Read Pat Boylston's e-mail for a more complete explanation, but, the bottom line is that borrowing solely to post collateral is a risky deal for the bond-holders, because it is unclear how the IRS would treat this transaction.  On the other hand, PGB suggests that a tax-exempt pre-pay for power is do-able if, and it's a big "if," you can get bond counsel to sign off on a legal opinion blessing the transaction.---sch



-----Original Message-----
From: Boylston, Pat [mailto:PGBOYLSTON@stoel.com]
Sent: Monday, October 29, 2001 12:27 PM
To: Hall, Steve C. (Legal)
Subject: RE: Tax-exempt financing


Something is in the air.  This is my third pre-pay question today.

Very complicated subject because it falls into a gray area where the IRS
has not been very comfortable creating bright lines because of a
perception of the potential for abuse.  Reason for IRS fear, probably
justified, is that one very central and primary theme of regulation in
this area is to prevent a municipal entity borrowing at "subsidized"
tax-exempt rates and investing the money (in whatever form of investment
you can think of) in something producing a higher return.  Yes, the
classic "arbitrage" play.

Concern has been that by pre-paying municipality was, in effect, making
an investment in the physical energy asset and there would be some form
of return, real or expected, which needed to be tested to see if it
violated the regulations rule governing permissable investment return on
tax-exempt funds.

Despite that, IRS did issue a ruling based on facts out of Alabama in
the early-mid 1990s which sanctioned an electrict energy and capacity
pre-pay deal.  Facts were pretty tight.  They included, either expressly
or by pretty clear implication, that the energy and capacity were solely
for the use of the pre-paying entity.  Also, the deal was set up for
business reasons independent of the fact that the pre-pay money could be
borrowed at tax-exempt rates.  (There are also other factors cited which
one would need to work through if a real deal is being proposed.)

In the late 1990s the area became very problematic because of a series
of very large natural gas pre-pay deals which came to market.  This are
still being debated and are technically still under IRS review.  Most of
these had a significant element of purchase for resale.  Some also
included the purchase of gas in the ground assets as opposed to the
obligation of an independent third party to deliver as existed in the
Alabama private letter ruling.

Following the IRS's announcement that it was going to review the entire
pre-pay area the blockbuster public pre-pay deals came to a halt.  That
is not to say they are not still doable.  However,the risk profile is
very different than it was five years ago and the ability to get an
approving outside legal opinion may be a significant closing issue.

All that being said, the most "middle of the road" deal would be a
pre-pay of a contract to provide electric energy and capacity.  If I
remember correctly, the Alabama ruling also involved some element of
extending an existing relationship rather than being a totally "new"
contract with a new buyer.  

There is some precedent for munis to bond for large ascertained
financial oblgations, such as the WPPSS participants who issued bonds to
fund the payment of their shares of the liability while awaiting their
insurancers settlement of their claims. I do not think borrowing to
cover margin payment obligations is specifically covered in the IRS
regulations. However, there are several policy/ general principles
reasons that I do not think it would fly.  Same thing for borrowing to
pay SOLELY for loc costs.  Although paying for the LOC portion of a
bricks and mortar transaction is not a problem.  

A number of other issues are also raised which would have to be worked
through.  For example, if the purpose is borrowing to pay for an LOC,
how much do you borrow.  One year's 150 bps fee?  Several years fees?
Do you cash collateralize the LOC, which is just an investment to secure
the LOC and which then has to go through the IRS investment return
regulations (although in fact you can do this if linked to a bricks and
mortar type situation although you are forced by the way the regulations
work to be negative on your investment spread borrowing to investment
return.)

In general, tough but not impossible to put together a pre-pay energy
deal.  Not a happening thing with the financial margin/ LOC
transactions.   

-----Original Message-----
From: Hall, Steve C. (Legal) [mailto:Steve.C.Hall@ENRON.com]
Sent: Monday, October 29, 2001 10:27 AM
To: Boylston, Pat
Subject: Tax-exempt financing


Pat,

We have a few quick questions relating to tax-exempt financing.  

1.  Can munis use tax-exempt financing to pre-pay for power?

2.  Can munis use tax-exempt financing to meet financial obligations
relating to power purchases, e.g., use the cash to post margin or pay
for a letter of credit?

Thanks,

Steve



>  -----Original Message-----
> From: 	Shields, Jeff  
> Sent:	Monday, October 29, 2001 9:44 AM
> To:	Hall, Steve C. (Legal)
> Cc:	Calger, Christopher F.
> Subject:	muni margin calls
> 
> Steve, 
> 
> I believe muni's can not use tax exempt financing to pre-pay for
> power. However, do you know if there is a mechanism to prepay using
> tax exempt debt on a margin call?
> 
> Jeff


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