UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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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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OR |
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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 |
AES IRONWOOD, L.L.C.
(Exact name of Registrant as specified in its charter)
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Delaware |
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54-1457573 |
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(State of other jurisdiction of incorporation |
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(I.R.S. Employer Identification No.) |
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305 Prescott Road, Lebanon, Pennsylvania |
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17042 |
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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: (717) 228-1328 |
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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 whether
the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes o No
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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 ý
As of June 30, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter, and as of March 30, 2004, AES Ironwood, L.L.C. had one membership interest outstanding, which was held by AES Ironwood, 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 herein other than of historical facts, 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 operations and performance of our facility;
• the financial condition of third parties on which we depend, including in particular, Williams Power Company, Inc., formerly known as Williams Energy Marketing & Trading Company (“Williams”), as the power purchaser and fuel supplier under the power purchase agreement, and The Williams Companies, Inc., as the guarantor of performance under the power purchase agreement;
• unanticipated effects of the arbitration decision relating to our power purchase agreement dispute with Williams and the possibility of future disputes or proceedings regarding the power purchase agreement;
• the continued performance of Williams 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 provide adequate security to supplement or replace their guarantee of Williams’ 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 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;
• inadequate insurance coverage;
• unexpected expenses or lower than expected revenues;
• environmental and regulatory compliance; and
• terrorists acts and adverse reactions to United States anti-terrorism activities.
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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ITEM 1. Business
General
We are a Delaware limited liability company formed on October 30, 1998 to develop, construct, own, operate and maintain a 705-megawatt (MW) gas-fired electric generating power plant in Lebanon County, Pennsylvania, and to manage the production of electric generating capacity, ancillary services and energy at our facility. References to “us”, “our”, “we” or “the Company” herein mean AES Ironwood, L.L.C. We commenced commercial operations on December 28, 2001. Since the commercial operation date, our sole business is the ownership and operation of this facility.
We own the land on which our facility is located. Our facility was designed, engineered, procured and constructed for us by Siemens Westinghouse Power Corporation (Siemens Westinghouse) on a fixed-price, turnkey basis under the construction agreement. Siemens Westinghouse is also providing combustion turbine maintenance services and spare parts for our facility for an initial term of between eight and ten years, depending on the timing of scheduled outages, under a maintenance services agreement. AES Prescott, L.L.C. (AES Prescott), an indirect wholly-owned subsidiary of The AES Corporation, provides development, construction management and operations and maintenance services for the project under an operations agreement.
We entered into a power purchase agreement for a term of 20 years under which Williams is 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 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 revenues will be derived from payments made by Williams under the power purchase agreement.
Organizational Structure
All of our equity interests are owned by AES Ironwood, Inc., a wholly-owned subsidiary of The AES Corporation. The AES Corporation has provided funds to AES Ironwood, Inc. so that AES Ironwood, Inc. can make equity contributions to us to fund project costs. Under an Equity Subscription Agreement dated June 1, 1999, with AES Ironwood, Inc., these contributions are limited to $50.1 million. As of December 31, 2003, AES Ironwood, Inc. had made net contributions to us of $38.8 million. Approximately $9.1 million of the remaining contribution was supported by a surety bond until June 25, 2002, when the surety bond expired. At that time the surety bond was replaced by an acceptable letter of credit in the amount of $9.1 million. The need for the letter of credit ceased with the granting of final acceptance on March 12, 2003. We notified the collateral agent and they have released us of this requirement. On March 12, 2003, final acceptance under the agreement was granted and an Officer’s Certificate has been submitted to the Collateral Agent indicating that the facility has been fully funded and no further contribution will be required. AES Ironwood, Inc. currently has no operations outside of its activities in connection with our project and does not anticipate undertaking any operations not associated with our project. AES Ironwood, Inc. has no assets other than its membership interests in us and AES Prescott. AES Prescott has no operations outside of its activities in connection with our project. Under a services agreement, The AES Corporation supplies to AES Prescott all of the personnel and services necessary for AES Prescott to comply with its obligations under the operations agreement. As of December 31, 2003, The AES Corporation provided 27 employees to our facility.
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 safely 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.
