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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2004
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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AES IRONWOOD, L.L.C.
(Exact name of Registrant as
specified in its charter)
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Delaware
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54-1457573
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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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305 Prescott Road, Lebanon, Pennsylvania
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17042
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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: (717)
228-1328
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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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes o No ý
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 ý
As of June 30, 2004, the last business day of the Registrant’s most
recently completed second fiscal quarter, and as of March 31 , 2005, AES Ironwood, L.L.C. had one
membership interest outstanding, which was held by AES Ironwood, 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 us in
periodic press releases and other public communications, constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. Certain, but not necessarily all, of
such forward-looking statements can be identified by the use of forward-looking
terminology, such as “believes,” “estimates,” “plans,” “projects,” “expects,” “may,”
“will,” “should,” “approximately,” or “anticipates” or the negative thereof or
other variations thereof or comparable terminology, or by discussion of
strategies, each of which involves risks and uncertainties.
We have based these forward-looking statements on our current expectations and
projections about future events based upon our knowledge of facts as of the
date of this Form 10-K and our assumptions about future events.
All
statements herein other than of historical facts, including those regarding
market trends, our financial position, business strategy, projected plans and
objectives of management for future operations of the facility, are
forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors outside of our control that may cause our actual results or
performance to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include,
among others, the following:
• unexpected
problems relating to the operations and performance of our facility;
• the
financial condition of third parties on which we depend, including in
particular, Williams Power Company,
Inc., formerly known as Williams Energy Marketing & Trading Company (“Williams”),
as the power purchaser and fuel supplier under the Power Purchase Agreement,
and The Williams Companies, Inc., as the guarantor of performance under the
Power Purchase Agreement;
• unanticipated
effects of the arbitration decision relating to our Power Purchase Agreement
dispute with Williams and the possibility of future disputes or proceedings
regarding the Power Purchase Agreement;
• the
continued performance of Williams 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 provide adequate security to supplement or replace their guarantee of
Williams’ 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 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;
• inadequate
insurance coverage;
• unexpected
expenses or lower than expected revenues;
• environmental
and regulatory compliance; and
• terrorists
acts and adverse reactions to United States anti-terrorism activities.
We have no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
3
PART I
ITEM 1. Business
General
We are
a Delaware limited liability company formed on October 30, 1998 to develop,
construct, own, operate and maintain a 705-megawatt (MW) gas-fired electric
generating power plant in Lebanon County, Pennsylvania, and to manage the
production of electric generating capacity, ancillary services and energy at
our facility. References to “us”, “our”, “we”
or “the Company” herein mean AES Ironwood, L.L.C. We commenced commercial operations on
December 28, 2001, the “commercial operations date”.
Since the commercial operation date, our sole business is the ownership and
operation of this facility.
We own
the land on which our facility is located. Our facility was
designed, engineered, procured and constructed for us by Siemens Westinghouse
Power Corporation (“Siemens Westinghouse”) on a fixed-price, turnkey basis
under the construction agreement (the “Construction Agreement”). For more information, see “- Summary of Principal Project
Contracts – Construction Agreement” below. Siemens Westinghouse is also
providing combustion turbine maintenance services and spare parts for our
facility for an initial term of between eight and ten years, depending on the
timing of scheduled outages, under a maintenance services agreement. AES Prescott, L.L.C. (“AES
Prescott”), an indirect wholly-owned subsidiary of The AES Corporation,
provides development, construction management and operations and maintenance
services for the project under an operations agreement, referred to as the “Development
and Operations Services Agreement”.
We
entered into a Power Purchase Agreement (the “Power Purchase Agreement”) for a
term of 20 years under which Williams is committed to purchase all of the net
capacity, fuel conversion and ancillary services of our facility. For more information, see “– Summary of Principal Project
Contracts – Power Purchase Agreement” below. Net capacity is the maximum amount
of electricity generated by our facility net of electricity used at our
facility. Fuel conversion services consist of
the combustion of natural gas in order to generate electric energy. Ancillary services consist of services necessary to
support the transmission of capacity and energy.
Williams is obligated to supply us with all natural gas necessary to provide
net capacity, fuel conversion services and ancillary services under the Power
Purchase Agreement. During the
term of the Power Purchase Agreement, substantially all of our revenues will be
derived from payments made by Williams under the Power Purchase Agreement.
Organizational
Structure
All of
our equity interests are owned by AES Ironwood, Inc.,
a wholly-owned subsidiary of The AES Corporation. The AES Corporation has provided funds to AES
Ironwood, Inc. so that AES Ironwood, Inc. can make equity contributions to us to fund project costs. Under an equity
subscription agreement (the “Equity Subscription Agreement”) dated June 1,
1999, with AES Ironwood, Inc., these contributions were limited to $50.1
million. As of December 31, 2004, AES Ironwood, Inc. had made contributions to
us of $38.8 million. Approximately $9.1 million of the remaining contribution
was supported by a surety bond until June 25, 2002, when the surety bond
expired. At that time the surety bond was replaced by an acceptable letter of
credit in the amount of $9.1 million. The need for the letter of credit ceased
with the granting of final acceptance on March 12, 2003. The collateral agent
has released us of this requirement. On March 12, 2003, final acceptance under
the agreement was granted and an Officer’s Certificate has been submitted to
the Collateral Agent indicating that the facility has been fully funded and no
further contribution will be required.
AES Ironwood, Inc. currently has
no operations outside of its activities in connection with our facility and
does not anticipate undertaking any operations not associated with our facility. AES Ironwood, Inc. has no assets
other than its membership interests in us and AES Prescott.
AES Prescott has no operations outside of its activities in connection with our
facility. Under a services agreement, The AES
Corporation supplies to AES Prescott all of the personnel and services
necessary for AES Prescott to comply with its obligations under the operations
agreement, referred to as the “Development and Operations Agreement”. As of December 31,
2004, The AES Corporation provided 27 employees to our facility.
The AES Corporation is a leading global power company, with
2004 sales of $9.5 billion. The AES Corporation delivers 45,000 megawatts of
electricity to customers in 27 countries through 117 power facilities and 17
distribution companies. Its 30,000 people are committed to operational
excellence and safely meeting the world’s growing power needs. Approximately
23% of The AES Corporation’s revenues come from
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businesses
in North America, 17% from the Caribbean, 41% from South America, 11% from
Europe and Africa, and 8% from Asia.
The
following organizational chart illustrates the relationship among our company,
AES Ironwood, Inc., AES Prescott and The AES
Corporation:
Our
principal executive offices are located at 305 Prescott Road, Lebanon,
Pennsylvania 17042. Our telephone
number is (717) 228-1328.
Developments Relating to
Williams
Under
the Power Purchase Agreement, in the event that Standard & Poors (“S&P”)
or Moody’s rates the long-term senior unsecured debt of The Williams Companies,
Inc. lower than investment grade, The Williams Companies, Inc., or an affiliate
thereof is required to supplement The Williams Companies, Inc. guarantee with
additional alternative security that is acceptable to the Company within 90
days after the loss of such investment grade rating. For more information, see
– “Summary of Principal Project Contracts – Security”. 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.
In an
action related to the ratings downgrade of The Williams Companies, Inc., both
S&P and Moody’s lowered their ratings on the Company’s senior secured
bonds. On December 10, 2003 S&P lowered its ratings on the Company’s senior
secured bonds to “B+” from “BB-” with a negative outlook. On November 27, 2002,
Moody’s lowered its ratings on the Company’s senior secured bonds to “B2” from “Ba2”.
The Company does not believe that such ratings downgrades will have any other
direct or immediate effect on the Company, as none of the other financing
documents or project contracts have provisions that are triggered by a
reduction of the ratings of the bonds.
To satisfy the requirements
of the Power Purchase Agreement, on September 20, 2002, Citibank, N.A. issued a
$35 million Irrevocable Standby Letter of Credit (the “Letter of Credit”) on
behalf of Williams. The Letter of Credit does not alter, modify, amend or
nullify the guaranty issued by The Williams Companies, Inc. in favor of the
Company and is considered to be additional security to the security amounts
provided by such guaranty. The Letter of Credit became effective on September
20, 2002 and expired upon the close of business on July 10, 2003 except that
the Letter of Credit will be automatically extended without amendment for
successive one year periods from the present or any future expiration date
hereof, unless Citibank, N.A. provides written notice of its election not to
renew the Letter of Credit at least thirty days prior to any such expiration
date. In July 2004, Citibank, N.A. sent notification that the letter of credit
will be extended to July 12, 2005. Additionally, in a Letter Agreement dated
September 20, 2002, Williams agreed to (a) provide eligible credit support
prior to the stated expiration date of the Letter of Credit and (b) replenish
any portion of the Letter of Credit or eligible credit support that is drawn,
reduced, cashed or redeemed, at any time, with an equal amount of eligible
credit support. Within twenty days prior to the expiration of the Letter of
Credit and/or any expiration date of eligible credit support posted by
Williams, Williams shall post eligible credit support to the Company in place
of the Letter of Credit and/or any expiring eligible credit support unless The
Williams Companies, Inc. regains and maintains its investment grade status, in
which case the
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Letter of Credit or eligible
credit support shall automatically terminate and no additional eligible credit
support shall be required. The Company and Williams acknowledge that the
posting of such Letter of Credit and Williams’ agreement and performance of the
requirements of (a) and (b) as set forth in the immediately preceding sentence
shall be in full satisfaction of Williams’ obligations contained in Section
19.3 of the Power Purchase Agreement to provide replacement security due to the
downgrade of The Williams Companies, Inc. below investment grade status.
Since the Company depends on
The Williams Companies, Inc. and its affiliates for both revenues and fuel
supply under the Power Purchase Agreement, if The Williams Companies, Inc. and
its affiliates were to terminate or default under the Power Purchase Agreement,
there would be a severe negative impact to the Company’s cash flow and
financial condition which could result in a default on the Company’s senior
secured bonds. Due to recent declines in pool prices, the Company would
expect that if required to seek alternative purchasers of its power as a result
of a default by The Williams Companies, Inc. and its affiliates that any such
alternate revenues would be substantially below the amounts that would have
been otherwise payable pursuant to the Power Purchase Agreement. There
can be no assurance as to the Company’s ability to generate sufficient cash
flow to cover operating expenses or debt service obligations in the absence of
a long-term Power Purchase Agreement with Williams or its affiliates.
For the twelve months ended
December 31, 2004, the Company has invoiced Williams approximately $54.5
million in respect of fixed payments, fuel conversion services and ancillary
services. Approximately $52.4 million has been recognized as revenue and
approximately $2.1 million has been deferred consistent with the Company’s revenue
recognition policy discussed in Note 3 to the financial statements.
The Company had ongoing disputes, including arbitration with Williams,
relating to the parties’ Power Purchase Agreement. The arbitration was bifurcated into two
phases, and an award was issued on Phase I on February 3, 2004. The primary issue in Phase I related to
various aspects of the availability of the facility for the year ended December
31, 2002, including disputes over the amount of any availability bonus or
penalty. Phase II of the arbitration
involved a dispute concerning the proper duration of facility start-ups and
shutdowns, including fuel used during start-ups and shutdowns. While Phase I of the arbitration was limited
to billing disputes in 2002, many of the same issues are disputed between the
parties for 2003 billings.
The arbitral panel’s award on Phase I of the arbitration found that
Williams had misapplied the applicable rules of PJM Interconnection, L.L.C. in
the billing dispute with the Company over the availability of the
facility. The panel declined, however,
to decide the facility’s availability during 43 disputed maintenance
events. Instead, it encouraged the
parties to reach a mutual resolution of the disputed events by applying the
correct Pennsylvania-New Jersey-Maryland (“PJM”) rule and, failing mutual
agreement, to submit the dispute to a third party engineer for resolution. The parties are currently discussing possible
resolution of the disputed events, and anticipate submitting any events that
cannot be resolved by mutual agreement to a third party. Until the matter is fully resolved, the
availability of the facility, and certain payments that are calculated based on
availability, cannot be determined.
During 2004 Williams paid approximately $2.2 million in respect of
availability bonus for 2002 and 2003. Approximately $1.8 million has been
recorded in operating revenues and approximately $415,000 has been recorded as
a reduction of bad debt expense, included in general and administrative costs.
The parties are continuing to resolve the outstanding availability issues and
expect resolution during 2005.
Also as a
result of the panel’s Phase I Award, the Company will begin pre-funding a cash
account on a quarterly basis to reflect the maximum amount of a fuel conversion
volume rebate that might be payable to Williams if the facility operates the
requisite number of hours to earn the maximum rebate available under the Power
Purchase Agreement. The maximum theoretical
annual amount of the fuel conversion volume rebate is $1.7 million, but the
account will not be fully funded during the course of the year if the facility
is not operated a sufficient number of hours to achieve the maximum fuel
conversion volume rebate. Depending on
the amount of facility operation, the Company may be entitled to withdraw some
of the funds deposited into the account during the second half of its fiscal
year. On April 1, 2004, the Company
deposited $71,000. This amount is included with restricted cash. For the twelve
months ended December 31, 2004, the Company has determined that no additional
liability has occurred and there is no liability for fuel conversion volume
rebate for the entire year ended December 31, 2004. The funds will be left in
the restricted account in anticipation of any liability incurred during the
first quarter of 2005. The Company will reassess this funding requirement for
each subsequent quarter to determine the liability. The funding will be
accomplished by transferring funds from an unrestricted cash account to the
restricted account.
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On March 12, 2004 the parties settled Phase II of the
arbitration between the Company and Williams, which involved Williams’ claims that the duration of start-ups and shutdowns should
be shortened, with a corresponding reduction in the volume of fuel consumed
during such operations. The settlement
resolves and releases, without any payment by the Company, Williams’ claim that it should be
reimbursed retroactively to the date of commercial operation for excess fuel
allegedly consumed during start-ups and shutdowns. An agreed order of dismissal has
been submitted requesting the arbitral panel to dismiss Phase II of the
arbitration with prejudice. The
settlement of Phase II has no impact on Phase I of the arbitration. The parties continue to negotiate in an
effort to settle issues left unresolved by the award in Phase I.
Energy Revenues
The
Company generates energy revenues under the Power Purchase Agreement with Williams. During the 20-year term of the agreement, the Company also
expects to sell electric energy and capacity produced by the facility, as well
as ancillary and fuel conversion services. Under the
Power Purchase Agreement, the Company also generates revenues from meeting (1)
base electrical output guarantees and (2) heat rate bonuses when providing
efficient fuel conversion services.
Upon
its expiration, or in the event that the Power Purchase Agreement is terminated
prior to its 20-year term, the Company would seek to generate energy revenues
from the sale of electric energy and capacity into the merchant market or under
new short- or long-term power purchase or similar agreements. There can be no assurances as to whether such efforts
would be successful.
Operating Expenses
Under
an agreement with AES Prescott, the Company is required to reimburse all
operator costs on a monthly basis. Operator
costs generally consist of all direct costs and overhead.
Additionally, a monthly operator fee of approximately $425,000, subject to
annual adjustment, is payable on each bond payment date.
Competition
Under
the Power Purchase Agreement, Williams is required to purchase all of the
Company’s capacity and energy. Therefore,
during the 20-year term of the Power Purchase Agreement, competition from other
capacity and energy providers will only become an issue if Williams breaches
its agreement and ceases to purchase the Company’s capacity and energy or the
Power Purchase Agreement is otherwise terminated or not performed in accordance
with its terms. Upon the expiration of the Power
Purchase Agreement or in the event the Power Purchase Agreement is terminated
prior to the expiration of its term, 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. Competition
and market conditions could have the effect of reducing operating time and
therefore reducing fuel conversion services and associated variable payments.
Employees
As of
December 31, 2004, the Company had nine officers.
Except for these officers, the Company does not have any employees and does not
anticipate having any employees in the future.
Under the operations agreement, AES Prescott 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 which are provided to AES
Prescott under the Development and Operations Agreement. As of December 31,
2004, The AES Corporation provided 27 employees to the facility.
Insurance
As
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 its facility and business interruption insurance covering
at least 12 months of debt service and fixed operation and maintenance expenses. The Company has obtained title insurance in an amount
equal to the principal amount of the senior secured bonds.
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AES
Prescott, as operator of the Company’s facility, maintains, among other
insurance policies, workers’ compensation insurance, or evidence of
self-insurance, if required, and comprehensive automobile bodily injury and
property damage liability insurance.
Permits and Regulatory
Approvals
AES
Prescott, as operator of the facility, and the Company, as owner of the
facility, must comply with numerous federal, state and local regulatory
requirements including environmental requirements in the operation of the
facility.
On
March 31, 1999, the Company received a certification from the Federal Energy
Regulatory Commission (“FERC”) that it 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 it
continues to make only wholesale sales of electricity, which it intends to do. Prior to commercial operation, the Company filed the Power
Purchase Agreement with FERC and obtained approval for the rates contained
therein. 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
March 29, 1999, the Company received its Prevention of Significant
Deterioration Permit, or “air permit,” from the Pennsylvania Department of
Environmental Protection. The air
permit required that the Company’s facility be constructed in a manner that
would allow it to meet specified limitations on emissions of air pollutants.
The Company is operating under Plan Approval 38-05019 (“Plan Approval”). The plan approval is being amended to reflect
changes in start up time durations and was in a 30 day public review period,
which ended on March 31, 2004. The
amended plan approval language will be incorporated into the Company’s Title V
Operating permit. Discussions are ongoing with respect to conditions in the
permit. The Company is operating under a permit shield and the Plan Approval.
The
Company is subject to a number of statutory and regulatory standards and
required approvals relating to energy, labor and environmental laws. Although the necessary environmental permits for the
commencement of construction of its facility have been obtained, the Company is
required to comply with the terms of its environmental permits and to obtain
other permits for the operation of the facility.
The
permits that have been obtained and that will be obtained contain ongoing
requirements. Failure to satisfy and maintain
any of the permit conditions or other applicable requirements could prevent the
operation of the Company’s facility and/or result in additional costs.
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 an Amended and Restated Power Purchase Agreement, dated as
of February 5, 1999, with Williams for the sale to Williams of all of the
electric energy and capacity produced by its facility as well as ancillary
services and fuel conversion services. During 2003 the Company entered
into arbitration with Williams to resolve certain disputes regarding the proper
interpretation of certain provisions of the Power Purchase Agreement relating
to amounts claimed by the Company to be payable by Williams and amounts by the
Company to Williams. On February 3, 2004 the arbitration panel handed their
decision to the parties. The arbitration decision covered both revenue and
non-revenue items. The most important item to the Company was in respect of the
calculation of total available capacity.
For further information, please see “Legal Proceedings”.
8
Term
The
term of the Power Purchase Agreement extends for 20 years after the first
contract anniversary date, which is the last day in the month in which the
commercial operation date occurs. The
commercial operation date occurs when:
• the
initial start-up testing of the facility has been successfully completed,
• the
Company has received all approvals from PJM Interconnection, L.L.C., which is the independent system operator that operates
the transmission system to which the facility will interconnect, and
• the
Company has obtained all required permits and authorizations for operation of
the facility.
These
prerequisites were met and the facility commenced operations, subject to the
terms of the Power Purchase Agreement, on December 28, 2001, accordingly, the
Power Purchase Agreement’s initial term is expected to expire on December 31,
2021.
