No-Action Letter under:
THE OFFICE OF PUBLIC UTILITY REGULATION
DIVISION OF INVESTMENT MANAGEMENT
|Our Ref. No. 01-3-OPUR
Large Scale Distributed Generation II
Statutory Trust, et al.
File No. 132-3
Based on the facts and representations in your letter of September 5, 2001, we would not recommend any enforcement action to the Commission under section 2(a)(3) of the Public Utility Holding Company Act of 1935 against The Passive Participants, as defined in your letter, if the proposed Transaction takes place in the manner and under the circumstances described in your letter.
You should note that facts or conditions different from those presented in your letter might require a different conclusion. Further, this response expresses only the Division's position on enforcement action. It does not purport to express any legal conclusion on the questions presented.
David G. LaRoche
September 5, 2001
September 5, 2001
Michael Hornstein, Esquire
Orrick, Herrington & Sutcliffe, LLP
3050 K Street, N.W.
Washington, DC 20007-5135
Re: Large Scale Distributed Generation II Statutory Trust, et al.
File No. 132-3
Dear Mr. Hornstein:
Enclosed is our response to your letter of September 5, 2001. By incorporating our answer in the enclosed copy of your letter, we avoid having to recite or summarize the facts involved.
Very truly yours,
David G. LaRoche
September 5, 2001
Office of Public Utility Regulation
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Attn: Catherine Fisher
Re: Request for No-Action Letter
under Section 2(a)(3) of the Public Utility Holding Company Act of 1935
Dear Ms. Fisher:
We are writing on behalf of Large Scale Distributed Generation II Statutory Trust, a Connecticut statutory trust, as lessor (the "Trust"), the various financial institutions that are or become parties to the Transaction (as defined below) documents from time to time as certificate holders1 (in such capacity as certificate holders, each, together with their respective successors and permitted assigns and sub-participants, a "Certificate Holder" and collectively, the "Certificate Holders"), the various financial institutions that are or become parties to the Transaction documents from time to time as lenders2 (in such capacity as lenders, each, together with their respective successors and permitted assigns and sub-participants, a "Lender" and collectively, the "Lenders"), State Street Bank and Trust Company of Connecticut, National Association, as trustee of the Trust (the "Trustee"), and First Union National Bank, as administrative agent (in such capacity, the "Administrative Agent"), in connection with a synthetic lease transaction (the "Transaction") entered into with our client PPL Large Scale Distributed Generation II, LLC, a Delaware limited liability company (the "Lessee"). For purposes of this letter, the Certificate Holders, the Lenders, the Trustee, and the Administrative Agent are referred to collectively from time to time as "Passive Participants" and individually as a "Passive Participant."
The Lessee has entered into the Transaction to finance the purchase of certain gas turbine generators, transformers, selective catalytic reduction systems, spare engines and other related equipment (collectively, the "Equipment"), the purchase, installation, development and construction of certain improvements and facilities (collectively, the "Facilities"), and the acquisition of various sites within the United States (the "Sites") at which the Equipment will be installed and on which the Facilities will be constructed (each Site and the related Equipment and Facility thereon is referred to herein as a "Project"). Certain of the Equipment also may be installed at other generation facilities owned or operated by Lessee or its affiliates (such Equipment to be located at such other facilities, the "Non-Project Equipment" and together with the Projects, the "Leased Property"). The Leased Property will be used for the generation of electricity. Title to the Leased Property will be held in the name of the Trust. All of the beneficial interest in the Trust will be owned by the Certificate Holders.
In this firm's capacity as counsel to the Lessee, we are writing on behalf of the Passive Participants to request that the Staff of the SEC concur in our view that none of the Passive Participants, by virtue of the Transaction, will be an "electric utility company" under Section 2(a)(3) of the Public Utility Holding Company Act of 1935, as amended (the "1935 Act").
The Transaction is structured as a synthetic lease. A synthetic lease structure, unlike certain other lease structures (e.g., a true lease), allows for the separation of accounting and tax treatment. For example, under a true lease structure the lessor/owner of an asset is the owner for both tax (lessor/owner receives the tax benefits) and accounting (the asset, and any liability associated with it, appear on lessor/owner's balance sheet) purposes. However, under a synthetic lease structure, the lessee/operator of the asset is the owner for tax purposes (lessee/operator receives the tax benefits) and the lessor/owner is the owner for accounting purposes (the asset, and any liability associated with it, appear on lessor/owner's balance sheet).
Pursuant to the Transaction, the Trust will acquire the Equipment, lease or acquire the Sites, and construct the Facilities. Pursuant to a supervisory agreement (the "Supervisory Agreement"), the Trust has appointed the Lessee as its agent to undertake and supervise the acquisition, installation and testing of the Equipment and the selection and acquisition of the Sites and to develop and construct the Facilities.
