1105 North Market Street, Suite 1108, Wilmington, DE 19801, (302) 427-8494
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)


LSP-Cottage Grove, L.P.
LSP-Whitewater Limited Partnership
(Exact name of registrant as specified in its charter)

9405 Arrowpoint Boulevard
Charlotte, NC 28273
(704) 525-3800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
      Yes [   ]       No[ Ö ]

PART I/ITEM 1. BUSINESS

Organization

     Cottage Grove

          LSP-Cottage Grove, L.P. ("Cottage Grove") is a single purpose Delaware limited partnership formed in December 1993 to develop, finance, construct and own a gas-fired cogeneration facility located in Cottage Grove, Minnesota (the "Cottage Grove Facility"). The 1% general partner of Cottage Grove is LSP-Cottage Grove, Inc., a Delaware corporation which is an indirect, wholly-owned subsidiary of Cogentrix Energy, Inc. ("Cogentrix Energy"). Another indirect subsidiary of Cogentrix Energy owns an approximately 72% limited partnership interest. TPC Cottage Grove, Inc. ("TPC Cottage Grove"), a Delaware corporation, owned the remaining approximately 27% limited partnership interest. On September 4, 2002, TPC Cottage Grove converted to a limited liability company and changed its name to FPP Cottage Grove, LLC ("FPP Cottage Grove") in conjunction with the purchase of its parent company, TPC Funding, LLC by Fort Point Power, LLC. FPP Cottage Grove is not affiliated with Cogentrix Energy.

     Whitewater

          LSP-Whitewater Limited Partnership ("Whitewater", and collectively with Cottage Grove, the "Partnerships") is a single purpose Delaware limited partnership formed in December 1993 to develop, finance, construct and own a gas-fired cogeneration facility located in Whitewater, Wisconsin (the "Whitewater Facility", and collectively with the Cottage Grove Facility, the "Facilities"). The 1% general partner of Whitewater is LSP-Whitewater I, Inc., a Delaware corporation (along with LSP-Cottage Grove, Inc., the "General Partners", and each individually a "General Partner"), which is also an indirect, wholly-owned subsidiary of Cogentrix Energy. Another indirect subsidiary of Cogentrix Energy owns an approximately 73% limited partnership interest. TPC Whitewater, Inc. ("TPC Whitewater"), a Delaware corporation, owned the remaining approximately 26% limited partnership interest. On September 4, 2002, TPC Whitewater converted to a limited liability compan y and changed its name to FPP Whitewater, LLC ("FPP Whitewater") in conjunction with the purchase of its parent company, TPC Funding, LLC by Fort Point Power, LLC. FPP Whitewater is not affiliated with Cogentrix Energy.

     Cogentrix Energy

          Cogentrix Energy is a closely held corporation which is principally engaged in the business of acquiring, developing, owning and operating electric power generation facilities primarily in the United States. Cogentrix Energy sells electricity and steam, principally under long-term power purchase and steam sales agreements. Cogentrix Energy currently owns - entirely or in part - a total of 24 electric generating plants in the United States and one in the Dominican Republic. Cogentrix Energy's 25 plants are designed to operate at a total production capability of approximately 6,075 megawatts. After taking into account Cogentrix Energy's part interests in the 18 plants that it does not wholly-own, which range from 1.6% to approximately 74.2%, its net equity interest in the total production capability of its 25 electric generating plants is approximately 3,269 megawatts. Cogentrix Energy currently operates 12 of its facilities, 10 of which were dev eloped and constructed by Cogentrix Energy.

          Cogentrix Energy also has an ownership interest in and will operate two facilities currently under construction in Mississippi. Once these facilities begin operation, Cogentrix Energy will have ownership interests in a total of 26 domestic - and one international - electric generating facilities that are designed with a total production capability of approximately 7,695 megawatts. Cogentrix Energy's net equity interest in the total production capability of those 27 facilities will be approximately 4,889 megawatts.

          Since its inception in 1983, Cogentrix Energy has developed substantial expertise in the development, construction and operation of power generating facilities and is one of the larger independent power producers in the United States based on total project megawatts in operation. Additional information concerning Cogentrix Energy can be found in Cogentrix Energy's reports filed with the Securities and Exchange Commission.

     Funding

          LS Power Funding Corporation ("Funding") was organized in June 1995 as a special purpose Delaware corporation to issue debt securities in connection with financing the construction of the Facilities. Funding's sole business activities are limited to maintaining its organization and activities necessary pursuant to the offering of the Senior Secured Bonds (defined below) and its acquisition of the First Mortgage Bonds (defined below) from the Partnerships.

     The Senior Secured Bonds are the following:

          7.19% Senior Secured Bonds Due 2010, Series A of LS Power Funding Corporation
          8.08% Senior Secured Bonds Due 2016, Series A of LS Power Funding Corporation

     The First Mortgage Bonds are the following:

          7.19% First Mortgage Bonds of LSP-Cottage Grove, L.P. Due 2010
          8.08% First Mortgage Bonds of LSP-Cottage Grove, L.P. Due 2016
          7.19% First Mortgage Bonds of LSP-Whitewater Limited Partnership Due 2010
          8.08% First Mortgage Bonds of LSP-Whitewater Limited Partnership Due 2016

          Cottage Grove and Whitewater each own 50% of the outstanding stock of Funding.

The Power Plants

     The Cottage Grove Facility

          The Cottage Grove Facility is a dispatchable, combined-cycle natural gas-fired (with fuel oil back-up) cogeneration facility designed to generate approximately 245 megawatts of electrical capacity measured at summer conditions, and 262 megawatts of electrical capacity measured at winter conditions, with a maximum of 190,000 pounds per hour of steam. The Cottage Grove Facility is a "topping-cycle cogeneration facility", which means that when the power plant is operated in a combined-cycle mode, it uses natural gas or fuel oil to produce electricity, and the reject heat from power production is then used to provide steam to its steam purchaser. The Cottage Grove Facility commenced commercial operation on October 1, 1997 (the "Cottage Grove Commercial Operations Date"). The Facility consists of a single combustion turbine-generator unit, a heat recovery steam generator, a steam turbine-generator unit, auxiliary boilers, and all required buildings and a ccessory equipment. The auxiliary boilers are used to provide steam to the Minnesota Mining and Manufacturing Company's ("3M") Cottage Grove facility, Cottage Grove's steam purchaser, when the Cottage Grove Facility is off-line.

          All of the electric capacity and energy generated by the Cottage Grove Facility is sold to Northern States Power Company ("NSP" or, as the context requires, the "Power Purchaser") under a 30-year power purchase agreement (the "Cottage Grove Power Purchase Agreement") which runs through October 2027. The thermal energy generated by the Cottage Grove Facility is sold in the form of steam to 3M under a 30-year steam supply agreement. Natural gas for the Cottage Grove Facility is purchased pursuant to 20-year contracts with Dynegy Marketing and Trade (formerly Natural Gas Clearinghouse) ("Dynegy") and Aquila Energy Marketing Corporation ("Aquila"), a subsidiary of Aquila, Inc. Interstate gas transportation is provided by Northern Natural Gas Company ("Northern Natural"), and local gas transportation is provided by Peoples Natural Gas Company ("Peoples"), a division of Aquila, Inc., each pursuant to a 20-year contract subject to a 10-year renewal option . Additionally, Northern Natural provides gas storage services pursuant to a 20-year contract subject to a 10-year renewal option. The Cottage Grove Facility is designed to operate as a Qualifying Facility ("QF") under the Public Utility Regulatory Policies Act of 1978 ("PURPA") and the regulations promulgated thereunder. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of Energy Price Changes, Interest Rates and Inflation" for additional discussion related to Dynegy and Aquila.

     The Whitewater Facility

          The Whitewater Facility is a dispatchable, combined-cycle natural gas-fired (with fuel oil back-up) cogeneration facility designed to generate approximately 245 megawatts of electrical capacity measured at summer conditions and 262 megawatts of electrical capacity measured at winter conditions, with a maximum of 190,000 pounds per hour of steam. The Whitewater Facility is a "topping-cycle cogeneration facility". The Whitewater Facility commenced commercial operation on September 18, 1997 (the "Whitewater Commercial Operations Date"). The Facility consists of a single combustion turbine-generator unit, a heat recovery steam generator, a steam turbine-generator unit, auxiliary boilers, and all required buildings and accessory equipment. The auxiliary boilers are used to provide thermal energy to Whitewater's thermal energy purchasers when the Whitewater Facility is off-line.

          Whitewater sells up to 236.5 megawatts of electric capacity and associated energy generated by the Whitewater Facility to Wisconsin Electric Power Company ("WEPCO" or, as the context requires, the "Power Purchaser") pursuant to a 25-year power purchase agreement expiring in September 2022, as amended (the "Whitewater Power Purchase Agreement" and, collectively with the Cottage Grove Power Purchase Agreement, the "Power Purchase Agreements"). Whitewater may also sell to third parties up to 12 megawatts of electric capacity and any energy that is not dispatched by WEPCO. The thermal energy generated by the Whitewater Facility is provided in the form of steam to the University of Wisconsin-Whitewater ("UWW") under a steam supply agreement expiring on June 30, 2005 and in the form of hot water to a greenhouse owned by Whitewater and located adjacent to the Whitewater Facility (the "Greenhouse"). Natural gas for the Whitewater Facility is purchased pursu ant to 20-year contracts with Dynegy and Aquila. Interstate gas transportation is provided by Northern Natural pursuant to a 20-year contract subject to a 10-year renewal option, and local gas transportation is provided by Wisconsin Natural Gas Company ("WNG") pursuant to a 25-year contract with two five-year renewal options. Additionally, Northern Natural provides gas storage services pursuant to a 20-year contract subject to a 10-year renewal option. The Whitewater Facility is designed to operate as a QF under PURPA and the regulations promulgated thereunder. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of Energy Price Changes, Interest Rates and Inflation" for additional discussion related to Dynegy and Aquila.

Project Management

          Cogentrix Energy provides certain management and administration services to the Partnerships. See Part III/Item 13 - "Certain Relationships and Related Transactions".

Operations And Maintenance

     Operations And Maintenance Agreements

          The Cottage Grove and Whitewater Facilities are operated by LSP-Cottage Grove, Inc. and LSP-Whitewater I, Inc. (the "Operator" and collectively, the "Operators"), respectively, pursuant to operations and maintenance agreements (an "O&M Agreement" and collectively, the "O&M Agreements"). Under each O&M Agreement, the Operators are required to provide certain services during commercial operation. As compensation for their services, the Operators are reimbursed under each O&M Agreement on a monthly basis for certain approved costs incurred in connection with operating the related Facility. In addition, the Operators receive an annual management fee of $350,000 (subject to adjustment each year based on specified indices published by the United States Bureau of Labor Statistics) during the operational years of each Facility. The Partnerships contract directly with certain subcontractors for materials and services which are outside the sco pe of the Operators' obligations under the O&M Agreements, including major maintenance of the Facilities. The Operators are also subject to an annual performance bonus or penalty payment depending on each Facility's availability relative to certain performance criteria reflecting aspects of similar criteria contained in each Facility's Power Purchase Agreement. Furthermore, they are subject to a penalty payment depending upon each Facility's ability to produce an uninterrupted supply of thermal energy.

     Parts Agreements

          Each of the Cottage Grove and Whitewater Facilities has a parts agreement (a "Parts Agreement" and collectively, the "Parts Agreements") with Westinghouse Electric Corporation ("Westinghouse Electric"). Under each Parts Agreement, Westinghouse Electric provides a spare set of certain major combustion turbine parts (including combustors, fuel nozzles, transitions, turbine blades and vanes and various other items), and repairs or replaces specified parts during certain scheduled and unscheduled outages of the related Facility. Pursuant to each Parts Agreement, which expires at the earlier of (i) reaching 2,400 equivalent starts or 48,000 hours equivalent operating hours as determined in accordance with the applicable Westinghouse Electric service bulletin or (ii) 15 years after provisional acceptance of the related Facility, Westinghouse Electric is paid an annual fee of $976,833 (subject to an inflation adjustment each year based on specified indice s published by the United States Bureau of Labor Statistics or upwards adjustment based on operations of the facility) for 12 years. In addition, Westinghouse Electric provides certain Westinghouse Electric parts at a discount from the list price for the life of the related Facility and repairs certain parts at cost plus a certain percentage markup for the duration of the financing of such Facility.

Greenhouse

          Whitewater has an operational services agreement (the "Greenhouse Operational Services Agreement") with FloriCulture, Inc. ("FloriCulture"), an affiliate of Whitewater, which operates the Greenhouse for the benefit of Whitewater.

          Under the terms of the Greenhouse Operational Services Agreement, FloriCulture is required to provide all the services necessary to produce, market, and sell horticultural products and to operate and maintain the Greenhouse. As compensation for its services, FloriCulture is reimbursed on a monthly basis for approved costs in connection with conducting the Greenhouse business and operating the Greenhouse, and will receive an annual management fee equal to 16% of Floriculture's net profit. The term of the Greenhouse Operational Services Agreement will expire on May 31, 2022.

Sale Of Capacity And Electricity

     Cottage Grove

          Under and subject to the terms of the Cottage Grove Power Purchase Agreement, NSP is obligated to purchase all electric capacity made available to it and all associated energy which NSP chooses to dispatch from the Cottage Grove Facility beginning on the Cottage Grove Commercial Operations Date and extending for 30 years thereafter.

          Payments by NSP to Cottage Grove under the Cottage Grove Power Purchase Agreement consist of (i) capacity payments and (ii) energy payments. The capacity payments made by NSP are based on the Facility's tested capacity and availability, and have three components: one rate component based on a fixed schedule and two rate components that escalate in accordance with changes in published indices. NSP is required to make capacity payments to Cottage Grove on a monthly basis for electric capacity made available to NSP, regardless of the level of dispatch. Capacity payments from NSP are subject to adjustment on the basis of performance-based factors which reflect the Cottage Grove Facility's semi-annually tested capacity and its rolling 12-month average for availability and on-peak availability. Capacity payments are also adjusted for transmission losses or gains relative to a reference plant.

          Under the Cottage Grove Power Purchase Agreement, NSP has full dispatch discretion over energy delivered by the Cottage Grove Facility subject to certain agreed dispatch parameters. This offers NSP the flexibility to call upon the Cottage Grove Facility to deliver energy when it is the lowest cost unused variable energy source available to NSP. There is no contractual minimum amount of energy that NSP must purchase from Cottage Grove.

          Energy payments for energy delivered by the Cottage Grove Facility vary in accordance with a published monthly natural gas index or, in case of dispatch in excess of 16 hours per day, with the Cottage Grove Facility's actual fuel costs. The prices that Cottage Grove pays for natural gas pursuant to its gas supply contracts vary in accordance with the same monthly natural gas index as the related variable energy rate contained in the Cottage Grove Power Purchase Agreement or, in some circumstances, in accordance with daily spot prices for natural gas. While the gas pricing and gas transportation escalation rates under Cottage Grove's gas supply and transportation agreements are designed to generally track corresponding revenues derived under the Cottage Grove Power Purchase Agreement, there can be no assurance that such pricing components will match corresponding revenue streams under all operating and escalation environments.

          Following the 10th anniversary of the Cottage Grove Commercial Operations Date, if NSP fails to obtain, or is denied authorization by any governmental authority having jurisdiction over NSP's retail rates and charges, to recover from its customers any payments made to Cottage Grove under the Cottage Grove Power Purchase Agreement, any such disallowance will be monitored in a tracking account and the unpaid balance in the tracking account shall accrue interest at 8.7% per annum. Within 30 days after Cottage Grove's First Mortgage Bonds have been fully retired, NSP may begin reducing payments to Cottage Grove to (i) ensure the payments are in-line with Minnesota Public Utility Commission rates and (ii) begin amortizing the balance in the tracking account. Should NSP exercise its right to reduce payments, the maximum reduction is 75% of the capacity payment otherwise due for the period.

     Whitewater

          Under and subject to the terms of the Whitewater Power Purchase Agreement, WEPCO is obligated to purchase the electric capacity made available to it up to 236.5 megawatts and associated energy which WEPCO chooses to dispatch from the Whitewater Facility beginning on the Whitewater Commercial Operations Date and extending for 25 years thereafter.

          Payments by WEPCO to Whitewater under the Whitewater Power Purchase Agreement consist of (i) capacity payments and (ii) energy payments. The capacity payments made by WEPCO are based on the Whitewater Facility's tested capacity and availability and have three rate components: a rate component based on a fixed schedule, a fixed operation and maintenance rate component escalating in accordance with changes in a published index, and a fixed gas transport rate component escalating in a similar manner. WEPCO is required to make capacity payments to Whitewater on a monthly basis for electric generating capacity made available to WEPCO, regardless of the amount of electric energy actually dispatched. Capacity payments from WEPCO are subject to adjustment on the basis of performance-based factors which reflect the Whitewater Facility's semi-annually tested capacity, and average and peak availability factors for the preceding contract year.

