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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003

[_] 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 333-91391

AES IRONWOOD, L.L.C.
(Exact name of registrant as specified in its charter)

305 PRESCOTT ROAD, LEBANON, PA 17042
(717) 228-1328
(Registrant’s address of principal executive offices,)
(zip code and telephone number, including area code)

          Registrant is a wholly owned subsidiary of The AES Corporation. Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is filing this Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.

          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 registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [_] No [X]

AES IRONWOOD, L.L.C.
TABLE OF CONTENTS

Page No.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

AES IRONWOOD, L.L.C.
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Condensed Statements of Operations,
Three and Six Months Ended June 30, 2003 and 2002
(UNAUDITED)
(dollars in thousands)

See notes to condensed financial statements.

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AES IRONWOOD, L.L.C.
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Condensed Balance Sheets
as of June 30, 2003 and December 31, 2002
(UNAUDITED)
(dollars in thousands)

See notes to condensed financial statements.

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AES IRONWOOD, L.L.C.
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Condensed Statement of Changes in Member’s Capital
Period From December 31, 2002
Through June 30, 2003
(UNAUDITED)
(dollars in thousands)

See notes to condensed financial statements.

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AES IRONWOOD, L.L.C.
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Condensed Statements of Cash Flows,
Six months ended June 30, 2003 and 2002
(UNAUDITED)
(dollars in thousands)

See notes to condensed financial statements.

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AES IRONWOOD, L.L.C.
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Notes to Condensed Financial Statements

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Cautionary Note Regarding Forward-Looking Statements

Some of the statements in this Form 10-Q, as well as statements made by AES Ironwood, L.L.C. (the “Company”) 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. The Company has based these forward-looking statements on its current expectations and projections about future events based upon its knowledge of facts as of the date of this Form 10-Q and its assumptions about future events.

All statements other than of historical facts included herein, including those regarding market trends, the Company’s financial position, business strategy, projected plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors outside of the Company’s control that may cause the actual results or performance of the Company 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:

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The Company has no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

General

The Company was formed on October 30, 1998 to develop, construct, own, operate and maintain its Facility. The Company was dormant until June 25, 1999, the date of the sale of its senior secured bonds. The Company obtained $308.5 million of project financing from the sale of its senior secured bonds. The total cost of the construction of the Company’s Facility was approximately $330 million, which was financed by the proceeds from the sale of the senior secured bonds and the equity contributions described below. The Facility granted provisional acceptance on December 27, 2001 and was declared commercially available on December 28, 2001. On March 12, 2003 the Facility granted final acceptance.

Energy Revenues

The Company generates energy revenues under its power purchase agreement with Williams Energy. During the 20-year term of the agreement, the Company also 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.

Upon its expiration, or in the event that the power purchase agreement is terminated prior to its 20- year term, the Company 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. There can be no assurances as to whether such efforts would be successful.

Operating Expenses

Under an agreement with AES Prescott, L.L.C., we are required to reimburse all operator costs on a monthly basis. Operator costs generally consist of all direct costs and overhead. Additionally, a monthly operator fee of approximately $400,000, subject to annual adjustment, is payable on each bond payment date.

Performance Guarantees

     Electrical Output

If the average net electrical output of the Facility at provisional acceptance or interim acceptance, whichever was the earlier to occur, was less than the natural gas-based electrical output guarantee, then Siemens Westinghouse was to pay the Company, 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 was less than the natural gas-based electrical output guarantee. During performance testing, output was calculated to be 37,854 kilowatts less than the natural gas-based electrical output guarantee. Accordingly, the daily charge for this amount was calculated at $8,328 per day.

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At the conclusion of the April 2002 outage, Siemens Westinghouse retested the Facility and achieved no improvement in electrical output. The daily charge for electrical output shortfall remained at $8,328 per day through June 30, 2002.

Output was improved in July 2002 to 3,195 kilowatts less than the natural gas-based electrical output guarantee and accordingly the interim rebate was lowered to $645 per day on July 4, 2002, the day the Company began receiving higher capacity payments from Williams Energy.

