SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from. . . . . . . .to. . . . . . . . . . . . . . . . .
Commission file number 333-89725
AES Eastern Energy, L.P.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Exact name of registrant as specified in its charter)
Delaware 54-1920088
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 N. 19th Street, Arlington, Va. 22209
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 522-1315
N/A
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Registrant is a wholly owned subsidiary of The AES Corporation. Registrant
meets the conditions set forth in General Instruction H(1)(a) and (b) of Form
10-Q and is filing this Quarterly Report on Form 10-Q with the reduced
disclosure format authorized by General Instruction H.
TABLE OF CONTENTS
PART I
Page
Item 1. Condensed Consolidated Financial Statements (Unaudited)
AES EASTERN ENERGY, L.P.
Condensed Consolidated Financial Statements:
Consolidated Statements of Income for the three months ended
September 30, 2002 and September 30, 2001 ............................... 3
Consolidated Statements of Income for the nine months ended
September 30, 2002 and September 30, 2001 ............................... 4
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001. 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and September 30, 2001 ............................... 6
Statement of Changes in Partners' Capital for the nine months ended
September 30, 2002 ...................................................... 7
Notes to Condensed Consolidated Financial Statements....................... 8
AES NY, L.L.C. (General Partner of AES Eastern Energy, L.P.)*
Condensed Consolidated Balance Sheets:
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001
Notes to Condensed Consolidated Balance Sheets............................. 14
* The condensed consolidated balance sheets of AES NY, L.L.C. contained in
this Quarterly Report on Form 10-Q should be considered only in connection
with its status as the general partner of AES Eastern Energy, L.P.
Item 2. Discussion and Analysis of Results of Operations and
Financial Condition
(a) Results of Operations............................................. 21
(b) Liquidity and Capital Resources................................... 24
Item 4. Controls and Procedures........................................... 28
PART II
Item 1. Legal Proceedings................................................. 28
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits..................................................... 28
(b) Reports on Form 8-K.......................................... 28
Signature................................................................... 29
2
PART 1 - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
AES Eastern Energy, L.P.
Condensed Consolidated Statements of Income
For the three months ending September 30, 2002 and September 30, 2001
(Amounts in Thousands)
-------------------------------------------------------------------------------
Three months ended September 30, 2002 2001
---- ----
Operating Revenues
Energy $87,241 $95,500
Capacity 11,829 6,449
Transmission congestion contract (14,730) (13,724)
Other 1,448 432
--------- --------
Total operating revenues 85,788 88,657
Operating Expenses
Fuel 36,833 36,566
Operations and maintenance 4,037 4,692
General and administrative 17,123 13,658
Depreciation and amortization 9,040 8,658
--------- --------
Total operating expenses 67,033 63,574
--------- --------
Operating Income 18,755 25,083
Other Income/(Expense)
Interest expense (15,596) (14,386)
Interest income 482 805
(Loss)gain on derivative valuation (362) 320
-------- --------
Net Income $ 3,279 $11,822
========= ========
The notes are an integral part of the
condensed consolidated financial statements.
3
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES Eastern Energy, L.P.
Condensed Consolidated Statements of Income
For the nine months ending September 30, 2002 and
September 30, 2001
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Nine months ended September 30, 2002 2001
---- ----
(Thousands)
Operating Revenues
Energy 222,356 $270,771
Capacity 26,954 20,985
Transmission congestion contract 4,239 (26,168)
Other 6,141 4,155
--------- --------
Total operating revenues 259,690 269,743
Operating Expenses
Fuel 100,833 101,630
Operations and maintenance 12,375 15,940
General and administrative 43,898 40,441
Depreciation and amortization 26,411 24,964
--------- --------
Total operating expenses 183,517 182,975
--------- --------
Operating Income 76,173 86,768
Other Income/(Expense)
Interest expense (44,398) (44,009)
Interest income 1,552 3,025
(Loss)gain on derivative valuation (277) 87
-------- --------
Net Income 33,050 $45,871
========= ========
The notes are an integral part of the condensed consolidated
financial statements.
4
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES Eastern Energy, L.P.
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(Amounts in Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
------------- -----------
ASSETS
Current Assets
Restricted cash:
Operating- cash and cash equivalents .......... $ 19,047 $ 4,193
Revenue Account ............................... 28,128 71,606
Accounts receivable - trade ....................... 29,742 27,590
Accounts receivable - affiliates .................. -- 319
Accounts receivable - other ....................... 2,137 2,123
Inventory ......................................... 26,760 29,615
Prepaid expenses .................................. 7,309 6,464
---------- ----------
Total Current Assets .......................... 113,123 141,910
---------- ----------
Property, Plant, Equipment and Related Assets
Land .............................................. 6,901 6,884
Electric generation assets (net of accumulated
depreciation of $82,939 and $62,623) ............ 718,491 732,278
Other intangible assets (net of accumulated
amortization of $26,247 and $19,941) ............ 219,568 225,864
---------- ----------
Total property, plant, equipment and
related assets ........................... 944,960 965,026
---------- ----------
Other Assets
Derivative valuation .............................. 11,846 55,182
Rent reserve account .............................. 31,341 31,719
---------- ----------
Total Assets .................................. $1,101,270 $1,193,837
========== ==========
LIABILITIES
Current Liabilities
Accounts payable .................................. 3,178 $ 1,663
Lease financing - current ......................... 1,665 6,223
Environmental remediation ......................... -- 155
Accrued interest expense .......................... 14,098 28,353
Due to The AES Corporation and affiliates ......... 7,310 6,414
Other accrued expenses and liabilities ............ 20,741 19,026
---------- ----------
Total Current Liabilities ....................... 46,992 61,834
---------- ----------
Long-term liabilities
Lease financing - long term ....................... 637,661 639,326
Environmental remediation ......................... 9,505 11,442
Defined benefit plan obligation ................... 15,576 16,968
Derivative valuation liability .................... 13,137 26,665
Transmission congestion contract .................. 3,177 3,506
Other liabilities ................................. 1,110 1,057
---------- ----------
Total Long-term Liabilities ..................... 680,166 698,964
---------- ----------
Total Liabilities ............................... 727,158 760,798
Commitments and Contingencies (Note 2)
PARTNERS' CAPITAL ................................... 374,112 433,039
---------- ----------
Total Liabilities and Partners' Capital ............. $1,101,270 $1,193,837
========== ==========
The notes are an integral part of the condensed consolidated
financial statements.
5
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES Eastern Energy, L.P.
Condensed Consolidated Statements of Cash Flows
For the nine months ending September 30, 2002 and September 30, 2001
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Nine months Nine months
ended ended
Sept. 30, Sept 30,
2002 2001
-------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ....................................... $ 33,050 $ 45,871
Adjustments to reconcile net income to
Net cash (used in)operating activities:
Depreciation and amortization .................. 26,622 24,966
(Loss)gain on transmission congestion
contract valuation .......................... (329) 26,208
Gain(loss) on derivative ....................... 278 (87)
Net defined benefit plan cost .................. (1,392) (1,531)
Changes in current assets and liabilities:
Accounts receivable .......................... (1,847) 1,145
Inventory .................................... 2,855 (5,334)
Prepaid expenses ............................. (845) (18)
Accounts payable ............................... 1,515 901
Accrued interest expense ....................... (14,255) (15,237)
Due to AES Corporation and affiliates .......... 896 (2,367)
Other accrued expenses and liabilities ......... (325) 8,047
-------- --------
Net cash provided by operating activities ... 46,223 82,564
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for capital additions ................... (6,556) (15,382)
Decrease in restricted cash ...................... 28,624 24,878
Net change in rent reserve account ............... 378 (265)
-------- --------
Net cash provided by investing activities ... 22,446 9,231
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ................................... (63,960) (98,200)
Payments for deferred financing .................. -- (1,154)
Principal payments on lease obligations .......... (6,223) (1,813)
Partner's contribution ........................... 1,514 9,372
-------- --------
Net cash used in financing activities ....... (68,669) (91,795)
-------- --------
CHANGE IN CASH AND CASH EQUIVALENTS ................... -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........ -- --
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............. $ -- $ --
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid ......................................... $ 56,354 $ 59,246
======== ========
The notes are an integral part of the condensed consolidated
financial statements.
6
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES Eastern Energy, L.P.
Consolidated Statement of Changes in Partners'
Capital For the nine months ended September
30, 2002
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Accumulated
Other
General Limited Comprehensive Comprehensive
Partner Partner Total Income(loss) Income(loss)
--------- --------- --------- ------------ -----------
Balance, December 31, 2001 . $ 4,331 $ 428,708 $ 433,039 $ 28,544 --
Partners' Contribution ..... 15 1,499 1,514
Net Income ................. 331 32,719 33,050 33,050
Distributions Paid ......... (640) (63,320) (63,960)
Accumulated OCI Income(loss) (295) (29,236) (29,531) (29,531) (29,531)
--------- --------- --------- --------- ---------
Balance, September 30, 2002 $ 3,742 $ 370,370 $ 374,112 $ (987) $ 3,519
========= ========= ========= ========= =========
The notes are an integral part of the condensed consolidated
financial statements.
7
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
Notes to the Condensed Consolidated Financial Statements
Note 1. Unaudited Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements of AES
Eastern Energy, L.P. (the Partnership) reflect all adjustments which are
necessary, in the opinion of management, for a fair presentation of the
Partnership's consolidated results for the interim periods. All such
adjustments are of a normal recurring nature. The unaudited condensed
consolidated financial statements should be read in conjunction with the
Partnership's consolidated financial statements as of December 31, 2001 and for
the year then ended and notes contained therein, which are set forth in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 2001.
