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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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0001261679 MSW Energy Holdings LLC Delaware 14-1873119
0001261680 MSW Energy Finance Co., Delaware 20-0047886
Inc.
Commission File (Exact name of each (State or other (I.R.S. Employer
Number registrant as specified jurisdiction of Identification
in its charter) incorporation or Number)
organization)
c/o American Ref-Fuel Company LLC
155 Chestnut Ridge Road
Montvale , New Jersey 07645
Phone No. 800-727-3835
(Address, including zip code, and telephone number, including area code, of the
registrants' principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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 registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act):
MSW Energy Holdings LLC: yes [ ] no [X]
MSW Energy Finance Co., Inc: yes [ ] no [X]
Aggregate market value of voting and non-voting common stock held by
nonaffiliates:
MSW Energy Holdings LLC: None
MSW Energy Finance Co., Inc: None
Indicate the number of shares outstanding of each of the registrants' classes of
common stock, as of the latest practicable date.
MSW Energy Holdings LLC: None
MSW Energy Finance Co., Inc: 100 shares of Common Stock
Documents Incorporated by Reference: None
MSW Energy Finance Co., Inc. 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.
DEFINITIONS
"Allied" refers to Allied Waste Industries, Inc.
"Acquisition" refers to the agreement by MSW Energy Holdings to acquire Duke's
50% membership interest in Ref-Fuel Holdings.
"AIGGIG" refers to AIG Global Asset Management Holdings Corp.
"American Ref-Fuel" refers to American Ref-Fuel Company LLC.
"ARC" refers to American Ref-Fuel Company LLC.
"ARC operating companies" refers to the subsidiaries of ARC that operate the WTE
facilities.
"BFI" refers to Browning Ferris Industries, Inc.
"CSFB Private Equity" refers to Credit Suisse First Boston Private Equity, Inc.
"Duke" refers to Duke Energy Corporation.
"Duke Capital" refers to Duke Capital LLC.
"Equalization Transactions" refers to the proposed transactions pursuant to
which CSFB Private Equity affiliates will collectively own a 59.88%
indirect interest in Ref-Fuel Holdings and Highstar, Highstar I and
Highstar II will collectively own a 39.92% indirect interest in Ref-Fuel
Holdings.
"Erie" refers to Duke Energy Erie, LLC.
"HENS" refers to Hempstead, Essex, Niagara and Seconn, a series of partnerships
owned by Allied and Ref-Fuel Holdings.
"Highstar" refers to Highstar Renewable Fuels LLC.
"Highstar I" refers to Highstar Renewable Fuels I LLC.
"Highstar II" refers to Highstar Renewable Fuels II LLC.
"Hudson" refers to MSW Energy Hudson LLC.
"Investors" refers to Allied and Ref-Fuel Holdings as investors in the HENS.
"LLC Agreement" refers to the limited liability company agreement of MSW Energy
Holdings, dated June 24, 2003.
"MSW Acquisition" refers to MSW Energy Acquisition LLC.
"MSW Energy II" refers to MSW Energy Holdings II LLC.
"MSW Energy Holdings" refers to MSW Energy Holdings LLC.
"MSW Energy Finance" refers to MSW Energy Finance Co., Inc.
"MSW Merger" refers to MSW Merger LLC.
"MSW Transactions" refers to the June 30, 2003 acquisition by MSW Energy
Holdings of Duke's 49.8% interest in American Ref-Fuel Holdings and the
December 12, 2003 merger of MSW Merger into UAE Holdings, resulting in the
transfer of UAE's 50% interest in Ref-Fuel Holdings LLC being transferred
to MSW Energy II.
"Recapitalization" refers to the recapitalization of the HENS.
"Redemption" refers to the redemption of Allied's interest in the HENS.
"Ref-Fuel Holdings" refers to Ref-Fuel Holdings LLC.
"Senior Notes" refers to the 8 1/2 % Senior Secured Notes due 2010 of MSW Energy
Holdings.
"UAE" refers to United American Energy Corp.
"UAE Holdings" refers to United American Energy Holdings Corp.
"WTE" refers to the waste-to-energy business in which municipal waste is
combusted to produce energy.
Table of Contents
Part I.........................................................................1
Item 1. Business...............................................................1
Item 2. Properties............................................................7
Item 3. Legal Proceedings.....................................................8
Item 4. Submission of Matters to a Vote of Security Holders...................8
PART II........................................................................8
Item 5. Market for Registrants' Common Equity and Related
Stockholder Matters and Purchases of Equity Securities....................8
Item 6. Selected Financial Data...............................................8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................11
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk..............................................................29
Item 8. Financial Statements and Supplementary Data...........................30
Item 9. Changes in and Disagreements with Accountants on
Financial Disclosure.....................................................82
Item 9A. Controls and Procedures.............................................82
PART III......................................................................82
Item 10. Directors and Executive Officers of the Registrant..................82
Item 11. Executive Compensation..............................................84
Item 12. Security Ownership of Certain Beneficial Owners
and Management...........................................................84
Item 13. Certain Relationships and Related Transactions......................85
Item 14. Principal Accountant Fees and Services..............................86
Part IV..................................................................86
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..............................................................86
SIGNATURES
SAFE HARBOR STATEMENT
This Form 10-K contains "forward-looking statements" intended to qualify for
safe harbor from liability established by the Private Securities Litigation
Reform Act of 1995. Forward-looking statements should be read with the
cautionary statements and important factors included in this Form 10-K at Part
II, Item 7- "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors." Forward-looking statements are all
statements other than statements of historical fact, including without
limitation those that are identified by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts" and similar expressions
Part I
Item 1. Business
COMPANY OVERVIEW
The terms "we," "our," "ours" and "us" refer only to MSW Energy Holdings;
the terms "American Ref-Fuel" and "ARC" refer to American Ref-Fuel Company LLC;
and the term "Ref-Fuel Holdings" refers to Ref-Fuel Holdings LLC.
Overview
We were formed in June 2003 as a Delaware limited liability company for the
purpose of acquiring a 50% indirect membership interest in Ref-Fuel Holdings LLC
(formerly Duke/UAE Ref-Fuel LLC) (the "Acquisition"). At the initial closing on
June 30, 2003, we acquired MSW Energy Hudson LLC (or Hudson), which holds a
49.8% membership interest in Ref-Fuel Holdings. We have agreed to acquire Duke
Energy Erie, LLC (or Erie), a wholly-owned subsidiary of Duke that holds an
additional 0.2% membership interest in Ref-Fuel Holdings within two years and
six months after our purchase of Hudson. We currently own 49.8%, and have voting
control over an additional 0.2%, of Ref-Fuel Holdings, which owns 100% of
American Ref-Fuel. MSW Energy II holds directly and indirectly the other 50%
membership interest in Ref-Fuel Holdings.
Our sole source of operating cash flow relates to our indirect 49.8%
membership interest in Ref-Fuel Holdings. Ref-Fuel Holdings is a holding company
whose sole source of operating cash flow relates to its 100% membership interest
in American Ref-Fuel. As a 49.8% owner that has voting control over an
additional 0.2% interest, we do not have the ability to unilaterally control
Ref-Fuel Holdings or American Ref-Fuel. Given our interest in Ref-Fuel Holdings,
the financial statements and other financial information contained in this
report relating to Ref-Fuel Holdings are not directly comparable to our
financial statements and other financial information.
American Ref-Fuel owns partnerships that develop, own and operate WTE
facilities, which combust municipal solid waste and produce energy in the form
of electricity and steam. American Ref-Fuel owns or controls and operates six
WTE facilities located in the northeastern United States, which we refer to as
the ARC operating facilities. The subsidiaries of American Ref-Fuel that operate
the ARC operating facilities (the ARC operating companies) derive revenues
principally from disposal or tipping fees received by the ARC operating
companies for accepting waste and from the sale of electricity and steam
produced by those facilities.
Each of the ARC operating companies has outstanding indebtedness. The
majority of this indebtedness is evidenced by tax-exempt bonds and is
collateralized by the ARC operating facilities and other assets of the ARC
operating companies. American Ref-Fuel also has outstanding indebtedness.
Substantially all distributions to American Ref-Fuel from the ARC operating
companies, after the payment of expenses and debt service on ARC operating
company-level indebtedness, are subject to the satisfaction of financial tests
such as working capital and debt coverage ratio tests. Distributions from
American Ref-Fuel to Ref-Fuel Holdings, after the payment of expenses and debt
service on American Ref-Fuel indebtedness, are also subject to the satisfaction
of financial tests.
The following information relates to the ARC operating facilities:
Capacity Contract Expiration Date
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Date of
Commercial
Waste Operation/
Disposal Service Date
(tons Electric Agreements/Electricity Acquired by
Operating per Generating Disposal Sales American
Facility Location day) (megawatts) Contracts Contracts Ref-Fuel
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Hempstead Hempstead, NY 2,505 72 2009 2009 1989
Essex Newark, NJ 2,700 70 2020 2021 1991
Seconn Preston, CT 689 18 2015 2017 1992
Niagara Falls,
Niagara NY 2,250 50 2007-2012 2014 1980/1993
Semass Rochester, MA 2,700 79 2003-2016 2015 1989/1996
Delaware
Valley Chester, PA 2,688 79 2017 2016 1992/1997(1)
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(1) Date acquired for the Delaware Valley facility refers to the date of
acquisition by BFI. Following that date, the Delaware Valley facility was
managed by a predecessor of American Ref-Fuel until it was acquired by
American Ref-Fuel on April 30, 2001.
1
American Ref-Fuel indirectly owns 100% of the ARC operating companies,
except for Semass Partnership (which owns the Semass facility), of which
American Ref-Fuel indirectly owns 90%. American Ref-Fuel also owns TransRiver
Marketing Co., L.P. (or TransRiver), a waste procurement company. In addition to
providing waste procurement services to American Ref-Fuel, TransRiver owns a
740-ton-per-day transfer station in Lynn, Massachusetts.
American Ref-Fuel's facilities together process a total of approximately
five million tons of waste each year.
Waste Processed ('000 tons/year) 1999(1) 2000 2001 2002 2003
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Hempstead Facility 926 897 915 923 936
Essex Facility 975 916 918 899 937
Seconn Facility 245 241 248 252 258
Niagara Facility 760 782 755 725 755
Semass Facility 978 1,106 1,091 1,056 1,069
Delaware Valley Facility 1,040 1,114 1,151 1,060 1,111
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Total 4,924 5,056 5,078 4,915 5,066
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The ARC operating facilities sell approximately 2.6 million MWH of
electricity each year.
Power Sold ('000 MWH) 1999(1) 2000 2001 2002 2003
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Hempstead Facility 562 537 547 541 557
Essex Facility 514 465 468 465 479
Seconn Facility 129 126 129 137 138
Niagara Facility 301 299 289 278 270
Semass Facility 561 631 612 597 591
Delaware Valley Facility 567 616 618 554 577
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Total 2,634 2,674 2,663 2,572 2,612
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The following table summarizes each ARC operating facility's weighted
average boiler availability levels.
Availability Levels 1999(1) 2000 2001 2002 2003
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Hempstead Facility 95.5% 92.2% 93.8% 93.1% 94.8%
Essex Facility 95.9 90.7 92.5 92.7 92.6
Seconn Facility 96.9 93.9 95.3 96.2 96.3
Niagara Facility 93.4 92.5 90.3 89.8 89.7
Semass Facility 88.0 93.2 91.6 89.6 87.6
Delaware Valley Facility 88.1 92.2 92.1 88.4 88.4
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Weighted Average 92.2% 92.3% 92.5% 91.0% 90.9%
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(1) For the fiscal year ended September 30, 1999.
American Ref-Fuel guarantees or provides support for each of its
subsidiaries that owns an ARC operating facility, in one or more of the
following forms:
-- guarantees of recourse debt;
-- support agreements in connection with service agreement-related
obligations for each of the Hempstead, Semass, Seconn and the Delaware
Valley facilities; and
-- contingent credit support for damages from performance failures,
environmental indemnities, or contingent capital and credit support to
finance costs, in most cases in connection with a corresponding
increase in service fees, relating to uncontrollable circumstances.
In order to provide American Ref-Fuel with an additional source of funds to
meet calls on its project support obligations, each of its members has entered
into the Equity Contribution Agreement pursuant to which each member has agreed
2
to provide up to $50 million in equity capital. Each member's obligation to make
equity capital contributions under the Equity Contribution Agreement is
conditioned upon the other making an equal contribution and is limited to each
making no more than $50 million of aggregate equity contributions. If a member
is not rated at least BBB by S&P, such party is required to provide a letter of
credit from a commercial bank that is rated at least A- by S&P to secure its
obligations under the Equity Contribution Agreement.
Structure and Ownership
CSFB Private Equity and several funds affiliated with it, and Highstar
collectively hold 100% of our membership interests. Highstar is an affiliate of
AIGGIG, a subsidiary of American International Group, Inc. The entities through
which CSFB Private Equity makes its investment in us are sometimes referred to
in this report collectively as the CSFB Private Equity Investor.
Ref-Fuel Holdings is governed by a limited liability company agreement
pursuant to which our consent and that of MSW Energy II is required for certain
shareholder actions, including modifications of the Ref-Fuel Holdings limited
liability company agreement and actions taken by Ref-Fuel Holdings as the 100%
owner of American Ref-Fuel. Therefore, notwithstanding the fact that affiliates
of CSFB Private Equity indirectly own a majority of the membership interests of
Ref-Fuel Holdings, the consent of Highstar is required for certain actions to be
taken with respect to Ref-Fuel Holdings and neither we nor CSFB Private Equity
unilaterally control Ref-Fuel Holdings or American Ref-Fuel.
Management
We are managed by a board of directors, which currently consists of five
representatives: two appointed by Highstar, two appointed by MSW Acquisition
(the entity holding the CSFB Private Equity Investor interest) and one
independent director. Pursuant to the terms of our amended and restated limited
liability company agreement (the LLC Agreement), and so long as our 8 1/2%
Senior Secured Notes due 2010 (the Senior Notes) are outstanding, the consent of
the independent director is required for us to effect any bankruptcy or
insolvency proceeding or to consent to any involuntary bankruptcy proceeding.
Other than consenting to the bankruptcy and insolvency actions, the independent
director is a non-voting director.
Pursuant to the LLC Agreement, each of our two members, and any of our
substitute members, has the right to appoint: (i) two representatives to the
board for so long as such member owns at least 40.1% of our aggregate membership
interests and (ii) one representative to the board for so long as such member
owns at least 20.1% of our aggregate membership interests. All actions by the
board require the affirmative vote of the representatives designated by the
members holding a majority of our membership interests. So long as the CSFB
Private Equity Investor and Highstar each owns at least a 40.1% membership
interest in us, any action of our board requires the affirmative vote of a
representative to the board appointed by each of MSW Acquisition and Highstar.
The representatives to our board, other than our independent director, also
serve as the members of the board of directors of Ref-Fuel Holdings. These
directors vote as one block on the board of Ref-Fuel Holdings. Pursuant to the
terms of the LLC Agreement, our members have agreed to instruct our board to
vote to cause Ref-Fuel Holdings and its subsidiaries, subject to any applicable
contractual restrictions, to distribute available cash on a monthly basis to the
extent practicable, but no less frequently than quarterly. In accordance with
the terms of the LLC Agreement, our members have further agreed that our board
will not vote to permit us or our subsidiaries to consent to (i) any amendments
or modifications to any contractual restrictions on dividends binding on
Ref-Fuel Holdings or its subsidiaries that would make such restrictions more
restrictive or (ii) any new restrictions on dividends from such entities.
MSW Energy Finance Co., Inc.
Our wholly-owned subsidiary, MSW Energy Finance, was formed in June 2003
solely for the purpose of serving as a co-issuer of the Senior Notes. Other than
serving as a co-issuer of our Senior Notes, MSW Energy Finance does not have any
operations or assets and will not have any revenues.
Recent Developments
On January 26, 2004, affiliates of CSFB Private Equity entered into a
securities purchase agreement with Highstar II, an affiliate of AIGGIG, pursuant
3
to which the CSFB Private Equity affiliates agreed to sell to Highstar II 40% of
the outstanding shares of common stock of UAE Holdings. Upon the consummation of
the transactions contemplated by the securities purchase agreement, the CSFB
Private Equity affiliates will collectively own 60% and Highstar II will own 40%
of the outstanding shares of common stock of UAE Holdings. Concurrently with the
execution of the aforementioned purchase agreement, Highstar, MSW Acquisition,
and UAE Holdings entered into a membership interests purchase agreement pursuant
to which Highstar agreed to sell to MSW Acquisition 10% and to UAE Holdings
0.01% of our outstanding membership interests. Prior to such transaction,
Highstar will transfer 39.89% of our membership interests to its wholly-owned
subsidiary, Highstar I. Upon the consummation of the transactions contemplated
by the membership interests purchase agreement, MSW Acquisition will own 60%,
Highstar and Highstar I will own 39.99% and UAE Holdings will own 0.01% of our
outstanding membership interests, and UAE Holdings will be our managing member.
The transactions described above (the Equalization Transactions) will
result in CSFB Private Equity affiliates collectively owning a 59.88% indirect
interest in Ref-Fuel Holdings, and Highstar, Highstar I and Highstar II
collectively owning a 39.92% indirect interest in Ref-Fuel Holdings.
The parties plan to enter into a stockholders' agreement and members'
agreement that will provide for our governance and that of UAE Holdings, and our
respective subsidiaries. The consent of both the CSFB Private Equity affiliates
and an affiliate of AIGGIG will be required for us and UAE Holdings and in many
cases our subsidiaries to take certain significant actions. The agreements will
also provide for transfer restrictions, a right of first offer, tag-along
rights, drag-along rights and participation rights with respect to us and UAE
Holdings. The parties will also enter into a registration rights agreement with
respect to UAE Holdings.
The transactions contemplated by the aforementioned agreement will be
conditioned upon the consummation of each other and will also be subject to
certain closing conditions, including the receipt of all necessary governmental
approvals. These transactions are expected to close in the second quarter of
2004. However, we cannot assure you that the transactions will be consummated.
Energy Regulatory Matters
Federal and state energy laws regulate the development, ownership, business
organization, and operation of generating facilities and the sale of
electricity. The Federal Power Act (FPA) authorizes the Federal Energy
Regulatory Commission (FERC) to regulate the wholesale sale of electric energy
and the transmission of electric energy in interstate commerce. The Public
Utility Holding Company Act of 1935 (PUHCA) provides for regulation of holding
companies that hold ownership interests in companies that own or operate
facilities for the generation, transmission or distribution of electricity for
sale. State laws regulate the activities of utilities which serve retail
electric customers.
The Public Utility Regulatory Policies Act of 1978 (PURPA) was enacted to
encourage the development of generating facilities which conserve fossil fuels,
either by producing electricity using a fuel other than fossil fuel, or by the
cogeneration of electricity and steam or other thermal energy which is useful.
Each ARC operating facility meets the requirements for a qualifying facility
(QF) in accordance with regulations issued by the FERC pursuant to PURPA. One of
the ARC operating facilities, Niagara, qualifies as a cogeneration QF. A
cogeneration QF must produce a certain proportion of its total energy output in
the form of thermal energy that is used for a commercial purpose, and its fossil
fuel input must be in a certain proportion to its electric and thermal output.
The other ARC operating facilities satisfy the requirements for qualifying small
power production facilities which rely primarily on biomass for fuel and have a
net power production capacity no greater than 80 megawatts. All QFs must satisfy
the FERC ownership requirement, which states that no more than 50 percent of the
stream of benefits from ownership in the generating facility can be owned by
electric utilities or electric utility holding companies.
PURPA requires utilities to purchase the electric output of QFs at
negotiated rates or rates up to the incremental or "avoided" cost that the
utility would have incurred if it produced the electricity itself or purchased
it from another source. State public utility commissions must approve the rates,
and in some instances, other contract terms, under which utilities purchase
electricity from QFs. State public utility commissions are responsible for
determining the avoided cost rates for utilities subject to their jurisdiction,
although QFs and utilities may negotiate outside of this framework. Some state
public utility commissions require utilities to file their agreements under
which utilities purchase electricity from QFs.
4
Under PURPA and FERC regulations, QFs also are entitled to certain
exemptions from the FPA, PUHCA and state utility regulation. Two of the ARC
operating facilities, Seconn and Niagara, are exempt from all relevant
provisions of the FPA. The other four ARC operating facilities, the Hempstead
facility, the Essex facility, the Semass facility and the Delaware Valley
facility (collectively, the FPA Facilities) are not fully exempt from the FPA
because they are WTE facilities with a net power production capacity larger than
30 megawatts. Companies subject to the FPA must obtain FERC approval for rates
and terms for the sale of electric energy at wholesale and must comply with
other requirements of the FPA and FERC regulations.
Each of the FPA Facilities has filed rate schedules with the FERC in
compliance with the FPA, so that its power purchase agreement (PPA) with the
power-purchasing utility is deemed effective under the FPA. In addition, two of
the FPA Facilities, namely the Essex and the Delaware Valley facilities, have
received FERC authorization to sell electricity at wholesale at market-based or
negotiated rates to any unaffiliated purchaser or into a regional energy market.
The other two FPA Facilities, namely the Hempstead and Semass facilities, do not
sell electricity at market-based rates and therefore do not have or need FERC
market-based rate authority. In connection with their market-based rate
authorizations, each of Essex and Delaware Valley has received a blanket
authorization to issue securities or assume liabilities without further FERC
approval, and has received waivers of other FPA regulations which apply to
traditional utilities selling electricity at cost-based rates. Each of the FPA
Facilities must file quarterly reports providing certain details concerning
wholesale power transactions during the prior calendar quarter. The FPA
Facilities must obtain the prior authorization of the FERC for change-of-control
transactions and for the sale or other transfer of jurisdictional facilities,
including wholesale power sale contracts and interconnection facilities
connecting a generating facility to the transmission grid. Each of the Hempstead
and Semass facilities requires the FERC's prior approval to issue securities or
assume obligations with respect to any other person's securities.
As QFs, all of the ARC operating facilities are exempt from regulation as
"electric utility companies" under PUHCA, and ownership of equity interests in
the ARC operating facilities is likewise not subject to PUHCA regulation, unless
the owner is otherwise independently subject to PUHCA regulation. Thus, no
entity would become subject to regulation under PUHCA solely as a result of
holding an ownership interest in one or more of the ARC operating facilities.
Each of the ARC operating facilities also has been determined to be an exempt
wholesale generator (EWG) which is exempt from regulation under PUHCA. An EWG
must be engaged exclusively in the business of owning and/or operating an
eligible facility and selling electricity at wholesale. An eligible facility is
a generating facility that is used solely to produce electricity for sale at
wholesale. If any ARC operating facilities ceases to meet the requirements for
either QF or EWG status, American Ref-Fuel could remain exempt from PUHCA,
provided that the requirements for the other exemption continue to be satisfied.
In addition, as QFs, all of the ARC operating facilities are exempt from state
laws regulating the rates charged by, or the financial and organizational
activities of, electric utilities. Loss of QF status, which could only occur if
an ARC operating facility were to no longer comply with the FERC's QF
requirements, would terminate the non-PUHCA regulatory benefits and exemptions
that all of the ARC operating facilities currently enjoy.
All of the ARC operating facilities are located within a region served by a
FERC-regulated independent system organization (ISO) or regional transmission
organization (RTO). An ISO or RTO is a FERC-regulated entity responsible for
controlling the transmission system and scheduling transmission service within
its region and between regions on an open access basis. ISOs or RTOs also
administer regional energy sales markets. The Niagara facility and Hempstead
facility are within the New York ISO region; the Semass facility and the Seconn
facility are within the New England ISO region; and the Essex facility and the
Delaware Valley facility are within the PJM RTO region. The price for electric
energy and other electric products sold in these markets other than through
bilateral contracts between sellers and purchasers is set by competitive bids to
supply and offers to purchase, subject to FERC-approved rules. At this time, the
Essex facility and the Delaware Valley facility frequently sell electricity into
the PJM spot market, but the output of the other ARC operating facilities
generally is fully committed under their respective PPAs.
Environmental Matters
American Ref-Fuel conducts operations that require compliance with
environmental provisions of federal, state and local laws, regulations and
standards related to protection of human health and the natural environment.
Specific rules contained in these laws and regulations address air and water
emissions, as well as waste management and disposal. Other provisions of such
environmental laws and regulations address rare unplanned events, such as
5
spills, releases and emergency response. Permitting, record-keeping, reporting
and periodic certifications, along with routine and periodic inspections and
audits are also managed according to applicable laws and regulations.
American Ref-Fuel has indicated that compliance with such laws and
regulations is a major focus for it. According to American Ref-Fuel, its
philosophy with regard to environmental matters at American Ref-Fuel and each of
the ARC operating facilities includes operating within permit limits and
continually striving to improve environmental performance. American Ref-Fuel
reports that it believes that all of its operations are compliant in all
material respects with the requirements of environmental laws and regulations.
The ARC operating facilities are subject to numerous federal, state and
local environmental permitting and licensing requirements related to the
protection of human health and natural resources. American Ref-Fuel reports that
it believes that each of the ARC operating facilities has in place all of the
material environmental permits and licenses necessary to operate as planned. In
addition, several of the ARC operating facilities from time to time operate
pursuant to various orders issued by, and various agreements with, federal,
state and/or local environmental regulatory agencies. American Ref-Fuel reports
that it believes that each of the ARC operating facilities is compliant in all
material respects with all such applicable orders and agreements.
Certain environmental permits for the ARC operating facilities are subject
to periodic renewal or reissuance. There is no assurance that such renewal or
reissuance will be granted by regulatory authorities or that any renewed or
reissued environmental permit will not contain new, more stringent requirements
resulting in the need for additional capital expenditures for modifications to
the ARC operating facilities in order to bring the ARC operating facilities into
compliance. Any failure or delay in renewing or reissuing environmental permits
or any increase in costs resulting from any renewed or reissued environmental
permits could adversely effect the operation of the ARC operating facilities. In
addition, certain environmental permits contain terms that can result in
periodic adjustment of operating limits, which can result in reduced revenue.
Under various federal, state and local environmental laws and regulations,
a current or previous owner or operator of any facility may be required to
investigate and remediate past releases or threatened releases of hazardous or
toxic substances or petroleum products generated, managed or located at the
facility, and may be held liable to a governmental entity or to third parties
for property damage, personal injury and investigation and remediation costs
incurred by a party in connection with any releases or threatened releases. An
operator may also be liable for costs of remediation at a third party's site to
which the operator has sent waste for disposal. These laws, including, but not
limited to, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, impose liability without regard to whether the owner
knew of or caused the presence of the hazardous substances or whether the owner
owned the property where the release occurred. Courts have interpreted liability
under such laws to be strict and joint and several. The cost of investigation,
remediation or removal of substances may be substantial. In connection with
American Ref-Fuel's ownership and operation of the ARC operating facilities,
American Ref-Fuel may become liable for such costs. Although American Ref-Fuel
reports that it is not presently aware of any such condition expected to
materially affect the ARC operating facilities, it is possible that such
conditions impacting the ARC operating facilities could be discovered in the
future or that such conditions could be created by future spills or releases. As
a result, it is possible that American Ref-Fuel may become liable for
remediation costs.
Several major pieces of environmental legislation are periodically
considered for reauthorization or amendment by the United States Congress. These
include, among others: the Clean Air Act; the Clean Water Act; the Comprehensive
Environmental Response, Compensation and Liability Act; and the Endangered
Species Act. Changes to these laws could adversely affect many areas of the
operations of the ARC operating facilities.
We are unable to predict at this time what additional steps American
Ref-Fuel may be required to take as a result of the implementation of future
environmental protection requirements for air or water and regulation of
hazardous or toxic materials, but such steps could adversely affect operations
and result in substantial additional costs. Failure to comply with such
requirements could result in the complete shutdown of one or more of the ARC
operating facilities not in compliance as well as the imposition of civil and/or
criminal penalties.
Delaware Valley Facility Continuous Emissions Monitoring Systems Issues. In
2002 the Delaware Valley facility experienced deterioration of hydrochloric acid
(HCl) monitors and related components due to corrosive flue gases leaking from
damaged stack breachings. Some or all of the monitors were out of service for
periods of time in 2002 and 2003.
American Ref-Fuel has repaired the stack breachings and is replacing major
components of the CEMS system, including installing new multi-component monitors
6
for HCl. The capital cost of these upgrades is estimated to be $1.75 million.
For three of the six monitors, installation is complete and certification test
reports have been submitted to the Pennsylvania Department of Environmental
Protection (PADEP). For the other three monitors, installation and verification
test are expected to be completed by June 2004. ARC expects to incur additional
CEMS availability fines until these remaining monitors are installed.
Certification of the monitors is subject to PADEP approval. It is possible that
PADEP will impose requirements involving additional capital and operating costs
above those projected by American Ref-Fuel.
Future Mercury Regulation at the Essex Facility. On January 5, 2004 the New
Jersey Department of Environmental Protection (NJDEP) proposed regulations
applicable to the Essex facility that will make mercury emission requirements
more stringent. Specifically, the proposed requirement will increase the
required removal efficiency to 85% removal after one year and 95% removal after
seven years versus the current 80% removal, while retaining the alternative
limit of 28 micrograms per cubic meter. Assuming the regulations are promulgated
in this form, there would be an increased risk that emission exceedances would
occur and therefore an increased probability that additional controls would
ultimately be required to prevent such exceedances. ARC believes that the new
requirements would at a minimum result in increased operating costs due to
increased use of activated carbon in the current control equipment. It is also
possible that the more stringent requirements could require the installation of
additional pollution control equipment such as compact hybrid particulate
collector units, a device similar to a baghouse. American Ref-Fuel reports that
it estimates that the cost of the installation of such additional pollution
control equipment, if required, would be approximately $38 million. The Essex
service agreement provides a mechanism for a pass-through to the Port Authority
of New York and New Jersey of the majority of any additional capital and
operating costs that may be required. American Ref-Fuel reports that it cannot
currently determine the likelihood of additional and operating capital costs
being incurred in connection with these potential changes in regulation, or the
total of any such costs.
