October 2006 Issue No. 58

Welcome to the October 2006 edition of
Business Leasing and Finance News
formerly Business Leasing News

About BLFN: David G. Mayer, a Business Group partner at Patton Boggs LLP, founded this monthly e-newsletter in January 2002. BLFN’s mission is to provide leasing and financing strategies for your success.

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FOUNDER'S NOTE
By David G. Mayer

As we start the fourth quarter, this issue of Business Leasing News (BLN) leads off with an article that discusses a “first-of-its-kind” lease of natural gas – the molecules – that constitute the “pad gas” for a natural gas storage facility. The natural gas will be kept and leased in a gas storage reservoir almost a mile deep into the ground. The article demonstrates how leases provide meaningful, economic support as part of a project financing transaction that relates to the storage of a vital and growing source of clean energy. The second article takes a page out of the play book of the 2006 Lease Accountants Conference. It provides a list of land mines in documentation, primarily from the presenter’s point of view as accountants responsible for managing pending and closed deals. The third article warns lessors and lenders to get the right kind of evidence of insurance at closing to avoid potentially expensive fights to obtain coverage. The fourth article, which is “Leasing 101,” asks: “What is a ‘Balance Sheet’?” and stems from the ever present, but increasingly pressing trend, to restrict off-balance sheet financing.

Look for an article next month on the coming breed of very light jets. Thanks again for reading BLN. Feel free to contact me by telephone at (214) 758-1545 or e-mail at dmayer@pattonboggs.com to discuss BLN’s topics or other issues in your day.

1. Novel Pad Gas Lease Supports Project Financing of Natural Gas Storage Facility

If you ask leasing professionals about what types of assets a company can lease, they would probably say that you could lease almost any kind of property. But even those experts may pause if you suggest that an institutional lessor could and would lease natural gas—the molecules—for use in a natural gas storage facility situated almost a mile deep into the earth.

How can a lessor lease natural gas molecules? Is it not burned up when used or transported? How does a lessor price a natural gas lease? What purchase or termination options can a lessor give the lessee? Is there residual value? How do the debt and lease parties decide on priority, subordination and other intercreditor issues? What kind of asset is natural gas – is it real estate when injected into a storage reservoir, or a “good” under the Uniform Commercial Code (UCC)? Does the “waterfall” of cash flow in a project financing involving a lease of gas go toward paying the debt or the lease rent first? How can the parties take a risk on a commodity that experiences volatile pricing in the open market? Can a lessor create a “true lease” of the natural gas?

These questions and many others have been answered in the successful closing of an innovative lease of natural gas. The key to the transaction hinges in part on the use of the natural gas subject to the lease. The lessee agreed to use the leased natural gas exclusively as “pad gas” or “cushion gas” or “base gas,” all nearly synonymous terms (Pad Gas).

*Terms to Know: “Natural gas,” commonly referred to as simply “gas,” is a gaseous fossil fuel consisting primarily of methane. Natural gas is measured in quantities of volume, such as cubic feet. It is also measured in quantities of heat content, such as therms or British thermal units (Btu’s). Pad Gas refers to the volume of natural gas injected into a gas storage reservoir as gas that must remain in the storage facility to provide the required pressurization to extract the remaining gas. In effect, Pad Gas creates a permanent lining or base in an underground gas storage reservoir into which the reservoir’s customers’ other gas, called “working gas,” may be injected, withdrawn and sold in the gas marketplace for use in heating, generating electricity and other typical applications by industry and other gas suppliers, marketers or users. Pad Gas helps maintain adequate pressure and rates of delivering working gas (measured on a daily or monthly basis) to its users.

Why Lease Natural Gas

The primary reason to lease Pad Gas relates to managing the investment as a component of the cost of a natural gas facility, including the reservoir where the Pad Gas is injected.

