# Appendix — United States v. Wabash Valley Power Ass'n, 117 S. Ct. 389 (1996) (No. 96-342)

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1996

## Text

reer

Supreme Court, U.S.
FILED

r
496 342 auc 30 19%

In the Supreme Court of the United States

OCTOBER TERM, 1995

IN THE MATTER OF WABASH VALLEY
PowER ASSOCIATION, INC.

THE UNITED STATES OF AMERICA,
ON BEHALF OF THE RURAL ELECTRIFICATION
ADMINISTRATION, PETITIONER

ON PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI

WALTER DELLINGER
Acting Solicitor General
aia FRANK W. HUNGER
ep : Assistant Attorney General
PAUL BENDER
Deputy Solicitor General
> mi ¢ DAviD C. FREDERICK
ww |: r Assistant to the Solicitor
c> General
Be SR WILLIAM KANTER
x . An a JOHN P. SCHNITKER
+ Ne JOHN T. STEMPLEWICZ
4 Attorneys
=~ Department of Justice
an LD Washington, D.C. 20530
per kilowatt hour sold, which remains
fixed through 2027. C/V T. p. 923. Under REA scenario 1
(12.1%), Stone computed a mixed debt service adder of 5 or 6
mills per kilowatt hour (i.e., .05> or .06>) which would stay in
rates through 2027. C/V T. p. 1007. The impact of Stone’s
“fixed debt service adder” is reviewed in 44 128-130, 152, 155-

156.

106a

decided herein). The Court considers this issue
under sections IV. C. 2. and VL., infra.

94. Burns & McDonnell, and Thimis in particular,
were retained by REA to prepare a long-term power
cost study and provide revenue estimates for the
period 1990-2027 for six Indiana-based utilities:
Wabash, NIPSCO, I & M, PSI, IPL, and Hoosier
Energy Rural Electric Cooperative (“Hoosier”). C/V
T. p. 1049. As mentioned above, Thimis relied on
Stone’s load forecast in preparing her power cost
study for Wabash. Significantly, in making her pro-
jections, Thimis testified that Burns & McDonnell
was directed by REA to develop three different
scenarios reflecting three different asswned rate
increases for Wabash: scenario 1 -- 12.1% rate
increase in 1991; scenario 2 -- three 9% rate increases
in 1991, 1992 and 1993, followed by six 4% rate
increases; and scenario 3 -- three 9% rate increases in
1991, 1992 and 1993. Burns & McDonnell sought to
project the actual costs based on these three assumed
rate increase scenarios. REA Ex. B-28; C/V T. p.
1067. The revenue reguirements (i.e., costs) projected
by Burns & McDonnell were then provided to Charles
E. Jerominski, REA’s valuation expert (whose
credentials and valuation are discussed below).

95. REA Ex. B-30 compares the Wabash and REA
power cost studies. The chart indicates that while
Wabash is projecting that its costs will increase at an
annual rate of 3.74%, REA is projecting that Wabash’s
costs will increase at an annual rate of 5.52%
(assuming no debt service costs paid to REA for
Marble Hill debt), and at an annual rate of 5.73%
(assuming the rate increases in REA scenario 3).
C/V T. p. 1077. Thus, using Wabash’s assumed 4%
inflation rate, Wabash projects that its costs will

107a

decline in real terms by approximately .26%. Using
REA’s assumed 4.5% inflation rate, REA projects
that Wabash’s costs will increase in real terms by
roughly 1%.

96. Thimis identified four variables that she be-
lieves explain nearly all of the difference between the
Wabash and REA power cost forecasts. According to
her testimony, the principal variables on which the
parties made different assumptions are: 1) load
growth; 2) inflation rate; 3) unit retirements; and 4)
the cost of power from Hoosier. C/V T. p. 1084-1092.
Thimis testified that when Burns & McDonnell reran
its study using Wabash’s assumptions on the forego-
ing variables, the result “almost exactly mirrored the
Wabash Valley run numbers.” C/V T. p. 1094; REA
Ex. B-31. The Court will return to a discussion of
these four variables under Sections IV. C. 2. - 4. and
VI.C.

3. Wabash’s Power Supply Market; _Testimony _Of
Raymond F. Radigan

97. Raymond F. Radigan testified for REA concern-
ing the power supply market in the region served by
Wabash, and the potential power supply options avail-
able to the Nembers. C/V T. p. 1143-44. Radigan is
employed by Research Management International
(“RMI”) in Columbus, Ohio, a firm that provides engi-
neering consulting services, and he has a background
in utility planning. C/V T. p. 1138-39. Radigan’s tes-
timony appears to have been directed at refuting
Wabash’s projected costs in the without Wabash
scenario, which assumes that the Members could pur-
chase power from their host IOUs at average
embedded cost.

108a

98. Radigan’s assignment from REA was to gener-
ally assess the power supply market in the region
served by Wabash; he was not asked to prepare a
specific power supply study or plan for the Members.
C/V T. p. 1148-44. REA Ex. B-34 is RMI’s market
study for REA. For the purposes of his testimony
and the RMI study, Radigan assumed that the
Members were not bound by the Supply Contracts.
C/V T. p. 1146-47.

99. Radigan testified that he examined the relevant
market and found that there is surplus capacity
available in the near term. C/V T. p. 1151-52. Radi-
gan testified that some utilities have more surplus q
than others, that NIPSCO has 20% surplus, that I & 7
M has a surplus, but that PSI and IPL will be adding
some_capacity in the mid-1990s. C/V T. p. 1155-56.
Radigan testified that a purchaser of short-term
supply in a surplus market would expect competition
among sellers and, consequently, low prices, but in
the long term, the addition of new capacity would |
likely mean higher prices for the buyer. C/V T. p.
1157-58.

100. In his study, Radigan hypothesized several
power supply options that might be available to the
Members without Wabash. Radigan testified that the
“easiest [option] to think about” is one where the
Members simply purchase power from their host
10Us as they did prior to Wabash (which is the
assumption made by Wabash in the “without-Wabash
scenario”). C/V T. p. 1168-69. Radigan generally
alluded to the following potential obstacles that may
make this option uncertain: a) circumstances have
changed; b) the Supply Contracts; ¢) the cost of
power for those Members in the NIPSCO area may be
higher than remaining with Wabash; d) the Members

a

—————— LS tt ke

109a

would lose the benefits of Gibson Unit No. 5 and
transmission agreements; e) the uncertainty over
whether the members would be able to acquire power
at average embedded cost; f) assuming that the
Members do not own the substations, they would have
to acquire or construct substations, and financing
would be difficult since REA has cut off loans to the
Members; and g) acid rain legislation. C/V T. p. 1168-
93. Radigan was unable to quantify the results of his
study and merely concluded that developing a power
supply option for the Members would not necessarily
be an “easy task.” C/V T. p. 1206-07.

101. On cross examination, Radigan admitted that
there is currently a surplus market for electricity,
C/V T. p. 1216-17, and that if Wabash ceased supplying
the Members and the Members entered the power
supply market, there would be an additional 700
megawatts of power available in an already surplus
market. C/V T. p. 1231-33. This is consistent with
Olley’s testimony when he stated that: “If Wabash
were dissolved, it would cease to purchase the 650
megawatts it now purchases, so there would be that
amount of power now available ... for buyers, and at
the same time presumably the [Members] would go
out on the market seeking to buy 650 megawatts of
power.” C/V T. p. 769-70.

102. During cross examination, Radigan refused to
opine on whether a buyer would be able to acquire
long term power today at average embedded cost. C/V
T. p. 1217-20. Radigan also testified that he was un-
aware that in the summer of 1990 Wabash success-
fully entered into a 20-year power contract with I &
M, at average embedded cost, to supply the new
General Motors load. C/V T. p. 1209-10.

110a

103. Radigan further testified on cross examination
that a power supplier with excess capacity could not
withhold that capacity in hopes of receiving a higher
price when capacity diminishes. C/V T. p. 1220.
Radigan did not analyze the benefits to the sellers in
selling power to the Members at average embedded
cost. C/V T. p. 1221.

4. Viability Rate Increase; Testimony Of Paul L. Gioia

104. REA presented Paul L. Gioia as a witness to
render an opinion whether, in general terms, there is
any regulatory basis for the [URC to approve a rate
increase of the nature suggested in REA scenario 1,
notwithstanding Indiana’s “used and useful” rule.
C/V T. p. 1257-58, 1300-01. Since 1987, Gioia has been
employed as a senior vice president of the First
Albany Corporation, a brokerage and investment
banking firm in New York City. C/V T. p. 1247-48.
His work experience includes an appointment as
examiner in the Public Service Company of New
Hampshire bankruptcy proceeding, C/V T. p. 1248-49,
and a six year tenure as chairman of the New York
Public Service Commission (““NYPSC”). C/V T. p.
1252-53.

105. Gioia never testified that the IURC would
approve any particular Wabash rate increase; instead,
Gioia speculated that the IURC would seriously
consider extraordinary rate relief for Wabash if, after
considering several factors such as the impact of the
rate increase on consumers, the IURC determined
that such rate relief would enable Wabash to exit
bankruptcy as a financially viable utility. C/V T. p.
1257-.58, 1276, 1300, 1302. As support for his opinion,
Gioia relied on his experience with the NYPSC and
certain orders entered by the IURC concerning PSI

PS ee

llla

and NIPSCO. Gioia testified that, while with the
NYPSC, the commission granted Long Island Light-
ing Company a viability rate increase after determin-
ing that extraordinary rate relief was in the public
interest and, under the circumstances, a better alter-
native than bankruptcy. C/V T. p. 1253-55.

106. Gioia primarily relied on a 1986 IURC order
granting PSI an 8.2% retail rate increase in the wake
of Marble Hill. C/V T. p. .1259-60. See REA Ex. 38, 72
P.U.R. 4th 660 (Cause No. 37414) (referred to herein
as the “PSI Case”). Gioia testified that in such order
the IURC granted PSI an extraordinary rate in-
crease after finding that PSI “was facing severe
financial problems and was in eminent [sic] risk of...
bankruptcy,” that “the financial viability of the
utility is essential for ... the public to have confi-
dence that the [utility] can provide the essential
services that are entrusted to it,” and that a
bankruptcy proceeding could become a “drain on the
resources and attention of [the] utility,” thereby
possibly jeopardizing the utility’s ability “to provide
essential services” to the public. C/V T. p. 1259-60.
Gioia further testified that the [URC supported the
8.2% rate increase by creating a $475 million regula-
tory asset equal to estimated future tax benefits
resulting from the Marble Hill write-off. C/V T. p.
1267-68. The PSI Case, and other cases, suggested to
Gioia that the IURC would seriously consider “a rate
increase based on restoring the financial viability of
the company” if the IURC “concluded that the
public’s interest was served by the rate increase[,]
that it was just and reasonable and that it was a way
to reasonably restore the utility [to] financial
viability.” C/V T. p. 1276-77.

112a

107. On cross examination, Gioia refused to opine on
whether the IURC would grant any particular rate
increase; instead, he reiterated his general belief that
the IURC would consider some rate increase “that
would return Wabash to financial viability and could
conclude the bankruptcy case.” C/V T. p. 1800-02.
Gioia acknowledged that the primary objective of the
IURC in the PSI Case was to keep PSI out of bank-
ruptcy. C/V T. p. 1321. In response to the question of
whether he had an opinion on whether the rate
increase fabricated in REA scenario 1 would accom-
plish the objective of returning Wabash to financial
viability, Gioia stated that he had no such opinion and
that his analysis “assume[d] ... that this rate in-
crease would be part of a plan... that could success-
fully conclude this proceeding.” C/V T. p. 1325-26.
Gioia admitted that if a regulatory commission was
presented with two plans, both capable of successfully
ending a utility’s bankruptcy case, but one required a
revenue increase of 35% while the other required a
revenue increase of 13%, the commission would favor
the plan involving lower rates. C/V T. p. 1828-29.

108. Gioia’s testimony was limited to the question
of whether Wabash could seek a viability rate in-
crease. He did not offer any opinions on whether the
willing buyer could obtain a viability rate increase
following its purchase of Wabash.

5. Testimony Of Thomas B. Heath

109. Thomas B. Heath is an assistant to the REA
Administrator, and is responsible for dealing with
REA’s “troubled credits.” C/V T. p. 1338. Based on
his experience and review of the REA Plan, it is
Heath’s opinion that Wabash has the ability to pay the
rate increases required in the Pian and remain a

ll3a

viable entity.” C/V T. p. 13844. Based upon the
projected rate composition graphically portrayed in
REA Exs. B-38 -- 41, Heath does not believe that
repayment of the entire Marble Hill debt represents
an overwhelmingly significant burden for Wabash.
C/V T. p. 1364-65.

110. With respect to whether any entity had ever
expressed an interest in purchasing Wabash, Heath
testified that there was an interest expressed by a
cooperative and two 10OUs, and that one of the 1OUs
had made “a very formal offer.” C/V T. p. 1377-79."

111. On cross examination, Heath acknowledged the
uniqueness of the Supply Contracts (because of the
specific reference to rate approval by the Public
Service Commission of Indiana), and indicated that he
was generally familiar (though not personally
involved) with REA’s efforts to develop a new whole-
sale power supply contract. C/V T. p. 1414-18.

112. On cross examination, Heath testified that
REA scenario 2 (3 x 9% plus 6 x 4%) and scenario 3 (3
x 9%) “are within” the REA Plan, and that REA
scenario 1 (12.1%) is only to discredit the Wabash
Plan. C/V T. p. 1429. However, as Heath admitted,
confirmation of the REA Plan “would require three
9% rate increases and 4% rate increases as neces-
sary.” C/V T. p. 1430-33. Heath testified that the

The REA Plan requires three 9% rate increases during
the first two years, plus 4% rate increases in any year
following a year in which debt service payments were missed
and load growth was not less than zero, plus regular cost-of-
service rate increases.

