EXHIBIT 99.1
INTERNAL REVENUE SERVICE PRIVATE LETTER RULING
PERTAINING TO SECURITIZATION BONDS
Internal Revenue Service Department of the Treasury
Index Number: 61.00-00 61.03-00 Washington, DC 20224
61.43-00 451.01-00
David A. Mikelonis Person to Contact:
Sr. Vice-President & General Counsel Thomas Preston: ID NO. 50-05811
Consumers Energy Company Telephone Number:
212 West Michigan Avenue (202) 622-4443
Jackson, MI 49201-2236 Refer Reply To:
CC:DOM:FIP:2-PLR-115362-00
Date: NOV 15 2000
Legend:
Parent = CMS Energy Corporation
EIN: 38-2726431
Company = Consumers Energy Company
EIN: 38-0442310
Trustee = securitization bond trustee
State A = Michigan
State B = Delaware
Statute = Senate Bills 937 and 1253, 2000 Mich.
Pub. Act 141 and 142
a = $472,550,000
-
b = 0.50
-
c = 14.5
-
d = 15
-
e = 5
-
Dear Mr. Mikelonis:
This letter is in reply to Company's letter dated August 7, 2000,
and other correspondence, asking the Internal Revenue Service to rule on
the transaction described below.
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.
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 received 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 grants 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 has formed 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 is 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 total 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.
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 "cleanup" (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 Issuers 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.
AESs may not bill and collect Securitization Charges or Tax
Charges from customers without the consent of the Company. The Company has
agreed that it will not give that consent.
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 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) any remaining expenses of the Issuer, including payments, if any,
required under any hedge or swap agreements. Thereafter, an amount equal
to earnings in the Capital Account will be released to the Issuer and any
remaining unallocated amounts will be allocated to the Reserve Subaccount
for distribution on subsequent payment dates.
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
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?
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.
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: /s/ Marshall Feiring
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Marshall Feiring
Senior Technician Reviewer, Branch 2