Note 2. Commitments and Contingencies
Coal Purchases - In connection with the acquisition of the Partnership's four
coal-fired electric generating stations (the Plants), the Partnership assumed
from New York State Electric & Gas Corporation (NYSEG) an agreement to purchase
the coal required by the Somerset and Cayuga Plants. Each year, either party
can request renegotiation of the price of one-third of the coal supplied
pursuant to this agreement. During 2001 the coal suppliers were committed to
sell and the Partnership was committed to purchase all three lots of coal for
the Somerset Plant as well as 70% of the anticipated coal purchases for the
Cayuga Plant. The supplier requested renegotiation during 2001 for the 2002 lot
but the parties failed to reach agreement. Therefore, the parties have current
commitments in 2002 with respect to only two lots for the Somerset Plant and
50% of the anticipated coal purchases at the Cayuga Plant. The supplier
requested renegotiation during 2002 for the 2003 lot plus the 2002 lot for
which agreement was not reached. On September 11, 2002, the Partnership and the
supplier reached agreement on both of the lots. Therefore, the commitment of
the Partnership for 2003 is three lots for the Somerset Plant plus 70% of the
anticipated coal usage for the Cayuga Plant. The termination date for the
contract is December 31, 2003. No later than June 30, 2003, the parties shall
meet to determine if the agreement is to be extended under mutually agreeable
terms and conditions. If the agreement were not extended, the Partnership would
seek a new coal supplier. As of the acquisition date of the Plants, the
contract prices for the coal purchased through 2002 were above the market
price, and the Partnership recorded a purchase accounting liability for
approximately $15.7 million related to the fulfillment of its obligation to
purchase coal under this agreement. The purchase accounting liability is
amortized as a reduction to coal expense over the life of the contract. As of
September 30, 2002, the remaining liability was approximately $1.1 million.
As of September 30, 2002, the Partnership's remaining anticipated coal
purchases for the year ending December 31, 2002 were between $20.0 and $23.0
million. Based on the coal purchase commitments for 2003, the Partnership has
expected coal purchases ranging between $78.2 million and $86.2 million.
Transmission Agreements - On August 3, 1998, AES NY, L.L.C., the general
partner of the Partnership (the General Partner), entered into an agreement for
the purpose of transferring certain rights and obligations from NYSEG to the
General Partner under an existing transmission agreement among Niagara Mohawk
Power Corporation (NIMO), the New York Power Authority, NYSEG and Rochester Gas
& Electric Corporation, and an existing transmission agreement between NYSEG
and NIMO. This agreement provides for the assignment of rights to transmit
energy from the Somerset Plant and other sources to remote load areas and other
delivery points, and was assumed by the Partnership on the date of acquisition
of the Plants. In accordance with its plan, as of the acquisition date, the
Partnership discontinued using this service. The Partnership did not transmit
over these lines but was required to pay the current fees until the effective
cancellation date, November 19, 1999. These fees aggregated approximately $3.4
million over the six months ended December 31, 1999, and were recorded as a
purchase accounting liability. Because the Partnership did not use the lines
during this period, the Partnership received no economic benefit subsequent to
the acquisition.
The Partnership was informed by NIMO that the Partnership would be responsible
for the monthly fees of $500,640 under the existing transmission agreement to
the originally scheduled termination date of October 1, 2004. On October 5,
1999, the Partnership filed a complaint against NIMO alleging that the
Partnership has a right to non-firm transmission service upon six months prior
notice without payment of $500,640 in monthly fees subsequent to the
cancellation date of November 19, 1999.
8
On March 9, 2000, a settlement was reached between the Partnership and NIMO,
which was approved by the Federal Energy Regulatory Commission (FERC).
According to the settlement, the Partnership will continue to pay NIMO a fixed
rate of $500,640 per month during the period of November 20, 1999 to October 1,
2004, and in turn, will receive a form of transmission service commencing on
May 1, 2000, which the Partnership believes will provide an economic benefit
over the period of May 1, 2000 to October 1, 2004.
The Partnership has the right under a Remote Load Wheeling Agreement (RLWA) to
transmit 298 MW over firm transmission lines from the Somerset Plant. The
Partnership has the right to designate alternate points of delivery on NIMO's
transmission system provided that the Partnership is not entitled to receive
any transmission service charge credit on the NIMO system.
On November 1, 2000, the effective date of the final settlement, the
transmission contract was classified as an energy-trading contract as defined
in Emerging Issues Task Force (EITF) No. 98-10, Accounting for Contracts
Involved in Energy Trading and Risk Management Activities. From January 1, 2001
the contract was accounted for as a derivative under SFAS No. 133. The
transmission contract was entered into because it provided a reasonable
settlement for resolving a FERC issue. The agreement is essentially a swap
between the congestion component of the locational prices posted daily by the
New York ISO in western New York and the more heavily populated areas in
eastern New York. The agreement is a financially settled contract since there
is no requirement to flow power under this agreement. The agreement generates
gains or losses from exposure to shifts or changes in market prices. The
Partnership recorded income of approximately $4.2 million in the first nine
months of 2002 related to this contract.
Line of Credit Agreement - On May 14, 1999, the Partnership established a
three-year revolving working capital credit facility of up to $50 million for
the purpose of making funds available to pay for certain operating and
maintenance costs. This facility was terminated as of March 9, 2001. In April
2001, the Partnership entered into a $35 million secured revolving working
capital and letter of credit facility with Union Bank of California, N.A. This
facility has a term of approximately twenty-one months. The Partnership can
borrow up to $35 million for working capital purposes under this facility. In
addition, the Partnership can have letters of credit issued under this facility
up to $25 million, provided that the total amount of working capital borrowings
and letters of credit issuances may not exceed the $35 million limit on the
entire facility. Since the new facility was signed, there have been three
borrowings. The first borrowing was for $7 million on July 13, 2001 at an
interest rate of 8.125%. The borrowing was repaid in full on July 31, 2001. The
second borrowing was for $8.5 million on January 11, 2002 at an interest rate
of 6.125%. The borrowing was repaid in full on February 28, 2002. The third
borrowing was for $14.0 million on July 9, 2002, at an interest rate of 6.125%.
The Partnership repaid the borrowing in two installments: $7.2 million on July
31, 2002 and $6.8 million on August 28, 2002.
The Partnership has signed an Agreement with Union Bank of California, N.A. for
a one-year extension of the current facility, which has been placed into
escrow. The amendment is dated November 20, 2002 and will become effective once
the conditions precedent are met. Currently, lenders have committed to provide
only $15 million of the $35 million secured revolving working capital and
letter of credit facility. The Partnership has 180 days from the effective date
of the agreement to syndicate the remaining $20 million.
Environmental - The Partnership has recorded a liability of $12 million as an
undiscounted liability under purchase accounting for environmental remediation
associated with the acquisition of the Plants. On an ongoing basis, the
Partnership monitors its compliance with environmental laws. Because of the
uncertainties associated with environmental compliance and remediation
activities, future costs of compliance or remediation could be higher or lower
than the amount currently accrued.
The Partnership received an information request letter dated October 12, 1999
from the New York Attorney General, which seeks detailed operating and
maintenance history for the Westover and Greenidge Plants. On January 13, 2000,
the Partnership received a subpoena from the New York State Department of
Environmental Conservation (DEC) seeking similar operating and maintenance
history from the Plants. This information is being sought in connection with
the Attorney General's and the DEC's investigations of several electricity
generating stations in New York that are suspected of undertaking modifications
in the past without undergoing an air permitting review. The Partnership has
provided the requested documentation.
9
On April 14, 2000, the Partnership received a request for information pursuant
to Section 114 of the Clean Air Act from the U.S. Environmental Protection
Agency (EPA)seeking detailed operating and maintenance history data for the
Cayuga and Somerset Plants. The EPA has commenced an industry-wide
investigation of coal-fired electric power generators to determine compliance
with environmental requirements under the Clean Air Act associated with
repairs, maintenance, modifications and operational changes made to coal-fired
facilities over the years. The EPA's focus is on whether the changes were
subject to new source review or new source performance standards, and whether
best available control technology was or should have been used. The Partnership
has provided the requested documentation.
The Partnership is currently in negotiation with the EPA and DEC concurrently.
If the Partnership's current proposal is rejected, the EPA and the DEC could
issue a notice or notices of violation (NOV) to the Partnership for violations
of the Clean Air Act and the Environmental Conservation Law. If the Attorney
General, the DEC or the EPA does file an enforcement action against the
Somerset, Cayuga, Westover, or Greenidge Plants, then penalties may be imposed
and further emission reductions might be necessary at these Plants which could
require the Partnership to make substantial expenditures. The Partnership is
unable to estimate the effect of such a NOV on its financial condition or
results of future operations.
By letter dated May 25, 2000, the DEC issued a NOV to NYSEG for violations of
the Clean Air Act and the Environmental Conservation Law at the Greenidge and
Westover Plants related to NYSEG's alleged failure to obtain an air permitting
review for repairs and improvements made during the 1980s and 1990s, which was
prior to the acquisition of the Plants by the Partnership. Pursuant to the
purchase agreement relating to the acquisition of the Plants from NYSEG, the
Partnership agreed to assume responsibility for environmental liabilities that
arose while NYSEG owned the Plants. On September 12, 2000, the Partnership
agreed with NYSEG that the Partnership will assume the defense of and
responsibility for the NOV, subject to a reservation of its right to assert
applicable exceptions to its contractual undertaking to assume preexisting
environmental liabilities. The financial and operational effect of this NOV is
still being discussed with the DEC.
Nitrogen Oxide and Sulfur Dioxide Emission Allowances - The Plants emit
nitrogen oxide (NOX) and sulfur dioxide (SO2) as a result of burning coal to
produce electricity. The Plants have been allocated allowances by the DEC to
emit NOX during the ozone season, which runs from May 1 to September 30. Each
NOX allowance authorizes the emission of one ton of NOX during the ozone
season. The Plants are also subject to SO2 emission allowance requirements
imposed by the EPA. Each SO2 allowance authorizes the emission of one ton of
SO2 during the calendar year. Both NOX and SO2 allowances may be bought, sold,
or traded. If NOX and/or SO2 emissions exceed the allowance amounts allocated
to the Plants, then the Partnership may need to purchase additional allowances
on the open market or otherwise reduce its production of electricity to stay
within the allocated amounts. The Plants were net sellers of NOX allowances in
2001, and are also expected to have a surplus of NOX allowances in 2002. The
Plants were self-sufficient with respect to SO2 allowances in 2001; however, it
is expected that the Plants may have a shortfall of approximately 5,000 to
7,000 SO2 allowances in 2002. The majority of the SO2 allowance shortfall was
covered with allowances purchased from the electricity generating stations
owned by an affiliate of the Partnership, AES Creative Resources, L.P. (ACR),
which are on long-term cold standby. The allowances were purchased at quoted
market prices.
