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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
0001276518 MSW Energy Holdings II LLC Delaware 13-3213489
0001276517 MSW Energy Finance Co. Delaware 20-0400947
II, Inc.
Commission File Number (Exact name of each (State or other (I.R.S. Employer
registrant as specified in jurisdiction of Identification
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 II LLC: yes [ ] no [X]
MSW Energy Finance Co., II Inc: yes [ ] no [X]
Aggregate market value of voting and non-voting common stock held by
nonaffiliates:
MSW Energy Holdings II LLC: None
MSW Energy Finance Co., II 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 II LLC: None
MSW Energy Finance Co., II Inc: 100 shares of Common Stock
Documents Incorporated by Reference: None
MSW Energy Finance Co. II, 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.
TABLE OF CONTENTS
Part I....................................................................................................................1
Item 1. Business..........................................................................................................1
Item 2. Properties.......................................................................................................8
Item 3. Legal Proceedings................................................................................................9
Item 4. Submission of Matters to a Vote of Security Holders.............................................................10
PART II..................................................................................................................10
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters and Purchases of Equity Securities........10
Item 6. Selected Financial Data.........................................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.....................................................20
Item 8. Financial Statements and Supplementary Data......................................................................23
Item 9. Changes in and Disagreements with Accountants on Financial Disclosure............................................47
Item 9A. Controls and Procedures........................................................................................47
PART III.................................................................................................................47
Item 10. Directors and Executive Officers of the Registrant.............................................................47
Item 11. Executive Compensation.........................................................................................50
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................53
Item 13. Certain Relationships and Related Transactions.................................................................54
Item 14. Principal Accountant Fees and Services.........................................................................54
Part IV..................................................................................................................55
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................55
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", "us" and "Company" refer only to MSW Energy
Holdings II and its subsidiaries; 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
MSW Energy Holdings II LLC (MSW Energy Holdings II and collectively
hereinafter with its subsidiaries, referred to as the Company), a Delaware
limited liability company formed in August 2003 and its wholly-owned subsidiary,
MSW Energy Finance Co. II, Inc. (MSW Finance II), a Delaware corporation, were
formed for the purpose of issuing debt, the proceeds of which, along with
capital contributions, were used to fund the merger of MSW Merger LLC (MSW
Merger), the Company's indirect parent, with and into American Ref-Fuel Holdings
Corp. (Holdings Corp., formerly known as United American Energy Holdings Corp.)
(the Merger). After the Merger, Ref-Fuel II Corp. (Ref-Fuel II, formerly known
as UAE Ref-Fuel II Corp.), a Delaware corporation, an indirect subsidiary of
Holdings Corp., became a subsidiary of MSW Energy Holdings II. The Merger was
completed on December 12, 2003 (see Note 3). After completion of the Merger, MSW
Energy Holdings II held a direct 49.9% capital interest in Ref-Fuel Holdings LLC
(Ref-Fuel Holdings) and wholly owns Ref-Fuel II, which owned a 0.1% capital
interest in Ref-Fuel Holdings. Both interests were contributed to MSW Energy
Holdings II by Holdings Corp. Ref-Fuel Holdings owns 100% of American Ref-Fuel
Company LLC (ARC, American Ref-Fuel or ARC LLC). American Ref-Fuel, through
subsidiaries, owns and operates six waste-to-energy (WTE) facilities in the
northeast United States. From inception (August 20, 2003) through December 12,
2003, MSW Energy Holdings II did not have any operations, other than incurring
interest on its debt.
On April 30, 2004, MSW Energy Holdings II's indirect owner, Holdings Corp.
entered into a series of transactions (Equalization Transactions) which changed
its ownership structure. As a result, Holdings Corp. is owned 60% by several
private equity funds (the DLJMB Funds), each of which is managed by entities
affiliated with Credit Suisse First Boston Private Equity, Inc. (CSFB Private
Equity), and 40% by several investment funds (the Highstar Funds) managed by AIG
Global Investment Corp. (AIGGIC).
Also as a result of the Equalization Transactions, MSW Energy Holdings LLC
(MSW Energy Holdings), which holds a 49.8% membership interest in Ref-Fuel
Holdings, was owned (i) 60% by MSW Acquisition LLC, an affiliate of CSFB Private
Equity, (ii) 39.99% collectively by entities managed by AIGGIC, and (iii) 0.01%
by Holdings Corp., who was named the managing member.
The Equalization Transactions resulted in the DLJMB Funds collectively
owning a 60% indirect interest in MSW Energy Holdings II and the Highstar Funds
collectively owning a 40% indirect interest in MSW Energy Holdings II.
On August 31, 2004, Holdings Corp., the DLJMB Funds and the Highstar Funds
effected a series of transactions that resulted in Holdings Corp. becoming the
indirect parent of MSW Energy Holdings (August 31 Transactions).
After the Equalization Transactions, Holdings Corp. controls the operations
of Ref-Fuel Holdings as 99.8% of the interests in Ref-Fuel Holdings are owned by
the Company and MSW Energy Holdings (effective as of April 30, 2004). As a
result, the Company has effective control of Ref-Fuel Holdings, and is therefore
consolidating its results of operations and cash flows for the period from May
1, 2004, and the balance sheet as of April 30, 2004. The minority interests
shown relate to MSW Energy Holdings' 49.8% and Duke's 0.2% interest in Ref-Fuel
Holdings.
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
1
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 substantially all 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
-------- ------------------------
Date of
Commercial
Waste Service Operation/
Disposal Electric Agreements/ Electricity Date Acquired by
Operating (tons Generating Disposal Sales American
Facility Location per day) (megawatts) Contracts Contracts Ref-Fuel
- --------- ----------- --------- ----------- ----------- ------------ -----------------
Hempstead Hempstead, NY 2,671 72 2009 2009 1989
Essex Newark, NJ 2,700 70 2020 2021 1991
Seconn Preston, CT 689 18 2015 2017 1992
Niagara Niagara Falls, NY 2,250 50 2007-2012 2014 1980/1993
Semass Rochester, MA 2,700 79 2004-2016 2015 1989/1996
Delaware Chester, PA 2,688 79 2017 2016 1992/1997(1)
Valley
(1) Date acquired for the Delaware Valley facility refers to the date of
acquisition by Browning Ferris Industries (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.
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. (TransRiver), a waste procurement company. In addition to
providing waste procurement services to American Ref-Fuel, TransRiver owns a
885-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) 2000 2001 2002 2003 2004
- -------------------------------- ---- ---- ---- ---- ----
Hempstead Facility 897 915 923 936 952
Essex Facility 916 918 899 937 917
Seconn Facility 241 248 252 258 258
Niagara Facility 782 755 725 755 786
Semass Facility 1,106 1,091 1,056 1,069 1,060
Delaware Valley Facility 1,114 1,151 1,060 1,111 1,138
----- ----- ----- ----- -----
Total 5,056 5,078 4,915 5,066 5,111
===== ===== ===== ===== =====
The ARC operating facilities sell approximately 2.6 million MWH of
electricity each year.
Power Sold ('000 MWH) 2000 2001 2002 2003 2004
- -------------------------------- ---- ---- ---- ---- ----
Hempstead Facility 537 547 541 557 562
Essex Facility 465 468 465 479 479
Seconn Facility 126 129 137 138 139
Niagara Facility 299 289 278 270 245
Semass Facility 631 612 597 591 590
Delaware Valley Facility 616 618 554 577 586
----- ----- ----- ----- -----
Total 2,674 2,663 2,572 2,612 2,601
===== ===== ===== ===== =====
2
The following table summarizes each ARC operating facility's weighted
average boiler availability levels.
Availability Levels 2000 2001 2002 2003 2004
- -------------------------------- ---- ---- ---- ---- ----
Hempstead Facility 92.2% 93.8% 93.1% 94.8% 95.5%
Essex Facility 90.7 92.5 92.7 92.6 91.0
Seconn Facility 93.9 95.3 96.2 96.3 96.4
Niagara Facility 92.5 90.3 89.8 89.7 91.3
Semass Facility 93.2 91.6 89.6 87.6 88.9
Delaware Valley Facility 92.2 92.1 88.4 88.4 89.8
---- ---- ---- ---- ----
Weighted Average 92.3% 92.5% 91.0% 90.9% 91.6%
---- ---- ---- ---- ----
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:
o guarantees of recourse debt;
o support agreements in connection with service agreement-related obligations
for each of the Hempstead, Semass, Seconn and the Delaware Valley
facilities; and
o 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
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
Holdings Corp. owns indirectly 100% of our membership interest. Holdings
Corp. is beneficially owned 60% and 40% by affiliates of the DLJMB Funds and the
Highstar Funds, respectively.
Ref-Fuel Holdings is governed by a limited liability company agreement
pursuant to which our consent and that of MSW Energy Holdings is required for
certain shareholder actions, including modification of the Ref-Fuel Holdings
limited liability company agreement and actions taken by Ref-Fuel Holdings as
the 100% owner of American Ref-Fuel. Notwithstanding the fact that the DLJMB
Funds indirectly own a majority of the membership interests of Ref-Fuel
Holdings, the consent of the Highstar Funds is required for certain actions to
be taken with respect to Ref-Fuel Holdings and neither we nor the DLJMB Funds
unilaterally control Ref-Fuel Holdings or American Ref-Fuel.
Management
Holdings Corp., through subsidiaries, manages our affairs. Our board of
directors is deemed to be the board of directors of Holdings Corp. consisting of
seven members: four directors designated by the DLJMB Funds and three directors
designated by the Highstar Funds, plus one independent director. Direct
management and control of MSW Energy Holdings II is exercised by its managing
member, an indirect, wholly-owned subsidiary of Holdings Corp. Pursuant to the
terms of our amended and restated limited liability company agreement (the LLC
Agreement), and so long as our 7 3/8% Senior Secured Notes due 2010 (the Senior
Notes) are outstanding, the consent of the independent director will be 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.
3
Pursuant to the LLC Agreement, Holdings Corp. is the managing member of MSW
Energy Holdings II. Pursuant to the Holdings Corp. Shareholders Agreement, the
managing member cannot take the actions described below at MSW Energy Holdings
II without the consent of the DLJMB Funds and the Highstar Funds, so long as
they continue to own a minimum percentage of the common stock of Holdings Corp.
With respect to the DLJMB Funds that minimum percentage is either (A) both the
DLJMB Funds and the Highstar Funds each continue to own at least 15% of the
common stock of Holding Corp. on a fully diluted basis, or (B) the DLJMB Funds
continue to own at least 15% of the common stock of Holdings Corp. on a fully
diluted basis and continues to own at least 75% of its ownership at the time of
the Equalization Transactions. With respect to the Highstar Funds, that minimum
percentage is either (A) both the DLJMB Funds and the Highstar Funds each
continue to own at least 15% of the common stock of Holdings Corp. on a fully
diluted basis, or (B) the Highstar Funds continue to own at least 15% of the
common stock of Holdings Corp. on a fully diluted basis and continues to own at
least 75% of its ownership at the time of the Equalization Transations. These
significant actions relate to:
o amending their organizational documents;
o forming new subsidiaries;
o making any substantial change to the character of their business;
o incurring indebtedness;
o purchasing securities of, or property not sued in the ordinary course
of business from, an unrelated entity;
o hiring or firing executive officers or senior management;
o adopting or amending cash bonus or severance plans with respect to
executive officers or equity; compensation plans;
o entering into transaction with affiliates;
o making capital expenditures;
o making certain acquisitions of assets;
o making any sale of equity of any subsidiaries of Holdings Corp. or MSW
Energy Holdings;
o merging or consolidating with any other equity; or
o instituting a bankruptcy proceeding.
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.
4
MSW ENERGY FINANCE CO. II, INC.
Our wholly-owned subsidiary, MSW Energy Finance Co. II Inc. (MSW Energy
Finance II), was formed in November 2003 solely for the purpose of serving as a
co-issuer of the Senior Notes. Other than serving as a co-issuer of our 7 3/8%
Senior Notes, MSW Energy Finance II does not have any operations or assets and
will not have any revenues.
RECENT DEVELOPMENTS
DLJ Merchant Banking Partners and AIG Highstar Capital, L.P. announced on
February 1, 2005 that they have signed a definitive agreement to sell Holdings
Corp. to Danielson Holding Corporation (Danielson).
Danielson will pay $740 million in cash for the equity of Holdings Corp.
and will assume the consolidated net debt of Holdings Corp. Subject to receipt
of regulatory approvals and required financing, the transaction is expected to
close in the second quarter of 2005.
In connection with the sale, costs relating to transaction expenses,
severance, employment contracts, the OMA, Long-Term Incentive Plans, housing
subsidies, lease termination and other related items are estimated to be between
$50 and $70 million.
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.
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, three
of the ARC operating facilities, namely the Essex, Niagara 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 three ARC operating facilities, namely
the Hempstead, Seconn 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, Niagara and the Delaware Valley facilities frequently sell electricity
into the market, but the output of the other ARC operating facilities generally
is fully committed under their respective PPAs.
Environmental Matters
The Company 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 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.
5
The Company has indicated that compliance with such laws and regulations is
a major focus for it, and believes its philosophy with regard to environmental
matters includes operating within permit limits and continually striving to
improve environmental performance. The Company 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. American Ref-Fuel reports
that it is presently aware of one such condition expected to materially affect
the ARC operating facilities as described below, and it is possible that such
other 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 additional 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.