Under the terms of the construction agreement, various provisions relating to electrical output performance provided either for a bonus to be paid by us to Siemens Westinghouse or for Siemens Westinghouse to pay us a rebate based on the outcome of those performance tests. As a result of our settlement agreement, however, Siemens Westinghouse is deemed to have met but not exceeded the performance guarantees and no bonus was paid by us and no rebate was paid by Siemens Westinghouse. 

     Heat Rate Guarantees

If the average net heat rate of the Facility at provisional acceptance and/or interim acceptance, if having occurred before final acceptance, exceeded the natural gas-based heat rate guarantee, then Siemens Westinghouse was to pay us, as a rebate and not as liquidated damages, for each day during the interim period, an amount equal to $44 per day for each BTU/KwH by which the measured net heat rate is greater than the natural gas-based heat rate guarantee. During performance testing heat rate was calculated to be 162 BTU/KwH less than the natural gas-based natural heat rate guarantee. The daily charge for this amount had been calculated at $7,116 per day.

At the conclusion of the April 2002 outage Siemens Westinghouse retested the Facility and achieved an improvement in heat rate. During performance testing heat rate was calculated to be 71 BTU/KwH less than the natural gas-based natural heat rate guarantee. The daily charge for this amount has been calculated at $3,118 per day. The improvement in heat rate commenced on May 23, 2002, and the lesser amount was invoiced to Siemens Westinghouse from that date until February 28, 2003.

For the six month period ended June 30, 2003, we have invoiced Siemens Westinghouse approximately $222 thousand in electrical output and heat rate rebates. The amounts we invoiced Siemens Westinghouse for the months of January 2003 and February 2003 have been paid by Siemens Westinghouse and are included in other income. The electrical output and heat rate rebates have ceased pursuant to the terms of final acceptance granted in Agreement Change Order No. 71, dated March 12, 2003. At that time plant performance guarantees were deemed to have been met.

Under the terms of the construction agreement, various provisions relating to heat performance provided either for a bonus to be paid by us to Siemens Westinghouse or for Siemens Westinghouse to pay us a rebate based on the outcome of those performance tests. As a result of our settlement agreement, however, Siemens Westinghouse was deemed to have met but not exceeded the performance guarantees and no bonus was paid by us and no rebate was paid by Siemens Westinghouse.

Recent and New Accounting Pronouncements

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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 SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” 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 consolidated 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.

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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 their interpretations will have a significant impact on their consolidated financial statements.

Equity Contributions

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 June 30, 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. On March 12, 2003, final acceptance of the plant was granted to Siemens Westinghouse so AES Ironwood, Inc. is no longer required to contribute funds to the Company.

Results of Operations

For the Three Months Ended June 30, 2003 and 2002

Operating revenues for the three months ended June 30, 2003 were approximately $12.56 million compared to $12.81 million for the comparable period of the prior calendar year. This amount consists of capacity payments of approximately $4.0 million per month in 2003 and $3.93 million per month in 2002. The remainder consists of fuel conversion and heat rate bonus payments. The Company was dispatched for a greater number of days in 2002 than 2003, and higher payments were received for fuel conversion and heat rate bonus in 2002 than 2003.

Depreciation for the three months ended June 30, 2003 was approximately $2.70 million compared to $2.50 million for the comparable period of the prior calendar year. Depreciation expense has increased due to additional capital expenditures.

Management services and fees for the three months ended June 30, 2003 were approximately $1.51 million compared to $1.97 million for the comparable period of the prior calendar year. Management services and fees are costs incurred by AES Prescott, L.L.C. and reimbursed by the Company. These fees are lower in 2003 primarily due to cost cutting efforts to reduce payroll and administrative costs.

