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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-40478
AES RED OAK, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 54-1889658
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
832 Red Oak Lane, Sayreville, NJ 08872
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 238-1462
Securities Registered Pursuant To Section 12(b) of The Act: None
Securities Registered Pursuant To Section 12(g) of The Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. |X|
As of June 28, 2002, the last business day of the registrant's most recently
completed second fiscal quarter, and as of March 7, 2003, there was one
membership interest in AES Red Oak, LLC outstanding, which was held by AES Red
Oak, Inc., the Company's parent and a wholly-owned subsidiary of The AES
Corporation.
All of the Registrant's equity securities are indirectly owned by The AES
Corporation. Registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the
reduced disclosure format authorized by General Instruction I of Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
Page
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS...........................2
PART I......................................................................3
ITEM 1. BUSINESS.........................................................3
ITEM 2. PROPERTIES......................................................34
ITEM 3. LEGAL PROCEEDINGS...............................................35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............35
PART II....................................................................36
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................36
ITEM 6. SELECTED FINANCIAL DATA.........................................36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.......44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA......................46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................67
PART III...................................................................68
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............68
ITEM 11. EXECUTIVE COMPENSATION..........................................68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................68
ITEM 14. CONTROLS AND PROCEDURES.........................................68
PART IV....................................................................69
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K........................................................69
SIGNATURES....................................................................74
CERTIFICATIONS................................................................75
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-K, as well as statements made by us
in periodic press releases and other public communications, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "believes," "estimates," "plans," "projects," "expects,"
"may," "will," "should," "approximately," or "anticipates" or the negative
thereof or other variations thereof or comparable terminology, or by discussion
of strategies, each of which involves risks and uncertainties. We have based
these forward-looking statements on our current expectations and projections
about future events based upon our knowledge of facts as of the date of this
Form 10-K and our assumptions about future events.
All statements other than of historical facts included herein, including
those regarding market trends, our financial position, business strategy,
projected plans and objectives of management for future operations of the
facility, are forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors outside of our
control that may cause our actual results or performance to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. These risks, uncertainties and other
factors include, among others, the following:
o unexpected problems relating to the performance of the facility,
o the financial condition of third parties on which we depend,
including in particular, Williams Energy Marketing & Trading Company
("Williams Energy"), as fuel supplier under the power purchase
agreement we entered into with Williams Energy for the sale of all
electric energy and capacity produced by the facility, as well as
ancillary and fuel conversion services (the "Power Purchase
Agreement"), and The Williams Companies, Inc., as the guarantor of
Williams Energy's performance under the Power Purchase Agreement,
o continued performance by Williams Energy (as guaranteed by The
Williams Companies, Inc.) under the Power Purchase Agreement,
o the ability of The Williams Companies, Inc. or its affiliates to
avoid a default under the Power Purchase Agreement by continuing to
maintain or provide adequate security to supplement their guarantee
of Williams Energy's performance under the Power Purchase Agreement,
o our ability to find a replacement power purchaser on favorable or
reasonable terms, if necessary,
o an adequate merchant market after the expiration, or in the event of
a termination, of the Power Purchase Agreement,
o the outcome of our pending arbitration with Williams Energy,
o capital shortfalls and access to additional capital on reasonable
terms, or in the event that the Power Purchase Agreement is
terminated,
o the possibility that Williams Energy will not request that we run or
"dispatch" the facility as provided under the Power Purchase
Agreement,
o inadequate insurance coverage,
o unexpected expenses or lower than expected revenues,
o environmental and regulatory compliance,
o terrorists acts and adverse reactions to United States anti-terrorism
activities, and
o additional factors that are unknown to us or beyond our control.
We have no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
2
PART I
ITEM 1. BUSINESS
General
We are a Delaware limited liability company formed on September 13, 1998,
to develop, construct, own, lease, operate and maintain a gas-fired electric
generating power plant in the Borough of Sayreville, Middlesex County, New
Jersey and manage the production of electric generating capacity, ancillary
services and energy at our facility. The Company reached provisional acceptance
on August 11, 2002, risk transfer on August 13, 2002, and became commercially
available on September 1, 2002. Since our commercial operation date, our sole
business is the ownership, leasing and operation of the project. Williams
Energy has disputed the September 1, 2002, commercial operation date and has
informed the Company that it recognizes commercial availability of our facility
as of September 28, 2002. The Company expects to settle the dispute through
arbitration during the second quarter of 2003. See "Project Status and Recent
Developments".
Our facility was initially designed, engineered, procured and constructed
for us by Washington Group International, Inc. ("WGI") (as the successor
contractor) on a fixed-price, turnkey basis. On May 14, 2001, WGI filed a plan
of reorganization along with voluntary petitions to restructure under Chapter
11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of
Nevada in Reno (the "Bankruptcy Court"). As a result of WGI's bankruptcy
filing, on June 20, 2001 we made a demand on the Raytheon Company ("Raytheon")
to perform its obligations under a guarantee which Raytheon had given us of
WGI's performance obligations under the construction agreement and Raytheon
became responsible for the construction of our facility. As mentioned above, we
granted Raytheon provisional acceptance on August 11, 2002. We are currently
working with Raytheon to schedule and prepare for the performance testing
required for final acceptance of the facility. See "Summary of Principal
Agreements - Construction Agreement".
Siemens Westinghouse Power Corporation provides combustion turbine
maintenance services and spare parts with respect to the turbines for our
facility under a maintenance services agreement for an initial term of 16 years
from the date of execution of the agreement or after the twelfth scheduled
outage for a turbine, whichever occurs first, unless we exercise our right to
cancel the agreement after the first major outage of the turbines at
approximately the sixth year of operation of the facility. AES Sayreville, a
wholly owned subsidiary of AES Red Oak, Inc., our direct corporate parent,
provides development, construction management and operations and maintenance
services for our operating facility under the operations agreement. We act as
construction agent for our affiliate, AES Red Oak Urban Renewal Corporation
("AES URC"), for the development and construction of part of the facility under
a construction agency agreement. We own the land on which our facility is
located, and lease part of the facility from AES URC with an option to
purchase.
We have entered into the Power Purchase Agreement for a term of 20 years
under which Williams Energy has committed to purchase all of the net capacity,
fuel conversion and ancillary services of our facility. Net capacity is the
maximum amount of electricity generated by our facility net of electricity used
at our facility. Fuel conversion services consist of the combustion of natural
gas in order to generate electric energy. Ancillary services consist of
services necessary to support the transmission of capacity and energy. Williams
Energy is obligated to supply us with all natural gas necessary to provide net
capacity, fuel conversion services and ancillary services under the Power
Purchase Agreement. During the term of the Power Purchase Agreement
substantially all of our operating revenues will be derived from payments made
under the Power Purchase Agreement. Under certain limited circumstances
described herein, Williams Energy has the right to terminate the Power Purchase
Agreement.
Organizational Structure
All of the equity interests in our company are owned by AES Red Oak, Inc.,
a wholly owned subsidiary of The AES Corporation. AES Red Oak, Inc. currently
has no operations outside of its activities in connection with our project and
does not anticipate undertaking any unrelated operations. AES Red Oak, Inc.
also owns all of the equity interests in AES Sayreville, L.L.C., which provides
development, construction management, and operations and maintenance services
to us. AES Sayreville has no operations outside of its activities in connection
with our project. AES Red Oak, Inc. has no assets other than its membership
interests in us and AES Sayreville. The AES Corporation supplies AES Sayreville
with personnel and services necessary to carry out its obligations to us.
3
We also own all of the equity interests in AES URC, which was organized as
an urban renewal corporation under New Jersey law so that portions of our
project can be designated as redevelopment areas or projects in order to
provide certain real estate tax and development benefits for our project. AES
URC has no operations outside of its activities in connection with our project.
The AES Corporation is a leading global power company committed to
supplying electricity in a socially responsible way. The AES Corporation is a
public company and is subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports,
proxy statements and other information, including financial reports, with the
SEC, which are not incorporated into and do not form a part of this Form 10-K.
The following organizational chart illustrates the relationship among us,
AES Red Oak, Inc., AES Sayreville, The AES Corporation, and AES URC:
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The AES Corporation
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AES Red Oak, Inc.
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AES Red Oak, L.L.C. AES Sayerville, L.L.C.
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AES Red Oak Urban Renewal Corporation
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Our principal executive offices are located at 832 Red Oak Lane,
Sayreville, NJ 08872. Our telephone number is (732) 238-1462.
Project Status and Recent Developments
The Company reached provisional acceptance on August 11, 2002, risk
transfer on August 13, 2002, and became commercially available on September 1,
2002. Williams Energy has disputed the September 1, 2002, commercial operation
date and has informed the Company that it recognizes commercial availability of
the facility as of September 28, 2002. The Company has entered into arbitration
to settle the dispute over the commercial operation date and the proper
interpretation of certain provisions of the Power Purchase Agreement. We expect
that the arbitration will be resolved in the second quarter of 2003. The
arbitration relates to disputed amounts of approximately $7.6 million, which
includes a $594,000 payment extension option dispute and a $7.0 million
commercial operation start date dispute. The Company is also disputing $392,000
of merchant price and testing gas charges with Williams Energy although this is
not yet part of the arbitration. While the Company believes that its
interpretation of the Power Purchase Contract is correct, the Company cannot
predict the outcome of these matters.
Raytheon must now perform certain agreed upon completion items in order to
obtain final acceptance. On March 8, 2003, we entered into a letter agreement
with Raytheon pursuant to which we granted Raytheon a free extension of the
guaranteed final acceptance date from April 1, 2003 to June 30, 2003. See
"Summary of Principal Project Contracts - Construction Agreement - Completion
and Acceptance of Our Project - Final Acceptance."
Pursuant to Section 18.3 of the Power Purchase Agreement, in the event
that Standard & Poors ("S&P") or Moody's rates the long-term senior unsecured
debt of The Williams Companies, Inc. lower than investment grade, The Williams
Companies, Inc. is required to supplement The Williams Companies, Inc.
guarantee with additional alternative security that is acceptable to the
Company within 90 days after the loss of such investment grade rating.
According to published sources, on July 23, 2002, S&P lowered the
long-term senior unsecured debt rating of The Williams Companies, Inc. to "BB"
from "BBB-" and further lowered such rating to "B" on July 25, 2002. According
to published sources, on July 24, 2002, Moody's lowered the long-term senior
unsecured debt rating of The
4
Williams Companies, Inc. to "B1" from "Baa3" and further lowered such rating on
November 22, 2002 to "Caa1". Accordingly, The Williams Companies, Inc.'s
long-term senior unsecured debt is currently rated below investment grade by
both S&P and Moody's.
