UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2003 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number: 333-40478
AES RED OAK, L.L.C.
(Exact name of registrant as specified in its charter)
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Delaware |
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54-1889658 |
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(State of other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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832 Red Oak Lane, Sayreville, NJ |
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08872 |
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(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code: (732) 238-1462 |
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Securities Registered Pursuant To Section 12(b) of The Act: None |
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Securities Registered Pursuant To Section 12(g) of The Act: None |
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark 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, or any amendment to this Form 10K. ý
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
As of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, and as of March 15, 2004, 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
TABLE OF CONTENTS
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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:
• unexpected problems relating to the performance of the facility,
• the financial condition of third parties on which we depend, including in particular, Williams Power Company, Inc., (“Williams Energy”), formerly Williams Energy Marketing & Trading Company, 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,
• delays in, or disputes over, the final completion of our facility,
• continued performance by Williams Energy (as guaranteed by The Williams Companies, Inc.) under the Power Purchase Agreement,
• the ability of The Williams Companies, Inc. or its affiliates to avoid a default under the Power Purchase Agreement by continuing to maintain or provide adequate security to supplement their guarantee of Williams Energy’s performance under the Power Purchase Agreement,
• our ability to find a replacement power purchaser on favorable or reasonable terms, if necessary,
• an adequate merchant market after the expiration, or in the event of a termination, of the Power Purchase Agreement,
• capital shortfalls and access to additional capital on reasonable terms, or in the event that the Power Purchase Agreement is terminated,
• the possibility that Williams Energy will not request that we run or “dispatch” the facility as provided under the Power Purchase Agreement,
• inadequate insurance coverage,
• unexpected expenses or lower than expected revenues,
• environmental and regulatory compliance,
• terrorists acts and adverse reactions to United States anti-terrorism activities, and
• 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.
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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. We reached provisional acceptance on August 11, 2002, risk transfer on August 13, 2002, and took the position that we were commercially available on September 1, 2002. Williams Energy disputed the September 1, 2002 commercial operation date and informed us that it recognized commercial availability of the facility as of September 28, 2002. On November 4, 2003, a settlement was reached and a commercial operation date of September 28, 2002 was agreed upon. See Item 3 “Legal Proceedings”. Since our commercial operation date, our sole business is the ownership, leasing and operation of the project.
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 discussed above, provisional acceptance has been granted and the Facility has commenced commercial operations, however, Raytheon must perform certain agreed upon completion items in order to obtain final acceptance. Raytheon gave notice of Final Acceptance on July 22, 2003 based on its July 8, 2003 performance test. On July 31, 2003, we received a letter from the project’s independent engineer stating that it could not support Raytheon’s claim of final acceptance and it did not consider the July 8, 2003 performance test valid. In making this assessment, the independent engineer cited, among other reasons, (i) modifications made to certain equipment in performance of the July 8 performance test which would adversely impact the operations of the plant and other pieces of equipment and (ii) Raytheon’s failure to demonstrate compliance with guaranteed emissions limits. On August 1, 2003, we rejected Raytheon’s claim of final acceptance. This rejection was based upon Raytheon’s failure to meet the conditions for final acceptance provided for in the Engineering, Procurement and Construction Services Agreement (“EPC contract”). On August 7, 2003, we received a response from Raytheon in which Raytheon claims that our rejection of the final acceptance is invalid and improper. The Company is currently considering its options for resolving this dispute. 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, L.L.C., 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 a 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
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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. The AES Corporation is a leading global power company, with 2003 sales of $8.4 billion. AES delivers 45,000 megawatts of electricity to customers in 27 countries through 116 power facilities and 17 distribution companies. Its 30,000 people are committed to operational excellence and meeting the world’s growing power needs. Approximately 26% of AES’s revenues come from businesses in North America, 18% from the Caribbean, 39% from South America, 11% from Europe and Africa, and 6% from Asia.
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., (“AES Sayreville”) 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.
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 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:
Our principal executive offices are located at 832 Red Oak Lane, Sayreville, NJ 08872. Our telephone number is (732) 238-1462.
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
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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 current 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. 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.
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 Pennsylvania-New Jersey-Maryland (“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 $.2 million and $11.1 million for the years ended December 31, 2003 and 2002, respectively. Related fuel expenses were approximately $.9 million and $6.9 million for the years ended December 31, 2003 and 2002, respectively.
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 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, 2003, 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.
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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.
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 (September 30, 2002).
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
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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. As a result of these extensions, we 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. As a result of the dispute over the commercial operation date, we 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. This issue was resolved as part of the arbitration settlement with Williams. During the period of the Second Paid Extension Option, we 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 August 2002, we had received $14 million in liquidated damages from Raytheon under the construction agreement. We did not receive any liquidated damages under the construction agreement in 2003.
Williams Energy is currently our sole customer for purchases of capacity, ancillary services, and energy and our sole source for fuel. Williams Energy’s payments under the Power Purchase Agreement are expected to provide all of our operating revenues during the term of the Power Purchase Agreement. It is unlikely that we 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 adverse impact on our 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:
• generate net electric energy and/or ancillary services;
• perform start-ups;
• perform shutdowns; and
• 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.
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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 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. We have not incurred any such fine or penalty to date.
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 Agreement, 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.
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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 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 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:
• 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;
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• the suspension of performance is of no greater scope and of no longer duration than is reasonably required by the force majeure condition;
• the party declaring force majeure uses all commercially reasonable efforts to remedy its inability to perform; and
• 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:
• 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;
• 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;
• 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;
• To the extent that the claiming party’s failure to perform was caused by lack of funds;
• 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
• 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.
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Events of Default; Termination; Remedies
The following will constitute events of default under the Power Purchase Agreement:
• breach of any term or condition of the Power Purchase Agreement, including, but not limited to, (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;
• 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;
• 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;
• 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;
• 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;
• involuntary bankruptcy or insolvency of either party that continues for more than 60 days;
• voluntary bankruptcy or insolvency by either party;
• 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;
• 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
• 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
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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.
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, eit