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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
o TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission
file number: 333-40478
AES RED OAK, L.L.C.
(Exact name of
registrant as specified in its charter)
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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, 2004, the last business day of the
registrant’s most recently completed second fiscal quarter, and as of March 30,
2005, 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
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-K, as well
as statements made by AES Red Oak, L.L.C. (the “Company”, “we”, “us” or “our”) 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. The
Company has based these forward-looking statements on its current expectations
and projections about future events based upon its knowledge of facts as of the
date of this Form 10-K and its assumptions about future events.
All statements other than of historical facts included
herein, including those regarding market trends, the Company’s 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 the Company’s control that may cause its 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 the Company depends, including in
particular, Williams Power Company, Inc., (“Williams Energy”), formerly Williams
Energy Marketing & Trading Company, as fuel supplier under the Power Purchase
Agreement 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 the Company’s 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 guaranty 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 the Company runs, or “dispatches”
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 the Company or beyond the Company’s control.
The Company has no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information, future
events or otherwise.
2
PART I
ITEM 1. BUSINESS
General
The Company is 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 the Company’s facility. The
Company reached provisional acceptance on August 11, 2002, risk transfer
on August 13, 2002, and took the position that the Company was
commercially available on September 1, 2002. Williams Energy disputed the September 1,
2002 commercial operation date and informed the Company 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 the Company’s commercial operation
date, its sole business is the ownership, leasing and operation of the project.
Our facility was initially designed, engineered,
procured and constructed for the Company 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 the Company made a demand on the
Raytheon Company (“Raytheon”) to perform its obligations under a guarantee
which Raytheon had given the Company of WGI’s performance obligations under the
construction agreement and Raytheon became responsible for the construction of
the Company’s 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,
the Company 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, the Company 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, the
Company received a response from Raytheon in which Raytheon claims that the
Company’s rejection of the final acceptance is invalid and improper. The Company and Raytheon have filed
complaints against each other. 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 the Company’s 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 the Company exercises its right to cancel the agreement after the first major
outage of the turbines. The estimated timeframe for the completion of the first
major outages is 2011.
The Company has 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 its
facility. Net capacity is the maximum amount of electricity generated by the
Company’s facility net of electricity used at its 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 the
Company 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 the Company’s operating
revenues will be derived from payments made under the Power Purchase Agreement.
Under certain limited circumstances described herein, Williams Energy has the
right to terminate the Power Purchase Agreement.
3
Organizational
Structure
All of the equity interests in the Company are owned
by AES Red Oak, Inc., a wholly owned subsidiary of The AES Corporation (“AES”).
AES is a leading global power company, with 2004 sales of $9.5 billion. AES’s
generating assets include interests in 120 facilities in 27 countries totaling
approximately 44 gigawatts of capacity. Its 30,000 people are committed to
operational excellence and meeting the world’s growing power needs
Approximately 23% of
AES’s revenues come from businesses in North America, 17% from the Caribbean,
41% from South America, 11% from Europe and Africa, and 8% from Asia.
AES Red Oak, Inc. currently has no operations
outside of its activities in connection with its 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 its operations. AES Red Oak, Inc. has no assets other than its
membership interests in the Company and AES Sayreville. The AES Corporation supplies
AES Sayreville with personnel and services necessary to carry out its
obligations to us.
The Company also owns all of the equity interests in
AES Red Oak Urban Renewal Corporation (“AES URC”), which was organized as an
urban renewal corporation under New Jersey law so that portions of its project
can be designated as redevelopment areas or projects in order to provide
certain real estate tax and development benefits for its project. AES URC has
no operations outside of its activities in connection with the Company’s operations.
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:
The Company’s principal executive offices are located
at 832 Red Oak Lane, Sayreville, NJ 08872. The Company’s telephone number is (732)
238-1462.
Energy
Revenues
As mentioned above, the Company generates energy
revenues under the Power Purchase Agreement with Williams Energy. During the 20-year term of the agreement, the
Company 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.
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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, 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. Due to current pool prices, however, the
Company would expect that even if it 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 the Company’s ability to generate
sufficient cash flow to cover operating expenses or its debt service
obligations in the absence of a long-term Power Purchase Agreement with
Williams Energy.
After the plant reached provisional acceptance, the
Company 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, the Company operated
the facility as a merchant plant with electric revenues sold to Williams
Energy, in its capacity as the Company’s 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, the
Company 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. The Company recognized merchant revenues of
approximately $.3 million, $.2 million and $11.1 million for the years ended December 31,
2004, 2003 and 2002, respectively.
Related fuel expenses were approximately $.6 million, $.9 million and
$6.9 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Competition
Under the Power Purchase Agreement, Williams Energy is
required to purchase all of the Company’s 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. As current gas market prices have been high,
Williams Energy has only dispatched the Company 21% of the time in 2004 and 14%
in 2003. Following the term of the Power Purchase Agreement, 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.
Employees
The Company is a Delaware limited liability company
and has no employees other than its 6 officers. The Company’s officers receive
no compensation for the services they provide to the Company or for any
transactions between the Company and its affiliates. Under the operations
agreement, AES Sayreville 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 provided to AES Sayreville under a services agreement. As of December 31, 2004, The AES
Corporation provided 27 employees to work at its facility.
