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Term |
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Meaning |
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Acquisition Corp.
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ESI Tractebel Acquisition Corp.
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Act |
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Securities Act of 1933, as amended |
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avoided cost |
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the incremental cost to an electric utility of electric energy and/or capacity that, but for the purchase from a qualifying facility, such utility would generate itself or purchase from another source |
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Boston Edison |
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Boston Edison Company |
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Broad Street |
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Broad Street Contract Services, Inc. |
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Btu |
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British thermal units, a unit of energy |
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cogeneration |
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power production technology that provides for the sequential generation of two or more useful forms of energy from a single primary fuel source |
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Commonwealth |
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Commonwealth Electric Company |
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ESI Energy |
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ESI Energy, LLC |
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ESI GP |
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ESI Northeast Energy GP, Inc. |
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ESI LP |
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ESI Northeast Energy LP, Inc. |
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ESI Northeast Acquisition |
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ESI Northeast Energy Acquisition Funding, Inc. |
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ESI Northeast Funding |
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ESI Northeast Energy Funding, Inc. |
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ESI Northeast Fuel |
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ESI Northeast Fuel Management, Inc. |
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ETURC |
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ESI Tractebel Urban Renewal Corporation, previously IEC Urban Renewal Corporation |
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FAS |
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Statement of Financial Accounting Standards No. |
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FERC |
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Federal Energy Regulatory Commission |
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FPL |
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Florida Power & Light Company |
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FPL Energy |
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FPL Energy, LLC |
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FPL Group |
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FPL Group, Inc. |
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FPL Group Capital |
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FPL Group Capital Inc |
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FPLE Operating Services |
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FPL Energy Operating Services, Inc. |
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Funding Corp. |
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ESI Tractebel Funding Corp., previously IEC Funding Corp. |
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IEC |
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Intercontinental Energy Corporation, a Massachusetts corporation |
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JCP&L |
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Jersey Central Power & Light Company |
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kwh |
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kilowatt-hour |
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Management's Discussion |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Montaup |
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Montaup Electric Company |
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MMBtu |
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millions of Btu |
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mw |
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megawatt(s) |
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NE LLC |
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Northeast Energy, LLC |
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NE LP |
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Northeast Energy, LP |
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NEA |
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Northeast Energy Associates, a limited partnership |
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NJEA |
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North Jersey Energy Associates, a limited partnership |
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NEPOOL |
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New England power pool |
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New England Power |
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New England Power Company |
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Note _ |
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Note _ to Consolidated and Combined Financial Statements or Note _ to Financial Statements, as the case may be |
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O&M |
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operations and maintenance |
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Partners |
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ESI GP and ESI LP together with Tractebel GP and Tractebel LP |
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Partnerships |
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NEA together with NJEA |
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PJM |
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Pennsylvania-New Jersey-Maryland power pool |
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ProGas |
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ProGas Limited of Alberta, Canada |
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PSE&G |
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Public Service Electric & Gas Company of Newark, New Jersey |
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PURPA |
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Public Utility Regulatory Policies Act of 1978, as amended |
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qualifying facilities or QFs |
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Non-utility power production facilities meeting the requirements of a qualifying facility under PURPA |
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Reform Act |
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Private Securities Litigation Reform Act of 1995 |
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Rule 144A |
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Rule 144A promulgated under the Act |
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Tractebel |
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Tractebel, Inc. |
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Tractebel GP |
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Tractebel Northeast Generation GP, Inc. |
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Tractebel LP |
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Tractebel Associates Northeast LP, Inc. |
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Tractebel Power |
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Tractebel Power, Inc. |
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Trustee |
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State Street Bank and Trust Company, a Massachusetts banking corporation |
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Westinghouse |
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Siemens Westinghouse Operating Services Company |
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Westinghouse Power |
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Siemens Westinghouse Power Corporation |
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CAUTIONARY STATEMENTS AND RISK FACTORS THAT MAY AFFECT FUTURE RESULTS |
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In connection with the safe harbor provisions of the Reform Act, Funding Corp., NEA and NJEA (collectively, the Partnerships), Acquisition Corp. and NE LP (all five entities collectively, the registrants) are hereby filing cautionary statements identifying important factors that could cause the registrants' actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of the registrants in this combined Form 10-K, in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "projection," "target," "outlook") are not statements of historical facts and may be forward-looking. Forward-looking statements involve estimates, assumptio
ns and uncertainties. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors (in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements) that could cause the registrants' actual results to differ materially from those contained in forward-looking statements made by or on behalf of the registrants.