*Technical Point: According to the Federal Energy Regulatory Commission (FERC), there are three major types of underground reservoirs that facilities use to store gas. The first and most common type is underground storage in depleted gas or oil fields. The second type of underground storage is aquifers. Aquifer storage is made possible by injecting gas in formations filled with water and displacing that water with the natural gas. The third type is salt cavern storage, which requires the removal of layers of salt and brine, thereby creating a cavern in which to store gas.

Pad Gas usually constitutes a major cost in relation to the total cost of a natural gas storage facility. Leasing Pad Gas often makes more economic sense than financing the purchase of Pad Gas with debt. Typically, the more Pad Gas required by the storage facility the more advantageous it can be to lease the Pad Gas. The cost of gas purchased early in a lease term can be spread over a lengthy project life and therefore greatly reduce project cost to the sponsor at the inception of a project. Conversely, if the storage facility is already operating, the Pad Gas can be sold by a lessee to the lessor and leased back from the lessor, allowing the lessee to extract cash from the deal on the sale of the Pad Gas and either use it to reduce debt or apply it to other investments.

Positive Factors in Financing Pad Gas Storage

Several other reasons exist to lease and/or finance gas storage facilities. According to the Energy Information Administration (EIA), since the mid-1980’s, natural gas consumption in the United States has risen nearly 40 percent, from just over 16 trillion cubic feet (TCF) per year to over 22 TCF per year. During that same time period, gas storage capacity has risen by approximately 2 percent, with effective working gas capacity at approximately 3 TCF. Natural gas consumption worldwide is expected to increase at an average rate of 2.4 percent annually from now until 2030 according to the EIA.

Natural gas demand continues to rise, but the total available gas storage remains limited. The development of independent gas storage projects is severely constrained by challenging geological formations and limited availability of pipeline infrastructure to transport the gas. Although development might make sense from a purely market-driven perspective, the reality is that many projects will not work economically because of these impediments. As a result, strong markets exist for new gas storage capacity in regional areas such as the Gulf Coast, Rocky Mountains, Northeast and West Coast, where developers can overcome these challenges. 

Other Risk Factors in Financing Natural Gas Storage

Significant risks exist in the development and financing of natural gas storage facilities and leasing gas in those facilities. They include:

• Constraints from the regulatory regime affecting storage of natural gas, including FERC, environmental and local and state law;
  
  
• Opposition of local residents and businesses near the storage facility of a reservoir;
  
  
• Challenges in securing land and mineral rights from owners necessary to fully operate a reservoir, including control of gas and development of injection and withdrawal wells and access points to the reservoir;
  
  
• Lack of proximity to production and pipelines to transport gas to and from the reservoir;
  
  
• Exposure to “merchant” operations; that of finding demand for the storage without the benefit of fixed long-term committed contracts;
  
  
• Competition from liquid natural gas - LNG;
  
  
• Limitations on pipeline infrastructure (nearby pipelines to transport and distribute gas), geography and geology that render projects impracticable.

*Warning: In one of the most dramatic examples of the powerful swings in gas prices and risk in gas investing, a Connecticut hedge fund, Amaranth Advisors, lost $6 billion last month, with about $5 billion being lost in one week. While the loss made headlines, it bears little resemblance to the risk factors that a gas storage facility faces because the facility’s business is not that of making profits on trades. Rather, the gas storage business makes profits from payments for storing gas consisting primarily of working gas. Volatility of gas prices can even make storage more valuable. The value may occur because gas purchasers store gas to manage potential spikes in price or demand that might arise, for example, from hurricanes or other natural events. It also allows gas marketers to deliver gas to the most lucrative and/or highest demand markets (that is, capture the differential value of gas in the national gas markets). How Giant Bets on Natural Gas Sank Brash Hedge-Fund Trader - Up in Summer, Brian Hunter Lost $5 Billion in a Week As Market Turned on Him, A Low-Profile Life in Calgary, The Wall Street Journal, By Ann Davis; Page A:1, Col. 6 (Sept. 19, 2006).