The costs associated with the acquisition, installation and testing of the Equipment, the acquisition of the Sites, and the development and construction of the Facilities will be advanced by the Trust using funds provided by the Certificate Holders and the Lenders. Pursuant to a loan agreement between the Trust and the Lenders, a portion of the funds to be advanced by the Trust to acquire and complete the Leased Property will be borrowed from the Lenders. The remaining funds necessary to acquire the Equipment and complete the Projects will be Advanced by the Certificate Holders.
In order to facilitate the Transaction, the Certificate Holders have appointed the Trustee to act on their behalf and administer the Trust, and the Certificate Holders and the Lenders together have appointed the Administrative Agent to act on their behalf in connection with the Transaction and the Operative Agreements (as defined below) generally. In such capacities, the Trustee executes certain documents on behalf of the Trust and the Administrative Agent is a party to certain of the Operative Agreements and has been granted a security interest for the benefit of the Certificate Holders and the Lenders in all of the Leased Property and all of the other assets of the Trust. The Operative Agreements provide that it is the intent of the parties that the Transaction be deemed a lease for accounting purposes only and that for income tax, insolvency and other purposes, the Transaction shall be deemed a financing and Lessee shall be deemed the owner of the Leased Property.
Pursuant to the operative agreements governing the Transaction (the "Operative Agreements"), (i) prior to substantial completion of each Project, the Lessee is granted a license for purposes of testing the Equipment and to sell any electricity generated as a result thereof, and (ii) upon substantial completion of each Project or the delivery of any Non-Project Equipment, the Trust shall lease to the Lessee each such Project and Non-Project Equipment pursuant to a master lease agreement (the "Lease") for a term of years. The terms and conditions of the Lease will be substantially similar to those contained in a typical triple net lease used in other synthetic lease transactions, which, among other things, requires a lessee to be responsible for all aspects of the operation and control of a facility, including insurance, maintenance and taxes. The Lease entered into between the Trust and the Lessee in connection with the Transaction is no different. During the lease term, the Trust holds title to the Leased Property, but the Lessee is responsible for all aspects of the operation and control of the Leased Property, including insurance, maintenance and taxes. Therefore, because the Lease provides that the Lessee retains exclusive control over the Leased Property during the term of the Lease, none of the Trust, as the holder of title of the Leased Property, the Certificate Holders, as holders of the beneficial interest in the Trust, the Lenders, as lenders to the Trust, the Trustee, as trustee of the Trust, or the Administrative Agent, as the Certificate Holder's and Lender's agent, will have operational control over the asset.
The Lease will grant the Lessee an option to purchase each Project or the Non-Project Equipment at or prior to the end of the term of the Lease. In the event that the Lessee does not exercise that option to purchase all of the Leased Property and the Lease is not renewed, the Lessee will be required upon the expiration of the Lease term to sell the Leased Property not purchased by the Lessee on behalf of the Trust to a third party not affiliated with Lessee. In addition, in the event that the Lessee defaults on its obligations under the Supervisory Agreement, the Lease or other Operative Agreements, or the Trust defaults under its loan from the Lenders, the Administrative Agent will be able to exercise traditional secured lender remedies that include taking possession of the Leased Property for ultimate sale, lease or operation. While the Passive Participants should be deemed not to have dominion or control during the term of the Lease, upon the expiration or early termination of the Lease or in connection with the exercise of any traditional secured lender remedies whereby, in either case, a person other than the Lessee obtains control of a Project or No-Project Equipment, one or more of the Passive Participants could be deemed to have dominion and control over some or all of the Leased Property. Because the facts relevant to this request for no-action letter would no longer be applicable, in such case we would expect that the relevant parties would seek any required approvals for possession or operation of a Project or other Leased Property.
On July 12, 2001, the Lessee and the Trust each filed an application with the Federal Energy Regulatory Commission ("FERC") for determination of "exempt wholesale generator" ("EWG") status under and as defined in Section 32 of the 1935 Act.3 Letters granting such EWG status by the FERC were issued August 16, 2001. In addition, such letters state that copies thereof will be forwarded to the Securities Exchange Commission. The Lessee will supply electricity generated from the Leased Property at wholesale for ultimate sale to end-users at retail.
This request for no-action letter is being submitted because none of the Passive Participants qualify as EWGs under Section 32 of the 1935 Act. As financial institutions, the Passive Participants are not exclusively engaged in the business of owning and/or operating "eligible facilities" as required for EWG status under Section 32.
As such, we request this no-action letter concurring with our view that none of the Passive Participants, by virtue of the Transaction, will be an "electric utility company" under Section 2(a)(3) of the 1935 Act.