Purchase and Sale
of Capacity and Services
During
the term, commencing with the commercial operation date, the Company must sell
and make available to Williams on an exclusive basis, and Williams must
purchase and pay for the Company’s facility’s net capacity and ability to
generate electric energy. In addition,
during the term, commencing with the commercial operation date, the Company
must perform for Williams on an exclusive basis, and Williams must purchase and
pay for fuel conversion services and ancillary services.
Fuel conversion services consist of the generation of electric energy from fuel
provided by Williams. Ancillary
services consist of services necessary to support the transmission of capacity
and energy.
Fuel Conversion
and Other Services
Williams
must deliver or cause to be delivered to the Company at the gas delivery point
on an exclusive basis all quantities of natural gas as the Company requires:
• to
generate net electric energy and/or ancillary services,
• to
perform start-ups,
• to
perform shutdowns, and
• to
operate the facility during any period other than a start-up, shutdown or
dispatch period for any reason.
Pricing and
Payments
For
each month of the term after the commercial operation date, Williams must pay
the Company for the facility’s net capacity, successful start-ups and
associated shutdowns, other services and fuel conversion services at the
applicable rates described in the Power Purchase Agreement.
Each monthly payment by Williams will consist of a total fixed payment, a fuel
conversion payment and a start-up payment. The total
fixed payment, which is payable regardless of facility dispatch by Williams but
is subject to adjustment based on facility availability, is calculated by
multiplying a fixed capacity rate for each contract year by the facility’s net
capacity in the billing month and 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 fuel
conversion payment is intended to cover the Company’s variable operating and
maintenance costs and escalates annually based on an escalation index described
in the Power Purchase Agreement. The start-up
payment is intended to cover the Company’s non-fuel variable costs when the
plant is starting up to meet a dispatch request.
In addition, the Company may receive heat rate bonuses or be required to pay
heat rate penalties.
Prior
to the commercial operation date and during specific facility tests thereafter,
the Company purchased natural gas from Williams.
Williams sold to the Company the natural gas at prices specified in the Power
Purchase Agreement, and the Company sold to Williams at the electric delivery
point any net electric energy produced during those periods at 90% of the
energy market clearing price.
9
Williams
will be entitled to an annual fuel conversion volume rebate if its dispatch of
the Company’s facility exceeds specified levels and specified monthly
non-dispatch payments if, under specific circumstances, the facility is not
available for dispatch. All fuel
conversion volume rebate payments and non-dispatch payments must be made to
Williams after debt service and specified other payments but prior to any
distribution to holders of the equity interests in our company. Fuel conversion volume rebate payments must be paid to
Williams within 30 days after the end of the contract year in which the
payments have been earned and non-dispatch payments must be paid to Williams
within 20 days after the end of the month on which a payment obligation arises. Fuel conversion volume rebate payments and any
non-dispatch payments owed to Williams and not paid when due must be paid,
together with interest, when funds become available to the Company at the
priority level described above.
Interconnection
and Metering Equipment
At the
Company’s sole cost and expense, it will maintain, or be responsible for the
maintenance of its facility, the 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 may be located at any switchyard and/or
substation to be built at its facility. At the
Company’s cost and expense, the interconnection facilities and protective gas
apparatus needed to generate and deliver net electric and/or ancillary services
to the electric delivery point have been completed as required under the Power
Purchase Agreement. The
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 the Company’s 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.
The
Company has been solely responsible for the negotiation and execution of the
interconnection agreement with GPU Energy under which GPU Energy will own and
be responsible for the electric metering equipment and the design,
installation, construction and maintenance of the electrical facilities and
protective apparatus, including any transmission equipment and related
facilities, necessary to interconnect GPU Energy’s electrical system with the
Company’s facility at the electric delivery point.
Williams reimbursed the Company for the reasonable GPU Energy costs (i.e., transmission
facility costs, GPU Energy protective apparatus and other equipment, GPU Energy
electric meters, and GPU Energy costs for PJM and other required
interconnection-related studies) incurred by the Company.
Williams
was responsible for the installation and will be responsible for the
maintenance and testing of the gas metering equipment, to the extent not
otherwise installed, maintained and tested by the supplier of gas
transportation services, as reasonably approved by the Company.
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.
Operation /
Dispatch
The
Company’s facility, the interconnection facilities and the protective gas
apparatus must be operated in accordance with accepted electrical practices and
applicable requirements and guidelines reasonably adopted by GPU Energy from
time to time and applied consistently to GPU Energy’s electric generating
facilities, with respect to our facility and interconnection facilities, or in
accordance with standard gas industry practices, with respect to protective gas
apparatus. If there is a conflict between the
terms and conditions of the Power Purchase Agreement and GPU Energy
requirements, GPU Energy requirements will control.
The
Company must operate its facility in parallel with GPU Energy’s electrical
system with governor control and the net electric energy to be delivered by the
Company under the Power Purchase Agreement must be three-phase, 60 hertz,
alternating current at a nominal voltage acceptable to GPU Energy at the
electric delivery point, must not adversely affect the voltage, frequency, wave
shape or power factor of at the electric
delivery point and must be delivered to the electric delivery point in a manner
acceptable to GPU Energy.
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The
Power Purchase Agreement acknowledges that GPU Energy has the right to require
the Company to disconnect its facility from GPU Energy’s electrical system, or
otherwise curtail, interrupt or reduce deliveries of net electric energy, for
specific safety or emergency reasons. If the Company’s
facility has been disconnected for these reasons, Williams will continue to be
obligated to make total fixed payments for at least 24 hours after the
occurrence of the disconnection of our facility by GPU Energy.
The
Company must use commercially reasonable efforts to promptly correct any
condition at our facility which necessitates the disconnection of our facility
from GPU Energy’s electrical system or the reduction, curtailment or
interruption of electrical output of its facility.
Williams will have the exclusive right to schedule the operation of the Company’s
facility or a unit in accordance with the provisions of the Power Purchase
Agreement so long as the scheduling is consistent with the design limitations
of the Company’s facility, applicable law, regulations and permits, and
manufacturers’ reasonable recommendations for operating limits with respect to
the Company’s facility and major components.
Up to
two times each year, the Company must demonstrate, in accordance with the
then-applicable criteria of PJM the capability of its facility to produce and
maintain, as required for the demonstration, the Company’s facility’s net
capacity.
Force Majeure
A
party will be excused from performing its obligations under the Power Purchase
Agreement and will not be liable in damages or otherwise to the other party if
and to the extent the party declares that it is unable to perform or is
prevented from performing an obligation under the Power Purchase Agreement by a
force majeure condition, except for any obligations and/or liabilities under
the Power Purchase Agreement to pay money, which will not be excused, and
except to the extent an obligation accrues prior to the occurrence or existence
of a force majeure condition so 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 more than five days later, 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
• once
the party declaring force majeure is able to resume performance of its
obligations excused as a result of the force majeure condition, it promptly
gives written notice to the other party.
Irrespective
of whether the force majeure condition is declared by Williams or the Company,
the time period of a force majeure will be excluded from the calculation of all
payments under the Power Purchase Agreement and Williams must be under no
obligation to pay the Company any of the payments described in the Power
Purchase Agreement. If Williams
declares a force majeure, however, it must, subject to its right to terminate
the Power Purchase Agreement if the force majeure has not been fully corrected
or alleviated within 18 months of the declaration, continue to pay the Company
only the applicable monthly total fixed payment as described in the Power
Purchase Agreement until the earlier of (1) the termination of the force
majeure condition or (2) the termination of the Power Purchase Agreement. Furthermore, if the Company declares a force majeure due
to an action or inaction of GPU Energy that prevents the Company from
delivering net electric energy to the electric delivery point, Williams must
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 the following nor will the following
excuse a party’s performance:
• Any
reduction, curtailment or interruption of generation or operation of the
Company’s facility, or of the ability of Williams 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
11
materials, equipment, supplies or services, or any inability of GPU
Energy to deliver net electric energy to Williams, unless, and then only to the
extent that, any acts or omissions would
itself be excused under the Power Purchase Agreement as a force majeure; or
• Any
outage, whether or not due to the fault or negligence of the Company, of its
facility 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 ability of the
Company to perform its obligations under the Power Purchase Agreement; or
• 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; or
• To
the extent that the claiming party’s failure to perform was caused by lack of
funds; or
• To
the extent Williams is unable to perform due to a shortage of natural gas not
caused by an event of force majeure; or
• Because
of an increase or decrease in the market price of electric energy/capacity,
natural gas or because it is uneconomic for the party to perform its obligations
under the Power Purchase Agreement.
Neither
party will be required to settle any strike, walkout, lockout or other labor
dispute on terms which, in the sole judgment of the party involved in the
dispute, are contrary to its interest. Williams will
have the right to terminate the Power Purchase Agreement if a force majeure has
been declared by the Company and the effect of the force majeure has not been
fully corrected or alleviated within 18 months after the date the force majeure
was declared. Williams, however, will not have
the right to terminate the Power Purchase Agreement if (1) the force majeure
was caused by Williams or (2) the force majeure event does not prevent or
materially limit Williams’ ability to sell our facility’s 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, (1) any failure to maintain or to renew any security, (2) any
breach of a representation, warranty or covenant or (3) failure of either party
to make a required payment to the other party;
• the
Company’s facility is not available to provide fuel conversion services to
Williams during any period of 180 consecutive days after the commercial
operation date, except as may be excused by force majeure or the absence of
available natural gas, or if the non-availability is caused by an act or
failure to act by Williams where the action is required by the Power Purchase
Agreement;
• the
Company sells or supplies net electric energy, ancillary services or capacity
from its facility, or agrees to do the same, to any person or entity other than
Williams, without the prior approval of Williams;
• failure
by the Company for 30 consecutive days to perform regular and required
maintenance, testing or inspection of the interconnection facilities, its
facility and/or other electric equipment and facilities;
• failure
by the Company 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 its 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 under the Power Purchase Agreement;
• involuntary
bankruptcy or insolvency of either party and continues for more than 60 days;
• voluntary
bankruptcy or insolvency by either party;
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• any
modifications, alterations or other changes to the Company’s facility by or on
behalf of the Company which prevent it 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 does not materially affect the Company’s
ability to perform its obligations under the Power Purchase Agreement; and
• (1)
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 the Company’s
management or policies or (2) any person or an affiliate, other than The AES
Corporation or an affiliate, authorized to act as a power marketer by FERC will
own, directly or indirectly, beneficially or of record, any of the equity
interests in the Company.
Upon
the occurrence of any event of default, other than an event of default for
voluntary bankruptcy or insolvency, 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, must give prompt written
notice of the default to the defaulting party.
The notice must describe, in reasonable detail, the nature of the default and,
where known and applicable, the steps necessary to cure the default. The defaulting party must have 30 days, but only two
business days in the case of a default for failure to make a requested payment
to the non-defaulting party under the Power Purchase Agreement, 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 any event
of default for voluntary bankruptcy or insolvency, 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. The non-defaulting party may exercise all the rights and
remedies as are available to it to recover damages caused by the default.
Security
Williams
has provided the Company a guaranty, issued by The Williams Companies, Inc., of Williams’ performance and payment obligations under
the Power Purchase Agreement. Under 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. or an affiliate thereof, is required to replace such
Williams Companies, Inc. guaranty,
within thirty days, with an alternative security that is acceptable to the
Company after loss of such investment grade rating.
Under
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. guarantee with additional alternative security that is
acceptable to the Company within 90 days after the loss of such investment
grade rating. According to published
sources, 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.
To
satisfy the requirements of the Power Purchase Agreement, on September 20,
2002, Citibank, N.A. issued a $35 million Irrevocable Standby Letter of Credit
(the “Letter of Credit”) on behalf of Williams. The Letter of Credit does not
alter, modify, amend or nullify the guaranty issued by The Williams Companies,
Inc. in favor of the Company and is considered to be additional security to the
security amounts provided by such guaranty. The Letter of Credit became
effective on September 20, 2002 and expired upon the close of business on July
10, 2003; except that the Letter of Credit will be automatically extended
without amendment for successive one year periods from the present or any
future expiration date hereof, unless Citibank, N.A. provides written notice of
its election not to renew the Letter of Credit at least thirty days prior to
any such expiration date. In July 2004, Citibank, N.A. sent notification that
the letter of credit will be extended to July 12, 2005. Additionally, in a
Letter Agreement dated September 20, 2002, Williams agreed to (a) provide
eligible credit support prior to the stated expiration date of the Letter of
Credit and (b) replenish any portion of the Letter of Credit or eligible credit
support that is drawn, reduced, cashed or redeemed, at any time, with an equal
amount of eligible credit support. Within twenty days prior to the
13
expiration of the Letter of Credit and/or any
expiration date of eligible credit support posted by Williams, Williams shall
post eligible credit support to the Company in place of the Letter of Credit
and/or any expiring eligible credit support unless The Williams Companies, Inc.
regains and maintains its investment grade status, in which case the Letter of
Credit or eligible credit support shall automatically terminate and no
additional eligible credit support shall be required. The Company and
Williams acknowledge that the posting of such Letter of Credit and Williams’
agreement and performance of the requirements of (a) and (b) as set forth in
the immediately preceding sentence shall be in full satisfaction of Williams’
obligations contained in Section 19.3 of the Power Purchase Agreement to
provide replacement security due to the downgrade of The Williams Companies,
Inc. falling below investment grade status.
Assignment
Generally,
neither the Power Purchase Agreement nor any rights, duties, interests or
obligations thereunder may be assigned, transferred, pledged or otherwise
encumbered or disposed of, by operation of law or otherwise without the prior
written consent of the other party.
The
Company agreed that it will not sell, transfer, assign, lease or otherwise
dispose of its facility or any substantial portion thereof or interest therein
necessary to perform its obligations under the Power Purchase Agreement to any
person that is a FERC-authorized power marketer or an affiliate without the
prior written consent of Williams, which consent must not be unreasonably
withheld.
Construction Agreement
The
Company, as assignee of AES Ironwood, Inc., entered into
an Agreement for Engineering, Procurement and Construction Services, dated as
of September 23, 1998, as amended, with Siemens Westinghouse for Siemens
Westinghouse 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.
By
meeting the provisions in Section 6.3 of the
construction agreement, provisional acceptance was granted by the Company on
December 27, 2001. On March 12, 2003, the Company
entered into a settlement agreement with Siemens Westinghouse concerning final
acceptance. This agreement became
effective as of that date and final acceptance was granted by the Company as of
that date. For further information, please see “Legal Proceedings”. The financial
impact of the settlement was recorded in the Company’s financial statements for
the year ended December 31, 2002.
Siemens
Westinghouse’s Services and Other Obligations
Siemens
Westinghouse must complete the Company’s project by performing or causing to be
performed all of the services. The required services have
included: engineering and design; construction and construction management;
providing design documents, instruction manuals, a project procedures manual
and quality assurance plan; procuring 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 some
applicable permits and providing information to assist the Company in obtaining
other applicable permits; performing inspection, expediting, quality
surveillance and traffic services; transporting, shipping, receiving and
marshalling 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 GPU Energy interconnections to our facility
(including gas and water pipelines); performing performance tests and Power
Purchase Agreement output tests; providing for start-up and initial operation
functions; and providing specified spare parts, waste disposal services,
chemicals, consumables and utilities.
The
services also included: training the Company’s personnel prior to provisional
acceptance; providing the Company and its designee with access to the facility
site; obtaining additional necessary real estate rights; clean-up
14
and waste disposal (including hazardous materials
brought to the facility site by Siemens Westinghouse or the subcontractors);
submitting a construction schedule and progress reports; payment of contractor
taxes; 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 the
Company; 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 Siemens Corporation to execute and deliver the related
guaranty.
Contract Price and
Payment
The
adjusted contract price, including base scope changes through the date of the
construction agreement, was approximately $241.6 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 Company
made scheduled payments to Siemens Westinghouse upon receipt of Siemens
Westinghouse’s payment request. The Company
did not defer any payment. The Company
withheld from each scheduled payment 5%, other than our project completion
payment, of the payment until after final acceptance.
As part of a settlement agreement, dated March 12, 2003, Siemens Westinghouse
agreed to waive their right to receive any payments with respect to the final
milestone payment of $2.2 million and to the retainage of $12.1 million held by
the Company. Additionally, Siemens
Westinghouse made a payment of $4.8 million to the Company in respect of items
related to final acceptance. This amount was recorded as a reduction in the
cost of the facility. The financial
impact of the settlement agreement was recorded in the Company’s financial
statements for the year ended December 31, 2002. Prior to provisional
acceptance, the Company received funds that reduced the cost of the plant that
was ultimately capitalized. These funds include liquidated damages in the
amount of $19.1 million and electric generation revenues during commissioning
of $8.4 million. Other costs were added back to the contract price such as
interest paid during construction in the amount of $60.2 million. The result of
such additions and subtractions has resulted in a capitalized cost of the plant
of approximately $278.2 million.
Mechanical
Completion
The
agreement sets forth certain conditions that were required to be met in order
for mechanical completion to occur. These
conditions were deemed to be met on December 27, 2001 when provisional
acceptance was granted.
Provisional and
Final Acceptance
The
agreement sets forth various requirements before provisional acceptance and
final acceptance of the project would be made by the Company. The Company
granted provisional acceptance on December 27, 2001. As part of a settlement
agreement with Siemens Westinghouse, final acceptance was granted on March 12,
2003.
Because
the Company has granted final acceptance on March 12, 2003, Siemens
Westinghouse will have no liability to the Company for any amounts thereafter
arising as performance guarantee payments, other than any interim period
rebates that arose prior to the final acceptance, for failure of our facility
to achieve any or all of the applicable performance guarantees other than
modifications to the facility as set forth in our settlement agreement.
Project Completion
Project
completion will be achieved under the construction agreement when:
• Final
acceptance of our facility will have occurred and the performance guarantees
with respect to our facility will have been achieved, or in lieu of achievement
of the performance guarantees, applicable rebates under the construction
agreement will have been paid, the Company will have elected final acceptance.
Pursuant to our arbitration settlement agreement, the Company granted final
acceptance on March 12, 2003;
• The
reliability guarantee will have been achieved;
• Siemens
Westinghouse will have demonstrated during the completed performance test that
the operation of our facility does not exceed the guaranteed emissions limits;
• The
requirements for achieving mechanical completion of our facility will continue
to be met;
15
• The
punch list items will have been completed in accordance with the construction
agreement; and
• Siemens
Westinghouse will have performed all of the services, other than those
services, such as Siemens Westinghouse’s warranty obligations, which by their
nature are intended to be performed after project completion.
Agreement
Change Order No. 71 “Final Acceptance” referred to a list of outstanding
technical issues that must be completed in order for Project Completion to
occur. The nature of many of these issues is such that it is most economically
feasible to complete them at the time of a hot gas path outage. There is no hot
gas path outage expected until 2006. The successful completion of the outage
and the technical issues should allow Project Completion to be granted.
When
Siemens Westinghouse believes that it has achieved project completion, it must
deliver to the Company a notice of project completion.