Title V Air Permit for the Essex Facility. On September 9, 2003, NJDEP
issued a pre-draft Title V air permit which contained new operating limitations
and conditions. Many of the new conditions would require Essex to monitor
emission sources and operating conditions not currently required to be monitored
under the existing air permits or which are monitored or controlled under other
permits. Through subsequent comments and negotiations, American Ref-Fuel has
negotiated removal or mitigation of the majority of those requirements which had
the potential to increase operating costs or result in new or reduced emission
limits or reductions in allowed operating rates. Increased monitoring also can
increase the risk of non-compliance and the imposition of fines and penalties. A
draft permit was issued for public comment in early March 2004, with comments
due by April 2, 2004. American Ref-Fuel will continue to work to mitigate
similar impacts of remaining permit conditions.
Possible Changes to Pennsylvania Oxides of Nitrogen Regulations. The PADEP
has proposed a regulation that would lower the existing emission limits for
oxides of nitrogen to a standard lower than what has been achieved by existing
technology on waste-to-energy facilities. If the regulation were promulgated in
the form proposed, American Ref-Fuel would evaluate the Delaware Valley
facility's ability to comply using selective non-catalytic reduction technology.
If that is not feasible, American Ref-Fuel may be required to retrofit the
Delaware Valley facility with selective catalytic reduction at an approximate
cost of $30 million. The Delaware Valley service agreement provides a mechanism
for a pass-through to Delaware County, Pennsylvania, American Ref-Fuel's primary
customer at the Delaware Valley facility, of approximately 56% of the additional
costs of any such retrofit. American Ref-Fuel and Delaware County, Pennsylvania
are vigorously opposing the proposed regulation through available avenues for
public comment, hearings and education of the relevant regulatory agency
representatives. The Independent Regulatory Review Commission (IRRC), which is a
regulatory oversight committee of the Pennsylvania State Legislature, has
responded to the PADEP with objections and recommendations regarding the
proposed regulation. Certain of the objections of the IRRC relate to the lack of
demonstrated cost-effective, achievable technology that would enable waste to
energy facilities to achieve the proposed levels of oxides of nitrogen.
Employees
ARC Management Company runs the day-to-day operations of American Ref-Fuel.
Collectively, ARC Management Company and the other subsidiaries of American
Ref-Fuel have approximately 720 employees. Neither MSW Energy Holdings nor MSW
Energy Finance has any employees. See "Management--MSW Energy Holdings."
Item 2. Properties
Neither MSW Energy Holdings nor MSW Energy Finance leases or owns any
physical property or office space.
7
Item 3. Legal Proceedings
Neither MSW Energy Holdings nor MSW Energy Finance is currently involved in
any litigation, other than routine, ongoing disclosure proceedings before the
FERC that under current law do not create any risk related to the regulatory
status or exemptions of the ARC operating companies.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters
and Purchases of Equity Securities
There is no trading market for the equity interests in MSW Energy Holdings
or MSW Energy Finance. CSFB Private Equity and several funds affiliated with it,
and Highstar, collectively hold 100% of the membership interests in MSW Energy
Holdings. MSW Energy Holdings owns 100% of the equity interests in MSW Energy
Finance.
Item 6. Selected Financial Data
Because MSW Energy Holdings has only been in existence since June 2003 and
has only held its interest in Ref-Fuel Holdings since June 2003, the Selected
Financial Data provided below for prior periods is for informational and
comparative purposes only. Because MSW Energy Holdings holds only a 49.8%
indirect membership interest in Ref-Fuel Holdings, the Selected Financial Data
provided for Ref-Fuel Holdings is not directly comparable to MSW Energy Holdings
financial information. Combined information is provided for the year ended
December 31, 2003 for informational and comparative purposes only.
Prior to June 30, 2003, Ref-Fuel Holdings was owned 50 percent by United
American Energy Corp. (UAE) and 50 percent by Duke Energy Corporation (Duke).
Effective June 30, 2003, Duke sold its membership interests representing 49.8%
of Ref-Fuel Holdings to MSW Energy Holdings LLC (MSW Energy), which is jointly
owned by (a) Highstar Renewable Fuels LLC (Highstar), which is affiliated with
AIG Global Asset Management Holdings Corp., (AIGGIG), a subsidiary of American
International Group, Inc.; and (b) MSW Acquisition LLC (MSW Acquisition) which
is owned by several funds affiliated with Credit Suisse First Boston Private
Equity, Inc. (CSFB Private Equity), the global private equity arm of Credit
Suisse First Boston.
On December 12, 2003, MSW Merger II, an affiliate of CSFB Private Equity,
merged with and into United American Energy Holdings Corp. (UAE Holdings) a
Delaware corporation, which continued as the surviving corporation in the
merger. UAE Holdings is the direct parent of UAE. As a result of this merger,
UAE's 50 percent ownership in American Ref-Fuel was transferred to MSW Energy
Holdings II LLC (MSW Energy II).
Upon consummation of the change in ownership and taking into account the
June 30, 2003 acquisition by MSW Energy I of Duke's membership interest in
Ref-Fuel Holdings (the MSW Transactions), affiliates of CSFB Private Equity and
AIGGIG (the Control Group) own, directly and indirectly, 99.8% of the membership
interests in Ref-Fuel Holdings (and will exercise voting power with respect to
Duke's remaining 0.2% interest). As a result, and in accordance with Emerging
Issues Task Force (EITF) Topic D-97, "Push-Down Accounting," Ref-Fuel Holdings'
financial statements will reflect the effects of its change in ownership and the
new owners' basis in the net assets and liabilities acquired. As a result, the
statement of operations and the statement of cash flows for the eleven and a
half months ended December 12, 2003 and the years ended December 31, 2002 and
2001 reflect the results of Ref-Fuel Holdings prior to purchase accounting
adjustments and the statement of operations of statement of cash flows for the
period ended December 31, 2003, reflect the impact of purchase accounting
adjustments arising from the MSW Transactions.
Prior to the MSW Transactions, profits and losses of Ref-Fuel Holdings were
allocated among its members based on ownership percentages. Subsequent to the
MSW Transactions profits and losses are allocated based upon the members'
ownership percentages except for the amortization of the variances in purchase
price. All significant intercompany accounts and transactions have been
eliminated in consolidation.
8
The table includes certain items that are not measures under generally
accepted accounting principles and are not intended to supplant the information
provided in accordance with generally accepted accounting principles.
Furthermore, these measures may not be comparable to those used by other
companies.
MSW Energy Holdings
Historical
From Inception
(June 30, 2003) to
December 31,
2003
----------------------
(in thousands)
Statement of Operations Data:
Equity in net earnings of Ref-Fuel Holdings $21,603
Interest income 91
Interest expense (8,500)
Accretion of Duke Agreement obligation (993)
Amortization of deferred financing fees (561)
Other expenses (1,029)
----------------------
Net income $10,611
----------------------
Cash Flow Data:
Cash provided by operating activities $10,409
Cash used in investing activities (346,014)
Cash provided by financing activities 341,118
Balance Sheet Data (at December 31, 2003):
Investment in Ref-Fuel Holdings $372,672
Total assets 391,647
Total debt 200,000
Total members' equity 160,111
Ref-Fuel Holdings
| Period from Combined
Period from | January 1, Results for
December 12, | 2003 the Year
2003 through | through Ended
December 31, | December December 31,For the Year
2003 | 12, 2003 2003 Ended 2002
---------------|---------------------------------------
Statement of Operations Data: | (in thousands)
Total Net Revenues $24,847 | $444,461 $469,308 $438,542
Operating and other expenses 8,417 | 183,822 192,239 171,752
Depreciation and amortization 3,391 | 55,838 59,229 67,249
General and administrative expenses 2,184 | 42,118 44,302 43,642
---------------|--------------------------------------
Operating income 10,855 | 162,683 173,538 155,899
Interest income 275 | 2,956 3,231 3,740
Interest expense (2,954)| (59,189) (62,143) (60,893)
Loss on early extinguishment of |
debt - | (3,191) (3,191) -
Equity in earnings of |
unconsolidated affiliates - | - - 15,500
Other expenses, net (94)| (188) (282) (757)
Minority interests in net income |
of subsidiaries - | - - (4,885)
---------------|-------------------------------------
Net income $8,082 | $103,071 $111,153 $108,604
---------------|-------------------------------------
Cash Flow and Other Data: |
EBITDA(1) $14,246 | $220,728 $234,974 $230,445
Adjusted EBITDA(1) 18,050 | 249,596 267,646 256,858
Cash flows from operating |
activities 14,870 | 171,034 185,904 198,651
Cash flows from investing |
activities 36,314 | (70,554) (34,240) (69,536)
Cash flows from financing |
activities (16,124)| (109,202) (125,326) (110,685)
9
Capital expenditures - | 33,780 33,780 35,727
Balance Sheet (as of end of period) |
Total cash and cash equivalents and |
reserves(2) | $233,973 $201,594
PP&E | 1,220,949 1,103,072
Total assets | 2,127,908 1,756,824
Total debt | 1,142,687 1,156,396
Total liabilities | 1,386,608 1,462,368
Total members' equity | 741,300 294,456
(1) "EBITDA" means, for any period, the (a) operating income (or loss),
plus (b) to the extent deducted in determining such income (or loss),
depreciation and amortization, plus, (c) loss on retirements and
relocation expenses. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should
not be considered as an alternative to cash flow from operating
activities or as a measure of liquidity or an alternative to net
income as indicators of our operating performance or any other
measures of performance derived in accordance with generally accepted
accounting principles.
"Adjusted EBITDA" means, for any period, EBITDA plus fair value
adjustment amortization and revenue levelization adjustments. Adjusted
EBITDA is not a measurement of financial performance under generally
accepted accounting principles and should not be considered as an
alternative to cash flow from operating activities or as a measure of
liquidity or an alternative to net income as indicators of our
operating performance or any other measures of performance derived in
accordance with generally accepted accounting principles.
(2) Total cash and cash equivalents and reserves includes, in addition to
cash and cash equivalents, both restricted cash and short-term
investments and restricted cash and long-term investments. Ref-Fuel
Holdings is required to maintain cash and investment balances that are
restricted by provisions of its debt agreements and lease agreements.
The presentation of these non GAAP measures is intended to enhance the
usefulness of financial information by providing measures which are indicators
of Ref-Fuel Holdings' performance. Ref-Fuel Holdings' management uses these non
GAAP measures internally to evaluate its business.
EBITDA and Adjusted EBITDA are calculated and reconciled to cash provided by
operating activities as follows:
| Combined
Period from | Period from Results for
December 12, | January 1, the Year
2003 through | 2003 through Ended
December 31, | December 12, December 31,For the Year
2003 | 2003 2003 Ended 2002
---------------|----------------------------------------
| (in thousands)
Operating income $10,855 | $162,683 $173,538 $155,899
Depreciation and amortization 3,391 | 55,838 59,229 67,249
Loss on asset retirements - | 2,207 2,207 1,886
Relocation expenses - | - - 5,411
---------------|----------------------------------------
EBITDA 14,246 | 220,728 234,974 230,445
Amortization of long term waste |
contracts (477)| (7,454) (7,931) (8,453)
Amortization of deferred revenue - | (909) (909) (198)
Amortization of energy contracts 3,286 | 27,293 30,579 25,984
Energy contract levelization 995 | 14,947 15,942 14,359
Amortization of lease - | (5,009) (5,009) (5,279)
---------------|---------------------------------------
Total fair value adjustment |
amortization and revenue |
levelization adjustments 3,804 | 28,868 32,672 26,413
---------------|---------------------------------------
Adjusted EBITDA $18,050 | $249,596 $267,646 $256,858
---------------|---------------------------------------
|
Reconciliation of Adjusted EBITDA to |
cash provided by operating |
activities |
Adjusted EBITDA $18,050 | $249,596 $267,646 $256,858
Less relocation expenses - | - - (5,411)
Less other expense, net (94)| (188) (282) (757)
Amortization of debt (494)| (4,097) (4,591) (4,608)
Interest expense (2,954)| (59,189) (62,143) (60,893)
Interest income 275 | 2,956 3,231 3,740
Interest on loss contracts - | 1,863 1,863 2,051
Changes in assets and liabilities |
Accounts receivable, net 2,890 | (6,337) (3,447) (437)
Prepaid expenses and other |
current assets 3,255 | (2,731) 524 (7,933)
10
Other long-term assets 562 | (2,971) (2,409) 3,567
Accounts payable and other |
current liabilities 1,886 | (21,202) (19,316) 19,314
Accrued interest payable (7,775)| 6,762 (1,013) 6,138
Other long-term liabilities (731)| 6,572 5,841 (12,978)
---------------|---------------------------------------
Cash provided by operating activities $14,870 | $171,034 $185,904 $198,651
===============|=======================================
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The following discussion contains forward-looking statements. These
statements are based on current plans and expectations and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual results to
differ include risks set forth in ''Risk Factors.'' The following should be read
in conjunction with the financial statements and related notes included
elsewhere in this report. We hold a 49.8% indirect membership interest in
Ref-Fuel Holdings. The financial statements and other financial information
contained in this report relating to Ref-Fuel Holdings are not directly
comparable to our financial statements and other financial information.
MSW ENERGY HOLDINGS
Results of Operations
From Inception to December 31, 2003
Equity in net earnings of Ref-Fuel Holdings. Equity in net earnings of
Ref-Fuel Holdings of $21.6 million from Inception (June 30, 2003) to December
31, 2003 represents our share (49.8%) of the net earnings of Ref-Fuel Holdings
of $34.7 million offset by amortization expense of $13.1 million associated with
the amortization of the amount of our excess purchase price over our share of
the net assets of Ref-Fuel Holdings at the date of acquisition. We acquired our
interest in Ref-Fuel Holdings on June 30, 2003. Effective December 12, 2003, as
a result of push-down accounting, we ceased amortization of the excess of our
purchase price over the net assets acquired of Ref-Fuel Holdings, as the cost of
our investment has been reflected on the books of Ref-Fuel Holdings.
Interest income. Interest income for the period from Inception (June 30,
2003) to December 31, 2003 represents interest on cash and cash equivalents at
rates ranging from 0.5% to 1.5%.
Interest expense. Interest expense of $8.5 million for the period from
Inception (June 30, 2003) to December 31, 2003 represents 8.5% annual interest
on our Senior Notes.
Accretion of Duke Agreement obligation. Accretion of Duke Agreement
obligation of $1.0 million for the period from Inception (June 30, 2003) to
December 31, 2003 represents accretion of interest on the amounts due under the
Duke Agreement (see ''Contractual Obligations and Commercial Commitments''
below) using the effective interest method.
Amortization of deferred financing fees. Amortization of deferred financing
fees of $0.6 million for the period from Inception (June 30, 2003) to December
31, 2003 represents amortization of direct costs associated with financing the
Senior Notes over the seven-year life of the Senior Notes.
Other expenses. Other operating expenses of $1.0 million for the period
from Inception (June 30, 2003) to December 31, 2003 represent expenses incurred
for a letter of credit and our operations and administration.
Liquidity and Capital Resources
At December 31, 2003, our assets related primarily to our 49.8% indirect
membership interest in Ref-Fuel Holdings. Accordingly, our performance and
significant source of future liquidity will depend solely on cash distributions,
if any, from Ref-Fuel Holdings. We will need to receive sufficient ongoing cash
11
distribution from Ref-Fuel Holdings in order to pay principal and interest on
our Senior Notes, however such distributions from Ref-Fuel Holdings are not
assured. Interest only is payable throughout the term of the Senior Notes with
principal and unpaid interest payable at maturity on September 1, 2010.
Debt Covenant
The indenture under which our Senior Notes were issued requires, among
other things, but subject to certain exceptions, that we not permit any
restricted payment unless certain ratio covenants based on our proportionate
ownership of Ref-Fuel Holdings have been met. We are presenting proportionate
adjusted data, including proportionate total cash and cash equivalents and
reserves, proportionate total debt, proportionate interest expense and
proportionate Adjusted EBITDA because these are used in the calculation of the
restrictive covenants contained in the indenture governing our Senior Notes.
The unaudited summary pro forma condensed consolidated statements of
operations data, pro forma MSW Energy Holdings other data and pro forma
proportionate other data for the year ended December 31, 2003, have been
prepared as if the Acquisition, the UAE Transactions and issuance of the Senior
Notes had occurred on January 1, 2003. Accordingly, the following table includes
the effects of push-down accounting on Ref-Fuel Holdings as if the Acquisition
and the UAE Transactions had occurred on January 1, 2003.
The following table includes certain items that are not measures under
generally accepted accounting principles and are not intended to supplant the
information provided in accordance with generally accepted accounting
principles. Furthermore, these measures may not be comparable to those used by
other companies. The following table should be read in conjunction with our
historical financial statements and related notes, the historical financial
statements and related notes of Ref-Fuel Holdings and the "Supplemental
Discussion and Analysis of Ref-Fuel Holdings".
Pro Forma
Year
Ended
December 31,
2003
-----------------
(in thousands)
Pro Forma MSW Energy Holdings other data
Dividends received (1) $36,130
Cash flow available for debt service (2) 35,880
Ratio of cash flows available for debt service to
interest 2.1x
Pro Forma Proportionate other data
Proportionate total cash and cash equivalents and
reserves (3) $127,597
Proportionate total debt (4) 733,999
Proportionate Adjusted EBITDA (5) 133,288
Proportionate interest expense (6) 44,938
Proportionate net leverage ratio (7) 4.5x
Ratio of proportionate Adjusted EBITDA to proportionate
interest expense (8) 3.0x
(1) Dividends received calculated as if we owned 49.8% of Ref-Fuel Holdings as
of January 1, 2003:
Pro Forma Year Ended
December 31,
2003
-------------------------
(in thousands)
Ref-Fuel Holdings dividends paid $72,550
MSW Energy Holdings ownership percentage 49.8%
-------------------------
Pro Forma distributions received $36,130
-------------------------
12
(2) Cash flow available for debt service is based on distributions received by
us less letter of credit fees payable in connection with the equity
contribution agreement.
(3) Total Ref-Fuel Holdings and MSW Energy Holdings cash and cash equivalents
and reserves include, in addition to cash and cash equivalents, both
restricted cash and short-term investments and restricted cash and
long-term investments.
Proportionate Total Cash and Cash Equivalents and Reserves is calculated as
follows:
Pro Forma
December 31,
2003
-----------------------
(in thousands)
Ref-Fuel Holdings cash and cash equivalents $96,511
Ref-Fuel Holdings restricted cash and short-term investments 52,753
Ref-Fuel Holdings restricted cash and long-term investments 84,709
-----------------------
Total Ref-Fuel Holdings cash and cash equivalents and reserves 233,973
MSW Energy Holdings ownership percentage 49.8%
-----------------------
Ref-Fuel Holdings proportionate total cash and cash
equivalents and reserves 116,519
MSW Energy Holdings total cash and cash equivalents 11,078
-----------------------
MSW Energy Holdings proportionate consolidated total cash and
cash equivalents and reserves $127,597
-----------------------
(4) MSW Energy Holdings Proportionate Total Debt is defined as 49.8% of the
total debt for Ref-Fuel Holdings (excluding unamortized debt premium) plus
our total debt.
Proportionate total debt is calculated as follows:
Pro Forma
December 31,
2003
----------------------
(in thousands)
Ref-Fuel Holdings current portion of long-term debt $81,907
Ref-Fuel Holdings long-term debt (excluding net unamortized debt
premium of $70.4 million) 990,380
----------------------
Total Ref-Fuel Holdings debt (excluding net unamortized debt
premium of $70.4 million) 1,072,287
MSW Energy Holdings ownership percentage 49.8%
----------------------
Ref-Fuel Holdings proportionate total debt 533,999
MSW Energy Holdings total debt 200,000
----------------------
Proportionate total debt $733,999
----------------------
(5) Proportionate Adjusted EBITDA is defined as 49.8% of the pro forma Adjusted
EBITDA of Ref-Fuel Holdings. Adjusted EBITDA (as calculated below) is not a
measurement of financial performance under generally accepted accounting
principles and should not be considered as an alternative to cash flow from
operating activities or as a measure of liquidity or an alternative to net
income as indicators of our operating performance or any other measures of
performance derived in accordance with generally accepted accounting
principles.
Proportionate Adjusted EBITDA is calculated as follows:
13
Pro Forma
Year Ended
December 31,
2003
-------------------
(in thousands)
Pro forma Ref-Fuel Holdings operating income $127,737
Pro forma Ref-Fuel Holdings depreciation and amortization 68,094
Pro forma Ref-Fuel Holdings loss on retirements 2,207
-------------------
Pro forma Ref-Fuel Holdings EBITDA 198,038
Pro forma Ref-Fuel Holdings fair value adjustment amortization
and revenue levelization adjustments 69,608
-------------------
Pro forma Ref-Fuel Holdings adjusted EBITDA 267,646
MSW Energy Holdings ownership percentage 49.8%
-------------------
Proportionate Adjusted EBITDA $133,288
-------------------
(6) Proportionate interest expense is defined as 49.8% of the pro forma
interest expense for American Ref-Fuel plus 100% of our pro forma interest
expense.
The following table reconciles MSW Energy Holdings Proportionate Interest
Expense:
Pro Forma
Year Ended
December 31,
2003
-------------------
(in thousands)
Pro Forma Ref-Fuel Holdings interest expense $56,101
MSW Energy Holdings ownership percentage 49.8%
-------------------
Ref-Fuel Holdings proportionate interest expense 27,938
MSW Energy Holdings pro forma interest expense 17,000
-------------------
MSW Energy Holdings proportionate interest expense $44,938
-------------------
(7) Proportionate net leverage ratio is defined as the quotient of
proportionate total debt less proportionate total cash divided by
proportionate Adjusted EBITDA.
(8) Proportionate Adjusted EBITDA to proportionate interest expense is defined
as the quotient of proportionate Adjusted EBITDA divided by proportionate
interest expense.
Operating Activities
Our net cash provided by operating activities of $10.4 million for the
period from Inception (June 30, 2003) to December 31, 2003 relates primarily to
the distributions received from Ref-Fuel Holdings of $13.7 million in 2003
offset by the payment of $3.1 million of interest on our Senior Notes, $0.5
million paid at closing relating to our obligation under the Duke Agreement and
payments for our operating costs.
Investing Activities
Our net cash used in investing activities of $346.0 million for the period
from Inception (June 30, 2003) to December 31, 2003 relates primarily to amounts
paid relating to the Acquisition consisting of $304.8 million paid to Duke at
the initial closing, $20.7 million paid to Duke in September 2003 related to a
purchase price adjustment, and $15.0 million paid for Acquisition related costs.
In August 2003, as required under the terms of the deposit agreement for
the Senior Notes, we deposited $5.6 million into a restricted cash account.
14
Financing Activities
Our net cash provided by financing activities of $341.1 million for the
period from Inception (June 30, 2003) to December 31, 2003 relates primarily to
$150.0 million of proceeds from member contributions and $200.0 million from
proceeds of the Senior Notes, offset by cash paid for debt financing costs of
$8.4 million and a distribution we made to our owners of $0.5 million.
Critical Accounting Policies
Our management is responsible for our consolidated financial statements and
has evaluated the accounting policies to be used in their preparation. Our
management believes these policies to be reasonable and appropriate. The
following discussion identifies those accounting policies that we believe will
be critical in the preparation of our consolidated financial statements, the
judgments and uncertainties affecting the application of those policies, and the
possibility that materially different amounts will be reported under different
conditions or using different assumptions.
Use of Estimates in Preparing Financial Statements. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect: (a) the reported amounts of assets and liabilities at
the date of the financial statements; (b) the disclosures of contingent assets
and liabilities at the date of the financial statements; and (c) the reported
amounts of revenues and expenses recognized during the reporting period. Such
estimates may be subsequently revised as necessary when additional information
becomes available. Actual results could differ from those estimates.
Equity Method Investment. Investments are accounted for using the equity
method of accounting if the investment gives us the ability to exercise
significant influence, but not control, over an investee. Significant influence
is generally deemed to exist if we have an ownership interest in the voting
stock of the investee of between 20% and 50%, although other factors, such as
representation on the investee's board of directors, are considered in
determining whether the equity method of accounting is appropriate.
We have recorded our investment in Ref-Fuel Holdings as an equity-method
investment whereby our ownership percentage of 49.8% of Ref-Fuel Holdings is
reflected on our consolidated balance sheets as ''Investment in Ref-Fuel
Holdings.'' We will record our share of Ref-Fuel Holdings' earnings or losses as
''Equity in net earnings (loss) of Ref-Fuel Holdings'' on our consolidated
statement of operations cash distributions received from Ref-Fuel Holdings are
included in the accompanying consolidated statement of cash flows as
''Distributions from Ref-Fuel Holdings.''
Push-Down Accounting. On December 12, 2003, MSW Merger, an affiliate of
CSFB Private Equity, merged with and into UAE Holdings which continues as the
surviving corporation in the merger. UAE Holdings is the direct parent of UAE.
As a result of this merger, UAE's 50 percent ownership interest in Ref-Fuel
Holdings was transferred to MSW Energy II, an affiliate of MSW Merger (the UAE
Transactions). Upon consummation of the UAE Transactions between MSW Merger and
UAE Holdings on December 12, 2003 and taking into account the June 30, 2003
acquisition by us of Duke's membership interest in Ref-Fuel Holdings, affiliates
of CSFB Private Equity and AIGGIG (the ''control group'') will own, directly and
indirectly, 99.8% of the membership interests in Ref-Fuel Holdings (and will
exercise voting power with respect to the remaining 0.2% interest). Emerging
Issues Task Force (EITF) Topic D-97, "Push-Down Accounting,'' requires that
Ref-Fuel Holdings financial statements reflect this change in ownership.
Accordingly, the aggregate excess of purchase price over the net assets acquired
by us on June 30, 2003 was pushed-down to Ref-Fuel Holdings and its subsidiaries
on December 12, 2003.
Prior to push-down on December 12, 2003 identifiable intangible assets were
included in included in ''Investment in Ref-Fuel Holdings'' on the Company's
consolidated balance sheet and were amortized on a straight-line basis over
their estimated useful lives.
Effect of New Accounting Standard
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," and a revised interpretation of FIN 46 (FIN 46R) in December
2003 (collectively FIN 46). FIN 46 addresses consolidation of variable interest
entities. FIN 46 provides guidance for determining when a primary beneficiary
should consolidate a variable interest entity or equivalent structure that
15
functions to support the activities of the primary beneficiary. The provisions
of FIN 46 are effective immediately for all variable interest entities created
after January 31, 2003. It appears in the first year or interim period ending
after December 15, 2003 to variable interest entities in which enterprise holds
a variable interest that it acquired before February 1, 2003. Management has
evaluated FIN 46 and its related guidance and believes it will not have any
impact on our consolidated financial statements.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations outstanding as
of December 31, 2003:
Less than 1 More than 5
Contractual Obligations Total Year 1-3 Years 3-5 Years Years
-----------------------------------------------------------------
(in thousands)
Long-Term Debt Obligations $200,000 $- $- $- $200,000
Unconditional Purchase
Obligations 1,307(1) - 1,307 - -
Other Long-Term Obligations 49,500(2) 500 7,500 7,500 34,000
-----------------------------------------------------------------
Total $250,807 $500 $8,807 $7,500 $234,000
=================================================================
(1) Represents unconditional purchase obligation associated with the
Acquisition of $1,307 due at the second closing.
(2) Represents amounts due under the Duke Agreement.
In connection with the Acquisition, we entered into an agreement with Duke
Capital, which we refer to as the Duke Agreement, under which we agreed to pay
Duke Capital certain fees in exchange for Duke Capital's agreement to remain
obligated under a support agreement related to Ref-Fuel Holdings. The fees
payable under the Duke Agreement are subordinate to the Company's Senior Notes.
The fees payable under the Duke Agreement escalate over time, and a portion of
the fees have been deposited into an escrow account for the benefit of Duke
Capital.
Our ability to satisfy all of these obligations is entirely dependent on
the generation of cash distributions by Ref-Fuel Holdings. The business of
Ref-Fuel Holdings is subject to a variety of risks, many of which are outside
the control of Ref-Fuel Holdings. Any of these risks could affect Ref-Fuel
Holding's ability to generate cash flow. In addition, the ARC operating
companies and American Ref-Fuel must satisfy covenants imposed by their debt
agreements as well as other legal restrictions before making distributions to
their owners, including Ref-Fuel Holdings, and, ultimately, us. Finally, we do
not unilaterally control the board of directors of Ref-Fuel Holdings and cannot
unilaterally determine the amount of cash distributions.