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Any forward-looking statement speaks only as of the date on which such statement is made, and the registrants undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.
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The following are some important factors that could have a significant impact on the registrants' operations and financial results, and could cause the registrants' actual results or outcomes to differ materially from those discussed in the forward-looking statements:
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The registrants are subject to changes in laws or regulations, including the PURPA, changing governmental policies and regulatory actions, including those of the FERC, with respect to, but not limited to, acquisition and disposal of assets and facilities, and present or prospective competition.
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The registrants are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources and health and safety that could, among other things, restrict or limit the use of certain fuels required for the production of electricity. There are significant capital, operating and other costs associated with compliance with these environmental statutes, rules and regulations, and those costs could be even more significant in the future.
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The registrants operate in a changing market environment influenced by various legislative and regulatory initiatives regarding deregulation, regulation or restructuring of the energy industry, including deregulation of the production and sale of electricity. The registrants will need to adapt to these changes and may face increasing competitive pressure.
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The Partnerships were developed and are operated as QFs under PURPA and the regulations promulgated thereunder by the FERC. FERC regulations require that at least 5% of a QF's total energy output be useful thermal energy. To meet this requirement, the Partnerships sell steam under long-term sales agreements to two unrelated third parties for use in gas and chemical processing facilities to maintain their QF status. The Partnerships are dependent upon the on-going operations of these facilities. Loss of QF status would entitle one power purchaser to renegotiate the price provisions of its power purchase agreement and one power purchaser to terminate its power purchase agreement.
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A substantial portion of the output from the Partnerships' power generation facilities is sold under long-term power purchase agreements to four regulated utilities, two of which are under common control. The limited number of power purchasers creates a concentration of counterparty risk. The remaining output from the power generation facilities is sold, from time to time, in the merchant markets. In addition, it is expected that upon expiration of the power purchase agreements, the residual portion of the electrical output will be sold in the merchant market. Merchant plants sell power based on market conditions at the time of sale. The amount and timing of revenues to be received from the merchant markets in the future is uncertain.
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The operation of power generation facilities involves many risks, including start up risks, breakdown or failure of equipment, transmission lines or pipelines, the dependence on a specific fuel source or the impact of unusual or adverse weather conditions (including natural disasters), as well as the risk of performance below expected levels of output or efficiency. This could result in lost revenues and/or increased expenses. Insurance, warranties or performance guarantees may not cover any or all of the lost revenues or increased expenses, including the cost of replacement power. Breakdown or failure of an operating facility may prevent the facility from performing under applicable power sales agreements which, in certain situations, could result in termination of the agreement or payment of liquidated damages.
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The registrants use derivative instruments, such as swaps and options, to manage their commodity and financial market risks. The registrants could recognize financial losses as a result of volatility in the market values of these contracts, or if a counterparty fails to perform.
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In addition to risks discussed elsewhere, risk factors specifically affecting the registrants' success include the ability to efficiently operate generating assets, the price and supply of fuel, transmission constraints, competition from new sources of generation, excess generation capacity and demand for power. There can be significant volatility in market prices for fuel, and there are other financial, counterparty and market risks that are beyond the control of the registrants. The registrants' inability or failure to effectively hedge their assets or positions against changes in commodity prices, interest rates, counterparty credit risk or other risk measures could significantly impair their future financial results.
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The registrants' results of operations can be affected by changes in the weather. Severe weather can be destructive, causing outages and/or property damage, which could require additional costs to be incurred.
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The registrants are subject to costs and other effects of legal and administrative proceedings, settlements, investigations and claims; as well as the effect of new, or changes in, tax rates or policies, rates of inflation or accounting standards.
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The registrants are subject to direct and indirect effects of terrorist threats and activities. Generation and transmission facilities, in general, have been identified as potential targets. The effects of terrorist threats and activities include, among other things, terrorist actions or responses to such actions or threats, the inability to generate, purchase or transmit power, the risk of a significant slowdown in growth or a decline in the U.S. economy, delay in economic recovery in the U.S. and the increased cost and adequacy of security and insurance.
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The registrants' ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by national events as well as registrant-specific events.
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The registrants are substantially leveraged. The ability of the registrants to make interest and principal payments and fund capital expenditures is dependent on the future performance of the Partnerships. Future performance is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the control of the registrants. The registrants are also subject to restrictive covenants under their debt agreements that will limit the ability to borrow additional funds.