If the Company is satisfied that the project completion requirements have been
met, the Company must deliver to Siemens Westinghouse a project completion
certificate. If reasonable cause exists for
doing so, the Company must notify Siemens Westinghouse in writing that project
completion has not been achieved, stating the reasons therefor. If the Company’s project completion has not been achieved
as so determined by the Company, Siemens Westinghouse must promptly take such
action or perform the additional services as will achieve project completion and
must issue to the Company another notice of project completion. The procedure must be repeated as necessary until project
completion is achieved.
Price Rebate for
Failure to Meet Guarantees
Performance
Guarantees
Electrical
Output
If the
average net electrical output of our facility at provisional acceptance or
interim acceptance, whichever is the earlier to occur, is less than the natural
gas-based electrical output guarantee, then Siemens Westinghouse must pay the
Company, as a rebate, 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 natural gas-based electrical
output guarantee. During performance testing
output was calculated to be 37,854 kilowatts less than the natural gas-based
electrical output guarantee. The daily
charge for this amount was calculated at $8,328 per day.
At the
conclusion of the April 2002 outage, Siemens-Westinghouse retested the facility
and achieved no improvement in electrical output.
The daily charge for electrical output shortfall remained at $8,328 per day
through June 30, 2002.
Output
was improved in July 2002 to 3,195 kilowatts less than the natural gas-based
electrical output guarantee and accordingly the interim rebate was lowered to
$645 per day on July 4, 2002, the day the Company began receiving higher
capacity payments from Williams. This amount
was invoiced to Siemens-Westinghouse until February 28, 2003 and recorded as
other income.
Under
the terms of the agreement, various provisions relating to electrical output
performance provided either for a bonus to be paid by the Company to Siemens
Westinghouse or for Siemens Westinghouse to pay the Company a rebate based on
the outcome of those performance tests. As a result of our settlement
agreement, however, Siemens Westinghouse is deemed to have met but not exceeded
the performance guarantees and no bonus will be paid by the Company and no
rebate will be paid by Siemens Westinghouse.
Heat Rate
Guarantees
If the
average net heat rate of our facility at provisional acceptance and/or interim
acceptance, if having occurred before final acceptance, exceeds the natural
gas-based heat rate guarantee, then Siemens Westinghouse must pay the Company,
as a rebate, for each day during the interim period, an amount equal to $44 per
day for each BTU/KwH by which the measured net heat rate is greater than the
natural gas-based heat rate guarantee. During
performance testing heat rate was calculated to be 162 BTU/KwH more than the natural
gas-based heat rate guarantee. The daily
charge for this amount was calculated at $7,116 per day.
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At the
conclusion of the April 2002 outage Siemens-Westinghouse retested the facility
and achieved an improvement in heat rate. During
performance testing heat rate was calculated to be 71 BTU/KwH more than the
natural gas-based natural heat rate guarantee.
The daily charge for this amount has been calculated at $3,118 per day. The improvement in heat rate commenced on May 23, 2002,
and the lesser amount was invoiced to Siemens-Westinghouse from that date until
February 28, 2003. This amount was invoiced to
Siemens-Westinghouse until February 28, 2003 and recorded as other income.
For the twelve-month period
ended December 31, 2003, the Company has invoiced Siemens Westinghouse
approximately $222 thousand in electrical output and heat rate rebates for the
months of January and February, 2003. The amounts invoiced to Siemens
Westinghouse in 2003 have been paid by Siemens Westinghouse and are included in
other income. The electrical output and heat rate rebates have ceased
pursuant to the terms of final acceptance granted in Agreement Change Order No.
71, dated March 12, 2003. At that time plant performance guarantees were deemed
to have been met.
Under
the terms of the agreement, various provisions relating to heat performance
provided either for a bonus to be paid by the Company to Siemens Westinghouse
or for Siemens Westinghouse to pay the Company a rebate based on the outcome of
those performance tests. As a result of our settlement agreement, however,
Siemens Westinghouse is deemed to have met but not exceeded the performance
guarantees and no bonus will be paid by the Company and no rebate will be paid
by Siemens Westinghouse.
Liability and
Damages
Consequential Damages
Neither
party nor any of its contractors, subcontractors or other agents providing
equipment, material or services for our project will be liable for any
indirect, incidental, special or consequential loss or damage of any type.
Aggregate Liability of Contractor
The
total aggregate liability of Siemens Westinghouse and any of its
subcontractors, including liabilities covered by the Delay LD SubCap and the
Total LD SubCap, to us will not in any event exceed an amount equal to the
contract price so long as the limitation of liability will not apply to
obligations to remove liens or to make indemnification payments.
Warranties
and Guarantees
Siemens
Westinghouse warrants and guarantees that during the applicable warranty
period:
• all
machinery, equipment, materials, systems, supplies and other items comprising
our project must be new and of first-rate quality which satisfies GPU Energy
grade standards and in accordance with prudent utility practices and the
specifications described 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,
• the
Company’s project and its components must be free from all defects caused by
errors or omissions in engineering and design, as determined by reference to
prudent utility practices, and must comply with all applicable laws, all
applicable permits, GPU Energy electrical interconnection requirements, the
Power Purchase Agreement operating requirements and the guaranteed emissions limits;
and
• the
completed project must perform 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 Siemens Westinghouse within 30 days after the expiration of
the applicable warranty period of any defects or deficiencies discovered during
the applicable warranty period, Siemens Westinghouse must promptly re-perform
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
17
supplies or other items, replace or repair the same at its own expense. Siemens Westinghouse warrants and guarantees that, to the
extent the Company has made all payments then due to Siemens Westinghouse,
title to the Company’s facility and all work, materials, supplies and equipment
must 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.
During
the applicable warranty period, Siemens Westinghouse must promptly notify the
Company of any engineering and design defects which are manifested in any of
Siemens Westinghouse’s fleet of 501G combustion turbines under construction,
start-up or testing or in operation during the warranty period and which could
reasonably be expected to be common to the fleet or this facility. Upon the notification from Siemens Westinghouse of a
fleet-wide or common defect and otherwise upon notification from us no later
than 30 days after the expiration of the applicable warranty period of any
defects or deficiencies in our project or any component, the Company must,
subject to the provisions of the construction agreement, make the Company’s
facility or the subject equipment available to Siemens Westinghouse for Siemens
Westinghouse to re-perform, replace or, at its option, repair the same at its
expense so that it is in compliance with the standards warranted and
guaranteed, all in accordance with the construction agreement.
Force Majeure Event
A
force majeure event means 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 Siemens Westinghouse 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 (1) strikes, work stoppages and labor disputes or unrest
of any kind that involve only employees of Siemens Westinghouse or any
subcontractors, except as expressly provided in the preceding sentence, (2)
late delivery of materials or equipment, except to the extent caused by a force
majeure event and (3) 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 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 must give the other party written notice to that effect and must promptly
resume performance under the construction agreement.
18
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
construction schedule and the performance guarantees will be adjusted
accordingly, if necessary. All scope
changes must be authorized by a scope change order and only the Company or its
representative may issue scope change orders.
As soon as Siemens Westinghouse becomes aware of any circumstances which it has
reason to believe may necessitate a scope change, Siemens Westinghouse must
issue to the Company a scope change order notice at its expense. If the Company desires to make a scope change, in response
to a scope change order notice or otherwise, it must submit a scope change
order request to Siemens Westinghouse. Siemens
Westinghouse must 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 progress milestone dates, the
payment and milestone schedule, the Company’s construction schedule and the
performance guarantees. No scope
change order will be issued and no adjustment of the contract price, the
guaranteed completion dates, the construction progress milestone dates, the
payment and milestone schedule, our construction 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 Siemens Westinghouse
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 must be treated as scope changes.
In
December 2001, the Company reached an agreement with Siemens Westinghouse to
eliminate the requirement to use fuel oil as a secondary fuel from the
construction agreement. In a separate
agreement, Williams agreed to eliminate the requirement to use fuel oil as a
secondary fuel from the Power Purchase Agreement contract.
The result of the non-use of fuel oil will enhance the reliability of the plant
as well as increase the efficiency of the plant.
Effect of Force
Majeure Event
If and
to the extent that any force majeure events affect Siemens Westinghouse’s
ability to meet the guaranteed completion dates, or the construction progress
milestone dates, an equitable adjustment in one or more of the dates, the
payment and milestone schedule and our construction schedule must be made by
agreement between the Company and Siemens Westinghouse.
No adjustment to the performance guarantees and, except as otherwise expressly
described below, the contract price must be made as a result of a force majeure
event. If Siemens Westinghouse 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, six months or less, Siemens
Westinghouse must absorb all of its costs and expenses resulting from the
delay(s); and
• to
the extent that the delay(s) are, in the aggregate, more than six months,
Siemens Westinghouse must be reimbursed by the Company for those incremental
costs and expenses resulting from the delay(s) which are incurred by Siemens
Westinghouse after the six-month 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 agreement must
be determined, upon the mutual agreement of the parties.
Continued
Performance Pending Resolution of Disputes
If a
dispute arises regarding the amount of any increase or decrease in Siemens
Westinghouse’s costs with respect to a scope change, Siemens Westinghouse must
proceed with the performance of the scope change promptly following our
execution of the corresponding scope change order.
If
hazardous materials were not identified in an environmental site assessment
report delivered by the Company to Siemens Westinghouse prior to the
construction commencement date and were not brought onto the facility site by
Siemens Westinghouse or any of its subcontractors, then Siemens Westinghouse
will be entitled to a scope change under the construction agreement.
19
Risk of Loss
Until
the risk transfer date, which was December 27, 2001, the date at which
provisional acceptance was achieved, Siemens Westinghouse bore the risk of loss
and full responsibility for the costs of replacement, repair or reconstruction
resulting from any damage to or destruction of our facility or any materials,
equipment, tools and supplies, which are purchased for permanent installation
in or for use during construction of our facility.
Since December 27, 2001, the risk transfer date with respect to the Company’s
facility, the Company has born all risk of loss and full responsibility for
repair, replacement or reconstruction with respect to any loss, damage or
destruction to the Company’s facility.
Termination
Termination for 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 Siemens
Westinghouse 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 Siemens Westinghouse or, in emergency situations, upon
prior notice as circumstances permit.
Termination by Contractor
If the
Company fails to pay to Siemens Westinghouse any payment and its failure
continues for 20 days, then (1) Siemens Westinghouse 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,
is paid to Siemens Westinghouse, and/or (2) if the payment has not been made
prior to the commencement of a suspension by Siemens Westinghouse under clause
(1) above, Siemens Westinghouse may terminate the construction agreement upon
60 days’ prior written notice to the Company so long as the termination does
not become effective if the payment, plus accrued interest, is made to Siemens
Westinghouse prior to the end of the notice period.
In the event of a suspension, 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
construction schedule, and, as appropriate, the other provisions of the
construction agreement that may be affected thereby, must be made by agreement
between us and Siemens Westinghouse. 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 two years
in the aggregate, Siemens Westinghouse may, at its option, at any time
thereafter so long as the suspension continues to give written notice to the
Company that Siemens Westinghouse desires to terminate the suspended services. Unless the Company orders Siemens Westinghouse to resume
performance of the suspended services within 10 days of the receipt of the
notice from Siemens Westinghouse, the suspended services will be deemed to have
been terminated by the Company for the convenience of Siemens Westinghouse. If the occurrence of one or more force majeure events
prevents Siemens Westinghouse from performing the services for a period of 365
consecutive days, Siemens Westinghouse may, at its option, give written notice
to the Company of its desire to terminate the construction agreement.
Consequences of
Termination
• Upon
any termination, unless the termination is pursuant to any default, Siemens
Westinghouse will have been paid all amounts due and owing to it under the
construction agreement and it is not deemed to constitute a waiver by Siemens
Westinghouse 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, the
Company may, at its option elect to have ourselves, or our designee, which may
include any other affiliate of The AES Corporation or any third-party purchaser,
(1) assume responsibility for and take title to and possession of our project
and any or all work, materials or equipment remaining at the facility site and
(2) succeed automatically, without the necessity of any further action by
Siemens Westinghouse, to the interests of Siemens Westinghouse in any or all
items procured by Siemens Westinghouse for the Company’s project and in any and
all contracts and subcontracts entered into between Siemens Westinghouse and
any subcontractor with respect to the equipment specified in the construction
agreement with respect to any or all other subcontractors selected by us which
are materially necessary to the timely completion of our
20
project. Siemens Westinghouse must use all reasonable efforts to enable
the Company, or its designee, to succeed to Siemens Westinghouse’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 it
may deem expedient.
Default and
Remedies
Contractor’s Default
Siemens
Westinghouse’s events of default include:
voluntary bankruptcy or insolvency; involuntary bankruptcy or
insolvency; materially adverse misleading or false representation or warranty;
improper assignment; failure to maintain required insurance; failure to comply
with applicable laws or applicable permits; cessation or abandonment of the
performance of services; termination or repudiation of, or default under the
related 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 provisional acceptance, interim acceptance, final
acceptance and construction progress milestones; and failure to remedy
non-performance or non-observance of any provision in the construction
agreement.
The Company’s Rights and Remedies
If
Siemens Westinghouse 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 it under the construction
agreement or at law or in equity, and Siemens Westinghouse will have the
following obligations:
• The
Company may, without prejudice to any other right or remedy it 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 Siemens
Westinghouse. In case of partial termination,
the parties must 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 Siemens Westinghouse must have after
taking into account the partial termination, to one or more of the guaranteed
completion dates, the construction progress milestone dates, the contract
price, the payment and milestone schedule, our construction 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 the scope change
order and the dispute resolution procedures described in the construction
agreement are invoked, the procedures must give due consideration to customary
terms and conditions under which Siemens Westinghouse has entered into
subcontracts with third party prime contractors covering services substantially
similar to those services which are not being terminated.
• If
requested by the Company, Siemens Westinghouse must withdraw from the facility
site, must assign to the Company its 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,
Siemens Westinghouse in the performance of the services as the Company may
direct, and the Company, without incurring any liability to Siemens
Westinghouse (other than the obligation to return to Siemens Westinghouse 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 Siemens Westinghouse
at the facility site that the Company deems necessary to complete the services.
Assignment
Generally,
neither the Company nor Siemens Westinghouse will have any 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.
21
Maintenance
Services Agreement
The
Company, as assignee of AES Ironwood, Inc., has entered
into the Maintenance Program Parts, Shop Repairs and Scheduled Outage TFA
Services Contract, dated as of September 23, 1998, with Siemens Westinghouse by
which Siemens Westinghouse will provide the Company with, among other things,
combustion turbine parts, shop repairs and scheduled outage technical field
assistance services.
The
maintenance services agreement became effective on the date of execution and
unless terminated early, must terminate upon completion of shop repairs
performed by Siemens Westinghouse following the eighth scheduled outage of the
applicable combustion turbine or 10 years from initial synchronization of the
applicable combustion turbine, whichever occurs first.
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 facility site;
• provide
the services of a maintenance program engineer to manage the combustion turbine
maintenance program; and
• provide
TFA Services.
• 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 its operationsand maintenance personnel are properly trained;
• transporting
program parts in need of repair/refurbish; and
• providing
Siemens Westinghouse, on a monthly basis, with the required equivalent starts
and equivalent base load hours (“EBHs”).
The
Company and Siemens Westinghouse have jointly developed the scheduled outage
plan. The scheduled outage plan is
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 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.
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Parts Life Credit
After
applicable warranty periods described in the maintenance services agreement and
the construction agreement, Siemens Westinghouse will provide a parts life
credit if a program part requires replacement due to normal wear and tear prior
to meeting its expected useful life. Siemens
Westinghouse has the final decision with regard to actual parts life and the
degree of repair or refurbishment associated with any program parts. The parts life credit will be calculated in terms of EBHs
and equivalent starts. The price of
the replacement part will be adjusted for inflation.
If 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 EBHs accumulated by the applicable combustion
turbine as adjusted for inflation. 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 (1) the non-conformity of new program parts; (2) the
failing of a shop repair; (3) a program part requiring replacement due to
normal wear and tear prior to achieving its expected life in terms of EBHs or
equivalent starts; or (4) the failure of a service, performed by Siemens
Westinghouse, the Company must 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 EBHs of a
scheduled outage and it was anticipated that the additional parts,
miscellaneous hardware, shop repairs and TFA services to be used in the
unscheduled outage were to be used during the upcoming scheduled outage, the
upcoming Scheduled outage must 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 described 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 described in the maintenance services agreement minus a specified
percentage.
Changes in
Operating Restrictions
The
maintenance services agreement requires that each combustion turbine be
operated in accordance with the requirements of the Power Purchase Agreement
and prudent utility practices, with 8,000 EBH/year and 100 equivalent starts
per year by using natural gas. Should the
actual operations differ from these operating parameters which cause 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
must be made.
Warranties
Siemens
Westinghouse warrants that the new program parts, miscellaneous hardware and
any shop repairs must 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 must 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
23
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 must expire no later than one year after the
termination or end of the term of the maintenance services agreement.
In
addition, Siemens Westinghouse warrants 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 a program
part, Siemens Westinghouse will pay us liquidated damages for each day the
program part is not repaired and delivered the aggregate of which liquidated damage
payments must 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 described 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 (1) our
receipt, handling, storage, operation and maintenance of our project, including
any program parts and miscellaneous hardware, being done in accordance with the
terms of the combustion turbine instruction manuals; (2) operation of the
combustion turbine in accordance with the terms of the maintenance services
agreement; (3) repair of accidental damage done consistently with the equipment
manufacturer’s recommendations; (4) us providing Siemens Westinghouse with
access to the facility site to perform its services under the maintenance
services agreement; and (5) 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:
• specific
bankruptcy events affecting Siemens Westinghouse occur;
• Siemens
Westinghouse fails to perform or observe in any material respect any provision
in the maintenance services agreement and fails to (1) promptly commence to
cure and diligently pursue the cure of the failure or (2) remedy the failure
within 45 days after Siemens Westinghouse receives written notice of the
failure;
• the
Company terminates the construction agreement due to the contractor’s default
thereunder or due to its inability to obtain construction financing or
environmental operating permits; or
• the
contractor terminates the construction agreement for any reason other than our
default thereunder.
Notwithstanding
the preceding, the Company may terminate the maintenance services agreement at
any time for its convenience following the completion of the first major outage
of both combustion turbines. In addition,
the maintenance services agreement will automatically terminate if:
• the
Company terminates the construction agreement for reasons other than (1) the
default of the contractor and (2) our inability to obtain permits for our
project; or
• the
contractor terminates the construction agreement for our default thereunder. If the termination occurs, Siemens Westinghouse must
discontinue any work or services being performed and continue to protect our
property. Siemens Westinghouse must transfer
title to and deliver any new program parts and miscellaneous hardware already
purchased by us. The Company must pay Siemens
Westinghouse those amounts owed at the time of termination.
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Limitation of
Liability
The
Company agreed that the remedies provided in the maintenance services agreement
are exclusive and that under no circumstances must 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 agreed that under no circumstances must 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 agreed that under no circumstances must 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 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 prevents 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 does not include: (1) economic hardship, (2) changes in market
conditions or (3) 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 the delay.
