Message-ID: <30149718.1075840809154.JavaMail.evans@thyme>
Date: Mon, 30 Apr 2001 23:32:00 -0700 (PDT)
From: stephen.douglas@enron.com
To: louise.kitchen@enron.com
Subject: RE: Tax reserve on Allegheny Peakers
Mime-Version: 1.0
Content-Type: text/plain; charset=us-ascii
Content-Transfer-Encoding: quoted-printable
X-From: Stephen H Douglas <Stephen H Douglas/ENRON@enronXgate@ENRON>
X-To: Louise Kitchen <Louise Kitchen/HOU/ECT@ECT>
X-cc: 
X-bcc: 
X-Folder: \ExMerge - Kitchen, Louise\'Americas\Asset Marketing
X-Origin: KITCHEN-L
X-FileName: louise kitchen 2-7-02.pst

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