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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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: 333-40478
AES RED OAK, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 54-1889658
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
832 Red Oak Lane, Sayreville, NJ 08872
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 238-1462
Securities Registered Pursuant To Section 12(b) of The Act: None
Securities Registered Pursuant To Section 12(g) of The Act: None
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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 |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. |X|
As of June 28, 2002, the last business day of the registrant's most recently
completed second fiscal quarter, and as of March 7, 2003, there was one
membership interest in AES Red Oak, LLC outstanding, which was held by AES Red
Oak, Inc., the Company's parent and a wholly-owned subsidiary of The AES
Corporation.
All of the Registrant's equity securities are indirectly owned by The AES
Corporation. Registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the
reduced disclosure format authorized by General Instruction I of Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
Page
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS...........................2
PART I......................................................................3
ITEM 1. BUSINESS.........................................................3
ITEM 2. PROPERTIES......................................................34
ITEM 3. LEGAL PROCEEDINGS...............................................35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............35
PART II....................................................................36
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................36
ITEM 6. SELECTED FINANCIAL DATA.........................................36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.......44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA......................46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................67
PART III...................................................................68
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............68
ITEM 11. EXECUTIVE COMPENSATION..........................................68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................68
ITEM 14. CONTROLS AND PROCEDURES.........................................68
PART IV....................................................................69
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K........................................................69
SIGNATURES....................................................................74
CERTIFICATIONS................................................................75
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-K, as well as statements made by us
in periodic press releases and other public communications, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "believes," "estimates," "plans," "projects," "expects,"
"may," "will," "should," "approximately," or "anticipates" or the negative
thereof or other variations thereof or comparable terminology, or by discussion
of strategies, each of which involves risks and uncertainties. We have based
these forward-looking statements on our current expectations and projections
about future events based upon our knowledge of facts as of the date of this
Form 10-K and our assumptions about future events.
All statements other than of historical facts included herein, including
those regarding market trends, our financial position, business strategy,
projected plans and objectives of management for future operations of the
facility, are forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors outside of our
control that may cause our actual results or performance to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. These risks, uncertainties and other
factors include, among others, the following:
o unexpected problems relating to the performance of the facility,
o the financial condition of third parties on which we depend,
including in particular, Williams Energy Marketing & Trading Company
("Williams Energy"), as fuel supplier under the power purchase
agreement we entered into with Williams Energy for the sale of all
electric energy and capacity produced by the facility, as well as
ancillary and fuel conversion services (the "Power Purchase
Agreement"), and The Williams Companies, Inc., as the guarantor of
Williams Energy's performance under the Power Purchase Agreement,
o continued performance by Williams Energy (as guaranteed by The
Williams Companies, Inc.) under the Power Purchase Agreement,
o the ability of The Williams Companies, Inc. or its affiliates to
avoid a default under the Power Purchase Agreement by continuing to
maintain or provide adequate security to supplement their guarantee
of Williams Energy's performance under the Power Purchase Agreement,
o our ability to find a replacement power purchaser on favorable or
reasonable terms, if necessary,
o an adequate merchant market after the expiration, or in the event of
a termination, of the Power Purchase Agreement,
o the outcome of our pending arbitration with Williams Energy,
o capital shortfalls and access to additional capital on reasonable
terms, or in the event that the Power Purchase Agreement is
terminated,
o the possibility that Williams Energy will not request that we run or
"dispatch" the facility as provided under the Power Purchase
Agreement,
o inadequate insurance coverage,
o unexpected expenses or lower than expected revenues,
o environmental and regulatory compliance,
o terrorists acts and adverse reactions to United States anti-terrorism
activities, and
o additional factors that are unknown to us or beyond our control.
We have no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
2
PART I
ITEM 1. BUSINESS
General
We are a Delaware limited liability company formed on September 13, 1998,
to develop, construct, own, lease, operate and maintain a gas-fired electric
generating power plant in the Borough of Sayreville, Middlesex County, New
Jersey and manage the production of electric generating capacity, ancillary
services and energy at our facility. The Company reached provisional acceptance
on August 11, 2002, risk transfer on August 13, 2002, and became commercially
available on September 1, 2002. Since our commercial operation date, our sole
business is the ownership, leasing and operation of the project. Williams
Energy has disputed the September 1, 2002, commercial operation date and has
informed the Company that it recognizes commercial availability of our facility
as of September 28, 2002. The Company expects to settle the dispute through
arbitration during the second quarter of 2003. See "Project Status and Recent
Developments".
Our facility was initially designed, engineered, procured and constructed
for us by Washington Group International, Inc. ("WGI") (as the successor
contractor) on a fixed-price, turnkey basis. On May 14, 2001, WGI filed a plan
of reorganization along with voluntary petitions to restructure under Chapter
11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of
Nevada in Reno (the "Bankruptcy Court"). As a result of WGI's bankruptcy
filing, on June 20, 2001 we made a demand on the Raytheon Company ("Raytheon")
to perform its obligations under a guarantee which Raytheon had given us of
WGI's performance obligations under the construction agreement and Raytheon
became responsible for the construction of our facility. As mentioned above, we
granted Raytheon provisional acceptance on August 11, 2002. We are currently
working with Raytheon to schedule and prepare for the performance testing
required for final acceptance of the facility. See "Summary of Principal
Agreements - Construction Agreement".
Siemens Westinghouse Power Corporation provides combustion turbine
maintenance services and spare parts with respect to the turbines for our
facility under a maintenance services agreement for an initial term of 16 years
from the date of execution of the agreement or after the twelfth scheduled
outage for a turbine, whichever occurs first, unless we exercise our right to
cancel the agreement after the first major outage of the turbines at
approximately the sixth year of operation of the facility. AES Sayreville, a
wholly owned subsidiary of AES Red Oak, Inc., our direct corporate parent,
provides development, construction management and operations and maintenance
services for our operating facility under the operations agreement. We act as
construction agent for our affiliate, AES Red Oak Urban Renewal Corporation
("AES URC"), for the development and construction of part of the facility under
a construction agency agreement. We own the land on which our facility is
located, and lease part of the facility from AES URC with an option to
purchase.
We have entered into the Power Purchase Agreement for a term of 20 years
under which Williams Energy has committed to purchase all of the net capacity,
fuel conversion and ancillary services of our facility. Net capacity is the
maximum amount of electricity generated by our facility net of electricity used
at our facility. Fuel conversion services consist of the combustion of natural
gas in order to generate electric energy. Ancillary services consist of
services necessary to support the transmission of capacity and energy. Williams
Energy is obligated to supply us with all natural gas necessary to provide net
capacity, fuel conversion services and ancillary services under the Power
Purchase Agreement. During the term of the Power Purchase Agreement
substantially all of our operating revenues will be derived from payments made
under the Power Purchase Agreement. Under certain limited circumstances
described herein, Williams Energy has the right to terminate the Power Purchase
Agreement.
Organizational Structure
All of the equity interests in our company are owned by AES Red Oak, Inc.,
a wholly owned subsidiary of The AES Corporation. AES Red Oak, Inc. currently
has no operations outside of its activities in connection with our project and
does not anticipate undertaking any unrelated operations. AES Red Oak, Inc.
also owns all of the equity interests in AES Sayreville, L.L.C., which provides
development, construction management, and operations and maintenance services
to us. AES Sayreville has no operations outside of its activities in connection
with our project. AES Red Oak, Inc. has no assets other than its membership
interests in us and AES Sayreville. The AES Corporation supplies AES Sayreville
with personnel and services necessary to carry out its obligations to us.
3
We also own all of the equity interests in AES URC, which was organized as
an urban renewal corporation under New Jersey law so that portions of our
project can be designated as redevelopment areas or projects in order to
provide certain real estate tax and development benefits for our project. AES
URC has no operations outside of its activities in connection with our project.
The AES Corporation is a leading global power company committed to
supplying electricity in a socially responsible way. The AES Corporation is a
public company and is subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports,
proxy statements and other information, including financial reports, with the
SEC, which are not incorporated into and do not form a part of this Form 10-K.
The following organizational chart illustrates the relationship among us,
AES Red Oak, Inc., AES Sayreville, The AES Corporation, and AES URC:
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The AES Corporation
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AES Red Oak, Inc.
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AES Red Oak, L.L.C. AES Sayerville, L.L.C.
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AES Red Oak Urban Renewal Corporation
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Our principal executive offices are located at 832 Red Oak Lane,
Sayreville, NJ 08872. Our telephone number is (732) 238-1462.
Project Status and Recent Developments
The Company reached provisional acceptance on August 11, 2002, risk
transfer on August 13, 2002, and became commercially available on September 1,
2002. Williams Energy has disputed the September 1, 2002, commercial operation
date and has informed the Company that it recognizes commercial availability of
the facility as of September 28, 2002. The Company has entered into arbitration
to settle the dispute over the commercial operation date and the proper
interpretation of certain provisions of the Power Purchase Agreement. We expect
that the arbitration will be resolved in the second quarter of 2003. The
arbitration relates to disputed amounts of approximately $7.6 million, which
includes a $594,000 payment extension option dispute and a $7.0 million
commercial operation start date dispute. The Company is also disputing $392,000
of merchant price and testing gas charges with Williams Energy although this is
not yet part of the arbitration. While the Company believes that its
interpretation of the Power Purchase Contract is correct, the Company cannot
predict the outcome of these matters.
Raytheon must now perform certain agreed upon completion items in order to
obtain final acceptance. On March 8, 2003, we entered into a letter agreement
with Raytheon pursuant to which we granted Raytheon a free extension of the
guaranteed final acceptance date from April 1, 2003 to June 30, 2003. See
"Summary of Principal Project Contracts - Construction Agreement - Completion
and Acceptance of Our Project - Final Acceptance."
Pursuant to Section 18.3 of the Power Purchase Agreement, in the event
that Standard & Poors ("S&P") or Moody's rates the long-term senior unsecured
debt of The Williams Companies, Inc. lower than investment grade, The Williams
Companies, Inc. is required to supplement The Williams Companies, Inc.
guarantee with additional alternative security that is acceptable to the
Company within 90 days after the loss of such investment grade rating.
According to published sources, on July 23, 2002, S&P lowered the
long-term senior unsecured debt rating of The Williams Companies, Inc. to "BB"
from "BBB-" and further lowered such rating to "B" on July 25, 2002. According
to published sources, on July 24, 2002, Moody's lowered the long-term senior
unsecured debt rating of The
4
Williams Companies, Inc. to "B1" from "Baa3" and further lowered such rating on
November 22, 2002 to "Caa1". Accordingly, The Williams Companies, Inc.'s
long-term senior unsecured debt is currently rated below investment grade by
both S&P and Moody's.
Due to the downgrade of The Williams Companies, Inc. to below investment
grade, the Company and Williams Energy entered into a letter agreement dated
November 7, 2002 (the "Letter Agreement"), under which Williams Energy agreed
to provide the Company with a $10 million prepayment (the "Prepayment") within
five business days after execution of the Letter Agreement and at least $25
million additional collateral on January 6, 2003. A description of the
collateral that supports Williams Energy's obligations under the Power Purchase
Agreement is set forth below under the caption "Power Purchase Agreement -
Security".
On March 15, 2000, the Company issued $384 million in senior secured bonds
for the purpose of providing financing for the construction of the facility and
to fund, through the construction period, interest payments to the bondholders.
In September 2000, the Company consummated an exchange offer whereby the
holders of the senior secured bonds exchanged their privately placed senior
secured bonds for registered senior secured bonds.
In an action related to the ratings downgrade of The Williams Companies,
Inc., S&P lowered its ratings on the Company's senior secured bonds to "BB-" on
July 26, 2002, and placed the rating on credit watch with developing
implications. On November 21, 2002 S&P placed the ratings on negative outlook.
Additionally, on July 25, 2002, Moody's indicated that its ratings on the
Company's senior secured bonds were placed under review for possible downgrade.
On October 7, 2002, Moody's lowered its ratings on the Company's senior secured
bonds to "Ba2" and on November 11, 2002 lowered the ratings to "B2" with a
negative outlook. As a result of such ratings downgrades, the Company's working
capital facility is unavailable and the Company is required to pay higher fees
for draws on any of its project support agreements. The Company does not
believe that such ratings downgrades will have any other direct or immediate
effect on the Company, as none of the other financing documents or project
contracts have provisions that are triggered by a reduction of the ratings of
the bonds. As of December 31, 2002, $381.6 million aggregate principal amount
of senior secured bonds were outstanding.
During the 20-year term of the Power Purchase Agreement, we expect to sell
electric energy and capacity produced by the facility, as well as ancillary and
fuel conversion services to Williams Energy and to purchase fuel supply from
Williams Energy. Since we depend on The Williams Companies, Inc. and its
affiliates for both revenues and fuel supply under the Power Purchase
Agreement, if The Williams Companies, Inc. and its affiliates were to terminate
or default under the Power Purchase Agreement, there would be a severe negative
impact our cash flow and financial condition which could result in a default on
our senior secured bonds. Due to the recent decline in pool prices, we would
expect that if we were required to seek alternate purchasers of our power as a
result of such a default or termination, even if we were successful in finding
alternate revenue sources, any such alternate revenue sources would be
substantially below the amounts that would have been otherwise payable pursuant
to the Power Purchase Agreement. There can be no assurances as to our ability
to generate sufficient cash flow to cover operating expenses or our debt
service obligations in the absence of a long-term Power Purchase Agreement with
Williams Energy.
Energy Revenues
As mentioned above, we generate energy revenues under the Power Purchase
Agreement with Williams Energy. During the 20-year term of the agreement, we
expect to sell electric energy and capacity produced by the facility, as well
as ancillary and fuel conversion services. Under the Power Purchase Agreement,
we also generate revenues from meeting (1) base electrical output guarantees
and (2) heat rate rebates through efficient electrical output.
Upon its expiration, or in the event that the Power Purchase Agreement is
terminated prior to its 20-year term or Williams Energy otherwise fails to
perform, we would seek to generate energy revenues from the sale of electric
energy and capacity into the merchant market or under new short- or long-term
power purchase or similar agreements. Due to recent declines in pool prices,
however, we would expect that even if we were successful in finding alternate
revenue sources, any such alternate revenues would be substantially below the
amounts that would have been otherwise payable pursuant to the Power Purchase
Agreement.
5
After the plant reached provisional acceptance, we elected to confirm
reliability for up to 19 days before binding with Williams Energy. Beginning
August 13, 2002 (the date of risk transfer) through August 31, 2002, we
operated the facility as a merchant plant with electric revenues sold to
Williams Energy, in its capacity as our PJM account representative, at spot
market prices and bought gas from Williams Energy at spot market prices.
Additionally, during September 2002, we made net electric energy available to
Williams Energy during times other than receiving a Williams Energy dispatch
notice. This net electric energy is referred to as "other sales of energy" in
the Power Purchase Agreement and is sold at the local marginal price commonly
referred to as spot market energy. Gas required for this energy generation was
purchased from Williams Energy at spot market prices. We recognized merchant
revenues of approximately $11.1 million and fuel expenses of approximately $6.9
million for the year ended December 31, 2002.
Competition
Under the Power Purchase Agreement, Williams Energy is required to
purchase all of our facility's capacity and energy for an initial term of 20
years. Therefore, during the term of the Power Purchase Agreement, competition
from other capacity and energy providers will become an issue only if the Power
Purchase Agreement is terminated or not performed in accordance with its terms.
Following the term of the Power Purchase Agreement, we anticipate selling our
facility's net capacity, ancillary services and energy under a new Power
Purchase Agreement or into the Pennsylvania-New Jersey-Maryland ("PJM") power
pool market. At that time, we will face competition from other generating
facilities selling into the PJM power pool market including, possibly, other
facilities owned by The AES Corporation or its affiliates.
Employees
We are a Delaware limited liability company and have no employees other
than our 7 officers. Our officers receive no compensation for the services they
provide to us or for any transactions between us and our affiliates. Under the
operations agreement, AES Sayreville has managed the development and
construction of and now operates and maintains our facility. The direct labor
personnel and the plant operations management are employees of The AES
Corporation provided to AES Sayreville under a services agreement. As of
December 31, 2002, The AES Corporation provided 27 employees to work at our
facility.
Insurance
As owner of our site and lessee and owner of the facility, we maintain a
comprehensive insurance program as required under our various project contracts
and the indenture governing our senior secured bonds and underwritten by
recognized insurance companies. Among other insurance policies, we also
maintain commercial general liability insurance, permanent property insurance
for full replacement value of the facility and business interruption insurance
covering at least 18 months of gross revenues less variable operating expenses.
We have obtained title insurance in an amount equal to the principal amount of
the bonds.
AES Sayreville, as operator of our facility, maintains, among other
insurance policies, workers' compensation insurance (or evidence of
self-insurance), if required, and comprehensive automobile bodily injury and
property damage liability insurance.
Permits And Regulatory Approvals
AES Sayreville, as operator of our facility, and us, as owner and lessee
of our facility, must comply with numerous federal, state and local regulatory
requirements including environmental requirements in the operation of our
facility.
On November 4, 1999, we received a certification from the Federal Energy
Regulatory Commission ("FERC") that we are an exempt wholesale generator.
Certification as an exempt wholesale generator exempts us from regulation under
the Public Utility Holding Company Act of 1935. We will maintain this status so
long as we continue to make only wholesale sales of electricity, which we
intend to do. Prior to commercial operation, we filed the Power Purchase
Agreement with FERC and requested approval for the rates contained therein. On
June 22, 2001, we received FERC approval at those rates. We may also need to
obtain FERC approval for sales of electricity at market-based rates after the
Power Purchase Agreement is no longer in effect.
6
On January 28, 2000, we received our Prevention of Significant
Deterioration Permit, or "air permit," from the New Jersey Department of
Environmental Protection. The appeal period in respect of the air permit
expired on February 28, 2000, and no appeal was filed. The air permit requires
that our facility be constructed in a manner that will allow it to meet
specified limitations on emissions of air pollutants. Under the construction
agreement, originally WGI and now Raytheon, as project guarantor, are required
to construct our facility to meet these requirements. The required emission
standards were met upon provisional acceptance and commercial operation and no
additional modification is currently needed.
We are subject to a number of statutory and regulatory standards and
required approvals relating to energy, labor and environmental laws. The
necessary environmental permits for the commencement of construction and
operation of our facility have been obtained.
Summary of Principal Project Contracts
While we believe that the following summaries contain the material terms
of the principal project contracts, such summaries may not include all of the
provisions of each agreement that each individual investor may feel is
important. These summaries do not restate each agreement discussed herein and
exclude certain definitions and complex legal terminology that may be contained
in each relevant agreement. You should carefully read each agreement discussed
herein, each of which is filed as an exhibit to this Form 10-K.
Power Purchase Agreement
We entered into a Fuel Conversion Services, Capacity and Ancillary
Services Purchase Agreement, dated as of September 17, 1999, with Williams
Energy, for the sale to Williams Energy of all of the electric energy and
unforced capacity produced by our facility as well as ancillary services and
fuel conversion services.
Term
The Power Purchase Agreement extends for 20 years from the first contract
anniversary date, which is the last day of the month in which commercial
operation occurred. We recognize a commercial operation date of September 1,
2002. Williams Energy has disputed the September 1, 2002, commercial operation
date and has informed the Company that it recognizes commercial availability of
our facility as of September 28, 2002. See "Project Status and Recent
Developments". While we believe our interpretation of the Power Purchase
Agreement is correct we cannot predict the outcome of this matter.
Upon notice from Williams Energy no later than 90 days prior to the end of
the initial term of the Power Purchase Agreement, the term of the Power
Purchase Agreement may be extended by Williams Energy for up to a total of 24
months for each hour of the initial term during which we are unable to deliver
energy or ancillary services because of an event of force majeure (other than
an inability of the Company to obtain natural gas to operate the facility) that
occurs after the commercial operation date.
Under the Power Purchase Agreement, the commercial operation date was
required to occur by December 31, 2001, however the Company had the right to
extend the commercial operation date until June 30, 2002 by invoking its right
to a free extension option which was available under the Power Purchase
Agreement if certain conditions were met. The Company exercised its right to
extend the commercial operation date from December 31, 2001 to June 30, 2002,
as granted under the free extension option. In addition, the Company had the
right under the Power Purchase Agreement to again extend the commercial
operation date from June 30, 2002 to June 30, 2003 (the "Second Paid Extension
Option"), upon written notification to Williams Energy no later than May 21,
2002 (which represented an agreed upon extension from the original April 30,
2002 notification deadline), by paying Williams Energy (i) an amount equal to
the lesser of any actual damages Williams Energy suffered or incurred after
June 30, 2002, as a result of Williams Energy's reliance upon delivery by such
date, to the extent said damages could not be mitigated fully, or $3.0 million
and (ii) certain amounts of liquidated damages as calculated pursuant to the
Power Purchase Agreement. On May 21, 2002, the Company exercised the Second
Paid Extension Option. Williams Energy initially invoiced the Company $3
million related to this extension but subsequently withdrew this invoice and,
as of the date hereof, Williams Energy has not provided the Company support for
the amount of actual damages suffered or incurred after June 30, 2002 as a
result of Williams Energy's reliance upon delivery by such date, therefore the
Company has not yet paid or accrued any amounts that may be owed as described
in clause (i) above. As of December 31,
7
2002, the Company had paid liquidated damages to Williams Energy at the rate of
$11,000 per day for the period beginning on July 1, 2002 and ending on August
31, 2002, which amounted to $682,000. The Company had also paid liquidated
damages to Williams Energy at the rate of $22,000 per day for the period
beginning on September 1, 2002 and ending on September 27, 2002, which amounted
to $594,000, although this amount is still in dispute through arbitration.
During the period of the Second Paid Extension Option, the Company continued to
collect liquidated damages through August 10, 2002 from Raytheon under the
construction agreement in the amount of $108,000 per day. As of December 31,
2002, the Company had received $14 million in liquidated damages from Raytheon
under the construction agreement.
Williams Energy is currently the Company's sole customer for purchases of
capacity, ancillary services, and energy and the Company's sole source for
fuel. Williams Energy's payments under the Power Purchase Agreement are
expected to provide all of the Company's operating revenues during the term of
the Power Purchase Agreement. It is unlikely that the Company would be able to
find another purchaser or fuel source on similar terms for the facility if
Williams Energy were not performing under the Power Purchase Agreement. Any
material failure by Williams Energy to make capacity and fuel conversion
payments or to supply fuel under the Power Purchase Agreement would have a
severe impact on the Company's operations.
Purchase and Sale of Capacity
During the term of the Power Purchase Agreement, we will perform for
Williams Energy on an exclusive basis, and Williams Energy will purchase and
pay for, fuel conversion services. Fuel conversion services include the
operation of our facility by us to combust natural gas delivered by Williams
Energy in order to generate and deliver energy or to provide ancillary
services. We will sell and make available to Williams Energy on an exclusive
basis, and Williams Energy will purchase and pay for, our facility's net
capacity and ability to generate electric energy. We may not sell, without the
consent of Williams Energy in its sole discretion, capacity generated on the
site but not from our facility.
Fuel Conversion and Other Services
Williams Energy must deliver or cause to be delivered to us at the natural
gas delivery point on an exclusive basis all quantities of natural gas required
by us to:
o generate net electric energy and/or ancillary services;
o perform start-ups;
o perform shutdowns; and
o operate our facility during any period other than a start-up,
shutdown or dispatch period for any reason.
Williams Energy at all times retains title to the natural gas delivered to
us except that when our facility is operated during any period other than a
start-up, shutdown or dispatch period title is transferred to us at the natural
gas delivery point.
Williams Energy is solely responsible for all costs and expenses related
to the supply and transportation of natural gas to the natural gas delivery
point. We are responsible for all costs and expenses related to the
transportation, gathering or taxation of natural gas or its use or possession
at and after the natural gas delivery point.
Upon the expiration of the Power Purchase Agreement or any termination of
the Power Purchase Agreement as the result of Williams Energy's default
thereunder, we will have the right to purchase the gas interconnection
facilities from Williams Energy, or if Williams Energy does not own the gas
interconnection facilities, Williams Energy will assign to us all of its rights
to transportation services using the gas interconnection facilities.
Pricing and Payments
For each month of the term after the commercial operation date, Williams
Energy must pay us for our facility's net capacity, successful start-ups and
associated shutdowns, ancillary services and fuel conversion services at the
applicable rates set forth in the Power Purchase Agreement. Each monthly
payment by Williams Energy consists of a total fixed payment, a variable
operations and maintenance payment and an energy exercise fee. The total fixed
8
payment, which is payable regardless of facility dispatch by Williams Energy
but is subject to adjustment based on facility availability, is calculated by
multiplying an unforced capacity rate for each contract year by the temperature
adjusted unforced capacity in the billing month and adding to that the product
of the fuel conversion option demand charge and the average facility capacity
for that month. The total fixed payment is anticipated to be sufficient to
cover our debt service and fixed operating and maintenance costs and to provide
us a return on equity. The variable operations and maintenance payment is
intended to cover our variable operating and maintenance costs and escalates
annually based on an escalation index set forth in the Power Purchase
Agreement. The energy exercise fee is intended to compensate us for each
successful start-up. We may receive heat rate bonuses or be required to pay
heat rate penalties.
Prior to the commercial operation date, and during some facility tests
thereafter, we purchased natural gas from Williams Energy. Williams Energy sold
us the natural gas at prices specified in the Power Purchase Agreement, and we
sold to Williams Energy at the electric delivery point any net electric energy
produced during the periods at the hourly integrated market clearing marginal
price for electric energy at the location where it was delivered or received,
calculated pursuant to the terms of the operating agreement of PJM
Interconnection, LLC, which is the independent system operator that operates
the transmission system to which our facility interconnects. We are solely
responsible for any fines or penalties resulting from the delivery of the net
electric energy at the electric delivery point when the delivery is made
without the authorization of PJM, Jersey Central Power, which is the host
utility, or FERC.
Williams Energy is entitled to an annual fuel conversion volume rebate if
its dispatch of our facility exceeds specified levels and monthly non-dispatch
payments if, under some circumstances, our facility does not deliver, in whole
or in part, the requested net electric energy requested by Williams Energy. All
fuel conversion volume rebate payments and non-dispatch payments must be made
to Williams Energy after debt service and certain other payments but prior to
any distribution to holders of equity interests in our company. Fuel conversion
volume rebate payments and any non-dispatch payments owed to Williams Energy
and not paid when due will be paid, together with interest thereon, when funds
become available to us at the priority level described above. A separate
reserve account must be maintained by us and our lenders and we must deposit to
that account on a monthly basis, from our cash flow, any applicable and unpaid
non-dispatch payment plus a ratable amount of the maximum fuel conversion
volume rebate amount that Williams Energy may have earned. Amounts held in that
reserve account will be used to pay, to the extent owed, the fuel conversion
volume rebate and non-dispatch payments.
Required Authorizations
During the term of the Power Purchase Contract, we must, at our own cost
and expense, obtain as and when required all approvals, permits, licenses and
other authorizations from governmental authorities as may be required for us to
operate and maintain our facility, the interconnection facilities and
protective gas apparatus and to perform our obligations under the Power
Purchase Agreement. We plan to obtain all additional governmental approvals,
permits, licenses and authorizations as may be required with respect to our
facility as soon as practicable.
