Delaware

54-1457573

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

ASSETS:

Current assets:

Cash and cash equivalents

$

4,893

1,088

Interest receivable

5

8

Accounts receivable — net

4,728

10,135

Prepaid expenses

2,286

2,511

Inventory — fuel

18

26

Restricted cash including debt service reserve

3,396

5,803

Total current assets

15,326

19,571

Land

1,143

1,143

320,179

322,745

Restricted cash-certificate of deposit

77

77

Deferred financing costs-net of accumulated amortization of $542 and $508, respectively

3,093

3,127

Other assets

753

753

Total assets

340,571

347,416

LIABILITIES AND MEMBER’S CAPITAL:

Current liabilities:

Accounts payable

339

2,666

Accrued interest

2,254

2,262

Payable to AES and affiliates

2,297

2,873

Note payable

1,463

2,328

Bonds payable, current

5,153

4,751

Total current liabilities

11,506

14,880

Bonds payable

300,183

301,773

Total liabilities

311,689

316,653

Commitments and Contingencies (Notes 5 and 6)

Member’s capital:

Common stock, $1 par value-10 shares authorized, none issued or outstanding

—

—

Contributed capital

38,800

Member’s deficit

Total liabilities and member’s capital

340,571

347,416

AES Ironwood, L.L.C. (the “Company”) was formed on October 30, 1998 in the State of Delaware, to develop, construct, own, operate and maintain a 705-megawatt (MW) gas-fired, combined cycle electric generating facility (the “Facility”) in South Lebanon Township, Pennsylvania. The Company was considered dormant until June 25, 1999, at which time it consummated a project financing and certain related agreements. The Facility, which was declared commercially available on December 28, 2001, consists of two Westinghouse 501 G combustion turbines, two heat recovery steam generators, and one steam turbine. The Facility produces and sells electricity, and provides fuel conversion and ancillary services, solely to Williams Energy Marketing & Trading Company (“Williams Energy”) under a power purchase agreement with a term of 20 years that commenced on December 28, 2001.

The Company is a wholly-owned subsidiary of AES Ironwood, Inc., which is a wholly-owned subsidiary of The AES Corporation. AES Ironwood, Inc. has no assets other than its ownership interests in the Company and AES Prescott, L.L.C. AES Ironwood, Inc. has no operations and is not expected to have any operations. Its only income will be from distributions it receives from the Company and AES Prescott, L.L.C. The equity that AES Ironwood, Inc. has provided to the Company has been provided to AES Ironwood, Inc. by The AES Corporation. The AES Corporation files quarterly and annual reports with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, which are publicly available, but do not constitute a part of, and are not incorporated into, this Form 10-Q.

BASIS OF PRESENTATION

In the Company’s opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the interim periods presented herein, are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the three-month period presented herein are not necessarily indicative of the results of operations to be expected for the full year or future periods.

Certain 2002 amounts have been reclassified on the condensed financial statements to conform with the 2003 presentation.

The Company generates energy revenues under its power purchase agreement with Williams Energy. During the 20-year term of the agreement, the Company expects to sell electric energy and capacity produced by the Facility, as well as ancillary and fuel conversion services. Under the power purchase agreement, the Company also generates 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.

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Because the accompanying condensed financial statements do not include all of the information and footnotes required by generally accepted accounting principles, they should be read in conjunction with the audited financial statements for the period ended December 31, 2002 and notes thereto included in AES Ironwood, L.L.C.’s Annual Report on Form 10-K for the year ended December 31, 2002.

BONDS

On June 25, 1999, the Company issued $308.5 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. On May 12, 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. Repayment of the bonds commenced with the quarterly payment on February 28, 2002. The amount payable in 2003 is approximately $4.75 million. Annual principal repayments over the life of the bonds range from 0.64% (or $1.97 million) to 6.92% (or $21.3 million). Repayment dates are February 28, May 31, August 31, and November 30 of each year, with the final payment due November 30, 2025.

Repayments as of December 31, 2002 are as follows:

Year

Principal

Interest

Total

2003

2004

2005

2006

2007

2008-2025

Total payments

EQUITY SUBSCRIPTION AGREEMENT

The Company, along with AES Ironwood, Inc., entered into an equity subscription agreement, pursuant to which AES Ironwood, Inc. was required to contribute up to $50.1 million to the Company to fund project costs after the bond proceeds have been fully utilized. As of March 31, 2003, AES Ironwood, Inc. had made net contributions of $38.8 million of equity capital. Upon final acceptance of the plant, no further contribution is required. As a result of granting final acceptance to Siemens Westinghouse on March 12, 2003, AES Ironwood, Inc. is no loner required to contribute funds to the company.