Benefits of Leasing Natural Gas

Despite the risks in gas storage, many solid economic and business reasons exist for leasing Pad Gas.  They include the following:

• Lease expense may be treated as an operating cost and therefore may not be treated as debt on a balance sheet of the lessee. If this treatment occurs, it would typically allow for a lower equity contribution for a storage project. 
  
  
• Depending on whether the parties use a true lease or financing lease structure, the project sponsor and/or lessor may realize a large percentage of the residual value “upside” of the Pad Gas after the end of the lease term.
  
  
• If the lessee’s rate of return on investments is greater then the cost of leasing, the gas lease should be considered to allow other deployment of capital in the storage project.
  
  
• Lease payments can be pre-determined by hedging the funding rate, the injection gas price and the price of the gas at withdrawal at the end of the lease term, which stabilizes project cash flows. 

*Tip: Make certain that the hedge party has the financial strength to honor the hedging transaction, and that you have knowledgeable counsel assist with the hedging agreements. Use the gas hedging strategy to mitigate risk of realizing a certain value for the gas at lease expiration while potentially gaining residual value upside.

• The lease term is typically longer than project financing, which reduces periodic rent payments and reallocates cash to repay debt while the lease remains in effect.

Disadvantages of Leasing Natural Gas

Leasing natural gas, like trading natural gas, is far from risk free. The risks include the following:

• The lessor owns title in Pad Gas, which removes it from collateral of the project lender in a project financing transaction and reduces the amount of debt a lender advances;
  
  
• The lessee/sponsor may be subject to higher future commodity prices on any early termination or expiration of the lease term when the lessee is required to replace the Pad Gas returned to the lessor; and
  
  
• The lease transaction typically requires negotiation of an intercreditor agreement, which can be complex and difficult to arrange and may limit certain of the lessor’s rights as the owner of the Pad Gas.

Every transaction has risk elements. Leases of Pad Gas require close attention to the details and applicable law, which involve federal, state and local rules and laws, permits and approvals.

*Tip: Hire competent consultants, engineers, real estate and environmental specialists and legal counsel, including tax, bond, leasing and gas procurement and transaction lawyers, to assist in these transactions. Work the lease pricing rigorously to consider all economic factors that affect the success of the gas storage project. Consider the lengthy time frame to arrange land and mineral rights to the project site, which can amount to thousands of acres, and thereafter to inject and withdraw the Pad Gas, which can take several months. Evaluate the impact of these factors on pricing and legal rights and remedies. Understand thoroughly the substantial controls of regulatory authorities, such as FERC, to affect the storage facility and the rights of the parties.

Basic Transaction Structure

In the recently closed Pad Gas lease, the total cost of the overall project exceeded $130 million, including equity. The sponsor/lessee received two tranches of senior debt and a lease of all of its Pad Gas, all on a non-recourse basis (with exceptions and limitations). The senior debt provided over 60 percent of the cost to construct and finance the facility. The Pad Gas lease involved the purchase and lease of over $30 million of Pad Gas. The Pad Gas lease constituted an operating expense of the project and expired after the debt’s maturity date. The lessor applied “true lease” standards in structuring the Pad Gas lease for state law purposes under Article 2A of the UCC and other applicable case law. See True Leases Under Attack: Lessors Face Persistent Challenges to True Lease Transactions, by David G. Mayer, Journal of Equipment Lease Financing (Special Issue, Fall 2005).

For the lessor, the Pad Gas constituted “goods” under the UCC. Because the lessor purchased the Pad Gas directly from suppliers and maintained full title, the senior lenders had an interest only in the leasehold rights of the lessee/sponsor under the Pad Gas. The lessor assigned the lessee the warranties with respect to the Pad Gas it purchased. It also used the lessee’s substantial operating and development skills by allowing the lessee, in collaboration with the lessor, to direct the purchase and transportation of the Pad Gas to the facility site. The sponsor signed initial multi-year contracts for storage with third parties sufficient to pay for the debt and lease financing transaction, but certain “merchant” risk continued with respect to the income generation of the project over the entire debt and lease terms. The lease and debt both used tax-exempt financing from bonds for the purpose of freeing the project from sales and use tax on the lease and the purchase of the Pad Gas. The lessor hedged its Pad Gas purchases to settle a firm price for the Pad Gas as of the commencement date of the lease to mitigate price swings of the Pad Gas. Because of the complexity and difficulty of the intercreditor relationships between the senior debt and the lessor in the transaction, the parties structured the transaction to cover the most essential subordination and intercreditor elements in the lease and other operative documents.