Due to the downgrade of The Williams Companies, Inc. to below investment
grade, the Company and Williams Energy entered into a letter agreement dated
November 7, 2002 (the "Letter Agreement"), under which Williams Energy agreed
to provide the Company with a $10 million prepayment (the "Prepayment") within
five business days after execution of the Letter Agreement and at least $25
million additional collateral on January 6, 2003. A description of the
collateral that supports Williams Energy's obligations under the Power Purchase
Agreement is set forth below under the caption "Power Purchase Agreement -
Security".
On March 15, 2000, the Company issued $384 million in senior secured bonds
for the purpose of providing financing for the construction of the facility and
to fund, through the construction period, interest payments to the bondholders.
In September 2000, the Company consummated an exchange offer whereby the
holders of the senior secured bonds exchanged their privately placed senior
secured bonds for registered senior secured bonds.
In an action related to the ratings downgrade of The Williams Companies,
Inc., S&P lowered its ratings on the Company's senior secured bonds to "BB-" on
July 26, 2002, and placed the rating on credit watch with developing
implications. On November 21, 2002 S&P placed the ratings on negative outlook.
Additionally, on July 25, 2002, Moody's indicated that its ratings on the
Company's senior secured bonds were placed under review for possible downgrade.
On October 7, 2002, Moody's lowered its ratings on the Company's senior secured
bonds to "Ba2" and on November 11, 2002 lowered the ratings to "B2" with a
negative outlook. As a result of such ratings downgrades, the Company's working
capital facility is unavailable and the Company is required to pay higher fees
for draws on any of its project support agreements. The Company does not
believe that such ratings downgrades will have any other direct or immediate
effect on the Company, as none of the other financing documents or project
contracts have provisions that are triggered by a reduction of the ratings of
the bonds. As of December 31, 2002, $381.6 million aggregate principal amount
of senior secured bonds were outstanding.
During the 20-year term of the Power Purchase Agreement, we expect to sell
electric energy and capacity produced by the facility, as well as ancillary and
fuel conversion services to Williams Energy and to purchase fuel supply from
Williams Energy. Since we depend on The Williams Companies, Inc. and its
affiliates for both revenues and fuel supply under the Power Purchase
Agreement, if The Williams Companies, Inc. and its affiliates were to terminate
or default under the Power Purchase Agreement, there would be a severe negative
impact our cash flow and financial condition which could result in a default on
our senior secured bonds. Due to the recent decline in pool prices, we would
expect that if we were required to seek alternate purchasers of our power as a
result of such a default or termination, even if we were successful in finding
alternate revenue sources, any such alternate revenue sources would be
substantially below the amounts that would have been otherwise payable pursuant
to the Power Purchase Agreement. There can be no assurances as to our ability
to generate sufficient cash flow to cover operating expenses or our debt
service obligations in the absence of a long-term Power Purchase Agreement with
Williams Energy.
Energy Revenues
As mentioned above, we generate energy revenues under the Power Purchase
Agreement with Williams Energy. During the 20-year term of the agreement, we
expect to sell electric energy and capacity produced by the facility, as well
as ancillary and fuel conversion services. Under the Power Purchase Agreement,
we also generate revenues from meeting (1) base electrical output guarantees
and (2) heat rate rebates through efficient electrical output.
Upon its expiration, or in the event that the Power Purchase Agreement is
terminated prior to its 20-year term or Williams Energy otherwise fails to
perform, we would seek to generate energy revenues from the sale of electric
energy and capacity into the merchant market or under new short- or long-term
power purchase or similar agreements. Due to recent declines in pool prices,
however, we would expect that even if we were successful in finding alternate
revenue sources, any such alternate revenues would be substantially below the
amounts that would have been otherwise payable pursuant to the Power Purchase
Agreement.
5
After the plant reached provisional acceptance, we elected to confirm
reliability for up to 19 days before binding with Williams Energy. Beginning
August 13, 2002 (the date of risk transfer) through August 31, 2002, we
operated the facility as a merchant plant with electric revenues sold to
Williams Energy, in its capacity as our PJM account representative, at spot
market prices and bought gas from Williams Energy at spot market prices.
Additionally, during September 2002, we made net electric energy available to
Williams Energy during times other than receiving a Williams Energy dispatch
notice. This net electric energy is referred to as "other sales of energy" in
the Power Purchase Agreement and is sold at the local marginal price commonly
referred to as spot market energy. Gas required for this energy generation was
purchased from Williams Energy at spot market prices. We recognized merchant
revenues of approximately $11.1 million and fuel expenses of approximately $6.9
million for the year ended December 31, 2002.
Competition
Under the Power Purchase Agreement, Williams Energy is required to
purchase all of our facility's capacity and energy for an initial term of 20
years. Therefore, during the term of the Power Purchase Agreement, competition
from other capacity and energy providers will become an issue only if the Power
Purchase Agreement is terminated or not performed in accordance with its terms.
Following the term of the Power Purchase Agreement, we anticipate selling our
facility's net capacity, ancillary services and energy under a new Power
Purchase Agreement or into the Pennsylvania-New Jersey-Maryland ("PJM") power
pool market. At that time, we will face competition from other generating
facilities selling into the PJM power pool market including, possibly, other
facilities owned by The AES Corporation or its affiliates.
Employees
We are a Delaware limited liability company and have no employees other
than our 7 officers. Our officers receive no compensation for the services they
provide to us or for any transactions between us and our affiliates. Under the
operations agreement, AES Sayreville has managed the development and
construction of and now operates and maintains our facility. The direct labor
personnel and the plant operations management are employees of The AES
Corporation provided to AES Sayreville under a services agreement. As of
December 31, 2002, The AES Corporation provided 27 employees to work at our
facility.
Insurance
As owner of our site and lessee and owner of the facility, we maintain a
comprehensive insurance program as required under our various project contracts
and the indenture governing our senior secured bonds and underwritten by
recognized insurance companies. Among other insurance policies, we also
maintain commercial general liability insurance, permanent property insurance
for full replacement value of the facility and business interruption insurance
covering at least 18 months of gross revenues less variable operating expenses.
We have obtained title insurance in an amount equal to the principal amount of
the bonds.
AES Sayreville, as operator of our facility, maintains, among other
insurance policies, workers' compensation insurance (or evidence of
self-insurance), if required, and comprehensive automobile bodily injury and
property damage liability insurance.
Permits And Regulatory Approvals
AES Sayreville, as operator of our facility, and us, as owner and lessee
of our facility, must comply with numerous federal, state and local regulatory
requirements including environmental requirements in the operation of our
facility.
On November 4, 1999, we received a certification from the Federal Energy
Regulatory Commission ("FERC") that we are an exempt wholesale generator.
Certification as an exempt wholesale generator exempts us from regulation under
the Public Utility Holding Company Act of 1935. We will maintain this status so
long as we continue to make only wholesale sales of electricity, which we
intend to do. Prior to commercial operation, we filed the Power Purchase
Agreement with FERC and requested approval for the rates contained therein. On
June 22, 2001, we received FERC approval at those rates. We may also need to
obtain FERC approval for sales of electricity at market-based rates after the
Power Purchase Agreement is no longer in effect.
6
On January 28, 2000, we received our Prevention of Significant
Deterioration Permit, or "air permit," from the New Jersey Department of
Environmental Protection. The appeal period in respect of the air permit
expired on February 28, 2000, and no appeal was filed. The air permit requires
that our facility be constructed in a manner that will allow it to meet
specified limitations on emissions of air pollutants. Under the construction
agreement, originally WGI and now Raytheon, as project guarantor, are required
to construct our facility to meet these requirements. The required emission
standards were met upon provisional acceptance and commercial operation and no
additional modification is currently needed.
We are subject to a number of statutory and regulatory standards and
required approvals relating to energy, labor and environmental laws. The
necessary environmental permits for the commencement of construction and
operation of our facility have been obtained.
Summary of Principal Project Contracts
While we believe that the following summaries contain the material terms
of the principal project contracts, such summaries may not include all of the
provisions of each agreement that each individual investor may feel is
important. These summaries do not restate each agreement discussed herein and
exclude certain definitions and complex legal terminology that may be contained
in each relevant agreement. You should carefully read each agreement discussed
herein, each of which is filed as an exhibit to this Form 10-K.
Power Purchase Agreement
We entered into a Fuel Conversion Services, Capacity and Ancillary
Services Purchase Agreement, dated as of September 17, 1999, with Williams
Energy, for the sale to Williams Energy of all of the electric energy and
unforced capacity produced by our facility as well as ancillary services and
fuel conversion services.
Term
The Power Purchase Agreement extends for 20 years from the first contract
anniversary date, which is the last day of the month in which commercial
operation occurred. We recognize a commercial operation date of September 1,
2002. Williams Energy has disputed the September 1, 2002, commercial operation
date and has informed the Company that it recognizes commercial availability of
our facility as of September 28, 2002. See "Project Status and Recent
Developments". While we believe our interpretation of the Power Purchase
Agreement is correct we cannot predict the outcome of this matter.
Upon notice from Williams Energy no later than 90 days prior to the end of
the initial term of the Power Purchase Agreement, the term of the Power
Purchase Agreement may be extended by Williams Energy for up to a total of 24
months for each hour of the initial term during which we are unable to deliver
energy or ancillary services because of an event of force majeure (other than
an inability of the Company to obtain natural gas to operate the facility) that
occurs after the commercial operation date.
Under the Power Purchase Agreement, the commercial operation date was
required to occur by December 31, 2001, however the Company had the right to
extend the commercial operation date until June 30, 2002 by invoking its right
to a free extension option which was available under the Power Purchase
Agreement if certain conditions were met. The Company exercised its right to
extend the commercial operation date from December 31, 2001 to June 30, 2002,
as granted under the free extension option. In addition, the Company had the
right under the Power Purchase Agreement to again extend the commercial
operation date from June 30, 2002 to June 30, 2003 (the "Second Paid Extension
Option"), upon written notification to Williams Energy no later than May 21,
2002 (which represented an agreed upon extension from the original April 30,
2002 notification deadline), by paying Williams Energy (i) an amount equal to
the lesser of any actual damages Williams Energy suffered or incurred after
June 30, 2002, as a result of Williams Energy's reliance upon delivery by such
date, to the extent said damages could not be mitigated fully, or $3.0 million
and (ii) certain amounts of liquidated damages as calculated pursuant to the
Power Purchase Agreement. On May 21, 2002, the Company exercised the Second
Paid Extension Option. Williams Energy initially invoiced the Company $3
million related to this extension but subsequently withdrew this invoice and,
as of the date hereof, Williams Energy has not provided the Company support for
the amount of actual damages suffered or incurred after June 30, 2002 as a
result of Williams Energy's reliance upon delivery by such date, therefore the
Company has not yet paid or accrued any amounts that may be owed as described
in clause (i) above. As of December 31,
7
2002, the Company had paid liquidated damages to Williams Energy at the rate of
$11,000 per day for the period beginning on July 1, 2002 and ending on August
31, 2002, which amounted to $682,000. The Company had also paid liquidated
damages to Williams Energy at the rate of $22,000 per day for the period
beginning on September 1, 2002 and ending on September 27, 2002, which amounted
to $594,000, although this amount is still in dispute through arbitration.