Interconnection
Agreement
The
Company has entered into a Generation Facility Transmission Interconnection
Agreement, dated as of March 23, 1999, with GPU Energy for the installation,
operation and maintenance of the facilities necessary to interconnect our
facility to the transmission system of GPU Energy.
Under the interconnection agreement, the Company and GPU Energy will construct,
own, operate and maintain the interconnection facilities.
The Company will be responsible for all of the costs of construction, operation
and maintenance of the interconnection facilities, including those owned by GPU
Energy.
Scope
The
interconnection agreement became effective on March 23, 1999 (the effective
date established by FERC), and will continue in full force and effect until a
mutually agreeable termination date not to exceed the retirement date for the
Company’s facility.
The Company’s
Obligations
At
December 31, 2004, the Company owned, operated and maintained a portion of the
interconnection facilities, including, but not limited to, a 230 kV switchyard,
including generator step up transformers, instrument
25
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 modify our portion of the interconnection facilities as
may be required to conform to changes in good utility practice or as required
by PJM.
The
Company is obligated to keep our facility insured against loss or damage in
accordance with the minimum coverages specified in the interconnection
agreement.
Operation and
Maintenance of Interconnection Facilities
The
parties are obligated to operate and maintain their respective portions of the
interconnection facilities in accordance with good utility practices and the
requirements and guidelines of PJM and GPU Energy.
GPU
Energy 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
GPU Energy or interferes with the safe and reliable operation of its
transmission system or the regional transmission system.
GPU Energy, however, is obligated to use reasonable efforts to minimize any
disconnection, curtailment, interruption or reduction in output.
In
accordance with good utility practice, GPU Energy 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. GPU Energy 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 our
facility or its portion of the interconnection facilities, GPU Energy may,
following 30 days’ notice and opportunity to cure the failure, disconnect the
Company’s facility from the transmission system.
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 so long as the party encountering the delay or prevention uses 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.
26
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. GPU Energy
will have the right to operate and/or to purchase specific equipment,
facilities and appurtenances from the Company that are necessary for GPU Energy
to operate and maintain its transmission system if (1) the Company commences
bankruptcy proceedings or petitions for the appointment of a trustee or other
custodian, liquidator, or receiver, (2) 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 (3) the Company ceases operation for 30
consecutive days without having an assignee, successor, or transferee in place.
Operations
Agreement
The
Company entered into a Development and Operations Services Agreement, dated as
of June 1, 1999, with AES Prescott by which AES Prescott is providing
development and construction management services and, after the commercial
operation date, operating and maintenance services for our facility for a
period of 27 years. Under the
operations agreement, AES Prescott 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. During fiscal
year 2004, AES Prescott was compensated for the services on a cost plus
fixed-fee basis of approximately $425,000 per month. The fee is adjusted annually by the change in
Gross Domestic Product, Implicit Price Deflator. Total fees paid by the Company were $5.2
million and $5.1 million for the years ended December 31, 2004 and 2003,
respectively. Under the services
agreement between AES Prescott and The AES Corporation, The AES Corporation
provides to AES Prescott all of the personnel and services necessary for AES
Prescott to comply with its obligations under the operations agreement.
Effluent Supply
Agreement
The
Company, as assignee of AES Ironwood, Inc., has entered
into an Effluent Supply Agreement, dated as of March 3, 1998, with the City of
Lebanon Authority, by which City of Lebanon Authority will provide effluent to
be used by the Company at the electric generating facility.
Supply of Effluent
Subsequent
to completion of the pipeline connecting the Company’s facility with the
wastewater treatment facility owned and operated by City of Lebanon Authority
and throughout the term of the effluent supply agreement, City of Lebanon
Authority must make available to the Company a supply of effluent not less than
2,160,000 gallons per day. In the event
of a shortfall, the Company may elect to accept potable water from City of
Lebanon Authority in accordance with the effluent supply agreement. The Company will not be obligated to purchase any minimum
amount of effluent and will be entitled to seek and obtain water from other
available sources. City of Lebanon Authority must
use its best efforts to comply with requests by the Company for excess
effluent, which must not exceed (1) 4,600,000 gallons per day or (2)
1,679,000,000 gallons per calendar year. In addition,
City of Lebanon Authority must use its best efforts to meet the Company’s
minimum effluent requirements.
Compensation
The
Company is obligated to pay City of Lebanon Authority monthly for all effluent
delivered to the point of delivery during the prior month.
The base rate for effluent supplied is:
(1) for 0 to 2,160,000 gallons per day, $0.29
per thousand gallons and (2) for 2,160,000 or greater gallons per day, $0.21 per thousand gallons, which rates are subject to annual
adjustments for inflation.
Pipeline and Real Estate
Rights
The
Company was solely responsible, at its cost and expense, for constructing and
installing the pipeline.
27
The
Company and City of Lebanon Authority cooperated in good faith to obtain the necessary
real estate rights for constructing, operating, maintaining and accessing the
pipeline.
Operation and
Maintenance
The
City of Lebanon Authority must operate and maintain the pipeline in accordance
with the effluent supply agreement, and as compensation. The Company must pay
the City of Lebanon Authority $18,250 per year, which amount will be subject to
annual adjustment for inflation.
Capital
Improvements
The
effluent supply agreement provides for capital improvements.
Potable Water
The
City of Lebanon Authority must make available to the Company on a continuous
basis a potable water supply of not less than 50 gallons per minute. The Company will not be obligated to purchase a minimum
amount of potable water, but must pay the City of Lebanon Authority for potable
water accepted at the potable delivery point at the rate applicable to the
Company described in City of Lebanon Authority’s applicable rate schedule.
Force Majeure
If
either party is unable to carry out any obligation under the effluent supply
agreement due to force majeure, the effluent supply agreement must remain in
effect, but the obligation will be suspended for the period necessary as a
result of the force majeure so long as:
(1) the non-performing party gives the other party written notice not
later than 48 hours after the occurrence of the force majeure describing the
particulars of the force majeure; (2) the suspension of performance is of no
greater scope and of longer duration than is required by the force majeure; and
(3) the non-performing party uses its best efforts to remedy its inability to
perform. Notwithstanding the preceding, the
settlement of strikes, lockouts, and other labor disputes will be entirely
within the discretion of the affected party, and the party will not be required
to settle any strike, lockout or other labor dispute on terms which it deems
inadvisable.
Term
The
term of the effluent supply agreement will be 25 years unless terminated early
as a result of (1) the Company’s inability to obtain financing for the Company’s
project; (2) the Company’s inability to obtain necessary approvals to construct
and operate the Company’s project; (3) failure by the Company to deliver the
commencement notice by December 31, 2004, or (4) the occurrence of any event of
default.
Early Termination
for Event of Default
A
party may terminate the effluent supply agreement (1) upon a bankruptcy event
of the other party or (2) if the other party fails to perform or observe any of
its material obligations under the effluent supply agreement within the time
contemplated by the effluent supply agreement and the failure continues for a
period of time greater than 30 days from the defaulting party.
Pennsy Supply
Agreements
The
Company, as assignee of AES Ironwood, Inc., entered into
an Agreement Relating to Real Estate, dated as of October 22, 1998, with Pennsy
Supply, Inc. under which Pennsy Supply has
agreed to grant to the Company specific easements and the right to pump water
from Pennsy Supply-owned property. The easements,
which are primarily for access and utility purposes, run from property owned by
the Company, on which it developed and constructed its electric generating
facility, across property owned by Pennsy Supply and require that the Company’s
property be used as a power plant. Pennsy Supply
has also agreed to grant to the Company easements with respect to storm-water
facilities and construction of a rail spur. Pennsy Supply
will make water available to the Company during construction and testing of its
facility and for as long as the Company operates our facility. The Company will bear all costs and expenses with respect
to water-pumping. In consideration for the
easements and the water-pumping rights, the Company has agreed to convey to
Pennsy Supply title to a parcel of land adjacent to the property owned by the
Company.
28
The
Company also entered into an Easement and Right of Access Agreement, dated as
of April 15, 1999, with Pennsy Supply under which Pennsy Supply has granted the
Company the rights and easements referred to in the prior paragraph as well as
specific other rights and easements required by the Company for the
construction and operation of its facility.
ITEM 2. Properties
The
Company’s principal property is the land for the facility site, which it owns,
and the completed power plant. The facility site is located in South Lebanon
Township, Lebanon County, Pennsylvania on an approximately 35-acre parcel of
land. The Company has access, utility, drainage and construction easements
across neighboring property. The Company is able to use these easements as long
as there is no default under the agreements with the owner of the adjacent
property and the Company is using the facility site for a power plant. Under
certain financing documents, the Company’s rights and interests in our property
rights are encumbered by mortgages, security agreements, collateral assignments
and pledges for the benefit of the bondholders and other senior creditors.
The
Company’s facility consists of a nominal 705 megawatt (net) gas-fired combined
cycle electric generating facility. The plant became operational with
commercial acceptance on December 28, 2001.
The
Company’s facility was designed, engineered, procured and constructed for the
Company by Siemens Westinghouse under a fixed-price construction agreement.
Among other components, our facility uses two Siemens Westinghouse model 501G
combustion turbines with hydrogen-cooled generators, two unfired heat recovery
steam generators and one multi-cylinder steam turbine with a hydrogen-cooled
generator. Siemens Westinghouse has provided the Company with specific
combustion turbine maintenance services and spare parts for an initial term of
between eight and ten years, depending on the timing of scheduled outages,
under a maintenance services agreement. Under the Power Purchase Agreement,
Williams or its affiliates will supply fuel necessary to allow the Company to
provide capacity, fuel conversion and ancillary services to Williams. AES
Prescott, the operator, will provide development, construction management and
operations and maintenance services for our facility under an operations
agreement. The Company will provide installation, operation and maintenance of
facilities necessary to interconnect our facility to the transmission system of
GPU Energy, under an interconnection agreement.
ITEM 3. Legal
Proceedings
Developments Relating to
Siemens Westinghouse
The
Company previously had a dispute with Siemens Westinghouse over which party was
responsible for the payment of the cost of electricity and natural gas used by
the project during certain periods prior to the December 28, 2001 commercial
acceptance. On March 12, 2003, the
Company entered into a settlement agreement with Siemens Westinghouse entitled “Agreement
Change Order No. 71” concerning final acceptance. This agreement became effective as of that
date and final acceptance was granted by us as of that date.
The
terms of the agreement include but are not limited to the following items:
The
Company agreed not to pursue the cost of electricity and natural gas used by
the project during certain periods prior to the December 28, 2001 commercial
acceptance date. These costs totaled approximately $10.7 million, and were included
in accounts receivable. This amount was originally recorded as a reduction in
the cost of the facility in the 2001 financial statements.
The
Company agreed to pay approximately $156,000 in respect of an outstanding
amount claimed by Siemens Westinghouse regarding an April 2002 outage to test
and inspect the facility. This amount was included in the Company’s calculation
of the April outage and was recorded in Accounts Payable. Siemens Westinghouse waived their right to
receive any payments with respect to a milestone payment of $2.2 million and to
the retainage amounts relating to performance guarantees of $12.1 million held
by the Company. Additionally, Siemens Westinghouse made a payment of $4.8
million to the Company in respect of items related to final acceptance. This amount was recorded as a reduction in
the cost of the facility. The financial
impact from the settlement has been recorded in the Company’s financial
statements as of December 31, 2002. The
effect of this settlement for fiscal year 2002 was a reduction of insurance
expense of $291,000 and a $182,000 reduction of depreciation expense as a
result of the reduction in facility cost.
29
Developments Relating to
Williams
The Company had ongoing disputes, including arbitration with Williams,
relating to the parties Power Purchase Agreement. The arbitration was bifurcated into two
phases, and an award was issued on Phase I on February 3, 2004. The primary issue in Phase I related to various
aspects of the availability of the facility for the year ended December 31,
2002, including disputes over the amount of any availability bonus or
penalty. Phase II of the arbitration
involved a dispute concerning the proper duration of facility start-ups and
shutdowns, including fuel used during start-ups and shutdowns. While Phase I of the arbitration was limited
to billing disputes in 2002, many of the same issues were disputed between the
parties for 2003 billings.
The arbitral panel’s award on Phase I of the arbitration found that
Williams had misapplied the applicable rules of PJM Interconnection, L.L.C. in
the billing dispute with the Company over the availability of the
facility. The panel declined, however,
to decide the facility’s availability during 43 disputed maintenance
events. Instead, it encouraged the
parties to reach a mutual resolution of the disputed events by applying the
correct PJM rule and, failing mutual agreement, to submit the dispute to a
third party engineer for resolution. The
parties are currently discussing possible resolution of the disputed events,
and anticipate submitting any events that cannot be resolved by mutual
agreement to a third party. Until the
matter is fully resolved, the availability of the facility, and certain
payments that are calculated based on availability, cannot be determined. During 2004 Williams paid approximately $2.2
million in respect of availability bonus for 2002 and 2003. Approximately $1.8
million has been recorded in operating revenues and approximately $415,000 has
been recorded as a reduction of bad debt expense, included in general and
administrative costs. The parties are continuing to resolve the outstanding
availability issues and expect resolution during 2005.
Also as a
result of the panel’s Phase I Award, the Company will begin pre-funding a cash
account on a quarterly basis to reflect the maximum amount of a fuel conversion
volume rebate that might be payable to Williams if the facility operates the
requisite number of hours to earn the maximum rebate available under the Power
Purchase Agreement. The maximum
theoretical annual amount of the fuel conversion volume rebate is $1.7 million,
but the account will not be fully funded during the course of the year if the
facility is not operated a sufficient number of hours to achieve the maximum
fuel conversion volume rebate. Depending
on the amount of facility operation, the Company may be entitled to withdraw
some of the funds deposited into the account during the second half of its fiscal
year. Based on the arbitral award, the
Company does not anticipate any payment for a fuel conversion volume rebate
will be due for 2004. If funding is required, amounts will be classified as
restricted cash. For the three months ended March 31, 2004, the Company has
determined that approximately $71,000 should be deposited into this account. On
April 1, 2004, the Company deposited $71,000. This amount is included with
restricted cash. For the twelve months ended December 31, 2004, the Company has
determined that no additional liability has occurred and there is no liability
for fuel conversion volume rebate for the entire year ended December 31, 2004.
The funds will be left in the restricted account in anticipation of any
liability incurred during the first quarter of 2005. The Company will reassess
this funding requirement for each subsequent quarter to determine the
liability. The funding will be accomplished by transferring funds from an
unrestricted cash account to the restricted account.
On March 12, 2004 the parties settled Phase II of the
arbitration between the Company and Williams, which involved Williams’ claims that the duration of start-ups and shutdowns should
be shortened, with a corresponding reduction in the volume of fuel consumed during
such operations. The settlement resolves
and releases, without any payment by the Company, Williams’ claim that it should be reimbursed retroactively to the
date of commercial operation for excess fuel allegedly consumed during start-ups and shutdowns. An agreed order of dismissal has been submitted requesting the
arbitral panel to dismiss Phase II of the arbitration with prejudice. The settlement of Phase II has no impact on
Phase I of the arbitration.
ITEM 4. Submission
of Matters to a Vote of Security Holders
Not
applicable pursuant to General Instruction I of the Form 10-K.
30
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity
Securities
There
is no market for the Company’s equity interests. All of the Company’s member
interests are owned by its parent, AES Ironwood, Inc., a subsidiary of The AES
Corporation. During December 2002 the Company declared and paid $4.3 million in
dividends to AES Ironwood, Inc. The documents pertaining to the financing of
the Company indicate certain prerequisites for the payment of dividends. Among
these are: project accounts have been
established, no event of default has occurred and is continuing, the commercial
operation date has occurred and the senior debt coverage ratio as defined in
the agreement is 1.2 to 1 or better. As the coverage ratios were not met for
the years ended 2003 and 2004, no such dividends were declared or paid in 2003
and 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 our
financial statements and the notes thereto included elsewhere in this annual
report. The following discussion involves forward-looking statements. Our
actual results may differ significantly from the results suggested by these
forward-looking statements.
General
We
were formed on October 30, 1998 to develop, construct, own, operate and
maintain the facility. We were dormant until June 25, 1999, the date of the
sale of the senior secured bonds. We granted provisional acceptance on December
27, 2001. We commenced commercial
operations subject to the Power Purchase Agreement on December 28, 2001. We
obtained $308.5 million of project financing from the sale of the senior
secured bonds. The total cost of the construction of our facility was estimated
to be approximately $339.1 million, which was financed by the proceeds from the
sale of the senior secured bonds and the equity contributions described below.
As a result of the Siemens Westinghouse settlement, the facility cost was
reduced by approximately $7.3 million.
In May 2000, we consummated an exchange offer whereby the holders of the
senior secured bonds exchanged their privately placed senior secured bonds for
registered senior secured bonds.
During 2004 the PJM power market, into which our 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 our facility on a
very limited basis. During 2004, our facility was called on to generate 16.4%
of the year as compared to 10.9% during 2003. Revenue from capacity
payments will be the same during the life of the Power Purchase Agreement (see
Note 3). Payments for fuel conversion services are expected to vary with
dispatch notices from Williams. We would expect to generate greater revenues
from fuel conversion services during periods of greater dispatch. Since revenue
from capacity payments comprises most of our revenues, a change from year to
year in dispatch percentage may not have an equal effect on total revenue.
The
result of this lower dispatch resulted in much lower payments for fuel
conversion services. We believe that the fixed capacity payments are sufficient
to meet the cash demands of our business, but we require the additional revenue
from such fuel conversion services to be profitable.
The
projection for 2005 based on dispatch profiles from Williams, is that we will
operate approximately 20%. During January and February 2005 we were not
dispatched.
We are
concerned that Williams will not dispatch our facility in a manner that would
increase our profitability. As a result, our management is researching ways to
enhance our facility’s performance. Any savings in starting the facility or
improved performance will also benefit Williams, with the result that Williams
would find it more economically feasible to dispatch our facility.
31
Equity Contributions
Pursuant to an Equity Subscription Agreement, Ironwood
was required to contribute up to $50.1 million to the Company to fund
construction after the bond proceeds had been fully utilized. As of December 31,
2004, Ironwood had made net contributions of $38.8 million of equity capital.No
further funds are required to be contributed.
Results of Operations
For the years ended December 31, 2004, 2003 and
2002, operating revenues were approximately $54.1 million, $50.1 million and
$51.9 million respectively. Operating revenues consist of capacity payments of
approximately $4.0 million per month. Consistent with our revenue recognition
policy discussed in Note 3 to the financial statements, a portion of the amount
collected has been deferred. The remaining revenue consists of fuel conversion
and heat rate bonus payments.
For the years ended December 31, 2004, 2003 and
2002, depreciation expense was approximately $10.8 million, $10.6 million and
$10.1 million respectively. The increase
in 2004 is due to full year’s depreciation of capitalized outage costs incurred
in 2003.
For the years ended December 31, 2004, 2003 and
2002, corporate management fees were approximately $5.2 million, $5.1 million
and $5.0 million respectively.
For the years ended December 31, 2004, 2003 and
2002, operating costs were approximately $4.1 million, $5.8 million and $5.4
million respectively. Gas costs of approximately $950,000 and $362,000 were
incurred in 2003 and 2002, respectively. The amounts represent cost for fuel
used to perform the facility’s winter capability test during these years. The
facility was dispatched in February 2004, and was able to perform the test
at no cost. As a result, fuel cost for 2004 was approximately $46,000.