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All obligations of the Partnerships are non-recourse to the direct and indirect owners of the registrants. Following any default by the Partnerships, security is limited to the owners' economic interests in the Partnerships. The owners have no meaningful revenues other than the distributions they receive from the Partnerships. In the event of default, the ability of the owners to satisfy any obligations will be limited to amounts payable by the Partnerships as distributions.
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The issues and associated risks and uncertainties described above are not the only ones the registrants may face. Additional issues may arise or become material as the energy industry evolves. The risks and uncertainties associated with these additional issues could impair the registrants' businesses in the future.
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PART I |
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Item 1. Business
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General. NE LP, a Delaware limited partnership, was formed on November 21, 1997 for the purpose of acquiring ownership interests in two partnerships, NEA, a Massachusetts limited partnership, and NJEA, a New Jersey limited partnership, each of which owns an electric power generation station in the northeastern United States. NE LP is jointly owned by ESI GP and ESI LP (indirect wholly-owned subsidiaries of FPL Energy, which is an indirect wholly-owned subsidiary of FPL Group, a company listed on the New York Stock Exchange) and Tractebel GP and Tractebel LP (indirect wholly-owned subsidiaries, through Tractebel and Tractebel Power of Tractebel S.A., a Belgian energy, industrial services and energy services business, and a member of the Suez group). NE LP also formed a wholly-owned entity, NE LLC, to assist in such acquisitions. On January 14, 1998, NE LP and NE LLC acquired all of the interests in the Partnerships from IEC and f
rom certain individuals for approximately $545 million, including approximately $10 million of acquisition costs. The acquisition of the Partnerships was accounted for using the purchase method of accounting and was subject to pushdown accounting, which gave rise to a new basis of accounting by the Partnerships. |
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The Partnerships were formed in 1986 to develop, construct, own, operate and manage the power generation stations. NEA's facility commenced commercial operation in September 1991 and is located in Bellingham, Massachusetts. NJEA's facility commenced commercial operation in August 1991 and is located in Sayreville, New Jersey.
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In connection with the acquisitions of the Partnerships' interests, the Funding Corp., a Delaware corporation, was acquired by a subsidiary of ESI Energy, Tractebel Power and Broad Street from IEC. This entity was established in 1994 solely for the purpose of issuing debt. This debt was privately issued under Rule 144A to acquire outstanding bank debt and to lend funds to the Partnerships and was subsequently exchanged for publicly-issued debt.
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On November 13, 1997, the Acquisition Corp., a Delaware corporation, was formed. The Acquisition Corp.'s common stock is jointly owned by a subsidiary of ESI Energy and Tractebel Power. On February 12, 1998, the Acquisition Corp. issued $220 million of debt under Rule 144A which was also subsequently exchanged for publicly-issued debt. The proceeds were loaned to NE LP and then distributed to direct subsidiaries of FPL Energy and Tractebel Power. Repayment of the debt is expected to be made from distributions from the Partnerships.
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None of the registrants or the Partners have any employees.
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Partnerships' Operations. The Partnerships operate in the independent power industry. In the United States, rate-regulated electric utilities have been the dominant producers and suppliers of electric energy since the early 1900s. In 1978, PURPA removed regulatory constraints relating to the production and sale of electric energy by certain non-utility power producers and required electric utilities to buy electricity from certain types of non-utility power producers under certain conditions, thereby encouraging companies other than electric utilities to enter the electric power production market. The Partnerships were created as a result of the PURPA legislation. |
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Each of the Partnerships owns and derives substantially all of its revenues from a nominal 300 mw combined-cycle cogeneration facility. The facilities were constructed by Westinghouse Power and use natural gas to produce electrical energy and thermal energy in the form of steam. The Partnerships were developed and are operated as qualifying facilities under PURPA and the regulations promulgated thereunder by the FERC. The Partnerships must satisfy certain annual operating and efficiency standards and ownership requirements to maintain qualifying facility status, which exempts the Partnerships from certain federal and state regulations. The Partnerships are, however, not exempt from state regulatory commission general supervisory powers relating to environmental and safety matters.
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NEA and NJEA sell substantially all of their output to regulated utilities under power purchase agreements as follows:
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The remainder of the net electrical energy produced by the Partnerships is available for sale to the marketplace either directly to third parties or via FPL Energy's power marketing subsidiary. The power purchase agreements provide for substantially continuous delivery of base load power. |
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Two of the power purchase agreements require the establishment of energy banks to record cumulative payments made by the utilities in excess of avoided cost rates scheduled or specified in such agreements. The energy bank balances bear interest at various rates specified in the agreements. Upon termination of the agreements, with the exception of the NEA power purchase agreement discussed in Note 3 - Energy Bank Balances, some or all of the remaining amounts recorded in the energy banks will be required to be repaid. The energy bank balances are partially secured by letters of credit (see Note 7 - Energy Bank and Loan Collateral).