During the period of the Second Paid Extension Option, the Company continued to
collect liquidated damages through August 10, 2002 from Raytheon under the
construction agreement in the amount of $108,000 per day. As of December 31,
2002, the Company had received $14 million in liquidated damages from Raytheon
under the construction agreement.
Williams Energy is currently the Company's sole customer for purchases of
capacity, ancillary services, and energy and the Company's sole source for
fuel. Williams Energy's payments under the Power Purchase Agreement are
expected to provide all of the Company's operating revenues during the term of
the Power Purchase Agreement. It is unlikely that the Company would be able to
find another purchaser or fuel source on similar terms for the facility if
Williams Energy were not performing under the Power Purchase Agreement. Any
material failure by Williams Energy to make capacity and fuel conversion
payments or to supply fuel under the Power Purchase Agreement would have a
severe impact on the Company's operations.
Purchase and Sale of Capacity
During the term of the Power Purchase Agreement, we will perform for
Williams Energy on an exclusive basis, and Williams Energy will purchase and
pay for, fuel conversion services. Fuel conversion services include the
operation of our facility by us to combust natural gas delivered by Williams
Energy in order to generate and deliver energy or to provide ancillary
services. We will sell and make available to Williams Energy on an exclusive
basis, and Williams Energy will purchase and pay for, our facility's net
capacity and ability to generate electric energy. We may not sell, without the
consent of Williams Energy in its sole discretion, capacity generated on the
site but not from our facility.
Fuel Conversion and Other Services
Williams Energy must deliver or cause to be delivered to us at the natural
gas delivery point on an exclusive basis all quantities of natural gas required
by us to:
o generate net electric energy and/or ancillary services;
o perform start-ups;
o perform shutdowns; and
o operate our facility during any period other than a start-up,
shutdown or dispatch period for any reason.
Williams Energy at all times retains title to the natural gas delivered to
us except that when our facility is operated during any period other than a
start-up, shutdown or dispatch period title is transferred to us at the natural
gas delivery point.
Williams Energy is solely responsible for all costs and expenses related
to the supply and transportation of natural gas to the natural gas delivery
point. We are responsible for all costs and expenses related to the
transportation, gathering or taxation of natural gas or its use or possession
at and after the natural gas delivery point.
Upon the expiration of the Power Purchase Agreement or any termination of
the Power Purchase Agreement as the result of Williams Energy's default
thereunder, we will have the right to purchase the gas interconnection
facilities from Williams Energy, or if Williams Energy does not own the gas
interconnection facilities, Williams Energy will assign to us all of its rights
to transportation services using the gas interconnection facilities.
Pricing and Payments
For each month of the term after the commercial operation date, Williams
Energy must pay us for our facility's net capacity, successful start-ups and
associated shutdowns, ancillary services and fuel conversion services at the
applicable rates set forth in the Power Purchase Agreement. Each monthly
payment by Williams Energy consists of a total fixed payment, a variable
operations and maintenance payment and an energy exercise fee. The total fixed
8
payment, which is payable regardless of facility dispatch by Williams Energy
but is subject to adjustment based on facility availability, is calculated by
multiplying an unforced capacity rate for each contract year by the temperature
adjusted unforced capacity in the billing month and adding to that the product
of the fuel conversion option demand charge and the average facility capacity
for that month. The total fixed payment is anticipated to be sufficient to
cover our debt service and fixed operating and maintenance costs and to provide
us a return on equity. The variable operations and maintenance payment is
intended to cover our variable operating and maintenance costs and escalates
annually based on an escalation index set forth in the Power Purchase
Agreement. The energy exercise fee is intended to compensate us for each
successful start-up. We may receive heat rate bonuses or be required to pay
heat rate penalties.
Prior to the commercial operation date, and during some facility tests
thereafter, we purchased natural gas from Williams Energy. Williams Energy sold
us the natural gas at prices specified in the Power Purchase Agreement, and we
sold to Williams Energy at the electric delivery point any net electric energy
produced during the periods at the hourly integrated market clearing marginal
price for electric energy at the location where it was delivered or received,
calculated pursuant to the terms of the operating agreement of PJM
Interconnection, LLC, which is the independent system operator that operates
the transmission system to which our facility interconnects. We are solely
responsible for any fines or penalties resulting from the delivery of the net
electric energy at the electric delivery point when the delivery is made
without the authorization of PJM, Jersey Central Power, which is the host
utility, or FERC.
Williams Energy is entitled to an annual fuel conversion volume rebate if
its dispatch of our facility exceeds specified levels and monthly non-dispatch
payments if, under some circumstances, our facility does not deliver, in whole
or in part, the requested net electric energy requested by Williams Energy. All
fuel conversion volume rebate payments and non-dispatch payments must be made
to Williams Energy after debt service and certain other payments but prior to
any distribution to holders of equity interests in our company. Fuel conversion
volume rebate payments and any non-dispatch payments owed to Williams Energy
and not paid when due will be paid, together with interest thereon, when funds
become available to us at the priority level described above. A separate
reserve account must be maintained by us and our lenders and we must deposit to
that account on a monthly basis, from our cash flow, any applicable and unpaid
non-dispatch payment plus a ratable amount of the maximum fuel conversion
volume rebate amount that Williams Energy may have earned. Amounts held in that
reserve account will be used to pay, to the extent owed, the fuel conversion
volume rebate and non-dispatch payments.
Required Authorizations
During the term of the Power Purchase Contract, we must, at our own cost
and expense, obtain as and when required all approvals, permits, licenses and
other authorizations from governmental authorities as may be required for us to
operate and maintain our facility, the interconnection facilities and
protective gas apparatus and to perform our obligations under the Power
Purchase Agreement. We plan to obtain all additional governmental approvals,
permits, licenses and authorizations as may be required with respect to our
facility as soon as practicable.
Interconnection and Metering Equipment
At our sole cost and expense, we designed, constructed and installed and
currently maintain the GPU interconnection facilities and protective gas
apparatus needed to generate and deliver net electric energy and/or ancillary
services to the electric delivery point in order to fulfill our obligations
under the Power Purchase Agreement, including all interconnection facilities
and protective gas apparatus that are located at the switchyards and/or
substations at our facility. Our facility, interconnection facilities and
protective gas apparatus have been designed, constructed and completed in a
good and workmanlike manner and in accordance with accepted electrical
practices (with respect to our facility and interconnection facilities) or in
accordance with standard gas industry practices (with respect to protective gas
apparatus), so that the expected useful life of our facility, the
interconnection facilities and protective gas apparatus will be not less than
the term of the Power Purchase Agreement.
Public Service Electric and Gas ("PSE&G"), under contract with Williams
Energy, has installed the natural gas interconnection facilities and natural
gas metering equipment to our satisfaction. PSE&G has also installed gas
metering equipment although we are currently involved in a dispute with
Williams Energy over the location of such equipment. All electric metering
equipment and gas metering equipment, whether owned by us or by a third party,
must be operated, maintained and tested in accordance with accepted electrical
practices, in the case of the electric
9
metering equipment, and in accordance with applicable industry standards, in
the case of the gas metering equipment. Except under limited circumstances, we
may not enter into any modification or amendment of the interconnection
agreement with Jersey Central Power without the prior written consent of
Williams Energy.
As of December 31, 2002, all electrical interconnection and metering
equipment had been installed and accepted by Jersey Central Power. Certain
costs associated with the equipment are in dispute. See "Interconnection
Agreement - Jersey Central Power's Obligations."
Operation and Dispatch
Our facility and the interconnection facilities must be operated in
accordance with accepted electrical practices and applicable requirements and
guidelines of Jersey Central Power pursuant to the interconnection agreement.
The protective gas apparatus must be operated in accordance with standard gas
industry practices. If there is a conflict between the terms and conditions of
the Power Purchase Agreement and Jersey Central Power requirements, the Jersey
Central Power requirements control.
We must operate our facility in parallel with Jersey Central Power's
electrical system in accordance with the interconnection agreement. When
dispatched by Williams Energy, we must operate our facility and each unit
thereof with automatic regulation equipment in service.
The Power Purchase Agreement acknowledges that Jersey Central Power has
the right to require us to disconnect our facility from its electrical system,
or otherwise curtail, interrupt or reduce deliveries of net electric energy, in
accordance with the terms of the interconnection agreement. If our facility has
been disconnected for these reasons, Williams Energy will continue to be
obligated to make total fixed payments for at least 24 hours after the
occurrence of disconnection of our facility by Jersey Central Power.
We must use commercially reasonable efforts to correct promptly any
condition at our facility which necessitates the disconnection of our facility
from Jersey Central Power's electrical system or the reduction, curtailment or
interruption of electrical output of our facility.
Williams Energy has the exclusive right to use the net electric energy and
ancillary services and to schedule the operation of our facility or a unit
thereof in accordance with the provisions of the Power Purchase Agreement;
however, the scheduling must be consistent with the design limitations of our
facility, applicable law, regulations and permits, and the agreements and the
manuals of PJM.
Williams Energy and our company must perform each of our respective
obligations in a manner that avoids the creation of cashout obligations or
imbalance penalties imposed by the natural gas transporter. Williams Energy
must try to minimize any imbalance charges under a transporter's tariff and
thereafter we will be responsible for imbalance charges levied by the natural
gas transporter to the extent that the charges result from: (i) an imbalance
caused by us greater than the allocable tolerance in the transporter's tariff
or (ii) our failure to promptly notify Williams Energy of a change in the
operation of our facility that would cause any imbalance.
Force Majeure
A party will be excused from performing its obligations under the Power
Purchase Agreement and will not be liable for damages or otherwise to the other
party if and to the extent the party declares that it is unable to perform or
is prevented from performing an obligation under the Power Purchase Agreement
by a force majeure condition, except for any obligations and/or liabilities
under the Power Purchase Agreement to pay money, which will not be excused, and
except to the extent an obligation accrues prior to the occurrence or existence
of a force majeure condition as long as:
o the party declaring its inability to perform by virtue of force
majeure, as promptly as practicable after the occurrence of the force
majeure condition, but in no event later than 5 days thereafter,
gives the other party written notice describing, in detail, the
nature, extent and expected duration of the force majeure condition;
o the suspension of performance is of no greater scope and of no longer
duration than is reasonably required by the force majeure condition;
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o the party declaring force majeure uses all commercially reasonable
efforts to remedy its inability to perform; and
o as soon as the party declaring force majeure is able to resume
performance of its obligations excused as a result of the force
majeure condition, it must give prompt written notification thereof
to the other party.
