UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------------------
0001261679 MSW Energy Holdings LLC Delaware 14-1873119
0001261680 MSW Energy Finance Co., Inc. Delaware 20-0047886
Commission File Number (Exact name of each registrant as (State or other jurisdiction (I.R.S. Employer
specified in its charter) of incorporation or Identification Number)
organization)
c/o American Ref-Fuel Company LLC
155 Chestnut Ridge Road
Montvale , New Jersey 07645
Phone No. 800-727-3835
(Address, including zip code, and telephone number, including area code, of
the registrants' principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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 registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act):
MSW Energy Holdings LLC: yes [ ] no [X]
MSW Energy Finance Co., Inc: yes [ ] no [X]
Aggregate market value of voting and non-voting common stock held by
nonaffiliates:
MSW Energy Holdings LLC: None
MSW Energy Finance Co., Inc: None
Indicate the number of shares outstanding of each of the registrants' classes
of common stock, as of the latest practicable date.
MSW Energy Holdings LLC: None
MSW Energy Finance Co., Inc: 100 shares of Common Stock
Documents Incorporated by Reference: None
MSW Energy Finance Co., Inc. 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.
TABLE OF CONTENTS
Part I....................................................................................................................1
Item 1. Business..........................................................................................................1
Item 2. Properties.......................................................................................................8
Item 3. Legal Proceedings................................................................................................9
Item 4. Submission of Matters to a Vote of Security Holders.............................................................10
PART II..................................................................................................................10
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters and Purchases of Equity Securities........10
Item 6. Selected Financial Data.........................................................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.....................................................20
Item 8. Financial Statements and Supplementary Data......................................................................23
Item 9. Changes in and Disagreements with Accountants on Financial Disclosure............................................47
Item 9A. Controls and Procedures........................................................................................47
PART III.................................................................................................................47
Item 10. Directors and Executive Officers of the Registrant.............................................................47
Item 11. Executive Compensation.........................................................................................50
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................53
Item 13. Certain Relationships and Related Transactions.................................................................54
Item 14. Principal Accountant Fees and Services.........................................................................55
Part IV..................................................................................................................55
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................55
SIGNATURES
SAFE HARBOR STATEMENT
This Form 10-K contains "forward-looking statements" intended to qualify for
safe harbor from liability established by the Private Securities Litigation
Reform Act of 1995. Forward-looking statements should be read with the
cautionary statements and important factors included in this Form 10-K at Part
II, Item 7- "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors." Forward-looking statements are all
statements other than statements of historical fact, including without
limitation those that are identified by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts" and similar expressions
Part I
Item 1. Business
COMPANY OVERVIEW
The terms "we," "our," "ours" "us" and "Company" refer only to MSW Energy
Holdings LLC and its subsidiaries; the terms "American Ref-Fuel" and "ARC" refer
to American Ref-Fuel Company LLC; and the term "Ref-Fuel Holdings" refers to
Ref-Fuel Holdings LLC.
Overview
MSW Energy Holdings LLC (MSW Energy Holdings and collectively hereinafter
with its subsidiaries, referred to as the Company) was formed in March 2003 as a
Delaware limited liability company for the purpose of acquiring a 50% indirect
membership interest in Ref-Fuel Holdings (the Acquisition). At the initial
closing on June 30, 2003, we acquired MSW Energy Hudson LLC (MSW Hudson), which
holds a 49.8% membership interest in Ref-Fuel Holdings. We have agreed to
acquire Duke Energy Erie LLC (Erie), a wholly-owned subsidiary of Duke Energy
Corporation (Duke), that holds an additional 0.2% membership interest in
Ref-Fuel Holdings within two years and six months after our purchase of MSW
Hudson (the second closing). We currently own 49.8%, and have voting control
over an additional 0.2%, of Ref-Fuel Holdings, which owns 100% of American
Ref-Fuel. MSW Energy Holdings II LLC (MSW Energy Holdings II) holds directly and
indirectly the other 50% membership interest in Ref-Fuel Holdings.
On August 31, 2004, American Ref-Fuel Holdings Corp. (Holdings Corp., and
formerly known as United American Energy Holdings Corp.), the indirect parent of
MSW Energy Holdings II , and managing member of the Company, and several private
equity funds (the DLJMB Funds), each of which is managed by entities affiliated
with Credit Suisse First Boston Private Equity, Inc. (CSFB Private Equity), and
several investment funds (the Highstar Funds), each of which is managed by AIG
Global Investment Corp. (AIGGIC), effected a series of transactions that
resulted in Holdings Corp. becoming the indirect parent of the Company (the
August 31 Transactions).
Prior to the August 31 Transactions, and as a result of a series of
transactions known as the Equalization Transactions, which were consummated on
April 30, 2004, the DLJMB Funds and the Highstar Funds beneficially owned 60%
and 39.99%, respectively, of the equity interests in the Company, and 60% and
40%, respectively, of the equity interests in Holdings Corp. Holdings Corp.
owned a 0.01% managing member interest in the Company.
The Equalization Transactions also resulted in Holdings Corp. assuming full
control of the management and operations of the Company and Ref-Fuel Holdings
through its interests in the Company and MSW Energy Holdings II. The other 50%
interest in Ref-Fuel Holdings is owned directly and indirectly by MSW Energy
Holdings II. MSW Energy Holdings II acquired its membership interest in Ref-Fuel
Holdings in a separate transaction (theMerger) completed on December 12, 2003.
As a result of the Equalization Transactions, the Company has effective control
of Ref-Fuel Holdings, and is therefore consolidating its results of operations
and cash flows for the period from May 1, 2004, and the balance sheet as of
April 30, 2004. The minority interests relates to Duke's 0.2% interest and
MSW Energy Holdings II's 50% interest in Ref-Fuel Holdings.
American Ref-Fuel owns partnerships that develop, own and operate
waste-to-energy facilities (WTE), which combust municipal solid waste and
produce energy in the form of electricity and steam. American Ref-Fuel owns or
controls and operates six WTE facilities located in the northeastern United
States, which we refer to as the ARC operating facilities. The subsidiaries of
American Ref-Fuel that operate the ARC operating facilities (the ARC operating
companies) derive revenues principally from disposal or tipping fees received by
the ARC operating companies for accepting waste and from the sale of electricity
and steam produced by those facilities.
Each of the ARC operating companies has outstanding indebtedness. The
majority of this indebtedness is evidenced by tax-exempt bonds and is
collateralized by the ARC operating facilities and substantially all assets of
the ARC operating companies. American Ref-Fuel also has outstanding
indebtedness. Substantially all distributions to American Ref-Fuel from the ARC
operating companies, after the payment of expenses and debt service on ARC
operating company-level indebtedness, are subject to the satisfaction of
financial tests such as working capital and debt coverage ratio tests.
Distributions from American Ref-Fuel to Ref-Fuel Holdings, after the payment of
expenses and debt service on American Ref-Fuel indebtedness, are also subject to
the satisfaction of financial tests.
1
The following information relates to the ARC operating facilities:
Capacity Contract Expiration Date
---------------------- ------------------------------------------
Date of Commercial
Waste Service Operation/
Disposal Electric Agreements/ Electricity Date Acquired by
(tons per Generating Disposal Sales American
Operating Facility Location day) (megawatts) Contracts Contracts Ref-Fuel
- -------------------- ----------------- ---------- ----------- ----------- ----------- ------------------
Hempstead Hempstead, NY 2,671 72 2009 2009 1989
Essex Newark, NJ 2,700 70 2020 2021 1991
Seconn Preston, CT 689 18 2015 2017 1992
Niagara Niagara Falls, NY 2,250 50 2007-2012 2014 1980/1993
Semass Rochester, MA 2,700 79 2004-2016 2015 1989/1996
Delaware Valley Chester, PA 2,688 79 2017 2016 1992/1997(1)
(1) Date acquired for the Delaware Valley facility refers to the date of
acquisition by Browning Ferris Industries (BFI) . Following that date, the
Delaware Valley facility was managed by a predecessor of American Ref-Fuel
until it was acquired by American Ref-Fuel on April 30, 2001.
American Ref-Fuel indirectly owns 100% of the ARC operating companies,
except for Semass Partnership (which owns the Semass facility), of which
American Ref-Fuel indirectly owns 90%. American Ref-Fuel also owns TransRiver
Marketing Co., L.P. (TransRiver), a waste procurement company. In addition to
providing waste procurement services to American Ref-Fuel, TransRiver owns a
885-ton-per-day transfer station in Lynn, Massachusetts.
American Ref-Fuel's facilities together process a total of approximately
five million tons of waste each year.
Waste Processed ('000 tons/year) 2000 2001 2002 2003 2004
- -------------------------------- ------ ------ ------ ------ ------
Hempstead Facility 897 915 923 936 952
Essex Facility 916 918 899 937 917
Seconn Facility 241 248 252 258 258
Niagara Facility 782 755 725 755 786
Semass Facility 1,106 1,091 1,056 1,069 1,060
Delaware Valley Facility 1,114 1,151 1,060 1,111 1,138
------ ------ ------ ------ ------
Total 5,056 5,078 4,915 5,066 5,111
====== ====== ====== ====== ======
The ARC operating facilities sell approximately 2.6 million MWH of electricity each year.
Power Sold ('000 MWH) 2000 2001 2002 2003 2004
- -------------------------------- ------ ------ ------ ------ ------
Hempstead Facility 537 547 541 557 562
Essex Facility 465 468 465 479 479
Seconn Facility 126 129 137 138 139
Niagara Facility 299 289 278 270 245
Semass Facility 631 612 597 591 590
Delaware Valley Facility 616 618 554 577 586
------ ------ ------ ------ ------
Total 2,674 2,663 2,572 2,612 2,601
====== ====== ====== ====== ======
The following table summarizes each ARC operating facility's weighted average boiler availability levels.
Availability Levels 2000 2001 2002 2003 2004
- -------------------------------- ------ ------ ------ ------ ------
Hempstead Facility 92.2% 93.8% 93.1% 94.8% 95.5%
Essex Facility 90.7 92.5 92.7 92.6 91.0
Seconn Facility 93.9 95.3 96.2 96.3 96.4
Niagara Facility 92.5 90.3 89.8 89.7 91.3
Semass Facility 93.2 91.6 89.6 87.6 88.9
Delaware Valley Facility 92.2 92.1 88.4 88.4 89.8
------ ------ ------ ------ ------
Weighted Average 92.3% 92.5% 91.0% 90.9% 91.6%
====== ====== ====== ====== ======
2
American Ref-Fuel guarantees or provides support for each of its
subsidiaries that owns an ARC operating facility, in one or more of the
following forms:
o guarantees of recourse debt;
o support agreements in connection with service agreement-related obligations
for each of the Hempstead, Semass, Seconn and the Delaware Valley
facilities; and
o contingent credit support for damages from performance failures,
environmental indemnities, or contingent capital and credit support to
finance costs, in most cases in connection with a corresponding increase in
service fees, relating to uncontrollable circumstances.
In order to provide American Ref-Fuel with an additional source of funds to
meet calls on its project support obligations, each of its members has entered
into the Equity Contribution Agreement pursuant to which each member has agreed
to provide up to $50 million in equity capital. Each member's obligation to make
equity capital contributions under the Equity Contribution Agreement is
conditioned upon the other making an equal contribution and is limited to each
making no more than $50 million of aggregate equity contributions. If a member
is not rated at least BBB by S&P, such party is required to provide a letter of
credit from a commercial bank that is rated at least A- by S&P to secure its
obligations under the Equity Contribution Agreement.
Structure and Ownership
Holdings Corp. owns indirectly 100% of our membership interests as a result
of the August 31 Transactions. Holdings Corp. is beneficially owned 60% and 40%
by the DLJMB Funds and the Highstar Funds, respectively.
Ref-Fuel Holdings is governed by a limited liability company agreement
pursuant to which our consent and that of MSW Energy Holdings is required for
certain shareholder actions, including modification of the Ref-Fuel Holdings
limited liability company agreement and actions taken by Ref-Fuel Holdings as
the 100% owner of American Ref-Fuel. Notwithstanding the fact that the DLJMB
Funds indirectly own a majority of the membership interests of Ref-Fuel
Holdings, the consent of the Highstar Funds is required for certain actions to
be taken with respect to Ref-Fuel Holdings and neither we nor the DLJMB Funds
unilaterally control Ref-Fuel Holdings or American Ref-Fuel.
Management
We are managed by our managing member, Holdings Corp. Our board of
directors is deemed to be the board of directors of Holdings Corp. consisting of
seven members: four directors designated by the DLJMB Funds and three directors
designated by the Highstar Funds, plus one independent director. The overall
management and control of MSW Energy Holdings is exercised by the managing
member. No member other than the managing member participates in the management,
control or direction of the operations, business, or affairs of MSW Energy
Holdings, is involved in or transacts business for MSW Energy Holdings, or has
the power to act for or on behalf of or to bind MSW Energy Holdings, such powers
being vested solely and exclusively in the managing member. Pursuant to the
terms of our amended and restated limited liability company agreement (the LLC
Agreement), and so long as our 8 1/2% Senior Secured Notes due 2010 (Senior
Notes) are outstanding, the consent of the independent director will be required
for us to effect any bankruptcy or insolvency proceeding or to consent to any
involuntary bankruptcy proceeding. Other than consenting to these bankruptcy and
insolvency actions, the independent director is a non-voting director.
Pursuant to the LLC Agreement, Holdings Corp. is the managing member of MSW
Energy Holdings. Pursuant to the Holdings Corp. Shareholders Agreement, the
managing member cannot take the actions described below at MSW Energy Holdings
without the consent of the DLJMB Funds and the Highstar Funds, so long as they
continue to own a minimum percentage of the common stock of Holdings Corp. With
respect to the DLJMB Funds that minimum percentage is either (A) both the DLJMB
Funds and the Highstar Funds each continue to own at least 15% of the common
stock of Holdings Corp. on a fully diluted basis, or (B) the DLJMB Funds
continue to own at least 15% of the common stock of Holdings Corp. on a fully
diluted basis and continues to own at least 75% of its ownership at the time of
3
the Equalization Transactions. With respect to the Highstar Funds, that minimum
percentage is either (A) both the DLJMB Funds and the Highstar Funds each
continue to own at least 15% of the common stock of Holdings Corp. on a fully
diluted basis, or (B) the Highstar Funds continue to own at least 15% of the
common stock of Holdings Corp. on a fully diluted basis and continues to own at
least 75% of its ownership at the time of the Equalization Transactions. These
significant actions relate to:
o amending their organizational documents;
o forming new subsidiaries;
o making any substantial change to the character of their business;
o incurring indebtedness;
o purchasing securities of, or property not used in the ordinary course
of business from, an unrelated entity;
o hiring or firing executive officers or senior management;
o adopting or amending cash bonus or severance plans with respect to
executive officers or equity; compensation plans;
o entering into transactions with affiliates;
o making capital expenditures;
o making certain acquisitions of assets;
o making any sale of equity of any subsidiaries of Holdings Corp. or MSW
Energy Holdings;
o merging or consolidating with any other equity; or
o instituting a bankruptcy proceeding.
The representatives to our board, other than our independent director, also
serve as the members of the board of directors of Ref-Fuel Holdings. These
directors vote as one block on the board of Ref-Fuel Holdings. Pursuant to the
terms of the LLC Agreement, our members have agreed to instruct our board to
vote to cause Ref-Fuel Holdings and its subsidiaries, subject to any applicable
contractual restrictions, to distribute available cash on a monthly basis to the
extent practicable, but no less frequently than quarterly. In accordance with
the terms of the LLC Agreement, our members have further agreed that our board
will not vote to permit us or our subsidiaries to consent to (i) any amendments
or modifications to any contractual restrictions on dividends binding on
Ref-Fuel Holdings or its subsidiaries that would make such restrictions more
restrictive or (ii) any new restrictions on dividends from such entities.
MSW ENERGY FINANCE CO., INC.
Our wholly-owned subsidiary, MSW Energy Finance Co., Inc. (MSW Energy
Finance), was formed in June 2003 solely for the purpose of serving as a
co-issuer of the Senior Notes. Other than serving as a co-issuer of our 8 1/2%
Senior Notes, MSW Energy Finance does not have any operations or assets and will
not have any revenues.
RECENT DEVELOPMENTS
DLJ Merchant Banking Partners and AIG Highstar Capital, L.P. announced on
February 1, 2005 that they have signed a definitive agreement to sell Holdings
Corp. to Danielson Holding Corporation (Danielson).
4
Danielson will pay $740 million in cash for the equity of Holdings Corp.
and will assume the consolidated net debt of Holdings Corp. Subject to receipt
of regulatory approvals and required financing, the transaction is expected to
close in the second quarter of 2005.
In connection with the Sale, costs relating to transaction expenses,
severance, employment contracts, the OMA, Long-Term Incentive Plans, housing
subsidies, lease termination and other related items are estimated to be between
$50 million and $70 million.
Energy Regulatory Matters
Federal and state energy laws regulate the development, ownership, business
organization, and operation of generating facilities and the sale of
electricity. The Federal Power Act (FPA) authorizes the Federal Energy
Regulatory Commission (FERC) to regulate the wholesale sale of electric energy
and the transmission of electric energy in interstate commerce. The Public
Utility Holding Company Act of 1935 (PUHCA) provides for regulation of holding
companies that hold ownership interests in companies that own or operate
facilities for the generation, transmission or distribution of electricity for
sale. State laws regulate the activities of utilities which serve retail
electric customers.
The Public Utility Regulatory Policies Act of 1978 (PURPA) was enacted to
encourage the development of generating facilities which conserve fossil fuels,
either by producing electricity using a fuel other than fossil fuel, or by the
cogeneration of electricity and steam or other thermal energy which is useful.
Each ARC operating facility meets the requirements for a qualifying facility
(QF) in accordance with regulations issued by the FERC pursuant to PURPA. One of
the ARC operating facilities, Niagara, qualifies as a cogeneration QF. A
cogeneration QF must produce a certain proportion of its total energy output in
the form of thermal energy that is used for a commercial purpose, and its fossil
fuel input must be in a certain proportion to its electric and thermal output.
The other ARC operating facilities satisfy the requirements for qualifying small
power production facilities which rely primarily on biomass for fuel and have a
net power production capacity no greater than 80 megawatts. All QFs must satisfy
the FERC ownership requirement, which states that no more than 50 percent of the
stream of benefits from ownership in the generating facility can be owned by
electric utilities or electric utility holding companies.
PURPA requires utilities to purchase the electric output of QFs at
negotiated rates or rates up to the incremental or "avoided" cost that the
utility would have incurred if it produced the electricity itself or purchased
it from another source. State public utility commissions must approve the rates,
and in some instances, other contract terms, under which utilities purchase
electricity from QFs. State public utility commissions are responsible for
determining the avoided cost rates for utilities subject to their jurisdiction,
although QFs and utilities may negotiate outside of this framework. Some state
public utility commissions require utilities to file their agreements under
which utilities purchase electricity from QFs.
Under PURPA and FERC regulations, QFs also are entitled to certain
exemptions from the FPA, PUHCA and state utility regulation. Two of the ARC
operating facilities, Seconn and Niagara, are exempt from all relevant
provisions of the FPA. The other four ARC operating facilities, the Hempstead
facility, the Essex facility, the Semass facility and the Delaware Valley
facility (collectively, the FPA Facilities) are not fully exempt from the FPA
because they are WTE facilities with a net power production capacity larger than
30 megawatts. Companies subject to the FPA must obtain FERC approval for rates
and terms for the sale of electric energy at wholesale and must comply with
other requirements of the FPA and FERC regulations.
Each of the FPA Facilities has filed rate schedules with the FERC in
compliance with the FPA, so that its power purchase agreement (PPA) with the
power-purchasing utility is deemed effective under the FPA. In addition, three
of the ARC operating facilities, namely the Essex, Niagara and the Delaware
Valley facilities, have received FERC authorization to sell electricity at
wholesale at market-based or negotiated rates to any unaffiliated purchaser or
into a regional energy market. The other three ARC operating facilities, namely
the Hempstead, Seconn and Semass facilities, do not sell electricity at
market-based rates and therefore do not have or need FERC market-based rate
authority. In connection with their market-based rate authorizations, each of
Essex, Niagara, and Delaware Valley has received a blanket authorization to
issue securities or assume liabilities without further FERC approval, and has
received waivers of other FPA regulations which apply to traditional utilities
selling electricity at cost-based rates. Each of the FPA Facilities must file
quarterly reports providing certain details concerning wholesale power
transactions during the prior calendar quarter. The FPA Facilities must obtain
the prior authorization of the FERC for change-of-control transactions and for
the sale or other transfer of jurisdictional facilities, including wholesale
power sale contracts and interconnection facilities connecting a generating
facility to the transmission grid. Each of the Hempstead and Semass facilities
requires the FERC's prior approval to issue securities or assume obligations
with respect to any other person's securities.