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To meet the FERC regulations for a qualifying facility, both NEA and NJEA sell at least 5% of the thermal energy produced to unrelated third parties. NEA sells steam to a third party which leases a carbon dioxide facility owned by NEA and located on NEA's property. NJEA sells steam to a third party adjacent to the NJEA facility.
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In 2002, one of the Partnerships terminated a long-term gas supply agreement effective December 31, 2002 and entered into new replacement long-term gas supply agreements with Tractebel Energy Marketing, Inc. (TEMI) and FPL Energy Power Marketing, Inc. (PMI), respectively, each of which are related to NE LP. These two new agreements, which became effective January 1, 2003, provide the partnership with the same combined quantity of natural gas and with pricing that is more favorable to the partnership than the agreement previously in effect. Before restructuring, the prior agreement provided the partnership with approximately 37% of its fuel requirements, and approximately 18% of the total fuel requirements of the Partnerships. Affiliates of TEMI and PMI have guaranteed certain of their respective obligations under the replacement long-term gas supply agreements.
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The Partnerships will continue to receive approximately 80% of the natural gas that fuels the Partnerships' facilities through long-term gas supply agreements, including agreements with ProGas and, in the case of NJEA, with PSE&G. Natural gas is transported to, or stored for later use by, the Partnerships pursuant to long-term gas transportation and storage agreements. The remainder of the daily fuel requirements is satisfied by open-market purchases. Certain price escalators under the long-term gas supply agreements are intended to correlate to the price escalators under the power purchase agreements, thereby reducing the risk associated with increases in the price of natural gas.
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ESI Northeast Fuel, an indirect wholly-owned subsidiary of FPL Energy, is the fuel manager for the Partnerships and provides fuel management and administrative services by contracting with FPL Energy's power marketing subsidiary.
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FPLE Operating Services, a wholly-owned indirect subsidiary of FPL Energy, provides O&M services for the Partnerships. See Management's Discussion - Results of Operations.
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Seasonality. The performance of the Partnerships is dependent on ambient conditions (principally air temperature), which affect the efficiency and capacity of the combined-cycle facilities. Payments due to NJEA under the JCP&L power purchase agreement during the winter and summer seasons are substantially higher than those in spring and fall. Otherwise, the business of the Partnerships is not materially subject to seasonal factors. |
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Environmental. Federal, state and local environmental laws and regulations cover air and water quality, land use, power plant and transmission line siting, lead paint, asbestos, noise and aesthetics, solid waste, natural resources, and other environmental matters. Compliance with these laws and regulations could increase the cost of operating the facilities by requiring, among other things, changes in the design and operation of these facilities. During 2002 and 2001, the registrants spent $0 and $0.3 million, respectively, on capital additions necessary to comply with environmental laws and regulations and do not anticipate incurring such costs in 2003. |
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Competition. Recent regulatory change has created additional competition in the form of wholesale power marketers that engage in purchase and resale transactions between power producers and power distributors. Although substantially all of the Partnerships' output is committed under the power purchase agreements described above, these factors may adversely affect energy prices under certain power purchase agreements that are tied to the wholesale electric market prices. NE LP and the Partnerships do not expect electric utility industry restructuring to result in any material adverse change to prices under the Partnerships' power purchase agreements. However, the impact of electric utility industry restructuring on the companies that purchase power from the Partnerships is uncertain. Both Massachusetts and New Jersey have enacted legislation designed to deregulate the production and sale of electricity. By allowing wholesale electricity
customers to choose their electricity supplier, deregulation is expected to result in a shift from cost-based rates to market-based rates for energy production. Similar initiatives are also being pursued on the federal level. |
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The Partnerships operate in two power pools. NEA operates in NEPOOL and NJEA operates in PJM, each of which has an independent system operator that manages the wholesale electricity market and the transmission of electricity. While legislators and state regulatory commissions will decide what impact, if any, competitive forces will have on retail transactions, the FERC has jurisdiction over potential changes which could affect competition in wholesale transactions. The FERC has approved various filings submitted by NEPOOL and PJM regarding electric industry deregulation initiatives.
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Item 2. Properties
As of December 31, 2002, the Partnerships had the following properties: |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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This discussion should be read in conjunction with the Notes to Consolidated and Combined Financial Statements contained herein. In the discussion of Results of Operations below, all comparisons are with the corresponding items in the prior year.
