(7) LEASING ACTIVITIES

Investment in Finance Leases Held in Trust

PHI has a portfolio of cross-border energy lease investments (the lease portfolio) consisting of hydroelectric generation facilities, coal-fired electric generation facilities and natural gas distribution networks located outside of the United States. Each lease investment is comprised of a number of leases as of June 30, 2011 and December 31, 2010, the lease portfolio consisted of seven investments with an aggregate book value of $1.3 billion and eight investments with an aggregate book value of $1.4 billion, respectively.

During the second quarter of 2011, PHI entered into early termination agreements with two lessees involving all of the leases comprising one of the eight lease investments and a small portion of the leases comprising a second lease investment. The early terminations of the leases were negotiated at the request of the lessees and were completed in June 2011. PHI received net cash proceeds of $161 million (net of a termination payment of $423 million used to retire the non-recourse debt associated with the terminated leases) and recorded a pre-tax gain of $39 million, representing the excess of the net cash proceeds over the carrying value of the lease investments.

With respect to the terminated leases, PHI had previously made certain business assumptions regarding foreign investment opportunities available at the end of the full lease terms. Because the leases were terminated earlier than full term, management decided not to pursue these opportunities and certain income tax benefits recognized previously were reversed in the amount of $22 million. As part of the negotiations with the lessees, the company required an early termination payment sufficient to provide a gain on the early termination of the leases. The after-tax gain on the lease terminations was $3 million, reflecting an income tax provision at the statutory federal rate of $14 million and the income tax benefit reversal. PHI has no intent to terminate early any other leases in the lease portfolio. With respect to certain of these remaining leases, management's assumption continues to be that the foreign earnings recognized at the end of the lease term will remain invested abroad.

The components of the cross-border energy lease investments at June 30, 2011 and at December 31, 2010 are summarized below:


	June 30, 2011			December 31, 2010
	*(millions of dollars)*
Scheduled lease payments to PHI, net of non-recourse debt	$	2,119		$	2,265
Less: Unearned and deferred income		(790	)		(842	)

Investment in finance leases held in trust		1,329			1,423
Less: Deferred income tax liabilities		(725	)		(816	)

Net investment in finance leases held in trust	$	604		$	607

Income recognized from cross-border energy lease investments, excluding the gain on the terminated leases discussed above, was comprised of the following for the three and six months ended June 30, 2011 and 2010:


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	*(millions of dollars)*
Pre-tax income from PHI's cross-border energy lease investments (included in "Other Revenue")	$	14	$	13	$	28	$	26
Income tax expense related to cross-border energy lease investments		7		3		10		7

Net income from PHI's cross-border energy lease investments	$	7	$	10	$	18	$	19

PHI regularly monitors the financial performance and condition of the lessees under its cross-border energy lease investments. Changes in credit quality are assessed to determine if they should be reflected in the carrying value of the leases. PHI reviews each lessee's performance versus annual compliance requirements set by the terms and conditions of the leases. This includes a comparison of published credit ratings to minimum credit rating requirements in the leases for lessees with public credit ratings. In addition, PHI routinely meets with senior executives of the lessees to discuss the lessee company and asset performance. If the annual compliance requirements or minimum credit ratings are not met, remedies are available under the leases. PHI believes that all lessees were in compliance with the terms and conditions of their lease agreements at June 30, 2011.

The table below shows PHI's net investment in these leases by the published credit ratings of the lessees as of June 30, 2011 and December 31, 2010:


Lessee Rating (a)	June 30, 2011		December 31, 2010
	*(millions of dollars)*
Rated Entities
AA/Aa and above	$	723	$	709
A		438		549

Total		1,161		1,258
Non Rated Entities		168		165

Total	$	1,329	$	1,423

(a)	Excludes the credit ratings of collateral posted by the lessees in these transactions.