5
As QFs, all of the ARC operating facilities are exempt from regulation as
"electric utility companies" under PUHCA, and ownership of equity interests in
the ARC operating facilities is likewise not subject to PUHCA regulation, unless
the owner is otherwise independently subject to PUHCA regulation. Thus, no
entity would become subject to regulation under PUHCA solely as a result of
holding an ownership interest in one or more of the ARC operating facilities.
Each of the ARC operating facilities also has been determined to be an exempt
wholesale generator (EWG) which is exempt from regulation under PUHCA. An EWG
must be engaged exclusively in the business of owning and/or operating an
eligible facility and selling electricity at wholesale. An eligible facility is
a generating facility that is used solely to produce electricity for sale at
wholesale. If any ARC operating facilities ceases to meet the requirements for
either QF or EWG status, American Ref-Fuel could remain exempt from PUHCA,
provided that the requirements for the other exemption continue to be satisfied.
In addition, as QFs, all of the ARC operating facilities are exempt from state
laws regulating the rates charged by, or the financial and organizational
activities of, electric utilities. Loss of QF status, which could only occur if
an ARC operating facility were to no longer comply with the FERC's QF
requirements, would terminate the non-PUHCA regulatory benefits and exemptions
that all of the ARC operating facilities currently enjoy.
All of the ARC operating facilities are located within a region served by a
FERC-regulated independent system organization (ISO) or regional transmission
organization (RTO). An ISO or RTO is a FERC-regulated entity responsible for
controlling the transmission system and scheduling transmission service within
its region and between regions on an open access basis. ISOs or RTOs also
administer regional energy sales markets. The Niagara facility and Hempstead
facility are within the New York ISO region; the Semass facility and the Seconn
facility are within the New England ISO region; and the Essex facility and the
Delaware Valley facility are within the PJM RTO region. The price for electric
energy and other electric products sold in these markets other than through
bilateral contracts between sellers and purchasers is set by competitive bids to
supply and offers to purchase, subject to FERC-approved rules. At this time, the
Essex, Niagara and the Delaware Valley facilities frequently sell electricity
into the market, but the output of the other ARC operating facilities generally
is fully committed under their respective PPAs.
Environmental Matters
The Company conducts operations that require compliance with environmental
provisions of federal, state and local laws, regulations and standards related
to protection of human health and the natural environment. Specific rules
contained in these laws and regulations address air and water emissions, as well
as waste management and disposal. Other provisions of such environmental laws
and regulations address rare unplanned events, such as spills, releases and
emergency response. Permitting, record-keeping, reporting and periodic
certifications, along with routine and periodic inspections and audits are also
managed according to applicable laws and regulations.
The Company has indicated that compliance with such laws and regulations is
a major focus for it, and believes its philosophy with regard to environmental
matters includes operating within permit limits and continually striving to
improve environmental performance. The Company reports that it believes that all
of its operations are compliant in all material respects with the requirements
of environmental laws and regulations.
The ARC operating facilities are subject to numerous federal, state and
local environmental permitting and licensing requirements related to the
protection of human health and natural resources. American Ref-Fuel reports that
it believes that each of the ARC operating facilities has in place all of the
material environmental permits and licenses necessary to operate as planned. In
addition, several of the ARC operating facilities from time to time operate
pursuant to various orders issued by, and various agreements with, federal,
state and/or local environmental regulatory agencies. American Ref-Fuel reports
that it believes that each of the ARC operating facilities is compliant in all
material respects with all such applicable orders and agreements.
Certain environmental permits for the ARC operating facilities are subject
to periodic renewal or reissuance. There is no assurance that such renewal or
reissuance will be granted by regulatory authorities or that any renewed or
reissued environmental permit will not contain new, more stringent requirements
resulting in the need for additional capital expenditures for modifications to
the ARC operating facilities in order to bring the ARC operating facilities into
compliance. Any failure or delay in renewing or reissuing environmental permits
or any increase in costs resulting from any renewed or reissued environmental
permits could adversely effect the operation of the ARC operating facilities. In
addition, certain environmental permits contain terms that can result in
periodic adjustment of operating limits, which can result in reduced revenue.
6
Under various federal, state and local environmental laws and regulations,
a current or previous owner or operator of any facility may be required to
investigate and remediate past releases or threatened releases of hazardous or
toxic substances or petroleum products generated, managed or located at the
facility, and may be held liable to a governmental entity or to third parties
for property damage, personal injury and investigation and remediation costs
incurred by a party in connection with any releases or threatened releases. An
operator may also be liable for costs of remediation at a third party's site to
which the operator has sent waste for disposal. These laws, including, but not
limited to, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, impose liability without regard to whether the owner
knew of or caused the presence of the hazardous substances or whether the owner
owned the property where the release occurred. Courts have interpreted liability
under such laws to be strict and joint and several. The cost of investigation,
remediation or removal of substances may be substantial. In connection with
American Ref-Fuel's ownership and operation of the ARC operating facilities,
American Ref-Fuel may become liable for such costs. American Ref-Fuel reports
that it is presently aware of one such condition expected to materially affect
the ARC operating facilities as described below, and it is possible that other
such conditions impacting the ARC operating facilities could be discovered in
the future or that such conditions could be created by future spills or
releases. As a result, it is possible that American Ref-Fuel may become liable
for additional remediation costs.
Several major pieces of environmental legislation are periodically
considered for reauthorization or amendment by the United States Congress. These
include, among others: the Clean Air Act; the Clean Water Act; the Comprehensive
Environmental Response, Compensation and Liability Act; and the Endangered
Species Act. Changes to these laws could adversely affect many areas of the
operations of the ARC operating facilities.
We are unable to predict at this time what additional steps American
Ref-Fuel may be required to take as a result of the implementation of future
environmental protection requirements for air or water and regulation of
hazardous or toxic materials, but such steps could adversely affect operations
and result in substantial additional costs. Failure to comply with such
requirements could result in the complete shutdown of one or more of the ARC
operating facilities not in compliance as well as the imposition of civil and/or
criminal penalties.
Future Mercury Regulation at the Essex Facility. On December 6, 2004 the
New Jersey Department of Environmental Protection (NJDEP) promulgated
regulations applicable to the Essex facility that will make mercury emission
requirements more stringent. Specifically, the new regulations increase the
required removal efficiency to 85% removal on January 3, 2006 and 95% removal on
January 3, 2012 versus the current 80% removal, while retaining the alternative
limit of 28 micrograms per cubic meter. As a result of the new regulations,
there is an increased risk that emission exceedances will occur and therefore an
increased probability that additional controls will ultimately be required to
prevent such exceedances. ARC believes that the new requirements may at a
minimum result in increased operating costs due to increased use of activated
carbon in the current control equipment. It is also possible that the
regulations will require the installation of additional pollution control
equipment such as compact hybrid particulate collector units, a device similar
to a baghouse. Management estimates that the cost of the installation of such
additional pollution control equipment, if required, would be approximately $38
million. The Essex service agreement provides a mechanism for a pass-through to
the Port Authority of New York and New Jersey of the majority of any additional
capital and operating costs that may be required. We cannot currently determine
the likelihood of additional and operating capital costs being incurred in
connection with these changes in regulation, or the total of any such costs.
Lower Passaic River Study. In August 2004, USEPA notified American Ref-Fuel
Company of Essex County (Essex) that it was potentially liable under CERCLA
Section 107(a) for response actions in the Lower Passaic River Study Area
(LPRSA), a 17 mile stretch of river in northern New Jersey. Essex is one of at
least 52 Potentially Responsible Parties (PRPs) named thus far. USEPA alleges
that hazardous substances found in the LPRSA were being released from the Essex
site, which abuts the river. USEPA's notice letter states that Essex may be
liable for costs related to a proposed $10 million study of the Lower Passaic
River and for unspecified natural resource damages. Considering the history of
industrial and other discharges into the LPRSA from other sources, including
named PRPs, Essex believes that its contribution will be determined to be de
minimus; however, it is not possible at this time to predict that outcome with
certainty or to estimate Ref-Fuel Holdings' liability for the study or any
eventual natural resource damage.
7
Employees
American Ref-Fuel Company (ARC Management Company) runs the day-to-day
operations of American Ref-Fuel. Collectively, ARC Management Company and the
other subsidiaries of American Ref-Fuel have approximately 685 employees. See
"Management--MSW Energy Holdings."
Item 2. Properties
The Company owns or operates the following facilities. We lease office
space in Montvale, New Jersey.
Hempstead Facility
History and Ownership. The Hempstead Partnership beneficially owns and
operates the Hempstead facility, a 72-megawatt, 2,671-ton-per-day WTE facility
located in the Town of Hempstead, New York. The Hempstead facility was developed
and constructed by the Hempstead Partnership at an overall cost of $424 million
and began commercial operations in November 1989.
Essex Facility
History and Ownership. The Essex Partnership beneficially owns and operates
the Essex facility, a 70-megawatt, 2,700-ton-per-day WTE facility located in the
City of Newark, County of Essex, New Jersey. The Essex facility was developed
and constructed at a cost of $356 million and began commercial operations in
February 1991.
Seconn Facility
History and Ownership. The Seconn Partnership beneficially owns and
operates the Seconn facility, an 18-megawatt, 689-ton-per-day WTE facility
located in Preston, Connecticut. The Seconn facility was developed and
constructed at a cost of $177 million and commenced commercial operations in
March 1992.
Niagara Facility
History and Ownership. The Niagara Partnership beneficially owns and
operates the Niagara facility, a 50-megawatt, 2,250-ton-per-day WTE facility
located in the City of Niagara Falls, New York. In May 1993, the Niagara
Partnership acquired the rights and responsibilities of Occidental Chemical
Corporation (Occidental) under a leveraged lease for a refuse derived fuel (RDF)
facility that commenced commercial operations in 1980.
Semass Facility
History and Ownership. Semass L.P. owns 90% of the Semass Partnership,
which owns the Semass facility, a 2,700-ton-per-day WTE facility located in
Rochester, Massachusetts. The Semass facility, which utilizes a RDF design and
was originally developed by Energy Answers Corporation, began commercial
operations in 1989 and was expanded in 1994 to its current size. In addition,
the Company also owns and operates a transfer station located in Braintree,
Massachusetts (the Braintree Transfer Station) on land that is lease from the
Town of Braintree. The transfer station is designed to receive and transfer
waste.
Delaware Valley Facility
History and Ownership. The Company leases its Delaware Valley facility
which is located in the City of Chester, Delaware County, Pennsylvania from Bank
of America, as owner. The 79-megawatt, 2,688-ton-per-day resource recovery
facility was constructed by a subsidiary of Westinghouse Electric Corporation
and commenced commercial operations in 1992.
8
Lynn Transfer Station
The Company also owns and operates a transfer station located in Lynn,
Massachusetts (the Lynn Transfer Station). The transfer station is designed to
receive and transfer waste.
Item 3. Legal Proceedings
Landfill Agreements
Semass Partnership, a subsidiary of Ref-Fuel Semass, has a waste management
agreement (the WMA) dated May 25, 1982, as amended, with the Carver, Marion,
Wareham Regional Refuse Disposal District (CMW). The WMA allows Semass
Partnership to utilize a portion of a landfill (the CMW Landfill), which CMW
leases from Wankinco River, Inc. (Wankinco).
Beginning in May 1997, Wankinco provided several notices purportedly
terminating the lease on the CMW Landfill based upon an allegation that the
lease term automatically expired due to alleged failures to strictly comply with
the terms of the lease. In June 1997, Semass Partnership and CMW filed suit
against Wankinco and A. D. Makepeace Company, Inc., Wankinco's parent company,
seeking a declaratory judgment that Semass Partnership and CMW may continue to
operate the CMW Landfill. Trial of the matter before the court was completed in
2001 and a decision was received by the Company in December 2002, which decided
virtually all issues in favor of the Semass Partnership. The Semass Partnership
avoided both forfeiture of possession and any liability for damages due to
landfill operations. Wankinco appealed in January 2003, and on August 19, 2004,
the Appellate Court upheld the Trial Court decision in respect of all decisions
related to the alleged lease violations. One ruling unrelated to lease
forfeiture or damages for unlawful possession was remanded because the Judge's
ruling that Semass had not engaged in "an unfair and deceptive act or practice"
applied the law conjunctively rather than disjunctively (as required by the
law). The Appellate Court affirmed the Judge's ruling that there was no
unfairness, but remanded the question of deception for further findings since
the Appellate Court, due to the use of the conjunctive rather than disjunctive,
was unable to infer that the Judge did not find a compensable deceptive act.
Management believes that the Judge's ruling on remand will clarify this issue in
favor of the Company. In addition, Wankinco appealed the Appellate Court's
decision on the lease issues to the Supreme Judicial Court of Massachusetts and,
on September 30, 2004, the Supreme Judicial Court denied Wankinco's Application
for Further Appellate Review. Accordingly, except for the remand discussed
above, the favorable decisions received by Semass have become final and
nonappealable. Apart from this decision, the Semass Partnership and Wankinco
continue litigating several other actions involving regulatory issues at the
landfill.
Management believes that the ultimate resolution of these matters will not
have a material adverse impact on the results of operations, future cash flows
or financial position of the Company.
In March 1990, the Semass Partnership, CMW and Wankinco entered into an
agreement related to the CMW Landfill, as amended (the Settlement Agreement),
which requires, among other things, the Semass Partnership to make annual
deposits into an environmental protection trust fund (the Fund) in lieu of
obtaining environmental impairment liability insurance for the CMW Landfill. The
Semass Partnership is required under the Settlement Agreement to deposit
$500,000 annually into the Fund, payable in equal quarterly installments.
Certain additional deposits are required subject to the availability of cash in
accordance with the Loan Agreement. The Semass Partnership's obligation to make
deposits into the Fund ceases when the Fund reaches a balance of $20.0 million
unless the fund limit is increased by agreement of the parties, or absent such
agreement, by arbitration, wherein it is determined the fund limit needs to be
increased to adequately protect against environmental damage. Management
believes that the $20.0 million fund limit is adequate for this purpose.
Proceeds from the Fund are to be used primarily for remediation of the CMW
Landfill in the event of environmental damage. The Semass Partnership and
Wankinco are each entitled to receive one-half of the balance of the Fund upon
final closure of the CMW Landfill and receipt of required governmental
approvals. During the year ended December 31, 2004 the Semass Partnership made
the required quarterly deposits into the Fund and charged operations for
one-half of the deposits into the Fund, representing one-half of the balance of
the Fund which will be disbursed to Wankinco upon final closure of the CMW
Landfill. Additional charges to operations may be required in future years if
any disbursements are required from the Fund to remediate any environmental
damages. To date, management is not aware of any such environmental damages. As
of December 31, 2004, the balance in the Fund is approximately $14.0 million and
is included in restricted cash and long-term investments. A corresponding
liability of approximately $7.0 million, representing approximately one-half of
the deposits and related earnings in the Fund, is included in other long-term
liabilities as of December 31, 2004 and 2003, respectively.
9
Lower Passaic River Study
In August 2004, USEPA notified American Ref-Fuel Company of Essex County (Essex)
that it was potentially liable under CERCLA Section 107(a) for response actions
in the Lower Passaic River Study Area (LPRSA), a 17 mile stretch of river in
northern New Jersey. Essex is one of at least 52 Potentially Responsible Parties
(PRPs) named thus far. USEPA alleges that hazardous substances found in the
LPRSA were being released from the Essex site, which abuts the river. USEPA's
notice letter states that Essex may be liable for costs related to a proposed
$10 million study of the Lower Passaic River and for unspecified natural
resource damages. Considering the history of industrial and other discharges
into the LPRSA from other sources, including named PRPs, Essex believes that its
contribution will be determined to be de minimus; however, it is not possible at
this time to predict that outcome with certainty or to estimate Ref-Fuel
Holdings' liability for the study or any eventual natural resource damage.
Other Matters
The Company is involved in various claims or litigation in the ordinary course
of business. Management believes that the ultimate resolution of these matters,
either individually or in the aggregate, will not have a material adverse impact
on the future results of operations, cash flows or financial position of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters
and Purchases of Equity Securities
There is no trading market for the equity interests in MSW Energy Holdings
or MSW Energy Finance. Holdings Corp. holds directly and indirectly 100% of the
membership interests in MSW Energy Holdings, which in turn owns 100% of the
equity interests in MSW Energy Finance.
Item 6. Selected Financial Data
Prior to the Equalization Transactions, the Company's investment in
Ref-Fuel Holdings was accounted for using the equity method. As a result of the
Equalization Transactions, the Company has effective control of Ref-Fuel
Holdings and as of April 30, 2004 is consolidating its results. All significant
intercompany transactions and accounts have been eliminated.
10
From Inception
For The Year (June 30, 2003) to
Ended December 31,
December 31, 2004 2003
-------------------- ---------------------
(in thousands)
Statement of Operations Data:
Net revenues $ 298,644 $ -
Equity in net earnings of Ref-Fuel Holdings 6,545 21,603
Operating expenses (116,089) -
Depreciation and amortization expense (45,154) -
Administrative and general expense (27,198) (1,029)
Loss on asset retirement (1,765) -
Interest income 2,676 91
Interest expense (52,765) (10,054)
Minority interest in subsidiaries (39,642) -
Other income (expenses), net 305 -
Taxes (6,610) -
-------------------- ---------------------
Net income $18,947 $ 10,611
-------------------- ---------------------
Cash Flow Data:
Cash provided by operating activities $ 170,043 $ 10,409
Cash provided by (used in) investing activities 18,839 (347,894)
Cash provided by (used in) financing activities (106,204) 341,118
Balance Sheet Data:
Investment in Ref-Fuel Holdings $ - $ 372,672
Total assets 2,055,731 391,647
Total debt 1,246,013 200,000
Total members' equity 131,348 160,111
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The following discussion contains forward-looking statements. These
statements are based on current plans and expectations and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual results to
differ include risks set forth in "Risk Factors." The following should be read
in conjunction with the financial statements and related notes included
elsewhere in this report.
Results of Operations
For the Year Ended December 31, 2004 as Compared to the Period Ended December
31, 2003
Net revenues. Net revenues of $298.6 million for the year ended December
31, 2004 represent the consolidated results of operations of Ref-Fuel Holdings
for the eight-month period ended December 31, 2004. As indicated above, as a
result of the Equalization Transactions, Ref-Fuel Holdings' results of
operations are consolidated as of April 30, 2004. These revenues represent
$194.9 million of waste disposal and related services revenue, $93.2 million of
energy revenue and $10.5 million of other revenue. There were no revenues during
the same period in 2003, as the results from Ref-Fuel Holdings were accounted
for under the equity method of accounting.
11
Equity in net earnings of Ref-Fuel Holdings. Equity in net earnings of
Ref-Fuel Holdings represents our share of the net earnings of Ref-Fuel Holdings
for the four months ended April 30, 2004 of $6.5 million. Prior to the
Equalization Transactions, which were consummated on April 30, 2004, we
accounted for our investment under the equity method of accounting. As a result
of these transactions, we are consolidating these results after April 30, 2004.
Equity in net earnings of Ref-Fuel Holdings of $21.6 million from Inception
(June 30, 2003) to December 31, 2003 represents our share (49.8%) of the net
earnings of Ref-Fuel Holdings of $34.7 million offset by amortization expense of
$13.1 million associated with the amortization of the amount of our excess
purchase price over our share of the net assets of Ref-Fuel Holdings at the date
of acquisition. We acquired our interest in Ref-Fuel Holdings on June 30, 2003.
Effective December 12, 2003, as a result of push-down accounting, we ceased
amortization of the excess of our purchase price over the net assets acquired of
Ref-Fuel Holdings, as the cost of our investment has been reflected on the books
of Ref-Fuel Holdings.
Operating expenses. As a result of the Equalization Transactions, Ref-Fuel
Holdings' results of operations are consolidated as of April 30, 2004. The
operating expenses of $116.1 million for the year ended December 31, 2004
represents Ref-Fuel Holdings' operational expenses for the eight months ended
December 31, 2004.
Depreciation and amortization expense. As a result of the Equalization
Transactions, Ref-Fuel Holdings' results of operations are consolidated as of
April 30, 2004. Therefore, the depreciation and amortization expense of $45.2
million for the year ended December 31, 2004 represents Ref-Fuel Holdings'
depreciation and amortization expenses for the eight months ended December 31,
2004.
General and administrative expense. As a result of the Equalization
Transactions, Ref-Fuel Holdings' results of operations are consolidated as of
April 30, 2004. Therefore, the administrative and general expense of $27.2
million for the twelve months ended December 31, 2004 represents Ref-Fuel
Holdings' administrative and general expenses of $26.1 million for the eight
months ended December 31, 2004, and $1.1 million attributable to MSW Energy
Holdings' other activities.