On October 16, 2001, AES Greenidge was awarded a Federal Clean Coal Grant that,
if accepted, will fund 50% of the capital costs for backend technology and 30%
of the operations and maintenance costs for a test and demonstration period.
This technology will include a single bed, in-duct Selective Catalytic
Reduction (SCR) unit in combination with low-NOX combustion technology, on
Greenidge Unit 4 firing on coal and biomass. It will also include a Circulating
Dry Scrubber (CDS) for SO2, Mercury and acid gas removal. AES Greenidge's share
of the project's costs will be approximately $9.8 million. AES Greenidge has
submitted a written request to the Department of Energy, which administers the
Clean Coal program, for a 12 to 18 month delay in starting the grant. This
request was made in light of the current difficult electricity and credit
markets and the uncertain state regulatory environment.
In April 2002, EPA proposed to establish location, design, construction and
capacity standards for cooling water intake structures at existing power
plants. The EPA is developing these regulations under the terms of an Amended
Consent Decree in Riverkeeper, Inc vs. Whitman, US District Court, Southern
District of New York. It has been reported that EPA reached an agreement in
principle with the plaintiffs to propose changes to the 316(b) rulemaking
schedule. Pending agreement by the judge for modifying the deadlines, the new
scheduled finalization of the rules for existing facilities has been extended
by six months to February 16, 2004. These new rules will impose new compliance
requirements, with
10
potentially significant costs, on operating plants across the nation. Cost
items include various environmental and engineering studies, and potential
capital and maintenance costs. The Partnership has not determined the effects
of these regulations on its financial condition.
The Partnership is obligated to make payments under the Coal Hauling Agreement
with Somerset Railroad Corporation (SRC), an affiliated company, in an amount
sufficient, when added with funds available from other sources, to enable SRC
to pay, when due, all of its operating expenses and other expenses, including
interest on and principal of outstanding indebtedness. For the nine-month
period ending September 30, 2002 and 2001, the Partnership recorded $2.9
million and $3.6 million, respectively, as operating expenses and other accrued
liabilities under this agreement. On August 14, 2000, SRC entered into a $26
million credit facility with Fortis Capital Corp. which replaced in its
entirety a credit facility for the same amount previously provided to SRC by an
affiliate of CIBC World Markets.
The new credit facility provided by Fortis Capital Corp. consists of a 14-year
term note (maturing on May 6, 2014), with principal and interest payments due
quarterly. The current interest rate on the loans under this credit facility is
equal to a Base Rate plus 0.625% for the Base Rate loans and LIBOR plus 1.375%
for LIBOR loans. The principal amount of SRC's outstanding indebtedness under
this credit facility was approximately $21.8 million as of September 30, 2002.
The agreements governing the leases of the Somerset and Cayuga Plants include
negative covenants restricting the Partnership's ability to incur indebtedness
and to make payments to its partners (which are referred to as restricted
payments). The incurrence of indebtedness covenant states that neither the
Partnership nor any of its subsidiaries may create, incur, assume, suffer to
exist, guarantee or otherwise become directly or indirectly liable with respect
to indebtedness except for permitted indebtedness. Neither SRC nor the limited
liability company that owns SRC may incur any indebtedness, other than the SRC
credit facility or a replacement facility or other than any operating leases in
respect of rail assets, without the written consent of the institutional
investors that organized the trusts that own the Somerset and Cayuga Plants and
lease them to the Partnership. These agreements do permit the Partnership to
incur indebtedness for certain purposes and subject to applicable limits,
including indebtedness to finance modifications to the Somerset and Cayuga
Plants required by law and up to $100,000,000 of additional indebtedness,
provided that no more than $75,000,000 of such additional indebtedness may be
incurred to provide working capital and no more than $50,000,000 of such
additional indebtedness may be secured by liens upon the Partnership's assets
and no more than $25,000,000 of such additional indebtedness may be incurred
for purposes other than to provide working capital. The covenant restricting
incurrence of indebtedness will restrict the Partnership's future ability to
obtain additional debt financing for working capital, capital expenditures or
other purposes.
Note 3. Price Risk Management
Comprehensive Income - As of September 30, 2002, the Partnership has recorded
$1.0 million of other comprehensive loss due to the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In the years
prior to the adoption of SFAS No. 133, the Partnership did not have any items
of other comprehensive income.
On January 1, 2001, the Partnership adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which, as amended and
interpreted, established new accounting and reporting standards for derivative
instruments and hedging activities. The Statement requires that the Partnership
recognize all derivatives, as defined in the Statement, on the balance sheet at
fair value. Derivatives, or any portion thereof, that are not effective hedges
are adjusted to fair value through income. Derivatives that are effective
hedges are adjusted to fair value through other comprehensive income (loss)
until the hedged items are recognized in earnings. The adoption of SFAS No. 133
on January 1, 2001, resulted in a cumulative reduction of Other Comprehensive
Income (OCI) in Partner's Capital of $66.3 million.
The Partnership utilizes derivative financial instruments to hedge commodity
price risk. The Partnership utilizes electric derivative instruments, including
swaps and forwards, to hedge the risk related to forecasted electricity sales
over the next four years. The majority of the Partnership's electric
derivatives are designated and qualify as cash flow hedges. No hedges were
derecognized or discontinued during the nine months ended September 30, 2002.
No significant amounts of hedge ineffectiveness were recognized in earnings
during the nine months ended September 30, 2002.
11
Gains and losses on derivatives reported in accumulated other comprehensive
income are reclassified into earnings when the hedged forecasted sale occurs.
Approximately $4.3 million of other comprehensive loss is expected to be
recognized as an addition to earnings over the next twelve months. Amounts
recorded in other comprehensive income during the nine months ended September
30, 2002, were as follows (in millions):
Balance as of December 31, 2001 $28.5
Reclassified to earnings 12.3
Change in fair value (41.8)
------
Balance, September 30, 2002 $(1.0)
======
In addition to the electric derivatives classified as cash flow hedge
contracts, the Partnership has a Transmission Congestion Contract that is a
derivative under the definition of SFAS No.133, but does not qualify for hedge
accounting. This contract is recorded at fair value on the balance sheet with
changes in the fair value recognized through earnings.
Note 4. New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, entitled, "Goodwill and Other
Intangible Assets." This standard eliminates the amortization of goodwill, and
requires goodwill to be reviewed periodically for impairment. This standard
also requires the useful lives of previously recognized assets to be adjusted
accordingly. This standard is effective for fiscal years beginning after
December 15, 2001, for all goodwill and other intangible assets recognized on
the Partnership's balance sheet at that date, regardless of when the assets
were initially recognized. Intangible assets were created in the acquisition,
that were inseparable from the electric generation assets acquired; therefore,
the intangible assets have a definite life. Under this Statement, the asset
retirement obligation is recorded at fair value in the period in which it is
incurred by increasing the carrying amount of the related long-lived asset. The
liability is accreted to its present value in each subsequent value and the
capitalized cost is depreciated over the useful life of the related asset. The
Partnership will continue to amortize the other intangible assets currently
recorded on the balance sheet. The initial adoption of SFAS 142 did not have a
significant impact on the Partnership's financial position and results of
operations. Any impairment will be determined in accordance with the provisions
of SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets."
In July 2001, the FASB issued SFAS No. 143, entitled "Accounting for Asset
Retirement Obligations." This standard is effective for fiscal years beginning
after June 15, 2002, and provides accounting requirements for asset retirement
obligations associated with tangible long-lived assets. The Partnership has not
determined the effects of this standard on its financial reporting.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." The provisions of this statement are effective
for financial statements issued for fiscal years beginning after December 15,
2001, and address reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 provides guidance for developing estimates of future cash
flows used to test assets for recoverability and requires that assets to be
disposed of be classified as held for sale when certain criteria are met. The
statement also extends the reporting of discontinued operations to all
components of an entity and provides guidance for recognition of a liability
for obligations associated with disposal activity. The initial adoption of the
provisions of SFAS No. 144 did not have any material impact on its financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for transactions occurring after
May 15, 2002. The adoption of this standard does not have a significant impact
on the Partnership's consolidated financial statements.
12
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Partnership
will adopt the provisions of SFAS No. 146 for restructuring activities
initiated after December 31, 2002. SFAS No. 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of a company's commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded
at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amount recognized. This standard will
be accounted for prospectively.
Note 5. Reclassifications
Certain 2001 amounts have been reclassified in the condensed consolidated
financial statements to conform with the 2002 presentation.
Note 6. Subsequent Events
On October 3, The AES Corporation announced plans to secure a new a $1.6
billion bank facility and began an offer to exchange up to $500 million of
senior notes for cash and secured notes. Based on this news, Standard & Poor's
Ratings Services and Fitch Ratings reduced the debt rating on AES senior
unsecured notes to B from BB-. On October 3, 2002, Standard & Poor's lowered
its rating on the Partnership's $550 million pass though trust certificates and
$35 million working capital facility bank loan to BB+ from BBB- solely due to
the Partnership's rating linkage to The AES Corporation. The rating was also
placed on CreditWatch with negative implications. In a press release announcing
the ratings downgrade of the Partnership's debt, Standard & Poor's noted that
in most circumstances, it will not rate the debt of a wholly owned subsidiary
higher than the rating of the parent. Even though the Partnership believes that
the provisions of its financing arrangements render it bankruptcy remote from
The AES Corporation, Standard & Poor's stated that it did not view these
provisions as 100% preventative of the risk of the Partnership being filed into
bankruptcy in the event of a bankruptcy of The AES Corporation. Therefore,
Standard & Poor's limited the rating differential provided by such structural
elements to three notches and stated that the Partnership's credit ratings
cannot be higher than BB+.