Conclusion

Pad Gas leasing is not for the faint of heart. However, demand for natural gas and regional storage capability makes the natural gas business a likely candidate for sustained growth in particular areas of the United States and other parts of the world. Leasing Pad Gas is a novel, but rational, way to obtain 100 percent financing of the vital element of operating a gas storage facility. For those who understand the complexities of storing natural gas, leases of the Pad Gas provide a useful financial vehicle to store a clean and important source of energy for the future.

Thanks to of Fortis Capital Corp. for contributing to and commenting on this article; Atwood Jeter and Jason Schumacher of Patton Boggs LLP for editing this article and E³ Consulting for providing technical information for this article. A modified version of this article is scheduled to be published next month by Financier Worldwide and distributed in Europe, North America, and Asia.

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2. Accounting for Risk: Ten Land Mines in Lease Documentation

Confronting some of the most vexing issues affecting the leasing industry, a record-breaking number of lease accountants met at their 2006 Lease Accountants Conference last month in San Antonio. In one educational session, two industry veterans showed how failures in regulatory and financial processes can result in explosive land mines for leasing companies.

David Gauthier (Bank of America Leasing) and Chuck Lietz (U.S. Bancorp Equipment Finance) presented a session called Operational Land Mines on September 20. One part of their discussion demonstrated how failing to properly negotiate, close and maintain legal documentation can adversely affect the success of a leasing business.

*Term to Know: For purposes of the presentation, Gauthier and Lietz defined “land mines” as financial, compliance or operational disasters/incidences that leasing companies can prevent or minimize through preparedness, experience and knowledge of their business operations.

Why Land Mines Exist

Land mines exist because of five reasons: (1) honest mistakes that occur due to errors or irregularities despite the best automation; (2) managerial pressures that weaken systems of controls as managers struggle to balance resources and profitability; (3) inadequate employee training on understanding the importance of their functions in protecting the organization; (4) failure of employees to question the “why” of certain actions or circumstances and instead follow rote processes of irrelevant or ineffective controls in their tasks; and (5) relentless change and complexity in the leasing industry, change and complexity which pose a constant challenge for companies by creating an environment that is fraught with potential for making mistakes.

Top Ten Land Mines in Documenting Lease Transactions

Every organization should know and understand the potential for errors and have processes to minimize or prevent them. Specifically, the presenters identified top land mines that every leasing company should closely monitor. They are, with BLN’s spin:

1. Accepting vague and liberal return provisions and maintenance requirements in lease documentation. Land mine: Equipment is either not returned at all, or not returned to an acceptable location or in good condition, resulting in loss of residual value and follow-on deal opportunities due to unplanned costs, losses and delays.
   
   
2. Failing to double-check for errors in numbers, dates, descriptions of equipment and other economics in leases and lease schedules that make or break the transaction. Land mine: An unapproved and unintended deal hits the books with returns different than the leasing organization approved or expected. Even worse, the equipment or other leased asset does not exist because of the failure during due diligence or documentation to validate equipment descriptions/identification and existence of the items.
   
