Message-ID: <4927558.1075846734383.JavaMail.evans@thyme> Date: Wed, 13 Sep 2000 02:22:00 -0700 (PDT) From: susan.scott@enron.com To: robert.guthrie@enron.com Subject: Re: CIAC Cc: james.centilli@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: james.centilli@enron.com X-From: Susan Scott X-To: Robert Guthrie X-cc: James Centilli X-bcc: X-Folder: \Susan_Scott_Dec2000_June2001_1\Notes Folders\'sent mail X-Origin: SCOTT-S X-FileName: sscott3.nsf Thanks Robert, this is a big help. Just wondering -- you make the statement that "El Paso is not directing TW to build the interconnect facilities..." Do you think that our having an interconnect agreement outlining the specifications for the facilities and setting forth certain indemnities weaken our position at all in terms of saying this is not a CIAC? Robert Guthrie 09/13/2000 08:05 AM To: Susan Scott/ET&S/Enron@ENRON cc: James Centilli/ET&S/Enron@ENRON Subject: Re: CIAC I can only address this from the tax position. Books may differ from the noted treatment depending on the true facts. I have a call to James Centilli for his thoughts. I also have not reviewed any written language, so this is based on our conversations; therefore the facts may change depending on the final arrangement. Based on my understanding, the meter fee will be structured as a fee paid to TW for services and not to build the interconnect facilities. Because El Paso is not directing TW to build the interconnect facilities TW will not record these fees as a CIAC for tax. In short, the management fee is just normal operational type revenue. The benefit to El Paso is that they avoid the gross-up because this payment does not fall under the guidelines of IRS Code Section 118 (b). However, please note that the management fee is still taxable to TW in the year actually received or deemed received. It is just not classified as a CIAC for tax purposes. The potential book benefit to TW is that the interconnect facilities built should be allowed as part of rate base because the assets were built by TW and not contributed from El Paso -- I have a call to James Centilli to confirm. Clarification on CIAC ( IRC 118(b)). This is a code section that governs for tax only how payments received from customers or potential customers for services that benefit the customer are treated for tax purposes. For tax, the money received is recognized in the year received or deemed received, and the asset is depreciated, normally 15 years, MACRS. The Gross-up paid is the time value of money over the life of the asset and is paid by the customer requesting the service. The Management fee structure will generate the same result as the CIAC for tax. For tax, the money is received and taxed. The money is then used indirectly to build the interconnect facilities that are deprecated over 15 years, MACRS for tax. The piece missing is that El Paso avoids the gross-up of approximately $50,000. The $50,000 becomes a lost cost to TW for doing the deal with El Paso. The lost cost should be off-set in part from rate recovery. I don't know how this piece will work -- James Centilli should be able to confirm. Let me know if we need to discuss further. I am out of the office after 12:30 today to return on Monday. I will check my voice mail. However, If you need to move on this or need additional help, please call me on my mobile number (832) 647-4610. Enron Capital & Trade Resources Corp. From: Susan Scott 09/12/2000 05:27 PM To: Robert Guthrie/Corp/Enron@ENRON cc: Subject: CIAC Robert, here is the beginning of a note I need to send to Drew Fossum explaining what we're doing with El Paso. Can you elaborate on the "meter fee" approach? I'm not sure I really understand what keeps it from being a CIAC, and why we get to include it in the rate base. If you can add to this I would appreciate it, or just give me a call and we can discuss it further. Thanks so much for your help. *** El Paso Field Services wants TW to build interconnect facilities. Estimated cost: $280,000. EPFS will contribute $165,000 pursuant to an interconnect agreement. The Commercial Group would like to avoid the tax gross-up associated with a contribution in aid of construction. The Internal Revenue Code expressly provides that contributions in aid of construction and other contributions made by a customer or potential customer (collectively, "CIACs") are not contributions to capital and thus are not excluded from gross income. Accordingly, such amounts are required to be included in gross income. EPFS has proposed, instead of the $165,000 being paid in a lump sum, that the contribution instead be paid in equal monthly installments as a "meter fee." Our tax department has advised me that while this approach does not absolve TW from tax liability on that revenue, it does have a couple of advantages. It would remove the contribution from the CIAC category (why is it not a CIAC?)and TW would be allowed to include it in its rate base. Additionally, TW would be allowed to treat the interconnect facilities as a depreciable asset.