When Électricité de France stepped in to buy Constellation Energy’s nuclear assets and help the company avoid bankruptcy, the Maryland Public Service Commission conditioned the sale on a set of...
Business & Money
term, in fact, have distinct opportunities to enhance overall value for themselves as well as for future buyers. In some cases, this may take the form of tax-efficient recapitalization and refinancing transactions. It also may involve strategies that, coupled with HIA, can help to alleviate the double taxation imposed on repatriated foreign earnings. Many U.S. utilities face this exposure to double taxation on their repatriated foreign earnings given the harsh application to the leveraged, capital-intensive utilities of U.S. tax rules regarding the allocation and apportionment of U.S. interest expense between U.S. and foreign sources.
For investors who have been unable to repatriate foreign earnings because of harsh U.S. tax consequences, the HIA legislation potentially would allow these earnings to be repatriated at a reduced U.S tax cost. Additionally, the proposed bill may allow U.S. utilities to make these investments with local-country third-party financing, repatriate the proceeds at a reduced U.S. tax cost, and pay down U.S. debt or fund other liabilities. In the future, this would give U.S. utilities a use for future foreign earnings (i.e., to use those earnings to repay the third-party financing). This would have the additional benefit of freeing-up U.S. earnings for domestic investment and funding of domestic liabilities.
The overall impact of the pending U.S. legislation, and the appropriate approach to select in each case regarding restructuring, refinancing, and repatriation options will vary according to each taxpayer's overall tax posture. Thus, at first glance, the proposed rule changes may have little or no impact on a given company's finances, or disposition planning choices. However, this is one area where all assumptions and decisions must be based on a thorough and close analysis of the:
- Current foreign and U.S. tax implications of moving earnings cross-border from and into a particular jurisdiction;
- Taxpayers' current foreign tax credit position, including analyses of each U.S and foreign entities' debt/equity structure, future capital needs, tax bases, and earnings and profits profiles;
- Local-country tax implications of restructuring and refinancing local-country operating companies, including the implications of existing loan covenant terms and the constraints that may arise from local regulatory considerations; and
- Projections of earnings generated/used offshore and U.S. investors' needs to access those earnings for use in the U.S.
After the International Portfolio Review
Once a utility understands the full picture of its international portfolio, it can move ahead and develop an appropriate holding or disposition strategy.
For example, it may decide that some assets or businesses can be sold outright, as stand-alone operations. Other holdings might be more profitably sold if they are offered along with other assets in a geographic region or country. Or they might be better grouped together according to business capabilities: as a group of generation plants, perhaps, or a package of energy distribution businesses. The possibilities of public offerings in certain markets also should not be overlooked.
Restructuring or refinancing in advance of any transactions also can enhance the ultimate consequences of the overall strategy, including the offset of gains or losses, or the realization of losses with the "right" character to fit the profile of the