The Partnership's commercial agreements typically include adequate assurance
provisions relating to trade credit and some agreements have credit rating
triggers. These trigger events typically would give counterparties the right to
suspend or terminate credit when the Partnership's credit ratings were
downgraded. Under such circumstances, the Partnership would need to post
collateral to continue transacting risk-management business with many of its
counterparties under either adequate assurance or specific credit rating
trigger clauses. The cost of posting collateral would have a negative effect on
the Partnership's profitability and increase the volatility of the
Partnership's earnings. If such collateral were not posted, the Partnership's
ability to continue transacting business as before the ratings downgrade would
be impaired. Since the Partnership's ratings downgrade, only one of the
Partnership's counterparties made a margin call, which was in the amount of $1
million. After discussions with this counterparty, the Partnership provided a
letter of credit for $500,000, which expires at December 31, 2002.
13
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES NY, L.L.C.
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(Amounts in Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets
Restricted cash:
Operating - cash and cash equivalents ... $ 20,588 $ 5,805
Revenue account ......................... 28,129 71,606
Accounts receivable - trade ................. 29,742 27,590
Accounts receivable - affiliates ............ 2,935 3,254
Accounts receivable - other ................. 2,712 2,316
Inventory ................................... 26,760 29,615
Prepaid expenses ............................ 7,439 6,539
---------- ----------
Total Current Assets .................... 118,305 146,725
Property, Plant, Equipment and Related Assets
Land ........................................ 7,351 7,334
Electric generation assets(net of accumulated
depreciation of $87,890 and $66,962) ..... 718,790 733,473
Other intangible assets(net of accumulated
amortization of $26,247 and $19,941) ........ 219,568 225,864
---------- ----------
Total property, plant, equipment
and related assets ................. 945,709 966,671
Other Assets
Derivative valuation asset .................. 11,846 55,182
Rent reserve account ........................ 31,341 31,719
---------- ----------
Total Assets ............................ $1,107,201 $1,200,297
========== ==========
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities
Accounts payable ............................ $ 3,215 $ 1,663
Lease financing - Current ................... 1,665 6,223
Environmental remediation ................... 15 155
Accrued interest expense .................... 14,098 28,353
Due to The AES Corporation and affiliates ... 7,539 6,586
Other accrued expenses and liabilities ...... 21,400 19,401
---------- ----------
Total Current Liabilities ................. 47,932 62,381
Long-term liabilities
Lease financing - long-term ................. 637,661 639,326
Environmental remediation ................... 11,260 13,420
Defined benefit plan obligation ............. 15,269 16,630
Derivative valuation liability .............. 13,137 26,665
Transmission Congestion Contract ............ 3,177 3,506
Other liabilities ........................... 1,110 1,058
---------- ----------
Total Long-term Liabilities ............... 681,614 700,605
---------- ----------
Total Liabilities ......................... 729,546 762,986
Commitments and Contingencies (Note 3)
Minority Interest ............................. 373,879 432,938
Member's Equity ............................... 3,776 4,373
---------- ----------
Total Liabilities and Member's Equity ......... $1,107,201 $1,200,297
========== ==========
The notes are an integral part of the condensed consolidated financial
statements.
14
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
Note 1. Condensed Consolidated Balance Sheets
The accompanying unaudited condensed consolidated balance sheets of AES NY,
L.L.C. (the Company) reflect all adjustments which are necessary, in the
opinion of management, for a fair presentation of the Company's consolidated
financial position for the interim periods. All such adjustments are of a
normal recurring nature. The unaudited condensed consolidated balance sheets
should be read in conjunction with the Company's consolidated balance sheet as
of December 31, 2001 and notes contained therein, which are set forth in the
Annual Report on Form 10-K of AES Eastern Energy, L.P. (AEE) for the year ended
December 31, 2001.
Note 2. Plants Placed on Long-Term Cold Standby
During the fourth quarter of 2000, AES Creative Resources, L.P. (ACR) placed
its AES Hickling and AES Jennison plants (ACR Plants) on long-term cold
standby. The long-term cold standby designation means that these plants require
more than 14 days to be brought on-line. The Company is currently evaluating
the future of these plants. AES Hickling will be fully depreciated at the end
of the current year. AES Jennison is currently fully depreciated.
Note 3. Commitments and Contingencies
Coal Purchases - In connection with the acquisition by AEE of its four
coal-fired electric generating stations (the AEE Plants), AEE assumed from New
York State Electric & Gas Corporation (NYSEG) an agreement to purchase the coal
required by the AEE Somerset and Cayuga plants. Each year either party can
request renegotiation of the price of one-third of the coal supplied pursuant
to this agreement. During 2001, the coal suppliers were committed to sell and
AEE was committed to purchase all three lots of coal for the Somerset Plant as
well as 70% of the anticipated coal purchases for the Cayuga Plant. The
supplier requested renegotiation during 2001 for the 2002 lot, but the parties
failed to reach agreement. Therefore, the parties have current commitments in
2002 with respect to only two lots for the Somerset Plant and 50% of the
anticipated coal purchases at the Cayuga Plant. The supplier requested
renegotiation during 2002 for the 2003 lot plus the 2002 lot for which
agreement was not reached. On September 11, 2002, the AEE and the supplier
reached agreement on both of the lots. Therefore, the commitment of the AEE for
2003 is three lots for the Somerset Plant plus 70% of the anticipated coal
usage for the Cayuga Plant. The termination date for the contract is December
31, 2003. No later than June 30, 2003, the parties shall meet to determine if
the agreement is to be extended under mutually agreeable terms and conditions.
If the agreement were not extended, AEE would seek a new coal supplier. As of
the acquisition date of the Plants, the contract prices for the coal purchased
through 2002 were above the market price, and AEE recorded a purchase
accounting liability for approximately $15.7 million related to the fulfillment
of its obligation to purchase coal under this agreement. The purchase
accounting liability is amortized as a reduction to coal expense over the life
of the contract. As of September 30, 2002, the remaining liability was
approximately $1.1 million.
As of September 30, 2002, AEE's remaining anticipated coal purchases for the
year ending December 31, 2002 were between $20.0 and $23.0 million. Based on
the coal purchase commitments for 2003, AEE has expected coal purchases ranging
between $78.2 million and $86.2 million.
Transmission Agreements - On August 3, 1998, the Company entered into an
agreement for the purpose of transferring certain rights and obligations from
NYSEG to the Company under an existing transmission agreement among Niagara
Mohawk Power Corporation (NIMO), the New York Power Authority, NYSEG and
Rochester Gas & Electric Corporation, and an existing transmission agreement
between NYSEG and NIMO. This agreement provides for the assignment of rights to
transmit energy from the Somerset Plant and other sources to remote load areas
and other delivery points, and was assumed by AEE on the date of acquisition of
the Plants. In accordance with its plan, as of the acquisition date, AEE
discontinued using this service. AEE did not transmit over these lines but was
required to pay the current fees until the effective cancellation date,
November 19, 1999. These fees aggregated approximately $3.4 million over the
six months ended December 31, 1999, and were recorded as a purchase accounting
liability. Because AEE did not use the lines during this period, AEE received
no economic benefit subsequent to the acquisition.
AEE was informed by NIMO that AEE would be responsible for the monthly fees of
$500,640 under the existing transmission agreement to the originally scheduled
termination date of October 1, 2004. On October 5, 1999, AEE filed a complaint
against NIMO alleging that AEE has a right to non-firm transmission service
upon six months prior notice without payment of $500,640 in monthly fees
subsequent to the cancellation date of November 19, 1999.
15
On March 9, 2000, a settlement was reached between AEE and NIMO, which was
approved by the Federal Energy Regulatory Commission (FERC). According to the
settlement, AEE will continue to pay NIMO a fixed rate of $500,640 per month
during the period of November 20, 1999 to October 1, 2004 and, in turn, will
receive a form of transmission service commencing on May 1, 2000, which AEE
believes will provide an economic benefit over the period of May 1, 2000 to
October 1, 2004.
AEE has the right under a Remote Load Wheeling Agreement (RLWA) to transmit 298
MW over firm transmission lines from the Somerset Plant. AEE has the right to
designate alternate points of delivery on NIMO's transmission system provided
that AEE is not entitled to receive any transmission service charge credit on
the NIMO system.
On November 1, 2000, the effective date of the final settlement, the
transmission contract was classified as an energy-trading contract as defined
in Emerging Issues Task Force (EITF) No. 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." From January 1,
2001 the contract was accounted for as a derivative under SFAS No. 133. The
transmission contract was entered into because it provided a reasonable
settlement for resolving a FERC issue. The agreement is essentially a swap
between the congestion component of the locational prices posted daily by the
New York ISO in western New York and the more heavily populated areas in
eastern New York. The agreement is a financially settled contract since there
is no requirement to flow power under this agreement. The agreement generates
gains or losses from exposure to shifts or changes in market prices. AEE
recorded income of approximately $4.2 million in the first nine months of 2002
related to this contract.
Line of Credit Agreement - On May 14, 1999, AEE established a three-year
revolving working capital credit facility of up to $50 million for the purpose
of making funds available to pay for certain operating and maintenance costs.
This facility was terminated as of March 9, 2001. In April 2001, AEE entered
into a $35 million secured revolving working capital and letter of credit
facility with Union Bank of California, N.A. This facility has a term of
approximately twenty-one months. AEE can borrow up to $35 million for working
capital purposes under this facility. In addition, AEE can have letters of
credit issued under this facility up to $25 million, provided that the total
amount of working capital borrowings and letters of credit issuances may not
exceed the $35 million limit on the entire facility. Since the new facility was
signed, there have been three borrowings. The first borrowing was for $7
million on July 13, 2001 at an interest rate of 8.125%. The borrowing was
repaid on July 31, 2001. The second borrowing was for $8.5 million on January
11, 2002 at an interest rate of 6.125%. The borrowing was repaid in full on
February 28, 2002. The third borrowing was for $14.0 million on July 9, 2002,
at an interest rate of 6.125%. AEE repaid the borrowing in two installments:
$7.2 million on July 31, 2002 and $6.8 million on August 28, 2002.