          Under the Whitewater Power Purchase Agreement, WEPCO has full dispatch discretion over energy to be delivered by the Whitewater Facility subject to certain agreed dispatch parameters. This offers WEPCO the flexibility to call upon the Whitewater Facility to deliver energy when it is the lowest cost unused variable energy source available to WEPCO. There is no contractual minimum amount of energy that WEPCO must purchase from Whitewater.

          Energy payments for energy delivered by the Whitewater Facility vary in accordance with a published monthly natural gas index or with the Whitewater Facility's actual fuel costs. The prices that Whitewater pays for natural gas pursuant to its gas supply contracts vary in accordance with the same monthly natural gas index as the related variable energy rate contained in the Whitewater Power Purchase Agreement or, in some circumstances, in accordance with daily spot prices for natural gas. While the gas pricing and gas transportation escalation rates under Whitewater's gas supply and transportation agreements are designed to generally track corresponding revenues derived under the Whitewater Power Purchase Agreement, there can be no assurance that such pricing components will match corresponding revenue streams under all operating and escalation environments.

          Subject to certain limitations, the capacity payments from WEPCO may be reduced to the extent that WEPCO's senior debt instruments are downgraded by any two of Standard & Poor's Corporation, Moody's Investors Service, Inc. and Duff & Phelps as a result of WEPCO's long-term power purchase obligations under the Whitewater Power Purchase Agreement. So long as Whitewater's First Mortgage Bonds are outstanding, the reduction may not exceed the level necessary to cause Whitewater's debt service coverage ratio to be less than 1.4 in any month, with such ratio calculated on a rolling average of the four fiscal quarters immediately preceding the proposed adjustment. After Whitewater's First Mortgage Bonds have been repaid, the reduction may not exceed 50% of Whitewater's revenues minus expenses. The amount of the reductions precluded by application of the above limitations will be monitored in a tracking account and the unpaid balance in the tracking account shall accrue interest at the base or prime lending rate set from time to time by The Chase Manhattan Bank, N.A. or its successor. Accrued tracking account obligations are to be repaid when possible, subject to the limitations described above, or may be applied to WEPCO's purchase of the Whitewater Facility at the expiration of the Whitewater Power Purchase Agreement.

          In the event that at any time WEPCO is denied rate recovery from its customers of any payment to be made to Whitewater under the Whitewater Power Purchase Agreement by an applicable regulatory authority, WEPCO's payments to Whitewater may be correspondingly reduced, subject to certain limitations. While Whitewater's First Mortgage Bonds are outstanding, the capacity payments may be reduced by the annual regulatory disallowance provided that the reduction may not cause Whitewater's debt service coverage ratio to be less than 1.4 in any month calculated on a rolling average of the four fiscal quarters preceding the proposed adjustment. After Whitewater's First Mortgage Bonds are repaid, reductions may not exceed 50% of Whitewater's revenues minus expenses. The amount of the reductions precluded by these restrictions is monitored in a tracking account with repayment subject to the same provisions as for bond downgrading adjustments discussed above.

Qualifying Facility Status

          The Cottage Grove Facility and the Whitewater Facility are each certified as a QF under PURPA and the regulations of the Federal Energy Regulatory Commission ("FERC") promulgated thereunder. While loss of QF status does not result in a default under either Power Purchase Agreement, it can result in a reduction in payments under the Cottage Grove Power Purchase Agreement to the lower of FERC approved rates or the contract rates, or under the Whitewater Power Purchase Agreement to the lower of FERC approved rates or rates reflecting a five percent discount from the capacity component of the contract rates. Under its respective Power Purchase Agreement, each Partnership may regain full contract rates if it regains QF status that has been lost. In addition, a loss of QF status will cause the rates and certain organizational and financial affairs of the affected Partnership to become subject to regulation by the FERC, possibly result in both Partnerships becoming regulated under the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), and to the extent not preempted by the Federal Power Act, as amended ("FPA"), becoming subject to the jurisdiction of the applicable state public utility commission.

Thermal Energy Sales

     Cottage Grove

          Cottage Grove has a steam supply agreement, as amended, with 3M (the "3M Thermal Energy Agreement"), which provides for Cottage Grove to supply the steam requirements of 3M's manufacturing plant in Cottage Grove, Minnesota. The Cottage Grove Facility is capable of delivering up to 190,000 pounds of steam per hour through its cogeneration process and, alternatively, up to 160,000 pounds of steam per hour in the aggregate through two auxiliary steam generators (the "Auxiliary Boilers") which are used when NSP has not dispatched the Facility or when the cogeneration process is otherwise unavailable. The term of the 3M Thermal Energy Agreement extends for an initial period of 30 years from the date upon which the first deliveries of steam were made, which term may be extended upon terms and conditions mutually satisfactory to Cottage Grove and 3M.

          The 3M Thermal Energy Agreement obligates Cottage Grove to supply all of 3M's steam requirements up to a maximum of 664 million pounds of steam annually at a rate not to exceed 190,000 pounds per hour when the Cottage Grove Facility's cogeneration process is operating and 160,000 pounds per hour when the steam is generated by the Auxiliary Boilers (the "Maximum 3M Purchase Amount"). For the first ten years after Cottage Grove commences steam delivery to 3M, 3M must take and use, at a minimum, the amount of steam necessary to maintain the Cottage Grove Facility's status as a QF (the "Minimum 3M Purchase Amount"). Thereafter, if 3M takes less than the Minimum 3M Purchase Amount, Cottage Grove may reduce the Maximum 3M Purchase Amount and sell steam in excess of such reduction to other steam purchasers. In the event Cottage Grove delivers steam which does not conform to the specifications in the 3M Thermal Energy Agreement, Cottage Grove must discontin ue such delivery (unless otherwise requested by 3M) and, at its own expense, take prompt action to correct such non-conformance. The 3M Thermal Energy Agreement also provides that 3M is obligated to return the condensate to the Cottage Grove Facility, supply a quantity of cooling and potable water sufficient to satisfy the requirements of the Cottage Grove Facility and, to the extent consistent with certain governmental permits and regulations, accept the Cottage Grove Facility's wastewater and sanitary wastewater into 3M's existing discharge systems. 3M has the right to reduce the water supply to the Facility in the event that it cannot satisfy both its own and Cottage Grove's requirements; however, Cottage Grove has drilled a back-up well as a reserve in the event of any shortfalls in water supply from 3M.

          Cottage Grove is obligated to supply steam to 3M on a non-interruptible basis, except during periods of force majeure, emergency conditions affecting the Cottage Grove Facility and periods when 3M is unable to accept steam due to repair or maintenance of its manufacturing plant. In the event of any failure to supply steam to 3M, other than as a result of force majeure or the acts or omissions of 3M, Cottage Grove must reimburse 3M for its incremental costs.

     Whitewater

          University of Wisconsin-Whitewater - Whitewater has a steam supply agreement with the Department of Administration of the State of Wisconsin ("DOA"), which provides for Whitewater to supply the steam requirements of UWW (the "UWW Thermal Energy Agreement"). The initial term of the UWW Thermal Energy Agreement expires June 30, 2005 (the "UWW Initial Term"). The DOA has the option to extend the UWW Initial Term for up to four extension periods of four years each.

          The UWW Thermal Energy Agreement obligates Whitewater to supply all of UWW's steam requirements up to a maximum of 350 million pounds of steam annually at a rate not to exceed 100,000 pounds per hour (the "Maximum UWW Purchase Amount"). The DOA may also request, and Whitewater must use reasonable efforts to supply, steam in excess of the Maximum UWW Purchase Amount. The DOA is not obligated to take any minimum annual or hourly quantity of steam. In the event Whitewater delivers steam that does not conform to the specifications set forth in the UWW Thermal Energy Agreement, Whitewater must discontinue such delivery (unless otherwise requested by the DOA) and, at its own cost, take prompt action to correct such non-conformance.

          Whitewater has agreed to reimburse the DOA for costs up to $500,000 incurred to repair and recondition one of UWW's existing steam boilers for use as a back-up boiler and to modify the operations of the UWW heating plant where its boilers are located. Whitewater has also agreed to pay the annual costs to maintain the back-up boiler in a standby mode. During the years ended December 31, 2002, 2001 and 2000, no additional amounts were paid for repair of the boiler.

          Whitewater is obligated to supply steam to UWW on a non-interruptible basis, except during periods of force majeure, emergency conditions affecting the Whitewater Facility and periods when UWW is unable to accept steam due to necessary repair or maintenance to the UWW steam piping system. In the event of any failure to supply UWW, other than as a result of force majeure or the acts or omissions of UWW, Whitewater must reimburse UWW for its incremental costs.

          Greenhouse - Under the terms of the Greenhouse Operational Services Agreement with FloriCulture, Whitewater will supply the hot water requirements of the Greenhouse. See "Operations and Maintenance; Greenhouse".

Commodity Natural Gas Sales

          As discussed below under the heading "Gas Supply", Cottage Grove and Whitewater have the ability, subject to certain minimum requirements, to purchase natural gas inventories in order to manage the expected fuel demand at their respective Facility. Each Partnership manages its natural gas inventory levels and in the event excess inventory is on hand, each partnership sells the excess natural gas directly to third parties or between the Partnerships.

Gas Supply

          Each of Cottage Grove and Whitewater has entered into gas supply contracts with substantially identical terms, with the exception of the volume of gas required to be delivered under the contracts. This difference is primarily a result of varying contractual requirements in the Power Purchase Agreements. Specifically, each Partnership has entered into (i) a gas sales contract with Dynegy, as amended (the "Dynegy Gas Supply Contract"), and (ii) a gas sales contract with Aquila, as amended (the "Aquila Gas Supply Contract," and together with the Dynegy Gas Supply Contract, the "Gas Supply Contracts") to collectively service 100% of the expected gas requirements of its Facility.

          The Aquila Gas Supply Contract and the Dynegy Gas Supply Contract each provides for the sale of up to 17,060 MMBtu per day of gas to Cottage Grove and up to 11,855 MMBtu per day of gas to Whitewater. Under the Gas Supply Contracts, except during periods of force majeure or default by a Partnership, Dynegy and Aquila (together, the "Gas Suppliers") are required to supply on a firm basis to the point of demarcation between the field zone and the market zone of Northern Natural (the "Demarcation Point"), all gas properly nominated by each Partnership. If a Gas Supplier fails to deliver properly nominated gas to the Demarcation Point for any reason other than force majeure or a Partnership's failure to pay for past deliveries, Cottage Grove or Whitewater, as the case may be, has the right to buy replacement gas (or fuel oil) from other sources and charge the applicable Gas Supplier for the direct increased cost (including transportation charges), if any , of using such gas or fuel oil.

          Under the Gas Supply Contracts, there are three categories of gas, Tier I Gas, Tier II Gas, and Tier III Gas. Tier I Gas is "baseload" gas, nominated prior to the commencement of each month at a set volume for such month. Tier II Gas is "TOK-swing" gas, nominated prior to the commencement of each month at a set volume with the ability to reduce daily volumes to reflect daily swings in gas needs at the Facilities. Tier III Gas is "spot-swing" gas, nominated on a monthly basis (in the case of Aquila) and daily basis (in the case of both Dynegy and Aquila) to fulfill daily swings in Facility requirements not met by Tier I Gas and/or Tier II Gas.

          The price for Tier I Gas is equal to a published price for first-of-the-month spot natural gas delivered to Northern Natural in Texas, Oklahoma and Kansas (the "TOK Price"), plus a percentage fee. The price for Tier II Gas is equal to the TOK Price plus a reservation fee payable on all Tier II volumes nominated, regardless of whether such volumes are actually purchased by such Partnership. The price for Tier III Gas is calculated on a daily cost basis, which could vary above or below the first-of-the-month TOK Price. The TOK Price, or, in some circumstances, actual fuel cost is used as the basis for the price payable for variable energy under the Power Purchase Agreements.

          Under the Gas Supply Contracts, the Partnerships are subject to an annual minimum take requirement for Tier I Gas equal to 40% of the annualized maximum quantity. Under the Dynegy Gas Supply Contract, one-half of Tier II Gas quantities delivered may be applied to reduce the minimum take requirement. The Partnerships may satisfy the minimum take requirements by delivering gas to the Facilities, taking gas into storage or by remarketing gas to third parties. In the event of two consecutive annual minimum take shortfalls, Aquila has the right to reduce the volumes deliverable under the applicable Aquila Gas Supply Contract. On a monthly basis, Whitewater and Cottage Grove are required to take all Tier I Gas nominated for such month, make other arrangements for the disposition thereof, or pay certain penalties.

          The primary term of each Gas Supply Contract is 20 years beginning with the Commercial Operations Date of the respective Facility. Following the end of the primary term, the Dynegy Gas Supply Contract may be extended at the applicable Partnership's option for an additional five-year term. The Aquila Gas Supply Contract extends beyond the primary term on a year-to-year basis, unless affirmatively terminated by one of the parties thereto.

          The Gas Supply Contracts may be terminated prior to expiration in the event the corresponding Power Purchase Agreement is terminated without replacement or upon the occurrence of certain events of default. Events of default include bankruptcy or insolvency proceedings, legal process against the contract itself, false representations or warranties, unexcused failure to deliver gas, continued failure to pay for gas after suspension of deliveries by the applicable Gas Supplier or any other continued material breach.

Gas Transportation

     Cottage Grove

          Cottage Grove has various gas transportation agreements with Northern Natural (collectively, the "Cottage Grove Northern Transportation Agreements") pursuant to an agreement among Cottage Grove, Northern Natural and Peoples (the "Cottage Grove Letter Agreement"). The Cottage Grove Letter Agreement and the Cottage Grove Northern Transportation Agreements (the "Cottage Grove Northern Agreements") have a term of 20 years, subject to a 10-year option to renew by Cottage Grove, and set forth the terms and conditions under which Northern Natural agrees to transport on both a firm and interruptible basis the gas purchased by Cottage Grove pursuant to the Cottage Grove Gas Supply Contracts. Under the Cottage Grove Northern Agreements, gas is transported from Northern Natural's field zone to the Demarcation Point on an interruptible basis, and from the Demarcation Point to the interconnection of the facilities of Northern Natural and Peoples (the "Cottage Gr ove TBS") on a firm basis. Subject to certain restrictions (including minimum and maximum injection and withdrawal rates), the Cottage Grove Northern Agreements also provide firm storage service at Northern Natural's gas storage facility in the market zone of an aggregate volume of gas sufficient to supply the Cottage Grove Facility for approximately 29 days. Based on the execution of short-term storage capacity release activities, resulting available Northern market zone firm storage service capacity is presently sufficient to supply the Cottage Grove Facility for approximately seven days.

          Cottage Grove also has an agreement with Peoples that provides for the transportation from the Cottage Grove TBS to the Cottage Grove Facility of 29,120 MMBtu per day on a firm basis and excess gas required by the Cottage Grove Facility on an interruptible basis (the "Peoples Agreement", and together with the Cottage Grove Northern Agreements, the "Cottage Grove Transportation Agreements").

          Under the Cottage Grove Letter Agreement, Peoples has agreed to release to Cottage Grove 34,120 MMBtu/day of firm capacity it currently holds on Northern Natural's system for gas transportation under the Cottage Grove Transportation Agreements from the Demarcation Point to the Cottage Grove TBS. Northern Natural has agreed to construct, maintain and own at its expense the Cottage Grove TBS and other facilities necessary to effectuate the services described above. In order to secure its payment obligations under the Cottage Grove Letter Agreement, if the rating on the Senior Secured Bonds falls below investment grade, Cottage Grove may be required to obtain a guarantee or a letter of credit from an investment grade entity. Based on Northern Natural's effective FERC approved gas tariff, the amount of security for payment obligations could be as much as $3.2 million. See "Management's Discussion and Analysis of Financial Conditions and Results of Ope rations - Liquidity and Capital Resources - Rating Agency Action."

          The Peoples Agreement provided for the construction of an approximately one mile long pipeline at Peoples' expense from the Cottage Grove TBS to the Cottage Grove Facility. The agreement designates Peoples as Cottage Grove's agent with respect to nominations on Northern Natural's system and requires Peoples to deliver gas, if available, to Cottage Grove in case of a failure of any of Cottage Grove's supplies under the Cottage Grove Gas Supply Contracts. In addition, the Peoples Agreement provides various balancing services which augment the balancing rights held by Cottage Grove under the Cottage Grove Northern Agreements. For up to 20 days of each "heating period" (i.e., an interval beginning December 1 and extending to the end of the following February) Peoples has the option to retain the gas destined for the Cottage Grove Facility for its own use, subject to proper notice and the reimbursement of Cottage Grove for replacement fuel costs. In cons ideration for such option, Cottage Grove receives a monthly payment of $116,480, escalated each year based on specified indices, published during the heating period. In addition, on any day during each heating period on which Cottage Grove nominates a quantity of gas and transportation from the Gas Suppliers and Northern Natural less than 29,120 MMBtu, Peoples may require Cottage Grove to nominate and deliver to Peoples the difference between the quantities actually nominated and 29,120 MMBtu, subject to compliance with Northern Natural's tariffs, agreement between Peoples and NSP and payment to Cottage Grove of its actual cost of gas and gas transportation with respect to such differential quantities.