16
Supplemental Discussion and Analysis of Ref-Fuel Holdings
History and Organization
Ref-Fuel Holdings LLC (Ref-Fuel or Ref-Fuel Holdings), which was formerly
known as Duke/UAE Ref-Fuel LLC, is a Delaware limited liability company that was
formed in 1997, for the purpose of obtaining 50 percent ownership of the
following partnerships:(a) American Ref-Fuel Company (Ref-Fuel Management),
which owned 98 percent of TransRiver Marketing Company, L.P. (TransRiver); (b)
American Ref-Fuel Company of Hempstead (Hempstead); (c) American Ref-Fuel
Company of Essex County (Essex); (d) American Ref-Fuel Company of Southeastern
Connecticut (Seconn); (e) American Ref-Fuel Company of Niagara, L.P. (Niagara);
(f) American Ref-Fuel Company of Semass, L.P. (Ref-Fuel Semass); (g) American
Ref-Fuel Operations of Semass, L.P. (Semass Operator); (h) American Ref-Fuel
Company of the Capital District, L.P. These companies, along with American
Ref-Fuel Company of Delaware Valley, L.P. (Delaware Valley) are collectively
referred to as the American Ref-Fuel Partnerships). The American Ref-Fuel
Partnerships, except for Delaware Valley, were a series of general and limited
partnerships 50 percent owned by Ref-Fuel Holdings and 50 percent indirectly by
subsidiaries wholly owned by Allied Waste Industries, Inc. (Allied), who also
owned the remaining 2 percent of TransRiver and 100 percent of Delaware Valley.
Prior to April 30, 2001, Hempstead, Essex, Niagara and Seconn
(collectively, the HENS) were a series of partnerships that were equally owned
by Allied Waste Industries, Inc. (Allied) and Ref-Fuel Holdings (the Investors).
On April 30, 2001 the Investors recapitalized their partnership interests in the
HENS (the Recapitalization). The terms of the Recapitalization provided that
indirect subsidiaries of Ref-Fuel Management became the managing general
partners of the HENS. The interest held by Ref-Fuel in the HENS converted to a
Class A interest, and the interest held by Allied converted to a Class B
interest. In conjunction with the Recapitalization, the HENS contributed $163.5
million to obtain 99 percent noncontrolling interests in equipment leasing
entities controlled by Allied. ARC LLC also agreed to substitute as guarantor
for guarantees previously furnished by Duke and Allied, less certain liabilities
retained by Allied and Duke pursuant to credit backstop agreements.
The Class A and Class B partners were both general partners in the HENS;
however, the Class B partners had limited involvement in the HENS' management
and had limited participation in partnership distributions, except as expressly
agreed. Among other limitations, the Class A partners were restricted from the
following actions without the written consent of the Class B partners: voluntary
dissolution of the HENS, sale or abandonment of a substantial portion of the
HENS' assets, disposition of any of the HENS' interests in the equipment leasing
entities, and certain other activities.
From April 30, 2001 through April 30, 2002, the profits and losses of the
HENS were allocated as follows: (a) depreciation expense allocated to the HENS
from the equipment leasing entities was allocated to the Class A partner only;
(b) net income and loss before depreciation of the equipment leasing entities
allocated to the HENS was allocated between the Class A and Class B partners
based on certain defined earnings tranches; and (c) all other net income or loss
of the HENS was allocated between the Class A and Class B partners based on
certain defined earnings tranches which differ from the tranches used to
allocate the earnings of the equipment leasing entities. Both Allied and
Ref-Fuel Holdings had separate, nonconcurrent rights to cause the HENS to redeem
Allied's Class B interests in the HENS for the HENS' interest in the equipment
leasing entities (Redemption).
In January 2002, Allied announced its intention to exercise that right and
completed the Redemption on April 30, 2002. The Redemption of the HENS resulted
in the following: (a) gross income for the period from January 1, 2002, through
the Redemption date, was reallocated first to the Class A partners in an amount
equal to the difference between the Class A partners' share of economic
depreciation and prior special allocations of depreciation expense to the Class
A partners with all remaining profits and losses allocated consistent with
profit and loss allocations described above; (b) the HENS' interests in the
equipment leasing entities were distributed to Allied in redemption of Allied's
Class B interests in the HENS; and (c) the $2.6 million difference between the
fair value of Allied's interest in the HENS and the fair value received by
Allied in redemption of those interests was paid by Allied to the HENS.
The Redemption of Allied's Class B interest in the HENS resulted in the
application of purchase accounting to the HENS in accordance with Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
adjusted the assets and liabilities of the HENS to fair value.
17
Prior to June 30, 2003, Ref-Fuel Holdings was owned 50 percent by United
American Energy Corp. (UAE) and 50 percent by Duke Energy Corporation (Duke).
Effective June 30, 2003, Duke sold its membership interests representing 49.8%
of Ref-Fuel Holdings to MSW Energy Holdings LLC (MSW Energy I), which is jointly
owned by (a) Highstar Renewable Fuels LLC (Highstar), which is affiliated with
AIG Global Asset Management Holdings Corp., (AIGGIG), a subsidiary of American
International Group, Inc.; and (b) MSW Acquisition LLC (MSW Acquisition) which
is owned by several funds affiliated with Credit Suisse First Boston Private
Equity, Inc. (CSFB Private Equity), the global private equity arm of Credit
Suisse First Boston.
On December 12, 2003, MSW Merger II, an affiliate of CSFB Private Equity,
merged with and into United American Energy Holdings Corp. (UAE Holdings) a
Delaware corporation, which continued as the surviving corporation in the
merger. UAE Holdings is the direct parent of UAE. As a result of this merger,
UAE's 50 percent ownership in American Ref-Fuel was transferred to MSW Energy
Holdings II LLC (MSW Energy II).
Upon consummation of the change in ownership and taking into account the
June 30, 2003 acquisition by MSW Energy I of Duke's membership interest in
Ref-Fuel Holdings (the MSW Transactions), affiliates of CSFB Private Equity and
AIGGIG (the Control Group) own, directly and indirectly, 99.8% of the membership
interests in Ref-Fuel Holdings (and will exercise voting power with respect to
Duke's remaining 0.2% interest). As a result, and in accordance with Emerging
Issues Task Force (EITF) Topic D-97, "Push-Down Accounting," Ref-Fuel Holdings'
financial statements will reflect the effects of its change in ownership and the
new owners' basis in the net assets and liabilities acquired. As a result, the
statement of operations and the statement of cash flows for the eleven and a
half months ended December 12, 2003 and the years ended December 31, 2002 and
2001 reflect the results of Ref-Fuel Holdings prior to purchase accounting
adjustments and the statement of operations of statement of cash flows for the
period ended December 31, 2003, reflect the impact of purchase accounting
adjustments arising from the MSW Transactions.
Prior to the MSW Transactions, profits and losses of Ref-Fuel Holdings were
allocated among its members based on ownership percentages. Subsequent to the
MSW Transactions profits and losses are allocated based upon the members'
ownership percentages except for the amortization of the variances in purchase
price. All significant intercompany accounts and transactions have been
eliminated in consolidation.
All of the American Ref Fuel Partnerships are indirect wholly owned
subsidiaries or controlled subsidiaries of American Ref-Fuel. The consolidated
financial statements of Ref-Fuel Holdings include the accounts of Ref-Fuel
Holdings, its controlled subsidiaries and certain investments.
Results of Operations
Comparison of the Combined Results for the Year Ended December 31, 2003 and for
the Year Ended December 31, 2002
Total Net Revenues. Total net revenues were $469.3 million for the year
ended December 31, 2003, an increase of $30.8 million, or 7%, over the prior
year. Net revenues increased mainly as a result of improved pricing;
approximately $4.3 million due to waste pricing increases, $10.4 million due to
energy pricing improvements and $2.0 million from higher prices for recovered
metals. Other drivers of the increase related to increased production and
volumes; $6.0 million resulting from increased hauling and transfer station
operations, $2.4 million due to increased steam production at the Niagara
facility, $7.4 million due to an increase in ash disposal volumes, and $5.5
million over all increased production. This increase in revenues was offset by
$6.7 million of additional amortization of intangible contract assets resulting
from the Redemption and the MSW Transactions.
Expenses. Operating and other expenses were $192.2 million for the year
ended December 31, 2003, an increase of $20.5 million, or 12% from the prior
year. The most significant increase, approximately $11.2 million, resulted from
increased disposal costs associated with the hauling and transfer station
operations and ash disposal. The remaining increases were primarily attributable
to increased maintenance expenses at the plants.
Depreciation and amortization of $59.2 million for the year ended December
31, 2003, decreased by $8.0 million, or 12 %, over the prior year. This decrease
resulted from the third quarter 2002 change in estimated of useful lives of
certain plant and equipment and the elimination of certain intangible assets as
a result of the purchase accounting adjustments recorded on account of the
Redemption.
18
General and administrative expenses were $44.3 million for the year ended
December 31, 2003, an increase of $0.7 million, or 2%, from the prior year
period. The difference from the prior year relates to several transactions which
occurred in 2002, including the relocation costs associated with Ref-Fuel
Holdings' corporate office move to Montvale, New Jersey, which was partially
offset by approximately $1.1 million reimbursement of legal expenses received.
During 2003, there was an increase in development spending related to the
exploration of the development of new plant facilities and $1.9 million of
increased insurance expenses, which further offset this difference.
Interest Income. Interest income was $3.2 million for the year ended
December 31, 2003, a decrease of $0.5 million, or 14%, as compared to the prior
year. This decrease was generally due to the change in interest rates on
invested funds.
Interest Expense. Interest expense was $62.1 million for the year ended
December 31, 2003, an increase of $1.2 million, or 2%, from the prior year. The
increase was due to the refinancing of variable rate debt with fixed rate debt
at 6.26% in May, 2003, partially offset by reduced balances on project-related
debt.
Loss on Early Extinguishment of Debt. Ref-Fuel Holdings expensed
approximately $3.2 million of deferred financing costs associated with the
refinancing of debt during 2003. There was no such expense in 2002.
Equity in Earnings of Equipment Leasing Entities. As a result of the
Redemption, Ref-Fuel Holdings no longer had an interest in the equipment leasing
entities in 2003, which caused the decrease in the equity earnings of equipment
leasing entities of $15.5 million from 2002.
Other expense, net. Other expenses were $0.3 million for the year ended
December 31, 2003, a decrease of $0.5 million, or 63% from the prior year
period. Other expenses consist primarily of income taxes levied on certain
wholly owned non-operating subsidiaries of Ref-Fuel Holdings that are taxable
corporations.
Income Attributable to Class B Minority Interests. Minority interest in net
income of subsidiaries of $4.9 million for the year ended December 31, 2002 was
due to Allied's interests in the HENS partnerships, which no longer existed as a
result of the Redemption.
Liquidity and Capital Resources
Ref-Fuel Holdings has historically generated funds from its operations
providing funding for its working capital requirements, capital spending, debt
repayments and dividend payout. The other source of liquidity was a $325 million
credit facility with a group of lending institutions. The facility provided for
term loans of $215 million to be borrowed by Ref-Fuel Holdings and its
subsidiaries and for a revolving credit facility of up to $110 million,
including $35.0 million of which could be used for letters of credit. Ref-Fuel
Holdings is contingently liable to furnish $25.0 million in letters of credit as
collateral under an indemnity agreement if Ref-Fuel Holdings' long-term debt
rating was reduced to below investment grade.
On May 9, 2003, American Ref-Fuel completed the sale of $275 million
aggregate principal amount of 6.26 percent Senior Notes due 2015. The proceeds
of the financing were used to repay $242.6 million under the outstanding credit
facility, fund debt service reserve accounts and for general corporate purposes.
As part of this refinancing, American Ref-Fuel entered into an amended and
restated revolving credit facility (the Amended Credit Facility) for up to $75
million, including $45 million of which could be used for letters of credit.
Under the terms of the credit facility, American Ref-Fuel is subject to certain
financial covenants, with respect to leverage and adjusted cash flow coverage
ratios. As of December 31, 2003, there were no borrowings and $7.0 million in
letters of credit outstanding.
Cash Flows
Operating Activities
Ref-Fuel Holding's net cash flows provided by operating activities totaled
$185.9 million for the year ended December 31, 2003, compared with $198.6
million for the year ended December 31, 2002. The decrease in cash flow from
operating activities of $12.7 million is attributable to a $23.8 million payout
under a terminated long-term compensation plan in 2003 that did not occur in
2002, offset by increased operating income in 2003.
19
Investing Activities
Cash flows utilized in investing activities are typically related to
capital additions and restricted cash changes. Ref-Fuel Holdings is required to
maintain cash and investment balances that are restricted by provisions of its
debt agreements and lease agreements. Ref-Fuel Holdings' capital additions
consist primarily of expenditures to maintain the operating facilities,
including expenditures for replacement and refurbishment of equipment and
environmental compliance that increase value, change capacities or extend useful
lives.
Cash flows utilized in investing activities totaled $34.2 million for the
year ended December 31, 2003, compared with $69.5 million for the year ended
December 31, 2002. The reduction of $35.3 million is primarily due to a change
in the requirement for restricted cash due to changes in the timing of debt
payments.
Financing Activities
Cash flows utilized in financing activities are related to borrowings of
long-term debt, principal payments of long-term debt and distributions to
members.
Cash flows utilized in financing activities totaled $125.3 million for the
year ended December 31, 2003, compared with $110.7 million for the year ended
December 31, 2002. In 2002, Ref-Fuel Holdings borrowed $40.0 million against its
revolving credit facility, and repaid debt of $56.0 million. Ref-Fuel Holdings
increased its outstanding borrowings by approximately $325.3 million partially
in conjunction with the refinancing of the Senior Notes in 2003. Repayments of
debt were approximately $372.9 million. Additionally, distributions to members
decreased by $22.0 million in 2003.
Capital Structure and Resources
As of December 31, 2003, the ARC operating companies had an aggregate of
$883.7 million in outstanding project debt, with maturities ranging from 2003 to
2026. Certain operating companies are obligated to restrict funds on a monthly
basis for payment of project debt and certain operating companies are required
to maintain debt service reserve funds. Ref-Fuel Holdings management believes
that all debt service reserve funds requirements have been satisfied.
In order to provide American Ref-Fuel with an additional source of funds to
meet calls on American Ref-Fuel's project support obligations, each Member has
entered into the Equity Contribution Agreement pursuant to which each Member has
agreed to provide up to $50 million in equity capital to the Company. Each
Member's obligation to make equity contributions under the Equity Contribution
Agreement is conditioned upon the other making an equal contribution and is
limited to each making no more than $50 million of aggregate equity
contributions. If a Member is not rated at least BBB by S&P, such party is
required to provide a letter of credit from a commercial bank that is rated at
least A- by S&P to secure its obligations under the Equity Contribution
Agreement.
Commitments and Contingencies
The following is a schedule of Ref-Fuel Holdings' contractual obligations
outstanding at December 31, 2003 (in thousands):
Contractual Less than 1 More than 5
Obligation Total Year 1-3 Years 3-5 Years Years
- -----------------------------------------------------------------------------------
Long Term
Debt
Obligations $1,142,687 $81,907 $166,559 $188,938 $705,283
Operating
Lease
Obligations 160,781 13,487 27,789 26,245 93,260
Other Long-
Term
Obligations 18,936 6,025 2,894 - 10,017
----------------------------------------------------------------------
Total $1,322,404 $101,419 $197,242 $215,183 $808,560
======================================================================
20
Additionally, a consolidated subsidiary of Ref-Fuel Holdings maintained
employment agreements with nine of its officers which expired on December 31,
2003. These agreements were replaced with new agreements on January 1, 2004, the
maximum liability of which is $2.2 million.
Effect of Inflation
Ref-Fuel Holdings' management believes that Ref-Fuel Holdings' results of
operations have not been materially impacted by inflation over the past three
years.
Critical Accounting Policies
The management of Ref-Fuel Holdings is responsible for its financial
statements and has evaluated the accounting policies used in their preparation.
The management of Ref-Fuel Holdings believes these policies to be reasonable and
appropriate. The following discussion identifies those accounting policies that
Ref-Fuel Holdings believes are critical in the preparation of Ref-Fuel Holdings'
financial statements, the judgments and uncertainties affecting the application
of those policies, and the possibility that materially different amounts would
be reported under different conditions or using different assumptions.
Use of Estimates in Preparing Financial Statements. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of commitments and contingencies at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting the financial
statements are those related to the realizable value of accounts receivable,
long-lived assets, fair market value assumptions, power assets, waste contracts,
intangible assets, liabilities for self-insurance and certain landfill
liabilities. Such estimates are subsequently revised, as necessary, when
additional information becomes available. Actual results could differ from those
estimates.
Revenue Recognition. Ref-Fuel Holdings recognizes revenue from two major
sources: waste disposal services and energy production. Revenue from waste
disposal services is recognized as waste is received and revenue from energy
production is recognized as the energy is delivered. Each operating facility has
one or more long-term power sales contracts for the sale of energy with
contracts expiring in 2009 to 2021. Each ARC operating facility is contractually
obligated for waste services from its host community or communities with
contracts expiring in 2009 to 2020. In addition to the host community contracts,
certain facilities enter into long-term waste service contracts with surrounding
communities. Additionally, TransRiver, a wholly-owned subsidiary of Ref-Fuel
Holdings, markets waste capacity not committed to long-term waste contracts.
In connection with the acquisition of the Semass Partnership, Ref-Fuel
Holdings is accounting for the long-term power contracts acquired in accordance
with Emerging Issues Task Force (EITF) Issues 91-6 "Revenue Recognition of
Long-Term Power Sales Contracts" and EITF 96-17 "Revenue Recognition under
Long-Term Power Sales Contracts That Contain both Fixed and Variable Pricing
Terms" which require the Semass Partnership and Ref-Fuel Holdings to recognize
power revenues under these contracts as the lesser of (a) amounts billable under
the respective contracts or (b) an amount determinable by the kilowatt hours
made available during the period multiplied by the estimated average revenue per
kilowatt hour over the term of the contract. The determination of the lesser
amount is to be made quarterly based on the cumulative amounts that would have
been recognized had each method been applied consistently from the beginning of
the contract.
Property, Plant and Equipment. Property, plant and equipment are carried at
cost. Ref-Fuel Holdings provides for depreciation using the straight-line method
over the estimated useful lives of the assets. Cost and accumulated depreciation
of retired or disposed plant and equipment are removed from the respective
accounts and the gain or loss, if any, is reflected in net income.
Routine repairs and maintenance are charged against current operations.
Expenditures that increase value, change capacities or extend useful lives are
capitalized.
Ref-Fuel Holdings maintains a supply of various spare parts integral to its
operations. Certain spare parts which management does not expect to use within
the upcoming year have been classified as long-term spare parts inventory within
property, plant and equipment.
21
Landfill Costs. In June 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143). SFAS 143 applies to all legally
enforceable obligations associated with the retirement of tangible long-lived
assets and provides the accounting and reporting requirements for such
obligations. SFAS 143 requires amounts initially recognized as an asset
retirement obligation to be measured at fair value. The recognized asset
retirement cost is capitalized as part of the cost of the asset and is
depreciated over the useful life of the asset.
SFAS 143, which primarily impacts Ref-Fuel Holdings' accounting for
landfill operation, does not change the landfill accounting followed
historically by Ref-Fuel Holdings. Ref-Fuel Holdings expenses costs for future
closure and post-closure obligations on a per-unit basis as the landfill space
is consumed. This practice will continue to be followed upon adoption of SFAS
143 except, under the new rules; costs associated with future final capping
activities that occur during the operating life of the landfill will be
accounted for as an asset retirement obligation. Effective January 1, 2003, upon
adoption of SFAS 143, Ref-Fuel Holdings recognized an asset and corresponding
liability of approximately $0.7 million relating to the landfill retirement
obligations related to post-closure activities equal to their estimated fair
value. Landfill retirement costs arising from post-closure obligations, which
were capitalized as part of the landfill asset, are amortized consistent with
Ref-Fuel Holdings' current estimated life and are non-cash in nature. Landfill
retirement costs arising from final capping obligations, will be amortized on a
units-of-consumption basis over the estimated number of tons of waste that each
final capping event covers.
Goodwill. Goodwill represents the total consideration paid in excess of the
fair value of the net tangible and intangible assets acquired. Effective January
1, 2002, upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142), Ref-Fuel Holdings stopped recording goodwill amortization and
performed its assessment of its reporting units and its initial assessment of
impairment, which was estimated using discounted cash flows. Additionally,
Ref-Fuel Holdings performed its required annual fair value testing of its
recorded goodwill for its reporting units using the discounted cash flows
approach which was consistent with the approach used upon adoption of SFAS 142.
Based upon its most recent analysis, Ref-Fuel Holdings believes that no
impairment exists.
Energy Contract Intangibles. Energy contract intangibles represent the
amount by which the contractual rates in long-term energy sales contracts held
by certain subsidiaries of Ref-Fuel Holdings exceeded fair value on the dates
that such contracts were acquired. These contract related intangibles are being
amortized against income as a reduction of energy revenues on a straight-line
basis over periods ranging from 10 to 20 years, which represented the remaining
term of the applicable contracts as of the dates of acquisition.
Operating Lease. The fair value adjustment related to the operating lease
with respect to the Delaware Valley facility represents the liability by which
the present value of future rent payments on the Delaware Valley facility lease
exceeds the fair value of the Delaware Valley facility as of the acquisition
date. This amount is being amortized as a decrease in facility rent expense on a
straight-line basis over approximately 15 years, which represented the life of
the associated lease at the time of acquisition.
Long-Term Waste Contracts. The fair value adjustment related to the
acquired long-term waste contracts represents the liability by which the present
value of costs of disposal and processing of waste delivered pursuant to certain
long-term waste contracts held by the Semass Partnership exceeded the estimated
fair value of the contract revenue at the date of acquisition. The liability is
being amortized as an increase to waste disposal revenues using the
straight-line method and an increase to interest expense using the effective
interest method over 19 years, the remaining term of the applicable contracts as
of the date of acquisition.
Review of Long-Lived Assets. Ref-Fuel Holdings reviews long-lived assets
for impairment, whenever events or changes in business circumstances indicate
the carrying amount of the assets may not be fully recoverable. Ref-Fuel
Holdings performs cash flow analyses to determine if impairment exists. If the
sum of the expected future cash flows is less than the carrying amount, an
impairment loss is recognized. Based upon its most recent analysis, Ref-Fuel
Holdings believes that no impairment exists. Additionally, Ref-Fuel Holdings
periodically reviews the estimated useful lives of long-lived assets.
Taxation. The operating subsidiaries consist of limited liability companies
and partnerships. Accordingly, income taxes are not levied at the Ref-Fuel
Holdings level, but rather on the individual members. Certain wholly-owned
non-operating subsidiaries of Ref-Fuel Holdings are taxable corporations.
22
Effect of New Accounting Standards
In January 2003, the FASB issued Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities." FIN 46 requires that
unconsolidated variable interest entities be consolidated by their primary
beneficiaries. A primary beneficiary is the party that absorbs a majority of the
entity's expected losses or residual benefits. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to existing
variable interest entities in the periods beginning after June 15, 2003.
Ref-Fuel Holdings does not believe that it will have a material effect on its
financial position, results of operations or cash flows.
RISK FACTORS
Any of the following risks could materially adversely affect our business,
financial condition or results of operations.
Our substantial indebtedness and the substantial indebtedness of American
Ref-Fuel could adversely affect our financial condition.
We have a substantial amount of indebtedness. As of December 31, 2003, our
total indebtedness was $200 million, which represented approximately 55.5% of
our total capitalization. As of December 31, 2003, American Ref-Fuel's total
indebtedness was approximately $1.1 billion, which represented approximately
60.7% of American Ref-Fuel's total capitalization.
This substantial indebtedness could have important consequences. For
example, it could
-- make it more difficult for us to satisfy our obligations with respect
to our outstanding debt, including our repurchase obligations;
-- increase our vulnerability to general economic and industry
conditions;
-- limit our flexibility in planning for, or reacting to, changes in the
business and industry in which American Ref-Fuel operates;
-- place us and American Ref-Fuel at a competitive disadvantage compared
to competitors of American Ref-Fuel that have less debt; and
-- limit our ability to borrow additional funds in order to make capital
contributions to fund the ARC operating facilities.
Our indenture imposes significant operating and financial restrictions on
us.
The indenture governing our outstanding debt contains restrictive covenants
that limit our ability to engage in activities that may be in our long-term best
interests. These restrictions limit our ability and the ability of any
restricted subsidiaries to do the following, among other things:
-- incur additional indebtedness;
-- create liens;
-- pay dividends or make other equity distributions;
-- purchase or redeem capital stock;
-- make investments;
-- sell assets or consolidate or merge with or into other companies; and
23
-- engage in transactions with affiliates.
Our failure to comply with those covenants could result in an event of
default which, if not cured or waived, could result in the acceleration of all
of our debt. Moreover, it is possible that in the future the owners of MSW
Energy Holdings and MSW Energy II could determine to merge those companies with
each other or into Ref-Fuel Holdings. While such a merger would be required to
comply with the terms of the indenture, a result would be an increase in the
amount of indebtedness of the successor.
Our sole source of cash flow relates to our investment in Ref-Fuel
Holdings, whose sole source of cash flow, in turn, relates to its 100% interest
in American Ref-Fuel, and accordingly our performance will depend solely on cash
distributions from American Ref-Fuel and Ref-Fuel Holdings.
We will need to receive sufficient ongoing cash distributions from Ref-Fuel
Holdings in order to pay principal and interest on our outstanding debt.
Accordingly, our ability to service our debt is subject to a number of risks,
including the following:
-- We depend on the ability of American Ref-Fuel and its subsidiaries to
generate sufficient cash flow to service American Ref-Fuel's
significant debt and to make distributions to Ref-Fuel Holdings. The
business of American Ref-Fuel is subject to a variety of risks, many
of which, as described below, are outside the control of American
Ref-Fuel. Any of these risks could affect American Ref-Fuel's ability
to generate cash flow. In the event that American Ref-Fuel fails to
generate cash flow sufficient to make distributions to Ref-Fuel
Holdings, we will not be able to pay interest and principal on our
outstanding debt.
-- American Ref-Fuel and the ARC operating companies have a significant
amount of indebtedness outstanding. The ARC operating companies must
satisfy restrictions imposed by their debt agreements on distributions
to American Ref-Fuel, and American Ref-Fuel must satisfy restrictions
imposed by its debt agreements on distributions to Ref-Fuel Holdings.
The ARC operating companies must also satisfy any applicable legal
restrictions on distributions to equity holders before making cash
distributions to American Ref-Fuel, and American Ref-Fuel must also
satisfy any applicable legal restrictions on distributions to equity
holders before making cash distributions to Ref-Fuel Holdings.
We own an indirect 49.8% membership interest in American Ref-Fuel and have
voting control over an additional 0.2% interest, and our lack of unilateral
control over American Ref-Fuel could adversely affect our financial condition.
We own an indirect 49.8% membership interest and have voting control over
an additional 0.2% interest in Ref-Fuel Holdings, which owns 100% of American
Ref-Fuel. Voting by the board of directors of Ref-Fuel Holdings is done in
accordance with ownership percentage. The other 50% membership interest in
Ref-Fuel Holdings is currently owned by MSW Energy II. Notwithstanding the fact
that affiliates of CSFB Private Equity indirectly own a majority of the
membership interests of Ref-Fuel Holdings, the consent of Highstar, as one of
our 50% owners, is required for member actions to be taken by Ref-Fuel Holdings.
All actions by the board require the affirmative vote of representatives
designated by members holding a majority of the membership interests. As the
current holders of 50% of the voting interests in Ref-Fuel Holdings, we and MSW
Energy II have equal voting rights. However, MSW Energy II may have intentions
with respect to Ref-Fuel Holdings and American Ref-Fuel that are different than
ours. Additionally, MSW Energy II has its own outstanding indebtedness, which is
secured by, among other things, its interest in Ref-Fuel Holdings. Our inability
to unilaterally control decisions made by the board of directors of Ref-Fuel
Holdings could impair our ability to service our outstanding debt. If the
Equalization Transactions are consummated, affiliates of CSFB Private Equity
will own a majority of the interests in Ref-Fuel Holdings and control a majority
of the board of directors of Ref-Fuel Holdings. However, the board of directors
of Ref-Fuel Holdings will not be able to enter into significant transactions
without the consent of the affiliate of AIGGIG, and therefore, neither we, MSW
Energy II nor CSFB Private Equity will be able to unilaterally control decisions
made by Ref-Fuel Holdings.
We may not have the ability to raise the funds necessary to finance any
change of control offer required by the indenture governing certain of our
outstanding debt or to pay principal on our outstanding debt.
24
If we undergo a change of control, as defined in the indenture, we may need
to refinance large amounts of our debt. If a change of control occurs, we must
offer to buy back our Senior Notes for a price equal to 101% of the principal
amount, plus any accrued and unpaid interest, and liquidated damages, if any. We
may not have sufficient funds available for us to make any required repurchases
under the indenture. If we fail to make the required repurchases, we will go
into default under the indenture. A default under the indenture may cause all of
the indebtedness under the indenture to become due and payable. It is unlikely
that we would be able to repay or refinance all of that indebtedness in those
circumstances. Any future debt that we incur may contain restrictions on
repayment upon a change of control. If any change of control occurs, we may not
have sufficient funds to satisfy all of our debt obligations. The purchase offer
requirements could also delay or make it more difficult for others to effect a
change of control. Further, the definition of change of control includes a
phrase relating to "all or substantially all." Although there is a limited body
of case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a holder of our Senior Notes to require us to repurchase its notes as
a result of a sale, lease, transfer, conveyance or other disposition of less
than all of our assets may be uncertain.
Despite current indebtedness levels, American Ref-Fuel and its subsidiaries
may incur significant additional indebtedness, which would further increase the
risks associated with our substantial indebtedness and the substantial
indebtedness of American Ref-Fuel and its subsidiaries.
Our subsidiaries may be able to incur substantial additional indebtedness
in the future because the terms of the indebtedness do not prohibit our
subsidiaries from doing so. If new debt is added to our subsidiaries' current
debt levels, the related risks that we and they face would be increased. In
addition, the indenture does not prevent us from incurring obligations that do
not constitute indebtedness. Furthermore, American Ref-Fuel and its subsidiaries
may be able to incur substantial additional indebtedness in the future.