POWER PURCHASE AGREEMENT

The Company has entered into a power purchase agreement 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 term of the power purchase agreement is 20 years, commencing on December 28, 2001, the commercial operation date. Payment obligations to the Company are guaranteed by The Williams Companies, Inc. Such payment obligations under the guaranty are capped at an amount equal to 125% of the sum of the principal amount of the senior secured bonds plus the maximum debt service reserve account required balance.

Fuel Conversion and Other Services – Williams Energy has the obligation to deliver, on an exclusive basis, all quantities of natural gas 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.

Concentration of Credit Risk – Williams Energy currently is the Company’s 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 the Company’s revenues during the term of the power purchase agreement. It is uncertain whether 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 and material 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. are capped at an amount equal to 125% of the sum of the principal amount of our senior secured bonds, plus the maximum debt service reserve account balance. At March 31, 2002, this amount was approximately $400 million.

Under the power purchase agreement, in the event that S&P or Moody’s rate the long–term senior unsecured debt of The Williams Companies, Inc. lower than investment grade, The Williams Companies, Inc., or affiliate thereof, is required to replace The Williams Companies, Inc. guaranty with an alternative security that is acceptable to us 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.” According to published sources, this rating was further lowered on November 22, 2002 to “Caa1” by Moody’s. Accordingly, The Williams Companies, Inc.’s long–term senior unsecured debt is currently rated below investment grade by both S&P and Moody’s, and is subject to further downgrade by both ratings agencies.

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-” from “BBB-” on July 26, 2002, and placed the rating on credit watch. On November 27, 2002, Moody’s lowered its ratings on the Company’s senior secured bonds to “B2” from “Ba2”. The Company does not believe that such ratings downgrades will have any other direct or immediate effect, as none of the other financing documents or project contracts have provisions that are triggered by a reduction of the ratings of the bonds.

To satisfy the requirements of the power purchase agreement, on September 20, 2002, Citibank, N.A., issued a $35 million Irrevocable Standby Letter of Credit (“the Letter of Credit”) on behalf of Williams Energy. The Letter of Credit does not alter, modify, amend or nullify the guaranty issued by The Williams Companies, Inc. in favor of the Company and is considered to be additional security to the security amounts provided by such guaranty. The Letter of Credit became effective on September 20, 2002 and shall expire upon the close of business on July 10, 2003; except that the Letter of Credit will be automatically extended without amendment for successive one year periods from the present or any future expiration date hereof, unless Citibank, N.A. provides written notice of its election not to renew the Letter of Credit at least thirty days prior to any such expiration date. Additionally, in a Letter Agreement dated September 20, 2002, Williams Energy agreed to (a) provide eligible credit support prior to the stated expiration date of the Letter of Credit and (b) replenish any portion of the Letter of Credit or eligible credit support that is drawn, reduced, cashed or redeemed, at any time, with an equal amount of eligible credit support. Within twenty days prior to the expiration of the Letter of Credit and/or any expiration date of eligible credit support posted by Williams Energy, Williams Energy shall post eligible credit support to the Company in place of the Letter of Credit and/or any expiring eligible credit support unless The Williams Companies, Inc. regains and maintains its investment grade status, in which case the Letter of Credit or eligible credit support shall automatically terminate and no additional eligible credit support shall be required. The Company and Williams Energy acknowledge that the posting of such Letter of Credit and Williams Energy’s agreement and performance of the requirements of (a) and (b) as set forth in the immediately preceding sentence shall be in full satisfaction of Williams Energy’s obligations contained in Section 19.3 of the power purchase agreement to provide replacement security due to the downgrade of The Williams Companies, Inc. falling below investment grade status.

Since the Company depends 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 to the Company’s cash flow and financial condition which could result in a default on the Company’s senior secured bonds. Due to recent declines in pool prices, the Company would expect that if required to seek alternative purchasers of our power as a result of a default by The Williams Companies, Inc. and its affiliates 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 debt service obligations in the absence of a long-term power purchase agreement with Williams Energy or its affiliates.

