Hoosier Energy hit with $120M claim from John Hancock

An electric co-op supplying power to customers in 48 central and southern Indiana counties could face a perilous spike in
its financial load following a $120 million claim against it by insurance giant John Hancock Life Insurance Co.

Bloomington-based Hoosier Energy Rural Electric Cooperative filed a lawsuit in Monroe Circuit Court Oct. 30 to block Hancock
from asserting the co-op defaulted on a real estate deal the two struck six years ago.

A default could not only entitle Hancock to $120 million, but automatically trigger cross-defaults in Hoosier’s contracts
third parties "and could give rise to hundreds of millions in additional liabilities," Hoosier said in a request
for a temporary
restraining order that was granted Oct. 30.

"In this scenario, Hoosier likely would be unable to satisfy all such demands, which in turn likely would imperil its
to fulfill its mission to the public."

So much is on the line for Hoosier that it has hired none other than Conseco Inc.’s bulldog of an outside counsel, Reed Oslan
of Chicago law firm Kirkland & Ellis LLP.

Oslan said Hoosier Energy never stopped making lease payments to John Hancock under the lease-back of the utility’s Merom
Generating Station in Sullivan County in 2002.

Rather, the nation’s credit crunch came home to roost on Hoosier Energy’s lines. A firm that guaranteed the utility’s lease
payments suffered a credit downgrade and, in the midst of a national credit crunch, Hoosier couldn’t line up a replacement
fast enough to satisfy Hancock.

Hoosier never missed a lease payment, its counsel said, but Hancock is trying to assert there was a technical default in an
effort to squeeze Hoosier for some of the millions of dollars’ worth of tax deductions Hancock once enjoyed from the power
plant leaseback deal. Those tax deductions for Hancock and dozens of other corporations were recently struck down by courts
after an Internal Revenue Service challenge.

Now, John Hancock is "taking advantage of the credit crisis and trying to screw this small-town energy provider,"
Oslan told
IBJ. Oslan is known locally for recovering millions of dollars from former Conseco officers and directors who defaulted on
stock-backed loans.

At risk is the ability of Hoosier Energy to provide electricity at competitive prices to 17 electric co-ops serving more than
half of Indiana’s counties, including Johnson, Shelby and Rush.

Hoosier Energy is owned by those distribution cooperatives and is structured as a not-for-profit. Hoosier was incorporated
in 1949. It has about 460 employees and generates power for 800,000 homes, farms, industries and businesses.

It was not immediately clear how much Hoosier Energy has in reserves and credit lines to withstand a potential financial hit
of $120 million or more. Company officials would not elaborate, and managers of its member cooperatives who did return phone
calls also declined comment.

Oslan said he expects Hoosier to prevail in court and even with an unfavorable outcome doesn’t see immediate financial impact,
noting such litigation can play out for years.

Quick cash at the time

John Hancock’s potential take of $120 million is big by most measures but looms like a cooling tower to Hoosier: akin to one-quarter
of its $513 million in 2007 revenue.

By comparison, for Hoosier the benefits of the lease-back deal of the Merom plant were puny.

Hoosier Energy leased the 1,070-megawatt station to Hancock, which in turn immediately leased the property back to Hoosier,
according to court records.

John Hancock received the right to hundreds of millions of dollars in tax benefits involving lease payments, depreciation
and interest expense.

Hoosier Energy didn’t enjoy tax benefits. But it netted about $20 million in a lump payment that "was used to fund specific
construction projects," according to its annual report.

Hoosier Energy officials declined to elaborate.

The cash was welcomed during a time of tightening pollution compliance costs for its coal-based generating plants. Still,
there were risks. Hoosier’s own court filings noted that, even as the lease-back deal was being assembled in 2002, the Internal
Revenue Service was looking awry at "lease in, lease out," deals as illegal "sham" transactions for tax

Hoosier Energy agreed to a variant of that structure, but only "if Hancock assumed all the risk from an adverse tax ruling,"
Hoosier said in court filings.

A few years after the Merom deal was inked, the IRS began challenging the type of contract signed by Hancock and Hoosier,
this year began turning the screws on corporations that benefited from such deals to the tune of billions of dollars.

"Hancock, having now realized that its tax benefits are worthless and that the IRS will successfully attack the transaction,
is now attempting to shift the burden of this adverse tax result to Hoosier," Oslan’s legal team said, "notwithstanding
fact that Hoosier assumed none of this risk under the agreements."

Live wire, later

But as it turns out, Hoosier Energy appears to have assumed risk in the leaseback deal concerning a portion of the contract
requiring it to obtain a credit-worthy swap and a surety bond.

Effectively, those were insurance for Hancock in case Hoosier couldn’t make its lease payments. Hoosier obtained them from
Ambac Credit and Ambac Assurance, both of New York.

According to the terms of the lease deal with Hancock, if Ambac’s credit rating dropped below a certain level, Hoosier would
have 60 days to find a replacement or be considered in default of the lease agreement.

On June 19, Ambac Assurance’s rating dropped below the threshold, according to court records. But Hoosier had a hard time
finding a replacement "as a result of the dire nature of the current credit market in the United States."

The utility said the parties agreed to at least three extensions, citing the difficulties in credit markets. Hoosier said
its board on Oct. 13 reached an agreement with Berkshire Hathaway Inc. to provide a credit replacement and informed Hancock
that Berkshire’s credit review was "substantially complete."

Rather than continuing to work with Hoosier, the utility said Hancock recently sent it a letter rejecting a "further
extension" and claimed an event of default.

Hoosier is arguing that, effectively, Hancock is not entitled to relief because the lease deal has been worthless for some
time as the result of various IRS and court rulings.

A spokesman for John Hancock said the company’s policy is not to comment on pending litigation. Hancock had yet to file a
response in court.

A hearing scheduled for Nov. 10 is likely to be postponed.

As of early this year, Hoosier Energy held "A" level credit ratings from Standard & Poor’s and Moody’s.

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