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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
o 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)
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Delaware
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54-1889658
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(State of other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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832 Red Oak Lane, Sayreville, NJ
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08872
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(Address of
principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (732) 238-1462
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Securities Registered Pursuant To Section 12(b) of
The Act: None
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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 ý No o
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,
or any amendment to this Form 10K. ý
Indicate by check mark whether the Registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
As of June 30, 2004, the last business day of the
registrant’s most recently completed second fiscal quarter, and as of March 30,
2005, 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
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-K, as well
as statements made by AES Red Oak, L.L.C. (the “Company”, “we”, “us” or “our”) 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-K 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 of the facility, 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 its 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:
• unexpected
problems relating to the performance of the facility,
• the
financial condition of third parties on which the Company depends, including in
particular, Williams Power Company, Inc., (“Williams Energy”), formerly Williams
Energy Marketing & Trading Company, as fuel supplier under the Power Purchase
Agreement 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,
• delays
in, or disputes over, the final completion of the Company’s facility,
• continued
performance by Williams Energy (as guaranteed by The Williams Companies, Inc.)
under the Power Purchase Agreement,
• 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 guaranty of Williams Energy’s performance
under the Power Purchase Agreement,
• our
ability to find a replacement power purchaser on favorable or reasonable terms,
if necessary,
• an
adequate merchant market after the expiration, or in the event of a
termination, of the Power Purchase Agreement,
• capital
shortfalls and access to additional capital on reasonable terms, or in the
event that the Power Purchase Agreement is terminated,
• the
possibility that Williams Energy will not request that the Company runs, or “dispatches”
the facility as provided under the Power Purchase Agreement,
• inadequate
insurance coverage,
• unexpected
expenses or lower than expected revenues,
• environmental
and regulatory compliance,
• terrorists
acts and adverse reactions to United States anti-terrorism activities, and
• additional
factors that are unknown to the Company or beyond the Company’s control.
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.
2
PART I
ITEM 1. BUSINESS
General
The Company is 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 the Company’s facility. The
Company reached provisional acceptance on August 11, 2002, risk transfer
on August 13, 2002, and took the position that the Company was
commercially available on September 1, 2002. Williams Energy disputed the September 1,
2002 commercial operation date and informed the Company that it recognized
commercial availability of the facility as of September 28, 2002. On November 4, 2003, a settlement was
reached and a commercial operation date of September 28, 2002 was agreed
upon. See Item 3 “Legal Proceedings”. Since the Company’s commercial operation
date, its sole business is the ownership, leasing and operation of the project.
Our facility was initially designed, engineered,
procured and constructed for the Company 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 the Company made a demand on the
Raytheon Company (“Raytheon”) to perform its obligations under a guarantee
which Raytheon had given the Company of WGI’s performance obligations under the
construction agreement and Raytheon became responsible for the construction of
the Company’s facility. As discussed
above, provisional acceptance has been granted and the facility has commenced
commercial operations, however, Raytheon must perform certain agreed upon
completion items in order to obtain final acceptance. Raytheon gave notice of
Final Acceptance on July 22, 2003 based on its July 8, 2003
performance test. On July 31, 2003,
the Company received a letter from the project’s independent engineer stating
that it could not support Raytheon’s claim of final acceptance and it did not
consider the July 8, 2003 performance test valid. In making this assessment, the independent
engineer cited, among other reasons, (i) modifications made to certain
equipment in performance of the July 8 performance test which would
adversely impact the operations of the plant and other pieces of equipment and (ii) Raytheon’s
failure to demonstrate compliance with guaranteed emissions limits. On August 1, 2003, the Company rejected
Raytheon’s claim of final acceptance.
This rejection was based upon Raytheon’s failure to meet the conditions
for final acceptance provided for in the Engineering, Procurement and
Construction Services Agreement (“EPC contract”). On August 7, 2003, the
Company received a response from Raytheon in which Raytheon claims that the
Company’s rejection of the final acceptance is invalid and improper. The Company and Raytheon have filed
complaints against each other. 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 the Company’s 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 the Company exercises its right to cancel the agreement after the first major
outage of the turbines. The estimated timeframe for the completion of the first
major outages is 2011.
The Company has entered into a 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 its
facility. Net capacity is the maximum amount of electricity generated by the
Company’s facility net of electricity used at its 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 the
Company 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 the Company’s 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.
3
Organizational
Structure
All of the equity interests in the Company are owned
by AES Red Oak, Inc., a wholly owned subsidiary of The AES Corporation (“AES”).
AES is a leading global power company, with 2004 sales of $9.5 billion. AES’s
generating assets include interests in 120 facilities in 27 countries totaling
approximately 44 gigawatts of capacity. Its 30,000 people are committed to
operational excellence and meeting the world’s growing power needs
Approximately 23% of
AES’s revenues come from businesses in North America, 17% from the Caribbean,
41% from South America, 11% from Europe and Africa, and 8% from Asia.
AES Red Oak, Inc. currently has no operations
outside of its activities in connection with its 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., (“AES Sayreville”) which
provides development, construction management, and operations and maintenance
services to us. AES Sayreville has no operations outside of its activities in connection
with its operations. AES Red Oak, Inc. has no assets other than its
membership interests in the Company and AES Sayreville. The AES Corporation supplies
AES Sayreville with personnel and services necessary to carry out its
obligations to us.
The Company also 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 so that portions of its project
can be designated as redevelopment areas or projects in order to provide
certain real estate tax and development benefits for its project. AES URC has
no operations outside of its activities in connection with the Company’s operations.
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:
The Company’s principal executive offices are located
at 832 Red Oak Lane, Sayreville, NJ 08872. The Company’s telephone number is (732)
238-1462.
Energy
Revenues
As mentioned above, the Company generates energy
revenues under the 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.
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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, 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. Due to current pool prices, however, the
Company would expect that even if it 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 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.
After the plant reached provisional acceptance, the
Company 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, the Company operated
the facility as a merchant plant with electric revenues sold to Williams
Energy, in its capacity as the Company’s Pennsylvania-New Jersey-Maryland (“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
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. The Company recognized merchant revenues of
approximately $.3 million, $.2 million and $11.1 million for the years ended December 31,
2004, 2003 and 2002, respectively.
Related fuel expenses were approximately $.6 million, $.9 million and
$6.9 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Competition
Under the Power Purchase Agreement, Williams Energy is
required to purchase all of the Company’s 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. As current gas market prices have been high,
Williams Energy has only dispatched the Company 21% of the time in 2004 and 14%
in 2003. Following the term of the Power Purchase Agreement, the Company anticipates
selling its facility’s net capacity, ancillary services and energy under a new Power
Purchase Agreement or into the PJM power pool market. At that time, the Company
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
The Company is a Delaware limited liability company
and has no employees other than its 6 officers. The Company’s officers receive
no compensation for the services they provide to the Company or for any
transactions between the Company and its affiliates. Under the operations
agreement, AES Sayreville has managed the development and construction of and now
operates and maintains the Company’s 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, 2004, The AES
Corporation provided 27 employees to work at its facility.
Insurance
As owner of the Company’s site and lessee and owner of
the facility, the Company maintains a comprehensive insurance program as
required under its various project contracts and the indenture governing its
senior secured bonds and underwritten by recognized insurance companies. Among
other insurance policies, the Company also maintains 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. The Company has obtained title
insurance in an amount equal to the principal amount of the bonds.
The Company, or AES Sayreville as operator, 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.
5
Permits And
Regulatory Approvals
AES Sayreville, as operator of the Company’s facility,
and the Company, as owner of its facility, must comply with numerous federal, state
and local regulatory requirements including environmental requirements in the
operation of its facility.
On November 4, 1999, the Company received a
certification from the Federal Energy Regulatory Commission (“FERC”) that the
Company is an exempt wholesale generator. Certification as an exempt wholesale
generator exempts the Company from regulation under the Public Utility Holding
Company Act of 1935. The Company will maintain this status so long as the
Company continues to make only wholesale sales of electricity, which the
Company intends to do. Prior to commercial operation, the Company filed the Power
Purchase Agreement with FERC and requested approval for the rates contained
therein. On June 22, 2001, the Company received FERC approval at those
rates. The Company 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.
On January 28, 2000, the Company received its
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 the Company’s 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 its facility to meet these requirements. The required emission standards were met upon
provisional acceptance and commercial operation and no additional modification
is currently needed.
The Company is 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 its facility have
been obtained.
Summary of
Principal Project Contracts
While the Company believes 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
The Company 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 its 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 (September 30, 2002).
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 the Company
is 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
6
“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. As a result of these extensions, the
Company 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. As a
result of the dispute over the commercial operation date, the Company 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. This issue
was resolved as part of the arbitration settlement with Williams. 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 August 2002, the Company had
received $14 million in liquidated damages from Raytheon under the construction
agreement. The Company did not receive
any liquidated damages under the construction agreement in 2003 or 2004.
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 its
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 adverse impact on the Company’s operations.
Purchase and
Sale of Capacity
During the term of the Power Purchase Agreement, the
Company 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 the Company’s facility by the Company to
combust natural gas delivered by Williams Energy in order to generate and
deliver energy or to provide ancillary services. The Company will sell and make
available to Williams Energy on an exclusive basis, and Williams Energy will
purchase and pay for, its facility’s net capacity and ability to generate
electric energy. The Company may not sell, without the consent of Williams
Energy in its sole discretion, capacity generated on the site but not from its
facility.
Fuel
Conversion and Other Services
Williams Energy must deliver or cause to be delivered
to the Company at the natural gas delivery point on an exclusive basis all quantities
of natural gas required by the Company to:
• generate
net electric energy and/or ancillary services;
• perform
start-ups;
• perform
shutdowns; and
• operate
its 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 the Company except that when the Company’s facility is
operated during any period other than a start-up, shutdown or dispatch period
title is transferred to the Company 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. The Company is 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, the Company will have the right to purchase the
gas interconnection facilities from Williams Energy, or if Williams Energy does
not own the gas interconnection
7
facilities, Williams Energy will assign to the Company
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 the Company for its 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 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 the Company’s debt service and
fixed operating and maintenance costs and to provide the Company a return on
equity. The variable operations and maintenance payment is intended to cover its
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 the Company for each successful start-up. The
Company 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, the Company purchased natural gas from Williams
Energy. Williams Energy sold the Company the natural gas at prices specified in
the Power Purchase Agreement, and the Company 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 its
facility interconnects. The Company is 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, JCP&L, which is the host utility, or FERC. The Company has not
incurred any such fine or penalty to date.
Williams Energy is entitled to an annual fuel conversion
volume rebate if its dispatch of the Company’s facility exceeds specified levels
and monthly non-dispatch payments if, under some circumstances, its 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 the 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 the Company at the
priority level described above. A separate reserve account must be maintained
by the Company and the Company’s lenders and the Company must deposit to that
account on a monthly basis, from its 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 Agreement, the
Company must, at its own cost and expense, obtain as and when required all
approvals, permits, licenses and other authorizations from governmental
authorities as may be required for the Company to operate and maintain its
facility, the interconnection facilities and protective gas apparatus and to
perform its obligations under the Power Purchase Agreement. The Company plans to obtain all additional
governmental approvals, permits, licenses and authorizations as may be required
with respect to its facility as soon as practicable.
Interconnection
and Metering Equipment
At the Company’s sole cost and expense, the Company designed,
constructed and installed and currently maintains 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 its
obligations under the Power Purchase Agreement, including all interconnection
facilities and protective gas apparatus that are located at the switchyards
and/or substations at the its facility. The Generation Facility and
Transmission Interconnection Agreement is with
8
Jersey Central Power & Light Company (“JCP&L”)
d/b/a GPU Energy (“GPU”), and is dated April 27, 1999. GPU has since been
merged with, and into, FirstEnergy, and JCP&L is now a subsidiary of
FirstEnergy. The Company’s 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 its 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 the Company’s 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 the Company’s satisfaction. PSE&G has also installed gas metering
equipment, although the Company is 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 the Company or by a third party, must be operated, maintained and
tested in accordance with accepted electrical practices, in the case of the
electric metering equipment, and in accordance with applicable industry
standards, in the case of the gas metering equipment. Except under limited
circumstances, the Company may not enter into any modification or amendment of
the interconnection agreement with JCP&L 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 JCP&L — See “Interconnection
Agreement - JCP&L’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 JCP&L 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 JCP&L requirements, the JCP&L requirements
control. The Company must operate the facility in parallel with JCP&L’s
electrical system in accordance with the interconnection agreement. When
dispatched by Williams Energy, the Company must operate its facility and each
unit thereof with automatic regulation equipment in service.
The Power Purchase Agreement acknowledges that JCP&L
has the right to require the Company to disconnect the Company’s 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 the Company’s 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 its facility by JCP&L.
The Company must use commercially reasonable efforts
to correct promptly any condition at its facility which necessitates the disconnection
of its facility from JCP&L’s electrical system or the reduction,
curtailment or interruption of electrical output of its facility.
Williams Energy has the exclusive right to use the net
electric energy and ancillary services and to schedule the operation of
the Company’s 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 its facility, applicable law, regulations and
permits, and the agreements and the manuals of PJM.
Williams Energy and the Company must perform each of its
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 the Company 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 the Company greater than the allocable
tolerance in the transporter’s tariff or (ii) the Company’s failure to
promptly notify Williams Energy of a change in the operation of the Company’s 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
9
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:
• 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;
• the
suspension of performance is of no greater scope and of no longer duration than
is reasonably required by the force majeure condition;
• the
party declaring force majeure uses all commercially reasonable efforts to
remedy its inability to perform; and
• 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 the Company any
of the payments described in the Power Purchase Agreement. If Williams Energy
declares a force majeure, however, it will continue to pay the Company 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 the Company due to an action or
inaction of JCP&L that prevents the Company 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:
• Any
reduction, curtailment or interruption of generation or operation of the
Company’s 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 JCP&L 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;
• Any
outage, whether or not due to the Company’s fault or negligence, attributable
to a defect or inadequacy in the manufacture, design or installation of its
facility that prevents, curtails, interrupts or reduces the ability of its
facility to generate net electric energy or the Company’s ability to perform its
obligations under the Power Purchase Agreement;
• 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;
• To
the extent that the claiming party’s failure to perform was caused by lack of
funds;
• 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
• 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.