     Whitewater

          Whitewater has various gas transportation agreements with Northern Natural (collectively, the "Whitewater Northern Agreements"). The Whitewater Northern Agreements have a term of 20 years, with a 10-year option to renew by Whitewater, and set forth the terms and conditions under which Northern Natural agrees to transport, on both a firm and interruptible basis, the gas purchased by Whitewater pursuant to the Whitewater Gas Supply Contracts. Under the Whitewater Northern Agreements, gas will be transported from Northern Natural's field zone to the Demarcation Point on an interruptible basis, and from the Demarcation Point to the interconnection of the facilities of Northern Natural and WNG (the "Whitewater TBS") on a firm basis. Subject to certain restrictions (including the minimum and maximum injection and withdrawal rates), the Whitewater Northern Agreements also provide for firm storage service at Northern Natural's gas storage facility in the ma rket zone of an aggregate volume of gas sufficient to supply the Whitewater Facility for approximately 18 days. Based on the execution of short-term storage capacity release activities, resulting available Northern market zone firm storage service capacity is presently sufficient to supply the Whitewater Facility for approximately nine days. Finally, the Whitewater Northern Agreements provide for interruptible storage service at Northern Natural's gas storage facility in the market area, subject to its availability.

          Under the Whitewater Northern Agreements, Northern Natural agrees to provide 30,400 MMBtu/day of firm capacity for the transportation of gas from the Demarcation Point to the Whitewater TBS. Northern Natural has also agreed to construct, maintain and own the Whitewater TBS and other facilities necessary to effectuate the services described above. As a contribution toward the cost of these facilities, Whitewater made a payment to Northern Natural of $2,500,000. In order to secure its payment obligations under the Whitewater Northern Agreements, if the rating on the Senior Secured Bonds falls below investment grade, Whitewater may be required to obtain a guarantee or a letter of credit from an investment grade entity. Based on Northern Natural's effective FERC approved Gas Tariff, the amount of security for payment obligations could be as much as $3.2 million. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources - Rating Agency Action."

          Whitewater also has an agreement with WNG which provides for the transportation of all gas required by the Whitewater Facility from the Whitewater TBS to the Whitewater Facility (the "WNG Agreement", and together with the Whitewater Northern Agreements, the "Whitewater Transportation Agreements"). The WNG Agreement provided for the construction of an approximately five mile long pipeline from the Whitewater TBS to the Whitewater site. Whitewater paid approximately $1,328,000 for the construction of the pipeline. The WNG Agreement extends for an initial term of 25 years (with two optional five-year extensions), and provides for the firm transport of the daily and hourly gas requirements of the Whitewater Facility.

          Whitewater has an agreement, as amended, with Wisconsin Power & Light Company ("WP&L") which provides WP&L with the ability to purchase a portion of Whitewater's daily gas supply and interstate transportation capacity in return for the payment of a monthly fee to Whitewater and reimbursement of Whitewater's incremental costs (the "WP&L Agreement"). The WP&L Agreement permits WP&L to purchase from Whitewater up to 15,000 MMBtu/day of gas and up to 10,400 MMBtu/day of interstate transportation capacity, not to exceed in the aggregate 508,000 MMBtu/year of combined gas and transportation capacity. In consideration therefore, WP&L pays Whitewater a monthly fee of $58,500 and the incremental costs incurred for replacement gas or fuel oil, including transportation. The term of the WP&L Agreement expired in October 2002 on its terms.

Dependence On Third Parties

          Each Partnership is highly dependent on a single utility for purchases of electric generating capacity and energy from its respective Facility, a single operator to perform the operation and maintenance of its respective Facility and, in the case of the Cottage Grove Facility, a single steam purchaser for purchases of thermal energy. In addition, each Partnership has contracted with only two gas companies, Aquila and Dynegy, to supply the expected gas requirements of the Facilities, has contracted with a single interstate gas transporter, Northern Natural, to transport gas, and has contracted with a single gas distributor, Aquila Networks. Any material breach by any one of these parties of their respective obligations to either Partnership could affect the ability of the applicable Partnership to make payments under its First Mortgage Bonds and consequently Funding's ability to make payments on the Senior Secured Bonds. In addition, bankruptcy or in solvency of certain other parties or defaults by such parties relative to their contractual or regulatory obligations could adversely affect the ability of a Partnership to make payments to Funding with respect to such Partnership's First Mortgage Bonds and consequently Funding's ability to make payments on the Senior Secured Bonds. If a project agreement were to be terminated due to a breach of such project agreement, the affected Partnership's ability to enter into a substitute agreement having substantially equivalent terms and conditions, or with an equally creditworthy third party, is uncertain. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of Energy Price Changes, Interest Rates and Inflation" for additional discussion related to Dynegy and Aquila.

The Independent Power Market

          The enactment of PURPA removed certain regulatory constraints relating to the production and sale of electric energy by certain non-utility power producers and required electric utilities to buy electricity from certain types of non-utility power producers under certain conditions, thereby encouraging companies other than electric utilities to enter the electric power production market. As a result, a market for electric power produced by independent power producers unaffiliated with utilities such as the Partnerships has developed in the United States since the enactment of PURPA.

          The Energy Policy Act of 1992 (the "Policy Act") expands certain exemptions previously available under PURPA and provides for the ability of independent power producers to compete in a non-regulated fashion without having to qualify as QFs under PURPA. In addition, over the last several years, various state utility commissions have opened the electric generation and sales market to competition not only from QFs but also to non-QF independent power producers and competitive proposals from other utilities and power marketers. These developments have often required that independent power projects must now be viewed as "least-cost" with such a showing being demonstrated through a competitive procurement process, such as those which resulted in the selection of the Cottage Grove Facility and Whitewater Facility.

Regulation

     General

          The Partnerships are required to comply with numerous Federal, state and local statutory and regulatory standards and obtain and maintain numerous permits and approvals relating to energy, the environment and other laws required for the operation of the Facilities. The permits and regulatory approvals that have been issued to the Partnerships contain certain conditions. There can be no assurance that either Facility will continue to operate in accordance with the conditions established by the permits or approvals or that the Partnerships or third parties will be able to obtain any outstanding permits required for the operation of the Facilities. Laws and regulations affecting Funding, the Partnerships and the Facilities may change during the period in which the Senior Secured Bonds are scheduled to be outstanding, and such changes could adversely affect Funding or the Partnerships. For example, changes in laws or regulations (including but not limit ed to environmental laws and regulations) could impose more stringent or comprehensive requirements on the operation or maintenance of the Facilities, resulting in increased compliance costs or the reduction of certain benefits currently available to the Partnerships, or could expose Funding or the Partnerships to liabilities for previous actions taken in compliance with all laws in effect at the time or for actions taken by or conditions caused by unrelated third parties. We strive to comply with all environmental laws, regulations, permits and licenses but, despite such efforts, at times we have been in non-compliance, although not materially.

     PURPA

          PURPA and the regulations promulgated thereunder by FERC provide an electric generating facility with rate and regulatory incentives if the facility is a QF. Under PURPA, a topping-cycle cogeneration facility is a QF if (i) the facility sequentially produces both electricity and a useful thermal energy output during any calendar year (and the first 12 months of operation) which constitutes at least five percent of its total energy output and which is used for industrial, commercial, heating or cooling purposes, (ii) during any calendar year (and the first 12 months of operation) the sum of the useful power output of the facility plus one-half of its useful thermal energy output equals or exceeds 42.5% of the total energy input of natural gas and oil, or, in the event that the facility's useful thermal energy output is less than 15% of the facility's total energy output, such sum equals or exceeds 45% of such total energy input and (iii) the facility is not owned by a person primarily engaged in the generation or sale of electric energy (other than from QFs, other types of exempt facilities and power marketers) or more than 50% owned by an electric utility, electric utility holding company, or a wholly or partially owned subsidiary of an electric utility or an electric utility holding company. PURPA and the regulations promulgated thereunder exempt QFs from PUHCA, most provisions of the FPA and certain state laws relating to rates, and the financial and organizational regulation of electric utilities.

          The Partnerships expect the Facilities to continue to meet all of the criteria required for designation as QFs under PURPA. If either Facility were to fail to meet such criteria, the related Partnership may become subject to regulation under PUHCA (but see discussion under "PUHCA" below), the FPA and state utility laws.

     PUHCA

          PUHCA provides that any corporation, partnership or other entity, or organized group of persons which owns, controls or holds with power to vote 10% or more of the outstanding voting securities, or controlling influence over the management, of a "public utility company" or a company which is a "holding company" of a "public utility company" is subject to registration with the United States Securities and Exchange Commission (the "Commission") and regulation under PUHCA, unless eligible for an exemption or unless a Commission order declaring it not to be a holding company is issued. PUHCA requires registration for a non-exempt holding company of a public utility company, and requires a public utility holding company to limit its utility operations to a single integrated utility system and to divest any other operations not functionally related to the operation of the utility system. In addition, a registered holding company and the public utility com pany, which is a subsidiary of a registered holding company under PUHCA, is subject to financial, organizational and rate regulation, including approval by the Commission of its financing transactions.

          The Policy Act contains amendments to PUHCA which may allow the Partnerships to operate their businesses without becoming subject to PUHCA in the event that either Facility loses its status as a QF. Under the Policy Act, a company engaged exclusively in the business of owning and/or operating one or more facilities used for the generation of electric energy exclusively for sale at wholesale may be exempted from PUHCA. In order to qualify for such an exemption, a company must apply to the FERC for a determination of eligibility, pursuant to implementing rules promulgated by the FERC. Both Whitewater and Cottage Grove were granted exempt wholesale generator status by the FERC on October 17, 1996. Notwithstanding this exemption, in the event that QF status is revoked, the applicable Partnership would be subject to regulation under the FPA and the capacity and energy rates, as described below, would have to be approved by FERC.

     FPA

          Under the FPA, the FERC has exclusive rate-making jurisdiction over wholesale sales of electricity and transmission in interstate commerce. These rates may be based on a cost-of-service approach or a market-based approach. If a Facility were to lose its QF status, the rates set forth in each of the Power Purchase Agreements would have to be filed with FERC and would be subject to review and acceptance by the FERC under the FPA. The Whitewater Power Purchase Agreement provides for a reduction in capacity payment rates in such event to the lower of a five percent discount from the contract rates, or FERC approved rates. The Cottage Grove Power Purchase Agreement provides for Cottage Grove to receive the lower of FERC approved rates or the contract rates.

          The FPA, and the FERC's authority thereunder, also subject public utilities to various other requirements, including accounting and record-keeping requirements, FERC approval requirements applicable to activities such as selling, leasing or otherwise disposing of certain facilities, FERC approval requirements for mergers, consolidations, acquisitions, the issuance of securities and assumption of liabilities, and certain restrictions regarding interlocking directorates. Upon a loss of QF status, the affected Partnership would become subject to such requirements and although it could make application for specific waivers, there is no assurance such application would be approved.

     State Regulation

          If the Whitewater Facility loses its QF status, it would, absent a successful request for exemption, become subject to a wide range of Wisconsin statutes and regulations applicable to Wisconsin public utilities, including the requirement of the approval by the Wisconsin Public Service Commission (the "Wisconsin PSC") for the issuance of securities and the need to file periodic detailed information on financial and organizational matters.

          The rates charged to Whitewater under the WNG Agreement are subject to approval by the Wisconsin PSC. The criteria for approval by the Wisconsin PSC is related to its determination that such rates are compensatory. If the rates are determined by the Wisconsin PSC to be non-compensatory, and the Wisconsin PSC requires WNG to increase the rates, Whitewater shall be subject to such increased rates.

          Wisconsin law prohibits the granting or transfer of any licenses, permits and franchises to own or operate equipment to produce light, heat or power to any foreign corporation. Local counsel does not believe that the Wisconsin law applies to Whitewater. However, if it is determined that this prohibition does apply, Whitewater's Certificate of Public Convenience and Necessity ("CPCN") could be determined to be invalid. If this were to occur, Whitewater's ability to repay the Whitewater First Mortgage Bonds, and Funding's ability to repay the Senior Secured Bonds, could be materially delayed or impaired.

     Gas Supply And Transportation

          The gas transportation agreements serving each Facility are subject in various respects to the regulatory authority of governmental entities having jurisdiction, including but not limited to (i) for Cottage Grove, the Minnesota Environmental Quality Board ("MEQB"), the Minnesota Department of Natural Resources, the Minnesota Public Utilities Commission and the FERC and (ii) for Whitewater, the Wisconsin Department of Natural Resources, the Wisconsin PSC and the FERC.

          There can be no assurance that changes in regulatory rules or oversight by such agencies would not adversely affect the economics of Cottage Grove and Whitewater or their access to gas supplies. Similarly, modifications to tariff provisions could result in a disallowance of any price discounts existing under the transportation agreements.

Environmental Matters

          The construction and operation of power projects are subject to extensive environmental protection and land use regulation in the United States. Those regulations applicable to the Partnerships primarily involve the discharge of emissions into the water and air and the use of water, but can also include wetlands preservation, endangered species, waste disposal and noise regulation. These laws and regulations often require a lengthy and complex process of obtaining and renewing licenses, permits and approvals from federal, state and local agencies. If such laws and regulations are changed and the Facilities are not grandfathered, extensive modifications to power project technologies and the Facilities could be required.

          The Partnerships expect that environmental regulations will continue to become more stringent as environmental legislation previously passed becomes implemented and new laws are enacted. Accordingly, the Partnerships plan to continue a strong emphasis on implementation of environmental standards and procedures at the Facilities to minimize the environmental impact of energy generation.

          Clean Air Act.  In late 1990, Congress passed the Clean Air Act Amendments of 1990 (the "1990 Amendments") which affect existing facilities, as well as new project development. The original Clean Air Act of 1970 set guidelines for emissions standards for major pollutants from newly built sources. The Facilities we operate are in compliance with federal performance standards mandated for such facilities under the Clean Air Act and the 1990 Amendments. The 1990 Amendments attempt to reduce emissions from existing sources - particularly large, older facilities that were exempted from certain regulations under the original Clean Air Act.

          The 1990 Amendments create a marketable commodity called a sulfur dioxide ("SO₂") "allowance." All non-exempt facilities over 25 megawatts that emit SO₂, including independent power plants, must obtain allowances in order to operate after 1999. Each allowance gives the owner the right to emit one ton of SO₂. The Facilities have determined their need for allowances and have accounted for these requirements in their operating budgets and financial forecasts.

          The 1990 Amendments also contain other provisions that could affect the Facilities. Provisions dealing with geographical areas the EPA has designated as in "nonattainment" with national ambient air quality standards require that existing sources of air pollutants in a nonattainment area be retrofitted with reasonably available control technology ("RACT") for all pollutants for which an area is designated nonattainment. The technology currently installed at the Facilities should uniformly meet or exceed RACT for those pollutants.

          The 1990 Amendments also provide an extensive new operating permit program for existing sources called the Title V permitting program. Because the Facilities were permitted under the Prevention of Significant Deterioration New Source Review Process, the permitting impact to the Partnerships under the 1990 Amendments at the Facilities is expected to be minimal. The costs of applying for and obtaining operating air permits are not anticipated to be significant. Both Partnerships have applied for Title V permits. Cottage Grove has received its Title V operating permit while the Whitewater permit is pending.

          The hazardous air pollutant provisions of the 1990 Amendments presently exclude electric steam generating facilities, such as the Facilities. Studies of the emissions from such facilities have been submitted to Congress. The EPA is expected to regulate mercury emissions from coal-fired power plants only on or before December 15, 2004. It is not expected that these regulations will apply to the Partnerships.

          The EPA has recently proposed to control HAP emissions from stationary combustion turbines. Each of these combustion turbines are of the type and are operated such that the proposed regulation will require only more reporting requirements and not additional control technology. This regulation is proposed and the final regulation may or may not be more or less stringent than that proposed.

          In July 1997, the EPA promulgated more restrictive ambient air quality standards for ozone and for particulate matter: less than 25 microns in diameter - PM-2.5. These new standards were affirmed by the Supreme Court in February 2001 and when finally implemented by the EPA will likely increase the number of nonattainment areas for both ozone and PM-2.5. If the Facilities are in these new nonattainment areas, further emission reduction requirements could result in the installation of additional control technology.