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The following organizational chart illustrates the relationship among our company, AES Ironwood, Inc., AES Prescott and The AES Corporation:
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The AES Corporation |
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AES Ironwood, Inc. |
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AES Ironwood, L.L.C. |
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AES Prescott, L.L.C. |
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Our principal executive offices are located at 305 Prescott Road, Lebanon, Pennsylvania 17042. Our telephone number is (717) 228-1328.
Developments Relating to Williams
Under the power purchase agreement, in the event that S&P or Moody’s rate the long term senior unsecured debt of The Williams Companies, Inc. lower than investment grade, The Williams Companies, Inc., or an affiliate thereof, is required to replace The Williams Companies, Inc. guarantee with an alternative security that is acceptable to the Company. According to published sources, on July 23, 2002, S&P lowered the long term senior unsecured debt rating of The Williams Companies, Inc. to “BB-” from “BBB-”, and further lowered such rating to “B” on July 25, 2002. On May 23, 2003 S&P upgraded the rating to “B+” with a negative outlook. According to published sources, on July 24, 2002, Moody’s lowered the long-term senior unsecured debt rating of The Williams Companies, Inc. to “B1” from “Baa3.” According to published sources, this rating was further lowered on November 22, 2002 to “Caa1” by Moody’s, and then upgraded to “B3” on June 4, 2003. Accordingly, The Williams Companies, Inc.’s long term senior unsecured debt is currently rated below investment grade by both S&P and Moody’s.
In an action related to the ratings downgrade of The Williams Companies, Inc., S&P lowered its ratings on the Company’s senior secured bonds to “BB-” from “BBB-” on July 26, 2002, and placed the rating on credit watch. On December 10, 2003 S&P lowered its ratings on the Company’s senior secured bonds to “B+” from “BB-” with a negative outlook. On November 27, 2002, Moody’s lowered its ratings on the Company’s senior secured bonds to “B2” from “Ba2”. The Company does not believe that such ratings downgrades will have any other direct or immediate effect on the Company, as none of the other financing documents or project contracts have provisions that are triggered by a reduction of the ratings of the bonds.
To satisfy the requirements of the power purchase agreement, on September 20, 2002, Citibank, N.A. issued a $35 million Irrevocable Standby Letter of Credit (the “Letter of Credit”) on behalf of Williams. The Letter of Credit does not alter, modify, amend or nullify the guaranty issued by The Williams Companies, Inc. in favor of the Company and is considered to be additional security to the security amounts provided by such guaranty. The Letter of Credit became effective on September 20, 2002 and expired upon the close of business on July 10, 2003; except that the Letter of Credit will be automatically extended without amendment for successive one year periods from the present or any future expiration date hereof, unless Citibank, N.A. provides written notice of its election not to renew the Letter of Credit at least thirty days prior to any such expiration date. On June 13, 2003, Citibank, N.A. sent notification that the letter of credit will be extended to July 12, 2004. Additionally, in a Letter Agreement dated September 20, 2002, Williams agreed to (a) provide eligible credit support prior to the stated expiration date of the Letter of Credit and (b) replenish any portion of the Letter of Credit or eligible credit support that is drawn, reduced, cashed or redeemed, at any time, with an equal amount of eligible credit support. Within twenty days prior to the expiration of the Letter of Credit and/or any expiration date of eligible credit support posted by Williams, Williams
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shall post eligible credit support to the Company in place of the Letter of Credit and/or any expiring eligible credit support unless The Williams Companies, Inc. regains and maintains its investment grade status, in which case the Letter of Credit or eligible credit support shall automatically terminate and no additional eligible credit support shall be required. The Company and Williams acknowledge that the posting of such Letter of Credit and Williams’ agreement and performance of the requirements of (a) and (b) as set forth in the immediately preceding sentence shall be in full satisfaction of Williams’ obligations contained in Section 19.3 of the power purchase agreement to provide replacement security due to the downgrade of The Williams Companies, Inc. below investment grade status.
