EXHIBIT 99.1
ACADIA POWER PARTNERS, LLC
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
INDEX
DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
PAGE(S)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................... 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Members' Capital................................ 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements................................. 6-14
[PRICEWATERHOUSECOOPERS LOGO]
PRICEWATERHOUSECOOPERS LLP
1201 Louisiana
Suite 2900
Houston TX 77002-5678
Telephone (713) 356 4000
Facsimile (713) 356 4717
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
Acadia Power Partners, LLC and subsidiary:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of members' capital and of cash flows
present fairly, in all material respects, the financial position of Acadia Power
Partners, LLC and subsidiary (the "Company") at December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility 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 audit 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 accounting 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.
As discussed in Notes 9 and 10, Calpine Energy Services ("CES") has asserted
certain claims related to dispute resolution under provisions of two tolling
agreements between CES and the Company. The ultimate resolution of this dispute
may have a significant adverse effect on the Company's financial position,
results of operations and cash flows in future periods.
As discussed in Note 5, the Company's revenues are received from transactions
with CES, a related party and certain other transactions are executed with
various entities of Calpine Corporation and Cleco Corporation, all of which are
related parties.
/s/PricewaterhouseCoopers LLP
Houston, Texas
March 25, 2005
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
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2004 2003
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 3,462,436 $ 3,286,987
Accounts receivable -- related parties 6,450,902 6,187,895
Inventory 1,775,097 1,773,860
Other current assets 2,240,378 2,967,907
------------ ------------
Total current assets 13,928,813 14,216,649
Plant and equipment, net (Note 4) 462,653,850 474,560,519
Other noncurrent assets 7,631,952 4,167,438
============ ============
Total assets $484,214,615 $492,944,606
============ ============
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable -- trade $ 547,310 $ 2,600,697
Accounts payable -- related parties 389,770 324,978
Accrued liabilities 8,132,870 784,810
------------ ------------
Total current liabilities 9,069,950 3,710,485
Commitments and Contingencies (Note 9)
Members' capital 475,144,665 489,234,121
------------ ------------
Total liabilities and members' capital $484,214,615 $492,944,606
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
2
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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2004 2003 2002
------------- ------------- -------------
(Unaudited)
REVENUES
Nonaffiliated $- $ 16,053,598 $ 23,784,443
Related parties 74,692,887 65,024,892 25,317,550
------------- ------------- -------------
Total revenues 74,692,887 81,078,490 49,101,993
POWER, PLANT GENERATING AND MARKETING EXPENSE
Plant operating expense 18,196,308 12,750,635 4,997,390
Depreciation expense 14,257,335 13,919,584 6,579,496
Purchased power expense -- related parties 951,041 149,961 7,839,121
------------- ------------- -------------
Total power plant generating and marketing expense 33,404,684 26,820,180 19,416,007
------------- ------------- -------------
Income from operations 41,288,203 54,258,310 29,685,986
OTHER INCOME AND EXPENSES
Contract termination gain (Note 7) - 105,500,000 -
Other income (expense) 13,367 (49,898) 3,139
------------- ------------- -------------
Net income $ 41,301,570 $ 159,708,412 $ 29,689,125
============= ============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
3
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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CALPINE ACADIA ACADIA POWER TOTAL MEMBERS'
HOLDINGS, LLC HOLDINGS, LLC CAPITAL
------------- ------------- --------------
BALANCES AT DECEMBER 31, 2001 (UNAUDITED) $ 210,375,160 $ 210,375,160 $ 420,750,320
Cash contributions (unaudited) 40,284,962 40,284,962 80,569,924
Distributions (unaudited) (11,969,341) (11,969,341) (23,938,682)
Net income (unaudited) 14,844,562 14,844,563 29,689,125
------------- ------------- -------------
BALANCES AT DECEMBER 31, 2002 (UNAUDITED) 253,535,343 253,535,344 507,070,687