© Heath’s testimony concerning the formal purchase offer
made by an IOU was to correct his January, 1990 testimony
when he stated that no formal offer had ever been made. C/V
T. p. 1378-79.

ll4a

additional 4% rate increases under the REA Plan
would be necessary if Wabash’s annual load growth is
less than 3%. C/V T. p. 1434. Since not even REA is
predicting that Wabash will experience annual load
growth of 3%, it follows that the additional 4% rate
increases would be necessary under the REA Plan
and that, therefore, only REA scenario 2 is “within”
the REA Plan.

113. Heath testified on cross examination that the
REA Plan “does not specify how many dollars” must
be paid to creditors, and that “fi]t’s ... a workable plan
that will adjust itself to the facts in the future.” C/V
T. p. 1429, 1484. However, Heath testified later that
the REA Plan purports to either retire the entire
REA debt of “{s]lightly over a billion dollars” (includ-
ing post-petition and post-confirmation interest) by
the year 2027, or liquidate Wabash if the debt has not
been retired by that time. C/V T. p. 1484, 1449.

114. With respect to the prior expressions of an
interest to purchase Wabash, on cross examination
Heath identified the interested buyers as Big Rivers
cooperative, PSI and IPL. C/V T. p.1449-57. Big
Rivers, which has only four members, never formal-
ized its interest because it wanted “to see where the
[Wabash] bankruptcy was heading.” C/V T. p. 1449-50.
Heath testified that PSI made a serious “formal”
offer prior to the PSI Settlement, but REA did not
accept the offer and Heath was unable or unwilling to
produce a copy of the offer. C/V T. p. 1453-56. Heath
testified that IPL’s interest in acquiring Wabash
never materialized into an offer. C/V T. p. 1456-57.
REA did not advise Wabash or the Court of any offers
to purchase Wabash. C/V T. p. 1452-55. REA has
never sought this Court’s approval of any offer to
acquire Wabash.

valuation expert. Jerominski is employed by AUS
Consultants Valuation Services Group (“AUS”), in
Milwaukee, Wisconsin. C/V T. p. 1470. Jerominski
has an undergraduate degree in mechanical engineer-
ing from the Milwaukee School of Engineering, and
an MBA from the University of Chicago. C/V T. p.
1471. Jerominski testified that he has been in the
appraisal business for 21 years and that he is a senior
member of the ASA. C/V T. p. 1472.

116. Jerominski understood that his assignment
from REA was “to do a going concern or business
enterprise valuation for certain tangible/intangible
assets of Wabash.” C/V T. p. 1478. Jerominski’s
valuation report is REA Ex. B-43. Jerominski testi-
fied that this was a unique assignment for him, and
that in 21 years of experience, it is the first time in
the utility context that he has valued a not-for-profit
entity. C/V T. p. 1480. Although Jerominski consid-
ered valuing Wabash from the perspective of a for-
profit buyer, and did not reject that approach, he
testified that such an approach would be impractical
because a) the assumptions necessary to transform
Wabash and the cash flows are problematical, b) not-
for-profit entities tend to remain not-for-profit
(“institutional lethargy”), and c) the appraiser might
lack specific information regarding certain benefits
that may be available to the for-profit buyer and which
should be reflected in the cash flows. C/V T. p. 1481-
82. Thus, Jerominski assumed that the willing buyer
of Wabash would be a not-for-profit entity. C/V T. p.
1482-83.

1l6a

117. Besides his assumption that the willing buyer
of Wabash would be a not-for-profit entity, Jerominski
assumed that the Supply Contracts would remain in
force and that the capital structure would be 100%
debt. C/V T. p. 1482-83. (Jerominski made other as-
sumptions regarding Wabash’s cash flows, which are
discussed below in connection with the REA scenar-
i0s.)

118. Jerominski rejected the market approach to
valuation because he perceived there to be an insuffi-
cient number of comparable sales transactions, and
relied instead exclusively on the income approach.
C/V T. p. 1484-85. Jerominski testified that there are
two components to the income approach to valuation:
the future economic benefits of the cash flows and the
risks of achieving those cash flows (i.e., the discount
rate). C/V T. p. 1485. Using the “build up” method,
where essentially a risk premium is added to a risk-
free rate, Jerominski determined that 9.8% was the
appropriate discount rate for his 100% debt-funded
enterprise. C/V T. p. 1486-87.

119. To estimate Wabash’s cash flows, Jerominski
testified that he met with representatives from REA
and Burns & McDonnell and “tried to come up with
what we thought were reasonable scenarios concern-
ing what the future cash flows might be.” C/V T. p.
1496. Jerominski and the others at the meeting “came
up with” the following cash flow scenarios: scenario 1
-- assumed 12.1% rate increase in 1991 plus cost of
service rate increases; scenario 2 -- assumed three 9%
rate increases in 1991, 1992 and 1993, plus six 4% rate
increases in 1996, 2003, 2008, 2010, 2013 and 2023, plus
cost of service rate increases; scenario 3 -- assumed
three 9% rate increases in 1991, 1992 and 1993, plus
cost-of-service rate increases. Scenarios 2 and 3 are

117a

dependent on REA preemption and are “offshoots of
REA’s plan.” C/V T. p. 1348, 1497.

120. Jerominski testified that the scenario 1 net
cash flows were arrived at by taking the gross
revenues from the Burns & McDonnell report, REA
Ex. B-28, subtracting operating expenses and costs
for future plant additions appearing in such report,
and adding back depreciation expense appearing in
such report. C/V T. p. 1501, 1504-05. Applying a 9.8%
discount rate, Jerominski testified that the present
value of the net cash flows from scenario 1 (plus the
reversion value) is, in round numbers, $450 million.
C/V T. p. 1508.

121. Jerominski testified that the same approach
used in scenario 1 was used in scenarios 2 and 3, with
the exception that he applied a 10.3% discount rate
because of the perceived higher risk in realizing
those cash flows, which are dependent on REA
preemption. C/V T. p. 1508-09. Jerominski testified
that the present value of the net cashflows from
scenario 2 (plus the reversion value) is $975 million,
and that the value for scenario 3 is $750 million. C/V
T. p. 1508-09.

122. Jerominski described his valuation opinion as
being “bifurcated,” and testified that scenario 3 ($750
million) is the most probable result, but if those cash
flows are not attainable, then scenario 1 ($450 million)
is the most likely result. C/V T. p. 1510. In his re-
port, REA Ex. B-28 p. 3, Jerominski states that the
distinction between scenarios 1 and 3 is whether
“REA is unable to preempt.” Significantly, Jeromin-
ski rejected scenario 2 ($975 million) because “he was
not convinced ... that the REA really knew whether
or not ...{,] even if they thought they could put [the
six 4% rate increases] in[,] that they would put them

118a

in.” C/V T. p. 1510. Jerominski concluded that
scenario 2 “was not a reasonable valuation conclu-
sion.” C/V T. p. 1510. Jerominski thus refused to
support the same rate increases that Heath testified
were necessary for conf irmation of the REA Plan.

123. Using REA Ex. B-45 as an_ illustration,
Jerominski testified that the most important differ-
ence between his valuations and the Wabash valua-
tions is the level of the cash flows and not the
discount rates. C/V T. p. 1513, 1515-16.

124. Although Jerominski found both Wabash valua-
tions to be “intellectually interesting,” he does not
believe Lewellen’s cost savings approach results in a
fair market value conclusion, and he disagrees with
Gross’ assumption that the willing buyer would be a
for-profit entity. Jerominski criticized both Wabash
valuations for allegedly assuming away the issue
before the Court which, according to Jerominski, is
whether the Members “actually could raise rates and
pay at those levels [assumed by REA).” C/V T. 1517.
Finally, Jerominski testified through REA Ex. A-46
that Gross’ value would be approximately $95 million
higher if “everything else [was] held constant” and
taxes were not subtracted from the revenues. C/V T.
p. 1521.

125. On cross examination, Jerominski admitted
that the definition of willing buyer assumes a reason-
able knowledge of all relevant facts, and that the
relevant facts in this matter would include economic
conditions, legal constraints and regulatory con-
straints. C/V T. p. 1525. Jerominski viewed Wabash’s
1989 financial statements and balance sheet, but
testified that they were of limited value in the context
of his valuation. C/V T. p. 1525-26. Jerominski was
able to identify some of Wabash’s tangible assets, but

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119a

he did not view such assets or prepare a separate cost
valuation of such assets. C/V T. p. 1527-28. Jeromin-
ski testified that Wabash’s most important intangible
asset is the Supply Contracts, but he did not sepa-
rately value the contracts. C/V T. p. 1530-40.

126. Jerominski testified on cross examination that
a willing buyer would want to know the legal
constraints associated with the Supply Contracts.
C/V T. p. 1532. Jerominski agreed that the Supply
Contracts require IURC regulation, C/V T. p. 1534,
that the Wabash By-laws and Articles of Incorpora-
tion established Wabash as a not-for-profit entity and
provide that the Members shall elect Wabash’s Board
of Directors, C/V T. p. 1532-33, and that the Members
control Wabash’s rates, C/V T. p. 1540, yet he testi-
fied that such constraints had no effect on his
projected cash flows. C/V T. p. 1533-34. Jerominski
testified that the enforceability of the Supply
Contracts “could have an effect” on Wabash’s value,
that he reviewed Professor Macneil’s opinion on the
Supply Contracts as well as a written opinion from
REA (which was not offered into evidence), and that
his valuation opinion assumes the enforceability of
the Supply Contracts. C/V T. p. 1536-38. He did not
investigate what the value of Wabash would be if the
Supply Contracts were unenforceable. C/V T. p. 1542.

127. On cross examination, Jerominski testified
that rate regulation of Wabash could impact on its
value, C/V T. p. 1545, and that a willing buyer would
be interested in the existing regulation of Wabash,
C/V T. p. 1530, and how regulation might affect future
cash flows. C/V T. p. 1544. Jerominski testified that
“it would be prudent for the potential investor to have
some sense of how the [IURC) would likely view
future rate increases.” C/V T. p. 1535. Jerominski

120a

reviewed the 1986 IURC order in the PSI Case and
found the IURC to be “very flexible” and “very
concerned about the future financial viability of PSI.”
C/V T. p. 1546. Scenario 1 (12.1% rate increase) was
modeled on the 8.2% rate increase granted to PSI,
C/V T. p. 1550, but Jerominski conceded that the
Members have not approved a 12.1% rate increase.
C/V T. p. 1548.

128. Whereas the scenario 1 rate increase is based
on the IURC's “flexibility” shown in the PSI Case,
the rate increases in scenarios 2 and 3 are based on
REA’s ability to preempt. C/V T. p. 1551. In all three
scenarios, the net cash flows valued by Jerominski
are dependent upon the revenues generated by the
assumed rate increases. C/V T. p. 1550, 1555. Such
revenues appear in the Burns & McDonnell study,
REA Ex. B-28, next to the “REVENUE ADJUST-
MENT [3]” line, where the explanatory footnote “[3]”
refers to “Revenue derived from rate increases to
cover REA debt.” C/V T. p. 1555. Jerominski admit-
ted that there are no operational costs associated
with any of the rate increases postulated in the three
REA scenarios, C/V T. p. 1556-57, which intensifies
the impact of such rate increases on net revenues.
C/V T. p. 1558. Jerominski testified that the rate
increases are calculated for the entire 37-year study
period plus perpetuity. C/V T. p. 1554. This was
accomplished by computing what Stone referred to
earlier as a “fixed debt service adder” and adding such
amount to the cost of each kilowatt sold by Wabash
until the year 2027. C/V T. p. 1560. The result of
adding the “fixed debt service adder” to the cost of
each kilowatt sold is that revenues automatically
increase as load growth increases and more kilowatts
are sold. C/V T. p. 1561.

12la

129. As an illustration of the impact of the “fixed
debt service adder,” the Revenue Adjustment Line for
REA scenario 1 shows that a 12.1% rate increase will
create $20 million in 1991 but over $48 million in 2027.
C/V T. p. 1561-62. The “fixed debt service adder”
works the same way in scenarios 2 and 3, only the
revenues produced are higher. C/V T. p. 1565. In
scenario 2, the Revenue Adjustment Line projects
that revenues will double between 1991 and 1992,
double again in 1996 to $61 million, surpass $100
million in 2000, increase to $219 million in 2023, and
reach $238 million in 2027, the last year of REA’s
study. C/V T. p. 1567. Jerominski used the revenues
produced by the “fixed debt service adder,” and
appearing in the Revenue Adjustment Line, to arrive
at his cash flows. C/V T. p. 1567.

130. On cross examination, Jerominski admitted
that the gross revenues projected under REA
scenario 1 increase from $198 million in 1991 to $3.2
billion in 2027. C/V T. p. 1576. In the year 2024,
Jerominski projects gross revenues under scenario 1
of $2.4 billion (REA Ex. B-43, Appx. 1, p. 1), yet he
acknowledged that such figure exceeds the total net
farm income for the entire State of Indiana in the
year 2024, which is projected by REA’s own witness,
Andrew Moody, to be only $2.3 billion. C/V T. p. 1579.

131. Jerominski testified on cross examination that,
ideally, all three approaches to valuation (i.e., cost,
market and income) would be used in all appraisals,
C/V T. p. 1571, but he did not inquire into or analyze
any sales of utilities, C/V T. p. 1573-74, or determine
Wabash’s liquidation value, although he was generally
aware that the book value of Wabash’s assets is “in
the neighborhood of $130, $150 million.” C/V T. p.
1574. Jerominski had no opinion on whether it was

122a

reasonable to assume that a not-for-profit electric
utility would have a going concern value-to-book value
ratio of 5:1. C/V T. p. 1586.

132. Lastly, in response to the question of what the
fair market value of Wabash would be if he were asked
to do a valuation of Wabash on behalf of Hoosier,
Jerominski testified that “I really couldn’t answer
your questions intelligently until I knew what the
interests were of that specific coop.” C/V T. p. 1581.
Hoosier is a not-for-profit cooperative, and Jeromin-
ski assumed for purposes of his valuation that the
willing buyer would be a cooperative. C/V T. p. 1580.

C. WABASH'S REBUTTAL TO REA CASE

In rebuttal to REA’s case, Wabash called four
witnesses. Dr. Shannon P. Pratt testified concerning
the reliability of the Jerominski appraisal. Through
Rick Coons, Wabash introduced evidence to rebut
certain testimony of Thimis, Radigan and Gioia.
Finally, Wabash recalled Reising and Setliff to rebut
certain testimony of Thimis and to generally rebut
REA scenario 1.