We are controlled by AIGGIG and CSFB Private Equity or their respective
affiliates, whose interests in our business may be different than holders of our
outstanding debt.
Affiliates of AIGGIG and CSFB Private Equity own all of our equity and are
able to control our affairs in all cases. With the exception of one independent
director, who is entitled to vote only with respect to certain bankruptcy
matters, our entire board has been designated by affiliates of AIGGIG and CSFB
Private Equity and is associated with AIGGIG and CSFB Private Equity. In
addition, affiliates of AIGGIG and CSFB Private Equity control the appointment
of management, the entering into of mergers, sales of substantially all of our
assets and other extraordinary transactions.
For example, if we encounter financial difficulties or are unable to pay
our debts as they mature, the interests of AIGGIG and CSFB Private Equity as
equity holders might conflict with the interests of the holders of our debt.
Affiliates of AIGGIG and CSFB Private Equity may also have an interest in
pursuing, or having American Ref-Fuel pursue, acquisitions, divestitures,
financings or other transactions that, in their judgment, could enhance their
equity investments, even though those transactions might involve risks to the
holders of our debt. In addition, AIGGIG and CSFB Private Equity or their
affiliates may in the future own businesses that directly compete with ours.
If American Ref-Fuel or the ARC operating companies were to become
bankrupt, the creditors of American Ref-Fuel would be paid in full before any
distributions are made to Ref-Fuel Holdings.
In the event of any bankruptcy, liquidation or reorganization of American
Ref-Fuel or the ARC operating companies, creditors of American Ref-Fuel or the
ARC operating companies, as applicable, would have to be paid in full before
American Ref-Fuel could make any distributions to Ref-Fuel Holdings.
Distributions, if any, from Ref-Fuel Holdings to us may be insufficient for us
to pay interest and principal on our outstanding debt or to meet our financial
and other obligations.
American Ref-Fuel's revenues depend on the operation of the ARC operating
facilities.
American Ref-Fuel's receipt of distributions from the ARC operating
companies and TransRiver are dependent on the successful operation of the ARC
operating facilities. The operation of the ARC operating facilities involves
many risks, including:
-- the breakdown or failure of equipment or processes;
25
-- difficulty or inability to find suitable replacement parts for
equipment;
-- the performance of the ARC operating facilities below expected levels
of waste throughput, electric or steam generation or efficiency;
-- the unavailability of sufficient quantities of waste;
-- decreases in the fees for solid waste disposal;
-- decreases in the demand or market prices for recovered ferrous and
nonferrous metal;
-- disruption in the transmission of electricity generated;
-- labor disputes;
-- operator error;
-- catastrophic events such as hurricanes, earthquakes, floods and acts
of terrorism that damage or destroy the facilities or the area in
which the facilities are located.
-- changes in law or application of law (including any applicable
environmental laws or permit requirements); and
-- the exercise of the power of eminent domain.
While American Ref-Fuel will maintain insurance to protect against certain
of these risks, the insurance may not cover all of these risks and the proceeds
of the insurance may not fully compensate for damages to the ARC operating
facilities and the ARC operating facilities' lost revenues or increased
expenses. A decrease or elimination of revenues generated by the ARC operating
facilities or an increase in the costs of operating the ARC operating facilities
could decrease or eliminate funds available to American Ref-Fuel to make
distributions to Ref-Fuel Holdings, which in turn would decrease or eliminate
the funds available to Ref-Fuel Holdings to make distributions to us, which
would adversely affect our financial condition.
American Ref-Fuel depends on performance by third parties under contractual
arrangements.
American Ref-Fuel depends on third parties to, among other things, purchase
the electric and steam energy produced by the ARC operating facilities, and
supply and deliver the waste and other goods and services necessary for the
operation of the ARC operating facilities. The viability of the ARC operating
facilities and the ability of American Ref-Fuel to make distributions to
Ref-Fuel Holdings depend significantly upon the performance by third parties in
accordance with the contracts entered into by the ARC operating companies and
the third parties in connection with the ARC operating facilities.
If the third parties to those contracts do not perform their obligations,
or are excused from performing their obligations because of nonperformance by
the ARC operating companies or other parties to the documents, or due to force
majeure events or changes in laws or regulations, the ARC operating companies
may not be able to secure alternate arrangements on substantially the same
terms, if at all, for the services provided under the contracts. Furthermore,
the ability of the ARC operating companies and TransRiver to make distributions
to American Ref-Fuel may be adversely affected, which may adversely affect our
financial condition. In addition, the bankruptcy or insolvency of a participant
or third party in the ARC operating facilities could result in nonpayment or
nonperformance of that party's obligations to the ARC operating companies and
could adversely affect the ability of American Ref-Fuel to make distributions to
Ref-Fuel Holdings, which in turn would decrease or eliminate the funds available
to Ref-Fuel Holdings to make distributions to us, which would decrease or
eliminate the funds available to us.
American Ref-Fuel is obligated to provide financial support to the ARC
operating companies.
26
American Ref-Fuel guarantees or provides financial support for each of the
ARC operating companies, in one or more of the following forms:
-- guarantees of certain debt (Hempstead facility, $42,670,000; Seconn
facility, approximately $43,500,000; Niagara facility, approximately
$165,010,000; Semass facility $5,000,000);
-- support agreements in connection with service or operating
agreement-related obligations for each of the Hempstead facility, the
Semass facility, the Seconn facility and the Delaware Valley facility;
-- the obligation to pay each lease payment installment in connection
with the Hempstead facility and the Seconn facility to the extent
required for the Hempstead partnership and the Seconn partnership to
fulfill their obligations under their respective lease agreements;
-- contingent credit support for damages from performance failures;
-- environmental indemnities; and
-- contingent capital and credit support to finance costs, in most cases
in connection with a corresponding increase in service fees, relating
to uncontrollable circumstances.
Many of these contingent obligations cannot readily be quantified but they
may be material to American Ref-Fuel's cash flow and financial condition. If
American Ref-Fuel were required to provide this support, it could materially and
adversely affect its ability to make payments with respect to the outstanding
principal of, premium, if any, and interest on the indebtedness of American
Ref-Fuel, and, accordingly, affect American Ref-Fuel's ability to make
distributions to Ref-Fuel Holdings and, in turn, affect Ref-Fuel Holdings'
ability to make distributions to us.
American Ref-Fuel's operations are concentrated in one region, and its
revenue is highly dependent on two facilities.
All of the ARC operating facilities are located in the northeastern United
States. The entrance of new competitors into the market or the expansion of
existing competitors could have a material adverse effect on distributions
available to American Ref-Fuel from the ARC operating companies and, ultimately,
on our financial condition.
American Ref-Fuel's Hempstead facility and its Semass facility accounted
for approximately 52% of American Ref-Fuel's net revenues in 2003, and are
expected to continue to account for a significant percentage of its net revenues
for the foreseeable future. Moreover, the existing waste supply contract and
power purchase agreement for the Hempstead facility will expire in 2009. The
power purchase agreement for the Hempstead facility with the Long Island Power
Authority provided for approximately 10% of American Ref-Fuel's total net
revenues in 2003. American Ref-Fuel may not be able to secure alternate
arrangements on substantially the same terms, if at all, to replace the
Hempstead facility's existing waste supply contract or power purchase agreement.
If American Ref-Fuel is unable to secure these arrangements, our ability to
service our outstanding debt could be negatively impacted.
American Ref-Fuel depends on a significant supply of solid waste.
If the ARC operating facilities do not obtain a supply of solid waste at
prices and quantities that are sufficient to operate the ARC operating
facilities at their expected operating levels, it will adversely affect the
operations of American Ref-Fuel and its ability to make distributions to
Ref-Fuel Holdings, which would adversely affect our financial condition. One or
more of the following factors could impact the price and supply of waste:
-- defaults by waste suppliers under their contracts;
-- a decline in solid waste supply due to increased recycling;
-- composting of municipal solid waste;
-- legal prohibitions against disposal of certain types of solid waste in
WTE facilities; or
27
-- increased competition from landfills, recycling facilities and
transfer stations.
In addition, state and local governments mandate recycling and waste
reduction at the source and the scope of these recycling and waste reduction
mandates may be enlarged in the future. The ARC operating companies may not be
successful in obtaining sufficient quantities of waste at adequate prices for
the successful operation of the ARC operating facilities. Failure to obtain
sufficient waste could have a material adverse effect on distributions available
to American Ref-Fuel from the ARC operating companies and, ultimately, on our
financial condition.
Failure to comply with environmental permitting and governmental
regulations would adversely affect American Ref-Fuel's operations.
The ARC operating facilities are subject to extensive federal, state and
local laws and regulations related to the environment, health and safety and
associated compliance and permitting obligations (including those related to the
use, storage, handling, discharge, emission and disposal of municipal solid
waste and other waste, pollutants or hazardous substances or wastes, or
discharges and air and other emissions) as well as land use and development.
Environmental laws also impose obligations to clean up contaminated properties
or to pay for the cost of such remediation, often upon parties that did not
actually cause the contamination. Compliance with these laws, regulations and
obligations could require substantial capital expenditures. Failure to comply
could result in the imposition of penalties, fines or restrictions on operations
and/or remedial liabilities. The costs and liabilities of any of these results
could adversely affect the operations of one or more of the ARC operating
facilities. Environmental laws and regulations may also limit American
Ref-Fuel's ability to operate the ARC operating facilities at maximum capacity
or at all. These laws, regulations and obligations could change with the
promulgation of new laws and regulations or a change in the interpretation of
existing laws and regulations, which could result in substantially similar
risks. Stricter environmental regulations could materially affect American
Ref-Fuel's cash flow and its ability to make distributions to Ref-Fuel Holdings,
which would have an adverse effect on our financial condition.
The costs of addressing future environmental requirements at the ARC
operating facilities or at disposal facilities where ARC operating facilities
have disposed of waste are difficult to estimate. Although American Ref-Fuel
reports that it believes that all of its operations are compliant in all
material respects with the requirements of environmental laws and regulations,
the ARC operating facilities may not at all times be in compliance with all
applicable environmental laws and regulations or that steps to bring American
Ref-Fuel's facilities into compliance will not limit American Ref-Fuel's ability
to make distributions to Ref-Fuel Holdings.
Certain environmental permits for the ARC operating facilities are subject
to periodic renewal or reissuance. Regulatory authorities may not renew or
reissue the permits. In addition, any renewed or reissued environmental permit
may contain new, more stringent requirements resulting in the need for
additional capital and operating expenditures due to additions to or
modifications of the ARC operating facilities in order to bring the ARC
operating facilities into compliance with the renewed or reissued permits'
terms. Certain environmental permits contain terms that can result in periodic
adjustment of operating limits, which can result in reduced revenue. Any of the
following events could adversely affect the amount of distributions available to
American Ref-Fuel and the ability of American Ref-Fuel to make distributions to
Ref-Fuel Holdings:
-- loss of environmental permits;
-- reduction in allowed operations;
-- failure or delay in the renewal or reissuance of environmental
permits;
-- any increase in operating costs resulting from any renewed or reissued
environmental permit; and
-- any expenditures, penalties, restrictions and/or liabilities resulting
from any other non-compliance.
Changes in electricity regulation could have an adverse impact on American
Ref-Fuel.
The ARC operating companies derive a significant amount of revenue from the
sale of electric power. The electric power generation business is subject to
substantial regulation and the ARC operating companies are required to comply
28
with numerous laws and regulations in order to sell the power generated from the
ARC operating facilities. These laws and regulations could be revised and new
laws and regulations could be adopted. The power purchase agreements with
respect to each ARC operating facility could be adversely affected if amendments
to, or a repeal of, existing regulations with respect to the production of
energy were enacted that reduce the benefits currently afforded under the power
purchase agreements. A reduction in benefits could adversely affect the amount
of distributions available to American Ref-Fuel and its ability to make payment
of the principal of and premium, if any, and interest on its debt and to make
cash distributions to Ref-Fuel Holdings. American Ref-Fuel's business could be
materially and adversely affected by statutory or regulatory changes or
administrative or judicial interpretations of existing statutes, regulations or
licenses that impose more comprehensive or stricter energy regulation on
American Ref-Fuel.
American Ref-Fuel's insurance may be inadequate and impact its ability to
service its debt and make distributions to its equity holders.
American Ref-Fuel maintains comprehensive insurance with respect to the ARC
operating facilities, including general liability, boiler and machinery
coverage, all risk fire and casualty insurance (with business interruption
coverage) covering, among other things, damage caused by fire, floods or
earthquake. American Ref-Fuel's insurance coverage may not be available in the
future on commercially reasonable terms or at commercially reasonable rates or
that the amounts for which each ARC operating facility is insured will cover all
unanticipated losses. If there is a total or partial loss of one or more ARC
operating facilities, the insurance proceeds received by American Ref-Fuel in
respect thereof may not be sufficient to satisfy the indebtedness with respect
to the affected ARC operating facility. A total or partial loss of one or more
ARC operating facilities could impact the ability of American Ref-Fuel to make
payments with respect to its debt and to make cash distributions to Ref-Fuel
Holdings
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
None.
29
Item 8. Financial Statements and Supplementary Data
30
Report of Independent Auditors
To the Members and Board of Directors of
MSW Energy Holdings LLC and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet and the related
statements of operations, members' equity and cash flows present fairly, in all
material respects, the financial position of MSW Energy Holdings LLC and
Subsidiaries (the "Company") at December 31, 2003 and the results of their
operations and their cash flows for the period from inception (June 30, 2003) to
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audit. We
conducted our audit of these consolidated statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, NJ
March 29, 2004
31
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
Assets
December 31, 2003
-----------------
Current assets
Cash and cash equivalents $5,513
Restricted cash 564
Other current assets 76
-----------------
Total current assets 6,153
Investment in Ref-Fuel Holdings 372,672
Deferred financing fees, net 7,821
Restricted cash 5,001
-----------------
Total assets $391,647
=================
Liabilities and Members' Equity
Liabilities
Accounts payable and accrued liabilities $556
Due to related party 480
Accrued interest 5,667
Current portion of other long-term liabilities 500
-----------------
Total current liabilities 7,203
Senior notes 200,000
Other long-term liabilities 24,333
-----------------
Total Liabilities 231,536
-----------------
Commitments and contingencies (Notes 3 and 7)
Members' equity
Total members' equity 160,111
-----------------
Total liabilities and members' equity $391,647
=================
The accompanying notes are an integral part of these consolidated financial
statements.
32
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
From Inception
(June 30, 2003)
to December 31,
2003
--------------------
Revenues
Equity in net earnings of Ref-Fuel Holdings $21,603
Interest income 91
--------------------
21,694
--------------------
Expenses
Interest expense 8,500
Accretion of Duke Agreement obligation 993
Amortization of deferred financing fees 561
Other expenses 1,029
--------------------
Total expenses 11,083
--------------------
Net income $10,611
====================
The accompanying notes are an integral part of these consolidated financial
statements.
33
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
(in thousands)
Balance at Inception (June 30, 2003) $-
Contributions from members 150,000
Distribution to members (500)
Net income 10,611
-----------------
Balance, December 31, 2003 $160,111
=================
The accompanying notes are an integral part of these consolidated financial
statements.
34
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
From Inception
(June 30, 2003)
to December 31,
2003
----------------------
Cash flows from operating activities:
Net income $10,611
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in earnings of Ref-Fuel Holdings (21,603)
Accretion of Duke Agreement obligation 993
Amortization of deferred financing fees 561
Distributions received from Ref-Fuel Holdings 13,720
Changes in operating assets and liabilities:
Increase in other current assets (76)
Increase in accounts payable and accrued liabilities 556
Increase in due to related party 480
Increase in accrued interest on Senior Notes 5,667
Decrease in other long-term liability (500)
----------------------
Net cash provided by operating activities 10,409
----------------------
Cash flows from investing activities:
Payments for purchase of Ref-Fuel Holdings (340,449)
Increase in restricted cash (5,565)
----------------------
Net cash used in investing activities (346,014)
----------------------
Cash flows from financing activities:
Proceeds from long-term debt offering 200,000
Contributions from members 150,000
Distribution to members (500)
Payment of deferred financing fees (8,382)
----------------------
Net cash provided by financing activities 341,118
----------------------
Net increase in cash and cash equivalents 5,513
Cash and cash equivalents, beginning of period -
----------------------
Cash and cash equivalents, end of period $5,513
======================
Supplemental cash flow disclosure
Cash paid for interest $3,117
======================
The accompanying notes are an integral part of these consolidated financial
statements.
35
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
MSW Energy Holdings LLC (''MSW'' and collectively hereinafter with its
subsidiaries, referred to as the ''Company''), a Delaware limited liability
company and its wholly-owned subsidiaries, MSW Energy Finance Co., Inc. (''MSW
Finance''), a Delaware corporation, and MSW Energy Hudson LLC (''MSW Hudson''),
a Delaware limited liability company, were formed and organized in 2003 for the
purpose of acquiring and holding a 50% interest in Ref-Fuel Holdings LLC
(formerly Duke/UAE Ref-Fuel LLC) (''Ref-Fuel Holdings''), pursuant to an equity
purchase agreement between Duke Energy Corp. ("Duke Energy") and MSW. Ref-Fuel
Holdings' sole source of operating cash flow relates to its 100% membership
interest in American Ref-Fuel Company LLC (''ARC'' or ''American Ref-Fuel'').
American Ref-Fuel is an owner and operator of six waste-to-energy facilities in
the United States. The initial acquisition of Ref-Fuel Holdings (the ''Initial
Closing'') was completed on June 30, 2003 (Note 3). Prior to June 30, 2003, MSW
had no operations.
MSW is operated under an amended and restated limited liability company
agreement (the ''LLC Agreement'') dated June 24, 2003.
MSW Finance was organized in June 2003, for the sole purpose of acting as
co-issuer with MSW of $200.0 million aggregate principal amount of 8 1/2 percent
senior secured notes due September 1, 2010 (''Senior Notes'') (Note 4). Other
than serving as co-issuer, MSW Finance does not conduct operations of its own
and has no assets.
MSW Hudson holds the Company's interest in Ref-Fuel Holdings, and acts as
guarantor of the Senior Notes.
On December 12, 2003, United American Energy Holdings Corp. ("UAE
Holdings") announced that it had entered into an agreement and plan of merger
with MSW Merger LLC ("MSW Merger", an affiliate of CSFB Private Equity, Inc.
("CSFB Private Equity")), one of MSW's two members, to acquire UAE Holdings'
indirect 50% ownership interest in Ref-Fuel Holdings in a series of transactions
(the "UAE Transactions"). The UAE Transactions were completed on December 12,
2003. After completion of the UAE Transactions, MSW Energy Holdings II LLC ("MSW
II"), an indirect subsidiary of UAE Holdings, holds a direct and indirect 50%
membership interest in Ref-Fuel Holdings. Accordingly, on December 12, 2003,
Ref-Fuel Holdings became majority owned, directly and indirectly, and controlled
by affiliates of the Company's members (the "Control Group").
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MSW and its wholly-owned subsidiaries. All material intercompany transactions
and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management of the Company to make estimates and assumptions that affect the (a)
reported amounts of assets and liabilities at the date of the financial
statements; (b) disclosure of contingent assets and liabilities at the date of
the financial statements; and (c) the reported amounts of revenues and expenses
recognized during the reporting period. Significant estimates include the
preliminary allocation of the purchase price to the fair value of the Company's
share of the Ref-Fuel Holdings net assets at the date of acquisition. Such
estimates may be subsequently revised as necessary when additional information
becomes available. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash balances and unrestricted short-term
investments with original maturities of three months or less. All of the
Company's cash is maintained by one financial institution in segregated
accounts.
36
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash and Investments
The Company is required, under certain circumstances, to maintain cash and
investment balances that are restricted by provisions of debt and other
agreements. These amounts are held by financial institutions in order to comply
with contractual provisions requiring reserves for payments such as interest on
the Senior Notes and obligations under the Duke Agreement (Note 7). Restricted
cash and investments may be invested in accounts earning market rates;
therefore, the carrying value approximates fair value.
Included in current and long-term restricted cash on the accompanying
consolidated balance sheet at December 31, 2003 are $0.1 million in letters of
credit support fees, the $0.5 million Duke Agreement payment due June 30, 2004
and an additional $5.0 million which is required to be funded into an escrow
account on behalf of Duke Capital by June 30, 2004 and held for the term of the
obligation, subject to certain conditions (Note 7).
Fair Value of Financial Instruments
The carrying value of financial instruments, including cash and cash
equivalents, restricted cash, other current assets, and accounts payable and
accrued liabilities approximates their fair value because of the short-term
nature of these instruments.
The carrying value of the Company's other long-term liabilities on the
accompanying consolidated balance sheet approximates the fair value. The fair
value at December 31, 2003 of amounts outstanding under the Senior Notes was
approximately $218.0 million.
Deferred Financing Fees
Deferred financing fees of $8.4 million were incurred by the Company in
connection with the issuance of the Senior Notes. These costs are deferred and
amortized to interest expense over the seven-year life of the Senior Notes. From
Inception (June 30, 2003) to December 31, 2003, amortization of deferred
financing fees totaled $0.6 million.
Equity Method Investment
Investments are accounted for using the equity method of accounting if the
investment gives the Company the ability to exercise significant influence, but
not control, over an investee. Significant influence is generally deemed to
exist if the Company has an ownership interest in the voting stock of the
investee of between 20% and 50%, although other factors, such as representation
on the investee's board of directors, are considered in determining whether the
equity method of accounting is appropriate.
The Company has recorded its investment in Ref-Fuel Holdings as an equity
method investment whereby the Company's ownership percentage of 49.8% in
Ref-Fuel Holdings is reflected on the accompanying consolidated balance sheet as
"Investment in Ref-Fuel Holdings." The Company's share of Ref-Fuel Holdings' net
earnings is included in "Equity in net earnings of Ref-Fuel Holdings" on the
accompanying consolidated statement of operations. Cash distributions received
from Ref-Fuel Holdings are included on the accompanying consolidated statement
of cash flows as "Distributions from Ref-Fuel Holdings" and are reflected as a
reduction of "Investment in Ref-Fuel Holdings" when received by the Company.
Prior to push-down accounting on December 12, 2003, identifiable intangible
assets were included in ''Investment in Ref-Fuel Holdings'' on the Company's
accompanying consolidated balance sheet and were amortized on a straight-line
basis over their estimated useful lives.
Income Taxes
Since the Company is a limited liability company, it has elected to be
treated as a partnership for income tax purposes and, therefore, is not subject
to federal or state income taxes; however, its income or loss is required to be
included in the income tax returns of its members.
37
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Push-Down Accounting
Upon consummation of the UAE Transactions resulting in MSW II's 50%
ownership of Ref-Fuel Holdings and taking into account the June 30, 2003
acquisition by the Company of Duke Energy's 49.8% membership interest in
Ref-Fuel Holdings, the Control Group owns, directly and indirectly, 99.8% of the
membership interests in Ref-Fuel Holdings (and will exercise voting power with
respect to the remaining 0.2% interest). Emerging Issues Task Force (EITF) Topic
D-97, "Push-Down Accounting," requires that Ref-Fuel Holdings consolidated
financial statements reflect this collective change in ownership. Effectively,
the aggregate excess of purchase price over net assets acquired by each of MSW
II and the Company were pushed down to Ref-Fuel Holdings and its subsidiaries as
of December 12, 2003.
As a result, after December 12, 2003, Ref-Fuel Holdings' results of
operations include the impact of the push-down accounting. Due to the differing
purchase prices paid by the Company and MSW II for their respective membership
interest in Ref-Fuel Holdings, each of MSW and MSW II will be allocated only
their respective portion of Ref-Fuel Holdings net income (loss) in future
periods reflecting the amortization of the respective amounts pushed down to
Ref-Fuel Holdings.
Risks and Uncertainties
The Company's operations involve a number of significant risks and
uncertainties. Factors that could affect MSW's future operating results and
cause actual results to vary materially from expectations and adversely affect
the Company's financial condition and prevent it from fulfilling its
obligations, include but are not limited to, the Company's dependency on equity
earnings and cash distributions from Ref-Fuel Holdings as its sole source of
income and operating cash flow, the Company's inability to unilaterally control
Ref-Fuel Holdings and the Company's substantial indebtedness and the substantial
indebtedness of Ref-Fuel Holdings.
Recently Issued Accounting Standard
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities", and a revised interpretation of FIN 46 ("FIN 46R") in
December 2003 (collectively "FIN 46"). FIN 46 addresses consolidation of
variable interest entities. FIN 46 provides guidance for determining when a
primary beneficiary should consolidate a variable interest entity or equivalent
structure that functions to support the activities of the primary beneficiary.
The provisions of FIN 46 are effective immediately for all variable interest
entities created after January 31, 2003. It applies in the first year or interim
period ending after December 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
Management has evaluated FIN 46 and its related guidance and believes it will
not have an impact on the Company's consolidated financial statements.
3. Acquisition of Membership Interests in Ref-Fuel Holdings
Pursuant to an equity purchase agreement between MSW and Duke Energy, MSW
agreed to acquire Duke Energy's 50% membership interest in Ref-Fuel Holdings in
two separate closings. At the initial closing on June 30, 2003, MSW acquired MSW
Hudson (formerly Duke Energy Hudson, LLC), which holds a 49.8% membership
interest in Ref-Fuel Holdings. The Company has agreed to acquire Duke Energy
Erie, LLC (''Erie''), a wholly-owned subsidiary of Duke Energy that holds an
additional 0.2% membership interest in Ref-Fuel Holdings, at a second closing to
occur at a future date within two years and six months after the initial
closing. At the initial closing, the Company entered into a voting agreement
with Erie, pursuant to which Erie granted the Company the right to vote the 0.2%
membership interest in Ref-Fuel Holdings held by Erie until such time as the
membership interest in Erie is transferred to MSW. As a result, MSW has direct
or indirect voting control of 50% of the membership interests in Ref-Fuel
Holdings after the initial closing.
The aggregate cash purchase price for both the initial and second closing
was $326.8 million, excluding acquisition related costs and obligations assumed.
Of the agreed-upon purchase price, $304.8 million was paid on June 30, 2003 and
a $20.7 million purchase price adjustment was paid to Duke Energy on September
5, 2003. The purchase price payment for the second closing will be $1.3 million
which has been recorded in accounts payable and accrued liabilities in the
38
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accompanying consolidated balance sheet. The purchase price paid at the initial
closing was financed with proceeds from the Company's offering of Senior Notes
(Note 4), together with capital contributions made by the Company's two members
of $75.0 million each (Note 6). The purchase price payable at the second closing
is expected to be financed by cash on hand or capital contributions from the
members.
The Company's share of members' equity of Ref-Fuel Holdings acquired as of
June 30, 2003 was $144.9 million. The excess purchase price of $218.6 million
has been allocated to the Company's proportionate share of the fair values of
the assets acquired and liabilities assumed based on an independent valuation of
Ref-Fuel Holdings tangible assets, property, plant and equipment, identifiable
intangible assets and debt. The amounts allocated to fixed and intangible assets
are amortized using the straight-line method over the estimated useful lives of
the underlying assets or obligations ranging from ten to twenty years. A summary
of the allocation of purchase price to the fair value of the assets acquired by
the Company and the Company's underlying investment in Ref-Fuel Holdings'
members' equity is as follows (in thousands):
Ref-Fuel Holdings' members' equity acquired $144,933
Fixed assets and other adjustments 76,363
Identifiable intangible assets, net 154,068
Goodwill (12,050)
Other long-term assets (2,892)
Long-term debt (22,405)
Other long-term liabilities 25,465
--------------
Purchase price for acquisition of 49.8% of Ref-Fuel
Holdings $363,482
==============
In connection with the acquisition, the Company has entered into an
agreement with Duke Capital Corporation (''Duke Capital''), an affiliate of Duke
Energy, (the ''Duke Agreement'') under which the Company agreed to pay Duke
Capital certain future fees (Note 7) in exchange for Duke Capital's agreement to
remain obligated under an existing support agreement related to Ref-Fuel
Holdings. The fees payable under the Duke Agreement are subordinate to the
Company's Senior Notes. The fees payable under the Duke Agreement escalate over
time, and a portion of such fees are to be deposited into an escrow account for
the benefit of Duke Capital. The Company is in compliance with all of its
obligations under this agreement.
Other long-term liabilities consist entirely of the present value of the
obligation under the Duke Agreement at December 31, 2003.
The following table summarizes the components of the Company's interest in
Ref-Fuel Holdings at December 31, 2003 (in thousands):
Acquisition of 49.8% of Ref-Fuel Holdings $325,480
Duke Agreement obligation at date of acquisition 23,033
Direct acquisition costs 14,969
---------------
Purchase price for acquisition of 49.8% of Ref-Fuel Holdings 363,482
Accrued purchase price for second closing 1,307
---------------
Total purchase price 364,789
Equity in net earnings of Ref-Fuel Holdings 21,603
Distributions received from Ref-Fuel Holdings (13,720)
---------------
Total investment in Ref-Fuel Holdings at December 31, 2003 $372,672
===============
39
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Information
Unaudited pro forma results showing the effects of the acquisition as if it
had occurred on January 1, 2003 are as follows (in thousands):
Pro Forma For
the Year Ended
December 31, 2003
--------------------
Revenue
Equity in net earnings of Ref-Fuel Holdings $35,637
Interest income 91
--------------------
Total revenue 35,728
--------------------
Expenses
Interest expense 17,000
Accretion of Duke Agreement obligation 1,986
Amortization of deferred financing fees 1,122
Other expenses 1,154
--------------------
Total expenses 21,262
--------------------
Net income $14,466
====================
These results are not necessarily indicative of the results of operations that
would have been acquired had the acquisition taken place at the beginning of
2003.