Operating fees for the three months ended June 30, 2003 were approximately $1.28 million compared to $1.26 million for the comparable period of the prior calendar year. Operating fees are slightly higher during the current year as these fees are adjusted annually for inflation. The Company entered into a Development and Operations Services Agreement, dated as of June 1, 1999, with AES Prescott by which AES Prescott provided development and construction management services and is providing operating and maintenance services for our Facility for a period of 27 years.

Other operating costs for the three months ended June 30, 2003 were $1.20 million, compared with $933 thousand for the comparable period of the prior calendar year. Other operating costs include, but are not limited to, fuel paid for facility testing, non-dispatch payments, heat rate penalty and

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emissions allowances. The increase in 2003 is primarily due to higher costs paid for heat rate and non- dispatch penalties.

General and administrative costs for the three months ended June 30, 2003 were $1.33 million compared to $600 thousand for the comparable period of the prior calendar year. The increase in 2003 is due to an increase in operating insurance for the current year.

For the three months ended June 30, 2003, other income was $6 thousand compared to $1.30 million for the comparable period of the prior calendar year. The decrease in 2003 is due to higher heat rate and interim rebates invoiced to Siemens Westinghouse in the second quarter of 2002. The rebates ended in March 2003 with the granting of final acceptance (See Performance Guarantees above).

For the three months ended June 30, 2003, interest income earned on invested funds was $33 thousand compared to $19 thousand for the comparable period of the prior calendar year. The increase is due to higher average balances in interest earning accounts.

For the three months ended June 30, 2003, interest costs incurred on the bond proceeds was $6.75 million, compared to $6.81 million for the comparable period of the prior calendar year, and is included as interest expense in the statement of operations. The decrease in 2003 is due to the amortization of bond principal resulting in a lower interest calculation.

As a result of the foregoing, the Company had a net loss of $2.19 million for the three months ended June 30, 2003 compared to a net income of $47 thousand for the comparable period of the prior calendar year.

For the Six Months Ended June 30, 2003 and 2002

Operating revenues for the six months ended June 30, 2003 were approximately $24.98 million compared to $25.34 million for the comparable period of the prior calendar year. This amount consists of capacity payments of approximately $4.0 million per month in 2003 and $3.93 million per month in 2002. The remainder consists of fuel conversion and heat rate bonus payments. The Company was dispatched more in 2002 than 2003, and higher payments were received for fuel conversion and heat rate bonus in 2002 than 2003.

Depreciation for the six months ended June 30, 2003 was approximately $5.32 million compared to $4.96 million for the comparable period of the prior calendar year. Depreciation expense has increased due to additional capital expenditures.

Management services and fees for the six months ended June 30, 2003 were approximately $3.23 million compared to $3.75 million for the comparable period of the prior calendar year. Management services and fees are costs incurred by AES Prescott, L.L.C. and reimbursed by the Company. These fees are lower in 2003 primarily due to cost cutting efforts to reduce payroll and administrative costs.

Operating fees for the six months ended June 30, 2003 were approximately $2.56 million compared to $2.52 million for the comparable period of the prior calendar year. Operating fees are slightly higher during the current year as these fees are adjusted annually for inflation. The Company entered into a Development and Operations Services Agreement, dated as of June 1, 1999, with AES

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Prescott by which AES Prescott provided development and construction management services and is providing operating and maintenance services for our Facility for a period of 27 years.

Other operating costs for the six months ended June 30, 2003 were $2.28 million, compared with $1.24 million for the comparable period of the prior calendar year. Other operating costs include, but are not limited to, fuel paid for facility testing, non-dispatch payments, heat rate penalty and emissions allowances. The increase in 2003 is primarily due to fuel used in February’s winter capability test and higher costs paid for heat rate and non- dispatch penalties.

General and administrative costs for the six months ended June 30, 2003 were $2.44 million compared to $973 thousand for the comparable period of the prior calendar year. The increase in 2003 is due to an increase in operating insurance for the current year.

For the six months ended June 30, 2003, other income was $239 thousand compared to $2.75 million for the comparable period of the prior calendar year. The decrease in 2003 is due to higher heat rate and interim rebates invoiced to Siemens Westinghouse in the first and second quarter of 2002. The rebates ended in March 2003 with the granting of final acceptance (See Performance Guarantees above).