For the years ended December 31, 2004, 2003 and
2002, general and administrative costs of $7.2 million, $9.3 million and $10.6
million, respectively, were incurred. The decrease of general and
administrative costs in the year ended December 31, 2004 as compared to
the year ended December 31, 2003 primarily relates to lower costs for
legal expense, insurance expense and bad debt expense. The decrease in legal
fees is primarily due to the costs related to the dispute with Williams during
the year ended December 31, 2003. Insurance costs have decreased as the
experience factor of the Siemens fleet of similar combustion turbines
increases.
For the years ended December 31, 2004, 2003 and
2002 loss on disposal of assets was $357,000, $978,000, and $0 respectively.
During 2002 we commenced installation of an auxiliary boiler to increase the
efficiency of the facility. The arbitration settlement of March 2003
determined that we have no obligation to install the auxiliary boiler as there
would be no economic benefit produced by its installation. On July 24,
2003, the Company entered into a contract with a sales assistance company to
facilitate the sale of the boiler. Total costs associated with the auxiliary
boiler were approximately $886,000. In December 2003, the fair value less
selling costs of the auxiliary boiler was estimated to be $450,000 and was
included in asset held for sale. In November 2004, the fair value less
selling costs of the auxiliary boiler was estimated to be $100,000 and is
included in asset held for sale.
Approximately $436,000 was expensed in 2003 and was included in loss on
disposal of assets in the statement of operations. Approximately $350,000 has
been expensed in 2004 with respect to this asset. In 2003, emission credits, included in other
assets, were sold to AES Eastern Energy, L.P., an indirect wholly owned
subsidiary of The AES Corporation at a fair market price resulting in a net
loss of $431,000. Additionally in 2003, a vehicle was sold at a loss of
$111,000.
For the years ended December 31, 2004, 2003 and
2002, interest expense was approximately $26.4 million, $27.0 million and $27.2
million respectively. The decreasing amounts are due to lower interest as a
result of amortizing the bonds payable.
For the years ended December 31, 2004, 2003 and
2002, the interest income earned on invested funds was approximately $183,000,
$84,000 and $138,000, respectively.
Interest earned is typically dependent upon average cash balances.
However, in November 2004, Williams paid the undisputed amounts with
respect to 2002 and 2003 availability bonus. Accompanying this payment was
approximately $65,000 in interest on the payments.
32
Other income in 2004, representing $15,000, consisted
of sales of scrap. Other income in 2003 consisted of $222,000 from Siemens
Westinghouse relating to their payment of performance guarantees and $10,000
from the sale of excess fuel compared to $3.5 million from Siemens Westinghouse
relating to their payment of performance guarantees and $1.3 million from the
sale of excess fuel in 2002.
For the year ended 2004, we had a net income
of $197,000 compared to a net losses of $8.3 million and $1.6 million for the
years ended December 31, 2003 and December 31, 2002,
respectively. The net income for fiscal
year 2004 was primarily attributable to collecting the undisputed availability
bonus for contract years 2002 and 2003 in the amount of approximately $2.2
million. Additionally there was no arbitration in fiscal year 2004, and as a
result legal expense for that year is substantially lower than fiscal years
2003 and 2002. The increased net loss for 2003 is primarily attributable to
Williams dispatching the facility 10.9% during 2003 compared to 28.4% in 2002,
the absence of the $3.5 million payment from Siemens Westinghouse we received
in 2002 with respect to heat rate and output rebates and the absence of $1.3
million from the sale of excess fuel in 2002. Additionally, we incurred
increased expenses due to arbitration, higher security costs, and other smaller
operating items. Revenue from capacity payments will be the same during
the life of the Power Purchase Agreement (see Note 3 to the financial
statements). Payments for fuel conversion services are expected to vary with
dispatch notices from Williams. We would expect to generate greater revenues
from fuel conversion services during periods of greater dispatch. Since revenue
from capacity payments comprises most of our revenues, a change from year to
year in dispatch percentage may not have an equal effect on total revenue.
Liquidity and Capital Resources
The minimum cash flow from Williams under the Power
Purchase Agreement is approximately $4.0 million per month or approximately $48
million annually. Net operating cash outflows are approximately $1.3 million
per month. The balance left will provide for senior debt interest and principal
payments. We expect that current dispatch scenarios from Williams will yield
cash flows in 2005 similar to 2004. Consistent with our revenue recognition policy
discussed in Note 3 to the financial statements, a portion of the amount
collected has been deferred. Additionally, a significant monthly expenditure is
for payment of our long term service agreement with Siemens Westinghouse. This
agreement provides that we pay approximately $400 per gas turbine per
equivalent operating hour. In the event we are not required to dispatch the
facility, there is no charge. While operating at base load, the estimated
monthly payment for the long term service agreement could be as much as
$450,000. We believe that our cash flows are sufficient to fund our future
operations and to satisfy our outstanding obligations.
We believe that cash flows from the sale of
electricity under the Power Purchase Agreement will be sufficient to pay
ongoing project costs, including principal and interest on the senior secured
bonds. After the Power Purchase Agreement expires, we will depend on market
sales of electricity.
In order to provide liquidity in the event of cash
flow shortfalls, the debt service reserve account contains an amount equal to
the debt service reserve account required balance through cash funding,
issuance of the debt service reserve letter of credit or a combination of the
two.
For the years ended December 31, 2004, 2003 and
2002 cash provided from operating activities was approximately $15.5 million,
$4.6 million and $5.9 million respectively. The increase in cash provided from
operating activities was due to higher income and changes in working capital.
Net income for the year ended December 31, 2004 was $197 thousand compared
to net losses of $8.3 million and $1.6 million for the years ended December 31,
2003 and 2002, respectively. Additions to net income to arrive at cash provided
from operating activities include such non-cash expenses as depreciation and
amortization of deferred financing costs. For the years ended December 2004,
2003 and 2002 depreciation expense was $10.8 million, $10.6 million and $10.1
million respectively, and amortization expense for the years ended December 31,
2004, 2003 and 2002 was $136,000, $137,000 and $145,000 respectively.
Additionally deferred revenue of $2.1 million, $1.4 million and $0 for the
years ended December 31, 2004, 2003 and 2002, respectively, were added to
net income.
For the year ended December 31, 2004 net cash
used in investing activities was $2.0 million compared to net cash provided by
investing activities of $3.4 million for the year ended December 31, 2003.
Net cash used in investing activities for the year ended December 31, 2002
was approximately $17.2 million. Cash used in investing activities in 2004 was
primarily for payments for property, plant and equipment. Cash from investing
activities in 2003 was primarily due to
the terms of Agreement Change Order 71, of final acceptance (See Note 8). As
part of the agreement, approximately $4.8 million of construction related
receivables from Siemens Westinghouse was
33
received. Cash used in investing activities in 2002 was
primarily due to changes in construction related payables and payments of
retention to Siemens as part of final acceptance terms of Agreement Change
Order 71.
For the years ended December 31, 2004 net cash
used in financing activities was approximately $8.5 million compared to $6.8
million for the year ended December 31, 2003. The higher amount of cash
used in 2004 was due to higher bond principle payments. Net cash provided by
financing activities for the year ended December 31, 2002 was
approximately $4.8 million. Capital contributions in 2003 of approximately $8.8
million from Ironwood were partially offset by dividends paid of approximately
$4.3 million.
On December 30, 2001, we provided the collateral
agent with a debt service reserve letter of credit in an initial stated amount
of approximately $17.3 million.
We believe 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
and the power purchase letter of credit will be sufficient to pay project
costs, including ongoing expenses and principal and interest on our senior
secured bonds as described above and fund costs of our commercial operations.
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.
Cash balances at December 31, 2004 and 2003 are
as follows:
|
Unrestricted Cash (balance in000’s)
|
|
December 31, 2004
|
|
December 31, 2003
|
|
|
Checking
account – general
|
|
$
|
17
|
|
$
|
21
|
|
|
Cash
Management Account
|
|
146
|
|
389
|
|
|
Revenue
Account
|
|
7,161
|
|
1,953
|
|
|
Distribution
Account
|
|
3
|
|
3
|
|
|
Total
Unrestricted Cash
|
|
$
|
7,327
|
|
$
|
2,366
|
|
|
Restricted Cash (balances in 000’s)
|
|
December 31, 2004
|
|
December 31, 2003
|
|
|
Bond
Interest Account
|
|
$
|
2,212
|
|
$
|
2,241
|
|
|
Bond
Principal Payment Account
|
|
596
|
|
535
|
|
|
Operating
and Maintenance Account
|
|
1,050
|
|
1,047
|
|
|
Major
Maintenance Reserve Account
|
|
710
|
|
707
|
|
|
Debt Reserve
LOC Account
|
|
27
|
|
26
|
|
|
Fuel
Conversion Volume Rebate Account
|
|
71
|
|
—
|
|
|
Total
Restricted Cash
|
|
$
|
4,666
|
|
$
|
4,556
|
|
Concentration of Credit Risk in
Williams and Affiliates
Williams currently is our sole customer for purchases
of capacity, ancillary services, and energy, and our sole source for fuel.
Williams’ payments under the Power Purchase Agreement are expected to provide
all of our revenues during the term of the Power Purchase Agreement. It is
uncertain whether we would be able to find another purchaser or fuel source on
similar terms for our facility if Williams were not performing under the Power
Purchase Agreement. Any material failure by Williams to make capacity and fuel
conversion payments or to supply fuel under the Power Purchase Agreement would
have a severe impact on our operations. The payment obligations of Williams
under the Power Purchase Agreement are guaranteed by The Williams Companies,
Inc. The payment obligations of The Williams Companies, Inc. are capped at an
amount equal to 125% of the sum of the principal amount of our senior secured
bonds, plus the maximum debt service reserve account balance. At December 31, 2004, this amount was
approximately $395 million.
Under the Power Purchase Agreement, in the event that
Standard & Poors or Moody’s rates the long-term senior unsecured debt of
The Williams Companies, Inc. lower than investment grade, The Williams
Companies, Inc. is required to supplement The Williams Companies, Inc.
guarantee with additional alternative security that is acceptable to the
Company within 90 days after the loss of such investment grade rating. According to published sources, The
34
Williams Companies, Inc.’s long term senior unsecured
debt has been rated below investment grade since 2002 by both S&P and Moody’s.
In an action related to the ratings downgrade of The
Williams Companies, Inc., S&P lowered its ratings on the our senior secured
bonds to “BB-” from “BBB-” on July 26, 2002, and placed the rating on
credit watch. On December 10, 2003 S&P lowered its ratings on our
senior secured bonds to “B+” from “BB-” with a negative outlook. On November 27,
2002, Moody’s lowered its ratings on our senior secured bonds to “B2” from “Ba2”. We do not believe that such ratings
downgrades will have any other direct or immediate effect on us, as none of the
other financing documents or project contracts has provisions that are
triggered by a reduction of the ratings of the bonds.
To
satisfy the requirements of the Power Purchase Agreement, on September 20,
2002, Citibank, N.A. issued a $35 million Irrevocable Standby Letter of Credit
on behalf of Williams. The Letter of Credit does not alter, modify, amend or
nullify the guaranty issued by The Williams Companies, Inc. in favor of us and
is considered to be additional security to the security amounts provided by
such guaranty. The Letter of Credit became effective on September 20, 2002
and expired upon the close of business on July 10, 2003; except that the
Letter of Credit will be automatically extended without amendment for
successive one year periods from the present or any future expiration date
hereof, unless Citibank, N.A. provides written notice of its election not to
renew the Letter of Credit at least thirty days prior to any such expiration
date. In July 2004, Citibank, N.A. sent notification that the letter of
credit will be extended to July 12, 2005. Additionally, in a Letter
Agreement dated September 20, 2002, Williams agreed to (a) provide
eligible credit support prior to the stated expiration date of the Letter of
Credit and (b) replenish any portion of the Letter of Credit or eligible credit
support that is drawn, reduced, cashed or redeemed, at any time, with an equal amount
of eligible credit support. Within twenty days prior to the expiration of the
Letter of Credit and/or any expiration date of eligible credit support posted
by Williams, Williams shall post eligible credit support to us in place of the
Letter of Credit and/or any expiring eligible credit support unless The
Williams Companies, Inc. regains and maintains its investment grade status, in
which case the Letter of Credit or eligible credit support shall automatically
terminate and no additional eligible credit support shall be required. We
and Williams acknowledge that the posting of such Letter of Credit and Williams’
agreement and performance of the requirements of (a) and (b) as set forth in
the immediately preceding sentence shall be in full satisfaction of Williams’
obligations contained in Section 19.3 of the Power Purchase Agreement to
provide replacement security due to the downgrade of The Williams Companies,
Inc. below investment grade status.
Our dependence on The Williams Companies, Inc. and its
affiliates under the Power Purchase Agreement exposes us to possible loss of
revenues and fuel supply, which in turn, could negatively impact our cash flow
and financial condition and could result in a default under our senior secured
bonds. There can be no assurance as to our ability to generate sufficient cash
flow to cover operating expenses or our debt service obligations in the absence
of a long term Power Purchase Agreement with Williams or its affiliates.
Business Strategy and Outlook
Under our overall business strategy, we are committed
to market and sell all of our net capacity, fuel conversion and ancillary
services to Williams during the 20-year term of the Power Purchase Agreement.
After expiration of the Power Purchase Agreement, we anticipate selling our
facility’s capacity, ancillary services and energy under a Power Purchase
Agreement or into the PJM power market. We intend to cause the 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 Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 (ARB No. 51). In October 2003,
FASB Staff Position No. 46-6, “Effective Date of FIN 46, Consolidation of
Variable Interest Entities” deferred the effective date of FIN 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 first reporting period ending after March
35
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 us to include disclosures
for non SPE VIEs created or acquired on or after February 1, 2003 in our
financial statements related to the total assets and the maximum exposure to
loss resulting from our interests in VIEs. The adoption of FIN 46(r) for
VIEs created or acquired prior to February 1, 2003 did not have an impact
on the our financial statements.
Critical Accounting Policies
General
We prepare our financial statements in accordance with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies
which we believe are most critical to understanding and evaluating our reported
financial results include the following:
Revenue Recognition, Property Plant and Equipment and Contingencies.
Revenue Recognition
We generate energy revenues under our Power Purchase
Agreement with Williams. During the 20-year term of the agreement, we expect to
sell electric energy and capacity produced by the facility, as well as
ancillary and fuel conversion services. Under the Power Purchase Agreement, we
also generate revenues from meeting (1) base electrical output guarantees and
(2) heat rate bonuses through efficient fuel conversion. Revenues from the
sales of electric energy are recorded based on output delivered at rates as
specified under contract terms. Revenues from capacity are recorded on a
straight-line basis over the life of the contract. Amounts billed in excess of
revenue recognized are recorded as deferred revenue. Revenues for ancillary and
other services are recorded when the services are rendered.
Upon its expiration, or in the event that the Power
Purchase Agreement is terminated prior to its 20 year term, we would seek to
generate energy revenues from the sale of electric energy and capacity into the
merchant market or under new short- or long-term power purchase or similar
agreements. There can be no assurances as to whether such efforts would be
successful.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and
is depreciated over its useful life. The plant is depreciated using a ten
percent salvage value. The estimated lives of our generation facilities range
from 5 to 40 years. A significant decrease in the estimated useful life of a
material amount of our property, plant or equipment could have a material
adverse impact on our operating results in the period in which the estimate is
revised and subsequent periods.
|
Description of Asset
|
|
Depreciable
Life
|
|
Net Book Value at
December 31, 2004
|
|
Net Book Value at
December 31, 2003
|
|
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Plant
|
|
40
|
|
$
|
219,121
|
|
$
|
224,627
|
|
|
Buildings
|
|
40
|
|
812
|
|
833
|
|
|
Land
Improvements
|
|
40
|
|
10,368
|
|
10,643
|
|
|
Equipment
|
|
40
|
|
1,975
|
|
2,023
|
|
|
Rotable
Turbine Parts
|
|
7-28
|
|
43,104
|
|
46,992
|
|
|
Development
Costs
|
|
25
|
|
21,431
|
|
22,513
|
|
|
Furniture
& Fixtures
|
|
15
|
|
646
|
|
696
|
|
|
Data
Processing Equipment
|
|
7
|
|
361
|
|
440
|
|
|
Vehicles
|
|
5
|
|
183
|
|
228
|
|
|
Projects
|
|
N/A
|
|
3,691
|
|
1,934
|
|
|
Spare Parts
|
|
N/A
|
|
2,710
|
|
2,406
|
|
|
|
|
|
|
$
|
304,402
|
|
$
|
313,335
|
|
36
Contingencies
We had ongoing disputes, including an
arbitration with Williams, relating to the parties Power Purchase
Agreement. The arbitration was
bifurcated into two phases, and an award was issued on Phase I on February 3,
2004. The primary issue in Phase I
related to various aspects of the availability of the Facility for the year
ended December 31, 2002, including disputes over the amount of any
availability bonus or penalty. Phase II
of the arbitration involved a dispute concerning the proper duration of
facility start-ups and shutdowns, including fuel used during start-ups and
shutdowns. While Phase I of the
arbitration was limited to billing disputes in 2002, many of the same issues
are disputed between the parties for 2003 billings.
The arbitral panel’s award on Phase I of the
arbitration found that Williams had misapplied the applicable rules of PJM
Interconnection, L.L.C. (“PJM”) in the billing dispute with us over the
availability of the facility. The panel
declined, however, to decide the facility’s availability during 43 disputed
maintenance events. Instead, it
encouraged the parties to reach a mutual resolution of the disputed events by
applying the correct PJM rule and, failing mutual agreement, to submit the
dispute to a third party engineer for resolution. The parties are currently discussing possible
resolution of the remaining eleven disputed events, and anticipate submitting
any events that cannot be resolved by mutual agreement to a third party. Until the matter is fully resolved, the
availability of the Facility, and certain payments that are calculated based on
availability, cannot be determined. However,
based on the panel’s Award and its negotiations with Williams, we anticipate we
will be paid some portion of our claimed availability bonus for 2002 and 2003
and that we do not owe an amount for annual availability capacity adjustment or
fuel conversion volume rebate.
Also as a result of the panel’s Phase I
Award, we will begin pre-funding a cash account on a quarterly basis to reflect
the maximum amount of a fuel conversion volume rebate that might be payable to
Williams if the Facility operates the requisite number of hours to earn the
maximum rebate available under the Power Purchase Agreement. The maximum theoretical amount of the fuel
conversion volume rebate is $1.7 million, but the account will not be fully
funded during the course of the year if the facility is not operated a sufficient
number of hours to achieve the maximum fuel conversion volume rebate. Depending on the amount of facility
operation, we may be entitled to withdraw some of the funds deposited into the
account during the second half of our fiscal year. Based on the arbitral award, there was no
required payment for a fuel conversion volume rebate for 2002, 2003, or 2004.