Irrespective of whether the force majeure condition is declared by
Williams Energy or us, the time period of a force majeure will be excluded from
the calculation of all payments under the Power Purchase Agreement and Williams
Energy will be under no obligation to pay us any of the payments described in
the Power Purchase Agreement. If Williams Energy declares a force majeure,
however, it will continue to pay us only the applicable monthly total fixed
payment as described in the Power Purchase Agreement until the earlier of (i)
the termination of the force majeure condition or (ii) the termination of the
Power Purchase Agreement. Furthermore, if a force majeure is declared by us due
to an action or inaction of Jersey Central Power that prevents us from
delivering net electric energy to the electric delivery point, Williams Energy
will continue to pay the applicable portion of the total fixed payment for the
first 24 hours of the period.
Notwithstanding anything to the contrary contained in the Power Purchase
Agreement, except as may expressly be provided in the Power Purchase Agreement,
the term force majeure will not include or excuse a party's performance in the
following circumstances:
o Any reduction, curtailment or interruption of generation or operation
of our facility, or of the ability of Williams Energy to accept or
transmit net electric energy, whether in whole or in part, which
reduction, curtailment or interruption is caused by or arises from
the acts or omissions of any third party providing services or
supplies to the party claiming force majeure, including any vendor or
supplier to either party of materials, equipment, supplies or
services, or any inability of Jersey Central Power to deliver net
electric energy to Williams Energy, unless, and then only to the
extent that, any act or omission would itself be excused under the
Power Purchase Agreement as a force majeure;
o Any outage, whether or not due to our fault or negligence,
attributable to a defect or inadequacy in the manufacture, design or
installation of our facility that prevents, curtails, interrupts or
reduces the ability of our facility to generate net electric energy
or our ability to perform our obligations under the Power Purchase
Agreement;
o To the extent that the party claiming force majeure failed to prevent
or remedy the force majeure condition by taking all commercially
reasonable acts (short of litigation, if the remedy requires
litigation) and, except as otherwise provided in the Power Purchase
Agreement, failed to resume performance under the Power Purchase
Agreement with reasonable dispatch after the termination of the force
majeure condition;
o To the extent that the claiming party's failure to perform was caused
by lack of funds;
o To the extent Williams Energy is unable to perform due to a shortage
of natural gas supply not caused by an event of force majeure; or
o Because of an increase or decrease in the market price of electric
energy/capacity or natural gas or because it is uneconomic for the
party to perform its obligations under the Power Purchase Agreement.
Neither party will be required to settle any strike, walkout, lockout or
other labor dispute on terms which, in the sole judgment of the party involved
in the dispute, are contrary to its interest.
Williams Energy will have the right to terminate the Power Purchase
Agreement if we have declared a force majeure and the effect of said force
majeure has not been fully corrected or alleviated within 18 months after the
date said force majeure was declared. Williams Energy, however, will not have
the right to terminate the Power Purchase Agreement if (i) the force majeure
was caused by Williams Energy or (ii) the force majeure event does not prevent
or materially limit Williams Energy's ability to sell our facility net capacity
into or through the PJM power pool market or to a third party.
Events of Default; Termination; Remedies
The following will constitute events of default under the Power Purchase
Agreement:
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o breach of any term or condition of the Power Purchase Agreement,
including, but not limited to, (i) any failure to maintain or to
renew any security, (ii) any breach of a representation, warranty or
covenant or (iii) failure of either party to make a required payment
to the other party;
o our facility is not available to provide fuel conversion services or
ancillary services to Williams Energy during any period of 180
consecutive days after the occurrence of the commercial operation
date, except as may be excused by force majeure or the absence of
available natural gas, or if non-availability is caused by an act or
failure to act by Williams Energy where the action is required by the
Power Purchase Agreement;
o we sell or supply net electric energy, ancillary services or capacity
from our facility, or agree to do the same, to any person or entity
other than Williams Energy, without the prior approval of Williams
Energy;
o our failure for 30 consecutive days to perform regular and required
maintenance, testing or inspection of the interconnection facilities,
our facility and/or other electric equipment and facilities where the
failure is material;
o our failure for 30 consecutive days to correct or resolve a material
violation of any code, regulation and/or statute applicable to the
construction, installation, operation or maintenance of our facility,
the interconnection facilities, protective gas apparatus or any other
electric equipment and facilities required to be constructed and
operated under the Power Purchase Agreement when the violation
impairs our continued ability to perform its obligations under the
Power Purchase Agreement;
o involuntary bankruptcy or insolvency of either party that continues
for more than 60 days;
o voluntary bankruptcy or insolvency by either party;
o any modifications, alterations or other changes to our facility by or
on our behalf which prevent us from fulfilling, or materially
diminish our ability to fulfill, its obligations, duties, rights and
responsibilities under the Power Purchase Agreement and which after
reasonable notice and opportunity to cure, are not corrected;
o there will be outstanding for more than 60 days any unsatisfied
final, non-appealable judgment against us in an amount exceeding
$500,000, unless the existence of the unsatisfied judgment will not
materially affect our ability to perform its obligations under the
Power Purchase Agreement; and
o The AES Corporation will cease to own, directly or indirectly,
beneficially and of record, at least 50 percent of the equity
interests in our company, or will cease to possess the power to
direct or cause the direction of our company's management or
policies, or any person, other than The AES Corporation or an
affiliate, authorized to act as a power marketer by FERC or any
affiliate of the person will own, directly or indirectly,
beneficially or of record, any of the equity interests in our
company.
Upon the occurrence of any event of default, other than a
bankruptcy-related event of default, for which no notice will be required or
opportunity to cure permitted, the party not in default, to the extent the
party has actual knowledge of the occurrence of the event of default, will give
prompt written notice of the default to the defaulting party. The notice will
set forth, in reasonable detail, the nature of the default and, where known and
applicable, the steps necessary to cure the default. The defaulting party will
have 30 days, two business days in the case of a default related to the breach
of a representation, warranty or covenant, following receipt of the notice
either to cure the default or commence in good faith all the steps as are
necessary and appropriate to cure the default if the default cannot be
completely cured within the 30-day period.
If the defaulting party fails to cure the default or take the steps as
provided under the preceding paragraph, and immediately upon the occurrence of
insolvency or the filing of a voluntary petition for bankruptcy, the Power
Purchase Agreement may be terminated by the non-defaulting party, without any
liability or responsibility whatsoever, by written notice to the party in
default thereof. The Power Purchase Agreement will then terminate and the
non-defaulting party may exercise all rights and remedies as are available to
it to recover damages caused by the default, seek specific performance or
exercise other rights and remedies that it may have in equity or at law.
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Security
The Power Purchase Agreement requires us to provide $30 million of
financial security for our performance and payment obligations prior to
commercial operation and $10 million of financial security for our performance
and payment obligations subsequent to the commercial operation date. We may, at
any time at our option, elect to either provide the financial security in the
form of a guaranty of The AES Corporation or in the form of a single letter of
credit, satisfactory to Williams Energy in form and substance, upon which
Williams Energy may draw as specified in the Power Purchase Agreement. If the
financial security contains an expiration date, either express or implied, we
will renew the financial security not later than 10 days prior to the
expiration date and will provide written notice of the renewal to Williams
Energy at the same time. If we fail to renew the financial security as set
forth above, Williams Energy is entitled to demand and receive payment
thereunder on or after three days after written notice of the failure is
provided to us, and the amount drawn will be deposited in an interest-bearing
escrow account.
The letter of credit referred to above must be issued by a financial
institution that at all times during the term of the letter of credit meets and
maintains the following criteria: (i) a U.S. or foreign bank rated "C" or
better by Thompson Bankwatch; or (ii) a U.S. or foreign bank, surety company or
financial institution whose senior debt has the rating listed below by two of
the three rating agencies: Standard & Poor's: "A-" or better; Moody's: "A3" or
better; Duff & Phelps: "A-" or better. If the bank, surety company or financial
institution fails to maintain the ratings criteria, then upon 30 days' written
notice from Williams Energy, we are required to obtain equivalent security from
another bank, surety company or financial institution meeting the above stated
criteria.
In order to satisfy this obligation, prior to the commercial operation
date we provided a $30 million letter of credit which was reduced to $10
million on the commercial operation date. This letter of credit will remain in
effect during the term of the Power Purchase Agreement.
The payment obligations of Williams Energy under the Power Purchase
Agreement are guaranteed by The Williams Companies, Inc. The payment
obligations of The Williams Companies, Inc. under the guaranty are capped at an
amount equal to $509,705,311. Beginning on January 1 of the first full year
after the commercial operation date, this guaranty cap is to be reduced
semiannually by a fixed amount which is based on the amortization of our senior
secured bonds during the applicable semiannual period. Pursuant to Section 18.3
of the Power Purchase Agreement, in the event that Standard & Poors or Moody's
rates the long-term senior unsecured debt of The Williams Companies, Inc. lower
than investment grade, The Williams Companies, Inc. is required to supplement
The Williams Companies, Inc. guarantee with additional alternative security
that is acceptable to the Company within 90 days after the loss of such
investment grade rating.
According to published sources, on July 23, 2002, S&P lowered the
long-term senior unsecured debt rating of The Williams Companies, Inc. to "BB"
from "BBB-" and further lowered such rating to "B" on July 25, 2002. According
to published sources, on July 24, 2002, Moody's lowered the long-term senior
unsecured debt rating of The Williams Companies, Inc. to "B1" from "Baa3" and
further lowered such rating on November 22, 2002 to "Caa1". Accordingly, The
Williams Companies, Inc.'s long-term senior unsecured debt is currently rated
below investment grade by both S&P and Moody's.
Due to the downgrade of The Williams Companies, Inc. to below investment
grade, the Company and Williams Energy entered into a letter agreement dated
November 7, 2002 (the "Letter Agreement"), under which Williams Energy agreed
to provide the Company (a) a prepayment of $10 million within five business
days after execution of the Letter Agreement (the "Prepayment"); (b)
alternative credit support equal to $35 million on or before January 6, 2003 in
any of the following forms: (i) cash, (ii) letter(s) of credit with the Company
as the sole beneficiary substantially in the form of the PPA Letter of Credit,
unless mutually agreed to otherwise, or (iii) a direct obligation of the United
States Government delivered to a custodial securities account as designated by
the Company with a maturity of not more than three years; and (c) replenish any
portion of the alternative credit support that is drawn, reduced, cashed, or
redeemed, at any time, with an equal amount of alternative credit support. In
the Letter Agreement, the Company and Williams Energy acknowledged that the
posting of such alternative credit support and Williams Energy's agreement and
performance of the requirements of (a), (b), and (c), as set forth in the
immediately preceding sentence, would be in full satisfaction of Williams
Energy's obligations contained in Section 18.3 of the Power Purchase Agreement.