For the six months ended June 30, 2003, interest income earned on invested funds was $54 thousand compared to $52 thousand for the comparable period of the prior calendar year. The increase is due to higher average balances in interest earning accounts.

For the six months ended June 30, 2003, interest costs incurred on the bond proceeds was $13.53 million compared to $13.64 million for the comparable period of the prior calendar year and is included as interest expense in the statement of operations. The decrease in 2003 is due to the amortization of bond principal resulting in a lower interest calculation.

As a result of the foregoing, the Company had a net loss of $4.07 million for the six months ended June 30, 2003 compared to a net income of $1.07 million for the comparable period of the prior calendar year.

Liquidity and Capital Resources

The minimum cash flow from Williams Energy under the power purchase agreement is approximately $4.0 million per month. Net operating cash outflows are approximately $1.3 million per month. The balance left will provide for senior debt interest and principal payments. Additionally, a significant monthly expenditure is for payment of our long term service agreement with Siemens Westinghouse. This agreement provides that we pay approximately $400 per gas turbine per equivalent operating hour. In the event we are not required to dispatch the facility, there is no charge. While operating at base load, the estimated monthly payment for the long term service agreement could be as much as $450,000. We believe that our cash flows are sufficient to fund our future operations and to satisfy our outstanding obligations.

We believe that cash flows from the sale of electricity under the power purchase agreement will be sufficient to pay ongoing project costs, including principal and interest on the senior secured bonds. After the power purchase agreement expires, we will depend on market sales of electricity.

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In order to provide liquidity in the event of cash flow shortfalls, the debt service reserve account contains an amount equal to the debt service reserve account required balance through cash funding, issuance of the debt service reserve letter of credit or a combination of the two.

Concentration of Credit Risk

Williams Energy currently is the Company’s sole customer for purchases of capacity, ancillary services and energy, and the 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 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 June 30, 2003, this amount was approximately $399 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 an affiliate thereof, is required to replace The Williams Companies, Inc. guaranty with an alternative security that is acceptable to the Company. 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 “B3" by Moody’s. According to published sources, this rating was increased with a developing outlook on June 4, 2003 to “B2" 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.

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 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 expired 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. On June 13, 2003, Citibank, N.A. sent notification that the letter of credit will be extended to July 12, 2004.

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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. We 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.

The Company’s dependence on 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 cash flow and financial condition and could result in a default under the senior secured bonds. 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.

Business Strategy and Outlook

The Company’s overall business strategy is to market and sell all of its net capacity, fuel conversion and ancillary services to Williams Energy during the 20-year term of the power purchase agreement. After expiration or in the event of an early termination of the power purchase agreement, the Company anticipates selling its Facility’s capacity, ancillary services and energy in the spot market or under a short or long term power purchase agreement or into the Pennsylvania/New Jersey/Maryland power pool market. The Company intends to cause its Facility to be managed, operated, and maintained in compliance with the project contracts and all applicable legal requirements.

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 our 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

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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. 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, 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. There can be no assurances as to whether such efforts would be successful.

     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 5 to 40 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 subsequent periods.

Contingencies

We are 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 believes it has earned an annual availability bonus for 2002. We invoiced Williams Energy

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approximately $1.4 million as an annual availability bonus for 2002. However, Williams Energy has disputed the amounts so we have only recognized as revenue the amounts that Williams Energy has paid, which is approximately $0.3 million.