On March 12, 2004 the parties
have settled Phase II of the arbitration between Williams and us, which
involved Williams’ claims that the duration of start-ups and shutdowns should
be shortened, with a corresponding reduction in the volume of fuel consumed
during such operations. The settlement
resolves and releases, without any payment by us, Williams’ claim that it should be reimbursed retroactively to the
date of commercial operation for excess fuel allegedly consumed during start-ups and shutdowns. An agreed order of dismissal has been submitted requesting the
arbitral panel to dismiss Phase II of the arbitration with prejudice. The settlement of Phase II has no impact on
Phase I of the arbitration. The parties
continue to negotiate in an effort to settle issues left unresolved by the
Award in Phase I.
Commitments
(a) Bonds
Interest on the Bonds is payable quarterly in
arrears. Quarterly principal payments on
the Bonds commenced on February 28, 2002.
The final maturity date for the Bonds is November 30, 2025.
Principal and interest is payable as follows at December 31,
2004 (in thousands):
37
|
Year
|
|
Principal
|
|
Interest
|
|
Total
|
|
|
2005
|
|
$
|
7,032
|
|
$
|
25,931
|
|
$
|
32,963
|
|
|
2006
|
|
7,156
|
|
25,304
|
|
32,460
|
|
|
2007
|
|
9,132
|
|
24,605
|
|
33,737
|
|
|
2008
|
|
11,352
|
|
23,723
|
|
35,075
|
|
|
2009
|
|
9,624
|
|
22,774
|
|
32,398
|
|
|
2010-2025
|
|
251,120
|
|
199,542
|
|
450,662
|
|
|
Total
payments
|
|
$
|
295,416
|
|
$
|
321,879
|
|
$
|
617,295
|
|
(b) Operations Agreement
We entered into a Development and Operations Services
Agreement, dated as of June 1, 1999, with AES Prescott by which AES
Prescott is providing development and construction management services and,
after the commercial operation date, operating and maintenance services for our
facility for a period of 27 years. Under the
operations agreement, AES Prescott is responsible for, among other things,
preparing plans and budgets related to start-up and commercial operation of our
facility, providing qualified operating personnel, making repairs, purchasing
consumables and spare parts (not otherwise provided under the maintenance
services agreement) and providing other services as needed according to
industry standards. During fiscal
year 2004, AES Prescott was compensated for the services on a cost plus
fixed-fee basis of approximately $425,000 per month. The fee is adjusted annually by the change in
Gross Domestic Product, Implicit Price Deflator. Total fees paid by us were $5.2 million for
the year ended December 31, 2004.
Under the services agreement between AES Prescott and The AES
Corporation, The AES Corporation provides to AES Prescott all of the personnel
and services necessary for AES Prescott to comply with its obligations under
the operations agreement.
The following table is an estimate of management fees
to be paid through the end of the contract, using an annual inflation rate of
2.7% (in thousands):
|
Year
|
|
Management Fee
|
|
|
2005
|
|
$
|
5,358
|
|
|
2006
|
|
5,506
|
|
|
2007
|
|
5,622
|
|
|
2008
|
|
5,750
|
|
|
2009
|
|
5,884
|
|
|
2010-2026
|
|
114,661
|
|
|
Total
payments
|
|
$
|
142,781
|
|
(c) Interconnection
Agreement
We entered into an interconnection agreement with GPU
Energy (“GPU”) to transmit the electricity generated by the facility to the
transmission grid so that it may be sold as prescribed under the 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 us under certain circumstances as
detailed in the agreement. Costs associated with the agreement are based on
electricity transmitted via GPU at a variable price, the PJM Tariff, as charged
by GPU to the Company, 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 is obligated to pay approximately $214,000
per year as a maintenance fee for the interconnection equipment. The term of
this agreement is twenty-five years. The total of these payments was
approximately $214,000 for the each year ended December 31, 2004, 2003 and
2002, respectively.
The following table is an estimate of interconnection
agreement maintenance fees to be paid through the end of the contract (in
thousands):
|
Year
|
|
Interconnection
Agreement
Maintenance Fee
|
|
|
2005
|
|
$
|
214
|
|
|
2006
|
|
214
|
|
|
2007
|
|
214
|
|
|
2008
|
|
214
|
|
|
2009
|
|
214
|
|
|
2010-2026
|
|
3,638
|
|
|
Total
payments
|
|
$
|
4,708
|
|
38
Other Commitments
Maintenance
Services Agreement
We entered into the Maintenance Program Parts, Shop
Repairs and Scheduled Outage TFA Services Contract (the “Maintenance Services
Agreement”), dated as of September 23, 1998, with Siemens Westinghouse by
which Siemens Westinghouse will provide the Company with, among other things,
combustion turbine parts, shop repairs and scheduled outage technical field
assistance services. The
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 eighth scheduled outage of the applicable
combustion turbine or 10 years from the effective date of the contract,
whichever occurs first, unless we exercise our right to terminate the agreement
after the first major outage of the turbines.
The Maintenance Services Agreement indicates that we
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 EBHs 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 below.
The total of these payments was approximately $1.8
million, $2.9 million and $4.8 million for the years ended December 31,
2004, 2003 and 2002, respectively, which included true-ups for one planned
maintenance outage in each fiscal year ended December 31, 2003 and 2002,
as the turbines were far short of the 8,000 EBH level. Assuming a similar
dispatch level in 2005 as in 2004, a comparable level of payments would be
expected for the year ended December 31, 2005. Based upon our current
estimates, assuming a certain number of EBH’s and equivalent starts (“ES”), the
remaining minimum payments to Siemens Westinghouse would approximate $20.7
million through the period ending the 10 year term of the contract.
Contractual Obligations
|
($000’s)
|
|
Total
|
|
2005
|
|
2006-2007
|
|
2008-2009
|
|
2010 &
Thereafter
|
|
Commitments
Reference
|
|
Footnote
reference
|
|
|
Debt Service
Obligations (including interest)
|
|
$
|
617,295
|
|
$
|
32,963
|
|
$
|
66,197
|
|
$
|
67,473
|
|
$
|
450,662
|
|
(a)
|
|
(5)
|
|
|
Operations
Agreement
|
|
142,781
|
|
5,358
|
|
11,128
|
|
11,634
|
|
114,661
|
|
(b)
|
|
(8)
|
|
|
Interconnection
Agreement
|
|
4,708
|
|
214
|
|
428
|
|
428
|
|
3,638
|
|
(c)
|
|
(8)
|
|
|
Total
|
|
$
|
764,784
|
|
$
|
38,535
|
|
$
|
77,753
|
|
$
|
79,535
|
|
$
|
568,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
7A. Quantitative
and Qualitative Disclosures About Market Risk
The bonds have an aggregate principal amount of $295.4
million at December 31, 2004. We are not subject to interest rate risk as
the interest rates associated with our outstanding indebtedness are fixed over
the life of the bonds. We currently have no other financial or derivative
financial instruments. We do not believe that we face other material risks requiring
disclosure pursuant to Item 305 of Regulation S-K.
In an action related to the ratings downgrade of The
Williams Companies, Inc., S&P lowered its ratings on our senior secured
bonds to “BB-” from “BBB-” on July 26, 2002, and placed the rating on credit
watch. On December 10, 2003 S&P lowered its ratings on our senior
secured bonds to “B+” from “BB-” with a negative outlook. On November 27,
2002, Moody’s lowered its ratings on our senior secured bonds to “B2” from “Ba2”. We do not believe that such ratings
downgrades will have any other direct or immediate effect on us, as none of the
other
39
financing documents or project contracts have
provisions that are triggered by a reduction of the ratings of the bonds.
During 2004, the PJM market, into which our facility’s
generation is distributed, continues to experience 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 our
facility on a very limited basis. Based upon current market conditions and
projections from Williams, we anticipate a comparable dispatch level in
2005. In the event that these market
conditions do not improve, and Williams does not dispatch our facility at all
in 2005, we believe that the fixed capacity payments are sufficient to meet the
cash demands of our business, but we require the additional revenue from such
fuel conversion services to be profitable.
40
ITEM 8. Financial
Statements and Supplemental Data
AES IRONWOOD, L.L.C.
AN INDIRECT WHOLLY OWNED SUBSIDIARY
OF THE AES CORPORATION
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Changes in
Member’s Capital
Statements of Cash Flows
Notes to Financial
Statements
41
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Member of
AES Ironwood, L.L.C.:
We
have audited the accompanying balance sheets of AES Ironwood, L.L.C. (an indirect wholly owned subsidiary of The
AES Corporation) (the “Company”) as of December 31, 2004 and 2003, and the
related 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 financial statements present fairly, in all material
respects, the financial position of AES
Ironwood, L.L.C. as of December 31,
2004 and 2003, and the results of its operations and its 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. 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.
McLean, Virginia
March 24,
2005
42
AES IRONWOOD, L.L.C.
AN INDIRECT WHOLLY OWNED
SUBSIDIARY
OF THE AES CORPORATION
BALANCE SHEETS,
DECEMBER 31, 2004 AND 2003
(DOLLARS IN THOUSANDS)
|
|
|
2004
|
|
2003
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
7,327
|
|
$
|
2,366
|
|
|
Interest
receivable
|
|
16
|
|
4
|
|
|
Accounts
receivable — net
|
|
4,453
|
|
4,445
|
|
|
Prepaid
insurance
|
|
745
|
|
813
|
|
|
Prepaid
expenses — other
|
|
232
|
|
233
|
|
|
Inventory —
fuel
|
|
—
|
|
7
|
|
|
Asset held
for sale
|
|
100
|
|
450
|
|
|
Total
current assets
|
|
12,873
|
|
8,318
|
|
|
|
|
|
|
|
|
|
Land
|
|
1,143
|
|
1,143
|
|
|
Property,
plant, and equipment-net of accumulated depreciation of $31,572 and $20,744,
respectively
|
|
304,402
|
|
313,335
|
|
|
Deferred
financing costs-net of accumulated amortization of $781 and $645,
respectively
|
|
2,854
|
|
2,990
|
|
|
Restricted
cash including debt service reserve
|
|
4,666
|
|
4,556
|
|
|
Total assets
|
|
$
|
325,938
|
|
$
|
330,342
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBER’S CAPITAL:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
56
|
|
$
|
61
|
|
|
Accrued
interest
|
|
2,180
|
|
2,227
|
|
|
Payable to
AES and affiliates
|
|
2,132
|
|
2,146
|
|
|
Note payable
|
|
—
|
|
292
|
|
|
Bonds
payable, current
|
|
7,032
|
|
6,356
|
|
|
Total
current liabilities
|
|
11,400
|
|
11,082
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
3,505
|
|
1,392
|
|
|
Bonds
payable
|
|
288,384
|
|
295,416
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
303,289
|
|
307,890
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Notes 5, 6, 7 and 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member’s
capital:
|
|
|
|
|
|
|
Common
stock, $1 par value-10 shares authorized, none issued or outstanding
|
|
—
|
|
—
|
|
|
Contributed
capital
|
|
38,800
|
|
38,800
|
|
|
Member’s
deficit
|
|
(16,151
|
)
|
(16,348
|
|
|
|
|
|
|
|
|
|
Total member’s
capital
|
|
22,649
|
|
22,452
|
|
|
|
|
|
|
|
|
|
Total
liabilities and member’s capital
|
|
$
|
325,938
|
|
$
|
330,342
|
|
See notes to financial
statements.
43
AES IRONWOOD,
L.L.C.
AN INDIRECT WHOLLY
OWNED SUBSIDIARY
OF THE AES
CORPORATION
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
|
|
$
|
54,131
|
|
$
|
50,055
|
|
$
|
51,852
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Depreciation
|
|
10,828
|
|
10,629
|
|
10,103
|
|
|
Corporate
management fees
|
|
5,215
|
|
5,110
|
|
5,042
|
|
|
Operating
costs
|
|
4,070
|
|
5,776
|
|
5,385
|
|
|
General and
administrative costs
|
|
7,192
|
|
9,254
|
|
10,589
|
|
|
Loss on
disposal of assets
|
|
357
|
|
978
|
|
—
|
|
|
Operating
income
|
|
26,469
|
|
18,308
|
|
20,733
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME/EXPENSE
|
|
|
|
|
|
|
|
|
Other income
|
|
15
|
|
253
|
|
4,774
|
|
|
Interest
income
|
|
183
|
|
84
|
|
138
|
|
|
Interest
expense
|
|
(26,470
|
)
|
(26,956
|
)
|
(27,244
|
)
|
|
NET INCOME
(LOSS)
|
|
$
|
197
|
|
$
|
(8,311
|
)
|
$
|
(1,599
|
)
|
See notes to
financial statements.
44
AES IRONWOOD,
L.L.C.
AN INDIRECT WHOLLY
OWNED SUBSIDIARY
OF THE AES
CORPORATION
STATEMENTS OF CHANGES IN
MEMBER’S CAPITAL,
YEARS ENDED DECEMBER 31,
2004, 2003 AND 2002
(DOLLARS IN
THOUSANDS)
|
|
|
Common Stock
|
|
Additional
Paid - in
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
|
BALANCE DECEMBER 31,
2001
|
|
—
|
|
$
|
—
|
|
—
|
|
|
(2,137
|
)
|
$
|
(2,137
|
)
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
(1,599)
|
|
(1,599
|
)
|
|
Dividends
paid
|
|
—
|
|
—
|
|
—
|
|
(4,301
|
)
|
(4,301
|
)
|
|
Contributed
capital
|
|
—
|
|
—
|
|
8,800
|
|
—
|
|
8,800
|
|
|
Conversion
of debt to equity
|
|
—
|
|
—
|
|
30,000
|
|
—
|
|
30,000
|
|
|
BALANCE DECEMBER 31,
2002
|
|
—
|
|
—
|
|
38,800
|
|
(8,037
|
)
|
30,763
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
(8,311
|
)
|
(8,311
|
)
|
|
BALANCE DECEMBER 31,
2003
|
|
—
|
|
—
|
|
38,800
|
|
(16,348
|
)
|
22,452
|
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
197
|
|
197
|
|
|
BALANCE DECEMBER 31,
2003
|
|
—
|
|
$
|
—
|
|
$
|
38,800
|
|
$
|
(16,151
|
)
|
$
|
22,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to
financial statements.
45
AES IRONWOOD,
L.L.C.
AN INDIRECT WHOLLY OWNED SUBSIDIARY
OF THE AES CORPORATION
STATEMENTS OF CASH FLOWS,
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)
|
|
$
|
197
|
|
$
|
(8,311
|
)
|
$
|
(1,599
|
)
|
|
Amortization
of deferred financing costs
|
|
136
|
|
137
|
|
145
|
|
|
Depreciation
|
|
10,828
|
|
10,629
|
|
10,103
|
|
|
Loss on
disposal of assets
|
|
357
|
|
978
|
|
—
|
|
|
Change in:
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
(12
|
)
|
4
|
|
31
|
|
|
Accounts
receivable
|
|
(8
|
)
|
864
|
|
301
|
|
|
Prepaid
insurance
|
|
1,916
|
|
1,480
|
|
(2,293
|
)
|
|
Prepaid
expense - other
|
|
1
|
|
(15
|
)
|
(218
|
)
|
|
Inventory
|
|
7
|
|
19
|
|
(26
|
)
|
|
Other assets
|
|
—
|
|
753
|
|
(485
|
)
|
|
Certificate
of deposit
|
|
—
|
|
77
|
|
—
|
|
|
Accounts
payable
|
|
(5
|
)
|
(2,605
|
)
|
(1,357
|
)
|
|
Accrued
interest
|
|
(47
|
)
|
(35
|
)
|
(15
|
)
|
|
Account
payable-parent and affiliates
|
|
(14
|
)
|
(727
|
)
|
1,289
|
|
|
Deferred
revenue
|
|
2,113
|
|
1,392
|
|
—
|
|
|
Net cash
provided by operating activities
|
|
15,469
|
|
4,640
|
|
5,876
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments for
property, plant and equipment
|
|
(1,901
|
)
|
(2,647
|
)
|
(328
|
)
|
|
Change in
construction related payables
|
|
—
|
|
—
|
|
(12,000
|
)
|
|
Change in
construction related receivables
|
|
—
|
|
4,826
|
|
7,426
|
|
|
Withdrawals
from (payments to) restricted cash accounts
|
|
(110
|
)
|
1,247
|
|
(390
|
)
|
|
Change in
retention payable
|
|
—
|
|
—
|
|
(11,941
|
)
|
|
Net cash
(used in) provided by investing activities
|
|
(2,011
|
)
|
3,426
|
|
(17,233
|
)
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments for
bonds payable
|
|
(6,356
|
)
|
(4,752
|
)
|
(1,976
|
)
|
|
Contributed
capital
|
|
—
|
|
—
|
|
8,800
|
|
|
Payment of
dividends
|
|
—
|
|
—
|
|
(4,301
|
)
|
|
Payments on
note payable
|
|
(2,141
|
)
|
(2,036
|
)
|
2,328
|
|
|
Net cash
(used in) provided by financing activities
|
|
(8,497
|
)
|
(6,788
|
)
|
4,851
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
4,961
|
|
1,278
|
|
(6,506
|
)
|
|
CASH AND
CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
2,366
|
|
1,088
|
|
7,594
|
|
|
CASH AND
CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
7,327
|
|
$
|
2,366
|
|
$
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE:
|
|
|
|
|
|
|
|
|
Interest
paid (net of amounts capitalized)
|
|
$
|
26,517
|
|
$
|
26,956
|
|
$
|
27,244
|
|
|
Conversion
of subordinated loan payable to parent to equity
|
|
$
|
—
|
|
$
|
—
|
|
$
|
30,000
|
|
|
Transfer of
property, plant & equipment to asset held for sale
|
|
$
|
—
|
|
$
|
450
|
|
$
|
—
|
|
|
Insurance
carrier financing
|
|
$
|
1,849
|
|
$
|
2,590
|
|
$
|
—
|
|
See notes to
financial statements
46
AES IRONWOOD,
L.L.C.
AN INDIRECT
WHOLLY OWNED SUBSIDIARY
OF THE AES
CORPORATION
NOTES TO
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31,
2004, 2003 AND 2002
1. ORGANIZATION
AES Ironwood, L.L.C. (the “Company) was formed on October 30,
1998, in the state of Delaware to develop, construct, and operate a
705-megawatt (MW) gas-fired, combined cycle electric generating facility in
South Lebanon Township, Pennsylvania (the “Facility”). The Company was
considered dormant until June 25, 1999, at which time the Project
Financing and certain related agreements were consummated (hereinafter, “Inception”).
The Plant includes two Westinghouse 501 G combustion turbines, two heat
recovery steam generators, and one steam turbine. The Plant produces and sells
electricity, as well as provides fuel conversion and ancillary services,
solely to Williams Power Company, Inc., formerly known as Williams Energy
Marketing & Trading Company (“Williams”) under a Power Purchase Agreement
with a term of 20 years that commenced on December 28, 2001, the
commercial operation date.
The Company is a wholly-owned subsidiary of AES
Ironwood, Inc. (“Ironwood”), which is a wholly owned subsidiary of The AES
Corporation (“AES”). Ironwood has no assets other than its ownership interests
in the Company and AES Prescott, L.L.C. (“Prescott”), another wholly owned
subsidiary of Ironwood (see Note 9). Ironwood has no operations and is not
expected to have any operations. Its only income is distributions it receives
from the Company and Prescott.