As further discussed in Note 6, the Company is in ongoing discussions with Williams Energy relating to the calculation of certain amounts under the power purchase agreement. Under the power purchase agreement, the Company has earned an annual availability bonus and an additional capacity payment for 2002. The Company has invoiced Williams Energy approximately $1.4 million as an annual availability bonus for 2002 and approximately $0.1 million as a capacity payment for 2002. However, Williams Energy has disputed these amounts so the Company has only recognized the amounts that Williams Energy has paid, which is approximately $0.3 million. For the three months ended March 31, 2003 the Company has invoiced Williams Energy approximately $12.4 million in respect of fixed payments and ancillary services. There have been disputes over the calculation of some of the 2003 invoices, but the Company considers these immaterial and will not require arbitration. The Company will continue to discuss with Williams Energy the calculation of the 2002 amounts but is unable to predict the outcome of these discussions and their potential impact on the Company’s ability to collect these contractual items either for the three months ended March 31, 2003 or in the future.

Construction – The Company entered into a fixed-price turnkey construction agreement with Siemens Westinghouse for the design, engineering, procurement and construction of the Facility. By meeting the provisions in Section 6.3 of the construction agreement, provisional acceptance was granted by the Company on December 27, 2001. We previously had a dispute with Siemens Westinghouse over which party was responsible for the payment of the cost of electricity and natural gas used by the project during certain periods prior to the December 28, 2001 commercial acceptance. As a result of a settlement agreement with Siemens Westinghouse entitled Agreement Change Order No. 71, we granted final acceptance as of March 12, 2003.

As a result of the settlement agreement, we have agreed, among other things, not to pursue the cost of electricity and natural gas used by the project during certain periods prior to the December 28, 2001 commercial acceptance date. We have also agreed to pay $156,000 relating to an outstanding claim by Siemens Westinghouse regarding an April 2002 outage. This amount was recorded as an accrued expense during 2002 and was paid as part of the settlement. Siemens Westinghouse has agreed to waive their right to receive any payments with respect to a milestone payment of $2.2 million and to the retainage of $12.1 million held by us. Additionally, Siemens Westinghouse made a payment of $4.8 million to us in respect of items related to final acceptance. This amount was recorded as a reduction in the cost of the Facility. The effects of this settlement agreement have been recorded in our financial statements as of December 31, 2002.

Power Purchase Agreement - The Company is having ongoing discussions with Williams Energy relating to the calculation of certain amounts under the power purchase agreement. Under the power purchase agreement, the Company has earned an annual availability bonus

and an additional capacity payment for 2002. The Company has invoiced Williams Energy approximately $1.4 million as an annual availability bonus for 2002 and approximately $0.1 million as a capacity payment for 2002. However, Williams Energy has disputed the amounts so the Company has only recognized the amounts that Williams Energy has paid, which is approximately $0.3 million. Additionally, on April 14, 2003, Williams Energy notified the Company that they disagree with the Company’s calculated availability for 2002. They have recalculated availability based on their interpretation of the power purchase agreement and believe that no availability bonus is due. Instead Williams Energy has claimed that the Company owes them an annual availability capacity adjustment in the amount of approximately $3.5 million. Additionally, Williams Energy has claimed that the Company also owes a fuel conversion volume rebate in the amount of approximately $366 thousand. The Company has notified Williams Energy that the Company disputes their calculations. The Company will continue to discuss with Williams Energy the calculation of these amounts but are unable to predict the outcome of these discussions and their potential impact on the Company’s ability to collect these contractual items either for the three months ended March 31, 2003 or in the future.

Maintenance – The Company, as assignee of AES Ironwood, Inc., has entered into the Maintenance Program Parts, Shop Repairs and Scheduled Outage TFA Services Contract, dated as of September 23, 1998, with Siemens Westinghouse by which Siemens Westinghouse will provide the Company with, among other things, combustion turbine parts, shop repairs and scheduled outage technical field assistance services. The Contractor will provide the Company with specific combustion turbine maintenance services and spare parts for an initial term of between eight and ten years under a maintenance service 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.

The Company has determined the maintenance services agreement provides for the purchase of parts that will be capitalized, as well as maintenance items that will be expensed when incurred.

The maintenance services agreement became effective on the date of execution and unless terminated early, must terminate upon completion of shop repairs performed by Siemens Westinghouse following the eighth scheduled outage of the applicable combustion turbine or 10 years from initial synchronization of the applicable combustion turbine, whichever occurs first.