10
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 the Company has 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 the
Company’s 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:
• 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;
• 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;
• the
Company sells or supplies net electric energy, ancillary services or capacity
from the Company’s facility, or agrees to do the same, to any person or entity
other than Williams Energy, without the prior approval of Williams Energy;
• our
failure for 30 consecutive days to perform regular and required maintenance,
testing or inspection of the interconnection facilities, the Company’s facility
and/or other electric equipment and facilities where the failure is material;
• 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 the Company’s 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 the Company’s continued ability
to perform its obligations under the Power Purchase Agreement;
• involuntary
bankruptcy or insolvency of either party that continues for more than 60 days;
• voluntary
bankruptcy or insolvency by either party;
• any
modifications, alterations or other changes to the Company’s facility by or on its
behalf which prevent the Company from fulfilling, or materially diminish its
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;
• there
will be outstanding for more than 60 days any unsatisfied final, non-appealable
judgment against the Company in an amount exceeding $500,000, unless the
existence of the unsatisfied judgment will not materially affect its ability to
perform its obligations under the Power Purchase Agreement; and
• The
AES Corporation will cease to own, directly or indirectly, beneficially and of
record, at least 50 percent of the equity interests in the Company, or will
cease to possess the power to direct or cause the direction of its 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 its 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
11
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.
Security
The Power Purchase Agreement required the Company to
provide $30 million of financial security for the Company’s performance and
payment obligations prior to commercial operation and $10 million of financial
security for its performance and payment obligations subsequent to the
commercial operation date. The Company may,
at any time at its 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, the Company 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 the
Company fails 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 (“S&P”):
“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, the Company is 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 the Company 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 The Williams Companies, Inc.
under the guaranty were originally capped at an amount equal to approximately
$510 million. Beginning on January 1
of the first full year after the commercial operation date, this guaranty cap
is reduced semiannually by a fixed amount which is based on the amortization of
the company’s senior secured bonds during the applicable semiannual
period. As of December 31, 2004 the
guaranty was capped at $501.4 million. Pursuant
to Section 18.3 of the Power Purchase Agreement, in the event that 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. guaranty 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, The Williams Companies, Inc.’s long
term senior unsecured debt has been rated below investment grade since 2002 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 Power Purchase Agreement 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
12
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 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.
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 elected to have the $10
million Prepayment included as part of the alternative credit support. On September 24,
2004, Williams Energy posted a letter of credit and the Company returned the
$25 million of 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 remaining $10 million
alternative credit support to Williams Energy in accordance with the terms of
the Letter Agreement as described above.
Williams Energy has notified the Company that it intends to post a
letter of credit for the remaining $10 million in June 2005. Williams
Energy will recoup the Prepayment by set-off, beginning in July 2005, of
amounts owing to the Company under the Power Purchase Agreement. As of March 30,
2005, the Company had cash balances of approximately $40.0 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 S&P 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 S&P
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) the Company may, upon reasonable advance notice to Williams
Energy, assign the Power Purchase Agreement and any of its rights, interests,
duties or obligations thereunder as collateral security to any Lender so long
as the assignee
13
agrees to be bound by all of the terms and conditions
of the Power Purchase Agreement to the same extent as the Company in the event
that such lender exercises its rights under such assignment and (iii) the
Company may assign any of its rights, duties and obligations under the Power
Purchase Agreement to any affiliate provided such affiliate assumes in writing
all of the Company’s obligations under the Power Purchase Agreement and the
guaranty of its performance as required by the Power Purchase Agreement remains
in effect.
Construction
Agreement
The Company 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
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 the Company’s facility. Under a Guaranty in its
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, the Company and Raytheon entered into the Owner/Guarantor Supplemental
Agreement pursuant to which (i) Raytheon and the Company 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 the Company by Raytheon under its guaranty
and (y) the Company’s obligations to Raytheon arising from the performance of
those obligations, (ii) Raytheon (or their designees) was designated as
the Company’s agent for purposes of administering the subcontracts and vendor
contracts assigned by WGI to us, (iii) all future payments by the Company would
be paid in accordance with the terms of the construction agreement directly to
Raytheon, and (iv) Raytheon would indemnify the Company 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 the Company 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, which it paid
in 2002. Raytheon must perform certain
agreed upon completion items in order to obtain final acceptance. See “Completion and Acceptance of the Company’s
Project – Final Acceptance”.
Raytheon
Services and Other Obligations
Raytheon must complete the Company’s 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 the
Company 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 the Company’s 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 the Company’s
personnel prior to provisional acceptance; providing the Company and its
designee with access to the site; obtaining additional necessary real estate
rights; cleaning-up
14
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 the Company on August 11, 2002.
Raytheon must perform certain agreed upon completion items in order to
obtain final acceptance. See “Completion
and Acceptance of the Company’s Project – Final Acceptance”.
Construction
and Start-Up
Raytheon was required to 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 the Company’s project schedule and is obligated to cause:
• each
construction progress milestone to be achieved on or prior to the applicable
construction progress milestone date; and
• final
acceptance of the Company’s facility on or before the guaranteed final
acceptance date. See “Completion and Acceptance of the Company’s Project –
Final Acceptance “. Raytheon must perform
the services so that its 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, including base scope
changes through the date of the construction agreement, was $295.7 million and
commencing on the construction commencement date was paid in installments in
accordance with the payment and milestone schedule. The contract was adjusted as a result of scope changes. The prepayment funds were backed by a
prepayment letter of credit in the Company’s 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, the
Company 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, Raytheon was
entitled to post a letter of credit in the amount of the then current
retainage. On March 4, 2002, Raytheon provided the Company 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 the Company 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 the Company and the Company has paid Raytheon
the corresponding amount of this retainage.
As of December 31, 2003, Raytheon had provided a letter of credit
of approximately $30.8 million. On August 26,
2004, the Company drew down approximately $30.3 million under a letter of
credit posted by Raytheon pursuant to the terms of the EPC Agreement. Prior to
this date, the Company had drawn $0.5 million on this letter of credit. See “Completion and Acceptance of the Company’s
Project – Final Acceptance.”
15
The Company’s
Services
The Company’s responsibilities include: designating a
representative for the Company’s 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 the Company’s
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 the Company fails to meet any of the Company’s 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 the Company’s project schedule, and, as
appropriate, the other provisions of the construction agreement that may be
affected thereby, will be made by agreement between the Company and Raytheon.
Completion and
Acceptance of the Company’s 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 the Company notice of the
performance tests, the Company 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 the Company’s 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 had been paying the Company interim rebates
until their notice of final acceptance date of July 22, 2003, but the
Company contends that these amounts should continue to be paid until the final
acceptance date, which the Company contends has not yet occurred. Based on the
Company’s interpretation of the contract, the Company expects that 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
the Company a final lump-sum payment which will be based on the amount of the
deficiency. Raytheon disputes the Company’s position since they contend that
the final acceptance date has already occurred. See “Final Acceptance”.
Provisional
Acceptance
Provisional acceptance was achieved on August 11,
2002 and risk transfer occurred on August 13, 2002 when:
• Raytheon
caused a completed performance test in which the Company’s 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
• our
facility achieved the requirements of mechanical completion.
The independent engineer and the Company were satisfied
that the provisional acceptance requirements had been met and delivered to
Raytheon a provisional acceptance certificate on August 11, 2002. The Company took possession and control of
the Company’s facility and the Company is now solely responsible for the
operation and maintenance of the facility although Raytheon continues to have reasonable
access to its facility to complete the services.
Final
Acceptance
Final acceptance will be achieved when:
16
• Raytheon
has caused a completed performance test in accordance with the construction
agreement to be concluded in which the Company’s 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;
• our
facility has achieved, and continues to satisfy the requirements for the
achievement of, mechanical completion;
• the
reliability guarantee has been achieved under the construction agreement; and
• 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 the Company’s 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.
At any time after provisional acceptance of the
Company’s 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 the Company 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 the Company’s 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 the Company’s 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) the
Company’s facility has achieved provisional acceptance and (ii) the
reliability guarantee has been achieved, then final acceptance of its facility
will be deemed to occur on 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 the
Company entered into a letter agreement with Raytheon pursuant to which the
Company agreed to extend the guaranteed final acceptance date to June 30,
2003. Raytheon gave notice of Final
Acceptance on July 22, 2003 based on its July 8, 2003 performance
test. On July 31, 2003, the Company
received a letter from the project’s independent engineer stating that it could
not support Raytheon’s claim of final acceptance and it did not consider the July 8,
2003 performance test valid. In making
this assessment, the independent engineer cited, among other reasons, (i) modifications
made to certain equipment in performance of the July 8 performance test
which would adversely impact the operations of the plant and other pieces of
equipment and (ii) Raytheon’s failure to demonstrate compliance with
guaranteed emissions limits. On August 1,
2003, the Company rejected Raytheon’s claim of final acceptance. This rejection was based upon Raytheon’s
failure to meet the conditions for final acceptance provided for in the EPC
contract. On August 7, 2003, the Company received a response from Raytheon
in which Raytheon claims that the Company’s rejection of the final acceptance
is invalid and improper.
On August 26, 2004, the Company drew down
approximately $30.3 million under a letter of credit posted by Raytheon
pursuant to the terms of the EPC Agreement. Prior to this date, the Company had
drawn $544,000 on this letter of credit. The Company believes that Raytheon
substantially breached the EPC Agreement, due, among other things, to the facility’s
failure to achieve compliance with certain performance tests, and Raytheon’s
failure to complete other services under the EPC Agreement and certain
amendments thereto, including a Settlement Agreement dated August 6, 2002,
that purported to resolve disputes over whether Raytheon had achieved
Mechanical Completion and Provisional Acceptance. As a result, the Company
claims that Raytheon’s breaches have caused damages in excess of the amount of
the letter of credit. Raytheon disputes these claims and has failed and refused
to pay costs and damages to the Company despite the Company’s demands for such
payment.
17
On August 27, 2004, Raytheon filed a construction
lien claim for $30,963,662 in Middlesex County against the real property and
improvements owned by the Company under the New Jersey Construction Lien
Law. Among other things, Raytheon claims therein that the draw of the
Letter of Credit represents a debt to Raytheon owed by the Company.
On October 28, 2004, the Company received a
complaint filed by Raytheon in the State of New York. In the complaint,
Raytheon is seeking to recover $30,302,269, which represents the amount Red Oak
drew down on the letter of credit on August 26, 2004, attorneys’ fees and
costs, and also to recover up to $110 million of net expense Raytheon claims to
have incurred in good faith under the governing guaranty and construction agreements. The Company filed an answer and counterclaim
on December 13, 2004, in which it denied liability to Raytheon, asserted
various defenses and countersued Raytheon for breach of the EPC Agreement and
Settlement Agreement, breach of express warranties under the EPC Agreement, and
fraudulent misrepresentation and concealment.
The Company claimed damages of not less than $140 million and attorneys’
fees and costs to the extent allowable.
Raytheon moved to dismiss the Company’s fraudulent misrepresentation and
concealment claim and to limit the Company’s damages on January 14,
2005. The Company filed its opposition
to the motion to dismiss and also filed an amended counterclaim on February 18,
2005. Thereafter, Raytheon agreed to withdraw its motion to dismiss. On March 4,
2005, Raytheon filed a motion for summary judgment that seeks the return of
$16,311,711 of the Letter of Credit draw. The Company has not yet filed
its opposition to the motion, and Raytheon has not yet filed an answer to the
amended counterclaim. The Company has recorded the $30.3 million as a current
liability, but has not accrued any additional amounts with respect to Raytheon’s
claims. The Company believes it has meritorious defenses to the claims
asserted by Raytheon against it and intends to defend the lawsuit and pursue
its counterclaims vigorously.
Project
Completion
Project completion will be achieved under the
construction agreement when:
• Final
acceptance of the Company’s facility will have occurred and the performance guarantees
with respect to its 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 the Company will have elected final
acceptance);
• The
reliability guarantee will have been achieved;
• Raytheon
will have demonstrated during the completed performance test that the operation
of the Company’s facility does not exceed the guaranteed emissions limits;
• The
requirements for achieving mechanical completion of the Company’s facility will
continue to be met;
• The
punch list items will have been completed in accordance with the construction
agreement; and
• 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 the Company a notice of project completion. If the
Company is satisfied that the final acceptance requirements have been met, the
Company will deliver to Raytheon a project completion certificate. If reasonable
cause exists for doing so, the Company will notify Raytheon in writing that
project completion has not been achieved, stating the reasons therefore. If the
Company’s 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 the Company 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 the Company’s facility. If
Raytheon does not achieve its project completion on or before the Company’s project
completion deadline or if the Company determines that Raytheon is not proceeding
with all due diligence to complete the services in order to achieve project
completion by the deadline, the Company may retain another contractor to
complete the work at contractor’s expense.
18
As a result of the Company’s ongoing disagreement with
Raytheon regarding final acceptance, project completion has not yet occurred.
Price Rebate
for Failure to Meet Guarantees
Completion Dates
Raytheon guaranteed that (i) provisional
acceptance or final acceptance of the Company’s facility will be achieved on or
before the guaranteed provisional acceptance date and (ii) final
acceptance of the Company’s facility will be achieved on or before the
guaranteed final acceptance date.
If neither provisional acceptance nor final acceptance
of the Company’s facility occurred by the date that is 50 days after the guaranteed
provisional acceptance date, Raytheon was obligated to pay the Company $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 the Company scheduled late completion payments beginning on April 6,
2002 and ending on August 10, 2002 (the day prior to the provisional
acceptance date). A total of $14 million
in liquidated damages was received in 2002, and no amounts were received in 2003
or 2004.
Pursuant to the construction agreement, if neither
provisional acceptance nor final acceptance of the Company’s 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 the Company and the
independent engineer a plan to accelerate the performance of the services as
necessary in order to achieve final acceptance of the Company’s facility by the
guaranteed final acceptance date. Raytheon submitted the required plan which
was subsequently approved by the Company and the independent engineer.
Performance
Guarantees
Electrical Output
Under the construction contract, if the average net
electrical output of the Company’s 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, the Company’s output was calculated to be
13,370 kilowatts less than the electrical output guarantee. Accordingly, the Company’s daily charge for
this amount has been calculated at $2,941.40 per day. Raytheon had been paying
the Company this amount until their notice of final acceptance date of July 22,
2003, but the Company is disputing this claim of final acceptance and contends that
these amounts should continue to be paid until the final acceptance date. See “Final
Acceptance”.
Upon final acceptance, if the average net electrical
output of the Company’s 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 the Company’s 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 the
Company’s 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.