   
3. Negotiating limitations on lessor’s assignment rights. Land mine: This problem may require the lessor to seek its lessee’s consent to, or require advance notice of, certain transfers of the leases, which may reduce the value, stall a transaction or impede the transferability of the financial asset represented by the lease.
4. Filing inadequate or improperly drafted financing statements under the UCC, or other incorrect, incomplete or omitted filing, recordation or registration information required to perfect an interest in a leased asset such as under the Cape Town Convention 2001 (for “aircraft objects”), at the Surface Transportation Board (for railroad rolling stock and locomotives) and at the U.S. Coast Guard offices (for vessels). Land mine: The lessor may forfeit value or obtain limited rights as a lessor or secured party in the assets under a lease, charter or other financing arrangement.
5. Taking inadequate insurance coverage or evidence of insurance. A vast array of insurance may be required or desired in a transaction, including basic “all-risk” and comprehensive general liability as well as repossession, fraud and environmental liability coverage, among other types. Land mine: This action could result in a potential lack of coverage or inability to prove coverage should a loss or liability occur, subjecting the leasing company to uninsured or inadequate exposure to liability or property loss.
   
    
6. Documenting the deal with terms that do not represent the approved transaction, including incorrect purchase, return, renewal and termination options. Land mine:  Lessor may lose or provide unexpected and uneconomic benefit to the lessee or end up in litigation to correct numbers adverse to what the lessee or lessor had bargained for in term sheets, proposals or definitive negotiations.
   
   
7. Confusing basic deal structure that fails to meet the tests for a true lease under state law, including a “finance lease” under Article 2A of the UCC, and properly separate tax concepts and accounting guidance in documenting and booking the transaction. Land mine: The lessor could end up with a disastrous loss of ownership of the asset or lesser rights as a secured or unsecured creditor in a bankruptcy and/or unexpected legal, accounting and tax treatment of the deal.
   
   
8. Calculating formulas incorrectly, such as stipulated loss values or termination values. Land mine: This error may provide a bargain to the lessee and losses for the lessor, or, perhaps worse, litigation over unintended numbers in the transaction that the lessee may assert represents fraud, deceptive trade practices or a penalty by the lessor.
   
   
9. Drafting sales, use or personal property tax provisions incorrectly or inadequately in that they fail to require the lessee to make, or assist the lessor in making, all filings and payments when due and indemnify the lessor against all taxes (other than the lessor’s net income taxes). Land mine: This situation could expose the lessor to priming liens of a tax authority, unexpected foreclosure of a tax lien by the tax authority to recover taxes, and a “lesser of two evils” choice of paying the taxes for the lessee or losing the leased asset in a tax foreclosure sale.
   
   
10. Binding the lessor to an offer quoted in a transaction proposal or commitment without protective language that the quote is not binding with consistent language to the effect of the non-binding nature of the offer. Land mine: The lessee charges that the lessor intended the quote to represent definitive documentation of the transaction in expensive litigation or disputes, and the lessor may be forced to perform on a deal that lacks proper documentation or approvals.

Conclusion

Mistakes do happen, but as leasing companies face continued pressure to build volume in an era of compressed margins and yields, they have no room to step on land mines without incurring damaging hits to their earnings, process and overall success. By learning from the land mines, leasing and finance companies can improve their operational effectiveness while avoiding disasters in their documentation and other processes. Gauthier and Lietz challenged their audience to recognize and protect their companies from the land mines and to implement processes that will avert the ten land mines in lease documentation. Each participant in the room knew that he or she faced an important task having learned and/or confirmed where to find the land mines in their respective businesses.

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3. Case & Comment: Lessor Sues Brokers When Insurers Deny Coverage in Comdisco Ventures, Inc. v. Federal Insurance

Almost every equipment leasing and financing transaction requires the issuance of a certificate or other evidence of insurance by brokers or underwriters at closing. Lessors and lenders have found out the hard way not to rely on brokers to issue certificates of insurance, or to rely on anything less than an endorsement of insurance coverage as binding evidence insurance in their favor. Such was the case In re: Comdisco Ventures, Inc. V. Federal Insurance Company, et al, No. 04 C 2007, 04 C 2393, 2005 WL 1377856 (N.D. Ill), June 8, 2005.