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Critical Accounting Policies and Estimates |
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The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles requires management to exercise judgment and make estimates and assumptions where amounts are not subject to precise measurement or are dependent on future events.
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Critical accounting policies and estimates, which are important to the portrayal of both the registrants' financial condition and results of operations and which require complex, subjective judgments, are as follows:
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Accounting for Derivatives and Hedging Activities - On January 1, 2001, NE LP and the Partnerships adopted FAS 133, "Accounting for Derivatives and Hedging Activities," as amended by FAS 137 and FAS 138 (collectively, FAS 133). NE LP and the Partnerships use derivative instruments (primarily swaps and options) to manage the commodity price risk inherent in fuel purchases as described in Note 2 - Accounting for Derivative Instruments and Hedging Activities and Note 6 - Financial Instruments. These accounting pronouncements, which require the use of fair value accounting if certain conditions are met, apply not only to traditional financial derivative instruments, but to any contract having the accounting characteristics of a derivative.
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FAS 133 requires that derivative instruments be recorded on the balance sheet at fair value. Changes in the derivatives' fair values are recognized currently in earnings (in change in fair value of derivatives) unless hedge accounting is applied. While substantially all of NE LP and the Partnerships' derivative transactions are entered into for the purposes described above, hedge accounting is only applied where specific criteria are met and it is practicable to do so. For those transactions for which hedge accounting can be applied, much of the effects of changes in fair value are reflected in other comprehensive income (a component of partners' equity) rather than being recognized in current earnings. Settlement gains and losses are recorded in fuel expense.
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Since FAS 133 became effective in 2001, the FASB has discussed and, from time to time, issued implementation guidance related to FAS 133. In particular, much of the interpretive guidance affects when certain contracts for the purchase and sale of power and certain fuel supply contracts can be excluded from the provisions of FAS 133. Despite the large volume of implementation guidance, the standard and supplemental guidance does not provide specific guidance on all contract issues that NE LP and the Partnerships have faced during the past two years. As a result, significant judgment must be used in applying FAS 133 and its interpretations. The interpretation of FAS 133 continues to evolve. One possible result of changes in interpretations could be that certain contracts would have to be recorded on the balance sheets at fair value, with changes in fair value recorded in the income statements. See Note 6.
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Energy Bank Balances
- Two of the power purchase agreements required the establishment of energy banks to record cumulative payments made by the utilities in excess of avoided cost rates scheduled or specified in such agreements. The energy bank balances bear interest at various rates specified in the agreements. Upon termination of the agreements, with the exception of the NEA power purchase agreement discussed below, some or all of the remaining amounts recorded in the energy banks will be required to be repaid. The energy bank balances are partially secured by letters of credit (see Note 7 - Energy Bank and Loan Collateral). |
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On December 31, 2000, NEA exercised its option to receive a reduced energy payment for the period remaining on one of the power purchase agreements in lieu of paying the energy bank balance existing as of that date. The $24.9 million balance as of December 31, 2000 is being amortized into revenue on a straight-line basis over the remaining life of the agreement which expires on September 15, 2021. NEA's accounting treatment reflects the position that, as of December 31, 2000, the energy bank balance represents deferred revenue and is being reduced for the discounted amount of the energy payments on a straight-line basis over the remaining life of the power purchase agreement. The power purchaser has disputed this position. It contends that the energy bank balance is growing and could require a significant payment by NEA upon termination. On October 31, 2002, the power purchaser filed a demand for arbitration with the American Arbitration Association in this matter. Based upon advice from legal counsel, NEA i
s confident in its interpretation of the contract and related accounting treatment (see Note 3 - Energy Bank Balances).
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Major Maintenance
- Maintenance expenses are accrued for certain identified major maintenance and repair items related to the Partnerships' facilities. The expenses are accrued ratably over each major maintenance cycle. The amounts accrued relate to maintenance costs required for the equipment to operate over its depreciable life. For the periods ended December 31, 2002, 2001 and 2000, the Partnerships recorded major maintenance expense of $4.7 million, $7.3 million and $4.8 million, respectively. At December 31, 2002 and 2001, the Partnerships had $9.1 million and $11.8 million of accrued major maintenance expense, respectively. |
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Results of Operations |
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NE LP for the years ended December 31, 2002 and 2001 - NE LP's net income increased in 2002 primarily due to a gain on restructuring of contracts, higher revenues, net unrealized mark-to-market gains on derivatives and lower interest expense, partially offset by higher fuel costs.