Future Mercury Regulation at the Essex Facility. On December 6, 2004 the
New Jersey Department of Environmental Protection (NJDEP) promulgated
regulations applicable to the Essex facility that will make mercury emission
requirements more stringent. Specifically, the new regulations increase the
required removal efficiency to 85% removal on January 3, 2006 and 95% removal on
January 3, 2012 versus the current 80% removal, while retaining the alternative
limit of 28 micrograms per cubic meter. As a result of the new regulations,
there is an increased risk that emission exceedances will occur and therefore an
increased probability that additional controls will ultimately be required to
prevent such exceedances. ARC believes that the new requirements may 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
6
regulations will require the installation of additional pollution control
equipment such as compact hybrid particulate collector units, a device similar
to a baghouse. Management 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. We cannot currently determine
the likelihood of additional and operating capital costs being incurred in
connection with these changes in regulation, or the total of any such costs.
Lower Passaic River Study. In August 2004, USEPA notified American Ref-Fuel
Company of Essex County (Essex) that it was potentially liable under CERCLA
Section 107(a) for response actions in the Lower Passaic River Study Area
(LPRSA), a 17 mile stretch of river in northern New Jersey. Essex is one of at
least 52 Potentially Responsible Parties (PRPs) named thus far. USEPA alleges
that hazardous substances found in the LPRSA were being released from the Essex
site, which abuts the river. USEPA's notice letter states that Essex may be
liable for costs related to a proposed $10 million study of the Lower Passaic
River and for unspecified natural resource damages. Considering the history of
industrial and other discharges into the LPRSA from other sources, including
named PRPs, Essex believes that its contribution will be determined to be de
minimus; however, it is not possible at this time to predict that outcome with
certainty or to estimate Ref-Fuel Holdings' liability for the study or any
eventual natural resource damage.
Employees
American Ref-Fuel Company (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 685 employees. See
"Management--MSW Energy Holdings II."
Item 2. Properties
The Company owns or operates the following facilities. We lease office
space in Montvale, New Jersey
Hempstead Facility
History and Ownership. The Hempstead Partnership beneficially owns and
operates the Hempstead facility, a 72-megawatt, 2,671-ton-per-day WTE facility
located in the Town of Hempstead, New York. The Hempstead facility was developed
and constructed by the Hempstead Partnership at an overall cost of $424 million
and began commercial operations in November 1989.
Essex Facility
History and Ownership. The Essex Partnership beneficially owns and operates
the Essex facility, a 70-megawatt, 2,700-ton-per-day WTE facility located in the
City of Newark, County of Essex, New Jersey. The Essex facility was developed
and constructed at a cost of $356 million and began commercial operations in
February 1991.
Seconn Facility
History and Ownership. The Seconn Partnership beneficially owns and
operates the Seconn facility, an 18-megawatt, 689-ton-per-day WTE facility
located in Preston, Connecticut. The Seconn facility was developed and
constructed at a cost of $177 million and commenced commercial operations in
March 1992.
Niagara Facility
History and Ownership. The Niagara Partnership beneficially owns and
operates the Niagara facility, a 50-megawatt, 2,250-ton-per-day WTE facility
located in the City of Niagara Falls, New York. In May 1993, the Niagara
Partnership acquired the rights and responsibilities of Occidental Chemical
Corporation (Occidental) under a leveraged lease for a refuse derived fuel (RDF)
facility that commenced commercial operations in 1980.
7
Semass Facility
History and Ownership. Semass L.P. owns 90% of the Semass Partnership,
which owns the Semass facility, a 2,700-ton-per-day WTE facility located in
Rochester, Massachusetts. The Semass facility, which utilizes a RDF design and
was originally developed by Energy Answers Corporation, began commercial
operations in 1989 and was expanded in 1994 to its current size. In addition,
the Company also owns and operates a transfer station located in Braintree,
Massachusetts (the Braintree Transfer Station) on land that is lease from the
Town of Braintree. The transfer station is designed to receive and transfer
waste.
Delaware Valley Facility
History and Ownership. The Company leases its Delaware Valley facility
which is located in the City of Chester, Delaware County, Pennsylvania from the
Bank of America, as owner. The 79-megawatt, 2,688-ton-per-day resource recovery
facility was constructed by a subsidiary of Westinghouse Electric Corporation
and commenced commercial operations in 1992.
Lynn Transfer Station
The Company also owns and operates a transfer station located in Lynn,
Massachusetts (the Lynn Transfer Station). The transfer station is designed to
receive and transfer waste.
Item 3. Legal Proceedings
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).
Beginning in May 1997, Wankinco provided several 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 appealed in January 2003, and on August 19, 2004,
the Appellate Court upheld the Trial Court decision in respect of all decisions
related to the alleged lease violations. One ruling unrelated to lease
forfeiture or damages for unlawful possession was remanded because the Judge's
ruling that Semass had not engaged in "an unfair and deceptive act or practice"
applied the law conjunctively rather than disjunctively (as required by the
law). The Appellate Court affirmed the Judge's ruling that there was no
unfairness, but remanded the question of deception for further findings since
the Appellate Court, due to the use of the conjunctive rather than disjunctive,
was unable to infer that the Judge did not find a compensable deceptive act.
Management believes that the Judge's ruling on remand will clarify this issue in
favor of the Company. In addition, Wankinco appealed the Appellate Court's
decision on the lease issues to the Supreme Judicial Court of Massachusetts and,
on September 30, 2004, the Supreme Judicial Court denied Wankinco's Application
for Further Appellate Review. Accordingly, except for the remand discussed
above, the favorable decisions received by Semass have become final and
nonappealable. 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.
8
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
unless the fund limit is increased by agreement of the parties, or absent such
agreement, by arbitration, wherein it is determined the fund limit needs to be
increased to adequately protect against environmental damage. Management
believes that the $20.0 million fund limit is adequate for this purpose.
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 year ended December 31, 2004, 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, 2004, the balance in the Fund is approximately $14.0 million,
and is included in restricted cash and long-term investments. A corresponding
liability of approximately $7.0 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, 2004.
Lower Passaic River Study
In August 2004, USEPA notified American Ref-Fuel Company of Essex County (Essex)
that it was potentially liable under CERCLA Section 107(a) for response actions
in the Lower Passaic River Study Area (LPRSA), a 17 mile stretch of river in
northern New Jersey. Essex is one of at least 52 Potentially Responsible Parties
(PRPs) named thus far. USEPA alleges that hazardous substances found in the
LPRSA were being released from the Essex site, which abuts the river. USEPA's
notice letter states that Essex may be liable for costs related to a proposed
$10 million study of the Lower Passaic River and for unspecified natural
resource damages. Considering the history of industrial and other discharges
into the LPRSA from other sources, including named PRPs, Essex believes that its
contribution will be determined to be de minimus; however, it is not possible at
this time to predict that outcome with certainty or to estimate Ref-Fuel
Holdings' liability for the study or any eventual natural resource damage.
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.
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
II or MSW Energy Finance II. Holdings Corp. indirectly holds 100% of the
membership interests in MSW Energy Holdings II, which in turn owns 100% of the
equity interests in MSW Energy Finance II.
9
Item 6. Selected Financial Data
Prior to the Equalization Transactions, the Company's investment in
Ref-Fuel Holdings was accounted for using the equity method. As a result of the
Equalization Transactions, the Company has effective control of Ref-Fuel
Holdings and as of April 30, 2004 is consolidating its results. All significant
intercompany transactions and accounts have been eliminated.
From Inception
(August 20, 2003) to
Year Ended December 31,
December 31, 2004 2003
--------------------- ---------------------
(in thousands)
Statement of Operations Data:
Net revenues $ 298,644 $ -
Equity in net earnings of Ref-Fuel Holdings 6,148 4,041
Operating expenses (116,089) -
Depreciation and amortization expense (45,154) -
General and administrative expense (27,657) -
Loss on asset retirement (1,765) -
Interest income 2,632 36
Interest expense (50,486) (1,843)
Minority interest in subsidiaries (39,868) -
Other income (expenses), net 305 (67)
Provision for income taxes (13,751) (892)
--------------------- ---------------------
Net income $ 12,959 $ 1,275
--------------------- ---------------------
Cash Flow Data:
Cash provided by operating activities $ 175,181 $ 224
Cash provided by investing activities 19,148 -
Cash used in financing activities (107,984) (222)
Balance Sheet Data:
Investment in Ref-Fuel Holdings $ - $ 488,447
Total assets 2,169,504 497,535
Total debt 1,271,013 225,000
Total members' equity 147,893 149,980
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.
Results of Operations
For the Year Ended December 31, 2004 as Compared to the Period Ended December
31, 2003
Net revenues. Net revenues of $298.6 million for the year ended December
31, 2004 represent the consolidated results of operations of Ref-Fuel Holdings
for the eight-month period ended December 31, 2004. As indicated above, as a
10
result of the Equalization Transactions, Ref-Fuel Holdings' results of
operations are consolidated as of April 30, 2004. These revenues represent
$194.9 million of waste disposal and related services revenue, $93.2 million of
energy revenue and $10.5 million of other revenue. There were no revenues during
the same period in 2003, as the results from Ref-Fuel Holdings were accounted
for under the equity method of accounting.
Equity in net earnings of Ref-Fuel Holdings. Equity in net earnings of
Ref-Fuel Holdings represents our share of the net earnings of Ref-Fuel Holdings
for the four months ended April 30, 2004 of $6.1 million. Prior to the
Equalization Transactions, which were consummated on April 30, 2004, we
accounted for our investment under the equity method of accounting. As a result
of these transactions, we are consolidating these results after April 30, 2004.
Equity in net earnings of Ref-Fuel Holdings of $4.0 million from Inception
(August 20, 2003) to December 31, 2003 represents our share (50%) of the net
earnings of Ref-Fuel Holdings.
Operating expenses. As a result of the Equalization Transactions, Ref-Fuel
Holdings' results of operations are consolidated as of April 30, 2004. The
operating expenses of $116.1 million for the year ended December 31, 2004
represents Ref-Fuel Holdings' operational expenses for the eight months ended
December 31, 2004.
Depreciation and amortization expense. As a result of the Equalization
Transactions, Ref-Fuel Holdings' results of operations are consolidated as of
April 30, 2004. Therefore, the depreciation and amortization expense of $45.2
million for the year ended December 31, 2004 represents Ref-Fuel Holdings'
depreciation and amortization expenses for the eight months ended December 31,
2004.
General and administrative expense. As a result of the Equalization
Transactions, Ref-Fuel Holdings' results of operations are consolidated as of
April 30, 2004. Therefore, the administrative and general expense of $27.7
million for the twelve months ended December 31, 2004 represents Ref-Fuel
Holdings' administrative and general expenses of $26.1 million for the eight
months ended December 31, 2004, and $1.6 million attributable to MSW Energy
Holdings II's other activities.
Loss on asset retirement. As a result of the Equalization Transactions,
Ref-Fuel Holdings' results of operations are consolidated as of April 30, 2004.
Therefore, the loss on asset retirement of $1.8 million for the year ended
December 31, 2004 represents Ref-Fuel Holdings' loss for the eight months ended
December 31, 2004.
Interest income. As a result of the Equalization Transactions, Ref-Fuel
Holdings' results of operations are consolidated as of April 30, 2004.
Therefore, the majority of the interest income of $2.6 million for the year
ended December 31, 2004 represents interest on cash and cash equivalents at
rates ranging from 0.5% to 2.3% for the eight months ended December 31, 2004.
Interest income for the period from Inception (August 20, 2003) to December 31,
2003 represents interest on cash and cash equivalents at rates ranging from 0.5%
to 1.5%.
Interest expense. As a result of the Equalization Transactions, Ref-Fuel
Holdings's results of operations are consolidated as of April 30, 2004.
Therefore, the interest expense of $50.5 million for the year ended December 31,
2004 represents Ref-Fuel Holdings' interest expense in the amount of $32.4 for
the eight months ended December 31, 2004, and the interest expense for the
twelve months ended December 31, 2004 attributable to MSW Energy Holdings II of
$18.1 million, which represents interest on our 7 3/8% Senior Notes due 2010
($16.6 million) and amortization of deferred financing costs ($1.4 million).
Interest expense is $1.8 million for the period from Inception (August 20, 2003)
to December 31, 2003 represents 7 3/8% annual interest on our Senior Notes.
Minority Interest. Minority interest represents the income attributable to
MSW Energy Holdings (49.8% interest in Ref-Fuel Holdings), and Duke (0.2%
interest in Ref-Fuel Holdings).
Income taxes. Income taxes expense of $13.8 million for the twelve months
ended December 31, 2004, represents the tax liability using the effective tax
rate of 51.5 % for the twelve month period.
Liquidity and Capital Resources
At December 31, 2004, our assets related primarily to our indirect membership
interest in ARC operating facilities. ARC LLC and the ARC operating facilities
have historically generated funds from operations for working capital
requirements, capital spending, debt repayments and dividend payouts.
Accordingly, our performance and significant source of future liquidity will
depend solely on cash distributions, if any, from these entities. We will need
to receive sufficient ongoing cash distributions in order to pay principal and
interest on our Senior Notes, however such distributions 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.
11
Operating Activities
Our net cash provided by operating activities of $175.1 million for the year
ended December 31, 2004 relates primarily to consolidation of Ref-Fuel Holdings
for the eight months ended December 31, 2004. In addition it includes the
distributions received from Ref-Fuel Holdings of $31.5 million prior to the
consolidation of results.
Investing Activities
Our net cash provided by investing activities of $19.1 million for the year
ended December 31, 2004 relates primarily to the consolidation of Ref-Fuel
Holdings, less capital expenditures ($12.0 million) and changes in restricted
cash ($9.0 million).
Financing Activities
Our net cash used in financing activities of $107.9 million for the year
ended December 31, 2004 relates primarily to $53.7 million of long term debt
payments and a distribution we made to our owners of $31.1 million and
distributions to the holders of our minority interest of $23.0 million.