In the Letter Agreement, the Company and Williams Energy expressly agreed that
the posting of the Prepayment or any alternative credit support either now or
in the future or any other terms set forth in the Letter Agreement is not
intended to and did not modify, alter, or amend in any way, the terms and
conditions or relieve The Williams Company, Inc. from any obligations it has
under its guarantee of the
13
payment obligations of Williams Energy under the Power Purchase Agreement. The
guaranty remains in full force and effect and the Company retains all of its
rights and remedies provided by that guaranty.
Under the terms of the Letter Agreement, the Company is obligated to
return the Prepayment to Williams Energy upon the earlier of (i) The Williams
Companies, Inc. regaining its investment grade rating or Williams Energy
providing a substitute guaranty of investment grade rating; (ii) the beginning
of Contract Year 20; or (iii) the posting of alternative credit support by
Williams Energy as set forth below. In the case of items (i) and (iii) above,
except to the extent, in the case of item (iii), Williams Energy elects to have
all or a portion of the Prepayment make up a combination of the alternative
credit support required to be posted pursuant to Section 18.3(b) of the Power
Purchase Agreement, Williams Energy shall have the right to recoup the
Prepayment by set-off of any and all amounts owing to the Company under the
Power Purchase Agreement beginning no earlier than the June in the calendar
year after the occurrence of item (i) or (iii) and continuing thereafter until
the Prepayment has been fully recovered. In the case of item (ii) above,
Williams Energy shall have the right to immediately set-off all amounts owing
to the Company under the Power Purchase Agreement after the occurrence of item
(ii) and continuing thereafter until the Prepayment has been fully recovered.
Except to the extent Williams Energy elects to include the Prepayment as part
of the alternative credit support, the amount of alternative credit support
posted by Williams Energy pursuant to the Letter Agreement shall be initially
reduced by the amount of the Prepayment, and Williams Energy shall thereafter
increase the alternative credit support proportionately as Williams Energy
recoups the Prepayment set-off on the payment due date of amounts owing to the
Company.
If the Company does not return the Prepayment to Williams Energy as set
forth in the preceding paragraph, then the Company shall be considered in
default under the Letter Agreement and Williams Energy shall be entitled to
enforce any and or all of its contractual rights and remedies as set forth in
the Power Purchase Agreement, including, but not limited to, drawing on the
letter of credit previously posted by the Company in favor of Williams Energy.
Williams Energy made the Prepayment on November 14, 2002 and provided an
additional $25 million of cash to us on January 6, 2003 as alternative credit
support. As allowed by the Letter Agreement, Williams Energy has elected to
have the $10 million Prepayment included as part of the alternative credit
support. In the event that The Williams Companies, Inc. regains and maintains
its investment grade status, provides a substitute guaranty of investment grade
rating, or posts a letter of credit, we will be required to return the $35
million alternative credit support to Williams Energy in accordance with the
terms of the Letter Agreement as described above. As of March 7, 2003, we had
cash balances of approximately $28.9 million. See "Item 7-Managements
Discussion and Analysis of Financial Condition and Results of Operations
- -Liquidity and Capital Resources".
Assignment
Generally, a party to the Power Purchase Agreement may not assign,
transfer, pledge or otherwise encumber or dispose of any rights, duties,
interests or obligations thereunder without the prior written consent of the
other party except that (i) Williams Energy may, upon reasonable advance notice
to us, assign its rights, duties and obligations under the Power Purchase
Agreement to any of its affiliates or any other entity, provided that such
affiliate or other entity's long term unsecured debt at such time is rated
investment grade by Standard & Poor's and Moody's or such affiliate or other
entity's obligations under the Power Purchase Agreement are guaranteed by an
affiliate whose long-term unsecured debt at such time is rated investment grade
by Standard & Poor's and Moody's and such assignee agrees to be bound by all of
the terms and conditions on the Power Purchase Agreement to the same extent as
Williams Energy, (ii) we may, upon reasonable advance notice to Williams
Energy, assign the Power Purchase Agreement and any of our rights, interests,
duties or obligations thereunder as collateral security to any Lender so long
as the assignee agrees to be bound by all of the terms and conditions of the
Power Purchase Agreement to the same extent as we are in the event that such
lender exercises its rights under such assignment and (iii) we may assign any
of our rights, duties and obligations under the Power Purchase Agreement to any
affiliate provided such affiliate assumes in writing all of our obligations
under the Power Purchase Agreement and the guaranty of our performance as
required by the Power Purchase Agreement remains in effect.
Construction Agreement
We entered into an Agreement for Engineering, Procurement and Construction
Services, dated as of October 15, 1999, with WGI (as the successor contractor)
under which WGI was required to perform services in connection with the design,
engineering, procurement, site preparation and clearing, civil works,
construction, start-up, training and
14
testing and to provide all materials and equipment (excluding operational spare
parts), machinery, tools, construction fuels, chemicals and utilities, labor,
transportation, administration and other services and items (collectively and
separately, the "services") for our facility. Under a Guaranty in our favor,
effective as of October 15, 1999, all of WGI's obligations under the
construction agreement are irrevocably and unconditionally guaranteed by
Raytheon.
WGI filed for bankruptcy on May 14, 2001, however construction of the
facility continued through a series of cooperative agreements executed by us,
WGI and Raytheon. On November 9, 2001, the Bankruptcy Court approved WGI's
rejection of the construction agreement and the execution of the PCA by WGI and
Raytheon. Additionally, on November 21, 2001, we and Raytheon entered into the
Owner/Guarantor Supplemental Agreement pursuant to which (i) Raytheon and we
acknowledged that, notwithstanding the rejection of the construction agreement
by WGI, Raytheon would cause the project to be completed in accordance with the
terms of the construction agreement pursuant to Raytheon's performance guaranty
obligations, and the construction agreement will have continuing applicability
insofar as it defines (x) the obligations owed to us by Raytheon under its
guaranty and (y) our obligations to Raytheon arising from the performance of
those obligations, (ii) Raytheon (or their designees) was designated as our
agent for purposes of administering the subcontracts and vendor contracts
assigned by WGI to us, (iii) all future payments by us would be paid in
accordance with the terms of the construction agreement directly to Raytheon,
and (iv) Raytheon would indemnify us with respect to any claims arising out of
the subcontracts and vendor contracts assumed by us.
Provisional acceptance of the facility was achieved on August 11, 2002
when we entered into a settlement agreement with Raytheon. In return for
provisional acceptance, Raytheon agreed to perform work identified in the punch
list provided as part of the agreement. Raytheon was also required to pay a $5
million settlement fee minus outstanding milestones and change-orders for a net
payment to the Company for $2.37 million. Raytheon must perform certain agreed
upon completion items in order to obtain final acceptance. See "Completion of
our Project - Final Acceptance".
Raytheon Services and Other Obligations
Raytheon must complete our project by performing or causing to be
performed all of the agreed upon services. The services have included:
engineering and design; construction and construction management; providing us
design documents, instruction manuals, a project procedures manual and quality
assurance plan; procurement of all materials, equipment and supplies and all
contractor and subcontractor labor and manufacturing and related services;
providing a spare parts list; providing all labor and personnel; obtaining all
applicable permits; performing inspection, expediting, quality surveillance and
traffic services; transporting, shipping, receiving and marshaling all
materials, equipment and supplies and other items; providing storage for all
materials, supplies and equipment and procurement or disposal of all soil and
gravel (including remediation and disposal of specific hazardous materials);
providing for design, construction and installation of electrical
interconnection facilities (including electric metering equipment, automatic
regulation equipment, protective apparatus and control system equipment) and
reviewing other utility interconnections to our facility (including gas and
water pipelines); performing performance tests; providing for start-up and
initial operation functions; providing specified spare parts, waste disposal
services, chemicals, consumables and utilities.
The services have also included: training our personnel prior to
provisional acceptance; providing us and our designee with access to the site;
obtaining additional necessary real estate rights; cleaning-up and waste
disposal (including hazardous materials brought to the site by Raytheon or the
subcontractors); submitting a project schedule and progress reports; paying of
contractor taxes; making employee identification and security arrangements;
protecting adjoining utilities and public and private lands from damage; paying
appropriate royalties and license fees; providing final releases and waivers to
us; posting collateral or providing other assurances if major subcontractors
fail to furnish final waivers; maintaining labor relations and project labor
agreements; providing further assurances; coordinating with other contractors;
and causing Raytheon to execute and deliver the related guaranty.
As mentioned above, provisional acceptance was granted by us on August 11,
2002. Raytheon must perform certain agreed upon completion items in order to
obtain final acceptance. See "Completion and Acceptance of our Project - Final
Acceptance"
15
Construction and Start-Up
Raytheon must perform certain services in accordance with prudent utility
practices, generally accepted standards of professional care, skill, diligence
and competence applicable to engineering, construction and project management
practices, all applicable laws, all applicable permits, the real estate rights,
the quality assurance plan, the electrical interconnection requirements, the
environmental requirements and safety precautions set forth in the construction
agreement, and all of the requirements necessary to maintain the warranties
granted by the subcontractors under the construction agreement. Raytheon must
perform the services in accordance with our project schedule and is obligated
to cause:
o each construction progress milestone to be achieved on or prior to
the applicable construction progress milestone date; and
o final acceptance of our facility to occur on or before the guaranteed
final acceptance date. The guaranteed final acceptance date was
originally required to occur 13.5 months after the guaranteed
provisional acceptance date as defined under the construction
agreement, but on March 8, 2003 we entered into a letter agreement
with Raytheon pursuant to which we agreed to extend the guaranteed
final acceptance date to June 30, 2003.
Raytheon must perform the services so that our facility, when operated in
accordance with the instruction manual and the Power Purchase Agreement
operating requirements as of provisional acceptance and final acceptance, will
comply with all applicable laws and applicable permits, the electrical
interconnection requirements and the guaranteed emissions limits in accordance
with the completed performance test requirements.
Contract Price and Payment
The adjusted contract price may either be paid in installments in
accordance with the payment and milestone schedule or be prepaid as described
in the collateral agency agreement. Initially, the adjusted contract price was
prepaid in the amount of $295.7 million ($288.6 million of which was paid at
closing), which included base scope changes through March 15, 2000. The
contract price may be adjusted as a result of scope changes. The prepayment
funds were backed by a prepayment letter of credit in our favor. However, under
the construction agreement, the bankruptcy filing by WGI on May 14, 2001
constituted an event of default under the construction agreement. Accordingly,
we requested that the full available amount of such letter of credit be drawn
upon and deposited in the construction account held by the collateral agent.