BACKGROUND: Comdisco Ventures, Inc. (Comdisco) leased computer equipment, office furniture and other office equipment to various venture capital backed “dot.com” companies. Comdisco entered into a master lease agreement (MLA) with the lessees and retained ownership of the equipment as lessor. Comdisco also required each lessee to obtain insurance on such equipment and to name Comdisco as an additional insured and loss payee under its policies. In this case, the lessees allegedly instructed their brokers to procure the required insurance policies and to issue certificates of insurance to Comdisco as evidence of that coverage. When the dot.com era abruptly ended, the lessees defaulted under their MLAs and the leased equipment disappeared. Subsequently, in alleged reliance on the certificates of insurance Comdisco received, Comdisco made claims under the insurance policies for payment for the loss of the equipment. On receipt of the claims, the insurers denied coverage because Comdisco was not an additional insured or loss payee on the lessee’s policies, even though Comdisco alleged that the lessee’s insurance broker represented that Comdisco obtained such coverage as an additional insured and loss payee.

ISSUE: Did Comdisco state a claim for liability against insurance brokers for negligence in failing to bind coverage in favor of Comdisco?

OUTCOME: Maybe. To have a valid claim, Comdisco had to demonstrate professional negligence by the broker in discharging its duties to Comdisco. To show negligence, Comdisco also had to show that the brokers had a duty of care to Comdisco which the broker breached. The Court did not reach a decision on the merits of whether the brokers had a duty to Comdisco, but the litigation did remind us of the importance of assuring that a certificate of insurance evidences binding insurance coverage in favor of the lessor or lender. Comdisco failed to obtain such evidence of insurance and ended up with the claims in this case instead of an insurance check.

LAW OF CASE: In reviewing the facts and law, the Court said:

Summit [one of the defendants] argues that Comdisco's reliance on the “Evidence of Property Insurance” was not reasonable as a matter of law. The Court disagrees.

First, the Evidence of Property Insurance issued by Summit to Comdisco states, “This is evidence that insurance as identified below has been issued, is in force, and conveys all the rights and privileges under the policy.” The document does not contain a disclaimer of the type commonly found in certificates of insurance. See, e.g., American Country Ins. Co. v. Kraemer Bros., Inc., 298 Ill.App.3d 805, 232 Ill.Dec. 871, 699 N.E.2d 1056, 1059 (Ill.App. 1st Dist.1998) (“This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below.”). If a certificate of insurance does not include a disclaimer, the insured may rely on representations made in the certificate. Id. at 1060 (emphasis added). Thus, Comdisco's reliance on the Evidence of Property Insurance was reasonable.

The quoted language highlights the critical difference between “evidence of insurance” which binds insurance coverage, and a “certificate of insurance” which may not. See Certificate of Insurance Fails to Protect Lessor, Business Leasing News (Dec. 2003). The Court found that brokers may (but it did not decide that the brokers did) face liability if they failed to issue proper evidence of coverage. The Court also implied that the absence of a disclaimer means that the certificate confers coverage.

*Comment: The primary issue presented by this case underscores the importance of securing the right kind of evidence of insurance when closing any kind of leasing or financing transaction. Yet, lessors and lenders often accept the very commonly-used ACORD form or other certificate of insurance that does not bind coverage. Accepting less than binding evidence of insurance is ill-advised at best. It is well established that a certificate of insurance naming a party as an "additional insured" is neither conclusive proof of the existence of a contract of insurance nor a contract to insure the party. See Morrison Knudsen Co., Inc. v. Continental Casualty Co., Inc.,181 A.D.2d 500 (1st Dept. 1992); Monette Armstrong v. Ogden Allied Facilities Mgmt. Corp., 234 A.D.2d 235, 236 (1st Dept. 1996); Consolidated Edison Company of New York, Inc. v. United Capitol Insurance Company and International Dismantling & Machinery Corp. (1999). For lessors and lenders, a few simple steps may lead to a far better outcome than Comdisco experienced:

• confirm that your insurance coverage and evidence meets all requirements of the lease, lending and other financing documents;  
  