Interconnection and Metering Equipment
At our sole cost and expense, we designed, constructed and installed and
currently maintain the GPU interconnection facilities and protective gas
apparatus needed to generate and deliver net electric energy and/or ancillary
services to the electric delivery point in order to fulfill our obligations
under the Power Purchase Agreement, including all interconnection facilities
and protective gas apparatus that are located at the switchyards and/or
substations at our facility. Our facility, interconnection facilities and
protective gas apparatus have been designed, constructed and completed in a
good and workmanlike manner and in accordance with accepted electrical
practices (with respect to our facility and interconnection facilities) or in
accordance with standard gas industry practices (with respect to protective gas
apparatus), so that the expected useful life of our facility, the
interconnection facilities and protective gas apparatus will be not less than
the term of the Power Purchase Agreement.
Public Service Electric and Gas ("PSE&G"), under contract with Williams
Energy, has installed the natural gas interconnection facilities and natural
gas metering equipment to our satisfaction. PSE&G has also installed gas
metering equipment although we are currently involved in a dispute with
Williams Energy over the location of such equipment. All electric metering
equipment and gas metering equipment, whether owned by us or by a third party,
must be operated, maintained and tested in accordance with accepted electrical
practices, in the case of the electric
9
metering equipment, and in accordance with applicable industry standards, in
the case of the gas metering equipment. Except under limited circumstances, we
may not enter into any modification or amendment of the interconnection
agreement with Jersey Central Power without the prior written consent of
Williams Energy.
As of December 31, 2002, all electrical interconnection and metering
equipment had been installed and accepted by Jersey Central Power. Certain
costs associated with the equipment are in dispute. See "Interconnection
Agreement - Jersey Central Power's Obligations."
Operation and Dispatch
Our facility and the interconnection facilities must be operated in
accordance with accepted electrical practices and applicable requirements and
guidelines of Jersey Central Power pursuant to the interconnection agreement.
The protective gas apparatus must be operated in accordance with standard gas
industry practices. If there is a conflict between the terms and conditions of
the Power Purchase Agreement and Jersey Central Power requirements, the Jersey
Central Power requirements control.
We must operate our facility in parallel with Jersey Central Power's
electrical system in accordance with the interconnection agreement. When
dispatched by Williams Energy, we must operate our facility and each unit
thereof with automatic regulation equipment in service.
The Power Purchase Agreement acknowledges that Jersey Central Power has
the right to require us to disconnect our facility from its electrical system,
or otherwise curtail, interrupt or reduce deliveries of net electric energy, in
accordance with the terms of the interconnection agreement. If our facility has
been disconnected for these reasons, Williams Energy will continue to be
obligated to make total fixed payments for at least 24 hours after the
occurrence of disconnection of our facility by Jersey Central Power.
We must use commercially reasonable efforts to correct promptly any
condition at our facility which necessitates the disconnection of our facility
from Jersey Central Power's electrical system or the reduction, curtailment or
interruption of electrical output of our facility.
Williams Energy has the exclusive right to use the net electric energy and
ancillary services and to schedule the operation of our facility or a unit
thereof in accordance with the provisions of the Power Purchase Agreement;
however, the scheduling must be consistent with the design limitations of our
facility, applicable law, regulations and permits, and the agreements and the
manuals of PJM.
Williams Energy and our company must perform each of our respective
obligations in a manner that avoids the creation of cashout obligations or
imbalance penalties imposed by the natural gas transporter. Williams Energy
must try to minimize any imbalance charges under a transporter's tariff and
thereafter we will be responsible for imbalance charges levied by the natural
gas transporter to the extent that the charges result from: (i) an imbalance
caused by us greater than the allocable tolerance in the transporter's tariff
or (ii) our failure to promptly notify Williams Energy of a change in the
operation of our facility that would cause any imbalance.
Force Majeure
A party will be excused from performing its obligations under the Power
Purchase Agreement and will not be liable for damages or otherwise to the other
party if and to the extent the party declares that it is unable to perform or
is prevented from performing an obligation under the Power Purchase Agreement
by a force majeure condition, except for any obligations and/or liabilities
under the Power Purchase Agreement to pay money, which will not be excused, and
except to the extent an obligation accrues prior to the occurrence or existence
of a force majeure condition as long as:
o the party declaring its inability to perform by virtue of force
majeure, as promptly as practicable after the occurrence of the force
majeure condition, but in no event later than 5 days thereafter,
gives the other party written notice describing, in detail, the
nature, extent and expected duration of the force majeure condition;
o the suspension of performance is of no greater scope and of no longer
duration than is reasonably required by the force majeure condition;
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o the party declaring force majeure uses all commercially reasonable
efforts to remedy its inability to perform; and
o as soon as the party declaring force majeure is able to resume
performance of its obligations excused as a result of the force
majeure condition, it must give prompt written notification thereof
to the other party.
Irrespective of whether the force majeure condition is declared by
Williams Energy or us, the time period of a force majeure will be excluded from
the calculation of all payments under the Power Purchase Agreement and Williams
Energy will be under no obligation to pay us any of the payments described in
the Power Purchase Agreement. If Williams Energy declares a force majeure,
however, it will continue to pay us only the applicable monthly total fixed
payment as described in the Power Purchase Agreement until the earlier of (i)
the termination of the force majeure condition or (ii) the termination of the
Power Purchase Agreement. Furthermore, if a force majeure is declared by us due
to an action or inaction of Jersey Central Power that prevents us from
delivering net electric energy to the electric delivery point, Williams Energy
will continue to pay the applicable portion of the total fixed payment for the
first 24 hours of the period.
Notwithstanding anything to the contrary contained in the Power Purchase
Agreement, except as may expressly be provided in the Power Purchase Agreement,
the term force majeure will not include or excuse a party's performance in the
following circumstances:
o Any reduction, curtailment or interruption of generation or operation
of our facility, or of the ability of Williams Energy to accept or
transmit net electric energy, whether in whole or in part, which
reduction, curtailment or interruption is caused by or arises from
the acts or omissions of any third party providing services or
supplies to the party claiming force majeure, including any vendor or
supplier to either party of materials, equipment, supplies or
services, or any inability of Jersey Central Power to deliver net
electric energy to Williams Energy, unless, and then only to the
extent that, any act or omission would itself be excused under the
Power Purchase Agreement as a force majeure;
o Any outage, whether or not due to our fault or negligence,
attributable to a defect or inadequacy in the manufacture, design or
installation of our facility that prevents, curtails, interrupts or
reduces the ability of our facility to generate net electric energy
or our ability to perform our obligations under the Power Purchase
Agreement;
o To the extent that the party claiming force majeure failed to prevent
or remedy the force majeure condition by taking all commercially
reasonable acts (short of litigation, if the remedy requires
litigation) and, except as otherwise provided in the Power Purchase
Agreement, failed to resume performance under the Power Purchase
Agreement with reasonable dispatch after the termination of the force
majeure condition;
o To the extent that the claiming party's failure to perform was caused
by lack of funds;
o To the extent Williams Energy is unable to perform due to a shortage
of natural gas supply not caused by an event of force majeure; or
o Because of an increase or decrease in the market price of electric
energy/capacity or natural gas or because it is uneconomic for the
party to perform its obligations under the Power Purchase Agreement.
Neither party will be required to settle any strike, walkout, lockout or
other labor dispute on terms which, in the sole judgment of the party involved
in the dispute, are contrary to its interest.
Williams Energy will have the right to terminate the Power Purchase
Agreement if we have declared a force majeure and the effect of said force
majeure has not been fully corrected or alleviated within 18 months after the
date said force majeure was declared. Williams Energy, however, will not have
the right to terminate the Power Purchase Agreement if (i) the force majeure
was caused by Williams Energy or (ii) the force majeure event does not prevent
or materially limit Williams Energy's ability to sell our facility net capacity
into or through the PJM power pool market or to a third party.
Events of Default; Termination; Remedies
The following will constitute events of default under the Power Purchase
Agreement:
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o breach of any term or condition of the Power Purchase Agreement,
including, but not limited to, (i) any failure to maintain or to
renew any security, (ii) any breach of a representation, warranty or
covenant or (iii) failure of either party to make a required payment
to the other party;
o our facility is not available to provide fuel conversion services or
ancillary services to Williams Energy during any period of 180
consecutive days after the occurrence of the commercial operation
date, except as may be excused by force majeure or the absence of
available natural gas, or if non-availability is caused by an act or
failure to act by Williams Energy where the action is required by the
Power Purchase Agreement;
o we sell or supply net electric energy, ancillary services or capacity
from our facility, or agree to do the same, to any person or entity
other than Williams Energy, without the prior approval of Williams
Energy;
o our failure for 30 consecutive days to perform regular and required
maintenance, testing or inspection of the interconnection facilities,
our facility and/or other electric equipment and facilities where the
failure is material;
o our failure for 30 consecutive days to correct or resolve a material
violation of any code, regulation and/or statute applicable to the
construction, installation, operation or maintenance of our facility,
the interconnection facilities, protective gas apparatus or any other
electric equipment and facilities required to be constructed and
operated under the Power Purchase Agreement when the violation
impairs our continued ability to perform its obligations under the
Power Purchase Agreement;
o involuntary bankruptcy or insolvency of either party that continues
for more than 60 days;
o voluntary bankruptcy or insolvency by either party;
o any modifications, alterations or other changes to our facility by or
on our behalf which prevent us from fulfilling, or materially
diminish our ability to fulfill, its obligations, duties, rights and
responsibilities under the Power Purchase Agreement and which after
reasonable notice and opportunity to cure, are not corrected;
o there will be outstanding for more than 60 days any unsatisfied
final, non-appealable judgment against us in an amount exceeding
$500,000, unless the existence of the unsatisfied judgment will not
materially affect our ability to perform its obligations under the
Power Purchase Agreement; and
o The AES Corporation will cease to own, directly or indirectly,
beneficially and of record, at least 50 percent of the equity
interests in our company, or will cease to possess the power to
direct or cause the direction of our company's management or
policies, or any person, other than The AES Corporation or an
affiliate, authorized to act as a power marketer by FERC or any
affiliate of the person will own, directly or indirectly,
beneficially or of record, any of the equity interests in our
company.
Upon the occurrence of any event of default, other than a
bankruptcy-related event of default, for which no notice will be required or
opportunity to cure permitted, the party not in default, to the extent the
party has actual knowledge of the occurrence of the event of default, will give
prompt written notice of the default to the defaulting party. The notice will
set forth, in reasonable detail, the nature of the default and, where known and
applicable, the steps necessary to cure the default. The defaulting party will
have 30 days, two business days in the case of a default related to the breach
of a representation, warranty or covenant, following receipt of the notice
either to cure the default or commence in good faith all the steps as are
necessary and appropriate to cure the default if the default cannot be
completely cured within the 30-day period.
If the defaulting party fails to cure the default or take the steps as
provided under the preceding paragraph, and immediately upon the occurrence of
insolvency or the filing of a voluntary petition for bankruptcy, the Power
Purchase Agreement may be terminated by the non-defaulting party, without any
liability or responsibility whatsoever, by written notice to the party in
default thereof. The Power Purchase Agreement will then terminate and the
non-defaulting party may exercise all rights and remedies as are available to
it to recover damages caused by the default, seek specific performance or
exercise other rights and remedies that it may have in equity or at law.
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Security
The Power Purchase Agreement requires us to provide $30 million of
financial security for our performance and payment obligations prior to
commercial operation and $10 million of financial security for our performance
and payment obligations subsequent to the commercial operation date. We may, at
any time at our option, elect to either provide the financial security in the
form of a guaranty of The AES Corporation or in the form of a single letter of
credit, satisfactory to Williams Energy in form and substance, upon which
Williams Energy may draw as specified in the Power Purchase Agreement. If the
financial security contains an expiration date, either express or implied, we
will renew the financial security not later than 10 days prior to the
expiration date and will provide written notice of the renewal to Williams
Energy at the same time. If we fail to renew the financial security as set
forth above, Williams Energy is entitled to demand and receive payment
thereunder on or after three days after written notice of the failure is
provided to us, and the amount drawn will be deposited in an interest-bearing
escrow account.
The letter of credit referred to above must be issued by a financial
institution that at all times during the term of the letter of credit meets and
maintains the following criteria: (i) a U.S. or foreign bank rated "C" or
better by Thompson Bankwatch; or (ii) a U.S. or foreign bank, surety company or
financial institution whose senior debt has the rating listed below by two of
the three rating agencies: Standard & Poor's: "A-" or better; Moody's: "A3" or
better; Duff & Phelps: "A-" or better. If the bank, surety company or financial
institution fails to maintain the ratings criteria, then upon 30 days' written
notice from Williams Energy, we are required to obtain equivalent security from
another bank, surety company or financial institution meeting the above stated
criteria.
In order to satisfy this obligation, prior to the commercial operation
date we provided a $30 million letter of credit which was reduced to $10
million on the commercial operation date. This letter of credit will remain in
effect during the term of the Power Purchase Agreement.
The payment obligations of Williams Energy under the Power Purchase
Agreement are guaranteed by The Williams Companies, Inc. The payment
obligations of The Williams Companies, Inc. under the guaranty are capped at an
amount equal to $509,705,311. Beginning on January 1 of the first full year
after the commercial operation date, this guaranty cap is to be reduced
semiannually by a fixed amount which is based on the amortization of our senior
secured bonds during the applicable semiannual period. Pursuant to Section 18.3
of the Power Purchase Agreement, in the event that Standard & Poors or Moody's
rates the long-term senior unsecured debt of The Williams Companies, Inc. lower
than investment grade, The Williams Companies, Inc. is required to supplement
The Williams Companies, Inc. guarantee with additional alternative security
that is acceptable to the Company within 90 days after the loss of such
investment grade rating.
According to published sources, on July 23, 2002, S&P lowered the
long-term senior unsecured debt rating of The Williams Companies, Inc. to "BB"
from "BBB-" and further lowered such rating to "B" on July 25, 2002. According
to published sources, on July 24, 2002, Moody's lowered the long-term senior
unsecured debt rating of The Williams Companies, Inc. to "B1" from "Baa3" and
further lowered such rating on November 22, 2002 to "Caa1". Accordingly, The
Williams Companies, Inc.'s long-term senior unsecured debt is currently rated
below investment grade by both S&P and Moody's.
Due to the downgrade of The Williams Companies, Inc. to below investment
grade, the Company and Williams Energy entered into a letter agreement dated
November 7, 2002 (the "Letter Agreement"), under which Williams Energy agreed
to provide the Company (a) a prepayment of $10 million within five business
days after execution of the Letter Agreement (the "Prepayment"); (b)
alternative credit support equal to $35 million on or before January 6, 2003 in
any of the following forms: (i) cash, (ii) letter(s) of credit with the Company
as the sole beneficiary substantially in the form of the PPA Letter of Credit,
unless mutually agreed to otherwise, or (iii) a direct obligation of the United
States Government delivered to a custodial securities account as designated by
the Company with a maturity of not more than three years; and (c) replenish any
portion of the alternative credit support that is drawn, reduced, cashed, or
redeemed, at any time, with an equal amount of alternative credit support. In
the Letter Agreement, the Company and Williams Energy acknowledged that the
posting of such alternative credit support and Williams Energy's agreement and
performance of the requirements of (a), (b), and (c), as set forth in the
immediately preceding sentence, would be in full satisfaction of Williams
Energy's obligations contained in Section 18.3 of the Power Purchase Agreement.
In the Letter Agreement, the Company and Williams Energy expressly agreed that
the posting of the Prepayment or any alternative credit support either now or
in the future or any other terms set forth in the Letter Agreement is not
intended to and did not modify, alter, or amend in any way, the terms and
conditions or relieve The Williams Company, Inc. from any obligations it has
under its guarantee of the
13
payment obligations of Williams Energy under the Power Purchase Agreement. The
guaranty remains in full force and effect and the Company retains all of its
rights and remedies provided by that guaranty.
Under the terms of the Letter Agreement, the Company is obligated to
return the Prepayment to Williams Energy upon the earlier of (i) The Williams
Companies, Inc. regaining its investment grade rating or Williams Energy
providing a substitute guaranty of investment grade rating; (ii) the beginning
of Contract Year 20; or (iii) the posting of alternative credit support by
Williams Energy as set forth below. In the case of items (i) and (iii) above,
except to the extent, in the case of item (iii), Williams Energy elects to have
all or a portion of the Prepayment make up a combination of the alternative
credit support required to be posted pursuant to Section 18.3(b) of the Power
Purchase Agreement, Williams Energy shall have the right to recoup the
Prepayment by set-off of any and all amounts owing to the Company under the
Power Purchase Agreement beginning no earlier than the June in the calendar
year after the occurrence of item (i) or (iii) and continuing thereafter until
the Prepayment has been fully recovered. In the case of item (ii) above,
Williams Energy shall have the right to immediately set-off all amounts owing
to the Company under the Power Purchase Agreement after the occurrence of item
(ii) and continuing thereafter until the Prepayment has been fully recovered.
Except to the extent Williams Energy elects to include the Prepayment as part
of the alternative credit support, the amount of alternative credit support
posted by Williams Energy pursuant to the Letter Agreement shall be initially
reduced by the amount of the Prepayment, and Williams Energy shall thereafter
increase the alternative credit support proportionately as Williams Energy
recoups the Prepayment set-off on the payment due date of amounts owing to the
Company.
If the Company does not return the Prepayment to Williams Energy as set
forth in the preceding paragraph, then the Company shall be considered in
default under the Letter Agreement and Williams Energy shall be entitled to
enforce any and or all of its contractual rights and remedies as set forth in
the Power Purchase Agreement, including, but not limited to, drawing on the
letter of credit previously posted by the Company in favor of Williams Energy.
Williams Energy made the Prepayment on November 14, 2002 and provided an
additional $25 million of cash to us on January 6, 2003 as alternative credit
support. As allowed by the Letter Agreement, Williams Energy has elected to
have the $10 million Prepayment included as part of the alternative credit
support. In the event that The Williams Companies, Inc. regains and maintains
its investment grade status, provides a substitute guaranty of investment grade
rating, or posts a letter of credit, we will be required to return the $35
million alternative credit support to Williams Energy in accordance with the
terms of the Letter Agreement as described above. As of March 7, 2003, we had
cash balances of approximately $28.9 million. See "Item 7-Managements
Discussion and Analysis of Financial Condition and Results of Operations
- -Liquidity and Capital Resources".
Assignment
Generally, a party to the Power Purchase Agreement may not assign,
transfer, pledge or otherwise encumber or dispose of any rights, duties,
interests or obligations thereunder without the prior written consent of the
other party except that (i) Williams Energy may, upon reasonable advance notice
to us, assign its rights, duties and obligations under the Power Purchase
Agreement to any of its affiliates or any other entity, provided that such
affiliate or other entity's long term unsecured debt at such time is rated
investment grade by Standard & Poor's and Moody's or such affiliate or other
entity's obligations under the Power Purchase Agreement are guaranteed by an
affiliate whose long-term unsecured debt at such time is rated investment grade
by Standard & Poor's and Moody's and such assignee agrees to be bound by all of
the terms and conditions on the Power Purchase Agreement to the same extent as
Williams Energy, (ii) we may, upon reasonable advance notice to Williams
Energy, assign the Power Purchase Agreement and any of our rights, interests,
duties or obligations thereunder as collateral security to any Lender so long
as the assignee agrees to be bound by all of the terms and conditions of the
Power Purchase Agreement to the same extent as we are in the event that such
lender exercises its rights under such assignment and (iii) we may assign any
of our rights, duties and obligations under the Power Purchase Agreement to any
affiliate provided such affiliate assumes in writing all of our obligations
under the Power Purchase Agreement and the guaranty of our performance as
required by the Power Purchase Agreement remains in effect.
Construction Agreement
We entered into an Agreement for Engineering, Procurement and Construction
Services, dated as of October 15, 1999, with WGI (as the successor contractor)
under which WGI was required to perform services in connection with the design,
engineering, procurement, site preparation and clearing, civil works,
construction, start-up, training and
14
testing and to provide all materials and equipment (excluding operational spare
parts), machinery, tools, construction fuels, chemicals and utilities, labor,
transportation, administration and other services and items (collectively and
separately, the "services") for our facility. Under a Guaranty in our favor,
effective as of October 15, 1999, all of WGI's obligations under the
construction agreement are irrevocably and unconditionally guaranteed by
Raytheon.
WGI filed for bankruptcy on May 14, 2001, however construction of the
facility continued through a series of cooperative agreements executed by us,
WGI and Raytheon. On November 9, 2001, the Bankruptcy Court approved WGI's
rejection of the construction agreement and the execution of the PCA by WGI and
Raytheon. Additionally, on November 21, 2001, we and Raytheon entered into the
Owner/Guarantor Supplemental Agreement pursuant to which (i) Raytheon and we
acknowledged that, notwithstanding the rejection of the construction agreement
by WGI, Raytheon would cause the project to be completed in accordance with the
terms of the construction agreement pursuant to Raytheon's performance guaranty
obligations, and the construction agreement will have continuing applicability
insofar as it defines (x) the obligations owed to us by Raytheon under its
guaranty and (y) our obligations to Raytheon arising from the performance of
those obligations, (ii) Raytheon (or their designees) was designated as our
agent for purposes of administering the subcontracts and vendor contracts
assigned by WGI to us, (iii) all future payments by us would be paid in
accordance with the terms of the construction agreement directly to Raytheon,
and (iv) Raytheon would indemnify us with respect to any claims arising out of
the subcontracts and vendor contracts assumed by us.
Provisional acceptance of the facility was achieved on August 11, 2002
when we entered into a settlement agreement with Raytheon. In return for
provisional acceptance, Raytheon agreed to perform work identified in the punch
list provided as part of the agreement. Raytheon was also required to pay a $5
million settlement fee minus outstanding milestones and change-orders for a net
payment to the Company for $2.37 million. Raytheon must perform certain agreed
upon completion items in order to obtain final acceptance. See "Completion of
our Project - Final Acceptance".
Raytheon Services and Other Obligations
Raytheon must complete our project by performing or causing to be
performed all of the agreed upon services. The services have included:
engineering and design; construction and construction management; providing us
design documents, instruction manuals, a project procedures manual and quality
assurance plan; procurement of all materials, equipment and supplies and all
contractor and subcontractor labor and manufacturing and related services;
providing a spare parts list; providing all labor and personnel; obtaining all
applicable permits; performing inspection, expediting, quality surveillance and
traffic services; transporting, shipping, receiving and marshaling all
materials, equipment and supplies and other items; providing storage for all
materials, supplies and equipment and procurement or disposal of all soil and
gravel (including remediation and disposal of specific hazardous materials);
providing for design, construction and installation of electrical
interconnection facilities (including electric metering equipment, automatic
regulation equipment, protective apparatus and control system equipment) and
reviewing other utility interconnections to our facility (including gas and
water pipelines); performing performance tests; providing for start-up and
initial operation functions; providing specified spare parts, waste disposal
services, chemicals, consumables and utilities.
The services have also included: training our personnel prior to
provisional acceptance; providing us and our designee with access to the site;
obtaining additional necessary real estate rights; cleaning-up and waste
disposal (including hazardous materials brought to the site by Raytheon or the
subcontractors); submitting a project schedule and progress reports; paying of
contractor taxes; making employee identification and security arrangements;
protecting adjoining utilities and public and private lands from damage; paying
appropriate royalties and license fees; providing final releases and waivers to
us; posting collateral or providing other assurances if major subcontractors
fail to furnish final waivers; maintaining labor relations and project labor
agreements; providing further assurances; coordinating with other contractors;
and causing Raytheon to execute and deliver the related guaranty.
As mentioned above, provisional acceptance was granted by us on August 11,
2002. Raytheon must perform certain agreed upon completion items in order to
obtain final acceptance. See "Completion and Acceptance of our Project - Final
Acceptance"
15
Construction and Start-Up
Raytheon must perform certain services in accordance with prudent utility
practices, generally accepted standards of professional care, skill, diligence
and competence applicable to engineering, construction and project management
practices, all applicable laws, all applicable permits, the real estate rights,
the quality assurance plan, the electrical interconnection requirements, the
environmental requirements and safety precautions set forth in the construction
agreement, and all of the requirements necessary to maintain the warranties
granted by the subcontractors under the construction agreement. Raytheon must
perform the services in accordance with our project schedule and is obligated
to cause:
o each construction progress milestone to be achieved on or prior to
the applicable construction progress milestone date; and
o final acceptance of our facility to occur on or before the guaranteed
final acceptance date. The guaranteed final acceptance date was
originally required to occur 13.5 months after the guaranteed
provisional acceptance date as defined under the construction
agreement, but on March 8, 2003 we entered into a letter agreement
with Raytheon pursuant to which we agreed to extend the guaranteed
final acceptance date to June 30, 2003.
Raytheon must perform the services so that our facility, when operated in
accordance with the instruction manual and the Power Purchase Agreement
operating requirements as of provisional acceptance and final acceptance, will
comply with all applicable laws and applicable permits, the electrical
interconnection requirements and the guaranteed emissions limits in accordance
with the completed performance test requirements.
Contract Price and Payment
The adjusted contract price may either be paid in installments in
accordance with the payment and milestone schedule or be prepaid as described
in the collateral agency agreement. Initially, the adjusted contract price was
prepaid in the amount of $295.7 million ($288.6 million of which was paid at
closing), which included base scope changes through March 15, 2000. The
contract price may be adjusted as a result of scope changes. The prepayment
funds were backed by a prepayment letter of credit in our favor. However, under
the construction agreement, the bankruptcy filing by WGI on May 14, 2001
constituted an event of default under the construction agreement. Accordingly,
we requested that the full available amount of such letter of credit be drawn
upon and deposited in the construction account held by the collateral agent.
The collateral agent made such drawing on May 4, 2001 in the amount of $95.8
million, which was the then outstanding amount of the prepayment letter of
credit as it had been reduced by WGI's achievement of construction milestones
under the construction agreement. Subsequent to the termination of the
prepayment arrangements with WGI, payments to WGI for achievement of
construction milestones as specified in the construction agreement were made in
accordance with the terms of the construction agreement.
Under the construction agreement, we are entitled to withhold from each
scheduled payment, other than the last milestone payment, 10% of the requested
payment until after final acceptance by us of the facility unless, as discussed
below, Raytheon posts a letter of credit in the amount of amounts which would
otherwise be retained. Within 10 days after the final acceptance, we are
required to pay all retainage except for (a) 150% of the cost of completing all
punch list items and (b) the lesser of (i) 150% of the cost of repairing or
replacing any items that have already been repaired or replaced by Raytheon and
(ii) $1 million. Within 30 days after project completion, we are required to
pay the sum of the unpaid balance of the contract price, including all
retainage, less the amount indicated in (b) of the immediately proceeding
sentence. Within 30 days of the first anniversary of the earlier of provisional
acceptance or final acceptance, we are required, so long as project completion
has occurred, to pay all remaining retainage, if any.
Under the construction agreement, in lieu of our retaining these amounts,
Raytheon is entitled to post a letter of credit in the amount of the then
current retainage. On March 4, 2002, Raytheon provided us with a letter of
credit in the amount of $29.5 million (which amount represented the outstanding
amount of retainage under the construction agreement on the date the letter of
credit was posted) and we paid Raytheon the amount of the retainage. Raytheon
has subsequently increased the amount of the letter of credit in proportion to
the amounts which would otherwise be retained by us and we have paid Raytheon
the corresponding amount this retainage. As of December 31, 2002, Raytheon had
provided a letter of credit of approximately $30.8 million. We may draw on this
letter of credit in the
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event that Raytheon fails to pay us any amount owed to us under the
construction agreement. As of December 31, 2002 and March 7, 2003, we had drawn
$96,000 and $273,000 on this letter of credit, respectively.
