Question
[redacted]
February 10, 2000
Thomas Hancock, Esq.
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
6th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re:Proposed Sale of Membership Interests of [redacted] Dear Mr. Hancock:
As a follow-up to our recent telephone conversation, please be advised as follows:
For purposes of claiming the federal production tax credit, under Treasury Regulation 1.46 3(d)(1); the turbines are considered to be placed in service in the taxable year in which they are placed in a condition of readiness and availability for a specifically assigned function. Treasury Regulation 1.46.3(d)(2) explicitly sates that equipment that is operational may be considered placed in service despite continued testing to eliminate any defects.
Although the turbines were "placed in service" for tax purposes in June 1999, the Project has been undergoing continuous testing and elimination of defects and was not yet complete.
The Project has experienced numerous problems after June 1999 which have delayed completion and saleability of the Project. Specifically, in order to achieve the level of completion that would make the Project saleable, the turbines and the facility as a whole would need to:
- Achieve a production output level in excess of 90% of warranted output. Turbine output has been well below 90% of warranted output. The problems affecting product output (as well as passage of the required testing) are described in detail below.
- The most significant problem has been a gearbox manufacturing defect which was widespread and took extensive time and effort to work out appropriately. The resolution requires the turbine manufacturer to swap out the defective gearboxes with new or retrofitted gearboxes. As I am sure you can understand, this effort involved the turbine manufacturer, developers, lenders, the lenders' engineer, and the input and concurrence of the prospective purchaser, all of who needed to be satisfied before the Project could become saleable. This swap-out process is ongoing.
- There have been other problems as well that have contributed to the delay in completion and saleability of the Project. The turbines have a blade vibration problem which causes the turbines to shut down. Additionally, the turbines deploy blade tips for braking which do not realign properly after they are applied, thereby reducing production. Also, the turbines have been experiencing yaw drive failures. Each of these problems is now being addressed.
- Passing the Funding Drawdown Requirement which requires each turbine to operate without fault for 48 continuous hours. This requirement was not met until December 1999.
- Pass the Initial Wind Plant Test which requires the facility as a whole to operate without fault or manual intervention for 72 continuous hours. Although still not fully satisfied, this requirement was "deemed" met in December 1999 and the portion of the test which was not satisfied has been delayed until the final Acceptance Test.
- Have a fully automated and functional central monitoring and control system ("CMCS"). The CMCS did not achieve full integration with all of the site turbines until January 2000.
In addition to the above, the Project is still required to undergo and pass the Acceptance Test which is designed to address the issues delayed from the Initial Wind Plant Test and prove whether the turbines perform in accordance with warranted power output levels.
As you can see from the above, the developers of the Project have experienced quite a number of unforeseeable problems which have had to be resolved in order to prepare the Project for sale. The developers have at all times had the sole intent to sell the Project at the earliest possible time and have been engaged in sole and continuous, uninterrupted efforts to overcome the problems, complete and sell the Project. Any income generated by the Project during this period of time is entirely incidental to the developers' effort to complete, test and sell the Project.
We trust this adequately address your questions.
Sincerely,
[redacted]
[redacted]