Since the Company depends on The Williams Companies, Inc. and its affiliates for both revenues and fuel supply under the power purchase agreement, if The Williams Companies, Inc. and its affiliates were to terminate or default under the power purchase agreement, there would be a severe negative impact to the Company’s cash flow and financial condition which could result in a default on the Company’s senior secured bonds. Due to recent declines in pool prices, the Company would expect that if required to seek alternative purchasers of its power as a result of a default by The Williams Companies, Inc. and its affiliates that 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 assurance as to the Company’s ability to generate sufficient cash flow to cover operating expenses or debt service obligations in the absence of a long-term power purchase agreement with Williams or its affiliates.
For the twelve months ended December 31, 2003, the Company has invoiced Williams approximately $51.4 million in respect of fixed payments, fuel conversion services and ancillary services. Approximately $50.1 million has been recognized as revenue and approximately $1.4 million has been deferred consistent with the Company’s revenue recognition policy discussed in note 3 to the financial statements.
The Company has ongoing disputes, including arbitration with Williams, relating to the parties power purchase agreement. The arbitration was bifurcated into two phases, and an award was issued on Phase I on February 3, 2004. The primary issue in Phase I related to various aspects of the availability of the facility for the year ended December 31, 2002, including disputes over the amount of any availability bonus or penalty. Phase II of the arbitration involves a dispute concerning the proper duration of facility start-ups and shutdowns, including fuel used during start-ups and shutdowns. While Phase I of the arbitration was limited to billing disputes in 2002, many of the same issues are disputed between the parties for 2003 billings.
The arbitral panel’s award on Phase I of the arbitration found that Williams had misapplied the applicable rules of PJM Interconnection, L.L.C. in the billing dispute with the Company over the availability of the facility. The panel declined, however, to decide the facility’s availability during 43 disputed maintenance events. Instead, it encouraged the parties to reach a mutual resolution of the disputed events by applying the correct Pennsylvania-New Jersey-Maryland (“PJM”) rule and, failing mutual agreement, to submit the dispute to a third party engineer for resolution. The parties are currently discussing possible resolution of the disputed events, and anticipate submitting any events that cannot be resolved by mutual agreement to a third party. Until the matter is fully resolved, the availability of the facility, and certain payments that are calculated based on availability, cannot be determined. However, based on the panel’s Award and its negotiations with Williams, the Company anticipates it will be paid some portion of its claimed availability bonus for 2002 and 2003 and does not owe an amount for annual availability capacity adjustment or fuel conversion volume rebate.
Also as a result of the panel’s Phase I Award, the Company will begin pre-funding a cash account on a quarterly basis to reflect the maximum amount of a fuel conversion volume rebate that might be payable to Williams if the facility operates the requisite number of hours to earn the maximum rebate available under the power purchase agreement. The maximum theoretical annual amount of the fuel conversion volume rebate is $1.7 million, but the account will not be fully funded during the course of the year if the facility is not operated a sufficient number of hours to achieve the maximum fuel conversion volume rebate. Depending on the amount of facility operation, the Company may be entitled to withdraw some of the funds deposited into the account during the second half of its fiscal year. Based on the arbitral award, the Company does not anticipate any payment for a fuel conversion volume rebate will be due for 2002 or 2003. If funding is required, amounts will be classified as restricted cash.
On March 12, 2004 the parties settled Phase II of the arbitration between the Company and Williams, which involved Williams’ claims that the duration of start-ups and shutdowns should be shortened, with a corresponding reduction in the volume of fuel consumed during such operations. The settlement resolves and releases, without any payment by the Company, Williams’ claim that it should be reimbursed retroactively to the date of commercial operation for excess fuel allegedly consumed during start-ups and shutdowns. An agreed order of dismissal has been submitted requesting the arbitral panel to dismiss Phase II of the arbitration with prejudice. The settlement of Phase II has no impact on Phase I of the arbitration. The parties continue to negotiate in an effort to settle issues left unresolved by the award in Phase I.
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Energy Revenues
The Company generates energy revenues under the power purchase agreement with Williams. During the 20-year term of the agreement, the Company also expects to sell electric energy and capacity produced by the facility, as well as ancillary and fuel conversion services. Under the power purchase agreement, the Company also generates 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, the Company 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. There can be no assurances as to whether such efforts would be successful.