On April 14, 2003, Williams Energy notified us that they disagree with our 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 we owe them an annual availability capacity adjustment in the amount of approximately $3.5 million. This amount has not been accrued as we believe our interpretation of the power purchase agreement and our evaluation of availability is correct. As a result of Williams Energy’s assertion, they withheld approximately $0.3 million from 2003 capacity payments in respect of previously paid availability bonus. Accordingly, this amount has been accrued as bad debt expense during the second quarter to reflect this reduction in 2002 bonus. During April 2003, Williams withheld a portion of the monthly capacity payments. On August 12, 2003, Williams Energy reimbursed a portion of the setoff amount. As of August 12, 2003, the amount of these setoffs equals approximately $275 thousand. The amount withheld is a portion of the $3.5 million Williams Energy believes is due to them with respect to the 2002 annual availability capacity adjustment. We have notified Williams Energy that the power purchase agreement does not allow setoffs of disputed amounts and no further setoffs in respect to Williams Energy’s alleged capacity adjustment should occur prior to the conclusion of the dispute resolution process. This setoff is included within the accounts receivable balance of June 30, 2003.

Williams has claimed we also owe a fuel conversion volume rebate in the amount of approximately $366 thousand. We have notified Williams Energy that the Company disputes their calculations. This amount has not been accrued.

We and Williams have entered into the arbitration process in accordance with the terms of the power purchase agreement to resolve these issues. We will continue to discuss with Williams Energy the calculation of these amounts but are unable to predict the outcome of either arbitration or these discussions and the potential impact on our ability to collect these contractual items either for the six months ended June 30, 2003 or in the future.

Commitments

Interest on the bonds is payable quarterly in arrears. Quarterly principal payments on the bonds commenced on February 28, 2002. The final maturity date for the bonds is November 30, 2025.

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Evaluation of Disclosure Controls and Procedures. Our President and our Principal Financial Officer, based on the evaluation of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, have concluded that as of June 30, 2003, our disclosure controls and procedures were effective and designed to ensure that material information relating to us and our consolidated subsidiaries, when applicable, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared.

Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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. On March 12, 2003, we entered into a settlement agreement with Siemens Westinghouse entitled Agreement Change Order No. 71 concerning final acceptance. This agreement became effective as of that date and final acceptance was granted by us as of that date.

The terms of the agreement include, but are not limited to, the following items:

We have agreed 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. These costs totaled approximately $10.7 million, and were included in accounts receivable.

We have agreed to pay approximately $156,000 in respect of an outstanding amount claimed by Siemens Westinghouse regarding an April 2002 outage to test and inspect the Facility. This amount was included in our calculation of the April outage and was recorded in accounts payable. 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 amounts relating to performance guarantees 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 financial impact from the settlement has been recorded in our financial statements as of December 31, 2002. The effect of this settlement for fiscal year 2002 was a reduction in insurance of $291,000 and a $182,000 reduction in depreciation as a result of the reduction in Facility cost.

We are having ongoing discussions with Williams Energy relating to the calculation of certain amounts under the power purchase agreement. Under the power purchase agreement, we have earned an annual availability bonus and an additional capacity payment for 2002. We have invoiced Williams Energy approximately $1.4 million as an annual availability bonus for 2002 and

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approximately $0.1 million as a capacity payment for 2002. However, Williams Energy has disputed the amounts so we have only recognized the amounts that Williams Energy has paid, which is approximately $0.3 million. Additionally, on April 14, 2003, Williams Energy notified us that they disagree with our calculated availability for 2002. Based on their interpretation of the power purchase agreement Williams Energy believes that no availability bonus is due us. Instead Williams Energy believes that we owe them an annual availability capacity adjustment in the amount of approximately $3.5 million. During April 2003 and again in July 2003, Williams has withheld an amount equal to amounts they believe are due them with respect of the annual availability capacity adjustment. The current amount of these setoffs equals approximately $1.76 million. We have notified Williams that the power purchase agreement does not allow setoffs of disputed amounts and these funds should be returned to us. Additionally, Williams Energy has determined we also owe a fuel conversion volume rebate in the amount of approximately $366 thousand. We have notified Williams Energy that we dispute their calculations. We 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 our ability to collect these contractual items either for the six months ended June 30, 2003 or in the future.

     (a) Exhibits

     (b) Reports on Form 8-K

          The Company did not file any reports on Form 8-K during the quarter ended June 30, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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