Water Supply - The Company has entered into a contract with the City of Lebanon Authority for the purchase of 50 percent of the water use of the Company. The contract has a term of 25 years and commenced on March 9, 1998. Costs associated with the use of water by the Company under this contract are based on gallons used per day at prices specified under the contract terms. The Company has also entered into an agreement with Pennsy Supply, Inc., which will provide the remaining 50 percent of the water use of the Company.

Interconnection Agreement - The Company has entered into an interconnection agreement with GPU Energy to transmit the electricity generated by the Company to the transmission grid so that it may be sold as prescribed under the Company’s power purchase agreement. The agreement is in effect for the life of the Facility; however it may be terminated by mutual consent of both GPU Energy and the Company under certain circumstances as

detailed in the agreement. Costs associated with the agreement are based on electricity transmitted via GPU Energy at a variable price, and the tariff imposed by the Pennsylvania/New Jersey/Maryland power pool market, as charged by GPU Energy to the Company, which is comprised of both service cost and asset recovery cost, as determined by GPU Energy and approved by the Federal Energy Regulatory Commission.

Letters of Credit

AES Ironwood, Inc. had a letter of credit agreement in relation to its equity subscription agreement. The initial amount of the bond under this agreement was $50.1 million. On July 10, 2002, the surety bond was replaced by an acceptable letter of credit in the amount of $9.1 million. The need for the letter of credit ceased with the granting of final acceptance on March 12, 2003. The collateral agent released the Company of this requirement on March 21, 2003.

To satisfy the requirements of the power purchase agreement, on September 20, 2002, Citibank, N.A, issued a $35 million Irrevocable Letter of Credit (“the Letter of Credit”) on behalf of Williams Energy. The Letter of Credit does not alter, modify, amend or nullify the guaranty issued by The Williams Companies, Inc. in favor of the Company and is considered to be additional security to the security amounts provided by such guaranty. The Letter of Credit became effective on September 20, 2002 and shall expire upon the close of business on July 10, 2003; except that the Letter of Credit will be automatically extended without amendment for successive one year periods from the present or any future expiration date hereof, unless Citibank, N.A. provides written notice of its election not to renew the Letter of Credit at least thirty days prior to any such expiration date. Additionally, in a Letter Agreement dated September 20, 2002, Williams Energy agreed to (a) provide Eligible Credit Support prior to the stated expiration date of the Letter of Credit and (b) replenish any portion of the Letter of Credit or Eligible Credit Support that is drawn, reduced, cashed or redeemed, at any time, with an equal amount of Eligible Credit Support. Within twenty days prior to the expiration of the Letter of Credit and/or any expiration date of eligible credit support posted by Williams Energy, Williams Energy shall post eligible credit support to the Company in place of the Letter of Credit and/or any expiring eligible credit support unless The Williams Companies, Inc. regains and maintains its investment grade status, in which case the Letter of Credit or eligible credit support shall automatically terminate and no additional eligible credit support shall be required. The Company and Williams Energy acknowledge that the posting of such Letter of Credit and Williams Energy’s agreement and performance of the requirements of (a) and (b) as set forth in the immediately preceding sentence shall be in full satisfaction of Williams Energy’s obligations contained in Section 19.3 of the power purchase agreement to provide replacement security due to the downgrade of The Williams Companies, Inc. falling below investment grade status.

RECENT AND 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 this statement, the asset retirement obligation is recorded at fair value in the period in which it is incurred by increasing the carrying amount of the related long lived asset. The liability is accreted to its present value in each subsequent period and the capitalized cost is depreciated over the useful life of the related asset. The Company adopted

the standard on January 1, 2003 and has determined that the effects of the adoption of SFAS No. 143 on our financial position and results of operations were not material.

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. The adoption of this standard by the Company did not have any immediate material effect on the Company’s financial statements.

In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The amendments set forth in SFAS No. 149 require that contracts with comparable characteristics be accounted for similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative according to SFAS No. 133 and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. In addition, the statement amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", and amends certain other existing pronouncements.

The requirements of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.  The provisions of the statement that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The Company is currently evaluating the impacts, if any, of SFAS No. 149 on its financial statements.

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 adoption of this interpretation by the Company did not have any immediate material effect on the Company’s financial statements.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. For variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003, application begins in the first fiscal year or interim period

beginning after June 15, 2003. The Company does not expect that implementation of this statement and interpretations will have a significant impact on their consolidated financial statements.