Operating Expenses
Under an agreement with AES Prescott, L.L.C., the Company is required to reimburse it all operator costs on a monthly basis. Operator costs generally consist of all direct costs and overhead. Additionally, a monthly operator fee of approximately $425,000, subject to annual adjustment, is payable on each bond payment date.
Competition
Under the power purchase agreement, Williams is required to purchase all of the Company’s capacity and energy. Therefore, during the 20-year term of the power purchase agreement, competition from other capacity and energy providers will only become an issue if Williams breaches its agreement and ceases to purchase the Company’s capacity and energy or the power purchase agreement is otherwise terminated or not performed in accordance with its terms. Upon the expiration of the power purchase agreement or in the event the power purchase agreement is terminated prior to the expiration of its term, the Company anticipates selling its facility’s net capacity, ancillary services and energy under a new power purchase agreement or into the PJM power pool market. At that time, the Company 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. Competition and market conditions could have the effect of reducing operating time and therefore reducing fuel conversion services and associated variable payments.
Employees
As of December 31, 2003, the Company had nine officers. Except for these officers, the Company does not have any employees and does not anticipate having any employees in the future. Under the operations agreement, AES Prescott has managed the development and construction of and now operates and maintains the Company’s facility. The direct labor personnel and the plant operations management are employees of The AES Corporation which are provided to AES Prescott under the services agreement. As of December 31, 2003, The AES Corporation provided 27 employees to the facility.
Insurance
As owner of the facility, the Company maintains a comprehensive insurance program as required under its various project contracts and the indenture governing its senior secured bonds and underwritten by recognized insurance companies. Among other insurance policies, the Company also maintains commercial general liability insurance, permanent property insurance for full replacement value of its facility and business interruption insurance covering at least 12 months of debt service and fixed operation and maintenance expenses. The Company has obtained title insurance in an amount equal to the principal amount of the senior secured bonds.
AES Prescott, as operator of the Company’s 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 Prescott, as operator of the facility, and the Company, as owner of the facility, must comply with numerous federal, state and local regulatory requirements including environmental requirements in the operation of the facility.
On March 31, 1999, the Company received a certification from the Federal Energy Regulatory Commission (FERC) that it is an Exempt Wholesale Generator. Certification as an Exempt Wholesale Generator exempts the Company from regulation under the Public Utility Holding Company Act of 1935. The Company will maintain this status so long as it continues to make only wholesale sales of electricity, which it intends to do. Prior to commercial operation, the Company filed the power purchase agreement with FERC and obtained approval for the rates contained therein. The Company 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 March 29, 1999, the Company received its Prevention of Significant Deterioration Permit, or “air permit,” from the Pennsylvania Department of Environmental Protection. The appeal period in respect of the air permit expired on May 3, 1999 and no appeal was filed. The air permit required that the Company’s facility be constructed in a manner that would allow it to meet specified limitations on emissions of air pollutants. Under the construction agreement, Siemens Westinghouse was required to construct the facility to meet these requirements. During the April 2002 outage, Siemens Westinghouse made certain modifications to ensure the facility’s emissions would be within the limits set by the EPC construction contract. Testing on May 22, 2002 indicated the modifications to be successful and at that date the facility’s emissions were in compliance and Siemens-Westinghouse had met the emission guarantees of the EPC construction contract.
The Company is operating under Plan Approval 38-05019. The plan approval is being amended to reflect changes in start up time durations and is currently in a 30 day public review period, which ends on March 31, 2004. The amended plan approval language will be incorporated into the Company’s Title V Operating permit. The plan approval and draft Title V operating permit should arrive for our review and finalization during the second quarter 2004.
The Company is subject to a number of statutory and regulatory standards and required approvals relating to energy, labor and environmental laws. Although the necessary environmental permits for the commencement of construction of its facility have been obtained, the Company is required to comply with the terms of its environmental permits and to obtain other permits for the operation of the facility.
The permits that have been obtained and that will be obtained contain ongoing requirements. Failure to satisfy and maintain any of the permit conditions or other applicable requirements could prevent the operation of the Company’s facility and/or result in additional costs.