19
As of December 31, 2004, Raytheon owed
approximately $65,000 in rebates that were invoiced in 2003. This amount is reflected in accounts
receivable at December 31, 2004. The
Company did not invoice interim rebates in 2004, pending resolution of the
Final Acceptance date with Raytheon.
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
the Company’s 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 the Company 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:
• all
machinery, equipment, materials, systems, supplies and other items comprising
the Company’s 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;
• it
will perform all of its design, construction, engineering and other services in
accordance with the construction agreement;
• 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
• 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 the Company notifies 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 the Company has made all payments then due to Raytheon,
title to the Company’s facility and all work, materials, supplies and equipment
will pass to the Company 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.
20
Upon notification from the Company no later than 30
days after the expiration of the applicable warranty period of any defects or deficiencies
in the Company’s project or any component thereof, the Company will, subject to
the provisions of the construction agreement, make the Company’s 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:
• the
non-performing party gives the other party prompt notice describing the
particulars of the occurrence;
• the
suspension of performance is of no greater scope and of no longer duration than
is reasonably required by the force majeure event;
• the
non-performing party exercises all reasonable efforts to mitigate or limit
damages to the other party;
• 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
• 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
The Company 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, the
Company’s 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 the Company or its 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 the Company a scope change order notice at Raytheon’s expense. If
the Company desires to make a scope change, in response to a scope change order
notice or otherwise, the Company will submit a scope change order request to
Raytheon. Raytheon will promptly review the scope change order request and
notify the Company 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
21
progress milestone dates, the payment and milestone
schedule, the Company’s 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, the Company’s 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 the Company’s project schedule will
be made by agreement of the Company 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:
• 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
• to
the extent that the delay(s) are, in the aggregate, more than 60 days, Raytheon
will be reimbursed by the Company 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 the Company 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 the Company’s execution of the corresponding scope change order.
Hazardous
Materials
If hazardous materials were not identified in an
environmental site assessment report delivered by the Company 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.
Risk of Loss
Since the risk transfer date with respect to the
Company’s facility, the Company bear all risk of loss and full responsibility
for repair, replacement or reconstruction with respect to any loss, damage or
destruction to its facility.
Termination
Termination for the
Company’s Convenience
The Company may for its 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. The Company 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.
22
Termination by
Raytheon
If the Company fails 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 the Company’s project
schedule, and, as appropriate, the other provisions of the construction agreement
that may be affected thereby, will be made by agreement between the Company and
Raytheon. If the Company has 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 the
Company that Raytheon desires to terminate the construction agreement. Unless the
Company orders 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 the Company for the Company’s 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
• Upon
any termination, the Company 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 the
Company’s option elect to have itself, or its designee, which may include any
other affiliate or any third-party purchaser, (i) assume responsibility
for and take title to and possession of the Company’s 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 the Company’s
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 the Company which are materially necessary to the timely completion
of the Company’s project, Raytheon will use all reasonable efforts to enable the
Company, or the Company’s designee, to succeed to Raytheon’s interests
thereunder.
• If
any termination occurs, the Company may, without prejudice to any other right
or remedy it may have, at its option, finish the services by whatever method the
Company may deem expedient.
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 the Company 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
23
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.
The Company’s Rights
and Remedies
If Raytheon is in default of its obligations, the
Company will have any or all of the following rights and remedies, in addition
to any other rights and remedies that may be available to the Company under the
construction agreement or at law or in equity, and Raytheon will have the
following obligations:
• The
Company may, without prejudice to any other right or remedy the Company 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, the
Company’s 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.
• If
requested by us, Raytheon must withdraw from the site, must assign to the
Company such of contractor’s subcontracts, to the extent permitted therein, as the
Company 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 the Company may direct, and we, without
incurring any liability to Raytheon, other than the obligation to return to
Raytheon at the completion of the Company’s project the materials that are not
consumed or incorporated into the Company’s 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
the Company deems 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 the
Company may, without 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 the Company’s project or a
substantial portion of its project so long as such assignee has financial and
operational capabilities that are either substantially similar to the Company’s
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
The Company has entered into the Maintenance Program
Parts, Shop Repairs and Scheduled Outage Technical Field Assistance (“TFA”) Services
Contract (the “Maintenance Services Agreement”), dated as of December 8,
1999, 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 fees assessed by Siemens Westinghouse
will be based on the number of Equivalent Base Load Hours (“EBH”) or Equivalent
Starts (“ES”), accumulated by the applicable Combustion Turbine as adjusted for
inflation. The Company has received approximately $11.0 million in rotable
spare parts under this agreement. This
amount is
24
recorded as Spare Parts Inventory, under Property,
Plant and Equipment, and the remaining amount owed as current and long-term
liabilities in the accompanying balance sheets.
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 the Company exercises
its right to terminate the agreement after the first major outage of the turbines.
The estimated timeframe for the completion of the first major outages is 2011.
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:
• deliver
the type and quantity of new program parts for installation of the combustion
turbine;
• repair/refurbish
program parts and equipment for the combustion turbine;
• provide
miscellaneous hardware;
• provide
the Company with material safety data sheets for all hazardous materials
Siemens Westinghouse intends to bring/use on the site;
• provide
the services of a maintenance program engineer to manage the combustion turbine
maintenance program;
• provide
technical field assistance, or TFA Services, which involves advice and
consultation for the disassembly, inspection and assembly of various equipment;
and
• remove
and reinstall insulation as required to complete inspections.
The Company is responsible for, among other things:
• storing
and maintaining parts, materials and tools to be used in or on the combustion
turbine;
• maintaining
and operating the combustion turbine consistently with the warranty conditions;
• ensuring
that the Company’s operator and maintenance personnel are properly trained;
• transporting
program parts in need of repair/refurbishing; and
• providing
Siemens Westinghouse, on a monthly basis, with the number of equivalent starts
and the number of equivalent base hours incurred by each combustion turbine.
The Company and Siemens Westinghouse will continue to jointly
develop the scheduled outage plan. The scheduled outage plan will be consistent
with the terms and conditions of the Power Purchase Agreement.
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
25
or refurbishment associated with any program part. If the
Company disputes Siemens Westinghouse’s decision, the Company 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 EBH’s and ES’s. The price of the
replacement part will be adjusted for inflation. If the Company disputes
Siemens Westinghouse’s decision, the Company may seek to resolve the dispute in
accordance with the dispute resolution procedures discussed below.
Contract Price
and Payment Terms
Siemens Westinghouse will invoice the Company monthly
and payments are then due within 25 days. The fees assessed by Siemens Westinghouse
will be based on the number of EBH’s or ES’s 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 EBH’s or ES’s; or (iv) the failure of a
service, performed by Siemens Westinghouse, the Company 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. The Company 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 EBH’s 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. The Company 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, the Company 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 the Company 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 the Company from Siemens
Westinghouse will constitute Siemens Westinghouse’s sole liability and the
Company’s exclusive remedies for unscheduled outages whether its 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, the Company may hire another qualified
person, at its cost, to perform the work. If the hired party proceeds to
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, the Company 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’s/year and 250
ES/ year by using natural gas and water. Should the actual operations differ
from these operating parameters which
26
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 the Company 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 the Company 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, the Company
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) the Company’s receipt, handling, storage, operation
and maintenance of the Company’s 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) the Company’s 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
The Company 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
failure or (b) remedy the failure within 45 days after Siemens
Westinghouse receives written notice of the failure; (iii) the Company terminates
the construction agreement due to Raytheon’s default thereunder or due to the
Company’s inability to obtain construction financing or environmental operating
permits; or (iv) Raytheon terminates the construction agreement for any
reason other than the Company’s default thereunder. Notwithstanding the
foregoing, the Company 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) the Company terminates the
construction agreement for reasons other than (a) the default of Raytheon
and (b) the Company’s inability to obtain permits for the Company’s project
or (ii) Raytheon terminates the construction agreement for the Company’s default
thereunder.
27
If such termination occurs, Siemens Westinghouse will discontinue
any work or services being performed and continue to protect the Company’s property.
Siemens Westinghouse will transfer title to the Company and deliver any new
program parts and miscellaneous hardware already purchased by the Company. The
Company will pay Siemens Westinghouse those amounts owed at the time of
termination.
Siemens Westinghouse may also terminate the maintenance
services agreement if: (i) the Company fails to make payments or (ii) specific
bankruptcy events affecting the Company occur. Siemens Westinghouse cannot
terminate the maintenance services agreement if the Company pays outstanding
amounts due within 90 days. Upon termination, Siemens Westinghouse will stop
all work, place no additional orders, protect the Company’s property and
deliver the property to the Company upon the Company’s 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 the Company 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 the Company’s customers.
The Company agrees 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. The Company further agrees
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. The Company further agrees 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.
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, the Company,
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.
28
Environmental
Compliance
Siemens Westinghouse will indemnify the Company from
any fines, penalties, expense, loss or liability, including the costs of
clean-up, incurred by the Company 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.
The Company will indemnify Siemens Westinghouse from
any fines, penalties, expense, loss or liability incurred by Siemens Westinghouse
as a result of the Company’s failure to meet its obligations under the maintenance
services agreement. The Company 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 the Company’s combustion
turbines, Siemens Westinghouse will, within a reasonable time of becoming aware
of the fleetwide issues, notify the Company 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
The Company has entered into a Generation Facility
Transmission Interconnection Agreement, dated as of April 27, 1999 with JCP&L,
for the installation, operation and maintenance of the facilities necessary to
interconnect the Company’s facility to JCP&L’s transmission system. Under
the interconnection agreement, the Company and JCP&L constructed, own,
operate and maintain the interconnection facilities. The Company is responsible
for all of the costs of construction, operation and maintenance of the interconnection
facilities, including those owned by JCP&L. 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. 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 had been
completed as required under the Power Purchase Agreement.
Company
Market-Based Tariff Petition
FERC approval of the Company’s market-based tariff
petition was received on June 22, 2001.
JCP&L’s Obligations
The Company has entered into an interconnection
installation agreement, by which JCP&L has installed, at the Company’s cost
and expense, the JCP&L interconnection facilities. The JCP&L interconnection
facilities, together with the facilities that the Company has installed, are
necessary to allow the interconnection of the Company’s facility with the
transmission system of JCP&L. The JCP&L 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 JCP&L, at the Company’s cost and expense. The remainder of
the interconnection facilities have been installed and are owned, maintained and
operated by the Company.
JCP&L has completed the installation of the JCP&L
interconnection facilities necessary to permit the Company to meet the Company’s
construction agreement requirement to energize the switch yard and commence
commissioning of the Company’s facility.
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. The cost of these
interconnection facilities was approximately $5.1 million, and is included on
the balance sheet as property, plant and equipment.
29
The Company’s Obligations
The Company has installed and owns, operates and
maintains 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.
The Company is obligated to give prior notice to JCP&L
before undertaking any additions, modifications or replacements to the Company’s
facility or its interconnection facilities that will increase the generating
capacity of the Company’s facility or could reasonably be expected to affect
the transmission system, the JCP&L Interconnection Facilities or the
operation of the Company’s facility. The Company must reimburse JCP&L for
all costs incurred by JCP&L associated with any modifications, additions or
replacements that it must make to the transmission system or the JCP&L Interconnection
Facilities, as reasonably required by JCP&L, in connection with the Company’s
proposed addition, modification or replacement at the Company’s facility. The
Company is 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 the Company’s facility will be
interconnected.
The Company is obligated to keep the Company’s 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 JCP&L.
JCP&L will have the right to disconnect the
Company’s facility from its transmission system and/or curtail, interrupt or reduce
the output of the Company’s facility when operation of the Company’s facility
or the interconnection facilities adversely affects the quality of service rendered
by JCP&L or interferes with the safe and reliable operation of its transmission
system or the regional transmission system. JCP&L, however, is obligated to
use reasonable efforts to minimize any disconnection, curtailment, interruption
or reduction in output.
In accordance with good utility practice, JCP&L 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. JCP&L is obligated
to use due diligence to restore the interconnection facilities to service as
promptly as practicable.
In addition, if the Company fails to operate,
maintain, administer, or insure its facility or its portion of the
interconnection facilities, JCP&L may, following 30 days notice and
opportunity to cure the failure, disconnect the Company’s 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 the Company’s expense and will be owned, maintained and repaired
by JCP&L, also at the Company’s expense. JCP&L has provided, at the
Company’s expense, telemetering equipment which has been installed by us, to
retrieve certain information. The revenue meters are to be tested at least once
every two years, or more frequently at the Company’s request. Any revenue meter
found to be inaccurate by greater than 1% is to be adjusted, repaired or
replaced.
Land Rights
and Access
The Company has granted to JCP&L the right of
reasonable access and all necessary rights of way, easements, and licenses as JCP&L
may require to install, operate, maintain, replace and remove the revenue
meters and other portions of the JCP&L interconnection facilities.
30
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:
• breach
of a material term or condition and uncured failure to provide a required
schedule, report or notice;
• 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;
• 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;
• 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
• 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.
JCP&L will have the right to operate and/or to
purchase specific equipment, facilities and appurtenances from the Company that
are necessary for JCP&L to operate and maintain its transmission system if (i) the
Company commences 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 the Company or appoints a trustee or other custodian,
liquidator, or receiver for the Company or a substantial part of the Company’s assets
and the decree is not dismissed within 60 days or (iii) the Company ceases
operation for 30 consecutive days without having an assignee, successor, or
transferee in place.
Operations
Agreement and Services Agreement
The Company 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 the Company’s facility for a period of 32 years.
Under the Operations Agreement, AES Sayreville is responsible for, among other
things, preparing plans and budgets related to start-up and commercial
operation of the Company’s 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, 2004, 2003
31
and 2002, the Company paid AES Sayreville a total of
$5.3 million, $5.3 million and $4.4 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
The Company has entered into a Water Supply Agreement
dated as of December 22, 1999 with the Borough of Sayreville (“Borough”) under
which the Borough will provide untreated water to the Company’s 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 has made available to the Company’s 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
the Company’s facility with water drawn from the Duhernal aquifer and
transported through the Duhernal water pipeline.
Compensation
The cost of the pipeline and pumping station was
approximately $678,000 and $1.71 million, respectively. The Company has paid the pipeline and pumping
station projects in full, as of December 31, 2003. In addition, the Company paid
the Borough an initial payment of $150,000 from the bond proceeds, which was credited
to the Company’s account and was used to offset the cost of untreated water
purchased during the Company’s 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 the Company with Duhernal Water, the Company also must pay
the Borough for those additional costs. The Company 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 aquifer 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 aquifer 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:
• For
the first contract year it is reduced by the amount of the initial payment;
• 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
32
• starting
with 8th contract year and with six months prior written notice, the Company
has 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 the Company 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 the Company 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, the Company may,
at the Company’s 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 the Company’s 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 the Company’s expense, all necessary government
approvals. The Borough and the Company have cooperated to obtain, at the
Company’s 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.