  
• rely on an ACORD or similar proprietary broker’s form of certificate only when it expressly confers insurance coverage that you verify separately (and do not assume that the absence of a disclaimer serves as evidence that binding coverage is in effect, as the Court implied may be adequate);
  
  
• accept written evidence of coverage from a broker if you can confirm the broker’s authority from the underwriting to cover you on the policy as additional insureds and loss payees, as appropriate; and
  
  
• obtain written evidence of insurance directly from the underwriter/insurer, which indicates clearly that your interests have been endorsed on the underlying insurance policies at closing (but note the policies may not become available until after closing).

Although the Court in the Comdisco case did not address the issues on the merits, imagine how expensive it must have been to litigate the cases. Lessors and lenders can take a far easier and cheaper way out: Get the right evidence of insurance at closing and do not settle for less, as Comdisco apparently did.

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4. Leasing 101: What Is a “Balance Sheet?”

The Financial Accounting Standards Board (FASB) will likely make significant changes in off-balance sheet accounting. See also Off-Balance Sheet Leasing: Is the End in Sight? by David G. Mayer, Monitor (Jan. 2005); FASB Takes Aim at Off-Balance Sheet Leasing, by David G. Mayer (with Bill Bosco, Principal of consulting firm, Leasing 101), Business Leasing News (July 2006).

The changes will impact over $1.05 trillion of off-balance sheet lease obligations according to a recent doctoral study. Six months earlier, in a Sarbanes-Oxley Report issued June 15, 2005 under Press Release 2005-91, the Securities and Exchange Commission (SEC) stated (on page 4):

An extrapolation of the findings from the sample of issuers in the Study to the approximate population of active U.S. issuers suggests that there may be approximately $1.25 trillion in non-cancelable future cash obligations committed under operating leases that are not recognized on issuer balance sheets, but are instead disclosed in the notes to the financial statements.

To understand the concerns of the FASB and the SEC, it is critical to understand what a balance sheet really is, and what it is not. From that point, you can evaluate the significance of off-balance sheet financial reporting (or the lack of financial reporting on a balance sheet).

Defined essentially the same way worldwide, a balance sheet is a financial statement that typically shows the assets, liabilities and owners' equity of an entity at a particular date. It is one of the big four financial statements. As described by Wikepedia, the big four statements are:

1. Balance sheet, which describes a company's assets and liabilities.
2. Income statement, which describes a company's income and expenses.
3. Cash flow statement, which describes how corporate operating, investment, and financing activities have affected the company's cash position.
4. Statement of retained earnings, which describes changes to shareholders equity (for example, a payment of dividend).

Given the complexities of financial reporting, companies usually explain these statements and their meaning in notes to the financial statements and in a management discussion and analysis typically included with the big four statements.

In essence, a balance sheet provides a “snapshot” of the financial worth of an organization at a specific point in time. However, the other three statements provide a formal statement of an entity’s financial performance over a period of time. Stated more technically, a balance sheet reports, at a certain date, all important economic resources of an organization – tangible and intangible, current and past.

Whether or not leases and other obligations appear on balance sheets in the future remains to be seen, but at least appreciate how important balance sheet reporting is in the increasingly “transparent” financial world in the United States.

For more on this topic, see: What is Balance Sheet? By Karen Kincaid Balmer and presented by Albert Lilienfeld, Practicing Law Institute (2006).

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About Patton Boggs LLP; Recent Publications; Upcoming Speeches

Patton Boggs LLP is a law firm of more than 450 lawyers located throughout the United States and internationally in Doha, Qatar. Patton Boggs most recently added offices in the New York metropolitan area. The firm has done business in over 70 countries during its almost half a century of operation, and increasingly focuses on such dynamic markets as India, China, Brazil, and Western Europe in business and public policy matters.

Patton Boggs has major practice areas in Business Transactions, Intellectual Property, Public Policy, and Litigation. These groups are composed of many practice groups designed specifically to meet client needs and the needs of developing markets. I often focus on aviation, power, infrastructure, and technology matters as part of the 120-member Business Transactions Group.

