SALE-LEASEBACKS are becoming more challenging.
Lessees should be careful in sale-lease-backs of power projects not to assign the lessor a contract to sell electricity from the project or pledge such a contract to the lessor as security to support the rents and other lease obligations. Accounting firms are taking the position that this will rule out off-balance sheet treatment for the lease financing. The only arrangement with which the accountants seem comfortable is where the lessor has a pledge of shares in the lessee to secure the rents. The lessee can then agree to a covenant not to sell or assign the power contract. The same analysis applies to tolling agreements.
Off-balance sheet treatment will also be a problem if the accountants view the power contract or tolling agreement as, in substance, a sublease of the power plant to whomever is buying the electricity. (For a detailed discussion of the sublease issue, see an article by Leslie Knowlton and Henry Phillips of Deloitte + Touche in the April 2002 NewsWire.)