AEE has signed an Agreement with Union Bank of California, N.A. for a one-year
extension of our current facility, which has been placed into escrow. The
amendment is dated November 20, 2002 and will become effective once the
conditions precedent are met. Currently, lenders have committed to provide only
$15 million of the $35 million secured revolving working capital and letter of
credit facility. The Partnership has 180 days from the effective date of the
agreement to syndicate the remaining $20 million.
Environmental - The Company has recorded a liability of $12 million as an
undiscounted liability under purchase accounting for environmental remediation
associated with the acquisition of the AEE Plants and the ACR Plants. On an
ongoing basis, the Company monitors its compliance with environmental laws.
Because of the uncertainties associated with environmental compliance and
remediation activities, future costs of compliance or remediation could be
higher or lower than the amount currently accrued.
AEE received an information request letter dated October 12, 1999 from the New
York Attorney General, which seeks detailed operating and maintenance history
for the Westover and Greenidge Plants. On January 13, 2000, the Company
received a subpoena from the New York State Department of Environmental
Conservation (DEC) seeking similar operating and maintenance history from the
AEE and ACR Plants. This information is being sought in connection with the
Attorney General's and the DEC's investigations of several electricity
generating stations in New York that are suspected of undertaking modifications
in the past without undergoing an air permitting review. AEE has provided the
requested documentation.
On April 14, 2000, AEE received a request for information pursuant to Section
114 of the Clean Air Act from the U.S. Environmental Protection Agency (EPA)
seeking detailed operating and maintenance history data for the Cayuga and
Somerset Plants. The EPA has commenced an industry-wide investigation of
coal-fired electric power generators to determine compliance with environmental
requirements
16
under the Clean Air Act associated with repairs, maintenance, modifications and
operational changes made to coal-fired facilities over the years.
The EPA's focus is on whether the changes were subject to new source review or
new source performance standards, and whether best available control technology
was or should have been used. AEE has provided the requested documentation.
AEE is currently in negotiation with the EPA and DEC concurrently. If AEE's
current proposal is rejected, the EPA and the DEC could issue a notice or
notices of violation (NOV) to AEE for violations of the Clean Air Act and the
Environmental Conservation Law. If the Attorney General, the DEC or the EPA
does file an enforcement action against the Somerset, Cayuga, Westover, or
Greenidge Plants, then penalties may be imposed and further emission reductions
might be necessary at these Plants which could require AEE to make substantial
expenditures. AEE is unable to estimate the effect of such a NOV on its
financial condition or results of future operations.
By letter dated May 25, 2000, the DEC issued a Notice of Violation (NOV) to
NYSEG for violations of the Clean Air Act and the Environmental Conservation
Law at the Greenidge and Westover Plants related to NYSEG's alleged failure to
obtain an air permitting review for repairs and improvements made during the
1980s and 1990s, which was prior to the acquisition of the Plants by AEE.
Pursuant to the purchase agreement relating to the acquisition of the Plants
from NYSEG, AEE agreed to assume responsibility for environmental liabilities
that arose while NYSEG owned the Plants. On September 12, 2000, AEE agreed with
NYSEG that AEE will assume the defense of and responsibility for the NOV,
subject to a reservation of its right to assert applicable exceptions to its
contractual undertaking to assume preexisting environmental liabilities. The
financial and operational effect of this NOV is still being discussed with the
DEC.
Nitrogen Oxide and Sulfur Dioxide Emission Allowances - The AEE Plants emit
nitrogen oxide (NOX) and sulfur dioxide (SO2) as a result of burning coal to
produce electricity. The six Plants have been allocated allowances by the DEC
to emit NOX during the ozone season, which runs from May 1 to September 30.
Each NOX allowance authorizes the emission of one ton of NOX during the ozone
season. The six Plants are also subject to SO2 emission allowance requirements
imposed by the EPA. Each SO2 allowance authorizes the emission of one ton of
SO2 during the calendar year. Both NOX and SO2 allowances may be bought, sold,
or traded. If NOX and/or SO2 emissions exceed the allowance amounts allocated
to the six Plants, then the Company may need to purchase additional allowances
on the open market or otherwise reduce its production of electricity to stay
within the allocated amounts. The Plants were net sellers of NOX allowances in
2001 and are also expected to have a surplus of NOx allowances in 2002. The
Plants were self-sufficient with respect to SO2 allowances in 2001; however, it
is expected that the AEE Plants may have a shortfall of approximately 5,000 to
7,000 SO2 allowances in 2002. The majority of the SO2 allowance shortfall was
covered with allowances purchased from the ACR Plants, which are on long-term
cold standby. The allowances were purchased at quoted market prices.
On October 16, 2001, AES Greenidge was awarded a Federal Clean Coal Grant that,
if accepted, will fund 50% of the capital costs for backend technology and 30%
of the operations and maintenance costs for a test and demonstration period.
This technology will include a single bed, in-duct Selective Catalytic
Reduction (SCR) unit in combination with low-NOX combustion technology, on
Greenidge Unit 4 firing on coal and biomass. It will also include a Circulating
Dry Scrubber (CDS) for SO2, Mercury and acid gas removal. AES Greenidge's share
of the costs for the project will be approximately $9.8 million. AES Greenidge
has submitted a written request to the Department of Energy, which administers
the Clean Coal program, for a 12 to 18 month delay in starting the grant. This
request was made in light of the current difficulties in the electricity and
credit markets and the uncertain state regulatory environment.
In October 1999, ACR entered into a consent order with the DEC to resolve
alleged violations of the water quality standards in the groundwater
downgradient of an ash disposal site. The consent order included a suspended
$5,000 civil penalty and a requirement to submit a work plan to initiate
closure of the landfill by October 8, 2000. The consent order also called for a
site investigation, which was conducted and indicated that there is a
possibility that some groundwater remediation at the site may be required.
Further compliance with this order included a Closure Investigation Report
which was submitted to the NYSDEC in the spring of 2000, and a Closure Plan
which was submitted to the NYSDEC in January 2001. The Closure Plan was
implemented in December 2001 when capping of the site was completed. AEE
contributed one-half of the costs to close the landfill, which were
approximately $2 million, and it will contribute additional costs for long-term
groundwater monitoring. Nevertheless, if a groundwater remediation is required,
these costs have not been budgeted, and AEE may be responsible for a portion of
such costs.
17
ACR has recently reported that concentrations of a number of chemicals in a few
groundwater wells increased in the year ending December 31, 2001, since the
Jennison and Hickling Plants were placed on long-term cold standby. The early
2002 testing data indicates that the increase in concentrations has ended and
are starting to decrease. ACR and the DEC have agreed that remediation is not
needed at this time. ACR will continue to monitor the groundwater conditions
and include an assessment of the groundwater concentration trends in its 2002
annual report to the DEC.
In April 2002, EPA proposed to establish location, design, construction and
capacity standards for cooling water intake structures at existing power
plants. The EPA is developing these regulations under the terms of an Amended
Consent Decree in Riverkeeper, Inc vs. Whitman, US District Court, Southern
District of New York. It has been reported that EPA reached an agreement in
principle with the plaintiffs to propose changes to the 316(b) rulemaking
schedule. Pending agreement by the judge for modifying the deadlines, the new
scheduled finalization of the rules for existing facilities has been extended
by 6 months to February 16, 2004. These new rules will impose new compliance
requirements, with potentially significant costs, on operating plants across
the nation. Cost items include various environmental and engineering studies,
and potential capital and maintenance costs. AEE has not determined the effects
of these regulations on its financial condition.
AEE is obligated to make payments under the Coal Hauling Agreement with
Somerset Railroad Corporation (SRC), an affiliated company, in an amount
sufficient, when added with funds available from other sources, to enable SRC
to pay, when due, all of its operating expenses and other expenses, including
interest on and principal of outstanding indebtedness. For the nine-month
period ended September 30, 2002 and 2001, AEE had recorded $2.9 million and
$3.6 million, respectively, as operating expenses and other accrued liabilities
under this agreement. On August 14, 2000, SRC entered into a $26 million credit
facility with Fortis Capital Corp. which replaced in its entirety a credit
facility for the same amount previously provided to SRC by an affiliate of CIBC
World Markets. The new credit facility provided by Fortis Capital Corp.
consists of a 14-year term note (maturing on May 6, 2014), with principal and
interest payments due quarterly. The current interest rate on the loans under
this credit facility is equal to a Base Rate plus 0.625% for the Base Rate
loans and LIBOR plus 1.375% for LIBOR loans. The principal amount of SRC's
outstanding indebtedness under this credit facility was approximately $21.8
million as of September 30, 2002.
The agreements governing the leases of the Somerset and Cayuga Plants include
negative covenants restricting AEE's ability to incur indebtedness and to make
payments to its partners (which are referred to as restricted payments). The
incurrence of indebtedness covenant states that neither AEE nor any of its
subsidiaries may create, incur, assume, suffer to exist, guarantee or otherwise
become directly or indirectly liable with respect to indebtedness except for
permitted indebtedness. Neither SRC nor the limited liability company that owns
SRC may incur any indebtedness, other than the SRC credit facility or a
replacement facility or other than any operating leases in respect of rail
assets, without the written consent of the institutional investors that
organized the trusts that own the Somerset and Cayuga Plants and lease them to
AEE. These agreements do permit AEE to incur indebtedness for certain purposes
and subject to applicable limits, including indebtedness to finance
modifications to the Somerset and Cayuga Plants required by law and up to
$100,000,000 of additional indebtedness, provided that no more than $75,000,000
of such additional indebtedness may be incurred to provide working capital and
no more than $50,000,000 of such additional indebtedness may be secured by
liens upon AEE's assets and no more than $25,000,000 of such additional
indebtedness may be incurred for purposes other than to provide working
capital. The covenant restricting incurrence of indebtedness will restrict the
Company's future ability to obtain additional debt financing for working
capital, capital expenditures or other purposes.