The Company obtained easement rights from two adjacent property owners and the
Borough of Sayreville. The Company 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,
the Company executed, without being compensated by the Borough, the documents
necessary to evidence the Borough’s ownership of those facilities in November 2003.
Operation and
Maintenance of Infrastructure
The Borough will operate and maintain all
infrastructure necessary to supply the untreated water to the project boundary.
The Company 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, the Company 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
The Company pays 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. The Company 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 the Company 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. The Company will pay for its costs and
expenses arising from the capital improvements as well as those of the Borough.
If the Company damages either infrastructure or capital improvements, the
Company will restore the damaged portions thereof or pay the Borough to restore
the damaged portions.
Land
Development Plan
The Company entered into an agreement with the Borough
of Sayreville by which the Company will develop and implement a plan to replace
trees which were removed during clearing of the facility site. The Land
33
Development Plan is required for final site approval. The
estimated cost of the plan is approximately $425,000. The Company is in the process of selecting a
contractor to perform the service and no payments have been made as of December 31,
2004. On July 23, 2003, the project
was secured by a letter of credit issued by Union Bank of California for
$425,000 with the Borough of Sayreville as the beneficiary. This irrevocable standby letter of credit had
an expiration date of June 30, 2004, but was automatically extended for
another one-year period. On August 19, 2004, AES secured a performance
bond for $539,493 relating to the tree replacement and other site improvements.
This bond replaces the previous letter of credit and represents the amount
potentially due if there is a failure of AES Red Oak, LLC to take action
regarding the plan.
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 the Company 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 the Company and the financing parties with escorted
access to any infrastructure or other property owned by the Borough to which the
Company or the financing parties reasonably request access.
The Company’s
Additional Obligations
The Company 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, the Company must
provide the Borough with a detailed invoice listing any amounts due to the
Company 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:
• the
affected party gives the other party written notice within 48 hours of the
occurrence of the force majeure;
• the
suspension of performance is of no greater scope and no longer than required by
the force majeure; and
• 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 the Company and by the Borough under some circumstances
including; (i) the Company’s 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
The Company’s principal property is the project site, on
which the Company’s facility is located, which the Company owns. The site is
located in the Borough of Sayreville, Middlesex County, New Jersey on an
approximately 62-acre parcel of land. The Company has access, utility and
construction easements and licenses across neighboring property. The Company
has title insurance in connection with the Company’s property rights.
Under the Company’s financing documents, its rights
and interests in the Company’s property are encumbered by mortgages, security
agreements, collateral assignments and pledges for the benefit of the Company’s
bondholders and other senior creditors.
34
The Company’s facility consists of an approximately
830 megawatt (net) gas-fired combined cycle electric generating facility. The
Company’s facility was designed, engineered, procured and constructed for the
Company by WGI and Raytheon, as successor guarantor, under a fixed-price,
turnkey construction agreement. Among
other components, the Company’s 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 the Company 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 the Company exercises
its right to cancel the agreement after the first major outage of the
combustion turbines which will be after approximately the eighth year of
operation of the facility. Under the Power Purchase Agreement, Williams Energy
or its affiliates is supplying the fuel necessary to allow the Company to
provide capacity, fuel conversion and ancillary services to Williams Energy.
AES Sayreville has provided development, construction management, and
operations and maintenance services for the Company’s facility under an
operations agreement. The Company has provided installation, operation and
maintenance of facilities necessary to interconnect the Company’s facility to JCP&L’s
transmission system under an interconnection agreement.
ITEM 3. LEGAL PROCEEDINGS
Williams Energy -
On November 4, 2003, the Company and Williams Energy, through arbitration,
settled a dispute regarding the date of commercial operation and the proper
interpretation of certain provisions of the Power Purchase Agreement relating
to amounts the Company claimed were payable by Williams Energy. The arbitration
related to disputed amounts of approximately $7.6 million, which included a $594,000
payment extension dispute and a $7 million commercial operation start date
dispute. Under the settlement, Williams
made a cash payment to the Company of $4,050,153 on November 14, 2003,
which included $225,055 of interest from October 2002 to the payment date,
and the Commercial Operation Date was deemed to be September 28,
2002. The related revenue had been
substantially recorded in 2002, with the remaining amount recorded in the
fourth quarter of 2003. This payment settled all payment obligations between
the parties for the month of September 2002 with respect to the Commercial
Operation Date under the Power Purchase Agreement. From the Company’s perspective, the cash
payment has the economic effect of recognizing a Commercial Operation Date prior
to of September 28, 2002. The Company is currently disputing $1.4 million of merchant price, testing gas and
other charges with Williams Energy that the Company contends Williams Energy owes to us. These charges
were not part of the arbitration discussed above.
Raytheon - On
October 28, 2004, the Company received a complaint filed by Raytheon in
the State of New York. In the complaint, Raytheon is seeking to recover
$30,302,269, which represents the amount Red Oak drew down on the letter of
credit on August 26, 2004, attorneys’ fees and costs, and also to recover
up to $110 million of net expense Raytheon claims to have incurred in good
faith under the governing guaranty and construction agreements. The Company filed an answer and counterclaim
on December 13, 2004, in which it denied liability to Raytheon, asserted
various defenses and countersued Raytheon for breach of the EPC Agreement and
Settlement Agreement, breach of express warranties under the EPC Agreement, and
fraudulent misrepresentation and concealment.
The Company claimed damages of not less than $140 million and attorneys’
fees and costs to the extent allowable.
Raytheon moved to dismiss the Company’s fraudulent misrepresentation and
concealment claim and to limit Company’s damages on January 14, 2005. The Company filed its opposition to the
motion to dismiss and also filed an amended counterclaim on February 18,
2005. Thereafter, Raytheon agreed to withdraw its motion to dismiss. On
March 4, 2005, Raytheon filed a motion for summary judgment that seeks the
return of $16,311,711 of the Letter of Credit draw. Company has not yet
filed its opposition to the motion, and Raytheon has not yet filed an answer to
the amended counterclaim. The Company has recorded the $30.3 million as
a current liability, but has not accrued any additional amounts with respect to
Raytheon’s claims. The Company believes it has meritorious defenses to the
claims asserted by Raytheon against it and intends to defend the lawsuit and
pursue its counterclaims vigorously.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable pursuant to General Instruction I of
the Form 10-K.
35
PART II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no market for the Company’s equity interests.
All of the Company’s member interests are owned by the Company’s parent, AES
Red Oak, Inc., a wholly owned subsidiary of The AES Corporation. On December 22,
2003, the Company declared and paid a $1.05 million dividend to AES Red Oak, Inc.
No dividends were paid in 2004.
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 the Company’s financial statements and the notes thereto included
elsewhere in this annual report. The following discussion involves
forward-looking statements. The Company’s actual results may differ significantly
from the results suggested by these forward-looking statements. See “Cautionary
Note Regarding Forward-Looking Statements.”
General
AES Red Oak, L.L.C. (“the Company”) was formed on September 13,
1998 to develop, construct, own, operate and maintain the Company’s facility. The
Company was dormant until March 15, 2000, the date of the sale of the
Company’s senior secured bonds. The Company obtained $384 million of project
financing from the sale of the senior secured bonds. The total cost of the
construction of the Company’s facility was approximately $450 million, which was financed by the proceeds from the
Company’s 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,
the Company consummated an exchange offer whereby the holders of the Company’s senior
secured bonds exchanged their privately placed senior secured bonds for
registered senior secured bonds.
The Company reached provisional acceptance on August 11,
2002, risk transfer on August 13, 2002, and took the position that the
Company was commercially available on September 1, 2002. Williams Energy disputed the September 1,
2002, commercial operation date and informed the Company that it recognized
commercial availability of the facility as of September 28, 2002. On November 4, 2003, a settlement was
reached and a commercial operation date of September 28, 2002 was agreed
upon. See “Item 3 – Legal Proceedings”.
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 minimum capacity 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. During 2003 the PJM market,
into which the Company’s generation is distributed, experienced a general
decline in the amount paid for electricity. There was also a marked increase in
the cost of natural gas. As a result, Williams Energy dispatched the Company’s facility
on a very limited basis. The Company’s facility was called on to generate only 21%
of the year in 2004 and only 14% of the year in 2003. Accordingly, the minimum
capacity payments have been the Company’s primary source of operating revenues,
representing $62.5 million and $62.0 million of the Company’s total revenues
for the years ended December 31, 2004 and 2003, respectively.
Based upon current market conditions and projections
from Williams Energy, the Company anticipates a dispatch level in 2005 to be
within the range of the levels for 2003 and 2004. In the event that these market conditions do
not improve, and Williams Energy does not dispatch the Company’s facility at
all in 2005, the Company believes that the fixed capacity payments are
sufficient to meet the cash demands of the Company’s business, but the Company will
require the additional revenue from such fuel conversion services to be
profitable.
The Company is concerned that Williams Energy will not
dispatch the Company’s facility in a manner that will increase its
profitability. As a result, the Company’s management is researching ways to
enhance its facility’s
36
performance. The Company believes that any savings in
starting the facility or improved performance will also benefit Williams Energy,
with the result that Williams Energy may find it more economically feasible to
dispatch the Company’s facility.
The following discussion presents certain financial
information for the years ended December 31, 2004, 2003 and 2002.
Equity
Contributions
Under an equity subscription agreement, AES Red Oak, Inc.
agreed to contribute up to approximately $56.7 million to the Company to fund
project costs. As of December 31,
2002 all $56.7 million had been contributed, and there have been no further
contributions other than employee stock issuances. The equity that AES Red Oak Inc. provided to
the Company was provided to it by The AES Corporation.
Results of
Operations
Net income for 2004 was $0.8 million, while the first
full year of operation in 2003 yielded a net loss of $0.3 million. The Company commenced commercial operations
in August 2002 and had a net loss for the year ended December 31,
2002 of $3.0 million.
Operating revenues were approximately $69.7 million,
$64.2 million and $26.2 million for the years ended December 31, 2004,
2003 and the partial year of operations ended December 31, 2002,
respectively. These amounts included fixed payments of $62.5 million, $62.0
million and $15.2 million for the years ended December 31, 2004, 2003 and
2002, respectively. Revenues from September 2002
through December 2004 consist of capacity sales and ancillary services under
the Power Purchase Agreement. Revenues for the period of August and part
of September 2002 consisted of merchant revenue in this partial year of
operations. The remaining amount of revenue relates to variable revenue which the
Company receives when dispatched, and merchant revenue the Company earned prior
to the Company’s commercial operation date in September 2002. The Company
has no control over when the facility is dispatched, as that decision is made
by Williams Energy based on several factors including market conditions.
Operating expenses were $34.5 million and $30.9
million for the years ended December 31, 2004 and 2003, respectively and
$16.8 million for the partial year of operations ended December 31, 2002. These costs are largely of a recurring nature
and are discussed below.
Fuel purchased from Williams Energy during the period
of merchant operations and testing was $0.6 million, $0.9 million and $6.9
million for the years ended December 31, 2004, 2003 and 2002,
respectively. The Company purchased more fuel in 2002 in connection with the
merchant operations the Company conducted in the period prior to the commercial
operation date.
The fuel conversion volume rebate was $5.9 million and
$5.8 million for the years ended December 31, 2004 and 2003, respectively
and $1.6 million for the partial year of operations ended December 31, 2002.
This cost represents payments to Williams and is based upon a twelve month
facility utilization factor.
Corporate management fees were $1.6 million for each
of the years ended December 31, 2004 and 2003 and was $0.6 million for the
partial year of operations ended December 31, 2002. Corporate management
fees are charged on a monthly basis based on a fixed amount which is adjusted
annually for inflation.
Other operating expenses were $10.6 million and $7.2
million for the years ended December 31, 2004 and 2003, respectively and
$2.0 million for the partial year of operations ended December 31, 2002. Maintenance costs were higher in the 2004
period, largely the result of two planned combustor inspection outages,
compared to only one in 2003, and other unplanned maintenance costs.
Depreciation expense was $11.8 million and $11.4
million for the years ended December 31, 2004 and 2003, respectively and
was $4.4 million for the partial year of operations ended December 31, 2003.
The increase in depreciation expense results from additional parts placed in
service after planned combustor inspection outages.
General and administrative costs were $1.1 million and
$1.7 million for the years ended December 31, 2004 and 2003, respectively
and $0.4 million for the partial year of operations ended December 31,
2002. The decrease of general and administrative costs in the year ended December 31,
2004 as compared to the year ended December 31,
37
2003 primarily relates to higher legal fees in the
2003 period related to the dispute with Williams Energy of the Commercial Operation
Date.
Total other income (expense) was approximately $(34.4)
million and $(33.6) million for the years ended December 31, 2004 and
2003, respectively and $(12.5) million for the partial year of operations ended
December 31, 2002. These costs are comprised of other income and expense,
liquidated damages received and paid and interest income and expense.
Other income from interim rebates was approximately
$1.4 million for the years ended December 31, 2003, and $1.0 million for
the partial year of operations ended December 31, 2002. These amounts
consist of interim rebates received from Raytheon under the construction
agreement as a result of their failure to meet heat rate and output performance
guarantees. The Company did not invoice
interim rebates in 2004, pending resolution of the Final Acceptance date with
Raytheon.
Other (expenses) included letter of credit fees which
were approximately $(1.0) million for each of the years ended December 31,
2004 and 2003 and $(.4) million for the partial year of operations ended December 31,
2002. These amounts consist of fees paid to Dresdner Bank pursuant to the
Company’s 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.
For the year ended December 31, 2002, the Company
recognized revenue of $1.8 million, for liquidated damages received from
Raytheon for late completion payments and a construction related outage in November 2002. This revenue was recognized in 2002 after the
commercial operation date.
For the years ended December 31, 2003 and 2002, the
Company expensed $.2 million and $1.8 million, respectively 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. This expense was recognized in 2002 after the
commercial operation date. The Company did not incur any liquidated damages for
the year ended December 31, 2004.