On June 25, 1999, the Company issued $308.5
million in senior secured bonds (see Note 5) for the purpose of providing
financing for the construction of the Plant and to fund, through the
construction period, interest payments to the bondholders. On May 12, 2000, the
Company consummated an exchange offer whereby the holders of the senior bonds
exchanged their privately placed senior secured bonds for registered senior
secured bonds.
Pursuant to an Equity Subscription Agreement, Ironwood
was required to contribute up to $50.1 million to the Company to fund
construction after the bond proceeds had been fully utilized. As of December 31,
2004, Ironwood had made net contributions of $38.8 million of equity capital.
No further contributions are required..
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 December 28, 2001, Williams Energy
has not requested that the Company dispatch the facility to a significant
degree. The minimum capacity payments provided for under the Power Purchase
Agreement have been the Company’s primary source of operating revenues,
representing $48.2 million of the Company’s total revenues of $54.1 million for
the twelve months ended December 31, 2004.
Approximately $3.5 million has been deferred consistent with the
company’s revenue recognition policy discussed in Note 3 to the financial
statements.
The Company has used these operating revenues,
together with interest income from the investment of operating funds to pay its
generation expenses and other operations and maintenance expenses.
The Company currently has not been dispatched by
Williams in 2005 and can provide no assurance that the Company will be
dispatched. In the event that the
facility is not dispatched, the Company’s operating revenues will consist of
minimum capacity payments under the Power Purchase Agreement. The Company has also provided the debt
service reserve letter of credit ($17.3 million) 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
47
and satisfactory financial condition of the third
parties on which the Company depends, particularly Williams 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’ 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 and The Williams Companies, Inc. and its
affiliates, the possibility of unexpected problems related to the performance
of the facility, the possibility of unexpected expenses or lower than expected
revenues and additional factors that are unknown to the Company or beyond its
control.
Since the Company depends on Williams for both
revenues and fuel supply under the Power Purchase Agreement, if Williams 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 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.
3. SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
– These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America.
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 –
Restricted cash in the amount of approximately $4.7 million as of December 31,
2004 and $4.6 million as of December 31, 2003 consists of accounts the
Company is required under the Collateral Agency Agreement (see Note 5) to
maintain for the construction, maintenance, and debt service of the facility.
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 forty years. Maintenance and repairs are charged to expense as
incurred.
|
Description of Asset
|
|
Depreciable
Life
|
|
Net Book Value at
December 31, 2004
|
|
Net Book Value at
December 31, 2003
|
|
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Plant
|
|
40
|
|
$
|
219,121
|
|
$
|
224,627
|
|
|
Buildings
|
|
40
|
|
812
|
|
833
|
|
|
Land
Improvements
|
|
40
|
|
10,368
|
|
10,643
|
|
|
Equipment
|
|
40
|
|
1,975
|
|
2,023
|
|
|
Rotable
Turbine Parts
|
|
7-28
|
|
43,104
|
|
46,992
|
|
|
Development
Costs
|
|
25
|
|
21,431
|
|
22,513
|
|
|
Furniture
& Fixtures
|
|
15
|
|
646
|
|
696
|
|
|
Data
Processing Equipment
|
|
7
|
|
361
|
|
440
|
|
|
Vehicles
|
|
5
|
|
183
|
|
228
|
|
|
Projects
|
|
N/A
|
|
3,691
|
|
1,934
|
|
|
Spare Parts
|
|
N/A
|
|
2,710
|
|
2,406
|
|
|
|
|
|
|
$
|
304,402
|
|
$
|
313,335
|
|
48
Long- Lived Assets –
The Company evaluates the impairment of our long-lived assets based on the
provisions of Statement of Financial Accounting Standards No. 144 (“SFAS No.
144”). The Company has determined that
the value of one of its assets was impaired and has reduced the recorded value
accordingly (See Note 12).
Other Assets –
Pursuant to the provisions of 25 Pennsylvania Code Section 123, Nitrogen
Oxide (NOx), Allowance Requirements, which establishes a NOx budget and a NOx
allowance trading program for NOx affected sources for the purpose of achieving
air quality standards, the Company purchased approximately $1.1 million in NOx
allowances in 1999. The NOx allowances were purchased for NOx emissions during
the ozone seasons for the first two full years of operations. These amounts are
reported as other assets and will be amortized as they are utilized.
Approximately $384 thousand in NOx were used during the 2002 NOx season. In July 2003
the remaining NOx were sold at a loss; recorded in loss on sale of assets for
the year ended December 31, 2003 (see Note 9).
Deferred Financing Costs –
Financing costs are deferred and are being amortized using the straight-line
method over approximately 26 years, which does not differ materially from the
effective interest method of amortization.
Prepaid Expenses –
Prepaid expenses at December 31, 2004 consists of prepaid insurance in the
amount of approximately $745,000, prepaid taxes in the amount of approximately
$168,000, prepaid leases in the amount of approximately $31,000, and prepaid
rating agency review fees in the amount of $33,000. Prepaid expenses at December 31,
2003 consisted of prepaid insurance in the amount of approximately $811,000,
prepaid taxes in the amount of approximately $166,000, prepaid leases in the
amount of approximately $29,000, and prepaid rating agency review fees in the
amount of $38,000.
Revenue Recognition
– The Company generates energy
revenues under our Power Purchase Agreement with Williams. Under the terms of
the 20-year term of the agreement, the Company sells 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 bonuses through
efficient electrical output. Revenues from the sales of electric energy are
recorded based on output delivered at rates as specified under contract terms.
In accordance with EITF 91-6, “Revenue Recognition of Long-Term Power Sales
Contracts”, the Company recognizes fixed capacity revenues on the straight-line
basis over the life of the agreement. Differences between the actual capacity
payments and the straight-line method are recorded as deferred revenue.
Revenues for ancillary and other services are recorded when the services are
rendered. Upon its expiration, or in the
event that the Power Purchase Agreement is terminated prior to its 20-year
term, the Company would seek to generate energy revenues from the sale of
electric energy and capacity into the merchant market or under new short- or
long-term power purchase or similar agreements. There can be no assurances as
to whether such efforts would be successful (see Note 7).
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, the Company does not pay income taxes, and no
provision for income taxes has been reflected in the accompanying financial
statements.
Accounts Receivable - As of December 31,
2004, accounts receivable of approximately $4.5 million consists of unpaid
invoices from Williams. As of December 31,
2003, accounts receivable of approximately $4.4 million consists of unpaid
invoices from Williams Energy of approximately $5.5 million and unpaid invoices
from Siemens Westinghouse of approximately $193,000, less allowance for
doubtful accounts of approximately $1.3 million.
Other income – For the year ended
December 31, 2004, other income consisted of $8,000 from the sale of
excess fuel compared to $222,000 from Siemens Westinghouse relating to their
payment of performance guarantees and $10,000 from the sale of excess fuel for
the year ended December 31, 2003.
Reclassifications –
Certain reclassifications have been made to the 2003 and 2002 amounts to
conform to the 2004 presentation.
49
4. RECENT
AND NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting
Standards Board (“FASB”) issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51 (ARB No. 51”). In October 2003, FASB Staff Position
No. 46-6, “Effective Date of FIN 46, Consolidation of Variable Interest
Entities” deferred the effective date of FIN 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 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 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) for VIEs created or acquired
prior to February 1, 2003 did not have an impact on the Company’s
financial statements.
5. BONDS
PAYABLE
On June 25, 1999, the Company issued $308.5
million of 8.857% senior secured bonds due in 2025 (the Bonds) to qualified
institutional buyers and/or institutional accredited investors, pursuant to a
transaction exempt from registration under the Securities Act of 1933 (the Act)
in accordance with Rule 144A under the Act. On May 12, 2000, the Company
consummated an exchange offer whereby the holders of the senior secured bonds
exchanged their privately placed senior secured bonds for registered senior
secured bonds. The net proceeds of the bonds (after deferred financing costs),
approximately $305.2 million, were used to fund the construction of the Plant
and, during the construction period, for interest payments to bondholders.
In an action related to the ratings downgrade of The
Williams Companies, Inc., S&P lowered its ratings on the Company’s senior
secured bonds to “BB-” from “BBB-” on July 26, 2002, and placed the rating
on credit watch. On December 10, 2003 S&P lowered its ratings on the
Company’s senior secured bonds to “B+” from “BB-” with a negative outlook. On November 27,
2002, Moody’s lowered its ratings on the Company’s senior secured bonds to “B2”
from “Ba2”. The Company does not
believe that such ratings downgrades will have any other direct or immediate
effect on the Company, as none of the other financing documents or project
contracts have provisions that are triggered by a reduction of the ratings of
the bonds.
Interest on the Bonds is payable quarterly in arrears.
Quarterly principal payments on the Bonds commenced on February 28, 2002.
The final maturity date for the Bonds is November 30, 2025.
Principal and interest is payable as follows at December 31
(in thousands)
|
Year
|
|
Principal
|
|
Interest
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
7,032
|
|
$
|
25,931
|
|
$
|
32,963
|
|
|
2006
|
|
7,156
|
|
25,304
|
|
32,460
|
|
|
2007
|
|
9,132
|
|
24,605
|
|
33,737
|
|
|
2008
|
|
11,352
|
|
23,723
|
|
35,075
|
|
|
2009
|
|
9,624
|
|
22,774
|
|
32,398
|
|
|
2010-2025
|
|
251,120
|
|
199,542
|
|
450,662
|
|
|
Total
payments
|
|
$
|
295,416
|
|
$
|
321,879
|
|
$
|
617,295
|
|
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.
50
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 or liquidated damages from certain failures related to the performance
of the facility under the EPC with the Contractor, or in certain instances in
which payments are received under the Power Purchase Agreement with Williams under the event of default, at
which time the Company has terminated the Power Purchase Agreement.
Collateral for the Bonds consists of the Plant and
related facilities, all agreements relating to the operation of the project,
the Company’s bank and investment accounts, and all ownership interests in the
Company as prescribed under the trust indenture (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) (see
Note 6).
Indenture – The
Indenture contains limitations on the Company incurring additional indebtedness;
granting liens on the Company’s property; distributing equity and paying
subordinated indebtedness issued by affiliates; entering into transactions with
affiliates; and amending, terminating, or assigning any of the contracts and
fundamental changes or disposition of assets.
Collateral Agency Agreement –
The Collateral Agency Agreement requires the Company to fund or provide the
funding for a debt service reserve fund. The Company has therefore entered into
a Debt Service Reserve Letter of Credit Agreement dated June 1, 1999,
which commenced on December 28, 2001. The amount required for funding the
debt service reserve fund is equal to six months scheduled payments of
principal and interest on the Bonds plus interest on the Debt Service Reserve
Letter of Credit. A Letter of Credit issued December 31, 2001 and expiring
December 31, 2006 in the amount $17.3 million has been obtained from
Dresdner Bank AG to fulfill our requirement under the Collateral Agency
Agreement.
Covenants – The
Indenture, Collateral Agency Agreement, and Equity Subscription Agreement
contain specific covenants and requirements that the Company must meet. These covenants primarily entail the
restriction of payments, reporting requirements, and the creation and
maintenance of debt service reserve and construction- related accounts.
6. EQUITY
SUBSCRIPTION AGREEMENT
The Company, along with Ironwood, has entered into an
Equity Subscription Agreement, pursuant to which Ironwood, agreed to contribute
up to approximately $50.1 million to the Company to fund project costs. This
amount is secured by an acceptable bond issued by Ironwood. Ironwood will fund
these amounts as they come due upon the earlier of (a) expenditure of all funds
that have been established for construction or (b) the occurrence, and during
the continuation of, an event of default, as defined under the indenture
governing its senior secured bonds. A portion of this equity requirement may be
made in the form of affiliate debt, between the Company and Ironwood, which
would be subordinate to the senior secured bonds.
Pursuant to an Equity Subscription Agreement, Ironwood
was required to contribute up to $50.1 million to the Company to fund
construction after the bond proceeds had been fully utilized. As of December 31,
2004, Ironwood had made net contributions of $38.8 million of equity capital.
No further funds are required to be contributed.
7. POWER
PURCHASE AGREEMENT
The Company has entered into a Power Purchase
Agreement with Williams for the sale of all electric energy and capacity
produced by the facility, as well as ancillary and fuel conversion services.
The term of the Power Purchase Agreement is 20 years, commencing on December 28,
2001, the commercial operation date. Payment obligations to the Company are
guaranteed by The Williams Companies, Inc. Such payment obligations under the
guarantee are capped at an amount equal to 125% of the sum of the principal
amount of the senior secured bonds plus the maximum debt service reserve
account required balance. The payment obligations of Williams under the Power
Purchase Agreement are guaranteed by The Williams Companies, Inc. At December 31,
2004, this amount was approximately $395.3 million.
Fuel Conversion and Other Services –
Williams has the obligation to deliver, on an exclusive basis, all quantities
of natural gas required by the Plant to generate electricity or ancillary
services, to start up or shut down
51
the Plant, and to operate the Plant during any period
other than a start-up, shut-down, or required dispatch by Williams for any
reason.
Concentration of Credit Risk –
Williams currently is 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 revenues during the term of the Power Purchase
Agreement. It is uncertain whether the Company would be able to find another
purchaser or fuel source on similar terms for the Company’s facility if
Williams were not performing under the Power Purchase Agreement. Any material
failure by Williams to make capacity and fuel conversion payments or to supply
fuel under the Power Purchase Agreement would have a severe impact on the
Company’s operations. The payment obligations of Williams under the Power
Purchase Agreement are guaranteed by The Williams Companies, Inc. The payment
obligations of The Williams Companies, Inc. are capped at an amount equal to 125%
of the sum of the principal amount of the Company’s senior secured bonds, plus
the maximum debt service reserve account balance. At December 31, 2004, this amount was
approximately $395 million.
In an action related to the ratings downgrade of The
Williams Companies, Inc., S&P and Moody’s lowered their ratings on the
Company’s senior secured bonds. On December 10, 2003 S&P lowered its
ratings on the Company’s senior secured bonds to “B+” from “BB-” with a
negative outlook. On November 27, 2002, Moody’s lowered its ratings on the
Company’s senior secured bonds to “B2” from “Ba2”. The Company does not believe
that such ratings downgrades will have any other direct or immediate effect on
the Company, as none of the other financing documents or project contracts have
provisions that are triggered by a reduction of the ratings of the bonds.
To
satisfy the requirements of the Power Purchase Agreement, on September 20,
2002, Citibank, N.A. issued a $35 million Irrevocable Standby Letter of Credit
(the “Letter of Credit”) on behalf of Williams. The Letter of Credit does not
alter, modify, amend or nullify the guaranty issued by The Williams Companies,
Inc. in favor of the Company and is considered to be additional security to the
security amounts provided by such guaranty. The Letter of Credit became
effective on September 20, 2002 and expired upon the close of business on July 10,
2003; except that the Letter of Credit will be automatically extended without
amendment for successive one year periods from the present or any future
expiration date hereof, unless Citibank, N.A. provides written notice of its
election not to renew the Letter of Credit at least thirty days prior to any
such expiration date. In July 2004, Citibank, N.A. sent notification that
the letter of credit will be extended to July 12, 2005. Additionally, in a
Letter Agreement dated September 20, 2002, Williams agreed to (a) provide
eligible credit support prior to the stated expiration date of the Letter of
Credit and (b) replenish any portion of the Letter of Credit or eligible credit
support that is drawn, reduced, cashed or redeemed, at any time, with an equal
amount of eligible credit support. Within twenty days prior to the expiration
of the Letter of Credit and/or any expiration date of eligible credit support
posted by Williams, Williams shall post eligible credit support to the Company
in place of the Letter of Credit and/or any expiring eligible credit support
unless The Williams Companies, Inc. regains and maintains its investment grade
status, in which case the Letter of Credit or eligible credit support shall
automatically terminate and no additional eligible credit support shall be
required. The Company and Williams acknowledge that the posting of such
Letter of Credit and Williams’ agreement and performance of the requirements of
(a) and (b) as set forth in the immediately preceding sentence shall be in full
satisfaction of Williams’ obligations contained in Section 19.3 of the
Power Purchase Agreement to provide replacement security due to the downgrade
of The Williams Companies, Inc. below investment grade status.
Since
the Company depends on The Williams Companies, Inc. and its affiliates for both
revenues and fuel supply under the Power Purchase Agreement, if The Williams
Companies, Inc. and its affiliates were to terminate or default under the Power
Purchase Agreement, there would be a severe negative impact to the Company’s
cash flow and financial condition which could result in a default on the
Company’s senior secured bonds. Due to recent declines in pool prices,
the Company would expect that if required to seek alternative purchasers of its
power as a result of a default by The Williams Companies, Inc. and its
affiliates that any such alternate revenues would be substantially below the
amounts that would have been otherwise payable pursuant to the Power Purchase
Agreement. There can be no assurance as to the Company’s ability to
generate sufficient cash flow to cover operating expenses or debt service
obligations in the absence of a long-term Power Purchase Agreement with
Williams or its affiliates.
The Company has ongoing disputes, including
arbitration with Williams, relating to the parties Power Purchase
Agreement. The arbitration was
bifurcated into two phases, and an award was issued on Phase I on February 3,
2004. The primary issue in Phase I
related to various aspects of the availability of the facility for the year
ended December 31, 2002, including disputes over the amount of any
availability bonus or penalty. Phase II
of the
52
arbitration involves a dispute concerning the proper duration of
facility start-ups and shutdowns, including fuel used during start-ups and
shutdowns. While Phase I of the
arbitration was limited to billing disputes in 2002, many of the same issues
are disputed between the parties for 2003 billings. (See Note 8)
8. COMMITMENTS
AND CONTINGENCIES
Maintenance – The
Company, as assignee of AES Ironwood, Inc., has entered into the Maintenance
Program Parts, Shop Repairs and Scheduled Outage TFA Services Contract, dated
as of September 23, 1998, with Siemens Westinghouse by which Siemens
Westinghouse will provide the Company with, among other things, combustion
turbine parts, shop repairs and scheduled outage technical field assistance
services. The Contractor provided the Company with specific combustion turbine
maintenance services and spare parts for an initial term of between eight and
ten years under a maintenance service agreement. The fees assessed by Siemens
Westinghouse will be based on the number of Equivalent Base Load Hours
accumulated by the applicable Combustion Turbine as adjusted for
inflation. The fees to Siemens
Westinghouse are capitalized when paid. Each outage is analyzed and the
cumulative fees and other costs related to the outage are capitalized as part
of the facility or expensed accordingly.
The maintenance services agreement became effective on
the date of execution and unless terminated early, must terminate upon completion
of shop repairs performed by Siemens Westinghouse following the eighth
scheduled outage of the applicable combustion turbine or 10 years from initial
synchronization of the applicable combustion turbine, whichever occurs first.
Additionally, a significant monthly expenditure is for
payment of the Company’s long term service agreement with Siemens Westinghouse.