Supplemental Pro Forma Information
The following results represent the pro forma results as if MSW Energy
Holdings II's acquisition of its interests in Ref-Fuel Holdings and the
Equalization Transactions had occurred on January 1, 2004 and 2003,
respectively. These results are presented for informational purposes only, and
are not necessarily indicative of the actual results that would have resulted
had the acquisition and the Equalization Transactions actually occurred on
January 1, 2004 and 2003, respectively. (In thousands, unaudited):
Pro Forma Pro Forma
For the Year For the Year
Ended Ended
December 31, 2004 December 31, 2003
----------------- --------------------
Revenues
Waste disposal and related services $ 284,446 $ 284,131
Energy 134,754 139,824
Other 16,981 14,522
----------------- --------------------
Total net revenues 436,181 438,477
----------------- --------------------
Expenses
Operating 189,411 191,400
Depreciation and amortization 67,996 67,996
General and administrative 42,153 45,864
Loss on asset retirements 2,107 2,207
----------------- --------------------
Operating income 134,514 131,010
Interest income 3,615 3,326
Interest expense (65,369) (68,583)
Loss on early extinguishment of debt - (3,191)
Minority interests in net income of subsidiaries (46,573) (41,482)
Other income (expenses), net 425 (282)
----------------- --------------------
Net income before taxes 26,612 20,798
Income taxes (10,915) (8,527)
----------------- --------------------
Net income $ 15,697 $ 12,271
================= ====================
Comparison of the Unaudited Pro Forma Years ended December 31, 2004 and 2003
Total Net Revenues. Total pro forma net revenues were $436.1 million for the
year ended December 31, 2004, a decrease of $2.3 million from the same period
for the prior year. Waste revenues remained consistent for the two periods,
slight increases were attributable to an increase in waste processed at the
facilities. One of the Ref-Fuel Holdings facilities experienced a scheduled
pricing decrease during the year, which was offset by increased steam sales of
$2.3 million for the period ended December 31, 2004, as compared to the prior
period.
12
Metals pricing increased over the prior year, resulting in an increase of $7.7
million in other revenues, which was partially offset by the expiration of an
ash reuse marketing arrangement in the first quarter of 2004, decreasing
revenues by $4.1 million, as compared to the prior year period.
Expenses. Operating expenses were $189.4 million for the year ended December 31,
2004, a decrease of $2.0 million from the prior year period. The most
significant factors were decreased expenses related to expiration of an ash
reuse marketing arrangement in the first quarter of 2004 (4.9 million) and the
decrease in landfill cost of $0.5 million as a result of lower volumes. The
decrease in the expenses were partially offset by increased host fees of $1.5
million and increased facility maintenance performed during scheduled outages
and the cost of materials.
General and administrative. General and administrative expenses were $42.1
million for the year ended December 31, 2004, a decrease of $3.7 million, from
the prior year due to a decrease of $2.3 million in severance costs, a decrease
of $1.5 million in a long-term compensation plan, a $0.2 million decrease in bad
debt expense. This decrease was partially offset by increases in miscellaneous
general and employee expenses.
Minority Interest. Minority Interests represents the income attributable to MSW
Energy Holdings (49.8% interest in Ref-Fuel Holdings), and Duke (0.2% interest
in Ref-Fuel Holdings).
Provision for Income taxes. The provision for income taxes represents the tax
liability for the period using a rate of 41%.
Debt Covenants
Certain of the debt agreements held by the Company's subsidiaries 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 the Company 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. In the event of any bankruptcy or liquidation the
Ref-Fuel Holdings debt would be repaid prior to the repayment of the Senior
Notes.
The indenture under which our Senior Notes were issued contain certain
restrictions which will, among other things, us from incurring additional
indebtedness, making restricted payments, making investments, selling assets or
merging with other companies, subject to certain exceptions. The Senior Notes
are redeemable with the payment of certain stated make whole amounts before
September 1, 2007 and, thereafter, at the face amount of the Senior Notes, plus
accrued interest. Restricted Payments are not permitted unless certain ratio
covenants based on our proportionate ownership of Ref-Fuel Holdings have been
met. We are presenting proportionate adjusted data, including proportionate
interest expense and proportionate adjusted earnings before interest, taxes,
depreciation and amortization (Adjusted EBITDA) because these are used in the
calculation of the restrictive covenants contained in the indenture governing
our Senior Notes.
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.
Year
Ended
December 31,
2004
--------------
(in thousands)
Proportionate Data
Proportionate Adjusted EBITDA (1) $ 138,940
Proportionate interest expense (2) 40,564
Ratio of proportionate Adjusted EBITDA to
proportionate interest expense (3) 3.4x
13
(1) Proportionate Adjusted EBITDA is defined as 50% of the 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:
Year Ended
December 31,
2004
---------------
(in thousands)
Ref-Fuel Holdings operating income $ 136,076
Ref-Fuel Holdings depreciation and amortization 67,996
Ref-Fuel Holdings loss on retirements 2,107
---------------
Ref-Fuel Holdings EBITDA 206,179
Ref-Fuel Holdings fair value adjustment amortization
and revenue levelization adjustments 71,700
---------------
Ref-Fuel Holdings adjusted EBITDA 277,879
MSW Energy Holdings II ownership percentage 50.0%
---------------
Proportionate Adjusted EBITDA $ 138,940
===============
(2) Proportionate interest expense is defined as 50% of the interest expense
for Ref-Fuel Holdings plus 100% of our interest expense.
The following table reconciles MSW Energy Holdings II Proportionate Interest
Expense:
Year Ended
December 31,
2004
(in thousands)
---------------
Ref-Fuel Holdings interest expense $ 47,251
MSW Energy Holdings II ownership percentage 50.0%
---------------
Ref-Fuel Holdings proportionate interest expense 23,626
MSW Energy Holdings II interest expense 16,938
---------------
MSW Energy Holdings II proportionate interest expense $ 40,564
===============
(3) Proportionate Adjusted EBITDA to proportionate interest expense is defined
as the quotient of proportionate Adjusted EBITDA divided by proportionate
interest expense.
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.
14
Principles of Consolidation. The accompanying consolidated financial
statements include our accounts and the accounts of our wholly-owned
subsidiaries and Ref-Fuel Holdings. Prior to the Equalization Transactions, our
investment in Ref-Fuel Holdings was accounted for using the equity method. As a
result of the Equalization Transactions, we have effective control of Ref-Fuel
Holdings and, as of April 30, 2004, are consolidating its results. All
significant intercompany transactions and accounts have been eliminated. The
minority interests shown relate to Duke's 0.2% interest and MSW Energy Holdings'
49.8% interest in Ref-Fuel Holdings.
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.
Significant management estimates include the estimated lives of long-lived
assets, allowances for doubtful accounts receivable, liabilities for
self-insurance and certain landfill liabilities. Such estimates may be
subsequently revised as necessary when additional information becomes available.
Actual results could differ from those estimates.
Goodwill. Goodwill represents the total consideration paid in excess of the
fair value of the net tangible and identifiable intangible assets acquired and
the liabilities assumed. In accordance with the provisions of Financial
Accounting Standard (FAS No. 142), "Goodwill and Other Intangible Assets", we
perform an annual fair value test of its recorded goodwill for our reporting
units using a discounted cash flows approach.
Intangible Assets. Energy contract intangibles represent the amount by
which the contract rates in long-term energy sales contracts held by certain of
our subsidiaries of the Company exceeded fair value on the dates that these
subsidiaries were acquired. These contract related to 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 five to fifteen
years.
Waste contract intangibles represent 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.
We have intangible assets related to Nitrous Oxide (NOx) emission
allowances. These assets have indefinite lives and, as such, are not amortized.
Consistent with all of our intangible assets, these are reviewed under the
provisions of FAS No. 142 for potential impairment on an annual basis.
Deferred financing costs represent certain capitalizable costs that we have
incurred to finance our long-term debt obligations. These costs are amortized to
interest expense over the life of the related debt.
Other Liabilities. Landfill closure and postclosure costs are included in
other long-term liabilities. We accrue landfill closure and postclosure costs as
the remaining permitted space of the landfill is consumed over the life cycle of
the landfill.
We are accounting for the long-term power contracts at the Semass
Partnership 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 us 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. The
difference between the amount billed and the amount recognized is included in
other long-term liabilities.
15
Revenue Recognition. We recognize 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. We invest excess cash and funds held in trust
in bank deposit accounts, government securities, commercial paper, certificates
of deposit and money market investments with a limited number of financial
institutions.
We have exposure to credit risk in accounts receivable because we dispose
of waste for and sell power to a limited number of customers. We believe
adequate reserves are maintained 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 acquisition
of Ref-Fuel Holdings by MSW Energy Holdings and MSW Energy Holdings II. These
costs are amortized to interest expense over the life of the related debt using
the effective interest method.
Income Taxes. As we are a single member limited liability company, and not
directly subject to Federal and State income taxes; rather our income or loss is
required to be included in the income tax returns of our member. As a result we
provide for Federal and State income taxes in order to reflect what the effect
on income would have been if the taxes of the Company were not included in the
income tax returns of its members. Changes in taxes payable are treated as
capital contributions and/or distributions. For the period ended December 31,
2004, our provision reflects the twelve months of C Corporation taxes that our
member is responsible for on the equity method plus the consolidating taxes of
Ref-Fuel Holdings subsequent to the Equalization Transactions plus our income
and expenses.
We account for income taxes under the asset and liability method. The
provision for income taxes includes deferred income taxes resulting from items
reported in different periods for income tax and financial statement purposes.
Deferred income tax assets and liabilities represent the expected future tax
consequences of the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. The effects
of changes in tax rates on deferred income tax assets and liabilities are
recognized in the period that includes the enactment date.
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.
Our investment in Ref-Fuel Holdings was accounted for using the equity
method of accounting prior to the Equalization Transactions. As a result, the
accompanying consolidated results of operations include our share of net
earnings in "Equity in net earnings of Ref-Fuel Holdings" for the period up to
April 30, 2004.
Push-Down Accounting. On December 12, 2003, MSW Merger, an affiliate of
CSFB Private Equity, merged with and into Holdings Corp. which continues as the
surviving corporation in the Merger. Upon consummation of the Merger and taking
into account the June 30, 2003 acquisition of membership interests in Ref-Fuel
Holdings, the Control Group owns, directly and indirectly, 99.8% of the
membership interests in Ref-Fuel Holdings (and exercises voting power with
respect to the remaining 0.2% interest). 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 that we acquired was pushed-down to Ref-Fuel Holdings and its
subsidiaries on December 12, 2003.
Fair Value of Financial Instruments. Unless disclosed otherwise, all of our
other financial instruments are stated at cost, which management believes
approximates fair market value.
Stock-Based Compensation. We have adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation, (FAS 123) as amended by
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FAS No. 123" concerning certain transition and
disclosure provisions, but applies the intrinsic value recognition provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for stock-based
compensation plans of the Company.
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
The following table sets forth our contractual obligations outstanding as
of December 31, 2004 (in thousands):
Payment Due by Period
16
Less than 1 More than 5
Contractual Obligations Total Year 1-3 Years 3-5 Years Years
----------- ------------ ---------- ----------- ------------
Long-Term Debt Obligations $ 1,271,013 $ 87,184 $ 169,797 $ 176,935 $ 837,097
Operating Lease Obligations 154,559 14,566 27,972 41,519 70,502
Other Long-Term Obligations 20,278 6,246 3,333 - 10,699
----------- ------------ ---------- ----------- ------------
Total $ 1,445,850 $ 107,996 $ 201,102 $ 218,454 $ 918,298
=========== ============ ========== =========== ============
RISK FACTORS
Any of the following risks could materially adversely affect our business,
financial condition or results of operations.
Our substantial indebtedness could adversely affect our financial condition.
We have a substantial amount of indebtedness. As of December 31, 2004 our
total indebtedness was $1,216.8 million, which represented approximately 71% of
our total capitalization.
This substantial indebtedness could have important consequences. For
example, it could:
o make it more difficult for us to satisfy our obligations with respect to
our outstanding debt, including our repurchase obligations;
o increase our vulnerability to general economic and industry conditions;
o limit our flexibility in planning for, or reacting to, changes in the
business and industry in which we operate;
o place us at a competitive disadvantage compared to our competitors that
have less debt; and
o limit ARC LLC's ability to borrow additional funds in order to make capital
contributions to fund the ARC operating facilities.
Our indentures impose significant operating and financial restrictions on us.
The indentures 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:
o incur additional indebtedness;
o create liens;
o pay dividends or make other equity distributions;
o purchase or redeem capital stock;
o make investments;
o sell assets or consolidate or merge with or into other companies; and
o engage in transactions with affiliates.
17
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
or some of our debt. Moreover, it is possible that in the future the owners of
MSW Energy Holdings and MSW Energy Holdings 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 revenues depend on the operation of the ARC operating facilities.
Our 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:
o the breakdown or failure of equipment or processes;
o the difficulty or inability to find suitable replacement parts for
equipment;
o the performance of the ARC operating facilities below expected levels of
waste throughput, electric or steam generation or efficiency;
o the unavailability of sufficient quantities of waste;
o decreases in the fees for solid waste disposal;
o decreases in the demand or market prices for recovered ferrous and
nonferrous metal;
o disruption in the transmission of electricity generated;
o labor disputes;
o operator error;
o 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;
o changes in law or application of law (including any applicable
environmental laws or permit requirements); and
o the exercise of the power of eminent domain.
While we 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 us, which would adversely affect our financial
condition.
We depend on performance by third parties under contractual arrangements.
We depend 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
depends significantly upon the performance by third parties in accordance with
the long-term 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,
18
the ability of the ARC operating companies and TransRiver to make distributions
to us 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 their ability to make distributions to us , which would
decrease or eliminate the funds available to us.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our operations are concentrated in one region.