Note 4. Price Risk Management
Comprehensive Income - As of September 30, 2002, the Company has recorded $1.0
million of other comprehensive loss due to the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In the years
prior to the adoption of SFAS No. 133, the Company did not have any items of
other comprehensive income.
18
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which, as amended and interpreted,
established new accounting and reporting standards for derivative instruments
and hedging activities. The Statement requires that the Company recognize all
derivatives, as defined in the Statement, on the balance sheet at fair value.
Derivatives, or any portion thereof, that are not effective hedges are adjusted
to fair value through income. Under this Statement, the asset retirement
obligation is recorded at fair value in the period in which it is incurred by
increasing the carrying amount of the related long-lived asset. The liability
is accreted to its present value in each subsequent value and the capitalized
cost is depreciated over the useful life of the related asset. Derivatives that
are effective hedges are adjusted to fair value through other comprehensive
income (loss) until the hedged items are recognized in earnings. The adoption
of SFAS No. 133 on January 1, 2001 resulted in a cumulative reduction of Other
Comprehensive Income (OCI) in member's equity of $66.3 million.
AEE utilizes derivative financial instruments to hedge commodity price risk.
AEE utilizes electric derivative instruments, including swaps and forwards, to
hedge the risk related to forecasted electricity sales over the next four
years. The majority of AEE's electric derivatives are designated and qualify as
cash flow hedges. No hedges were derecognized or discontinued during the nine
months ended September 30, 2002. No significant amounts of hedge
ineffectiveness were recognized in earnings during the nine months ended
September 30, 2002.
Gains and losses on derivatives reported in accumulated other comprehensive
income are reclassified into earnings when the hedged forecasted sale occurs.
Approximately, $6.3 million of other comprehensive income is expected to be
recognized as an addition to earnings over the next twelve months. Amounts
recorded in other comprehensive income during the nine months ended September
30, 2002, were as follows (in millions):
Balance, December 31, 2001 $28.5
Reclassified to earnings 12.3
Change in fair value (41.8)
------
Balance, September 30, 2002 $(1.0)
======
In addition to the electric derivatives classified as cash flow hedge
contracts, AEE has a Transmission Congestion Contract that is a derivative
under the definition of SFAS No. 133, but does not qualify for hedge
accounting. This contract is recorded at fair value on the balance sheet with
changes in the fair value recognized through earnings.
Note 5. New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, entitled, "Goodwill and Other
Intangible Assets." This standard eliminates the amortization of goodwill, and
requires goodwill to be reviewed periodically for impairment. This standard
also requires the useful lives of previously recognized assets to be adjusted
accordingly. This standard is effective for fiscal years beginning after
December 15, 2001, for all goodwill and other intangible assets recognized on
the Company's balance sheet at that date, regardless of when the assets were
initially recognized. Intangible assets were created in the acquisition, that
were inseparable from the electric generation assets acquired; therefore, the
intangible assets have a definite life. The Company will continue to amortize
the other intangible assets currently recorded on the balance sheet. The
adoption of SFAS 142 did not have a significant impact on the Company's
financial position or results of operations. Any future impairment will be
determined in accordance with the provisions of SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets."
In July 2001, the FASB issued SFAS No. 143, entitled "Accounting for Asset
Retirement Obligations." This standard is effective for fiscal years beginning
after June 15, 2002, and provides accounting requirements for asset retirement
obligations associated with tangible long-lived assets. The Company has not
determined the effects of this standard on its financial position or results
from operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." The provisions of this statement are effective
for financial statements issued for fiscal years beginning after December 15,
2001, and address reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 provides guidance for developing estimates of future cash
flows used to test assets for recoverability and requires that assets to be
disposed of be classified as held for sale when certain criteria are met. The
statement also extends the reporting of discontinued operations to all
components of an entity and provides guidance for recognition of a liability
for obligations associated with disposal activity. The initial adoption of the
provisions of SFAS No. 144 did not have any material impact on its financial
position or results of operations.
19
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature.
The changes related to debt extinguishment will be effective for fiscal years
beginning after May 15, 2002, and the changes related to lease accounting will
be effective for transactions occurring after May 15, 2002. Adoption of this
standard will not have any immediate effect on the Company's consolidated
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized. This standard will be
accounted for prospectively.
Note 6. Subsequent Events
On October 3, The AES Corporation announced plans to secure a new a $1.6
billion bank facility and began an offer to exchange up to $500 million of
senior notes for cash and secured notes. Based on this news, Standard & Poor's
Ratings Services and Fitch Ratings reduced the debt rating on AES senior
unsecured notes to B from BB-. On October 3, 2002, Standard & Poor's lowered
its rating on AEE's $550 million pass though trust certificates and $35 million
working capital facility bank loan to BB+ from BBB- solely due to AEE's rating
linkage to The AES Corporation. The rating was also placed on CreditWatch with
negative implications. In a press release announcing the ratings downgrade of
AEE's debt, Standard & Poor's noted that in most circumstances, it will not
rate the debt of a wholly owned subsidiary higher than the rating of the
parent. Even though AEE believes that the provisions of its financing
arrangements render it bankruptcy remote from The AES Corporation, Standard &
Poor's stated that it did not view these provisions as 100% preventative of the
risk of AEE being filed into bankruptcy in the event of a bankruptcy of The AES
Corporation. Therefore, Standard & Poor's limited the rating differential
provided by such structural elements to three notches and stated that AEE's
credit ratings cannot be higher than BB+.
AEE's commercial agreements typically include adequate assurance provisions
relating to trade credit and some agreements have credit rating triggers. These
trigger events typically would give counterparties the right to suspend or
terminate credit when AEE's credit ratings were downgraded. Under such
circumstances, AEE would need to post collateral to continue transacting
risk-management business with many of its counterparties under either adequate
assurance or specific credit rating trigger clauses. The cost of posting
collateral would have a negative effect on AEE's profitability and increase the
volatility of AEE's earnings. If such collateral were not posted, AEE's ability
to continue transacting business as before the ratings downgrade would be
impaired. Since AEE's ratings downgrade, only one of AEE's counterparties made
a margin call, which was in the amount of $1 million. After discussions with
this counterparty, AEE provided a letter of credit for $500,000, which expires
at December 31, 2002.
20
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information in this Management's Discussion and Analysis should be read in
conjunction with the accompanying consolidated financial statements and the
related Notes to the Financial Statements. Forward looking statements in this
Management's Discussion and Analysis are qualified by the cautionary statement
in the Forward Looking Statements section of the Management's Discussion and
Analysis of Results of Operations and Financial Condition.
Significant Accounting Policies
General
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the periods presented. The significant accounting policies which we
believe are most critical to understanding and evaluating our reported
financial results include the following: Revenue Recognition, Property, Plant
and Equipment, Contingencies and Derivatives.
Revenue Recognition
Revenues from the sale of electricity are recorded based upon output delivered
and rates specified under contract terms. Revenues generated from commodity
forwards, swaps and options, which are entered into for the hedging of
forecasted sales, are recorded based on settlement accounting with the net
amount received recognized as revenue. Revenues for ancillary and other
services are recorded when the services are rendered.
Property, Plant and Equipment
Electric generation assets and inseparable intangible assets that existed at
the date of acquisition are recorded at fair market value. Somerset and Cayuga,
which represent $650 million of the electric generation assets, are subject to
a leasing arrangement accounted for as a financing. Additions or improvements
thereafter are recorded at cost. Depreciation is computed using the
straight-line method over the 34-year and 28-year lease terms for Somerset and
Cayuga, respectively, and over the estimated useful lives for the other fixed
assets, which range from 7 to 35 years. The lease expiration date for the
Cayuga lease is November 13, 2027 and the lease expiration date for the
Somerset lease is February 13, 2033. A significant decrease in the estimated
useful lives of a material amount of our property, plant or equipment could
have a material adverse impact on our operating results in the period in which
the estimate is revised and subsequent periods. Maintenance and repairs are
charged to expense as incurred.
Contingencies
We accrue for loss contingencies when the amount of the loss is probable and
estimable. We are subject to various environmental regulations, and we are
involved in certain legal proceedings. If our actual environmental and/or legal
obligations are materially different from our estimates, the recognition of the
actual amounts may have a material impact on our operating results and
financial condition.
Derivatives
On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended and interpreted,
established new accounting and reporting standards for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives (including
derivatives embedded in other contracts) be recorded as either assets or
liabilities at fair value on the balance sheet. Changes in the derivative's
fair value are to be recognized in earnings in the period of change, unless
hedge accounting criteria are met. Hedge accounting allows the derivative's
gains or losses in fair value to offset the related results of the hedged item.
We utilize derivative financial instruments to manage commodity price risk.
Although the majority of our derivative instruments qualify for hedge
accounting, SFAS No. 133 resulted in more variation to our results of
operations from changes in commodity prices. For the nine months ended
September 30, 2002 and 2001, we recognized $4.2 million and $26.2 million of
income and loss, respectively, pursuant to SFAS No. 133 related to derivatives,
which did not qualify for hedge accounting.
21
Results of Operations for the three months ended September 30, 2002
- -------------------------------------------------------------------------
(Amounts in Millions)
%
For the three months ended September 30, 2002 2001 Change
------ ------ -------
Energy revenue ................. $ 87.2 $ 95.5 (8.7)
Capacity revenue ............... 11.8 6.4 84.4
Transmission Congestion Contract (14.7) (13.7) (7.3)
Other .......................... 1.4 0.4 --
Energy revenues for the three months ended September 30, 2002 were $87.2
million, compared to $95.5 million for the comparable period of the prior
calendar year, a decrease of 8.7%. The decrease in Energy Revenues is primarily
due to lower market prices and lower demand. Market prices for peak electricity
were 4.13% lower than the comparable period of the prior calendar year. Market
prices for offpeak electricity were 1.1% higher than the comparable period of
the prior calendar year. Demand for peak and offpeak electricity was 0.4% and
1.40% higher, respectively, than the comparable period of the prior calendar
year. The year-to-year price and demand comparisons are based on data reported
by the New York ISO.