Loss on asset retirement. As a result of the Equalization Transactions,
Ref-Fuel Holdings' results of operations are consolidated as of April 30, 2004.
Therefore, the loss on asset retirement of $1.8 million for the year ended
December 31, 2004 represents Ref-Fuel Holdings' loss for the eight months ended
December 31, 2004.
Interest income. As a result of the Equalization Transactions, Ref-Fuel
Holdings' results of operations are consolidated as of April 30, 2004.
Therefore, the majority of the interest income of $2.7 million for the year
ended December 31, 2004 represents Ref-Fuel Holdings interest on cash and cash
equivalents at rates ranging from 0.5% to 2.3% for the eight months ended
December 31, 2004. Interest income for the period from Inception (June 30, 2003)
to December 31, 2003 represents interest on cash and cash equivalents at rates
ranging from 0.5% to 1.5%.
Interest expense. As a result of the Equalization Transactions, Ref-Fuel
Holdings' results of operations are consolidated as of April 30, 2004.
Therefore, the interest expense of $52.8 million for the year ended December 31,
2004 represents Ref-Fuel Holdings' interest expense in the amount of $32.4 for
the eight months ended December 31, 2004, and the interest expense for the
twelve months ended December 31, 2004 attributable to MSW Energy Holdings of
$20.4 million, which represents interest on our 8.5% Senior Notes due 2010
($17.0 million), the accretion of our Duke liability ($2.1 million) and
amortization of deferred financing costs ($1.2 million). Interest expense of
$10.0 million of which $8.5 million for the period from Inception (June 30,
2003) to December 31, 2003 represents 8.5% annual interest on our Senior Notes.
Minority Interest. Minority interests represents the income attributable to
MSW Energy Holdings II (50.0% interest in Ref-Fuel Holdings), and Duke (0.2%
interest in Ref-Fuel Holdings).
Income taxes. Income taxes expense of $6.6 million for the year ended
December 31, 2004, represents the tax liability using the effective tax rate of
25.9% for the year.
Liquidity and Capital Resources
At December 31, 2004, our assets related primarily to our indirect membership
interest in ARC operating facilities. ARC LLC and the ARC operating facilities
have historically generated funds from operations for working capital
requirements, capital spending, debt repayments and dividend payouts.
Accordingly, our performance and significant source of future liquidity will
depend solely on cash distributions, if any, from these entities. We will need
to receive sufficient ongoing cash distributions in order to pay principal and
interest on our Senior Notes, however such distributions are not assured.
Interest only is payable throughout the term of the Senior Notes with principal
and unpaid interest payable at maturity on September 1, 2010.
12
Operating Activities
Our net cash provided by operating activities of $170.0 million for the
year ended December 31, 2004 relates primarily to consolidation of
Ref-Fuel Holdings for the eight months ended December 31, 2004. In addition it
includes the distributions received from Ref-Fuel Holdings of $31.4 million
prior to the consolidation of results. Our net cash provided by operating
activities of $10.4 million for the period from Inception (June 30, 2003) to
December 31, 2003 relates primarily to the distributions received from Ref-Fuel
Holdings of $13.7 million in 2003 offset by the payment of $3.1 million of
interest on our Senior Notes, $0.5 million paid at closing relating to our
obligation under the Duke Agreement and payments for our operating costs.
Investing Activities
Our net cash provided by investing activities of $18.8 million for the year
ended December 31, 2004 relates primarily to the consolidation of Ref-Fuel
Holdings, less capital expenditures ($12.0 million) and changes in restricted
cash ($9.0 million). Our net cash used in investing activities of $347.9 million
for the period from Inception (June 30, 2003) to December 31, 2003 relates
primarily to amounts paid relating to the Acquisition consisting of $304.8
million paid to Duke at the initial closing, $20.7 million paid to Duke in
September 2003 related to a purchase price adjustment, and $15.0 million paid
for Acquisition related costs.
In August 2003, as required under the terms of the Deposit Agreement for
the Senior Notes, we deposited $5.6 million into a restricted cash account.
Financing Activities
Our net cash used in financing activities of $106.2 million for the year
ended December 31, 2004 relates primarily to $53.7 million of long term debt
payments and a distribution we made to our owners of $29.4 million and
distributions to the holders of our minority interest of $23.1 million. Our net
cash provided by financing activities of $341.1 million for the period from
Inception (June 30, 2003) to December 31, 2003 relates primarily to $150.0
million of proceeds from member contributions and $200.0 million from proceeds
of the Senior Notes, offset by cash paid for debt financing costs of $8.4
million and a distribution we made to our owners of $0.5 million.
Supplemental Pro Forma Information
The following results represent the pro forma results as if MSW Energy
Holdings' acquisition of its interests in Ref-Fuel Holdings and the Equalization
Transactions had occurred on January 1, 2004 and 2003, respectively. These
results are presented for informational purposes only, and are not necessarily
indicative of the actual results that would have resulted had the Acquisition
and the Equalization Transactions actually occurred on January 1, 2004 and 2003,
respectively. (In thousands, unaudited):
13
Pro Forma Pro Forma
For the Year Ended For the Year Ended
December 31, 2004 December 31, 2003
--------------------- --------------------
Revenues
Waste disposal and related services $ 284,446 $ 284,131
Energy 134,754 139,824
Other 16,981 14,522
--------------------- --------------------
Total net revenues 436,181 438,477
--------------------- --------------------
Expenses
Operating 189,411 191,400
Depreciation and amortization 67,996 67,996
General and administrative 41,694 46,360
Loss on asset retirements 2,107 2,207
--------------------- --------------------
Operating income 134,973 130,514
Interest income 3,658 3,413
Interest expense (67,648) (70,573)
Loss on early extinguishment of debt - (3,191)
Minority interests in net income of
subsidiaries (45,742) (40,631)
Other income (expenses), net 425 (282)
--------------------- --------------------
Net income before taxes 25,666 19,250
Income taxes (10,527) (6,494)
--------------------- --------------------
Net income $ 15,139 $ 12,756
===================== ====================
Comparison of the Unaudited Pro Forma Years ended December 31, 2004 and 2003
Total Net Revenues. Total pro forma net revenues were $436.1 million for the
year ended December 31, 2004, an increase of $2.3 million from the same period
for the prior year. Waste revenues remained consistent for the two periods,
slight increases were attributable to an increase in waste processed at the
facilities. One of the Ref-Fuel Holdings facilities experienced a scheduled
pricing decrease during the year, which decreased power revenue by approximately
$10 million, which was offset by increased steam sales of $2.3 million for the
period ended December 31, 2004, as compared to the prior period. Metals pricing
increased over the prior year, resulting in an increase of $7.7 million in other
revenues, which was partially offset by the expiration of an ash reuse marketing
arrangement in the first quarter of 2004, decreasing revenues by $4.1 million,
as compared to the prior year period.
Expenses. Operating expenses were $189.4 million for the year ended December 31,
2004, a decrease of $2.0 million from the prior year period. The most
significant factors were decreased expenses related to expiration of an ash
reuse marketing arrangement in the first quarter of 2004 ($4.9 million) and the
decease in landfill cost of $0.5 million as a result of lower volumes. The
decrease in the expenses were partially offset by increased host fees of $1.5
million and increased facility maintenance performed during scheduled outages
and cost of materials.
General and administrative. General and administrative expenses were $41.7
million for the year ended December 31, 2004, a decrease of $4.7 million, or
10%, from the prior year's period due to a decrease of $2.3 million in severance
costs, a decrease of $1.5 million in a long-term compensation expenses, and a
$0.2 million decrease in bad debt expense. This decrease was also partially
offset by increases in miscellaneous general and employee expenses.
Interest Expense. Interest expense was $67.6 million for the year ended December
31, 2004, a decrease of $2.9 million, or 4%, from the prior year. The decrease
resulted from scheduled repayments of principal during 2003 and 2004.
Minority Interest. Minority interests represents the interest attributable to
MSW Energy Holdings II (50.0% interest in Ref-Fuel Holdings), and Duke (0.2%
interest in Ref-Fuel Holdings).
14
Provision for income taxes. The provision for income taxes represents the tax
liability for the period using a rate of 41%.
Debt Covenants
Certain of the debt agreements held by the Company's subsidiaries contain
restrictions on cash distributions and new borrowings. Substantially all of the
assets and revenues of the facilities owned or controlled and operated by
subsidiaries of the Company are pledged to trustees under the terms of the debt
agreements. In addition, the terms of the documents governing these obligations
limit the business activities and the circumstances and timing of making
partnership distributions. In the event of any bankruptcy or liquidation the
Ref-Fuel Holdings debt would be repaid prior to the repayment of the Senior
Notes.
The indenture under which our Senior Notes were issued contain certain
restrictions which will, among other things, prevent us from incurring
additional indebtedness, making restricted payments, making investments, selling
assets or merging with other companies, subject to certain exceptions. The
Senior Notes are redeemable with the payment of certain stated make whole
amounts before September 1, 2007 and, thereafter, at the face amount of the
Senior Notes, plus accrued interest. Restricted Payments are not permitted
unless certain ratio covenants based on our proportionate ownership of Ref-Fuel
Holdings have been met. We are presenting proportionate adjusted data, including
proportionate interest expense and proportionate adjusted earnings before
interest, taxes, depreciation and amortization (Adjusted EBITDA) because these
are used in the calculation of the restrictive covenants contained in the
indenture governing our Senior Notes.
The following table includes certain items that are not measures under
generally accepted accounting principles and are not intended to supplant the
information provided in accordance with generally accepted accounting
principles. Furthermore, these measures may not be comparable to those used by
other companies. The following table should be read in conjunction with our
historical financial statements and related notes.
Year
Ended
December 31,
2004
--------------
(in thousands)
Proportionate Data
Proportionate Adjusted EBITDA (1) $ 138,384
Proportionate interest expense (2) 40,781
Ratio of proportionate Adjusted EBITDA to proportionate interest expense (3) 3.4x
(1) Proportionate Adjusted EBITDA is defined as 49.8% of the Adjusted
EBITDA of Ref-Fuel Holdings. Adjusted EBITDA (as calculated below) is
not a measurement of financial performance under generally accepted
accounting principles and should not be considered as an alternative to
cash flow from operating activities or as a measure of liquidity or an
alternative to net income as indicators of our operating performance or
any other measures of performance derived in accordance with generally
accepted accounting principles.
Proportionate Adjusted EBITDA is calculated as follows:
Year Ended
December 31,
2004
--------------
(in thousands)
Ref-Fuel Holdings operating income $ 136,076
Ref-Fuel Holdings depreciation and amortization 67,996
Ref-Fuel Holdings loss on retirements 2,107
--------------
Ref-Fuel Holdings EBITDA 206,179
Ref-Fuel Holdings fair value adjustment amortization and revenue levelization
adjustments 71,700
--------------
Ref-Fuel Holdings adjusted EBITDA 277,879
MSW Energy Holdings ownership percentage 49.8%
--------------
Proportionate Adjusted EBITDA $ 138,384
==============
(2) Proportionate interest expense is defined as 49.8% of the interest expense
for Ref-Fuel Holdings plus 100% of our interest expense.
15
The following table reconciles MSW Energy Holdings Proportionate Interest
Expense:
Year Ended
December 31,
2004
----------------
(in thousands)
Ref-Fuel Holdings interest expense $ 47,251
MSW Energy Holdings ownership percentage 49.8%
----------------
Ref-Fuel Holdings proportionate interest expense 23,531
MSW Energy Holdings interest expense 17,250
----------------
MSW Energy Holdings proportionate interest expense $ 40,781
================
(3) Proportionate Adjusted EBITDA to proportionate interest expense is
defined as the quotient of proportionate Adjusted EBITDA divided by
proportionate interest expense.
Critical Accounting Policies
Our management is responsible for our consolidated financial statements and
has evaluated the accounting policies to be used in their preparation. Our
management believes these policies to be reasonable and appropriate. The
following discussion identifies those accounting policies that we believe will
be critical in the preparation of our consolidated financial statements, the
judgments and uncertainties affecting the application of those policies, and the
possibility that materially different amounts will be reported under different
conditions or using different assumptions.
Principles of Consolidation. The accompanying consolidated financial
statements include our accounts and the accounts of our wholly-owned
subsidiaries and Ref-Fuel Holdings. Prior to the Equalization Transactions, our
investment in Ref-Fuel Holdings was accounted for using the equity method. As a
result of the Equalization Transactions, we have effective control of Ref-Fuel
Holdings and, as of April 30, 2004, are consolidating its results. All
significant intercompany transactions and accounts have been eliminated. The
minority interests shown relate to Duke's 0.2% interest and MSW Energy Holdings
II's 50% interest in Ref-Fuel Holdings.
Use of Estimates in Preparing Financial Statements. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect: (a) the reported amounts of assets and liabilities at
the date of the financial statements; (b) the disclosures of contingent assets
and liabilities at the date of the financial statements; and (c) the reported
amounts of revenues and expenses recognized during the reporting period.
Significant management estimates include the estimated lives of long-lived
assets, allowances for doubtful accounts receivable, liabilities for
self-insurance and certain landfill liabilities. Such estimates may be
subsequently revised as necessary when additional information becomes available.
Actual results could differ from those estimates.
Goodwill. Goodwill represents the total consideration paid in excess of the
fair value of the net tangible and identifiable intangible assets acquired and
the liabilities assumed. In accordance with the provisions of Financial
Accounting Standard (FAS No. 142), "Goodwill and Other Intangible Assets", we
perform an annual fair value test of its recorded goodwill for our reporting
units using a discounted cash flows approach.
Intangible Assets. Energy contract intangibles represent the amount by
which the contract rates in long-term energy sales contracts held by certain of
our subsidiaries exceeded fair value on the dates that these subsidiaries were
acquired. These contract related to intangibles are amortized into income as a
reduction of energy revenues on a straight-line basis over the remaining terms
of the applicable contracts, which range from five to fifteen years.
16
Waste contract intangibles represent the amount by which the contract rates
in long-term waste sales contracts held by Hempstead exceeded fair value on the
dates that the partnership was acquired. These contract related intangibles are
being amortized into income as a reduction of waste revenues on a straight-line
basis through 2009, the term of the applicable contracts.
We have intangible assets related to Nitrous Oxide (NOx) emission
allowances. These assets have indefinite lives and, as such, are not amortized.
Consistent with all of our intangible assets, these are reviewed under the
provisions of SFAS No. 142 for potential impairment on an annual basis.
Deferred financing costs represent certain capitalizable costs that we have
incurred to finance our long-term debt obligations. These costs are amortized to
interest expense over the life of the related debt.
Other Liabilities. Landfill closure and postclosure costs are included in
other long-term liabilities. We accrue landfill closure and postclosure costs as
the remaining permitted space of the landfill is consumed over the life cycle of
the landfill.
We are accounting for the long-term power contracts at the Semass
Partnership in accordance with Emerging Issues Task Force (EITF) Issues 91-6
"Revenue Recognition of Long-Term Power Sales Contracts" and EITF 96-17 "Revenue
Recognition under Long-Term Power Sales Contracts That Contain both Fixed and
Variable Pricing Terms" which require us to recognize power revenues under these
contracts as the lesser of (a) amounts billable under the respective contracts
or (b) an amount determinable by the kilowatt hours made available during the
period multiplied by the estimated average revenue per kilowatt hour over the
term of the contract. The determination of the lesser amount is to be made
quarterly based on the cumulative amounts that would have been recognized had
each method been applied consistently from the beginning of the contract. The
difference between the amount billed and the amount recognized is included in
other long-term liabilities.
Revenue Recognition. We recognize revenue from two major sources: waste
disposal services and energy production. Revenue from waste disposal services is
recognized as waste is received and revenue from energy production is recognized
as the energy is delivered.
Concentration of Credit Risk. We invest excess cash and funds held in trust
in bank deposit accounts, government securities, commercial paper, certificates
of deposit and money market investments with a limited number of financial
institutions.
We have exposure to credit risk in accounts receivable because we dispose
of waste for and sell power to a limited number of customers. We believe
adequate reserves are maintained for potential credit losses. Furthermore, these
and other customers are primarily located in the northeastern region of the
United States of America.
Unamortized Debt Premium. Unamortized debt premium represents the increase
in the fair value of the Company's debt recorded as a result of the acquisition
of Ref-Fuel Holdings by MSW Energy Holdings and MSW Energy Holdings II. These
costs are amortized to interest expense over the life of the related debt using
the effective interest method.
Income Taxes. As we are a limited liability company, and not directly
subject to Federal and State income taxes; rather our income or loss is required
to be included in the income tax returns of our member. After the August 31
Transactions we became owned 100% directly and indirectly by Holdings Corp.,
which is a C corporation for tax purposes. As a result, we are required to
provide for Federal and State income taxes in order to reflect what the effect
on income would have been if the taxes of the Company were not included in the
income tax returns of its members. Changes in taxes payable are treated as
capital contributions and/or distributions. For the year ended December 31,
2004, our provision reflects the four months of C Corporation taxes that our
member is responsible for on the equity method plus our income and
expenses, plus the taxes of Ref-Fuel Holdings subsequent to the Equalization
Transactions.
17
We account for income taxes under the asset and liability method. The
provision for income taxes includes deferred income taxes resulting from items
reported in different periods for income tax and financial statement purposes.
Deferred income tax assets and liabilities represent the expected future tax
consequences of the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. The effects
of changes in tax rates on deferred income tax assets and liabilities are
recognized in the period that includes the enactment date.
Equity Method Investment. Investments are accounted for using the equity
method of accounting if the investment gives us the ability to exercise
significant influence, but not control, over an investee. Significant influence
is generally deemed to exist if we have an ownership interest in the voting
stock of the investee of between 20% and 50%, although other factors, such as
representation on the investee's board of directors, are considered in
determining whether the equity method of accounting is appropriate.
Our investment in Ref-Fuel Holdings was accounted for using the equity
method of accounting prior to the Equalization Transactions. As a result, the
accompanying consolidated results of operations include our share of net
earnings in "Equity in net earnings of Ref-Fuel Holdings" for the period up to
April 30, 2004.
Push-Down Accounting. On December 12, 2003, MSW Merger, an affiliate of
CSFB Private Equity, merged with and into Holdings Corp. which continues as the
surviving corporation in the Merger. Upon consummation of the Merger and taking
into account the June 30, 2003 acquisition of membership interests in Ref-Fuel
Holdings, the Control Group owns, directly and indirectly, 99.8% of the
membership interests in Ref-Fuel Holdings (and exercises voting power with
respect to the remaining 0.2% interest). Emerging Issues Task Force (EITF) Topic
D-97, "Push-Down Accounting," requires that Ref-Fuel Holdings' financial
statements reflect this change in ownership. Accordingly, the aggregate excess
of purchase price over the net assets that we acquired on June 30, 2003 was
pushed-down to Ref-Fuel Holdings and its subsidiaries on December 12, 2003.
Prior to push-down on December 12, 2003 identifiable intangible assets were
included in "Investment in Ref-Fuel Holdings" on our consolidated balance sheet
and were amortized on a straight-line basis over their estimated useful lives.
As a result of push-down accounting, the excess of the purchase price paid by us
over our share of members' equity of Ref-Fuel Holdings on the acquisition date
has been allocated to our proportionate share of the fair value of the assets
acquired and liabilities assumed, based on a preliminary independent valuation
of Ref-Fuel Holdings (see Note 3 to the consolidated financial statements).
Fair Value of Financial Instruments. Unless disclosed otherwise, all of our
other financial instruments are stated at cost, which management believes
approximates fair market value.
Stock-Based Compensation. We have adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation", (FAS 123) as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FAS No. 123" concerning certain transition and
disclosure provisions, but applies the intrinsic value recognition provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for stock-based
compensation plans of the Company.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations outstanding as
of December 31, 2004 (in thousands):
Payment Due by Period
Less than 1 More than 5
Contractual Obligations Total Year 1-3 Years 3-5 Years Years
----------- ----------- ----------- ----------- -----------
Long-Term Debt Obligations $ 1,246,012 $ 87,184 $ 169,796 $ 176,935 $ 812,097
Operating Lease Obligations 154,559 14,566 27,972 41,519 70,502
Unconditional Purchase Obligations 1,307(1) 1,307 - - -
Other Long-Term Obligations 69,278 8,746 10,833 7,500 42,199
----------- ----------- ----------- ----------- -----------
Total $ 1,471,156 $ 111,803 $ 208,601 $ 225,954 $ 924,798
=========== =========== =========== =========== ===========
(1) Represents unconditional purchase obligation associated with the second
closing of $1,307 due at the second closing.
18
RISK FACTORS
Any of the following risks could materially adversely affect our business,
financial condition or results of operations.
Our substantial indebtedness could adversely affect our financial condition.
We have a substantial amount of indebtedness. As of December 31, 2004 our
total indebtedness was $1,191.8 million, which represented approximately 71% of
our total capitalization.