We are currently in discussions with Raytheon as to when the performance
testing required for final acceptance will occur. See "Completion and
Acceptance of Our Project - Final Acceptance."
Our Services
Our responsibilities include: designating a representative for our
project; furnishing Raytheon access to the site; securing specified real estate
rights; providing specified start-up personnel; furnishing specified spare
parts, water disposal services and consumables; providing permanent utilities
for the start-up, testing and operation of our facility; providing raw and
potable water arrangements; providing fuel supply arrangements; providing
electrical interconnection facilities arrangements; furnishing approvals;
administering third-party contracts; causing The AES Corporation to provide a
pre-financial closing guaranty.
If we fail to meet any of our obligations under the construction
agreement, then, to the extent that Raytheon was reasonably delayed in the
performance of the services as a direct result thereof, an equitable adjustment
to one or more of the contract price, the guaranteed completion dates, the
construction progress milestone dates, the payment and milestone schedule and
our project schedule, and, as appropriate, the other provisions of the
construction agreement that may be affected thereby, will be made by agreement
between us and Raytheon.
Completion and Acceptance of Our Project
Mechanical Completion
Mechanical completion was achieved on August 13, 2002.
Performance Tests and Power Purchase Agreement Output Tests
Once mechanical completion was achieved, Raytheon was required to perform
certain performance tests in accordance with criteria set forth in the
construction agreement. Raytheon gave us notice of the performance tests, we
arranged for the disposition of output during start-up and testing and Raytheon
declared these performance tests complete since during the tests the operation
of our facility complied with applicable laws, applicable permits, Guaranteed
Emissions Limits and other required standards. Although the performance test
met the levels required for the commencement of commercial operations, they did
not meet the levels guaranteed by Raytheon under the construction agreement.
Therefore, as provided by the construction agreement, Raytheon has been paying
and will continue to pay us interim rebates until the final acceptance date. On
the final acceptance date additional performance tests will be performed and if
specified levels of heat rate and output are not met, Raytheon will be required
to pay us a final lump-sum payment which will be based on the amount of the
deficiency.
Provisional Acceptance
Provisional acceptance was achieved on August 11, 2002 and risk transfer
occurred on August 13, 2002 when:
o Raytheon caused a completed performance test in which our facility
demonstrated an average net electrical output of 95% (or higher) of
the electrical output guarantee and 105% (or lower) of the gas-based
heat rate guarantee; and
o our facility achieved the requirements of mechanical completion.
The independent engineer and we were satisfied that the provisional
acceptance requirements had been met and delivered to Raytheon a provisional
acceptance certificate on August 11, 2002. We took possession and control of
our facility and we are now solely responsible for the operation and
maintenance of the facility although Raytheon continues to have reasonable
access to our facility to complete the services.
Final Acceptance
Final acceptance will be achieved when:
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o Raytheon has caused a completed performance test in accordance with
the construction agreement to be concluded in which our facility
demonstrates during the performance test an average net electrical
output of 100% (or higher) of the electrical output guarantee and
100% (or lower) of the heat rate guarantee;
o our facility has achieved, and continues to satisfy the requirements
for the achievement of, mechanical completion;
o the reliability guarantee has been achieved under the construction
agreement; and
o Raytheon has completed performance of the services except for (i)
punch list items and (ii) services that are required by the terms of
the construction agreement to be completed after the achievement of
final acceptance, such as Raytheon's warranty obligations.
The reliability guarantee will have been achieved if and only if our
facility demonstrates an average equivalent availability of not less than 95%
while operating over a period of at least 30 consecutive days in accordance
with applicable laws, applicable permits, the electrical interconnection
requirements, the Power Purchase Agreement operating requirements, the
guaranteed emissions limits, the instruction manual and the Power Purchase
Agreement.
When Raytheon believes that it has achieved final acceptance of our
facility, it will deliver to us a notice of final acceptance. The guaranteed
final acceptance date under the construction agreement was originally 13.5
months after the guaranteed provisional acceptance date (February 14, 2002).
However, on March 8, 2003, we entered into a letter agreement with Raytheon
pursuant to which we granted Raytheon a free extension of the guaranteed final
acceptance date from April 1, 2003 to June 30, 2003. Once we are satisfied that
the final acceptance requirements have been met, we will deliver to Raytheon a
final acceptance certificate. If reasonable cause exists for doing so, we will
notify Raytheon in writing that final acceptance has not been achieved, stating
the reasons therefor. If we determine that final acceptance has not been
achieved, Raytheon will promptly take the action or perform the additional
services needed to achieve final acceptance and will issue to us another notice
of final acceptance. The procedure will be repeated as necessary until final
acceptance has been achieved or deemed to have occurred.
At any time, by giving notice to Raytheon, we in our sole discretion may
elect to effect final acceptance, in which case final acceptance will be deemed
effective as of the date of the notice, and Raytheon will have no liability to
us for any amounts thereafter arising as performance guarantee payments, other
than any interim period rebates that arose prior to the election by us, for
failure of our facility to achieve any or all of the performance guarantees
applicable thereto.
At any time after provisional acceptance of our facility has been
achieved, Raytheon may, after exhausting all reasonable repair and replacement
alternatives in order to achieve the applicable performance guarantees for
final acceptance, and so long as that the reliability guarantee will have been
achieved, give to us notice of its intention to elect to declare final
acceptance. In that event, Raytheon may elect to use the results of the most
recent eligible completed performance test for the purpose of determining our
facility's level of achievement of the performance guarantees. Final acceptance
will be deemed effective as of the last to occur of (i) the date of our receipt
of the declaration and report of the final completed performance test, or, as
applicable, the most recent completed performance test and (ii) the effective
date of the achievement of the reliability guarantee.
If on or before the guaranteed final acceptance date (i) our facility has
achieved provisional acceptance and (ii) the reliability guarantee has been
achieved, then final acceptance of our facility will be deemed to occur on the
guaranteed final acceptance date.
Project Completion
Project completion will be achieved under the construction agreement when:
o Final acceptance of our facility will have occurred and the
performance guarantees with respect to our facility will have been
achieved (or in lieu of achievement of the performance guarantees,
applicable rebates under the construction agreement will have been
paid, or we will have elected final acceptance);
o The reliability guarantee will have been achieved;
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o Raytheon will have demonstrated during the completed performance test
that the operation of our facility does not exceed the guaranteed
emissions limits;
o The requirements for achieving mechanical completion of our facility
will continue to be met;
o The punch list items will have been completed in accordance with the
construction agreement; and
o Raytheon will have performed all of the services, other than those
services, such as Raytheon's warranty obligations, which by their
nature are intended to be performed after project completion.
When Raytheon believes that it has achieved project completion, it will
deliver to us a notice of project completion. If it is satisfied that the final
acceptance requirements have been met, we will deliver to Raytheon a project
completion certificate. If reasonable cause exists for doing so, we will notify
Raytheon in writing that project completion has not been achieved, stating the
reasons therefor. If our project completion has not been achieved as so
determined by us, Raytheon will promptly take the action or perform the
additional services as will achieve project completion and will issue to us
another notice of project completion. The procedure will be repeated as
necessary until project completion is achieved.
Raytheon will be obligated to achieve project completion within 90 days
after final acceptance of our facility. If Raytheon does not achieve our
project completion on or before our project completion deadline or if we
determine that Raytheon is not proceeding with all due diligence to complete
the services in order to achieve project completion by the deadline, we may
retain another contractor to complete the work at contractor's expense.
Price Rebate for Failure to Meet Guarantees
Completion Dates
Raytheon guaranteed that (i) provisional acceptance or final acceptance of
our facility will be achieved on or before the guaranteed provisional
acceptance date and (ii) final acceptance of our facility will be achieved on
or before the guaranteed final acceptance date.
If neither provisional acceptance nor final acceptance of our facility
occurs by the date that is 50 days after the guaranteed provisional acceptance
date, Raytheon was obligated to pay us $108,000 per day as liquidated damages,
for each day provisional acceptance or final acceptance is later than the
guaranteed provisional acceptance date. The aggregate amount of such payments
that Raytheon is obligated to make is limited to 13% of the adjusted contract
price (approximately $40 million). Since neither provisional nor final
acceptance had occurred within 50 days of the guaranteed provisional acceptance
date of February 14, 2002, Raytheon began to pay us scheduled late completion
payments beginning on April 6, 2002 and ending on August 10, 2002 (the day
prior to the provisional acceptance date). As of December 31, 2002, a total of
$14 million in liquidated damages had been received.
Pursuant to the construction agreement, if neither provisional acceptance
nor final acceptance of our facility occurred on or before the date that was 90
days after the guaranteed provisional acceptance date, Raytheon was required to
submit for approval by us and the independent engineer a plan to accelerate the
performance of the services as necessary in order to achieve final acceptance
of our facility by the guaranteed final acceptance date. Raytheon submitted the
required plan which was subsequently approved by us and the independent
engineer.
Performance Guarantees
Electrical Output
Under the construction contract, if the average net electrical output of
our facility at provisional acceptance or interim acceptance, whichever is the
earlier to occur, is less than the electrical output guarantee, then Raytheon
must pay us, as a rebate and not as liquidated damages, for each day during the
interim period, an amount equal to $0.22 per day for each kilowatt by which the
average net electrical output is less than the electrical output guarantee.
During performance testing, our output was calculated to be 13,370 kilowatts
less than the electrical output guarantee. Accordingly, our daily charge for
this amount has been calculated at $2,941.40 per day. Raytheon has been paying
this amount since August 13, 2002 and will continue paying until next
performance test which is currently scheduled to occur on or just prior to the
final acceptance date.
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Upon final acceptance, if the average net electrical output of our
facility during the completed performance test is less than the electrical
output guarantee, then Raytheon must pay us, as a bonus, an amount equal to
$520 for each kilowatt by which the average net electrical output is less than
the guarantee minus any interim rebates paid or to be paid by Raytheon.
Heat Rate Guarantees
If the average net heat rate of our facility at provisional acceptance or
interim acceptance, if having occurred before final acceptance, exceeds the
heat rate guarantee, then Raytheon must pay us, as a rebate and not as
liquidated damages, for each day during the interim period, an amount equal to
$46 per day for each BTU/KwH by which the measured net heat rate is greater
than the heat rate guarantee.
Upon final acceptance, if the net heat rate of our facility during the
completed performance test exceeds the heat rate guarantee, then Raytheon will
pay us, as a rebate, a lump sum amount equal to $110,000 for each BTU/KwH by
which the measured heat rate is greater than the heat rate guarantee minus any
interim rebates paid or to be paid by Raytheon.
For the year ended December 31, 2002, we have invoiced Raytheon
approximately $955,835 in electrical output and heat rate rebates. As of
December 31, 2002, Raytheon owed approximately $207,830 in rebates. This amount
is reflected in accounts receivable-other at December 31, 2002. As of December
31, 2002, we had drawn $96,000 on the letter of credit provided by Raytheon
which covered rebate amounts.
Liability and Damages
Limitation of Liability
In no event will Raytheon's liability (i) for provisional acceptance late
completion payments exceed an amount equal to 13% of the contract price, (ii)
for performance guarantee payments arising from the electrical output guarantee
exceed in the aggregate an amount equal to 10% of the contract price, (iii) for
performance guarantee payments arising from the heat rate guarantee exceed in
the aggregate 15% of the contract price and (iv) for all provisional acceptance
late completion payments and performance guarantee payments exceed an amount
equal to 34% of the contract price.
Consequential Damages
Neither party nor any of its contractors, subcontractors or other agents
providing equipment, material or services for our project will be liable for
any indirect, incidental, special or consequential loss or damage of any type.
Aggregate Liability of Contractor
The total aggregate liability of Raytheon and any of its subcontractors,
including, without limitation, liabilities described above, to us will not in
any event exceed an amount equal to the contract price for liability due to
events occurring before the provisional acceptance date or 40% of the contract
price for liability due to events occurring after the provisional acceptance
date; however, the limitation of liability will not apply to obligations to
remove liens or to make indemnification payments.
Warranties and Guarantees
Raytheon warrants and guarantees that during the applicable warranty
period:
o all machinery, equipment, materials, systems, supplies and other
items comprising our project will be new and of first-rate quality
which satisfies utility-grade standards and in accordance with
prudent utility practices and the specifications set forth in the
construction agreement, suitable for the use in generating electric
energy and capacity under the climatic and normal operating
conditions and free from defective workmanship or materials;
o it will perform all of its design, construction, engineering and
other services in accordance with the construction agreement;
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o our project and its components are free from all defects caused by
errors or omissions in engineering and design, as determined by
reference to prudent utility practices, and comply with all
applicable laws, all applicable permits, the electrical
interconnection requirements, the Power Purchase Agreement operating
requirements and the guaranteed emissions limits; and
o the completed project performs its intended functions of generating
electric energy and capacity as a complete, integrated operating
system as contemplated in the construction agreement.
If we notify Raytheon within 30 days after the expiration of the
applicable warranty period of any defects or deficiencies discovered during the
applicable warranty period, Raytheon will promptly reperform any of the
services at its own expense to correct any errors, omissions, defects or
deficiencies and, in the case of defective or otherwise deficient machinery,
equipment, materials, systems supplies or other items, replace or repair the
same at its own expense. Raytheon warrants and guarantees that, to the extent
we have made all payments then due to Raytheon, title to our facility and all
work, materials, supplies and equipment will pass to us free and clear of all
liens, other than any permitted liens. Other than the warranties and guarantees
provided in the construction agreement there are no other warranties of any
kind, whether statutory, express or implied relating to the services.
Upon notification from us no later than 30 days after the expiration of
the applicable warranty period of any defects or deficiencies in our project or
any component thereof, we will, subject to the provisions of the construction
agreement, make our facility or the subject equipment available to Raytheon for
Raytheon to re-perform, replace or, at Raytheon's option, repair the same at
Raytheon expense so that it is in compliance with the standards warranted and
guaranteed, all in accordance with the construction agreement.
Force Majeure
Force Majeure Event
A force majeure event will mean any act or event that prevents the
affected party from performing its obligations, other than the payment of
money, under the construction agreement or complying with any conditions
required to be complied with under the construction agreement if the act or
event is beyond the reasonable control of and not the fault of the affected
party and the party has been unable by the exercise of due diligence to
overcome or mitigate the effects of the act or event. Force majeure events
include, but are not limited to, acts of declared or undeclared war, sabotage,
landslides, revolution, terrorism, flood, tidal wave, hurricane, lightning,
earthquake, fire, explosion, civil disturbance, insurrection or riot, act of
God or the public enemy, action, including unreasonable delay or failure to
act, of a court or public authority, or strikes or other labor disputes of a
regional or national character that are not limited to only the employees of
Raytheon or its subcontractors and that are not due to the breach of a labor
contract or applicable law by the party claiming force majeure or any of its
subcontractors. Force majeure events do not include (i) acts or omissions of
Raytheon or any subcontractors, except as expressly provided in the foregoing
sentence, (ii) late delivery of materials or equipment, except to the extent
caused by a force majeure event, and (iii) economic hardship.
Excused Performance
If either party is rendered wholly or partly unable to perform its
obligations because of a force majeure event, that party will be excused from
whatever performance is affected by the force majeure event to the extent so
affected so long as:
o the non-performing party gives the other party prompt notice
describing the particulars of the occurrence;
o the suspension of performance is of no greater scope and of no longer
duration than is reasonably required by the force majeure event;
o the non-performing party exercises all reasonable efforts to mitigate
or limit damages to the other party;
o the non-performing party uses its best efforts to continue to perform
its obligations under the construction agreement and to correct or
cure the event or condition excusing performance; and
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o when the non-performing party is able to resume performance of its
obligations, that party will give the other party written notice to
that effect and will promptly resume performance under the
construction agreement.
Scope Changes
We may order scope changes to the services, in which event one or more of
the contract price, the construction progress milestone dates, the guaranteed
completion dates, the payment and milestone schedule, our project schedule and
the performance guarantees will be adjusted accordingly, if necessary. All
scope changes will be authorized by a scope change order and only we or our
representative may issue scope change orders.
As soon as Raytheon becomes aware of any circumstances which Raytheon has
reason to believe may necessitate a scope change, Raytheon will issue to us a
scope change order notice at Raytheon's expense. If we desire to make a scope
change, in response to a scope change order notice or otherwise, we will submit
a scope change order request to Raytheon. Raytheon will promptly review the
scope change order request and notify us in writing of the options for
implementing the proposed scope change and the effect, if any, each option
would have on the contract price, the guaranteed completion dates, the
construction progress milestone dates, the payment and milestone schedule, our
project schedule and the performance guarantees.
No scope change order will be issued and no adjustment of the contract
price, the guaranteed completion dates, the construction progress milestone
dates, the payment and milestone schedule, our project schedule or the
performance guarantees will be made in connection with any correction of
errors, omission, deficiencies, or improper or defective work on the part of
Raytheon or any subcontractors in the performance of the services. Changes due
to changes in applicable laws or applicable permits occurring after the date of
the construction agreement will be treated as scope changes.
Effect of Force Majeure Event
If and to the extent that any force majeure events affect Raytheon's
ability to meet the guaranteed completion dates, or the construction progress
milestone dates, an equitable adjustment in one or more of the dates, the
payment and milestone schedule and our project schedule will be made by
agreement of us and Raytheon. No adjustment to the performance guarantees and,
except as otherwise expressly set forth below, the contract price will be made
as a result of a force majeure event. If Raytheon is delayed in the performance
of the services by a force majeure event, then:
o to the extent that the delay(s) are, in the aggregate, 60 days or
less, Raytheon will absorb all of its costs and expenses resulting
from said delay(s); and
o to the extent that the delay(s) are, in the aggregate, more than 60
days, Raytheon will be reimbursed by us for those incremental costs
and expenses resulting from said delay(s) which are incurred by
Raytheon after said 60-day period.
Price Change
An increase or decrease in the contract price, if any, resulting from a
scope change requested by us or made under the construction contract will be
determined by mutual agreement of the parties.
Continued Performance Pending Resolution of Disputes
Notwithstanding any dispute regarding the amount of any increase or
decrease in Raytheon's costs with respect to a scope change, Raytheon will
proceed with the performance of the scope change promptly following our
execution of the corresponding scope change order.
Hazardous Materials
If hazardous materials were not identified in an environmental site
assessment report delivered by us to Raytheon prior to the commencement date
and were not brought onto the site by Raytheon or any of its subcontractors,
then Raytheon will be entitled to a scope change under the construction
agreement.
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Risk of Loss
With respect to our facility, until the risk transfer date, which occurred
on August 13, 2002, Raytheon bore the risk of loss and full responsibility for
the costs of replacement, repair or reconstruction resulting from any damage to
or destruction of our facility or any materials, equipment, tools and supplies
that are purchased for permanent installation in or for use during construction
of our facility.
Since the risk transfer date with respect to our facility, we bear all
risk of loss and full responsibility for repair, replacement or reconstruction
with respect to any loss, damage or destruction to our facility.
Termination
Termination for our Convenience
We may for our convenience terminate any part of the services or all
remaining services at any time upon 30 days' prior written notice to Raytheon
specifying the part of the services to be terminated and the effective date of
termination. We may elect to suspend completion of all or any part of the
services upon 10 days' prior written notice to Raytheon, or, in emergency
situations, upon prior notice as circumstances permit.
Termination by Raytheon
If we fail to pay to Raytheon any payment and the failure continues for 30
days, then (i) Raytheon may suspend its performance of the services upon 10
days' prior written notice to us, which suspension may continue until the time
as the payment, plus accrued interest thereon, is paid to Raytheon, and/or (ii)
if the payment has not been made prior to the commencement of a suspension by
Raytheon under clause (i) above, Raytheon may terminate the construction
agreement upon 60 days' prior written notice to us; however, the termination
will not become effective if the payment, plus accrued interest thereon, is
made to Raytheon prior to the end of the notice period. If the suspension
occurs, an equitable adjustment to one or more of the contract price, the
guaranteed completion dates, the construction progress milestone dates, the
payment and milestone schedule and our project schedule, and, as appropriate,
the other provisions of the construction agreement that may be affected
thereby, will be made by agreement between us and Raytheon. If we have
suspended completion of all or any part of the services in accordance with the
construction agreement for a period in excess of 365 days in the aggregate,
Raytheon may, at its option, at any time thereafter so long as the suspension
continues, give written notice to us that Raytheon desires to terminate the
construction agreement. Unless we order Raytheon to resume performance of the
suspended services within 15 days of the receipt of the notice from Raytheon,
the suspended services will be deemed to have been terminated by us for our
convenience. If the occurrence of one or more force majeure events prevents
Raytheon from performing the services for a period in the aggregate of 720
days, either party may, at its option, give written notice to the other party
of its desire to terminate the construction agreement.
Consequences of Termination
o Upon any termination, we may, so long as the termination is pursuant
to any default Raytheon will have been paid all amounts due and owing
to it under the construction agreement, which will not be deemed to
constitute a waiver by Raytheon of any rights to payment it may have
as a result of a non-default related termination in the event of a
termination pursuant to a default, at our option elect to have
itself, or our designee, which may include any other affiliate or any
third-party purchaser, (i) assume responsibility for and take title
to and possession of our project and any or all work, materials or
equipment remaining at the site and (ii) succeed automatically,
without the necessity of any further action by Raytheon, to the
interests of Raytheon in any or all items procured by Raytheon for
our project and in any and all contracts and subcontracts entered
into between Raytheon and any subcontractor with respect to the
equipment specified in the construction agreement, and with respect
to any or all other subcontractors selected by us which are
materially necessary to the timely completion of our project,
Raytheon will use all reasonable efforts to enable us, or our
designee, to succeed to Raytheon's interests thereunder.
o If any termination occurs, we may, without prejudice to any other
right or remedy it may have, at its option, finish the services by
whatever method we may deem expedient.
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Surviving Obligations
Termination of the construction agreement (i) will not relieve either
party of any obligation with respect to the confidentiality of the other
party's information, (ii) will not relieve either party of any obligation which
expressly or by implication survives termination of the construction agreement
and (iii) except as otherwise provided in any provision of the construction
agreement expressly limiting the liability of either party, will not relieve
either party of any obligations or liabilities for loss or damage to the other
party arising out of or caused by acts or omissions of the party prior to the
effectiveness of the termination or arising out of the termination, and will
not relieve Raytheon of its obligations as to portions of the services already
performed or as to obligations assumed by Raytheon or us prior to the date of
termination.
Default and Remedies
Raytheon's Default
Raytheon's events of default include: voluntary bankruptcy or insolvency;
involuntary bankruptcy or insolvency; materially adverse misleading or false
representation or warranty; improper assignment; failure to maintain required
insurance; failure to comply with applicable laws or applicable permits;
cessation or abandonment of the performance of services; termination or
repudiation of, or default under the related construction contract guaranty;
failure to supply sufficient skilled workers or suitable material or equipment;
failure to make payment when due for labor, equipment or materials;
non-occurrence of either provisional acceptance or final acceptance within 90
days after the guaranteed provisional acceptance date, non-occurrence of
construction progress milestones and failure proceed under a remediation plan
within 90 days after the non-occurrence; and failure to remedy non-performance
or non-observance of any provision in the construction agreement.
Our Rights and Remedies
If Raytheon is in default of its obligations, we will have any or all of
the following rights and remedies, in addition to any other rights and remedies
that may be available to us under the construction agreement or at law or in
equity, and Raytheon will have the following obligations:
o We may, without prejudice to any other right or remedy we may have
under the construction agreement or at law or in equity, terminate
the construction agreement in whole or in part immediately upon
delivery of notice to Raytheon. In case of the partial termination,
the parties will mutually agree upon a scope change order to make
equitable adjustments, including the reduction and/or deletion of
obligations of the parties commensurate with the reduced scope
Raytheon will have after taking into account the partial termination,
to one or more of the guaranteed completion dates, the construction
progress milestone dates, the contract price, the payment and
milestone schedule, our project schedule, the performance guarantees
and the other provisions of the construction agreement which may be
affected thereby, as appropriate. If the parties are unable to reach
mutual agreement as to said scope change order and the dispute
resolution procedures set forth in the construction agreement are
invoked, the procedures will give due consideration to customary
terms and conditions under which Raytheon has entered subcontracts
with third party prime contractors covering services substantially
similar to those services which are not being terminated.
o If requested by us, Raytheon must withdraw from the site, must assign
to us such of contractor's subcontracts, to the extent permitted
therein, as we may request, and must remove the materials, equipment,
tools and instruments used by, and any debris and waste materials
generated by, Raytheon in the performance of the Services as we may
direct, and we, without incurring any liability to Raytheon, other
than the obligation to return to Raytheon at the completion of our
project the materials that are not consumed or incorporated into our
project, solely on an "as is, where is" basis without any
representation or warranty of any kind whatsoever, may take
possession of any and all designs, drawings, materials, equipment,
tools, instruments, purchase orders, schedules and facilities of
Raytheon at the site that we deem necessary to complete the services.
Assignment
The parties shall have no right to assign or delegate any of their
respective rights or obligations under the construction agreement either
voluntarily or involuntarily or by operation of law, except that we may,
without
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Raytheon's approval, assign any or all of its rights under the construction
agreement (a) as collateral security to the financing parties and (b) to any
transferee of our project or a substantial portion of our project so long as
such assignee has financial and operational capabilities that are either
substantially similar to ours at the time or otherwise are such that the
assignment could not reasonably be expected to have a material adverse effect
on Raytheon's rights and obligations under the construction agreement.
Maintenance Services Agreement
We have entered into the Maintenance Program Parts, Shop Repairs and
Scheduled Outage TFA Services Contract, dated as of December 8, 1999, with
Siemens Westinghouse by which Siemens Westinghouse will provide us with, among
other things, combustion turbine parts, shop repairs and scheduled outage
technical field assistance services. The fees assessed by Siemens Westinghouse
will be based on the number of Equivalent Base Load Hours accumulated by the
applicable Combustion Turbine as adjusted for inflation. The Company has
received approximately $10.5 million in rotable spare parts under this
agreement. This amount is recorded as spare parts inventory and as a long-term
liability in the December 31, 2002 balance sheet.
The maintenance services agreement became effective on the date of
execution and unless terminated early, will terminate upon completion of shop
repairs performed by Siemens Westinghouse following the twelfth scheduled
outage of the applicable combustion turbine or sixteen years from the date of
execution, whichever occurs first, unless we exercise our right to terminate
the agreement after the first major outage of the turbines, which will be
approximately the sixth year of operation of the facility.
Scope of Work
During the term of the maintenance services agreement, and in accordance
with the scheduled outage plan, Siemens Westinghouse is required to do the
following:
o deliver the type and quantity of new program parts for installation
of the combustion turbine;
o repair/refurbish program parts and equipment for the combustion
turbine;
o provide miscellaneous hardware;
o provide us with material safety data sheets for all hazardous
materials Siemens Westinghouse intends to bring/use on the site;
o provide the services of a maintenance program engineer to manage the
combustion turbine maintenance program;
o provide technical field assistance, or TFA Services, which involves
advice and consultation for the disassembly, inspection and assembly
of various equipment; and
o remove and reinstall insulation as required to complete inspections.