Capacity revenues for the three months ended September 30, 2002 were $11.8
million, compared to $6.4 million for the comparable period of the prior
calendar year, an increase of 84.4%. The increase in capacity revenue is
primarily due to the higher bilateral prices received for the current summer
capacity period (May - October) over the prior year's summer capacity period.
Transmission Congestion Contract loss for the three months ended September 30,
2002 was $14.7 million, compared to a loss of $13.7 million for the comparable
period of the prior calendar year. This agreement is essentially a swap between
the congestion component of the locational prices posted by the New York ISO in
western New York and eastern New York. This contract is a derivative under the
definition of SFAS No. 133, but does not qualify for hedge accounting. This
contract is recorded at fair value on the balance sheet with changes in the
fair value recognized through earnings. The transmission contract was entered
into because it provided a reasonable settlement for resolving a FERC dispute
between the Partnership and Niagara Mohawk Power Corporation.
Operating Expenses
- -------------------- %
For the three months ended September 30, 2002 2001 Change
------ ------ -------
Fuel expense $36.8 $36.6 0.5
Operations and maintenance 4.0 4.7 (14.9)
General and administrative 17.1 13.7 24.8
Depreciation and amortization 9.0 8.7 3.4
Fuel expenses for the three months ended September 30, 2002 were $36.8 million,
compared to $36.6 million for the comparable period of the prior calendar year,
an increase of 0.5%.
Operations and maintenance expense for the three months ended September 30,
2002 was $4.0 million, compared to $4.7 million for the comparable period of
the prior calendar year, a decrease of 14.9%. We have initiated a cost
reduction program.
General and administrative expense for the three months ended September 30,
2002 was $17.1 million, compared to $13.7 million for the comparable period of
the prior calendar year, an increase of 24.8%. This increase is primarily due
to significant increases in property taxes and property and medical insurance
and a voluntary early retirement program. Twenty-seven of the fifty-six
employees eligible accepted the voluntary early retirement program. The
voluntary early retirement program will increase expenses in 2002 by $514,000
but provides projected savings of $1.5 million and $1.7 million in 2003 and
2004, respectively.
Depreciation and amortization expense for the three months ended September 30,
2002 was $9.0 million, compared to $8.7 million for the comparable period of
the prior calendar year, an increase of 3.4%.
22
Other Expenses
- -------------------- %
For the three months ended September 30, 2002 2001 Change
------ ------ -------
Interest expense $15.6 $14.4 8.3
Interest income 0.5 0.8 (37.5)
(Loss)gain on derivative valuation (0.4) 0.3 -
Other income/expenses for the three months ended September 30, 2002 were net
expenses of $15.5 million, compared to net expenses of $13.3 million for the
comparable period of the prior calendar year, an increase of 16.5%.
Results of Operations for the nine months ended September 30, 2002
- ------------------------------------------------------------------
(Amounts in Millions)
%
For the nine months ended September 30, 2002 2001 Change
------ ------ -------
Energy revenue $222.4 $270.8 (17.9)
Capacity revenue 27.0 21.0 28.6
Transmission Congestion Contract 4.2 (26.2) --
Other 6.1 4.2 45.2
Energy revenues for the nine months ended September 30, 2002 were $222.4
million, compared to $270.8 million for the comparable period of the prior
calendar year, a decrease of 17.9%. The decrease in Energy Revenues is
primarily due to lower market prices and lower demand. Market prices for peak
and off-peak electricity were 26.4% and 20.6% lower, respectively, than the
comparable period of the prior calendar year. Demand for peak and off-peak
electricity was 3.4% and 3.3% lower than the comparable period of the prior
calendar year. The year-to-year price and demand comparisons are based on data
reported by the New York ISO.
Capacity revenues for the nine months ended September 30, 2002 were $27.0
million, compared to $21.0 million for the comparable period of the prior
calendar year, an increase of 28.6%. The increase in capacity revenue is
primarily due to the higher bilateral prices received for the current summer
capacity period (May - October) over the prior year's summer capacity period,
although the effects of lower market rates in 2001 were partially offset by a
long-term capacity contract which expired in April 2001.
Transmission Congestion Contract income for the nine months ended September 30,
2002 was $4.2 million, compared to a loss of $26.2 million for the comparable
period of the prior calendar year. This agreement is essentially a swap between
the congestion component of the locational prices posted by the New York ISO in
western New York and eastern New York. This contract is a derivative under the
definition of SFAS No. 133, but does not qualify for hedge accounting. This
contract is recorded at fair value on the balance sheet with changes in the
fair value recognized through earnings. The transmission contract was entered
into because it provided a reasonable settlement for resolving a FERC dispute
between the Partnership and Niagara Mohawk Power Corporation.
Operating Expenses
- -------------------- %
For the nine months ended September 30, 2002 2001 Change
------ ------ -------
Fuel expense $100.8 $101.6 (0.8)
Operations and maintenance 12.4 15.9 (22.0)
General and administrative 43.9 40.4 8.7
Depreciation and amortization 26.4 25.0 5.6
Fuel expenses for the nine months ended September 30, 2002 were $100.8 million,
compared to $101.6 million for the comparable period of the prior calendar
year, a decrease of 0.8%. The decrease in Fuel Expenses is primarily due to
lower operating levels due to lower demand.
23
Operations and maintenance expense for the nine months ended September 30, 2002
was $12.4 million, compared to $15.9 million for the comparable period of the
prior calendar year, a decrease of 22.0%. This decrease is primarily due to
maintenance expenses incurred during a scheduled outage at Cayuga in the second
quarter of 2001, which are not annually recurring expenses. In addition, we
have initiated a cost reduction program.
General and administrative expense for the nine months ended September 30, 2002
was $43.9 million, compared to $40.4 million for the comparable period of the
prior calendar year. Significant increases in property taxes and property and
medical insurance were offset by reversal of accruals for potential
environmental liabilities which were resolved at a lower cost than projected.
The voluntary early retirement program will increase expenses in 2002 by
$514,000 but provides projected saving of $1.5 million and $1.7 million in 2003
and 2004, respectively.
Depreciation and amortization expense for the nine months ended September 30,
2002 was $26.4 million, compared to $25.0 million for the comparable period of
the prior calendar year, an increase of 5.6%. This increase is primarily due to
deprecation of the SCR system to reduce NOx emissions at Cayuga, which was
operational June 7, 2001.
Other Expenses
- -------------------- %
For the nine months ended September 30, 2002 2001 Change
------ ------ -------
Interest expense $44.4 $44.0 0.9
Interest income 1.6 3.0 (46.7)
(Loss)gain on derivative valuation (0.3) 0.1 --
Other income/expenses for the nine months ended September 30, 2002 were net
expenses of $43.1 million, compared to net expenses of $40.9 million for the
comparable period of the prior calendar year, an increase of 5.4%.
Liquidity and Capital Resources
- ----------------------------------
Net working capital at September 30, 2002 and December 31, 2001 was $66.1
million and $80.1 million, respectively.
Cash Flows
Operating Activities
For the nine-month period ended September 30, 2002 and 2001, Cash flows from
operations were $46 million and $83 million, respectively. The reduction in
cash flows from operations is primarily due to the reduction in Net Income and
the loss in the Transmission Congestion Contract.
Cash flow from our operations during the first half of 2002 was sufficient to
cover the aggregate rental payments under the leases of Somerset and Cayuga
paid July 2, 2002. We believe that cash flow from our full years' operations
will be sufficient to cover aggregate rental payments due on January 2, 2003.
We also believe that future cash flows will be sufficient to cover future rent
payments. The lease expiration date for the Cayuga lease is November 13, 2027
and the lease expiration date for the Somerset lease is February 13, 2033.
We are obligated to make payments under the Coal Hauling Agreement with
Somerset Railroad Corporation (SRC), an affiliated company, in an amount
sufficient, when added with funds available from other sources, to enable SRC
to pay, when due, all of its operating expenses and other expenses, including
interest on and principal of outstanding indebtedness. As of September 30, 2002
and 2001, we had recorded $2.9 million and $3.6 million, respectively, as
operating expenses and other accrued liabilities under this agreement. On
August 14, 2000, SRC entered into a $26 million credit facility with Fortis
Capital Corp. which replaced in its entirety a credit facility for the same
amount previously provided to SRC by an affiliate of CIBC World Markets. The
new credit facility provided by Fortis Capital Corp. consists of a 14-year term
note (maturing on May 6, 2014), with principal and interest payments due
quarterly. The current interest rate on the loans under this credit facility is
equal to a Base Rate plus 0.625% for the Base Rate loans and LIBOR plus 1.375%
for LIBOR loans. The principal amount of SRC's outstanding indebtedness under
this credit facility was approximately $21.8 million as of September 30, 2002.
24
At March 9, 2001, our $20 million Credit Suisse First Boston working capital
credit facility was terminated. In April 2001, we entered into a $35 million
secured revolving working capital and letter of credit facility with Union Bank
of California, N.A. This facility has a term of approximately twenty-one
months. We can borrow up to $35 million for working capital purposes under this
facility. In addition, we can have letters of credit issued under this facility
up to $25 million, provided that the total amount of working capital borrowings
and letters of credit issuances may not exceed the $35 million limit on the
entire facility. There have been three borrowings under this facility from
signing through August 14, 2002. The first borrowing was for $7 million on July
13, 2001 at an interest rate of 8.125%. The borrowing was repaid on July 31,
2001. The second borrowing was for $8.5 million on January 11, 2002 at an
interest rate of 6.125%. The borrowing was repaid in full on February 28, 2002.
The third borrowing was for $14.0 million on July 9, 2002 at an interest rate
of 6.125%. The borrowing was repaid in two installments: $7.2 million on July
31, 2002 and $6.8 million on August 28, 2002.