Interest income earned on invested funds, including the
security collateral received from Williams Energy, the proceeds of the letter
of credit from Raytheon and other available funds, was approximately $.5
million for each of the years ended December 31, 2004 and 2003, respectively
and $.1 million for the partial year of operations ended December 31, 2002. The interest income earned for the year ended
December 31, 2003 included $.2 million of interest on amounts owed by, and
paid as part of the arbitration settlement with, Williams Energy. See “Item 3 – Legal Proceedings”. Excluding
the interest on the arbitration settlement, interest income was approximately
$.2 million higher in 2004, as compared to 2003, primarily relating to higher
interest rates. The amount of interest income earned for the year ended December 31,
2003 compared to the year ended December 31, 2002 decreased as a result of
a lower average balance in the construction account resulting from the Company’s
use of the bond proceeds for construction of the facility.
Interest (expense) was approximately $(33.8) million
and $(34.2) million for the years ended December 31, 2004 and 2003,
respectively and $(13.2) million for the partial year of operations ended December 31,
2002. The decrease from 2003 as compared to 2004 resulted from lower principal
balances after scheduled repayments. Interest expense was lower in 2002, as
compared to 2004 and 2003, as interest costs prior to commencement of
commercial operations were capitalized.
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, 2004,
Property Plant and Equipment adjusted for accumulated depreciation was $399.3
million, which includes generation, building and office equipment.
Liquidity and
Capital Resources
Sources and Uses of Cash
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 payments (each as defined in the Power Purchase Agreement) and other
payments for the delivery of fuel conversion, capacity and ancillary
services. The Company currently
anticipates being dispatched by Williams
38
Energy beginning in April 2005 but can provide no
assurance that this will occur. If the
facility is not dispatched, the Company’s 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, will be used to fund the Company’s generation expenses
and other operations and maintenance expenses and to meet the obligations
described below.
Since September 28, 2002, Williams Energy has not
dispatched the facility to a significant degree, outside the peak summer months.
The minimum capacity payments provided for under the Power Purchase Agreement
have been the Company’s primary source of operating revenues, representing
$62.5 million of the Company’s total revenues of $69.7 million in 2004. The minimum cash flow from Williams under the
Power Purchase Agreement is approximately $3.8 million per month for October through
May and $7.9 million per month from June through September.
During 2004, net cash provided by operating activities
was $14.1 million. The Company currently anticipates that the plant will be
dispatched in future periods within a similar range as it was during 2004 and
2003 and that operating cash flow will be comparable to 2004 in 2005. The Company also believes that cash flows
from the sale of electricity and/or minimum capacity payments under the Power
Purchase Agreement and funds available to be drawn under the debt service
reserve letter of credit or the power purchase letter of credit will be
sufficient to pay project costs, including ongoing expenses and principal and
interest on the Company’s senior secured bonds, fund costs of the Company’s commercial
operations and pay fees and expenses in connection with the letters of credit.
The Company has provided the collateral agent with a
debt service reserve letter of credit in an initial stated amount of $22.0
million. The Company has also provided Williams Energy a $10 million letter of
credit under the Power Purchase Agreement, which the Company refers to as the
power purchase letter of credit, to support specific payment obligations under
the Power Purchase Agreement. The repayment obligations with respect to any
drawings under the power purchase letter of credit are the Company’s senior
debt obligation. The interest rate on these loans would be the sum of a) the
higher of (i) the Federal Funds Rate plus .50% and (ii) the Agent’s
prime rate and b) an applicable margin rate which is based upon the rating of
the Company’s senior secured bonds. Since the Company’s senior secured bonds
are currently rated below investment grade, the Company’s working capital
facility has been unavailable and the Company is required to pay higher fees
for draws on any of the Company’s project support agreements.
As discussed below, Williams
Energy has notified the Company that it intends to post a letter of credit for
the remaining $10 million in June 2005. Under the terms of the Letter
Agreement, Williams Energy has the right to recoup the Prepayment by set-off of
any and all amounts owing to the Company under the Power Purchase Agreement no
earlier than the June in the calendar year after 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, whichever comes first (Note 7). Williams Energy
will recoup the Prepayment by set-off, beginning in July 2005, of amounts
owing to the Company under the Power Purchase Agreement. The Company is
currently reviewing financing facilities, comparable to the working capital
agreement which expired March 31, 2005, that would allow for funds to be
available for future working capital requirements, as needed (Note 6). After
the Power Purchase Agreement expires, the Company plans 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.
39
Contractual Obligations
A summary of the Company’s
contractual obligations and commitments as of December 31, 2004 is
presented in the table below.
|
($000’s)
|
|
Total
|
|
2005
|
|
2006-
2007
|
|
2008-
2009
|
|
2010 and
Thereafter
|
|
Notes
Reference
|
|
|
Debt Service
Obligations
|
|
$
|
814,670
|
|
$
|
37,648
|
|
$
|
76,821
|
|
$
|
81,699
|
|
$
|
618,502
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
Agreement
|
|
63,374
|
|
1,672
|
|
3,470
|
|
3,645
|
|
54,587
|
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Supply
Agreement
|
|
8,400
|
|
300
|
|
600
|
|
600
|
|
6,900
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
886,444
|
|
$
|
39,620
|
|
$
|
80,891
|
|
$
|
85,944
|
|
$
|
679,989
|
|
|
|
(a) Debt Service Obligations
(including interest)
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 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.
Annual principal repayments over the life of the 2019 Bonds range from
1.0799% of original principal amount or $2.4 million to 11.2819% of original
principal amount or $25.3 million.
Quarterly principal repayment of the 2029 Bonds does not commence until February 28,
2019.
(b) Operations Agreement
The Company entered into an Operations Agreement (the “Operations
Agreement”), dated as of March 1, 2000 with AES Sayreville, L.L.C. by
which AES Sayreville, L.L.C. provides operating and maintenance services for the
Company’s facility for a period of 32 years. “See Item 1 – Business”. The fee
is adjusted annually by the change in Gross Domestic Product, Implicit Price
Deflator, which the Company has assumed will be 2.5% on average. Total fees paid by the Company were $1.6
million for the year ended December 31, 2004. Under the services agreement between AES
Sayreville, L.L.C and The AES Corporation, The AES Corporation provides to AES
Sayreville, L.L.C all of the personnel and services necessary for AES
Sayreville, L.L.C to comply with its obligations under the Operations Agreement.
These obligations are not recorded in the Company’s consolidated financial
statements until services are rendered.
(c) Water Supply Agreement
The Company has also entered into a contract (the “Water
Supply Agreement”), dated as of December 22, 1999, with the Borough of
Sayreville (the “Borough”) pursuant to 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. These obligations are not
recorded in the Company’s consolidated financial statements until period has
elapsed.
Other Commitments.
Maintenance Services Agreement
The Company has entered into the Maintenance Program
Parts, Shop Repairs and Scheduled Outage TFA Services Contract (the “Maintenance
Services Agreement”), dated as of December 8, 1999, 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
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 16 years from the effective date of the
contract, whichever occurs first, unless the Company exercises its right to
terminate the agreement after the first major outage of the turbines.
40
The Maintenance Services Agreement indicates that the
Company will pay fees each month based on a stated amount for each equivalent
base load hour (“EBH”) of the combustion turbines, adjusted for inflation, over
the term of the agreement. However, if a
scheduled maintenance outage occurs prior to 8,000 EBH’s being accumulated
since the last scheduled maintenance outage for that turbine, the Company will
be invoiced the remaining amount to equate to 8,000 hours (“true-up”). In the
event the Company is not required to dispatch the facility, there is no charge
for that month. Accordingly, no amounts have been included in the Contractual
Obligations table above.
The total of these payments was approximately $6.8
million, $4.7 million and $1.2 million for the years ended December 31,
2004, 2003 and 2002, respectively, which included true-ups for two planned
maintenance outages in 2004 and one in 2003, as the turbines were far short of
the 8,000 EBH level. Assuming a similar dispatch level in 2005 as in 2004, and
the performance of one planned hot gas maintenance outage, a comparable level
of payments would be expected for the year ended December 31, 2005. Based
upon the Company’s current estimates, assuming a certain number of EBH’s and
equivalent starts (“ES”), the first major outages would be completed by 2011
and the remaining minimum payments to Siemens Westinghouse would approximate $32
million through that period.
Power Purchase Agreement
As discussed in “Item 1-Business-Power
Purchase Agreement -Security” and
Footnote 7 to the Consolidated Financial Statements, pursuant to Section 18.3
of the Power Purchase Agreement, Williams Energy has provided the Company $10
million of cash and has posted a $25 million letter of credit as alternate
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 $10 million
prepayment to Williams Energy. Under the terms of the Letter 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 no
earlier than the June in the calendar year after the occurrence of
regaining its investment grade rating or the posting of alternative credit
support by Williams Energy whichever comes first (Note 7). The Company is
currently reviewing financing facilities, comparable to the working capital
agreement which expired March 31, 2005, that would allow for funds to be
available for future working capital requirements, as needed (Note 6). As of December 31, 2004, the Company had
cash balances of approximately $41.6 million.
Williams Energy has notified the Company that it intends to post a
letter of credit for the remaining $10 million in June 2005. Williams
Energy will recoup the Prepayment by set-off, beginning in July 2005, of
amounts owing to the Company under the Power Purchase Agreement. The $10
million prepayment, which is currently reported as restricted cash, will then
be reported as unrestricted cash as amounts are effectively repaid 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 the Company’s
operating revenues will generate sufficient cash.
Land Development Plan
The Company has entered into an agreement with the
Borough of Sayreville by which the Company will develop and implement a plan to
replace trees which were removed during clearing of the facility site. The Land Development Plan is required for final
site approval. The estimated cost of the plan is approximately $425,000. The Company is in the process of selecting a
contractor to perform the service and no payments have been made as of December 31,
2004. On July 23, 2003, the project
was secured by a letter of credit issued by Union Bank of California for
$425,000 with the Borough of Sayreville as the beneficiary. This irrevocable standby letter of credit had
an expiration date of June 30, 2004, but was automatically extended for
another one-year period. On August 19, 2004, AES secured a performance
bond for $539,493 relating to the tree replacement and other site improvements.
This bond replaces the previous letter of credit and represents the amount
potentially due if there is a failure of AES Red Oak, LLC to take action
regarding the plan.
Other
It is anticipated that the Company will incur capital
expenditures of approximately $1.5 million in 2005 related to general
improvements of the facility, and another $1.3 million relating to the Construction
Agreement.
41
Risks that May Impact
the Company’s Liquidity
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.
The payment obligations of the Williams Companies, Inc.
under its guaranty of Williams Energy’s obligations under the Power Purchase
Agreement were originally capped at an amount equal to approximately $510
million. 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.
As of December 31, 2004, the guarantee was capped at $501.4
million.
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
under “Item 1-Business Power Purchase Agreement-Security” and Footnote 7 to the
Company’s Consolidated Financial Statements.
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 to the Company’s cash flow and financial condition
which could result in a default on the Company’s senior secured bonds. Due to the current pool prices, the Company would
expect that if it were required to seek alternate purchasers of the Company’s power
in the event of a default of Williams Energy, even if the Company was
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
the Company’s ability to generate sufficient cash flow to cover operating
expenses or the Company’s debt service obligations in the absence of a long-term
power purchase agreement with Williams Energy.
In addition to the factors discussed above, and/or the
other factors listed under the “Cautionary Note Regarding Forward-Looking
Statements,” if a working capital facility continues to be unavailable, the
Company could experience a negative impact on the its cash flow and financial
condition, which may result in draws upon its letters of credit.
Business
Strategy and Outlook
The Company’s overall business strategy is to market
and sell all of the Company’s 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, the Company would seek to sell the
Company’s 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, the Company would expect that even if it were successful
in finding alternate revenue sources, any such alternate revenues would be
substantially below the amounts that would have been otherwise receivable
pursuant to the Power Purchase Agreement.
There can be no assurances as to whether such efforts would be
successful.
The Company intends to cause the Company’s facility to
be managed, operated and maintained in compliance with the project contracts
and all applicable legal requirements.
Recent and New
Accounting Pronouncements
In January 2003, the Financial Accounting
Standards Board (“FASB”) issued FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 (“FIN No. 46”).
In October 2003, FASB Staff Position No. 46-6, “Effective Date of FIN
No. 46, Consolidation of Variable Interest Entities” deferred the
effective date of FIN No. 46 for variable interests held by a public
entity in a variable interest entity (“VIE”) that was created or acquired
before February 1, 2003 to the end of the first interim or annual period
ending after December 15, 2003. In December 2003, FASB issued
FIN 46 (revised December 2003), Consolidation of Variable Interest
Entities, an
42
Interpretation of ARB No. 51 (“FIN 46(R)”), which
clarified some requirements and incorporated several staff positions that the
Company was already required to apply. In addition, FIN 46(R) deferred
the effective date for VIEs that were created or acquired before February 1,
2003 and were not considered special purpose entities (“SPEs”) prior to the
issuance of the interpretation until the end of the first reporting period
ending after March 15, 2004. FIN 46(R) defines a VIE as (i) any
entity in which the equity investors at risk in such entity do not have the
characteristics of a controlling financial interest, or (ii) any entity
that does not have sufficient equity at risk to finance its activities without
additional subordinated financial support from other parties. It requires
the consolidation of the VIE by the primary beneficiary. The adoption of
FIN 46(R) requires the Company to include disclosures for non SPE VIEs created
or acquired on or after February 1, 2003 in its consolidated financial
statements related to the total assets and the maximum exposure to loss
resulting from the Company’s interests in VIEs. The adoption of FIN 46(R)
did not have a material effect on the Company’s financial position, results of
operations, or cash flows.
Critical
Accounting Policies
General– The Company prepares the
Company’s financial statements in accordance with accounting principles
generally accepted in the United States of America. As such, the Company is
required to make certain estimates, judgments and assumptions that the Company believes
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 the
Company believes are most critical to understanding and evaluating the Company’s
reported financial results include the following: Revenue Recognition, Property, Plant and
Equipment and Contingencies.
Revenue Recognition — The Company generates energy revenues under
the Power Purchase Agreement with Williams Energy. During the 20-year term of the agreement, the
Company expects to sell capacity and electric energy produced by the facility,
as well as ancillary services 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. Amounts that are in dispute are reserved
for accordingly, based on the probability that they will be realized.