Insurance
As owner of the Company’s site and lessee and 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
the facility and business interruption insurance covering at least 18 months of
gross revenues less variable operating expenses. The Company has obtained title
insurance in an amount equal to the principal amount of the bonds.
The Company, or AES Sayreville as operator, 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.
5
Permits And
Regulatory Approvals
AES Sayreville, as operator of the Company’s facility,
and the Company, as owner of its facility, must comply with numerous federal, state
and local regulatory requirements including environmental requirements in the
operation of its facility.
On November 4, 1999, the Company received a
certification from the Federal Energy Regulatory Commission (“FERC”) that the
Company 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 the
Company continues to make only wholesale sales of electricity, which the
Company intends to do. Prior to commercial operation, the Company filed the Power
Purchase Agreement with FERC and requested approval for the rates contained
therein. On June 22, 2001, the Company received FERC approval at those
rates. 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 January 28, 2000, the Company received its
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 the Company’s 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 its facility to meet these requirements. The required emission standards were met upon
provisional acceptance and commercial operation and no additional modification
is currently needed.
The Company is 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 its facility have
been obtained.
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 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 its 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 the Company
is 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
6
“Second Paid Extension Option”), upon written
notification to Williams Energy no later than May 21, 2002 (which
represented an agreed upon extension from the original April 30, 2002
notification deadline), by paying Williams Energy (i) an amount equal to
the lesser of any actual damages Williams Energy suffered or incurred after June 30,
2002, as a result of Williams Energy’s reliance upon delivery by such date, to
the extent said damages could not be mitigated fully, or $3.0 million and (ii) certain
amounts of liquidated damages as calculated pursuant to the Power Purchase
Agreement. On May 21, 2002, the
Company exercised the Second Paid Extension Option. As a result of these extensions, the
Company 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, the Company 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, the Company continued to collect
liquidated damages through August 10, 2002 from Raytheon under the
construction agreement in the amount of $108,000 per day. As of August 2002, the Company had
received $14 million in liquidated damages from Raytheon under the construction
agreement. The Company did not receive
any liquidated damages under the construction agreement in 2003 or 2004.
Williams Energy is currently the Company’s sole
customer for purchases of capacity, ancillary services, and energy and its sole
source for fuel. Williams Energy’s
payments under the Power Purchase Agreement are expected to provide all of its
operating revenues during the term of the Power Purchase Agreement. It is unlikely that the Company would be able
to find another purchaser or fuel source on similar terms for the facility if
Williams Energy were not performing under the Power Purchase Agreement. Any material failure by Williams Energy to
make capacity and fuel conversion payments or to supply fuel under the Power
Purchase Agreement would have a severe adverse impact on the Company’s operations.
Purchase and
Sale of Capacity
During the term of the Power Purchase Agreement, the
Company 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 the Company’s facility by the Company to
combust natural gas delivered by Williams Energy in order to generate and
deliver energy or to provide ancillary services. The Company will sell and make
available to Williams Energy on an exclusive basis, and Williams Energy will
purchase and pay for, its facility’s net capacity and ability to generate
electric energy. The Company may not sell, without the consent of Williams
Energy in its sole discretion, capacity generated on the site but not from its
facility.
Fuel
Conversion and Other Services
Williams Energy must deliver or cause to be delivered
to the Company at the natural gas delivery point on an exclusive basis all quantities
of natural gas required by the Company to:
• generate
net electric energy and/or ancillary services;
• perform
start-ups;
• perform
shutdowns; and
• operate
its 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 the Company except that when the Company’s facility is
operated during any period other than a start-up, shutdown or dispatch period
title is transferred to the Company 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. The Company is 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, the Company will have the right to purchase the
gas interconnection facilities from Williams Energy, or if Williams Energy does
not own the gas interconnection
7
facilities, Williams Energy will assign to the Company
all of its rights to transportation services using the gas interconnection
facilities.
Pricing and
Payments
For each month of the term after the commercial
operation date, Williams Energy must pay the Company for its 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 the Company’s debt service and
fixed operating and maintenance costs and to provide the Company a return on
equity. The variable operations and maintenance payment is intended to cover its
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 the Company for each successful start-up. The
Company 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, the Company purchased natural gas from Williams
Energy. Williams Energy sold the Company the natural gas at prices specified in
the Power Purchase Agreement, and the Company 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 its
facility interconnects. The Company is 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, JCP&L, which is the host utility, or FERC. The Company has not
incurred any such fine or penalty to date.
Williams Energy is entitled to an annual fuel conversion
volume rebate if its dispatch of the Company’s facility exceeds specified levels
and monthly non-dispatch payments if, under some circumstances, its 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 the 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 the Company at the
priority level described above. A separate reserve account must be maintained
by the Company and the Company’s lenders and the Company must deposit to that
account on a monthly basis, from its 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, the
Company must, at its own cost and expense, obtain as and when required all
approvals, permits, licenses and other authorizations from governmental
authorities as may be required for the Company to operate and maintain its
facility, the interconnection facilities and protective gas apparatus and to
perform its obligations under the Power Purchase Agreement. The Company plans to obtain all additional
governmental approvals, permits, licenses and authorizations as may be required
with respect to its facility as soon as practicable.