We have signed an Agreement with Union Bank of California, N.A. for a one-year
extension of our current facility, which has been placed in escrow. The
amendment is dated November 20, 2002 and will become effective once the
conditions precedent are met. Currently, lenders have committed to provide only
$15 million of the $35 million secured revolving working capital and letter of
credit facility. The Partnership has 180 days from the effective date of the
agreement to syndicate the remaining $20 million.
The Somerset, Cayuga and Westover generating stations have created Voluntary
Employees' Beneficiary Associations ("VEBA") to fund their retiree medical
expenses. Employer contributions to pay the claims of the employees are
deposited in the VEBA Trusts. Currently, the VEBA Trusts are to pay the medical
claims of the employees who are union members and who retire between the ages
of 55 and 65 and the medical claims of their spouses. Some of the VEBA trusts
offer supplemental Medicare benefits, the other Trusts' coverages end when the
employee is Medicare eligible. These VEBA trusts were created in 2002, and are
not currently fully funded.
The Greenidge generating station has accrued $2.7 million for their retiree
medical expenses. This accrued expense was estimated using the guidance of SFAS
No.106 "Employers' Accounting for Postretirement Benefit Other than Pension."
This estimate will be adjusted when the actuarial study, now being undertaken
is completed.
The agreements governing the leases of Somerset and Cayuga include negative
covenants restricting our ability to incur indebtedness and to make payments to
our partners (which are referred to as restricted payments). The incurrence of
indebtedness covenant states that neither we nor any of our subsidiaries may
create, incur, assume, suffer to exist, guarantee or otherwise become directly
or indirectly liable with respect to indebtedness except for permitted
indebtedness. Neither SRC nor the limited liability company that owns SRC may
incur any indebtedness, other than the SRC credit facility or a replacement
facility or other than any operating leases in respect of rail assets, without
the written consent of the institutional investors that organized the trusts
that own Somerset and Cayuga and lease them to us. These agreements do permit
us to incur indebtedness for certain purposes and subject to applicable limits,
including indebtedness to finance modifications to Somerset and Cayuga required
by law and up to $100,000,000 of additional indebtedness, provided that no more
than $75,000,000 of such additional indebtedness may be incurred to provide
working capital and no more than $50,000,000 of such additional indebtedness
may be secured by liens upon our assets and no more than $25,000,000 of such
additional indebtedness may be incurred for purposes other than to provide
working capital. The covenant restricting incurrence of indebtedness will
restrict our future ability to obtain additional debt financing for working
capital, capital expenditures or other purposes.
The restricted payment covenant states that neither we nor any of our
subsidiaries may make any distribution (other than to us or to any of our
subsidiaries) unless it is made on or within 10 business days after a rent
payment date, and the following conditions are also satisfied:
(1) all rent under the leases for Somerset and Cayuga, including
deferrable payments, must have been paid to date;
25
(2) amounts on deposit or deemed on deposit in the rent reserve
account and the additional liquidity account established in connection
with the pass through trust certificates issued to finance the
acquisition of Somerset and Cayuga must be equal to or greater than
the rent reserve account required balance or the additional liquidity
required balance, as applicable;
(3) no lease material default, lease event of default or event of
default under any permitted indebtedness shall have occurred and be
then continuing;
(4) no amounts may be outstanding under the working capital credit
facility;
(5) we have no indemnity currently due and payable under specified
provisions of the participation agreements relating to the Somerset
and Cayuga leases or any other operative document or any obligation to
fund the indemnity accounts (as defined in the leases) under the
leases;
(6) the coverage ratios for each of the two semiannual rent payment
periods immediately preceding the rent payment date (based on actual
operating history) must be equal to or greater than the required
coverage ratio and the pro forma coverage ratios for each of the four
semiannual periods immediately succeeding this rent payment date must
be equal to or greater than the required coverage ratio; and
(7) with respect to the SRC credit facility or any replacement
facility, no event of default shall have occurred and be then
continuing under the facilities and the remaining term of the SRC
credit facility or any replacement facility shall not be less than 30
days.
As of September 30, 2002, we were in compliance with all of the conditions of
the restricted payment covenant.
Investing Activities
We incurred approximately $6.6 million and $15.4 million in capital
expenditures with regard to our assets for the nine months ended September 30,
2002 and 2001, respectively. We will make capital expenditures thereafter
according to the maintenance program for our electricity generating stations.
In addition to capital requirements associated with the ownership and operation
of our electricity generating stations, we will have significant fixed charge
obligations in the future, principally with respect to the leases.
Compliance with environmental standards will continue to be reflected in our
capital expenditures and operating costs. Based on the current status of
regulatory requirements, we do not anticipate that any capital expenditures or
operating expenses associated with our compliance with current laws and
regulations will have a material effect on our results of operations or our
financial condition, other than the expenditures for the SCRs at Somerset and
Cayuga, including the construction of new landfill space to manage ash from and
sludge from Somerset's desulfurization and SCR system operations and the
construction of a SCR system on Cayuga Unit 1, which became operational on June
7, 2001, and expenditures for possible installation of a SCR system on Cayuga
Unit 2, the U.S. Department of Energy Power Plant Improvement project on
Greenidge Unit 4 and the Westover Overfire Air Project.
The AES Corporation contributed approximately $1.5 million to us in the first
nine months of 2002. The contribution was accounted for as a partner's
contribution and` was related to the construction of the SCR on Unit 1 of
Cayuga, which became operational on June 7, 2001.
Financing Activities
Cash flow from operations in excess of the aggregate rental payments under our
leases is permitted, if certain criteria are met, to be paid in the form of a
distribution to AES NY, LLC. On January 11, 2002 and July 5, 2002, we made
distribution payments of $32.5 million and $31.4 million, respectively.
26
Credit Rating Discussion
Credit ratings affect our ability to execute our commercial strategies in a
cost-effective manner. In determining our credit rating, the rating agencies
consider a number of factors. Quantitative factors that appear to have
significant weight include, among other things, earnings before interest, taxes
and depreciation and amortization ("EBITDA"); operating cash flow; total debt
outstanding; fixed charges such as interest expense and lease payments;
liquidity needs and availability and various ratios calculated from these
factors. Qualitative factors appear to include, among other things,
predictability of cash flows, business strategy, industry position and
contingencies. As of the filing date, the pass through trust certificates
issued to finance the acquisition of Somerset and Cayuga carry a non-investment
grade rating (BB+) from Standard & Poor's Ratings Services and Fitch IBCA, Inc.
ratings agencies and a non-investment grade rating (Ba1) from Moody's Investors
Service, Inc. rating agency.
On October 3, 2002, Standard & Poor's lowered it rating on our $550 million
pass though trust certificates and $35 million working capital facility bank
loan to BB+ from BBB- solely due to our rating linkage to The AES Corporation.
The rating was also placed on CreditWatch with negative implications.
Trigger Events
Our commercial agreements typically include adequate assurance provisions
relating to trade credit and some agreements have credit rating triggers. These
trigger events typically would give counterparties the right to suspend or
terminate credit if our credit ratings were downgraded. Under such
circumstances, we would need to post collateral to continue transacting
risk-management business with many of our counterparties under either adequate
assurance or specific credit rating trigger clauses. The cost of posting
collateral would have a negative effect on our profitability. If such
collateral were not posted, our ability to continue transacting business as
before the downgrade would be impaired. In response to an earlier downgrade of
The AES Corporation, one of our coal suppliers requested credit assurance based
on a clause specific to their contact. After discussions with the supplier, we
negotiated a agreement for a prepayment system with a discounted price. This
agreement expires on December 31, 2002. On October 8, 2002, one of our
counterparties made a $1 million margin call on us because of the Standard &
Poor's downgrade. After discussions with this counterparty, we provided a
letter of credit for $500,000, which expires at December 31, 2002.
Forward-looking Statements
Certain statements contained in this Form 10-Q are forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of
1995. These forward-looking statements speak only as of the date hereof.
Forward-looking statements can be identified by the use of forward-looking
terminology such as "believe," "expects," "may," "intends," "will," "should" or
"anticipates" or the negative forms or other variations of these terms or
comparable terminology, or by discussions of strategy. Future results covered
by the forward-looking statements may not be achieved. Forward-looking
statements are subject to risks, uncertainties and other factors, which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. The most significant risks,
uncertainties and other factors are discussed under the heading "Business (a)
General Development of Business" in our Annual Report on Form 10-K, and you are
urged to read this section and carefully consider such factors.
27
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The principal executive
officer and principal financial officer of our General Partner, after
evaluating the effectiveness of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
240.15d-14(c)) as of a date (the "Evaluation Date) within 90 days of the filing
date of the quarterly report, have concluded that as of the Evaluation Date,
our disclosure controls and procedures were effective to ensure that material
information relating to us and our consolidated subsidiaries is recorded,
processed, summarized and reported in a timely manner.
Changes in Internal Controls. There were no significant changes in our internal
controls or, to our knowledge in other factors that could significantly affect
such controls, subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 2 to our Condensed Consolidated Financial Statements and Note 3
to the Condensed Consolidated Balance Sheets of AES NY, L.L.C. in Part I.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
28
Signatures
Pursuant to the requirements 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.
AES EASTERN ENERGY, L.P.
By: AES NY, L.L.C., as General Partner
By:/s/ Daniel J. Rothaupt
--------------------------------
Daniel J. Rothaupt
President
By:/s/ Amy Conley
---------------------------------
Amy Conley
Vice President
(principal financial officer)
Date: November 14, 2002
29
CERTIFICATIONS
I, Daniel J. Rothaupt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AES Eastern Energy
L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Daniel J. Rothaupt
--------------------------------
Daniel J. Rothaupt
President
(prinicipal executive officer)
30
CERTIFICATIONS
I, Amy Conley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AES Eastern Energy
L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By:/s/ Amy Conley
---------------------------------
Amy Conley
Vice President
(principal financial officer)