We are responsible for, among other things:
o storing and maintaining parts, materials and tools to be used in or
on the combustion turbine;
o maintaining and operating the combustion turbine consistently with
the warranty conditions;
o ensuring that our operator and maintenance personnel are properly
trained;
o transporting program parts in need of repair/refurbishing; and
o providing Siemens Westinghouse, on a monthly basis, with the number
of equivalent starts and the number of equivalent base load hours
("EBHs") incurred by each combustion turbine.
We and Siemens Westinghouse will jointly develop the scheduled outage
plan. The scheduled outage plan will be consistent with the terms and
conditions of the Power Purchase Agreement.
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Early Replacement
If it is determined that due to normal wear and tear a program part(s) for
the combustion turbine has failed or will not last until the next scheduled
outage, and the part has to be repaired before the scheduled replacement
period, Siemens Westinghouse will replace the program part by moving up a new
program part which is otherwise scheduled to be delivered at a later date. The
contract price for the replacement will not be affected if the replacement date
is less than or equal to one year earlier than the scheduled outage during
which the program part was scheduled to be replaced. If the actual replacement
date for a program part is more than one year earlier than the scheduled outage
at which point the program part was scheduled to be replaced, the early
replacement will result in an adjustment to the payment schedule. Siemens
Westinghouse has the final decision with regard to the replacement or
refurbishment associated with any program part. If we dispute Siemens
Westinghouse's decision, we may seek to resolve the dispute in accordance with
the dispute resolution procedures discussed below.
Parts Life Credit
After applicable warranty periods set forth in the maintenance services
agreement and the construction agreement, Siemens Westinghouse will provide a
parts life credit if a program part requires replacement due to normal wear and
tear prior to meeting its expected useful life. Siemens Westinghouse has the
final decision with regard to actual parts life and the degree of repair or
refurbishment associated with any program parts. The parts life credit will be
calculated in terms of EBHs and equivalent starts. The price of the replacement
part will be adjusted for inflation. If we dispute Siemens Westinghouse's
decision, we may seek to resolve the dispute in accordance with the dispute
resolution procedures discussed below.
Contract Price and Payment Terms
Siemens Westinghouse will invoice us monthly and payments are then due
within 25 days. The fees assessed by Siemens Westinghouse will be based on the
number of EBHs accumulated by the applicable combustion turbine as adjusted for
changes in the consumer price index. The contract price will be the aggregate
number of fees as adjusted plus any additional payment amount mutually agreed
to by the parties under a change order.
Unscheduled Outages and Unscheduled Outage Work
If during the term of the maintenance services agreement an unscheduled
outage occurs resulting from (i) the non-conformity of new program parts; (ii)
the failing of a shop repair; (iii) a program part requiring replacement due to
normal wear and tear prior to achieving its expected life in terms of EBHs or
equivalent starts; or (iv) the failure of a service, performed by Siemens
Westinghouse, we will hire Siemens Westinghouse, to the extent not supplied by
Siemens Westinghouse as a warranty remedy under Siemens Westinghouse's
warranties under the maintenance services agreement, to supply any additional
parts, miscellaneous hardware, shop repairs and TFA Services under a change
order. We will be entitled to any applicable parts life credit with respect to
program parts as well as a discount for TFA Services. If the unscheduled outage
occurs within a specified number of EBHs of a scheduled outage and it was
anticipated that the additional parts, miscellaneous hardware, shop repairs and
TFA Services to be used in the unscheduled outage were to be used during the
upcoming scheduled outage, the upcoming scheduled outage will be moved up in
time to become the unscheduled outage/moved-up scheduled outage. We will not be
required to pay any additional money for the program parts, miscellaneous
hardware, shop repairs and TFA Services.
If any program parts are delivered by Siemens Westinghouse within 15 days
of receipt of the change order, we will pay to Siemens Westinghouse the price
for the program part set forth in the maintenance services agreement plus a
specified percentage.
Any program part delivered after 30 days of the change order will cost us
the price set forth in the maintenance services agreement minus a specified
percentage.
The remedies set forth in the maintenance services agreement, and
discounts on any TFA Services purchased by us from Siemens Westinghouse will
constitute Siemens Westinghouse's sole liability and our exclusive remedies for
unscheduled outages whether our claims are based in contract, in tort, or
otherwise. If Siemens Westinghouse fails to send a TFA Services representative
by the end of the second day following written receipt of the unscheduled
outage, we may hire another qualified person, at its cost, to perform the work.
If the hired party proceeds to
26
disassemble the combustion turbine to determine the case of the unscheduled
outage and Siemens Westinghouse still has not provided personnel to assist with
the inspection, we can elect to terminate the maintenance services agreement on
the basis that Siemens Westinghouse has failed to perform a material
obligation.
Changes in Operating Restrictions
The maintenance services agreement requires that each combustion turbine
will be operated in accordance with the requirements of the Power Purchase
Agreement and prudent utility practices, with 8,000 EBH/year and 250 equivalent
starts per year by using natural gas fuel or liquid fuel and water. Should the
actual operations differ from these operating parameters which causes a
scheduled outage to be planned/performed earlier or later than as expected,
then, under a change order, an adjustment in the scope, schedule, and price
will be made.
Warranties
Siemens Westinghouse warrants that the new program parts, miscellaneous
hardware and any shop repairs will conform to standards of design, materials
and workmanship consistent with generally accepted practices of the electric
utility industry. The warranty period with respect to program parts, hardware
and shop repair is until the earlier of one year from the date of installation
of the original program part or hardware, a specific number of starts or fired
hours after installation of the program parts and hardware, or three years from
the date of delivery of the original program part, hardware, and in the case of
shop repair, three years from completion of the work. Warranties on the program
parts and hardware will not expire more than one year after the conclusion of
the maintenance services agreement. Siemens Westinghouse will repair or replace
any program part or hardware, at its cost, if notified of any failure or
non-conformity of the program part or hardware during the warranty period.
Siemens Westinghouse also warrants that the services of its personnel and
technical information transmitted will be competent and consistent with prudent
utility practices and the services will comply in all material respects with
laws and will be free from defects in workmanship for a period of one year from
the date of completion of that item of services. The warranties on the services
will expire no later than one year after the termination or end of the term of
the maintenance services agreement.
In addition, Siemens Westinghouse warrants that any program part removed
during a scheduled outage and delivered by us to the designated facility for
repair will be repaired and delivered by Siemens Westinghouse within 26 weeks.
If Siemens Westinghouse does not deliver the program part within this time
frame or does not provide a new program part in lieu of the program part being
shop repaired and an outage occurs which requires such a program part, Siemens
Westinghouse will pay us liquidated damages for each day the program part is
not repaired and delivered the aggregate of which liquidated damage payments
will not exceed a maximum annual cap. If upon reaching the maximum cap on
aggregate liquidated damages, Siemens Westinghouse still has not repaired and
delivered the program part, we may elect to terminate the maintenance services
agreement because Siemens Westinghouse will be considered to have failed to
perform its material obligations.
Except for the express warranties set forth in the maintenance services
agreement, Siemens Westinghouse makes no other warranties or representations of
any kind. No implied statutory warranty of merchantability or fitness for a
particular purpose applies.
The warranties provided by Siemens Westinghouse are conditioned upon (i)
our receipt, handling, storage, operation and maintenance of our project,
including any program parts and miscellaneous hardware, being done in
accordance with the terms of the combustion turbine instruction manuals; (ii)
operation of the combustion turbine in accordance with the terms of the
maintenance services agreement; (iii) repair of accidental damage done
consistently with the equipment manufacturer's recommendations; (iv) our
providing Siemens Westinghouse with access to the site to perform its services
under the maintenance services agreement; and (v) hiring Siemens Westinghouse
to provide TFA Services, program parts, shop repairs and miscellaneous hardware
required to dissemble, repair and reassemble the combustion turbine.
Termination
We may terminate the maintenance services agreement if (i) specific
bankruptcy events affecting Siemens Westinghouse occur; (ii) Siemens
Westinghouse fails to perform or observe in any material respect any provision
in the maintenance services agreement and fails to (a) promptly commence to
cure and diligently pursue the cure of the
27
failure or (b) remedy the failure within 45 days after Siemens Westinghouse
receives written notice of the failure; (iii) we terminate the construction
agreement due to Raytheon's default thereunder or due to our inability to
obtain construction financing or environmental operating permits; or (iv)
Raytheon terminates the construction agreement for any reason other than our
default thereunder. Notwithstanding the foregoing, we may terminate the
maintenance services agreement at any time for convenience following the
completion of the first major outage of both combustion turbine generators. In
addition, the maintenance services agreement will automatically terminate if
(i) we terminate the construction agreement for reasons other than (a) the
default of Raytheon and (b) our inability to obtain permits for our project or
(ii) Raytheon terminates the construction agreement for our default thereunder.
If such termination occurs, Siemens Westinghouse will discontinue any work or
services being performed and continue to protect our property. Siemens
Westinghouse will transfer title to us and deliver any new program parts and
miscellaneous hardware already purchased by us. We will pay Siemens
Westinghouse those amounts owed at the time of termination.
Siemens Westinghouse may also terminate the maintenance services agreement
if: (i) we fail to make payments or (ii) specific bankruptcy events affecting
us occur. Siemens Westinghouse cannot terminate the maintenance services
agreement if we pay outstanding amounts due within 90 days. Upon termination,
Siemens Westinghouse will stop all work, place no additional orders, protect
our property and deliver the property to us upon our instructions. Siemens
Westinghouse will be entitled to payment for work performed up until its
termination of the maintenance services agreement, and to all outstanding fees
and reasonable costs associated with the termination.
Limitation of Liability
Each party agrees that, except to the extent liquidated damages provided
in the maintenance services agreement are so considered, neither Siemens
Westinghouse, nor its suppliers, nor will we under any circumstances be liable
for: any indirect, special, incidental or consequential loss or damage
whatsoever; damage to or loss of property or equipment; loss of profits or
revenues; loss of use of material, equipment or power system; increased costs
of any kind, including but not limited to capital cost, fuel cost and cost of
purchased or replacement power, or claims of our customers.
We agree that the remedies provided in the maintenance services agreement
are exclusive and that under no circumstances will the total aggregate
liability of Siemens Westinghouse during a given year exceed 100% of the
contract price payable to Siemens Westinghouse for that given year under the
maintenance services agreement. We further agree that under no circumstances
will the total aggregate liability of Siemens Westinghouse for liquidated
damages during a given year exceed a specified percentage of the contract price
payable to Siemens Westinghouse for that given year under the maintenance
services agreement. We further agree that under no circumstances will the total
aggregate liability of Siemens Westinghouse exceed a specified percentage of
the contract price payable to Siemens Westinghouse under the maintenance
services agreement.
Force Majeure
Neither party will be liable for failure to perform any obligation or
delay in performance, excluding payment, to the extent the failure or delay is
caused by any act or event beyond the reasonable control of the affected party
or Siemens Westinghouse's suppliers; so long as the act or event is deemed to
be a force majeure and is not the fault or the result of negligence of the
affected party and the party has been unable by exercise of reasonable
diligence to overcome or mitigate the effects of the act or event. Force
majeure includes: any act of God; act of civil or military authority; act of
war whether declared or undeclared; act, including delay, failure to act, or
priority, of any governmental authority; civil disturbance; insurrection or
riot; sabotage; fire; inclement weather conditions; earthquake; flood; strikes,
work stoppages, or other labor difficulties of a regional or national character
which are not limited to only the employees of Siemens Westinghouse or its
subcontractors or suppliers and which are not due to the breach of an
applicable labor contract by the party claiming force majeure; embargo; fuel or
energy shortage; delay or accident in shipping or transportation to the extent
attributable to another force majeure; changes in laws which substantially
prevent a party from complying with its obligations in conformity with its
requirements under the maintenance services agreement or failure or delay
beyond its reasonable control in obtaining necessary manufacturing facilities,
labor, or materials from usual sources to the extent attributable to another
force majeure; or failure of any principal contractor to provide equipment to
the extent attributable to another force majeure. Force majeure will not
include: (i) economic hardship, (ii) changes in market conditions or (iii)
except due to an event of force majeure, late delivery of program parts or
other equipment.
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If a delay in performance is excusable due to a force majeure, the date of
delivery or time for performance of the work will be extended by a period of
time reasonably necessary to overcome the effect of the force majeure and if
the force majeure lasts for a period longer than 30 days and the delay directly
increases Siemens Westinghouse's costs or expenses, we, after reviewing Siemens
Westinghouse's additional direct costs and expenses, will reimburse Siemens
Westinghouse for its reasonable additional direct costs and expenses incurred
after 30 days from the beginning of the force majeure resulting from said
delay.
Environmental Compliance
Siemens Westinghouse will indemnify us from any fines, penalties, expense,
loss or liability, including the costs of clean-up, incurred by us as a result
of (i) Siemens Westinghouse's failure to meet its obligations under the
maintenance services agreement or (ii) any spills of hazardous waste or oil,
petroleum or petroleum products to the environment which are attributable to
and occur during Siemens Westinghouse's performance, or the performance of its
contractors or subcontractors, of the workscope obligations at the site under
the maintenance services agreement.
We will indemnify Siemens Westinghouse from any fines, penalties, expense,
loss or liability incurred by Siemens Westinghouse as a result of our failure
to meet our obligations under the maintenance services agreement. We will have
no responsibility or liability with regard to any hazardous waste or oil,
petroleum or petroleum products which were spilled by Siemens Westinghouse, or
any other of its contractors or subcontractors performing workscope obligations
at the site.
Fleetwide Issue Notification
During the term of this agreement, if Siemens Westinghouse becomes aware
of a fleetwide issue involving the Siemens Westinghouse 501F Combustion Turbine
which may have a deleterious effect on our combustion turbines, Siemens
Westinghouse will, within a reasonable time of becoming aware of the fleetwide
issues, notify us thereof, and if the fleetwide issue requires an additional
repair or replacement of a program part or miscellaneous hardware to be
performed, the additional repair or replacement will be performed in accordance
with the provisions of the maintenance services agreement.
Interconnection Agreement
We have entered into a Generation Facility Transmission Interconnection
Agreement, dated as of April 27, 1999 with Jersey Central Power, for the
installation, operation and maintenance of the facilities necessary to
interconnect our facility to Jersey Central Power's transmission system. Under
the interconnection agreement, we and Jersey Central Power will construct, own,
operate and maintain the interconnection facilities. We are responsible for all
of the costs of construction, operation and maintenance of the interconnection
facilities, including those owned by Jersey Central Power. We have been
importing electricity from the transmission system to support commissioning of
the facility since July 2001 and the interconnection facilities have exported
power to the transmission system since that time. At December 31, 2002, the
interconnection facilities and protective gas apparatus needed to generate and
deliver net electric and/or ancillary services to the electric delivery point
have been completed as required under the Power Purchase Agreement.
Company Market-Based Tariff Petition
FERC approval of our company market-based tariff petition was received on
June 22, 2001.
Jersey Central Power's Obligations
We have entered into an interconnection installation agreement, by which
Jersey Central Power has installed, at our cost and expense, the Jersey Central
Power interconnection facilities. The Jersey Central Power interconnection
facilities, together with the facilities that we have installed, are necessary
to allow the interconnection of our facility with the transmission system of
Jersey Central Power. The Jersey Central Power interconnection facilities which
include, but are not limited to, certain substation protective relaying
equipment and two 230 kV 2-cycle circuit breakers, are owned, maintained and
operated by Jersey Central Power, at our cost and expense. The remainder of the
interconnection facilities have been installed and are owned, maintained and
operated by us.
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Jersey Central Power has completed the installation of the Jersey Central
Power interconnection facilities necessary to permit us to meet our
construction agreement requirement to energize the switch yard and commence
commissioning of our facility. We have been importing electricity from the
transmission system to support commissioning of the facility since July 2001
and the interconnection facilities are ready to export power to the
transmission system. We have reimbursed Jersey Central Power for its actual
costs of installing the Jersey Central Power interconnection facilities. Our
payments to Jersey Central Power consist of advance payments of $100,000 on the
execution date of the interconnection installation agreement, $200,000 upon the
issuance of the notice to proceed, and $1,700,000 at the closing for financing
of our facility. We have received from Jersey Central Power monthly invoices
for work performed for which we have paid approximately $5.1 million to date.
We are currently disputing $118,000 of charges with Jersey Central Power
regarding the costs associated with the facilities.
Our Obligations
We have installed and own, operate and maintain a portion of the
interconnection facilities, including, but not limited to, a 230 kV switchyard,
including generator step up transformers, instrument transformers, revenue
metering, power circuit breakers, control and protective relay panels,
supervisory control and data acquisition equipment, and protective relaying
equipment.
We are obligated to give prior notice to Jersey Central Power before
undertaking any additions, modifications or replacements to our facility or our
interconnection facilities that will increase the generating capacity of our
facility or could reasonably be expected to affect the transmission system, the
Jersey Central Power Interconnection Facilities or the operation of our
facility. We must reimburse Jersey Central Power for all costs incurred by
Jersey Central Power associated with any modifications, additions or
replacements that it must make to the transmission system or the Jersey Central
Power Interconnection Facilities, as reasonably required by Jersey Central
Power, in connection with our proposed addition, modification or replacement at
our facility. We are obligated to modify its portion of the interconnection
facilities as may be required to conform to changes in good utility practice or
as required by PJM Interconnection, L.L.C., which is the independent system
operator that operates the transmission system to which our facility will be
interconnected.
We are obligated to keep our facility insured against loss or damage in
accordance with the minimum coverages specified in the Interconnection
Agreement.
Operation and Maintenance of Interconnection Facilities
The parties are obligated to operate and maintain their respective
portions of the interconnection facilities in accordance with good utility
practices and the requirements and guidelines of PJM and Jersey Central Power.
Jersey Central Power will have the right to disconnect our facility from
its transmission system and/or curtail, interrupt or reduce the output of our
facility when operation of our facility or the interconnection facilities
adversely affects the quality of service rendered by Jersey Central Power or
interferes with the safe and reliable operation of its transmission system or
the regional transmission system. Jersey Central Power, however, is obligated
to use reasonable efforts to minimize any disconnection, curtailment,
interruption or reduction in output.
In accordance with good utility practice, Jersey Central Power may remove
the interconnection facilities from service as necessary to perform maintenance
or testing or to install or replace equipment on the interconnection facilities
or the transmission system. Jersey Central Power is obligated to use due
diligence to restore the interconnection facilities to service as promptly as
practicable.
In addition, if we fail to operate, maintain, administer, or insure our
facility or its portion of the interconnection facilities, Jersey Central Power
may, following 30 days notice and opportunity to cure the failure, disconnect
our facility from the transmission system.
Revenue Metering
Revenue meters, which are part of the interconnection facilities, will be
installed to measure the transfer of electrical energy between the parties at
the point of interconnection. The revenue meters have been installed at our
expense and will be owned, maintained and repaired by Jersey Central Power,
also at our expense. Jersey Central Power has installed, at our expense,
telemetering equipment which has been installed by us, to retrieve certain
30
information. The revenue meters are to be tested at least once every two years,
or more frequently at our request. Any revenue meter found to be inaccurate by
greater than 1% is to be adjusted, repaired or replaced.
Land Rights and Access
We have granted to Jersey Central Power the right of reasonable access and
all necessary rights of way, easements, and licenses as Jersey Central Power
may require to install, operate, maintain, replace and remove the revenue
meters and other portions of the Jersey Central Power Interconnection
Facilities.
Force Majeure
If either party is delayed in or prevented from performing or carrying out
its obligations under the interconnection agreement by reason of force majeure,
the party will not be liable to the other party for or on account of any loss,
damage, injury or expense resulting from or arising out of the delay or
prevention; however, the party encountering the delay or prevention will use
due diligence to remove the cause or causes thereof.
Default
The events of default under the interconnection agreement are:
o breach of a material term or condition and uncured failure to provide
a required schedule, report or notice;
o failure or refusal of a party to permit the representatives of the
other party access to maintenance records, or its interconnection
facilities or protective apparatus;
o appointment by a court of a receiver or liquidator or trustee that is
not discharged within 60 days, issuance by a court of a decree
adjudicating a party as bankrupt or insolvent or sequestering a
substantial part of its property that has not been discharged within
60 days after its entry, or filing of a petition to declare a party
bankrupt or to reorganize a party under the Federal Bankruptcy Code
or similar state statute that has not been dismissed within 60 days;
o voluntary filing by a party of a petition in bankruptcy or consent to
the filing of a bankruptcy or reorganization petition, an assignment
for the benefit of creditors, an admission by a party in writing of
its inability to pay its debts as they come due, or consent to the
appointment of a receiver, trustee, or liquidator of a party or any
part of its property; and
o failure to provide the other party with reasonable written assurance
of the party's ability to perform any of the material duties and
responsibilities under the interconnection agreement within 60 days
of a reasonable request for the assurance.
Upon an event of default, the non-defaulting party may give notice of the
event of default to the defaulting party. The defaulting party will have 60
days following the receipt of the notice to cure the default or to commence in
good faith the steps necessary to cure a default that cannot be cured within
that 60-day period. If the defaulting party fails to cure its default within 60
days or fails to take the steps necessary to cure a default that cannot be
cured within a 60-day period, the non-defaulting party will have the right to
terminate the interconnection agreement.
Jersey Central Power will have the right to operate and/or to purchase
specific equipment, facilities and appurtenances from us that are necessary for
Jersey Central Power to operate and maintain its transmission system if (i) we
commence bankruptcy proceedings or petitions for the appointment of a trustee
or other custodian, liquidator, or receiver; (ii) a court issues a decree for
relief of our company or appoints a trustee or other custodian, liquidator, or
receiver for our company or a substantial part of our assets and the decree is
not dismissed within 60 days or (iii) we cease operation for 30 consecutive
days without having an assignee, successor, or transferee in place.
Operations Agreement and Services Agreement
We entered into a Development and Operations Services Agreement (the
"Operations Agreement"), dated as of March 10, 2000, with AES Sayreville under
which AES Sayreville is providing, operating and maintenance services for our
facility for a period of 32 years. Under the Operations Agreement, AES
Sayreville is responsible for, among
31
other things, preparing plans and budgets related to start-up and commercial
operation of our facility, providing qualified operating personnel, making
repairs, purchasing consumables and spare parts (not otherwise provided under
the maintenance services agreement) and providing other services as needed
according to industry standards.
AES Sayreville is compensated for its maintenance and operation services
on a cost basis, and it also receives certain management fees which it passes
on to The AES Corporation. For the years ended December 31, 2002 and 2001, we
paid AES Sayreville a total of $3.04 million and $1.9 million, respectively,
for their services.
Under a services agreement between AES Sayreville and The AES Corporation,
The AES Corporation has and continues to provide to AES Sayreville all of the
personnel and services necessary for AES Sayreville to comply with its
obligations under the operations agreement.
Water Supply Agreement
We have entered into a Water Supply Agreement dated as of December 22,
1999 with the Borough of Sayreville under which the Borough will provide
untreated water to our facility.
Supply of Untreated Water
Untreated Water Supply
The Borough of Sayreville is in the final stages of approval of the Lagoon
Water Pipeline, Lagoon Pumping Station, and Sayreville Interconnection Number
2. The Company was responsible for selection of a contractor and for payment of
all costs. The pipeline construction has been completed. The construction
contract for the Pumping Station was awarded and is completed. Startup and
commissioning of this system started May 1, 2002. Subsequent to the completion
of the Lagoon Pumping Station and the Lagoon Water Pipeline, the Borough will
make available to our facility a supply of untreated water from the South River
that is up to 4.6 million gallons per day and 1.53 billion gallons per year.
The Borough must use reasonable efforts to maintain the Lagoon's water level at
an elevation of 29 feet, but during periods when water cannot be drawn from the
South River, the Lagoon's water level must not be drawn to elevations below 20
feet. During periods when either the Lagoon's water level is below 20 feet and
water cannot be drawn from the South River or when water from the Lagoon is
needed to ensure a supply of treated water to Borough treated water customers,
the Borough must supply our facility with water drawn from the Duhernal
acquifer and transported through the Duhernal water pipeline.
Compensation
The cost of the pipeline and pumping station are estimated to be
approximately $678,000 and $1.71 million, respectively. The Company has paid
the pipeline project in full, and as of December 31, 2002, has paid
approximately $1.69 million towards the pumping station.
In addition to the amounts discussed in the preceding paragraph, we paid
the Borough an initial payment of $150,000 from the bond proceeds, which was
credited to our account and is being used to offset the cost of untreated water
purchased during our project's start-up and testing phase and during the first
year of operation. If the Borough incurs additional costs from Middlesex Water
Company as a result of the Borough providing us with Duhernal Water, we also
must pay the Borough for those additional costs. We must pay the Borough
monthly for all untreated water delivered to the point of delivery during the
prior month. The base rate for untreated water supplied from the South River is
$216 per million gallons, which includes $53 per million gallons to cover
operations, maintenance and administrative costs and $163 per million gallons
to cover past infrastructure costs. The operations and maintenance rate will be
escalated in accordance with the percentage changes in water rates that are
applicable to other Borough water customers. The base rate for untreated water
delivered from the Duhernal acquifer is $932 per million gallons which includes
$785 to cover the operations, maintenance and administrative costs and $147 to
cover acquisition costs. The operations and maintenance portion of the base
rate for water delivered from the Duhernal acquifer is also subject to
escalation in accordance with the percentage changes in water rates that are
applicable to other Borough water customers.
With respect to each contract year there is a minimum bill amount, which
is initially $300,000 per year. One-twelfth of the minimum bill amount must be
paid each month. The minimum bill amount is adjusted as follows:
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o For the first contract year it is reduced by the amount of the
initial payment;
o it is reduced by an amount equal to the product of (x) the quantity
of untreated water that would have been delivered but for service
interruptions by the Borough and (y) the rate for untreated water
delivered from the South River; and
o starting with 8th contract year and with six months' prior written
notice, we have the right to reduce the minimum bill amount for any
contract year by reducing the annual quantity of water to be provided
by up to 15%. Starting with the 21st contract year we may reduce the
annual quantity to be delivered without limit.
Service Interruptions
In the event that there is an interruption in the delivery of untreated
water attributable to a break in the infrastructure, the Borough will provide a
shortfall notice and the Borough and we will agree on the best way to repair
the infrastructure and restore service. If the Borough fails to restore service
within a reasonable period of time, we may, at our expense, contract with
contractors reasonably approved by the Borough to remedy the interruption.
Infrastructure and Real Estate Rights--The Lagoon Water Pipeline, Lagoon
Pumping Station and Sayreville Interconnection Number 2
The Borough has designed, at our expense, the Lagoon Water Pipeline,
Lagoon Pumping Station and Sayreville Interconnection Number 2 in conformance
with standard water system practice. The Borough was responsible for obtaining,
at our expense, all necessary government approvals. The Borough and we have
cooperated to obtain, at our expense, the real estate rights necessary for the
construction, operation and maintenance of the Lagoon Water Pipeline, Lagoon
Pumping Station and Sayreville Interconnection Number 2. The Borough was not
required to exercise its power of eminent domain to obtain the necessary real
estate rights. We obtained easement rights from two adjacent property owners
and the Borough of Sayreville. We also obtained permission from the New Jersey
State House Commission to cross property designated as "Green Acres" by the New
Jersey Department of Protection. Upon completion and testing of the Lagoon
Water Pipeline, Lagoon Pumping Station and Sayreville Interconnection Number 2,
we will execute, without being compensated by the Borough, the documents as are
necessary to evidence the Borough's ownership of those facilities. We are and
were responsible for selecting a contractor to construct the Lagoon Water
Pipeline, Lagoon Pumping Station and Sayreville Interconnection Number 2 and we
have paid or in the process of paying for all costs associated with the
construction and construction inspection of those facilities. The project is
complete, tested and operational.
