The Federal Energy Regulatory Commission on April 23 approved a Feb. 25 request from Louisville Gas and Electric and Kentucky Utilities for authorization related to a transaction under which they will exercise a lease-end purchase option for two 146-MW units at their E.W. Brown station near Harrodsburg, Kentucky (Brown units 6 and 7, collectively called the Brown combustion turbines (CTs)).
In December 1999, Louisville Electric and Kentucky Utilities entered into a transaction under which the Brown CTs were the subject of a cross-border sale/leaseback transaction (1999 Transaction). The 1999 Transaction was approved by the commission. There were three primary components to the 1999 Transaction as relevant to this application.
- First, pursuant to the 1999 Purchase Agreement and the associated Bill of Sale, Louisville Electric and Kentucky Utilities sold to a Finnish lessor called ABB Credit Oy (Lessor) all of their ownership interests in the Brown CTs for a price of approximately 122 million euros (the Sale). Lessor financed its purchase through loans made to it by its lenders, ANZ Grindlays Export Finance Ltd. and ABB Capital B.V.
- Second, contemporaneously with the sale, applicants entered into a Lease Agreement (1999 Lease Agreement), pursuant to which the Lessor leased the Brown CTs back to applicants. Louisville Electric and Kentucky Utilities retained all ability to operate and maintain the Brown CTs under the 1999 Lease Agreement.
- Third, contemporaneously with the Sale and Lease, applicants defeased themselves of their obligations to make lease payments under the term of the Lease Agreement, by vesting those obligations in a third-party bank. In consideration for assuming those obligations under the 1999 Lease Agreement, Louisville Electric and Kentucky Utilities made a payment to the third party bank, ANZ Grindlays Export Finance (and/or its successors), roughly equivalent to the then-present value of the stream of lease payments and the payment due to Lessor to re-purchase the units upon lease termination. That payment was financed using the proceeds of the sale to the Lessor described in the first step above.
Louisville Electric and Kentucky Utilities are now within the window for exercising a “Call Option,” under th agreements, notice of which must be provided to the Lessor no later than May 9, which is the Call Option Termination Date. Applicants plan to provide that notice and terminate the lease. Termination of the lease will result in passing legal title to the Brown CTs from the Lessor back to the two utilities. If the proposed transaction is not consummated, the Lease would continue on until its 2017 termination, at which point the ultimate procedures and cost to re-acquire title in the Brown CTs may be different than the existing call-option process and the amounts deposited with the defeasance bank in 1999.
The two utilities are both subsidiaries of PPL Corp. (NYSE: PPL), which is spinning off its unregulated power plants into Talen Energy but will retain these two utilities and their power plants.