Property, Plant and Equipment — Property, plant and equipment is recorded at
cost and is depreciated, after consideration for salvage value, over its useful
life. The estimated lives of the Company’s
generation facilities range from five to thirty-six years. A significant decrease in the estimated
useful life of a material amount of the Company’s property, plant or equipment
could have a material adverse impact on the Company’s operating results in the
period in which the estimate is revised and in subsequent periods. The depreciable lives and original costs of
the Company’s property plant and equipment by category are as follows:
|
Description of Asset
|
|
Depreciable Life
|
|
Original Costs at
December 31, 2004
|
|
Original Costs at
December 31, 2003
|
|
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
Buildings
|
|
35
|
|
$
|
1,767
|
|
$
|
1,767
|
|
|
Vehicles
|
|
5
|
|
112
|
|
112
|
|
|
Computers
|
|
6
|
|
772
|
|
772
|
|
|
Furniture
and Fixtures
|
|
10
|
|
515
|
|
515
|
|
|
Combustion
Turbine Generator Parts
|
|
9-36
|
|
53,345
|
|
45,367
|
|
|
Gas Heaters
|
|
35
|
|
1,119
|
|
1,119
|
|
|
Spare Parts
Inventory
|
|
—
|
|
5,379
|
|
12,751
|
|
|
Plant
|
|
35
|
|
363,943
|
|
362,390
|
|
|
|
|
|
|
$
|
426,952
|
|
$
|
424,793
|
|
Spare Parts Inventory – Spare
parts inventory consists of rotable and other spare parts, primarily covered
under the Maintenance Services Agreement discussed in Note 8. Inventory is reported at cost and is included
in Property, Plant and Equipment, once received from Siemens Westinghouse. The liability for these spare parts is
reflected as
43
current and long-term liabilities in the accompanying balance sheets.
For financial reporting purposes, payments made to Siemens Westinghouse are
treated as a reduction of the liability in the accompanying balance sheet,
except for the portion that is considered maintenance expense when a scheduled
outage occurs. Spare parts begin to be
depreciated over their useful lives once placed in service.
Commitments and Contingencies–
Raytheon - The Company’s facility
was initially designed, engineered, procured and constructed for the Company 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 the Company made a demand on the Raytheon Company
(“Raytheon”) to perform its obligations under a guarantee which Raytheon had
given the Company of WGI’s performance obligations under the construction
agreement and Raytheon became responsible for the construction of the Company’s
facility. As discussed above,
provisional acceptance has been granted and the facility has commenced
commercial operations, however, Raytheon must perform certain agreed upon
completion items in order to obtain final acceptance. Raytheon gave notice of
Final Acceptance on July 22, 2003 based on its July 8, 2003
performance test. On July 31, 2003,
the Company received a letter from the project’s independent engineer stating
that it could not support Raytheon’s claim of final acceptance and it did not
consider the July 8, 2003 performance test valid. In making this assessment, the independent
engineer cited, among other reasons, (i) modifications made to certain
equipment in performance of the July 8 performance test which would
adversely impact the operations of the plant and other pieces of equipment and (ii) Raytheon’s
failure to demonstrate compliance with guaranteed emissions limits. On August 1, 2003, the Company rejected
Raytheon’s claim of final acceptance.
This rejection was based upon Raytheon’s failure to meet the conditions
for final acceptance provided for in the EPC contract. On August 7, 2003,
the Company received a response from Raytheon in which Raytheon claims that the
Company’s rejection of the final acceptance is invalid and improper.
On August 26, 2004, the Company drew down
approximately $30.3 million under a letter of credit posted by Raytheon
pursuant to the terms of the EPC Agreement. Prior to this date, the Company had
drawn $544,000 on this letter of credit. The Company believes that Raytheon
substantially breached the EPC Agreement, due, among other things, to the facility’s
failure to achieve compliance with certain performance tests, and Raytheon’s
failure to complete other services under the EPC Agreement and certain
amendments thereto, including a Settlement Agreement dated August 6, 2002,
that purported to resolve disputes over whether Raytheon had achieved
Mechanical Completion and Provisional Acceptance. As a result, the Company
claims that Raytheon’s breaches have caused damages in excess of the amount of
the letter of credit. Raytheon disputes these claims and has failed and refused
to pay costs and damages to the Company despite the Company’s demands for such
payment.
On August 27, 2004, Raytheon filed a construction
lien claim for $30,963,662 in Middlesex County against the real property and
improvements owned by the Company under the New Jersey Construction Lien
Law. Among other things, Raytheon claims therein that the draw of the
Letter of Credit represents a debt to Raytheon owed by the Company.
On October 28, 2004, the Company received a
complaint filed by Raytheon in the State of New York. In the complaint,
Raytheon is seeking to recover $30,302,269, which represents the amount Red Oak
drew down on the letter of credit on August 26, 2004, attorneys’ fees and
costs, and also to recover up to $110 million of net expense Raytheon claims to
have incurred in good faith under the governing guaranty and construction
agreements. The Company filed an answer
and counterclaim on December 13, 2004, in which it denied liability to
Raytheon, asserted various defenses and countersued Raytheon for breach of the
EPC Agreement and Settlement Agreement, breach of express warranties under the
EPC Agreement, and fraudulent misrepresentation and concealment. The Company claimed damages of not less than
$140 million and attorneys’ fees and costs to the extent allowable. Raytheon moved to dismiss the Company’s
fraudulent misrepresentation and concealment claim and to limit the Company’s
damages on January 14, 2005. The
Company filed its opposition to the motion to dismiss and also filed an amended
counterclaim on February 18, 2005. Thereafter,
Raytheon agreed to withdraw its motion to dismiss. On March 4, 2005,
Raytheon filed a motion for summary judgment that seeks the return of
$16,311,711 of the Letter of Credit draw. The Company has not yet filed
its opposition to the motion, and Raytheon has not yet filed an answer to the
amended counterclaim. The Company has recorded the $30.3 million as a current
liability, but has not accrued any
44
additional
amounts with respect to Raytheon’s claims. The Company believes it has
meritorious defenses to the claims asserted by Raytheon against it and intends
to defend the lawsuit and pursue its counterclaims vigorously.
Williams Energy- The Company had
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. On November 4, 2003, the Company and
Williams Energy settled this dispute.
The Company is also disputing $1.4 million of
merchant price, testing gas and other charges with Williams Energy that the
Company contends is owed from Williams. This was not part of the above
arbitration.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company issued and has outstanding two series of
bonds, registered under the Securities Act of 1933. As of December 31, 2004, the aggregate
outstanding principal amount of these bonds was $370.1 million. The Company is
not subject to interest rate risk as the interest rates associated with the
Company’s outstanding indebtedness are fixed over the life of the bonds.
The Company currently has no other financial or
derivative financial instruments. The Company does not believe that the it faces
other material market risks requiring disclosure pursuant to Item 305 of
Regulation S-K.
During 2003 the PJM market, into which the Company’s facility’s
generation is distributed, experienced a general decline in the amount paid for
electricity. This, in combination with a marked increase in the cost of natural
gas, was a major factor in Williams’ decision to dispatch the Company’s facility
on a very limited basis. These market conditions continued through 2004. Based
upon current market conditions and projections from Williams, the Company anticipates
a dispatch level in 2005 comparable to the range over the last two years. In the event that these market conditions do
not improve, and Williams does not dispatch the Company’s facility at all in
2005, the Company believes that the fixed capacity payments are sufficient to
meet the cash demands of the Company’s business, but the Company requires the
additional revenue from such fuel conversion services to be profitable.
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
46
Report of Independent Registered Public Accounting Firm
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, 2004
and 2003 and the related consolidated statements of operations, changes in
member’s capital and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, 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, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
As more fully discussed in Note 7, the Company’s
dependence upon Williams Power Company, Inc., formerly 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 Power Company, Inc. and related guaranty
by The Williams Companies, Inc. or their affiliates.
Deloitte & Touche LLP
McLean, Virginia
March 24, 2005
47
AES
RED OAK, L.L.C. AND SUBSIDIARY
AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION
Consolidated
Balance Sheets,
December 31, 2004 and 2003
(dollars in thousands, except
share amounts)
|
|
|
2004
|
|
2003
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
5
|
|
$
|
38
|
|
|
Restricted
cash at cost, which approximates market value
|
|
41,584
|
|
34,837
|
|
|
Receivables
|
|
4,374
|
|
4,070
|
|
|
Receivable
from affiliate
|
|
30
|
|
51
|
|
|
Prepaid and
other assets
|
|
599
|
|
628
|
|
|
Total
current assets
|
|
46,592
|
|
39,624
|
|
|
Land
|
|
4,240
|
|
4,240
|
|
|
Property,
plant, and equipment – net of accumulated depreciation of $27,614 and
$15,830, respectively
|
|
399,338
|
|
408,963
|
|
|
Deferred
financing costs – net of accumulated amortization of $3,941 and $3,128
respectively
|
|
14,764
|
|
15,577
|
|
|
Other assets
|
|
606
|
|
219
|
|
|
Total assets
|
|
$
|
465,540
|
|
$
|
468,623
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBER’S EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
784
|
|
$
|
398
|
|
|
Accrued
liabilities
|
|
1,945
|
|
956
|
|
|
Accrued
interest
|
|
2,722
|
|
2,759
|
|
|
Liabilities
under spare parts agreement – current portion
|
|
827
|
|
4,520
|
|
|
Payable to
affiliate
|
|
282
|
|
131
|
|
|
Bond
payable-current portion
|
|
5,072
|
|
5,230
|
|
|
Payable to
Raytheon.
|
|
30,302
|
|
—
|
|
|
Payable to
Williams
|
|
10,000
|
|
35,000
|
|
|
Total
current liabilities
|
|
51,934
|
|
48,994
|
|
|
|
|
|
|
|
|
|
Bonds
payable
|
|
365,060
|
|
370,132
|
|
|
Other
liabilities
|
|
141
|
|
2,017
|
|
|
Total
liabilities
|
|
$
|
417,135
|
|
$
|
421,143
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member’s
capital:
|
|
|
|
|
|
|
Common
stock, $1 par value-10 shares authorized, none issued or outstanding
|
|
$
|
—
|
|
$
|
—
|
|
|
Contributed
capital
|
|
56,873
|
|
56,775
|
|
|
Member’s
deficit
|
|
(8,468
|
)
|
(9,295
|
)
|
|
Total member’s
capital
|
|
48,405
|
|
47,480
|
|
|
Total
liabilities and member’s capital
|
|
$
|
465,540
|
|
$
|
468,623
|
|
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, 2004, 2003 and 2002
(dollars in thousands)
|
|
|
Year Ended
December 31,
2004
|
|
Year Ended
December 31,
2003
|
|
Year Ended
December 31,
2002
|
|
|
OPERATING
REVENUES
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
69,682
|
|
$
|
64,206
|
|
$
|
26,244
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Fuel costs
|
|
627
|
|
906
|
|
6,898
|
|
|
Fuel
conversion volume rebate
|
|
5,859
|
|
5,793
|
|
1,645
|
|
|
Corporate
management fees
|
|
1,642
|
|
1,608
|
|
594
|
|
|
Other
operating expenses
|
|
10,631
|
|
7,207
|
|
1,990
|
|
|
Depreciation
expense
|
|
11,788
|
|
11,392
|
|
4,438
|
|
|
Property
taxes and insurance
|
|
2,801
|
|
2,284
|
|
794
|
|
|
General
administrative costs
|
|
1,149
|
|
1,718
|
|
443
|
|
|
Total
operating expenses
|
|
34,497
|
|
30,908
|
|
16,802
|
|
|
Operating
income
|
|
$
|
35,185
|
|
$
|
33,298
|
|
$
|
9,442
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME
(EXPENSE)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
476
|
|
$
|
495
|
|
$
|
125
|
|
|
Other
income- interim rebates
|
|
—
|
|
1,427
|
|
957
|
|
|
Liquidated
damages received
|
|
—
|
|
—
|
|
1,810
|
|
|
Interest
expense
|
|
(33,798
|
)
|
(34,232
|
)
|
(13,163
|
)
|
|
Letter of
credit fees and other
|
|
(1,036
|
)
|
(1,013
|
)
|
(379
|
)
|
|
Liquidated
damages paid
|
|
—
|
|
(249
|
)
|
(1,810
|
)
|
|
Total other
income (expense)
|
|
(34,358
|
)
|
(33,572
|
)
|
(12,460
|
)
|
|
NET INCOME
(LOSS)
|
|
$
|
827
|
|
$
|
(274
|
)
|
$
|
(3,018
|
)
|
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, 2004, 2003 and 2002
(dollars in thousands)
|
|
|
Common Stock
|
|
Contributed
|
|
Member’s
|
|
Member’s
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Equity
|
|
|
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
|
|
|
Contributed
capital
|
|
—
|
|
—
|
|
39
|
|
—
|
|
39
|
|
|
Dividends
|
|
—
|
|
—
|
|
—
|
|
(1,050
|
)
|
(1,050
|
)
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
(274
|
)
|
(274
|
)
|
|
BALANCE, DECEMBER 31,
2003
|
|
—
|
|
$
|
—
|
|
$
|
56,775
|
|
$
|
(9,295
|
)
|
$
|
47,480
|
|
|
Contributed
capital
|
|
—
|
|
—
|
|
$
|
98
|
|
—
|
|
$
|
98
|
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
827
|
|
827
|
|
|
BALANCE, DECEMBER 31,
2004
|
|
—
|
|
$
|
—
|
|
$
|
56,873
|
|
$
|
(8,468
|
)
|
$
|
48,405
|
|
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, 2004, 2003 and 2002
(dollars in thousands)
|
|
|
Year Ended
December 31,
2004
|
|
Year Ended
December 31,
2003
|
|
Year Ended
December 31,
2002
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
827
|
|
$
|
(274
|
)
|
$
|
(3,018
|
)
|
|
Amortization
of deferred financing costs
|
|
813
|
|
813
|
|
853
|
|
|
Depreciation
|
|
11,788
|
|
11,392
|
|
4,438
|
|
|
Loss on
disposal of asset
|
|
46
|
|
—
|
|
—
|
|
|
Change in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(304
|
)
|
4,372
|
|
(8,442
|
)
|
|
Receivable
from affiliate
|
|
21
|
|
258
|
|
(184
|
)
|
|
Prepaid and
other assets
|
|
29
|
|
(398
|
)
|
(230
|
)
|
|
Other assets
|
|
(387
|
)
|
(78
|
)
|
(141
|
)
|
|
Accounts
payable
|
|
386
|
|
(777
|
)
|
293
|
|
|
Accrued
liabilities
|
|
753
|
|
(560
|
)
|
1,454
|
|
|
Accrued
interest
|
|
(37
|
)
|
(45
|
)
|
(17
|
)
|
|
Payable to
affiliate
|
|
151
|
|
113
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating activities
|
|
14,086
|
|
14,816
|
|
(5,058
|
)
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments for
capital additions
|
|
(1,973
|
)
|
(2,696
|
)
|
(24,029
|
)
|
|
Payments
under long term spare parts agreement
|
|
(5,569
|
)
|
(2,788
|
)
|
(1,175
|
)
|
|
Retention
payable
|
|
—
|
|
—
|
|
(29,478
|
)
|
|
Restricted
cash
|
|
(6,747
|
)
|
(27,088
|
)
|
(1,688
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash
(used in) investing activities
|
|
(14,289
|
)
|
(32,572
|
)
|
(56,370
|
)
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payment of
principal on bonds payable
|
|
(5,230
|
)
|
(6,218
|
)
|
(2,420
|
)
|
|
Contribution
from parent
|
|
98
|
|
39
|
|
55,750
|
|
|
Security
proceeds from (repayment to) Williams under PPA
|
|
(25,000
|
)
|
25,000
|
|
10,000
|
|
|
Proceeds
from Raytheon letter of credit under EPC agreement
|
|
30,302
|
|
—
|
|
—
|
|
|
Dividends
paid to parent
|
|
—
|
|
(1,050
|
)
|
(2,000
|
)
|
|
Net cash
provided by financing activities
|
|
170
|
|
17,771
|
|
61,330
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
$
|
(33
|
)
|
$
|
15
|
|
$
|
(98
|
)
|
|
CASH AND
CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
$
|
38
|
|
$
|
23
|
|
$
|
121
|
|
|
CASH AND
CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
5
|
|
$
|
38
|
|
$
|
23
|
|
|
SUPPLEMENTAL
DISCLOSURE OF OTHER ACTIVITIES:
|
|
|
|
|
|
|
|
|
Interest
paid (net of amounts capitalized)
|
|
$
|
33,022
|
|
$
|
33,537
|
|
$
|
8,437
|
|
|
Receipt of
spare parts under long-term service agreement
|
|
$
|
205
|
|
$
|
289
|
|
$
|
10,500
|
|
|
Transfer of
construction in progress to property, plant and equipment
|
|
$
|
223
|
|
$
|
344
|
|
$
|
411,597
|
|
See notes to consolidated
financial statements.