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 us from the ARC operating companies and, ultimately, on our
financial condition.
We depend 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 our
operations and financial condition. One or more of the following factors could
impact the price and supply of waste:
o defaults by waste suppliers under their contracts;
o a decline in solid waste supply due to increased recycling;
o composting of municipal solid waste;
o legal prohibitions against disposal of certain types of solid waste in WTE
facilities; or
o 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. Also, solid waste transfer stations adjacent to
railroad lines, and which are exempt from state and local government regulations
due to a 1995 amendment to the Interstate Commerce Act, are being developed in
the northeast United States and may offer pricing below current market prices.
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 our financial condition.
Failure to comply with environmental permitting and governmental regulations
would adversely affect our 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. While we believe that we are currently in
compliance with applicable environmental laws in all material respects, 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. 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 our 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
19
change in the interpretation of existing laws and regulations, which could
result in substantially similar risks. Stricter environmental regulations could
materially affect our cash flow 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 we report that we
believe that all of our 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 and steps to bring our facilities into
compliance may limit our future cash flow.
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
us:
o loss of environmental permits;
o reduction in allowed operations;
o failure or delay in the renewal or reissuance of environmental permits;
o any increase in operating costs resulting from any renewed or reissued
environmental permit; and
o any expenditures, penalties, restrictions and/or liabilities resulting from
any other non-compliance.
Changes in electricity regulation could have an adverse impact on us.
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
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 us and our ability to make payment of the
principal of and premium, if any, and interest on our debt. Our 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 us.
20
Item 8. Financial Statements and Supplementary Data
21
Report of Independent Registered Public Accounting Firm
To the Members and Board of Directors of MSW Energy Holdings II LLC and
Subsidiaries:
In our opinion, the consolidated balance sheets and the related statements of
operations, member's equity and cash flows present fairly, in all material
respects, the financial position of MSW Energy Holdings II LLC and Subsidiaries
(the "Company") at December 31, 2004 and 2003, and the results of their
operations and their cash flows for the year ended December 31, 2004 and from
Inception (August 20, 2003) to December 31, 2003 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the 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 financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, NJ
March 15, 2005
22
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
Assets
December 31, 2004 December 31, 2003
--------------------- ---------------------
Current assets
Cash and cash equivalents $ 86,347 $ 2
Restricted cash and short-term investments 61,995 -
Accounts receivable, net of allowance for doubtful accounts of $1,491 and
$0, respectively 72,027 -
Prepaid expenses and other current assets 11,012 8
--------------------- ---------------------
Total current assets 231,381 10
--------------------- ---------------------
Long-term assets
Property, plant and equipment, net 1,187,178 -
Intangible assets, net 536,229 9,078
Goodwill 123,984 -
Investment in Ref-Fuel Holdings - 488,447
Restricted cash and long-term investments 85,926 -
Other long-term assets 4,806 -
--------------------- ---------------------
Total long-term assets 1,938,123 497,525
--------------------- ---------------------
Total assets $ 2,169,504 $ 497,535
===================== =====================
Liabilities and Member's Equity
Current Liabilities
Accounts payable and other current liabilities $ 41,171 $ 263
Current portion of other long-term liabilities 87,184 -
Accrued interest payable 16,448 1,705
Income taxes payable 35 1,044
--------------------- ---------------------
Total current liabilities 144,838 3,012
--------------------- ---------------------
Long-term Liabilities
Long-term debt 1,183,829 225,000
Other long-term liabilities 201,996 -
Long-term deferred tax 126,944 119,543
--------------------- ---------------------
Total long-term liabilities 1,512,769 344,543
--------------------- ---------------------
Total Liabilities 1,657,607 347,555
--------------------- ---------------------
Commitments and contingencies (Notes 12 and 13)
Minority Interest in Consolidated Subsidiary 364,004 -
Member's equity
Total member's equity 147,893 149,980
--------------------- ---------------------
Total liabilities and member's equity $ 2,169,504 $ 497,535
===================== =====================
The accompanying notes are an integral part of these consolidated financial statements.
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
From Inception
For the Year Ended (August 20, 2003)
December 31, to December 31,
2004 2003
------------------ ------------------
Revenues
Waste disposal and related services $ 194,950 $ -
Energy 93,188 -
Other 10,506 -
------------------ ------------------
Total net revenues 298,644 -
------------------ ------------------
Expenses
Operating 116,089 -
Depreciation and amortization 45,154 -
General and administrative 27,657 67
Loss on asset retirement 1,765 -
------------------ ------------------
Total expenses 190,665 67
------------------ ------------------
Operating income (loss) 107,979 (67)
Interest income 2,632 36
Interest expense (50,486) (1,843)
Equity in net earnings of unconsolidated affiliate - Ref-Fuel Holdings 6,148 4,041
Minority interests in net income of subsidiaries (39,868) -
Other, net 305 -
------------------ ------------------
Income before income taxes 26,710 2,167
Provision for income taxes (13,751) (892)
------------------ ------------------
Net income 12,959 1,275
Other comprehensive loss (211) -
------------------ ------------------
Comprehensive income $ 12,748 $ 1,275
================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
24
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBER'S EQUITY
(in thousands)
Member's Accumulated Other
Interests Comprehensive Income Total
---------------- ----------------------- ----------------
Balance at Inception (August 20, 2003) $ - $ - $ -
Contributions from member 4,545 - 4,545
Contribution of investment in
Ref-Fuel Holdings by member 364,711 - 364,711
Distribution to member (220,551) - (220,551)
Comprehensive income 1,275 - 1,275
----------------- --------------------- -----------------
Balance, December 31, 2003 149,980 - 149,980
================= ===================== =================
Finalization of purchase accounting 4,573 - 4,573
Contributions from member for taxes (Note 2) 11,479 - 11,479
Capital contribution from member
52 - 52
Distribution to members (31,150) - (31,150)
Unrealized gain on investments from the
consolidation of Ref-Fuel Holdings - 211 211
Comprehensive income 12,959 (211) 12,748
----------------- ---------------------- -----------------
Balance, December 31, 2004 $ 147,893 $ - $ 147,893
================= ====================== =================
The accompanying notes are an integral part of these consolidated financial statements.
25
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
From Inception
For the Year Ended (August 20, 2003)
December 31, to December 31,
2004 2003
-------------------------- -----------------------
Cash flows from operating activities:
Net income $ 12,959 $ 1,275
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 68,457 138
Deferred taxes 2,739
Revenue contract levelization 15,163 -
Equity in earnings of Ref-Fuel Holdings, prior to consolidation (6,148) (4,041)
Distributions from Ref-Fuel Holdings, prior to consolidation 31,500 -
Loss on asset retirements 1,765 -
Minority interest in income of consolidated subsidiaries 39,868 -
Provision for deferred income taxes - (152)
Changes in operating assets and liabilities:
Accounts receivable, net (713) -
Prepaid expenses and other current assets 513 (8)
Other long-term assets 2,923 -
Accounts payable and current liabilities (1,886) 263
Income taxes payable 10,530 1,044
Accrued interest payable (6,846) 1,705
Other long-term liabilities 4,357 -
-------------------------- -----------------------
Net cash provided by operating activities 175,181 224
-------------------------- -----------------------
Cash flows from investing activities:
Change in restricted cash and investments, net (8,779) -
Additions of property, plant and equipment (12,361) -
Proceeds from sale of assets 50 -
Cash from consolidation of unconsolidated subsidiary 40,238 -
-------------------------- -----------------------
Net cash provided by investing activities 19,148 -
-------------------------- -----------------------
Cash flows from financing activities:
Payment of financing cost (54) -
Payment of long-term debt (53,757) -
Proceeds from long-term debt offering - 225,000
Contribution from member (23) 4,545
Distributions paid to member (31,150) (220,551)
Distributions paid to holders of minority interest (23,000) -
Payments of deferred financing fees - (9,216)
-------------------------- -----------------------
Net cash used in financing activities (107,984) (222)
-------------------------- -----------------------
Net increase in cash and cash equivalents 86,345 2
Cash and cash equivalents, beginning of period 2 -
-------------------------- -----------------------
Cash and cash equivalents, end of period $ 86,347 $ 2
========================== =======================
The accompanying notes are an integral part of these consolidated financial statements.
27
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
MSW Energy Holdings II LLC (MSW Energy Holdings II and collectively
hereinafter with its subsidiaries, referred to as the Company), a Delaware
limited liability company formed in August 2003 and its wholly-owned subsidiary,
MSW Energy Finance Co. II, Inc. (MSW Finance II) a Delaware corporation, were
formed for the purpose of issuing debt, the proceeds of which, along with
capital contributions, were used to fund the merger of MSW Merger LLC (MSW
Merger), the Company's indirect parent, with and into American Ref-Fuel Holdings
Corp. (Holdings Corp.) (the Merger). After the Merger, ARC II Corp. (ARC II,
formerly known as UAE Ref-Fuel II Corp.) a Delaware corporation, an indirect
subsidiary of Holdings Corp., became a subsidiary of MSW Energy Holdings II. The
Merger was completed on December 12, 2003 (see Note 3). After completion of the
Merger, MSW Energy Holdings II held a direct 49.9% capital interest in Ref-Fuel
Holdings LLC (Ref-Fuel Holdings) and wholly owns ARC II, II, which owned a 0.1%
capital interest in Ref-Fuel Holdings. Both interests were contributed to MSW
Energy Holdings II by Holdings Corp. Ref-Fuel Holdings is a holding company
whose sole source of operating cash flow relates to its 100% membership interest
in American Ref-Fuel Company LLC (ARC, American Ref-Fuel or ARC LLC). American
Ref-Fuel, which through subsidiaries, owns and operates six waste-to-energy
facilities in the northeast United States. From inception (August 20, 2003)
through December 12, 2003, MSW Energy Holdings II did not have any operations,
other than incurring interest on its debt.
MSW Finance II was organized in November 2003 for the sole purpose of
acting as co-issuer with MSW Energy Holdings II of $225.0 million aggregate
principal amount of 7 3/8% senior secured notes due September 1, 2010 (Senior
Notes). Other than serving as co-issuer, MSW Finance II does not conduct
operations of its own and has no assets.
On April 30, 2004, MSW Energy Holdings II's indirect owner, Holdings Corp.,
entered into a series of transactions (Equalization Transactions) which changed
its ownership structure. As a result, Holdings Corp. is owned 60% by several
private equity funds (the DLJMB Funds), each of which is managed by entities
affiliated with Credit Suisse First Boston Private Equity, Inc. (CSFB Private
Equity), and 40% by several investment funds (the Highstar Funds), each of which
is managed by AIG Global Investment Corp. (AIGGIC) (Collectively the Control
Group).
Also as a result of the Equalization Transactions, MSW Energy Holdings LLC
(MSW Energy Holdings), which holds a 49.8% membership interest in Ref-Fuel
Holdings, was owned (i) 60% by MSW Acquisition LLC, an affiliate of CSFB Private
Equity, (ii) 39.99% collectively by entities managed by AIGGIC, and (iii) 0.01%
by Holdings Corp., who was named the managing member.
The Equalization Transactions resulted in the DLJMB Funds affiliates
collectively owning a 60% indirect interest in MSW Energy Holdings II and the
Highstar Funds affiliates collectively owning a 40% indirect interest in MSW
Energy Holdings II.
On August 31, 2004, Holdings Corp., the DLJMB Funds and the Highstar Funds
effected a series of transactions that resulted in UAE Holdings Corp. becoming
the indirect parent of MSW Energy Holdings (August 31 Transactions).
After the Equalization Transactions, Holdings Corp. controls the operations
of Ref-Fuel Holdings as 99.8% of the interests in Ref-Fuel Holdings are owned by
the Company and MSW Energy Holdings (effective as of April 30, 2004). As a
result, the Company has effective control of Ref-Fuel Holdings, and is therefore
consolidating its results of operations and cash flows for the period from May
1, 2004, and the balance sheet as of April 30, 2004.
American Ref-Fuel owns partnerships that develop, own and operate
waste-to-energy facilities, which combust municipal solid waste and produce
energy in the form of electricity and steam. Through such partnerships, American
Ref-Fuel owns or controls six waste-to-energy facilities located in the
northeastern United States (the ARC operating facilities). The subsidiaries of
American Ref-Fuel that operate the ARC operating facilities (the ARC operating
28
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
companies) derive revenues principally from disposal or tipping fees received
for accepting waste and from the sale of electricity and steam produced by those
facilities. ARC subsidiaries include: (a) American Ref-Fuel Company (Ref-Fuel
Management); (b) TransRiver Marketing Company, L.P. (TransRiver); (c) American
Ref-Fuel Company of Hempstead (Hempstead); (d) American Ref-Fuel Company of
Essex County (Essex); (e) American Ref-Fuel Company of Southeastern Connecticut
(Seconn); (f) American Ref-Fuel Company of Niagara, L.P. (Niagara); (g) American
Ref-Fuel Company of Semass, L.P. (Ref-Fuel Semass); (h) American Ref-Fuel
Operations of Semass, L.P. (Semass Operator); (i) American Ref-Fuel Company of
Delaware Valley, L.P. (Delaware Valley) (collectively referred to as the
American Ref-Fuel Partnerships).
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MSW Energy Holdings II, its wholly-owned subsidiaries and Ref-Fuel Holdings.
Prior to the Equalization Transactions, the Company's investment in Ref-Fuel
Holdings was accounted for using the equity method. As a result of the
Equalization Transactions, the Company has effective control of Ref-Fuel
Holdings and as of April 30, 2004, is consolidating its results of operations,
cash flows and balance sheet. All significant intercompany transactions and
accounts have been eliminated. The minority interests shown relate to Duke's
0.2% interest and MSW Energy Holdings' 49.8% interest in Ref-Fuel Holdings.