Operation and Maintenance of Infrastructure
The Borough will operate and maintain all infrastructure necessary to
supply the untreated water to the project boundary. We will reimburse the
Borough for its associated maintenance and replacement costs.
The Borough will own and maintain metering equipment to measure the
delivery of untreated water from each source to the point of delivery and will
transmit a signal of the measurements to the Borough, which uses the
information to compile billing invoices. At least once every five years, or
more often if requested by either party, we must test the metering equipment.
If the tests reveal that the metering equipment is inaccurate, the equipment
must be recalibrated or replaced and a billing adjustment may be made.
Infrastructure Studies and Additions
We pay for the actual cost, subject to a mutually agreed upon cap, of
infrastructure studies to determine the costs and benefits of (i) installing a
new pipeline and (ii) improving the existing South River intake structure. We
will have the right to pay for the upgrades, improvements and/or new
infrastructure that may be identified as necessary or desirable by the studies
in exchange for the benefits allowed with their implementation. Other water
users that benefit from the improvements will pay a pro-rata portion of the
costs of the improvements.
If the Borough or we reasonably determines that capital improvements to
the infrastructure are required, the party will notify the other party and the
parties will meet in good faith to determine the scope of the capital
improvements. We will pay for our costs and expenses arising from the capital
improvements as well as those of the
33
Borough. If we damage either infrastructure or capital improvements, we will
restore the damaged portions thereof or pay the Borough to restore the damaged
portions.
Additional Obligations of the Parties
Additional Obligations of the Borough
The Borough must use its best efforts to either (i) amend its existing
permit, which limits pumping from the Lagoons to 1,000,000 gallons of water per
day or (ii) obtain or change any other permits necessary to allow it to meet
its obligations under the water supply agreement. The Borough must provide us
with written invoices by not later than the 15th of each month. The amounts due
under the invoices are due within 30 days of receipt. The Borough must provide
us and the financing parties with escorted access to any infrastructure or
other property owned by the Borough to which we or the financing parties
reasonably request access.
Our Additional Obligations
We must provide the Borough with notice of any violation by the Borough of
applicable government approvals related to the delivery of untreated water. Not
later than the 15th day of each month, we must provide the Borough with a
detailed invoice listing any amounts due to us under the water supply
agreement.
Force Majeure
If either party is unable to carry out any obligation under the water
supply agreement due to an event of force majeure, the water supply agreement
will remain in effect but the obligation will be suspended for the period
necessitated by the force majeure, as long as:
o the affected party gives the other party written notice within 48
hours of the occurrence of the force majeure;
o the suspension of performance is of no greater scope and no longer
than required by the force majeure; and
o the non-performing party uses its best efforts to remedy its
inability to perform.
Term
The water supply agreement has a term of 30 years with an option to extend
for up to four additional five year terms. The agreement may be terminated by
us and by the Borough under some circumstances including; (i) our failure to
deliver a commencement notice on or prior to December 31, 2003; (ii) the
occurrence of a bankruptcy event affecting the other party; and (iii) failure
of a party to perform a material obligation within the time contemplated and
the continuation of the failure for a period of 30 days or more.
ITEM 2. PROPERTIES
Our principal property is the project site, which we own. We have leased
our site for a 25-year term to AES URC, who constructed and owns part of the
facility on the site. AES URC has subleased the site back to us and that part
of the facility owned by AES URC and at the end of the lease term we will have
an option to purchase the part of the facility on the site owned by AES URC so
that we will own all of the site and facility. The site is located in the
Borough of Sayreville, Middlesex County, New Jersey on an approximately 62-acre
parcel of land. We have access, utility and construction easements and licenses
across neighboring property. We have title insurance in connection with our
property rights.
Under our financing documents, our rights and interests in our property
are encumbered by mortgages, security agreements, collateral assignments and
pledges for the benefit of our bondholders and other senior creditors.
Our facility consists of an approximately 830 megawatt (net) gas-fired
combined cycle electric generating facility. Our facility became commercially
available under the Power Purchase Agreement in September 2002. We sell our
facility's capacity, and provide fuel conversion and ancillary services, to
Williams Energy under a 20-year Power Purchase Agreement.
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Our facility is located on property that we own in the Borough of
Sayreville, Middlesex County, New Jersey. Our facility was designed,
engineered, procured and constructed for us by WGI and Raytheon, as successor
guarantor, under a fixed-price, turnkey construction agreement. Among other
components, our facility uses three Siemens Westinghouse model 501F combustion
turbines, three heat recovery steam generators and one multicylinder steam
turbine. Under a maintenance services agreement, Siemens Westinghouse is
providing us with specific combustion turbine maintenance services and spare
parts in respect of each combustion turbine until sixteen years after execution
of the agreement or the twelfth planned outage of the combustion turbine,
whichever is earlier, unless we exercise our right to cancel the agreement
after the first major outage of the combustion turbines which will be after
approximately the sixth year of operation of the facility. Under the Power
Purchase Agreement, Williams Energy or its affiliates is supplying the fuel
necessary to allow us to provide capacity, fuel conversion and ancillary
services to Williams Energy. AES Sayreville has provided development,
construction management, and operations and maintenance services for our
facility under an operations agreement. We have provided installation,
operation and maintenance of facilities necessary to interconnect our facility
to Jersey Central Power's transmission system under an interconnection
agreement.
ITEM 3. LEGAL PROCEEDINGS
We have entered into arbitration with Williams Energy to resolve certain
disputes regarding the date of commercial operation and the proper
interpretation of certain provisions of the Power Purchase Agreement relating
to amounts we claim are payable by Williams Energy. We recognize a commercial
operation date of September 1, 2002 (the date on which we notified Williams
Energy of commercial availability) while Williams Energy currently recognizes a
commercial operation date of September 28, 2002. During the year ended December
31, 2002, Williams Energy has withheld or offset, from amounts invoiced by us,
amounts that Williams Energy believes were improperly invoiced by us based on
Williams Energy's interpretation of the Power Purchase Agreement. We have
entered into arbitration to settle the dispute over the commercial operation
date and the proper interpretation of certain provisions of the Power Purchase
Agreement. We expect that the arbitration will be resolved in the second
quarter of 2003. The arbitration relates to disputed amounts of approximately
$7.6 million, which includes a $594,000 payment extension option dispute and a
$7.0 million commercial operation start date dispute. We are also disputing
$392,000 of merchant price and testing gas charges with Williams Energy
although this is not yet part of the arbitration. While we believe that our
interpretation of the Power Purchase Agreement is correct, we cannot predict
the outcome of these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable pursuant to General Instruction I of the Form 10-K.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no market for our equity interests. All of our member interests
are owned by our parent, AES Red Oak, Inc., a wholly owned subsidiary of The
AES Corporation. On December 23, 2002, we declared and paid a $2.0 million
dividend to AES Red Oak, Inc.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable pursuant to General Instruction I of the Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our financial statements and the notes thereto included elsewhere in this
annual report. The following discussion involves forward-looking statements.
Our actual results may differ significantly from the results suggested by these
forward-looking statements. See "Cautionary Note Regarding Forward-Looking
Statements."
General
We were formed on September 13, 1998 to develop, construct, own, operate
and maintain our facility. We were dormant until March 15, 2000, the date of
the sale of our senior secured bonds. We obtained $384 million of project
financing from the sale of the senior secured bonds. The total cost of the
construction of our facility is estimated to be approximately $454.74 million,
which has and will continue to be financed by the proceeds from our sale of the
senior secured bonds, equity contributions, operating revenues and the amount
of liquidated damages received from Raytheon through August 10, 2002, under the
Construction Agreement, as described below. In late September 2000, we
consummated an exchange offer whereby the holders of our senior secured bonds
exchanged their privately placed senior secured bonds for registered senior
secured bonds.
The facility reached provisional acceptance on August 11, 2002, risk
transfer on August 13, 2002, and became commercially available under the Power
Purchase Agreement on September 1, 2002. Williams Energy has disputed the
September 1, 2002 commercial operation date and has informed the Company that
it recognizes commercial availability of the facility as of September 28, 2002.
The Company expects to settle the dispute through arbitration during the second
quarter of 2003. See "Item 3 - Legal Proceedings".
Since achieving commercial operations, under the Power Purchase Agreement
with Williams Energy, we are eligible to receive variable operations and
maintenance payments, total fixed payments, energy exercise fee payments (each
as defined in the Power Purchase Agreement) and other payments for the delivery
of fuel conversion, capacity and ancillary services. Since September 28, 2002,
Williams Energy has not requested that we run the facility or "dispatch" the
facility to a significant degree and the minimum capacity payments provided for
under the Power Purchase Agreement have been our primary source of operating
revenues. We have used these operating revenues, together with interim rebates
received from Raytheon under the construction agreement, interest income from
the investment of a portion of the proceeds from the sale of the senior secured
bonds and the $10 million Prepayment from Williams Energy to fund our
generation expenses and other operations and maintenance expenses.
The following discussion presents certain financial information for the
years ended December 31, 2002 and 2001 and the period from March 15, 2000
(inception) through December 31, 2000.
Equity Contributions
Under an equity subscription agreement, AES Red Oak, Inc. was obligated to
contribute up to approximately $55.75 million to us to fund project costs. As
of December 31, 2002 all $55.75 million had been contributed. The equity that
AES Red Oak Inc. provided to us was provided to it by The AES Corporation.
Additionally, in the fourth quarter of 2001, The AES Corporation made an
additional $986,000 capital contribution to us.
36
Results of Operations
We commenced commercial operations in August 2002 and had a net loss
for the year ended December 31, 2002 of $3.0 million. For the year ended
December 31, 2001 and the period from March 15, 2000 (inception) through
December 31, 2000, non-capitalizable costs less net interest expense resulted
in a net loss of approximately $2.0 million and $1.0 million, respectively. At
December 31, 2002, 2001 and 2000, these net losses resulted in a deficiency of
earnings to fixed charges of approximately $23.1, $32.3 million and $25.1
million, respectively. Due to our commencement of operations in August 2002,
these results of operations may not be comparable with the results of
operations during future periods.
Operating revenues for the year ended December 31, 2002 were approximately
$26.2 million. This amount consists of merchant revenue for August and part of
September 2002 and capacity sales under the Power Purchase Agreement during the
period from September to December.
Operating expenses, including general and administrative costs, for the
year ended December 31, 2002 were approximately $16.8 million. Operating
expenses consist of management fees and reimbursement operating and maintenance
expenses paid to AES Sayreville, L.L.C., gas purchased from Williams Energy
during the period of merchant operations, and general and administrative costs.
There were no operating revenues or operating expenses, other than general
and administrative costs, for the year ended December 31, 2001 or the period
from March 15, 2000 (inception) to December 31, 2000 as the facility was not
operational.
For the years ended December 31, 2002 and 2001 and the period from March
15, 2000 (inception) through December 31, 2000, general and administrative
costs of $302,000, $68,000 and $201,000, respectively, were incurred. These
costs did not directly relate to construction and are included as expenses in
the Statements of Operations. The increase of general and administrative costs
in the year ended December 31, 2002 compared to the year ended December 31,
2001 was primarily due to the fact that our facility became operational in
August 2002. The decrease in general and administrative costs for the year
ended December 31, 2001 compared to the period from March 15, 2000 (inception)
to December 31, 2000 is due to higher general and administrative costs being
incurred in connection with the inception of the project in 2000.
Total other income (expense) for the years ended December 31, 2002 and
2001 and the period from March 15, 2002 (inception) through December 31, 2000
was approximately $(12.5) million, $(1.9) million and $(747,000), respectively,
and is comprised of other income and expense, liquidated damages received and
paid and interest income and expense.
Other income for the year ended December 31, 2002 was approximately
$957,000. This amount consists of interim rebates received from Raytheon under
the construction agreement as a result of their failure to meet heat rate and
output performance guarantees. We did not recognize any other income in the
year ended December 31, 2001 or the period from March 15, 2000 (inception) to
December 31, 2000 since no interim rebates were due under the construction
agreement.
Other expense for the year ended December 31, 2002 was approximately
$379,000. This amount consists of fees paid to Dresdner Bank pursuant to our
debt service reserve letter of credit and reimbursement agreement and power
purchase agreement letter of credit and reimbursement agreement. See "Liquidity
and Capital Resources" for a description of these letters of credit. We did not
record any other expense for the year ended December 31, 2001 or the period
from March 15, 2000 (inception) to December 31, 2000 because the fees related
to these letters of credit were capitalized as part of the facility costs prior
to the commencement of commercial operations.
For the year ended December 31, 2002, we recognized revenue of $1.8
million of liquidated damages received from Raytheon for late completion
payments and a construction related outage in November 2002. We did not
recognize revenue related to any liquidated damages in the year ended December
31, 2001 or the period from March 15, 2000 (inception) to December 31, 2000
since no liquidated damages were due under the construction agreement.
37
For the year ended December 31, 2002, we expensed $1.8 million of
liquidated damages paid to Williams Energy as a result of our extension of the
commercial operation date and a construction related outage in November 2002.
We did not incur any liquidated damages for the year ended December 31, 2001 or
the period from March 15, 2000 (inception) to December 31, 2000.
On May 3, 2001, we requested the collateral agent to draw the full
available amount under a prepayment letter of credit related to the
construction agreement and deposit the proceeds of such drawing in the
construction account held by the collateral agent. The collateral agent made
such drawing on May 4, 2001 in the amount of $95.8 million, the balance of the
letter of credit on that date. Subsequent to the termination of the Interim
Agreement with WGI, payments to WGI or to Raytheon for achievement of
construction milestones as specified in the construction agreement were made in
accordance with the terms of the construction agreement from funds available in
the construction account. As of December 31, 2002 and 2001, the balance of the
construction account was $1.5 million and $6.1 million, respectively. The
decrease of the balance of the construction account for the year ended December
31, 2002 compared to the year ended December 31, 2001 was primarily a result of
the winding up of construction related activities.
The portion of the proceeds from the sale of the senior secured bonds that
were held in the construction account pending their application to construction
costs were invested by the trustee. For the years ended December 31, 2002 and
2001 and the period from March 15, 2000 (inception) through December 31, 2000,
the interest income earned on these invested funds was approximately $125,000,
$1.7 million and $1.9 million, respectively. The amount of interest income
earned for the year ended December 31, 2002 compared to the year ended December
31, 2001 decreased as a result of a lower average balance in the construction
account resulting from our use of the bond proceeds for construction of the
facility. The amount of interest income earned for the year ended December 31,
2001 compared to the year ended December 31, 2000 also decreased as a result of
our use of a portion of the proceeds for construction of the facility.
Prior to our commencement of commercial operations, construction related
interest costs incurred on the portion of the bond proceeds expended during the
construction period were capitalized to Construction in Progress. For the years
ended December 31, 2002 and 2001 and the period from March 15, 2000 (inception)
through December 31, 2000, capitalized construction related interest costs were
approximately $20.9 million, $30.3 million and $24.2 million, respectively. On
August 13, 2002, the risk transfer date, the balance of Construction in
Progress was transferred to Property, Plant and Equipment, where these costs
are included in the balance sheet for the year ended December 31, 2002. For the
years ended December 31, 2002 and 2001 and the period from March 15, 2000
(inception) through December 31, 2000, interest costs incurred on the bond
proceeds not spent on construction of our facility were approximately $13.2
million, $3.6 million and $2.6 million, respectively. The increase in interest
expense for the year ended December 31, 2002 compared to the year ended
December 31, 2001 is a result of our expensing interest costs incurred since
completion of construction instead of capitalizing these costs. The increase in
interest costs for the year ended December 31, 2001 compared to the period from
March 15, 2000 (inception) to December 31, 2001 is a result of our incurring
interest costs in 2001 on our draws on the construction letter of credit
provided by Raytheon.
On August 13, 2002, the risk transfer date, the balance of construction in
progress was transferred to Property, Plant and Equipment. As of December 31,
2002, Property Plant and Equipment adjusted for depreciation was $406.8
million, which includes generation, building and office equipment. As of
December 31, 2002 and 2001, Construction in Progress, which includes
capitalized facility construction costs and capitalized interest costs, was
$344,000 and $387.6 million, respectively. As discussed in greater detail
above, Construction in Progress also includes the capitalization of
construction related interest costs incurred on the portion of the bond
proceeds expended on qualifying assets during the construction period.
Liquidity and Capital Resources
On March 15, 2000, we issued $384 million in senior secured bonds for the
purpose of providing financing for the construction of the Facility and to the
fund, through the construction period, interest payments to the bondholders. In
September 2000, we consummated an exchange offer whereby the holders of the
senior secured bonds exchanged their privately placed senior secured bonds for
registered senior secured bonds.
The senior secured bonds were issued in two series: 8.54% senior secured
bonds due 2019 (the "2019 Bonds") in an aggregate principal amount of $224
million and 9.20% senior secured bonds due 2029 (the "2029 Bonds") in
38
an aggregate principal amount of $160 million. Principal repayment dates on the
2019 Bonds are February 28, May 31, August 31, and November 30 of each year,
with the final payment due November 30, 2019. Quarterly principal repayments on
the 2019 Bonds commenced on August 31, 2002. Quarterly principal repayment of
the 2029 Bonds does not commence until February 28, 2019.
The annual principal repayments on the 2019 and 2029 Bonds are scheduled
as follows:
Year Annual Payment
- -------------------------------------------------- --------------
2003............................................... $6.2 million
2004............................................... $5.2 million
2005............................................... $5.1 million
2006............................................... $7.1 million
2007............................................... $6.1 million
Thereafter......................................... $351.9 million
--------------
Total.............................................. $381.6 million
In an action related to the ratings downgrade of The Williams Companies,
Inc., S&P lowered its ratings on our senior secured bonds to "BB-" on July 26,
2002, and placed the rating on credit watch with developing implications. On
November 21, 2002, S&P placed the ratings on negative outlook. Additionally, on
July 25, 2002, Moody's indicated that its ratings on our senior secured bonds
were placed under review for possible downgrade. On October 7, 2002, Moody's
lowered its ratings on our senior secured bonds to "Ba2" and on November 11,
2002, lowered the ratings to "B2" with a negative outlook. As a result of such
ratings downgrades, our working capital facility is unavailable and we are
required to pay higher fees for draws on any of our project support agreements.
We do not believe that such ratings downgrades will have any other direct or
immediate effect on the Company, as none of the other financing documents or
project contracts have provisions that are triggered by a reduction of the
ratings of the bonds. As of December 31, 2002, $381.6 million aggregate
principal amount of senior secured bonds were outstanding.
As of December 31, 2002, we had capital commitments of $232,000 related to
major projects. This amount includes $118,000 in dispute with Jersey Central
Power regarding charges for costs related to the construction of the
interconnection facilities and $114,000 related to a road modification project.
As discussed in "Item 1-Business-Power Purchase Agreement -Security",
pursuant to Section 18.3 of the Power Purchase Agreement, in the event that
Standard & Poors ("S&P") or Moody's rates the long-term senior unsecured debt
of The Williams Companies, Inc. lower than investment grade, The Williams
Companies, Inc. is required to supplement The Williams Companies, Inc.
guarantee with additional alternative security that is acceptable to the
Company within 90 days after the loss of such investment grade rating.
According to published sources, on July 23, 2002, S&P lowered the
long-term senior unsecured debt rating of The Williams Companies, Inc. to "BB"
from "BBB-" and further lowered such rating to "B" on July 25, 2002. According
to published sources, on July 24, 2002, Moody's lowered the long-term senior
unsecured debt rating of The Williams Companies, Inc. to "B1" from "Baa3" and
further lowered such rating on November 22, 2002 to "Caa1". Accordingly, The
Williams Companies, Inc.'s long-term senior unsecured debt is currently rated
below investment grade by both S&P and Moody's.
Due to the downgrade of The Williams Companies, Inc. to below investment
grade, the Company and Williams Energy entered into a letter agreement dated
November 7, 2002 (the "Letter Agreement"), under which Williams Energy agreed
to provide the Company (a) a prepayment of $10 million within five business
days after execution of the Letter Agreement (the "Prepayment"); (b)
alternative credit support equal to $35 million on or before January 6, 2003 in
any of the following forms: (i) cash, (ii) letter(s) of credit with the Company
as the sole beneficiary substantially in the form of the PPA Letter of Credit,
unless mutually agreed to otherwise, or (iii) a direct obligation of the United
States Government delivered to a custodial securities account as designated by
the Company with a maturity of not more than three years; and (c) replenish any
portion of the alternative credit support that is drawn, reduced, cashed, or
redeemed, at any time, with an equal amount of alternative credit support. In
the Letter Agreement, the Company and Williams Energy acknowledged that the
posting of such alternative credit support and Williams Energy's agreement and
performance of the requirements of (a), (b), and (c), as set forth in the
39
immediately preceding sentence, shall be in full satisfaction of Williams
Energy's obligations contained in Section 18.3 of the Power Purchase Agreement.
In the Letter Agreement, the Company and Williams Energy expressly agreed that
the posting of the Prepayment or any alternative credit support either now or
in the future or any other terms set forth in the Letter Agreement were not
intended to nor do they modify, alter, or amend in any way, the terms and
conditions or relieve The Williams Company, Inc. from any obligations it has
under its guarantee of the payment obligations of Williams Energy under the
Power Purchase Agreement. The guaranty remains in full force and effect and the
Company retains all of its rights and remedies provided by that guaranty.
Under the terms of the Letter Agreement, the Company is obligated to
return the $10 million Prepayment to Williams Energy upon the earlier of (i)
The Williams Companies, Inc. regaining its investment grade rating or Williams
Energy providing a substitute guaranty of investment grade rating; (ii) the
beginning of Contract Year 20; or (iii) the posting of alternative credit
support by Williams Energy as set forth below. In the case of items (i) and
(iii) above, except to the extent, in the case of item (iii), Williams Energy
elects to have all or a portion of the Prepayment make up a combination of the
alternative credit support required to be posted pursuant to Section 18.3(b) of
the Power Purchase Agreement, Williams Energy shall have the right to recoup
the Prepayment by set-off of any and all amounts owing to the Company under the
Power Purchase Agreement beginning no earlier than the June in the calendar
year after the occurrence of item (i) or (iii) and continuing thereafter until
the Prepayment has been fully recovered. In the case of item (ii) above,
Williams Energy shall have the right to immediately set-off all amounts owing
to the Company under the Power Purchase Agreement after the occurrence of item
(ii) and continuing thereafter until the Prepayment has been fully recovered.
Except to the extent Williams Energy elects to include the Prepayment as part
of the alternative credit support, the amount of alternative credit support
posted by Williams Energy pursuant to the Letter Agreement shall be initially
reduced by the amount of the Prepayment, and Williams Energy shall thereafter
increase the alternative credit support proportionately as Williams Energy
recoups the Prepayment set-off on the payment due date of amounts owing to the
Company. If the Company does not return the Prepayment to Williams Energy as
set forth in the preceding paragraph, then the Company shall be considered in
default under the Letter Agreement and Williams Energy shall be entitled to
enforce any and or all of its contractual rights and remedies as set forth in
the Power Purchase Agreement, including, but not limited to, drawing on the
Letter of Credit previously posted by the Company in favor of Williams Energy.
Williams Energy made the $10 million Prepayment on November 14, 2002 and
provided an additional $25 million of cash to us on January 6, 2003 as
alternative credit support. As allowed by the Letter Agreement, Williams Energy
has elected to have the $10 million Prepayment included as part of the
alternative credit support. In the event that the Williams Companies, Inc.
regains and maintains its investment grade status, provides a substitute
guaranty of Investment Grade rating, or posts a letter of credit, we will be
required to return the $35 million alternative credit support to Williams
Energy in accordance with the terms of the Letter Agreement as described above.
As of March 7, 2003, we had cash balances of approximately $28.9 million. In
the event we are required to return the $35 million alternative credit support
we believe that we would use all or a portion of our current cash balances plus
cash generated from future operations in order to return the $35 million to
Williams Energy. This belief is subject to certain assumptions, risks and
uncertainties, including those set forth above under the caption "Cautionary
Note Regarding Forward-Looking Statements" and there can be no assurances that
our operating revenues will generate sufficient cash.
Under the construction agreement, we are entitled to withhold from each
scheduled payment, other than the last milestone payment, 10% of the requested
payment until after final acceptance by us of the facility unless, as discussed
below, Raytheon posts a letter of credit in the amount of amounts which would
otherwise be retained. Within 10 days after the final acceptance, we are
required to pay all retainage except for (a) 150% of the cost of completing all
punch list items and (b) the lesser of (i) 150% of the cost of repairing or
replacing any items that have already been repaired or replaced by Raytheon and
(ii) $1 million. Within 30 days after project completion, we are required to
pay the sum of the unpaid balance of the contract price, including all
retainage, less the amount indicated in (b) of the immediately proceeding
sentence. Within 30 days of the first anniversary of the earlier of provisional
acceptance or final acceptance, we are required, so long as project completion
has occurred, to pay all remaining retainage, if any.
Under the construction agreement, in lieu of our retaining these amounts,
Raytheon is entitled to post a letter of credit in the amount of the then
current retainage. On March 4, 2002, Raytheon provided us with a letter of
credit in the amount of $29.5 million (which amount represented the outstanding
amount of retainage under the construction agreement on the date the letter of
credit was posted) and we paid Raytheon the amount of the retainage. Raytheon
40
has subsequently increased the amount of the letter of credit in proportion to
the amounts which would otherwise be retained by us and we have paid Raytheon
the corresponding amount this retainage. As of December 31, 2002, Raytheon had
provided a letter of credit of approximately $30.8 million. We may draw on this
letter of credit in the event that Raytheon fails to pay us any amount owed to
us under the construction agreement. As of December 31, 2002 and March 7, 2003,
we had drawn $96,000 and $273,000 on this letter of credit, respectively.
Since achieving commercial operations, under the Power Purchase Agreement
with Williams Energy we are eligible to receive variable operations and
maintenance payments, total fixed payments, energy exercise payments (each as
defined in the Power Purchase Agreement) and other payments for the delivery of
fuel conversion, capacity and ancillary services. Since September 28, 2002,
Williams Energy has not dispatched the facility to a significant degree and the
minimum capacity payments provided for under the Power Purchase Agreement have
been our primary source of operating revenues. We have used these operating
revenues, together with interim rebates received from Raytheon under the
construction agreement, interest income from the investment of a portion of the
proceeds from the sale of the senior secured bonds and the $10 million
Prepayment from Williams Energy to fund our generation expenses and other
operations and maintenance expenses.
We currently anticipate being dispatched by Williams Energy beginning in
April 2003 but can provide no assurance that this will occur. If the facility
is not dispatched, our operating revenues will consist of minimum capacity
payments under the Power Purchase Agreement. Any future operating revenues,
including any minimum capacity payments received in the event that Williams
Energy does not dispatch the facility, together with interim rebates we receive
from Raytheon until final acceptance under the construction agreement will be
used to fund our generation expenses and other operations and maintenance
expenses and meet the obligations described above.