Interconnection
and Metering Equipment
At the Company’s sole cost and expense, the Company designed,
constructed and installed and currently maintains 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 are located at the switchyards
and/or substations at the its facility. The Generation Facility and
Transmission Interconnection Agreement is with
8
Jersey Central Power & Light Company (“JCP&L”)
d/b/a GPU Energy (“GPU”), and is dated April 27, 1999. GPU has since been
merged with, and into, FirstEnergy, and JCP&L is now a subsidiary of
FirstEnergy. The Company’s 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 its 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.
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 the Company’s satisfaction. PSE&G has also installed gas metering
equipment, although the Company is 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 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. Except under limited
circumstances, the Company may not enter into any modification or amendment of
the interconnection agreement with JCP&L 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 JCP&L — See “Interconnection
Agreement - JCP&L’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 JCP&L 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 JCP&L requirements, the JCP&L requirements
control. The Company must operate the facility in parallel with JCP&L’s
electrical system in accordance with the interconnection agreement. When
dispatched by Williams Energy, the Company must operate its facility and each
unit thereof with automatic regulation equipment in service.
The Power Purchase Agreement acknowledges that JCP&L
has the right to require the Company to disconnect the Company’s 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 the Company’s 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 its facility by JCP&L.
The Company must use commercially reasonable efforts
to correct promptly any condition at its facility which necessitates the disconnection
of its facility from JCP&L’s electrical system or the reduction,
curtailment or interruption of electrical output of its facility.
Williams Energy has the exclusive right to use the net
electric energy and ancillary services and to schedule the operation of
the Company’s 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 its facility, applicable law, regulations and
permits, and the agreements and the manuals of PJM.
Williams Energy and the Company must perform each of its
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 the Company 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 the Company greater than the allocable
tolerance in the transporter’s tariff or (ii) the Company’s failure to
promptly notify Williams Energy of a change in the operation of the Company’s 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
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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;
• 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 the Company any
of the payments described in the Power Purchase Agreement. If Williams Energy
declares a force majeure, however, it will continue to pay the Company 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 the Company due to an action or
inaction of JCP&L that prevents the Company 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 the
Company’s 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 JCP&L 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 the Company’s fault or negligence, attributable
to a defect or inadequacy in the manufacture, design or installation of its
facility that prevents, curtails, interrupts or reduces the ability of its
facility to generate net electric energy or the Company’s ability to perform its
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.
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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 the Company has 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 the
Company’s facility net capacity into or through the PJM power pool market or to
a third party.
Events of
Default; Termination; Remedies
The following will constitute events of default under
the Power Purchase Agreement:
• 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;
• the
Company sells or supplies net electric energy, ancillary services or capacity
from the Company’s facility, or agrees 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, the Company’s 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 the Company’s 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 the Company’s 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 the Company’s facility by or on its
behalf which prevent the Company from fulfilling, or materially diminish its
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 the Company in an amount exceeding $500,000, unless the
existence of the unsatisfied judgment will not materially affect its 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 the Company, or will
cease to possess the power to direct or cause the direction of its 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 its 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
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party. The notice will set forth, in reasonable
detail, the nature of the default and, where known and applicable, the steps
necessary to cure the default. The defaulting party will have 30 days, two
business days in the case of a default related to the breach of a
representation, warranty or covenant, following receipt of the notice either to
cure the default or commence in good faith all the steps as are necessary and
appropriate to cure the default if the default cannot be completely cured
within the 30-day period.
If the defaulting party fails to cure the default or
take the steps as provided under the preceding paragraph, and immediately upon
the occurrence of insolvency or the filing of a voluntary petition for
bankruptcy, the Power Purchase Agreement may be terminated by the
non-defaulting party, without any liability or responsibility whatsoever, by
written notice to the party in default thereof. The Power Purchase Agreement
will then terminate and the non-defaulting party may exercise all rights and
remedies as are available to it to recover damages caused by the default, seek
specific performance or exercise other rights and remedies that it may have in
equity or at law.
Security
The Power Purchase Agreement required the Company to
provide $30 million of financial security for the Company’s performance and
payment obligations prior to commercial operation and $10 million of financial
security for its performance and payment obligations subsequent to the
commercial operation date. The Company may,
at any time at its option, elect to either provide the financial security in
the form of a guaranty of The AES Corporation or in the form of a single letter
of credit, satisfactory to Williams Energy in form and substance, upon which
Williams Energy may draw as specified in the Power Purchase Agreement. If the financial security contains an
expiration date, either express or implied, the Company will renew the
financial security not later than 10 days prior to the expiration date and will
provide written notice of the renewal to Williams Energy at the same time. If the
Company fails to renew the financial security as set forth above, Williams
Energy is entitled to demand and receive payment thereunder on or after three
days after written notice of the failure is provided to us, and the amount
drawn will be deposited in an interest-bearing escrow account.
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