Reclassifications
Certain reclassifications have been made to the prior year to conform to
the current year's presentation.
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 consolidated 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, liabilities for self-insurance and certain
landfill liabilities. 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.
Restricted Cash and Investments
The Company is required to maintain cash and investment balances that are
restricted by provisions of its debt, operational 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
29
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
securities to maturity. The Company accounts for marketable securities in
accordance with SFAS 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.
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.
The company's only investment classified as available for sale was sold
during 2004.
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, is 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. Landill retirement costs arising
from post-closure obligations, are capitalized as part of the landfill asset,
are being amortized consistent with the landfills current estimated life.
Landfill retirement costs arising from final capping obligations are being
amortized on a units-of-consumption basis over the estimated number of tons of
waste that each final capping event covers.
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
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 and the liabilities
assumed. In accordance with the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets", (SFAS 142), Company performs an annual fair value test of
its recorded goodwill for its reporting units using a discounted cash flows
approach. As of December 31, 2004, the Company's estimate of the fair value of
its reporting units indicated no impairment of goodwill 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 five to fifteen years.
Waste contract intangibles represent 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.
30
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has intangible assets relating to Nitrous Oxide (NOx) emission
allowances. These assets have indefinite lives and, as such, are not amortized.
Consistent with all the Company's intangible assets, these are reviewed under
the provisions of FAS 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 using the effective interest
rate method.
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's investment in Ref-Fuel Holdings was accounted for using the
equity method of accounting prior to the Equalization Transactions. As a result,
the accompanying consolidated results of operations include the Company's share
of net earnings in "Equity in net earnings of Ref-Fuel Holdings" for the period
up to April 30, 2004.
Income Taxes
As the Company is a single member limited liability company, and not
directly subject to Federal and State income taxes; rather its income or loss is
required to be included in the income tax returns of its member. The Company
provides for Federal and State income taxes in order to reflect what the effect
on income would have been if the taxes of the Company were not included in the
income tax returns of its members. Changes in taxes payable are treated as
capital contributions and/or distributions. For the year ended December 31,
2004, the Company's provision reflects a year of C corporation taxes that
its members are responsible for on the income of the Company, and the taxes of
Ref-Fuel Holdings subsequent to the Equalization Transactions.
The Company accounts for income taxes under the asset and liability method.
The provision for income taxes includes deferred income taxes resulting from
items reported in different periods for income tax and financial statement
purposes. Deferred income tax assets and liabilities represent the expected
future tax consequences of the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effects of changes in tax rates on deferred income tax assets and
liabilities are recognized in the period that includes the enactment date
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.
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 2019, the end of the associated lease.
The fair value adjustment related to the acquired long-term waste contracts
represents the amount by which the fair value of long-term waste contracts held
by Ref-Fuel Semass and Essex exceeded the contract rates on the dates that the
partnerships were acquired. These costs are being amortized as an increase to
waste disposal revenues using the straight-line method over 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.
31
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is accounting for the long-term power contracts at Ref-Fuel
Semass 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 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.
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 energy to a limited number of customers.
The Company believes adequate reserves are maintained 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 Merger. These amounts are amortized
to interest expense over the life of the related debt using the effective
interest method.
Stock Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation, (SFAS 123) as amended by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FAS No. 123" concerning certain transition and disclosure
provisions, but applies the intrinsic value recognition provisions of Accounting
Principles Board opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations in accounting for stock-based compensation plans of the
Company.
Push-Down Accounting
On December 12, 2003, MSW Merger, an affiliate of CSFB Private Equity,
merged with and into Holdings Corp. which continues as the surviving corporation
in the merger. Upon consummation of the Merger and taking into account the MSW
Energy Holdings' June 30, 2003 acquisition of membership interests in Ref-Fuel
Holdings, the Control Group owns, directly and indirectly, 99.8% of the
membership interests in Ref-Fuel Holdings (and exercise voting power with
respect to the remaining 0.2% interest). EITF Topic D-97, "Push-Down
Accounting," requires that Ref-Fuel Holdings financial statements reflect this
collective change in ownership. Accordingly, the aggregate excess of purchase
price over net assets acquired by the Company on June 30, 2003 was pushed down
to Ref-Fuel Holdings and its subsidiaries as of December 12, 2003.
Risks and Uncertainties
The Company's operations involve a number of significant risks and
uncertainties. Factors that could affect the Company'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 the
operations of the ARC operazing companies, and the Company's substantial
indebtedness.
32
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Acquisition of Membership Interests in Ref-Fuel Holdings
On December 12, 2003, MSW Merger, the Company's indirect parent prior to
the merger, effected the merger with and into Holdings Corp. pursuant to which
the members of MSW Merger became the sole stockholders of Holdings Corp., a
company whose primary asset is its direct wholly-owned subsidiary, Ref-Fuel
Corp. (formerly known as UAE Corp.). At the same time the Company's direct
parent prior to the merger, MSW Intermediate Merger LLC, merged with and into
Ref-Fuel LLC (formerly known as UAE Ref-Fuel LLC), an indirect wholly-owned
subsidiary of Ref-Fuel Corp., and Ref-Fuel LLC contributed to the Company its
direct 49.9% capital interest in Ref-Fuel Holdings and all of its interest in
Ref-Fuel II, which owns a 0.1% capital interest in Ref-Fuel Holdings, which
resulted in an allocated purchase price attributable to Ref-Fuel Holdings of
$364.7 million recorded as a contribution to member's equity. As a result of the
Merger, the Company is wholly owned indirectly by Holdings Corp.
On December 12, 2003, immediately following these transactions, the Company
transferred to its new indirect owner, Ref-Fuel Corp., the net proceeds of
$220.5 million of the Senior Notes. These funds, along with additional capital
contributions to MSW Merger, were used to fund the Merger. At closing, Ref-Fuel
Corp. maintained an obligation under the ARC Equity Contribution Agreement dated
as of April 30, 2001 (the Equity Contribution Agreement).
The Company's share of members' equity of Ref-Fuel Holdings acquired as of
December 12, 2003 was $162.5 million. As required by push-down accounting, the
excess purchase price of approximately $202.2 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 tangible 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. Debt is being amortized
based on the effective interest rate method over the life of the obligations.
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 at December 12, 2003 is as follows (in
thousands):
Ref-Fuel Holdings' members' equity acquired $ 162,488
Fixed assets and other adjustments 74,395
Identifiable intangible assets, net 140,433
Goodwill (14,225)
Other long-term assets (2,891)
Long-term debt (20,341)
Other long-term liabilities 24,852
------------
Purchase price for acquisition of 50.0% of Ref-Fuel Holdings $ 364,711
============
33
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Information
The following results represent the unaudited pro forma results as if MSW
Energy Holdings II acquisition of its interests in Ref-Fuel Holdings and the
Equalization Transactions had occurred on January 1, 2004 and 2003,
respectively. These results are presented for informational purposes only, and
are not necessarily indicative of the actual results that would have resulted
had the acquisition and the Equalization Transactions actually occurred on
January 1, 2004 and 2003, respectively (in thousands, unaudited):
Pro Forma For Pro Forma For
the Year Ended the Year Ended
December 31, 2004 December 31, 2003
----------------- ------------------
Revenue
Waste disposal and related services $ 284,446 $ 284,131
Energy 134,754 139,824
Other 16,981 14,522
----------------- ------------------
Total revenue 436,181 438,477
----------------- ------------------
Expenses
Operating 189,411 191,400
Depreciation and amortization 67,996 67,996
General and administrative 42,153 45,864
Loss on asset retirements 2,107 2,207
----------------- ------------------
Operating income 134,514 131,010
Interest income 3,615 3,326
Interest expense (65,369) (68,583)
Loss on early extinguishment of debt - (3,191)
Minority interests net income of subsidiaries (46,573) (41,482)
Other income (expenses), net 425 (282)
----------------- ------------------
Net income before taxes 26,612 20,798
Taxes (10,915) (8,527)
----------------- ------------------
Net income $ 15,697 $ 12,271
================= ==================
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.
4. Equity Investment in Ref-Fuel Holdings
Prior to the Equalization Transactions, the Company recorded its investment
in Ref-Fuel Holdings as an equity investment. Ref-Fuel Holdings condensed
financial information prior to April 30, 2004 is included for informational
purposes. The following table summarized the components of the Company's
interest in Ref-Fuel Holdings at April 30, 2004 and December 31, 2003 (in
thousands):
Allocated purchase price contributed $ 364,711
Deferred income tax liability assumed 119,695
Equity in net earnings of Ref-Fuel Holdings 4,041
------------
Total investment in Ref-Fuel Holdings at December 31, 2003 488,447
------------
Equity in net earnings of Ref-Fuel Holdings 6,148
Distributions received from Ref-Fuel Holdings (31,500)
------------
Total investment in Ref-Fuel Holdings at April 30, 2004 $ 463,095
============
34
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized condensed balance sheet information of Ref-Fuel Holdings, is as
follows (in thousands):
As of As of
April 30, 2004 December 31, 2003
--------------------- ------------------------
Current assets $ 177,397 $ 233,151
Noncurrent assets 1,879,198 1,894,757
Current liabilities 147,068 133,358
Noncurrent liabilities 1,218,780 1,253,250
Members' Equity 690,747 741,300
Summarized statement of operations information for Ref-Fuel Holdings is as
follows (in thousands):
Period from | Period from
December 12, | January 1,
For the Four Months 2003 to | 2003 to
Ended December 31, | December 12,
April 30, 2004 2003 | 2003
-------------------- ------------- | ---------------
| (Predecessor)
|
Revenues $ 137,537 $ 24,847 | $ 444,461
Operating income 26,534 10,855 | 162,683
Net earnings 12,753 8,082 | 103,071
Company's equity in net earnings 6,148 4,041 |
5. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
Useful Life December 31, 2004 December 31, 2003
--------------- --------------------- ---------------------
Plant and equipment 2-50 years $ 1,206,558 $ -
Land 3,813 -
Up to 17
Leasehold improvements years 5,575 -
Landfill 13 years 17,768 -
Spare parts 12,282 -
Construction in progress 6,244 -
--------------------- ---------------------
Total property, plant and equipment 1,252,240 -
Accumulated depreciation (65,062) -
--------------------- ---------------------
Property, plant and equipment, net $ 1,187,178 $ -
===================== =====================
6. Intangible Assets
Intangible assets consist of the following (in thousands):
35
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Useful Life December 31, 2004 December 31, 2003
----------- ---------------------- -----------------
Energy contracts 5- 15years $ 525,125 $ -
Waste contracts 5 years 23,600 -
Financing costs 7 years 9,270 9,216
Emissions credits Indefinite 43,377 -
Other intangibles Indefinite 3,579 -
---------------------- ---------------------
604,951 9,216
Accumulated amortization (68,722) (138)
---------------------- ---------------------
Intangible assets, net $ 536,229 $ 9,078
====================== =====================
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 operations for each of the years indicated (in
thousands):
Energy contracts Waste contracts Totals
---------------------- ---------------------- ---------------------
Year ended December 31, 2004 $ 38,657 $ 2,736 $ 41,423
---------------------- ---------------------- ---------------------
(Estimated)
2005 $ 58,306 $ 4,256 $ 62,562
2006 58,306 4,256 62,562
2007 58,305 4,256 62,561
2008 58,206 4,256 62,462
2009 36,907 2,130 39,037
Thereafter 192,381 - 192,381
---------------------- ---------------------- ---------------------
Total $ 462,411 $ 19,154 $ 481,565
====================== ====================== =====================
7. Goodwill
Goodwill consists of the following (in thousands):
December 31, 2004 December 31, 2003
---------------------- ---------------------
Beginning balance $ - $ -
Goodwill from the consolidation of Ref-Fuel Holdings 121,945 -
Finalization of purchase accounting 2,039 -
---------------------- ---------------------
Ending balance $ 123,984 $ -
====================== =====================
8. Accounts Payable and Other Current Liabilities
Accounts payable and other current liabilities consist of the following (in
thousands):
36
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 December 31, 2003
---------------------- ---------------------
Accounts payable $ 25,015 $ 263
Incentive plan accruals 3,569 -
Compensation liabilities 8,254 -
Other 4,333 -
---------------------- ---------------------
$ 41,171 $ 263
====================== =====================
9. Financing Arrangements
Long-term debt obligations of the Company consist of the following (in
thousands):
Final
Interest Rate Maturity December 31, 2004 December 31, 2003
------------- -------- ------------------- -----------------
Senior Notes 7 3/8% 2010 $ 225,000 $ 225,000
------------------- -----------------
Ref-Fuel Holdings debt
ARC Senior Notes 6.26% 2015 240,000 -
Niagara Series 2001 5.45 - 5.625% 2015 165,010 -
Seconn Corporate Credit Bonds
- 1992 Series A 6.45% 2022 30,000 -
Seconn Corporate Credit Bonds -
ARC-I Series A and ARC-11 Series A 5.50% 2015 13,500
Hempstead Corporate Credit Bonds 5.00% 2010 42,670 -
Hempstead project debt 4.75%-5.00% 2009 114,543 -
Essex project debt 5.248%-7.375% 2020 96,496 -
Seconn project debt 5.125%-5.50% 2015 50,602 -
Semass Series 2001A 5.50%-5.625% 2016 134,345 -
Semass Series 2001B 5.00%-5.50% 2010 104,385 -
------------------- -----------------
Subtotal 991,551 -
------------------- -----------------
Other obligations 273 -
------------------- -----------------
Total debt at par value 1,216,824 225,000
Unamortized debt premium, net 54,189 -
Current portion (87,184) -
------------------- -----------------
Total long-term debt obligations $ 1,183,829 $ 225,000
=================== =================
In November 2003, the Company, issued $225.0 million aggregate principal
amount of 7 3/8 % senior secured notes due 2010 (Senior Notes). Interest on the
Senior Notes accrues at 7 3/8 % per annum, beginning from the date of issuance
and is payable on March 1st and September 1st of each year, commencing on March
1, 2004. Interest only is payable throughout the term of the Senior Notes with
principal and unpaid interest payable at maturity on September 1, 2010. 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 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.
