Question
June 10, 2004
VIA ELECTRONIC MAIL ANDPOSTAL SERVICE
Mr. B. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Ave, NW
Washington, D.C. 20580
Re: Confirmation of Advice Regarding Applicability of 16 C.F.R.802.2(b)
Dear Mr. Verne:
In our conversation of June 8, Idescribed for you a transaction in which Buyer will acquire from its Lessor anundivided interest for 50% of a power plant that Buyer operates. I write toconfirm the analysis and your informal advice.
Description
Buyer is an electric cooperative. It is owned by its members, withwhom it also has all-requirements contracts, but for HSR purposes Buyer is its own ultimate parent. Buyer operates anumber of electric generation facilities, including Plant. Plant consists ofrealty, generation equipment, and related assets. Plant was originally operatedby First Operator, which was another member-owned electric cooperative. FirstOperator caused the original construction of Plant and then entered intoseveral sale-leaseback transactions, which are described below. Approximately15 years ago, First Operator filed for Chapter 11 and eventually was dissolved.As part of the bankruptcy proceedings, Buyer agreed to "assume and becomeobligated to pay, perform, and discharge the obligations and liabilities"of First Operator under a number of agreements, including the Plant leases(with certain modifications and technical amendments). In addition, 10 of FirstOperator's 13 members became members of Buyer. (The other 3 members werereleased from their all-requirements contracts with First Operator and enteredinto similar contracts with the buyers of other assets of First Operator.)Buyer and the trustee for First Operator filed HSRNotifications with respect to Buyer's acquisition (and several relatedtransactions), and the transaction proceeded after the waiting period expired.
Plant first went into service in the mid-1980s. Lessor acquiredits interest shortly before the in-service date and has held the interest sincethat time. (Technically the interest is held by a single-purpose grantor trustcontrolled, for HSR purposes, by an ultimate parent entitythat we will refer to as Lessor. An entity included within Lessor is thegrantor and beneficiary of the trust.) Lessor is in the business of providingfinancing, and it has held this interest continuously since its acquisition.The lease agreement cedes all operational control to the lessee (which is nowBuyer). Buyer is responsible for all operation, maintenance, and insurance ofPlant, and Buyer controls the disposition of all power generated by Plant.
Lessor holds a 50% undivided interest in Plant. Until recently,the remaining 50% was owned by four other, similar grantor trusts establishedin the 1980s, which had entered into similar leases with First Operator, towhich Buyer succeeded. In the last two years, Buyer has acquired the beneficialinterests ire two of the trusts (representing 28% of Plant), but thesetransactions were nonreportable because they did not meet applicable sizetests.
Discussion
Buyer now proposes to acquire the 50% interest held by Lessor. Anundivided interest is considered an asset, so its acquisition is treated as theacquisition of an asset. See, e.g., Informal Interpretation File No. 9208001(available at http://www.ftc.gov/bc/hsr/informal/ opinions/9208001.htm).Nonetheless, this acquisition appears to be exempted under 16 C.F.R. 802.2(b). That section exempts from any reporting obligation the acquisition ofa "used facility" if
"thefacility is acquired from a lessor that has held title to the facility forfinancing purposes in the ordinary course of the lessor's business,"
"by alessee that has had sole and continuous possession and use of the facility sinceit was first built as a new facility."
The first condition is plainly satisfied here, because Lessorholds and has at all material times held its undivided interest in the ordinarycourse of its business. We understand that the fact that the interest is thebeneficial ownership of an undivided partial interest in the "title to thefacility" (rather than a direct ownership of 100% of the title) makes nodifference.
The second condition requires more analysis. First Operator causedPlant to be built, was the lessee in the original sale-leaseback transactionwith Lessor, and had sole and continuous possession and use of Plant until itssale in bankruptcy. Buyer in essence succeeded to First Operator's rights underthat original lease, and assumed virtually all the obligations of FirstOperator relating to the Plant. Buyer's membership now includes the FirstOperator members for whom Plant was primarily built. (Moreover, Buyer'sacquisition of First Operator's interest was reported under the HSR Act without incident.) Buyer has had sole and continuouspossession and use of Plant since the date that it succeeded to FirstOperator's rights. Under these circumstances, you agreed that Buyer would bedeemed to have stepped into the shoes of First Operator, that First Operator'sand Buyer's combined use and possession of Plant would be deemed "sole andcontinuous," and that the exemption therefore applied on the stated facts.
Conclusion
Based on the foregoing analysis, we have concluded that Buyer'sacquisition from Lessor of the beneficial interest in the trust controlled byLessor is not reportable.
Thank you again for your assistance. I would appreciate atelephone call confirming that I have correctly stated your advice.