This substantial indebtedness could have important consequences. For
example, it could:
o make it more difficult for us to satisfy our obligations with respect
to our outstanding debt, including our repurchase obligations;
o increase our vulnerability to general economic and industry
conditions;
o limit our flexibility in planning for, or reacting to, changes in the
business and industry in which we operate;
o place us at a competitive disadvantage compared to our competitors
that have less debt; and
o limit ARC LLC's ability to borrow additional funds in order to make
capital contributions to fund the ARC operating facilities.
Our indentures impose significant operating and financial restrictions on us.
The indentures governing our outstanding debt contains restrictive
covenants that limit our ability to engage in activities that may be in our
long-term best interests. These restrictions limit our ability and the ability
of any restricted subsidiaries to do the following, among other things:
o incur additional indebtedness;
o create liens;
o pay dividends or make other equity distributions;
o purchase or redeem capital stock;
o make investments;
o sell assets or consolidate or merge with or into other companies; and
o engage in transactions with affiliates.
Our failure to comply with those covenants could result in an event of
default which, if not cured or waived, could result in the acceleration of all
or some of our debt. Moreover, it is possible that in the future the owners of
MSW Energy Holdings and MSW Energy Holdings II could determine to merge those
companies with each other or into Ref-Fuel Holdings. While such a merger would
be required to comply with the terms of the indenture, a result would be an
increase in the amount of indebtedness of the successor.
19
Our revenues depend on the operation of the ARC operating facilities.
Our receipt of distributions from the ARC operating companies and
TransRiver are dependent on the successful operation of the ARC operating
facilities. The operation of the ARC operating facilities involves many risks,
including:
o the breakdown or failure of equipment or processes;
o the difficulty or inability to find suitable replacement parts for
equipment;
o the performance of the ARC operating facilities below expected levels
of waste throughput, electric or steam generation or efficiency;
o the unavailability of sufficient quantities of waste;
o decreases in the fees for solid waste disposal;
o decreases in the demand or market prices for recovered ferrous and
nonferrous metal;
o disruption in the transmission of electricity generated;
o labor disputes;
o operator error;
o catastrophic events such as hurricanes, earthquakes, floods and acts
of terrorism that damage or destroy the facilities or the area in
which the facilities are located;
o changes in law or application of law (including any applicable
environmental laws or permit requirements); and
o the exercise of the power of eminent domain.
While we will maintain insurance to protect against certain of these risks, the
insurance may not cover all of these risks and the proceeds of the insurance may
not fully compensate for damages to the ARC operating facilities and the ARC
operating facilities' lost revenues or increased expenses. A decrease or
elimination of revenues generated by the ARC operating facilities or an increase
in the costs of operating the ARC operating facilities could decrease or
eliminate funds available to us, which would adversely affect our financial
condition.
We depend on performance by third parties under contractual arrangements.
We depend on third parties to, among other things, purchase the electric
and steam energy produced by the ARC operating facilities, and supply and
deliver the waste and other goods and services necessary for the operation of
the ARC operating facilities. The viability of the ARC operating facilities
depends significantly upon the performance by third parties in accordance with
the long-term contracts entered into by the ARC operating companies and the
third parties in connection with the ARC operating facilities.
If the third parties to those contracts do not perform their obligations,
or are excused from performing their obligations because of nonperformance by
the ARC operating companies or other parties to the documents, or due to force
majeure events or changes in laws or regulations, the ARC operating companies
may not be able to secure alternate arrangements on substantially the same
terms, if at all, for the services provided under the contracts. Furthermore,
the ability of the ARC operating companies and TransRiver to make distributions
to us may be adversely affected, which may adversely affect our financial
condition. In addition, the bankruptcy or insolvency of a participant or third
party in the ARC operating facilities could result in nonpayment or
nonperformance of that party's obligations to the ARC operating companies and
could adversely affect their ability to make distributions to us , which would
decrease or eliminate the funds available to us.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our operations are concentrated in one region.
All of the ARC operating facilities are located in the northeastern United
States. The entrance of new competitors into the market or the expansion of
existing competitors could have a material adverse effect on distributions
available to us from the ARC operating companies and, ultimately, on our
financial condition.
20
We depend on a significant supply of solid waste.
If the ARC operating facilities do not obtain a supply of solid waste at
prices and quantities that are sufficient to operate the ARC operating
facilities at their expected operating levels, it will adversely affect
operations and our financial condition. One or more of the following factors
could impact the price and supply of waste:
o defaults by waste suppliers under their contracts;
o a decline in solid waste supply due to increased recycling;
o composting of municipal solid waste;
o legal prohibitions against disposal of certain types of solid waste in
WTE facilities; or
o increased competition from landfills, recycling facilities and
transfer stations.
In addition, state and local governments mandate recycling and waste reduction
at the source and the scope of these recycling and waste reduction mandates may
be enlarged in the future. Also, solid waste transfer stations adjacent to
railroad lines, and which are exempt from state and local government regulations
due to a 1995 amendment to the Interstate Commerce Act, are being developed in
the northeast United States and may offer pricing below current market prices.
The ARC operating companies may not be successful in obtaining sufficient
quantities of waste at adequate prices for the successful operation of the ARC
operating facilities. Failure to obtain sufficient waste could have a material
adverse effect on our financial condition.
Failure to comply with environmental permitting and governmental regulations
would adversely affect our operations.
The ARC operating facilities are subject to extensive federal, state and
local laws and regulations related to the environment, health and safety and
associated compliance and permitting obligations (including those related to the
use, storage, handling, discharge, emission and disposal of municipal solid
waste and other waste, pollutants or hazardous substances or wastes, or
discharges and air and other emissions) as well as land use and development.
Environmental laws also impose obligations to clean up contaminated properties
or to pay for the cost of such remediation, often upon parties that did not
actually cause the contamination. While we believe that we are currently in
compliance with applicable environmental laws in all material respects, it is
possible that such conditions impacting the ARC operating facilities could be
discovered in the future or that such conditions could be created by future
spills or releases. Compliance with these laws, regulations and obligations
could require substantial capital expenditures. Failure to comply could result
in the imposition of penalties, fines or restrictions on operations and/or
remedial liabilities. The costs and liabilities of any of these results could
adversely affect the operations of one or more of the ARC operating facilities.
Environmental laws and regulations may also limit our ability to operate the ARC
operating facilities at maximum capacity or at all. These laws, regulations and
obligations could change with the promulgation of new laws and regulations or a
change in the interpretation of existing laws and regulations, which could
result in substantially similar risks. Stricter environmental regulations could
materially affect our cash flow which would have an adverse effect on our
financial condition.
The costs of addressing future environmental requirements at the ARC
operating facilities or at disposal facilities where ARC operating facilities
have disposed of waste are difficult to estimate. Although we report that we
believe that all of our operations are compliant in all material respects with
the requirements of environmental laws and regulations, the ARC operating
facilities may not at all times be in compliance with all applicable
environmental laws and regulations and steps to bring our facilities into
compliance may limit our future cash flow.
Certain environmental permits for the ARC operating facilities are subject
to periodic renewal or reissuance. Regulatory authorities may not renew or
reissue the permits. In addition, any renewed or reissued environmental permit
may contain new, more stringent requirements resulting in the need for
additional capital and operating expenditures due to additions to or
modifications of the ARC operating facilities in order to bring the ARC
operating facilities into compliance with the renewed or reissued permits'
terms. Certain environmental permits contain terms that can result in periodic
adjustment of operating limits, which can result in reduced revenue. Any of the
following events could adversely affect the amount of distributions available to
us:
21
o loss of environmental permits;
o reduction in allowed operations;
o failure or delay in the renewal or reissuance of environmental
permits;
o any increase in operating costs resulting from any renewed or reissued
environmental permit; and
o any expenditures, penalties, restrictions and/or liabilities resulting
from any other non-compliance.
Changes in electricity regulation could have an adverse impact on us.
The ARC operating companies derive a significant amount of revenue from the
sale of electric power. The electric power generation business is subject to
substantial regulation and the ARC operating companies are required to comply
with numerous laws and regulations in order to sell the power generated from the
ARC operating facilities. These laws and regulations could be revised and new
laws and regulations could be adopted. The power purchase agreements with
respect to each ARC operating facility could be adversely affected if amendments
to, or a repeal of, existing regulations with respect to the production of
energy were enacted that reduce the benefits currently afforded under the power
purchase agreements. A reduction in benefits could adversely affect the amount
of distributions available to us and our ability to make payment of the
principal of and premium, if any, and interest on our debt. Our business could
be materially and adversely affected by statutory or regulatory changes or
administrative or judicial interpretations of existing statutes, regulations or
licenses that impose more comprehensive or stricter energy regulation on us.
22
Item 8. Financial Statements and Supplementary Data
23
Report of Independent Registered Public Accounting Firm
To the Members and Board of Directors of
MSW Energy Holdings LLC and Subsidiaries:
In our opinion, the consolidated balance sheets and the related statements of
operations, members' equity and cash flows present fairly, in all material
respects, the financial position of MSW Energy Holdings LLC and Subsidiaries
(the "Company") at December 31, 2004 and 2003, and the results of their
operations and their cash flows for the year ended December 31, 2004 and from
Inception (June 30, 2003) to December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsbility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the account principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, NJ
March 15, 2005
24
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
Assets
December 31, 2004 December 31, 2003
----------------- -----------------
Current assets
Cash and cash equivalents $ 86,310 $ 3,633
Restricted cash and short-term investments 64,703 2,444
Accounts receivable, net of allowance for doubtful accounts of $1,491 and $0,
respectively 72,027 -
Prepaid expenses and other current assets 12,426 76
----------------- -----------------
Total current assets 235,466 6,153
----------------- -----------------
Long-term assets
Property, plant and equipment, net 1,187,178 -
Intangible assets, net 535,134 7,821
Goodwill 2,175 -
Investment in Ref-Fuel Holdings - 372,672
Restricted cash and long-term investments 90,972 5,001
Other long-term assets 4,806 -
----------------- -----------------
Total long-term assets 1,820,265 385,494
----------------- -----------------
Total assets $ 2,055,731 $ 391,647
================= =================
Liabilities and Members' Equity
Current Liabilities
Accounts payable and other current liabilities $ 44,979 $ 1,056
Accounts payable to related party - 480
Current portion of other long-term liabilities 87,184 -
Accrued interest payable 16,583 5,667
Income taxes payable 22 -
----------------- -----------------
Total current liabilities 148,768 7,203
----------------- -----------------
Long-term Liabilities
Long-term debt 1,158,829 200,000
Other long-term liabilities 224,619 24,333
Long-term deferred tax 27,044 -
----------------- -----------------
Total long-term liabilities 1,410,492 224,333
----------------- -----------------
Total Liabilities 1,559,260 231,536
----------------- -----------------
Commitments and contingencies (Notes 12 and 13)
Minority Interest in Consolidated Subsidiary 365,123 -
Members' equity
Total members' equity 131,348 160,111
----------------- -----------------
Total liabilities and members' equity $ 2,055,731 $ 391,647
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
25
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
From Inception
For the Year Ended (June 30, 2003)
December 31, to December 31,
2004 2003
------------------ ----------------
Revenues
Waste disposal and related services $ 194,950 $ -
Energy 93,188 -
Other 10,506 -
------------------ ----------------
Total net revenues 298,644 -
------------------ ----------------
Expenses
Operating 116,089 -
Depreciation and amortization 45,154 -
General and administrative 27,198 1,029
Gain on asset retirement 1,765 -
------------------ ----------------
Total expenses 190,206 1,029
------------------ ----------------
Operating income (loss) 108,438 (1,029)
Interest income 2,676 91
Interest expense (52,765) (10,054)
Equity in net earnings of unconsolidated affiliate - Ref-Fuel Holdings 6,545 21,603
Minority interests in net income of subsidiaries (39,642) -
Other, net 305 -
------------------ ----------------
Income before income taxes 25,557 10,611
Provision for income taxes (6,610) -
------------------ ----------------
Net income 18,947 10,611
Other comprehensive loss (211) -
------------------ ----------------
Comprehensive income $ 18,736 $ 10,611
================== ================
The accompanying notes are an integral part of these consolidated financial statements.
26
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
(in thousands)
Members' Accumulated Other
Interests Comprehensive Income Total
----------------------- ---------------------------- -----------------------
Balance at Inception (June 30, 2003) $ - $ - $ -
Contributions from members 150,000 - 150,000
Distribution to members (500) - (500)
Comprehensive income 10,611 - 10,611
---------------- ---------------- ----------------
Balance, December 31, 2003 160,111 - 160,111
================ ================ ================
Assumption of tax liability (Note 2) (14,892) - (14,892)
Current tax benefit contributed to
member (Note 2) (3,463) - (3,463)
Distribution to members (29,355) (29,355)
Unrealized gain on investments from the
consolidation of Ref-Fuel Holdings - 211 211
Comprehensive income 18,947 (211) 18,736
---------------- ---------------- ----------------
Balance, December 31, 2004 $ 131,348 $ - $ 131,348
================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
27
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
From Inception
For the Year Ended (June 30, 2003)
December 31, to December 31,
2004 2003
------------------ ----------------------
Cash flows from operating activities:
Net income $ 18,947 $ 10,611
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 68,241 561
Deferred taxes 9,350 -
Revenue contract levelization 15,163 -
Interest on loss contract 2,096
Equity in earnings of Ref-Fuel Holdings, prior to consolidation, net of
amortization (6,545) (21,603)
Distributions from Ref-Fuel Holdings, prior to consolidation 31,374 13,720
Loss on asset retirements 1,765 -
Minority interest in income of consolidated subsidiaries 39,642 -
Changes in operating assets and liabilities:
Accounts receivable, net (713) -
Prepaid expenses and other current assets (803) (76)
Other long-term assets 4,199
Accounts payable and current liabilities 1,129 556
Accounts payable affiliates (480) 480
Taxes payable (3,201) -
Accrued interest payable (10,673) 5,667
Other long-term liabilities 551 493
------------------ ----------------------
Net cash provided by operating activities 170,042 10,409
------------------ ----------------------
Cash flows from investing activities:
Payments for purchase of Ref-Fuel Holdings - (340,449)
Change in restricted cash and investments, net (9,088) (7,445)
Additions of property, plant and equipment (12,361) -
Proceeds from sale of assets 50 -
Cash from consolidation of unconsolidated subsidiary 40,238 -
------------------ ----------------------
Net cash provided by (used in) investing activities 18,839 (347,894)
------------------ ----------------------
Cash flows from financing activities:
Proceeds from long-term debt offering - 200,000
Contributions from members - 150,000
Payment of deferred financing fees - (8,382)
Payment of long-term debt (53,757) -
Distributions paid to members (29,355)
Distributions paid to holders of minority interests (23,092) (500)
------------------ ----------------------
Net cash (used in) provided by financing activities (106,204) 341,118
------------------ ----------------------
Net increase in cash and cash equivalents 82,677 3,633
Cash and cash equivalents, beginning of period 3,633 -
------------------ ----------------------
Cash and cash equivalents, end of period $ 86,310 $ 3,633
================== ======================
The accompanying notes are an integral part of these consolidated financial statements.
28
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
MSW Energy Holdings LLC (MSW Energy Holdings and collectively hereinafter
with its subsidiaries, referred to as the Company), a Delaware limited liability
company formed in March 2003 and its consolidated wholly-owned subsidiaries, MSW
Energy Finance Co., Inc. (MSW Finance), a Delaware corporation, and MSW Energy
Hudson LLC (MSW Hudson), a Delaware limited liability company, were organized
for the purpose of acquiring and holding a 50% interest in Ref-Fuel Holdings LLC
(Ref-Fuel Holdings) from Duke Energy Corporation (Duke). The initial acquisition
of Ref-Fuel Holdings (the initial closing) was completed on June 30, 2003. MSW
Finance, a wholly-owned subsidiary, was organized for the sole purpose of acting
as co-issuer with MSW Energy Holdings of $200 million aggregate principal amount
of 8 1/2% senior secured notes due September 1, 2010 (Senior Notes). Other than
serving as co-issuer, MSW Finance does not conduct operations of its own and has
no assets.
At the initial closing, MSW Energy Holdings acquired MSW Hudson, which
holds a 49.8% membership interest in Ref-Fuel Holdings. MSW Energy Holdings has
agreed to acquire Duke Energy Erie, LLC (Duke Erie), an indirect, wholly-owned
subsidiary of Duke, that holds an additional 0.2% membership interest in
Ref-Fuel Holdings, within two years and six months after its purchase of MSW
Hudson.
On August 31, 2004, American Ref-Fuel Holdings Corp. (Holdings Corp.) and
formerly known as United American Energy Holdings Corp., the indirect parent of
MSW Energy Holdings II LLC (MSW Energy Holdings II) and managing member of the
Company, and several private equity funds (the DLJMB Funds), each of which is
managed by entities affiliated with Credit Suisse First Boston Private Equity,
Inc. (CSFB Private Equity), and several investment funds (the Highstar Funds)
managed by AIG Global Investment Corp. (AIGGIC) effected a series of
transactions that resulted in Holdings Corp. becoming the indirect parent of the
Company (the August 31 Transactions).
Prior to the August 31 Transactions, and as a result of a series of
transactions known as the Equalization Transactions, which were consummated on
April 30, 2004, the DLJMB Funds and the Highstar Funds (collectively the Control
Group) beneficially owned 60% and 39.99%, respectively, of the equity interests
in the Company, and 60% and 40%, respectively, of the equity interests in
Holdings Corp. Holdings Corp. owned a 0.01% managing member interest in the
Company.
The Equalization Transactions also resulted in Holdings Corp. assuming full
control of the management and operations of the Company and Ref-Fuel Holdings
through its interests in the Company and MSW Energy Holdings II. MSW Energy
Holdings II acquired its membership interest in Ref-Fuel Holdings in a separate
series of transactions (Merger) completed on December 12, 2003. The other
50% interest in Ref-Fuel Holdings is owned directly and indirectly by MSW Energy
Holdings II. As a result of the Equalization Transactions, the Company has
effective control of Ref-Fuel Holdings, and is therefore consolidating its
results of operations and cash flows for the period from May 1, 2004, and the
balance sheet as of April 30, 2004.
American Ref-Fuel Company LLC (American Ref-Fuel, ARC or ARC LLC), a
wholly-owned subsidiary of Ref-Fuel Holdings, owns partnerships that develop,
own and operate waste-to-energy facilities, which combust municipal solid waste
and produce energy in the form of electricity and steam. Through such
partnerships, American Ref-Fuel owns or controls six waste-to-energy facilities
located in the northeastern United States (the ARC operating facilities). The
subsidiaries of American Ref-Fuel that operate the ARC operating facilities (the
ARC operating companies) derive revenues principally from disposal or tipping
fees received for accepting waste and from the sale of electricity and steam
produced by those facilities. ARC operating subsidiaries include: (a) American
Ref-Fuel Company (Ref-Fuel Management); (b) TransRiver Marketing Company, L.P.
(TransRiver); (c) American Ref-Fuel Company of Hempstead (Hempstead); (d)
American Ref-Fuel Company of Essex County (Essex); (e) American Ref-Fuel Company
of Southeastern Connecticut (Seconn); (f) American Ref-Fuel Company of Niagara,
L.P. (Niagara); (g) American Ref-Fuel Company of Semass, L.P. (Ref-Fuel Semass);
(h) American Ref-Fuel Operations of Semass, L.P. (Semass Operator); (i) American
Ref-Fuel Company of Delaware Valley, L.P. (Delaware Valley) (collectively
referred to as the American Ref-Fuel Partnerships).
29
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MSW Energy Holdings, its wholly-owned subsidiaries and Ref-Fuel Holdings. Prior
to the Equalization Transactions, the Company's investment in Ref-Fuel Holdings
was accounted for using the equity method. As a result of the Equalization
Transactions, the Company has effective control of Ref-Fuel Holdings and as of
April 30, 2004, is consolidating its results of operations, cash flows and
balance sheet. All significant intercompany transactions and accounts have been
eliminated. The minority interests shown relate to Duke's 0.2% interest and MSW
Energy Holdings II's 50% interest in Ref-Fuel Holdings.
Reclassifications
Certain reclassifications have been made to the prior year to conform to
the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management of the Company to make estimates and assumptions that affect the (a)
reported amounts of assets and liabilities at the date of the financial
statements; (b) disclosure of contingent assets and liabilities at the date of
the consolidated financial statements; and (c) the reported amounts of revenues
and expenses recognized during the reporting period. Significant management
estimates include the estimated lives of long-lived assets, allowances for
doubtful accounts receivable, estimated useful lives and fair value adjustments
of net tangible and intangible assets, liabilities for self-insurance and
certain landfill liabilities. Such estimates may be subsequently revised as
necessary when additional information becomes available. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash balances and unrestricted short-term
investments with original maturities of three months or less.