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In 2002, the Partnerships restructured certain contracts. In conjunction with these restructurings, NE LP paid fees of approximately $23.9 million of which $23.3 million was funded through capital contributions by it's partners. A gain of approximately $45.1 million was recognized as a result of these restructuring activities.
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During 2002, one of the Partnerships entered into two new long-term gas supply agreements with PMI and TEMI which became effective January 1, 2003. These new agreements will provide the partnership with the same combined quantity of natural gas and with pricing that is more favorable to the partnership than the agreement previously in effect. Before restructuring, the prior agreement provided the partnership with approximately 37% of its fuel requirements, and approximately 18% of the total fuel requirements of the Partnerships. Affiliates of the suppliers have guaranteed certain of their respective obligations under its new long-term gas supply agreements.
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NEA terminated all agreements with its steam sales user and lessee in 2002 and entered into a new operating lease and ancillary agreements with a new lessee effective January 1, 2003 through September 14, 2016. Under the terms of the operating lease agreement, the lessee will operate and maintain NEA's carbon dioxide facility. Base rent under the lease is $0.1 million per month during the winter months as defined in the agreement and $0.2 million per month during the summer months as defined in the agreement. NEA is selling a portion of the steam at a minimum charge of $0.1 million during the winter months (as defined) and $0.2 million during the summer months (as defined). Both the base rent and base steam cost are adjusted every month by the operating results of the facility as defined in the agreement.
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Revenues for the year ended December 31, 2002 improved primarily as a result of increased electricity sales prices. Revenues in 2002 were comprised of $386.6 million of power sales to utilities and $3.9 million of steam sales. In 2001, revenues were comprised of $360.6 million of power sales to utilities and $3.8 million of steam sales. Power sales to utilities reflect a decrease in utility energy bank and deferred revenue balances of $25.6 million and $23.1 million in 2002 and 2001, respectively. The decrease in energy bank balances, which increased reported revenues, are determined in accordance with scheduled or specified rates under certain power purchase agreements. See Note 3 - Energy Bank Balances for information regarding an arbitration proceeding relating to energy bank balances.
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Fuel expense increased primarily as a result of increased prices of natural gas required to fuel the facilities. These fuel costs were partly offset in each of 2002 and 2001 by $20.8 million of deferred credit amortization for fuel contracts.
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NE LP makes scheduled interest and principal payments on its outstanding debt. NE LP is scheduled to make semi-annual principal and interest payments on June 30 and December 30. Interest expense for NE LP decreased in each of 2002 and 2001 as a result of decreasing principal balances on its outstanding debt.
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Both Massachusetts and New Jersey have enacted legislation designed to deregulate the production and sale of electricity. By allowing wholesale electricity customers to choose their electricity supplier, deregulation is expected to result in a shift from cost-based rates to market-based rates for energy production. Similar initiatives are also being pursued on the federal level. NE LP does not expect electric utility industry restructuring to result in any material adverse change to prices under the Partnerships' power purchase agreements. However, the impact of electric utility industry restructuring on the companies that purchase power from the Partnerships is uncertain.
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NE LP for the years ended December 31, 2001 and 2000 - NE LP's net income declined in 2001 primarily due to increased fuel costs and the adoption of FAS 133, partly offset by higher revenues and lower interest expense from decreasing principal balances on the outstanding debt and energy bank and other liabilities. As a result of FAS 133, earnings of NE LP and the Partnerships' were negatively affected by $3.3 million for the year ended December 31, 2001. For additional information regarding FAS 133, see Note 2 - Accounting for Derivative Instruments and Hedging Activities.
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Revenues for the year ended December 31, 2001 improved primarily as a result of increased electricity sales prices. Revenues in 2001 were comprised of $360.6 million of power sales to utilities and $3.8 million of steam sales. In 2000, revenues were comprised of $333.4 million of power sales to utilities and $4.2 million of steam sales. Power sales to utilities reflect a decrease in utility energy bank and deferred revenue balances of $23.1 million and $23.7 million in 2001 and 2000, respectively. The decrease in energy bank balances, which increased reported revenues, are determined in accordance with scheduled or specified rates under certain power purchase agreements. See Note 3 - Energy Bank Balances for information regarding an arbitration proceeding relating to energy bank balances.
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Fuel expense increased primarily as a result of the increased price of natural gas required to fuel the facilities. These fuel costs were partly offset in each of 2001 and 2000 by $20.8 million of deferred credit amortization for fuel contracts.
