Question
December 1, 2006
MichaelB. Verne
FederalTrade Commission
PremergerNotification Office
Bureauof Competition
600 Pennsylvania Ave., N.W.
Washington, D.C. 20580
Re: Informal Interpretation Regarding LLC InterestAcquisition
Dear Mike:
I am writing to confirm the conversation that(redacted) and I had with you yesterday regarding the reportability of aproposed acquisition of a 50% interest in an existing LLC that is constructinga wind farm. Your advice was that the acquisition price of the followingtransaction was not determined and that a fair market valuation should insteadbe used. Using the fair market value approach, as we described to you, youagreed that the deal would not be reportable.
Party A owns 100% of the membership interests in anexisting LLC that is constructing a wind farm. Party A has or will have madecapital contributions of $50 MM as of closing to fund equipment, materials andconstruction for the LLC. In the proposed transaction, Party B will receive a50% interest in the wind farm and, as a consequence of its 50 percentownership, Party B will be required to pay for equipment, materials, andconstruction for the LLC until Party B has made an equivalent $50 mmcontribution. These "catch-up" payments are projected to be paid overthe next six months as bills for construction, equipment, etc. come due. Onceboth Party A and Party B have contributed equal amounts, future fundingrequirements will be funded 50% by Party A and 50% by Party B -- subject tolate stage funding of the premium amount as detailed in the next paragraph.
Tocompensate Party A for its risk in developing the Project, Party B willeffectively pay a Premium of $17m in the form of an additional contribution tothe LLC. The total contribution of Party B pursuant to the Premium will be $34m(S 17m contribution to the LLC in lieu of the premium which would otherwise bepaid to Party A and a matching $17m as required to maintain a 50/50 matching ofcontributions). Contribution of the premium is contingent upon successfulcompletion of the project. As such, the premium will be earned on a turbine-by-turbine basis as each turbine achieves substantial completion and is capableof transmitting power into the grid. To transmit power to the grid, thesubstation must also be completed and meet specifications outlined in theinterconnection agreement. In addition, if the turbines are not constructed ina timely manner as required to qualify for Production Tax Credits("PTC"), the premium would be forfeited for each turbine that failedto qualify for the tax credits. (To qualify for PTC's, turbines must becompleted prior to year-end 2007 unless current PTC legislation is extended.)
The project is exposed to permit and otherchallenges, a risk which Party A and Party B would share in equally as ownersof the LLC. These challenges could result in cancellation of the project. Ifthe project were cancelled, and Party B had not contributed sufficient funds tomatch Party A's contribution, then Party B would be required to contribute theremaining outstanding requirement to the LLC. Party A and Party B would thenliquidate the LLC.
Party B believes that the fair market value of the50% LLC interests that it is receiving this transaction are represented by the$17 million that it is contributing to the LLC in lieu of payment to Party Aupon successful completion of the project. This fair market valuation issupported by the fact that Party A paid less than $15 million for 100% of theLLC interests in April of this year.