IRS Auditing $200M Gas Bonds Sold by Issuer in California

WASHINGTON — The Internal Revenue Service is auditing nearly $200.39 million of Series C gas revenue bonds issued by the M-S-R Energy Authority in 2009.

The audit was disclosed by the authority, a joint powers agency formed in California to minimize power costs for members, in an event notice posted on the Municipal Securities Rulemaking Board’s EMMA site.

The authority said the IRS told it that it “routinely examines municipal debt issuances to determine compliance with federal tax requirements.” The authority also said it “believes that the bonds complied with all applicable provisions of the Internal Revenue Code” and that it “will cooperate with the IRS in its examination of the bonds.”

The Series C bonds are part of a $901.62 million issue sold to finance the prepayment of an agreement for a supply of natural gas for 30 years for authority members — the Modesto Irrigation District, Santa Clara, Calif. and Redding, Calif.  The C bonds were used by Redding.

The bonds are payable solely from revenues and other funds pledged, according to bond offering documents. In order to hedge the risks posed by purchasing natural gas at a fixed price and selling it to participants at a price based on a floating index, the authority entered into three separate commodity price swap agreements with JPMorgan Chase Bank, NA.

The IRS last year was auditing at least five issues of tax-exempt bonds used for prepaid gas contracts, sources said.  These financings have been became subject to tax restrictions in 2003 and 2005, they said.

The Treasury and IRS enacted tax rules in 2003 that said tax-exempt bonds could be used for these financings if 90% or more of the bond proceeds were used for retail sales in qualified service areas. Then Congress, in the Energy Policy Act of 2005, included a “look-back sizing” provision for these financings saying that for bonds to be tax-exempt, the amount of gas supplies subject to the pre-payment should not exceed five years of historic gas use.

Citigroup Global Markets, Inc., or Citi, underwrote the bonds and its wholly owned subsidiary, Citigroup Energy, Inc., supplied the gas, according to the official statement.  Citigroup, Inc. was guarantor for the financial obligations of CEI.

Orrick, Herrington & Sutcliffe LLP was bond counsel to the authority in connection with the bond issuance and counsel to the authority and participants in connection with the prepaid gas agreements, supply agreements and the authority commodity swap agreements.

Kutak Rock LLP was counsel to the underwriter with regard to the bonds and counsel to the gas supplier for the prepaid gas, supply, authority commodity swap and supplier commodity swap agreements.

 

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