          In October 1998, the EPA issued a final rule addressing the regional transport of ground-level ozone across state boundaries to the eastern United States through NO_x emissions reduction. The rule focuses on such reductions in the eastern United States, requiring 22 states and the District of Columbia to submit revised "state implementation plans" ("SIPs") by September 1999 and have NO_x emission controls in place by May 2003 (the " NO_x SIP Call"). In March 2000, a federal appeals court upheld the NO_x SIP Call rule. In March 2001, the Supreme Court declined to hear an appeal of this ruling.

          In December 1999, the EPA issued a final rule requiring reductions of NO_x emissions from 392 generating and other facilities in 12 Eastern and Midwestern States by May of 2003. This rule responds to petitions by Northeastern States under CAA Section 126 for controls on upwind NO_x emission sources, which the states demonstrated prevents them from attaining the ozone ambient standard. The Section 126 rule is an alternative to the NO_x SIP Call rule and is very similar in structure. A January 2002 EPA memorandum discusses EPA's intent to harmonize the compliance dates for the NO_x SIP Call and the Section 126 Rule. It is EPA's intent to establish May 31, 2004 as the compliance date for all affected sources, subject to the completion of EPA's response to the related court decision. As a result, the compliance date has been delayed until the 2004 ozone season and there is an expected date certain. The Facil ities are not expected to be subject to these rules.

          The 1990 Amendments expand the enforcement authority of the federal government by increasing the range of civil and criminal penalties for violations of the Clean Air Act, enhancing administrative civil penalties, and adding a citizen suit provision. These enforcement provisions also include enhanced monitoring, recordkeeping and reporting requirements for existing and new facilities. On February 13, 1997, the EPA issued a regulation providing for the use of "any credible evidence or information" in lieu of, or in addition to, the test methods prescribed by regulation to determine the compliance status of permitted sources of air pollution. This rule may effectively make emission limits previously established for many air pollution sources, including the Facilities, more stringent.

          The Kyoto Protocol.  In 1998, the Kyoto Protocol regarding greenhouse gas emissions and global warming was signed by the United States, committing to reductions in greenhouse gas emissions of at least 7% below 1990 levels to be achieved by 2008-2012. The United States Senate must ratify the agreement for the protocol to take effect. In March 2001, the EPA announced that the United States would not be implementing the Kyoto Protocol in its present form. In February 2002, the Bush Administration announced a series of voluntary measures aimed at reducing the amount of greenhouse gas emissions. The effects on the Partnerships from these initiatives are unknown at this time.

          The Bush Administration is developing, and several members of Congress have introduced, multi-pollutant emission reduction legislation aimed at power plants. This new legislation would be designed to replace existing permitting programs and impose new emission limits and related requirements on power plants for NO_x, SO₂, mercury and, potentially, carbon dioxide. We cannot determine whether this new multi-pollutant approach to regulating power plants will become law and, if so, its effect on future emission reduction requirements on the Facilities.

          Clean Water Act.  The Facilities are subject to a variety of state and federal regulations governing existing and potential water/wastewater and stormwater discharges from the Facilities. Generally, federal regulations promulgated through the Clean Water Act govern overall water/wastewater and stormwater discharges through National Pollutant Discharge Elimination System ("NPDES") permits. Under current provisions of the Clean Water Act, existing permits must be renewed every five years, at which time permit limits are under extensive review and can be modified to account for more stringent regulations. In addition, the permits have re-opener clauses which can be used to modify a permit at anytime. The Facilities have either recently gone through permit renewal or will be renewed within the next few years. Based upon recent renewals, the Partnerships do not anticipate more stringent monitoring requirements for the Facilities. We believe that we are in compliance with applicable discharge requirements under the Clean Water Act.

          The Whitewater site boundary is situated approximately one quarter of a mile away from a landfill under which groundwater contamination has been discovered. To the extent that such contamination has reached or reaches the Whitewater Facility site, there is a possibility that Whitewater would be responsible for the costs of remediating such contamination from off-site sources that is subsequently identified at the site.

          The EPA is currently developing new regulatory requirements under the NPDES permit program for new and existing facilities that employ a cooling water intake structure. None of the Facilities are directly affected by this new EPA initiative.

          Emergency Planning and Community Right-to-Know Act.  In April of 1997, the EPA expanded the list of industry groups required to report the Toxic Release Inventory under Section 313 of the Emergency Planning and Community Right-to-Know Act to include electric utilities. If oil is burned at all, the Facilities will be required to complete a toxic chemical inventory release form for each listed toxic chemical manufactured, processed or otherwise used in excess of threshold levels for the 1998 reporting year. The purpose of this requirement is to inform the EPA, states, localities and the public about releases of toxic chemicals to the air, water and land that can pose a threat to the community. We have complied with this reporting requirement.

          Comprehensive Environmental Response, Compensation, and Liability Act.  The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), requires cleanup of sites from which there has been a release or threatened release of hazardous substances and authorizes the EPA to take any necessary response action at Superfund sites, including ordering potentially responsible parties ("PRPs") liable for the release to take or pay for such actions. PRPs are broadly defined under CERCLA to include past and present owners and operators of, as well as generators of wastes sent to a site. At present, we are not subject to liability for any Superfund matters and take measures to assure that CERCLA will not apply to properties we own or lease. However, we do generate certain wastes in the operation of our Facilities, including small amounts of hazardous wastes, and send certain wastes to third-party waste disposal sites. As a result, there can be no assurance that the Partnerships will not incur liability under CERCLA in the future.

          Resource Conservation and Recovery Act ("RCRA").  RCRA regulates the generation, treatment, storage, handling, transportation and disposal of hazardous wastes. The Partnerships are classified as conditionally exempt small quantity generators of hazardous wastes at both of the Facilities. We will continue to monitor regulations under this rule and will strive to maintain the exempt status.

Competition

          The demand for power in the United States traditionally has been met by utility construction of large-scale electric generation projects under rate-base regulation. PURPA removed certain regulatory constraints relating to the production and sale of electric energy by eligible non-utilities and required electric utilities to buy electricity from various types of non-utility power producers under certain conditions, thereby encouraging companies other than electric utilities to enter the electric power production market. Concurrently, there has been a decline in the construction of large generating plants by electric utilities. In addition to independent power producers, subsidiaries of fuel supply companies, engineering companies, equipment manufacturers and other industrial companies, as well as subsidiaries of a number of regulated utilities, have entered the power market. Because the Partnerships have long-term contracts to sell electric generatin g capacity and energy from the Facilities, it is not expected that competitive forces will have a significant effect on the businesses of the Partnerships. Nevertheless, each of the Power Purchase Agreements permits the purchasing utility to schedule the respective Facility for dispatch on an economic basis, which takes into account the variable cost of electricity to be delivered by the Facility compared to the variable cost of electricity available to the purchasing utility from other sources. Accordingly, competitive forces may have some effect on the dispatch levels of the Facilities.

          The FERC and numerous state utility regulatory commissions have continued to pursue proceedings to deregulate the generation and sale of electricity. In several states, including Wisconsin and Minnesota, commissions have initiated proceedings to examine or develop methods for making the retail sale of electricity competitive. These proceedings remain at early stages in Wisconsin and Minnesota, and the potential impact of these proceedings on the Partnerships is unknown at this time.

Employees

          Funding and the Partnerships have no employees and do not anticipate having any employees in the future. Each Partnership and each General Partner has a management services agreement which provides for Cogentrix Energy to perform management services for each Partnership and each General Partner. See Part III, Item 13 - "Certain Relationships and Related Transactions". In addition, each of the Cottage Grove and Whitewater Facilities is operated by LSP-Cottage Grove, Inc. and LSP-Whitewater I, Inc., respectively, pursuant to the O&M Agreements.


PART I/ITEM 2. PROPERTIES

Cottage Grove

          Cottage Grove owns a 13-acre tract of land located in the City of Cottage Grove, Washington County, Minnesota, on which the Cottage Grove Facility was constructed.

Whitewater

          Whitewater owns a 35-acre tract of land located in the City of Whitewater, Wisconsin on which the Whitewater Facility and the substation for the Facility were constructed (the "Whitewater Site") and a 61-acre tract of land in which a portion of the transmission right of way is included. Whitewater also owns a 93-acre tract of land, adjacent to the Whitewater Site and located in the City of Whitewater, Wisconsin, on which the Greenhouse was constructed.


PART I/ITEM 3. LEGAL PROCEEDINGS

          Funding, Whitewater and Cottage Grove experience routine litigation in the normal course of business. Management is of the opinion that none of this routine litigation will have a material adverse impact on the financial position or results of operations of Funding, Whitewater or Cottage Grove.


PART I/ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None.


PART II/ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

          There is no established public market for Funding's common stock. Funding has 1,000 authorized with 100 issued and outstanding shares of common stock, $0.01 par value per share, 50 shares of which are owned by each Partnership. All of the equity interests in the Partnerships are held by the partners of the Partnerships and, therefore, there is no established public market for the equity interests in the Partnerships.


PART II/ITEM 6. SELECTED FINANCIAL DATA

          The following selected financial data have been taken from the audited financial statements of Funding, Cottage Grove and Whitewater. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Part II, Item 7 and the financial statements and related notes included under Part II, Item 8.

Statements of Income Data (dollars in thousands):

Balance Sheets Data (dollars in thousands):

PART II/ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

General

          The Whitewater Facility commenced commercial operations on September 18, 1997, and the Cottage Grove Facility commenced commercial operations on October 1, 1997. The Whitewater and Cottage Grove Power Purchase Agreements described in Part I/Item 1 - "Business - Sale of Capacity and Electricity" meet the criteria of a "sales-type" capital lease as described in Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases". Cottage Grove and Whitewater each recognized a gain on sales-type capital lease for the difference between the estimated fair market value and the historical cost of the Facilities as of the commencement of the respective Power Purchase Agreement terms (commencement of commercial operations). The Partnerships each recorded a net investment in lease that reflects the present value of future minimum lease payments. Future minimum lease payments represent the amount of capacity payments due from the utilities und er the Power Purchase Agreements in excess of fixed operating costs (i.e. executory costs). The difference between the undiscounted future minimum lease payments due from the utilities and the net investment in lease represents unearned income. This unearned income will be recognized as lease revenue over the term of the Power Purchase Agreements using the effective interest rate method. The Partnerships will also recognize service revenue related to the reimbursement of costs incurred in operating the Facilities and providing electricity and thermal energy. The amount of service revenue recognized by each Partnership will be directly related to the level of dispatch of the Facilities by the utility and to a lesser extent the level of thermal energy required by the steam hosts.

          Cottage Grove and Whitewater maintain All Risk insurance programs that renew annually each November. Recent events have adversely impacted all segments of the insurance industry in particular the type of equipment used at the Cottage Grove and Whitewater Facilities. As a result, their insurance policy coverages will be at lower levels than have historically been procured, policy terms and conditions will be affected, levels of deductibles will increase and premiums will be significantly higher. The coverages obtained related to the November 2002 renewal have met the coverage levels as required under the indenture of the senior secured bonds.

Results Of Operations - 2002

     Cottage Grove

          Operating revenues for the years ended December 31, 2002 and 2001 consisted primarily of lease revenue of approximately $21.3 million for both years and service revenue of $22.5 million and $26.0 million, respectively. While lease revenues remained consistent between the two years, service revenue decreased 13.5% as a result of a decrease in the variable energy rate charged to the purchasing utility and steam purchaser as a result of a decrease in natural gas prices.

          Operating expenses for the years ended December 31, 2002 and 2001 consisted primarily of costs of services of $26.1 million and $28.4 million, respectively. Cost of services decreased 8.1% for the year ended December 31, 2002 as compared to the corresponding period of 2001. This decrease was primarily the result of a decrease in fuel expense, a component of cost of services, as a result of a decrease in natural gas prices. Included in cost of services for 2002 are the approximately $1.3 million of maintenance costs related to an unscheduled outage during September 2002. See "- Liquidity and Capital Resources - Other Financial Information."

          Interest expense of approximately $12.3 million and $12.4 million for the years ended December 31, 2002 and 2001, respectively, consisted primarily of interest expense on the First Mortgage Bonds and the amortization o f the costs incurred to issue the bonds.

     Whitewater

          Operating revenues for the years ended December 31, 2002 and 2001 consisted primarily of lease revenue of approximately $23.2 million and $23.3 million, respectively, and service revenue of $28.8 million and $28.5 million, respectively. Lease revenues remained consistent between the two years. The slight increase of 1.1% in service revenue was the result of an increase in the megawatt hours sold to the purchasing utility, which was offset by a decrease in the variable energy rate charged to the purchasing utility as a result of a decrease in natural gas prices.

          Operating expenses for the years ended December 31, 2002 and 2001 consisted primarily of costs of services of $32.6 and $30.6, respectively. This 6.5% increase was a result of an increase in maintenance costs, a component of costs of services, incurred during an unscheduled outage during February 2002 (see "-Liquidity and Capital Resources - Other Financial Information"), which was partially offset by a decrease in fuel expense, another component of cost of services, resulting from a decrease in natural gas prices.

          Interest expense of $14.0 million and $14.1 million for the years ended December 31, 2002 and 2001, respectively, consisted primarily of interest expense on the First Mortgage Bonds and the amortization costs incurred to issue the bonds.

Results Of Operations - 2001

     Cottage Grove

          Operating revenues for the years ended December 31, 2001 and 2000 consisted primarily of lease revenue of approximately $21.3 million for both years, and service revenue of $26.0 million and $29.5 million, respectively. While lease revenues remained consistent between the two years, service revenue decreased 11.9% as a result of a decrease in megawatt hours provided to the purchasing utility, which was partially offset by an increase in the variable energy rate charged to the purchasing utility and steam purchaser. The increase in the variable energy rate was the result of an increase in natural gas prices. Commodity sales, another component of operating revenues, decreased 26.5% for the year ended December 31, 2001 as compared to the corresponding period of 2000. This decrease resulted from a decrease in remarketed fuel sales to third party purchasers.

          Operating expenses for the years ended December 31, 2001 and 2000 consisted primarily of costs of services of $28.4 million and $33.2 million, respectively. Cost of services decreased 14.5% for the year ended December 31, 2001 as compared to the corresponding period of 2000. This decrease was the result of a decrease in megawatt hours sold to the purchasing utility, which was partially offset by an increase in fuel expense. The increase in fuel expense was the result of an increase in natural gas prices. Commodity cost of sales expense, another component of operating expenses, decreased 21.0% due to a decrease in remarketed fuel sales to third party purchasers.

          Interest expense of approximately $12.4 million and $12.5 million for the years ended December 31, 2001 and 2000, respectively, consisted primarily of interest expense on the First Mortgage Bonds and the amortization of the costs incurred to issue the bonds.

     Whitewater

          Operating revenues for the years ended December 31, 2001 and 2000 consisted primarily of lease revenue of approximately $23.3 million and $23.4 million, respectively, and service revenue of approximately $28.5 million and $33.8 million, respectively. While lease revenues remained consistent between the two years, service revenue decreased 15.7% as a result of a decrease in megawatt hours sold to the purchasing utility, which was partially offset by an increase in the variable energy rate charged to the purchasing utility and steam purchaser. The increase in variable energy rate was the result of an increase in natural gas prices.

          Operating expenses for the years ended December 31, 2001 and 2000 consisted primarily of costs of services of $30.6 million and $35.5 million, respectively. Cost of services decreased 13.8% for the year ended December 31, 2001 as compared to the corresponding period of 2000. This change was the result of a decrease in the megawatt hours sold to the purchasing utility, which was partially offset by an increase in fuel expense resulting from an increase in natural gas prices.

          Interest expense of approximately $14.1 million and $14.2 million for the years ended December 31, 2001 and 2000, respectively, consisted primarily of interest expense on the First Mortgage Bonds and the amortization costs incurred to issue the bonds.

Facility Construction

     Cottage Grove

          During the year ended December 31, 2000, Cottage Grove agreed to release Westinghouse Electric, the Facility's construction contractor, from performing certain repairs agreed to under the final settlement of the cost to construct the facility and reduced the existing letter of credit from $2.5 million to $2.0 million which was provided to support Westinghouse Electric's obligations to perform certain future maintenance work. In exchange, Westinghouse Electric paid Cottage Grove approximately $0.2 million which the Partnership recorded as an additional gain on sales-type capital lease during the year ended December 31, 2000.

     Whitewater

          During the year ended December 31, 2000, Whitewater agreed to release Westinghouse Electric, the Facility's construction contractor, from performing certain repairs agreed to under the final settlement of the cost to construct the facility and reduced the existing letter of credit from $2.5 million to $2.0 million which was provided to support Westinghouse Electric's obligations to perform certain future maintenance work. In exchange, Westinghouse Electric paid Whitewater approximately $0.2 million which the Partnership recorded as an additional gain on sales-type capital lease during the year ended December 2000.

