EXHIBIT 99.2
Internal Revenue Service Department of the Treasury
Index Number: 61.00-00, 61.03-00, Washington, DC 20224
61.43-00, 451.0l-00
Robert A.N. Cudd Person to Contact:
LeBoeuf, Lamb, Green & McRae, LLP Thomas M. Preston (50-05811)
125 West 55th Street Telephone Number:
New York, N.Y. 10019 (202) 622-4443
Refer Reply To:
CC:FIP:2-PLR-113200-01
Date:
Legend
Parent = Conectiv
EIN: 51-0377417
Company = Atlantic City Electric Company
EIN: 21-0398280
SPE = Atlantic City Electric Transition
Funding LLC
State A = New Jersey
State B = Delaware
Statute = Electric Discount and Energy
Competition Act
Agency = New Jersey Board of Public Utilities
Series A-l = Series 1999-l
a = 2 billion
b = 0.5
c = 30
Date A = June 25, 200l
Dear Mr. Cudd:
This letter is in reply to your letter dated February 28, 2001 asking the
Internal Revenue Service to rule on the transaction described below.
FACTS
Parent is a State B corporation that is a registered holding company under
the Public Utility Holding Company Act of 1935. Parent is the common parent of
an affiliated group of corporations and files a consolidated return on behalf of
the group.
The Company, a wholly owned subsidiary of Parent, is a calendar year
taxpayer that uses the accrual method of accounting, and is an investor-owned
electric utility in State A. Company generates, transmits, and distributes
electricity to residential, commercial, and industrial customers within a
designated territory. Company has the exclusive right to sell electricity at
retail within its territory and is regulated by Agency and the Federal Energy
Regulatory Commission.
State A is deregulating its electric industry. As a result, Company's
customers will be allowed to contract directly with alternative suppliers of
electricity, and Company will compete with other parties to sell electricity.
In a competitive market some of Company's generation facilities will have
values substantially below their book value and some of its contracts to
purchase electricity will be at rates above the market price. To enable Company
to recover the net uneconomic portions of its prudently incurred costs of
generation-related assets and obligations (Transition Costs), State A enacted
Statute under which Company will be allowed to collect nonbypassable charges
from consumers of electricity located in Company's territory. The charges will
be based, in part, on the amount of electricity purchased by the consumer.
Under Statute, a portion of Company's Transition Costs may be recovered by
collecting separate, nonbypassable, usage-based charges called Transition Bond
Charges (TBCs) and by issuing securities that will be secured by Company's right
to collect the TBCs. The TBCs will be collected from consumers of electricity
located in Company's territory. To obtain the authority to collect TBCs and to
issue securities, Company must apply for a financing order from the Agency.
Under a financing order, TBCs to be collected by Company will be generally
based on the actual electricity usage of each affected consumer. Actual
collection of TBCs will vary from expected collections due to a number of
factors including power usage and delinquencies. The Financing Order will
require the adjustment of the TBC charge at least annually. Under Statute, the
right to collect TBCs is a separate property right (Bondable Transition
Property).
PROPOSED TRANSACTION
On Date A, Company applied to the Agency for a Financing Order authorizing
the issuance of the Transition Bonds in an aggregate principal amount not to
exceed $a. The Financing Order will authorize TBCs in an amount needed to
service the Transition Bonds, pay transaction costs, and provide for credit
enhancement. The Financing Order will create Bondable Transition Property in the
right to collect the TBCs and will provide that the Bondable Transition Property
may be assigned to a special purpose entity (SPE). The Statute provides
procedures for assuring that the sale, assignment or other transfer of the
Bondable Transition Property from the Company to the SPE will be perfected under
State A law and the security interest granted by the SPE to the Bond Trustee
(under the indenture pursuant to which the
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Transition Bonds are issued) in the Bondable Transition Property will be
perfected under State A law.
In a previously issued Summary Order, the Agency has also granted Company
the authority to recover the federal income taxes and state corporate business
taxes it will incur as it bills customers for TBCs. Company's tax liability will
be collected under separate, non-bondable charges (Tax Charges).
Company will form the SPE under State B law as a bankruptcy remote, limited
liability company for the special purpose of effectuating the Proposed
Transaction. The SPE will use the accrual method of accounting. Company will be
the sole member of the SPE. The SPE will not elect to be treated as an
association taxable as a corporation under section 301.7701-3(b)(1) of the
Procedure and Administration Regulations. Company will contribute, as equity to
the SPE, cash equal to b percent of the total issue price of the Transition
Bonds.