The collateral agent made such drawing on May 4, 2001 in the amount of $95.8
million, which was the then outstanding amount of the prepayment letter of
credit as it had been reduced by WGI's achievement of construction milestones
under the construction agreement. Subsequent to the termination of the
prepayment arrangements with WGI, payments to WGI for achievement of
construction milestones as specified in the construction agreement were made in
accordance with the terms of the construction agreement.
Under the construction agreement, we are entitled to withhold from each
scheduled payment, other than the last milestone payment, 10% of the requested
payment until after final acceptance by us of the facility unless, as discussed
below, Raytheon posts a letter of credit in the amount of amounts which would
otherwise be retained. Within 10 days after the final acceptance, we are
required to pay all retainage except for (a) 150% of the cost of completing all
punch list items and (b) the lesser of (i) 150% of the cost of repairing or
replacing any items that have already been repaired or replaced by Raytheon and
(ii) $1 million. Within 30 days after project completion, we are required to
pay the sum of the unpaid balance of the contract price, including all
retainage, less the amount indicated in (b) of the immediately proceeding
sentence. Within 30 days of the first anniversary of the earlier of provisional
acceptance or final acceptance, we are required, so long as project completion
has occurred, to pay all remaining retainage, if any.
Under the construction agreement, in lieu of our retaining these amounts,
Raytheon is entitled to post a letter of credit in the amount of the then
current retainage. On March 4, 2002, Raytheon provided us with a letter of
credit in the amount of $29.5 million (which amount represented the outstanding
amount of retainage under the construction agreement on the date the letter of
credit was posted) and we paid Raytheon the amount of the retainage. Raytheon
has subsequently increased the amount of the letter of credit in proportion to
the amounts which would otherwise be retained by us and we have paid Raytheon
the corresponding amount this retainage. As of December 31, 2002, Raytheon had
provided a letter of credit of approximately $30.8 million. We may draw on this
letter of credit in the
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event that Raytheon fails to pay us any amount owed to us under the
construction agreement. As of December 31, 2002 and March 7, 2003, we had drawn
$96,000 and $273,000 on this letter of credit, respectively.
We are currently in discussions with Raytheon as to when the performance
testing required for final acceptance will occur. See "Completion and
Acceptance of Our Project - Final Acceptance."
Our Services
Our responsibilities include: designating a representative for our
project; furnishing Raytheon access to the site; securing specified real estate
rights; providing specified start-up personnel; furnishing specified spare
parts, water disposal services and consumables; providing permanent utilities
for the start-up, testing and operation of our facility; providing raw and
potable water arrangements; providing fuel supply arrangements; providing
electrical interconnection facilities arrangements; furnishing approvals;
administering third-party contracts; causing The AES Corporation to provide a
pre-financial closing guaranty.
If we fail to meet any of our obligations under the construction
agreement, then, to the extent that Raytheon was reasonably delayed in the
performance of the services as a direct result thereof, an equitable adjustment
to one or more of the contract price, the guaranteed completion dates, the
construction progress milestone dates, the payment and milestone schedule and
our project schedule, and, as appropriate, the other provisions of the
construction agreement that may be affected thereby, will be made by agreement
between us and Raytheon.
Completion and Acceptance of Our Project
Mechanical Completion
Mechanical completion was achieved on August 13, 2002.
Performance Tests and Power Purchase Agreement Output Tests
Once mechanical completion was achieved, Raytheon was required to perform
certain performance tests in accordance with criteria set forth in the
construction agreement. Raytheon gave us notice of the performance tests, we
arranged for the disposition of output during start-up and testing and Raytheon
declared these performance tests complete since during the tests the operation
of our facility complied with applicable laws, applicable permits, Guaranteed
Emissions Limits and other required standards. Although the performance test
met the levels required for the commencement of commercial operations, they did
not meet the levels guaranteed by Raytheon under the construction agreement.
Therefore, as provided by the construction agreement, Raytheon has been paying
and will continue to pay us interim rebates until the final acceptance date. On
the final acceptance date additional performance tests will be performed and if
specified levels of heat rate and output are not met, Raytheon will be required
to pay us a final lump-sum payment which will be based on the amount of the
deficiency.
Provisional Acceptance
Provisional acceptance was achieved on August 11, 2002 and risk transfer
occurred on August 13, 2002 when:
o Raytheon caused a completed performance test in which our facility
demonstrated an average net electrical output of 95% (or higher) of
the electrical output guarantee and 105% (or lower) of the gas-based
heat rate guarantee; and
o our facility achieved the requirements of mechanical completion.
The independent engineer and we were satisfied that the provisional
acceptance requirements had been met and delivered to Raytheon a provisional
acceptance certificate on August 11, 2002. We took possession and control of
our facility and we are now solely responsible for the operation and
maintenance of the facility although Raytheon continues to have reasonable
access to our facility to complete the services.
Final Acceptance
Final acceptance will be achieved when:
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o Raytheon has caused a completed performance test in accordance with
the construction agreement to be concluded in which our facility
demonstrates during the performance test an average net electrical
output of 100% (or higher) of the electrical output guarantee and
100% (or lower) of the heat rate guarantee;
o our facility has achieved, and continues to satisfy the requirements
for the achievement of, mechanical completion;
o the reliability guarantee has been achieved under the construction
agreement; and
o Raytheon has completed performance of the services except for (i)
punch list items and (ii) services that are required by the terms of
the construction agreement to be completed after the achievement of
final acceptance, such as Raytheon's warranty obligations.
The reliability guarantee will have been achieved if and only if our
facility demonstrates an average equivalent availability of not less than 95%
while operating over a period of at least 30 consecutive days in accordance
with applicable laws, applicable permits, the electrical interconnection
requirements, the Power Purchase Agreement operating requirements, the
guaranteed emissions limits, the instruction manual and the Power Purchase
Agreement.
When Raytheon believes that it has achieved final acceptance of our
facility, it will deliver to us a notice of final acceptance. The guaranteed
final acceptance date under the construction agreement was originally 13.5
months after the guaranteed provisional acceptance date (February 14, 2002).
However, on March 8, 2003, we entered into a letter agreement with Raytheon
pursuant to which we granted Raytheon a free extension of the guaranteed final
acceptance date from April 1, 2003 to June 30, 2003. Once we are satisfied that
the final acceptance requirements have been met, we will deliver to Raytheon a
final acceptance certificate. If reasonable cause exists for doing so, we will
notify Raytheon in writing that final acceptance has not been achieved, stating
the reasons therefor. If we determine that final acceptance has not been
achieved, Raytheon will promptly take the action or perform the additional
services needed to achieve final acceptance and will issue to us another notice
of final acceptance. The procedure will be repeated as necessary until final
acceptance has been achieved or deemed to have occurred.
At any time, by giving notice to Raytheon, we in our sole discretion may
elect to effect final acceptance, in which case final acceptance will be deemed
effective as of the date of the notice, and Raytheon will have no liability to
us for any amounts thereafter arising as performance guarantee payments, other
than any interim period rebates that arose prior to the election by us, for
failure of our facility to achieve any or all of the performance guarantees
applicable thereto.
At any time after provisional acceptance of our facility has been
achieved, Raytheon may, after exhausting all reasonable repair and replacement
alternatives in order to achieve the applicable performance guarantees for
final acceptance, and so long as that the reliability guarantee will have been
achieved, give to us notice of its intention to elect to declare final
acceptance. In that event, Raytheon may elect to use the results of the most
recent eligible completed performance test for the purpose of determining our
facility's level of achievement of the performance guarantees. Final acceptance
will be deemed effective as of the last to occur of (i) the date of our receipt
of the declaration and report of the final completed performance test, or, as
applicable, the most recent completed performance test and (ii) the effective
date of the achievement of the reliability guarantee.
If on or before the guaranteed final acceptance date (i) our facility has
achieved provisional acceptance and (ii) the reliability guarantee has been
achieved, then final acceptance of our facility will be deemed to occur on the
guaranteed final acceptance date.
Project Completion
Project completion will be achieved under the construction agreement when:
o Final acceptance of our facility will have occurred and the
performance guarantees with respect to our facility will have been
achieved (or in lieu of achievement of the performance guarantees,
applicable rebates under the construction agreement will have been
paid, or we will have elected final acceptance);
o The reliability guarantee will have been achieved;
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o Raytheon will have demonstrated during the completed performance test
that the operation of our facility does not exceed the guaranteed
emissions limits;
o The requirements for achieving mechanical completion of our facility
will continue to be met;
o The punch list items will have been completed in accordance with the
construction agreement; and
o Raytheon will have performed all of the services, other than those
services, such as Raytheon's warranty obligations, which by their
nature are intended to be performed after project completion.
When Raytheon believes that it has achieved project completion, it will
deliver to us a notice of project completion. If it is satisfied that the final
acceptance requirements have been met, we will deliver to Raytheon a project
completion certificate. If reasonable cause exists for doing so, we will notify
Raytheon in writing that project completion has not been achieved, stating the
reasons therefor. If our project completion has not been achieved as so
determined by us, Raytheon will promptly take the action or perform the
additional services as will achieve project completion and will issue to us
another notice of project completion. The procedure will be repeated as
necessary until project completion is achieved.
Raytheon will be obligated to achieve project completion within 90 days
after final acceptance of our facility. If Raytheon does not achieve our
project completion on or before our project completion deadline or if we
determine that Raytheon is not proceeding with all due diligence to complete
the services in order to achieve project completion by the deadline, we may
retain another contractor to complete the work at contractor's expense.
Price Rebate for Failure to Meet Guarantees
Completion Dates
Raytheon guaranteed that (i) provisional acceptance or final acceptance of
our facility will be achieved on or before the guaranteed provisional
acceptance date and (ii) final acceptance of our facility will be achieved on
or before the guaranteed final acceptance date.
If neither provisional acceptance nor final acceptance of our facility
occurs by the date that is 50 days after the guaranteed provisional acceptance
date, Raytheon was obligated to pay us $108,000 per day as liquidated damages,
for each day provisional acceptance or final acceptance is later than the
guaranteed provisional acceptance date. The aggregate amount of such payments
that Raytheon is obligated to make is limited to 13% of the adjusted contract
price (approximately $40 million). Since neither provisional nor final
acceptance had occurred within 50 days of the guaranteed provisional acceptance
date of February 14, 2002, Raytheon began to pay us scheduled late completion
payments beginning on April 6, 2002 and ending on August 10, 2002 (the day
prior to the provisional acceptance date). As of December 31, 2002, a total of
$14 million in liquidated damages had been received.