Summary of Principal Project Contracts
While the Company believes 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
The Company entered into an Amended and Restated Power Purchase Agreement, dated as of February 5, 1999, with Williams for the sale to Williams of all of the electric energy and capacity produced by its facility as well as ancillary services and fuel conversion services. During 2003 the Company entered into arbitration with Williams to resolve certain disputes regarding the proper interpretation of certain provisions of the power purchase agreement relating to amounts claimed by the Company to be payable by Williams and amounts by the Company to Williams. On February 3, 2004 the arbitration panel handed their decision to the parties. The arbitration decision covered both
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revenue and non-revenue items. The most important item to the Company was in respect of the calculation of total available capacity. For further information, please see “Legal Proceedings”.
Term
The term of the power purchase agreement extends for 20 years after the first contract anniversary date, which is the last day in the month in which the commercial operation date occurs. The commercial operation date occurs when:
• the initial start-up testing of the facility has been successfully completed,
• the Company has received all approvals from PJM Interconnection, L.L.C., which is the independent system operator that operates the transmission system to which the facility will interconnect, and
• the Company has obtained all required permits and authorizations for operation of the facility.
These prerequisites were met and the facility commenced operations, subject to the terms of the power purchase agreement, on December 28, 2001, accordingly, the power purchase agreement’s initial term is expected to expire on December 31, 2021.
Purchase and Sale of Capacity and Services
During the term, commencing with the commercial operation date, the Company must sell and make available to Williams on an exclusive basis, and Williams must purchase and pay for the Company’s facility’s net capacity and ability to generate electric energy. In addition, during the term, commencing with the commercial operation date, the Company must perform for Williams on an exclusive basis, and Williams must purchase and pay for fuel conversion services and ancillary services. Fuel conversion services consist of the generation of electric energy from fuel provided by Williams. Ancillary services consist of services necessary to support the transmission of capacity and energy.
Fuel Conversion and Other Services
Williams must deliver or cause to be delivered to the Company at the gas delivery point on an exclusive basis all quantities of natural gas as the Company requires:
• to generate net electric energy and/or ancillary services,
• to perform start-ups,
• to perform shutdowns, and
• to operate the facility during any period other than a start-up, shutdown or dispatch period for any reason.
Pricing and Payments
For each month of the term after the commercial operation date, Williams must pay the Company for the facility’s net capacity, successful start-ups and associated shutdowns, other services and fuel conversion services at the applicable rates described in the power purchase agreement. Each monthly payment by Williams will consist of a total fixed payment, a fuel conversion payment and a start-up payment. The total fixed payment, which is payable regardless of facility dispatch by Williams but is subject to adjustment based on facility availability, is calculated by multiplying a fixed capacity rate for each contract year by the facility’s net capacity in the billing month and is anticipated to be sufficient to cover the Company’s debt service and fixed operating and maintenance costs and to provide the Company a return on equity. The fuel conversion payment is intended to cover the Company’s variable operating and maintenance costs and escalates annually based on an escalation index described in the power purchase agreement. The start-up payment is intended to cover the Company’s non-fuel variable costs when the plant is starting up to meet a dispatch request. In addition, the Company may receive heat rate bonuses or be required to pay heat rate penalties.
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Prior to the commercial operation date, and during specific facility tests thereafter, the Company purchased natural gas from Williams. Williams sold to the Company the natural gas at prices specified in the power purchase agreement, and the Company sold to Williams at the electric delivery point any net electric energy produced during those periods at 90% of the energy market clearing price.
Williams will be entitled to an annual fuel conversion volume rebate if its dispatch of the Company’s facility exceeds specified levels and specified monthly non-dispatch payments if, under specific circumstances, the facility is not available for dispatch. All fuel conversion volume rebate payments and non-dispatch payments must be made to Williams after debt service and specified other payments but prior to any distribution to holders of the equity interests in our company. Fuel conversion volume rebate payments must be paid to Williams within 30 days after the end of the contract year in which the payments have been earned and non-dispatch payments must be paid to Williams within 20 days after the end of the month on which a payment obligation arises. Fuel conversion volume rebate payments and any non-dispatch payments owed to Williams and not paid when due must be paid, together with interest, when funds become available to the Company at the priority level described above.