1. Critique Of Jerominski’s Appraisal Testimony Of Dr.
Shannon P. Pratt

133._As its first rebuttal witness to the REA
valuations, Wabash presented Dr. Shannon P. Pratt,
president of Willamette Management Associates, Inc.,
a national valuation firm. C/V T. p. 1592. Pratt re-
ceived his undergraduate degree in business from the
university of Washington in 1955; he also has a
Master’s degree in corporate finance from the Uni-
versity of Oregon and a Doctorate degree in finance
from Indiana University. C/V T. p. 1593. Pratt is a
senior member and fellow of the ASA, and is the only

i

123a

fellow out of 34 in the United States with a designa-
tion in business valuation. C/V T. p. 1593-94. Pratt is
a certified review appraiser, which means he is quali-
fied to review other appraisals. C/V T. p. 1593-94.
Pratt has been involved in approximately 2,000 going
concern valuations, and in his capacity as certified
review appraiser has reviewed nearly 200 valuations.
C/V T. p. 1594-95.

134. Pratt reviewed Jerominski’s appraisal and
found that it does not properly measure the fair
market value of Wabash as a going concern. C/V T. p.
1596, 1607. Pratt identified two fundamentally flawed
assumptions in Jerominski’s appraisal: 1) the ability
of Wabash to raise rates to pay debt; and 2) that under
all circumstances, including the fabricated rate in-
creases, the Supply Contracts would remain in effect
and the Members would be perpetually forced to
purchase all of their power from Wabash. C/V T. p.
1596-97. Pratt reviewed Macneil’s report concerning
the Supply Contracts, wherein Macneil stated that if
REA was successful in its reorganization plan (i.e.,
allowed to preempt the IURC and seize control of the
Wabash Board), the Supply Contracts would be 64
breached and the Members would no longer be obli-
gated thereunder. C/V T. p. 1597-98. Based on his
review of Jerominski’s appraisal and Macneil’s report,
Pratt was critical of Jerominski for merely adopting
REA’s assumptions, failing to provide any foundation
supporting those assumptions, and failing to explain
why, for example, he believes preemption scenario 3 is
most likely, or why he believes the IURC is likely to
approve the rate increase in scenario 1. C/V T. p.
1598-99.

135. Concerning REA’s_ preemption scenarios,
Pratt testified that a willing buyer would review the

124a

Seventh Circuit’s opinion in Wabash v. REA (J) and
would conclude that a substantial risk exists in rely-
ing on preemption in estimating the fair market value
of Wabash. C/V T. p. 1599-1600. With respect to
Jerominski’s addition of a .5% risk factor to account
for the possibility of preemption, Pratt testified that
“the risk factor of five-tenths of one percent proposed
extra return to the investor to take a chance that all
of those assumptions would in fact become reality is
nowhere near enough to account for the risk as to
whether or not those assumptions would become real-
ity.” C/V T. p. 1599.

136. Pratt calculated that the projected revenues
under REA scenario 1 (which go from $157 million in
1990 to over $3 billion in 2027) increase at an annual
compounded rate of 8.4%, which is more than double
the expected inflation rate, and that he has great
difficulty conceiving of a buyer that would rely on
such dramatic revenue increases. C/V T. p. 1600.

137. Pratt described the assumptions underlying
Jerominski’s appraisal as being “extraordinary as-
sumptions.” C/V T. p. 1601-02. Pratt testified that
there are appraisal standards applicable to extraordi-
nary assumptions, that these standards are part of
the “Uniform Standards of Appraisal Practice,” and
that the ASA (of which Jerominski is a member) has
endorsed such standards. C/V T. p.1602-04. _Dr. Ex.
A-20 is a copy of the applicable Uniform Standards.
Standard 10-1(c) requires that appraisers make full
disclosure of extraordinary assumptions and quantify
their impact on value. Significantly, the comment to
such rule identifies “compliance with regulatory
authority rules” as being an example of an extraordi-
nary assumption or condition. C/V T. p. 1604-05.
Because the term “fair market value” assumes that

125a

the hypothetical buyer and seller are aware of and
would rely on conditions that are either known or
reasonably foreseeable as of the date of the appraisal,
the standard requires an appraiser “to quantify the
effect of any assumption which is dependent on some
future event on which an investor would not necessar-
ily fully rely as of the date of the appraisal.” C/V T. p.
1606-07. In Pratt’s opinion, Jerominski’s report fails
to comply with the Uniform Standards because it does
not disclose the impact of his extraordinary assump-
tions on value. C/V T. p. 1605-06.

138. Pratt testified that Jerominski’s report is not
an appraisal of fair market value within the meaning
of the definition, but instead represents what is
known in the appraisal business as a “hypothetical
appraisal.” C/V T. p. 1607. Based on sections 6.5 and
8.3 of the “Principles Of Appraisal Practice And Code
Of Ethics” of the ASA, Dr. Ex. A-21, Pratt testified
that Jerominski’s report failed to comply with the
standards for hypothetical appraisals. C/V T. p. 1608-
10.

139. Contrary to Jerominski’s statements on cross
examination regarding Hoosier as a potential buyer of
Wabash, Pratt testified that an appraiser’s opinion of
Wabash’s fair market value should not change signifi-
cantly depending upon the use of the appraisal. C/V
T. p. 1611. An appraisal that takes into account the
circumstances of a particular buyer, known as an
“Investment Value Appraisal,” is not a fair market
value appraisal -- which assumes typically motivated

7 Pratt defined the term “hypothetical appraisal” as “an
appraisal that is based on assumed conditions which are
contrary of fact or which are improbable of realization or con-
summation.”

126a

buyers without special circumstances. C/V T. p.
1611.

140. Pratt testified that there are methods usec by
appraisers to test the reasonableness of their valua-
tions, and he proceeded to apply two such tests to
Jerominski’s valuations. C/V T. p. 1611. Noting that
a fair market value appraisal would normally consider
both asset values and income streams, Pratt testified
that one appropriate test is to examine the prices at
which similar properties have exchanged hands and
discern the relationship between prices and asset
values. C/V T. p. 1612. This test “gives a person with
common sense some notion of a range of reasonable-
ness of a value of the entire entity related to its
tangible asset value.” C/V T. p. 1613-14. To test the
reasonableness of Jerominski’s conclusions, Pratt
analyzed eight sales of public utilities (classified as
electric generation and transmission companies)
occurring between 1987 and 1989. Pratt found that
the sales prices for the eight transactions ranged
from .95 to 1.24 times the book value of the assets.
C/V T. p. 1613. On cross examination Pratt clarified
the point that all eight of the aforementioned sales
were sales of going concerns. C/V T. p. 1629.

141. For his second test, Pratt added the aggregate
value of the publicly traded stocks of IPALCO Enter-
prises, Inc. (holding company of IPL), PSI Holdings,
Ine. (holding company of PSI), and NIPSCO Indus-
tries, Inc. (holding company of NIPSCO), to the value
of the respective utility’s liabilities, and divided the
sum by the utility’s asset value to arrive at a ratio for
measuring the way the public values investments in
such enterprises. C/V T. p. 1614-19. Pratt testified
that an appraiser would then add a premium to the
value to account for the difference between minority

127a

and sole ownership of the stock. C/V T. p. 1614. Dr.
Ex. A-19 contains the results of this test. Pratt found
that the aggregate value of the stock, plus the debt for
the three utilities, ranged from 1.12 to 1.21 times the
book value of their assets. C/V T. p. 1615. Applying a
30% premium to the stock only (and leaving the debt
at face value) would result in the total entity (stock
and debt) selling for between 1.24 and 1.35 times the
book value of the assets. C/V T. p. 1618.

142. Pratt testified that both of the methods
described above are valid for testing the reasonable-
ness of a valuation opinion on Wabash. C/V T. p. 1620.
Pratt applied the first test (ratio of sales price to book
value of assets) by multiplying the highest ratio (1.24)
times a Wabash book value of $150 million, which
resulted in a $186 million value for Wabash. C/V T. p.
1619. Pratt then applied the second test (ratio of
stock and debt to book value of assets) by multiplying
the highest ratio (1.35) times a Wabash book value of
$150 million, which resulted in a $202.5 million value
for Wabash. C/V T. p. 1620.

143. Although Jerominski did not inquire into any
sales of utilities, C/V T. p. 1573-74, as discussed
above, Pratt was able to cite 11 market observations
of comparable properties through his application of
the foregoing tests. The 11 market observations cited
by Pratt indicate a range of values for similar proper-
ties which is between .95 and 1.35 times the book value
of the assets. Pratt testified that this range of values
indicates significant reliability because, in the ap-
praisal business, the less diverse the numbers are,
the more reliable they are usually considered to be.
C/V T. p. 1620. Pratt concluded by reiterating that
Jerominski’s opinions cannot be relied on for the pur-

128a

pose of determining Wabash’s fair market value. C/V
T. p. 1621.

2. Testimony Of Rick Coons

144. As described above, Thimis identified Wabash’s
load growth as one of the four variables which explain
why REA is projecting substantially higher costs for
Wabash. Rick Coons, Wabash’s director of operations,
testified concerning the discrepancy between the load
growth and overall cost projections of Wabash and
REA. Through Coons, Wabash introduced Dr. Exs.
A-23 through A-26.

145. Dr. Exs. A-24, A-25 and A-26 illustrate that,
while REA is projecting an average annual load
growth for Wabash of 2.94% (under REA scenario 1),
Wabash is projecting an average annual load growth
of 1.61%, and the State Utility Forecasting Group
(“SUFG”) is projecting an average annual load
growth of 1.94%. Coons identified SUFG as an entity
created by the Indiana General Assembly in 1985 for
the purpose of developing independent forecasts of
electric power usage within the State of Indiana.
SUFG is staffed with experts in the field from
Indiana and Purdue Universities, is funded by the
Indiana legislature, and prepares electricity demand
forecasts for Indiana on a regular basis and submits
these forecasts to the IURC. C/V T. p. 1642-44. Dr.
Ex. A-23 is the 1990 SUFG report.”

146. Because Wabash’s service territory is directly
adjacent to the service territories of the host I0Us,

8 Although REA also relied on SUFG in preparing its
study, see REA Exs. B-14 and B-25, REA used a 1988 report
rather than the 1990 report. REA Exs. B-24 and B-25 indicate
that SUFG was projecting higher load growth in 1988 for
Wabash.

129a

C/V T. p. 1650, Coons compared the Burns & McDon-
nell load growth projections for the host I0Us with
the various load growth projections for Wabash. Dr.
Ex. A-25 illustrates that Burns & McDonnell is
projecting 1.89% load growth for PSI, 1.47% for
NIPSCO, and 1.48% for I & M, for an average annual
load growth of 1.6%. As found above, Wabash projects
that its load growth will be 1.61%, while SUFG is
projecting 1.94% and REA has projected 2.94%. Thus,
Wabash’s load growth projection is consistent with
the average load growth being projected by Burns &
McDonnell for the [OUs in the same service terri-
tory.

147. Dr. Ex. A-24 illustrates Wabash’s real price
growth rate as projected by SUFG, Wabash and PEA.
Whereas both SUFG and Wabash have projected that
Wabash’s costs will decrease in real terms by .3%,
REA projects that Wabash’s costs will increase in
real terms by 1.1%. Dr. Ex. A-27 illustrates the real
price growth rates for the four host IOUs as
projected by SUFG, Beck and Burns & McDonnell.
SUFG projects the following real price growth rates:
PSI -.11%, NIPSCO -1.1%, I & M -1.9%, and IPL -
.18%. Beck’s projections are consistent with SUFG’s
and are as follows: PSI +.60%, NIPSCO -1.7%, 1 & M -
1%, and IPL -.25%. In stark contrast, Burns &
McDonnell projects the following increases in the
real price growth rates: PSI +2.44%, NIPSCO +.62%,
I & M +2.17% and IPL +.95%.

148. Coons also rebutted Radigan’s testimony con-
cerning the ability to obtain power at average embed-
ded cost in today’s power supply market. Through
Coons, Wabash introduced Dr. Ex. 22, which is a 20-
year power supply contract executed on July 11, 1990,
for the sale of power from I & M to Wabash. The con-

130a

tract provides that I & M will supply all of Wabash’s
requirements for the General Motors load (26 mega-
watts) at rates based on average embedded cost. The
contract was negotiated in approximately three
months. C/V T. p. 1637-41.

149. In rebuttal to Gioia’s testimony regarding
whether the IURC would approve a 12.1% rate in-
crease for Wabash, Coons testified regarding the
aftermath of the PSI Case. Although none of REA’s
witnesses was aware of the status of the PSI Case
beyond the 1986 IURC order, Coons introduced a 1988
IURC order and a 1990 IURC order in the PSI Case.
Dr. Exs. A-29, A-30. The 1988 IURC order, Dr. Ex.
A-29, directed PSI to reduce its rates by 9% effective
July 1, 1988, to reduce its rates an additional 4.2%
effective October 1, 1989, and to make a $50 million
cash refund to its customers. C/V T. p. 1655-57. In
the words of the IURC, the 1988 order caused “PSI’s
October 1, 1989 rates [to be] rolled back to the Janu-
ary 1983 order rate level. In fact, they are even
slightly lower than the January, 1983 order rate level.
This confirms the phase-out of PSI’s 13.2% combined
emergency rate increase as directed by the Commis-
sion’s June, 1988 order.” C/V T. p. 1658-59; Dr. Ex. A-
30, p. 6. The 1990 order directed PSI to further
reduce its rates by 4.25%. C/V T. p. 1659; Dr. Ex. A-
30, p. 61.

3. Testimony Of Paul D. Reising

150. As described above, Thimis also identified unit
retirements as one of the four variables which explain
why REA is projecting substantially higher costs for
Wabash. Whereas the REA study assumes a 50-year
life for a base load coal unit, and at the end of such
time the unit is automatically retired and replaced

13la

with a new base load coal unit, C/V T. p. 1086, the
Wabash study provides for one unit retirement based
on published reports of American Electric Power that
the Breed Station in western Indiana will be retired
in 1996. C/V T. p. 1702.