In addition, we have provided the collateral agent with a debt service
reserve letter of credit in an initial stated amount of $22.0 million. The
collateral agent may draw on the debt service reserve letter of credit
commencing on the earlier of the guaranteed provisional acceptance date under
the construction agreement or the commercial operation date of the facility. We
have also provided Williams Energy a letter of credit under the Power Purchase
Agreement, which we refer to as the power purchase letter of credit, in the
amount of $30 million to support specific payment obligations if the facility
did not achieve commercial operation by the date required under the Power
Purchase Agreement. In connection with the Facility's achievement of commercial
availability on September 1, 2002, on September 28, 2002, the stated amount of
the letter of credit, was reduced from $30 million to $10 million. The
repayment obligations with respect to any drawings under the power purchase
letter of credit are a senior debt obligation of the Company.
We believe that (i) interim rebates paid and to be paid by Raytheon
through final acceptance, (ii) cash flows from the sale of electricity and/or
minimum capacity payments under the Power Purchase Agreement and (iii) funds
available to be drawn under the debt service reserve letter of credit or the
power purchase letter of credit (each as described above) will be sufficient to
(1) fund remaining construction costs at our facility and our commercial
operations, (2) pay fees and expenses in connection with the power purchase
agreement letter of credit (as described above) and (3) pay project costs,
including ongoing expenses and principal and interest on our senior secured
bonds as described above. As discussed above, in the event we are required to
return the alternate credit support we may also use a portion of operating
revenues for this purpose. After the Power Purchase Agreement expires, we plan
to depend on revenues generated from market sales of electricity. These beliefs
are subject to certain assumptions, risks and uncertainties, including those
set forth above under the caption "Cautionary Note Regarding Forward-Looking
Statements" and there can be no assurances.
Risks that May Impact Our Liquidity
Since we depend on Williams Energy for both revenues and fuel supply under
the Power Purchase Agreement, if Williams Energy were to terminate or default
under the Power Purchase Agreement, there would be a severe negative impact our
cash flow and financial condition which could result in a default on our senior
secured bonds. Due to recent declines in pool prices, we would expect that if
we were required to seek alternative purchasers of our power as a result of a
default by Williams Energy, that any such alternate revenues would be
substantially below the amounts that would have been otherwise payable pursuant
to the Power Purchase Agreement. There can be no assurance as to our ability to
generate sufficient cash flow to cover operating expenses or our debt service
obligations in the absence of a long-term power purchase agreement with
Williams Energy.
41
In addition to the factors discussed above, and/or the other factors
listed under the "Cautionary Note Regarding Forward-Looking Statements," if we
do not receive final rebates from Raytheon and/or the WCA continues to be
unavailable as a result of the ratings on our senior secured bonds, we could
experience a negative impact on our cash flow and financial condition.
Concentration of Credit Risk
Williams Energy currently is our sole customer for purchases of capacity,
ancillary services, and energy, and our sole source for fuel. Williams Energy's
payments under the Power Purchase Agreement are expected to provide all of our
operating revenues during the term of the Power Purchase Agreement. It is
unlikely that we would be able to find another purchaser or fuel source on
similar terms for our facility if Williams Energy were not performing under the
Power Purchase Agreement. Any material failure by Williams Energy to make
capacity and fuel conversion payments or to supply fuel under the Power
Purchase Agreement would have a severe impact on our operations. The payment
obligations of the Williams Companies, Inc. under its guaranty of Williams
Energy's obligations under the Power Purchase Agreement are capped at an amount
equal to $509,705,311. Beginning on January 1 of the first full year after the
commercial operation date, this guaranty cap is to be reduced semiannually by a
fixed amount which is based on the amortization of our senior secured bonds
during the applicable semiannual period.
Due to the downgrade of The Williams Companies, Inc. to below investment
grade, the Company and Williams Energy entered into a letter agreement dated
November 7, 2002 (the "Letter Agreement") under which Williams Energy agreed to
provide the Company with a $10 million prepayment (the "Prepayment") and certain
additional collateral. A description of the collateral that supports Williams
Energy's obligations under the Power Purchase Agreement is set forth above under
"Liquidity and Capital Resources".
Since we depend on Williams Energy for both revenues and fuel supply under
the Power Purchase Agreement, if Williams Energy were to terminate or default
under the Power Purchase Agreement, there would be a severe negative impact our
cash flow and financial condition which could result in a default on our senior
secured bonds. Due to the recent decline in pool prices, we would expect that
if we were required to seek alternate purchasers of our power in the event of a
default of Williams Energy, even if we were successful in finding alternate
revenue sources, any such alternate revenue sources would be substantially
below the amounts that would have been otherwise payable pursuant to the Power
Purchase Agreement. There can be no assurance as to our ability to generate
sufficient cash flow to cover operating expenses or our debt service
obligations in the absence of a long-term power purchase agreement with
Williams Energy.
Business Strategy and Outlook
Our overall business strategy is to market and sell all of our net
capacity, fuel conversion and ancillary services to Williams Energy during the
20-year term of the Power Purchase Agreement. After expiration of the Power
Purchase Agreement, or in the event the Power Purchase Agreement is terminated
prior to its 20-year term or Williams Energy otherwise fails to perform, we
would seek to sell our facility's capacity, ancillary services and energy in
the spot market or under a short or long-term power purchase agreement or into
the PJM power pool market. Due to recent declines in pool prices, however, we
would expect that even if we were successful in finding alternate revenue
sources, any such alternate revenues would be substantially below the amounts
that would have been otherwise payable pursuant to the Power Purchase
Agreement. There can be no assurances as to whether such efforts would be
successful.
We intend to cause our facility to be managed, operated and maintained in
compliance with the project contracts and all applicable legal requirements.
Recent and New Accounting Pronouncements
Effective January 1, 2001, the Company adopted SFAS No. 133, entitled
"Accounting for Derivative Instruments And Hedging Activities," which, as
amended, establishes new accounting and reporting standards for derivative
instruments and hedging activities. The Company produces and sells electricity,
as well as provides fuel conversion and ancillary services, solely to Williams
Energy under the Power Purchase Agreement. The Company does not believe that
the Power Purchase Agreement meets the definition of a derivative under SFAS
No. 133 and as
42
such should not be accounted for as a derivative or an embedded derivative
under SFAS No. 133. Therefore, there is no impact on the Company's financial
statements as of January 1, 2001, December 31, 2001, or December 31, 2002.
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 long-lived assets. Under the 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 period and the
capitalized cost is depreciated over the useful life of the related asset. The
Company has determined that the effects of the adoption of this standard on its
financial position and results of operations will not be material.
In August 2001, the FASB issued SFAS No. 144, entitled "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 generally are to be applied prospectively. This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 provides guidance for developing estimates of
future 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 a 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, entitled "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 No. 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 non-substantive 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 did not have any
immediate effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, entitled "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 Issue 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.
In November 2002, the FASB issued Interpretation No. 45, entitled
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation establishes
new disclosure requirements for all guarantees, but the measurement criteria are
applicable to guarantees issued and modified after December 31, 2002. The
Company has not yet determined the impact that this standard may have on its
financial statements.
Critical Accounting Policies
General- We prepare our 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, and Contingencies.
Revenue Recognition -- We generate energy revenues under the Power
Purchase Agreement with Williams Energy. During the 20-year term of the
agreement, we expect to sell capacity and electric energy produced by the
facility, as well as ancillary services and fuel conversion services. Under the
Power Purchase Agreement, we also generate revenues from meeting (1) base
electrical output guarantees and (2) heat rate rebates through efficient
43
electrical output. Revenues from the sales of electric energy and capacity are
recorded based on output delivered and capacity provided at rates as specified
under contract terms. Revenues for ancillary and other services are recorded
when the services are rendered.
Upon its expiration, or in the event that the Power Purchase Agreement is
terminated prior to its 20-year term or Williams Energy otherwise fails to
perform, we would seek to generate energy revenues from the sale of electric
energy and capacity into the merchant market or under new short- or long-term
power purchase or similar agreements. Due to recent declines in pool prices,
however, we would expect that even if we were successful in finding alternate
revenue sources, any such alternate revenues would be substantially below the
amounts that would have been otherwise payable pursuant to the Power Purchase
Agreement. There can be no assurances as to whether such efforts would be
successful.
After the plant reached provisional acceptance, we elected to confirm
reliability for up to 19 days before binding with Williams Energy. Beginning
August 13, 2002 (the date of risk transfer) through August 31, 2002, we
operated the facility as a merchant plant with electric revenues sold to
Williams Energy, in its capacity as our PJM account representative, at spot
market prices and bought gas from Williams Energy at spot market prices.
Additionally, during September 2002, we made net electric energy available to
Williams Energy during times other than receiving a Williams Energy dispatch
notice. This net electric energy is referred to as "other sales of energy" in
the Power Purchase Agreement and is sold at the local marginal price commonly
referred to as spot market energy. Gas required for this energy generation was
purchased from Williams Energy at spot market prices. We recognized merchant
revenues of approximately $11.1 million and fuel expenses of approximately $6.9
million for the year ended December 31, 2002. These amounts are included within
energy revenues and operating costs in the accompanying consolidated statements
of operations for the year ended December 31, 2002.
Property, Plant and Equipment -- Property, plant and equipment is recorded
at cost and is depreciated over its useful life. The estimated lives of our
generation facilities range from five to thirty-six years. A significant
decrease in the estimated useful life 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 in subsequent
periods. The depreciable lives of our property plant and equipment by category
are as follows:
December 31, 2002
Description of Asset Depreciable Life (in thousands)
- -------------------------------------- ---------------- -----------------
Buildings.............................. 35 $ 1,770
Vehicles............................... 5 112
Computers.............................. 6 746
Furniture and Fixtures................. 10 496
CTG Parts.............................. 9-36 44,881
Gas Heaters............................ 35 1,094
Plant.................................. 35 362,154
-----------
$ 411,253
===========
Contingencies -- On September 1, 2002, we notified Williams Energy of
availability and a date of commercial operation of September 1, 2002, as
described in the Power Purchase Agreement. Williams Energy has disputed a
commercial operation date of September 1, 2002 and has informed us that
Williams Energy recognizes the commercial availability of the facility as of
September 28, 2002. We have entered into arbitration to settle the dispute over
the commercial operation date and the proper interpretation of certain
provisions of the Power Purchase Agreement and expect to resolve the
arbitration during the second quarter of 2003. The arbitration relates to
disputed amounts of approximately $7.6 million, which includes a $594,000
payment extension option dispute and a $7.0 million commercial operation start
date dispute. We are also disputing $392,000 of merchant price and testing
charges with Williams Energy although this is not yet part of the arbitration.
While we believe that our interpretation of the Power Purchase Agreement is
correct, we cannot predict the outcome of these matters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We issued and have outstanding two series of bonds, registered under the
Securities Act of 1933. As of December 31, 2002, the aggregate outstanding
principal amount of these bonds was $381.6 million. Our Series A Bonds due 2019
were issued in an aggregate principal amount of $224 million and bear interest
at 8.54%. Our Series B Bonds due 2029 were issued in an aggregate principal
amount of $160 million and bear interest at 9.20%. Interest on the bonds is
payable on each February 28, May 31, August 31, and November 30, and commenced
on May 31, 2000. Since August 31, 2002, principal of the Series A Bonds has
been payable on the same dates as interest. Principal of the Series B Bonds
44
will be payable on the same dates as interest, beginning February 28, 2019. The
bonds and our other senior indebtedness which consists of bank letter of credit
facilities are secured ratably by a lien on and security interest in shared
collateral, which comprise substantially all of our assets. In addition, the
accounts established under our bond indenture, the debt service reserve account
and the debt service reserve letter of credit (other than to the extent of the
debt service reserve letter of credit provider's right to specific proceeds
thereunder) are separate collateral solely for the benefit of the holders of
our bonds. The fair value of these bonds at December 31, 2002 and 2001 was
approximately $261 million and $389.7 million, respectively. We are not subject
to interest rate risk as the interest rates associated with our outstanding
indebtedness are fixed over the life of the bonds.
In an action related to the ratings downgrade of The Williams Companies,
Inc., S&P lowered its ratings on the Company's senior secured bonds to "BB-" on
July 26, 2002, and placed the rating on credit watch with developing
implications. On November 21, 2002 S&P placed the ratings on negative outlook.
Additionally, on July 25, 2002, Moody's indicated that its ratings on the
Company's senior secured bonds were placed under review for possible downgrade.
On October 7, 2002, Moody's lowered its ratings on the Company's senior secured
bonds to "Ba2" and on November 11, 2002 lowered the ratings to "B2" with a
negative outlook. As a result of such ratings downgrades, the Company's working
capital facility is unavailable and the Company is required to pay higher fees
for draws on any of its project support agreements. The Company does not
believe that such ratings downgrades will have any other direct or immediate
effect on the Company, as none of the other financing documents or project
contracts have provisions that are triggered by a reduction of the ratings of
the bonds. As of December 31, 2002, $381.6 million aggregate principal amount
of senior secured bonds were outstanding.
We currently have no other financial or derivative financial instruments.
We do not believe that we face other material risks requiring disclosure
pursuant to Item 305 of Regulation S-K.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
AES Red Oak L.L.C. and Subsidiary
(An Indirect, Wholly Owned
Subsidiary Of The AES Corporation)
Index To Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Member's Capital
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
46
INDEPENDENT AUDITORS' REPORT
To the Member of
AES Red Oak, L.L.C. and Subsidiary:
We have audited the accompanying consolidated balance sheets of AES Red
Oak, L.L.C. and subsidiary (an indirect, wholly owned subsidiary of The AES
Corporation) (the "Company") as of December 31, 2002 and 2001, and the related
consolidated statements of operations, changes in member's deficit and cash
flows for the years ended December 31, 2002 and 2001 and the period from March
15, 2000 (inception) through December 31, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of AES Red Oak, L.L.C. and
subsidiary, as of December 31, 2002 and 2001, and the results of its operations
and its cash flows for the years ended December 31, 2002 and 2001 and the
period from March 15, 2000 (inception) through December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
As more fully discussed in Note 2, the Company's dependence upon Williams
Energy Marketing & Trading Company under the Power Purchase Agreement exposes
the Company to possible loss of revenues and fuel supply. There can be no
assurances as to the Company's ability to generate sufficient cash flow to
cover operating expenses or debt service obligations in the absence of a Power
Purchase Agreement with Williams Energy Marketing & Trading Company and related
guaranty by The Williams Companies, Inc. or their affiliates.
/s/ Deloitte & Touche LLP
McLean, Virginia
March 14, 2003
47
AES RED OAK, L.L.C. AND SUBSIDIARY
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Consolidated Balance Sheets,
December 31, 2002 and 2001
(dollars in thousands, except share amounts)
2002 2001
---------- ----------
ASSETS:
Current Assets:
Cash ........................................................................................ $ 23 $ 121
Restricted cash at cost, which approximates market value .................................... 7,749 6,061
Receivables ................................................................................. 8,442 --
Receivable from affiliate ................................................................... 309 125
Prepaid expenses ............................................................................ 230 --
---------- ----------
Total current assets ................................................................... 16,753 6,307
Land ........................................................................................ 4,240 4,240
Construction in progress .................................................................... 344 387,568
Property, plant, and equipment - net of accumulated depreciation of $4,438 and $0,
respectively ............................................................................. 406,815 --
Deferred financing costs - net of accumulated amortization of $2,315 and $1,462,
respectively ............................................................................. 16,390 17,243
Spare parts inventory ....................................................................... 10,500 --
Other assets ................................................................................ 141 --
---------- ----------
Total assets ........................................................................... $ 455,183 $ 415,358
========== ==========
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities:
Accounts payable ............................................................................ $ 1,175 $ 882
Retainage payable ........................................................................... -- 29,478
Accrued liabilities ......................................................................... 1,516 62
Accrued interest ............................................................................ 2,804 2,821
Payable to affiliate ........................................................................ 18 82
Bond payable-current portion ................................................................ 6,219 2,419
Other current liabilities ................................................................... 10,000 --
---------- ----------
Total current liabilities .............................................................. 21,732 35,744
Bonds payable ............................................................................... 375,361 381,581
Liabilities under spare parts agreement ..................................................... 9,325 --
---------- ----------
Total liabilities ...................................................................... $ 406,418 $ 417,325
========== ==========
Commitments and Contingencies (Note 8)
Member's equity:
Common stock, $1 par value-10 shares authorized, none issued or outstanding ................. $ -- $ --
Contributed capital ......................................................................... 56,736 986
Member's deficit ............................................................................ (7,971) (2,953)
---------- ----------
Total member's equity (deficit) ........................................................ 48,765 (1,967)
---------- ----------
Total liabilities and member's equity .............................................. $ 455,183 $ 415,358
========== ==========
See notes to consolidated financial statements.
48
AES RED OAK, L.L.C. AND SUBSIDIARY
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Consolidated Statements of Operations,
years ended December 31, 2002 and 2001 and the period from March 15, 2000
(inception) through December 31, 2000
(dollars in thousands)
March 15,
2000
(inception)
Year Ended Year Ended through
December 31, December 31, December 31,
2002 2001 2000
----------- ----------- -----------
OPERATING REVENUES
Energy ................................. $ 26,244 $ -- $ --
OPERATING EXPENSES
Fuel costs ............................. (6,898) -- --
Fuel conversion volume rebate .......... (1,645) -- --
Corporate management fees .............. (594) -- --
Other operating expenses ............... (2,925) -- --
Depreciation expense ................... (4,438) -- --
General administrative costs ........... (302) (68) (201)
----------- ----------- -----------
Total operating expenses ........... (16,802) (68) (201)
----------- ----------- -----------
Operating income (loss) ................ $ 9,442 $ (68) $ (201)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income ........................ $ 125 $ 1,655 $ 1,852
Other income ........................... 957 -- --
Liquidated damages received ............ 1,810 -- --
Interest expense ....................... (13,163) (3,592) (2,599)
Other expense .......................... (379) -- --
Liquidation damages paid ............... (1,810) -- --
----------- ----------- -----------
Total other income (expense) ....... (12,460) (1,937) (747)
----------- ----------- -----------
NET LOSS .................................... $ (3,018) $ (2,005) $ (948)
=========== =========== ===========
See notes to consolidated financial statements.
49
AES RED OAK, L.L.C. AND SUBSIDIARY
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Consolidated Statements of Changes in Member's
Capital, years ended December 31, 2002 and 2001 and the period
from March 15, 2000 (inception) through December 31, 2000
(dollars in thousands)
Common Stock
--------------------------- Contributed Member's Member's
Shares Amount Capital Deficit Equity
----------- ----------- ----------- ----------- -----------
BALANCE, MARCH 15, 2000 (inception) ..... -- $ -- $ -- $ -- $ --
Net loss ................................ -- -- -- (948) (948)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 .............. -- $ -- $ -- $ (948) $ (948)
Contributed capital ..................... -- -- 986 -- 986
Net loss ................................ -- -- -- (2,005) (2,005)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 .............. -- $ -- $ 986 $ (2,953) $ (1,967)
----------- ----------- ----------- ----------- -----------
Contributed capital ..................... -- -- 55,750 -- 55,750
Dividends ............................... -- -- -- (2,000) (2,000)
Net loss ................................ -- -- -- (3,018) (3,018)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2002 .............. -- $ -- $ 56,736 $ (7,971) $ 48,765
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
50
AES RED OAK, L.L.C. AND SUBSIDIARY
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Consolidated Statements of Cash Flows, for the years
ended December 31, 2002 and 2001 and the period from March
15, 2000 (inception) through December 31, 2000
(dollars in thousands)
March 15,
2000
(inception)
Year Ended Year Ended through
December 31, December 31, December 31,
2002 2001 2000
----------- ----------- -----------
OPERATING ACTIVITIES:
Net loss .................................................................. $ (3,018) $ (2,005) $ (948)
Amortization of deferred financing costs .................................. 853 816 646
Depreciation .............................................................. 4,438 -- --
Change in:
Accrued liabilities .................................................. 1,454 (28) 90
Accrued interest ..................................................... (17) -- 2,821
Accounts receivable - trade .......................................... (8,442) 21 (21)
Receivable from affiliate ............................................ (184) (125) --
Payable to affiliate ................................................. (64) (2,423) 2,505
Prepaid expenses ..................................................... (230) -- --
Other assets ......................................................... (141)
Accounts payable ..................................................... 293 578 304
----------- ----------- -----------
Net cash provided by (used in) operating activities ....................... $ (5,058) $ (3,166) $ 5,397
----------- ----------- -----------
INVESTING ACTIVITIES:
Transfer from prepaid construction costs .................................. -- -- (288,573)
Payments for construction in progress ..................................... (24,029) (42,926) (56,069)
Payments under long term service agreement ................................ (1,175) -- (4,240)
Change in:
Retention payable .................................................... (29,478) 29,478 --
Restricted cash ...................................................... (1,688) 15,734 (21,795)
----------- ----------- -----------
Net cash (used in) provided by investing activities ....................... $ (56,370) $ 2,286 $ (370,677)
----------- ----------- -----------
FINANCING ACTIVITIES:
Payment of principal on bonds payable ..................................... $ (2,420) $ -- $ 384,000
Payments for deferred financing costs ..................................... -- -- (18,705)
Contribution from parent .................................................. 55,750 986 --
Proceeds from Prepayment .................................................. 10,000 -- --
Dividends paid to parent .................................................. (2,000) -- --
----------- ----------- -----------
Net cash provided by financing activities ................................. 61,330 986 365,295
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ...................... $ (98) $ 106 $ 15
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ $ 121 $ 15 $ --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 23 $ 121 $ 15
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF OTHER ACTIVITIES:
Interest paid (net of amounts capitalized) ................................ $ -- $ -- $ 2,325
=========== =========== ===========
Transfer of prepaid construction costs to construction in progress ........ $ -- $ 31,840 $ 60,964
=========== =========== ===========
Receipt of spare parts under long-term service agreement .................. $ 10,500 $ -- $ --
=========== =========== ===========
Transfer of construction in progress to property, plant and equipment ..... $ 411,597 $ $
=========== =========== ===========
51
AES RED OAK L.L.C. AND SUBSIDIARY
AN INDIRECT WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001 AND THE PERIOD FROM MARCH 15, 2000
(INCEPTION) THROUGH DECEMBER 31, 2000
1. ORGANIZATION
AES Red Oak, L.L.C. (the "Company") was formed on September 13, 1998, in
the State of Delaware, to develop, construct, own and operate an 830-megawatt
(MW) gas-fired, combined cycle electric generating facility (the "Facility") in
the Borough of Sayreville, Middlesex County, New Jersey. The Company was
considered dormant until March 15, 2000 (hereinafter, inception), at which time
it consummated a project financing and certain related agreements. On March 15,
2000, the Company issued $384 million in senior secured bonds for the purpose
of providing financing for the construction of the Facility and to fund,
through the construction period, interest payments to the bondholders (see Note
6). In late September 2000, the Company consummated an exchange offer whereby
the holders of the senior secured bonds exchanged their privately placed senior
secured bonds for registered senior secured bonds.
The Facility, consists of three Westinghouse 501 FD combustion turbines,
three unfired heat recovery steam generators, and one multicylinder steam
turbine. The Facility produces and sells electricity, as well as provides fuel
conversion and ancillary services, solely to Williams Energy Marketing &
Trading Company ("Williams Energy") under a 20-year Fuel Conversion Services,
Capacity and Ancillary Services Purchase Agreement (the "Power Purchase
Agreement" or "PPA"). The term of the PPA is twenty years from the last day of
the month in which commercial operation commenced, which was September 2002.
The Company reached provisional acceptance on August 11, 2002, risk transfer on
August 13, 2002, and reached commercial availability on September 1, 2002.
Williams Energy has disputed the September 1, 2002 commercial operation date
and has informed the Company that it recognizes the commercial availability of
the Facility as of September 28, 2002. The Company expects to settle the
dispute through arbitration during the second quarter of 2003 (see Notes 7 and
8).
After the Facility reached provisional acceptance, the Company elected to
confirm reliability for up to 19 days before binding with Williams Energy. As
more fully described in Notes 3 and 7, beginning August 13, 2002 (the risk
transfer date) through August 31, 2002, the Company operated the Facility as a
merchant plant with electric revenues sold to Williams Energy, in its capacity
as the Company's PJM account representative, at spot market prices and bought
gas from Williams Energy at spot market prices. Additionally, during September
2002, the Company made net electric energy available to Williams Energy during
times when it had not received a Williams Energy dispatch notice. This net
electric energy is referred to as "other sales of energy" in the Power Purchase
Agreement and is sold at the local marginal price commonly referred to as spot
market energy. Gas required for this energy generation was purchased from
Williams Energy at spot market prices.
The Company is a wholly owned subsidiary of AES Red Oak, Inc. ("Red Oak"),
which is a wholly-owned subsidiary of The AES Corporation ("AES"). Red Oak has
no assets other than its ownership interests in the Company and AES Sayreville,
L.L.C. (see Note 9). Red Oak has no operations and is not expected to have any
operations. Red Oak's only income is distributions (if any) it receives from
the Company and AES Sayreville, L.L.C. Pursuant to an equity subscription
agreement (see Note 6), Red Oak agreed to contribute up to approximately $55.75
million to the Company to fund construction after the bond proceeds have been
fully utilized. As of December 31, 2002, all $55.75 million had been
contributed. The equity that Red Oak provided to the Company was provided to
Red Oak by AES, which owns all of the equity interests in Red Oak. AES files
quarterly and annual audited reports with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, which are publicly
available, but which do not constitute a part of, and are not incorporated
into, this Form 10-K.
The Company owns all of the equity interests in AES Red Oak Urban Renewal
Corporation ("AES URC"), which was organized as an urban renewal corporation
under New Jersey Law. As an urban renewal corporation under New Jersey law,
portions of the Facility can be designated as redevelopment areas in order to
provide certain real estate
52
tax and development benefits to the Facility. URC has no operations outside of
its activities in connection with the Facility.
In February 2001, the Company reclassified $986,000, a payable to
affiliate (AES Corporation) to contributed capital. This amount represented
expenditures paid by the AES Corporation prior to March 15, 2000.
2. OPERATIONS
During 2002, as further discussed in Note 7, the credit ratings of the
long-term senior unsecured debt of The Williams Companies, Inc. were downgraded
to below investment grade. Since achieving commercial operations, under the
Power Purchase Agreement with Williams Energy, the Company is eligible to
receive variable operations and maintenance payments, total fixed payments,
energy exercise fee payments (each as defined in the Power Purchase Agreement)
and other payments for the delivery of fuel conversion, capacity and ancillary
services. Since September 28, 2002, Williams Energy has not dispatched the
Facility to a significant degree and the minimum capacity payments provided for
under the Power Purchase Agreement have been the Company's primary source of
operating revenues. The Company has used these operating revenues, together
with interim rebates received from Raytheon under the construction agreement,
interest income from the investment portion of the proceeds from the sale of
the senior secured bonds and the $10 million Prepayment from Williams (Note 7)
to fund its generation expenses and other operations and maintenance expenses.