Pursuant to the Financing Order, Company will transfer the Bondable
Transition Property to the SPE. The SPE will issue and sell Transition Bonds to
investors not to exceed the aggregate principal amount of $a. The proceeds from
the issuance of the Transition Bonds, net of issuance costs, will be transferred
to Company in consideration for the Bondable Transition Property.
The SPE may periodically issue Transition Bonds in one or more series which
may consist of one or more classes in any series that differ, inter alia, as to
interest rate, amortization of principal, and maturity date. The terms of all
Transition Bonds of the same series will be identical, unless a series includes
more that one class, in which case the terms of all Transition Bonds of the same
class will be identical. Initially, the SPE will issue one series of Transition
Bonds.
The legal final maturity dates for the Transition Bonds may differ among
series or classes within a series. Company expects that the longest term class
of Transition Bonds in a series will have a legal final maturity date of no more
than c years. Company has represented that none of the Transition Bonds the
proceeds of which are used to buy down or buy out a non-utility generator
contract or to refinance interim debt issued to effectuate any such buy down or
buy out will have a scheduled amortization extending beyond the remaining term
of any such non-utility generator contract.
Interest on each series of Transition Bonds will accrue from the date of
issuance and will be payable quarterly or semiannually. Principal payments will
be scheduled to be made quarterly or semiannually. Within a series, the SPE will
pay interest on Transition Bonds for all classes prior to paying principal on
any class. If, on any payment date, amounts allocable to a series of Transition
Bonds are not sufficient to pay interest due, principal legally due or principal
scheduled on all of the outstanding Transition Bonds in a series, amounts
available will be allocated within that series, in each case until paid in full,
as follows: (i) payment of interest due on all of the outstanding Transition
Bonds within that series, followed by (ii) payment of principal
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legally due on all of the outstanding Transition Bonds within that series,
followed by (iii) payment of principal scheduled on all of the outstanding
Transition Bonds within that series.
Transition Bonds will not be secured by the assets of the Company, but
rather, will be recourse to the SPE and will be collateralized by the Bondable
Transition Property and the equity and assets of the SPE.
Initially, Company will service the consumer accounts that are subject to
the TBCs. Amounts collected by the Company will be deposited into its accounts
and remitted at least monthly to a Collection Account maintained by the Bond
Trustee. The Collection Account will include a General Subaccount into which the
Bond Trustee will deposit amounts remitted by the Company. The General
Subaccount will be divided into series subaccounts each having a Capital
Subaccount, an Overcollateralization Subaccount and a Reserve Subaccount. All
amounts in the Collection Account not allocated to any other subaccount will be
allocated to the General Subaccount. TBC collections in excess of amounts
necessary to pay interest and principal on the Transition Bonds, related fees
and expenses of the SPE, replenish the Capital Subaccount up to the required
capital level, and fund and maintain the Overcollateralization Subaccount up to
its required level, will be allocated to the Reserve Subaccount.
Investment income earned on amounts in the Collection Account may be used
to pay debt service on the Transition Bonds and other related fees and expenses.
The SPE will retain any amount of investment income remaining after Transition
Bonds for all series have been fully paid and such amounts may be distributed by
the SPE to the Company.
The TBCs will be set to provide for recovery of the costs associated with
billing and collecting the TBCs as well as for an excess amount
(Overcollateralization Amount) that will eventually reach b percent of the
original principal amount of the Transition Bonds. The Overcollateralization
Amount will be collected approximately ratably over the expected term of the
Transition Bonds.
The Bond Trustee will allocate amounts in subaccounts for each series of
Transition Bonds in the following order: (1) amounts owed to the Bond Trustee
including legal fees and expenses (up to a capped amount); (2) fees for
independent managers; (3) servicer fees; (4) administrator fees; (5) operating
expenses of the SPE (up to a capped amount); (6) current and accrued but unpaid
interest on Transition Bonds; (7) legally required principal payments on
Transition Bonds; (8) scheduled principal payments on Transition Bonds; (9)
payments of any amounts due under any hedge or swap agreements; (10) unpaid
operating expenses and indemnity amounts of the SPE; (11) replenishment of the
Capital Subaccount; (12) the Overcollateralization Subaccount; (13) release of
investment earnings on the Capital Subaccount to the SPE; (14) payment of any
remaining Bond Trustee expenses and indemnity amounts then owed; and (15) all
remaining amounts to the Reserve Subaccount.