151. Reising testified that no additional unit
retirements were appropriate during the Wabash
study period because: (1) the Wabash study includes
such a substantial level of capital improvements
(including over a billion dollars for PSI’s oldest units)
that, had he instead utilized more unit replacements,
the impact on costs would have netted out; (2) utilities
are putting greater effort into maintaining older
units and avoiding the construction costs of new
units; and (3) unit retirements are based on economics
rather than age, and today some units are expected to
have useful economic lives of 70 years or more. C/V
T. p. 1703-11.

152. Reising also testified concerning the likelihood
of the IURC approving the “fixed debt service adder”
fabricated in REA scenario 1. Reising, who is experi-
enced in rate matters and has been active in present-
ing testimony before the IURC, C/V T. p. 1688, con-
trasted the rate increase methodology utilized in
scenario 1 with the rate increase methodology
required by the IURC. Reising confirmed that the
revenue stream utilized by Jerominski was derived by
the use of a “fixed debt service adder,” which produced
the “revenue adjustment” figures appearing in the
Burns & McDonnell report. C/V T. p. 1690-91. To
produce the revenues shown in scenario 1, Reising
testified that the 12.1% rate increase causes a 12.1%
increase in revenues the first year and then becomes
a “fixed adder” or “energy rate adder” in the calcula-
tions for all subsequent years. C/V T. p. 1691. Reis-

132a

ing testified that ordinarily a 12.1% rate increase
approved by the IURC would result in net revenues
which would decline over time (i.e., as costs increase
faster than load growth), yet the revenues in REA
scenario 1 increase from $20 million to $48 million by
the end of the study period. C/V T. p. 1692. Reising is
unaware of the IURC ever permitting an “energy
rate adder” to recover debt service. C/V T. p. 1694.

4. Testimony Of Richard Setliff

153. Thimis also identified the inflation rate and the
cost of power from Hoosier as two of the four vari-
ables that explain why REA is projecting substan-
tially higher costs for Wabash. The Wabash study
assumes a 4% inflation rate, and the REA study
assumes 4.5%. C/V T. p. 1726. On rebuttal, Setliff
testified that the assumed 4% inflation rate is reason-
able and based on a number of reliable sources. He
also pointed out that both REA and Wabash utilized a
4% inflation rate in their previous studies, and that
the District Court approved a 4% inflation rate in the
Valuation Case. C/V T. p. 1726-28.

154. Setliff also testified regarding the cost of
power from Hoosier. Essentially, the REA study
assumes that the cost of power from Hoosier will
escalate, while the Wabash study indicates that the
cost of power from Hoosier will remain stable over
the study period. C/V T. p. 1092-93. On direct
examination, Thimis ridiculed the Wabash conclusion
and supported her position by inferring that Burns &
McDonnell had actually done Hoosier’s cost forecast
study in a separate project. C/V T. p. 1093. Setliff
testified that Burns & McDonnell misinterpreted the
contract between Hoosier and Wabash and incorrectly
assumed that Wabash would be purchasing at a higher

133a

rate. C/V T. p. 1729. Through Setliff, Wabash intro-
duced Dr. Exs. A-32, A-33, A-34, and A-35. Dr. Exs. A-
32 and A-33 are correspondence from Hoosier to Wa-
bash representing that Hoosier expects its power
costs to Wabash to remain flat (Dr. Ex. A-33 also
reveals that Hoosier is assuming a 4% inflation rate).
Dr. Ex. A-54 is the Burns & McDonnell cost forecast
study for Hoosier which Thimis referred to on direct
examination, but which was not introduced into
evidence by REA. C/V T. p. 1731. Dr. Ex. A-35 is a
graph comparing the Hoosier rate projections made in
the Wabash study, the Burns & McDonnell study for
REA, and the Burns & McDonnell study for Hoosier
(Dr. Ex. A-34). C/V T. p. 1731-41. Notably, the Burns
& McDonnell projection prepared for REA is drasti-
cally higher than its projection prepared for Hoosier,
and the latter projection is very consistent with the
Wabash projection.

155. Finally, Setliff testified, in detail, how Wa-
bash’s rates are established by the IURC. Setliff
explained that Wabash is allowed to collect, through
rates, sufficient revenues (“total revenues” or “TR”)
to recover its total costs (“TC”). TC includes power
supply costs, administrative and operational ex-
penses, allowances for renewals and replacements and

134a

working capital. C/V T.p. 1748-49. When TC exceeds
TR, the utility would need to seek rate relief from the
IURC to recover those costs. C/V T. p. 1749-50. In
preparing a rate case, the utility begins with a test
year (a compilation of operating data from the most
recent 12 months), analyzes the fixed, known and
measurable changes that impact on costs, and adjusts
the test year into a pro-forma test year, which is then
reviewed by the IURC. C/V T. p. 1750-51.

156. Setliff identified Dr. Ex. 37 as a graphic repre-
sentation of the LIURC’s approach to rate making.
C/V T. p. 1752. Setliff explained that once the [URC
establishes a rate, the rate remains at the same level
until the next rate case; however, both total revenues
and total costs will increase as load growth and costs
escalate. Generally, costs increase at a faster rate
than load growth; therefore, another rate increase
will eventually be needed when TC exceeds TR. C/V
T. p. 1752-55. In contrast, under the approach utilized
in REA scenario 1, the formula for total revenue is
not “TR = TC;” instead, it is “TR = TC x 1.12.” C/V
T. p. 1755-57. As shown in Dr. Ex. A-37, figure 4, the
approach utilized in REA scenario 1 eliminates the
possibility that TC will ever meet or exceed TR,
thereby artificially overstating Wabash’s revenues.
C/V T. p. 1759-60, 1764-65.

V. THE SUPPLY CONTRACTS ARE CONDITIONED
ON MEMBER CONTROL OF WABASH AND
IURC REGULATION.

157. In the 1987 valuation hearing, the Wabash wit-
nesses stated that the Members might breach or
attempt to avoid the Supply Contracts if the price of
power is raised above the competitive ceiling. The
District Court found that the record did not support

135a

the Bankruptcy Court’s conclusion that the Members
would break or avoid the Supply Contracts under such
circumstances. 111 B. R. at 756, 768-69, 772-73 (error
to find that Supply Contracts would be broken or
avoided by Members if rates increased). Based on the
evidence submitted at the remanded valuation hear-
ing, it is obvious that the contract issue should have
been stated differently. The actual issue is whether
the Members may rely upon and enforce the rights
they obtained in the negotiation of the Supply Con-
tracts.

158. The Supply Contracts set forth the bargain-in-
fact between Wabash and the Members. These agree-
ments obligated the Members to purchase long term
power from Wabash. In return, the Members negoti-
ated for and received certain rights, including: (a) the
right to set the initial rates of Wabash to its Mem-
bers; (b) the right to have the IURC approve the final
rates of Wabash to its Members; (c) the right to
operate as a not-for-profit entity; and (d) the right to
control the company through the right to elect the
Wabash Board of Directors.

159. Based on Professor Macneil’s unrebutted tes-
timony and this Court’s own analysis of the Supply
Contracts, the Court finds that any or all of the fol-
lowing events would likely result in a material breach
of the Supply Contracts by Wabash, freeing the
Members from the constraints of such contracts and
allowing them to purchase power elsewhere: (a) the
loss of IURC regulation over Wabash; (b) the imposi-
tion of rates exceeding those permitted by the IURC;
(c) the loss of Board control by the Members; (d) a
fundamental change in the regulatory scheme; (e)
REA preemption; and (f) confirmation of the REA
Plan.

A. OVERVIEW _OF RELEVANT FACTORS BEAR-
ING ON THE FAIR MARKET VALUE OF WA-
BASH AS A GOING CONCERN

160. REA and Wabash have stipulated that $175
million is the liquidation value of Wabash’s tangible,
useful assets, including (a) the 25% interest in Gibson
Unit No. 5, (b) the interest in the joint transmission
and distribution system, (c) distribution facilities, (d)
the headquarters building, (e) the load management
system, and (f) furniture, miscellaneous equipment
and vehicles. Dr. Ex. I. Wabash’s principal intangible
asset is the Supply Contracts with its Members,
which Martin, Pratt and Lewellen testified have no
independent liquidation value. Conf. T. L., p. 36-38.

161. Ordinarily, one would expect that Wabash’s
creditors would insist that the company’s assets be
liquidated for the creditors’ benefit unless Wabash
had some greater value as a going concern. In this
instance, Wabash and REA agree that Wabash is
worth more as a going concern. The Court’s task is
to determine what the fair market value of Wabash is
as a going concern.

162. In establishing the fair market value of a busi-
ness or assets, a court typically looks to the “price at
which the property would change hands between a
willing buyer and a willing seller, neither being under
any compulsion to sell and both having reasonable
knowledge of relevant facts.” Treas. Reg. (1.170A-
1(e)(2)(1984). See United States v. Cartwright, 411
U.S. 546, 551 (1973); Anselmo v. Commissioner, 598
F.Supp. 575, 576 (D. D.C. 1984). In the prior Valuation

137a

Case, the District Court indicated that this is a price
that results from an informed hargaining process.
111 B.R. at 768, citing Im re Valuation Proceeding
Under Sections 303(c) and 306 of the Regional Rail
Reorganization Act, 531 F.Supp. 1191, 1217-18 (Reg.
Rail. Reorg. Ct. 1981). Bu:yers or sellers with special
circumstances are excluded, but the Court must
“take into account all considerations that the parties
might fairly bring forward and give substantial
weight in their bargaining.” 111 B.R. at 768.

163. The parties have identified two different types
of potential buyers for Wabash, an investor-owned
utility and another not-for-profit cooperative. But as
Olley explained, any potential buyer must derive an
economic benefit from its purchase of Wabash or
there will be no transactioin.

164. A typical willing buyer is interested in how
(and when) he is going to earn a return on his invest-
ment in acquiring a going concern. Because Wabash
is a not-for-profit entity, itt is extraordinarily difficult
to imagine any hypothetical third-party buyer that
would be willing to purchase Wabash (as is) for more
than the value of its hard assets. While a substantial
amount of testimony was directed to estimating Wa-
bash’s future revenue streams, such revenue streams
would not have economic vialue to a hypothetical buyer
if it takes over Wabash in its current form. This is
because Indiana law requires that Wabash’s revenues
be adjusted periodically so that they cover only
operating costs and a modest capital reserve allow-
ance. Thus, the very not-for-profit nature of Wabash
precludes any buyer from earning a profit or an
economic return on the acquisition of Wabash as a
going concern.

138a

165. Wabash is a cooperative association that was
formed fuer the specific purpose of benefiting its
Members. The Members own and control the organi-
zation, through its Board of Directors, and determine
the rates to be charged by Wabash, subject to approval
by the IURC. Any potential buyer necessarily would
consider the constraints inherent in this structure.

166. Moreover, as noted above in Section V., the
Court agrees with the conclusions expressed by
Macneil, that any involuntary displacement of IURC
regulation of Wabash’s rates or loss of Member con-
trol over Wabash would likely breach the bargain-in-
fact between Wabash and its Members and release the
Members from their purchase obligations under the
Supply Contracts.

167. If any buyer of Wabash unilaterally attempted
to recover its acquisition cost by increasing rates
above the host IOUs’ average system costs, it is
likely that the Members would respond to this breach
of the Supply Contracts by purchasing their power at
average embedded cost from the host 1OUs.

168. The Court finds it probable that the Members
would be able to purchase all of their power require-
ments from the host IOUs at average embedded cost,
notwithstanding the obstacles generally alluded to by
Radigan, and that the costs projected in the without-
Wabash scenario are reasonable. The first obstacle
identified by Radigan is that “circumstances have
changed,” yet this ignores the fact that the Members
previously purchased power from the host IOUs and
they are still physically connected to them. See
Martin testimony. Val. T. L., p. 89. Radigan identified
the Supply Contracts as an obstacle, yet he assumed
for purpose of his study that the Supply Contracts do
not exist. C/V T. p. 1146-47. The next two obstacles

139a

identified by Radigan, i.e., increased costs for
NIPSCO area Members and loss of Gibson Unit No. 5
and transmission agreements, are actually assumed
to occur in the without-Wabash study, Dr. Ex. A-1, p.
12; therefore, such “obstacles” or increased costs
already have been accounted for by Wabash. With re-
spect to the fifth obstacle, whether the Members
could acquire long term power at average embedded
cost, Radigan merely testified that it is “difficult to
answer” and “hard to determine.” C/V T. p. 1179.
The Court finds that the Wabash evidence on this
issue — including the recent I & M contract, testi-
mony that there is currently a surplus market (even
before considering the 650-700 megawatts now pur-
chased by Wabash), and the fact that the Members
have historical and physical ties to their host IOUs
— is more probative than Radigan’s general uncer-
tainty.

169. It is not necessary to determine precisely what
rates would be available to the Members in the
absence of Wabash. The risk associated with convinc-
ing the Members to renegotiate their contracts alone
is sufficient to deter any investor-owned utility from
purchasing Wabash for a premium above the value of
its hard assets.

170. An investor-owned utility would not purchase
Wabash unless it had a reasonable expectation that it
could convert Wabash into a for-profit entity and
thereby earn a profit on what it paid for Wabash
either through rates approved by the [URC or other
adjustments in regulatory treatment.

171. An immediate difficulty with this hypothetical
transaction is that the Members would have to agree
to such a change in Wabash’s not-for-profit status and
the terms of the Supply Contracts. The Members

140a

would have no incentive to agree to such a radical
change unless the purchaser could offer lower rates
than the Members would otherwise pay to the host
10Us if Wabash ceased to exist.

172. Moreover, it is improbable that an investor-
owned utility would risk such a purchase if it already
has contracts for the sale of power to Wabash or may
expect to contract directly with the Members in the
event Wabash were to disband.