As discussed in Note 7, in the event that The Williams Companies, Inc. regains
and maintains its investment grade status, Williams Energy provides a
substitute guaranty of investment grade rating, or posts a letter of credit,
the Company will be required to return the $35 million alternative credit
support provided by Williams Energy in accordance with the terms of the Letter
Agreement.
The Company currently anticipates being dispatched by Williams Energy
beginning in April 2003 but can provide no assurance that this will occur. In
the event that the facility is not dispatched, the Company's operating revenues
will consist of minimum capacity payments under the Power Purchase Agreement.
The Company has also provided two letters of credit, the PPA Letter of Credit
($10 million) and the debt service reserve letter of credit ($22 million)
(Notes 6 and 7) that may be utilized if necessary to fund obligations as they
become due. In the event the Company regains its investment grade status, the
Company will also have access to its $2.5 million Working Capital Agreement
(Note 6).
The Company currently believes that its sources of liquidity will be
adequate to meet its needs through the end of 2003. This belief is based on a
number of assumptions, including but not limited to the continued performance
and satisfactory financial condition of the third parties on which the Company
depends, particularly Williams Energy as fuel supplier and purchaser of all
electric energy and capacity produced by the facility as well as ancillary and
fuel conversion services of the Company (as provided by the Power Purchase
Agreement) and The Williams Companies, Inc. as guarantor of Williams Energy's
performance under the Power Purchase Agreement. Known and unknown risks,
uncertainties and other factors outside the Company's control may cause actual
results to differ materially from its current expectations. These risks,
uncertainties and factors include but are not limited to risks and
uncertainties related to the financial condition and continued performance of
the third parties on which the Company depends, including Williams Energy and
The Williams Companies and its affiliates, the possibility of unexpected
problems related to the performance of the facility, the possibility of
unexpected expenses or lower than expected revenues and additional factors that
are unknown to the Company or beyond its control.
Since the Company depends on Williams Energy for both revenues and fuel
supply under the Power Purchase Agreement, if Williams Energy were to terminate
or default under the Power Purchase Agreement, there would be a severe negative
impact on the Company's cash flow and financial condition which could result in
a default on its senior secured bonds. Due to recent declines in pool prices,
the Company would expect that if it were required to seek alternative
purchasers of its power as a result of a default by Williams Energy, that any
such alternate revenues would be substantially below the amounts that would
have been otherwise payable pursuant to the Power Purchase Agreement. There can
be no assurance as to the Company's ability to generate sufficient cash flow to
cover operating expenses or its debt service obligations in the absence of a
long-term power purchase agreement with Williams Energy.
53
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and AES URC, its wholly owned subsidiary.
All intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents - The Company considers unrestricted cash on
hand, deposits in banks, and investments with original maturities of three
months or less to be cash and cash equivalents for the purpose of the statement
of cash flows.
Restricted Investments - The Company is required to maintain a
construction funding account for the payment of certain qualifying construction
costs and a construction interest account from which quarterly interest
payments are to be made. The balances in the construction funding account and
the construction interest account were $1.5 and $2.9, respectively, at December
31, 2002 and $6.0 and $0.1 million, respectively, as of December 31, 2001,
respectively. These amounts were fully invested in money market accounts.
The Company is also prohibited from making any distributions unless it has
required minimum balances in certain accounts and has met certain other
conditions contained in the Indenture and the Collateral Agency and
Intercreditor Agreement governing the senior secured bonds. The Company had
these required minimum balances and had met the required conditions when it
made a $2.0 million distribution to AES Red Oak, Inc. on December 31, 2002.
Construction in Progress - Costs incurred in developing the Facility,
including progress payments, engineering costs, management and development
fees, interest, and other costs related to construction were capitalized. On
August 13, 2002, the risk transfer date, the balance of Construction in
Progress on such date was transferred to Property, Plant and Equipment. Total
interest capitalized on the project financing debt was approximately $75.4
million and $54.5 million as of December 31, 2002 and 2001, respectively.
Certain costs related to construction activities were paid by AES prior to the
issuance of the bonds. These amounts of approximately $12.4 million, are
reflected within construction in progress, and were reimbursed to AES out of
the bond proceeds.
Property, Plant and Equipment -- Property, plant and equipment is recorded
at cost. Depreciation, after consideration of salvage value, is computed using
the straight-line method over the estimated useful lives of the assets, which
range from five to thirty-six years. Maintenance and repairs are charged to
expense as incurred. The depreciable lives of our property, plant and equipment
by category are as follows:
December 31, 2002
Description of Asset Depreciable Life (in thousands)
- -------------------------------------- ---------------- -----------------
Buildings.............................. 35 $ 1,770
Vehicles............................... 5 112
Computers.............................. 6 746
Furniture and Fixtures................. 10 496
CTG Parts.............................. 9-36 44,881
Gas Heaters............................ 35 1,094
Plant.................................. 35 362,154
----------
$ 411,253
==========
Prepayment of Construction Contract - The Company originally prepaid a
portion of the construction agreement in the amount of $288.6 million on March
15, 2000 to Washington Group International, Inc. ("WGI") (formerly Raytheon
Engineers & Constructors, Inc.). WGI's obligations under the construction
agreement were initially secured by a letter of credit issued October 11, 2000
by Bank of America in the Company's favor. The letter of credit represented the
value of all unperformed work to date. On May 14, 2001, WGI announced that it
had filed a plan of reorganization along with voluntary petitions to
restructure under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court for the District of Nevada in Reno (Bankruptcy Court). Under the
construction agreement, a bankruptcy filing by WGI constituted an event of
default. Based on correspondence received from
54
WGI preceding the bankruptcy filing and in accordance with the terms of the
construction contract, on May 3, 2001, the Company requested the full available
amount of such letter of credit be drawn upon and deposited in the construction
account held by the collateral agent. The collateral agent made such drawing on
May 4, 2001 in the amount of $95.8 million, which was the then outstanding
amount of the prepayment letter of credit as it had been reduced by the WGI's
achievement of construction milestones under the construction agreement.
Subsequent to the termination of the prepayment arrangements with WGI, payments
to WGI for achievement of construction milestones as specified in the
construction agreement were made in accordance with the terms of the
construction agreement. The Company reclassified amounts from the prepaid
construction account to the construction in progress as the letter of credit
was reduced. As of December 31, 2002 and 2001, the amount of the letter of
credit was $0 million. In 2001, as a result of WGI's bankruptcy filing the
Company made a demand on Raytheon to perform its obligations under the Raytheon
guarantee and WGI, Raytheon and the Company entered into agreements pursuant to
which Raytheon became responsible for the construction of the facility.
Deferred Financing Costs - Financing costs are deferred and are being
amortized using the straight-line method over the life of the bonds, which does
not differ materially from the effective interest method of amortization.
Accounts Payable and Retention Payable -- As of December 31, 2002,
accounts payable were generally comprised of amounts due for operating costs
incurred in the ordinary course of business. As of December 31, 2001, amounts
payable represented amounts due for construction billings and those amounts
billed by Raytheon as contractor under the engineering, procurement, and
construction contract (the EPC) but retained by us pending Raytheon's posting
of a letter of credit to guarantee its obligations under the EPC. These
liabilities were recorded as accounts payable and retention payable,
respectively as of December 31, 2001 and were paid in 2002 from the investment
balances (bonds proceeds), the equity subscription agreement proceeds, amounts
received as interim rebates from Raytheon.
Revenue Recognition -- We generate energy revenues under the Power
Purchase Agreement with Williams Energy. During the 20-year term of the
agreement, we expect to sell capacity and electric energy produced by the
facility, as well as ancillary services and fuel conversion services. Under the
Power Purchase Agreement, we also generate revenues from meeting (1) base
electrical output guarantees and (2) heat-rate rebates through efficient
electrical output. Revenues from the sales of electric energy and capacity are
recorded based on output delivered and capacity provided at rates as specified
under contract terms. Revenues for ancillary and other services are recorded
when the services are rendered.
Upon its expiration, or in the event that the Power Purchase Agreement is
terminated prior to its 20-year term or Williams Energy otherwise fails to
perform, we would seek to generate energy revenues from the sale of electric
energy and capacity into the merchant market or under new short- or long-term
power purchase or similar agreements. Due to recent declines in pool prices,
however, we would expect that even if we were successful in finding alternate
revenue sources, any such alternate revenues would be substantially below the
amounts that would have been otherwise earned pursuant to the Power Purchase
Agreement.
After the plant reached provisional acceptance, we elected to confirm
reliability for up to 19 days before binding with Williams Energy. Beginning
August 13, 2002 (the date of risk transfer) through August 31, 2002, we
operated the facility as a merchant plant and sold electric revenues to
Williams Energy, in its capacity as our PJM account representative, at spot
market prices and bought gas from Williams Energy at spot market prices.
Additionally, during September 2002, we made net electric energy available to
Williams Energy during times when we had not received a Williams Energy
dispatch notice. This net electric energy is referred to as "other Sales of
energy" in the Power Purchase Agreement and is sold at the local marginal price
commonly referred to as spot market energy. Gas required for this energy
generation was purchased from Williams Energy at spot market prices. We
recognized merchant revenues of approximately $11.1 million and fuel expenses
of approximately $6.9 million for the year ended December 31, 2002. These
amounts are included within energy revenues and operating costs in the
accompanying condensed consolidated statements of operations for the year ended
December 31, 2002.
55
In the year ended December 31, 2002 the Company recognized total other
income (expense) of approximately $12.5 million. Total other income (expense)
is comprised of other income and expense, liquidated damages received and paid
and interest income and expense. In the year ended December 31, 2002 the
Company recognized $957,000 of other income which consists of interim rebates
received from Raytheon under the construction agreement for their failure to
meet the heat rate and output performance guarantees. In the year ended
December 31, 2002 the Company recognized approximately $379,000 of other
expense which relates to fees incurred on its debt service letter of credit and
its power purchase agreement letter of credit and reimbursement agreement. In
the year ended December 31, 2002 the Company recognized revenue of $1.8 million
of liquidated damages received from Raytheon for late completion payments and a
construction related outage in November 2002 and expensed $1.8 million of
liquidated damages paid to Williams Energy as a result of the Company's
extension of the commercial operation date and a construction related outage in
November 2002.
Reclassifications - Certain reclassifications have been made to 2001
amounts to conform with the 2002 presentation.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Income Taxes - The Company is a limited liability company and is treated
as a disregarded entity for tax purposes. Therefore, it does not pay income
taxes, and no provision for income taxes has been reflected in the accompanying
financial statements.
Start-Up Costs - The Company follows AICPA Statement of Position (SOP)
98-5, Reporting on the Costs of Start-Up Activities, which requires that
start-up and organizational costs be expensed as incurred. As such, no costs to
which SOP 98-5 applies have been capitalized in the accompanying balance
sheets.
Spare Parts Inventory - Spare parts inventory consists of rotable and
other spare parts received in the third quarter of 2002 under the Maintenance
Services Agreement discussed in Note 8. Inventory is reported at cost. The
liability for these spare parts is reflected as "Liabilities under spare parts
agreement" in the accompanying 2002 balance sheet.
Recent Accounting Pronouncements - Effective January 1, 2001, the Company
adopted SFAS No. 133, entitled "Accounting for Derivative Instruments And
Hedging Activities," which, as amended, establishes new accounting and
reporting standards for derivative instruments and hedging activities. The
Company produces and sells electricity, as well as provides fuel conversion and
ancillary services, solely to Williams Energy under the Power Purchase
Agreement. The Company does not believe that the Power Purchase Agreement meets
the definition of a derivative under SFAS No. 133 and as such, should not be
accounted for as a derivative or an embedded derivative under SFAS No. 133.
Therefore, there is no impact on the Company's financial statements as of
January 1, 2001, December 31, 2001, or December 31, 2002.
In August 2001, the FASB issued SFAS No. 144, entitled "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 generally are to be applied prospectively. This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 provides guidance for developing estimates of
future 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 a 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.
56
4. CONCENTRATION OF CREDIT RISK IN WILLIAMS ENERGY AND ITS AFFILIATES
Williams Energy is currently the Company's sole customer for purchases of
capacity, ancillary services, and energy and its sole source for fuel. Williams
Energy's payments under the Power Purchase Agreement are expected to provide
all of the Company's operating revenues during the term of the Power Purchase
Agreement. It is unlikely that the Company would be able to find another
purchaser or fuel source on similar terms for its Facility if Williams Energy
were not performing under the Power Purchase Agreement. Any material failure by
Williams Energy to make capacity and fuel conversion payments or to supply fuel
under the Power Purchase Agreement would have a severe impact on the Company's
operations. The payment obligations of Williams Energy under the Power Purchase
Agreement are guaranteed by The Williams Companies, Inc. The payment
obligations of The Williams Companies, Inc. under the guaranty are capped at an
amount equal to $509,705,311. Beginning on January 1 of the first full year
after the commercial operation date, this guaranty cap is to be reduced
semiannually by a fixed amount which is based on the amortization of the
Company's senior secured bonds during the applicable semiannual period (see
Note 7).
The Company's dependence upon The Williams Companies, Inc. and its
affiliates under the Power Purchase Agreement exposes the Company to possible
loss of revenues and fuel supply, which in turn, could negatively impact its
cash flow and financial condition and may result in a default on its senior
secured bonds. There can be no assurances as to the Company's ability to
generate sufficient cash flow to cover operating expenses or its debt service
obligations in the absence of a long-term power purchase agreement with
Williams Energy.
5. NEW ACCOUNTING PRONOUNCEMENTS
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 long-lived assets. Under the 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 period and the
capitalized cost is depreciated over the useful life of the related asset. The
Company has determined that the effects of this standard on its financial
position and results of operations will be immaterial.
In April 2002, the FASB issued SFAS No. 145, entitled "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 No. 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 Company does not believe that the adoption of
this standard will have a material effect on its financial statements.
In June 2002, the FASB issued SFAS No. 146, entitled "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 Issue 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.
57
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation establishes new
disclosure requirements for all guarantees, but the measurement criteria are
applicable to guarantees issued and modified after December 31, 2002. The
Company has not yet determined the impact that this standard may have on its
financial statements.
6. BONDS PAYABLE
On March 15, 2000, the Company issued $224 million of 8.54% senior secured
bonds due 2019 ("2019 Bonds") and $160 million of 9.20% senior secured bonds
due 2029 (2029 Bonds and together with the 2019 Bonds, the "Bonds") to
qualified institutional buyers and/or institutional accredited investors,
pursuant to a transaction exempt from registration under the Securities and
Exchange Act of 1933 (the "Act") in accordance with Rule 144A of the Act. In
late September 2000, the Company consummated an exchange offer whereby the
holders of the Bonds exchanged their privately placed bonds for registered
bonds. The net proceeds of the bonds (after deferred financing costs),
approximately $365 million, were used to prepay WGI and other construction
costs of the Plant and were also used, during the construction period, for
interest payments to bondholders.
Future Maturities of Debt - Principal on the Bonds is payable quarterly in
arrears. Principal payments on the 2019 Bonds commenced on August 31, 2002.
Quarterly principal repayment of the 2029 Bonds does not commence until
February 28, 2019. The final maturity date for the Bonds is November 30, 2019
and November 30, 2029, respectively.
Principal & Interest Repayment Schedule:
Year Interest Principal
- ------------------------------------------------ ----------- ------------
(in thousands)
2003............................................ $ 33,537 $ 6,219
2004............................................ 33,113 5,230
2005............................................ 32,579 5,071
2006............................................ 32,111 7,101
2007............................................ 31,502 6,105
2008 and thereafter............................. 348,581 351,855
---------- ----------
Total Payments.................................. $ 511,423 $ 381,581
========== ==========
Optional Redemption - The Bonds are subject to optional redemption by the
Company, in whole or in part, at any time at a redemption price equal to 100%
of the principal amount plus accrued interest, together with a premium
calculated using a discount rate equal to the interest rate on comparable U.S.
Treasury securities plus 50 basis points.
Mandatory Redemption - The Bonds are subject to mandatory redemption by
the Company, in whole or in part, at a redemption price equivalent to 100% of
the principal amount plus accrued interest under certain situations pursuant to
receiving insurance proceeds, eminent domain proceeds, liquidated damages under
the construction agreement, or in certain instances in which payments are
received under the PPA if the Company terminates the PPA as a result of a
default by Williams.
Indenture - The Indenture contains limitations on the Company incurring
additional indebtedness, granting liens on the Company's property, distributing
equity and paying subordinated indebtedness issued by affiliates of the
Company, entering into transactions with affiliates, amending, terminating or
assigning any of the Company's contracts and fundamental changes or disposition
of assets.
Collateral for the Bonds consists of the Facility and related entities,
all agreements relating to the operation of the project, the bank and
investment accounts of the Company, and all ownership interests in the Company,
as prescribed under the trust indenture agency (the Indenture). The Company is
also bound by a collateral agency
58
agreement (the Collateral Agency Agreement) and an equity subscription
agreement (the Equity Subscription Agreement).
Collateral Agency Agreement - The Collateral Agency Agreement requires the
Company to fund or provide the funding or a letter of credit for a debt service
reserve fund. The debt service reserve fund letter of credit was posted at
financial closing in the amount of $22 million dollars. The amount required for
funding the debt service reserve fund is equal to six months scheduled payments
of principal and interest on the bonds.
Equity Subscription Agreement - The Company, along with Red Oak, entered
into an Equity Subscription Agreement, pursuant to which Red Oak agreed to
contribute up to approximately $55.75 million to the Company to fund project
costs. As of December 31, 2002, Red Oak had contributed the entire $55.75
million to the Company. The equity that Red Oak provided to the Company was
provided by AES. The Company does not have access to additional liquidity
pursuant to this agreement as Red Oak has fulfilled its funding obligations
thereunder.
Covenants - The Indenture, Collateral Agency Agreement and Equity
Subscription Agreement, contain specific covenants and requirements to be met
by the Company.
Bond Ratings and Effect on Working Capital Agreement. In connection with
the initial financing of the Facility, the Company entered into a working
capital agreement (the "WCA") pursuant to which it could borrow up to $2.5
million from time to time for use in connection with the payment of operating
and maintenance costs of the project. The obligation of the banks that are
party to the WCA to extend loans to the Company under the WCA is subject to,
among others, the following conditions precedent:
o The Company's senior secured bonds must be rated "BBB-"or higher
by S&P and "Baa3" or higher by Moody's;
o no default or event of default under the WCA shall have occurred
and be continuing; and
o no event has occurred and is continuing which could reasonably
be expected to have a material adverse effect on the Company.
In an action related to the ratings downgrade of The Williams Companies,
Inc., S&P lowered its ratings on the Company's senior secured bonds to "BB-" on
July 26, 2002, and placed the rating on credit watch with developing
implications. On November 21, 2002 S&P placed the ratings on negative outlook.
Additionally, on July 25, 2002, Moody's indicated that its ratings on the
Company's senior secured bonds were placed under review for possible downgrade.
On October 7, 2002, Moody's lowered its ratings on the Company's senior secured
bonds to "Ba2" and on November 11, 2002 lowered the ratings to "B2" with a
negative outlook. As a result of the Company's senior secured bonds having a
rating lower than "BBB-" by S&P and lower than "Baa3" by Moody's, funds
currently are not available to the Company under the WCA and will not be
available unless the ratings of the senior secured bonds of the Company satisfy
the condition precedent contained in the WCA. Further, as a result of the bond
ratings downgrades the Company must pay higher fees for draws on its project
support agreements. There can be no assurance that the ratings on the senior
secured bonds of the Company will be increased or that the lenders will waive
any of the conditions precedent set forth in the WCA.
7. POWER PURCHASE AGREEMENT
General. The Company and Williams Energy have entered into a Power
Purchase Agreement for the sale of all capacity produced by the Facility, as
well as ancillary services and fuel conversion services. Under the PPA,
Williams Energy has the obligation to deliver, on an exclusive basis, all
quantities of natural gas and fuel oil required by the Facility to generate
electricity or ancillary services, to start-up or shut-down the plant, and to
operate the Facility during any period other than a start-up, shut-down, or
required dispatch by Williams Energy for any reason.
59
The term of the PPA is 20 years from the first contract anniversary date,
which is the last day of the month in which commercial availability occurs. The
Company recognizes September 1, 2002 as the commercial availability date.
However, the date of commercial availability is in dispute and Williams Energy
recognizes September 28, 2002 as the commercial availability date. As discussed
below and in Note 8, we have entered into arbitration to resolve this dispute.
Under the Power Purchase Agreement, the commercial operation date was
required to occur by December 31, 2001, however the Company had the right to
extend the commercial operation date until June 30, 2002 by invoking its right
to a free extension option which was available under the Power Purchase
Agreement if certain conditions were met. The Company exercised its right to
extend the commercial operation date from December 31, 2001 to June 30, 2002,
as granted under the free extension option. In addition, the Company had the
right under the Power Purchase Agreement to again extend the commercial
operation date (the Second Paid Extension Option) from June 30, 2002 to June
30, 2003, upon written notification to Williams Energy no later than May 21,
2002 (which represented an agreed upon extension from the original April 30,
2002 notification deadline), by paying Williams Energy (i) an amount equal to
the lesser of any actual damages Williams Energy suffered or incurred after
June 30, 2002, as a result of Williams Energy's reliance upon delivery by such
date, to the extent said damages cannot be mitigated fully, or $3.0 million and
(ii) certain amount of liquidated damages as calculated pursuant to the Power
Purchase Agreement. On May 21, 2002, the Company exercised the Second Paid
Extension Option. Williams initially invoiced the Company $3 million related to
this extension but subsequently withdrew this invoice and, as of the date
hereof, Williams Energy has not provided the Company support for the amount of
actual damages suffered or incurred after June 30, 2002 as a result of Williams
reliance upon delivery by such date. Therefore the Company has not yet paid or
accrued any amounts that may be owed as described in clause (i) above. As of
December 31, 2002, the Company had paid liquidated damages to Williams Energy
at the rate of $11,000 per day for the period beginning on July 1, 2002 and
ending on August 31, 2002 which in aggregate amounted to $682,000. The Company
had also paid liquidated damages to Williams Energy at the rate of $22,000 per
day for the period beginning on September 1, 2002, and ending on September 27,
2002 which in aggregate amounted to $594,000, although these amounts are still
in dispute through arbitration. During the period of the Second Paid Extension
Option, the Company continued to collect liquidated damages through August 10,
2002 from Raytheon under the construction agreement in the amount of $108,000
per day. As of December 31, 2002, the Company had received $14 million in
liquidated damages from Raytheon under the construction agreement.
The Company has entered into arbitration with Williams Energy to resolve
certain disputes regarding the date of commercial operation and the proper
interpretation of certain provisions of the Power Purchase Agreement relating
to the amounts claimed by the Company to be payable by Williams Energy. During
the year ended December 31, 2002, Williams Energy has withheld or offset from
amounts invoiced by the Company amounts that Williams Energy believes were
improperly invoiced based on Williams Energy's interpretation of the Power
Purchase Agreement. The Company expects to resolve the dispute in the second
quarter of 2003. The arbitration relates to disputed amounts of approximately
$7.6 million, which includes a $594,000 payment extension option dispute and a
$7.0 million commercial operation start date dispute. The Company is also
disputing $392,000 of merchant price and gas testing charges with Williams
Energy although this is not currently part of the arbitration. While the
Company believes that its interpretation of the Power Purchase Agreement is
correct, the Company cannot predict the outcome of these matters.
Guaranties. The Company provided Williams Energy a letter of credit (PPA
Letter of Credit) in the amount of $30 million to support specific payment
obligations should the Facility not achieve commercial operation by the date
required under the PPA. Upon the commencement of commercial operations in
September 2002, the stated amount of that letter of credit was reduced to $10
million. The repayment obligations with respect to any drawings under the PPA
Letter of Credit are a senior debt obligation of the Company.
60
The payment obligations of Williams Energy under the PPA are guaranteed by
The Williams Companies, Inc. The payment obligations of The Williams Companies,
Inc. under the guaranty are capped at an amount equal to $509,705,311.
Beginning on January 1 of the first full year after the commercial operation
date, this guaranty cap is to be reduced semiannually by a fixed amount which
is based on the amortization of our senior secured bonds during the applicable
semiannual period.
Pursuant to Section 18.3 of the Power Purchase Agreement, in the event
that Standard & Poors or Moody's rates the long-term senior unsecured debt of
The Williams Companies, Inc. lower than investment grade, The Williams
Companies, Inc. is required to supplement The Williams Companies, Inc.
guarantee with additional alternative security that is acceptable to the
Company within 90 days after the loss of such investment grade rating.
According to published sources, on July 23, 2002, S&P lowered the
long-term senior unsecured debt rating of The Williams Companies, Inc. to "BB"
from "BBB-" and further lowered such rating to "B" on July 25, 2002. According
to published sources, on July 24, 2002, Moody's lowered the long-term senior
unsecured debt rating of The Williams Companies, Inc. to "B1" from "Baa3" and
further lowered such rating on November 22, 2002 to "Caa1". Accordingly, The
Williams Companies, Inc.'s long-term senior unsecured debt is currently rated
below investment grade by both S&P and Moody's.
Due to the downgrade of The Williams Companies, Inc. to below investment
grade, the Company and Williams Energy entered into a letter agreement dated
November 7, 2002 (the "Letter Agreement"), under which Williams Energy agreed
to provide the Company (a) a prepayment of $10 million within five business
days after execution of the Letter Agreement (the "Prepayment"); (b)
alternative credit support equal to $35 million on or before January 6, 2003 in
any of the following forms (i) cash, (ii) letter(s) of credit with the Company
as the sole beneficiary substantially in the form of the PPA Letter of Credit,
unless mutually agreed to otherwise, or (iii) a direct obligation of the United
States Government delivered to a custodial securities account as designated by
the Company with a maturity of not more than three years; and (c) replenish any
portion of the alternative credit support that is drawn, reduced, cashed, or
redeemed, at any time, with an equal amount of alternative credit support. In
the Letter Agreement, the Company and Williams Energy acknowledged that the
posting of such alternative credit support and Williams Energy's agreement and
performance of the requirements of (a), (b), and (c) as set forth in the
immediately preceding sentence, would be in full satisfaction of Williams
Energy's obligations contained in Section 18.3 of the Power Purchase Agreement.
In the Letter Agreement, the Company and Williams Energy expressly agreed that
the posting of the Prepayment or any alternative credit support either now or
in the future or any other terms set forth in the Letter Agreement, were not
intended, and did not modify, alter, or amend in any way, the terms and
conditions or relieve The Williams Company, Inc. from any obligations it has
under its guaranty of the payment obligations of Williams Energy under the
Power Purchase Agreement. The guaranty remains in full force and effect, and
the Company retains all of its rights and remedies provided by that guaranty.
Under the terms of the Letter Agreement, the Company is obligated to
return the Prepayment to Williams Energy upon the earlier of (i) The Williams
Companies, Inc. regaining its investment grade rating or Williams Energy
providing a substitute guaranty of investment grade rating; (ii) the beginning
of Contract Year 20; or (iii) the posting of alternative credit support by
Williams Energy as set forth below. In the case of items (i) and (iii) above,
except to the extent, in the case of item (iii), Williams Energy elects to have
all or a portion of the Prepayment make up a combination of the alternative
credit support required to be posted pursuant to Section 18.3(b) of the Power
Purchase Agreement, Williams Energy shall have the right to recoup the
Prepayment by set-off of any and all amounts owing to the Company under the
Power Purchase Agreement beginning no earlier than the June in the calendar
year after the occurrence of item (i) or (iii) and continuing thereafter until
the Prepayment has been fully recovered. In the case of item (ii) above,
Williams Energy shall have the right to immediately set-off all amounts owing
to the Company under the Power Purchase Agreement after the occurrence of item
(ii) and continuing thereafter until the Prepayment has been fully recovered.