Liquidity And Capital Resources

     Cottage Grove

          The principal components of operating cash flow for the year ended December 31, 2002 were net income of $6.4 million, a $0.4 million adjustment for amortization of debt issuance and financing costs and a net $0.5 million of cash provided by changes in other working capital assets and liabilities and the amortization of unearned lease income, net of minimum lease payments received of $0.8 million. Cash flow provided by operating activities of $8.1 million was primarily used to make partner distributions of $5.0 million, and repay $2.1 million of First Mortgage Bonds.

     Whitewater

          The principal components of operating cash flow for the period ended December 31, 2002 were net income of $6.4 million, a $0.8 million adjustment for depreciation and amortization of debt issuance and financing costs, and minimum lease payments received, net of amortization of unearned lease income of $1.9 million which were offset by a net $0.5 million of cash used by changes in other working capital assets and liabilities. Cash flow provided by operating activities of $8.6 million was primarily used to make partner distributions of $5.0 million, and repay $2.4 million of First Mortgage Bonds.

     Rating Agency Action

          On March 11, 2003, Moody's Investor Services ("Moody's") announced its decision to downgrade the rating of the LS Power Funding senior unsecured bonds from Baa2 to Baa3 as a result of lower than forecasted debt service coverage ratios, forced outages incurred during 2002 and a decline in credit quality of its gas suppliers. Moody's has deemed the rating outlook to be negative.

     Other Financial Information

          On February 4, 2002, Whitewater experienced an unplanned outage as a result of failure of certain components within the Facility's combustion turbine. Repairs to the components were made and operations restarted on February 17, 2002. The Partnership currently estimates the total cost of the outage to be approximately $7.7 million, of which $5.7 million has been covered under the Partnership's insurance policy. The Facility's portion of the cost of this unplanned outage was covered by cash flow from operations and management believes that this event will not adversely affect Whitewater's ability to meet its First Mortgage Bond obligations.

          On September 9, 2002, Cottage Grove experienced an unplanned outage as a result of failure of certain components within the Facility's combustion turbine. Repairs to the components were made and operations restarted on September 23, 2002. The Partnership currently estimates the total cost of the outage to be approximately $1.3 million, none of which will be covered under the Partnership's insurance policy. Of this amount, approximately $1.0 million is currently subject to dispute and may be recovered by Cottage Grove. Management expects that the cost of this unplanned outage will be covered by cash flow from operations and does not believe that this event will adversely affect Cottage Grove's ability to meet its First Mortgage Bond obligations.

          During February 2003, Cottage Grove experienced an additional unplanned outage. This outage may reduce Cottage Grove's bonus peak period capacity payment by approximately $0.3 million for the year ending December 31, 2003.

          Both Cottage Grove and Whitewater are required to maintain a debt service reserve fund as required by certain financing documents. During 1999 and 1998, the Partnerships transferred the debt service reserve funds to Cogentrix Energy. The required debt service funds at December 31, 2002, equal to $7.2 million and $8.2 million for Cottage Grove and Whitewater, respectively, are included on the respective balance sheets as Note Receivable from Affiliate. The receivables are backed by an irrevocable letter of credit from Cogentrix Energy, Inc.

          Each partnership maintains a letter of credit facility which expires in July 2007. These facilities provide for letters of credit in a face amount not to exceed $8.0 million for Whitewater and $8.5 million for Cottage Grove that may be drawn on by the respective Partnership from time to time. Such letters of credit will satisfy certain requirements of the Partnerships under various project agreements. As of September 30, 2002, a $0.5 million letter of credit was outstanding under the Cottage Grove letter of credit facility to secure certain obligations of Cottage Grove under the Cottage Grove Power Purchase Agreement and there were no amounts outstanding under the Whitewater letter of credit facility.

          The Partnerships expect that payments from the utilities under the Power Purchase Agreements will provide the substantial majority of the revenues of each of the Partnerships. Under and subject to the terms of the Power Purchase Agreements, each utility is obligated to purchase electric capacity made available to it and energy that it requests from the related Partnership. For additional information regarding NSP and WEPCO, reference is made to the respective Annual Reports filed on Form 10-K, the Quarterly Reports filed on Form 10-Q, proxy, and any other filings made by NSP and WEPCO with the Securities and Exchange Commission (the "Commission").

          The Power Purchase Agreements are dispatchable contracts that provide the utilities with the ability to suspend or reduce purchases of electricity from the Facilities. The Power Purchase Agreements are structured such that the Partnerships will continue to receive capacity payments during any period of dispatch. Each Partnership is dependent on capacity payments under its Power Purchase Agreement to meet its fixed obligations, including the payment of debt service under each Partnership's First Mortgage Bonds (which will be Funding's sole source of revenues for payment of debt service under the Senior Secured Bonds). Capacity payments by each of NSP and WEPCO are based on the tested capacity and availability of the Facilities and are unaffected by levels of dispatch. Each Facility's capacity is subject to semi-annual verification through testing. Capacity payments are subject to reduction if a Facility is operating at reduced or degraded capacity at the time of such test, although each Facility is permitted a retest subject to certain retest limitations. Also, capacity payments for each Facility are subject to reduction if the respective Facility does not maintain certain minimum levels of availability. Under the Cottage Grove Power Purchase Agreement, capacity payments are further adjusted by, among other things, the capacity loss factor, which is determined in accordance with procedures jointly agreed to by Cottage Grove and NSP. The Partnerships expect to achieve the minimum capacity and availability levels; however, any material shortfall in tested capacity or availability over a significant period could result in a shortage of funds to the Partnerships.

          Each Partnership presently believes that funds available from cash and investments on hand, restricted funds, operations and letter of credit and working capital facilities will be more than sufficient to liquidate each partnership's obligations as they come due, pay project debt service and make required contributions to project reserve accounts.

          As with any power generation facility, operation of the Facilities involves certain risks, including the performance of a Facility below expected levels of output or efficiency, interruptions in fuel supply, pipeline disruptions, disruptions in the supply of thermal or electrical energy, power shut-downs due to the breakdown or failure of equipment or processes, violation of permit requirements (whether through operation or change in law), operator error, labor disputes or catastrophic events such as fires, earthquakes, explosions, floods or other similar occurrences affecting a Facility or its power purchasers, thermal energy purchasers, fuel suppliers or fuel transporters. The occurrence of any of these events could significantly reduce or eliminate revenues generated by a Facility or significantly increase the expenses of that Facility, thereby impacting the ability of a Partnership to make payments of the amounts necessary to fund principal of a nd interest on its First Mortgage Bonds, and consequently Funding's ability to make payments of principal of and interest on the Senior Secured Bonds. Not all risks are insured and the proceeds of such insurance applicable to covered risks may not be adequate to cover a Facility's lost revenues or increased expenses. In addition, extended unavailability under the Power Purchase Agreements, which may result from one or more of such events, may entitle the respective Power Purchaser to terminate its Power Purchase Agreement.

Impact Of Energy Price Changes, Interest Rates And Inflation

          The Partnerships have attempted to mitigate the risk of increases in fuel and transportation costs by providing contractually for matching increases in the energy payments the Partnerships receive from the utilities purchasing electricity generated by the Facilities. In addition, the Partnerships have hedged against the risk of fluctuations in interest rates by arranging fixed-rate financing.


          The Cottage Grove and Whitewater Facilities each have gas supply contracts with two suppliers that in the aggregate provide 100% of the expected gas requirements of each Facility. One of the gas supply contracts at each Facility is with Dynegy and the other supply contract is with Aquila. The gas price components of the Aquila and Dynegy gas supply agreements are priced at market based indices and are structured to provide matching changes in energy payments under the Whitewater and Cottage Grove PPAs. Included within these gas supply agreements is a provision whereby Whitewater and Cottage Grove may select to pay a monthly fixed fee as consideration for the right to elect to purchase a daily quantity of gas priced at the TOK or first-of-the-month spot market price (the "Fuel Selection Fee"). Cottage Grove and Whitewater can each purchase up to 40% of its contracted gas supplies under the option structure. The remaining 60% of the gas requirement s are priced at the TOK price, or daily spot price. The U.S. gas market is currently experiencing a tightening of gas supplies, increased gas prices, and increased price volatility and, consequently, the Fuel Selection Fees are anticipated to be more costly. During 2002, a number of events negatively impacted the business and prospects of Dynegy and Aquila resulting in downgrades in the credit ratings of Dynegy and Aquila to non-investment grade by each of the major rating agencies. A failure to perform under the gas supply contracts by either Dynegy or Aquila may have a material adverse effect on Whitewater and Cottage Grove. While management believes that alternative natural gas supplies at market-based prices can be obtained so as to ensure against interruption, no assurance can be given that the replacement arrangements would have terms commercially equivalent to the Dynegy and Aquila contracts.

Critical Accounting Policies

     General

          The Partnerships prepare their financial statements in accordance with accounting principles generally accepted in the United States. This involves the use of certain estimates, judgments and assumptions which affect the reported amounts of assets and liabilities as well as revenues and expenses during the periods reported. The Partnerships have identified critical accounting policies which are significant factors to understanding and evaluating the financial statements.

     Long-Lived Assets

          The Partnerships evaluate the impairment of their long-lived assets, including net investment in leases, based on the projection of undiscounted cash flows, when a change in circumstances or events indicate that the carrying amount of an asset or group of assets may no longer be recoverable. Estimates of future cash flows used to test the recoverability of specific long-lived assets are based on expected cash flows from the use and eventual disposition of the assets. A significant reduction in actual and estimated cash flows could have a material adverse impact on the financial results.


PART II/ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          See financial statements commencing at F-1.


PART II/ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

          The information required with respect to changes in Funding's and the Partnerships' accountants was previously reported in the Current Report on Form 8-K of the Company filed on August 7, 2002 and is incorporated by reference into the Annual Report on Form 10-K.


PART III/ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors And Executive Officers Of The General Partners

          Each Partnership Agreement provides that all management functions of the respective Partnership are the responsibility of the General Partner, subject to certain conditions and limitations. All of the stock of each General Partner is owned by an indirect wholly-owned subsidiary of Cogentrix Energy. Certain officers of Cogentrix Energy concurrently serve as officers of the General Partner.

          The following table sets forth the names and positions of the directors and executive officers of each General Partner. Each of these individuals was elected or appointed to his position on March 20, 2002. Directors are elected annually and each elected director holds office until a successor is elected. Officers are chosen from time to time by vote of the board of directors.

          Mark F. Miller is the President, Chief Operating Officer and a Director of Cogentrix Energy. Prior to joining Cogentrix Energy in May 1997, Mr. Miller was Vice President for Northrop Grumman in Bethpage, New York. He joined Northrop Grumman in 1982 and held successive positions in the material, law and contracts departments before being named Vice President, Contracts and Pricing at Northrop's B-2 Division in 1991. In 1993, he became Vice President Business Management at the B-2 Division. In 1994, Northrop acquired the Grumman Corporation and Mr. Miller was named Vice President Business Management for the newly formed Electronics and Systems Integration Division, a position he held until his move to Cogentrix Energy. From 1980 to 1982, he was an associate with the law firm of Dolack, Hansler.

          Thomas F. Schwartz has been Senior Vice President - Finance and Chief Financial Officer since December 1999. From March 1997 until then he was Senior Vice President - Finance and Treasurer of Cogentrix Energy, prior to which he was Vice President - Finance and Treasurer since Cogentrix Energy's formation. Previously, Mr. Schwartz was Controller of Cogentrix, Inc. since April 1991. Prior to joining Cogentrix, he was an audit manager with Arthur Andersen LLP's Small Business Advisory Division.

          Bruno R. Dunn has been Senior Vice President Operations since joining Cogentrix Energy in January 1999. Immediately prior to joining Cogentrix Energy, Mr. Dunn was Vice President Operations of Wheelabrator Technologies, Inc., an independent power and environmental services and products company as well as Vice President Operations of Wheelabrator Environmental Systems, Inc., the waste to energy and cogeneration subsidiary of Wheelabrator Technologies. From 1988 to 1995 Mr. Dunn was Vice President Construction for Wheelabrator Technologies, Inc. From 1980 to 1988 Mr. Dunn was a project manager and/or operations manager for various Wheelabrator trash-to-energy facilities.

          Dennis W. Alexander has been Senior Vice President, General Counsel, Secretary and a Director of Cogentrix Energy since February 1994. Immediately prior to joining Cogentrix Energy, Mr. Alexander was Vice President/General Counsel of Wheelabrator Environmental Systems Inc., the waste-to-energy and cogeneration subsidiary of Wheelabrator Technologies Inc., an independent power and environmental services and products company, as well as Director, Environmental, Health and Safety Audit Program for Wheelabrator Technologies Inc. From 1988 to 1990, Mr. Alexander was Vice President/General Counsel - Operations of Wheelabrator Environmental Systems Inc. and from 1986 to 1988 was Vice President/General Counsel of Wheelabrator Energy Systems, a cogeneration project development subsidiary. From 1984 to 1986, he served as Group General Counsel for The Signal Company and from 1980 to 1984 as Division General Counsel of Wheelabrator-Frye Inc., each a diversified public company.

Directors And Executive Officers Of Funding

          The following table sets forth the names and positions of the individuals who are the directors and executive officers of Funding.

          Directors are elected annually and each elected director holds office until a successor is elected. Officers will be chosen from time to time by vote of the board of directors.

          For biographical information on each of the above listed persons other than Mr. Christiansen, see "-Directors and Executive Officers of the General Partners" above.

          Dean A. Christiansen is President of Lord Securities Corporation of New York, NY, which provides third-party financial services in support of asset securitization and structured finance transactions through conduit administration, independent governance services, and ownership and management of special purpose entities formed in connection with the issuance of commercial paper and other forms of securitized debt. Prior to joining Lord Securities Corporation, in 1990 he founded Acacia Capital, Inc., a New York City based corporate finance advisory firm. Mr. Christiansen is a 1983 graduate of the University of Notre Dame with a degree in Government, and his additional academics include four years of Aerospace Engineering and one year of Biblical studies. Mr. Christiansen serves as a member of the board of directors of Structural Concepts Corporation of Muskegon, Michigan, is on the board of advisors of Asia Capital Group, Ltd. of New York and Beijing, China, and is a member of the board of directors of Capital Markets Engineering & Trading, LLC of New York. Mr. Christiansen is series 7, series 63, and series 24 registered.


PART III/ITEM 11.   EXECUTIVE COMPENSATION

          None of the officers or directors of Funding or the General Partners has received or, it is anticipated, will receive compensation for their services from Funding or from the General Partners except that Lord Securities is paid a fee for providing the services of Mr. Abedine and Mr. Christiansen. The directors and executive officers of Cogentrix Energy are compensated by Cogentrix Energy and are not entitled to any direct compensation from the Partnerships. However, Cogentrix Energy is paid a management fee and is reimbursed for certain expenses by the Partnerships as described under Part III/Item 13 - "Certain Relationships and Related Transactions".


PART III/ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                                        MANAGEMENT

          The following information is given with respect to the partnership interests in LSP-Cottage Grove, L.P.:

          The following information is given with respect to the partnership interests in LSP-Whitewater Limited Partnership:

          Except as specifically provided or required by law, the limited partners of Cottage Grove and Whitewater may not participate in the management or control of the respective Partnerships. Thus, although each General Partner has a 1% interest in its Partnership, it has sole responsibility for the management of such Partnership. All of the outstanding capital stock of each of the General Partners is owned by an indirect subsidiary of Cogentrix Energy. See Part III/Item 13 - "Certain Relationships and Related Transactions".

          The following information is given with respect to the beneficial ownership of the outstanding capital stock of Funding:

PART III/ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          Each Partnership believes that, taking into consideration all of their terms and conditions, the transactions with the related parties described below were at least as favorable to it as those which could have been obtained from unrelated parties in arms-length transactions.

          Cogentrix Energy.  Cogentrix Energy has provided certain management services to each Partnership pursuant to the Management Services Agreements ("MSAs"). Under the MSAs, Cogentrix Energy manages the business affairs of each Partnership and is responsible for supervising each Partnership's, and monitoring each counterparty's, compliance with all contracts to which each Partnership is a party. Under the MSAs, each Partnership currently pays Cogentrix Energy as compensation for its services a monthly management fee which escalates annually pursuant to a rate of change in a consumer-price related index. Cogentrix Energy is also reimbursed for its reasonable and necessary expenses incurred in performing its services, including the salaries of its personnel to the extent related to services required under the MSAs. The amounts payable by each Partnership to Cogentrix Energy under the MSAs are designated as operating expenses under the dep ository agreements and therefore are paid prior to interest and principal on such Partnership's First Mortgage Bonds. For the years ended December 31, 2002 and 2001, Cogentrix Energy received payments pursuant to the MSAs of approximately $1,123,000 and $1,075,000, in the aggregate, respectively. Beginning in November 2002, Cogentrix Energy began providing fuel management services to each Partnership and will charge each Partnership $54,000 per year for these services.

