1
EXHIBIT 99.1
Internal Revenue Service
Index Number: 61.00-00 61.03-00
61.43-00 451.01-00
Theodore J. Vogel
Vice-President & Tax Counsel
Detroit Edison Company
2000 2nd Avenue - 990 WCB
Detroit, MI 48226-1279
Department of the Treasury
Washington, DC 20224
Person to Contact:
Thomas Preston:ID NO. 50-05811
Telephone Number:
(202) 622-4443
Refer Reply To:
CC:FIP:2-PLR-115061-00
Date:
Legend:
Parent = DTE Energy Company
EIN: 38-3217752
Company = The Detroit Edison Company
EIN: 38-0478650
Issuer = Detroit Edison Securitization Bond
Company LLC
State A = Michigan
State B = Delaware
Statute = Senate Bills 937 and 1253, 2000 Mich.
Pub. Act 141 and 142
a = $1.85 billion
- -
b = 0.50
- -
c = 14.5
- -
d = 15
- -
e = 5
- -
Dear Mr. Vogel:
This letter is in reply to Company's letter dated August 2, 2000, and
other correspondence, asking the Internal Revenue Service to rule on the
transaction described below.
2
PLR-115061-00 2
FACTS
Parent is the common parent of an affiliated group of corporations that
includes the Company. Parent files a consolidated return for the group.
Company, a calendar year taxpayer that uses the accrual method of
accounting, is an electric utility in State A. Company generates, transmits, and
distributes electricity to residential, commercial, and industrial customers
within a designated territory. Company has the right to sell electricity at
retail within its territory and is regulated by State A's Public Service
Commission ("PSC") and the Federal Energy Regulatory Commission.
State A is restructuring its electric industry. As a result, the
Company's customers will be allowed to contract directly with alternative
electric suppliers ("AESs"), and will compete with other parties to sell
electricity.
To facilitate deregulation, State A enacted Statute which allows each
electric utility to recover the net uneconomic portions of its regulatory assets
as determined by the PSC and any costs that the PSC determines the utility would
be unlikely to collect in a competitive market ("Qualified Costs"). Qualified
Costs include, but are not limited to, retail open access implementation costs
and the costs of a PSC approved restructuring, buyout or buy-down of a power
purchase contract, together with the costs of issuing, supporting, and servicing
securitization bonds and any costs of retiring and refunding the electric
utility's existing debt and equity securities in connection with the issuance of
securitization bonds. Qualified costs also include taxes related to the recovery
of securitization charges.
Under the Statute, a utility may apply to the PSC for a financing order
permitting it to recover a specified amount of Qualified Costs through the
imposition and collection of special charges on the utility's customers. The
special charges authorized by the financing order are called securitization
charges ("Securitization Charges") and are imposed on all customers in the
utility's service area using its facilities. The Securitization Charges are
"nonbypassable" and generally cannot be avoided even if a customer buys
electricity from another source. The Securitization Charges are assessed against
the amount of electricity purchased by, or made available to, the customer,
whether from the utility or from an AES. Actual collections of the
Securitization Charges will vary from expected collections due to a number of
factors including power usage and delinquencies. The Statute requires the
financing order to provide for adjustment of the Securitization Charges at least
annually to correct any over-collections or under-collections. Under the
Statute, the right to collect Securitization Charges and other rights under the
financing order constitute a separate property right that is called
securitization property.
3
PLR-115061-00 3
The Statute also permits a utility to request the PSC to approve the
issuance of securities called securitization bonds that are secured by the
utility's rights to the Securitization Charges ("Bonds"). The principal amount
of Bonds approved in the financing order includes the amount of the Qualified
Costs that may be recovered.
PROPOSED TRANSACTION
The Company has requested a financing order from the PSC authorizing
the issuance of the Bonds in an aggregate principal amount not to exceed $a. The
financing order authorizes Securitization Charges in an amount needed to service
the Bonds, pay transaction costs and provide for credit enhancement. The
financing order requires that the Securitization Charges be adjusted annually
until 12 months prior to the expected final payment date of the Bonds and
quarterly thereafter. The financing order creates securitization property
including the right to collect the Securitization Charges and provides that the
securitization property may be assigned by the Company to a special purpose
limited liability company ( the "Issuer").
In addition, the financing order will grant the Company authority to
impose and collect tax charges in an amount sufficient for the Company to
recover federal and state taxes payable as a result of the Company's recognizing
the Securitization Charges received. The Company will collect the tax charges
for its own account.
The Company will form the Issuer under State B law as a bankruptcy
remote, limited liability company solely for the purpose of effectuating the
proposed transaction. The Issuer will use the accrual method of accounting. The
Company will be the sole member of the Issuer. The Issuer will not elect to be
treated as a business entity organization taxable as a corporation under section
301.7701-3(b)(1) of the Procedural and Administration Regulations. The Company
will contribute, as equity to the Issuer, cash equal to b percent of the initial
principal amount of the Bonds.
Pursuant to the financing order, the Company will transfer the
securitization property to the Issuer. The Issuer will issue and sell Bonds to
investors. The proceeds from the issuance of the Bonds, net of issuance costs,
will be transferred to the Company in consideration for the securitization
property.
4
PLR-115061-00 4
The Issuer will initially issue one or more series of Bonds to
investors. Each series may be comprised of one or more classes, each having a
different final maturity date. The Company expects that the Bonds will have
expected final payment dates of no more than c years, and final maturity dates
of no more than d years. The expected final payment date is the date when all
principal and interest on a class of Bonds is expected to be paid in full by the
Issuer. The final maturity date is the date on which a class of Bonds will be in
default under the Indenture for failure to pay the principal thereof and
interest thereon in full.