Ref-Fuel Holdings Information
Summarized condensed balance sheet information with respect to the
Company's equity method investment in Ref-Fuel Holdings as of December 31, 2003
is as follows (in thousands):
Current assets $ 233,151
Noncurrent assets 1,894,757
Current liabilities 133,358
Noncurrent liabilities 1,253,250
Summarized statement of operations information for Ref-Fuel Holdings is as
follows (in thousands):
Period from | Period from
December 12, 2003 to| January 1, 2003 to
December 31, 2003 | December 12, 2003
--------------------|-------------------
Revenues $24,847 | $444,461
Operating income 10,855 | 162,683
Net earnings. 8,082 | 103,071
Company's equity in net earnings 4,025 | 30,626
The equity in net earnings of Ref-Fuel Holdings reported by the Company of $21.6
million represents the equity in net earnings prior to December 12, 2003 of
$30.6 million less amortization of $13.0 million, which was expensed prior to
push down, plus equity in earnings for the period from December 12, 2003 through
December 31, 2003 of $4.0 million. For the period from Inception (June 30, 2003)
to December 12, 2003, the $13.0 million amortization of excess purchase price
consisted of (in thousands):
40
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, plant and equipment, net $(1,968)
Intangible assets, net (14,231)
Long-term debt 2,063
Other long-term liabilities 1,088
-------------------
$(13,048)
===================
4. Senior Notes
In June 2003, MSW, jointly and severally with MSW Finance, issued $200.0
million aggregate principal amount of 8 1/2 percent senior secured notes due
2010 (''Senior Notes''). Interest on the Senior Notes accrues at 8 1/2 percent
per annum, beginning from the date of issuance and is payable on March 1st and
September 1st of each year, commencing on September 1, 2003. Interest only is
payable throughout the term of the Senior Notes with principal and unpaid
interest payable at maturity on September 1, 2010. The Senior Notes rank senior
in priority to all the Company's liabilities and are collateralized by
substantially all of the Company's assets, including its membership interest in
Ref-Fuel Holdings. Holders of Senior Notes may require the Company to repurchase
the Senior Notes upon a change in control or if the Company receives any
proceeds from certain financings or asset sales by Ref-Fuel Holdings and its
subsidiaries.
The Company may redeem some or all of the Senior Notes prior to September
1, 2010 under certain circumstances at redemption prices ranging from 100% to
108.5% of the related principal amounts, plus accrued and unpaid interest as of
such date.
The indenture for the Senior Notes provides for certain restrictive
covenants including, among other things, restrictions on incurrence of
indebtedness, certain payments to related and unrelated parties, acquisitions
and asset sales.
5. Members' Equity
MSW is equally owned by (i) Highstar Renewable Fuels LLC (''Highstar''),
which is affiliated with AIG Global Asset Management Holdings Corp.
(''AIGGIG''), a subsidiary of American International Group, Inc. (''AIG''), and
(ii) several funds affiliated with CSFB Private Equity, the global private
equity arm of Credit Suisse First Boston Inc. (''CSFB''), through MSW
Acquisition LLC ("MSW Acquisition"). Highstar and MSW Acquisition are together,
the ''Members''.
On June 30, 2003, the Members each contributed $75.0 million in cash to the
Company, in exchange for equal interests in the Company. The LLC Agreement
generally provides for equal participation in the activities of MSW, to the
extent its Members' interests remain equal.
6. Related Parties
Other than with respect to the Company's independent director, the entire
board is composed of representatives of the Members. In addition, the Members
control the appointment of the Company's management, authorizing mergers, sales
of substantially all of the Company's assets and other extraordinary
transactions.
In the normal course of business, certain of the Members may participate in
the ongoing management of the Company. Management team individuals from the
Members or companies related to the Company by common ownership may devote time
to strategies and operations of the Company.
Credit Suisse First Boston LLC (''CSFB LLC'') acted as the Company's
financial advisor and was the initial purchaser of the Senior Notes. In
addition, CSFB LLC committed to underwrite a bridge loan to the Company for the
acquisition from Duke Energy in the event that the Company did not close the
sale of the Senior Notes. Total fees paid to CSFB LLC for these services were
$11.9 million of which $5.9 million is included in acquisition costs (as a
component of the purchase price) and $6.0 million is included in deferred
financing fees in the accompanying consolidated balance sheet at December 31,
2003.
From time to time, CSFB or its affiliates may engage in investment banking
and other services with the Company or Ref-Fuel Holdings or its subsidiaries,
for which CSFB or its affiliates will receive customary compensation.
41
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsidiaries of AIG have issued existing insurance policies to the Company,
for which the AIG insurance company subsidiaries receive customary annual
premiums. The Insurance Company of Pennsylvania, an AIG subsidiary, entered into
an indemnity agreement with American Ref-Fuel, to support the issuance of surety
bonds on behalf of several American Ref-Fuel affiliates, for which The Insurance
Company of Pennsylvania receives customary annual premiums. In addition,
insurance company subsidiaries of AIG may in the future provide insurance and
surety bonds to the Company.
Due to related party expenses at December 31, 2003, consists of
reimbursable amounts due to Ref-Fuel Holdings for expenses paid on behalf of the
Company. Such amounts were paid in February 2004.
Commitments and Contingencies
7. Duke Agreement
The following table represents the future net minimum payments to be made
under the Duke Agreement as of December 31, 2003 (in thousands):
Years ending December 31,
2004 $500
2005 2,500
2006 2,500
2007 2,500
2008 2,500
Thereafter 39,000
-------------------
Total minimum payments 49,500
Less: amount representing interest (25,974)
-------------------
Present value of net minimum payments $23,526
===================
The payments due under the Duke Agreement have been estimated based upon
the initial provisions of several underlying agreements of Ref-Fuel Holdings,
however, such agreements may be extended at Ref-Fuel Holdings option, which
could increase the obligation due under the Duke Agreement.
Letters of Credit
At the initial closing, the Company assumed Duke Capital's obligations
under the equity contribution agreement related to ARC and provided a $50.0
million letter of credit to ARC. This equity contribution agreement is designed
to provide ARC with access to contingent equity should it require additional
capital to meet certain calls on its support obligations for the ARC operating
facilities. MSW is responsible for paying customary expenses associated with
obtaining this letter of credit. Each of the Company's Members provided
back-to-back letters of credit to the Company's letter of credit provider to
reimburse such letter of credit provider if the Company's letter of credit is
drawn by ARC. If for any reason the equity contribution letter of credit
provider is not reimbursed for a letter of credit drawing from the back-to-back
letters of credit and corporate guarantees provided by the Members, the Company
may be obligated to pay such reimbursement obligations.
8. Subsequent Event
On January 26, 2004, affiliates of CSFB Private Equity entered into a
securities purchase agreement with Highstar Renewable Fuels II LLC (Highstar
II), an affiliate of AIGGIG, pursuant to which the CSFB Private Equity
affiliates agreed to sell to Highstar II 40% of the outstanding shares of common
stock of UAE Holdings. Upon the consummation of the transactions contemplated by
the securities purchase agreement, the CSFB Private Equity affiliates will
collectively own 60% and Highstar II will own 40% of the outstanding shares of
common stock of UAE Holdings.
Concurrently with the execution of the aforementioned purchase agreement,
Highstar, MSW Acquisition, and UAE Holdings entered into a membership interests
purchase agreement pursuant to which Highstar agreed to sell to MSW Acquisition
42
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10% and to UAE Holdings 0.01% of the outstanding membership interests in MSW.
Prior to such transaction, Highstar will transfer 39.89% of the membership
interests in MSW to its wholly-owned subsidiary, Highstar I. Upon the
consummation of the transactions contemplated by the membership interests
purchase agreement, MSW Acquisition will own 60%, Highstar and Highstar I will
own 39.99% and UAE Holdings will own 0.01% of the outstanding membership
interests in MSW, and UAE Holdings will be the managing member of MSW.
The transactions described above (the "Equalization Transactions") will
result in CSFB Private Equity affiliates collectively owning a 59.88% indirect
interest in Ref-Fuel Holdings, and Highstar, Highstar I and Highstar II
collectively owning a 39.92% indirect interest in Ref-Fuel Holdings.
The parties will enter into a stockholders' agreement and members'
agreement that will provide for the governance of UAE Holdings, MSW and their
subsidiaries. The consent of both the CSFB Private Equity affiliates and an
affiliate of AIGGIG will be required to take certain significant actions at UAE
Holdings, MSW and, in many cases, their subsidiaries. The agreements will also
provide for transfer restrictions, a right of first offer, tag-along rights,
drag-along rights and participation rights with respect to UAE Holdings and MSW.
The parties will also enter into a registration rights agreement with respect to
UAE Holdings.
The transactions contemplated by the aforementioned agreements will be
conditioned upon the consummation of each other and will also be subject to
certain closing conditions, including the receipt of all necessary governmental
approvals. These transactions are expected to close in the second quarter of
2004.
43
Report of Independent Auditors
To the Members and Board of Directors of
Ref-Fuel Holdings LLC and Subsidiaries:
In our opinion, the accompanying balance sheet and the related statements of
operations, members' equity and cash flows present fairly, in all material
respects, the financial position of Ref-Fuel Holdings LLC and Subsidiaries (the
"Company") at December 31, 2002 and the results of their operations and their
cash flows for the period from January 1, 2003 through December 12, 2003 and for
the years ended December 31, 2002 and 2001 in conformity with accounting
principles generally accepted in the United States of America. These
consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits of these
consolidated statements in accordance with auditing standards generally accepted
in the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
intangibles.
PricewaterhouseCoopers LLP
Florham Park, NJ
March 29, 2004
44
Report of Independent Auditors
To the Members and Board of Directors of
Ref-Fuel Holdings LLC and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet and the related
statements of operations, members' equity and cash flows present fairly, in all
material respects, the financial position of Ref-Fuel Holdings LLC and
Subsidiaries (the "Company") at December 31, 2003 and the results of their
operations and their cash flows for the period from December 12, 2003 through
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audit. We
conducted our audit of these consolidated statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, NJ
March 29, 2004
45
Ref-Fuel Holdings LLC and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
- --------------------------------------------------------------------------------
December 31,
2003 2002
------------- -------------
(Predecessor)
Assets
Current assets
Cash and cash equivalents $96,511 $70,173
Restricted cash and short-term investments 52,753 49,460
Accounts receivable, net of allowance for doubtful
accounts of $1,955 and
$1,645, respectively 73,989 70,542
Prepaid expenses and other current assets 9,898 10,797
------------- -------------
Total current assets 233,151 200,972
------------- -------------
Long-term assets
Property, plant and equipment, net 1,220,949 1,103,072
Intangible assets, net 584,275 336,731
Goodwill 2,175 28,066
Restricted cash and long-term investments 84,709 81,961
Other long-term assets 2,649 6,022
------------- -------------
Total long-term assets 1,894,757 1,555,852
------------- -------------
Total assets $2,127,908 $1,756,824
============= =============
Liabilities and Members' Equity
Current liabilities
Accounts payable and other current liabilities $39,610 $65,685
Current portion of long-term debt 81,907 83,561
Accrued interest payable 11,841 12,854
------------- -------------
Total current liabilities 133,358 162,100
------------- -------------
Long-term liabilities
Long-term debt 1,060,780 1,072,835
Other long-term liabilities 192,470 227,433
------------- -------------
Total long-term liabilities 1,253,250 1,300,268
------------- -------------
Total liabilities 1,386,608 1,462,368
------------- -------------
Commitments and contingencies (Notes 11, 12, 14 and 16)
Members' equity
Total members' equity 741,300 294,456
------------- -------------
Total liabilities and members' equity $2,127,908 $1,756,824
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
46
Ref-Fuel Holdings LLC and Subsidiaries
Consolidated Statements of Operations
(In Thousands)
- --------------------------------------------------------------------------------
The period from | The period from
December 12, | January 1, 2003 For the Year For the Year
2003 through | through ended ended
December 31, | December 12, December December
2003 | 2003 31, 2002 31, 2001
----------------- | ---------------- ------------ ------------
Revenues |
Waste disposal and related |
services $15,398 | $269,493 $260,119 $155,792
Waste disposal and related |
services - affiliate - | - 12,190 25,848
Energy 8,194 | 160,821 160,284 117,536
Other 1,255 | 14,147 5,949 2,744
----------------- | ---------------- ------------ ------------
Total net revenues 24,847 | 444,461 438,542 301,920
Expenses |
Operating 8,417 | 181,615 169,866 98,481
Depreciation and |
amortization 3,391 | 55,838 67,249 40,899
General and administrative 2,184 | 42,118 43,642 30,107
Loss on asset retirements - | 2,207 1,886 757
----------------- | ---------------- ------------ ------------
Operating income 10,855 | 162,683 155,899 131,676
Interest income 275 | 2,956 3,740 4,663
Interest income - affiliate - | - - 1,707
|
Interest expense (2,954) | (59,189) (60,893) (55,747)
Interest expense - affiliate - | - - (4,525)
|
Loss on early extinguishment |
of debt - | (3,191) - (3,711)
|
Equity in earnings of |
unconsolidated affiliates |
American Ref-Fuel |
Partnerships - | - - 9,617
Equipment leasing entities - | - 15,500 16,705
Other expenses, net (94) | (188) (757) (145)
----------------- | ---------------- ------------ ------------
|
Income before minority |
interests 8,082 | 103,071 113,489 100,240
|
Minority interests in net |
income of subsidiaries - | - (4,885) (24,961)
----------------- | ---------------- ------------ ------------
|
Net income 8,082 | 103,071 108,604 75,279
|
Other comprehensive income 517 | - - -
----------------- | ---------------- ------------ ------------
|
Comprehensive income $8,599 | $103,071 $108,604 $75,279
================= | ================ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
47
Ref-Fuel Holdings LLC and Subsidiaries
Consolidated Statements of Members' Equity
(In Thousands)
- --------------------------------------------------------------------------------
MSW Energy MSW Energy Other
Duke I II/UAE Comprehensive
Interests Interests Interests Income Total
----------- ----------- ----------- --------------- ---------
Balance, December 31, 2000 $106,936 $- $106,935 $- $213,871
Recapitalization of
partnership interests
of the HENS (72,097) - (72,097) - (144,194)
Contributions received 25,000 - 25,000 - 50,000
Net income 37,639 - 37,640 - 75,279
Distributions to
members (29,399) - (29,399) - (58,798)
----------- ----------- ----------- --------------- ---------
Balance, December 31, 2001 68,079 - 68,079 - 136,158
Redemption of Class B
minority interests 72,097 - 72,097 - 144,194
Net income 54,302 - 54,302 - 108,604
Distributions to
members (47,250) - (47,250) - (94,500)
----------- ----------- ----------- --------------- ---------
Balance, December 31, 2002 147,228 - 147,228 - 294,456
MSW Energy I acquisition
of Duke's interest at
cost (144,933) 144,933 - - -
Net income for the period
from January 1, 2003
through December 12,
2003 20,910 30,626 51,535 - 103,071
Distributions to members (22,555) (13,720) (36,275) - (72,550)
----------- ----------- ----------- --------------- ---------
Equity prior to MSW
Transactions
(Predecessor) $650 $161,839 $162,488 $- $324,977
=========== =========== =========== =============== =========
Balance, December 12, 2003 $650 $367,340 $364,711 $- $732,701
Comprehensive income for
the period from
December, 12, 2003
through December 31,
2003 16 4,025 4,041 517 8,599
----------- ----------- ----------- --------------- ---------
Balance, December 31, 2003 $666 $371,365 $368,752 $517 $741,300
=========== =========== =========== =============== =========
The accompanying notes are an integral part of these consolidated financial
statements.
48
Ref-Fuel Holdings LLC and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
- --------------------------------------------------------------------------------
| The period
| from
The period from | January 1, For the For the
December 12, | 2003 Year Year
2003 through | through ended ended
December 31, | December December December
2003 | 12, 2003 31, 2002 31, 2001
--------------- | ------------ --------- ----------
Cash flows from operating |
activities |
Net income $8,082 | $103,071 $108,604 $75,279
Adjustments to reconcile net |
income to net cash provided by |
operating activities |
Depreciation and amortization 5,706 | 65,662 74,695 44,012
Revenue contract levelization 995 | 14,947 14,359 7,464
Interest on loss contracts - | 1,863 2,051 1,422
Equity in earnings of |
unconsolidated affiliates |
American-Ref Fuel |
partnerships - | - - (9,617)
Equipment leasing entities - | - (15,500) (16,705)
Distributions from |
unconsolidated affiliates |
American-Ref Fuel |
partnerships - | - - 3,025
Minority interest in net |
income of subsidiaries, net |
of distributions - | - 4,885 24,961
Loss on asset retirements - | 2,207 1,886 757
Loss on early extinguishment |
of debt - | 3,191 - 3,711
Changes in assets and |
liabilities |
Accounts receivable, net 2,890 | (6,337) (9,245) 911
Accounts receivable, |
affiliates - | - 8,808 (1,610)
Prepaid expenses and other |
current assets 3,255 | (2,731) (7,933) (896)
Other long-term assets 562 | (2,971) 3,567 481
Accounts payable and other |
current liabilities 1,886 | (21,202) 19,314 (3,026)
Accounts payable, |
affiliates - | - - 1,150
Accrued interest payable (7,775) | 6,762 6,138 (11,343)
Other long-term |
liabilities (731) | 6,572 (12,978) 13,053
--------------- | ------------ --------- ----------
Net cash provided by operating |
activities 14,870 | 171,034 198,651 133,029
--------------- | ------------ --------- ----------
|
Cash flows from investing |
activities |
Change in restricted cash and |
investments, net 32,981 | (38,505) (37,145) 19,673
Additions of property, plant |
and equipment - | (33,780) (35,727) (9,181)
Acquisition of intangible |
assets - | - (548) -
Proceeds from redemption - | - 2,592 -
Proceeds from sale of assets 3,333 | 1,731 1,292 263
Acquisitions, net of cash - | - - (143,949)
Acquisition of interest in |
unconsolidated affiliates - | - - (900)
Changes in advances or notes |
receivable and interest from |
affiliates - | - - 1,806
Cash from consolidation of |
unconsolidated affiliates - | - - 18,675
--------------- | ------------ --------- ----------
Net cash provided by (used in) |
investing activities 36,314 | (70,554) (69,536) (113,613)
--------------- | ------------ --------- ----------
|
Cash flows from financing |
activities |
Borrowings of long-term debt - | 325,318 40,000 646,640
Repayments of long-term debt (16,124) | (356,813) (56,032) (584,411)
Payment of financing costs - | (5,157) (153) (17,810)
Payment of call premiums on |
early extinguishment of debt - | - - (10,006)
Payments on notes payable to |
affiliates - | - - (2,350)
Distributions paid to members - | (72,550) (94,500) (58,798)
Contributions received from |
members - | - - 50,000
--------------- | ------------ --------- ----------
Net cash (used in) provided by |
financing activities (16,124) | (109,202) (110,685) 23,265
--------------- | ------------ --------- ----------
|
Net increase in cash and cash |
equivalents 35,060 | (8,722) 18,430 42,681
Cash and cash equivalents, |
beginning of period 61,451 | 70,173 51,743 9,062
--------------- | ------------ --------- ----------
Cash and cash equivalents, end |
of period $96,511 | $61,451 $70,173 $51,743
=============== | ============ ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
49
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Basis of Presentation
Ref-Fuel Holdings LLC (Ref-Fuel or the Company), which was formerly known as
Duke/UAE Ref-Fuel LLC, is a Delaware limited liability company formed in 1997.
Ref-Fuel was formed with the purpose of obtaining 50 percent ownership of the
following partnerships: (a) American Ref-Fuel Company (Ref-Fuel Management),
which owned 98 percent of TransRiver Marketing Company, L.P. (TransRiver); (b)
American Ref-Fuel Company of Hempstead (Hempstead); (c) American Ref-Fuel
Company of Essex County (Essex); (d) American Ref-Fuel Company of Southeastern
Connecticut (Seconn); (e) American Ref-Fuel Company of Niagara, L.P. (Niagara);
(f) American Ref-Fuel Company of Semass, L.P. (Ref-Fuel Semass); (g) American
Ref-Fuel Operations of Semass, L.P. (Semass Operator); and (h) American Ref-Fuel
Company of the Capital District, L.P. These companies, along with American
Ref-Fuel Company of Delaware Valley, L.P. (Delaware Valley), are collectively
referred to as the "American Ref-Fuel Partnerships". The American Ref-Fuel
Partnerships, except for Delaware Valley, were a series of general and limited
partnerships 50 percent owned by the Company and 50 percent indirectly owned by
wholly-owned subsidiaries of Allied Waste Industries, Inc. (Allied), who also
owned the remaining 2 percent of TransRiver and 100 percent of Delaware Valley.
The American Ref-Fuel Partnerships were organized to (a) develop, own and
operate waste-to-energy (WTE) facilities that combust municipal solid waste and
produce energy in the form of steam and electricity; and (b) procure waste for
such facilities.
Prior to June 30, 2003, Ref-Fuel was owned 50 percent by United American Energy
Corp. (UAE) and 50 percent by Duke Energy Corporation (Duke). Effective June 30,
2003, Duke sold membership interests representing 49.8% of Ref-Fuel Holdings to
MSW Energy Holdings LLC (MSW Energy I), which is jointly owned by (a) Highstar
Renewable Fuels LLC (Highstar), which is affiliated with AIG Global Asset
Management Holdings Corp. (AIGGIG), a subsidiary of American International
Group, Inc.; and (b) MSW Acquisition LLC (MSW Acquisition) which is owned by
several funds affiliated with Credit Suisse First Boston Private Equity, Inc.
(CSFB Private Equity), the global private equity arm of Credit Suisse First
Boston.
On December 12, 2003, MSW Merger LLC, an affiliate of CSFB Private Equity,
merged with and into United American Energy Holdings Corp. (UAE Holdings), a
Delaware corporation, which continued as the surviving corporation in the
merger. UAE Holdings is the direct parent of UAE. As a result of this merger,
the UAE ownership in Ref-Fuel was transferred to MSW Energy Holdings II LLC (MSW
Energy II).
Upon consummation of the change in ownership and taking into account the June
30, 2003 acquisition by MSW Energy I of Duke's membership interest in Ref-Fuel
(the MSW Transactions), affiliates of CSFB Private Equity and AIGGIG
(collectively, the Control Group) own, directly and indirectly, 99.8% of the
membership interests in Ref-Fuel (and will exercise voting rights with respect
to Duke's remaining 0.2% interest). As a result, and in accordance with Emerging
Issues Task Force (EITF) Topic D-97, "Push-Down Accounting," Ref-Fuel's
financial statements will reflect the effects of its change in ownership and the
new owners' basis in the net assets and liabilities acquired. As a result, the
statement of operations and the statement of cash flows for the period from
January 1, 2003 through December 12, 2003 and the years ended December 31, 2002
and 2001 (the Predecessor), reflect the results prior to the change in bases
resulting from the application of push-down accounting. The statement of
operations and the statement of cash flows for the period from December 12, 2003
through December 31, 2003 reflect the results subsequent to the push-down
adjustments.
Prior to the MSW Transactions, profits and losses of the Company were allocated
among its members based on ownership percentages. Subsequent to the MSW
Transactions, profits and losses are allocated based upon the members' ownership
percentages adjusted for the amortization of the respective members' incremental
bases in the assets and liabilities. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Prior to April 30, 2001, Hempstead, Essex, Niagara and Seconn (collectively, the
HENS) were a series of partnerships that were equally owned by Allied and
50
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Ref-Fuel. On April 30, 2001 the partnership interests in the HENS were
recapitalized (the Recapitalization). The terms of the Recapitalization provided
that indirect subsidiaries of American Ref-Fuel Company LLC (ARC LLC), a
wholly-owned subsidiary of Ref-Fuel, became the managing general partners of the
HENS. The interest held by Ref-Fuel in the HENS converted to a Class A interest,
and the interest held by Allied converted to a Class B interest. In conjunction
with the Recapitalization, the HENS contributed $163.5 million to obtain 99
percent noncontrolling interests in equipment leasing entities controlled by
Allied. ARC LLC also agreed to substitute as guarantor for certain guarantees
previously furnished by Duke and Allied.
The Class A and Class B partners were both general partners in the HENS;
however, the Class B partners had limited involvement in the HENS' management
and had limited participation in partnership distributions, except as expressly
agreed. Among other limitations, the Class A partners were restricted from the
following actions without the written consent of the Class B partners: voluntary
dissolution of the HENS, sale or abandonment of a substantial portion of the
HENS' assets, disposition of any of the HENS' interests in the equipment leasing
entities, and certain other activities.
From April 30, 2001 through April 30, 2002, the profits and losses of the HENS
were allocated as follows: (a) depreciation expense allocated to the HENS from
the equipment leasing entities was allocated to the Class A partner only; (b)
net income and loss before depreciation of the equipment leasing entities
allocated to the HENS was allocated between the Class A and Class B partners
based on certain defined earnings tranches; and (c) all other net income or loss
of the HENS was allocated between the Class A and Class B partners based on
certain defined earnings tranches which differ from the tranches used to
allocate the earnings of the equipment leasing entities. Both Allied and
Ref-Fuel had separate, nonconcurrent rights to cause the HENS to redeem Allied's
Class B interests in the HENS for the HENS' interest in the equipment leasing
entities (the Redemption, together with the Recapitalization, known as the
Allied Transactions).
The Redemption was completed on April 30, 2002. The Redemption of the HENS
resulted in the following: (a) gross income for the period from January 1, 2002,
through the Redemption date, was reallocated first to the Class A partners in an
amount equal to the difference between the Class A partners' share of economic
depreciation and prior special allocations of depreciation expense to the Class
A partners with all remaining profits and losses allocated consistent with
profit and loss allocations described above; (b) the HENS' interests in the
equipment leasing entities were distributed to Allied in redemption of Allied's
Class B interests in the HENS; and (c) the $2.6 million difference between the
fair value of Allied's interest in the HENS and the fair value received by
Allied in redemption of those interests was paid by Allied to the HENS.
The Redemption of Allied's Class B interest in the HENS resulted in the
application of purchase accounting to the HENS in accordance with Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and
adjusted the assets and liabilities of the HENS to fair value.
In conjunction with the Recapitalization, all of the American Ref Fuel
Partnerships are indirect wholly-owned subsidiaries or controlled subsidiaries
of the Company. The consolidated financial statements include the accounts of
Ref-Fuel, its controlled subsidiaries and certain investments.
Summary of Significant Accounting Policies
Reclassifications
Certain reclassifications have been made to the prior years to conform to the
current year's presentation.
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the (a) reported amounts of assets and
51
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
liabilities at the date of the financial statements; (b) disclosures of
contingent assets and liabilities at the date of the financial statements; and
(c) the reported amounts of revenues and expenses recognized during the
reporting period. Significant management estimates include the estimated lives
of long-lived assets, allowances for doubtful accounts receivable, estimated
useful lives and fair value adjustments of net tangible and intangible assets,
liabilities for self-insurance and certain landfill liabilities. Such estimates
are revised as necessary when additional information becomes available. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash balances and unrestricted short-term
investments with original maturities of three months or less.
Restricted Cash and Investments
The Company is required to maintain cash and investment balances that are
restricted by provisions of its debt or lease agreements. These amounts are held
by financial institutions in order to comply with contractual provisions
requiring such reserves.
Restricted cash and investments are invested in accounts earning market rates;
therefore, the carrying value approximates fair value. Restricted cash and
investments are excluded from cash and cash equivalents in the accompanying
financial statements, and changes in these assets are characterized as investing
activities in the consolidated statements of cash flows. Restricted cash and
investments include certain investments stated at amortized cost, which
approximates market, including debt securities that are classified as
''held-to-maturity'' as the Company has the intent and ability to hold the
securities to maturity. The Company accounts for marketable securities in
accordance with SFAS Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Under the provisions of this statement, investments
that are classified as available-for-sale are marked to market with unrealized
gains and losses reported as a component of other comprehensive income. For the
period from December 12, 2003 through December 31, 2003, $0.5 million relating
to unrealized gains on investments was recorded in other comprehensive income.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation of its assets using the straight-line method over the estimated
useful lives.
Routine repairs and maintenance are charged against current operations.
Expenditures that increase value, increase capacity or extend useful lives are
capitalized.
When property and equipment are retired, sold, or otherwise disposed of, the
cost net of accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in operating income for the period.
The Company maintains a supply of various spare parts integral to its
operations. Certain spare parts that are not expected to be used within the
upcoming year have been classified as long-term spare parts inventory within
property, plant and equipment.
Landfill costs, including original acquisition cost and incurred construction
costs, are amortized over the estimated capacity of the landfill based on a
per-unit basis as landfill space is consumed.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", management periodically reviews long-lived assets and
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If factors indicate that an
asset should be evaluated for possible impairment, management compares estimated
52
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
undiscounted future operating cash flows associated with the asset to its
carrying amount. If the carrying amount of the asset is greater than
undiscounted future operating cash flows, an impairment loss is calculated and
recognized. The effect of any impairment would be to expense the difference
between the fair value of such asset and its carrying value.