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, 2004, 2003 AND 2002
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 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. 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. Pursuant to an equity subscription agreement (see Note 6), Red Oak
agreed to contribute up to approximately $56.7 million to the Company to fund
construction after the bond proceeds have been fully utilized.
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 tax and development benefits to
the facility. URC has no operations outside of its activities in connection
with the facility.
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 requested that the Company run the facility or “dispatch” the
facility to a significant degree, outside the peak summer months. The minimum
capacity payments provided for under the Power Purchase Agreement have been the
Company’s primary source of operating revenues, representing $62.5 million of
the Company’s total revenues of $69.7 million for the twelve months ended December 31,
2004. The Company has used these
operating revenues, together with interest income from the investment of
available cash balances and the $10 million Prepayment from Williams (Note 7)
to fund its generation expenses, other operations and maintenance expenses and
debt service costs. 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 $10 million alternative credit support prepayment provided
by Williams Energy in accordance with the terms of the Letter Agreement. Williams
Energy has notified the Company that it intends to post a letter of credit for
the remaining $10 million in June 2005.
The Company currently anticipates being dispatched by
Williams Energy beginning in April 2005 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
52
provided two letters of credit, the Power Purchase
Agreement 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.
The Company currently believes that its sources of
liquidity will be adequate to meet its needs through the end of 2005. 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
that the facility will not be dispatched to a significant degree, delays in or
disputes over the completion of the facility, 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.
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 Cash and Investments -
The Company is 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 $41.6 million balance of restricted
cash consists of cash to be used to repay the drawdown of the letter of credit
from Raytheon and the prepayment credit support amount owed to Williams (See Note
7 - Power Purchase Agreement). The
Company had the required minimum balances and had met the required conditions
when it made distributions of $1.05 million and $2.0 million to AES Red Oak, Inc.
on December 31, 2003 and 2002, respectively.
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 and the original costs of
the Company’s property, plant and equipment by category are as follows:
53
|
Description of Asset
|
|
Depreciable Life
|
|
Original Costs at
December 31, 2004
|
|
Original Costs at
December 31, 2003
|
|
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
Buildings
|
|
35
|
|
$
|
1,767
|
|
$
|
1,767
|
|
|
Vehicles
|
|
5
|
|
112
|
|
112
|
|
|
Computers
|
|
6
|
|
772
|
|
772
|
|
|
Furniture and
Fixtures
|
|
10
|
|
515
|
|
515
|
|
|
Combustion
Turbine Generator Parts
|
|
9-36
|
|
53,345
|
|
45,367
|
|
|
Gas Heaters
|
|
35
|
|
1,119
|
|
1,119
|
|
|
Spare Parts
Inventory
|
|
—
|
|
5,379
|
|
12,751
|
|
|
Plant
|
|
35
|
|
363,943
|
|
362,390
|
|
|
|
|
|
|
$
|
426,952
|
|
$
|
424,793
|
|
Spare Parts Inventory – Spare
parts inventory consists of rotable and other spare parts, primarily covered
under the Maintenance Services Agreement discussed in Note 8. Inventory is reported at cost and is included
in Property, Plant and Equipment, once received from Siemens Westinghouse. The liability for these spare parts is
reflected as current and long-term liabilities in the accompanying balance
sheets. For financial reporting purposes, payments made to Siemens Westinghouse
are treated as a reduction of the liability in the accompanying balance sheet,
except for the portion that is considered maintenance expense when a scheduled
outage occurs.
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.
Revenue Recognition — The Company generates energy revenues under
the Power Purchase Agreement with Williams Energy. During the 20-year term of the agreement,
the Company expects to sell capacity and electric energy produced by the
facility, as well as ancillary services and fuel conversion services. Under the Power Purchase Agreement, revenues are
generated 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.
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.
Reclassifications – Certain
reclassifications have been made to prior period amounts to conform to the 2004
presentation.
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, and may result in a default on the Company’s debt. The payment
54
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
approximately $510 million. 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). As of December 31, 2004, the guarantee was
capped at $501.4 million.
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 January 2003, the Financial Accounting
Standards Board (“FASB”) issued FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 (“FIN No. 46”).
In October 2003, FASB Staff Position No. 46-6, “Effective Date
of FIN No. 46, Consolidation of Variable Interest Entities” deferred the
effective date of FIN No. 46 for variable interests held by a public
entity in a variable interest entity (“VIE”) that was created or acquired
before February 1, 2003 to the end of the first interim or annual period
ending after December 15, 2003. In December 2003, FASB issued
FIN 46 (revised December 2003), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51 (“FIN 46(R)”), which clarified
some requirements and incorporated several staff positions that the Company was
already required to apply. In addition, FIN 46(R) deferred the effective
date for VIEs that were created or acquired before February 1, 2003 and
were not considered special purpose entities (“SPEs”) prior to the issuance of
the interpretation until the end of the first reporting period ending after March 15,
2004. FIN 46(R) defines a VIE as (i) any entity in which the equity
investors at risk in such entity do not have the characteristics of a
controlling financial interest, or (ii) any entity that does not have
sufficient equity at risk to finance its activities without additional
subordinated financial support from other parties. It requires the
consolidation of the VIE by the primary beneficiary. The adoption of FIN
46(R) requires the Company to include disclosures for non SPE VIEs created or
acquired on or after February 1, 2003 in its consolidated financial
statements related to the total assets and the maximum exposure to loss
resulting from the Company’s interests in VIEs. The adoption of FIN 46(R)
did not have a material effect on the Company’s financial position, results of
operations, or cash flows.
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 Washington Group
International, Inc. (“WGI”) and other construction costs of the Company
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.
55
Interest & Principal Repayment
Schedule:
|
Year
|
|
Interest
|
|
Principal
|
|
|
|
|
(in thousands)
|
|
|
2005
|
|
$
|
32,578
|
|
$
|
5,072
|
|
|
2006
|
|
32,111
|
|
7,100
|
|
|
2007
|
|
31,502
|
|
6,106
|
|
|
2008
|
|
30,940
|
|
8,122
|
|
|
2009
|
|
30,117
|
|
12,520
|
|
|
2010 and
thereafter
|
|
287,290
|
|
331,212
|
|
|
Total
Payments
|
|
$
|
444,538
|
|
$
|
370,132
|
|
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 Power Purchase Agreement if
the Company terminates the Power Purchase Agreement as a result of a default by
Williams.
Indenture - The Trust Indenture
Agency (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 Indenture. The Company is also bound by a
collateral agency 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, and has an expiration date of March 15, 2007. 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 $56.7
million to the Company to fund project costs. As of December 31, 2002, Red
Oak had contributed the entire $56.7 million to the Company, including the
reclassification of a $986,000 payable to an affiliate (AES Corporation) to
contributed capital in February 2001. 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 had entered
into a working capital agreement pursuant to which it could borrow up to $2.5
million for use in connection with the payment of operating and maintenance
costs of the project. The obligation of
the banks that were party to the working capital agreement to extend loans to the
Company under the working capital agreement were subject to, among others, the
following conditions precedent:
56
• The
Company’s senior secured bonds must be rated “BBB-”or higher by S&P and “Baa3”
or higher by Moody’s;
• no
default or event of default under the working capital agreement shall have
occurred and be continuing; and
• no
event has occurred and is continuing which could reasonably be expected to have
a material adverse effect on the Company.
As the Company’s senior secured bonds have been rated
lower than “BBB-” by S&P and lower than “Baa3” by Moody’s since 2002, funds
had not been available to the Company under the working capital agreement. The
term of this working capital agreement expired on March 15, 2005. The Company
is currently reviewing comparable financing facilities that would allow for
funds to be available for future working capital requirements, as needed. 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 lenders will provide a comparable
replacement of the working capital agreement.
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 Power
Purchase Agreement, 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. The term of
the Power Purchase Agreement is 20 years from the first contract anniversary
date, which is the last day of the month in which commercial availability
occurs. As part of the arbitration
settlement with Williams Energy, described below, the Company recognizes September 28,
2002 as the commercial availability 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 (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. 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. 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, 2003,
the Company had received $14 million in liquidated damages from Raytheon under
the construction agreement, but none subsequent to that date.
The Company 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. Williams Energy has
withheld or offset from amounts invoiced by the Company amounts that Williams
Energy believes were improperly invoiced based on
57
Williams Energy’s interpretation of the Power Purchase
Agreement. The arbitration related to
disputed amounts of approximately $7.6 million, which included a $594,000
payment extension option dispute and a $7.0 million commercial operation start
date dispute. On November 4, 2003, the Company and Williams Energy settled
this dispute. Under the settlement,
Williams made a cash payment to the Company of $4,050,153 on November 14,
2003, which included $225,055 of interest from October 2002 to the payment
date, and the commercial operation date was agreed to be September 28,
2002. The related revenue had been substantially recorded in September 2002,
with the remaining amount recorded in the fourth quarter of 2003. This payment
settles all payment obligations between the parties for the month of September 2002
with respect to the commercial operation date under the Power Purchase
Agreement. From the Company’s
perspective, the cash payment has the economic effect of recognizing a
commercial operation date prior to September 28, 2002. The Company is also
disputing $1.4 million of merchant
price, testing gas and other charges with Williams Energy that the Company
contends is owed by Williams Energy. This was not part of the above arbitration.
Guaranties. The
Company provided Williams Energy a letter of credit (Power Purchase Agreement
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 Power Purchase Agreement. 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 Power Purchase Agreement Letter of Credit are a senior
debt obligation of the Company.
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 approximately
$510 million. 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.
Pursuant to Section 18.3 of the Power Purchase
Agreement, in the event that S&P’s 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. guaranty 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, The Williams Companies, Inc.’s long term senior unsecured debt
has been rated below investment grade since 2002 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 Power Purchase Agreement 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, was 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,
58
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 the Company on January 6,
2003 as the alternative credit support.
As allowed by the Letter Agreement, Williams elected to have the $10
million Prepayment included as part of the alternative credit support. On September 24,
2004, Williams Energy posted a letter of credit and the Company returned the
$25 million of 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. regain 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
remaining $10 million alternative credit support to Williams Energy in accordance
with the terms of the Letter Agreement as described above. Williams Energy has notified the Company that
it intends to post a letter of credit for the remaining $10 million in June 2005.
8. COMMITMENTS AND
CONTINGENCIES
Construction Agreement - The
Company entered into an Agreement for Engineering, Procurement and Construction
(EPC) 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 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 guaranty and WGI, Raytheon and the Company
entered into agreements pursuant to which Raytheon became responsible for the
construction of the facility.
Provisional acceptance has been granted and the facility
has commenced commercial operations, however, Raytheon must perform certain
agreed upon completion items in order to obtain final acceptance. Raytheon gave
notice of Final Acceptance on July 22, 2003 based on its July 8, 2003
performance test. On July 31, 2003,
the Company received a letter from the project’s independent engineer stating
that it could not support Raytheon’s claim of final acceptance and it did not
consider the July 8, 2003 performance test valid. In making this assessment, the independent
engineer cited, among other reasons, (i) modifications made to certain
equipment in performance of the July 8, 2003 performance test which would
adversely impact the operations of the plant and other pieces of equipment and (ii) Raytheon’s
failure to demonstrate compliance with guaranteed emissions limits. On August 1, 2003, the Company rejected
Raytheon’s claim of final acceptance.
This rejection was based upon Raytheon’s failure to meet the conditions
for final acceptance provided for in the EPC contract. On August 7, 2003, the
Company received a response from Raytheon in which Raytheon claims that the
Company’s rejection of the final acceptance is invalid and improper.
59
On August 26, 2004, the Company drew down
approximately $30.3 million under a letter of credit posted by Raytheon
pursuant to the terms of the EPC Agreement. Prior to this date, the Company had
drawn $544,000 on this letter of credit. The Company believes that Raytheon
substantially breached the EPC Agreement, due, among other things, to the
facility’s failure to achieve compliance with certain performance tests, and
Raytheon’s failure to complete other services under the EPC Agreement and
certain amendments thereto, including a Settlement Agreement dated August 6,
2002, that purported to resolve disputes over whether Raytheon had achieved
Mechanical Completion and Provisional Acceptance. As a result, the Company
claims that Raytheon’s breaches have caused damages in excess of the amount of
the letter of credit. Raytheon disputes these claims and has failed and refused
to pay costs and damages to the Company despite the Company’s demands for such
payment.