173. Another constraint upon the value that a
hypothetical IOU would put on Wabash is the need of
such a buyer to convince the IURC to let it raise its
rates to recover the cost of buying Wabash, plus a
return on that cost. Indiana law is an absolute bar
against any utility, including Wabash and any poten-
tial buyer (whether not-for-profit or investor-owned),
recovering through rates the sunk costs of a plant
that is not used and useful. Moreover, a potential
buyer may not be able to offer the same justification
that Wabash could for a viability rate increase.

174. A not-for-profit cooperative would not be inter-
ested in buying Wabash unless it could show an eco-
nomic benefit to its ratepayers from such purchase in
the form of cost savings. No evidence was presented
that a not-for-profit cooperative could derive any
economic benefit from the purchase of Wabash. While
REA’s witness Jerominski assumed that the potential
buyers of Wabash would most likely be not-for-profit
cooperatives, he failed to explain what economic
incentive would induce any other not-for-profit coop-
erative to acquire Wabash.

175. The unlikely prospect of a willing buyer for
Wabash is confirmed by the fact that since the
District Court’s remand for additional valuation find-
ings, REA has not produced any evidence that sup-

14la

ports even an inference that there is a willing buyer
for Wabash. On the contrary, REA’s witness Heath
admitted that all discussions between REA and
potential buyers have proved fruitless.

B. REJECTION OF REA'S “RATE INCREASE SCE-
NARIOS”

176. REA has proposed three “rate increase scenar-
ios,” resulting in values of $450 million, $750 million
and $975 million. REA scenario 2 ($975 million) was
rejected by REA’s own appraiser, Jerominski, and
REA presented no evidence to support it; therefore,
the Court need not consider such valuation. Never-
theless, because REA scenario 2 suffers from the
same defects as REA scenarios 1 and 8, it is also dis-
cussed herein. In each scenario, REA proposes that
Wabash’s value should simply be increased by the size
of rate increases that REA assumes Wabash can im-
plement in the future to repay its debt to REA. The
Court finds a number of fatal flaws in REA’s approach
to the valuation issue.

177. As a fundamental matter of common sense, the
Court finds ‘ghat there is no reason that any third
party would jwant to purchase Wabash’s liabilities,
whether they are $450 million, $750 million or $975
million, and.4hen raise rates to its existing customers
in order to repay those liabilities. REA’s contention
that the going concern value of Wabash depends on its
liabilities is inconsistent with the directions from the
District Court on remand since there is no conceiv-
able buyer who would willingly pay money simply to
assume a debt. REA’s rate increase scenarios as-

142a

sume that Wabash’s rates will be increased to repay
the debt to REA. This, of course, results in no eco-
nomic benefit to a hypothetical purchaser. Why would
anyone want to purchase Wabash to be a collection
agency for REA and impose the financial burden of
repaying REA’s debt upon its ratepayers?

178. The Court accepts the opinions expressed by
both Gross and Lewellen that Wabash’s market value
as a going concern cannot be increased by raising its
rates to pay its debt to REA. Apart from the con-
straints of Indiana rate regulation, there are simply
no Marble Hill assets to support the REA proposed
rate increases for its valuation “scenarios.”

179. It is clear to the Court that Wabash’s value
cannot properly be measured by the amount of its
debt, as REA proposes. The proper focus of any in-
quiry into the going concern value of Wabash must be
the cost savings or profit that a willing buyer could
realize, which in turn depends on Wabash’s used and
useful assets and the continued enforceability of the
Supply Contracts. Since REA’s “scenarios” contem-
plate that Wabash will raise rates in amounts ranging
from 12.1% to 51% for the sole purpose of repaying the
Marble Hill debt to REA, these “scenarios” are not
instructive for determining going concern value.

2 7 , “ ”
The Evidence.

180. The Court further finds that REA’s three rate
increase “scenarios” rest on a number of premises
that the Court rejects as contrary to the evidence
regarding the regulation of Wabash’s rates and the
consequences of any attempt to alter the contractual
relationships between Wabash and its Members.

143a

181. Two of REA’s scenarios -- scenarios 2 ($975
million) and 3 ($750 million) -- depend entirely upon
REA’s authority to preempt the application of Indiana
law to Wabash’s rates. REA’s final scenario --
scenario 1 ($450 million) -- depends upon an assump-
tion that the IURC will approve a permanent 12.1%
“fixed debt service adder” even without REA preemp-
tion and regardless of the used and useful rule and
without regard to the comparative costs and benefits
of such a rate increase.” The Court rejects REA’s
rate increase/debt collection scenarios as invalid.

a. REA’s Scenarios 2 And 3 Are Not Credible Because
They Depend Upon Preemption To Displace Indiana
Rate Regulation.

182. The unrebutted testimony of Macneil estab-
lished that the Supply Contracts are conditioned upon
IURC regulation of Wabash’s rates. C/V T. p. 501,
508-10. Both the District Court (713 F. Supp. at 1270)
and the Seventh Circuit (903 F.2d at 455) reached the
same conclusion in Wabash v. REA (1). REA’s wit-
nesses frankly conceded that the rate increases in
REA’s scenarios 2 and 3 depend upon REA preemp-
tion of IURC regulation of Wabash’s rates. While
Jerominski agreed that the Supply Contracts require
that Wabash’s rates be approved by the IURC (C/V T.
p. 1534), he nevertheless assumed whatever rate in-

9 The REA really has not formulated any “plan” to reor-
ganize and operate Wabash as a going concern. Instead, REA
and its witnesses have fabricated certain rate increases and
attempted to quantify the present value of future income
streams, assuming in the first instance that REA can imple-
ment and collect such rate ncreases. If such rate increases
and/or revenue projections are not realized, REA retains the
right to liquidate Wabash at any time during the next 37 years.

144a

creases REA asked him to assume. Again, the basis
for this assumption is nothing more than REA’s
purported right to supplant this specific contractual
requirement.

183. The Court is well aware that REA’s prior at-
tempt to preempt by letter was rejected in Wabash v.
REA (1). REA has now promulgated its Preemption
Rules, the validity of which Wabash once again has
challenged. Given the prior ruling by the District
Court and the Seventh Circuit in Wabash v. REA (J),
this Court doubts REA has authority for its latest
attempted preemption.” However, this Court need
not resolve the issue to determine the reasonableness
of REA’s scenarios 2 and 3. Even if REA had the
authority to adopt and apply its Preemption Rules to
Wabash, REA simply would win the battle and lose
the war. Macneil’s unrebutted testimony establishes
that if REA were to preempt state regulation of
Wabash’s rates, that would free the Members from
their obligations under the Supply Contracts.

184. Without enforceable Supply Contracts, REA’s
scenarios 2 and 3 are meaningless. REA’s own valua-
tion witness, Jerominski, conceded that the enforce-
ability of the Supply Contracts “would have an effect”
on Wabash’s valuation. C/V T. p. 1536-37. While
Jerominski stated that REA had provided him with a
written opinion that the contracts were enforceable
(C/V T. p. 1587), REA never produced this “opinion”
at trial to be subjected to cross examination. Mac-

» REA’s Health testified that preemption was an essential
aspect of REA’s scenarios 2 and 3 (C/V T. p. 1348), and that if
this breached the Supply Contracts, he did not know whether
he still believes that the REA Plan is feasible. C/V T. p. 1436-
37.

145a

neil’s testimony is the only competent evidence on the
enforceability issue that was presented to the Court.

b. There Is No Evidence That The IURC Is Likel To
Grant The Permanent 12.1% “Fixed Debt

Scenario 1.

185. REA has failed to present competent evidence
that the IURC is likely to grant the buyer of Wabash
the permanent 12.1% “fixed debt service adder” as-
sumed in REA’s scenario 1.

186. The testimony of REA’s own witnesses
clearly establishes that the 12.1% rate increase was
concocted by REA, its attorneys and consultants.
For example, Stone, an REA economist, admitted that
the 12.1% “fixed debt service adder” was merely the
mathematical equivalent of the 8.2% retail hike the
IURC had granted PSI (C/V T. p. 921-22), and that
the entire concept of a 12.1% rate increase was simply
REA’s response to the question of what would be an
alternative rate increase in the event that REA could
not preempt Indiana rate regulation. C/V T. p. 1004.

187. Gloria’s testimony was the only evidence that
REA offered in support of its contention that Wabash
could raise its wholesale rates by 12.1%. The Court
finds that Gloria’s testimony does not support REA’s
conclusion for at least two reasons.

188. First, Gloria studiously refused to offer an
opinion that the [URC would raise Wabash’s rates by
12.1% or any other particular amount. In fact, on
cross examination, Gloria specificaily rejected the
suggestion that he had testified that the 12.1% rate
increase in REA’s scenario 1 likely wouid be approved
by the IURC (C/V T. p. 1300), and stated: “I’m not
comfortable in stating that I have a degree of confi-

146a

dence that the Commission would approve that spe-
cific rate increase.” C/V T. p. 1302.

189. Second, REA’s assumption of a 12.1% whole-
sale rate increase must be rejected because there is
no logical relationship between PSI’s temporary rate
relief and REA’s assumption of a “fixed debt service
adder” that will be effective for the next 37 years.
The REA witnesses uniformly admitted that REA’s
assumed 12.1% wholesale rate increase was merely an
extrapolation from the 8.2% retail rate increase that
the IURC approved for PSI after the abandonment of
Marble Hill. However, the 8.2% interim emergency
retail rate increase approved in March, 1986, was not
only rescinded two years later by the IURC, but PSI
was also required to make an additional cash refund of
$50 million to its retail customers. REA offered no
explanation how PSI’s temporary (approximately 24-
month) emergency rate hike for cash flow relief could
be precedent for a permanent rate increase that REA
expects to collect from Wabash and its Members for
the next 37 years. On the contrary, PSI was granted
a temporary rate increase as an alternative to
bankruptcy based upon a specific finding by the IURC
that PSI’s ratepayers would be better off under such
regulatory treatment.

190. Based on the evidence introduced by Wabash,
the Court also believes that the distortions in the
assumed 12.1% rate increase underlying REA’s sce-
nario 1 would likely not be countenanced by the
IURC. Both Setliff and Reising testified that REA’s

21 Gloria also admitted that he did not know whether a
12.1% rate increase would be sufficient to return Wabash to
financial viability and provide necessary access to capital
markets. C/V T. 1825-26.

147a

rate increase was structured as an unconventional
“fixed debt service adder.” C/V T. p. 1691-92. Reising
has extensive experience in rate proceedings for
various utilities before the IURC. C/V T. p. 215-17.
Reising explained that ordinarily a 12.1% increase as
approved by the [URC would result in net revenues
that would decline over time (as costs increased). The
study that Burns & McDonnell prepared for REA
used a “fixed adder” that generates a constantly
increasing (not decreasing) revenue adjustment for
REA debt service.” C/V T. p. 1692. As part of
Wabash’s rebuttal, Reising testified that he was not
aware of any instance where the IURC had author-
ized an energy rate adder for debt service like REA’s,
nor was he aware of any trend developing in the
IURC’s rulings that might support REA’s position.
C/V T. p. 1694.

191. The exhibits presented by Wabash graphically
demonstrated the extent that REA scenario 1
distorts Wabash’s revenues (and, therefore, its value).
For example, Dr. Ex. A-4 compares the annual
revenue requirements projected in the REA study
under scenario 1 with those projected in the Wabash
study. By the year 2020 (the last year in the Wabash
study), the Wabash study projected that Wabash’s
revenues from the sale of electric power would be
approximately $750 million, while the REA study
projected annual revenues of approximately $1.7
billion (compared to approximately $150 million for
1990). REA’s revenue projections simply have no

2 For scenario 1 alone, REA projected that the “fixed debt
service adder” based on a 12.1% rate increase will produce $20
million of debt service payments in 1991 and over $48 million in
2027. C/V T. p. 1561-62.

148a

basis in reality, and thus, grossly distort the
valuation REA seeks to derive from such revenue
stream. For example, Pratt pointed out that REA’s
scenario 1 projected Wabash’s revenues to increase at
an annual compound rate of 8.4%, which is more than
twice the expected inflation rate. C/V T. p. 1600.
Jerominski conceded that REA scenario 1 projects
that by 2027 Wabash’s total annual revenues will be
$3.2 billion, even though REA’s own witness, Mcody,
estimated that the total net farm income in 2024 for
the entire State of Indiana would be only $2.3 billion.
C/V T. p. 1579.”

ce. REA Ignores The Requirement That Any

192. The Court further finds that REA's scenario 1
is based upon the flawed assumption that the IURC
will allow a buyer of Wabash to impose a 12.1% “fixed
debt service adder” regardless of the costs or benefits
for the ultimate consumers. REA’s own witness,
Gloria, establishes that the IURC will analyze any
proposed Wabash rate increase to ensure that the
costs do not exceed the benefits to the ultimate
consumers. C/V T. p. 1253-55. Jerominski admitted
that the IURC approved PSI’s temporary rate in-
crease in 1986 only after analyzing the relative costs

% It is also a mystery where REA expects to generate these
staggeringly high electric revenues when Moody estimates that
real farm income in Indiana will constantly drop from $861
million in 1990 to $367 million in 2077. C/V T. p. 848-58; Dr.
Ex. A-18. Moody also testified that during this same time
period real farm income in Indiana will decline approximately
2.3% per year. /d.

149a

and benefits of such an increase and concluding that it
was better to pay higher retail rates in the short
term than to allow PSI to go into bankruptcy with a
resulting loss in consumer and business confidence
and drain on PSI’s management. C/V T. p. 1259-60;
REA Ex. 38.

198. The analysis by Lewellen and Olley identifies
the maximum viability increase that could possibly be
applied to Wabash. Lewellen’s valuation captures all
the economic benefit that the Members can and will
derive from the Wabash organization and all its
tangible and intangible assets. The IURC would not
approve rates that are tied to a higher value because
there no longer would be a correlation between costs
and benefits. That is the fundamental flaw in REA’s
rate increase scenarios. The Court accepts the eco-
nomic analysis of Olley that the upper limit of a
viability rate increase, as a matter of economics and
regulatory law, could not exceed the additional value
that Wabash has for the Members. If rates were set
at a level that exceeded this additional worth to the
Members, this would dictate that the Members
purchase power from other sources at lower rates. In
other words, it would not make economic sense for the
IURC to keep Wabash or its new owner “viable” if the
result were to raise rates to its ultimate consumers
above the level available from other utilities. This
would not-be economically efficient regulation. Based
on the testimony of Lewellen, Olley, and Gloria, $450
million is more than twice the $221.7 million maxi-
mum value that can reasonably be presented to the
IURC and justified as a Wabash viability case.

