Understood.  Further, after just speaking with Wes, the tax reserve will be adjusted to the previous amount reflecting the initial risk assessment position.  Steve.

 -----Original Message-----
From: 	Kitchen, Louise  
Sent:	Wednesday, May 02, 2001 3:10 PM
To:	Douglas, Stephen H.
Cc:	Colwell, Wes; Gockerman, Matthew F.; Miller, Don
Subject:	RE: FW: Tax reserve on Allegheny Peakers

We are anything but comfortable with changes to reserves particularly at this late stage.   The assessment probabilty was increased by Matthew and this was untimely - its as simple as that he needed to do it last fall.

Its not the number, its the timing.



From:	Stephen H Douglas/ENRON@enronXgate on 05/02/2001 02:07 PM
To:	Louise Kitchen/HOU/ECT@ECT, Wes Colwell/ENRON@enronXgate
cc:	Matthew F Gockerman/ENRON@enronXgate 

Subject:	RE: FW: Tax reserve on Allegheny Peakers

I just spoke with Matthew and he explained that the transaction tax reserve calculation (a summary of which is attached) was prepared (and communicated to the deal group) early last fall.  The calculation indicates that the aggregate transaction tax exposure (including penalties) is $12,940,182.  The 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 reserve changed.  Matthew was influenced in increasing the applicable level of risk related to the transaction by a desire to more conservatively posture Enron after the completion of the disposition and to insure that subsequent period "surprises" did not occur - obviously, to the extent that collective management is of the belief that such a conservative posture is not appropriate then the tax reserve amount may be reduced.  Matthew spoke with Don before the change was proposed and was under the impression that all were comfortable with the change before it was made - ultimately, we will realize the reserved amount in earnings as the risk of the tax planning strategies subsides.  Matthew will be back in the office on May 8 and ready to speak with 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.
 << File: AES Transaction Tax Reserve.xls >> 
 -----Original Message-----
From: 	Kitchen, Louise  
Sent:	Tuesday, May 01, 2001 5:55 PM
To:	Douglas, Stephen H.
Cc:	Colwell, Wes; Don Miller/HOU/ECT@ENRON
Subject:	Re: 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 changed.  I am more concerned that we are making such a change having got it wrong to start with rather than the change itself.


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

Subject:	FW: Tax reserve on Allegheny Peakers

Wes, attached is the explanation for the Allegheny tax reserve.  I do not know why it was increased when it was.  It was my understanding that the reserve had been quantified by Matt Gockerman in my group and requested some time 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 booking currently that which was previously expected (said differently, without the disposition we would have spread the tax over time and with the disposition it became necessary to accelerate it as reflected in the tax reserve).  As always, I have asked that only the absolutely necessary amount be reserved.  Please call me at ext. 30938 to further discuss this matter.  Best regards.  Steve.

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

The reserve referred to relates to Sales and Use tax ("Sales/Use tax") liability related to the purchase and use by the Peaker project companies of various equipment (i.e., turbines in Illinois and transformers in Tennessee and Indiana) used to construct the Peaker facilities in Illinois, Indiana and Tennessee.  Enron bears this tax obligation under the Sales Agreement pursuant to which we sold the Peakers to Allegheny (effectively, this tax liability 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 structured the acquisition of the respective equipment to either avoid the Sales/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 Sales/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 cash in constructing the Peakers and earned more from the disposition of the Peakers than we otherwise would have since the counterparty would have (and we believe did in the specific case of Allegheny) modelled the cost of the Peakers as including the full current payment of such Sales/Use tax.  That said, we have requested that a portion of the disposition proceeds from the sale of the Peakers be reserved until the applicable statute of limitations related to the types of strategies that were employed to achieve the above described results expires since there is risk that our position could be 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 his return is available with me to discuss this matter with whomever you would like.  Matt has worked closely with Don and others in the Generation Asset group and has assured me that the suggested reserve is a sound (not overly conservative nor liberal) position.  Best regards.  Steve.

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

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

Regards

Louise