Pursuant to the construction agreement, if neither provisional acceptance
nor final acceptance of our facility occurred on or before the date that was 90
days after the guaranteed provisional acceptance date, Raytheon was required to
submit for approval by us and the independent engineer a plan to accelerate the
performance of the services as necessary in order to achieve final acceptance
of our facility by the guaranteed final acceptance date. Raytheon submitted the
required plan which was subsequently approved by us and the independent
engineer.
Performance Guarantees
Electrical Output
Under the construction contract, if the average net electrical output of
our facility at provisional acceptance or interim acceptance, whichever is the
earlier to occur, is less than the electrical output guarantee, then Raytheon
must pay us, as a rebate and not as liquidated damages, for each day during the
interim period, an amount equal to $0.22 per day for each kilowatt by which the
average net electrical output is less than the electrical output guarantee.
During performance testing, our output was calculated to be 13,370 kilowatts
less than the electrical output guarantee. Accordingly, our daily charge for
this amount has been calculated at $2,941.40 per day. Raytheon has been paying
this amount since August 13, 2002 and will continue paying until next
performance test which is currently scheduled to occur on or just prior to the
final acceptance date.
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Upon final acceptance, if the average net electrical output of our
facility during the completed performance test is less than the electrical
output guarantee, then Raytheon must pay us, as a bonus, an amount equal to
$520 for each kilowatt by which the average net electrical output is less than
the guarantee minus any interim rebates paid or to be paid by Raytheon.
Heat Rate Guarantees
If the average net heat rate of our facility at provisional acceptance or
interim acceptance, if having occurred before final acceptance, exceeds the
heat rate guarantee, then Raytheon must pay us, as a rebate and not as
liquidated damages, for each day during the interim period, an amount equal to
$46 per day for each BTU/KwH by which the measured net heat rate is greater
than the heat rate guarantee.
Upon final acceptance, if the net heat rate of our facility during the
completed performance test exceeds the heat rate guarantee, then Raytheon will
pay us, as a rebate, a lump sum amount equal to $110,000 for each BTU/KwH by
which the measured heat rate is greater than the heat rate guarantee minus any
interim rebates paid or to be paid by Raytheon.
For the year ended December 31, 2002, we have invoiced Raytheon
approximately $955,835 in electrical output and heat rate rebates. As of
December 31, 2002, Raytheon owed approximately $207,830 in rebates. This amount
is reflected in accounts receivable-other at December 31, 2002. As of December
31, 2002, we had drawn $96,000 on the letter of credit provided by Raytheon
which covered rebate amounts.
Liability and Damages
Limitation of Liability
In no event will Raytheon's liability (i) for provisional acceptance late
completion payments exceed an amount equal to 13% of the contract price, (ii)
for performance guarantee payments arising from the electrical output guarantee
exceed in the aggregate an amount equal to 10% of the contract price, (iii) for
performance guarantee payments arising from the heat rate guarantee exceed in
the aggregate 15% of the contract price and (iv) for all provisional acceptance
late completion payments and performance guarantee payments exceed an amount
equal to 34% of the contract price.
Consequential Damages
Neither party nor any of its contractors, subcontractors or other agents
providing equipment, material or services for our project will be liable for
any indirect, incidental, special or consequential loss or damage of any type.
Aggregate Liability of Contractor
The total aggregate liability of Raytheon and any of its subcontractors,
including, without limitation, liabilities described above, to us will not in
any event exceed an amount equal to the contract price for liability due to
events occurring before the provisional acceptance date or 40% of the contract
price for liability due to events occurring after the provisional acceptance
date; however, the limitation of liability will not apply to obligations to
remove liens or to make indemnification payments.
Warranties and Guarantees
Raytheon warrants and guarantees that during the applicable warranty
period:
o all machinery, equipment, materials, systems, supplies and other
items comprising our project will be new and of first-rate quality
which satisfies utility-grade standards and in accordance with
prudent utility practices and the specifications set forth in the
construction agreement, suitable for the use in generating electric
energy and capacity under the climatic and normal operating
conditions and free from defective workmanship or materials;
o it will perform all of its design, construction, engineering and
other services in accordance with the construction agreement;
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o our project and its components are free from all defects caused by
errors or omissions in engineering and design, as determined by
reference to prudent utility practices, and comply with all
applicable laws, all applicable permits, the electrical
interconnection requirements, the Power Purchase Agreement operating
requirements and the guaranteed emissions limits; and
o the completed project performs its intended functions of generating
electric energy and capacity as a complete, integrated operating
system as contemplated in the construction agreement.
If we notify Raytheon within 30 days after the expiration of the
applicable warranty period of any defects or deficiencies discovered during the
applicable warranty period, Raytheon will promptly reperform any of the
services at its own expense to correct any errors, omissions, defects or
deficiencies and, in the case of defective or otherwise deficient machinery,
equipment, materials, systems supplies or other items, replace or repair the
same at its own expense. Raytheon warrants and guarantees that, to the extent
we have made all payments then due to Raytheon, title to our facility and all
work, materials, supplies and equipment will pass to us free and clear of all
liens, other than any permitted liens. Other than the warranties and guarantees
provided in the construction agreement there are no other warranties of any
kind, whether statutory, express or implied relating to the services.
Upon notification from us no later than 30 days after the expiration of
the applicable warranty period of any defects or deficiencies in our project or
any component thereof, we will, subject to the provisions of the construction
agreement, make our facility or the subject equipment available to Raytheon for
Raytheon to re-perform, replace or, at Raytheon's option, repair the same at
Raytheon expense so that it is in compliance with the standards warranted and
guaranteed, all in accordance with the construction agreement.
Force Majeure
Force Majeure Event
A force majeure event will mean any act or event that prevents the
affected party from performing its obligations, other than the payment of
money, under the construction agreement or complying with any conditions
required to be complied with under the construction agreement if the act or
event is beyond the reasonable control of and not the fault of the affected
party and the party has been unable by the exercise of due diligence to
overcome or mitigate the effects of the act or event. Force majeure events
include, but are not limited to, acts of declared or undeclared war, sabotage,
landslides, revolution, terrorism, flood, tidal wave, hurricane, lightning,
earthquake, fire, explosion, civil disturbance, insurrection or riot, act of
God or the public enemy, action, including unreasonable delay or failure to
act, of a court or public authority, or strikes or other labor disputes of a
regional or national character that are not limited to only the employees of
Raytheon or its subcontractors and that are not due to the breach of a labor
contract or applicable law by the party claiming force majeure or any of its
subcontractors. Force majeure events do not include (i) acts or omissions of
Raytheon or any subcontractors, except as expressly provided in the foregoing
sentence, (ii) late delivery of materials or equipment, except to the extent
caused by a force majeure event, and (iii) economic hardship.
Excused Performance
If either party is rendered wholly or partly unable to perform its
obligations because of a force majeure event, that party will be excused from
whatever performance is affected by the force majeure event to the extent so
affected so long as:
o the non-performing party gives the other party prompt notice
describing the particulars of the occurrence;
o the suspension of performance is of no greater scope and of no longer
duration than is reasonably required by the force majeure event;
o the non-performing party exercises all reasonable efforts to mitigate
or limit damages to the other party;
o the non-performing party uses its best efforts to continue to perform
its obligations under the construction agreement and to correct or
cure the event or condition excusing performance; and
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o when the non-performing party is able to resume performance of its
obligations, that party will give the other party written notice to
that effect and will promptly resume performance under the
construction agreement.
Scope Changes
We may order scope changes to the services, in which event one or more of
the contract price, the construction progress milestone dates, the guaranteed
completion dates, the payment and milestone schedule, our project schedule and
the performance guarantees will be adjusted accordingly, if necessary. All
scope changes will be authorized by a scope change order and only we or our
representative may issue scope change orders.
As soon as Raytheon becomes aware of any circumstances which Raytheon has
reason to believe may necessitate a scope change, Raytheon will issue to us a
scope change order notice at Raytheon's expense. If we desire to make a scope
change, in response to a scope change order notice or otherwise, we will submit
a scope change order request to Raytheon. Raytheon will promptly review the
scope change order request and notify us in writing of the options for
implementing the proposed scope change and the effect, if any, each option
would have on the contract price, the guaranteed completion dates, the
construction progress milestone dates, the payment and milestone schedule, our
project schedule and the performance guarantees.
No scope change order will be issued and no adjustment of the contract
price, the guaranteed completion dates, the construction progress milestone
dates, the payment and milestone schedule, our project schedule or the
performance guarantees will be made in connection with any correction of
errors, omission, deficiencies, or improper or defective work on the part of
Raytheon or any subcontractors in the performance of the services. Changes due
to changes in applicable laws or applicable permits occurring after the date of
the construction agreement will be treated as scope changes.
Effect of Force Majeure Event
If and to the extent that any force majeure events affect Raytheon's
ability to meet the guaranteed completion dates, or the construction progress
milestone dates, an equitable adjustment in one or more of the dates, the
payment and milestone schedule and our project schedule will be made by
agreement of us and Raytheon. No adjustment to the performance guarantees and,
except as otherwise expressly set forth below, the contract price will be made
as a result of a force majeure event. If Raytheon is delayed in the performance
of the services by a force majeure event, then:
o to the extent that the delay(s) are, in the aggregate, 60 days or
less, Raytheon will absorb all of its costs and expenses resulting
from said delay(s); and
o to the extent that the delay(s) are, in the aggregate, more than 60
days, Raytheon will be reimbursed by us for those incremental costs
and expenses resulting from said delay(s) which are incurred by
Raytheon after said 60-day period.
Price Change
An increase or decrease in the contract price, if any, resulting from a
scope change requested by us or made under the construction contract will be
determined by mutual agreement of the parties.
Continued Performance Pending Resolution of Disputes
Notwithstanding any dispute regarding the amount of any increase or
decrease in Raytheon's costs with respect to a scope change, Raytheon will
proceed with the performance of the scope change promptly following our
execution of the corresponding scope change order.
Hazardous Materials
If hazardous materials were not identified in an environmental site
assessment report delivered by us to Raytheon prior to the commencement date
and were not brought onto the site by Raytheon or any of its subcontractors,
then Raytheon will be entitled to a scope change under the construction
agreement.
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Risk of Loss
With respect to our facility, until the risk transfer date, which occurred
on August 13, 2002, Raytheon bore the risk of loss and full responsibility for
the costs of replacement, repair or reconstruction resulting from any damage to
or destruction of our facility or any materials, equipment, tools and supplies
that are purchased for permanent installation in or for use during construction
of our facility.