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In January 2001, NE LP recorded an unrealized $18.3 million gain as the cumulative effect of adopting FAS 133, representing the effect of those derivative instruments for which hedge accounting was not applied. In addition, for the year ended December 31, 2001, NE LP recorded a net mark-to-market loss of $21.6 million representing the change in fair value of derivative instruments. See Note 2 - Accounting for Derivative Instruments and Hedging Activities.
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The Partnerships for the years ended December 31, 2002 and 2001
- The Partnerships' net income increased in 2002 primarily due to the gain on restructuring of contracts, higher revenues, net unrealized mark-to-market gains on derivatives and lower interest expense, partially offset by higher fuel costs. |
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In 2002, the Partnerships restructured certain contracts. In conjunction with these restructurings, NE LP paid fees of approximately $23.9 million of which $23.3 million was funded through capital contributions by its partners. A gain of approximately $45.1 million was recognized as a result of these restructuring activities.
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One of the Partnerships entered into two new long-term gas supply agreements which became effective January 1, 2003. These new agreements will provide the partnership with the same combined quantity of natural gas and with pricing that is more favorable to it than the agreement previously in effect. Before restructuring, the prior agreement provided the Partnership with approximately 37% of its fuel requirements, and approximately 18% of the total fuel requirements of the Partnerships. Affiliates of the suppliers have guaranteed certain of their respective obligations under the new long-term gas supply agreements.
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Revenues for the year ended December 31, 2002 improved primarily as a result of increased electricity sales prices. Revenues in 2002 were comprised of $386.6 million of power sales to utilities and $3.9 million of steam sales. In 2001, revenues were comprised of $360.6 million of power sales to utilities and $3.8 million of steam sales. Power sales to utilities reflect a decrease in utility energy bank and deferred revenue balances of $25.6 million and $23.1 million in 2002 and 2001, respectively. The decrease in energy bank balances, which increased reported revenues, are determined in accordance with scheduled or specified rates under certain power purchase agreements. See Note 3 - Energy Bank Balances for information regarding an arbitration proceeding related to energy bank balances.
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Fuel expense increased primarily as a result of increased prices of natural gas required to fuel the facilities. These fuel costs were partly offset in each of 2002 and 2001 by $20.8 million of deferred credit amortization for fuel contracts.
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The Partnerships make scheduled interest and principal payments on their outstanding debt. The Partnerships are scheduled to make semi-annual principal and interest payments on June 30 and December 30. Interest expense for the Partnerships decreased in each of 2002 and 2001 as a result of decreasing principal balances on their outstanding debt.
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Both Massachusetts and New Jersey have enacted legislation designed to deregulate the production and sale of electricity. By allowing wholesale electricity customers to choose their electricity supplier, deregulation is expected to result in a shift from cost-based rates to market-based rates for energy production. Similar initiatives are also being pursued on the federal level. The Partnerships do not expect electric utility industry restructuring to result in any material adverse change to prices under the Partnerships' power purchase agreements. However, the impact of electric utility industry restructuring on the companies that purchase power from the Partnerships is uncertain.
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The Partnerships for the years ended December 31, 2001 and 2000
- The Partnerships' net income declined in 2001 primarily due to increased fuel costs and the adoption of FAS 133, partly offset by higher revenues and lower interest expense from decreasing principal balances on outstanding debt and energy bank and other liabilities. As a result of FAS 133, earnings of the Partnerships were negatively affected by $3.3 million for the year ended December 31, 2001. For additional information regarding FAS 133, see Note 2 - Accounting for Derivative Instruments and Hedging Activities. |
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Revenues for the year ended December 31, 2001 improved primarily as a result of increased electricity sales prices. Revenues in 2001 were comprised of $360.6 million of power sales to utilities and $3.8 million of steam sales. In 2000, revenues were comprised of $333.4 million of power sales to utilities and $4.2 million of steam sales. Power sales to utilities reflect a decrease in utility energy bank balances of $23.1 million and $23.7 million in 2001 and 2000, respectively. The decrease in energy bank balances, which increased reported revenues, are determined in accordance with scheduled or specified rates under certain power purchase agreements. See Note 3 - Energy Bank Balances for information regarding an arbitration proceeding relating to energy bank balances.
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Fuel expense increased primarily as a result of the increased price of natural gas required to fuel the facilities. These fuel costs were partly offset in each of 2001 and 2000 by $20.8 million of deferred credit amortization for fuel contracts.