194. It simply is not enough for REA and its
witnesses to construct hypothetical rate increases
that, along with REA’s exaggerated load growth as-

150a

sumptions, produce imaginary income streams that
REA then discounts to present values ranging from
$450 to $975 million. Even if REA could implement its
assumed rate increases solely to collect the Marble
Hill debt (which it clearly cannot), REA has failed to
present any evidence that even suggests that a
willing buyer would assume that it could impose such
rate increases when acquiring Wabash as a going
concern. Nor does REA demonstrate bew such an
acquisition could benefit the willing buyer’s current
ratepayers: This fundamental fault in REA’s valua-
tion analysis does not appear to concern REA because
REA plans to liquidate Wabash if REA cannot imple-
ment its hypothetical rates or if its load growth
assumptions are not realized. The Court, however,
must determine what is a reasonable estimate of
Wabash’s going concern value for purposes of deciding
which reorganization plan is feasible, fair and equita-
ble.

C. SPECIFIC FINDINGS THAT WABASH HAS A
FAIR MARKET VALUE AS A GOING CON-
CERN OF NO MORE THAN $190 MILLION

195. Based on the valuation evidence presented by
the parties, and the Court’s findings with respect to
the unique characteristics of Wabash, the Court con-
cludes that Wabash’s fair market value as a going
concern does not exceed $190 million.

196. The Court finds most credible the opinion of
Gross that Wabash has a fair market value as a going
concern of $190 million.

197. Gross used a discounted cash flow methodol-
ogy. This method of valuation is predicated on the
theory that the value of an ongoing business is based
upon the future benefits (expressed in terms of cash

15la

flow) discounted back to the present value using an
appropriate discount or capitalization rate.

198. The Court is mindful of the Seventh Circuit's
observation in Metlyn Realty Corp.v. Esmark, Inc.,
763 F.2d 826 (7th Cir. 1985), that “the process of
valuation is inexact” (830) and that a discounted cash
flow valuation is “highly sensitive to assumptions
about the firm’s costs and rate of growth, and about
the discount rate.” (835) Moreover, this Court “is not
required to accept an appraiser’s opinion if it is
contrary to [the Court’s] own judgment on value.”
Orth v. Commissioner of Internal Revenue, 813 F.2d
837, 842 (7th Cir. 1987).

199. While it is difficult to put a fair market value
on Wabash because there is no real market for such a
unique entity, the Court believes that Gross used the
appropriate assumptions and made the most accurate
estimate of Wabash’s going concern value in tradi-
tional hypothetical terms.

200. Due to Wabash’s status as a non-profit public
utility, it may not represent the typical willing seller
motivated to sell at the highest price, though the
Court must look at a hypothetical seller. On the
other side of the hypothetical sales transaction, the
Court cannot conceive of a typical willing buyer,
being profit motivated, that would purchase Wabash in
its current not-for-profit form. Given Wabash’s
unique circumstances, the Court finds that it was ap-
propriate for Gross to utilize the Court as a surro-
gate for the willing seller and to assume that the
willing buyer would be an IOU.

201. A for-profit IOU would net purchase Wabash
unless it reasonably believed that it could convert
Wabash into a for-profit entity, recover the purchase
price through rates approved by the IURC, and make

152a

a profit on its acquisition investment. The conver-
sion or merger process, including renegotiated Sup-
ply Contracts and new Articles of Incorporation,
would require the consent and cooperation of the
Members. Because the Members could purchase
power from their host l[OUs at average embedded cost
if Wabash were dissolved, they would have substantial
leverage in this negotiation process. Gross described
the above obstacles confronting the willing buyer as
the “valuation chasm,” and he assumed that the
“valuation chasm” could be crossed if the rates to the
Members did not exceed the prevailing IOU rates.
Gross’ going concern value of $190 million is based on
some rather strained assumptions that the Supply
Contracts may be renegotiated, that Wabash’s Mem-
bers will permit the utility to be changed into a for-
profit organization, that the Members will cede
control of Wabash, and that the IURC will permit the
willing buyer to collect additional rates to recover its
investment in Wabash. Gross properly discounted for
these risks in arriving at the $190 million going
concern value; however, the Court still has some
reservations whether the Members would renegotiate
the Supply Contracts and whether the IURC would
grant the willing buyer a rate increase that, indi-
rectly, pays Marble Hill debt. Nevertheless, in its
role as surrogate for the willing seller, the Court
finds that $190 million is the maximum value that
could be negotiated with a willing buyer. This finding
is reinforced by the market tests performed by Pratt,
which demonstrated that the maximum going concern
values of comparable assets, not in bankruptcy, is
within the range of 1.24 to 1.35 times the book value of
the assets. Pratt’s market tests indicate a maximum

153a

going concern value for Wabash between $186 million
and $202.5 million.

202. Much of the conflicting evidence heard by the
Court concerned the power cost forecasts prepared by
Wabash and REA. Generally, REA projects higher
costs for Wabash because it projects higher load
growth, inflation, costs for unit retirements, and
costs for power from Hoosier. Under REA’s approach
to valuation (but not under Wabash’s approach) higher
costs lead directly to higher cash flows, which biases
the REA study and overstates value. The disagree-
ment over Wabash’s future costs, however, does not
disturb the $190 million estimate because higher
costs would be reflected in both the with-Wabash and
without-Wabash studies, with no measurable effect on
the cost savings achieved by Wabash (its “cash
flows”) and the consequent value. Moreover, the
higher power supply costs projected by REA would
not be a benefit to a hypothetical buyer unless such
buyer could increase revenues to cover these costs
and earn a profit.

203. While the Court does not think it is necessary
to resolve all the conflicts in the opinions regarding
Wabash’s future costs, the Court finds that the
weight of the evidence clearly supports Wabash’s
projections on each of the four factors that explain
nearly all of the differences between the Wabash and
REA power cost studies.

204. The Court’s finding is based particularly on
the following: (1) both Wabash and REA relied on
SUFG as a neutral and reliable source of load fore-
cast information, but Wabash’s load forecast approxi-
mates the most current 1990 SUFG load forecast
while REA relies on a 1988 SUFG study that had
predicted higher load growth; (2) Wabash’s load

154a

forecast of 1.61% equals the average load growth
projected by Burns & McDonnell for the host I0Us
supplying the same service territory as Wabash; (3)
whereas SUFG and Wabash project negative real
price growth rates for Wabash and the host 10Us,
REA projects positive real price growth rates for
such utilities; (4) the issue of unit retirements is
essentially moot because the Wabash study includes
an equivalent amount of capital expenditures for
refurbishments; and (5) REA incorrectly assumed
that the cost of power from Hoosier would escalate
when the evidence indicates that Hoosier itself pro-
jects that its price to Wabash will remain flat.

205. Utilizing the going concern value of $190
million, the total value of Wabash’s assets for pur-
poses of 11 U.S.C. §§ 506(a) and 1129(b) is approxi-
mately $431,940,000.00, summarized as follows:

Going Concern Value $ 190,000,000.00
PSI Settlement 170,000,000.00
S & L Settlement 15,000,000.00

Marble Hill real estate and
personal property, Marble
Hill Salvage Account,
Marble Hill Contractor
Escrow Account, Marble
Hill to Columbus Line, and

765 KV Switchyard (per
stipulation, Dr. Ex. 1) 29,800,000.00
Investment Accounts 19,000,000.00
CFC Investments 8,000,000.00
Vehicles 140,000.00

$431,940,000.00

206. Based on the above values and the amounts of
their claims, REA and CFC are undersecured.

155a

Vil. FINDINGS THAT VALUE OF WABASH TO
THE MEMBERS IS $221.7 MILLION

207. The Court finds that Wabash has an additional
value of $31.7 million to its Members above its fair
market value as a going concern, or a total value of
$221.7 million.”

208. Because of the strained assumptions required
to put a market value on Wabash in a hypothetical
sales transaction, and consistent with the objective to
determine its maximum value as a going concern for
creditors, Wabash presented evidence of what Wabash
was worth to its Members in its current form.

209. The Court agrees with Lewellen and Olley
that Wabash is clearly more valuable to the Members
than to any other buyer, and that such value is
properly measured through the cost savings (or
benefits) approach. Lewellen obtained the cost
savings information from Wabash’s power cost study,
Dr. Ex. A-I, which compares the Members’ costs both
with and without Wabash, and in the latter study,
assumes that the Members purchase their power from
the host I0Us. The Court previously approved
Wabash’s assumption that the Members could
purchase power from the host IOUs at average
embedded cost, and found Wabash’s power cost study
to be more reliable than REA's study, REA Ex. B-28.
Based on these prior findings, the Court now finds
that Lewellen properly valued the correct cost
savings (or benefits) in arriving at the value of $221.7
million. The Court also finds that the value of $221.7

% If there were an auction, of course, it is likely that
Wabash’s Members would bid only $1.00 more than the next
highest bidder, or $190,000,001.00. But Wabash is offering to
pay the full value to make certain it can exit bankruptcy.

156a

million would not substantially change if REA Ex. B-
28 were utilized, because the primary factors on
which the parties disagree—load growth, inflation
rate, unit retirements and Hoosier costs—would
simply increase the overall costs in both the with-
Wabash and without-Wabash scenarios, with no
substantial net impact on the cost savings.

210. Even were the Court to accept REA’s conten-
tions that Wabash has underestimated any one of the
components that determine its future power costs,
and that such factors affect only the costs of Wabash,
that calculation would narrow the difference between
the cost of power to Members with and without
Wabash, with a consequent reduction in the cost
savings realized by the Members, i.e., the additional
value of Wabash to its Members. Thus, the Court
finds that REA’s quarrels with Wabash’s underlying
power cost study merely confirm the fact that
Lewellen has placed the maximum value upon Wabash
that can be achieved for the benefit of creditors.

211. The Court has found that Lewellen properly
measured the cost savings, or benefits, of Wabash to
the Members, but the question remains whether, in
light of the Rate Case, the [URC would allow Wabash
to increase its rates for the purpose of paying $221.7
million to REA and CFC. The payment of $221.7
million to REA and CFC would represent the pay-
ment of $69.4 million over and above Wabash’s current
debt that is associated with used and useful assets
(i.e., $152.3 million). While Indiana law clearly pre-
cludes a Marble Hill-related rate increase, both
Wabash and REA presented evidence suggesting that
the IURC would approve a “viability” rate increase.

212. Based on Gloria’s testimony, and what
occurred in the PSI Case, it seems likely that the

157a

IURC would grant Wabash a viability rate increase if,
after engaging in a cost benefit analysis, the IURC
conluded that such rate increase was in the best
interests of the ultimate consumers. There is no
evidence that the IURC could or would grant such a
viability increase to REA or any buyer of Wabash.

213. The testimony of Lewellen and Olley quanti-
fies the upper limit of the viability rate increase that
the IURC is likely to approve for Wabash. The
Lewellen-Olley analysis identifies the maximum eco-
nomic benefit (i.e., present and future cost savings)
that Wabash can produce for its Members (and ulti-
mately for the retail consumers). The IURC, simi-
larly, would regard this as the rate ceiling that it
could authorize for Wabash and that will still produce
a benefit for the Members. To raise rates beyond this
level would, by definition, be punitive and conf
iscatory. In the final analysis, Lewellen’s value of
$221.7 million identifies “the maximum value you
could possibly squeeze out . . . of [the Members]
before it would pay them to go find other arrange-
ments.” C/V T. p. 718.

214. Based on the foregoing, the Court believes it
is reasonable to expect that the IURC would grant
Wabash a viability rate increase for the purpose of
paying $221.7 million to REA and CFC. However, the
IURC would approve such a rate increase only as part
of a feasible plan which would allow Wabash to exit
bankruptcy. This issue of plan feasibility is discussed
below.

215. It is important to distinguish the Gross and
Lewellen valuations. Gross’ fair market value of $190
million represents the amount which secured credi-
tors could expect to receive following a sale of Wabash
as a going concern; thereofore, such value satisfies

158a

the requirements of 11 U.S.C. §§ 506(a) and
1129(b)(2)(A). In contrast, Lewellen’s value of $221.7
million defines the upper limit on the value that
Wabash could present to the IURC as justification for
a viability rate increase. The significance of the
Lewellen value from a bankruptcy perspective is that,
by paying such amount to creditors, Wabash has
assured that the creditors are receiving the maxi-
mum amount possible for purposes of 11 U.S.C. §
1129(b)(2)(B).

Vill. THE WABASH PLAN

216. As described in detail below, creditors under
the Wabash Plan will receive approximately
$457,334,645.00. Thus, creditors will receive more
under the Wabash Plan than they would in a liquida-
tion.

217. Article II of the Wabash Plan classifies the
claims and interests as follows: Class 1 - Administra-
tive Claims; Class 2 - Secured Claim of REA on the
Generation and Transmission Assets (estimated to be
$182,390,500.00); Class 3 - Secured Claim of CFC on
the Generation and Transmission Assets (estimated
to be $7,609,500.00); Class 4 - Secured Claims of REA
and CFC on the Investment Accounts (estimated to be
$18,239,050.00 an $760,950.00, respectively); Class 5 -
Secured Claim of REA on the Timbers Account
(these funds were paid to REA, see § 221, infra.);
Class 6 - Secured Claims of REA and CFC on the
Marble Hill Assets (estimated to be $199,519,588.00
and $8,324,141.36, respectively); Class 7 - CFC’s Set-
Off Claim (estimated to be $8,162,899.04); Class 8 -
Unsecured Claims less than $25,000.00 (estimated to
be $21,788.47 in the aggregate); Class 9 - Claims of
PSI (estimated to be between $29,586,678.00 and

OOH ae a UE i er Se raed

Sy ae

159a

$110,000,000.00); Class 10 - Unsecured Claims of REA
and CFC (estimated to be $271,000,000.00 and
$12,000,000.00, respectively); Class 11 - Claims of
Members (estimated to be $7,184,740.07); and Class 12
- Interests of the Members.