          FloriCulture.  FloriCulture is a single purpose corporation formed to operate the Greenhouse for the benefit of Whitewater and is an indirect, wholly-owned subsidiary of Cogentrix Energy. Under the Greenhouse Operational Services Agreement, FloriCulture is required to provide all the services necessary to produce, market, and sell horticultural products and to operate and maintain the Greenhouse. As compensation for its services, FloriCulture is reimbursed on a monthly basis for its approved costs in connection with conducting the Greenhouse business and operating the Greenhouse, and receives an annual management fee equal to 16% of Floriculture's net profit attributable to the operation of the Greenhouse. The term of the Greenhouse Operational Services Agreement will expire on May 31, 2022. For the years ended December 31, 2002 and 2001, FloriCulture earned a management fee pursuant to the Greenhouse Operational Services Agreement of approximately $52,000 and $61,000, respectively.

          LSP-Cottage Grove, Inc.  LSP-Cottage Grove, Inc. is the general partner of Cottage Grove and an indirect wholly-owned subsidiary of Cogentrix Energy. LSP-Cottage Grove, Inc. has no assets other than its general partnership interest in Cottage Grove. The officers of LSP-Cottage Grove, Inc. concurrently serve as officers of Cogentrix Energy but do not receive compensation in the former capacity. LSP-Cottage Grove, Inc. is a party to the MSA with Cogentrix Energy. On March 16, 1999, Cottage Grove exercised an option under its O&M Agreement to terminate its Agreement with Westinghouse Services effective April 15, 1999. Pursuant to this occurrence, an O&M Agreement substantially similar to the previously existing agreement was executed with the general partner. Amounts paid to the general partner from the partnership under the new O&M Agreement approximated $680,000 and $663,000 for the years ended December 31, 2002 and 2 001, respectively.

          LSP-Whitewater I, Inc.  LSP-Whitewater I, Inc. is the general partner of Whitewater and is an indirect wholly-owned subsidiary of Cogentrix Energy. LSP-Whitewater I, Inc. has no assets other than its general partnership interest in Whitewater. The officers of LSP-Whitewater I, Inc. concurrently serve as officers of Cogentrix Energy but do not receive compensation in the former capacity. LSP-Whitewater I, Inc. is a party to the MSA with Cogentrix Energy. On March 16, 1999, Whitewater exercised an option under its O&M Agreement to terminate its Agreement with Westinghouse Services effective April 15, 1999. Pursuant to this occurrence, an agreement substantially similar to the previously existing O&M Agreement was executed with the general partner. Amounts paid to the general partner from the partnership under the new O&M Agreement approximated $539,000 and $527,000 for the years ended December 31, 2002 and 2001, respect ively.

Relationship Of Funding And The Partnerships

          Each Partnership owns 50% of the capital stock of Funding. Each Partnership has designated Funding as its agent for certain purposes including issuing the Senior Secured Bonds. Each Partnership has indemnified Funding against all claims arising in connection with Funding's performance of its obligations.


PART III/ITEM 14.   CONTROLS AND PROCEDURES

          Our President and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in rule 13a-14 (c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Partnership's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to Funding, Cottage Grove and Whitewater required to be included in our periodic filings under the Exchange Act. Since the Evaluation Date, there have not been any significant changes in our internal controls or in their factors that could significantly affect such controls.


PART IV/ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K

(a) (1) Financial Statements

          See Index to Financial Statements on page F-1.

(a) (2) Financial Statement Schedules

          All schedules are omitted since the information is not required or because such information is included in the financial statements and notes thereto.

(a) (3) Exhibits

          The exhibits listed on the accompanying Exhibits Index are filed as part of this report.

(b)      Reports On Form 8-K

SIGNATURES: Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


LS POWER FUNDING CORPORATION


By:           /s/  Mark F. Miller                                    
          Name:  Mark F. Miller
          Title:    President (Principal Executive Officer)
          Date:    March 31, 2003

          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURES: Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


LSP-COTTAGE GROVE, L.P.

By:     LSP-Cottage Grove, Inc.
Its:      General Partner


By:           /s/  Mark F. Miller                                    
          Name:  Mark F. Miller
          Title:    President (Principal Executive Officer)
          Date:    March 31, 2003

          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURES: Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


LSP-Whitewater Limited Partnership

By:     LSP-Whitewater I, Inc.
Its:     General Partner


By:           /s/  Mark F. Miller                                    
          Name:  Mark F. Miller
          Title:    President (Principal Executive Officer)
          Date:    March 31, 2003


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

          I, Mark F. Miller, certify that:

          I, Thomas F. Schwartz, certify that:

The Board of Directors
LS Power Funding Corporation:

We have audited the 2002 financial statements of LS Power Funding Corporation as listed in the accompanying index. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The 2001 and 2000 financial statements of LS Power Funding Corporation as listed in the accompanying index were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 7, 2002.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of LS Power Funding Corporation as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.


                                                                                                                         /s/ KPMG LLP        


March 26, 2003
Charlotte, North Carolina

The accompanying notes to the financial statements are an integral part of these statements.

The accompanying notes to the financial statements are an integral part of these statements.

The accompanying notes to the financial statements are an integral part of these statements.

The accompanying notes to the financial statements are an integral part of these statements.

1.   ORGANIZATION

          LS Power Funding Corporation ("Funding"), a Delaware corporation, was established on June 23, 1995 as a special purpose funding corporation to issue debt securities in connection with financing the construction of two gas-fired cogeneration facilities, one located in Cottage Grove, Minnesota and the other located in Whitewater, Wisconsin. LSP-Cottage Grove, L.P. ("Cottage Grove") and LSP-Whitewater Limited Partnership ("Whitewater") are single purpose Delaware limited partnerships established to develop, finance, construct and own the Cottage Grove and Whitewater facilities, respectively. Cottage Grove and Whitewater each own 50% of the outstanding stock of Funding. Funding's sole business activities are limited to maintaining its organization, the offering of the Senior Secured Bonds, and its acquisition of the First Mortgage Bonds issued by Cottage Grove and Whitewater.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Income Taxes

          Funding does not record a tax provision as it has no reportable book or taxable income, and there is no difference between Funding's book bases and tax bases of its existing assets and liabilities. Due to the nature of Funding's structure as a single purpose funding corporation, Funding is not expected to produce book or taxable income in future periods.

Use Of Estimates

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Guarantees

          In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on Funding's results of ope rations, financial position or cash flows. Funding adopted the disclosure provisions of this interpretation for the year ended December 31, 2002. Cottage Grove and Whitewater have indemnified Funding against all claims arising in connection with Funding's performance of its obligations.

3.   INVESTMENT IN FIRST MORTGAGE BONDS

          Investment in First Mortgage Bonds consisted of the following at December 31, 2002 and 2001 (dollars in thousands):

          The First Mortgage Bonds issued by Cottage Grove and Whitewater are secured by substantially all of the assets of the respective partnership. The collateral securing the obligations of one partnership does not secure the obligations of the other partnership. The fair value, based on third party market quote, of Funding's investment in the First Mortgage Bonds at December 31, 2002 and 2001, respectively, was approximately $44,736,000 higher and $13,805,000 lower than the historical carrying value.

          The following are summarized balance sheets as of December 31, 2002 and 2001 and statements of income for the years ended December 31, 2002, 2001 and 2000 (dollars in thousands) of Cottage Grove and Whitewater:

4.   SENIOR SECURED BONDS PAYABLE

          Senior Secured Bonds Payable consisted of the following at December 31, 2002 and 2001 (dollars in thousands):

          On June 30, 1995, Funding issued and sold $332,000,000 of Senior Secured Bonds. All of the First Mortgage Bonds issued by Cottage Grove and Whitewater were purchased with the entire proceeds from Funding's Senior Secured Bonds. The repayment terms of the Partnership's First Mortgage Bonds collectively coincide with those of Funding's Senior Secured Bonds. Interest is payable semi-annually on June 30 and December 30 of each year. Principal on the bonds is also payable semi-annually in varying amounts through June 30, 2010 for the 2010 Bonds, and beginning on December 30, 2010 for the 2016 Bonds.

          Collective future maturities of the Senior Secured Bonds as of December 31, 2002 were as follows (dollars in thousands):

          Funding's Senior Secured Bonds are secured primarily by a pledge of Funding's investment in the Partnership's First Mortgage Bonds. Since Funding is a special purpose corporation formed to issue the Senior Secured Bonds, Funding's ability to make payments of principal and interest on the Senior Secured Bonds is entirely dependent on Cottage Grove's and Whitewater's performance of its obligations under its First Mortgage Bonds. The obligations of Cottage Grove and Whitewater under their First Mortgage Bonds are obligations solely of the respective partnerships.

          The trust indenture for the Senior Secured Bonds contains certain covenants including, among others, limitations or restrictions relating to the use of the proceeds of the First Mortgage Bonds, actions with respect to the Partnership's First Mortgage Bonds, and additional debt other than the Senior Secured Bonds. The trust indenture also describes events of default of the Senior Secured Bonds, which include, among others, events involving bankruptcy of Funding and the failure of Cottage Grove and Whitewater to own 100% of the capital stock of Funding. Funding is in compliance with all of these covenants at December 31, 2002.

          The fair value, based on a third-party market quote, of the Senior Secured Bonds at December 31, 2002 and 2001 was approximately $44,736,000 higher and $13,805,000 lower, respectively, than the carrying value.

The Partners of
LSP-Cottage Grove, L.P.:

We have audited the 2002 financial statements of LSP-Cottage Grove, L.P. as listed in the accompanying index. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. The 2001 and 2000 financial statements of LSP-Cottage Grove, L.P. as listed in the accompanying index were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 7, 2002.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of LSP-Cottage Grove, L.P. as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.


                                                                                                                               /s/ KPMG LLP      

March 26, 2003
Charlotte, North Carolina

The accompanying notes to the financial statements are an integral part of these statements.

The accompanying notes to the financial statements are an integral part of these statements.

The accompanying notes to the financial statements are an integral part of these statements.

The accompanying notes to the financial statements are an integral part of these statements.

1.   ORGANIZATION AND NATURE OF BUSINESS

          LSP-Cottage Grove, L.P. (the "Partnership") is a Delaware limited partnership that was formed on December 14, 1993 to develop, finance, construct and own a gas-fired cogeneration facility with a design capacity of approximately 245 megawatts located in Cottage Grove, Minnesota (the "Facility"). Construction and start-up of the Facility was substantially completed and commercial operation commenced October 1, 1997 (the "Commercial Operations Date"). The 1% general partner of the Partnership is LSP-Cottage Grove, Inc. ("LSP-Cottage Grove"), a wholly-owned subsidiary of Cogentrix Cottage Grove, LLC ("Cogentrix"), a limited liability company. Cogentrix and TPC Cottage Grove, Inc. ("TPC"), a Delaware corporation, were the sole limited partners of the Partnership, owning approximately 72% and 27% limited partnership interests, respectively. On September 4, 2002, TPC converted to a limited liability company and changed its name to FPP Cottage Grove, LLC ("FPP") in conjunction with the purchase of its parent company, TPC Funding, LLC, by Fort Point Power, LLC. The ultimate parent of Cogentrix is Cogentrix Energy, Inc. ("Cogentrix Energy"), a North Carolina corporation.

          The Partnership holds a 50% equity ownership interest in LS Power Funding Corporation ("Funding"), which was established on June 23, 1995 as a special purpose funding corporation to issue debt securities (the "Senior Secured Bonds") in connection with financing construction of the Facility and a similar gas-fired cogeneration facility located in Whitewater, Wisconsin (the "Whitewater Facility"). On June 30, 1995, a portion of the proceeds from the offering and sale of the Senior Secured Bonds issued by Funding was used to purchase $155,000,000 of First Mortgage Bonds issued simultaneously by the Partnership.

          All of the electric capacity and energy generated by the Facility is sold to a major regulated utility, Northern States Power Company ("NSP" or, as the context requires, the "Utility"), under a 30-year power purchase agreement (the "Power Purchase Agreement") which runs through October 2027. The thermal energy generated by the Facility is sold in the form of steam to Minnesota Mining and Manufacturing Company ("3M" or, as the context requires, the "Steam Purchaser") under a 30-year thermal energy sales agreement (the "Steam Supply Agreement") which runs through October 2027.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash And Cash Equivalents

          Cash and cash equivalents include unrestricted bank deposits and short-term investments with original maturities of three months or less.

Restricted Cash

          The majority of the revenue received by the Partnership is required to be deposited into accounts administered by the trustee under the trust indenture for the First Mortgage Bonds (the "Trustee"). The Trustee invests funds held in these accounts at the direction of the Partnership. The funds are invested in commercial paper, high grade government money market funds and overnight repurchase obligations secured by U.S. Treasury Notes. The investments are carried at cost, which approximated market value at December 31, 2002 and 2001. In addition, special accounts are established to provide for major maintenance reserves. Amounts held by the Trustee in accounts designated for major maintenance, which might otherwise be considered cash equivalents, are treated as restricted cash.

Sales-Type Capital Lease

          The Power Purchase Agreement described in Note 9 has characteristics similar to a lease in that the agreement confers to the Utility the right to use specific property, plant and equipment and accordingly the Partnership accounted for the Power Purchase Agreement as a "sales-type" capital lease in accordance with Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases" (see Note 4).

Debt Issuance and Financing Costs

          Debt issuance and other financing costs, which include commitment fees, legal fees and other direct costs of obtaining financing, are deferred and amortized over the term of the related debt.

Note Receivable from Affiliate

          At December 31, 2002 and 2001, the Partnership had a note receivable from Cogentrix Energy. This amount represents funds required to be held on account for debt service. The note receivable is backed by a letter of credit issued to the Partnership. The note receivable bears interest at the three-month LIBOR rate plus 0.25%, and is due December 15, 2016.

Lease Revenue

          Lease revenue represents the amortization of unearned income on the lease using the effective interest rate method, as well as contingent rentals that result from changes in payment escalators occurring subsequent to the Commercial Operations Date. These contingent rentals are not expected to materially change the lease revenue recognized over the life of the Power Purchase Agreement.

Service Revenue

          Service revenue represents reimbursement to the Partnership of costs incurred to operate the Facility and to provide variable electric energy to the Utility and thermal energy to the Steam Purchaser. Service revenue is recorded based upon output delivered at rates specified under the Power Purchase Agreement.

Commodity Sales

          Commodity sales consist primarily of sales of excess natural gas fuel inventory, including amounts remarketed directly to third parties and related parties.

Cost of Services

          Cost of services represents expenses related to operating the Facility and providing variable electric energy to the Utility as well as thermal energy to the Steam Purchaser.

Income Taxes

          Under current tax laws, income or loss of partnerships is included in the income tax returns of the partners. Accordingly, the Partnership makes no provision for federal and state income taxes.

Use of Estimates

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

          Certain reclassifications have been made to the prior period financial statements to conform to the classifications used in the financial statements as of and for the year ended December 31, 2001.

Derivatives and Hedging Activities

          On January 1, 2001, the Partnership adopted Financial Accounting Standards Board ("FASB") SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, requires the fair value of derivative instruments to be recorded on the balance sheet as an asset or liability. Changes in the fair value of derivative financial instruments are either recognized periodically in income or partners' capital (as a component of other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flow. The Partnership has reviewed all of its financial instruments and has determined that they do not meet the definition of a derivative under SFAS No. 133 or that they are excluded from the accounting treatment of SFAS No. 133 as a result of qualifying for the normal purchase and sale exception under the statement.

Recently Issued Accounting Pronouncements

          On January 1, 2002, the Partnership adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption of this pronouncement had no impact on the accompanying financial statements. This statement requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. The standard also expanded the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Partnership reviews its long-lived assets for impairment whenever events occur or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review is based on various analyses, including undiscounted cash flow projections. An impairment charge is recognized for those assets that are not recoverable. Assets held for sale are recorded at the lesser of book value or fair value less cost to sell. In management's opinion, at December 31, 2002, the carrying value of the Partnership 's long-lived assets is recoverable in all material aspects. Prior to the adoption of SFAS No. 144, the Partnership accounted for its assets in accordance with SFAS No. 121, "Accounting for Long-Lived Assets and Long-Lived Assets to be Disposed of."

          In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires companies to record a liability relating to the retirement and removal of assets used in their business. The liability is discounted to its present value, and the related asset value is increased by the amount of the resulting liability. Over the life of the asset, the liability will be accreted to its future value and eventually extinguished when the asset is taken out of service. The provisions of this statement are effective for fiscal years beginning after June 15, 2002. The Partnership is completing its evaluation of the impact of this pronouncement and does not expect the adoption to have a material impact to the Partnership's financial condition or results of operations.

          In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections." SFAS No. 4 had required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 rescinds SFAS No. 4 and the related required classification gains and losses from extinguishment of debt as extraordinary items under certain circumstances. Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No.145 is applicable for the Partnership beginning January 1, 2003, with the provisions related to SFAS No. 13 for transactions occurring after May 15, 2002. The Partnership is currently evaluating the impact of adoption of SFAS No. 145.