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In January 2001, the Partnerships recorded an unrealized $18.3 million gain as the cumulative effect of adopting FAS 133, representing the effect of those derivative instruments for which hedge accounting was not applied. In addition, for the year ended December 31, 2001, the Partnerships recorded a net mark-to-market loss of $21.6 million representing the change in fair value of derivative instruments. See Note 2 - Accounting for Derivative Instruments and Hedging Activities.
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The Funding Corp. and the Acquisition Corp.
- Both the Funding Corp. and the Acquisition Corp. use interest income and principal payments received from the notes receivable from the Partnerships and NE LP, respectively, to make scheduled interest and principal payments on their outstanding debt. Both are scheduled to make semi-annual principal and interest payments on June 30 and December 30. Interest expense for the Funding Corp. decreased in each of 2002 and 2001 as a result of decreasing principal balances on its outstanding debt. Interest expense for the Acquisition Corp. decreased in 2002 due to decreasing principal balances on its outstanding debt. |
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Subsequent Event - In February 2003, NJEA entered into an agreement to modify the gas index used for calculating the energy price in the power purchase agreement with a New Jersey utility. This modification is effective as of August 14, 2002 with the rate being adjusted annually on August 14th of each year. Since August 14, 2002, the New Jersey utility had been paying for power under the rate that was in effect prior to the modification and in March 2003 the utility paid $9.2 million to NJEA representing the additional amount owed to NJEA using the agreed upon index. Payments for power delivered beginning February 1, 2003 through the end of the term of the power purchase agreement will be made using the agreed upon index. This agreement is subject to the approval of the New Jersey Board of Public Utilities.
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New Accounting Rules |
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Accounting for Asset Retirement Obligations
- Beginning in 2003, the registrants will be required to adopt FAS 143, "Accounting for Asset Retirement Obligations." See Note 2 - Accounting for Asset Retirement Obligations. |
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Guarantees - In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." See Note 2 - Guarantees.
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Variable Interest Entities (VIEs) - In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." See Note 2 - Variable Interest Entities (VIEs).
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Related Party Information |
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NE LP and the Partnerships receive O&M, fuel management and administrative services from entities related to FPL Energy. Payments to these entities for these services approximate $3.1 million annually. For additional information see Note 5.
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Effective January 2003 one of the Partnerships will receive fuel pursuant to fuel supply agreements with entities related to FPL Energy and Tractebel. For additional information see Note 3.
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Liquidity and Capital Resources |
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The Funding Corp. and the Partnerships
- Cash flow generated by the Partnerships during 2002 was sufficient to fund operating expenses as well as fund the debt service requirements of the Funding Corp. Debt maturities of the Funding Corp. will require cash outflows of approximately $348.5 million in principal and interest through 2007, including $59.1 million in 2003. It is anticipated that cash requirements for principal and interest payments in 2003 will be satisfied with operational cash flow. Operational cash flow may be affected by, among other things, changes in laws or regulations, including the PURPA, weather conditions, competition for retail and wholesale customers, availability, pricing and transportation of fuel and other energy commodities, and market demand for energy. See Funding Corp.'s Note 3 to Financial Statements, and Note 4 to Consolidated and Combined Financial Statements - Funding Corp. |
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Letters of credit were established to satisfy requirements in certain power purchase agreements. These letters of credit can be drawn upon in the event of default under one such agreement, or a termination of the other such agreement at a time when the energy bank balance is positive. See Note 7 to Consolidated and Combined Financial Statements - Energy Bank and Loan Collateral.
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The Acquisition Corp. and NE LP
- Cash flow generated by NE LP during 2002 was sufficient to fund operating expenses as well as fund the debt service requirements of the Acquisition Corp. and the Funding Corp. Debt maturities of the Acquisition Corp. and the Funding Corp. will require cash outflows of approximately $485.9 million in principal and interest through 2007, including $84.6 million in 2003. It is anticipated that cash requirements for principal and interest payments in 2003 will be satisfied with operational cash flow. Operational cash flow may be affected by, among other things, changes in laws or regulations, including the PURPA, weather conditions, competition for retail and wholesale customers, availability, pricing and transportation of fuel and other energy commodities, and market demand for energy. See Acquisition Corp.'s Note 3 to Financial Statements, and Note 4 to Consolidated and Combined Financial Statements - Acquisition Corp. |
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Letters of credit were established to satisfy requirements in certain power purchase agreements. These letters of credit can be drawn upon in the event of default under one such agreement, or a termination of the other such agreement at a time when the energy bank balance is positive. See Note 7 to Consolidated and Combined Financial Statements - Energy Bank and Loan Collateral.
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The long-term contractual obligations of NE LP and the Partnerships at December 31, 2002 were as follows:
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