The Internal Revenue Service is auditing $7 million of revenue bonds issued in 2007 by the Colorado Housing and Finance Authority for Confluence Energy LLC to finance the construction of a wood-pellet manufacturing plant in Kremmling, Colo.

Confluence Energy is a producer of wood pellets primarily used as a heating fuel, mostly for residential users. It uses available biomass in the form of trees that have been killed by the mountain pine beetle, and turns them into a usable, stable, sustainable and clean domestic energy source, according to its website.

The audit was disclosed by the authority in an event filing made with the Municipal Securities Rulemaking Board’s EMMA system.

The filing included a Jan. 10 letter from the IRS informing the authority of the audit that said: “The IRS routinely examines municipal debt issuances to determine compliance with federal tax requirements.”

U.S. Bank NA, the trustee, sent bondholders a notice on April 28, 2010, warning that “events of default have occurred and are continuing under the loan agreement and the indenture” because it had “not received payment of any monthly net pledged revenues from the borrower for the months of and after August 2009.”

The month before, the trustee issued a notice of partial mandatory redemption of $205,000 of the bonds.

In September 2009, the trustee notified disclosure repositories that the borrower had failed to file an annual report or quarterly disclosure documents as it had agreed to do in its continuing disclosure agreement.

But Confluence Energy finance director Margaret Hawkins said Tuesday that the bonds are not in default, and that the plant is operating.

She maintained that the company is not behind on providing the trustee with revenue needed to pay debt service, and said she is checking into the issue.

Mark Mathis, chief executive officer of the company, did not return calls.

The IRS asked the authority for detailed information about the bonds, including e-mails, correspondence, minutes of meetings, internal memoranda, and reports related to issuance that were not included in the bond transcript.

It also asked for disclosure documents that were required to be filed, a list of all capital expenditures, all contracts and documents related to the investment of bond proceeds, a copy of the yield computation and arbitrage calculations, and an update on the status of the bonds.

The IRS agent also asked for a tour of the bond-related property and facilities.

A copy of the official statement for the 2007 bonds was unavailable on EMMA.

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