Restricted Cash and Investments
The Company is required to maintain cash and investment balances that are
restricted by provisions of its debt, operational or lease agreements and
obligations under the Duke Agreement. These amounts are held by financial
institutions in order to comply with contractual provisions requiring such
reserves.
Restricted cash and investments may be invested in accounts earning market
rates; therefore, the carrying value approximates fair value. Restricted cash
and investments are excluded from cash and cash equivalents in the accompanying
financial statements, and changes in these assets are characterized as investing
activities in the consolidated statements of cash flows. Restricted cash and
investments include certain investments stated at amortized cost, which
approximates market, including debt securities that are classified as
"held-to-maturity" as the Company has the intent and ability to hold the
securities to maturity. The Company accounts for marketable securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". Under the
provisions of this statement, investments that are classified as
available-for-sale are marked to market with unrealized gains and losses
reported as a component of other comprehensive income. The Company's only
investment classified as available for sale was sold during 2004.
Fair Value of Financial Instruments
Unless disclosed otherwise, all other financial instruments of the Company
are stated at cost, which management believes approximates fair market value.
30
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation of its assets using the straight-line method over the estimated
useful lives.
Routine repairs and maintenance are charged against current operations.
Expenditures that increase value, increase capacity or extend useful lives are
capitalized.
When property and equipment are retired, sold, or otherwise disposed of,
the cost, net of accumulated depreciation, is removed from the accounts and any
resulting gain or loss is included in operating income for the period.
The Company maintains a supply of various spare parts integral to its
operations. Certain spare parts that are not expected to be used within the
upcoming year have been classified as long-term spare parts inventory within
property, plant and equipment.
Landfill costs, including original acquisition cost and incurred
construction costs, are amortized over the estimated capacity of the landfill
based on a per-unit basis as landfill space is consumed. Landfill retirement
costs arising from post-closure obligations, are capitalized as part of the
landfill asset, are being amortized consistent with the landfill's current
estimated life. Landfill retirement costs arising from final capping obligations
are being amortized on a units-of-consumption basis over the estimated number of
tons of waste that each final capping event covers.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", management periodically reviews long-lived assets and
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If factors indicate that an
asset should be evaluated for possible impairment, management compares estimated
undiscounted future operating cash flows associated with the asset to its
carrying amount. If the carrying amount of the asset is greater than
undiscounted future operating cash flows, an impairment loss is calculated and
recognized. The effect of any impairment would be to expense the difference
between the fair value of such asset and its carrying value.
Goodwill
Goodwill represents the total consideration paid in excess of the fair
value of the net tangible and identifiable intangible assets acquired and the
liabilities assumed. In accordance with the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), the Company performs an
annual fair value test of its recorded goodwill for its reporting units using a
discounted cash flows approach. As of December 31, 2004, the Company's estimate
of the fair value of its reporting units indicated no impairment of goodwill in
its annual assessment.
Intangible Assets
Energy contract intangibles represent the amount by which the contract
rates in long-term energy sales contracts held by certain subsidiaries of the
Company exceeded fair value on the dates that these subsidiaries were acquired.
These contract related intangibles are amortized into income as a reduction of
energy revenues on a straight-line basis over the remaining terms of the
applicable contracts, which range from five to fifteen years.
Waste contract intangibles represent the amount by which the contract rates
in long-term waste sales contracts held by Hempstead exceeded fair value on the
dates that the partnership was acquired. These contract related intangibles are
being amortized into income as a reduction of waste revenues on a straight-line
basis through 2009, the term of the applicable contracts.
The Company has intangible assets relating to Nitrous Oxide (NOx) emission
allowances. These assets have indefinite lives and, as such, are not amortized.
Consistent with all the Company's intangible assets, these are reviewed under
the provisions of SFAS 142 for potential impairment on an annual basis.
Deferred financing costs represent certain capitalizable costs incurred by
the Company to finance its long-term debt obligations. These costs are amortized
to interest expense over the life of the related debt using the effective
interest rate method.
31
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Method Investment
Investments are accounted for using the equity method of accounting if the
investment gives the Company the ability to exercise significant influence, but
not control, over an investee. Significant influence is generally deemed to
exist if the Company has an ownership interest in the voting stock of the
investee of between 20% and 50%, although other factors, such as representation
on the investee's board of directors, are considered in determining whether the
equity method of accounting is appropriate.
The Company's investment in Ref-Fuel Holdings was accounted for using the
equity method of accounting prior to the Equalization Transactions. As a result,
the accompanying consolidated results of operations include the Company's share
of net earnings in "Equity in net earnings of Ref-Fuel Holdings" for the period
up to April 30, 2004.
Income Taxes
As the Company is a limited liability company, it is not directly subject
to Federal and State income taxes; rather its income or loss is required to be
included in the income tax returns of its members. After the August 31
Transactions the Company became owned 100% directly and indirectly by Holdings
Corp., which is a C corporation for tax purposes. As a result, the Company is
required to provide for Federal and State income taxes in order to reflect what
the effect on income would have been if the taxes of the Company were not
included in the income tax returns of its members. Changes in taxes payable are
treated as capital contributions and/or distributions. For the year ended
December 31, 2004, the Company's provision reflects four months of C corporation
taxes that its member is responsible for on the income of the Company, and the
taxes of Ref-Fuel Holdings subsequent to the Equalization Transactions.
The Company accounts for income taxes under the asset and liability method.
The provision for income taxes includes deferred income taxes resulting from
items reported in different periods for income tax and financial statement
purposes. Deferred income tax assets and liabilities represent the expected
future tax consequences of the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effects of changes in tax rates on deferred income tax assets and
liabilities are recognized in the period that includes the enactment date.
Other Liabilities
Other current and other long-term liabilities primarily consist of (a) fair
value adjustments related to certain operating leases and long-term waste
contracts acquired by the Company; (b) deferred revenue; (c) accruals for
certain long-term incentive plans; (d) energy contract levelization; and (e) the
Duke Agreement liability (see Note 3).
The fair value adjustment related to the operating lease represents the
amount by which future rent payments on the Delaware Valley facility lease
exceeded the fair market value of that facility as of the acquisition dates.
This amount is being amortized as a decrease in facility rent expense on a
straight-line basis through 2019, the end of the associated lease.
The fair value adjustment related to the acquired long-term waste contracts
represents the amount by which the fair value of long-term waste contracts held
by Ref-Fuel Semass and Essex exceeded the contact rates on the dates that the
partnership were acquired. These costs are being amortized as an increase to
waste disposal revenues using the straight-line method over the term of the
applicable contracts.
Landfill closure and postclosure costs are also included in other long-term
liabilities. The Company accrues landfill closure and postclosure costs as the
remaining permitted space of the landfill is consumed over the expected life
cycle of the landfill.
32
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is accounting for the long-term power contracts at the Ref-Fuel
Semass in accordance with Emerging Issues Task Force (EITF) Issues 91-6 "Revenue
Recognition of Long-Term Power Sales Contracts" and EITF 96-17 "Revenue
Recognition under Long-Term Power Sales Contracts That Contain both Fixed and
Variable Pricing Terms", which require the Company to recognize power revenues
under these contracts as the lesser of (a) amounts billable under the respective
contracts; or (b) an amount determinable by the kilowatt hours made available
during the period multiplied by the estimated average revenue per kilowatt hour
over the term of the contract. The determination of the lesser amount is to be
made annually based on the cumulative amounts that would have been recognized
had each method been applied consistently from the beginning of the contract.
The difference between the amount billed and the amount recognized is included
in other long-term liabilities.
Revenue Recognition
The Company recognizes revenue from two major sources: waste disposal
services and energy production. Revenue from waste disposal services is
recognized as waste is received, and revenue from energy production is
recognized as the energy is delivered.
Concentration of Credit Risk
The Company invests excess cash and funds held in trust in bank deposit
accounts, government securities, commercial paper, certificates of deposit and
money market investments with a limited number of financial institutions.
The Company has exposure to credit risk in accounts receivable as the
Company disposes of waste for and sells energy to a limited number of customers.
The Company believes adequate reserves are maintained for potential credit
losses. Furthermore, these and other customers are primarily located in the
northeastern region of the United States of America.
Unamortized Debt Premium
Unamortized debt premium represents the increase in the fair value of the
Company's debt recorded as a result of the Merger. These amounts are amortized
to interest expense over the life of the related debt using the effective
interest method.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation", (SFAS 123) as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FAS No. 123" concerning certain transition and disclosure
provisions, but applies the intrinsic value recognition provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issues to Employees" and
related interpretations in accounting for stock-based compensation plans of the
Company.
Push-Down Accounting
On December 12, 2003, MSW Merger, an affiliate of CSFB Private Equity,
merged with and into Holdings Corp. which continues as the surviving corporation
in the Merger. Upon consummation of the Merger and taking into account the
Company's June 30, 2003 acquisition of membership interests in Ref-Fuel
Holdings, the Control Group owns, directly and indirectly, 99.8% of the
membership interests in Ref-Fuel Holdings (and exercise voting power with
respect to the remaining 0.2% interest). EITF Topic D-97, "Push-Down
Accounting," requires that Ref-Fuel Holdings financial statements reflect this
collective change in ownership. Accordingly, the aggregate excess of purchase
price over net assets acquired by the Company on June 30, 2003 was pushed down
to Ref-Fuel Holdings and its subsidiaries as of December 12, 2003.
Prior to push-down on December 12, 2003, identifiable intangible assets
were included in "Investment in Ref-Fuel Holdings" on the Company's consolidated
balance sheet and were amortized on a straight-line basis over their estimated
useful lives. As a result of push-down accounting, the excess of the purchase
price paid by the Company over the Company's share of members' equity of
Ref-Fuel Holdings on the acquisition date has been allocated to the Company's
proportionate share of the fair value of the assets acquired and liabilities
assumed, based on an independent valuation of Ref-Fuel Holdings.
Risks and Uncertainties
The Company's operations involve a number of significant risks and
uncertainties. Factors that could affect the Company's future operating
results and cause actual results to vary materially from expectations and
adversely affect the Company's financial condition and prevent it from
fulfilling its obligations, include but are not limited to, the Company's
dependency on the operations of the ARC operating companies and the Company's
substantial indebtedness.
33
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Acquisition of Membership Interests in Ref-Fuel Holdings
Pursuant to an equity purchase agreement between MSW Energy Holdings and
Duke, MSW Energy Holdings agreed to acquire Duke's 50% membership interest in
Ref-Fuel Holdings in two separate closings. At the initial closing on June 30,
2003, MSW Energy Holdings acquired MSW Hudson (formerly Duke Energy Hudson,
LLC), which holds a 49.8% membership interest in Ref-Fuel Holdings. The Company
has agreed to acquire Duke Erie, a wholly-owned subsidiary of Duke Energy that
holds an additional 0.2% membership interest in Ref-Fuel Holdings, at a second
closing to occur at a future date within two years and six months after the
initial closing. At the initial closing, the Company entered into a voting
agreement with Duke Erie, pursuant to which Duke Erie granted the Company the
right to vote the 0.2% membership interest in Ref-Fuel Holdings held by Duke
Erie until such time as the membership interest in Duke Erie is transferred to
MSW Energy Holdings. As a result, MSW Energy Holdings has direct or indirect
voting control of 50% of the membership interests in Ref-Fuel Holdings after the
initial closing.
The aggregate cash purchase price for both the initial and second closing
was $326.8 million, excluding acquisition related costs and obligations assumed.
Of the agreed-upon purchase price, $304.8 million was paid on June 30, 2003 and
a $20.7 million purchase price adjustment was paid to Duke on September 5, 2003.
The purchase price payment for the second closing will be $1.3 million which has
been recorded in accounts payable and accrued liabilities in the accompanying
consolidated balance sheet. The purchase price paid at the initial closing was
financed with proceeds from the Company's offering of Senior Notes (Note 4),
together with capital contributions made by the Company's two members of $75.0
million each (Note 6). The purchase price payable at the second closing is
expected to be financed by cash on hand or capital contributions from the
members.
The Company's share of members' equity of Ref-Fuel Holdings acquired as of
June 30, 2003 was $144.9 million. The excess purchase price of $218.6 million
has been allocated to the Company's proportionate share of the fair values of
the assets acquired and liabilities assumed based on an independent valuation of
Ref-Fuel Holdings tangible assets, property, plant and equipment, identifiable
intangible assets and debt. The amounts allocated to fixed and intangible assets
are amortized using the straight-line method over the estimated useful lives of
the underlying assets or obligations ranging from ten to twenty years.
A summary of the allocation of purchase price to the fair value of the
assets acquired by the Company and the Company's underlying investment in
Ref-Fuel Holdings' members' equity is as follows (in thousands):
Ref-Fuel Holdings' members' equity acquired $ 144,933
Fixed assets and other adjustments 76,363
Identifiable intangible assets, net 154,068
Goodwill (12,050)
Other long-term assets (2,892)
Long-term debt (22,405)
Other long-term liabilities 25,465
----------
Purchase price for acquisition of 49.8% of Ref-Fuel Holdings $ 363,482
==========
In connection with the acquisition, the Company has entered into an
agreement with Duke Capital Corporation (Duke Capital), an affiliate of Duke
Energy (the Duke Agreement) under which the Company agreed to pay Duke Capital
certain future fees (Note 7) in exchange for Duke Capital's agreement to remain
obligated under an existing support agreement related to Ref-Fuel Holdings. The
fees payable under the Duke Agreement are subordinate to the Company's Senior
Notes. The fees payable under the Duke Agreement escalate over time, and a
portion of such fees are to be deposited into a restricted account for the
benefit of Duke Capital. The Company is in compliance with all of its
obligations under this agreement. This liability is included in other current
and long-term liabilities, and represents the present value of the obligation
under the Duke Agreement. At December 31, 2004, the balance was $22.6 million
and $23.5 million at December 31, 2003.
34
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Information
The following results represent the unaudited pro forma results as if MSW
Energy Holdings' acquisition of its interests in Ref-Fuel Holdings, the
Equalization Transactions and the August 31 Transactions had occurred on January
1, 2004 and 2003. These results are presented for informational purposes only,
and are not necessarily indicative of the actual results that would have
resulted had the acquisition, the Equalization Transactions and the August 31
Transactions actually occurred on January 1, 2004 and 2003 (in thousands,
unaudited):
Pro Forma Pro Forma
For the Year Ended For the Year Ended
December 31, 2004 December 31, 2003
------------------ --------------------
Revenues
Waste disposal and related services $ 284,446 $ 284,131
Energy 134,754 139,824
Other 16,981 14,522
------------------ --------------------
Total net revenues 436,181 438,477
------------------ --------------------
Expenses
Operating 189,411 191,400
Depreciation and amortization 67,996 67,996
General and administrative 41,694 46,360
Loss on asset retirements 2,107 2,207
------------------ --------------------
Operating income 134,973 130,514
Interest income 3,658 3,413
Interest expense (67,648) (70,573)
Loss on early extinguishment of debt - (3,191)
Minority interests in net income of subsidiaries (45,742) (40,631)
Other income (expenses), net 425 (282)
------------------ --------------------
Net income before taxes 25,666 19,250
Provision for income taxes (10,527) (6,494)
------------------ --------------------
Net income $ 15,139 $ 12,756
================== ====================
These results are not necessarily indicative of the results of operations that
would have been acquired had the acquisition taken place at the beginning of
2003.
4. Equity Investment in Ref-Fuel Holdings
Prior to the Equalization Transactions, the Company recorded its investment
in Ref-Fuel Holdings as an equity investment. Ref-Fuel Holdings condensed
consolidated financial information prior to April 30, 2004 is included for
informational purposes. The following table summarizes the components of the
Company's interest in Ref-Fuel Holdings at December 31, 2003 and April 30, 2004
(in thousands):
Acquisition of 49.8% of Ref-Fuel Holdings $ 325,480
Duke Agreement obligation at date of acquisition 23,033
Direct acquisition costs 14,969
--------------
Purchase price for acquisition of 49.8% of Ref-Fuel Holdings 363,482
Accrued purchase price for second closing 1,307
--------------
Total purchase price 364,789
Equity in net earnings of Ref-Fuel Holdings 21,603
Distributions received from Ref-Fuel Holdings (13,720)
--------------
Total investment in Ref-Fuel Holdings at December 31, 2003 372,672
==============
Equity in net earnings of Ref-Fuel Holdings 6,545
Distributions received from Ref-Fuel Holdings (31,374)
--------------
Total investment in Ref-Fuel Holdings at April 30, 2004 $ 347,843
==============
35
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized condensed balance sheet information of Ref-Fuel Holdings, is as
follows (in thousands):
As of As of December 31,
April 30, 2004 2003
--------------------- -------------------
Current assets $ 177,397 $ 233,151
Noncurrent assets 1,879,198 1,894,757
Current liabilities 147,068 133,358
Noncurrent liabilities 1,218,780 1,253,250
Members' Equity 690,747 741,300
Summarized statement of operations information for Ref-Fuel Holdings is as
follows (in thousands):
Period from | Period from
December 12, | January 1,
For the Four 2003 to | 2003 to
Months Ended December 31, | December 12,
April 30, 2004 2003 | 2003
------------------ ---------------- | ----------------
| (Precessor)
Revenues $ 137,537 $ 24,847 | $ 444,461
Operating income 26,534 10,855 | 162,683
Net earnings 12,753 8,082 | 103,071
Company's equity in net |
earnings 6,545 4,025 | 30,626
|
5. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
December 31, December 31,
Useful Life 2004 2003
-------------- ------------- -------------
Plant and equipment 2-50 years $ 1,206,558 $ -
Land 3,813 -
Up to 17
Leasehold improvements years 5,575 -
Landfill 13 years 17,768 -
Spare parts 12,282 -
Construction in progress 6,244 -
------------- -------------
Total property, plant and equipment 1,252,240 -
Accumulated depreciation (65,062) -
------------- -------------
Property, plant and equipment, net $ 1,187,178 $ -
============= =============
36
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Intangible Assets
Intangible assets consist of the following (in thousands):
Useful Life December 31, 2004 December 31, 2003
------------------ ------------------ -----------------
Energy contracts 5-15 years $ 525,125 $ -
Waste contracts 5 years 23,600 -
Financing costs 7 years 8,382 8,382
Emissions credits Indefinite 43,377 -
Other intangibles Indefinite 3,579 -
------------------ -----------------
604,063 8,382
Accumulated amortization (68,929) (561)
------------------ -----------------
Intangible assets, net $ 535,134 $ 7,821
================== =================
The following table details the amount of actual/estimated amortization
expense associated with intangible assets included or expected to be included in
the Company's statement of operations for each of the years indicated (in
thousands):
Energy contracts Waste contracts Totals
---------------- ---------------- ---------------
Year ended December 31, 2004 $ 38,687 $ 2,736 $ 41,423
---------------- ---------------- ---------------
(Estimated)
2005 $ 58,306 $ 4,256 $ 62,562
2006 58,306 4,256 62,562
2007 58,305 4,256 62,561
2008 58,206 4,256 62,462
2009 36,907 2,130 39,037
Thereafter 192,381 - 192,381
---------------- ---------------- ---------------
Total $ 462,411 $ 19,154 $ 481,565
================ ================ ===============
7. Goodwill
Goodwill consists of the following (in thousands):
December 31, 2004 December 31, 2003
-------------------- --------------------
Beginning balance $ - $ -
Goodwill from the consolidation of Ref-Fuel Holdings 2,175 -
-------------------- --------------------
Ending balance $ 2,175 $ -
==================== ====================
37
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Accounts Payable and Other Current Liabilities
Accounts payable and other current liabilities consist of the following (in
thousands):
December 31, 2004 December 31, 2003
------------------ -----------------
Accounts payable $ 25,016 $ 556
Incentive plan accruals 3,569 -
Compensation liabilities 8,254 -
Short-term Duke liability 2,500 500
The second purchase 1,307 -
Other 4,333 -
------------------ -----------------
$ 44,979 $ 1,056
================== =================
9. Financing Arrangements
Long-term debt obligations of the Company consist of the following (in
thousands):
Final December 31, December 31,
Interest Rate Maturity 2004 2003
-------------- --------- ---------------- ---------------
Senior Notes 8.5% 2010 $200,000 $200,000
Ref-Fuel Holdings debt
ARC Senior Notes 6.26% 2015 240,000 -
Niagara Series 2001 5.45 - 5.625% 2015 165,010 -
Seconn Corporate Credit Bonds
- 1992 Series A 6.45% 2022 30,000 -
Seconn Corporate Credit Bonds
- ARC-I Series A and ARC-11
Series A 5.50% 2015 13,500
Hempstead Corporate Credit
Bonds 5.00% 2010 42,670 -
Hempstead project debt 4.625%-5.00% 2009 114,543 -
Essex project debt 5.248%-7.375% 2020 96,496 -
Seconn project debt 5.125%-5.50% 2015 50,602 -
Semass Series 2001A 5.50%-5.625% 2016 134,345 -
Semass Series 2001B 5.00%-5.50% 2010 104,385 -
---------------- ---------------
Subtotal 991,551 -
---------------- ---------------
Other obligations 273 -
---------------- ---------------
Total debt at par value 1,191,824 200,000
Unamortized debt premium, net 54,189 -
Current portion (87,184) -
---------------- ---------------
Total long-term debt
obligations $1,158,829 $200,000
================ ===============
In June 2003, the Company issued $200.0 million aggregate principal amount
of 8 1/2 % senior secured notes due 2010 (Senior Notes). Interest on the Senior
Notes accrues at 8 1/2 % per annum, beginning from the date of issuance and is
payable on March 1st and September 1st of each year, commencing on September 1,
2003. Interest only is payable throughout the term of the Senior Notes with
principal and unpaid interest payable at maturity on September 1, 2010. Holders
of Senior Notes may require the Company to repurchase the Senior Notes upon a
change in control or if the Company receives any proceeds from certain
financings or asset sales by Ref-Fuel Holdings and its subsidiaries.