Interconnection and Metering Equipment
At the Company’s sole cost and expense, it will maintain, or be responsible for the maintenance of its facility, the 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 its obligations under the power purchase agreement, including all interconnection facilities and protective gas apparatus that may be located at any switchyard and/or substation to be built at its facility. At the Company’s cost and expense, the interconnection facilities and protective gas apparatus needed to generate and deliver net electric and/or ancillary services to the electric delivery point have been completed as required under the power purchase agreement. The 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 the Company’s 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 the Company’s facility, the interconnection facilities and protective gas apparatus will be not less than the term of the power purchase agreement.
The Company has been solely responsible for the negotiation and execution of the interconnection agreement with GPU Energy under which GPU Energy will own and be responsible for the electric metering equipment and the design, installation, construction and maintenance of the electrical facilities and protective apparatus, including any transmission equipment and related facilities, necessary to interconnect GPU Energy’s electrical system with the Company’s facility at the electric delivery point. This equipment cost approximately $5.1 million which was capitalized as part of the facility. Williams reimbursed the Company for the reasonable GPU Energy costs (i.e., transmission facility costs, GPU Energy protective apparatus and other equipment, GPU Energy electric meters, and GPU Energy costs for PJM and other required interconnection-related studies) incurred, or to be reimbursed, by the Company under the interconnection agreement up to a maximum amount of which is in excess of the costs anticipated to be incurred by the Company under the interconnection agreement.
Williams was responsible for the installation and will be responsible for the maintenance and testing of the gas metering equipment, to the extent not otherwise installed, maintained and tested by the supplier of gas transportation services, as reasonably approved by the Company.
All electric metering equipment and gas metering equipment, whether owned by the Company 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 and oil metering equipment.
Operation / Dispatch
The Company’s facility, the interconnection facilities and the protective gas apparatus must be operated in accordance with accepted electrical practices and applicable requirements and guidelines reasonably adopted by GPU Energy from time to time and applied consistently to GPU Energy’s electric generating facilities, with respect to our facility and interconnection facilities, or in accordance with standard gas industry practices, with respect to
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protective gas apparatus. If there is a conflict between the terms and conditions of the power purchase agreement and GPU Energy requirements, GPU Energy requirements will control.
The Company must operate its facility in parallel with GPU Energy’s electrical system with governor control and the net electric energy to be delivered by the Company under the power purchase agreement must be three-phase, 60 hertz, alternating current at a nominal voltage acceptable to GPU Energy at the electric delivery point, must not adversely affect the voltage, frequency, wave shape or power factor of power at the electric delivery point and must be delivered to the electric delivery point in a manner acceptable to GPU Energy.
The power purchase agreement acknowledges that GPU Energy has the right to require the Company to disconnect its facility from GPU Energy’s electrical system, or otherwise curtail, interrupt or reduce deliveries of net electric energy, for specific safety or emergency reasons. If the Company’s facility has been disconnected for these reasons, Williams will continue to be obligated to make total fixed payments for at least 24 hours after the occurrence of the disconnection of our facility by GPU Energy.
The Company must use commercially reasonable efforts to promptly correct any condition at our facility which necessitates the disconnection of our facility from GPU Energy’s electrical system or the reduction, curtailment or interruption of electrical output of its facility. Williams will have the exclusive right to schedule the operation of the Company’s facility or a unit in accordance with the provisions of the power purchase agreement so long as the scheduling is consistent with the design limitations of the Company’s facility, applicable law, regulations and permits, and manufacturers’ reasonable recommendations for operating limits with respect to the Company’s facility and major components.
Up to two times each year, the Company must demonstrate, in accordance with the then-applicable criteria of PJM applicable generally to independent power and GPU Energy generating facilities in PJM of similar technology, the capability of its facility to produce and maintain, as required for the demonstration, the Company’s facility’s net capacity.
Force Majeure
A party will be excused from performing its obligations under the power purchase agreement and will not be liable in 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 so 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 more than five days later, gives the other party written notice describing, in detail, the nature, extent and expected duration of the force majeure condition;
• the suspension of performance is of no greater scope and of no longer duration than is reasonably required by the force majeure condition;