Goodwill
Goodwill represents the total consideration paid in excess of the fair value of
the net tangible and identifiable intangible assets acquired. Prior to the MSW
Transactions, goodwill related to Ref-Fuel Management and TransRiver in excess
of the fair value of the net tangible and identifiable intangible assets
acquired. Subsequent to the MSW Transactions, goodwill relates to the excess of
the fair value of the net tangible and identifiable intangible assets acquired
by MSW Energy I.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141
Business Combinations and SFAS No. 142, "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. The provisions of
SFAS 141 provide specific criteria for the initial recognition and measurement
of intangible assets apart from goodwill. SFAS 141 also requires that upon
adoption of SFAS 142 the Company reclassify the carrying amount of certain
intangible assets. The provisions of SFAS 142 (i) prohibit the amortization of
goodwill and indefinite-lived intangible assets; (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur which would impact the carrying value of
such assets); and (iii) require that the Company's operations be formally
identified into reporting units for the purpose of assessing potential future
impairments of goodwill. Effective January 1, 2002, upon adoption of SFAS 142,
the Company stopped recording goodwill amortization and performed its assessment
of its reporting units and its initial assessment of impairment, which was
estimated using discounted cash flows. Additionally, the Company performed its
required annual fair value testing of its recorded goodwill for its reporting
units using the discounted cash flows approach which was consistent with that
used upon adoption of SFAS 142. As of December 31, 2002 and 2003, the Company's
estimate of the fair value of its reporting units indicated no impairment of
goodwill upon adoption or in its annual assessment.
Intangible Assets
Energy contract intangibles represent the amount by which the contract rates in
long-term energy sales contracts held by certain subsidiaries of the Company
exceeded fair value on the dates that these subsidiaries were acquired. These
contract related intangibles are amortized into income as a reduction of energy
revenues on a straight-line basis over the remaining terms of the applicable
contracts, which range from eight to twenty years.
Waste contract intangibles represents the amount by which the contract rates in
long-term waste sales contracts held by Hempstead exceeded fair value on the
dates that the partnership was acquired. These contract related intangibles are
being amortized into income as a reduction of waste revenues on a straight-line
basis through 2009, the term of the applicable contracts.
The Company has intangible assets relating to Nitrous Oxide (NOx) emission
allowances. These assets have an indefinite lives and, as such, are not
amortized. Consistent with all the Company's intangible assets, these are
reviewed under the provisions of Statement SFAS 142 for potential impairment on
an annual basis.
Deferred financing costs represent certain capitalizable costs incurred by the
Company to finance its long-term debt obligations. These costs are amortized to
interest expense over the life of the related debt. No value was assigned to
these costs in the purchase accounting resulting from the MSW Transactions.
53
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Equity in Unconsolidated Affiliates
American Ref-Fuel Partnerships
The Company acquired noncontrolling interests in certain of the American
Ref-Fuel Partnerships in 1997 and 1998. These interests were accounted for using
the equity method until April 30, 2001, at which point the Company obtained
control of these partnerships and consolidated their results.
Equipment Leasing Entities
On April 30, 2001, the HENS contributed an aggregate of $163.5 million in cash
to obtain 99 percent noncontrolling interests in four equipment leasing
entities. Allied owned the remaining one percent controlling interest in the
entities and managed their operations. These entities were formed to purchase
equipment to be leased to Allied under operating lease agreements. Since the
HENS owned a noncontrolling interest in these equipment leasing entities, the
Company accounted for these investments using the equity method of accounting.
On April 30, 2002, the HENS interests in the equipment leasing entities were
distributed to Allied in redemption of Allied's Class B interests in the HENS.
Other Liabilities
Other current and other long-term liabilities primarily consist of (a) fair
value adjustments related to certain operating leases and long-term waste
contracts acquired by the Company; (b) deferred revenue; (c) accruals for
certain long-term incentive plans; and (d) energy contract levelization (see
Notes 10 and 14).
The fair value adjustment related to the operating lease represents the amount
by which future rent payments on the Delaware Valley facility lease exceeded the
fair market value of that facility as of the acquisition dates. This amount is
being amortized as a decrease in facility rent expense on a straight-line basis
through 2016, the end of the associated lease.
The fair value adjustment related to the acquired long-term waste contracts
represents the amount by which costs of disposal and processing of waste
delivered pursuant to certain long-term waste contracts held by Semass
Partnership and Essex exceeded estimated contract revenues at their respective
acquisition dates. These costs are being amortized as an increase to waste
disposal revenues using the straight-line method and an increase to interest
expense using the effective interest method through 2015, the term of the
applicable contracts.
Landfill closure and postclosure costs are also included in other long-term
liabilities. The Company accrues landfill closure and postclosure costs as the
remaining permitted space of the landfill is consumed over the expected life
cycle of the landfill.
The Company is accounting for the long-term power contracts at the Semass
Partnership in accordance with EITF Issues 91-6 "Revenue Recognition of
Long-Term Power Sales Contracts" and EITF 96-17 "Revenue Recognition under
Long-Term Power Sales Contracts That Contain both Fixed and Variable Pricing
Terms", which require the Company to recognize power revenues under these
contracts as the lesser of (a) amounts billable under the respective contracts;
or (b) an amount determinable by the kilowatt hours made available during the
period multiplied by the estimated average revenue per kilowatt hour over the
term of the contract. The determination of the lesser amount is to be made
annually based on the cumulative amounts that would have been recognized had
each method been applied consistently from the beginning of the contract. The
difference between the amount billed and the amount recognized is included in
other long-term liabilities.
54
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Revenue Recognition
The Company recognizes revenue from two major sources: waste disposal services
and energy production. Revenue from waste disposal services is recognized as
waste is received, and revenue from energy production is recognized as the
energy is delivered.
Concentration of Credit Risk
The Company invests excess cash and funds held in trust in bank deposit
accounts, commercial paper, certificates of deposit and money market investments
with a limited number of financial institutions.
The Company has exposure to credit risk in accounts receivable as the Company
disposes of waste for and sells power to a limited number of customers. The
Company maintains adequate reserves for potential credit losses. Furthermore,
these and other customers are primarily located in the northeastern region of
the United States of America.
Unamortized Debt Premium.
Unamortized debt premium represents the increase in the fair value of the
Company's debt recorded as a result of the MSW Transactions. These costs are
amortized to interest expense over the life of the related debt using the
effective interest method.
Income Taxes
The Company's subsidiaries primarily consist of limited liability companies and
partnerships. Accordingly, income taxes are not levied at the Company level, but
rather on the individual members. Certain wholly-owned nonoperating subsidiaries
of the Company are taxable corporations. For the period from December 12 to
December 31, 2003, the period from January 1, 2003 through December 12, 2003 and
the years ended December 31, 2002 and 2001 income tax expense amounted to
approximately $0.1 million, $0.5 million, $0.7 million and $0.5 million,
respectively, and is included as a component of Other expenses, net in the
statements of operations. Long-term deferred taxes of approximately $1.7 million
as of December 31, 2003 are included in Other long-term liabilities.
Fair Value of Financial Instruments
Unless disclosed otherwise, all other financial instruments of the Company are
stated at cost, which management believes approximates fair market value.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS 143 applies to all legally enforceable obligations associated
with the retirement of long-lived assets and provides the accounting and
reporting requirements for such obligations. SFAS 143 requires amounts initially
recognized as an asset retirement obligation to be measured at fair value. The
recognized asset retirement cost is capitalized as part of the cost of the asset
and is depreciated over the useful life of the asset.
SFAS 143, which primarily impacts the Company's accounting for its landfill
operations, does not change the landfill accounting followed historically by the
Company. The Company expenses costs for future closure and post-closure
obligations on a per-unit basis as the landfill space is consumed. This practice
was continued upon adoption of SFAS 143 except, under the new rules, costs
associated with future final capping activities that occur during the operating
life of the landfill will be accounted for as an asset retirement obligation.
Interest will be accreted on all landfill retirement obligations using the
55
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
effective interest method. Landfill retirement costs arising from post-closure
obligations, which will be capitalized as part of the landfill asset, will be
amortized consistent with the landfill's current estimated life. Landfill
retirement costs arising from final capping obligations will be amortized on a
units-of-consumption basis over the estimated number of tons of waste that each
final capping event covers. The Company adopted SFAS 143 effective January 1,
2003.
In January 2003, the FASB issued Interpretation (FIN) No. 46, "Consolidation of
Variable Interest Entities". FIN 46 requires that unconsolidated variable
interest entities be consolidated by their primary beneficiaries. A primary
beneficiary is the party that absorbs a majority of the entity's expected losses
or residual benefits. FIN 46 applies immediately to variable interest entities
created after January 31, 2003 and to existing variable interest entities in the
periods beginning after June 15, 2003. The Company does not believe that it will
have a material effect on the Company's financial position, results of
operations or cash flows.
Business Combinations
The Allied Transactions
In 1997 and 1998, the Company purchased a 50 percent interest in all of the
American Ref-Fuel Partnerships, except for TransRiver, in which the Company
purchased a 49 percent interest, and Delaware Valley, for which no interest was
purchased. These acquisitions were accounted for using the purchase method of
accounting.
On April 30, 2001, the Company completed its acquisition of Allied's interests
in Ref-Fuel Management, TransRiver, Ref-Fuel Semass, Semass Operator, and
Delaware Valley, as well as Allied's interests in notes due from the HENS. The
Company also acquired two other businesses during the year for approximately
$5.8 million. The acquisitions were accounted for in accordance with the
provisions of SFAS No. 141, "Business Combinations". Accordingly, the
consolidated statement of operations includes the results of these entities
beginning on each of their respective dates of acquisition. The assets acquired
and liabilities assumed were recorded at estimated fair values as determined by
Company management, after obtaining independent appraisals of the fair values of
material acquired property, plant and equipment and identified intangible assets
and debt.
A summary of the assets acquired and liabilities assumed in the 2001
acquisitions follows (in thousands):
Useful
Life Amount
----------- ------------------------------
Fair value of assets acquired
Current assets $51,111
Property, plant and equipment 2-50 years 168,704
Energy contracts 8-20 years 161,456
Other long-term assets 23,579
Notes due from the HENS 80,124
--------------------
$484,974
Fair value of liabilities assumed
Current liabilities (40,024)
Long-term debt obligations (156,227)
Waste contracts 6-19 years (71,075)
Operating lease acquired 15 years (79,184)
Other long-term liabilities (9,546)
--------------------
(356,056)
---------
Net assets acquired, net of cash
acquired 128,918
Transaction costs paid in prior
year (3,300)
Goodwill 18,331
---------
Cash paid, net of cash acquired $143,949
=========
Also on April 30, 2001, the Recapitalization of the HENS occurred. The
Recapitalization of Allied's 50 percent interest, combined with the 50 percent
interest previously held, resulted in the Company having control of the HENS.
56
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The consolidated results for the period from April 30, 2001 through April 30,
2002 included the Company's basis in the 50 percent of the HENS purchased in
1997 and 1998, and the HENS' historical basis for the remaining 50 percent.
Since both Allied and the Company had separate, nonconcurrent rights to cause
the Redemption, the fair value of the Class B interests was estimated based on
the value that the HENS contributed to the equipment leasing entities at the
Recapitalization date. The difference in the final recorded value of Allied's
member's equity in the HENS prior to the Recapitalization and the fair value of
the Class B interests at the Recapitalization date was $144.2 million, which
reduced the Company's members' equity as of the Recapitalization.
In January 2002, Allied provided notice of its intent to exercise its rights to
cause the Redemption. On April 30, 2002, the HENS distributed their interests in
the equipment leasing entities to Allied in redemption of Allied's Class B
interest in the HENS. The $2.6 million difference between the fair value of
Allied's interest in the HENS and the fair value of the interests in the
equipment leasing entities received by Allied in redemption of those interests
was paid by Allied to the HENS. The effective purchase price paid in connection
with the redemption of the Class B interests was determined as $193.1 million,
which was the value of the equipment leasing entities held by the HENS less the
amounts received from Allied as of the date of the Redemption.
In recording the Redemption, the Company released the previously recorded $144.2
million reduction to member's equity and applied purchase accounting to the HENS
in accordance with SFAS No. 141. The assets acquired and liabilities assumed
were recorded at estimated fair values as determined by Company management,
after obtaining independent appraisals of the fair values of acquired tangible
property, plant and equipment and identified intangible assets and debt. The
change in basis was allocated as follows (in thousands):
Useful Life Amount
-------------- -----------------
Current assets $ (714)
Property, plant and equipment 2-50 years 31,336
Energy contracts 8-20 years 85,793
Waste contracts assets 8 years 9,717
Other intangibles 5-30 years (3,957)
Write-off deferred income 42,199
Long-term debt (20,413)
-----------------
Total $ 143,961
=================
The Recapitalization of the HENS and the acquisition of the Allied interests in
other American Ref-Fuel Partnerships resulted in the Company having control or
100 percent ownership of companies that were previously held as investments
using the equity method of accounting. Accordingly, these equity interests were
consolidated as of April 30, 2001. The Company's basis in the cash of these
subsidiaries totaled $18.7 million, which is included as Cash from consolidation
of subsidiaries in the attached statement of cash flows.
The MSW Transactions
As described in Note 1, the MSW Transactions consisted of MSW Energy I's
purchase of Duke's 49.8% indirect ownership of the Company and MSW Energy II's
purchase of UAE's 50% indirect ownership of the Company, resulting in a change
of control as of December 12, 2003. As a result, the Company's assets are being
valued by independent appraisers in order to assist management in the
determination of the purchase price allocations relating to the fair market
value of the assets and liabilities acquired.
In recording the MSW Transactions in accordance with EITF Topic D-97, "Push-Down
Accounting", the Company recorded incremental fair value of $407.7 million as an
addition to members' equity and applied the respective fair value of the
acquisitions in accordance with SFAS No. 141. The assets acquired and
liabilities assumed were recorded at estimated fair values as determined by
Company management, using a preliminary valuation prepared by the independent
appraisers.
57
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On June 30, 2003, MSW Energy I acquired its interest in the Company for $363.5
million, allocated as follows: (in thousands):
Useful Life Amount
--------------- ------------------------------
Fair value of assets acquired
Current assets $110,930
Property, plant and equipment 2-50 years 623,054
Intangible assets 4-20 years 314,228
Other long-term assets 43,252
------------
$1,091,464
Fair value of liabilities assumed
Current liabilities (77,944)
Long-term debt obligations (556,083)
Other long-term liabilities (96,130)
------------
(730,157)
----------------
Net assets acquired 361,307
Goodwill 2,175
----------------
Acquisition cost $363,482
================
On December 12, 2003, MSW Energy II purchased UAE's indirect 50% ownership of
Ref-Fuel for $364.7 million, allocated as follows (in thousands):
Useful Life Amount
---------------- ------------------------------
Fair value of assets acquired
Current assets $114,035
Property, plant and equipment 2-50 years 613,195
Intangible assets 4-20 years 294,517
Other long-term assets 48,417
------------
$1,070,164
Fair value of liabilities assumed
Current liabilities (72,327)
Long-term debt obligations (536,833)
Other long-term liabilities (96,293)
------------
(705,453)
----------------
Acquisition cost $364,711
================
The incremental purchase price pushed down was approximately $218.5 million and
$202.2 million, for MSW Energy I and MSW Energy II, respectively as follows (in
thousands):
58
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Adjusted
Allocation of excess purchase MSW Energy I MSW Energy MSW Energy Total
price: Initial Purchase Amortization I II Adjustments
- ------------------------------------ ----------------- ------------- ------------ ------------ -------------
Property, plant and equipment, net $ 76,363 $ (1,968) $ 74,395 $ 74,395 $ 148,790
Intangible assets, net 154,068 (14,231) 139,837 140,433 280,270
Goodwill (12,050) - (12,050) (14,225) (26,275)
Other long-term assets (2,892) - (2,892) (2,891) (5,783)
Long term debt (22,405) 2,063 (20,342) (20,341) (40,683)
Other long-term liabilities 25,465 1,088 26,553 24,852 51,405
----------------- ------------- ------------ ------------ -------------
Members' equity $ 218,549 $ (13,048) $ 205,501 $ 202,223 $ 407,724
================= ============= ============ ============ =============
Reconciliation of excess purchase
price:
- ------------------------------------
Investments in Ref-Fuel $ 363,482 $ 364,711
Historical net cost of assets
acquired 144,933 162,488
----------------- ------------
Excess purchase price $ 218,549 $ 202,223
================= ============
Pro Forma Information (Unaudited)
The accompanying unaudited pro forma consolidated statements of operations for
the years ended December 31, 2003 and 2002 give effect to the ownership change
as if it occurred on January 1, 2003 and January 1, 2002, respectively.
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the actual results of operations that would
have been achieved had the MSW Transactions acquisitions taken place at the
beginning of the respective years (in thousands):
Year Ended December 31,
2003 2002
----------------------- ------------------
Revenues
Waste disposal and related services $ 280,986 $ 268,114
Energy 135,984 120,034
Other 15,402 5,949
----------------------- ------------------
Total net revenues 432,372 394,097
Expenses
Operating 190,032 169,866
Depreciation and amortization 68,094 77,007
General and administrative 44,302 43,642
Loss on asset retirements 2,207 1,886
----------------------- ------------------
Operating income 127,737 101,696
Interest income 3,231 3,740
Interest expense (56,101) (53,893)
Loss on early extinguishment of debt (3,191) -
Equity in earnings of unconsolidated
affiliates 15,500
Other expenses, net (115) (590)
----------------------- ------------------
Income before minority interests 71,561 66,453
Minority interests in net income of
subsidiaries - (4,885)
----------------------- ------------------
Net income $ 71,561 $ 61,568
======================= ==================
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
59
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Useful Life December 31,
--------------- -----------------------------
2003 2002
(Predecessor)
Plant and equipment 2-50 years $1,191,262 $1,195,551
Land 7,417 3,899
Leasehold improvements Up to 17 years 2,797 34,966
Landfill 13 years 5,997 11,297
Spare parts 12,253 11,878
Construction in progress 4,614 10,099
----------- ----------------
Total property, plant and equipment 1,224,340 1,267,690
Accumulated depreciation (3,391) (164,618)
----------- ----------------
Property, plant and equipment, net $1,220,949 $1,103,072
=========== ================
In 2002, the Company changed its accounting estimates relating to the useful
lives of certain plant and equipment. The estimated useful lives for most plant
assets were extended from 35 years to 50 years, and useful lives of most
replacement components, included in plant and equipment, were shortened from a
range of seven to ten years, to five years. The change in estimate was based
upon a study performed by the Company's engineering department, information
obtained from recent fair market assessments, comparisons to typical industry
practices and the effect of the Company's review of capital investments which
identified fully depreciated assets still in use, and assets that required
replacement before its expected useful life resulting in losses being recorded
on asset retirements. As a result of the change in estimate, net income was
increased by approximately $2.3 million in 2002.
5. Intangible Assets
Intangible assets consist of the following (in thousands):
Useful Life December 31,
--------------- -----------------------------
2003 2002
(Predecessor)
Energy contracts 6-18 years $522,430 $381,078
Waste contracts 6 years 23,600 9,717
Financing costs 4-22 years - 20,349
Emissions credits Indefinite 37,827 -
Other intangibles Indefinite 3,579 2,639
------------ ---------------
587,436 413,783
Accumulated amortization (3,161) (77,052)
------------ ---------------
Intangible assets, net $584,275 $336,731
============ ===============
The following table details the amount of actual / estimated amortization
expense associated with intangible assets included or expected to be included in
the Company's statement of operations for each of the years indicated (in
thousands):
60
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Waste
Energy contracts contracts Totals
---------------- -------------- ------------
The period from January 1, 2003
through December 12, 2003 $27,293 $1,207 $28,500
The period from December 12,
2003 through December 31, 2003 2,944 217 3,161
---------------- -------------- ------------
(Estimated)
2004 $57,822 $4,124 $61,946
2005 57,822 4,124 61,946
2006 57,822 4,124 61,946
2007 57,823 4,124 61,947
2008 57,722 4,124 61,846
Thereafter 230,475 2,763 233,238
---------------- -------------- ------------
Total $519,486 $23,383 $542,869
================ ============== ============
6. Goodwill
The changes in the carrying amount of goodwill are as follows (in thousands):
December 31,
----------------------------
2003 2002
------------- -------------
(Predecessor)
Beginning balance $- $28,066
Goodwill MSW Energy I 2,175 -
------------- -------------
Ending balance $2,175 $28,066
============= =============
The calculation of adjusted net income (excluding goodwill amortization) as if
SFAS 142 were adopted January 1, 2001 is as follows (in thousands):
| The period
The period from | from January
December 12, | 1, 2003 For the Year For the Year
2003 through | through ended ended
December 31, | December 12, December 31, December 31,
2003 | 2003 2002 2001
---------------- | ------------- -------------- --------------
|
Reported net income $8,082 | $103,071 $108,604 $75,279
Add back - Goodwill |
amortization - | - - 232
---------------- | ------------- -------------- --------------
Adjusted net income $8,082 | $103,071 $108,604 $75,511
================ | ============= ============== ==============
7. Investments in Unconsolidated Affiliates and Equity in Earnings of
Unconsolidated Affiliates
American Ref-Fuel Partnerships
Prior to April 30, 2001, the Company's interests in the American Ref-Fuel
Partnerships were accounted for using the equity method of accounting. The
following table details the Company's ownership percentages and share of net
earnings related to such entities (in thousands):
61
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Ownership Four Months ended
Percentage April 30, 2001
---------- --------------------
Ref-Fuel Management 50% $(222)
Hempstead 50% 6,720
Essex 50% 1,701
Niagara 50% 250
Seconn 50% (783)
Semass 50% 1,951
--------------------
$9,617
====================
The following is a summary of aggregate financial information for the Company's
investments in the American Ref-Fuel Partnerships for the period ended April 30,
2001 (in thousands):
Four Months ended
April 30, 2001
-------------------
Condensed statement of operations
Revenues $138,359
Net income 22,915
Company's share of net income 9,617
Distributions received from unconsolidated
affiliates 3,025
The Company's investment in the American Ref-Fuel Partnerships exceeded its
share of the underlying equity in the Partnerships' net assets by approximately
$98 million at December 31, 2000. Such difference was being amortized using the
straight-line method over the estimated economic lives of the related assets,
ranging from four to 29 years. Differences between the equity earnings of
unconsolidated affiliates reported by the Company and the Company's
proportionate share of the combined earnings of the related unconsolidated
affiliates resulted principally from the related amortizations.
Subsequent to the Allied Transaction, the results of operations of the American
Ref-Fuel Partnerships are included in the consolidated statement of operations.
Equipment Leasing Entities
Between April 30, 2001 and April 30, 2002, the HENS owned 99 percent
noncontrolling interests in equipment leasing entities and accounted for them
using the equity method. Summarized combined financial information are as
follows (in thousands):
H,E,N and S Leasing
Companies, LLC
-------------------------
Combined Balance Sheets
April 30,
2002
-------------------------
Current assets $53,212
Noncurrent assets 404,028
-------------------------
$457,240
=========================
Current liabilities $52,176
Noncurrent liabilities 207,408
Members' equity 197,656
-------------------------
$457,240
=========================
62
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Combined Statements of Operations
-------------------------------------------
For the period For the period
January 1, 2002 April 30, 2001
to April 30, to December 31,
2002 2001
-------------------- ---------------------
Net revenue $30,291 $31,198
General and administrative
expenses 238 362
Depreciation and amortization expense 10,597 10,841
-------------------- ---------------------
Operating income 19,456 19,995
Interest income 245 934
Interest expense (4,044) (4,055)
-------------------- ---------------------
Net income $15,657 $16,874
==================== =====================
The Company's equity in earnings of
equipment
leasing
entities $15,500 $16,705
==================== =====================
8. Accounts Payable and Other Current Liabilities
Accounts payable and other current liabilities consisted of the following (in
thousands):
December 31,
-----------------------------
2003 2002
(Predecessor)
Accounts payable $23,587 $22,506
Incentive plan accruals 3,628 23,119
Compensation liabilities 7,924 9,867
Short-term portion of deferred revenue - 1,887
Other 4,471 8,306
------------ ---------------
$39,610 $65,685
============ ===============
9. Financing Arrangements
Long-term debt obligations of the Company consisted of the following (in
thousands):
December 31,
----------------------------
2003 2002
(Predecessor)
Interest Rate
(average rate) Final Maturity
ARC LLC-supported debt
Senior Notes 6.26% 2015 $259,000 $-
Niagara Series 2001A 5.45%-5.625% 2015 165,010 165,010
Seconn Corporate Credit Bonds 5.50%-6.45% 2022 43,500 43,500
Hempstead Corporate Credit
Bonds 5.00% 2010 42,670 42,670
Variable
Credit facility term loans (3.92%) Retired in 2003 - 191,250
Credit facility revolving Variable
loan (3.03%) Retired in 2003 - 58,000
----------- ---------------
ARC LLC-supported debt 510,180 500,430
----------- ---------------
Other debt
Hempstead project debt 4.40%-5.00% 2009 133,278 149,999
Essex project debt 5.32%-7.48% 2020 108,662 119,983
63
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Seconn project debt 5.125%-5.50% 2015 53,499 57,107
Semass Series 2001A 5.50%-5.625% 2016 134,345 134,345
Semass Series 2001B 5.00%-5.50% 2010 118,010 118,010
Semass Series 2001C 2.90%-4.00% 2004 13,935 39,695
----------- ---------------
561,729 619,139
----------- ---------------
Other obligations 378 336
----------- ---------------
Total debt at par value 1,072,287 1,119,905
Unamortized debt premium, net 70,400 36,491
Current portion (81,907) (83,561)
----------- ---------------
Total long-term debt
obligations $1,060,780 $1,072,835
=========== ===============
On April 30, 2001, ARC LLC entered into a $325 million credit facility (the
Credit Facility) with a group of lending institutions. The Credit Facility
provided for term loans of $215 million to be borrowed by ARC LLC and its
subsidiaries (the Term Loans) and for a revolving credit facility of up to $110
million (the Revolving Loan) The Term Loans bore interest which, at ARC LLC's
option, was based on the base rate, as defined, plus 1.5 percent or the
Eurodollar rate, as defined, plus 2.5 percent. The Revolving Loan bore interest
at a rate determined on the date of the borrowing based on the Term Loan
interest rate, discussed above, plus an applicable margin of (a) 0.25 percent to
2.125 percent for base rate advances or (b) 1.25 percent to 3.125 percent for
Eurodollar rate advances. Commitment fees of up to 0.5 percent were assessed to
ARC LLC on the unused portion of the Revolving Loan. The Credit Facility allowed
ARC LLC to extend the term of the Revolving Loan for one year. Additionally,
subsequent to the one-year extension, ARC LLC could convert the Revolving Loan
into a one-year term loan. As such, amounts due under the Revolving Loan were
classified as long-term.
On May 9, 2003, ARC LLC completed the sale of $275 million aggregate principal
amount of 6.26 percent Senior Notes due 2015. The proceeds of the financing were
used to repay $242.6 million under the outstanding Credit Facility, fund debt
service reserve accounts and for general corporate purposes. As part of this
refinancing, ARC LLC entered into a three-year amended and restated revolving
credit facility (the Amended Credit Facility) for up to $75 million, including
$45 million of which could be used for letters of credit. Under the terms of the
Amended Credit Facility, the Company is subject to certain financial covenants,
as defined, with respect to leverage and adjusted cash flow coverage ratios. As
of December 31, 2003, there were no borrowings and $7.0 million of letters of
credit outstanding under the Amended Credit Facility. Pursuant to the terms of
certain guarantee agreements as of December 31, 2003, the Company was
contingently obligated to issue $29 million in letters of credit in the event
that the ratings of ARC LLC's senior debt are reduced to below investment grade.
The Amended Credit Facility allows for two one-year extensions at ARC LLC's
request. As a result of the refinancing, the Company expensed approximately $3.3
million of deferred financing costs associated with the retired debt.
ARC LLC-supported debt includes obligations of subsidiary companies for which
the Company has issued a guarantee. Other debt obligations mainly consist of
indebtedness supported by the facility to which the indebtedness belongs and
certain contingent credit support obligations of the Company.
Certain of the debt agreements held by the Company contain restrictions on cash
distributions and new borrowings. Substantially all of the assets and revenues
of the facilities owned or controlled and operated by subsidiaries of ARC LLC
are pledged to trustees under the terms of the debt agreements. In addition, the
terms of the documents governing these obligations limit the business activities
and the circumstances and timing of making partnership distributions.
64
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
During 2001, the Company refinanced all variable rate borrowings to fixed rate
borrowings with various redemption dates. The Company retired $226.1 million and
legally defeased $286.9 million during the year, resulting in a loss of $3.7
million related to the payment of call premiums, the expense of unamortized
financing costs and other activities.
The aggregate amounts of long-term debt mature as follows (in thousands):
2004 $81,907
2005 87,489
2006 79,070
2007 90,466
2008 98,472
Thereafter 634,883
------------
$1,072,287
============
The fair market value of the Company's indebtedness as of December 31, 2003 and
2002, approximated $1.1 billion and $1.2 billion, respectively. The Company
determined fair values based on quoted market values.
10. Other Long-Term Liabilities
Other long-term liabilities consist of the long-term portion of the following
(in thousands):
Amortization December 31,
-----------------------------
Period 2003 2002
(years) (Predecessor)
Long-term waste contracts acquired 9-17 $131,676 $96,640
Operating lease acquired 14 42,094 70,386
Deferred revenue 8-20 3,130 14,427
Long-term incentive plan accruals 2,894 1,417
Energy contract levelization 12 995 34,735
Landfill liabilities 13 10,017 8,144
Other 1,664 1,684
------------ ---------------
$192,470 $227,433
============ ===============
See Note 15 for amortization of certain other long-term liabilities.
11. Operational and Other Agreements
Hempstead, Essex, Seconn, Semass and Delaware Valley operate under various
long-term service agreements, the terms of which extend from 2009 through 2020.
