ML20195H415

Affidavit of Pc Kron Re Reasonableness of Settlement Proposal by Util from Credit Standpoint & Contention That Proposed Guarantees Would Improperly Erode Creditworthiness of Members

ML20195H415
Person / Time
Site:	Farley
Issue date:	06/17/1988
From:	Kron P CITIBANK, N.A.
To:
Shared Package
ML20195H131	List: ML20195H126 ML20195H415
References
NUDOCS 8806280285
Download: ML20195H415 (10)

Text

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l Affidavit of Philip C. Kron My name is Philip C. Kron and I am the Department Head of Citibank's Utilities Department. My background and qualifications are contained in my af fidavit submitted May 17, 1988 on behalf of APCO. The purpose of that affidavit was to address: (1) the reasonableness of the settlement proposal by APC0 f rom a credit standpoint; and (2) AEC's contention that the proposed guarantees would improperly erode the creditworthiness of its members.

I have reviewed Mr. MacGuineas' letter to Mr. Vogler dated June 8, 1988 wherein numerous references were made to my affidavit, a have the following observations and comments:

I. Mr. MacGuineas contends (pp. 7-9) that "APC0's position as a non-creditor seller is substantially dissimilar to the interests of a creditor or investor who has parted with cash or its own credit. Hence, Mr. Kron's general contentions [of reasonable conditions required by a lender) have no relevance to what would be appropriate or reasonable for APC0". I would submit that the plain facts show that this argument is wrong.

APC0 here would be transferring an ownership interest in Plant Farley, an interest that would confer all the present benefits l of the output of the plant, in part in return for a promise to l

pay a proportionate share of all Plant Farley costs. Thus, APC0 is extending a present benefit in reliance on AEC's promises to make payments in the future -- much as does a creditor or 1

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, 2 investor who parts with cash in exchange for a promise of future payment. In these circumstances APC0, no less than such a creditor or investor, should be entitled to reasonable protection that the payments it is relying on will actually be made.

Mr. MacGuineas' letter indeed fails to note what in my judgment are the two relevant distinctions between APC0's situation and that of a traditional lender, both of which support the proposed guarantees. First, as noted in my prior affadavit, traditional lenders require far more security than the subordinated assurances of payment sought here by APC0.

Second, unlike APC0, a traditional lender's potential liability is finite and known. When a creditor or investor parts with cash, a risk / reward determination is made. The risk of not recovering all of the cash invested is hopef ully mitigated by the return received. But, the investor knows that his maximum loss is the amnent of cash invested. Here , APC0 will of f er AEC the benefits of ownership of Plant Farley, i.e., a low-cost reliable power source, in exchange for the assumption of the future liabilities associated with ownership. Without guarantees of the type contained in the settlement proposal, APC0 has no assurance that AEC will be able to meet its future oblics ions under this joint ownership arrangement, and as a result, can be left on the hook for AEC's obligations, whatever l

they might be, and they could be enormous. Whereas a creditor or investor who has parted wi.th cash can only lose the amount of cash invested, APCO's potential liability in a joint ownership i

3 arrangement is unlimited.  ?

In my judgment, as a matter of fiscal responsibility, '

APC0 has every right to protection comparable to that of a traditional creditor or investor and perhaps even additional protection. The proposed guarantees, thus in my view, are the very minimum level of protection which APC0 should have in the circumstances.

11. Mr. MacGuineas refers (p. 7) to "Mr. Kron's assertion (p. 5) that in the event of bankruptcy g&t/ member all-requirements contracts 'could be rejected; however, obligations under guarantees must be honored'". Mr. MacGuineas then states that I appear to "perceive" that guarantees to APC0 from AEC's members would have priority over "those members' obligations under their contracts with AEC". This is not true, and is contrary both to my understanding and my prior affidavit.

My understanding is that the proposed guarantees would be subordinate to AEC's contracts with its members. In my experience, which includes considerable involvement with rural i

electric cooperative credit problems, this would remain true in l

l the event of a bankruptcy because, as noted in Mr. Bouknight's l.

l letter dated May 24, 1988, a "distribution cooperative's l

payments under a power supply contract are operating expenses, which take priority over the rights of unsecured creditors, e.g., guarantee holders".