The firm provides a broad array of skills in domestic and international business transactions. BLN covers a small part of the skills available at the firm. These capabilities include equipment finance and leasing, corporate finance, secured transactions, syndications, mezzanine finance, enhanced use and other federal leasing, project finance, real estate, healthcare, pharmaceuticals and technology transactions, and public policy work. We devote a significant part of our time to wind power, cogeneration, and oil and gas matters worldwide. We also address related creditors’ rights/bankruptcy in structuring transactions and resolving troubled credits.

We assist our clients with buying, selling, financing, and leasing real and personal property, including business and commercial aircraft, energy assets, facilities, vehicles, production equipment, technology hardware and software, and health care equipment, as well as highways and other infrastructure projects. We have specific teams for aviation, infrastructure/power, health care, federal leasing/finance/marketing, municipal leasing/finance, and international transactions by region or country. We provide extensive and newly expanded litigation resources with the addition of high-profile litigators in our New Jersey office.

*You are welcome to call me at 214.758.1545 or e-mail me at dmayer@pattonboggs.com. We value your contact with us on any topic, including questions arising from BLN articles or about our law practice.

Publications

The following is representative of recent works by David G. Mayer:

• The USA PATRIOT Act Renewed: Reassessing Money Laundering Risk in Finance Transactions, By Stephen J. McHale and David G. Mayer, LNJ Leasing Newsletter (Nov. 2006) (forthcoming).
  
  
• Unique Pad Gas Lease Supports Project Financing and Development of Gas Storage Facility in U.S., By David G. Mayer (with Fortis Capital Corp.), Asset-Based Lending Review, Financier Worldwide (Nov. 2006) (forthcoming).
  
  
• True Leases Under Attack: Lessors Face Persistent Challenges to True Lease Transactions, by David G. Mayer, Journal of Equipment Lease Financing (Special Issue, Fall 2005), a 17,000-word article. Special thanks go to the many editors, including Patton Boggs bankruptcy partner, Jeff LeForce; Patton Boggs tax partner, George Schutzer; Patton Boggs associate, Joel A. Bannister; three members of the ELA's Legal Committee; and two Foundation reviewers. 2005 JELF ARTICLE OF THE YEAR!
  
  
• The Cape Town Convention: New Complexities and Opportunities, by David G. Mayer and Frank Polk, aviation partner at McAfee & Taft, LNJ’s Equipment Leasing Newsletter (Oct. 2005).

Upcoming Speeches

• On October 22-24, 2006, the Equipment Leasing Association will sponsor the 2006 Annual ELA Convention at the JW Marriott Resort in Desert Springs, California. On Monday, October 23, 2006, from 2:30 p.m. – 4:30 p.m., Gary Mendell of Meridian Finance Group and David Mayer of Patton Boggs will present a Breakout Session titled, “Cross-Border Financing: Doing Successful International Deals.”

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Thanks to BLFN’s Team

I would like to thank BLFN’s team at Patton Boggs LLP. The team includes J. Atwood Jeter, a senior associate in the firm’s business transactions, real estate, and wind energy groups; the Patton Boggs staff editors, Paul Dumansky and Adrian Nicole McCoy; our Project Manager, Melissa Green; Claire Campbell; and our designer, Winston Jackson. Thanks also to Douglas C. Boggs, a Business Group/Securities partner and web site reviewer for BLFN, and our Marketing Chief, Mary Kimber, for assisting BLFN through our firm’s editing, design, and posting process.

All the best,

David

David G. Mayer
Founder: Business Leasing and Finance News
(formerly Business Leasing News)
Partner: Patton Boggs LLP
2001 Ross Avenue
Suite 3000
Dallas, Texas 75201
(214) 758-1545 (phone)
(214) 758-1550 (fax)

E-Mail: dmayer@pattonboggs.com

© David G. Mayer 2002-2007