218. Classes 2, 3, 4, 6, 9, 10, 11 and 12 are impaired
under the Wabash Plan. Classes 1, 5, 7 and 8 are not
impaired.

219. Of the impaired classes of claims, Classes 2
(REA), 3 (CFC), 4 (REA and CFC), 5 (REA), 6 (REA
and CFC) and 10 (REA and CFC) voted to reject the
Wabash Plan. Classes 9 (PSI) and 11 (Members’
claims) voted to accept the Wabash Plan.

220. Class 12 (Members’ interests) voted to accept
the Wabash Plan by a vote of 21 to 3.

221. REA’s claim as of the Petition Date (which
totals approximately $670 million before adjustments)
is dealt with in Classes 2, 4, 5,6 and 10. Under Class
2, REA’s secured claim for $182,390,500.00 (represent-
ing REA’s pro rata interest in the assets comprising
the going concern value) is to be satisfied by 1) the
prior payment of $28,928,693.22 from the Timbers
Account and 2) a new promissory note in the amount
of $153,461,806.78, secured by a new first mortgage on
the Generation and Transmission Assets and to be
paid in full over 35 years, with quarterly payments of
principal and interest. Under Classes 4 and 6, REA is
to receive its portion of cash from various sources,
including the Investment Accounts and Marble Hill
Assets (payments totalling $217,758,638.00). The
Wabash Plan estimates that the dividend distribution
to REA with respect to its Class 10 deficiency claim
(estimated to be $271,000,000.00) will be approximately
$30,489,984.00. Thus, REA is’ to_ receive
$430,639,122.00 under the Wabash Plan in addition to

160a

the $36.5 million that Wabash voluntarily paid REA
subsequent to the Petition Date (see Findings, 123,
supra).

222. CFC’s claim as of the Petition Date (which
totals approximately $35,491,876.29 before adjust-
ments) is dealt with in Classes 3, 4, 6, 7 and 10. Under
Class 3, CFC’s secured claim for $7,609,500.00
(representing CFC’s pro-rata interest in the assets
comprising the going concern value) shall continue to
be represented by the existing Bonds, shall be
secured by a new first mortgage on the Generation
and Transmission Assets and shall be paid in full over
23 years, with quarterly payments of principal and
interest. Under Classes 4 and 6, CFC is to receive its
portion of various cash assets, including the Invest-
ment Accounts and Marble Hill Assets (payments
totalling $9,085,091.00). Under Class 7, CFC is enti-
tled to set-off its Marble Hill claim against Wabash’s
investments in CFC (valued at approximately
$8,162,899.04). The Wabash Plan estimates that the
dividend distribution to CFC with respect to its Class
10 deficiency claim (estimated to be $12,000,000.00)
will be approximately $1,350,016.00. Thus, CFC is to
receive $26,207,506.00 under the Wabash Plan in
addition to the $12 million that Wabash voluntarily
paid CFC subsequent to the Petition Date (see
Findings, 24, supra).

223. The Wabash Plan provides that Class 8 un-
secured creditors having claims less than $25,000.00
shall be paid in full on the Effective Date. The total
amount of claims in Class 8 is approximately
$22,000.00.

224. PSI’s unsecured claims (ranging from an
alleged liquidated amount of $29,586,678.00 to an
alleged contingent amount of $110,000,000.00) are

16la

dealt with in Class 9. The Wabash Plan provides that
PSI shall receive $466,017.00, payable in equal install-
ments over five years without interest.

225. The Members’ unsecured claims for patronage
capital ($7,184,740.07 in the aggregate) are dealt with
in Class 11. The Wabash Plan provides that the Mem-
bers’ claims shall be reduced by the same percentage
that Class 10 claims are not paid. Any remaining
claims will only be paid, if at all, at some indetermi-
nate future date when permitted by Wabash’s By-
laws.

226. The Members’ interests in Wabash are dealt
with in Class 12. The Wabash Plan provides that the
Members shall not receive or retain any property
under the Plan on account of their interests, and that
upon the Date of Confirmation, the interests of the
Members shall terminate.

227. Wabash estimates that payments under the
Wabash Plan will require a rate increase of 4.2%
above current rate levels, plus utilization of the
excess revenues (approximately 9.6%) currently
being collected. Wabash Plan, Art. VII. Pursuant to
11 U.S.C. § 1129(a)(6), Wabash has requested that
confirmation of its Plan be made conditional on the
IURC and MPSC approving any rate increase
required by the Wabash Plan. Conf. T. I., p. 81-82.

228. Article IX of the Wabash Plan contains the
essential means for executing the Plan. First and
foremost, § 9.1 provides that Wabash shall assume the
Supply Contracts with the Members in order to
generate the revenues necessary to fund the Wabash
Plan. The assumption of the Supply Contracts will
obligate the Members to fulfill all of their covenants
thereunder, and will also entitle the Members to-the
benefit of all rights thereunder, including the right to

162a

select Wabash’s Board of Directors. In order to
enhance the feasibility of the Wabash Plan, §§ 9.2-9.5
provide that the Members shall make the following
capital contributions (on a per capita basis): a)
$3,213,346.00 payable in cash, or through rates over 12
months (“Phase I” capital); b) up to $5.5 million
payable in cash or through rates on an “as needed”
basis, determined by the Wabash Board (“Phase II”
capital); ¢c) waive any claim to the Investment
Accounts (approximately $19 million); and d) waive
any claim to reimbursement of the PSI Litigation
costs (approximately $18 million).

229. The amount of the Phase I capital contribu-
tion was derived from the amount allowed by the
IURC as a capital reserve in Wabash’s 1983 rate case
for extensions and replacements of plant. Conf. T. L.,
p. 74. However, the Phase I capital contribution of
$3.2 million is independent from, and in addition to,
the capital reserve previously allowed by the IURC.
Conf. T. 1., p. 159-60. The Members have the option of
making the Phase I capital contribution in a lump
sum or through rates collected over 12 months, Conf.
T. L, p. 76-77; however, the Court may order that the
cash payment be made promptly after the Effective
Date if necessary to confirmation. Wabash Plan, §
9.4.

230. The amount of the Phase II capital contribu-
tion represents approximately one quarter’s debt ser-
vice payment under the Wabash Plan. Conf. T. 1., p.
75. The Phase II capital contribution will serve as “a
back up position that [Wabash] would utilize in the-
event that it could not obtain necessary funds for the
continuation of the business’s activities.” Conf. T. 1.,
p. 75. Ifa financial emergency arises within ten years
after the Effective Date, Wabash would have the right

ed. ot bi beh A eee A a ie.

163a

to collect up to $5.5 million from the Members, either
through rates or cash payments. Conf. T. 1., p. 77.

IX. THE REA PLAN

231. The REA Plan classifies the claims and inter-
ests as follows: Class 1: REA and CFC Secured
Claims; Class 2: CFC Setoff Claim; Class 3: Claims of
PSI; Class 4: Priority Claims; Class 5: Unsecured
Claims of $20,000.00 or less; Class 6: Unsecured
Claims In Excess of $20,000.00 (REA and CFC); Class
7: Post-Petition Interest Claims (REA and CFC);
Class 8: Equity Interests and REMC Member Claims.
REA Plan, Art. 2.

232. The thrust of the REA Plan is to take control
of and, if necessary, liquidate Wabash. To accomplish
this, the REA Plan provides that preferred stock
shall be issued to REA and CFC, with one share of
stock being distributed for each dollar of debt. The
preferred stockholders would be given all of the
rights which the Members now have, including the
right to elect Wabash’s Board of Directors. REA
Plan, Art. 12. However, the REA Plan provides that
the Members shall retain their interests in Wabash.
REA Plan, Art. 10.

233. An essential aspect of the REA Plan is REA
preemption of the IURC and the MPSC. C/V T. p.
1348.

234. Notwithstanding that the REA Plan requires
a takeover of the Wabash Board and the preemption of
the state regulatory commissions, the Plan provides
for the assumption of the Supply Contracts. REA
Plan, § 18.1.

235. The REA Plan provides that REA and CFC
are to be paid in full (including post-petition and post-
confirmation interest). REA Plan, Arts. 3, 8,9. REA

164a

estimates that the total debt to REA and CFC is
approximately $1 billion. Dr. Ex. S; REA Ex. 31; C/V
T. p. 1434. The REA Plan provides that the claims of
REA and CFC will be paid in full through deferred
payments over the next thirty-seven (87) years,
ending in 2027.

236. The REA Plan provides that the secured
claims of REA and CFC shall be evidenced by Secured
Promissory Notes, to be executed on the Effective
Date, in amounts equal to such creditors’ Allowed
Secured Claims. REA Plan, § 3.1. If the value of the
Secured Collateral (and thus the amount of the
Allowed Secured Claims) has not been determined by
a Final Order as of the Effective Date, the REA Plan
provides that the Secured Promissory Notes shall be
executed in the “amount of the value of the Secured
Collateral, as determined by the Bankruptcy Court
prior to the Effective Date.” Jd. at § 3.3. The REA
Plan also provides for the issuance of Unsecured
Promissory Notes and Post-Petition Interest Prom-
issory Notes to REA and CFC, in amounts equal to
their Allowed Unsecured Claims and Allowed Post-
Petition Interest Claims. Jd. §§ 8.2, 9.2. The various
notes are all payable quarterly, with interest com-
pounded annually, and may be accelerated upon any
default under the REA Plan. REA Plan, Exs. A, B,
and C,

237. To be able to make the deferred payments
mentioned above, the REA Plan proposes a series of
rate increases. First, the REA Plan provides for
three (3) successive nine percent (9%) rate increases
over a two (2) year period which, compounded, is
approximately 29.5%. Second, the REA Plan provides
for a four percent (4%) rate increase in any year
following a year in which all of the scheduled pay-

MEP SMR) Dig? BRO RLDO RIGA TI ee ALY Pe E

0 gD EF ENGL

.

165a

ments are not made and load growth is not less than
zero. REA estimates that Wabash must sustain an
annual average load growth of 3% to avoid the
additional 4% rate increases. C/V T. p. 1434.” Third,
the REA Plan provides that Wabash must seek addi-
tional rate increases to cover increases in operating
expenses. REA Plan, Art. 14.

238. The rate increases proposed in the REA Plan
are to pay all of the Marble Hill debt, including post-
petition and postconfirmation interest.

239. The REA Plan contemplates that after conf-
irmation Wabash will seek regulatory approval of all
rate increases required by the Plan; however, REA
does not identify the entity having jurisdiction over
Wabash’s rates. REA Plan, Art. 17. In the event the
proposed rate-increases are not approved by Decem-
ber 31, 1991, Wabash is to be liquidated. /d. § 23.4.

240. The REA Plan provides that all of Wabash’s
cash (except for $3.2 million dollars) is to be
distributed to REA and CFC and that the proceeds
from the PSI Settlement and S & L litigation will be
deposited into a reserve fund for creditors and/or used
to make the deferred payments to the extent
necessary. REA Plan, §§ 3.10, 16.2.

241. Despite the facts that PSI rejected the REA
Plan, PSI’s claims have never been disallowed, and
the PSI Settlement is contingent on confirmation of
the Wabash Plan, the REA Plan purports to assume
and adopt the PSI Settlement. REA Plan, § 138.2.
Most importantly, the REA Plan provides that PSI

2% As noted above, REA is projecting 2.94% load growth,
Wabash is projecting 1.61% and SUFG is projecting 1.94%.
Under any of the load growth projections, the six additional
4% rate increases are required under the REA Plan.

166a

shall pay $170 million to REA and CFC. Id. § 3.10. In
addition, the REA Plan proposes to pay PSI
$466,017.00 over five years without interest, in full
satisfaction of PSI’s filed claims which total as much
as $110 million. 7d. § 5.2.

242. The REA Plan classifies the Members’ claims
and interests into a single class, REA Plan, (2.8, and
provides that the claims are not to be paid unless and
until all other claims are paid. id. § 10.2. Although
the REA Plan provides that the Members shall retain
their interests in Wabash, it strips the Members of
their right to elect the Wabash Board of Directors,
and gives these rights to the preferred shareholders
(i.e., REA and CFC). Jd. § 10.1.

243. REA did not. identify those individuals who
would serve as officers and directors of Wabash under
the REA Plan, nor has REA identified the nature of
their compensation. Heath testified that although
REA had begun the process of identifying the types of
individuals which REA would like to serve on the
Wabash Board, no specific individuals have yet been
selected. Conf. T. III., p. 147-150; C/V T. p. 1865-66.

244. The REA Plan provides that Wabash may be
liquidated for any reason at any time, at the discre-
tion of REA, and shall be liquidated if all claims are
not paid in full, with interest, by 2027. REA Plan, §
15.6, Art. 23. Neither the REA Plan nor any evidence
presented at the confirmation hearing explains how
Wabash would be liquidated. T. IIL, p. 126.
Additionally, the REA Plan proposes to terminate
this Court’s jurisdiction prior to the liquidation of
Wabash. REA Plan, Art. 27

245. The REA Plan provides that all creditors and
Members are impaired under the REA Plan. REA
Plan, Art. II. PSI and all 24 Members voted to reject

PLB EAGLE RL ORNE OE FLA AE 0 EB

167a

the REA Plan. CFC did not vote on the REA Plan.
Only REA voted to accept the REA Plan.

246. Factua! statements contained in the Conclu-
sions of Law shall stand as additional Findings of
Fact.

CONCLUSIONS OF LAW
L JURISDICTION AND BURDEN OF PROOF

1. This Court has jurisdiction over this matter
pursuant to 28 U.S.C. § 1334. This is a core proceed-
ing pursuant to 28 U.S.C. § 157(b) (2) (L).