III. I note that in the attachments to Mr. MacGuineas'

letter, prepared by Mr. Parrish of Southern Engineering Company, it is suggested that in the event of an uninsured catastrophe associated with Plant Farley APC0 would have adequate security for payment of Farley obligations by reason of AEC's annual r e v e.1 u e . This suggestion is erroneous because AEC's secured creditors have a priority lien which attaches to virtually all of AEC's asstts and AEC's annual revenue stream. In the event of an AEC and/or member bankruptcy where the all-requirements contracts are rejected and this revenue stream is placed in jeopardy, AEC's creditors still have credit protection because they can look to AEC's assets 35 means for repayment. In such a l

bankruptcy scenario, APC0 will not have the option of foreclosing on AEC's assets to provide liquidity to meet unforeseen Farley-related costs because APC0 does not share a lien on AEC's property. Consequently, the only "assets" possibly available to unsecured creditors like APC0 in the event of an AEC bankruptcy would be represented by the bankrupt firm's net equity capital, which in AEC's case is insignificant compared to APCO's potential liability.

l l I V. Mr. MacGuineas asserts (p. 8) that "it is important to l

l note that Mr. Kron fails to claim that Citibank requires guacantees from the members of the g&t's which Citibank finances. If such guarantees are ' essential' as Mr. Kron suggests, it is passing strange that Mr. Kron's own lending institution ignores that alleged need". There is nothing strange at all about our not having member guarantees support

3 our Cajun obligations because we believe we have credit protection in the form of REA "Set Asides". These "Set Asides" are unused government commitments to lend which were set aside specifically to refund bank advances that are not repaid by the cooperative that received them. Cajun, like AEC, is virtually 100% debt financed, has virtually no traditional capital market access and has virtually all of its assets and revenue stream encumbered by the REA. The only basis upon which we entered icto the Cajun transaction was this REA promise to stand behind the cooperative's obligation in full.

What has happened now is that the RE A has, thus f ar, refused to honor this commitment. However, we continue to view the RE A as our ultimate source of repayment. The fact that Citibank's reliance on the REA's guarantee has proved problematical underscores rather dramatically why APC0 needs payment assurances that it can rely on.

V. Finally, Mr. MacGuineas states (p. 8) that "while Mr.

Kron asserts that Mr. Gill's and Mr. Edmiston's affidavits contain contentions which are 'not valid', Mr. Kron offers no information to support his claim". I believe that my prior affadavit was quite clear and sufficiently detailed in this regard, and I-will stand upon it.

, 6-STATE OF NEW YORK L!ea:v[g COUNTY PHILIP C. KRON, being first duly sworn, deposes and says that he has read the Af fidavit of Philip C. Kron and that the matters and things set forth therein are true and c.orrect to the.best of his knowledge, information and belief. ...- ,

/kW PhilAp C. Kron Subscribed and sworn to before me this the d th day of June 1988.

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EXHIBIT B

[ ( 1 I Mr. Jesse S. Vogtle June 24, 1983 i Page 9 ,

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-responsibility for any possible tax liability of the Company l in this case, which is simply one of the costs to APCo of l violating the antitrust laws. Second, none of these l calculated taxes would be appropriate under any circumst.ances regarding nuclear fuel, since we are only paying for a right to use the fuel pro rata, and that could not be construed as i a sale requiring the payment of taxes.

26. Our proposal for the purchase price of the plant itself, excluding fuel for the moment, would be to establish I a reasonable net adjusted investeent (less depreciation and  !

esticated deco ==issioning costs) as of a date certain subject I l

to a final audit,

27. Regarding fuel, we would prefer to further explore the purchase concept versus sharing in Cc pany cost, includ-ing leases, since it is proposed that we not acquire title in any case.

We look forward to discussing these catters further with you next week.

Very truly yours, ALABAMA ELECTRIC COOPERATIVE, INC.

,y l 's A.' n : w ??x t M.

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Charles R. Low'an General Manager CRL: elf Attachtents

• 9 cc: Robert A. Buettner, Esq.