This agreement provides that the Company pays approximately $400 per gas
turbine per equivalent operating hour, adjusted for inflation. In the event the
Company is not required to dispatch the facility, there is no charge. While
operating at base load, the monthly payment for the long term service agreement
could be as much as $450,000. The total of these payments was approximately
$1.8 million, $2.9 million and $4.8 million for the years ended December 31,
2004, 2003 and 2002, respectively, which included true-ups for two planned
maintenance outages in 2003 and 2002. These payments are included with
Property, Plant and Equipment until an outage occurs. At that time an
allocation between additions to Property, Plant and Equipment and Operating
Expense is performed. The allocation is determined by the value of new
capitalizable parts received and amounts expended with no future value.
Water Supply – The
Company entered into a contract with the City of Lebanon Authority (the “Authority”)
for the purchase of 50 percent of the water use of the Plant. The contract has
a term of 25 years. Costs associated with the use of water by the Plant under
this contract are based on gallons used per day at prices specified under the
contract terms. The Company also entered into an agreement with Pennsy Supply,
Inc, which will provide the remaining 50 percent of the water use of the Plant.
The total of these payments was approximately $82,000, $70,000 and $83,000 for
the years ended December 31, 2004, 2003 and 2002, respectively.
Interconnection Agreement –
The Company entered into an interconnection agreement with GPU Energy (“GPU”)
to transmit the electricity generated by the Plant 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 Plant 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, the PJM Tariff, as charged
by GPU to the Company, 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 is obligated to pay approximately $214,000
per year as a maintenance fee for the interconnection equipment. The term of
this agreement is twenty-five years. The total of these payments was
approximately $214,000, $214,000 and $214,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
Power Purchase Agreement The
Company has ongoing disputes, including arbitration with Williams, relating to
the parties Power Purchase Agreement.
The arbitration was bifurcated into two phases, and an award was issued
on Phase I on February 3, 2004. The
primary issue in Phase I related to various aspects of the availability of the
facility for the year ended December 31, 2002, including disputes over the
amount of any availability bonus or penalty.
Phase II of the arbitration involves a dispute concerning the proper
duration of facility start-ups and shutdowns, including fuel used during
start-ups and shutdowns. While Phase I
of the arbitration was limited to billing disputes in 2002, many of the same
issues are disputed between the parties for 2003 billings.
53
The arbitral panel’s award on Phase I of the
arbitration found that Williams had misapplied the applicable rules of
Pennsylvania – New Jersey - Maryland Interconnection, L.L.C. (“PJM”) in the
billing dispute with the Company over the availability of the facility. The panel declined, however, to decide the
facility’s availability during 43 disputed maintenance events. Instead, it encouraged the parties to reach a
mutual resolution of the disputed events by applying the correct PJM rule and,
failing mutual agreement, to submit the dispute to a third party engineer for
resolution. The parties are currently
discussing possible resolution of the disputed events, and anticipate submitting
any events that cannot be resolved by mutual agreement to a third party. Until the matter is fully resolved, the
availability of the facility, and certain payments that are calculated based on
availability, cannot be determined.
During 2004 Williams paid approximately $2.2 million in respect of
availability bonus for 2002 and 2003. Approximately $1.8 million has been
recorded in operating revenues and approximately $415,000 has been recorded as
a reduction of bad debt expense, included in general and administrative costs.
The parties are continuing to resolve the outstanding availability issues and
expect resolution during 2005.
Also as a result of the panel’s Phase I Award, the
Company will begin pre-funding a cash account on a quarterly basis to reflect
the maximum amount of a fuel conversion volume rebate that might be payable to
Williams if the facility operates the requisite number of hours to earn the
maximum rebate available under the Power Purchase Agreement. The maximum theoretical annual amount of the
fuel conversion volume rebate is $1.7 million, but the account will not be
fully funded during the course of the year if the facility is not operated a
sufficient number of hours to achieve the maximum fuel conversion volume
rebate. Depending on the amount of
facility operation, the Company may be entitled to withdraw some of the funds
deposited into the account during the second half of its fiscal year. On April 1, 2004, the Company deposited
$71,000. This amount is included with restricted cash. For the twelve months
ended December 31, 2004, the Company has determined that no additional
liability has occurred and there is no liability for fuel conversion volume
rebate for the entire year ended December 31, 2004. The funds will be left
in the restricted account in anticipation of any liability incurred during the
first quarter of 2005. The Company will reassess this funding requirement for
each subsequent quarter to determine the liability. The funding will be
accomplished by transferring funds from an unrestricted cash account to the restricted
account.
On March 12, 2004 the parties settled Phase II of
the arbitration between the Company and Williams, which involved Williams’
claims that the duration of start-ups and shutdowns should be shortened, with a
corresponding reduction in the volume of fuel consumed during such
operations. The settlement resolves and
releases, without any payment by the Company, Williams’ claim that it should be
reimbursed retroactively to the date of commercial operation for excess fuel
allegedly consumed during start-ups and shutdowns. An agreed order of dismissal has been
submitted requesting the arbitral panel to dismiss Phase II of the arbitration
with prejudice. The settlement of Phase
II has no impact on Phase I of the arbitration.
The parties continue to negotiate in an effort to settle issues left
unresolved by the Award in Phase I.
9. RELATED
PARTY TRANSACTIONS
Effective June 1999, the Company entered into a
27-year development and construction management agreement with Prescott that
provides certain support services required by the Company for the development
and construction of the Plant. Under this agreement Prescott also provides
operations management services for the Plant. Payments for operations
management services are approximately $400,000 per month, adjusted annually for
inflation.
During the construction period, the construction
management fees were paid to Prescott from the investment balances or from
parent funding. For the years ended December 31, 2004, 2003 and 2002
approximately $5.2 million, $5.1 million and $5.0 million in management fees
were incurred and charged to operating expenses.
Accounts receivable from parent and affiliates
generally represents charges for certain AES projects that the Company has paid
for and invoiced to the Company’s parent and affiliates. Accounts payable are
generally amounts owed for shared services to the Company’s parent and
affiliates. Accounts payable to AES and affiliates as of December 31, 2004
and 2003 amounted to $2.1 million and $2.1 million, respectively.
During 2003, emission credits, included in other
assets, were sold to AES Eastern Energy, L.P., an indirect wholly owned
subsidiary of The AES Corporation at a fair market price for a net loss of $431
thousand.
The Company is the primary source of funding for the
AES Ironwood Foundation, a non-profit organization founded to provide social
responsibility to the local communities. The Company does not consolidate the
financial statements of the AES Ironwood Foundation into its financial statements.
The Company’s discretionary funding for
54
the
years ended December 31, 2004, December 31, 2003 and December 31,
2002 were approximately $112,000, $107,000, and $376,000 respectively
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 Bonds had a carrying amount of $295.4 million with
a fair value of approximately $328.9 million at December 31, 2004 versus a
carrying amount of $301.8 million with a fair value of approximately $325.9
million at December 31, 2003. The estimated fair value of the Bonds at December 31,
2004 and 2003 is based on quoted market prices of similarly rated bonds with
similar maturities.
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 7, the Company’s primary
customer is Williams, which provides all of the Company’s operating revenues during
the term of the Power Purchase Agreement.
12. ASSET
HELD FOR SALE
During
2002 the Company commenced installation of an auxiliary boiler to increase the
efficiency of the facility. The arbitration settlement of March 2003
determined that the Company has no obligation to install the auxiliary boiler
as there would be no economic benefit produced by its installation. On July 24,
2003, the Company entered into a contract with a sales assistance company to
facilitate the sale of the boiler. As of September 2003 total costs of the
auxiliary boiler were approximately $886,000. The fair value less selling costs
of the auxiliary boiler was estimated to be approximately $450,000 and included
in asset held for sale. Approximately $436,000 was written off in 2003 and
included in loss on disposal of assets in the statement of operations for the
year ended December 31, 2003.
In
November 2004 the fair value less selling costs of the auxiliary boiler
was re-evaluated to be $100,000. Approximately $350,000 was written off in 2004
and is included in loss on disposal of assets in the statement of operations
for the year ended December 31, 2004.
The
Company believes that the asset will be sold during 2005.
55
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. Certain prior year amounts have been reclassified on the
financial statements to conform with the 2004 presentation.
AES
Ironwood, L.L.C.
Quarters
Ended December 31, 2004, September 30, 2004, June 30, 2004, March 31,
2004
(dollars
in thousands)
|
|
|
Quarter Ended 2004
|
|
|
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
12,985
|
|
$
|
13,878
|
|
$
|
13,304
|
|
$
|
13,964
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
4,783
|
|
5,507
|
|
4,990
|
|
4,833
|
|
|
General and
administrative costs
|
|
1,463
|
|
1,762
|
|
1,943
|
|
2,024
|
|
|
Loss on
disposal of assets
|
|
357
|
|
—
|
|
—
|
|
—
|
|
|
OPERATING
INCOME
|
|
6,382
|
|
6,609
|
|
6,371
|
|
7,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME/EXPENSE
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
—
|
|
8
|
|
1
|
|
6
|
|
|
Interest
income
|
|
115
|
|
33
|
|
19
|
|
16
|
|
|
Interest
expense
|
|
(6,565
|
)
|
(6,600
|
)
|
(6,635
|
)
|
(6,670
|
)
|
|
NET (LOSS)
INCOME
|
|
$
|
(68
|
)
|
$
|
50
|
|
$
|
(244
|
)
|
$
|
459
|
|
AES
Ironwood, L.L.C.
Quarters
Ended December 31, 2003, September 30, 2003, June 30, 2003, March 31,
2003
(dollars
in thousands)
|
|
|
Quarter Ended 2003
|
|
|
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
|
|
Energy (1)
|
|
$
|
12,150
|
|
$
|
13,619
|
|
$
|
12,209
|
|
$
|
12,077
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
4,782
|
|
5,451
|
|
5,699
|
|
5,583
|
|
|
General and
administrative costs
|
|
2,809
|
|
1,913
|
|
2,333
|
|
2,199
|
|
|
Loss on
disposal of assets
|
|
164
|
|
814
|
|
—
|
|
—
|
|
|
OPERATING
INCOME
|
|
4,395
|
|
5,441
|
|
4,177
|
|
4,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME/EXPENSE
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
12
|
|
2
|
|
6
|
|
233
|
|
|
Interest
income
|
|
14
|
|
16
|
|
33
|
|
21
|
|
|
Interest
expense
|
|
(6,699
|
)
|
(6,726
|
)
|
(6,753
|
)
|
(6,778
|
)
|
|
NET (LOSS)
INCOME
|
|
$
|
(2,278
|
)
|
$
|
(1,267
|
)
|
$
|
(2,537
|
)
|
$
|
(2,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
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.
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
Form 10-K.
57
ITEM
12. Security
Ownership of Certain Beneficial Owners and Management
Not applicable pursuant to General Instruction I of
Form 10-K.
ITEM
13. Certain
Relationships And Related Transactions
Not applicable pursuant to General Instruction I of
Form 10-K.
ITEM
14. PRINCIPAL
ACCOUNTANT 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 on Form 10-K and review of the financial
statements included in the registrant’s Form 10-Q (17 CFR 249.308a) or services
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years were approximately
$212,000 and $208,500 for the years ended December 31, 2004 and 2003,
respectively.
Audit-Related,
Tax and All Other Fees
Other
than the audit fees described above, there were no other fees paid to the
principal accountants for the years ended December 31, 2004 and 2003,
respectively.
Pre-Approval
of Services Provided by Deloitte & Touche
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.
PART IV
ITEM
15. Exhibits
and Financial Statement Schedules
a) The following
documents are filed as part of this report:
1. Financial
Statements Filed:
Please refer to Item 8 - Financial Statements and Supplementary Data.
2. Financial
Statement Schedules Filed: None
Please refer to Item 8 - Financial Statements and Supplementary Data.
3. Exhibits
Filed:
Unless otherwise indicated, all exhibits to this Form
10-K are incorporated herein by reference from the identically numbered exhibit
of AES Ironwood, L.L.C.’s Registration Statement on Form S-4 (333-91391).
|
Exhibit
Number
|
|
Description
|
|
3
|
|
Amended and Restated Limited Liability
Company Agreement, dated as of October 4, 1999, of our Company.
|
|
|
|
|
|
4.1
|
|
Indenture and the First Supplemental
Indenture, dated as of June 1, 1999, by and among our Company, the
Trustee and the Depositary Bank.
|
58
|
4.2
|
|
Collateral Agency and Intercreditor
Agreement, dated as of June 1, 1999, by and among our Company, the
Trustee, the Collateral Agent, the DSR LOC Provider, the CP LOC Provider and
the Depositary Bank.
|
|
|
|
|
|
4.3
|
|
Debt Service Reserve Letter of Credit and
Reimbursement Agreement, dated as of June 1, 1999, by and among our
Company, the DSR LOC Provider and the Banks named therein.
|
|
|
|
|
|
4.4
|
|
Construction Period Letter of Credit and
Reimbursement Agreement, dated as of June 1, 1999, by and among our
Company, the CP LOC Provider and the Banks named therein.
|
|
|
|
|
|
4.5
|
|
Global Bonds, dated June 25, 1999,
evidencing 8.857% Senior Secured Bonds of our Company due 2025 in the
principal amount of $308,500,000.
|
|
|
|
|
|
4.6
|
|
Equity Subscription Agreement, dated as of June 1,
1999, by and among our Company, AES Ironwood and the Collateral Agent.
|
|
|
|
|
|
4.7
|
|
Security Agreement, dated as of June 1,
1999, by and between our Company and the Collateral Agent.
|
|
|
|
|
|
4.8
|
|
Pledge and Security Agreement, dated as of June 1,
1999, by and between AES Ironwood and the Collateral Agent.
|
|
|
|
|
|
4.9
|
|
Consent to Assignment, dated as of June 1,
1999, by and between the Power Purchaser and the Collateral Agent, and
consented to by our Company.
|
|
|
|
|
|
4.10
|
|
Consent to Assignment, dated as of June 1,
1999, by and between the PPA Guarantor and our Company, and consented to by
our Company.
|
|
|
|
|
|
4.11
|
|
Consent to Assignment, dated as of June 1,
1999, by and between the Contractor and the Collateral Agent, and consented
to by our Company (with respect to the construction agreement).
|
|
|
|
|
|
4.12
|
|
Consent to Assignment, dated as of June 1,
1999, by and between the Contractor and the Collateral Agent, and consented
to by our Company (with respect to the Maintenance Services Agreement).
|
|
|
|
|
|
4.13
|
|
Consent to Assignment, dated as of June 1,
1999, by and between Siemens Corporation and the Collateral Agent, and
consented to by our Company.
|
|
|
|
|
|
4.14
|
|
Consent to Assignment, dated as of June 1,
1999, by and between Prescott and the Collateral Agent, and consented to by
our Company.
|
|
|
|
|
|
4.15
|
|
Consent to Assignment, dated as of June 1,
1999, by and between Metropolitan Edison Company d/b/a GPU Energy and the
Collateral Agent, and consented to by our Company.
|
|
|
|
|
|
4.16
|
|
Consent to Assignment, dated as of June 1,
1999, by and between City of Lebanon Authority and the Collateral Agent, and
consented to by our Company.
|
|
|
|
|
|
4.17
|
|
Consent to Assignment, dated as of June 1,
1999, by and between Pennsy Supply, Inc. and the Collateral Agent, and
consented to by our Company.
|
|
|
|
|
|
4.18
|
|
Assignment and Assumption Agreement, dated June 25,
1999, by and between AES Ironwood, Inc. and AES Ironwood, L.L.C. (with
respect to the construction agreement).
|
|
|
|
|
|
4.19
|
|
Assignment and Assumption Agreement, dated June 25,
1999, by and between AES Ironwood, Inc. and AES Ironwood, L.L.C. (with
respect to the Maintenance Services Agreement).
|
59
|
10.1
|
|
Guaranty, dated as of June 18, 1999,
by and between the PPA Guarantor and our Company.
|
|
|
|
|
|
10.2
|
|
Amended and Restated Power Purchase
Agreement, dated as of February 5, 1999, and Amendment No. 1 to Amended
and Restated Power Purchase Agreement, dated as of June 18, 1999,
between our Company and the Power Purchaser. (Portions of this exhibit have
been omitted pursuant to a request for confidential treatment.)
|
|
|
|
|
|
10.3
|
|
Engineering, Procurement and Construction
Services Agreement, dated as of September 23, 1998 (the “EPC Contract”),
as amended, by and between our Company and the Contractor. (Portions of this
exhibit have been omitted pursuant to a request for confidential treatment.)
|
|
|
|
|
|
10.4
|
|
Guaranty, dated as of September 23,
1998, by and between Siemens Corporation and our Company.
|
|
|
|
|
|
10.5
|
|
Maintenance Program Parts, Shop Repairs and
Scheduled Outage TFA Services Contract, dated as of September 23, 1998,
and Amendment No. 1 to Maintenance Program Parts, Shop Repairs and Scheduled
Outage TFA Services Contract, dated as of January 13, 1999 (the “Maintenance
Services Agreement”), by and between our Company and the Contractor.
(Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.)
|
|
|
|
|
|
10.6
|
|
Development and Operations Services
Agreement, dated as of June 1, 1999, by and between our Company and
Prescott.
|
|
|
|
|
|
10.7
|
|
Effluent Supply Agreement, dated as of March 3,
1998, by and between our Company and City of Lebanon Authority.
|
|
|
|
|
|
10.8
|
|
Generation Facility Transmission
Interconnection Agreement, dated as of March 23, 1999, by and between
our Company and Metropolitan Edison Company d/b/a GPU Energy.
|
|
|
|
|
|
10.9
|
|
Agreement Relating to Real Estate, dated as
of October 23, 1998, by and between our Company and Pennsy Supply, Inc.
|
|
|
|
|
|
10.10
|
|
Easements and Right of Access Agreement,
dated as of April 15, 1999, by and between our Company and Pennsy
Supply, Inc.
|
|
|
|
|
|
10.11
|
|
Letter Agreement, dated September 20,
2002 between the Company and Williams Marketing and Trading Company. **
|
|
|
|
|
|
10.12
|
|
Irrevocable Standby Letter of Credit Issued
by Citibank N.A. **
|
|
|
|
|
|
12
|
|
Computation of Earnings/(Deficiency) to
Fixed Charges *
|
|
|
|
|
|
31.1
|
|
Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
|
|
|
|
|
|
31.2
|
|
Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 *
|
|
|
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 *
|
* Filed
herewith.
** Previously
filed as an exhibit to the Company’s current report on Form 8-K filed in September 20,
2002 and incorporated by reference herein.
60
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.
61
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
IRONWOOD, L.L.C.
|
|
|
|
|
|
|
|
|
/s/
A. W. Bergeron
|
|
|
|
By:
|
A. W. Bergeron
|
|
|
Title:
|
President
|
|
|
|
|
|
|
|
|
/s/
Michael Carlson
|
|
|
|
By:
|
Michael Carlson
|
|
|
Title:
|
Chief Financial
Officer
|
|
|
|
|
Date: March 24,
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
|
|
Director
|
|
March 24, 2005
|
|
A. W. Bergeron
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Edward P. Convery
|
|
Director
|
|
March 30, 2005
|
|
Edward P. Convery
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Dan Rothaupt
|
|
Director
|
|
March 24, 2005
|
|
Dan Rothaupt
|
|
|
|
|
62