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March 1, 2024
2024-0500

IRS guidance expands the scope of public utility financing arrangements that will qualify to be treated as non-taxable

  • The new Revenue Procedure updates old guidance to treat securitization transactions for public utilities by qualified state financing entities the same as wholly owned financing entities.
  • This is a welcome development as state financing entities have become popular financing vehicles.
 

Revenue Procedure 2024-15 allows qualified state financing entities to be treated the same as wholly owned financing entities for the purpose of qualified securitization transactions. As a result, public utilities may enter into securitization transactions with state financing entities that result in bond issuances without recognizing the income from receiving cash in exchange for a securitized revenue stream.

Revenue Procedure 2024-15 is effective on or after February 29, 2024, and may be applied to securitizations issued before that date.

Background

Public utilities often issue bonds backed by future payment streams (usually customer utility bills) that are sold to investors. These "qualifying securitization transactions" are governed by Revenue Procedure 2005-62, which allows a public utility that is authorized by state legislation to enter into a transaction to recover costs through a "qualifying securitization" without recognizing gross income if certain conditions are met.

Revenue Procedure 2005-62 defines a "qualified securitization" as the issuance of bonds and other securities that comply with requirements concerning a financing entity that is "wholly owned, directly or indirectly, by the utility."

State-financing entities

Some states have enacted legislation that allows a state financing entity to serve as a financing vehicle. Revenue Procedure 2005-62, however, does not apply to those state-financed securitization transactions because the qualifying state financing entity is not "wholly owned, directly or indirectly, by the public utility." The state financing entity is separate and apart from the utility so would not meet this requirement.

Revenue Procedure 2024-15 fixes this issue by addressing the definitions of qualifying state securitization and removing the requirement that the financing entity be wholly owned by the public utility.

Revenue Procedure 2024-15 defines "qualifying state securitization" as an issuance of debt instruments that: (1) is secured by the intangible property right to collect charges for the recovery of specified costs and other assets of a public utility; (2) is issued by a qualifying state financing entity and (3) provides for payments on at least an annual basis.

In addition, Revenue Procedure 2024-15 treats a public utility as not recognizing gross income upon:

  • The public utility receiving a financing order that creates an intangible property right in the specified costs that may be recovered through securitization
  • The public utility receiving cash or other valuable consideration in exchange for the transfer of that property right to a qualifying state financing entity
  • The qualifying state financing entity receiving cash or other valuable consideration in exchange for the debt issued by the qualifying state financing entity
    Or
  • The public utility receiving the proceeds of the debt issued by the qualifying state financing entity

Revenue Procedure 2005-62 update

Revenue Procedure 2024-15 updates Revenue Procedure 2005-62 to conform with the new requirements and expand the scope of arrangements that will qualify to be treated as non-taxable by (1) defining public utilities to refer to any utility company, instead of just investor-owned utilities and (2) allowing payments of a qualifying securitization to be provided annually.

Implications

As securitizations become more prevalent, this update is welcome because it expands the type of arrangements that are eligible to qualify under the safe harbor for these securitization transactions. In recent years, state financing entities have become popular and Revenue Procedure 2024-15 provides certainty that these transactions will also be treated as non-taxable.

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Contact Information

For additional information concerning this Alert, please contact:

Americas Power & Utilities Tax Group

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor
 

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