The indenture for the Senior Notes provides for certain restrictive
covenants including, among other things, restrictions on incurrence of
indebtedness, certain payments to related and unrelated parties, acquisitions
and asset sales.
38
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 9, 2003, ARC LLC completed the sale of $275 million aggregate
principal amount of 6.26% Senior Notes due 2015. The proceeds of the financing
were used to repay $242.6 million under an outstanding Credit Facility, fund
debt service reserve accounts and for general corporate purposes. As part of
this refinancing, the Company entered into a three-year amended and restated
revolving credit facility (the Amended Credit Facility) for up to $75 million,
including $45 million of which could be used for letters of credit. Under the
terms of the Amended Credit Facility, the Company is subject to certain
financial covenants, as defined, with respect to leverage and adjusted cash flow
coverage ratios. As of December 31, 2004 there were no borrowings and $10.2
million of letters of credit outstanding, respectively, under the Amended Credit
Facility. Pursuant to the terms of certain guarantee agreements as of December
31, 2004, the Company was contingently obligated to issue $29.0 million in
letters of credit in the event that the ratings of the Company's senior debt are
reduced to below investment grade. The Amended Credit Facility allows for two
one-year extensions at ARC LLC's request.
ARC LLC-supported debt includes obligations of subsidiary companies for
which the Company has issued a guarantee. Other debt obligations mainly consist
of indebtedness supported by the facility to which the indebtedness belongs and
certain contingent credit support obligations of the Company.
Certain of the debt agreements held by the Company contain restrictions on
cash distributions, new borrowings and require certain defined leverage ratios
and adjusted cash flow coverage ratios. Substantially all of the assets and
revenues of the facilities owned or controlled and operated by subsidiaries of
the Company are pledged to trustees under the terms of the debt agreements. In
addition, the terms of the documents governing these obligations limit the
business activities and the circumstances and timing of making partnership
distributions. In the event of any bankruptcy or liquidation, the ARC LLC debt
would be repaid prior to the repayment of the Senior Notes. The aggregate
amounts of long-term debt mature as follows (in thousands):
2005 $87,184
2006 79,331
2007 90,466
2008 98,472
2009 78,463
Thereafter 757,908
------------------
$1,191,824
==================
The fair market value of the Company's indebtedness as of December 31, 2004 and
2003, approximated $1.3 billion and $200 million, respectively. The Company
determined fair values based on quoted market values.
10. Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
Amortization
Period (years) December 31, 2004 December 31, 2003
-------------- ----------------- -----------------
Waste contracts acquired 9-17 $116,635 $-
Operating lease acquired 14 42,094 -
Duke liability 16 22,623 23,026
Energy contract levelization 12 24,123 -
Landfill liabilities 13 10,699 -
Deferred revenue 8-20 5,112 -
Other - 1,307
Incentive plan accruals 3,333 -
----------------- -----------------
$224,619 $24,333
================= =================
See Note 16 for amortization of certain other long-term liabilities.
39
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
The components of the provision for income taxes, for the year ended
December 31, 2004 and the period from inception (June 30, 2003) through December
31, 2003 consist of the following (in thousands):
From Inception
For the Year Ended (June 30, 2003) to
December 31, 2004 December 31, 2003
--------------------- -------------------
Current provision $ (2,740) $ -
Deferred provision 9,350 -
--------------------- -------------------
Total consolidated income tax provision $ 6,610 $ -
===================== ===================
A reconciliation of the statutory federal income tax expense with the
Company's actual effective combined federal and state income tax expense for
the year ended December 31, 2004 is as follows:
For the Year Ended
December 31, 2004
-------------------
Statutory federal income tax rate 35.00%
State tax rate, net of federal benefit 8.11%
Tax attributable to Ref-Fuel Holdings' corporate
subsidiaries 2.46%
Income prior to the August 31 Transactions not
subject to entity-level tax (19.70)%
-------------------
Net combined effective federal and state income
tax rate 25.87%
===================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The deferred income tax
liability included in the consolidated financial statements as of December 31,
2004 is comprised of the following (in thousands):
December 31, 2004
-----------------
The Company's respective share of depreciation, amortization,
accrued liabilities and other of Ref-Fuel Holdings $ 38,407
Other liabilities (10,971)
Net operating loss carryforward (392)
-----------------
Total $ 27,044
=================
The Company has Federal net operating loss carryforwards of approximately $1.3
million as of December 31, 2004 which expire between 2021 and 2024 and state net
operating loss carryforwards of approximately $2.2 million, which have various
expiration dates.
40
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Operational and Other Agreements
The ARC operating facilities operate under various long-term service
agreements, the terms of which extend from 2009 through 2020. These service
agreements require the projects to provide disposal services for waste delivered
by counterparties to these agreements at prices determined by various formulas
contained in such agreements.
Hempstead, Essex, Seconn, Semass and Delaware Valley operate under various
long-term service agreements, the terms of which extend from 2009 through 2020.
These service agreements require the projects to provide disposal services for
waste delivered by counterparties to these agreements at prices determined by
various formulas contained in such agreements. Duke and Allied Waste Industries,
Inc. (Allied) are each obligated to fund one-half of certain cash shortfalls and
other liabilities of Essex arising out of operating the project, including
certain environmental claims. Essex and ARC LLC entered into agreements with
Duke and Allied requiring Essex and ARC LLC to reimburse, indemnify and defend
Duke and Allied from any liability in respect to these obligations
With respect to the Delaware Valley facility, ARC LLC has guaranteed
amounts payable by Delaware Valley pursuant to certain agreements. ARC LLC
guarantees through 2006 the obligations of Delaware Valley under its service
agreement with the Delaware County Solid Waste Authority. In conjunction with
the acquisition of the facility, ARC LLC also provides an indemnity to the
sellers of the facility from post-acquisition environmental damages as a result
of remedial action for releases or threatened releases of hazardous substances
at the facility.
Significant Customers
All of the WTE facilities are contracted to sell power under long-term
power contracts with utility companies, the terms of which expire from 2009 to
2021. These contracts require the facilities to deliver, and the utility
companies to purchase, substantially all of the power generated by rates defined
in the contracts. Total revenues recognized under these energy contracts
approximated $108.2 million for the eight months ended December 31, 2004,
representing approximately 36% of total net revenues.
Credit Support
In order to provide ARC LLC with an additional source of funds to meet
calls on project support obligations, MSW Energy Holdings and Ref-Fuel Corp.
have each entered into the Equity Contribution Agreement pursuant to which they
each have agreed to provide up to $50 million in equity capital to ARC LLC. Each
of their respective obligations to make equity contributions under the Equity
Contribution Agreement is conditioned upon the other making an equal
contribution and is limited to each making no more than $50 million of aggregate
equity contributions. If either of them is not rated at least BBB by S&P, then
such entity is required to provide a letter of credit from a commercial bank
that is rated at least A- by S&P to secure its obligations under the Equity
Contribution Agreement.
13. Commitments and Contingencies
Environmental and Regulatory Risk
The Company operates in an environmentally sensitive industry and is
subject to extensive federal, state and local laws and regulations adopted for
the protection of the environment. The laws and regulations primarily applicable
to the Company are those related to discharge of emissions into the air and
management of solid waste but can also include those related to water use,
discharges to water, wetlands preservation and hazardous waste management.
Certain of these laws have extensive and complex requirements relating to
obtaining construction and operating permits, monitoring, record keeping and
reporting. While management believes that it is in substantial compliance with
permits and other applicable environmental laws relating to the Company, its
facilities, from time to time, may not be in full compliance with all such laws.
41
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Noncompliance with environmental laws and regulations can result in the
imposition of civil or criminal fines or penalties. In some instances,
environmental laws also may impose clean-up or other remedial obligations in the
event of a release of pollutants or contaminants into the environment. The
Company incurs operating costs and capital expenditures related to various
environmental protection and monitoring programs. Such expenditures have not had
a material adverse effect on the Company's consolidated financial position or
results of operations. However, federal, state and local regulatory authorities
may consider proposals to restrict or tax certain emissions, which proposals, if
adopted, could impose additional costs on the operation of the Company.
Future Mercury Regulation at the Essex Facility. On December 6, 2004 the
New Jersey Department of Environmental Protection (NJDEP) promulgated
regulations applicable to the Essex facility that will make mercury emission
requirements more stringent. Specifically, the new regulations increase the
required removal efficiency to 85% removal on January 3, 2006 and 95% removal on
January 3, 2012 versus the current 80% removal, while retaining the alternative
limit of 28 micrograms per cubic meter. As a result of the new regulations,
there is an increased risk that emission exceedances will occur and therefore an
increased probability that additional controls will ultimately be required to
prevent such exceedances. ARC believes that the new requirements may at a
minimum result in increased operating costs due to increased use of activated
carbon in the current control equipment. It is also possible that the
regulations will require the installation of additional pollution control
equipment such as compact hybrid particulate collector units, a device similar
to a baghouse. Management estimates that the cost of the installation of such
additional pollution control equipment, if required, would be approximately $38
million. The Essex service agreement provides a mechanism for a pass-through to
the Port Authority of New York and New Jesey of the majority of any additional
capital and operating capital costs being incurred in connection with these
changes in regulation, or the total of any such costs.
Lower Passaic River Study. In August 2004, USEPA notified American Ref-Fuel
Company of Essex County (Essex) that it was potentially liable under CERCLA
Section 107(a) for response actions in the Lower Passaic River Study Area
(LPRSA), a 17 mile stretch of river in northern New Jersey. Essex is one of at
least 52 Potentially Responsible Parties (PRPs) named thus far. USEPA alleges
that hazardous substances found in the LPRSA were being released from the Essex
site, which abuts the river. USEPA's notice letter states that Essex may be
liable for costs related to a proposed $10 million study of the Lower Passaic
River and for unspecified natural resource damages. Considering the history of
industrial and other discharges into the LPRSA from other sources, including
named PRPs, Essex believes that its contribution will be determined to be de
minimus; however, it is not possible at this time to predict that outcome with
certainty or to estimate Ref-Fuel Holdings' liability for the study or any
eventual natural resource damage.
Landfill Agreements
Semass Partnership, a subsidiary of Ref-Fuel Semass, has a waste management
agreement (the WMA) dated May 25, 1982, as amended, with the Carver, Marion,
Wareham Regional Refuse Disposal District (CMW). The WMA allows Semass
Partnership to utilize a portion of a landfill (the CMW Landfill), which CMW
leases from Wankinco River, Inc. (Wankinco).
Beginning in May 1997, Wankinco provided several notices purportedly
terminating the lease on the CMW Landfill based upon an allegation that the
lease term automatically expired due to alleged failures to strictly comply with
the terms of the lease. In June 1997, Semass Partnership and CMW filed suit
against Wankinco and A. D. Makepeace Company, Inc., Wankinco's parent company,
seeking a declaratory judgment that Semass Partnership and CMW may continue to
operate the CMW Landfill. Trial of the matter before the court was completed in
2001 and a decision was received by the Company in December 2002, which decided
virtually all issues in favor of the Semass Partnership. The Semass Partnership
avoided both forfeiture of possession and any liability for damages due to
landfill operations. Wankinco appealed in January 2003, and on August 19, 2004,
the Appellate Court upheld the Trial Court decision in respect of all decisions
related to the alleged lease violations. One ruling unrelated to lease
forfeiture or damages for unlawful possession was remanded because the Judge's
ruling that Semass had not engaged in "an unfair and deceptive act or practice"
applied the law conjunctively rather than disjunctively (as required by the
law). The Appellate Court affirmed the Judge's ruling that there was no
unfairness, but remanded the question of deception for further findings since
the Appellate Court, due to the use of the conjunctive rather than disjunctive,
was unable to infer that the Judge did not find a compensable deceptive act.
Management believes that the Judge's ruling on remand will clarify this issue in
favor of the Company. In addition, Wankinco appealed the Appellate Court's
decision on the lease issues to the Supreme Judicial Court of Massachusetts and,
on September 30, 2004, the Supreme Judicial Court denied Wankinco's Application
for Further Appellate Review. Accordingly, except for the remand discussed
above, the favorable decisions received by Semass have become final and
nonappealable. Apart from this decision, the Semass Partnership and Wankinco
continue litigating several other actions involving regulatory issues at the
landfill.
Management believes that the ultimate resolution of these matters will not
have a material adverse impact on the results of operations, future cash flows
or financial position of the Company.
In March 1990, the Semass Partnership, CMW and Wankinco entered into an
agreement related to the CMW Landfill, as amended (the Settlement Agreement),
which requires, among other things, the Semass Partnership to make annual
deposits into an environmental protection trust fund (the Fund) in lieu of
obtaining environmental impairment liability insurance for the CMW Landfill. The
Semass Partnership is required under the Settlement Agreement to deposit
$500,000 annually into the Fund, payable in equal quarterly installments.
Certain additional deposits are required subject to the availability of cash in
accordance with the Loan Agreement. The Semass Partnership's obligation to make
42
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deposits into the Fund ceases when the Fund reaches a balance of $20.0 million
unless the fund limit is increased by agreement of the parties, or absent such
agreement, by arbitration, wherein it is determined the fund limit needs to be
increased to adequately protect against environmental damage. Management
believes that the $20.0 million fund limit is adequate for this purpose.
Proceeds from the Fund are to be used primarily for remediation of the CMW
Landfill in the event of environmental damage. The Semass Partnership and
Wankinco are each entitled to receive one-half of the balance of the Fund upon
final closure of the CMW Landfill and receipt of required governmental
approvals. During the year ended December 31, 2004, the Semass Partnership made
the required quarterly deposits into the Fund and charged operations for
one-half of the deposits into the Fund, representing one-half of the balance of
the Fund which will be disbursed to Wankinco upon final closure of the CMW
Landfill. Additional charges to operations may be required in future years if
any disbursements are required from the Fund to remediate any environmental
damages. To date, management is not aware of any such environmental damages. As
of December 31, 2004 the balance in the Fund is approximately $14.0 millionand
is included in restricted cash and long-term investments. A corresponding
liability of approximately $7.0 million, approximately one-half of the deposits
and related earnings in the Fund, is included in other long-term liabilities as
of December 31, 2004.
Future Minimum Payments Under Operating Leases
Delaware Valley leases the Delaware Valley Project pursuant to an operating
lease that expires in July 2019. In certain default circumstances under such
lease, Delaware Valley (and ARC LLC by virtue of a guaranty) become obligated to
pay a contractually specified "stipulated loss" value that declines over time
and was approximately $170.1 million as of December 31, 2004. Total net rental
expense was $5.5 million for the year ended December 31, 2004.
The Company also leases office space for its Montvale, New Jersey
headquarters pursuant to an operating lease expiring in August 2007. As of
December 31, 2004, total minimum net rental payments on these leases are as
follows (in thousands):
2005 $14,566
2006 13,923
2007 14,049
2008 12,710
2009 28,809
Thereafter 70,502
---------------
$154,559
===============
Capital Expenditures
As of December 31, 2004, the Company has commitments for capital
expenditures of approximately $10.8 million, all of which are expected to be
incurred in 2005.
Other Matters
The Company is involved in various claims or litigation in the ordinary
course of business. Management believes that the ultimate resolution of these
matters, either individually or in the aggregate, will not have a material
adverse impact on the future results of operations, cash flows or financial
position of the Company.
The Company is required to provide financial assurance to government
agencies under applicable environmental and procurement regulations relating to
the landfill operations and waste disposal contract. Performance bonds to secure
the obligations, of which $23.0 million in surety bonds was outstanding as of
December 31, 2004, satisfy these financial requirements.
43
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Duke Agreement
The following table represents the future net minimum payments to be made
under the Duke Agreement as of December 31, 2004 (in thousands):
Years ending December 31,
2005 $ 2,500
2006 2,500
2007 2,500
2008 2,500
2009 2,500
Thereafter 36,500
-----------
Total minimum payments 49,000
Less: amount representing interest (23,877)
-----------
Present value of net minimum payments $ 25,123
===========
The payments due under the Duke Agreement have been estimated based upon the
initial provisions of several underlying agreements of Ref-Fuel Holdings,
however, such agreements may be extended at Ref-Fuel Holdings option, which
could increase the obligation due under the Duke Agreement.
Equity Contribution Agreement
At the initial closing, the Company assumed Duke Capital's obligations
under the equity contribution agreement related to ARC and provided a $50.0
million letter of credit to ARC. This equity contribution agreement is designed
to provide ARC with access to contingent equity should it require additional
capital to meet certain calls on its support obligations for the ARC operating
facilities. MSW Energy Holdings is responsible for paying customary expenses
associated with obtaining this letter of credit. Each of the Company's Members
provided back-to-back letters of credit to the Company's letter of credit
provider to reimburse such letter of credit provider if the Company's letter of
credit is drawn by ARC. If for any reason the equity contribution letter of
credit provider is not reimbursed for a letter of credit drawing from the
back-to-back letters of credit and corporate guarantees provided by the Members,
the Company may be obligated to pay such reimbursement obligations.
14. Employee Compensation and Benefit Plans
ARC LLC is the sponsor of the American Ref-Fuel Company Retirement Savings
Plan (the Savings Plan), which covers substantially all employees of the
Company. The Savings Plan, adopted July 1, 1988, as amended, incorporates a
defined contribution account for each employee with deferred savings features
permitted under Internal Revenue Code Section 401(k). Employees may make
voluntary contributions to one or more of various investment funds through
payroll deductions. The Company's matching contribution is defined as 50% of the
first five percent of covered compensation contributed by the employee. In
addition, the Company makes a basic contribution on an employee's behalf in an
amount equal to three percent of an employee's regular earnings which are less
than the Social Security Wage Base, plus six percent of an employee's
regular earnings in excess of the Social Security Wage Base. Company
contributions are directed to the investment funds in the same proportion as the
employees have directed their voluntary contributions. Amounts contributed to
the Savings Plan were approximately $1.8 million.
Long-Term Incentive Plans
Ref-Fuel Holdings has granted certain appreciation rights and/or
performance awards to its officers and certain key employees that were issued
under three separate long-term incentive plans; the Amended and Restated
Long-Term Incentive Plan (dated as of August 1998 and terminated October 2003,
the Long-Term Compensation Plan (dated as of January 2001 and the Management
Incentive Plan (dated as of January 2004). The incentive plans are administered
by the compensation committee of the Board of Directors of Ref-Fuel Holdings.
Awards under long-term incentive plans are based on the achievement of certain
management objectives during each plan year. Awards under the long-term
incentive plans mature in equal amounts of 25 percent in the current year and
the three subsequent years.
44
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognized long-term incentive compensation expense of
approximately $2.7 million during the year ended December 31, 2004. The Ref-Fuel
Holdings' obligation under the long-term incentive plans is approximately $6.1
million of which approximately $2.7 million is included in other long-term
liabilities with the remainder in current liabilities. The Ref-Fuel Holdings
paid out approximately $3.4 million under these plans for the year ended
December 31, 2004.
Employment Agreements
Ref-Fuel Holdings has employment agreements with its seven officers. The
agreements, which expire December 31, 2006, provides for annual base salaries,
subject to annual review by the Board of Directors of Ref-Fuel Holdings. Each
officer is also eligible to participate in cash based short-term and long-term
bonus and incentive compensation arrangements, retirement plans and other
arrangements that are generally provided to senior officers. If an officer's
employment is terminated by Ref-Fuel Holdings "without cause" or for "good
reason" (each defined in the agreement), such officer is entitled to an amount
equal to the sum of two times the annual base salary, two times the average
annual bonus for the three preceding years and prorated target cash bonus for
the calendar year which includes the date of termination.