          In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Partnership's results of operations, financial position or ca sh flows. The Partnership adopted the disclosure provisions of this interpretation for the year ended December 31, 2002. The Partnership, along with the Whitewater Facility, has indemnified Funding against all claims arising in connection with Funding's performance of its obligations.

3.   INVENTORIES

          Fuel inventories consisted of the following (dollars in thousands):

          Natural gas inventory, including fuel held for resale, is stated at cost based on the last-in, first-out method and fuel oil is stated at cost based on the first-in, first-out method.

          Spare parts inventories are recorded at average cost. Spare parts inventories of $338,000 and $384,000 as of December 31, 2002 and 2001, respectively, that are held to minimize unscheduled maintenance outages and that are not expected to be utilized within the next year are classified as other long-term assets in the accompanying balance sheets.

4.   SALES-TYPE CAPITAL LEASE

          Upon the Commercial Operations Date of the Facility, the Partnership recognized a gain on sales-type capital lease of $87,056,000 reflecting the difference between the estimated fair market value ($233,635,000) and the historical cost ($146,579,000) of the Facility. The interest rate implicit in the lease is 9.01%. The estimated residual value of the Facility at the end of the lease term is $0. The components of the net investment in lease were as follows (dollars in thousands):

          Gross investment in lease represents total capacity payments receivable over the life of the Power Purchase Agreement, net of executory costs, which are considered minimum lease payments in accordance with SFAS No. 13.

          Estimated minimum lease payments over the remaining term of the Power Purchase Agreement as of December 31, 2002, were as follows (dollars in thousands):

5.   INVESTMENT IN UNCONSOLIDATED AFFILIATE

          Investment in unconsolidated affiliate represents the Partnership's 50% ownership interest in Funding. The Partnership's investment in Funding is accounted for using the equity method. The following is summarized financial information for Funding (dollars in thousands):

Statement Of Income Data:

Balance Sheet Data:

6.   FIRST MORTGAGE BONDS PAYABLE

          First Mortgage Bonds payable consisted of the following (dollars in thousands):

          On June 30, 1995, the Partnership issued and sold $155,000,000 of First Mortgage Bonds to Funding. The bonds are secured by substantially all assets of the Partnership. Interest is payable semi-annually on June 30 and December 30 of each year. Principal on the First Mortgage Bonds is also payable semi-annually in varying amounts through June 30, 2010 for the 2010 Bonds, and beginning on December 30, 2010 for the 2016 Bonds. Collective future maturities of the First Mortgage Bonds as of December 31, 2002 were as follows (dollars in thousands):

          The trust indenture and other financing documents for the First Mortgage Bonds include a number of covenants with which the Partnership must comply. These covenants include, among others, compliance with certain reporting requirements and limitations of activities relating to the bond proceeds, additional debt, new and existing agreements, partnership distributions and other activities. The trust indenture also describes events of default of the First Mortgage Bonds, which include, among others, certain events involving bankruptcy of the Partnership and failure to maintain and comply with agreements made by the Partnership. The Partnership is in compliance with all agreements at December 31, 2002.

7.   CREDIT AGREEMENT

          The Partnership's original credit agreement, which was to have expired on its terms in June 2002, was extended through July 2007 with a new bank. The agreement provides for working capital loans of up to $3,000,000 and letter of credit commitments of up to $5,500,000 (the "Credit Agreement"). The interest rate for loans made under the Credit Agreement is based upon various short-term indices at the Partnership's option and is determined separately for each draw. The Credit Agreement includes commitment fees, payable quarterly in arrears, at 0.5% on the daily average unused amount of the commitment until the Credit Agreement is terminated. For all periods through December 31, 2002, no working capital loans had been issued under the Credit Agreement. The Partnership has issued a $500,000 letter of credit under the Credit Agreement to secure certain obligations of the Partnership under the Power Purchase Agreement.

8.   FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISKS

          The majority of the Partnership's trade accounts receivable are from NSP and the associated credit risk is considered limited. The carrying amounts of the Partnership's cash and cash equivalents, accounts receivable, restricted investments held by the Trustee, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The fair value, based on third-party market quote, of the Partnership's First Mortgage Bonds at December 31, 2002 and 2001, was approximately $20,886,000 higher and $6,445,000 higher, respectively, than the carrying value.

9.   COMMITMENTS AND CONTINGENCIES

Construction

          During 2000, the Partnership received a payment of approximately $185,000 in exchange for releasing Westinghouse Electric (the "Contractor") from certain additional repair work agreed to as part of the final settlement of the cost to construct the facility. This amount was included in gain on sales-type capital lease in the accompanying statements of income during the year ended December 31, 2000. In conjunction with this payment, a retainage letter of credit provided by the Contractor to support certain future warranty work was reduced to $2,000,000.

Power Purchase Agreement

          Under and subject to the terms of the Power Purchase Agreement, the Utility is obligated to purchase all of the electric capacity made available to it and all associated energy that the Utility chooses to dispatch from the Facility beginning on the Commercial Operations Date. Payments by the Utility to the Partnership under the Power Purchase Agreement consist of capacity payments and energy payments that fluctuate based upon published indices and/or a fixed schedule.

Thermal Energy Sales

          The Steam Supply Agreement obligates the Partnership to supply all of the Steam Purchaser's steam requirements up to a maximum of 664 million pounds of steam annually at a rate not to exceed 190,000 pounds per hour when the Facility's cogeneration process is operating and 160,000 pounds per hour when the steam is generated by the Facility's auxiliary boilers.

Gas Supply

          The Partnership has 20-year gas supply contracts through October 2017 with two fuel suppliers to provide 100% of the Facility's expected natural gas requirements. The gas supply contracts each provide for the sale of up to 17,060 MMBtu per day of gas to the Partnership. The price paid by the Partnership under the gas supply contracts fluctuates based upon published indices.

          Under the gas supply contracts, the Partnership is subject to annual minimum take requirements that may be satisfied by delivering gas to the Facility, taking gas into storage or remarketing gas to third parties. The Partnership records additional cost when it is determined that the annual minimum take requirements will not be met.

Gas Transportation

          The Partnership has various gas transportation agreements with fuel transportation companies that provide for delivery of gas to the Facility. The price paid by the Partnership under the gas transportation contracts fluctuates based upon published indices.

Operations And Maintenance

          The Facility is operated by LSP-Cottage Grove pursuant to a seven-year operations and maintenance agreement ("O&M Agreement") which expires on September 30, 2009 and can be renewed for two additional seven year terms.

Parts Agreement

          The Partnership has a spare parts agreement (the "Parts Agreement") with Westinghouse Electric. The compensation payable to Westinghouse Electric is an annual fee of $977,000 (escalated annually based upon published indices or adjusted upward based on the operations of the Facility) payable for 15 years through October 2012. Under the terms of the Parts Agreement, Westinghouse Electric provides (i) certain combustion turbine parts and refurbishment services, (ii) other spare parts at discounted prices and (iii) other repair services at direct cost plus a percent mark-up to the Partnership.

Litigation

          The Partnership experiences routine litigation in the normal course of business. Management is of the opinion that none of this routine litigation will have a material adverse effect on the financial position or results of operations of the Partnership.

10.   DEPENDENCE ON THIRD PARTIES

          The Partnership is highly dependent on NSP for purchases of electric generating capacity and energy from its Facility, LSP-Cottage Grove to perform the operation and maintenance of its Facility, and 3M for purchases of thermal energy. In addition, the Partnership has contracted with two gas companies to supply the expected gas requirements of the Facility, and has contracted with a single interstate gas transporter and local gas distributor to transport gas. Any material breach by any one of these parties of their respective obligations to the Partnership could affect the ability of the Partnership to make payments under its First Mortgage Bonds. In addition, bankruptcy or insolvency of certain other parties or defaults by such parties relative to their contractual or regulatory obligations could adversely affect the ability of the Partnership to make payments under its First Mortgage Bonds. If an agreement were to be terminated due to a breach of such agreement, the Partnership's ability to enter into a substitute agreement having substantially equivalent terms and conditions, or with an equally creditworthy third party, is uncertain.

          The Partnership has gas supply contracts with two suppliers that in the aggregate provide 100% of the expected gas requirements of the Facility. One is with Dynegy Marketing and Trade ("Dynegy Marketing"), an indirect wholly-owned subsidiary of Dynegy Holdings, Inc. ("Dynegy") and the other supply contract is with Aquila Energy Marketing Corporation, an indirect wholly-owned subsidiary of Aquila, Inc. ("Aquila"). The gas price components of the Aquila and Dynegy gas supply agreements are priced at market based indices and are structured to provide matching changes in energy payments under the Partnership Power Purchaser Agreement. Included within these gas supply agreements is a provision whereby the Partnership may select to pay a monthly fixed fee as consideration for the right to elect to purchase a daily quantity of gas priced at the TOK price (the "Fuel Selection Fee"). The Partnership can purchase up to 40% of its contracted gas supplies und er this structure. The remaining 60% of the gas requirements are priced at the TOK or first-of-the-month spot price, or daily spot price. The U.S. gas market is currently experiencing a tightening of gas supplies, increased gas prices, and increased price volatility and, consequently, the Fuel Selection Fees are anticipated to be more costly. During 2002, a number of events negatively impacted the business and prospects of Dynegy and Aquila resulting in downgrades in the credit ratings of Dynegy and Aquila to non-investment grade by each of the major rating agencies. A failure to perform under the gas supply contracts by either Dynegy or Aquila may have a material adverse effect on the Partnership. While management of the Partnership believes that alternative natural gas supplies at market-based prices can be obtained so as to ensure against interruption, no assurance can be given that the replacement arrangements would have terms commercially equivalent to the Dynegy and Aquila contracts.

11.   RELATED PARTY TRANSACTIONS

          Certain management services are provided to the Partnership pursuant to management services agreements. Under these agreements, certain companies manage the business affairs of the Partnership. Cogentrix Energy manages the Partnership and is reimbursed for the reasonable and necessary expenses incurred in performing its services, including salaries of its personnel to the extent related to services provided under the agreements. The Partnership incurred expenses of approximately $673,000, $697,000 and $643,000 to Cogentrix Energy during the years ended December 31, 2002, 2001 and 2000, respectively. Beginning in November 2002, Cogentrix Energy began providing fuel management services for the Partnership and will charge Cottage Grove $54,000 per year for these services. At December 31, 2002 and 2001, the Partnership had approximately $51,000 and $43,000, respectively, payable to Cogentrix Energy. Commodity sales include natural gas sales to a related party, LSP-Whitewater Limited Partnership. Total sales approximated $1,329,000, $1,128,000 and $1,202,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Additionally, at December 31, 2002 and 2001, the Partnership had a receivable of approximately $255,000 and $353,000, respectively, from LSP-Whitewater Limited Partnership.

          The Partnership incurred expenses of $680,000, $663,000 and $645,000 to LSP-Cottage Grove for the years ended December 31, 2002, 2001 and 2000, respectively, for services provided under the O&M Agreement. Additionally, at December 31, 2002 and 2001, the Partnership had a payable of approximately $351,000 and $278,000, respectively, to LSP-Whitewater Limited Partnership.

12.   PARTNERS' CAPITAL

          Profits, losses and normal operating distributions are allocated based on the respective partnership interests. Distributions are made in accordance with the trust indenture and other financing documents. Such distributions are subject to the prior satisfaction of a number of conditions including, among others, maintenance of required funding levels in various Trustee accounts and compliance with minimum levels of current and projected debt service coverage.

13.     UNSCHEDULED OUTAGES

          On September 9, 2002, the Partnership experienced an unplanned outage as a result of failure of certain components within the Facility's combustion turbine. Repairs to the components were made and operations restarted September 23, 2002. The Partnership currently estimates the total cost of the outage to be approximately $1,300,000, which is included in cost of services in the statements of income. Of this amount, approximately $1.0 million is currently subject to dispute and may be recovered by Cottage Grove. Management expects that the Partnership's portion of the cost of this unplanned outage will be covered by cash flow from operations and does not believe that this event will adversely affect Cottage Grove's ability to meet its First Mortgage Bonds obligations.

          During February 2003, Cottage Grove experienced an additional unplanned outage. Repairs were made and operations re-started. However, this outage could have an adverse impact on Cottage Grove's bonus peak period capacity payment by approximately $0.3 million for the year ending December 31, 2003.

The Partners of
LSP-Whitewater Limited Partnership:

We have audited the 2002 financial statements of LSP-Whitewater Limited Partnership as listed in the accompanying index. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. The 2001 and 2000 financial statements of LSP-Whitewater Limited Partnership as listed in the accompanying index were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 7, 2002 except with respect to the matter discussed in Note 14 as to which the date was February 17, 2002.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of LSP-Whitewater Limited Partnership as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.


                                                                                                                      /s/ KPMG LLP        

March 26, 2003
Charlotte, North Carolina

The accompanying notes to the financial statements are an integral part of these statements.

The accompanying notes to the financial statements are an integral part of these statements.

The accompanying notes to the financial statements are an integral part of these statements.

The accompanying notes to the financial statements are an integral part of these statements.

1.   ORGANIZATION AND NATURE OF BUSINESS

          LSP-Whitewater Limited Partnership (the "Partnership") is a Delaware limited partnership that was formed on December 14, 1993 to develop, finance, construct and own a gas-fired cogeneration facility with a design capacity of approximately 245 megawatts located in Whitewater, Wisconsin (the "Facility"). Construction and start-up of the Facility was substantially completed and commercial operation commenced September 18, 1997 (the "Commercial Operations Date"). The 1% general partner of the Partnership is LSP-Whitewater I, Inc. ("LSP-Whitewater"), a wholly-owned subsidiary of Cogentrix Whitewater, LLC, a limited liability company ("Cogentrix"). Cogentrix and TPC Whitewater, Inc. ("TPC"), a Delaware corporation, were the sole limited partners of the Partnership, owning approximately 73% and 26% limited partnership interests, respectively. On September 4, 2002, TPC converted to a limited liability company and changed its name to FPP Whitewater, LL C ("FPP") in conjunction with the purchase of its parent company, TPC Funding, LLC, by Fort Point Power, LLC. The ultimate parent of Cogentrix is Cogentrix Energy, Inc. ("Cogentrix Energy"), a North Carolina corporation.

          The Partnership holds a 50% equity ownership interest in LS Power Funding Corporation ("Funding"), which was established on June 23, 1995 as a special purpose Delaware corporation to issue debt securities (the "Senior Secured Bonds") in connection with financing construction of the Facility and a similar gas-fired cogeneration facility located in Cottage Grove, Minnesota (the "Cottage Grove Facility"). On June 30, 1995, a portion of the proceeds from the offering and sale of the Senior Secured Bonds issued by Funding was used to purchase $177,000,000 of First Mortgage Bonds issued simultaneously by the Partnership.

          The Partnership sells up to 236.5 megawatts of electric capacity and associated energy generated by the Facility to a major regulated utility, Wisconsin Electric Power Company ("WEPCO" or, as the context requires, the "Utility") pursuant to a 25-year power purchase agreement (the "Power Purchase Agreement"), as amended, expiring in September 2022. The Partnership may also sell to third parties up to 12 megawatts of electric capacity and any energy that is not dispatched by WEPCO. The thermal energy generated by the Facility is provided in the form of steam to the University of Wisconsin - Whitewater ("UWW") under a steam supply agreement expiring on June 30, 2005.

          The Partnership owns a greenhouse that produces and sells horticultural products (the "Greenhouse") to which the Facility provides hot water. The Partnership has an operations and maintenance agreement with Floriculture, Inc. ("Floriculture") to operate the Greenhouse.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash And Cash Equivalents

          Cash and cash equivalents include unrestricted bank deposits and short-term investments with original maturities of three months or less.

Restricted Cash

          The majority of the revenue received by the Partnership is required to be deposited into accounts administered by the trustee under the trust indenture for the First Mortgage Bonds (the "Trustee"). The Trustee invests funds held in these accounts at the direction of the Partnership. The funds are invested in commercial paper, high grade government money market funds and overnight repurchase obligations secured by U.S. Treasury Notes. The investments are carried at cost, which approximated market value at December 31, 2002 and 2001. In addition, special accounts are established to provide for payments and major maintenance reserves. Amounts held by the Trustee in accounts designated for major maintenance, which might otherwise be considered cash equivalents, are treated as restricted cash.

Sales-Type Capital Lease

          The Power Purchase Agreement described in Note 10 has characteristics similar to a lease in that the agreement confers to the Utility the right to use specific property, plant and equipment and accordingly, the Partnership accounted for the Power Purchase Agreement as a sales-type capital lease in accordance with Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases" (see Note 4).

Greenhouse Facility

          Depreciation on the Greenhouse and related equipment is computed using the straight-line method over 25 years and 10 years, respectively (see Note 5).