2. The Court may confirm a plan under 11 U.S.C. §
1129 only if all of the requirements found therein are
satisfied. One of the requirements of § 1129(a) is that
each class of claims or interests either accept the
plan or not be impaired by the plan. 11 U.S.C. §
1129(a)(8). If, as in the case of the Wabash Plan and
REA Plan, an impaired class does not accept the plan,
the plan may still be confirmed pursuant to 11 U.S.C.
§ 1129(b) (“cram down”). However, all of the other
requirements of § 1129(a) and (b) must be met. Matter
of Johns-Manville Corp., 68 B.R. 618, 629 (Bankr.
S.D. N.Y. 1986), affd, 843 F.2d 636 (8d Cir. 1988)
(hereinafter cited as “Manville”).

3. Although the plan proponent bears the ultimate
burden of proving that the plan complies with 11
U.S.C. § 1129, parties who file objections have the
burden of going forward with evidence supporting
their objections. Jn re Future Energy Corp., 83 B.R.
470, 481 n.21 (Bankr. S.D. Ohio 1988).

168a

Il. THE WABASH PLAN IS CONFIRMABLE
A. REQUIREMENTS OF 11 U.S.C. § 1129(a)
1. § 1129(a)(1)

4. Under § 1129(a)(1), the Court may confirm a plan
only if it complies with the applicable provisions of
Title 11. REA and CFC objected to a prior version of
the Wabash Plan because it allegedly improperly
classified the unsecured claim of CFC, in violation of
11 U.S.C. § 1122. The current Wabash Plan classifies
the unsecured claims of REA and CFC together;
therefore, these objections are moot.

5. REA objected to a prior version of the Wabash
Plan because it allegedly failed to estimate the value
of the claim against S & L. Subsequent to this objec-
tion, Wabash entered into the S & L Settlement;
therefore, this REA objection is moot.

6. REA objected to a prior version of the Wabash
Plan because it proposed to reimburse the Members
for litigation expenses incurred in pursuing S & L,
and to pay the net recovery from S & L to REA and
CFC. The current Wabash Plan proposes to pay the
gross amount of the S & L Settlement to REA and
CFC; therefore, this objection is moot.

7. REA objects to the Wabash Plan because it fails
to allow “over $200 million in post-petition guarantee
payments made by REA to” FFB, allegedly in contra-
vention of 11 U.S.C. § 502(e)(2). Because REA is un-
dersecured, it is not entitled to post-petition interest.
United States v. Timbers of Inwood Forest, 484 U.S.
365 %1988). REA’s reliance on 11 U.S.C. § 502(e)(2) to
characterize its post-petition payments to FFB as
something other than interest is misplaced. Section
502(e)(1)expressly provides that “[nlotwithstanding

169a

. paragraph (2) of this subsection, the court shall
disallow any claim for reimbursement or contribution
of an entity that is liable with the debtor on or has
secured the claim of a creditor, to the extent that - (A)
such creditor’s claim against the estate is dis-
allowed.” 11 U.S.C. (502(e)(1)(A) (emphasis added).
Thus, according to the plain language of the statute,
REA’s § 502(e)(2) claim for contribution under its
guaranty shall be disallowed to the extent that FFB’s
claim would be disallowed. Since FFB’s claim for
post-petition interest is not allowable, a fortiori,
REA’s claim for contribution is not allowable.

8. REA objects to the manner in which the Wabash
Plan proposes to apply the funds recently paid to REA
from the Timbers Account. See Wabash Plan, (3.2a.
The “Timbers Account” was aptly named because it
contained post-petition debt service payments on
REA’s non-Marble Hill claim—payments which,
under the holding in Timbers, need not be made to
undersecured creditors such as REA. Since, under
Timbers, REA is not entitled to the payment of post-
petition interest, the funds paid to REA from the
Timbers Account must reduce REA’s pre-petition
claim. The weight of authority would support the
application of such funds to the secured portion of
REA’s pre-petition claim. See, e.g., In re Maun, 95
B.R. 94 (Bankr. W.D. Mich. 1987); In re Canaveral
Seafoods, Inc., 79 B.R. 57 (Bankr. M.D. Fla. 1987).
Wabash’s application of the funds to reduce the
secured portion of REA’s pre-petition claim is con-
sistent with the Court’s Judgment entered on July 19,
1990 (see Findings, 23, supra); therefore, the Court
rejects this REA objection as unfounded.

9. Having dealt with the objections raised under §
1129(a)(1), the Court further concludes that the

170a

Wabash Plan satisfies the requirements of 11 U.S.C.
§§ 1122 and 1123. Thus, the Court concludes that the
Wabash Plan satisfies § 1129(a)(1).

2. § 1129(a)(2)

10. Section § 1129(a)(2) requires that the plan pro-
ponent comply with the applicable provisions of Title
11. Objections to confirmation raised under § 1129
(a)(2) generally involve the alleged failure of the plan
proponent to comply with § 1125 or § 1126. Manville,
68 B.R. at 630. No objections to the Wabash Plan
were based on § 1129(a)(2), and the Court concludes
that Wabash has complied with all applicable
provisions of Title 11.

3. §1129(a)(3)

11. Under Section 1129(a) (8), a plan must be pro-
posed in good faith and not by any means forbidden by
law. The focus of the good faith requirement found in
§ 1129(a)(8) is strictly limited to the contents of the
proposed plan. Jn re Madison Hotel Associates, 749
F.2d 410, 424-25 (7th Cir. 1984); In re Cherry, 84 B.R.
134, 137 (Bankr. N.D. Ill. 1988). Thus, the plan propo-
nent’s conduct (aside from the contents of the pro-
posed plan) is irrelevant to the good faith inquiry
under § 1129(a)(8). REA objects to the Wabash Plan
because Wabash has allegedly acted in bad faith. All
of REA’s allegations of bad faith concern actions and
legal positions taken by Wabash in the Chapter II
case, Valuation Case, Rate Case, and in Wabash v.
REA (1). Because none of REA’s allegations concern
the contents of the Wabash Plan, this REA objection
is unfounded. Furthermore, the pursuit of legal posi-
tions which are sustained by the courts does not
constitute bad faith for purposes of § 1129(a)(3). The

17la

Court concludes that Wabash has not acted in bad
faith and that the Wabash Plan was proposed in good
faith.

12. Fruit Belt objects to the Wabash Plan under §
1129(a)(3) because “there is no legal basis to require a
Member to make a contribution against its will.” The
Court notes that Fruit Belt was one of only three
Members to reject the Wabash Plan. Article IX of the
Wabash Plan provides that the Members’ capital
contributions may be collected through rates which
must be approved by the IURC and MPSC. Any
capital contributions collected by rates would, by
definition, be pursuant to valid state regulatory law.
Thus, Fruit Belt’s objection is without merit. The
Court concludes that the Wabash Plan satisfies §
1129(a)(3).

4. § 1129(a)(4)

13. Section 1129(a) (4) requires, inter alia, that any
payment made or to be made by the plan proponent for
services or for costs and expenses in connection with
the case or plan be approved by the court as reason-
able. No objections were filed under § 1129(a)(4), and
the Court concludes that all relevant payments
contemplated by this Section have been or will be
made subject to this Court’s approval. Thus, the
Wabash Plan satisfies Section 1129(a)(4).

5. § 1129(a)(5)

14. Section 1129(a)(5) requires, inter alia, that the
plan proponent disclose the identity of those individu-
als proposed to serve as directors and officers of the
debtor following confirmation, that the appointment of
such individuals to such offices be consistent with the
interests of creditors, equity security holders and

172a

public policy, and that the plan proponent disclose the
identity of any insiders to be retained by the
reorganized debtor, and the nature of any compensa-
tion for such insiders. No objections were filed under
this Section. Through its Plan and evidence admitted
at the confirmation hearing, Wabash identified its
proposed officers and directors, as well as the nature
of their compensation. The Court concludes that the
continuance of Wabash’s officers and directors serves
the interests of the creditors, Members and public
policy, and that § 1129(a)(5) has been satisfied in all
other respects.

6. § 1129(a)(6)

15. Section 1129(a)(6) requires that any rate
changes proposed in the plan be approved by the appro-
priate regulatory commission, or be expressly condi-
tioned on such approval. Only the IUCC filed an ob-
jection under this Section, and that objection was
subsequently withdrawn. The Court concludes that
the Wabash Plan satisfies § 1129(a)(6). See Wabash
Plan, Art. VII.

7. §1129(a)(7)

16. Section 1129(a) (7) provides, inter alia, that
each holder of an impaired claim or interest must
accept the plan or receive property under the plan
having a value that is not less than the value that the
holder of such claim or interest would receive in a
Chapter 7 liquidation. The impaired creditors and
interest holders who have not accepted the Wabash
Plan include REA, CFC, Fruit Belt, Jay County
REMC and Wabash County REMC (only in its
capacity as a Class 12 interest holder). The Wabash
Plan, therefore, must provide each of these entities

eos es

ere

173a

with an amount equal to or greater than the amount
which such entity would receive in a Chapter 7
liquidation.

17. REA and CFC object to the Wabash Plan under
§ 1129(a)(7) because Wabash’s liquidation analysis
does not include any value for the Supply Contracts
or other contracts. However, neither REA nor CFC
presented any evidence of what the Supply Contracts
and other contracts would be worth in a liquidation,
and the Court previously found that the Supply
Contracts and other contracts have no liquidation
value. Such assets have value only as part of
Wabash’s going concern value. Moreover, this objec-
tion would have merit only if the liquidation value of
the Supply Contracts and other intangibles exceeded
$243,636,628.00—the difference between the Wabash
liquidation value ($213,210,000.00) and the value to be
paid to REA and CFC ($456,846,628.00). Any value
less than $243,636,628.00 would mean that REA and
CFC would still be receiving more under the Wabash
Plan than they would in a liquidation. Thus, these
objections are unfounded.

18. The Wabash Plan proposes’ to pay
$456,846,628.00 to REA and CFC, collectively, which
is more than such creditors would receive in a
liquidation of Wabash. Therefore, the Wabash Plan
satisfies § 1129(a)(7) with respect to REA and CFC.
As unsecured creditors and interest holders, the
three Wabash Members that did not accept the
Wabash Plan would receive the same or less in a
Chapter 7 liquidation of Wabash; therefore, the
Wabash Plan also satisfies § 1129(a) (7) with respect
to said Members.

174a

8. §1129(a)(8)

19. Section 1129(a)(8), requiring that each class of
claims and interests either be unimpaired or accept
the plan, is not satisfied because REA and CFC
rejected the Wabash Plan. The Wabash Plan, there-
fore, can be confirmed only if it meets the cram down
requirements of § 1129(b), which are discussed here-
after.

9. § 1129(a)(9)

20. Section 1129(a)(9) provides for the appropriate :
treatment of various priority claims arising under 11
U.S.C. § 507. No objection to confirmation has been |
raised under this Section. The Wabash Plan satisfies
§ 1129(a)(9).

10. § 1129(a)(10)

21. Section 1129(a)(10) provides that if a class of
claims is impaired under a plan, at least one class of
impaired claims must accept the plan, determined
without including the acceptance by any insider. No
objections to confirmation were filed under this
Section. Several classes of claims are impaired by the
Wabash Plan; therefore, at least one class of impaired
claims must accept the Wabash Plan. Two impaired
classes of claims have accepted the Wabash Plan:
Class 9 (PSI) and Class 11 (Members). The Court
concludes that the Wabash Plan satisfies §
1129(a)(10).

11. § 1129(a)(11)

22. Section 1129(a)(1l) concerns the feasibility of a
ptan, and requires the court to determine whether
confirmation is likely to be followed by the liquida-
tion, or the need for further financial reorganization,

ila

175a

of the debtor or any successor to the debtor under the
plan. When determining the feasibility of a plan, the
Court will “consider [1] the adequacy of the capital
structure, [2] the earning power of the business, [3]
the economic conditions, [4] the ability of manage-
ment, [5] the continuity of the present management,
and [6] other matters which determine the prospects
of a sufficiently successful business operation.” Jn re
Cherry, 84 B.R. 134, 1388 (Bankr. N.D. Ill. 1988). The
inquiry for the Court is whether the Wabash Plan
offers a “reasonable prospect of success.” Jd. at 138;
Manville, 68 B.R. at 635.

23. REA, CFC and Fruit Belt objected to a prior
version of the Wabash Plan under § 1129(a)(11) on the
grounds that the pending appeals in the Valuation
Case, Rate Case, and Wabash v. REA (J) allegedly
made confirmation premature. Those cases have now
completed the appellate process; therefore, these ob-
jections are moot. To the extent that these objections
could also be based on the fact that Wabash v. REA
(II) is pending in District Court, the Court concludes
that the feasibility of the Wabash Plan is _ not
adversely affected thereby. Given the standard for
testing the feasibility of a plan (ie., “reasonable
prospect of success” and “not likely” to be followed by
liquidation or further reorganization), it cannot rea-
sonably be argued that the pending Wabash v. REA
(II) precludes a finding that the Wabash Plan is
feasible. Although it is “possible” that REA will
successfully preempt the IURC, the Court does not
consider such a result to be probable, especially given
the rejection of REA’s first attempt to preempt in
Wabash v. REA (J). Other factors, such as future
economic conditions, are also difficult to predict with
certainty and subject to change, yet the courts rou-

176a

tinely weigh such factors when deciding the feasibil-
ity issue. The outcome of Wabash v. REA (JI) would
seem to be relatively easier to predict than future
economic conditions. Just as it would be futile to
delay confirmation until future economic conditions
are known with absolute certainty, it would be futile
to delay confirmation until all possible appeals are
finally resolved on the preemption issue. Moreover,
REA preemption would not necessarily change the
conclusion that the Wabash Plan is feasible, so long
as the rates are no higher than those charged by the
host I[0Us.

24. Wabash amply demonstrated the feasibility of
its Plan. Lewellen testified that the capital structure
of Wabash following confirmation would compare
favorably with similarly situated G & Ts. This
testimony stands unrebutted. Additionally, notwith-
standing its objection, REA admitted that Wabash
will be able to make the payments required under the
Wabash Plan, and essentially conceded that the
Wabash Plan is feasible. Conf. T. II., p. 223; C/V T. p.
1457-59. Further supporti

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_1390%3A2. Public record. Not legal advice.