Section 2(a)(3) of the 1935 Act provides, in relevant part, that an "electric utility company" is "any company which owns or operates facilities used for the generation, transmission, or distribution of electric energy for sale . . . ." Thus, to the extent that the Certificate Holders, by virtue of their beneficial interest in the Trust, the Lenders or the Trustee or Administrative Agent, by virtue of being a party to certain of the Operative Agreements, are considered to "own" a Project or any of the other Leased Property, they could be considered electric utility companies under the 1935 Act. Any parent of these entities could then be considered a "holding company" within the definition of Section 2(a)(7) of the 1935 Act. However, as discussed below, none of the Passive Participants should be deemed to "own" (within the meaning of Section 2(a)(3)) the Trust, and thus none of the Passive Participants should, by virtue of the Transaction, be deemed to be an electric-utility company. Moreover, no public policy interest would be served by treating the Passive Participants as electric-utility companies since the underlying Trust will be exempt from the definition of electric-utility company, as well as from the other provisions of the 1935 Act.
As discussed above, the FERC granted EWG status to both the Lessee and the Trust, and as such each is exempt from the 1935 Act pursuant to Section 32. This exemption reflects the intent of Congress that an entity that owns or operates "eligible facilities" not be subject to regulation under the 1935 Act. The public policy established by Congress in Section 32 should apply with even greater force to entities, such as the Certificate Holders, which hold only beneficial interests in the Trust, and the Administrative Agent, Trustee and Lenders, which hold no beneficial interest in the Trust. There appears to be no public policy purpose served in regulating the Certificate Holders, Trustee or the Administrative Agent during construction and prior to the termination of the Lease, when the Trust, as the entity holding legal title to each Project, and the Lessee, the entity exercising exclusive dominion and control over each Project, will each be exempt from regulation under the 1935 Act. 4
The conclusion that public policy would not be served by regulating the Passive Participants is further supported by the passive nature of their interests. The Certificate Holders and Lenders will hold their interests as a result of the funds that they are providing to the Trust in the Transaction. The Trustee will act as trustee of the Trust, and the Administrative Agent will be acting as an agent on behalf of the Certificate Holders and the Lenders and hold a security interest in the Leased Property and the other collateral. None of the Passive Participants will exercise dominion and control over the Lessee, any Project or Non-Project Equipment. Rather, the Lessee will have exclusive responsibility for the acquisition, construction, operation and maintenance of the Projects and the Non-Project Equipment during the construction period and prior to the termination of the Lease. These factors, which are analogous to the factors considered in the SEC's adoption of Rule 7(d), weigh heavily in favor of a determination that none of the Passive Participants should be deemed to "own" the Project for purposes of the 1935 Act, and thus none of the Passive Participants should be deemed to be an electric-utility company within the meaning of Section 2(a)(3).
For the reasons discussed above, we request a no-action letter concurring with our view that none of the Passive Participants by virtue of the Transaction including by entering into the Operative Agreements and performing the transactions contemplated therein, will "own" (as that term is used in Section 2(a)(3) of the 1935 Act) facilities used for the generation, transmission or distribution of electric energy for sale, and thus none of the Passive Participants will be an "electric utility company" under Section 2(a)(3) the 1935 Act.
If you have any questions or desire any additional information regarding the matters discussed in this letter, please contact the undersigned at (202) 339-8461. If for any reason you do not concur with any of the views expressed in this letter, we respectfully request an opportunity to confer with you prior to any written response.
Very truly yours,
Michael D. Hornstein
|1||As of the date of this letter, the Certificate Holders are First Union National Bank, Citicorp USA, Inc., Barclays Bank PLC, Westdeutsche Landesbank Girozentrale, and CSL Leasing, Inc.|
|2||As of the date of this letter, the Lenders are First Union National Bank, Citicorp USA, Inc., Barclays Bank PLC, Westdeutsche Landesbank Girozentrale, Bank One, NA, The Industrial Bank of Japan, Limited, The Bank of Nova Scotia, Toronto Dominion (Texas), Inc., The Chase Manhattan Bank, and Union Bank of California, N.A.|
|3||See PPL Large Scale Distributed Generation II, LLC, FERC Docket No. EG01-262-000, filed July 12, 2001; and Large Scale Distributed Generation II Statutory Trust, FERC Docket No. EG01-263-000, filed July 12, 2001.|
|4||The SEC Staff has previously reached a similar conclusion under analogous circumstances. In BOT Financial Corp., 1994 SEC No-Act. LEXIS 740, the SEC staff concurred with the view that the owner participants holding undivided interests in an eligible facility, as defined under Section 32, should not be deemed to be an electric utility company where the owner of the facility is exempt under Section 32. See also Dow Chemical Canada, Inc., 1994 SEC No-Act. LEXIS 556 (SEC staff concurred with view that operator of eligible facility, as defined under Section 32, should not be deemed to be electric utility company where owner of facility was exempt under Section 32). See also Kenetech Facilities Management, Inc., 1993 SEC No-Act. LEXIS 419. C.f. Stone & Webster Management Consultants, Inc., 1972 SEC No-Act. LEXIS 8 (the SEC Staff concurred with the view that the operator of gas distribution facilities should not be deemed to be a gas utility company under Section 2(a)(4) of the 1935 Act since the owner of the facilities was exempt under Section 2(c) of the 1935 Act).|
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