Except to the extent Williams Energy elects to include the Prepayment as part
of the alternative credit support, the amount of alternative credit support
posted by Williams Energy pursuant to the Letter Agreement shall be initially
reduced by the amount of the Prepayment, and Williams Energy shall thereafter
increase the alternative credit support proportionately as Williams Energy
recoups the Prepayment set-off on the payment due date of amounts owing to the
Company.
61
If the Company does not return the Prepayment to Williams Energy as set
forth in the preceding paragraph, then the Company shall be considered in
default under the Letter Agreement and Williams Energy shall be entitled to
enforce any and or all of its contractual rights and remedies as set forth in
the Power Purchase Agreement, including, but not limited to, drawing on the
Letter of Credit previously posted by the Company in favor of Williams Energy.
Williams Energy made the Prepayment on November 14, 2002 and provided an
additional $25 million of cash to the Company on January 6, 2003 as the
alternative credit support. As allowed by the Letter Agreement, Williams has
elected to have the $10 million Prepayment included as part of the alternative
credit support. In the event that Williams regains and maintains its investment
grade status, provides a substitute guaranty of investment grade rating, or
posts a letter of credit, we will be required to return the $35 million
alternative credit support to Williams Energy in accordance with the terms of
the Letter Agreement as described above.
Concentration of Credit Risk -Williams Energy is currently the Company's
sole customer for purchases of capacity, ancillary services, and energy and the
Company's sole source for fuel. Williams Energy's payments under the Power
Purchase Agreement are expected to provide all of the Company's operating
revenues during the term of the Power Purchase Agreement. It is unlikely that
the Company would be able to find another purchaser or fuel source on similar
terms for the Facility if Williams Energy were not performing under the Power
Purchase Agreement. Any material failure by Williams Energy to make capacity
and fuel conversion payments or to supply fuel under the Power Purchase
Agreement would have a severe impact on the Company's operations.
8. COMMITMENTS AND CONTINGENCIES
Construction Agreement - The Company entered into an Agreement for
Engineering, Procurement and Construction services, dated as of October 15,
1999, between the Company and WGI (as the successor contractor), as amended for
the design, engineering, procurement, site preparation and clearing, civil
works, construction, start-up, training and testing and to provide all
materials and equipment (excluding operational spare parts), machinery, tools,
construction fuels, chemicals and utilities, labor, transportation,
administration and other services and items (collectively and separately, the
services) of the Facility. Under a guaranty in the Company's favor, effective
as of October 15, 1999, all of the WGI's obligations under the construction
agreement are irrevocably and unconditionally guaranteed by Raytheon. In 2001,
as a result of WGI's bankruptcy filing the Company made a demand on Raytheon to
perform its obligations under the Raytheon guarantee and WGI, Raytheon and the
Company entered into agreements pursuant to which Raytheon became responsible
for the construction of the Facility.
On August 11, 2002, the Company and Raytheon entered into a settlement
agreement in which Raytheon was granted provisional acceptance. In return for
provisional acceptance, Raytheon agreed to perform work identified in the punch
list provided as part of the agreement. Raytheon was also required to pay a $5
million settlement fee minus outstanding milestones and change-orders for a net
payment to the Company of $2.37 million. This amount was recorded as a
reduction in the cost of the Facility. Raytheon must now perform certain agreed
upon completion items in order to obtain final acceptance. On March 8, 2003,
the Company entered into a letter agreement with Raytheon pursuant to which the
Company granted Raytheon an extension of the guaranteed final acceptance date
from April 1, 2003 to June 30, 2003.
Maintenance Services - Pursuant to a maintenance services agreement dated
December 5, 1999, Siemens Westinghouse is to provide the Company, with specific
combustion turbine maintenance services and spare parts for twelve maintenance
periods or until December 8, 2015. As of December 31, 2002, the Company has
received approximately $10.5 million in rotable spare parts under this
agreement. The fees assessed by Siemens Westinghouse will be based on the
number of Equivalent Base Load Hours accumulated by the applicable Combustion
Turbine as adjusted for inflation. These fees are capitalized to the Facility
when paid and expensed as maintenance occurs. This amount is recorded as spare
parts inventory and a long-term liability in the accompanying 2002 balance
sheet. For financial reporting purposes the payments made to Siemens
Westinghouse are netted with the liabilities under the spare-parts agreement in
the accompanying 2002 balance sheet.
62
Water Supply and Water Supply Pipeline - The Company has entered into a
contract with the Borough of Sayreville (the "Borough") by which the Borough
will provide untreated water to the Company. The contract has a term of 30
years with an option to extend for up to four additional five-year terms. The
Company is contractually committed to a minimum annual payment of $300,000.
The Borough of Sayreville is in the final stages of design and approval of
the Lagoon Water Pipeline, Lagoon Pumping Station, and Sayreville
Interconnection Number 2. The Company is responsible for selection of a
contractor and for payment of all costs. The pipeline construction has been
completed. The construction contract for the Pumping Station was awarded and is
completed. Start up and commissioning of this system started May 1, 2002. The
cost of the pipeline and pumping station are estimated to be approximately
$678,000 and $1.64 million, respectively. The Company has paid the pipeline
project in full, and as of December 31, 2002, had paid approximately $1.6
million towards the pumping station.
Interconnection Agreement (GPU) - The Company has entered into an
interconnection agreement with Jersey Central Power & Light Company d/b/a GPU
Energy (GPU) to transmit the electricity generated by the Facility to the
transmission grid so that it may be sold as prescribed under the PPA. The
agreement is in effect for the life of the Facility, yet may be terminated by
mutual consent of both GPU and the Company under certain circumstances as
detailed in the agreement. Costs associated with the agreement are based on
electricity transmitted via GPU at a variable price and the PJM
(Pennsylvania/New Jersey/Maryland) Tariff as charged by GPU, which is comprised
of both service cost and asset recovery cost, as determined by GPU and approved
by the Federal Energy Regulatory Committee. On June 22, 2001, FERC approved the
Company's Market - Based Tariff petition. The Company has been importing
electricity from the transmission system to support commissioning of the
facility since July 2001 and the interconnection facilities have exported power
to the transmission system since that time.
Interconnection Installation Agreement (GPU) - The Company entered into an
interconnection agreement with GPU on April 27, 1999 to design, furnish install
and own certain facilities required to interconnect the Company with the
transmission system. Under the terms of this agreement, GPU will provide all
labor, supervision, materials and equipment necessary to perform the
interconnection installation. The cost of these interconnection facilities is
approximately $5.3 million. The Company had paid $5.1 million and $1.5 million
to GPU for these facilities as of December 31, 2002 and 2001, respectively.
Interconnection Services Agreement (PJM) - The Company entered into an
interconnection agreement with the Independent System Operator (ISO) of the PJM
Control Area on December 24, 2001, as required under the PJM Open Access
Transmission Tariff. This agreement includes specifications for each generating
unit that will be interconnected to the Transmission System, confirms Capacity
Interconnection Rights and includes the Company's agreement to abide by all
rules and procedures pertaining to generation in the PJM Control Area.
Gas Interconnection - Williams is responsible for the construction of all
natural gas interconnection facilities necessary for the delivery of natural
gas to the Company's natural gas delivery point. This includes metering
equipment, valves and piping. Upon the expiration of the PPA or termination of
the PPA, the Company has the right to purchase the natural gas interconnection
facilities from Williams. As of August 10, 2001, the interconnection facilities
have been constructed by Public Service Electric & Gas for Williams and these
facilities have been delivering gas to the Facility since August 8, 2001.
Williams Energy Arbitration - The Company has entered into arbitration
with Williams Energy to resolve certain disputes regarding the date of
commercial operation and the proper interpretation of certain provisions of the
Power Purchase Agreement relating to the amounts claimed by the Company to be
payable by Williams Energy. During the year ended December 31, 2002, Williams
Energy has withheld or offset from amounts invoiced by the Company amounts that
Williams Energy believes were improperly invoiced based on Williams Energy's
interpretation of the Power Purchase Agreement. The Company has entered into
arbitration to settle the dispute over the commercial operation date and the
proper interpretation of certain provisions of the Power Purchase Agreement and
expect to resolve the dispute in the second quarter of 2003. The arbitration
relates to disputed amounts of
63
approximately $7.6 million, which includes a $594,000 payment extension option
dispute and a $7.0 million commercial operation start date dispute. The Company
is also disputing $392,000 of merchant price and gas testing charges with
Williams Energy although this is not currently part of the arbitration. While
the Company believes that its interpretation of the Power Purchase Agreement is
correct, the Company cannot predict the outcome of these matters.
9. RELATED PARTY TRANSACTIONS
Effective March 2000, the Company entered into a 32-year development and
construction management agreement with AES Sayreville, L.L.C. ("Sayreville"),
another wholly owned subsidiary of Red Oak, to provide certain support services
required by the Company for the development and construction of the Facility.
Under this agreement Sayreville has also provided operations management
services for the Plant since the commencement of commercial operation. Minimum
amounts payable under the contract during the construction period were $125,000
per month. Since commercial operation was achieved, payments for operations
management services have been approximately $375,000 per quarter.
During the construction period, the construction management fees have been
paid to Sayreville from the investment balances or from equity funding. For the
years ended December 31, 2002 and 2001, and the period from March 15, 2000
(inception) through December 31, 2000, $1 million, $1.5 million and $1.25
million, in construction management fees were incurred and charged to
construction in progress, respectively. As of December 31, 2002, $80,000 was
payable to Sayreville. AES will continue to supply Sayreville with the
personnel, operational and maintenance services necessary to carry out its
obligations to the Company.
The Company had accounts receivable from affiliates of $309,000 and
$125,000 as of December 31, 2002 and 2001, respectively. The Company had
accounts payable to its parent and affiliates of $18,000 and $82,000 as of
December 31, 2002 and 2001, respectively. Accounts receivable from affiliates
generally represents charges for certain projects that the Company has paid for
and invoiced to its affiliates. Accounts payable to parent and affiliates
represent general amounts owed to the Company's parent and affiliates for
shared services.
10. PROJECT COST
The total cost of the construction of the Company's facility is estimated
to be approximately $454.74 million, up from an original cost of $439.8
million, which has and will continue to be financed by the proceeds from the
Company's sale of the senior secured bonds ($384 million), equity subscription
agreement contributions ($55.75 million), cash flow from liquidated damages
($14 million), and the additional equity contribution from AES of $986,000. The
increase in the estimated cost of the facility was caused by construction
delays which delayed provisional acceptance beyond the guaranteed provisional
acceptance date of February 14, 2002.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments have been
determined using available market information. The estimates are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The fair value of the Company's restricted investments approximates their
carrying value. The Bonds had a carrying amount of $381.6 million and $384
million at December 31, 2002 and 2001, respectively. The Bonds had a fair value
of approximately $261 million and $389.7 million, respectively, at December 31,
2002 and 2001.
12. SEGMENT INFORMATION
Under the provisions of Statement of Financial Accounting Standards No.
131, Disclosure About Segments of an Enterprise and Related Information, the
Company's business is expected to be operated as one reportable
64
segment, with operating income or loss being the measure of performance
evaluated by the chief operating decision maker. As described in Notes 1 and 6,
the Company's primary customer is Williams, which is expected to provide all of
the revenues of the Company during the term of the PPA.
13. SUBSEQUENT EVENTS
As discussed in Note 7, on January 6, 2003, Williams Energy provided $25
million of cash to the Company as alternative credit support in accordance with
Letter Agreement. As allowed by the Letter Agreement, Williams Energy has
elected to have the $10 million Prepayment included as part of the alternative
credit support. In the event that The Williams Companies, Inc. regains and
maintains its investment grade status, provides a substitute guaranty of
Investment Grade rating, or posts a letter of credit, the Company will be
required to return the $35 million alternative credit support to Williams
Energy in accordance with the terms of the Letter Agreement as described in
Note 7. As of March 7, 2003, the Company had cash balances of approximately
$28.9 million.
On March 8, 2003, the Company entered into a letter agreement with
Raytheon pursuant to which the Company granted Raytheon a free extension of the
guaranteed final acceptance date from April 1, 2003 to June 30, 2003. Raytheon
now must perform certain agreed upon completion items in order to obtain final
acceptance.
65
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited quarterly statements of
operations for the Company for 2002. We recognize our commercial operation date
as September 1, 2002, therefore 30 days of the quarter ended September 31, 2002
included operations and 62 days represented the development stage. Our
commercial operation date is currently in dispute. See Notes 7 and 8 to the
consolidated financial statements.
AES Red Oak, LLC
Quarter Ended Quarter Ended
December 31, September 30, Quarter Ended Quarter Ended
2002 2002 June 30, 2002 March 31, 2002
------------- ------------- ------------- --------------
(dollars in thousands)
OPERATING REVENUES
Energy ................................. $ 11,184 $ 15,060 $ -- $ --
OPERATING EXPENSES
Operating expenses ..................... (6,616) (9,884) -- --
General and administrative costs ............ 62 (208) (134) (22)
------------- ------------- ------------- -------------
Total Operating Expense ................ (6,554) (10,092) (134) (22)
------------- ------------- ------------- -------------
OPERATING INCOME ............................ 4,630 4,968 (134) (22)
OTHER INCOME/EXPENSE
Interest income ........................ 30 34 36 25
Interest expense ....................... (8,589) (4,310) (183) (81)
Other income ........................... 618 339 -- --
Liquidated damages received ............ 1,810 -- -- --
Other expense .......................... (379) -- -- --
Liquidated damages paid ................ (1,810) -- -- --
------------- ------------- ------------- -------------
Total Other Income/Expenses ............ (8,320) (3,937) (147) (56)
------------- ------------- ------------- -------------
NET INCOME .................................. $ (3,690) $ 1,031 $ (281) $ (78)
============= ============= ============= =============
AES Red Oak, LLC
Quarter Ended Quarter Ended
December 31, September 30, Quarter Ended Quarter Ended
2001 2001 June 30, 2001 March 31, 2001
------------- ------------- ------------- --------------
(dollars in thousands)
OPERATING REVENUES
Energy ................................. $ -- $ -- $ -- $ --
OPERATING EXPENSES
Operating expenses ..................... -- -- -- --
General and administrative costs ....... (11) (35) (13) (9)
------------- ------------- ------------- -------------
Total Operating Expense ................ (11) (35) (13) (9)
------------- ------------- ------------- -------------
OPERATING INCOME ............................ (11) (35) (13) (9)
OTHER INCOME/EXPENSE
Interest income ........................ 250 543 602 260
Interest expense ....................... (688) (1,326) (1,226) (352)
Other income ........................... -- -- -- --
Other expense .......................... -- -- -- --
------------- ------------- ------------- -------------
Total Other Income/Expenses ............ (438) (783) (624) (92)
------------- ------------- ------------- -------------
NET INCOME .................................. $ (449) $ (818) $ (637) $ (101)
============= ============= ============= =============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Not applicable pursuant to General Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Not applicable pursuant to General Instruction I of the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable pursuant to General Instruction I of the Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable pursuant to General Instruction I of the Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our President and our
Chief Financial Officer, after evaluating the effectiveness of our "disclosure
controls and procedures" (as defined in the Securities Exchange Act of 1934
Rules 13a-14c) as of a date (the "Evaluation Date") within 90 days before the
filing date of this annual report, have concluded that as of the Evaluation
Date, our disclosure controls and procedures were effective to ensure that
material information relating to us 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.
68
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) The following documents are filed as part of this report:
1. Consolidated Financial Statements Filed:
Please refer to Item 8 - Consolidated Financial Statement and
Supplementary Data.
2. Consolidated Financial Statement Schedules Filed:
Please refer to Item 8 - Consolidated Financial Statement and
Supplementary Data.
3. Exhibits Filed:
Unless otherwise indicated, all exhibits to this Form 10-K are incorporated
herein by reference from the identically numbered exhibit of AES Red Oak,
L.L.C.'s Registration Statement of Form S-4 (333-40478).
Exhibit
Number Description
------------- -------------------------------------------------------------
3 Amended and Restated Limited Liability Company Agreement,
dated as of November 23, 1999, of AES Red Oak, L.L.C.
4.1(a) Trust Indenture, dated as of March 1, 2000, by and among AES
Red Oak, L.L.C., the Trustee and the Depositary Bank.
4.1(b) First Supplemental Indenture, dated as of March 1, 2000, by
and among AES Red Oak, L.L.C., the Trustee and the Depositary
Bank.
4.2 Collateral Agency and Intercreditor Agreement, dated as of
March 1, 2000, by and among AES Red Oak, L.L.C., the Trustee,
the Collateral Agent, the Debt Service Reserve Letter of
Credit Provider, the Power Purchase Agreement Letter of
Credit Provider, the Working Capital Provider and the
Depositary Bank.
4.3 Debt Service Reserve Letter of Credit and Reimbursement
Agreement, dated as of March 1, 2000, by and among AES Red
Oak, L.L.C., the Debt Service Reserve Letter of Credit
Provider and the Banks named therein.
4.4 Power Purchase Agreement Letter of Credit and Reimbursement
Agreement, dated as of March 1, 2000, by and among AES Red
Oak, L.L.C., the Power Purchase Agreement Letter of Credit
Provider and the Banks named therein.
4.5 Global Bond, dated March 15, 2000, evidencing 8.54% Senior
Secured Bonds of AES Red Oak, L.L.C., Series A due 2019 in
the principal amount of $224,000,000.
4.6 Global Bond, dated March 15, 2000, evidencing 9.20% Senior
Secured Bonds of AES Red Oak, L.L.C., Series B due 2029 in
the principal amount of $160,000,000.
4.7 Equity Subscription Agreement, dated as of March 1, 2000, by
and among AES Red Oak, L.L.C., AES Red Oak, Inc. and the
Collateral Agent.
4.8 Working Capital Agreement, dated as of March 1, 2000, by and
among AES Red Oak, L.L.C., Working Capital Provider, and the
Banks named therein.
4.9 Security Agreement, dated as of March 1, 2000, by and between
AES Red Oak, L.L.C. and the Collateral Agent.
69
Exhibit
Number Description
------------- -------------------------------------------------------------
4.10 Pledge and Security Agreement, dated as of March 1, 2000, by
and between AES Red Oak, Inc. and the Collateral Agent.
4.11 Pledge and Security Agreement, dated as of March 1, 2000, by
and between AES Red Oak, L.L.C. and the Collateral Agent.
4.12 Consent to Assignment, dated as of March 1, 2000, by and
between Williams Energy Marketing & Trading Company and the
Collateral Agent, and consented to by AES Red Oak, L.L.C.
(with respect to the Power Purchase Agreement).
4.13 Consent to Assignment, dated as of March 1, 2000, by and
between The Williams Companies, Inc. and the Collateral
Agent, and consented to by AES Red Oak, L.L.C. (with respect
to the PPA Guaranty)
4.14 Consent to Assignment, dated as of March 1, 2000, by and
between Raytheon Engineers & Constructors, Inc. and the
Collateral Agent, and consented to by AES Red Oak, L.L.C.
(with respect to the construction agreement).
4.15 Consent to Assignment, dated as of March 1, 2000, by and
between Raytheon Company and the Collateral Agent, and
consented to by AES Red Oak, L.L.C. (with respect to the EPC
Guaranty).
4.16 Consent to Assignment, dated as of March 1, 2000, by and
between Siemens Westinghouse Power Corporation and the
Collateral Agent, and consented to by AES Red Oak, L.L.C.
(with respect to the Maintenance Services Agreement).
4.17 Consent to Assignment, dated as of March 1, 2000, by and
between AES Sayreville, L.L.C. and the Collateral Agent, and
consented to by AES Red Oak, L.L.C. (with respect to the
Development and Operations Services Agreement).
4.18 Consent to Assignment, dated as of March 1, 2000, by and
between Jersey Central Power and Light Company d/b/a GPU
Energy and the Collateral Agent, and consented to by AES Red
Oak, L.L.C. (with respect to the Interconnection Agreement).
4.19 Consent to Assignment, dated as of March 1, 2000, by and
between the Borough of Sayreville and the Collateral Agent,
and consented to by AES Red Oak, L.L.C. (with respect to the
Water Supply Agreement).
10.1 Fuel Conversion Services, Capacity and Ancillary Services
Purchase Agreement, dated as of September 17, 1999, and
Amendment No. 1, dated as of February 21, 2000, by and
between AES Red Oak, L.L.C. and Williams Energy Marketing &
Trading Company. (Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.)
10.2(a) Agreement for Engineering, Procurement and Construction
Services, dated as of October 15, 1999, and Amendment No. 1,
dated as of February 23, 2000, by and between AES Red Oak,
L.L.C. and Raytheon Engineers & Constructors, Inc. (Portions
of this exhibit have been omitted pursuant to a request for
confidential treatment.)
10.2(b) EPC Contract Prepayment Coordination Agreement, dated as of
March 14, 2000, between AES Red Oak, L.L.C. and Raytheon
Engineers and Constructors, Inc. (Portions of this exhibit
have been omitted pursuant to a request for confidential
treatment.)
70
Exhibit
Number Description
------------- -------------------------------------------------------------
10.3 Guaranty, dated as of October 15, 1999, by Raytheon Company
in favor of AES Red Oak, L.L.C. (Portions of this exhibit
have been omitted pursuant to a request for confidential
treatment.)
10.4 Maintenance Program Parts, Shop Repairs and Scheduled Outage
TFA Services Contract, dated as of December 8, 1999, and
Amendment No. 1, dated February 15, 2000, by and between AES
Red Oak, L.L.C. and Siemens Westinghouse Power Corporation.
(Portions of this exhibit have been omitted pursuant to a
request for confidential treatment.)
10.5 Development and Operations Services Agreement, dated as of
March 1, 2000, by and between AES Sayreville, L.L.C. and AES
Red Oak, L.L.C.
10.7 Water Supply Agreement, dated as of December 22, 1999, by and
between AES Red Oak, L.L.C. and the Borough of Sayreville.
10.8 General Facility Transmission Interconnection Agreement,
dated as of April 27, 1999, by and between Jersey Central
Power & Light Company d/b/a GPU Energy and AES Red Oak,
L.L.C.
10.9 Mortgage, Security Agreement and Assignment of Leases and
Income, dated as of March 1, 2000, by and between AES Red
Oak, L.L.C. and the Mortgagee.
10.10 Assignment of Leases and Income, dated as of March 1, 2000,
by and between AES Red Oak, L.L.C. and the Collateral Agent.
10.11 Financial Agreement, dated as of December 3, 1999, by and
between AES Red Oak Urban Renewal Corporation and the Borough
of Sayreville.
10.12 Promissory Note, dated as of March 15, 2000, of AES Red Oak
Urban Renewal Corporation to AES Red Oak, L.L.C.
10.13 Ground Lease Agreement, dated as of March 1, 2000, by and
between AES Red Oak, L.L.C. and AES Red Oak Urban Renewal
Corporation.
10.14 Sublease Agreement, dated as of March 1, 2000, by and between
AES Red Oak Urban Renewal Corporation and AES Red Oak, L.L.C.
10.15 Memorandum of Ground Lease, dated as of March 1, 2000, by and
between AES Red Oak, L.L.C. and AES Red Oak Urban Renewal
Corporation.
10.16 Memorandum of Sublease, dated as of March 1, 2000, by and
between AES Red Oak Urban Renewal Corporation and AES Red
Oak, L.L.C.
10.17 Construction Agency Agreement, dated as of March 1, 2000, by
and between AES Red Oak Urban Renewal Corporation and AES Red
Oak, L.L.C.
10.18 Leasehold Mortgage, Security Agreement and Assignment of
Leases and Income, dated as of March 1, 2000, by and between
AES Red Oak Urban Renewal Corporation and AES Red Oak, L.L.C.
71
Exhibit
Number Description
------------- -------------------------------------------------------------
10.19 Assignment of Mortgage, dated as of March 1, 2000, by AES Red
Oak, L.L.C. in favor of the Collateral Agent.
10.20 URC Security Agreement, dated as of March 1, 2000, by and
between AES Red Oak Urban Renewal Corporation and AES Red
Oak, L.L.C.
10.21 Assignment of Leases and Income, dated as of March 1, 2000,
by and between AES Red Oak Urban Renewal Corporation and AES
Red Oak, L.L.C.
10.22 Assignment of Assignment of Leases and Income, dated as of
March 1, 2000, by AES Red Oak, L.L.C. in favor of the
Collateral Agent.
10.23 Guaranty, dated as of March 1, 2000, by The Williams
Companies, Inc. in favor of AES Red Oak, L.L.C. (PPA
Guaranty). (Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.)
10.24 Project Completion Agreement dates as of November 16, 2001,
by and between Raytheon Company and Washington Group
International, Inc. (incorporated herein by reference from
Exhibit 10.1 to the Form 8-K filed on December 12, 2001, File
No. 333-40478).
10.25 Owner/Guarantor Supplemental Agreement, dated as of November
21, 2001, by and among AES Red Oak, L.L.C. and Raytheon
Company (incorporated herein by reference from Exhibit 10.2
to the Form 8-K filed on December 12, 2001, File No.
333-40478).
10.26** Letter Agreement, dated November 7, 2002, between AES Red
Oak, L.L.C. and Williams Energy Marketing & Trading Company.
10.27* Letter Agreement, dated March 5, 2003 between AES Red Oak,
L.L.C. and Raytheon Company.
12* Computation of Ratios of Earnings (Deficiency) to Fixed
Charges.
21* Subsidiary of the Registrant.
- ------------------
* Filed herewith.
** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2002 and incorporated by reference
herein.
b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the registrant
during the fourth quarter of the fiscal year ended December 31,
2002.
72
Supplementary Information to be Furnished With Reports filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act.
No annual report or proxy materials have been sent to security holders
during the fiscal year ended December 31, 2002. No annual report or proxy
materials will be sent to security holders subsequent to the filing of this
annual report on Form 10-K.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AES RED OAK, L.L.C.
/s/ A.W. Bergeron
------------------------------
By: A.W. Bergeron
Title: President
/s/ Michael Romaniw
------------------------------
By: Michael Romaniw
Title: Chief Financial Officer
/s/ William R. Baykowski
------------------------------
By: William R. Baykowski
Title: Principal Accounting Officer
Date:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Barry Sharp
- ---------------------------------
Barry Sharp Director March 31, 2003
/s/ John Ruggirello
- ---------------------------------
John Ruggirello Director March 31, 2003
/s/ Edward Hall
- ---------------------------------
Edward Hall Director March 31, 2003
74
CERTIFICATIONS
I, A.W. Bergeron, certify that:
1. I have reviewed this annual report on Form 10-K of AES Red Oak, LLC;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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: March 31, 2003
/s/ A.W. Bergeron
-----------------------------
A.W. Bergeron
President
75
I, Michael Romaniw, certify that:
1. I have reviewed this annual report on Form 10-K of AES Red Oak, LLC;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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: March 31, 2003
/s/ Michael Romaniw
------------------------------
Michael Romaniw
Chief Financial Officer
76