Debt Issuance and Financing Costs

          Debt issuance and financing costs, which consist of commitment fees, legal fees and other direct costs to obtain financing, are deferred and amortized over the term of the related debt.

Note Receivable from Affiliate

          At December 31, 2002 and 2001, the Partnership had a note receivable from Cogentrix Energy. This amount represents funds required to be held on account for debt service. The note receivable is backed by a letter of credit issued to the Partnership. The note receivable bears interest at the three-month LIBOR rate plus 0.25%, and is due December 15, 2016.

Lease Revenue

          Lease revenue represents the amortization of unearned income on the lease using the effective interest rate method, as well as contingent rentals that result from changes in payment escalators occurring subsequent to the Commercial Operations Date. These contingent rentals are not expected to materially change the lease revenue recognized over the life of the Power Purchase Agreement.

Service Revenue

          Service revenue represents reimbursement to the Partnership of costs incurred to operate the Facility and to provide variable electric energy to the Utility and thermal energy to UWW. Service revenue is recorded based upon output delivered at rates specified under the Power Purchase Agreement.

Commodity Sales

          Commodity sales consist primarily of sales of excess natural gas fuel inventory, including amounts remarketed directly to third parties and related parties.

Cost of Services

          Cost of services represents expenses related to operating the Facility and providing variable electric energy to the Utility, as well as thermal energy to UWW and the Greenhouse.

Greenhouse Operations

          Greenhouse operating revenues and expenses include all activity specifically related to greenhouse activities, including depreciation on the Greenhouse.

Income Taxes

          Under current tax laws, income or loss of partnerships is included in the income tax returns of the partners. Accordingly, the Partnership makes no provision for federal and state income taxes.

Use of Estimates

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Derivatives and Hedging Activities

          On January 1, 2001, the Partnership adopted Financial Accounting Standards Board ("FASB") SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, requires the fair value of derivative instruments to be recorded on the balance sheet as an asset or liability. Changes in the fair value of derivative financial instruments are either recognized periodically in income or partners' capital (as a component of other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flow. The Partnership has reviewed all of its financial instruments and has determined that they do not meet the definition of a derivative under SFAS No. 133 or that they are excluded from the accounting treatment of SFAS No. 133 as a result of qualifying for the normal purchase and sale exception under the statement.

Recently Issued Accounting Pronouncements

          On January 1, 2002, the Partnership adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption of this pronouncement had no impact on the Partnership's financial statements. This statement requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. The standard also expanded the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Partnership reviews its long-lived assets for impairment whenever events occur or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review is based on various analyses, including undiscounted cash flow projections. An impairment charge is recognized for those as sets that are not recoverable. Assets held for sale are recorded at the lesser of book value or fair value less cost to sell. In management's opinion, at December 31, 2002, the carrying value of the Partnership's long-lived assets is recoverable in all material aspects. Prior to the adoption of SFAS No. 144, the Partnership accounted for its assets in accordance with SFAS No. 121, "Accounting for Long-Lived Assets and Long-Lived Assets to be Disposed of."

          In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires companies to record a liability relating to the retirement and removal of assets used in their business. The liability is discounted to its present value, and the related asset value is increased by the amount of the resulting liability. Over the life of the asset, the liability will be accreted to its future value and eventually extinguished when the asset is taken out of service. The provisions of this statement are effective for fiscal years beginning after June 15, 2002. The Partnership is currently evaluating the effects of this pronouncement. Based on its current evaluation, the Partnership estimates that it will incur a liability in the range of $100,000 to $300,000 for asset retirement obligations on January 1, 2003. The cumulative effect of a change in accounting principle from unrecognized accretion and depreciat ion expense is estimated to be a loss in the range of $50,000 to $150,000.

          In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections." SFAS No. 4 had required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 rescinds SFAS No. 4 and the related required classification gains and losses from extinguishment of debt as extraordinary items under certain circumstances. Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No.145 is applicable for the Partnership beginning January 1, 2003, with the provisions related to SFAS No. 13 for transactions occurring after May 15, 2002. The Partnership is currently evaluating the impact of adoption of SFAS No. 145.

          In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Partnership's results of operations, financial position or ca sh flows. The Partnership adopted the disclosure provisions of this interpretation for the year ended December 31, 2002. The Partnership, along with the Cottage Grove Facility, has indemnified Funding against all claims arising in connection with Funding's performance of its obligations.

3.   INVENTORIES

          Fuel inventories consisted of the following (dollars in thousands):

          Natural gas inventory, including fuel held for resale, is stated at cost based on the last-in, first-out method and fuel oil inventory is stated at cost based on the first-in, first-out method.

          Spare parts inventories are recorded at average cost. Spare parts inventories of $585,000 and $570,000 as of December 31, 2002 and 2001, respectively, that are held to minimize unscheduled maintenance outages and that are not expected to be utilized within the next year are classified as other long-term assets in the accompanying balance sheets.

4.   SALES-TYPE CAPITAL LEASE

          Upon the Commercial Operations Date of the Facility, the Partnership recognized a gain on sales-type capital lease of $97,047,000 reflecting the difference between the estimated fair market value ($261,740,000) and the historical cost ($164,698,000) of the Facility. The interest rate implicit in the lease is 9.79%. The estimated residual value of the Facility at the end of the lease term is $0. The components of the net investment in lease were as follows (dollars in thousands):

          Gross investment in lease represents total capacity payments receivable over the life of the Power Purchase Agreement, net of executory costs, which are considered minimum lease payments in accordance with SFAS No. 13.

          Estimated minimum lease payments over the remaining term of the Power Purchase Agreement as of December 31, 2002, were as follows (dollars in thousands):

5.   GREENHOUSE FACILITY

          The Greenhouse Facility consisted of the following (dollars in thousands):

          Building and equipment is comprised of the cost of the Greenhouse under a turnkey construction contract inclusive of change orders and interest capitalized during the construction period.

6.   INVESTMENT IN UNCONSOLIDATED AFFILIATE

          Investment in unconsolidated affiliate represents the Partnership's 50% ownership interest in Funding. The Partnership's investment in Funding is accounted for using the equity method. The following is summarized financial information for Funding (dollars in thousands):

Statement Of Income Data:

Balance Sheet Data:

7.   FIRST MORTGAGE BONDS PAYABLE

          First Mortgage Bonds payable consisted of the following (dollars in thousands):

          On June 30, 1995, the Partnership issued and sold $177,000,000 of First Mortgage Bonds to Funding. The bonds are secured by substantially all assets of the Partnership. Interest is payable semi-annually on June 30 and December 30 of each year, commencing December 30, 1995. Principal on the First Mortgage Bonds is also payable semi-annually in varying amounts through June 30, 2010, for the 2010 Bonds, and beginning on December 30, 2010, for the 2016 Bonds. Collective future maturities of the First Mortgage Bonds as of December 31, 2002, were as follows (dollars in thousands):

          The trust indenture and other financing documents for the First Mortgage Bonds include a number of covenants with which the Partnership must comply. These covenants include, among others, compliance with certain reporting requirements and limitations of activities relating to the bond proceeds, additional debt, new and existing agreements, partnership distributions and other activities. The trust indenture also describes events of default of the First Mortgage Bonds which include, among others, certain events involving bankruptcy of the Partnership and failure to maintain and comply with agreements made by the Partnership. The Partnership is in compliance with these agreements at December 31, 2002.

8.   CREDIT AGREEMENT

          The Partnership's original credit agreement, which was to have expired on its terms in June 2002, was extended through July 2007 with a new bank. The agreement provides for working capital loans of up to $3,000,000 and letter of credit commitments of up to $5,000,000 (the "Credit Agreement"). The interest rate for loans made under the Credit Agreement is based upon various short-term indices at the Partnership's option and is determined separately for each draw. The Credit Agreement includes commitments fees, payable quarterly in arrears, at 0.5% on the daily average unused amount of the commitment until the Credit Agreement is terminated. There were no advances or letters of credit outstanding under the Credit Agreement at December 31, 2002 and 2001.

9.   FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISKS

          The majority of the Partnership's trade accounts receivable are from WEPCO and the associated credit risk is considered limited. The carrying amounts of the Partnership's cash and cash equivalents, accounts receivable, restricted investments held by the Trustee, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The fair value, based on a third-party market quote, of the Partnership's First Mortgage Bonds at December 31, 2002 and 2001, was approximately $23,850,000 higher and $7,360,000 higher, respectively, than the carrying value.

10.   COMMITMENTS AND CONTINGENCIES

Construction

          During 2000, the Partnership received a payment of approximately $180,000 in exchange for releasing Westinghouse electric (the "Contractor") from certain additional repair work agreed to as part of the final settlement of the cost to construct the Facility. This amount was included in gain on sales-type capital lease in the accompanying statements of income during the year ended December 31, 2000. In conjunction with this payment, a retainage letter of credit provided by the Contractor to support future warranty work was reduced to $2,000,000.

Power Purchase Agreement

          Under and subject to the terms of the Power Purchase Agreement, the Utility is obligated to purchase the electric capacity made available to it up to 236.5 megawatts and associated energy that the Utility chooses to dispatch from the Facility beginning on the Commercial Operations Date. Payments by the Utility to the Partnership under the Power Purchase Agreement consist of capacity payments and energy payments that fluctuate based upon published indices and/or a fixed schedule.

Thermal Energy Sales

          The Partnership has a thermal energy sales agreement with the Department of Administration of the State of Wisconsin ("DOA"), which provides for the Partnership to supply the steam requirements of UWW (the "Thermal Energy Agreement"). The initial term of the agreement runs through June 30, 2005. The DOA has the option to extend the agreement for up to four extension periods of four years each. The Thermal Energy Agreement obligates the Partnership to supply all of UWW's steam requirements up to a maximum of 350 million pounds of steam annually at a rate not to exceed 100,000 pounds per hour.

Gas Supply

          The Partnership has 20-year gas supply agreements through September 2017 with two fuel suppliers to provide 100% of the Facility's natural gas requirements. The gas supply contracts provide for the sale of up to 11,855 MMBtu per day of gas to the Partnership. The price paid by the Partnership to the fuel suppliers under the gas supply contracts fluctuates based upon published indices.

          Under the gas supply contracts, the Partnership is subject to annual minimum take requirements that may be satisfied by delivering gas to the Facility, taking gas into storage or remarketing gas to third parties. The Partnership records additional cost when it is determined that the annual minimum take requirements will not be met.

Gas Transportation

          The Partnership has entered into various gas transportation agreements with fuel transportation companies that provide for delivery of gas to the Facility. The price paid by the Partnership under the gas transportation contracts fluctuates based upon published indices.

Operations And Maintenance

          The Facility is operated by LSP-Whitewater pursuant to a seven-year operations and maintenance agreement (an "O&M Agreement").

Parts Agreement

          The Partnership has a spare parts agreement (the "Parts Agreement") with Westinghouse Electric. The compensation payable to Westinghouse Electric is an annual fee of $977,000 (escalated annually based upon published indices or adjusted upward based on the operations of the Facility) payable for 15 years through September 2012. Under the terms of the Parts Agreement, Westinghouse Electric provides (i) certain combustion turbine parts and refurbishment services, (ii) other spare parts at discounted prices and (iii) other repair services at direct cost plus a percent mark-up to the Partnership.

Greenhouse

          The Partnership has an operational services agreement with Floriculture, an affiliate of the Partnership, which operates the Greenhouse for the benefit of the Partnership. Under the terms of the operational services agreement, Floriculture is required to provide all the services to produce, market, and sell horticulture products and maintain the Greenhouse. As compensation for its services, Floriculture is reimbursed on a monthly basis for its approved costs in connection with conducting the Greenhouse business and operating the Greenhouse, and will receive an annual management fee equal to 16% of the Partnership's net profit from the operation of the Greenhouse. The term of the operational services agreement will expire on May 31, 2022. For the years ended December 31, 2002, 2001 and 2000, Floriculture earned a management fee pursuant to the operational services agreement of approximately $52,000, $61,000 and $65,000, respectively.

Litigation

          The Partnership experiences routine litigation in the normal course of business. Management is of the opinion that none of this routine litigation will have a material adverse effect on the financial position or results of operations of the Partnership.

11.   DEPENDENCE ON THIRD PARTIES

          The Partnership is highly dependent on WEPCO for purchases of electric generating capacity and energy from its Facility, and LSP-Whitewater to perform the operation and maintenance of its Facility. In addition, the Partnership has contracted with two gas companies to supply the expected gas requirements of the Facility, and has contracted with a single interstate gas transporter and local gas distributor to transport gas. Any material breach by any one of these parties of their respective obligations to the Partnership could affect the ability of the Partnership to make payments under its First Mortgage Bonds. In addition, bankruptcy or insolvency of certain other parties or defaults by such parties relative to their contractual or regulatory obligations could adversely affect the ability of the Partnership to make payments under its First Mortgage Bonds. If an agreement were to be terminated due to a breach of such agreement, the Partnership's ability to enter into a substitute agreement having substantially equivalent terms and conditions, or with an equally creditworthy third party, is uncertain.

          The Partnership has gas supply contracts with two suppliers that in the aggregate provide 100% of the expected gas requirements of the Facility. One is with Dynegy Marketing and Trade ("Dynegy Marketing"), an indirect wholly-owned subsidiary of Dynegy Holdings, Inc. ("Dynegy") and the other supply contract is with Aquila Energy Marketing Corporation, an indirect wholly-owned subsidiary of Aquila, Inc. ("Aquila"). The gas price components of the Aquila and Dynegy gas supply agreements are priced at market based indices and are structured to provide matching changes in energy payments under the Partnership Power Purchaser Agreement. Included within these gas supply agreements is a provision whereby the Partnership may select to pay a monthly fixed fee as consideration for the right to elect to purchase a daily quantity of gas priced at the TOK price (the "Fuel Selection Fee"). The Partnership can purchase up to 40% of its contracted gas supplies und er this structure. The remaining 60% of the gas requirements are priced at the TOK or first-of-the-month spot price, or daily spot price. The U.S. gas market is currently experiencing a tightening of gas supplies, increased gas prices, and increased price volatility and, consequently, the Fuel Selection Fees are anticipated to be more costly. During 2002, a number of events negatively impacted the business and prospects of Dynegy and Aquila resulting in downgrades in the credit ratings of Dynegy and Aquila to non-investment grade by each of the major rating agencies. A failure to perform under the gas supply contracts by either Dynegy or Aquila may have a material adverse effect on the Partnership. While management of the Partnership believes that alternative natural gas supplies at market-based prices can be obtained so as to ensure against interruption, no assurance can be given that the replacement arrangements would have terms commercially equivalent to the Dynegy and Aquila contracts.

12.   RELATED PARTY TRANSACTIONS

          Certain management services are provided to the Partnership pursuant to management services agreements. Under these agreements, certain companies manage the business affairs of the Partnership. Cogentrix Energy manages the Partnership and is reimbursed for its reasonable and necessary expenses incurred in performing its services, including salaries of its personnel to the extent related to services provided under the agreements. The Partnership incurred expenses of approximately $695,000, $682,000 and $679,000 to Cogentrix Energy during the years ended December 31, 2002, 2001 and 2000, respectively. Beginning in November 2002, Cogentrix Energy began providing fuel management services for the Partnership and will charge Whitewater $54,000 per year for these services. At December 31, 2002 and 2001, the Partnership recorded accounts payable to Cogentrix Energy of approximately $8,000 and $23,000, respectively. Commodity sales include natural gas sales to a related party, Cottage Grove, L.P. Total sales approximated $342,000, $542,000 and $861,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Additionally, at December 31, 2002 and 2001, the Partnership had a payable of approximately $255,000 and $353,000, respectively, to LSP-Cottage Grove, L.P.

          The Partnership paid $539,000, $527,000 and $513,000 to LSP-Whitewater for the years ended December 31, 2002, 2001 and 2000, respectively, for services provided under the O&M Agreement.

13.   PARTNERS' CAPITAL

          Profits, losses and distributions are allocated based on the respective partnership interests. Distributions are made in accordance with the trust indenture and other financing documents. Such distributions are subject to the prior satisfaction of a number of conditions including, among others, maintenance of required funding levels in various Trustee accounts and compliance with minimum levels of current and projected debt service coverage.

14.   UNSCHEDULED OUTAGE

          On February 4, 2002, the Partnership experienced an unplanned outage as a result of failure of certain components within the Facility's combustion turbine. Repairs to the components were made and operations restarted on February 17, 2002. The total cost of the outage was approximately $7,700,000, of which approximately $5,650,000 was received under the Partnership's insurance policy. The uninsured portion of the unplanned outage was covered by cash flow from operations and management does not believe this event will adversely affect Whitewater's ability to meet its First Mortgage Bond obligations.

LS POWER FUNDING CORPORATION
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP

Exhibits Index