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If the TBCs collected in any period are insufficient to satisfy the SPE's
payment obligations on the Transition Bonds, the Bond Trustee may draw on
amounts in the Reserve Subaccount, the Overcollateralization Subaccount, and
finally, the Capital Subaccount to make necessary payments and transfers under
the Indenture. To the extent that amounts in the Capital Subaccount or the
Overcollateralization Subaccount are used to satisfy scheduled principal and
interest payments, future TBCs will be adjusted to replenish those subaccounts.
In addition, any funds in the Reserve Subaccount from prior payment dates will
be used to replenish the Capital Subaccount and the Overcollateralization
Subaccount.
Investment income earned on amounts in the Collection Account also may be
used to satisfy scheduled interest and principal payments on the Transition
Bonds and to replenish the SPE's equity and the scheduled Overcollateralization
Amount. Any excess revenues, up to an amount equal to the investment income on
the Capital Subaccount, will be remitted to the SPE, which may distribute the
earnings to Company.
The Transition Bonds will provide for the following events of default: (1)
a default in the payment of interest within five days after a payment is due;
(2) a default in the payment of outstanding principal as of the legal maturity
date; (3) a default in the payment of the redemption price for any Transition
Bond on the redemption date therefor; (4) a default in any covenant,
representation or warranty of the SPE that continues for 30 days; and (5)
specified events of bankruptcy of the SPE.
If any default occurs and continues for any one series of Transition Bonds,
the Bond Trustee or holders of a majority in principal amount of all series then
outstanding may declare the principal of all series of the Transition Bonds to
be immediately due and payable.
ISSUES
Does the issuance of the Financing Order authorizing the collection of the
TBCs and the issuance of the Recovery Order authorizing the collection of the
Tax Charges result in gross income to Company?
Does the issuance of the Transition Bonds result in gross income to
Company?
Are the Transition Bonds obligations of Company?
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LAW
Section 61 of the Internal Revenue Code generally defines gross income as
"income from whatever source derived", except as otherwise provided by law.
Gross income includes income realized in any form, whether in money, property,
or services. Section 1.61-1(a) of the Income Tax Regulations. This definition
encompasses all "accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion." Commissioner v. Glenshaw Glass Co., 348 U.S.
426, 431 (1955), 1955-l C.B. 207.
The right to collect the TBCs and the Tax Charges is of significant value
in producing income for Company. Moreover, State A's action in making the TBC
rights transferable has enhanced that value. Generally, the granting of a
transferable right by the government does not cause the realization of income.
Rev. Rul. 92-16, 1992-1 C.B. 15 (allocation of air emission rights by the
Environmental Protection Agency does not cause a utility to realize gross
income); Rev. Rul. 67-135, 1967-1 C.B. 20 (fair market value of an oil and gas
lease obtained from the government through a lottery is not includable in
income).
The economic substance of a transaction generally governs its federal tax
consequences. Gregory v. Helvering, 293 U.S. 465 (1935), XIV-1 C.B. 193.
Affixing a label to an undertaking does not determine its character. Rev. Rul.
97-3, 1997-l C.B. 9. An instrument secured by property may be an obligation of
the taxpayer or, alternatively, may be a disposition of the underlying property
by the taxpayer. Cf. id. (the Small Business Administration is the primary
obligor of certain guaranteed payment rights that are created under its
participating security program).
CONCLUSIONS
Based on the facts as represented, we rule as follows:
(1) The issuance of the Financing Order authorizing the collection of the
TBCs and the issuance of the Recovery Order authorizing the collection of the
Tax Charges will not result in gross income to Company.
(2) The issuance of the Transition Bonds will not result in gross income to
Company.
(3) The Transition Bonds will be obligations of Company.
Except as specifically ruled on above, no opinion is expressed or implied
regarding the federal tax aspects of the transaction.
This ruling is directed only to Company. Under section 6110(k)(3) of the
Code, this ruling may not be used or cited as precedent.
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A copy of this letter should be attached to the federal income tax return
of Company for the taxable years that include the transaction described in this
letter.
Sincerely,
/s/ William E. Coppersmith
-----------------------------------
William E. Coppersmith
Chief, Branch 2
Office of Associate
Chief Counsel
(Financial Institutions & Products)
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