These service agreements require the projects to provide disposal services for
waste delivered by counterparties to these agreements at prices determined by
various formulas contained in such agreements. Duke and Allied are each
obligated to fund one-half of the cash shortfalls of Essex arising out of
operating cost needs subject to an accumulated combined total of $50 million
unless funds are required to satisfy certain environmental claims. In the event
of such environmental claims, the cumulative total is increased to the lesser of
(a) $100 million; or (b) $50 million plus cumulative Essex distributions. In
circumstances of default, Duke and Allied would be responsible to fund up to
amounts not expended for funding prior cash shortfalls. On April 30, 2001, Essex
and ARC LLC entered into agreements with Duke and Allied requiring Essex and ARC
LLC to reimburse, indemnify and defend Duke and Allied from any liability in
respect to these obligations.
65
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
With respect to the Delaware Valley facility, ARC LLC has guaranteed amounts
payable by Delaware Valley pursuant to certain agreements. ARC LLC has
indemnified the Delaware County Solid Waste Authority for amounts arising out
of, or relating to any failure of Delaware Valley under its service agreement.
In conjunction with the acquisition of the facility, ARC LLC also provides an
indemnity to the sellers of the facility from all environmental damages as a
result of remedial action and releases or threatened releases of hazardous
substances at the facility.
Credit Support
In order to provide the Company with an additional source of funds to meet calls
on the Company's project support obligations, MSW Energy I and UAE Energy Corp.
(collectively referred to as the Members) have each entered into the Equity
Contribution Agreement pursuant to which each of the Members have agreed to
provide up to $50 million in equity capital to the Company. Each of the Members'
obligation to make equity contributions under the Equity Contribution Agreement
is conditioned upon the other making an equal contribution and is limited to
each making no more than $50 million of aggregate equity contributions. If
either of the Members is not rated at least BBB by S&P, such Member is required
to provide a letter of credit from a commercial bank that is rated at least A-
by S&P to secure its obligations under the Equity Contribution Agreement.
Significant Customers
All of the Company's WTE facilities are contracted to sell power under long-term
power contracts with utility companies, the terms of which expire from 2009 to
2021. These contracts require the facilities to deliver, and the utility
companies to purchase, substantially all of the power generated by the
facilities at rates defined in the contracts. Total revenues recognized under
these energy contracts approximated $7.2 million, $143.5 million, $144.1
million, and $107.2 million for the period from December 12, 2003 through
December 31, 2003, the period from January 1, 2003 through December 12, 2003 and
the years ended December 31, 2002 and 2001, respectively, representing
approximately 29.0 percent, 32.3 percent , 32.9 percent and 35.5 percent,
respectively, of total net revenues.
12. Commitments and Contingencies
Environmental and Regulatory Risk
The Company operates in an environmentally sensitive industry and is subject to
extensive federal, state and local laws and regulations adopted for the
protection of the environment. The laws and regulations primarily applicable to
the Company are those related to discharge of emissions into the air and
management of solid waste but can also include those related to water use,
discharges to water, wetlands preservation and hazardous waste management.
Certain of these laws have extensive and complex requirements relating to
obtaining construction and operating permits, monitoring, record keeping and
reporting. While management believes that it is in substantial compliance with
permits and other applicable environmental laws relating to the Company, its
facilities, from time to time, may not be in full compliance with all such laws.
Noncompliance with environmental laws and regulations can result in the
imposition of civil or criminal fines or penalties. In some instances,
environmental laws also may impose clean-up or other remedial obligations in the
event of a release of pollutants or contaminants into the environment. The
Company incurs operating costs and capital expenditures related to various
environmental protection and monitoring programs. Such expenditures have not had
a material adverse effect on the Company's consolidated financial position or
results of operations. However, federal, state and local regulatory authorities
may consider proposals to restrict or tax certain emissions, which proposals, if
adopted, could impose additional costs on the operation of the Company.
66
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Landfill Agreements
Semass Partnership, a subsidiary of Ref-Fuel Semass, has a waste management
agreement (the WMA) dated May 25, 1982, as amended, with the Carver, Marion,
Wareham Regional Refuse Disposal District (CMW). The WMA allows Semass
Partnership to utilize a portion of a landfill (the CMW Landfill), which CMW
leases from Wankinco River, Inc. (Wankinco).
From May 1997 through July 1999, Wankinco provided notices purportedly
terminating the lease on the CMW Landfill based upon an allegation that the
lease term automatically expired due to alleged failures to strictly comply with
the terms of the lease. In June 1997, Semass Partnership and CMW filed suit
against Wankinco and A. D. Makepeace Company, Inc., Wankinco's parent company,
seeking a declaratory judgment that Semass Partnership and CMW may continue to
operate the CMW Landfill. Trial of the matter before the court was completed in
2001 and a decision was received by the Company in December 2002, which decided
virtually all issues in favor of the Semass Partnership. The Semass Partnership
avoided both forfeiture of possession and any liability for damages due to
landfill operations. Wankinco filed a notice of appeal in January 2003. Apart
from this decision, the Semass Partnership and Wankinco continue litigating
several other actions involving regulatory issues at the landfill.
Management believes that the ultimate resolution of these matters will not have
a material adverse impact on the results of operations, future cash flows or
financial position of the Company.
In March 1990, the Semass Partnership, CMW and Wankinco entered into an
agreement related to the CMW Landfill, as amended (the Settlement Agreement),
which requires, among other things, the Semass Partnership to make annual
deposits into an environmental protection trust fund (the Fund) in lieu of
obtaining environmental impairment liability insurance for the CMW Landfill. The
Semass Partnership is required under the Settlement Agreement to deposit
$500,000 annually into the Fund, payable in equal quarterly installments.
Certain additional deposits are required subject to the availability of cash in
accordance with the Loan Agreement. The Semass Partnership's obligation to make
deposits into the Fund ceases when the Fund reaches a balance of $20.0 million.
Proceeds from the Fund are to be used primarily for remediation of the CMW
Landfill in the event of environmental damage. The Semass Partnership and
Wankinco are each entitled to receive one-half of the balance of the Fund upon
final closure of the CMW Landfill and receipt of required governmental
approvals. During the years ended December 31, 2003 and 2002, the Semass
Partnership made the required quarterly deposits into the Fund and charged
operations for one-half of the deposits into the Fund, representing one-half of
the balance of the Fund which will be disbursed to Wankinco upon final closure
of the CMW Landfill. Additional charges to operations may be required in future
years if any disbursements are required from the Fund to remediate any
environmental damages. To date, management is not aware of any such
environmental damages. As of December 31, 2003 and 2002, the balance in the Fund
is approximately $13.5 million and $11.2 million, respectively, and is included
in restricted cash and long-term investments. A corresponding liability of
approximately $6.5 million and $5.6 million, representing approximately one-half
of the deposits and related earnings in the Fund, is included in other long-term
liabilities as of December 31, 2003 and 2002, respectively.
By letter dated February 10, 2004, Wankinco alleged a default under the
Settlement Agreement and the lease on the CMW Landfill, related to an alleged
failure by the Company to properly fund a $125,000 quarterly deposit. Management
believes that the deposit was properly made, that no default exists under the
Settlement Agreement or lease, and that the ultimate resolution of this matter
will not have a material adverse impact on the results of operation, future cash
flows or financial position of the Semass Partnership or the Company.
Future Minimum Payments Under Operating Leases
Delaware Valley leases the Delaware Valley Project pursuant to an operating
lease that expires in July 2019. The Company also leases office space for its
Montvale, New Jersey headquarters pursuant to operating leases expiring in
August 2007.
As of December 31, 2003, total minimum net rental payments on these leases are
as follows (in thousands):
67
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2004 $13,487
2005 14,178
2006 13,611
2007 13,768
2008 12,477
Thereafter 93,260
------------
$160,781
============
The Company is contingently liable for the payment of stipulated losses, a
portion of which is included minimum net rental payments for Delaware Valley
reflected in the table above. This stipulated loss value as of December 31, 2003
is approximately $177.4 million. Total net rental expense was $0.3 million, $6.7
million, $6.5 million and $3.2 million for the period from December 12, 2003
through December 31, 2003, the period from January 1, 2003 through December 12,
2003, and the years ended December 31, 2002 and 2001, respectively.
Capital Expenditures
As of December 31, 2003, the Company has commitments for capital expenditures of
approximately $14.2 million, all of which are expected to be incurred in 2004.
Other Matters
The Company is involved in various claims or litigation in the ordinary course
of business. Management believes that the ultimate resolution of these matters,
either individually or in the aggregate, will not have a material adverse impact
on the future results of operations, cash flows or financial position of the
Company.
The Company is required to provide financial assurance to government agencies
under applicable environmental and procurement regulations relating to the
landfill operations and waste disposal contract. Performance bonds to secure the
obligations, of which $29 million in surety bonds was outstanding as of December
31, 2003, satisfy these financial requirements.
13. Related Party Transactions
Included in the consolidated statement of operations for the years ended
December 31, 2002 and 2001 are revenues of approximately $12.2 million and $25.8
million, respectively, generated from the waste disposal services provided to
Allied and expenses of $1.0 million and $6.8 million, respectively, for the
hauling of ash and disposal of bypass waste by Allied for the four months ended
April 30, 2002 and the year ended December 31, 2001, respectively.
All of the revenues from the equipment leasing entities explained in Note 1 are
derived from operating leases between those entities and Allied; as such, the
equity in earnings of equipment leasing entities of $15.5 million is from Allied
for the year ended December 31, 2002. As of the Redemption, Allied is no longer
an affiliated entity.
Prior to the Allied Transaction, the Company issued certain notes payable to and
notes receivable from certain of the American Ref-Fuel Partnerships. These notes
bore interest at 6.12 percent, and were satisfied in conjunction with the Allied
Transaction. Interest income under the notes receivable approximated $1.7
million for the four months ended April 30, 2001, at which point they were
satisfied. Interest expense pursuant to the notes payable approximated $4.5
million for the four months ended April 30, 2001, at which point they were
satisfied.
In the ordinary course of business, the Company and its subsidiaries hold
insurance policies with AIG, for which the AIG insurance company subsidiaries
receive customary annual premiums. As of June 30, 2003, AIG and its subsidiaries
are related parties of the Company.
68
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. Employee Compensation and Benefit Plans
Retirement Savings Plan
The Company is the sponsor of the American Ref-Fuel Company Retirement Savings
Plan (the Savings Plan), which covers substantially all of the Company's
employees. The Savings Plan, adopted July 1, 1988, as amended, incorporates a
defined contribution account for each employee with deferred savings features
permitted under Internal Revenue Code Section 401(k). Employees may make
voluntary contributions to one or more of various investment funds through
payroll deductions. The Company's matching contribution is defined as 50 percent
of the first five percent of covered compensation contributed by the employee.
In addition, the Company makes a basic contribution on an employee's behalf in
an amount equal to three percent of an employee's regular earnings which are
less than the Social Security Wage Base, plus six percent of an employee's
regular earnings in excess of the Social Security Wage Base. Company
contributions are directed to the investment funds in the same proportion as the
employees have directed their voluntary contributions. Amounts contributed to
the Savings Plan were approximately $0.2 million, $2.7 million, $3.0 million and
$1.7 million for the period from December 12, 2003 through December 31, 2003,
the period from January 1, 2003 through December 12, 2003, and the years ended
December 31, 2002 and 2001, respectively.
Long-Term Incentive Plans
The Company has granted certain appreciation rights and/or performance awards to
its officers and certain key employees that were issued under long-term
incentive plans. The incentive plans are administered by the compensation
committee of the Board of Directors of the Company. The first Long-Term
Incentive Plan (the LTI Plan) was completed prior to 2001, except for certain
payments that participants were allowed to defer to periods ending October 1,
2003, in exchange for additional compensation. The expenses related to the
deferral were recognized ratably over the deferral period.
The Long-Term Compensation Plan (the LTC Plan), effective as of January 1, 2001,
replaced the LTI Plan. Awards under the LTC Plan are based on the achievement of
certain management objectives during each plan year. Awards under the LTC Plan
mature in equal amounts of 25 percent in the current year and the three
subsequent years.
The Company recognized compensation expense related to the LTI Plan and LTC Plan
of approximately $0.3 million, $4.9 million, $4.1 million and $2.9 million
during the period from December 12, 2003 through December 31, 2003, the period
from January 1, 2003 through December 12, 2003, and the years ended December 31,
2002 and 2001, respectively. The Company's obligation under the LTI Plan and LTC
Plan is approximately $4.6 million and $24.5 million at December 31, 2003 and
2002, respectively, of which approximately $2.4 million and $1.4 million is
included in other long-term liabilities with the remainder in current
liabilities. The Company paid out approximately $0.0 million, $25.2 million,
$0.9 million and $0.2 million under these plans for the period from December 12,
2003 through December 31, 2003, the period from January 1, 2003 through December
12, 2003 and for the years ended December 31, 2002 and 2001.
Severance Agreements
The Company maintains severance agreements with seven officers where under
certain conditions of separation of employment provide for the payment of base
salary plus bonus. The maximum contingent liability under these arrangements is
$2.2 million.
15. Supplemental Disclosure of Cash Flow Information
Depreciation and amortization expense included in the Statements of Cash Flows
consists of the following expenses (revenues) (in thousands):
69
Ref-Fuel Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The period | The period
from | from
December | January 1, For the
12, 2003 | 2003 For the Year
through | through Year Ended Ended
Statement of December | December December December
Asset / liability operations 31, 2003 | 12, 2003 31, 2002 31, 2001
- --------------------- ----------------------- ----------- | ----------- ----------- ----------
|
Property, plant and Depreciation and |
equipment amortization (1) $3,391 | $55,838 $67,249 $43,978
Energy contracts Energy revenues 3,286 | 27,293 25,984 12,505
Long-term waste Waste disposal and |
contracts related services (477) | (7,454) (8,453) (6,283)
Operating expenses |
Lease (rent expense) - | (5,009) (5,279) (3,519)
Debt Interest expense (494) | (4,097) (4,608) (907)
Waste disposal and |
related services and |
Deferred revenue energy revenues - | (909) (198) (1,762)
----------- | ----------- ----------- ----------
Total $5,706 | $65,662 $74,695 $44,012
=========== | =========== =========== ==========
(1) Includes amortization of intangible |
assets and amortization of goodwill |
|
Supplemental cash flow information |
Cash paid for |
interest $11,094 | $54,594 $57,306 $65,175
=========== | =========== =========== ==========
Noncash investing and financing activities |
Recapitalization of the HENS | $144,194
Redemption of Class B minority interest in |
the HENS (Note 3) | $144,194
Push-down basis of accounting - MSW Energy I $205,501 |
Push-down basis of accounting - MSW Energy II $202,223 |
Unrealized gain on investments $517 |
16. Subsequent Event
On January 26, 2004, affiliates of CSFB Private Equity entered into a securities
purchase agreement with Highstar Renewable Fuels II LLC (Highstar II), an
affiliate of AIGGIG, pursuant to which the CSFB Private Equity affiliates agreed
to sell to Highstar II 40% of the outstanding shares of common stock of UAE
Holdings. Upon the consummation of the transactions contemplated by the
securities purchase agreement, the CSFB Private Equity affiliates will
collectively own 60% and Highstar II will own 40% of the outstanding shares of
common stock of UAE Holdings.
Concurrently with the execution of the aforementioned purchase agreement,
Highstar, MSW Acquisition, and UAE Holdings entered into a membership interests
purchase agreement pursuant to which Highstar agreed to sell to MSW Acquisition
10% and to UAE Holdings 0.01% of the outstanding membership interests in MSW
Energy I. Prior to such transaction, Highstar will transfer 39.89% of our
membership interests to its wholly-owned subsidiary, Highstar I. Upon the
consummation of the transactions contemplated by the membership interests
purchase agreement, MSW Acquisition will own 60%, Highstar and Highstar I will
own 39.99% and UAE Holdings will own 0.01% of the outstanding membership
interests in MSW Energy I, and UAE Holdings will be the managing member of MSW
Energy I.
The transactions described above (the Equalization Transactions) will result in
CSFB Private Equity affiliates collectively owning a 59.88% indirect interest in
Ref-Fuel Holdings and Highstar, Highstar I and Highstar II collectively owning a
39.92% indirect interest in Ref-Fuel Holdings.
The parties will enter into a stockholders' agreement and members' agreement
that will provide for the governance of UAE Holdings, MSW Energy I and their
subsidiaries. The consent of both the CSFB Private Equity affiliates and an
affiliate of AIGGIG will be required to take certain significant actions at UAE
Holdings, MSW Holdings and, in many cases, their subsidiaries. The agreements
will also provide for transfer restrictions, a right of first offer, tag-along
rights, drag-along rights and participation rights with respect to UAE Holdings
and MSW Energy I. The parties will also enter into a registration rights
agreement with respect to UAE Holdings.
The transactions contemplated by the aforementioned agreements will be
conditioned upon the consummation of each other and will also be subject to
certain closing conditions, including the receipt of all necessary governmental
approvals. These transactions are expected to close in the second quarter of
2004.
70
Report of Independent Auditors
To the Members of
H, E, N and S Leasing Companies, LLC
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of members' equity and of cash flows, present
fairly, in all material respects, the financial position of H, E, N and S
Leasing Companies, LLC at April 30, 2002 and December 31, 2001, and the results
of their operations and their cash flows for the four-month period ended April
30, 2002 and eight-month period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
included 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, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Phoenix, Arizona
July 24, 2003
71
H, E, N and S Leasing Companies, LLC
Combined Balance Sheets (In Thousands)
- --------------------------------------------------------------------------------
December 31, April 30,
Assets 2001 2002
--------------------------
Current assets
Cash and cash equivalents $28,645 $44,226
Accounts receivable 4,476 8,868
Prepaid expenses and other current assets 187 118
--------------------------
Total current assets 33,308 53,212
--------------------------
Long-term assets
Property and equipment, net 213,452 395,778
Other long-term assets 8,577 8,250
--------------------------
Total long-term assets 222,029 404,028
--------------------------
Total assets $255,337 $457,240
==========================
Liabilities and Members' Equity
Current liabilities
Accounts payable and accrued expenses $6,255 $12,001
Current portion of long-term debt 8,550 39,255
Accrued interest payable 1,158 920
--------------------------
Total current liabilities 15,963 52,176
--------------------------
Long-term liabilities
Long-term debt 57,375 207,408
--------------------------
Total long-term liabilities 57,375 207,408
--------------------------
Total liabilities 73,338 259,584
--------------------------
Commitments and contingencies
Members' equity
Contributed capital 165,125 165,125
Retained earnings 16,874 32,531
--------------------------
Total members' equity 181,999 197,656
--------------------------
Total liabilities and members' equity $255,337 $457,240
==========================
The accompanying notes are an integral part of these combined financial
statements.
72
H, E, N and S Leasing Companies, LLC
Combined Statements of Operations (In Thousands)
- --------------------------------------------------------------------------------
For the eight For the four
months ended months ended
December 31, April 30,
2001 2002
------------------------------
Revenues - affiliates $31,198 $30,291
Expenses
General and administrative 362 238
Depreciation 10,841 10,597
------------------------------
Operating income 19,995 19,456
Interest income 934 245
Interest expense (4,055) (4,044)
------------------------------
Net income $16,874 $15,657
==============================
The accompanying notes are an integral part of these combined financial
statements.
73
H, E, N and S Leasing Companies, LLC
Combined Statements Of Members' Equity (In Thousands)
- --------------------------------------------------------------------------------
Total
Contributed Retained Members'
Capital Earnings Equity
------------------------------------------
Balance as of April 30, 2001 $- $- $-
Capital contributions 165,125 - 165,125
Net income - 16,874 16,874
------------------------------------------
Balance as of December 31, 2001 165,125 16,874 181,999
Net income - 15,657 15,657
------------------------------------------
Balance as of April 30, 2002 $165,125 $32,531 $197,656
==========================================
The accompanying notes are an integral part of these combined financial
statements.
74
H, E, N and S Leasing Companies, LLC
Combined Statements of Cash Flows (In Thousands)
- --------------------------------------------------------------------------------
For the eight For the four
months ended months ended
December 31, April 30,
2001 2002
------------------------------
Cash flows from operations
Net income $16,874 $15,657
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 12,141 11,278
Changes in assets and liabilities
Accounts receivable (4,476) (4,392)
Prepaid expenses and other current assets (187) 69
Accounts payable and accrued expenses 3,766 5,746
Accrued interest payable 1,158 (238)
------------------------------
Net cash provided by operating activities 29,276 28,120
------------------------------
Cash flows from investing activities
Purchases of property and equipment (221,804) (192,923)
------------------------------
Net cash used in investing activities (221,804) (192,923)
------------------------------
Cash flows from financing activities
Borrowings of long-term debt 69,000 192,700
Repayments of long-term debt (3,075) (11,962)
Payment of financing costs (9,877) (354)
Capital contributions 165,125 -
------------------------------
Net cash provided by financing activities 221,173 180,384
------------------------------
Net increase in cash and cash equivalents 28,645 15,581
Cash and cash equivalents, beginning of period - 28,645
------------------------------
Cash and cash equivalents, end of period $28,645 $44,226
==============================
Supplemental disclosure
Cash paid for interest $1,597 $3,601
==============================
Noncash investing activity
Acquisition of property and equipment $2,489
===============
The accompanying notes are an integral part of these combined financial
statements.
75
H, E, N and S Leasing Companies, LLC
Notes to Combined Financial Statements
December 31, 2001 and April 30, 2002
- --------------------------------------------------------------------------------
1. Organization and Basis of Presentation
H Leasing Company, LLC (H Leasing), E Leasing Company, LLC (E Leasing), N
Leasing Company, LLC (N Leasing) and S Leasing Company, LLC (S Leasing and
collectively, the Companies) are each Delaware limited liability companies
formed on December 14, 2000. The Companies had no operations until April 2001,
when the members made capital contributions to the Companies. Prior to the
redemption referred below, the Companies each have the following two members
that function in the following roles:
Member and Member and
Company Manager Special Purpose Manager
- ---------------------------------------------------------------------------------------------------------
H Leasing Allied Waste North America, Inc. American Ref-Fuel Company of Hempstead
E Leasing Allied Waste North America, Inc. American Ref-Fuel Company of Essex County
N Leasing Allied Waste North America, Inc. American Ref-Fuel Company of Niagara, L.P.
S Leasing Allied Waste North America, Inc. American Ref-Fuel Company of Southeastern Connecticut
On April 30, 2001, the members of each of the Companies entered into a Limited
Liability Company Agreement (LLC Agreement) which governs the operations and
management of the affairs of the Companies (see Note 3).
Allied Waste North America, Inc. (Allied NA) is a subsidiary of Allied Waste
Industries, Inc. (Allied) and has a 1% ownership interest in each of the
Companies. Each of American Ref-Fuel Company of Hempstead (Hempstead), American
Ref-Fuel Company of Essex County (Essex), American Ref-Fuel Company of Niagara,
L.P. (Niagara) and American Ref-Fuel Company of Southeastern Connecticut (Seconn
and collectively, the HENS) holds a 99% ownership interest in each of the
Companies. Subsidiaries of American Ref-Fuel Company LLC (ARC) and Allied are
also the partners in the HENS, which are partnerships that own and operate
waste-to-energy power generating facilities in New York, New Jersey and
Connecticut.
Each of the Companies was formed with the purpose of acquiring, owning, leasing
and managing municipal solid waste collection or disposal vehicles, construction
equipment, refuse containers and compactors and other waste management
equipment. The Companies lease this type of equipment to subsidiaries of Allied.
On April 30, 2001, the Companies were capitalized through equity contributions
by the members of approximately $165.1 million. In connection with the
capitalization of the Companies, the partners of HENS recapitalized their
partnership interests (the Recapitalization). The terms of the Recapitalization
provided that the interest held by ARC converted to Class A interests and the
interests held by Allied converted to Class B interests. Both ARC and Allied had
separate, noncurrent rights to cause the HENS to redeem Allied's Class B
interests in the HENS for the HENS' interests in the Companies (the Redemption).
In January 2002, Allied provided notice of its intent to exercise its rights to
cause the Redemption. The Redemption was completed on April 30, 2002 and
resulted in the HENS' interests in the Companies being distributed to Allied in
redemption of Allied's Class B interests.
76
H, E, N and S Leasing Companies, LLC
Notes to Combined Financial Statements
December 31, 2001 and April 30, 2002
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies
Principles of Combination
The accompanying financial statements have been prepared on a combined basis for
all of the Companies based upon the common ownership and managerial control by
Allied NA as the Manager. All significant intercompany accounts and transactions
have been eliminated in preparing the combined financial statements.
Revenue Recognition
The Companies recognize revenue from operating lease payments for municipal
solid waste collection or disposal vehicles, construction equipment, refuse
containers and compactors and other waste management equipment leased to
subsidiaries of Allied. Revenue is recognized ratably over the term of the lease
period, generally 42 months.
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the (a) reported amounts of assets and
liabilities at the date of the financial statements, (b) disclosures of
contingent assets and liabilities at the date of the financial statements and
(c) the reported amounts of revenues and expenses recognized during the
reporting period. Significant management estimates include the estimated lives
of long-lived assets. Such estimates may be subsequently revised as deemed
necessary when additional information becomes available. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and all short-term
investments with original maturities of three months or less. The Companies
invest excess cash and cash equivalents with institutions it believes are
creditworthy.
Property and Equipment
Property and equipment, which consist of equipment under lease, are recorded at
acquisition cost. The equipment under lease consists of municipal solid waste
collection or disposal vehicles, construction equipment, refuse containers and
compactors and other waste management equipment. The Companies provide for
depreciation using the straight-line method over the estimated useful lives.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives, are charged to expense as incurred. Routine repairs and
maintenance are the responsibility of the lessees. When property is retired or
sold, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, management
periodically reviews long-lived assets and intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If factors indicate that an asset should be evaluated for
possible impairment, management compares estimated undiscounted future operating
cash flows associated with the asset to its carrying amount. If the carrying
amount of the asset is greater than undiscounted future operating cash flows, an
impairment loss is calculated and recognized. The effect of any impairment would
be to expense the difference between the fair value of such asset and its
carrying value.
77
H, E, N and S Leasing Companies, LLC
Notes to Combined Financial Statements
December 31, 2001 and April 30, 2002
- --------------------------------------------------------------------------------
Deferred Financing Costs
Deferred financing costs represent certain capitalizable costs incurred by the
Companies to finance its long-term debt obligations. These costs are amortized
to interest expense on a straight-line basis over the life of the related debt.
Income Taxes
The Companies are limited liability companies that have elected to be treated as
partnerships for tax purposes. Accordingly, income taxes are not levied at the
Companies, but rather on the individual members.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable and debt approximate fair values due to the short-term maturities of
these instruments and the variable rates of interest on the debt.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. SFAS 145 requires that most gains
and losses from the extinguishment of debt no longer be classified as
extraordinary items and that they are recorded in the results of operations. In
addition, SFAS 145 amends FASB Statement No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
standard is effective for the Companies as of January 1, 2003 and is not
expected to have a material effect on the Companies' combined financial
position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. In addition, FIN 45 requires
disclosures about the guarantees that an entity has issued. The Companies will
apply the recognition provisions of FIN 45 prospectively to guarantees issued
after December 31, 2002, which is not expected to have a material effect on the
Companies' combined financial position, results of operations or cash flows.
3. Limited Liability Company Agreement
Allied NA, as the manager of each Company, has been delegated the rights and
responsibilities to operate and manage the Companies. The manager is fully
responsible for maintaining the books and records of the Companies and in
preparing required financial statements and reports related to the operating
results and financial position of the Companies. The manager, in accordance with
the agreement, is entitled to an annual fee of $100,000 for each Company,
payable quarterly, in consideration of accounting and administrative services
performed by the manager on behalf of the Companies. Amounts incurred by the
Companies related to such management fees amounted to $267,000 and $133,000 for
the periods April 30, 2001 to December 31, 2001 and January 1, 2002 to April 30,
2002, respectively. As of December 31, 2001 and April 30, 2002, there were no
amounts outstanding to Allied NA.
The LLC Agreement provides that profits and losses of the Companies are to be
allocated to each of the members in accordance with their percentage interests.
Distributions by the Companies, if any, are also to be made to the members pro
rata based upon their percentage interests and the unanimous agreement of the
members.
78
H, E, N and S Leasing Companies, LLC
Notes to Combined Financial Statements
December 31, 2001 and April 30, 2002
- --------------------------------------------------------------------------------
4. Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31, April 30,
Useful Life 2001 2002"
----------------------------------------------
Vehicles and equipment 3-15 years $181,672 $360,174
Waste containers and compactors 5-10 years 41,046 57,042
Construction in progress 1,575 -
-------------------------------
Total property and equipment 224,293 417,216
Accumulated depreciation (10,841) (21,438)
-------------------------------
Property and equipment, net $213,452 $395,778
===============================
5. Other Long-term Assets
Other long-term assets consisted of the following (in thousands):
December 31, April 30,
Useful Life 2001 2002
---------------------------------------------
Deferred financing costs, net 5 years $9,877 $10,231
Accumulated amortization (1,300) (1,981)
-------------------------------
Other long-term assets, net $8,577 $8,250
===============================
The deferred financing costs were incurred in connection with the Companies
entering into a credit agreement for long-term debt with a lender (see Note 7).
The Companies recorded amortization expense related to the deferred financing
costs for the periods April 30, 2001 to December 31, 2001 and January 1, 2002 to
April 30, 2002 of $1,300 and $681, respectively, which is included in interest
expense on the accompanying combined statements of operations.
