Message-ID: <19260907.1075840808882.JavaMail.evans@thyme>
Date: Wed, 2 May 2001 17:07:00 -0700 (PDT)
From: stephen.douglas@enron.com
To: louise.kitchen@enron.com, wes.colwell@enron.com
Subject: RE: FW: Tax reserve on Allegheny Peakers
Cc: matthew.gockerman@enron.com
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X-From: Stephen H Douglas <Stephen H Douglas/ENRON@enronXgate@ENRON>
X-To: Louise Kitchen <Louise Kitchen/HOU/ECT@ECT>, Wes Colwell <Wes Colwell/ENRON@enronXgate>
X-cc: Matthew F Gockerman <Matthew F Gockerman/ENRON@enronXgate>
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I just spoke with Matthew and he explained that the transaction tax reserve=
 calculation (a summary of which is attached) was prepared (and communicate=
d to the deal group) early last fall.  The calculation indicates that the a=
ggregate transaction tax exposure (including penalties) is $12,940,182.  Th=
e initial suggested tax reserve related to this exposure was approximately =
1/2 of this amount but, after discussions with Don last week, was increased=
 to 100 percent - thus the increase in tax reserve of approximately $6,000,=
000.  Thus, as evident, it is not that a calculation was incorrect but that=
 its assessment probability was increased and thus the suggested tax reserv=
e changed.  Matthew was influenced in increasing the applicable level of ri=
sk related to the transaction by a desire to more conservatively posture En=
ron after the completion of the disposition and to insure that subsequent p=
eriod "surprises" did not occur - obviously, to the extent that collective =
management is of the belief that such a conservative posture is not appropr=
iate then the tax reserve amount may be reduced.  Matthew spoke with Don be=
fore the change was proposed and was under the impression that all were com=
fortable with the change before it was made - ultimately, we will realize t=
he reserved amount in earnings as the risk of the tax planning strategies s=
ubsides.  Matthew will be back in the office on May 8 and ready to speak wi=
th whomever desires at that time.  I am attending the Enron Law Conference =
beginning this afternoon, followed by the Enron Industrial Markets Offsite =
next Monday and Tuesday but can be reached on my cell phone at 713-817-5052=
.  Best regards.  Steve.
=20
 -----Original Message-----
From: =09Kitchen, Louise =20
Sent:=09Tuesday, May 01, 2001 5:55 PM
To:=09Douglas, Stephen H.
Cc:=09Colwell, Wes; Don Miller/HOU/ECT@ENRON
Subject:=09Re: FW: Tax reserve on Allegheny Peakers

This is a substantial difference which was not requested when the deal was =
done.  I am waiting for Matthew to return and explain why his opinion chang=
ed.  I am more concerned that we are making such a change having got it wro=
ng to start with rather than the change itself.


From:=09Stephen H Douglas/ENRON@enronXgate on 05/01/2001 12:07 PM
To:=09Wes Colwell/ENRON@enronXgate
cc:=09Louise Kitchen/HOU/ECT@ECT=20

Subject:=09FW: Tax reserve on Allegheny Peakers

Wes, attached is the explanation for the Allegheny tax reserve.  I do not k=
now why it was increased when it was.  It was my understanding that the res=
erve had been quantified by Matt Gockerman in my group and requested some t=
ime ago and that Don and the commercial leads were aware of this.  This may=
 be coming across as an increase when in reality it is simply properly book=
ing currently that which was previously expected (said differently, without=
 the disposition we would have spread the tax over time and with the dispos=
ition it became necessary to accelerate it as reflected in the tax reserve)=
.  As always, I have asked that only the absolutely necessary amount be res=
erved.  Please call me at ext. 30938 to further discuss this matter.  Best =
regards.  Steve.

 -----Original Message-----
From: =09Douglas, Stephen H. =20
Sent:=09Monday, April 30, 2001 8:32 PM
To:=09Kitchen, Louise
Subject:=09RE: Tax reserve on Allegheny Peakers

The reserve referred to relates to Sales and Use tax ("Sales/Use tax") liab=
ility related to the purchase and use by the Peaker project companies of va=
rious equipment (i.e., turbines in Illinois and transformers in Tennessee a=
nd Indiana) used to construct the Peaker facilities in Illinois, Indiana an=
d Tennessee.  Enron bears this tax obligation under the Sales Agreement pur=
suant to which we sold the Peakers to Allegheny (effectively, this tax liab=
ility is a "pre-acquisition date" tax liability that we, as the seller, are=
 responsible for).  Typically, the equipment used to construct the Peakers =
would be assessed Sales/Use tax when purchased by the Project company that =
built the respective Peaker and that tax would effectively be passed on to =
the buyer in a sale such as that to Allegheny.  The EWS Tax Department stru=
ctured the acquisition of the respective equipment to either avoid the Sale=
s/Use tax or to spread the cost of such tax over time (for example, a sales=
-leaseback strategy was employed in Illinois to spread the cost of the Sale=
s/Use tax over many years as lease payments are made rather than pay it up =
front).  Ultimately, we benefitted from this since we did not use as much c=
ash in constructing the Peakers and earned more from the disposition of the=
 Peakers than we otherwise would have since the counterparty would have (an=
d we believe did in the specific case of Allegheny) modelled the cost of th=
e Peakers as including the full current payment of such Sales/Use tax.  Tha=
t said, we have requested that a portion of the disposition proceeds from t=
he sale of the Peakers be reserved until the applicable statute of limitati=
ons related to the types of strategies that were employed to achieve the ab=
ove described results expires since there is risk that our position could b=
e challenged and, if challenged, there is a risk that we would not prevail.=
  Matt is out until May 8 (he is a recent father of a baby girl) but upon h=
is return is available with me to discuss this matter with whomever you wou=
ld like.  Matt has worked closely with Don and others in the Generation Ass=
et group and has assured me that the suggested reserve is a sound (not over=
ly conservative nor liberal) position.  Best regards.  Steve.

 -----Original Message-----
From: =09Kitchen, Louise =20
Sent:=09Monday, April 30, 2001 3:18 PM
To:=09Matthew F Gockerman/HOU/ECT@ENRON
Cc:=09Stephen H Douglas/HOU/ECT@ENRON; Don Miller/HOU/ECT@ENRON
Subject:=09Tax reserve on Allegheny Peakers

I notice that our gain has substantially decreased due to a tax reserve inc=
rease of $5m.  Why has this been added and why so recently?

Regards

Louise