Stock Option Plan
On August 11, 2004, the Board of Directors of Holdings Corp., managing member of
the Company, adopted the 2004 Stock Option Plan (the SOP), effective January 1,
2004, as further modified on September 16, 2004. The SOP was designed to link
the interests of officers of Holdings Corp. and other senior management of
Ref-Fuel Holdings to the interests of Holdings Corp. shareholders through the
granting of options to purchase stock of Holdings Corp. Holdings Corp. is a
privately held company. During 2004 Holdings Corp. granted 13,199 options to the
executive officers of Ref-Fuel Holdings under the SOP. Options awarded under the
SOP vest over a period of four years and expire ten years from the date of
grant, uinless a triggering event (as defined in the agreement) has not occurred
during the option period.
On January 31, 2005, in conjunction with the Sale, as discussed in Note 17, the
Board of Directors and optionees under the SOP adopted an Option Modification
Agreement (OMA). Under the terms of the OMA, at the completion of the Sale, the
SOP plan will be canceled in exchange for a cash payment. The cash payment is
calculated as the value of all outstanding options granted or ungranted but
authorized under the terms of the SOP, together with certain amounts due and
anticipated under other long term compensation plans.
A summary of the Company's stock options for the year ended December 31, 2004,
is as follows:
Weighted Average
Shares exercise price
-------------- ----------------
Options outstanding:
Beginning of year - $ -
Granted 13,199 1,189.51
Exercised - -
Forfeited or terminated - -
Purchased by MSW Merger - -
----------- ----------
End of year 13,199 $ 1,189.51
Options exercisable at year-end - -
Weighted average fair value of options granted
during the year $ 132.30
The fair value of each stock option granted during the year ended December 31,
2004 is an estimate on the date of grant that is calculated using the minimum
value option pricing model with the following assumptions:
Year Ended
December
31, 2004
----------
Expected life (years) 3
Expected dividend -
Risk free interest rate 3.9%
The Company applies the recognition provisions of Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its
stock-based compensation plans. No compensation cost has been recognized for the
SOP. Set forth as follows are the Company's net income presented both as
reported and pro forma, as if compensation cost had been determined consistent
with the provisions of SFAS No. 123 for the year ended December 31, 2004 (in
thousands):
Year Ended December 31, 2004
--------------------------------
Net income, as reported $ 18,947
Add: stock-based compensation expense included in
reported net income, net of taxes -
Less: stock-based compensation expense included using
fair value method, net of taxes (1,746)
---------------
Pro forma net earnings $ 17,201
===============
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
15. Related Parties
We are indirectly owned 60% by the DLJMB Funds and 40% by the AIG Highstar
Funds. Our entire board has been designated by the DLJMB Funds and the AIG
Highstar Funds. The DLJMB Funds are each managed by entities affiliated with
Credit Suisse First Boston Private Equity, Inc., an affiliate of Credit Suisse
First Boston LLC (CSFB). Credit Suisse First Boston LLC (CSFB LLC) acted as
the Company's financial advisor and was the initial purchaser of the Senior
Notes. In addition, CSFB LLC committed to underwrite a bridge loan to the
Company for the acquisition from Duke Energy in the event that the Company did
not close the sale of the Senior Notes. Total fees paid to CSFB LLC for these
services were $11.9 million of which $5.9 million is included in acquisition
costs (as a component of the purchase price) and $6.0 million is included in
deferred financing fees in the accompanying consolidated balance sheet at
December 31, 2003.
CSFB or its affiliates may in the future engage in investment banking and
other services with us or our subsidiaries for which CSFB or its affiliates will
receive customary fees. We will negotiate the compensation for these services at
the time these services are provided. We expect the compensation to be customary
in accordance with the type of the transaction and with fees previously paid to
CSFB. The AIG Highstar Funds are each managed by AIG Global Investment Corp., an
indirect subsidiary of American International Group, Inc. (AIG). Subsidiaries of
AIG have issued existing insurance policies to us and to our subsidiaries,
including American Ref-Fuel, for which the AIG insurance company subsidiaries
receive customary annual premiums. The Insurance Company of Pennsylvania, an AIG
subsidiary, has issued surety bonds on behalf of several of American Ref-Fuel
affiliates, for which the Insurance Company of Pennsylvania receives customary
annual premiums. In addition, insurance company subsidiaries of AIG may in the
future provide insurance and surety bonds to us, our subsidiaries or Ref-Fuel
Holdings or its subsidiaries. The Company paid approximately $2.5 million for
such services for the year ended December 31, 2004.
45
MSW ENERGY HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accounts payable to related party balance at December 31, 2003 consists
of reimbursable amounts due to Ref-Fuel Holdings for expenses paid on behalf of
the Company. Such amounts were paid in February 2004.
16. Supplemental Disclosure of Cash Flow Information
Depreciation and amortization expense included in the Statements of Cash
Flows for the year ended December 2004 consist of the following expenses
(revenues) (in thousands):
From Inception
For the Year Ended (June 30, 2003) to
Asset / liability Statement of operations December 31, 2004 December 31, 2003
- --------------------------------- ----------------------------------------------------------- ------------------
Property, plant and equipment Depreciation and amortization (1) $ 45,154 $ -
Energy contracts Energy revenues 38,687 -
Long-term waste contracts Waste disposal and related services (5,787) -
Lease Operating expenses (rent expense) (1,099) -
Debt Interest expense (8,620) 561
Deferred revenue Waste disposal and related services and
energy revenues (94) -
------------------- ------------------
Total $ 68,241 $ 561
=================== ==================
(1) Includes amortization of intangible assets
Noncash investing and financing activities:
Cash from the consolidation of Ref-Fuel Holdings at April 30, 2004 $ 40,238 $ -
Cash paid for interest 65,139 3,117
Cash paid for taxes (net of refunds) 460 -
Current tax benefit contributed to member 3,463 -
17. Subsequent Event (unaudited)
DLJ Merchant Banking Partners and AIG Highstar Capital, L.P. announced on
February 1, 2005 that they have signed a definitive agreement to sell Holdings
Corp. to Danielson Holding Corporation (Danielson).
Danielson will pay $740 million in cash for the equity of Holdings Corp.
and will assume the consolidated net debt of Holdings Corp. Subject to receipt
of regulatory approvals and required financing, the transaction is expected to
close in the second quarter of 2005.
In connection with the Sale, costs relating to transaction expenses,
severance, employment contracts, the OMA, Long-Term Incentive Plans, housing
subsidies, lease termination and other related items are estimated to be between
$50 million and $70 million.
46
Item 9. Changes in and Disagreements with Accountants on Financial Disclosure
None.
Item 9A. Controls and Procedures
MSW Energy Holdings and Subsidiaries
As of December 31, 2004, the Chief Executive Officer and Chief Financial Officer
of the Company evaluated the effectiveness of its disclosure controls and
procedures pursuant to applicable Exchange Act Rules. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have each
concluded that these disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) that is required to be included in the Company's
periodic SEC filings.
There were no significant changes in internal controls or in other factors that
could significantly affect these controls for the year ended December 31, 2004.
PART III
Item 10. Directors and Executive Officers of the Registrant
MSW Energy Holdings
The following table gives the name, age and position of each of our officers and
members of the Holdings Corp. Board of Directors, which is deemed to be our
Board of Directiors as of December 31, 2004. Each of the directors, other than
Mr. Panaccione, is also a director of Ref-Fuel Holdings and American Ref-Fuel.
Name Age Position
------------------------ --- --------
Marc C. Baliotti 34 Director
Daniel H. Clare 33 Director
Thompson Dean 46 Director
OhSang Kwon 36 Director
Michael J. Miller 46 Director
Andrew T. Panaccione 43 Director
John Stokes 53 Director
Steven Webster 52 Director
John T. Miller 58 Chief Executive Officer and Advisory
Director1
Michael J. Gruppuso 43 Chief Financial Officer, Vice
President and Secretary2
(1) John T. Miller became Chief Executive Officer effective December 12, 2003.
Prior to that date Michael J. Miller served in that capacity.
(2) Michael J. Gruppuso became Chief Financial Officer, Vice President and
Secretary effective December 12, 2003. Prior to that date Daniel H. Clare served
as Chief Financial Officer and Treasurer until July 30, 2003 and William Whitman
served as Chief Financial Officer and Treasurer from July 30, 2003 until
December 12, 2003. Mr. Clare served as Secretary until December 12, 2003.
Marc C. Baliotti is one of our directors. He joined AIG Global Investment
Corp. in April 2002 and is a Principal of AIG Highstar II GP, L.P. Mr. Baliotti
previously worked as a consultant to Advanstar Communications Inc. from April
2001 to April 2002, as a Vice President with Bluevector, LLC (private equity
affiliate of marchFIRST) from April 2000 to April 2001 and as an Associate with
Donaldson Lufkin & Jenrette in its Merchant Banking Group from September 1997 to
April 2000. Mr. Baliotti is a graduate of the United States Naval Academy and
received an M.B.A. from Villanova University while on active duty in the U.S.
Navy.
47
Daniel H. Clare has served as a director of Ref-Fuel Holdings and has also
served as one of our directors, and as a director of MSW Energy Holdings and MSW
Energy Holdings II since December 2003. He also served as a director of Seabulk
International, Inc. He is currently a Vice President of Credit Suisse First
Boston LLC in the Merchant Banking Group and a Principal of DLJMBP. Mr. Clare
joined CSFB as an Associate in its Private Equity Division in 1999. He
previously worked in the investment banking division of Goldman, Sachs & Company
and as a consultant at Bain & Company, Inc. Mr. Clare holds an M.B.A. degree
from Harvard Business School and is a graduate of Haverford College.
Thompson Dean has served as a director of Ref-Fuel Holdings since July 2004
and has also served as one of our directors, and as a directory of MSW Energy
Holdings and MSW Energy Holdings II since July 2004. He is the Head of Leveraged
Corporate Private Equity, Managing Partner and Investment Committee Chairman of
DLJ Merchant Banking Partners (DLJMBP). Mr. Dean joined DLJMBP in 1988 and
became the Managing Partner in 1995. Following the merger of DLJ and CSFB, he
became the Head of Leveraged Corporate Private Equity, responsible for CSFB's
worldwide leverage buyout business. Mr. Dean serves as Managing Partner of DLJ
Merchant Banking Partners I, L.P., DLJMBP II, DLJMBP III and DLJ Growth Capital
Partners, and as Chairman of the respective Investment Committees. Prior to
joining DLJ, he was a Vice President in the Special Finance Group (Leveraged
Transactions) at Goldman, Sachs and Co. Mr. Dean is the Chairman of the Board of
DeCrane Aircraft Holdings, Inc., Jostens Holding Corp., Mueller Holdings (N.A.)
Inc. And Nycomed Holdings, is a director of Merrill Corporation and Safilo
S.p.A. He is also a director of the Lenox Hill Neighborhood Association, and
serves on various committees for The Society of Memorial Sloan Kettering, The
Museum of the City of New York, The Boys Club of New York and the University of
Virginia.
Michael J. Gruppuso is our Chief Financial Officer, Vice President and
Secretary. He has served as Vice President and Chief Financial Officer of ARC
Management Company since March 2002. Mr. Gruppuso joined ARC Management Company
in 1991 and served in several financial and managerial positions, most recently
Corporate Controller. Mr. Gruppuso also serves as Chief Financial Officer of MSW
Energy Holdings and MSW Energy Holdings II. Prior to joining ARC Management
Company, Mr. Gruppuso was employed by KTI Energy, Inc. from 1985 to 1991, an
owner of WTE projects, where he served as Vice President, Finance. Prior to KTI,
he was a Senior Tax Consultant for Ernst & Young from 1983 to 1985. Mr. Gruppuso
received a Bachelor of Science in Finance and Accounting from New York
University in 1983.
OhSang Kwon has served as a director of Ref-Fuel Holdings and has also
served as a director of MSW Energy Holdings and MSW Energy Holdings II since
December 2003. He is currently a director of Credit Suisse First Boston, LLC and
a Partner of DLJMBP and a Vice President of DLJMBP prior to that. From May 1997
to February 2000, he was an Associate with DLJ Securities Corporation, and he
became a Vice President of DLJ Securities Corporation in February 2000. From
October 1996 to May 1997 he was an Associate at Davis, Polk & Wardwell. Prior to
that, he was a law clerk for the Hon. William C. Conner in the United States
District Court for the Southern District of New York. He is a director of
Advanstar Communications, Inc.
John T. Miller is our Chief Executive Officer. He has served as Chief
Executive Officer of ARC Management Company since November 2001. As Chief
Executive Officer, Mr. Miller is responsible for the overall management and
direction of American Ref-Fuel. Mr. Miller joined American Ref-Fuel in March
1998 as Vice President and Chief Financial Officer. Mr. Miller also serves as
President, and Chief Executive Officer of MSW Energy Holdings and MSW Energy
Holdings II. Before joining ARC Management Company, Mr. Miller was employed by
E-Z Serve Corporation, a gasoline retailer and convenience store operator, where
he served as Chief Financial Officer. His duties there included a key role in
the company's spin-off as a separate publicly traded company, and the subsequent
negotiation of four acquisitions and related financings that added more than
$100 million of enterprise value. Prior to his role at E-Z Serve, Mr. Miller was
employed by Gotco Ltd. (4 years); Gulf Oil Corporation (11 years) and Ernst &
Young (4 years). Mr. Miller attended John Carroll University in Cleveland, Ohio,
where he received a Bachelor of Science degree in Business Administration. He
attended the U.S. Army Officer Candidate School in Virginia and served as a
Commissioned Officer for two years.
48
Michael J. Miller is one of our directors. He joined AIG Global Investment
Corp. in December 2001 and is a Managing Director of AIG Highstar II GP, L.P.
Mr. Miller previously worked as a Vice President with Enron North America (ENA)
from February 1997 to April 2001 and as a Vice President with Enron Corp. from
April 2001 to December 2001. At ENA, Mr. Miller led a group that developed and
constructed over 3,000 megawatts of electric generation projects throughout the
eastern United States. Mr. Miller, who received his B.S. from Rensselaer
Polytechnic Institute and his M.B.A. from the University of Chicago, holds the
Certified Financial Analyst designation.
Andrew T. Panaccione is our independent director and the President of
Entity Services Group, LLC. We are required to include an independent director
on our Board of Directors in order to meet rating agency requirements. Mr.
Panaccione also serves as the independent director of MSW Energy II. Before
joining Entity Services Group in 1993, Mr. Panaccione worked for over seven
years in the commercial real estate field. Prior to that, Mr. Panaccione was an
auditor for Arthur Andersen. Mr. Panaccione graduated cum laude from the
University of Delaware with a Bachelor of Science degree in accounting.
John Stokes has served as one of our directors, and as a director of
Ref-Fuel Holdings, MSW Energy Holdings and MSW Energy Holdings II since April
30, 2004. He joined AIG Global Investment Corp. in March 2004, and is a Managing
Director of AIG Highstar II GP, L.P. Mr. Stokes worked as a consultant to AIG
Global Investment Corp. from February 2002 until he became an employee in March
2004. From September 1998 until December 2001, Mr. Stokes was President and
Chief Executive Officer of Azurix North American, a fully integrated provider of
water and wastewater treatment services to municipal, industrial, and private
customers, throughout the United States and Canada. From August 1997 to
September 1998, Mr. Stokes was President and Chief Executive Officer of Electric
Lite, Inc., a pioneer in the retail-level marketing of electric power. Prior to
joining Electric Lite, Inc., Mr. Stokes held various positions with Enron Corp.,
ESI Energy, Inc. (a subsidiary of FPL Group), and Florida Power & Light Co. He
holds a B.S. in Mechanical Engineering from Clemson University and an M.B.A.
from the University of Miami.
Steven Webster has served as a director of Ref-Fuel Holdings since July
2004 and has also served as one of our directors, and as a directory of MSW
Energy Holdings and MSW Energy Holdings II since July 2004. He is Chairman of
Global Energy Partners, a merchant banking affiliate of CSFB Private Equity that
makes investments in energy companies and has served in that capacity since
2000. From 1998 to 1999, Mr. Webster served as Chief Executive Officer and
President of R&B Falcon Corporation, and from 1988 to 1997, Mr. Webster served
as Chairman and Chief Executive Officer of Falcon Drilling Corporation, both
offshore drilling contractors. Mr. Webster is on the board of Directors of
Brigham Exploration Company, Carrizo Oil & Gas, Inc., Goodrich Petroleum
Corporation, Grey Wolf Inc., Camden Property Trust Crown Resources Corporation,
Geokinetics, Inc. and Seabulk International, Inc. Mr. Webster also serves on the
Boards of several privately held companies primarily in the energy industry. In
addition, Mr. Webster serves as Chairman of Carrizo Oil & Gas Crown Resources
and BASIC Energy Services, Inc., a privately held oil and gas service company.
Mr. Webster is the founder and an original shareholder in Falcon Drilling
Company, Inc., a predecessor to Transocean, Inc., and is a co-founder and
original shareholder of Carrizo Oil & Gas, Inc. Mr. Webster holds a B.S.I.M.
from Purdue University and an M.B.A. from Harvard Business School. Mr. Webster
serves on the Dean's Advisory Board for Purdue.
Audit Committee
This committee oversees the financial reporting process; reviews the annual
and quarterly financial statements; recommends to the full board the appointment
of the independent accountants and evaluates their performance and fees charged;
meets with the independent accountants and with appropriate financial personnel
regarding corporate financial reporting, accounting procedures and controls, and
the scope of independent audits; and evaluates officers' compliance with ethics
policies, national and state laws and regulations related to securities,
criminal conduct and the environment. Messrs. Michael Miller, Kwon and Clare are
the members of the Audit Committee, and Mr. Miller is its chair. The Board of
Directors has determined that Mr. Miller is a financial expert (as defined by
the Securities and Exchange Commission).
MSW Energy Holdings has adopted a Code of Ethics which applies to the chief
executive officer, principal financial and accounting officers of MSW Energy
Holdings. The Code of Ethics may be accessed at the MSW Energy Holdings website
at http:// www.mswenergy.com. Printed copies may be obtained without charge by
writing to the Corporate Secretary, MSW Energy Holdings, 155 Chestnut Ridge
Road, Montvale, NJ 07645.
49
Amendments to the Code or waivers of the Code as required by Regulation
S-K, Item 406 will be posted on the website referred to above.
Item 11. Executive Compensation
None of our directors or officers, all of whom are employed by Ref-Fuel
Holdings, AIGGIC or CSFB Private Equity or their affiliates, are separately
compensated by us for their service as directors and officers.
We pay an annual fee of approximately $2,500 to Entity Services Group, LLC
for the services of Mr. Panaccione, our independent director. In addition,
pursuant to a consulting agreement dated July 30, 2003, we paid Mr. Whitman, who
was our Chief Financial Officer for a portion of the year 2003, a monthly fee of
$12,500 for his advisory and consulting services during 2003. Mr. Whitman's
consulting agreement is no longer in effect.
The Company's executive officers are not separately compensated for their
services as officers of the Company. They are, however, compensated for their
services as officers of Ref-Fuel Holdings. The compensation paid by Ref-Fuel
Holdings to its executives is comprised of three elements: base salary, annual
cash bonus and long-term incentive compensation.
Executive Compensation
The following table sets forth compensation paid to or earned by the Chief
Executive Officer and the other four most highly compensated executive officers
for services rendered to Ref-Fuel Holdings during 2004:
Annual Compensation
-------------------
Name and Principal Position Salary Bonus (1) Other Annual LTIP
Comp (2) Payouts (3)
- ------------------------------------------------------------------------------------------------
John Miller
Chief Executive Officer $377,727 $455,097 $149,773 $225,700
- ------------------------------------------------------------------------------------------------
Michael Gruppuso
VP and Chief Financial Officer $195,692 $98,342 $71,954 $90,899
- ------------------------------------------------------------------------------------------------
Michael DeCastro
VP, Operations of ARC $219,135 $110,123 $32,313 $90,899
- ------------------------------------------------------------------------------------------------
Sean Burke
VP, Organization and Development of ARC $209,962 $93,225 $70,693 $88,950
- ------------------------------------------------------------------------------------------------
Lynn Johnston
VP, Business Development of ARC $193,654 $91,868 $28,970 $79,575
- ------------------------------------------------------------------------------------------------
(1) - Bonus represents earned in 2004 and paid in February 2005.
(2) - For Mssrs. Miller, Gruppuso, and Burke, the amounts include $80,580,
$42,660 and $47,400, respectively of relocation subsidy payable in conjunction
with the relocation of the Ref-Fuel Holdings corporate offices to New Jersey in
2002. The remaining amounts for all of the executive officers include other
perquisites and retirement savings plan contributions that did not exceed, in
the aggregate for the individual officers, the minimum reportable amount.
(3) - Represents amounts paid in 2004. Amounts awarded for 2004 appear in
the table below. Ref-Fuel Holdings and its subsidiaries have granted certain
performance awards to its executive officers and certain key employees that were
issued under Long Term Incentive Plans (LTIP). The LTIP is administered by the
Compensation Committee of the Board of Directors of Ref-Fuel Holdings. Awards
under the LTIP are based on the achievement of certain management objectives
during the plan year, and mature in equal amounts of 25% each plan year.