Since the risk transfer date with respect to our facility, we bear all
risk of loss and full responsibility for repair, replacement or reconstruction
with respect to any loss, damage or destruction to our facility.
Termination
Termination for our Convenience
We may for our convenience terminate any part of the services or all
remaining services at any time upon 30 days' prior written notice to Raytheon
specifying the part of the services to be terminated and the effective date of
termination. We may elect to suspend completion of all or any part of the
services upon 10 days' prior written notice to Raytheon, or, in emergency
situations, upon prior notice as circumstances permit.
Termination by Raytheon
If we fail to pay to Raytheon any payment and the failure continues for 30
days, then (i) Raytheon may suspend its performance of the services upon 10
days' prior written notice to us, which suspension may continue until the time
as the payment, plus accrued interest thereon, is paid to Raytheon, and/or (ii)
if the payment has not been made prior to the commencement of a suspension by
Raytheon under clause (i) above, Raytheon may terminate the construction
agreement upon 60 days' prior written notice to us; however, the termination
will not become effective if the payment, plus accrued interest thereon, is
made to Raytheon prior to the end of the notice period. If the suspension
occurs, an equitable adjustment to one or more of the contract price, the
guaranteed completion dates, the construction progress milestone dates, the
payment and milestone schedule and our project schedule, and, as appropriate,
the other provisions of the construction agreement that may be affected
thereby, will be made by agreement between us and Raytheon. If we have
suspended completion of all or any part of the services in accordance with the
construction agreement for a period in excess of 365 days in the aggregate,
Raytheon may, at its option, at any time thereafter so long as the suspension
continues, give written notice to us that Raytheon desires to terminate the
construction agreement. Unless we order Raytheon to resume performance of the
suspended services within 15 days of the receipt of the notice from Raytheon,
the suspended services will be deemed to have been terminated by us for our
convenience. If the occurrence of one or more force majeure events prevents
Raytheon from performing the services for a period in the aggregate of 720
days, either party may, at its option, give written notice to the other party
of its desire to terminate the construction agreement.
Consequences of Termination
o Upon any termination, we may, so long as the termination is pursuant
to any default Raytheon will have been paid all amounts due and owing
to it under the construction agreement, which will not be deemed to
constitute a waiver by Raytheon of any rights to payment it may have
as a result of a non-default related termination in the event of a
termination pursuant to a default, at our option elect to have
itself, or our designee, which may include any other affiliate or any
third-party purchaser, (i) assume responsibility for and take title
to and possession of our project and any or all work, materials or
equipment remaining at the site and (ii) succeed automatically,
without the necessity of any further action by Raytheon, to the
interests of Raytheon in any or all items procured by Raytheon for
our project and in any and all contracts and subcontracts entered
into between Raytheon and any subcontractor with respect to the
equipment specified in the construction agreement, and with respect
to any or all other subcontractors selected by us which are
materially necessary to the timely completion of our project,
Raytheon will use all reasonable efforts to enable us, or our
designee, to succeed to Raytheon's interests thereunder.
o If any termination occurs, we may, without prejudice to any other
right or remedy it may have, at its option, finish the services by
whatever method we may deem expedient.
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Surviving Obligations
Termination of the construction agreement (i) will not relieve either
party of any obligation with respect to the confidentiality of the other
party's information, (ii) will not relieve either party of any obligation which
expressly or by implication survives termination of the construction agreement
and (iii) except as otherwise provided in any provision of the construction
agreement expressly limiting the liability of either party, will not relieve
either party of any obligations or liabilities for loss or damage to the other
party arising out of or caused by acts or omissions of the party prior to the
effectiveness of the termination or arising out of the termination, and will
not relieve Raytheon of its obligations as to portions of the services already
performed or as to obligations assumed by Raytheon or us prior to the date of
termination.
Default and Remedies
Raytheon's Default
Raytheon's events of default include: voluntary bankruptcy or insolvency;
involuntary bankruptcy or insolvency; materially adverse misleading or false
representation or warranty; improper assignment; failure to maintain required
insurance; failure to comply with applicable laws or applicable permits;
cessation or abandonment of the performance of services; termination or
repudiation of, or default under the related construction contract guaranty;
failure to supply sufficient skilled workers or suitable material or equipment;
failure to make payment when due for labor, equipment or materials;
non-occurrence of either provisional acceptance or final acceptance within 90
days after the guaranteed provisional acceptance date, non-occurrence of
construction progress milestones and failure proceed under a remediation plan
within 90 days after the non-occurrence; and failure to remedy non-performance
or non-observance of any provision in the construction agreement.
Our Rights and Remedies
If Raytheon is in default of its obligations, we will have any or all of
the following rights and remedies, in addition to any other rights and remedies
that may be available to us under the construction agreement or at law or in
equity, and Raytheon will have the following obligations:
o We may, without prejudice to any other right or remedy we may have
under the construction agreement or at law or in equity, terminate
the construction agreement in whole or in part immediately upon
delivery of notice to Raytheon. In case of the partial termination,
the parties will mutually agree upon a scope change order to make
equitable adjustments, including the reduction and/or deletion of
obligations of the parties commensurate with the reduced scope
Raytheon will have after taking into account the partial termination,
to one or more of the guaranteed completion dates, the construction
progress milestone dates, the contract price, the payment and
milestone schedule, our project schedule, the performance guarantees
and the other provisions of the construction agreement which may be
affected thereby, as appropriate. If the parties are unable to reach
mutual agreement as to said scope change order and the dispute
resolution procedures set forth in the construction agreement are
invoked, the procedures will give due consideration to customary
terms and conditions under which Raytheon has entered subcontracts
with third party prime contractors covering services substantially
similar to those services which are not being terminated.
o If requested by us, Raytheon must withdraw from the site, must assign
to us such of contractor's subcontracts, to the extent permitted
therein, as we may request, and must remove the materials, equipment,
tools and instruments used by, and any debris and waste materials
generated by, Raytheon in the performance of the Services as we may
direct, and we, without incurring any liability to Raytheon, other
than the obligation to return to Raytheon at the completion of our
project the materials that are not consumed or incorporated into our
project, solely on an "as is, where is" basis without any
representation or warranty of any kind whatsoever, may take
possession of any and all designs, drawings, materials, equipment,
tools, instruments, purchase orders, schedules and facilities of
Raytheon at the site that we deem necessary to complete the services.
Assignment
The parties shall have no right to assign or delegate any of their
respective rights or obligations under the construction agreement either
voluntarily or involuntarily or by operation of law, except that we may,
without
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Raytheon's approval, assign any or all of its rights under the construction
agreement (a) as collateral security to the financing parties and (b) to any
transferee of our project or a substantial portion of our project so long as
such assignee has financial and operational capabilities that are either
substantially similar to ours at the time or otherwise are such that the
assignment could not reasonably be expected to have a material adverse effect
on Raytheon's rights and obligations under the construction agreement.
Maintenance Services Agreement
We have entered into the Maintenance Program Parts, Shop Repairs and
Scheduled Outage TFA Services Contract, dated as of December 8, 1999, with
Siemens Westinghouse by which Siemens Westinghouse will provide us with, among
other things, combustion turbine parts, shop repairs and scheduled outage
technical field assistance services. The fees assessed by Siemens Westinghouse
will be based on the number of Equivalent Base Load Hours accumulated by the
applicable Combustion Turbine as adjusted for inflation. The Company has
received approximately $10.5 million in rotable spare parts under this
agreement. This amount is recorded as spare parts inventory and as a long-term
liability in the December 31, 2002 balance sheet.
The maintenance services agreement became effective on the date of
execution and unless terminated early, will terminate upon completion of shop
repairs performed by Siemens Westinghouse following the twelfth scheduled
outage of the applicable combustion turbine or sixteen years from the date of
execution, whichever occurs first, unless we exercise our right to terminate
the agreement after the first major outage of the turbines, which will be
approximately the sixth year of operation of the facility.
Scope of Work
During the term of the maintenance services agreement, and in accordance
with the scheduled outage plan, Siemens Westinghouse is required to do the
following:
o deliver the type and quantity of new program parts for installation
of the combustion turbine;
o repair/refurbish program parts and equipment for the combustion
turbine;
o provide miscellaneous hardware;
o provide us with material safety data sheets for all hazardous
materials Siemens Westinghouse intends to bring/use on the site;
o provide the services of a maintenance program engineer to manage the
combustion turbine maintenance program;
o provide technical field assistance, or TFA Services, which involves
advice and consultation for the disassembly, inspection and assembly
of various equipment; and
o remove and reinstall insulation as required to complete inspections.
We are responsible for, among other things:
o storing and maintaining parts, materials and tools to be used in or
on the combustion turbine;
o maintaining and operating the combustion turbine consistently with
the warranty conditions;
o ensuring that our operator and maintenance personnel are properly
trained;
o transporting program parts in need of repair/refurbishing; and
o providing Siemens Westinghouse, on a monthly basis, with the number
of equivalent starts and the number of equivalent base load hours
("EBHs") incurred by each combustion turbine.
We and Siemens Westinghouse will jointly develop the scheduled outage
plan. The scheduled outage plan will be consistent with the terms and
conditions of the Power Purchase Agreement.
25
Early Replacement
If it is determined that due to normal wear and tear a program part(s) for
the combustion turbine has failed or will not last until the next scheduled
outage, and the part has to be repaired before the scheduled replacement
period, Siemens Westinghouse will replace the program part by moving up a new
program part which is otherwise scheduled to be delivered at a later date. The
contract price for the replacement will not be affected if the replacement date
is less than or equal to one year earlier than the scheduled outage during
which the program part was scheduled to be replaced. If the actual replacement
date for a program part is more than one year earlier than the scheduled outage
at which point the program part was scheduled to be replaced, the early
replacement will result in an adjustment to the payment schedule. Siemens
Westinghouse has the final decision with regard to the replacement or
refurbishment associated with any program part. If we dispute Siemens
Westinghouse's decision, we may seek to resolve the dispute in accordance with
the dispute resolution procedures discussed below.
Parts Life Credit
After applicable warranty periods set forth in the maintenance services
agreement and the construction agreement, Siemens Westinghouse will provide a
parts life credit if a program part requires replacement due to normal wear and
tear prior to meeting its expected useful life. Siemens Westinghouse has the
final decision with regard to actual parts life and the degree of repair or
refurbishment associated with any program parts. The parts life credit will be
calculated in terms of EBHs and equivalent starts. The price of the replacement
part will be adjusted for inflation. If we dispute Siemens Westinghouse's
decision, we may seek to resolve the dispute in accordance with the dispute
resolution procedures discussed below.
Contract Price and Payment Terms
Siemens Westinghouse will invoice us monthly and payments are then due
within 25 days. The fees assessed by Siemens Westinghouse wi