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c Mr. Charles R. Lowman August 16, 1983

-Page 2 l

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Paragraph 4 of your letter. While that clause does not sat-isfy completely the concern of the Cempany for all of the  ;

matters dealt with in Paragraphs A.2, A.5, A 6, D.1(d) and (e) i of the Company's April 29, 1983 letter, it is an acceptable l starting point from which to negotiate.

i We cannot agree with the clause which you have suggested as a "Limitation of LiabiJity" clause and the companion clause entitled "Good Utility Practice." We would continue to insist on the principles outlined in our April 29, 1983 letter re-lating to the Company's responsibility to AEC and limits on such responsibility. Under the clause you have suggested, we can easily envision that every decision which the Company has made in the past and which it makes in the future with respect to the plant will be subject to second guessing by AEC, and subject to contentions that such actions constituted gross negligence, willful, wanton or reckless misconduct or failure to conform to "Good Utility Practice." This Fubjects the Company to a risk of second guessing, which it is unwilling to accept. We have, however, reviewed your suggestion for inclu-sion of a provision under which the Company would provide assurances that there would be no adverse distinctions made in operation of the nuclear plant solely because of AEC's per-centage ownership. We enclose herewith a revised contract clause designed to accomplish your objective.

With respect to the concern expressed in Paragraph 6 of your June 24, 1983 letter relating to AEC's unwillingness to hold the Company harmless from claims of its members, we cannot agree. Such protection is needed to avoid AEC achieving indirectly througp its menbers that which it would be contractually prohibited from achieving directly. We have herein included a generel clause entitled "Liability of the Parties" which would avoid such a result. This clause would also provide AEC with similar protection against claims from the Company's customers.

i With regard to AEC's pro rata responsibility for paying decommissioning costs, APC's sales price will be adjusted to give AEC a pro rata credit for decommissioning costs collected prior to the date for which the sales price is computed. This arrangement snoula alleviate tne concern raisea in Paragrapn 15 of your June 24 letter. The arrangement for pro rata sharing in spent fuel disposal costs proposed by the Company in its April 29, 1983 letter should cause AEC no concern since the arrangement and current legislation would result in AEC's

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1 Mr. Charles R. Lowman September 26, 1983 .

Page 11 present no insurmountable problenc. Caveat (b) must be ex-plored in greater depth with AEC to assure we are not ca.ught ,

in the regulatory lag trap that would suggest that since l 100% of A&G has been allocated in rate cases to retail, wholesale or off-system sales customers, AEC has no respon-sibility for A&G expenses.

3. Operatino Fees: APCO has proposed that it be paid a reasonable operating fee for running the plant on behalf of AEC. AEC has stated it feels that APCO should work for AEC for nothing. APCO has indicated its willingness to negotiate the level of the fees; however, AEC has stead-f a s t '.y refused to recognize any responsibility to pay more than out-of-pocket 9xpenses for services performed.

4. Incremental Costs Resultino Solely from AEC's Ownership Interest: ADCO has requested provisions in the opera:Ing agreement unde which AEC would be responsible for any incremental cost of c,3erations which result solely from AEC having purchased an cvnership interest in the plant.

AEC has stated that all costc of operations should be viewed as project costs even though they would not have been in-curred had AEC not had an ownezship position.

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5. Exclusion of Liability for Consecuential Damages:

AEC has agreed that a provision may be inserted in the '

agreement which would exclude liability for any conse-quential, special, incidental or indirect damages. This, as noted in Paragraph 1 above, may form part of the solution for the problems discussed there.

6. Deconmissioning Cost and Cost of Disposal of Nuclear Fuel: AEC stated its willingness to pay its proi rata share of decommissioning and spent fuel dispocal costs so lone as their responsibility was recognized from the date of closing. APCO has agreed to AEC's criterion by adjusting the sales price to give AEC a pro rata credit for the decom-missioning funds collected prior to the closing date, with AEC having responsibility for a pro rata share of total de-commissioning costs. The arrangement for pro rata sharing of spent fuel disposal costs originally proposed by APCO, along with current legislation, will result in AEC paying disposal costs only for that portion of the fuel used to generate AEC's energy output for Plant Farley.

. 7. Fines and Penalties: AEC has also agreed that it would be responsible for its pro rata cortion of any fines and penalties which arise out of plant operation where the inrosition arises after the acquisition by AEC of an

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