50
Long-Term Incentive Plans Awards in 2004
Name Maturity Date (1), (2) Amount Payable
Under the Award
- --------------------------------------------------------------------------------
John Miller 2008 $250,857
2007 $250,857
2006 $250,857
2005 $250,857
Michael Gruppuso 2008 $102,624
2007 $102,624
2006 $102,624
2005 $102,624
Michael DeCastro 2008 $102,624
2007 $102,624
2006 $102,624
2005 $102,624
Sean Burke 2008 $87,420
2007 $87,420
2006 $87,420
2005 $87,420
Lynn Johnston 2008 $68,416
2007 $68,416
2006 $68,416
2005 $68,416
(1) LTIP amounts are determined by multiplying the Net Distributable Cash
Flow (as defined in the agreement) for each year by the participants designated
percentage.
(2) LTIP awards vest and are payable in four equal annual installments.
52
Employment Agreements.
The Chief Executive Officer and each of the Named Executive Officers have
employment agreements in place with ARC which expire on December 31, 2006. Under
the terms of the employment agreements, if an officer's employment is terminated
by ARC without Cause, or by the employee for Good Reason (as defined in the
employment agreement), ARC is obligated to continue to pay the executive's base
salary and average bonus for two years after the date of termination as well as
continue to pay unvested amounts due under the LTIP. ARC is also obligated to
provide all health and welfare benefits to the executives for the two year
severance period.
Item 12. Security Ownership of Certain Beneficial Owner and Management
MSW Energy Holdings
The following table sets forth information with respect to the beneficial
ownership of our membership interests as of March 1, 2005 by:
o each person known to own beneficially more than 5% of our membership
interests;
o each of our directors and executive officers; and
o all of our directors and executive officers as a group.
The amounts and percentages of membership interests beneficially owned are
reported on the basis of SEC regulations governing the determination of
beneficial ownership of securities. Under SEC rules, a person is deemed to be a
"beneficial" owner of a security if that person has or shares voting power or
investment power, which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Securities that can be so acquired are deemed to be
outstanding for purposes of computing any other person's percentage. Under these
rules, more than one person may be deemed to be a beneficial owner of the same
securities and a person may be deemed to be a beneficial owner of securities as
to which such person has no economic interest.
Our beneficial owner listed has, to our knowledge, sole voting and
investment power with respect to all of our membership interests.
Beneficial Ownership of
MSW Energy Holdings
--------------------------
Percentage of Outstanding
Name of Beneficial Owner Membership Interests
--------------------------
DLJ Merchant Banking Partners III, L.P. and affiliated funds (1) 60%
AIG Highstar Capital II, L.P. and affiliated funds(2) 40%
Directors:
Marc C. Baliotti(4) --
Daniel H. Clare(3) --
Thompson Dean(3) --
OhSang Kwon(3) --
Steven A. Webster (3) --
Michael J. Miller(4) --
John M. Stokes (4) --
Officers:
John T. Miller(5) --
Michael J. Gruppuso(5) --
All executive officers and directors as a group (9 persons) --
53
(1) DLJ Merchant Banking Partners III, L.P.'s business address is 11 Madison
Avenue, New York, New York 10010.
(2) AIG Highstar Capital II, L.P. business address is 599 Lexington Avenue, New
York, New York 10022.
(3) Messrs. Clare, Dean, Kwon and Webster are affiliated with DLJ Merchant
Banking Partners III, L.P. Membership interests shown for Messrs. Clare, Dean,
Kwon and Webster exclude membership interests shown as held by DLJ Merchant
Banking Partners, L.P. to which Messrs. Clare, Dean, Kwon and Webster disclaim
beneficial ownership. The business address of each of Messrs. Clare, Dean, Kwon
and Webster is c/o DLJ Merchant Banking Partners III, L.P., 11 Madison Avenue,
New York, New York 10010..
(4) Messrs. Baliotti, M. Miller and Stokes are affiliated with AIG Highstar
Capital II, L.P. Membership interests shown for Messrs. Baliotti, M. Miller and
Stokes exclude membership interests shown as held by AIG Highstar Capital II,
L.P. as to which Messrs. Baliotti, M. Miller and Stokes disclaim beneficial
ownership. The business address of each of Messrs. Baliotti, M. Miller and
Stokes is c/o AIG Global Investment Corp., 599 Lexintong Avenue, New York, New
York 10022..
(5) The business address of Mr. J. Miller and Mr. Gruppuso is c/o American
Ref-Fuel LLC, 155 Chestnut Ridge Rd., Montvale, New Jersey 07645.
Item 13. Certain Relationships and Related Transactions
We are indirectly owned 60% by the DLJMB Funds and 40% by the AIG Highstar
Funds. Our entire board has been designated by the DLJMB Funds and the AIG
Highstar Funds.
The DLJMB Funds are each managed by entities affiliated with Credit Suisse
First Boston Private Equity, Inc., an affiliate of Credit Suisse First Boston
LLC (CSFB).
Credit Suisse First Boston LLC (CSFB LLC) acted as the Company's
financial advisor and was the initial purchaser of the Senior Notes. In
addition, CSFB LLC committed to underwrite a bridge loan to the Company for the
acquisition from Duke Energy in the event that the Company did not close the
sale of the Senior Notes. Total fees paid to CSFB LLC for these services were
$11.9 million of which $5.9 million is included in acquisition cost (as a
component of the purchase price) and $6.0 million is included in deferred
financing fees in the accompanying consolidated balance sheet at December 31,
2003.
CSFB or its affiliates may in the future engage in investment banking and
other services with us or our subsidiaries for which CSFB or its affiliates will
receive customary fees. We will negotiate the compensation for these services at
the time these services are provided. We expect the compensation to be customary
in accordance with the type of the transaction and with fees previously paid to
CSFB.
The AIG Highstar Funds are each managed by AIG Global Investment Corp., an
indirect subsidiary of American International Group, Inc. (AIG). Subsidiaries of
AIG have issued existing insurance policies to us and to our subsidiaries,
including American Ref-Fuel, for which the AIG insurance company subsidiaries
receive customary annual premiums. The Insurance Company of Pennsylvania, an AIG
subsidiary, has issued surety bonds on behalf of several of American Ref-Fuel
affiliates, for which the Insurance Company of Pennsylvania receives customary
annual premiums. In addition, insurance company subsidiaries of AIG may in the
future provide insurance and surety bonds to us, our subsidiaries or Ref-Fuel
Holdings or its subsidiaries. The Company paid approximately $2.5 million for
such services for the year ended December 31, 2004.
On August 11, 2004, the Board of Directors of Holdings Corp., managing
member of the Company, adopted the 2004 Stock Option Plan (the SOP), effective
January 1, 2004, as further modified on September 16, 2004. The SOP was designed
to link the interests of officers of the Holdings Corp. and other senior
management of Ref-Fuel Holdings to the interests of Holdings Corp. shareholders
through the granting of options to purchase stock of Holdings Corp. Holdings
Corp. is a privately held company. During 2004 Holdings Corp. granted 13,199
options to the executive officers of Ref-Fuel Holdings under the SOP. Options
awarded under the SOP vest over a period of four years and expire ten years from
the date of grant, unless a triggering event (as defined in the agreement) has
not occurred during the option period.
On January 31, 2005, in conjunction with the agreement for Danielson to
acquire the Holdings Corp. (the Sale); the Board and optionees adopted an Option
Modification Agreement (OMA). Under the terms of the OMA, at the completion of
the Sale, the SOP plan will be canceled in exchange for a cash payment. The cash
payment is calculated as the value of all outstanding options granted or
ungranted but authorized under the terms of the SOP, together with certain
amounts due and anticipated under the LTIP.
54
Item 14. Principal Accountant Fees and Services
The following table sets forth the fees billed or expected to be billed by
the independent accountants to the Company (in thousands).
December 31, December 31,
2004 2003
Fees Billed
Audit fees $ 786 $ 761
Audit-related fees - 1,224
Tax fees 16 -
All other fees 190 -
-------- -------
Total fees $ 992 $ 1,985
======== =======
Audit Fees are those fees for professional services rendered in connection
with: the audit of the Company's consolidated financial statements for the
fiscal period ended December 31, 2004 and December 31, 2003; the review of the
Company's quarterly consolidated financial statements on Form 10-Qs that are
customary under auditing standards generally accepted in the United States.
Audit-related fees are those associated with the Company's debt offering and
Form S-4 filing to register the Senior Notes It is expected that
PricewaterhouseCoopers LLP will provide similar nonaudit services during fiscal
2005. The Audit Committee reviewed and approved in advance the audit and
nonaudit services rendered by PricewaterhouseCoopers LLP during fiscal 2004 and
has considered and concluded that the provision of the nonaudit services is
compatible with maintaining the independence of PricewaterhouseCoopers LLP.
Part IV
Item 15. Financial Statement Schedules and Exhibits
(a) Financial Statement Schedules
Schedules not listed above have been omitted because they are not
applicable or because the required information is contained in the
financial statements or notes thereto.
(b) Exhibits
3.1 Certificate of Formation of MSW Energy Holdings LLC.*
3.2 Amended and Restated Limited Liability Company Agreement of MSW Energy
Holdings LLC, dated as of June 24, 2003, by and between Highstar
Renewable Fuels LLC and MSW Acquisition LLC.*
3.3 Amended and Restated Certificate of Incorporation of MSW Energy
Finance Co., Inc.*
3.4 Bylaws of MSW Energy Finance Co., Inc.*
3.5 Certificate of Amendment to the Certificate of Formation of MSW Energy
Hudson LLC.*
3.6 Second Amended and Restated Limited Liability Company Agreement of MSW
Energy Hudson LLC, dated as of June 30, 2003, by MSW Energy Holdings
LLC.*
4.1 Indenture dated June 25, 2003, by and among MSW Energy Holdings LLC,
MSW Energy Finance Co., Inc. and Wells Fargo Bank Minnesota, National
Association as Trustee.*
4.2 Supplemental Indenture dated July 11, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc., MSW Energy Hudson LLC and
Wells Fargo Bank Minnesota, National Association as Trustee.*
4.3 Form of 81/2% Senior Secured Note Due 2010 (included in Exhibit 4.1).*
55
4.4 Registration Rights Agreement dated as of June 25, 2003, by and among
MSW Energy Holdings LLC, MSW Energy Finance Co. Inc., MSW Energy
Hudson LLC and Credit Suisse First Boston LLC.*
4.5 Pledge and Security Agreement dated as of June 25, 2003, by and among
MSW Energy Holdings LLC, MSW Energy Finance Co., Inc. and Wells Fargo
Bank Minnesota, National Association as Collateral Agent.*
4.6 Pledge Supplement dated as of June 30, 2003 by MSW Energy Hudson LLC.*
4.7 Deposit Agreement, dated as of June 25, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc. and Wells Fargo Bank
Minnesota, National Association as Collateral Agent and Depositary
Agent, as amended.*
4.8 Purchase Agreement, dated as of June 11, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc., MSW Energy Hudson LLC and
Credit Suisse First Boston LLC.*
10.1 Amended and Restated Capital Contribution Agreement, dated as of June
24, 2003, by and between Highstar Renewable Fuels LLC and MSW
Acquisition LLC.*
10.2 Agreement, dated as of June 30, 2003, by and between MSW Energy
Holdings LLC and Duke Capital Corporation.*
10.3 Escrow Agreement, dated as of June 30, 2003, by and among MSW Energy
Holdings LLC, Duke Capital Corporation and Wachovia Bank, National
Association.*
10.4 Amended and Restated Limited Liability Company Agreement of Ref-Fuel
Holdings LLC, dated as of April 30, 2001, by and between Duke Energy
Global Asset Development, Inc. and UAE Ref-Fuel LLC, as amended.*
10.5 Equity Contribution Agreement, dated as of April 30, 2001, by and
among Duke Capital Corporation, United American Energy Corp., Ref-Fuel
Holdings LLC (formerly known as Duke/UAE Ref-Fuel LLC) and American
Ref-Fuel Company LLC.*
10.6 Substitution, Assumption, Amendment and Release Agreement, dated as of
June 30, 2003, by and among Duke Capital Corporation, United American
Energy Corp., Ref-Fuel Holdings LLC (formerly known as Duke/UAE
Ref-Fuel LLC), American Ref-Fuel Company LLC, and MSW Energy Holdings
LLC.*
10.7 Equity Purchase Agreement, dated as of March 19, 2003, by and between
MSW Energy Holdings LLC and Duke Energy Global Markets, Inc.*
10.8 Ref-Fuel Holdings LLC Management Incentive Plan.**
10.9 American Ref-Fuel Holdings Corp. (formerly United American Energy
Holdings Corp.) 2004 Stock Option Plan.**
10.10 Employment Agreement dated as of August 11, 2004, between American
Ref-Fuel Company LLC and John T. Miller (the other officer employment
agreements are identical to this agreement except for the compensation
amounts).**
12 Statement re Computation of Ratio of Earnings to Fixed Charges
56
14(a) Code of Ethics of MSW Energy Holdings LLC.*
14(b) Code of Ethics for MSW Energy Finance Co., Inc.*
21.1 Subsidiaries of MSW Energy Holdings LLC.*
31(a) 15d-14(a) Certification of John T. Miller for MSW Energy Holdings
LLC.
31(b) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy
Holdings LLC.
31(c) 15d-14(a) Certification of John T. Miller for MSW Energy Finance Co.,
Inc.
31(d) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy Finance
Co., Inc.
32(a) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Holdings LLC.
32(b) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Finance Co., Inc.
99 Additional Exhibits - Ref-Fuel Holdings LLC and Subsidiaries
Consolidated Financial Statements
* Incorporated by Reference to Registration Statement No. 333-109049.
** Management contract or compensatory plan or arrangement.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, MSW Energy Holdings LLC has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
MSW ENERGY HOLDINGS LLC
By: /s/ John T. Miller
---------------------------
John T. Miller
Chief Executive Officer
Date: March 16, 2005
--------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
- -------------------------- ---------------------------------- --------------
/s/ John T. Miller Chief Executive Officer (Principal March 16, 2005
------------------ Executive Officer)
John T. Miller
/s/ Michael J. Gruppuso Chief Financial Officer (Principal March 16, 2005
---------------------- Financial and Accounting Officer)
Michael J. Gruppuso
/s/ Marc C. Baliotti Director March 16, 2005
--------------------
Marc C. Baliotti
/s/ Daniel H. Clare Director March 16, 2005
-------------------
Daniel H. Clare
/s/ Thompson Dean Director March 16, 2005
-----------------
Thompson Dean
/s/ OhSang Kwon Director March 16, 2005
---------------
OhSang Kwon
/s/ Michael J. Miller Director March 16, 2005
---------------------
Michael J. Miller
58
/s/ Andrew T. Panaccione Director March 16, 2005
------------------------
Andrew T. Panaccione
/s/ John Stokes Director March 16, 2005
---------------
John Stokes
/s/ Steven Webster Director March 16, 2005
-----------------
Steven Webster
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, MSW Energy Finance Co., Inc. has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MSW ENERGY FINANCE CO., INC.
By: /s/ John T. Miller
-------------------------------------
John T. Miller
President and Chief Executive Officer
Date: March 16, 2005
------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
- --------------------------------- ------------------------------------- --------------
/s/ John T. Miller President and Chief Executive March 16, 2005
- --------------------------------- Officer (Principal Executive Officer)
John T. Miller
/s/ Michael J. Gruppuso Chief Financial Officer (Principal March 16, 2005
- --------------------------------- Financial and Accounting Officer)
Michael J. Gruppuso
/s/ Mark W. Romefelt Director March 16, 2005
- ---------------------------------
Mark W. Romefelt
60
EXHIBIT INDEX
3.1 Certificate of Formation of MSW Energy Holdings LLC.*
3.2 Amended and Restated Limited Liability Company Agreement of MSW Energy
Holdings LLC, dated as of June 24, 2003, by and between Highstar
Renewable Fuels LLC and MSW Acquisition LLC.*
3.3 Amended and Restated Certificate of Incorporation of MSW Energy
Finance Co., Inc.*
3.4 Bylaws of MSW Energy Finance Co., Inc.*
3.5 Certificate of Amendment to the Certificate of Formation of MSW Energy
Hudson LLC.*
3.6 Second Amended and Restated Limited Liability Company Agreement of MSW
Energy Hudson LLC, dated as of June 30, 2003, by MSW Energy Holdings
LLC.*
4.1 Indenture dated June 25, 2003, by and among MSW Energy Holdings LLC,
MSW Energy Finance Co., Inc. and Wells Fargo Bank Minnesota, National
Association as Trustee.*
4.2 Supplemental Indenture dated July 11, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc., MSW Energy Hudson LLC and
Wells Fargo Bank Minnesota, National Association as Trustee.*
4.3 Form of 81/2% Senior Secured Note Due 2010 (included in Exhibit 4.1).*
4.4 Registration Rights Agreement dated as of June 25, 2003, by and among
MSW Energy Holdings LLC, MSW Energy Finance Co. Inc., MSW Energy
Hudson LLC and Credit Suisse First Boston LLC.*
4.5 Pledge and Security Agreement dated as of June 25, 2003, by and among
MSW Energy Holdings LLC, MSW Energy Finance Co., Inc. and Wells Fargo
Bank Minnesota, National Association as Collateral Agent.*
4.6 Pledge Supplement dated as of June 30, 2003 by MSW Energy Hudson LLC.*
4.7 Deposit Agreement, dated as of June 25, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc. and Wells Fargo Bank
Minnesota, National Association as Collateral Agent and Depositary
Agent, as amended.*
4.8 Purchase Agreement, dated as of June 11, 2003, by and among MSW Energy
Holdings LLC, MSW Energy Finance Co., Inc., MSW Energy Hudson LLC and
Credit Suisse First Boston LLC.*
10.1 Amended and Restated Capital Contribution Agreement, dated as of June
24, 2003, by and between Highstar Renewable Fuels LLC and MSW
Acquisition LLC.*
10.2 Agreement, dated as of June 30, 2003, by and between MSW Energy
Holdings LLC and Duke Capital Corporation.*
10.3 Escrow Agreement, dated as of June 30, 2003, by and among MSW Energy
Holdings LLC, Duke Capital Corporation and Wachovia Bank, National
Association.*
61
10.4 Consulting Agreement, dated as of July 30, 2003, by and between MSW
Energy Holdings LLC and William E. Whitman.*
10.5 Amended and Restated Limited Liability Company Agreement of Ref-Fuel
Holdings LLC, dated as of April 30, 2001, by and between Duke Energy
Global Asset Development, Inc. and UAE Ref-Fuel LLC, as amended.*
10.6 Equity Contribution Agreement, dated as of April 30, 2001, by and
among Duke Capital Corporation, United American Energy Corp., Ref-Fuel
Holdings LLC (formerly known as Duke/UAE Ref-Fuel LLC) and American
Ref-Fuel Company LLC.*
10.7 Substitution, Assumption, Amendment and Release Agreement, dated as of
June 30, 2003, by and among Duke Capital Corporation, United American
Energy Corp., Ref-Fuel Holdings LLC (formerly known as Duke/UAE
Ref-Fuel LLC), American Ref-Fuel Company LLC, and MSW Energy Holdings
LLC.*
10.8 Equity Purchase Agreement, dated as of March 19, 2003, by and between
MSW Energy Holdings LLC and Duke Energy Global Markets, Inc.*
10.9 Ref-Fuel Holdings LLC Management Incentive Plan.**
10.10 American Ref-Fuel Holdings Corp. (formerly United American Energy
Holdings Corp.) 2004 Stock Option Plan.**
10.11 Employment Agreement dated August 11, 2004, between American Ref-Fuel
Company and John T. Miller (the other officer employment agreements
are identical to this agreement except for the compensation
amounts).**
12 Statement re Computation of Ratio of Earnings to Fixed Charges.
14(a) Code of Ethics for MSW Energy Holdings LLC.*
14(b) Code of Ethics for MSW Energy Finance Co., Inc.*
21.1 Subsidiaries of MSW Energy Holdings LLC.*
31(a) 15d-14(a) Certification of John T. Miller for MSW Energy Holdings
LLC.
31(b) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy
Holdings LLC.
31(c) 15d-14(a) Certification of John T. Miller for MSW Energy Finance Co.,
Inc.
31(d) 15d-14(a) Certification of Michael J. Gruppuso for MSW Energy Finance
Co., Inc.
32(a) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Holdings LLC.
32(b) Section 1350 Certification of John T. Miller and Michael J. Gruppuso
for MSW Energy Finance Co., Inc.
99 Additional Exhibits - Ref-Fuel Holdings LLC and Subsidiaries
Consolidated Financial Statements
* Incorporated by Reference to Registration No. 333-109049.
** Management contract or compensatory plan or arrangement.
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