On October 28, 2004, the Company received a
complaint filed by Raytheon in the State of New York. In the complaint,
Raytheon is seeking to recover $30,302,269, which represents the amount Red Oak
drew down on the letter of credit on August 26, 2004, attorneys’ fees and
costs, and also to recover up to $110 million of net expense Raytheon claims to
have incurred in good faith under the governing guaranty and construction
agreements. The Company filed an answer
and counterclaim on December 13, 2004, in which it denied liability to
Raytheon, asserted various defenses and countersued Raytheon for breach of the
EPC Agreement and Settlement Agreement, breach of express warranties under the
EPC Agreement, and fraudulent misrepresentation and concealment. The Company claimed damages of not less than
$140 million and attorneys’ fees and costs to the extent allowable. Raytheon moved to dismiss the Company’s
fraudulent misrepresentation and concealment claim and to limit Company’s damages
on January 14, 2005. The Company
filed its opposition to the motion to dismiss and also filed an amended
counterclaim on February 18, 2005. Thereafter,
Raytheon agreed to withdraw its motion to dismiss. On March 4, 2005,
Raytheon filed a motion for summary judgment that seeks the return of
$16,311,711 of the Letter of Credit draw. The Company has not yet filed
its opposition to the motion, and Raytheon has not yet filed an answer to the
amended counterclaim. The Company has recorded the $30.3 million as a current
liability, but has not accrued any additional amounts with respect to Raytheon’s
claims. The Company believes it has meritorious defenses to the claims
asserted by Raytheon against it and intends to defend the lawsuit and pursue
its counterclaims vigorously.
Maintenance Services – The
Company has entered into the Maintenance Program Parts, Shop Repairs and
Scheduled Outage TFA Services Contract (“Maintenance Services Agreement”),
dated as of December 8, 1999, 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 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
16 years from the effective date of the contract, whichever occurs first,
unless the Company exercises its right to terminate the agreement after the first
major outage of the turbines.
The Maintenance Services Agreement indicates that the
Company will pay fees each month based on a stated amount for each equivalent
base load hour of the combustion turbines, adjusted for inflation, over the
term of the agreement. However, if a
scheduled maintenance outage occurs prior to 8,000 equivalent base load hours
being accumulated since the last scheduled maintenance outage for that turbine,
the Company will be invoiced the remaining amount to equate to 8,000 hours (“true-up”).
In the event the Company is not required to dispatch the facility, there is no
charge for that month.
The total of these payments was approximately $6.8
million, $4.7 million and $1.2 million for the years ended December 31,
2004, 2003 and 2002, respectively, which included true-ups for two planned
maintenance outages, as the turbines were far short of the 8,000 EBH level. Assuming
a similar dispatch level in 2005 as in 2004, and the performance of one planned
hot gas maintenance outage, a comparable level of payments would be expected
for the year ended December 31, 2005. Based upon the Company’s current
estimates, assuming a certain number of equivalent base hours and equivalent
starts, the first major outages would be completed by 2011 and the remaining
minimum payments to Siemens Westinghouse would approximate $32 million through
that period.
As of December 31, 2004, the Company had received
approximately $11.0 million in rotable spare parts under this agreement. This amount is recorded as spare parts
inventory, or as Property, Plant and Equipment when placed in service. The
remaining amount owed to Siemens is recorded as current and long-term
liabilities in the accompanying balance sheets.
For financial reporting purposes, payments made to Siemens Westinghouse
are
60
treated as a reduction of the liability in the accompanying balance
sheet, except for the portion that is considered maintenance expense when a
scheduled outage occurs.
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.
Interconnection Agreement – The
Company entered into an interconnection agreement with Jersey Central Power &
Light Company (“JCP&L”) d/b/a GPU Energy (“GPU”), and is dated April 27,
1999. GPU has since been merged with, and into, FirstEnergy, and JCP&L is
now a subsidiary of FirstEnergy. This
agreement is to transmit the electricity generated by the facility to the
transmission grid so that it may be sold as prescribed under the Power Purchase
Agreement. 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. 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 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.
Land Development Plan – The
Company entered into an agreement with the Borough of Sayreville by which the
Company will develop and implement a plan to replace trees which were removed
during clearing of the facility site.
The Land Development Plan is required for final site approval. The
estimated cost of the plan is approximately $425,000. The Company is in the process of selecting a
contractor to perform the service and no payments have been made as of December 31,
2004. On July 23, 2003, the project
was secured by a letter of credit issued by Union Bank of California for
$425,000 with the Borough of Sayreville as the beneficiary. This irrevocable standby letter of credit had
an expiration date of June 30, 2004, but was automatically extended for
another one-year period. On August 19, 2004, AES secured a performance
bond for $539,493 relating to the tree replacement and other site improvements.
This bond replaces the previous letter of credit and represents the amount
potentially due if there is a failure of AES Red Oak, LLC to take action
regarding the plan.
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 Company since the commencement of
commercial operation. Minimum amounts payable under the contract during 2004
were approximately $137,000 per month. Corporate management fees were $1.6
million for each of the years ended December 31, 2004 and 2003 and was
$0.6 million for the partial year of operations ended December 31, 2002.
Corporate management fees are charged on a monthly basis based on a fixed amount
which is adjusted annually for inflation.
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, 2004, 2003 and 2002, the Company
paid AES Sayreville a total of $5.3 million, $5.3 million and $4.4 million,
respectively, for their services. AES will continue to supply Sayreville with the
personnel, operational and maintenance services necessary to carry out its
obligations to the Company.
61
The Company had accounts receivable from affiliates of
$30,000 and $51,000 as of December 31, 2004 and 2003, respectively. The Company had accounts payable to its
parent and affiliates of $282,000 and $131,000 as of December 31, 2004 and
2003, 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. 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 $370.1
million and $375.4 million at December 31, 2004 and 2003, respectively. The Bonds had a fair value of approximately $415.4
million and $399.0 million, respectively, at December 31, 2004 and 2003.
11. 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 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 Power
Purchase Agreement.
62
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited quarterly
statements of operations for the Company for the years ended December 31,
2004 and 2003, respectively.
|
|
|
AES Red Oak, LLC
|
|
|
|
|
Quarter Ended
December 31, 2004
|
|
Quarter Ended
September 30, 2004
|
|
Quarter Ended
June 30, 2004
|
|
Quarter Ended
March 31, 2004
|
|
|
|
|
(dollars in thousands)
|
|
|
OPERATING
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
12,235
|
|
$
|
27,904
|
|
$
|
17,915
|
|
$
|
11,628
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
(7,484
|
)
|
(9,022
|
)
|
(9,215
|
)
|
(7,627
|
)
|
|
General and
administrative costs
|
|
(448
|
)
|
(213
|
)
|
(311
|
)
|
(177
|
)
|
|
Total
Operating Expense
|
|
(7,932
|
)
|
(9,235
|
)
|
(9,526
|
)
|
(7,804
|
)
|
|
OPERATING
INCOME
|
|
4,303
|
|
18,669
|
|
8,389
|
|
3,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME/EXPENSE
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
199
|
|
158
|
|
58
|
|
61
|
|
|
Interest
expense
|
|
(8,386
|
)
|
(8,463
|
)
|
(8,471
|
)
|
(8,478
|
)
|
|
Other
expense
|
|
(278
|
)
|
(240
|
)
|
(257
|
)
|
(261
|
)
|
|
Total Other
Income/Expenses
|
|
(8,465
|
)
|
(8,545
|
)
|
(8,670
|
)
|
(8,678
|
)
|
|
NET INCOME
(LOSS)
|
|
$
|
(4,162
|
)
|
$
|
10,124
|
|
$
|
(281
|
)
|
$
|
(4,854
|
)
|
|
|
|
AES Red Oak, LLC
|
|
|
|
|
Quarter Ended
December 31, 2003
|
|
Quarter Ended
September 30, 2003
|
|
Quarter Ended
June 30, 2003
|
|
Quarter Ended
March 31, 2003
|
|
|
|
|
(dollars in thousands)
|
|
|
OPERATING
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
11,639
|
|
$
|
25,799
|
|
$
|
15,747
|
|
$
|
11,021
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
(5,976
|
)
|
(7,549
|
)
|
(6,689
|
)
|
(6,692
|
)
|
|
General and
administrative costs
|
|
(1,047
|
)
|
(1,025
|
)
|
(977
|
)
|
(953
|
)
|
|
Total
Operating Expense
|
|
(7,023
|
)
|
(8,574
|
)
|
(7,666
|
)
|
(7,645
|
)
|
|
OPERATING
INCOME
|
|
4,616
|
|
17,225
|
|
8,081
|
|
3,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME/EXPENSE
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
294
|
|
57
|
|
67
|
|
77
|
|
|
Interest
expense
|
|
(8,551
|
)
|
(8,575
|
)
|
(8,492
|
)
|
(8,614
|
)
|
|
Liquated
damages received
|
|
12
|
|
202
|
|
610
|
|
603
|
|
|
Other
expense
|
|
(252
|
)
|
(255
|
)
|
(255
|
)
|
(251
|
)
|
|
Liquated
damages paid
|
|
(249
|
)
|
—
|
|
—
|
|
—
|
|
|
Total Other
Income/Expenses
|
|
(8,746
|
)
|
(8,571
|
)
|
(8,070
|
)
|
(8,185
|
)
|
|
NET INCOME
(LOSS)
|
|
$
|
(4,130
|
)
|
$
|
8,654
|
|
$
|
11
|
|
$
|
(4,809
|
)
|
63
ITEM
9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures. We carried out an evaluation, under
the supervision and with the participation of our management, including the
chief executive officer (“CEO”) and chief financial officer (“CFO”), of the
effectiveness of our “disclosure controls and procedures” (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15-d-15
(e) as required by paragraph (b) of the Exchange Act Rules 13a-15
or 15d-15) as of December 31, 2004. The Company’s management,
including the CEO and CFO, is engaged in a comprehensive effort to review,
evaluate and improve our controls; however, management does not expect that our
disclosure controls or our internal controls over financial reporting will
prevent all errors and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met.
Based upon the controls evaluation performed, the CEO and CFO have
concluded that as of December 31, 2004, our disclosure controls and
procedures were effective to provide reasonable assurance that material
information relating to us and our consolidated subsidiaries is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms.
Changes in Internal Controls.
In the course of our evaluation of disclosure controls and procedures,
management considered certain internal control areas in which the Company has
made and are continuing to make changes to improve and enhance controls.
Based upon that evaluation, the CEO and CFO concluded that there were no
changes in our internal controls 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 the fourth quarter ended December 31,
2004, that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
Compliance with Section 404 of the
Sarbanes Oxley Act of 2002. Beginning with the
year ending December 31, 2006, Section 404 of the Sarbanes-Oxley Act
of 2002 will require us to include an internal control report of management
with our annual report on Form 10-K. The internal control
report must contain (1) a statement of management’s responsibility for
establishing and maintaining adequate internal controls over financial
reporting for our Company, (2) a statement identifying the framework used
by management to conduct the required evaluation of the effectiveness of our
internal controls over financial reporting, (3) management’s assessment of
the effectiveness of our internal controls over financial reporting as of the
end of our most recent fiscal year, including a statement as to whether or not
our internal controls over financial reporting are effective, and (4) a
statement that our independent auditors have issued an attestation report on
management’s assessment of our internal controls over financial reporting.
Management developed a comprehensive plan in order to achieve
compliance with Section 404 within the prescribed period and to review,
evaluate and improve the design and effectiveness of our controls and
procedures on an on-going basis. The
comprehensive compliance plan includes (1) documentation and assessment of
the adequacy of our internal controls over financial reporting, (2) remediation
of control weaknesses, (3) validation through testing that controls are
functioning as documented and (4) implementation of a continuous reporting
and improvement process for internal controls over financial reporting.
As a result of this initiative, the Company has made and will continue to make
changes from time to time in our internal controls over financial reporting.
64
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. PRINCIPAL
ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed for each of the last two
fiscal years for professional services rendered by the principal accountant for
the audit of the registrant’s annual financial statements, included in
registrant’s form 10-K, and review of the financial statements included
in the registrant’s Form 10Q (17CFR249.308a) or services that are normally
provided by the accountant in connection with statutory and regulatory filings
or engagements for those fiscal years were approximately $241,000 and $219,000 for
the years ended December 31, 2004 and 2003, respectively.
The registrant’s board of directors serves as its
audit committee. All audit and non-audit services to be provided to the
registrant by its principal accountant are approved by the board of directors. A
pre-approval policy is in place with The AES Corporation Audit Committee.
All
Other Fees
There were no other fees paid to the principal
accountant for the years ended December 31, 2004 and 2003, respectively.
65
PART IV
ITEM
15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
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:
None.
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.
|
66
|
Exhibit Number
|
|
Description
|
|
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.
|
|
|
|
|
|
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).
|
67
|
Exhibit Number
|
|
Description
|
|
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.)
|
|
|
|
|
|
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
|
68
|
Exhibit Number
|
|
Description
|
|
|
|
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.
|
|
|
|
|
|
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. (Power
Purchase Agreement Guaranty). (Portions of this exhibit have
|
69
|
Exhibit Number
|
|
Description
|
|
|
|
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.
|
|
|
|
|
|
31.1*
|
|
Certification by Chief Executive Officer Required
by Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934
|
|
|
|
|
|
31.2*
|
|
Certification by Chief Financial Officer Required
by Rule 13a-14(a) or 15d— 14(a) of the Securities
Exchange Act of 1934
|
|
|
|
|
|
32*
|
|
Section 1350
Certifications
|
* 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.
70
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, 2004. No annual
report or proxy materials will be sent to security holders subsequent to the
filing of this annual report on Form 10-K.
71
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/ Thomas P. Keating
|
|
|
By:
|
Thomas P. Keating
|
|
|
Title:
|
Chief Financial Officer
|
Date: March 30, 2005
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/ A. W Bergeron
|
|
|
|
|
|
|
A. W Bergeron
|
|
Director
|
|
March 24,
2005
|
|
|
|
|
|
|
|
/s/ Edward P. Convery
|
|
|
|
|
|
|
Edward P. Convery
|
|
Director
|
|
March 30,
2005
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/s/ Dan Rothaupt
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Dan Rothaupt
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Director
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March 30,
2005
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72