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
37
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Facility, fund debt service reserve accounts and for general corporate purposes.
As part of this refinancing, the Company 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, 2004 there were no borrowings and
$10.2 million of letters of credit outstanding, respectively, under the Amended
Credit Facility. Pursuant to the terms of certain guarantee agreements as of
December 31, 2004, the Company was contingently obligated to issue $29.0 million
in letters of credit in the event that the ratings of the Company's senior debt
are reduced to below investment grade. The Amended Credit Facility allows for
two one-year extensions at ARC LLC's request.
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, new borrowings and require certain defined leverage ratios
and adjusted cash flow coverage ratios. Substantially all of the assets and
revenues of the facilities owned or controlled and operated by subsidiaries of
the Company 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. In the event of any bankruptcy or liquidation, the ARC LLC debt
would be repaid prior to the repayment of the Senior Notes. The aggregate
amounts of long-term debt mature as follows (in thousands):
2005 $ 87,184
2006 79,331
2007 90,466
2008 98,472
2009 78,463
Thereafter 782,908
-------------
$ 1,216,824
=============
The fair value of the company's debt as of December 31, 2004 and 2003,
approximated $1.3 billion and $225 million, respectively. The company determined
fair value on quoted market values.
10. Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
Amortization
Period
(years) December 31, 2004 December 31, 2003
------- ---------------------- --------------------
Waste contracts acquired 9-17 $ 116,635 $ -
Operating lease acquired 14 42,094 -
Energy contract levelization 12 24,123 -
Landfill liabilities 13 10,699 -
Deferred revenue 8-20 5,112 -
Incentive plan accruals 3,333 -
---------------------- --------------------
$ 201,996 $ -
====================== ====================
See Note 16 for amortization of certain other long-term liabilities.
38
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
The components of the provision for income taxes, for the year ended
December 31, 2004 and the period from Inception (August 20, 2003) through
December 31, 2003 consist of the following (in thousands):
From Inception
(August 20, 2003)
For the Year Ended through
December 31, 2004 December 31, 2003
--------------------- -------------------
Current provision $ 11,012 $ 1,044
Deferred provision 2,739 (152)
--------------------- ------------------
Total consolidated income tax expense $ 13,751 $ 892
===================== ==================
A reconciliation of the statutory federal income tax expense with the
corporation's actual effective combined federal and state income tax expense for
the year ended December 31, 2004 and the period from inception (August 20, 2003)
through December 31, 2003 is as follows:
For the Period from
For the Year Ended Inception (August 20, 2003)
December 31, 2004 through December 31, 2003
----------------- -----------------
Statutory federal income tax rate 35.00% 35.0%
State tax rate, net of federal benefit 13.43% 6.0%
Other 3.05% 0.2%
--------------- ------------------
Net combined effective federal and state income
tax rate 51.48% 41.2%
=============== ==================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The deferred income tax
liability included in the consolidated financial statements as of December 31,
2004 and 2003 is comprised of the following (in thousands):
December 31, 2004 December 31, 2003
------------------ -------------------
The Company's respective share of depreciation,
amortization, accrued liabilities and other of
Ref-Fuel Holdings $ 127,336 $ 119,543
Net operating loss carryforward (392) -
------------------ -----------------
Total $ 126,944 $ 119,543
================== =================
The Company has Federal net operating loss carryforwards of approximately
$1.3 million as of December 31, 2004, which expire between 2021 and 2024 and
state net operating loss carryforwards of approximately $2.2 million, which have
various expiration dates.
12. Operational and Other Agreements
The ARC operating facilities 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.
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
39
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
waste delivered by counterparties to these agreements at prices determined by
various formulas contained in such agreements. Duke and Allied Waste Industries,
Inc. (Allied) are each obligated to fund one-half of certain cash shortfalls and
other liabilities of Essex arising out of operating the project, including
certain environmental claims. 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.
With respect to the Delaware Valley facility, ARC LLC has guaranteed
amounts payable by Delaware Valley pursuant to certain agreements. ARC LLC
guarantees through 2006 the obligations of Delaware Valley under its service
agreement with the Delaware County Solid Waste Authority. In conjunction with
the acquisition of the facility, ARC LLC also provides an indemnity to the
sellers of the facility from post-acquisition environmental damages as a result
of remedial action for releases or threatened releases of hazardous substances
at the facility.
In order to provide ARC LLC with an additional source of funds to meet
calls on its project support obligations, MSW Energy Holdings II and Holdings
Corp. entered into the Equity Contribution Agreement pursuant to which each of
them have agreed to provide up to $50 million in equity capital to ARC LLC.
Significant Customers
All of the 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 rates defined
in the contracts. Total revenues recognized under these energy contracts
approximated $108.2 million for the eight months ended December 31, 2004,
representing approximately 36% of total net revenues.
13. 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.
Lower Passaic River Study. In August 2004, USEPA notified American Ref-Fuel
Company of Essex County (Essex) that it was potentially liable under CERCLA
Section 107(a) for response actions in the Lower Passaic River Study Area
(LPRSA), a 17 mile stretch of river in northern New Jersey. Essex is one of at
least 52 Potentially Responsible Parties (PRPs) named thus far. USEPA alleges
that hazardous substances found in the LPRSA were being released from the Essex
site, which abuts the river. USEPA's notice letter states that Essex may be
liable for costs related to a proposed $10 million study of the Lower Passaic
River and for unspecified natural resource damages. Considering the history of
industrial and other discharges into the LPRSA from other sources, including
named PRPs, Essex believes that its contribution will be determined to be de
minimus; however, it is not possible at this time to predict that outcome with
40
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certainty or to estimate Ref-Fuel Holdings' liability for the study or any
eventual natural resource damage.
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).
Beginning in May 1997, Wankinco provided several 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 appealed in January 2003, and on August 19, 2004,
the Appellate Court upheld the Trial Court decision in respect of all decisions
related to the alleged lease violations. One ruling unrelated to lease
forfeiture or damages for unlawful possession was remanded because the Judge's
ruling that Semass had not engaged in "an unfair and deceptive act or practice"
applied the law conjunctively rather than disjunctively (as required by the
law). The Appellate Court affirmed the Judge's ruling that there was no
unfairness, but remanded the question of deception for further findings since
the Appellate Court, due to the use of the conjunctive rather than disjunctive,
was unable to infer that the Judge did not find a compensable deceptive act.
Management believes that the Judge's ruling on remand will clarify this issue in
favor of the Company. In addition, Wankinco appealed the Appellate Court's
decision on the lease issues to the Supreme Judicial Court of Massachusetts and,
on September 30, 2004, the Supreme Judicial Court denied Wankinco's Application
for Further Appellate Review. Accordingly, except for the remand discussed
above, the favorable decisions received by Semass have become final and
nonappealable. 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
unless the fund limit is increased by agreement of the parties, or absent such
agreement, by arbitration, wherein it is determined the fund limit needs to be
increased to adequately protect against environmental damage. Management
believes that the $20.0 million fund limit is adequate for this purpose.
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 year ended December 31, 2004, 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, 2004, the balance in the Fund is approximately $14.0 million,
and is included in restricted cash and long-term investments. A corresponding
liability of approximately $7.0 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, 2004.
41
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future Minimum Payments Under Operating Leases
Delaware Valley leases the Delaware Valley Project pursuant to an operating
lease that expires in July 2019. In certain default circumstances under such
lease, Delaware Valley (and ARC LLC by virtue of a guaranty) become obligated to
pay a contractually specified "stipulated loss" value that declines over time
and was approximately $170.1 million as of December 31, 2004. Total net rent
expense was $5.5 million for the year ended December 31, 2004.
The Company also leases office space for its Montvale, New Jersey
headquarters pursuant to an operating lease expiring in August 2007. As of
December 31, 2004, total minimum net rental payments on these leases are as
follows (in thousands):
2005 $ 14,566
2006 13,923
2007 14,049
2008 12,710
2009 28,809
Thereafter 70,502
----------------------
$ 154,559
======================
Capital Expenditures
As of December 31, 2004, the Company has commitments for capital
expenditures of approximately $10.8 million, all of which are expected to be
incurred in 2005.
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 $23.0 million in surety bonds was outstanding as of
December 31, 2004, satisfy these financial requirements.
14. Employee Compensation and Benefit Plans
ARC LLC is the sponsor of the American Ref-Fuel Company Retirement Savings
Plan (the Savings Plan), which covers substantially all employees of the
Company. 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 $1.8 million.
42
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Incentive Plans
Ref-Fuel Holdings has granted certain appreciation rights and/or
performance awards to its officers and certain key employees that were issued
under three separate long-term incentive plans; the Amended and Restated
Long-Term Incentive Plan (dated as of August 1998 and terminated October 2003,
the Long-Term Compensation Plan (dated as of January 2001 and the Management
Incentive Plan (dated as of January 2004). The incentive plans are administered
by the compensation committee of the Board of Directors of Ref-Fuel Holdings.
Awards under long-term incentive plans are based on the achievement of certain
management objectives during each plan year. Awards under the long-term
incentive plans mature in equal amounts of 25 percent in the current year and
the three subsequent years.
The Company recognized long-term incentive compensation expense of
approximately $2.7 million during the year ended December 31, 2004. The Ref-Fuel
Holdings' obligation under the long-term incentive plans is approximately $6.1
million of which approximately $2.7 million is included in other long-term
liabilities with the remainder in current liabilities. The Ref-Fuel Holdings
paid out approximately $3.4 million under these plans for the year ended
December 31, 2004.
Employment Agreements
Ref-Fuel Holdings has employment agreements with its seven officers. The
agreements, which expire December 31, 2006, provides for annual base salaries,
subject to annual review by the Board of Directors of Ref-Fuel Holdings. Each
officer is also eligible to participate in cash based short-term and long-term
bonus and incentive compensation arrangements, retirement plans and other
arrangements that are generally provided to senior officers. If an officer's
employment is terminated by Ref-Fuel Holdings "without cause" or for "good
reason" (each defined in the agreement), such officer is entitled to an amount
equal to the sum of two times the annual base salary, two times the average
annual bonus for the three preceding years and prorated target cash bonus for
the calendar year which includes the date of termination.
Stock Option Plan
On August 11, 2004, the Board of Directors of Holdings Corp., managing member of
the Company, adopted the 2004 Stock Option Plan (the SOP), effective January 1,
2004, as further modified on September 16, 2004. The SOP was designed to link
the interests of officers of Holdings Corp. and other senior management of
Ref-Fuel Holdings to the interests of Holdings Corp. shareholders through the
granting of options to purchase stock of Holdings Corp. Holdings Corp. is a
privately held company. During 2004 Holdings Corp. granted 13,199 options to the
executive officers of Ref-Fuel Holdings under the SOP. Options awarded under the
SOP vest over a period of four years and expire ten years from the date of
grant, unless a triggering event (as defined in the agreement) has not occurred
during the option period.
On January 31, 2005, in conjunction with the Sale, as discussed in Note 16, the
Board of Directors and optionees under the SOP adopted an Option Modification
Agreement (OMA). Under the terms of the OMA, at the completion of the Sale, the
SOP plan will be canceled in exchange for a cash payment. The cash payment is
calculated as the value of all outstanding options granted or ungranted but
authorized under the terms of the SOP, together with certain amounts due and
anticipated under other long term compensation plans.
A summary of the Company's stock options for the year ended December 31, 2004,
is as follows:
Shares Weighted average
exercise price
--------------- ----------------
Options outstanding:
Beginning of year - $ -
Granted 13,199 1,189.51
Exercised - -
Forfeited or terminated - -
Purchased by MSW Merger - -
--------------- ----------------
End of year 13,199 $ 1,189.51
=============== ================
Options exercisable at year end - -
Weighted average fair value of options granted
during the year $ 132.30
The fair value of each stock option granted during the year ended December 31,
2004 is an estimate on the date of grant that is calculated using the minimum
value option pricing model with the following assumptions:
Year Ended
December
31, 2004
------------
Expected life (years) 3
Expected dividend -
Risk free interest rate 3.9%
The Company applies the recognition provisions of Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock-based
compensation plans. No compensation cost has been recognized for the stock
option plan. Set forth as follows are the Company's net income presented both as
reported and pro forma, as if compensation cost had been determined consistent
with the provisions of FAS No. 123 for the year ended December 31, 2004 (in
thousands):
Year Ended December 31, 2004
----------------------------
Net income, as reported $18,947
Add: stock-based compensation expense included in
reported net income, net of taxes -
Less: stock-based compensation expense included using
fair value method, net of taxes (1,746)
----------------------------
Pro forma net earnings $17,201
============================
The effects of applying FAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
15. Related Parties
We are indirectly owned 60% by the DLJMB Funds and 40% by the AIG Highstar
Funds. Our entire board has been designated by the DLJMB Funds and the AIG
Highstar Funds.
The DLJMB Funds are each managed by entities affiliated with Credit Suisse
First Boston Private Equity, Inc., an affiliate of Credit Suisse First Boston
LLC (CSFB).
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
43
MSW ENERGY HOLDINGS II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
CSFB or its affiliates may in the future engage in investment banking and
other services with us or our subsidiaries for which CSFB or its affiliates will
receive customary fees. We will negotiate the compensation for these services at
the time these services are provided. We expect the compensation to be customary
in accordance with the type of the transaction and with fees previously paid to
CSFB.