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in thousands):
December 31, April 30,
2001 2002
-------------------------------
Accounts payable $2,546 $11,435
Accrued expenses 3,708 45
Accrued sales tax payable 1 521
-------------------------------
$6,255 $12,001
===============================
7. Long-Term Debt
On April 30, 2001, each of the Companies entered into a credit agreement (the
Credit Agreements) with a third party leader. The Credit Agreements provide for
term loans of up to $283.5 million to be borrowed by the Companies (the Term
Loans). The amount of borrowings available for each Company as of April 30, 2002
under the Credit Agreements are as follows (in thousands):
79
H, E, N and S Leasing Companies, LLC
Notes to Combined Financial Statements
December 31, 2001 and April 30, 2002
- --------------------------------------------------------------------------------
H Leasing Company $8,052
E Leasing Company 6,004
N Leasing Company 3,300
S Leasing Company 4,444
-----------------
Total $21,800
=================
Pursuant to cross guarantee provisions of the Credit Agreements, each of the
Companies is a guarantor of each of the other Company's obligations under the
Credit Agreements. Amounts borrowed under the Credit Agreements are to be used
solely for the purchase of vehicles, construction equipment, commercial
equipment and other equipment leased in the normal course of the Companies'
leasing business, including certain limited quantities of used equipment.
The Term Loans bear interest which, at each of the Companies' option, is based
on the index rate, as defined, plus 2.0 percent or the LIBOR rate, as defined,
plus 4.5 percent. Commitment fees of 0.5 percent are payable by the Companies on
the undrawn portion of the amounts available under the Credit Agreements.
Long-term debt outstanding and average interest rates for the Companies
consisted of the following (amounts in thousands, except percentages):
Average Interest Rate December 31, April 30,
---------------------
2001 2002 2001 2002
--------------------------------------------------
H Leasing Company 7.57% 4.91% $20,213 $81,383
E Leasing Company 9.47% 4.96% 18,025 73,785
N Leasing Company 9.62% 4.96% 10,625 42,419
S Leasing Company 7.92% 4.93% 17,062 49,076
-----------------------------
Total 65,925 246,663
Less - Current portion 8,550 39,255
-----------------------------
Total long-term debt $57,375 $207,408
=============================
The Credit Agreements contain restrictions on, among other things, new
borrowings and certain restricted payments, as defined, including dividends.
Substantially all of the assets and receipts under leases entered into by the
Companies are pledged as collateral. The lender maintains a collateral interest
in the funding and debt service accounts for the term of the Credit Agreements.
The aggregate amounts of maturities of long-term debt for the next five years
and thereafter as of April 30, 2002 are as follows (in thousands):
2002 $19,628
2003 39,255
2004 39,255
2005 39,255
2006 109,270
-------------------
$246,663
===================
8. Master Lease Agreement
The LLC Agreement also provides a form of Master Lease Agreement for the
Companies in their lease of equipment to subsidiaries of Allied. The master
80
H, E, N and S Leasing Companies, LLC
Notes to Combined Financial Statements
December 31, 2001 and April 30, 2002
- --------------------------------------------------------------------------------
lease provides for the major financial terms upon which the Companies lease
equipment, including a term of 42 months and lease factors to determine monthly
payments based upon the acquisition cost of the equipment. The lessees are
responsible for all the operating and maintenance costs of the equipment under
lease. The lessees can purchase the leased equipment at fair market value, as
defined in the master lease, at the end of the lease term. All of the leases by
the Companies qualify as operating leases.
Total future minimum lease payments receivable as of April 30, 2002 were as
follows (in thousands):
2002 $76,423
2003 114,634
2004 110,668
2005 39,380
-------------------
$341,105
===================
81
Item 9. Changes in and Disagreements with Accountants on Financial Disclosure
None.
Item 9A. Controls and Procedures
MSW Energy Holdings
As of December 31, 2003, the Chief Executive Officer and Chief Financial Officer
of MSW Energy Holdings evaluated the effectiveness of its disclosure controls
and procedures pursuant to applicable Exchange Act Rules. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have each
concluded that these disclosure controls and procedures are effective in timely
alerting them to material information relating to the company (including its
consolidated subsidiaries) that is required to be included in MSW Energy
Holdings' periodic SEC filings.
There were no significant changes in internal controls or in other factors that
could significantly affect these controls for the quarter ended December 31,
2003.
MSW Energy Finance
As of December 31, 2003, the Chief Executive Officer and Chief Financial Officer
of MSW Energy Finance evaluated the effectiveness of the company's disclosure
controls and procedures pursuant to applicable Exchange Act Rules. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer have
each concluded that these disclosure controls and procedures are effective in
timely alerting them to material information relating to the company (including
its consolidated subsidiaries) that is required to be included in MSW Energy
Finance's periodic SEC filings.
There were no significant changes in internal controls or in other factors that
could significantly affect these controls for the quarter ended December 31,
2003.
PART III
Item 10. Directors and Executive Officers of the Registrant
MSW Energy Holdings
The following table gives the name, age and position of each of our officers and
members of our Board of Directors as of December 31, 2003. Each of directors,
other than Mr. Panaccione, is also a director of Ref-Fuel Holdings and American
Ref-Fuel.
Name Age Position
- ------------------------------------------------------------
Marc C. Baliotti 33 Director
Ari Benacerraf 39 Director
Michael J. Miller 44 Director
Andrew T. Panaccione 42 Director
Michael W. Ranger 45 Director
John T. Miller 57 Chief Executive Officer(1)
Michael J. Gruppuso Chief Financial Officer, Vice
42 President and Secretary(2)
(1) John T. Miller became Chief Executive Officer effective December 12, 2003.
Prior to that date Michael J. Miller served in that capacity.
(2) Michael J. Gruppuso became Chief Financial Officer, Vice President and
Secretary effective December 12, 2003. Prior to that date Daniel H. Clare served
82
as Chief Financial Officer and Treasurer until July 30, 2003 and William Whitman
served as Chief Financial Officer and Treasurer from July 30, 2003 until
December 12, 2003. Mr. Clare served as Secretary until December 12, 2003.
Marc C. Baliotti is one of our directors. He joined AIG Global Investment
Corp. in April 2002 and is a Principal of AIG Highstar II GP, L.P. Mr. Baliotti
previously worked as a consultant to Advanstar Communications Inc. from April
2001 to April 2002, as a Vice President with Bluevector, LLC (private equity
affiliate of marchFIRST) from April 2000 to April 2001 and as an Associate with
Donaldson Lufkin & Jenrette in its Merchant Banking Group from September 1997 to
April 2000. Mr. Baliotti is a graduate of the United States Naval Academy and
received an M.B.A. from Villanova University while on active duty in the U.S.
Navy.
Ari Benacerraf is one of our directors. He has been a Managing Director of
Credit Suisse First Boston LLC in the Merchant Banking Group since 2001. Mr.
Benacerraf joined CSFB at that time upon the merger with Donaldson, Lufkin &
Jenrette, where he had been a Vice President and Senior Vice President in the
Merchant Banking Group since 1995. Mr. Benacerraf serves on the board of
directors of MSW Energy II, Seabulk International, Inc., Frontier Drilling ASA,
Localiza Rent-a-Car S.A. and Amatek Holdings S.A. Mr. Benacerraf holds an M.B.A.
degree from the Johnson School of Management at Cornell University.
Michael J. Gruppuso is our Chief Financial Officer, Vice President and
Secretary. He has served as Vice President and Chief Financial Officer of ARC
Management Company since March 2002. Mr. Gruppuso joined ARC Management Company
in 1991 and served in several financial and managerial positions, most recently
Corporate Controller. Mr. Gruppuso also serves as Chief Financial Officer of MSW
Energy II. Prior to joining ARC Management Company, Mr. Gruppuso was employed by
KTI Energy, Inc. from 1985 to 1991, an owner of WTE projects, where he served as
Vice President, Finance. Prior to KTI, he was a Senior Tax Consultant for Ernst
& Young from 1983 to 1985. Mr. Gruppuso received a Bachelor of Science in
Finance and Accounting from New York University in 1983.
John T. Miller is our Chief Executive Officer. He has served as Chief
Executive Officer of ARC Management Company since November 2001. As Chief
Executive Officer, Mr. Miller is responsible for the overall management and
direction of American Ref-Fuel. Mr. Miller joined American Ref-Fuel in March
1998 as Vice President and Chief Financial Officer. Before joining ARC
Management Company, Mr. Miller was employed by E-Z Serve Corporation, a gasoline
retailer and convenience store operator, where he served as Chief Financial
Officer. His duties there included a key role in the company's spin-off as a
separate publicly traded company, and the subsequent negotiation of four
acquisitions and related financings that added more than $100 million of
enterprise value. Prior to his role at E-Z Serve, Mr. Miller was employed by
Gotco Ltd. (4 years); Gulf Oil Corporation (11 years) and Ernst & Young (4
years). Mr. Miller attended John Carroll University in Cleveland, Ohio, where he
received a Bachelor of Science degree in Business Administration. He attended
the U.S. Army Officer Candidate School in Virginia and served as a Commissioned
Officer for two years.
Michael J. Miller is one of our directors. He joined AIG Global Investment
Corp. in December 2001 and is a Managing Director of AIG Highstar II GP, L.P.
Mr. Miller previously worked as a Vice President with Enron North America (ENA)
from February 1997 to April 2001 and as a Vice President with Enron Corp. from
April 2001 to December 2001. At ENA, Mr. Miller led a group that developed and
constructed over 3,000 megawatts of electric generation projects throughout the
eastern United States. Mr. Miller, who received his B.S. from Rensselaer
Polytechnic Institute and his M.B.A. from the University of Chicago, holds the
Certified Financial Analyst designation.
Andrew T. Panaccione is our independent director and the President of
Entity Services Group, LLC. We are required to include an independent director
on our Board of Directors in order to meet rating agency requirements. Mr.
Panaccione also serves as the independent director of MSW Energy II. Before
joining Entity Services Group in 1993, Mr. Panaccione worked for over seven
years in the commercial real estate field. Prior to that, Mr. Panaccione was an
auditor for Arthur Andersen. Mr. Panaccione graduated cum laude from the
University of Delaware with a Bachelor of Science degree in accounting.
Michael W. Ranger is one of our directors. Mr. Ranger has been a Managing
Director of Global Energy Partners, an affiliate of CSFB Private Equity,
overseeing private equity investments in the energy and power industries since
83
2002. Mr. Ranger joined CSFB upon the merger with Donaldson, Lufkin & Jenrette
in 2000, where he was a Managing Director in the Energy Group and Head of
Domestic Power until 2001. Mr. Ranger previously served as a Managing Director
and head of the Global Energy and Power Group of Donaldson, Lufkin & Jenrette
from 1990 to 2000. Mr. Ranger serves on the board of directors of MSW Energy II
and TXU Corp. and is a member of the board of managers of TXU Energy Company,
LLC. He is a graduate of St. Lawrence University.
Audit Committee
This committee oversees the financial reporting process; reviews the annual
and quarterly financial statements; recommends to the full board the appointment
of the independent accountants and evaluates their performance and fees charged;
meets with the independent accountants and with appropriate financial personnel
regarding corporate financial reporting, accounting procedures and controls, and
the scope of independent audits; and evaluates officers' compliance with ethics
policies, national and state laws and regulations related to securities,
criminal conduct and the environment. Messrs. Baliotti, Benacerraf, Miller and
Ranger are the members of the Audit Committee, and Mr. Ranger is its chair. The
Board of Directors has determined that Mr. Ranger is a financial expert (as
defined by the Securities and Exchange Commission).
MSW Energy Holdings has adopted a Code of Ethics which applies to the chief
executive officer, principal financial and accounting officers of MSW Energy
Holdings. The Code of Ethics may be accessed at the MSW Energy Holdings website
at http:// www.mswenergy.com. Printed copies may be obtained without charge by
writing to the Corporate Secretary, MSW Energy Holdings, 155 Chestnut Ridge
Road, Montvale, NJ 07645.
Amendments to the Code or waivers of the Code as required by Regulation
S-K, Item 406 will be posted on the website referred to above.
Item 11. Executive Compensation
MSW Energy Holdings
None of our directors or officers, all of whom are employed by Ref-Fuel
Holdings, AIGGIG or CSFB Private Equity or their affiliates, are separately
compensated by us for their service as directors and officers.
We pay an annual fee of approximately $2,500 to Entity Services Group, LLC
for the services of Mr. Panaccione, our independent director. In addition,
pursuant to a consulting agreement dated July 30, 2003, we paid Mr. Whitman, who
was our Chief Financial Officer for a portion of the year 2003, a monthly fee of
$12,500 for his advisory and consulting services during 2003. Mr. Whitman's
consulting agreement is no longer in effect.
Item 12. Security Ownership of Certain Beneficial Owners and Management
MSW Energy Holdings
The following table sets forth information with respect to the beneficial
ownership of our membership interests as of March 1, 2004 by:
-- each person known to own beneficially more than 5% of our membership
interests;
-- each of our directors and executive officers; and
-- all of our directors and executive officers as a group.
The amounts and percentages of membership interests beneficially owned are
reported on the basis of SEC regulations governing the determination of
beneficial ownership of securities. Under SEC rules, a person is deemed to be a
"beneficial" owner of a security if that person has or shares voting power or
investment power, which includes the power to dispose of or to direct the
84
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Securities that can be so acquired are deemed to be
outstanding for purposes of computing any other person's percentage. Under these
rules, more than one person may be deemed to be a beneficial owner of the same
securities and a person may be deemed to be a beneficial owner of securities as
to which such person has no economic interest.
Each of our two beneficial owners listed has, to our knowledge, sole voting
and investment power with respect to all of our membership interests.
Beneficial Ownership
of MSW Energy
Holdings
---------------------
Percentage of
Outstanding
Name of Beneficial Owner Membership Interests
- -------------------------------------------------------------------------------------
Highstar Renewable Fuels LLC(1) 50%
MSW Acquisition LLC(2) 50%
Directors:
Marc C. Baliotti(3) --
Ari Benacerraf(4) --
Michael J. Miller(3) --
Michael W. Ranger(4) --
Andrew T. Panaccione(5) --
All executive officers and directors as a group (7 persons) --
(1) Highstar is an affiliate of AIGGIG. Highstar Renewable Fuels' business
address is 599 Lexington Avenue, 25thFloor, New York, New York 10022.
(2) MSW Acquisition LLC is an affiliate of CSFB Private Equity. CSFB Private
Equity's business address is 11 Madison Avenue, New York, New York 10010.
(3) Messrs. Baliotti and Michael J. Miller are affiliated with AIGGIG, of which
Highstar Renewable Fuels LLC is an affiliate. Membership interests shown
for Messrs. Baliotti and Michael J. Miller exclude membership interests
shown as held by Highstar Renewable Fuels LLC, as to which Messrs. Baliotti
and Michael J. Miller disclaim beneficial ownership. The business address
of each of Messrs. Baliotti and Michael J. Miller is 599 Lexington Avenue,
25th Floor, New York, New York 10022.
(4) Messrs. Benacerraf and Ranger are affiliated with CSFB Private Equity, of
which MSW Acquisition LLC is an affiliate. Membership interests shown for
Messrs. Benacerraf and Ranger exclude membership interests shown as held by
MSW Acquisition LLC, as to which Messrs. Benacerraf and Ranger disclaim
beneficial ownership. The business address of each of Messrs. Benacerraf
and Ranger is 11 Madison Avenue, New York, New York 10010.
(5) The business address of Mr. Panaccione, our independent director, is Entity
Services Group, LLC, 103 Foulk Road, Suite 100, Wilmington, Delaware 19803.
Item 13. Certain Relationships and Related Transactions
None of our other directors or officers, all of whom are employed either by
AIG Global Investment Corp. or CSFB Private Equity or their affiliates, are
separately compensated by us for their service as directors and officers.
CSFB Private Equity and Highstar, which is an affiliate of AIGGIG,
collectively beneficially own 100% of our membership interests. CSFB Private
Equity is a wholly-owned subsidiary of Credit Suisse First Boston (USA), Inc.
AIGGIG is a subsidiary of AIG.
Credit Suisse First Boston LLC (''CSFB LLC'') acted as our financial
advisor and was the initial purchaser of the Senior Notes. In addition, CSFB LLC
committed to underwrite a bridge loan to the Company for the acquisition from
Duke Energy in the event that we did not close the sale of the Senior Notes.
Total fees paid to CSFB LLC for these services were $11.9 million of which $5.9
million is included in acquisition costs (as a component of the purchase price)
and $6.0 million is included in deferred financing fees in 2003.
Other than with respect to our independent director, our entire board has
been designated by AIGGIG or CSFB Private Equity or their affiliates. In
addition, affiliates of AIGGIG and CSFB Private Equity control the appointment
of our management, the entering into of mergers, sales of substantially all of
our assets and other extraordinary transactions.
In addition, CSFB issued a letter of credit on behalf of the CSFB Private
Equity Investor for the benefit of our letter of credit provider in connection
85
with our obligations under the equity contribution agreement. CSFB also issued a
letter of credit on behalf of MSW Acquisition LLC for the benefit of Highstar,
which letter of credit is no longer outstanding.
CSFB or its affiliates may in the future engage in investment banking and
other services with us or Ref-Fuel Holdings or its subsidiaries, for which CSFB
or its affiliates will receive customary compensation.
Subsidiaries of AIG have issued existing insurance policies to us and
American Ref-Fuel, for which the AIG insurance company subsidiaries receive
customary annual premiums. The Insurance Company of Pennsylvania, an AIG
subsidiary, has issued surety bonds on behalf of several American Ref-Fuel
affiliates, for which the Insurance Company of Pennsylvania receives customary
annual premiums. In addition, insurance company subsidiaries of AIG may in the
future provide insurance and surety bonds to us or Ref-Fuel Holdings or its
subsidiaries.
MSW Merger LLC, through a wholly owned subsidiary, beneficially owns 100%
of the membership interests of MSW Energy II, which, after giving effect to the
UAE Transactions, will hold the 50% membership interest in Ref-Fuel Holdings
that is currently owned by UAE Holdings. MSW Merger is a wholly owned subsidiary
of CSFB Private Equity.
Item 14. Principal Accountant Fees and Services
The following table sets forth the fees billed or expected to be billed by
the independent accountants to MSW Energy Holdings and MSW Energy Finance for
the fiscal period ended December 31, 2003.
Fees Billed 2003
(in thousands)
Audit fees $799
Audit-related fees 355
Tax fees -
All other fees -
-------------------
Total fees $1,154
===================
Audit Fees are those fees for professional services rendered in connection
with: the audit of the Company's consolidated financial statements for the
fiscal period ended December 31, 2003; the review of the Company's quarterly
consolidated financial statements on Form 10-Qs that are customary under
auditing standards generally accepted in the United States; and fees associated
with the Company's debt offering and Form S-4 filing to register the Senior
Notes. Audit-related fees consisted primarily of services rendered in connection
with the reaudit of Ref-Fuel Holdings Consolidated Financial Statements for the
years ended December 31, 2001 and 2000. It is expected that
PricewaterhouseCoopers LLP will provide similar nonaudit services during fiscal
2004. The Audit Committee reviewed and approved in advance the audit and
nonaudit services rendered by PricewaterhouseCoopers LLP during fiscal 2003 and
has considered and concluded that the provision of the nonaudit services is
compatible with maintaining the independence of PricewaterhouseCoopers LLP.
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Formation of MSW Energy Holdings LLC.*
3.2 Amended and Restated Limited Liability Company Agreement of MSW Energy
Holdings LLC, dated as of June 24, 2003, by and between Highstar
Renewable Fuels LLC and MSW Acquisition LLC.*
86
3.3 Amended and Restated Certificate of Incorporation of MSW Energy
Finance Co., Inc.*
3.4 Bylaws of MSW Energy Finance Co., Inc.*
3.5 Certificate of Amendment to the Certificate of Formation of MSW Energy
Hudson LLC.*
3.6 Second Amended and Restated Limited Liability Company Agreement of MSW
Energy Hudson LLC, dated as of June 30, 2003, by MSW Energy Holdings
LLC.*
4.1 Indenture dated June 25, 2003, by and among MSW Energy Holdings LLC,
MSW Energy Finance Co., Inc. and Wells Fargo Bank Minnesota, National
Association as Trustee.*
4.2 Supplemental Indenture dated July 11, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc., MSW Energy Hudson LLC and
Wells Fargo Bank Minnesota, National Association as Trustee.*
4.3 Form of 81/2% Senior Secured Note Due 2010 (included in Exhibit 4.1).*
4.4 Registration Rights Agreement dated as of June 25, 2003, by and among
MSW Energy Holdings LLC, MSW Energy Finance Co. Inc., MSW Energy
Hudson LLC and Credit Suisse First Boston LLC.*
4.5 Pledge and Security Agreement dated as of June 25, 2003, by and among
MSW Energy Holdings LLC, MSW Energy Finance Co., Inc. and Wells Fargo
Bank Minnesota, National Association as Collateral Agent.*
4.6 Pledge Supplement dated as of June 30, 2003 by MSW Energy Hudson LLC.*
4.7 Deposit Agreement, dated as of June 25, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc. and Wells Fargo Bank
Minnesota, National Association as Collateral Agent and Depositary
Agent, as amended.*
4.8 Purchase Agreement, dated as of June 11, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc., MSW Energy Hudson LLC and
Credit Suisse First Boston LLC.*
10.1 Amended and Restated Capital Contribution Agreement, dated as of June
24, 2003, by and between Highstar Renewable Fuels LLC and MSW
Acquisition LLC.*
10.2 Agreement, dated as of June 30, 2003, by and between MSW Energy
Holdings LLC and Duke Capital Corporation.*
10.3 Escrow Agreement, dated as of June 30, 2003, by and among MSW Energy
Holdings LLC, Duke Capital Corporation and Wachovia Bank, National
Association.*
10.4 Amended and Restated Limited Liability Company Agreement of Ref-Fuel
Holdings LLC, dated as of April 30, 2001, by and between Duke Energy
Global Asset Development, Inc. and UAE Ref-Fuel LLC, as amended.*
10.5 Equity Contribution Agreement, dated as of April 30, 2001, by and
among Duke Capital Corporation, United American Energy Corp., Ref-Fuel
Holdings LLC (formerly known as Duke/UAE Ref-Fuel LLC) and American
Ref-Fuel Company LLC.*
87
10.6 Substitution, Assumption, Amendment and Release Agreement, dated as of
June 30, 2003, by and among Duke Capital Corporation, United American
Energy Corp., Ref-Fuel Holdings LLC (formerly known as Duke/UAE
Ref-Fuel LLC), American Ref-Fuel Company LLC, and MSW Energy Holdings
LLC.*
10.7 Equity Purchase Agreement, dated as of March 19, 2003, by and between
MSW Energy Holdings LLC and Duke Energy Global Markets, Inc.*
12 Statement re Computation of Ratio of Earnings to Fixed Charges
14(a) Code of Ethics of MSW Energy Holdings LLC.
14(b) Code of Ethics for MSW Energy Finance Co., Inc.
21.1 Subsidiaries of MSW Energy Holdings LLC.
31(a) 15d-14(a) Certification of John T. Miller for MSW Energy Holdings
LLC.
31(b) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy
Holdings LLC.
31(c) 15d-14(a) Certification of John T. Miller for MSW Energy Finance Co.,
Inc.
31(d) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy Finance
Co., Inc.
32(a) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Holdings LLC.
32(b) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Finance Co., Inc.
* Incorporated by Reference to Registration Statement No. 333-109049.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because they are not
applicable or because the required information is contained in the financial
statements or notes thereto.
(c) Reports on Form 8-K
None
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, MSW Energy Holdings LLC has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
MSW ENERGY HOLDINGS LLC
By: /s/ John T. Miller
----------------------------
John T. Miller
Chief Executive Officer
Date: March 30, 2004
--------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
- --------------------------------------------------------------------------------
/s/ John T. Miller Chief Executive Officer March 30, 2004
- ------------------------------- (Principal Executive Officer)
John T. Miller
/s/ Michael J. Gruppuso Chief Financial Officer March 30, 2004
- ------------------------------- (Principal Financial and
Michael J. Gruppuso Accounting Officer)
/s/ Marc C. Baliotti Director March 30, 2004
- -------------------------------
Marc C. Baliotti
/s/ Ari Benacerraf Director March 30, 2004
- -------------------------------
Ari Benacerraf
/s/ Michael J. Miller Director March 30, 2004
- -------------------------------
Michael J. Miller
/s/ Andrew T. Panaccione Director March 30, 2004
- -------------------------------
Andrew T. Panaccione
/s/ Michael W. Ranger Director March 30, 2004
- -------------------------------
Michael W. Ranger
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, MSW Energy Finance Co., Inc. has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MSW ENERGY HOLDINGS LLC
By: /s/ John T. Miller
----------------------------
John T. Miller
Chief Executive Officer
Date: March 30, 2004
--------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
- --------------------------------------------------------------------------------
/s/ John T. Miller Chief Executive Officer March 30, 2004
- ------------------------------- (Principal Executive Officer)
John T. Miller
/s/ Michael J. Gruppuso Chief Financial Officer March 30, 2004
- ------------------------------- (Principal Financial and
Michael J. Gruppuso Accounting Officer)
/s/ Marc C. Baliotti Director March 30, 2004
- -------------------------------
Marc C. Baliotti
/s/ Ari Benacerraf Director March 30, 2004
- -------------------------------
Ari Benacerraf
/s/ Michael J. Miller Director March 30, 2004
- -------------------------------
Michael J. Miller
/s/ Andrew T. Panaccione Director March 30, 2004
- -------------------------------
Andrew T. Panaccione
/s/ Michael W. Ranger Director March 30, 2004
- -------------------------------
Michael W. Ranger
90
EXHIBIT INDEX
3.1 Certificate of Formation of MSW Energy Holdings LLC.*
3.2 Amended and Restated Limited Liability Company Agreement of MSW Energy
Holdings LLC, dated as of June 24, 2003, by and between Highstar
Renewable Fuels LLC and MSW Acquisition LLC.*
3.3 Amended and Restated Certificate of Incorporation of MSW Energy
Finance Co., Inc.*
3.4 Bylaws of MSW Energy Finance Co., Inc.*
3.5 Certificate of Amendment to the Certificate of Formation of MSW Energy
Hudson LLC.*
3.6 Second Amended and Restated Limited Liability Company Agreement of MSW
Energy Hudson LLC, dated as of June 30, 2003, by MSW Energy Holdings
LLC.*
4.1 Indenture dated June 25, 2003, by and among MSW Energy Holdings LLC,
MSW Energy Finance Co., Inc. and Wells Fargo Bank Minnesota, National
Association as Trustee.*
4.2 Supplemental Indenture dated July 11, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc., MSW Energy Hudson LLC and
Wells Fargo Bank Minnesota, National Association as Trustee.*
4.3 Form of 81/2% Senior Secured Note Due 2010 (included in Exhibit 4.1).*
4.4 Registration Rights Agreement dated as of June 25, 2003, by and among
MSW Energy Holdings LLC, MSW Energy Finance Co. Inc., MSW Energy
Hudson LLC and Credit Suisse First Boston LLC.*
4.5 Pledge and Security Agreement dated as of June 25, 2003, by and among
MSW Energy Holdings LLC, MSW Energy Finance Co., Inc. and Wells Fargo
Bank Minnesota, National Association as Collateral Agent.*
4.6 Pledge Supplement dated as of June 30, 2003 by MSW Energy Hudson LLC.*
4.7 Deposit Agreement, dated as of June 25, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc. and Wells Fargo Bank
Minnesota, National Association as Collateral Agent and Depositary
Agent, as amended.*
4.8 Purchase Agreement, dated as of June 11, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc., MSW Energy Hudson LLC and
Credit Suisse First Boston LLC.*
10.1 Amended and Restated Capital Contribution Agreement, dated as of June
24, 2003, by and between Highstar Renewable Fuels LLC and MSW
Acquisition LLC.*
10.2 Agreement, dated as of June 30, 2003, by and between MSW Energy
Holdings LLC and Duke Capital Corporation.*
10.3 Escrow Agreement, dated as of June 30, 2003, by and among MSW Energy
Holdings LLC, Duke Capital Corporation and Wachovia Bank, National
Association.*
91
10.4 Consulting Agreement, dated as of July 30, 2003, by and between MSW
Energy Holdings LLC and William E. Whitman.*
10.5 Amended and Restated Limited Liability Company Agreement of Ref-Fuel
Holdings LLC, dated as of April 30, 2001, by and between Duke Energy
Global Asset Development, Inc. and UAE Ref-Fuel LLC, as amended.*
10.6 Equity Contribution Agreement, dated as of April 30, 2001, by and
among Duke Capital Corporation, United American Energy Corp., Ref-Fuel
Holdings LLC (formerly known as Duke/UAE Ref-Fuel LLC) and American
Ref-Fuel Company LLC.*
10.7 Substitution, Assumption, Amendment and Release Agreement, dated as of
June 30, 2003, by and among Duke Capital Corporation, United American
Energy Corp., Ref-Fuel Holdings LLC (formerly known as Duke/UAE
Ref-Fuel LLC), American Ref-Fuel Company LLC, and MSW Energy Holdings
LLC.*
10.8 Equity Purchase Agreement, dated as of March 19, 2003, by and between
MSW Energy Holdings LLC and Duke Energy Global Markets, Inc.*
12 Statement re Computation of Ratio of Earnings to Fixed Charges
14(a) Code of Ethics for MSW Energy Holdings LLC
14(b) Code of Ethics for MSW Energy Finance Co., Inc.
21.1 Subsidiaries of MSW Energy Holdings LLC.*
31(a) 15d-14(a) Certification of John T. Miller for MSW Energy Holdings
LLC.
31(b) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy
Holdings LLC.
31(c) 15d-14(a) Certification of John T. Miller for MSW Energy Finance Co.,
Inc.
31(d) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy Finance
Co., Inc.
32(a) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Holdings LLC.
32(b) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Finance Co., Inc.
* Incorporated by Reference to Registration No. 333-109049.
92
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