Interest on the Bonds will be payable quarterly or semi-annually at
rates that are based on yields that are commensurate with similarly rated debt
obligations of comparable weighted average lives. The Bonds are expected to be
sold at or near their stated principal amounts. Principal payments will be
scheduled to be made quarterly or semi-annually. Within a series, principal will
be applied in sequential order to each class until the outstanding principal
balance of the class is reduced to zero.
In general, the Bonds will be payable solely out of the securitization
property and other assets of the Issuer. In addition, the Bonds may be subject
to an optional "clean-up" (i.e., early payment of all outstanding principal and
accrued interest) when the outstanding principal of the Bonds has been reduced
to e (or less than e) percent of the initial principal amount.
Initially, the Company will act as servicer of the securitization
property (the "Servicer"). As Servicer, the Company will bill and collect
Securitization Charges from customers, remit amounts collected to the Issuer,
apply to the PSC for adjustments to the Securitization Charges, and retain all
books and records with respect to the Securitization Charges, subject to the
Issuer's right of inspection. The Company will retain all investment income
earned on the Securitization Charges between the time they are collected and the
time they are remitted to the Issuer. Only in the event that the Company fails
satisfactorily to perform its servicing functions will the Company be subject to
replacement as Servicer. The Company will receive a fee as Servicer, payable
monthly.
The Securitization Charges will be set to provide for the recovery of
the principal of and interest on the Bonds and related expenses, as well as for
an excess amount, i.e., the Overcollateralization Amount, that will eventually
reach at least b percent of the initial principal amount of the Bonds. The
Overcollateralization Amount will be collected approximately ratably over the
expected term of the Bonds.
A Collection Account will be established as credit enhancement for the
5
PLR-115061-00 5
Bonds. The Collection Account will consist of four subaccounts entitled General,
Overcollateralization, Capital and Reserve. The General Subaccount will hold all
funds in the Collection Account not held in any of the other three subaccounts.
The Servicer will remit all Securitization Charge collections to the General
Subaccount, and the Trustee will use the amounts in the General Subaccount to
make payments in the following order of priority: (i) certain fees and expenses
of the Servicer and the administrator and the independent managers of the Issuer
and other operating expenses of the Issuer up to a specified amount, (ii)
interest on the Bonds, (iii) specified amounts of principal of the Bonds, (iv)
any amounts needed to replenish withdrawals from the Capital Subaccount up to
the initial balance, (v) amounts required to fund, to its required level, and to
replenish withdrawals from the Overcollateralization Subaccount, and (vi) to the
Reserve Subaccount for distribution on subsequent payment dates. Upon the
retirement of any series of Bonds, funds, if any, equal to the amounts in the
Overcollateralization Subaccount and the Reserve Subaccount will be transferred
to the Issuer (to the extent not required for other series), and The Company
will credit to ratepayers an amount so released to the Issuer.
To the extent that the General Subaccount in any period is insufficient
to make the required payments, the Trustee will draw upon the Reserve
Subaccount, the Overcollateralization Subaccount, and finally, the Capital
Subaccount to make these payments. To the extent that amounts in the Capital
Subaccount or the Overcollateralization Subaccount are used to make payments of
fees, expenses, interest and scheduled principal, future Securitization Charges
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.
Certain events constitute a default by the Issuer on its payment
obligations with respect to the Bonds. These events include a default in the
payment of interest within five days after a payment is due and a default in the
payment of outstanding principal as of the legal final maturity date. In the
event of a payment default, the Trustee or holders of Bonds owning a majority in
principal amount of the Bonds then outstanding may declare the unpaid principal
amount of all the Bonds then outstanding to be due and payable.
The Bonds will be nonrecourse to the Company and will be secured only
by, and generally payable solely out of, the Issuer's assets, which will include
the securitization property, rights under the transaction documents and the
Collection Account, the right to obtain adjustments to the securitization
property, and any swap agreement executed to permit the
6
PLR-115061-00 6
issuance of floating rate Bonds. The Company expects that at least two
nationally recognized credit rating agencies will give the Bonds their
respective highest available credit ratings.
ISSUES
1. Will the issuance of the financing order and the transfer of the
securitization property to the Issuer result in gross income to the Company?
2. Will the issuance of the Bonds and the transfer of the proceeds of
the Bonds to the Company result in gross income to the Company?
3. Will the Bonds constitute obligations of the Company?
7
PLR-115061-00 7
APPLICABLE 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), 1955-1 C.B. 207.
The right to collect the Securitization Charges and the Tax Charges is
of significant value in producing income for the Company. Moreover, State A's
action in making the rights to the Securitization Charges 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 includible 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, 1997-1 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. Neither the issuance of the financing order nor the transfer of the
Securitization Property to the Issuer will result in gross income to the
Company.
2. The issuance of the Bonds and the transfer of the proceeds of the
Bonds to the Company will not result in gross income to Company.
3. The Bonds will be obligations of Company.
8
PLR-115061-00 8
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 the taxpayer requesting it. Section
6110(k)(3) of the Code provides that this ruling may not be used or cited as
precedent.
A copy of this letter should be attached to the federal income tax
return of the Company for the taxable years that include the transaction
described in this letter.
Sincerely yours,
Acting Associate Chief Counsel
(Financial Institutions & Products)
By: _______________________
William E. Coppersmith
Chief, Branch 2
Enclosure
cc:
Brian E. Wheeler
2000 2nd Avenue - 990 WCB
Detroit, MI 48226-1279