The AIG Highstar Funds are each managed by AIG Global Investment Corp., an
indirect subsidiary of American International Group, Inc. (AIG). Subsidiaries of
AIG have issued existing insurance policies to us and to our subsidiaries,
including American Ref-Fuel, for which the AIG insurance company subsidiaries
receive customary annual premiums. The Insurance Company of Pennsylvania, an AIG
subsididiary, has issued surety bonds on behalf of several of 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, our subsidiaries or Ref-Fuel
Holdings or its subsidiaries. The Company paid approximately $2.5 million for
such services for the year ended December 31, 2004.
The accounts payable to related party balance 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.
16. Supplemental Disclosure of Cash Flow Information
Depreciation and amortization expense included in the Statements of Cash
Flows for the year ended December 2004 consist of the following expenses
(revenues) (in thousands):
For the Year Ended From Inception
(August 20, 2003) to
Asset / liability Statement of operations December 31, 2004 December 31, 2003
- -------------------------------- --------------------------------------- --------------------- ---------------------
Property, plant and equipment Depreciation and amortization (1) $ 45,154 $ -
Energy contracts Energy revenues 38,687 -
Long-term waste contracts Waste disposal and related services (5,787) -
Lease Operating expenses (rent expense) (1,099) -
Debt Interest expense (8,404) 138
Waste disposal and related services
Deferred revenue and energy revenues (94) -
--------------------- ---------------------
Total $ 68,457 $ 138
===================== =====================
(1) Includes amortization of intangible assets
Noncash investing and financing activities:
Cash from the consolidation of Ref-Fuel Holdings at April 30, 2004 $ 40,238 $ -
Cash paid for interest 60,914 -
Cash paid for taxes (net of refunds) 460 -
Contributions from member for taxes 11,479 -
17. Subsequent Event (unaudited)
DLJ Merchant Banking Partners and AIG Highstar Capital, L.P. announced on
February 1, 2005 that they have signed a definitive agreement to sell Holdings
Corp. to Danielson Holding Corporation (Danielson).
Danielson will pay $740 million in cash for the equity of Holdings Corp.
and will assume the consolidated net debt of Holdings Corp. Subject to receipt
of regulatory approvals and required financing, the transaction is expected to
close in the second quarter of 2005.
In connection with the sale, costs relating to transaction expenses,
severance, employment contracts, the OMA, Long-Term Incentive Plans, housing
subsidies, lease termination and other related items are estimated to be between
$50 million and $70 million.
44
Item 9. Changes in and Disagreements with Accountants on Financial Disclosure
None.
Item 9A. Controls and Procedures
MSW Energy Holdings II and Subsidiaries
As of December 31, 2004, the Chief Executive Officer and Chief Financial Officer
of the Company 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 the Company'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,
2004.
PART III
Item 10. Directors and Executive Officers of the Registrant
MSW Energy Holdings II
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, 2004. Each of the
directors, other than Mr. Panaccione, is also a director of Ref-Fuel Holdings
and American Ref-Fuel.
Name Age Position
---------------------- ---- ------------------------------------
Marc C. Baliotti 34 Director
Daniel H. Clare 33 Director
Thompson Dean 46 Director
OhSang Kwon 36 Director
Michael J. Miller 46 Director
Andrew T. Panaccione 43 Director
John Stokes 53 Director
Steven Webster 52 Director
John T. Miller 58 Chief Executive Officer and Advisory
Director(1)
Michael J. Gruppuso 43 Chief Financial Officer, Vice
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
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
45
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.
Daniel H. Clare has served as a director of Ref-Fuel Holdings and has also
served as one of our directors, and as a director of MSW Energy Holdings and MSW
Energy Holdings II since December 2003. He also serves as a direct of Seabulk
International, Inc. He is currently as Vice President of Credit Suisse First
Boston LLC in the Merchant Banking Group and a Principal of DLJMBP. Mr. Clare
joined CSFB as an Associate in its Private Equity Division in 1999. He
previously worked in the investment banking division of Goldman, Sachs & Company
and as a consultant at Bain & Company, Inc. Mr. Clare holds an M.B.A. degree
from Harvard Business School and is a graduate of Haverford College.
Thompson Dean has served as a director of Ref-Fuel Holdings since July 2004
and has also served as one of our directors, and as a directory of MSW Energy
Holdings and MSW Energy Holdings II since July 2004. He is the Head of Leveraged
Corporate Private Equity, Managing Partner and Investment Committee Chairman of
DLJ Merchant Banking Partners (DLJMBP). Mr. Dean joined DLJMBP in 1988 and
became the Managing Partner in 1995. Following the merger of DLJ and CSFB, he
became the Head of Leveraged Corporate Private Equity, responsible for CSFB's
worldwide leverage buyout business. Mr. Dean serves as Managing Partner of DLJ
Merchant Banking Partners I, L.P., DLJMBP II, DLJMBP III and DLJ Growth Capital
Partners, and as Chairman of the respective Investment Committees. Prior to
joining DLJ, he was a Vice President in the Special Finance Group (Leveraged
Transactions) at Goldman, Sachs and Co. Mr. Dean is the Chairman of the Board of
DeCrane Aircraft Holdings, Inc., Jostens Holding Corp., Mueller Holdings (N.A.)
Inc. And Nycomed Holdings, is a director of Merrill Corporation and Safilo
S.p.A. He is also a director of the Lenox Hill Neighborhood Association, and
serves on various committees for The Society of Memorial Sloan Kettering, The
Museum of the City of New York, The Boys Club of New York and the University of
Virginia.
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 Holdings II and MSW Energy Holdings. 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.
OhSang Kwon has served as a director of Ref-Fuel Holdings and has also
served as a director of MSW Energy Holdings and MSW Energy Holdings II since
December 2003. He is currently a director of Credit Suisse First Boston, LLC and
a Partner of DLJMP and a Vice President of DLJMBP prior to that. From May 1997
to February 2000, he was an Associate with DLJ Securities Corporation, and he
became a Vice President of DLJ Securities Corporation in February 2000. From
October 1996 to May 1997, he was an Associate at Davis, Polk &Wardell. Prior to
that, he was a law clerk for the Hon. William C. Conner in the United States
District Court for the Southern District of New York. He is a director of
Advanstar Communications, Inc.
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. Mr. Miller also serves as
President and Chief Executive Officer fo MSW Energy Holdings I and II. 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)
46
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.
John Stokes has served as one of our directors and as a director of
Ref-Fuel Holdings, MSW Energy Holdings and MSW Energy Holdings II, since April
30, 2004. He joined AIG Global Investment Corp. in March 2004, and is a Managing
Director of AIG Highstar II GP, L.P. Mr. Stokes worked as a consultant to AIG
Global Investment Corp. from February 2002 until he became an employee in March
2004. From September 1998 until December 2001, Mr. Stokes was President and
Chief Executive Officer of Azurix North America, a fully integrated proved of
water and wastewater services to municipal, industrial, and private customers
throughout the United States and Canada. From August 1997 to September 1998, Mr.
Stokes was President and Chief Executive Officer of Electric Lite, Inc., a
pioneer in the retail-level marketing of electric power. Prior to joining
Electric Lite, Inc., Mr. Stokes held various positions with Enron Corp., ESI
Energy, Inc. (a subsidiary of FPL Group), and Florida Power & Light Co. He holds
a B.S. in Mechanical Engineering from Clemson University and an M.B.A. from the
University of Miami.
Steven Webster has served as a director of Ref-Fuel Holdings since July
2004 and has also served as one of our directors, and as a directory of MSW
Energy Holdings and MSW Energy Holdings II since July 2004. He is Chairman of
Global Energy Partners, a merchant banking affiliate of CSFB Private Equity that
makes investments in energy companies and has served in that capacity since
2000. From 1998 to 1999, Mr. Webster served as Chief Executive Officer and
President of R&B Falcon Corporation, and from 1988 to 1997, Mr. Webster served
as Chairman and Chief Executive Officer of Falcon Drilling Corporation, both
offshore drilling contractors. Mr. Webster is on the board of Directors of
Brigham Exploration Company, Carrizo Oil & Gas, Inc., Goodrich Petroleum
Corporation, Grey Wolf Inc. Camden Property Trust Crown Resources Corporation,
Geokinetics, Inc. and Seabulk International, Inc. Mr. Webster also serves on the
Boards of several privately held companies primarily in the energy industry. In
addition, Mr. Webster serves as Chairman of Carrizo Oil & Gas Crown Resources
and BASIC Energy Services, Inc., a privately held oil and gas service company.
Mr. Webster is the founder and an original shareholder in Falcon Drilling
Company, Inc., a predecessor to Transocean, Inc., and is a co-founder and
original shareholder of Carrizo Oil & Gas, Inc. Mr. Webster holds a B.S.I.M.
from Purdue University and an M.B.A. from Harvard Business School. Mr. Webster
serves on the Dean's Advisory Board for Purdue.
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. Michael Miller, Kwon and Clare are
the members of the Audit Committee, and Mr. Miller is its chair. The Board of
Directors has determined that Mr. Miller is a financial expert (as defined by
the Securities and Exchange Commission).
MSW Energy Holdings II has adopted a Code of Ethics which applies to the
chief executive officer, principal financial and accounting officers of MSW
Energy Holdings II. 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 II
LLC, 155 Chestnut Ridge Road, Montvale, NJ 07645.
47
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
None of our directors or officers, all of whom are employed by Ref-Fuel
Holdings, AIGGIC 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.
The Company's executive officers are not separately compensated for their
services as officers of the Company. They are, however, compensated for their
services as officers of Ref-Fuel Holdings. The compensation paid by Ref-Fuel
Holdings to its executives is comprised of three elements: base salary, annual
cash bonus and long-term incentive compensation.
Executive Compensation
The following table sets forth compensation paid to or earned by the Chief
Executive Officer and the other four most highly compensated executive officers
for services rendered to Ref-Fuel Holdings during 2004:
Annual Compensation
-------------------
LTIP
Name and Principal Position Salary Bonus (1) Other Annual Payouts (3)
Comp (2)
John Miller $377,727 $455,097 $149,773 $ 225,700
Chief Executive Officer
Michael Gruppuso $195,692 $98,342 $71,954 $90,899
VP and Chief Financial Officer
Michael DeCastro $219,135 $110,123 $32,313 $90,899
VP, Operations of ARC
Sean Burke $209,962 $93,225 $70,693 $88,950
VP, Organization and Development of ARC
Lynn Johnston $193,654 $91,868 $28,970 $79,575
VP, Business Development of ARC
(1) - Bonus represents earned in 2004 and paid in February 2005.
(2) - For Mssrs. Miller, Gruppuso, and Burke, the amounts include $80,580,
$42,660 and $47,400, respectively of relocation subsidy payable in conjunction
with the relocation of the Ref-Fuel Holdings corporate offices to New Jersey in
2002. The remaining amounts for all of the executive officers include other
perquisites and retirement savings plan contributions that did not exceed, in
the aggregate for the individual officers, the minimum reportable amount.
48
(3) - Represents amounts paid in 2004. Amounts awarded for 2004 appear in
the table below. Ref-Fuel Holdings and its subsidiaries have granted certain
performance awards to its executive officers and certain key employees that were
issued under Long Term Incentive Plans (LTIP). The LTIP is administered by the
Compensation Committee of the Board of Directors of Ref-Fuel Holdings. Awards
under the LTIP are based on the achievement of certain management objectives
during the plan year, and mature in equal amounts of 25% each plan year.
49
Long-Term Incentive Plans Awards in 2004
Amount
Payable Under
the Award
Name Maturity Date (1), (2)
John Miller 2008 $250,857
2007 $250,857
2006 $250,857
2005 $250,857
Michael Gruppuso 2008 $102,624
2007 $102,624
2006 $102,624
2005 $102,624
Michael DeCastro 2008 $102,624
2007 $102,624
2006 $102,624
2005 $102,624
Sean Burke 2008 $87,420
2007 $87,420
2006 $87,420
2005 $87,420
Lynn Johnston 2008 $68,416
2007 $68,416
2006 $68,416
2005 $68,416
(1) LTIP amounts are determined by multiplying the Net Distributable Cash
Flow (as defined in the agreement) for each year by the participants designated
percentage.
(2) LTIP awards vest and are payable in four equal annual installments.
Employment Agreements.
50
The Chief Executive Officer and each of the Named Executive Officers have
employment agreements in place with ARC which expire on December 31, 2006. Under
the terms of the employment agreements, if an officer's employment is terminated
by ARC without Cause, or by the employee for Good Reason (as defined in the
employment agreement), ARC is obligated to continue to pay the executive's base
salary and average bonus for two years after the date of termination as well as
continue to pay unvested amounts due under the LTIP. ARC is also obligated to
provide all health and welfare benefits to the executives for the two year
severance period.
Item 12. Security Ownership of Certain Beneficial Owners and Management
MSW Energy Holdings II
The following table sets forth information with respect to the beneficial
ownership of our membership interests as of March 1, 2005 by:
o each person known to own beneficially more than 5% of our membership
interests;
o each of our directors and executive officers; and
o 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
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 II
-----------------------------
Percentage of Outstanding
Name of Beneficial Owner Membership Interests
- ----------------------------------------------------------- ----------------------------
DLJ Merchant Banking Partners III, L.P. and affiliated funds (1) 60%
AIG Highstar Capital II, L.P. and affiliated funds (2) 40%
Directors:
Marc C. Baliotti(4) --
Daniel H. Clare(3) --
Thompson Dean(3) --
OhSang Kwon(3) --
Steven A. Webster(3) --
Michael J. Miller(4) --
John M. Stokes(4) --
Officers:
John T. Miller(5) --
Michael J. Gruppuso(5) --
(1) DLJ Merchant Banking Partners III, L.P.'s business address is 11 Madison
Avenue, New York, New York 10010.
(2) AIG Highstar Capital II, L.P. business address is 599 Lexington Avenue, New
York, New York 10022.
(3) Messrs. Clare, Dean, Kwon and Webster are affiliated with DLJ Merchant
Banking Partners III, L.P. Membership interests shown for Messrs. Clare,
Dean, Kwon and Webster excludfe membership interests shown as held by DLJ
Merchant Banking Partners, L.P. to which Messrs. Clare, Dean, Kwon and
Webster disclaim beneficial ownership. The business address of each of
Messrs. Clare, Dean, Kwon and Webster is c/o DLJ Merchant Banking Partners
III, L.P., II Madison Avenue, New York, New York 10010.
(4) Messrs. Baliotti, M. Miller and Stokes are affiliated with AIG Highstar
Capital II, L.P. Membership interests shown for Messrs. Baliotti, M. Miller
and Stokes exclude membership interests shown as held by AIG Highstar
Capital II, L.P. as to which Messrs. Baliotti, M. Miller and Stokes
disclaim beneficial ownership. The business address of each of Messrs.
Baliotti, M. Miller and Stokes is c/o AIG Global Investment Corp., 599
Lexington Avenue, New York, New York 10022.
(5) The business address of Mr. J. Miller and Mr. Gruppuso is c/o American
Ref-Fuel LLC, 155 Chestnut Ridge Rd., Montvale, New Jersey 07645.
51
Item 13. Certain Relationships and Related Transactions
We are indirectly owned 60% by the DLJMB Funds and 40% by the AIG Highstar
Funds. Our entire board has been designated by the DLJMB Funds and the AIG
Highstar Funds.
The DLJMB Funds are each managed by entities affiliated with Credit Suisse
First Boston Private Equity, Inc., an affiliate of Credit Suisse First Boston
LLC (CSFB).
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.
CSFB or its affiliates may in the future engage in investment banking and
other services with us or our subsidiaries for which CSFB or its affiliates will
receive customary fees. We will negotiate the compensation for these services at
the time these services are provided. We expect the compensation to be customary
in accordance with the type of the transaction and with fees previously paid to
CSFB.
The AIG Highstar Funds are each managed by AIG Global Investment Corp., an
indirect subsidiary of American International Group, Inc. (AIG). Subsidiaries of
AIG have issued existing insurance policies to us and to our subsidiaries,
including 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 of 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, our subsidiaries or Ref-Fuel
Holdings or its subsidiaries. The Company paid approximately $2.5 million for
such services for the year ended December 31, 2004.
On August 11, 2004, the Board of Directors of Holdings Corp., managing
member of the Company, adopted the 2004 Stock Option Plan (the SOP), effective
January 1, 2004, as further modified on September 16, 2004. The SOP was designed
to link the interests of officers of the Holdings Corp. and other senior
management of Ref-Fuel Holdings to the interests of Holdings Corp. shareholders
through the granting of options to purchase stock of Holdings Corp. Holdings
Corp. is a privately held company. During 2004 Holdings Corp. granted 13,199
options to the executive officers of Ref-Fuel Holdings under the SOP. Options
awarded under the SOP vest over a period of four years and expire ten years from
the date of grant, unless a triggering event (as defined in the agreement) has
not occurred during the option period.
On January 31, 2005, in conjunction with the agreement for Danielson to
acquire the Holdings Corp. (the Sale); the Board and optionees adopted an Option
Modification Agreement (OMA). Under the terms of the OMA, at the completion of
the Sale, the SOP plan will be canceled in exchange for a cash payment. The cash
payment is calculated as the value of all outstanding options granted or
ungranted but authorized under the terms of the SOP, together with certain
amounts due and anticipated under the LTIP.
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 the company(in thousands).
Fees Billed December 31, 2004 December 31, 2003
----------------- -----------------
Audit fees $627 $204
Audit-related fees 70 327
Tax fees 73 -
All other fees 11 -
--------------- ---------------
Total fees $781 $531
=============== ===============
52
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, 2004 and 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;
Audit-related fees are those associated with the Company's debt offering and
Form S-4 filing to register the Senior Notes. It is expected that
PricewaterhouseCoopers LLP will provide similar nonaudit services during fiscal
2005. The Audit Committee reviewed and approved in advance the audit and
nonaudit services rendered by PricewaterhouseCoopers LLP during fiscal 2004 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. Financial Statement Schedules and Exhibits
(a) 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.
(b) Exhibits
3.1 Amended and Restated Certificate of Formation of MSW Finance LLC. *
3.2 Amended and Restated Limited Liability Company Agreement of MSW Energy
Holdings II LLC, dated as of November 5, 2004, by MSW Intermediate
Merger LLC, as the sole member. *
3.3 Certificate of Incorporation of MSW Energy Finance Co. II, Inc.*
3.4 Bylaws of MSW Energy Finance Co. II, Inc.*
3.5 Amended and Restated Certificate of Incorporation of UAE Ref-Fuel II
Corp. *
4.1 Indenture dated November 24, 2003, by and among MSW Energy Holdings II
LLC, MSW Energy Finance Co. II, Inc. and Wells Fargo Bank Minnesota,
National Association as Trustee.*
4.2 Supplemental Indenture dated December 12, 2003, by and among MSW
Energy Holdings II LLC, MSW Energy Finance Co. II, Inc., UAE Ref-Fuel
II Corp. and Wells Fargo Bank Minnesota, National Association as
Trustee.*
4.3 Form of 7 3/8% Senior Secured Note Due 2010 (included in Exhibit
4.1).*
4.4 Registration Rights Agreement dated as of November 24, 2003, by and
among MSW Energy Holdings II LLC, MSW Energy Finance Co. II, Inc., UAE
Ref-Fuel II Corp. and Credit Suisse First Boston LLC.*
53
4.5 Pledge and Security Agreement dated as of November 24, 2003, by and
among MSW Energy Holdings II LLC, MSW Energy Finance Co. II, Inc. and
Wells Fargo Bank Minnesota, National Association as Collateral Agent.*
4.6 Pledge Supplement dated as of November 24, 2003 by UAE Ref-Fuel II
Corp. *
4.7 Deposit Agreement, dated as of November 24, 2003, by and among MSW
Energy Holdings II LLC, MSW Energy Finance Co. II, Inc. and Wells
Fargo Bank Minnesota, National Association as Collateral Agent and
Depositary Agent.*
4.8 Purchase Agreement, dated as of November 7, 2003, by and among MSW
Energy Holdings II LLC, MSW Energy Finance Co. II, Inc., UAE Ref-Fuel
II Corp. and Credit Suisse First Boston LLC.*
10.1 Second Amended and Restated Limited Liability Company Agreement of
Ref-Fuel Holdings LLC, dated as of April 30, 2004, by and between MSW
Energy Holdings II LLC, UAE Ref-Fuel II Corp., MSW Hudson LLC and Duke
Energy Erie LLC, as amended. *
10.2 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 Duke/UAE
Holdings LLC.*
10.3 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.*
10.4 Ref-Fuel Holdings LLC Management Incentive Plan.**
10.5 American Ref-Fuel Holdings Corp. (formerly United American Energy
Holdings Corp.) 2004 Stock Option Plan.**
10.6 Employment Agreement dated August 11, 2004, between American Ref-Fuel
Company LLC and John T. Miller (the other officer employment
agreements are indentical to this agreement except for the
compensation amounts).**
12 Statement re Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of MSW Energy Holdings II LLC. *
31(a) 15d-14(a) Certification of John T. Miller for MSW Energy Holdings II
LLC.
31(b) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy
Holdings II LLC.
31(c) 15d-14(a) Certification of John T. Miller for MSW Energy Finance Co.
II, Inc.
31(d) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy Finance
Co.II, Inc.
32(a) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Holdings II LLC.
54
32(b) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Finance Co. II, Inc.
99 Additional Exhibits-Ref-Fuel Holdings LLC and Subsidiaries
Consolidated Financial Statements
* Incorporated by Reference to Registration Statement No. 333-112640.
** Management contract or compensatory plan or arrangement.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, MSW Energy Holdings II LLC has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MSW ENERGY HOLDINGS II LLC
By:/s/ John T. Miller
------------------
John T. Miller
Chief Executive Officer
Date:March 16, 2005
--------------
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
- --------------------------------- ----------------------------------- ----------------------
Chief Executive Officer (Principal March 16, 2005
/s/ John T. Miller Executive Officer)
- ---------------------------------
John T. Miller
Chief Financial Officer (Principal March 16, 2005
/s/ Michael J. Gruppuso Financial and Accounting Officer)
- ---------------------------------
Michael J. Gruppuso
Director March 16, 2005
/s/ Marc C. Baliotti
- ---------------------------------
Marc C. Baliotti
Director March 16, 2005
/s/ Daniel H. Clare
- ---------------------------------
Daniel H. Clare
Director March 16, 2005
/s/ Thompson Dean
- ---------------------------------
Thompson Dean
Director March 16, 2005
/s/ OhSang Kwon
- ---------------------------------
OhSang Kwon
Director March 16, 2005
/s/ Michael J. Miller
- ---------------------------------
Michael J. Miller
56
Director March 16, 2005
/s/ Andrew T. Panaccione
- ---------------------------------
Andrew T. Panaccione
Director March 16, 2005
/s/ John Stokes
- ---------------------------------
John Stokes
Director March 16, 2005
/s/ Steven Webster
- ---------------------------------
Steven Webster
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, MSW Energy Finance Co. II, Inc. has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MSW ENERGY FINANCE CO. II, INC.
By:/s/ John T. Miller
------------------
John T. Miller
President and Chief Executive Officer
Date:March 16, 2005
--------------
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
- --------------------------------- ----------------------------------- ----------------------
President and Chief Executive March 16, 2005
/s/ John T. Miller Officer (Principal Executive Officer)
- ---------------------------------
John T. Miller
Chief Financial Officer (Principal March 16, 2005
/s/ Michael J. Gruppuso Financial and Accounting Officer)
- ---------------------------------
Michael J. Gruppuso
Director March 16, 2005
/s/ Mark W. Romefelt
- ---------------------------------
Mark W. Romefelt
58
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Formation of MSW Finance LLC. *
3.2 Amended and Restated Limited Liability Company Agreement of MSW Energy
Holdings II LLC, dated as of November 5, 2004, by MSW Intermediate
Merger LLC, as the sole member. *
3.3 Certificate of Incorporation of MSW Energy Finance Co. II, Inc.*
3.4 Bylaws of MSW Energy Finance Co. II, Inc.*
3.5 Amended and Restated Certificate of Incorporation of UAE Ref-Fuel II
Corp. *
4.1 Indenture dated November 24, 2003, by and among MSW Energy Holdings II
LLC, MSW Energy Finance Co. II, Inc. and Wells Fargo Bank Minnesota,
National Association as Trustee.*
4.2 Supplemental Indenture dated December 12, 2003, by and among MSW
Energy Holdings II LLC, MSW Energy Finance Co. II, Inc., UAE Ref-Fuel
II Corp. and Wells Fargo Bank Minnesota, National Association as
Trustee.*
4.3 Form of 7 3/8% Senior Secured Note Due 2010 (included in Exhibit
4.1).*
4.4 Registration Rights Agreement dated as of November 24, 2003, by and
among MSW Energy Holdings II LLC, MSW Energy Finance Co. II, Inc., UAE
Ref-Fuel II Corp. and Credit Suisse First Boston LLC.*
4.5 Pledge and Security Agreement dated as of November 24, 2003, by and
among MSW Energy Holdings II LLC, MSW Energy Finance Co. II, Inc. and
Wells Fargo Bank Minnesota, National Association as Collateral Agent.*
4.6 Pledge Supplement dated as of November 24, 2003 by UAE Ref-Fuel II
Corp. *
4.7 Deposit Agreement, dated as of November 24, 2003, by and among MSW
Energy Holdings II LLC, MSW Energy Finance Co. II, Inc. and Wells
Fargo Bank Minnesota, National Association as Collateral Agent and
Depositary Agent.*
4.8 Purchase Agreement, dated as of November 7, 2003, by and among MSW
Energy Holdings II LLC, MSW Energy Finance Co. II, Inc., UAE Ref-Fuel
II Corp. and Credit Suisse First Boston LLC.*
10.1 Second Amended and Restated Limited Liability Company Agreement of
Ref-Fuel Holdings LLC, dated as of April 30, 2004, by and between MSW
Energy Holdings II LLC, UAE Ref-Fuel II Corp., MSW Hudson LLC and Duke
Energy Erie LLC, as amended. *
10.2 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 Duke/UAE
Holdings LLC.*
59
10.3 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.*
10.4 Ref-Fuel Holdings LLC Management Incentive Plan.**
10.5 American Ref-Fuel Holdings Corp. (formerly United American Energy
Holdings Corp.) 2004 Stock Option Plan.**
10.6 Employment Agreement dated as of August 11, 2004, between American
Ref-Feul Company LLC and John T. Miller (the other officer employment
agreements are identical to this agreement except for the compensation
amounts).**
12 Statement re Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of MSW Energy Holdings II LLC. *
31(a) 15d-14(a) Certification of John T. Miller for MSW Energy Holdings II
LLC.
31(b) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy
Holdings II LLC.
31(c) 15d-14(a) Certification of John T. Miller for MSW Energy Finance Co.
II, Inc.
31(d) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy Finance
Co.II, Inc.
32(a) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Holdings II LLC.
32(b) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Finance Co. II, Inc.
99 Additional Exhibits-Ref-Fuel Holdings and Subsidiaries Consolidated
Financial Statements
* Incorporated by Reference to Registration Statement No. 333-112640.
** Management contract or compensatory plan or arrangements.
60