Distributions (136,977,283) (40,567,695) (177,544,978)
Net income 79,854,206 79,854,206 159,708,412
Interest on distributions (3,822,083) 3,822,083 --
------------- ------------- -------------
BALANCES AT DECEMBER 31, 2003 192,590,183 296,643,938 489,234,121
Distributions (20,695,513) (34,695,513) (55,391,026)
Net income 20,650,785 20,650,785 41,301,570
Interest on distributions (5,739,330) 5,739,330 --
------------- ------------- -------------
BALANCES AT DECEMBER 31, 2004 $ 186,806,125 $ 288,338,540 $ 475,144,665
============= ============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
4
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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2004 2003 2002
------------- ------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 41,301,570 $ 159,708,412 $ 29,689,125
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 14,257,335 13,919,584 6,579,496
Changes in operating assets and liabilities
Accounts receivable
Trade -- 3,625,690 (3,625,690)
Related parties (263,007) (2,628,042) 1,785,637
Inventory (1,237) (491,252) (1,282,608)
Other current assets 727,529 (86,487) (2,881,420)
Noncurrent assets (3,464,514) (1,698,933) (2,468,505)
Accounts payable and accrued liabilities
Trade (2,053,387) (121,720) (13,386,296)
Related parties 64,792 324,978 (5,345,490)
Accrued Liabilities 7,348,059 (700,543)
------------- ------------- -------------
Net cash provided by operating activities 57,917,140 171,851,687 9,064,249
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (2,350,665) (6,294,795) (76,011,435)
Cash proceeds from sales and use tax refund -- 13,913,014 --
------------- ------------- -------------
Net cash provided by (used for) investing activities (2,350,665) 7,618,219 (76,011,435)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contributions -- -- 80,569,924
Distributions (55,391,026) (177,544,978) (23,938,682)
------------- ------------- -------------
Net cash provided by (used for) investing activities (55,391,026) (177,544,978) 56,631,242
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 175,449 1,924,928 (10,315,944)
CASH AND CASH EQUIVALENTS
Beginning 3,286,987 1,362,059 11,678,003
------------- ------------- -------------
Ending $ 3,462,436 $ 3,286,987 $ 1,362,059
============= ============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
5
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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1. ORGANIZATION AND OPERATIONS OF THE COMPANY
These financial statements consolidate the accounts of Acadia Power
Partners, LLC (the "Company"), a Delaware limited liability company, and
its wholly owned subsidiary, Acadia Partners Pipeline, LLC (the
"Subsidiary"). All intercompany balances have been eliminated. All
information for the year ended December 31, 2002 included in these
financial statements is unaudited.
The Company, an electric generation company, was formed on October 8,
1999, for the purpose of designing, developing, constructing, owning, and
operating a power generation project located in Louisiana. At formation,
Cleco Midstream Resources, LLC ("Cleco"), a Louisiana limited liability
company, and IEP USA Holdings, LLC ("IEP"), a Delaware limited liability
company, owned 70 percent and 30 percent interests in the Company,
respectively. The Subsidiary was formed on June 26, 2000, with the Company
as the sole member.
In February 2000 Cleco and IEP transferred their respective ownership
interests in the Company to Acadia Power Holdings, LLC ("Acadia
Holdings"), a Louisiana limited liability company, and Calpine Acadia
Holdings, LLC ("CAH"), a Delaware limited liability company and subsidiary
of Calpine Corporation ("Calpine"). CAH and Acadia Holdings (collectively,
the "Members") entered into the Amended and Restated Limited Liability
Company Agreement (the "Agreement") dated February 29, 2000. Under the
Agreement, the Company constructed, owns and operates a 1,160-megawatt
(MW) natural gas-fired electric generation plant (the "Facility") located
in Acadia Parish, Louisiana. Each member holds a 50 percent interest in
the Company as of December 31, 2004 and 2003. The Members share in profits
and losses of the Company in proportion of their ownership interests. The
Company is governed by an executive committee with two representatives
from each Member.
Construction on the Facility began in mid 2000 and the dates of commercial
operations for Phase I and Phase II were July 2002, and August 2002,
respectively. The Agreement will continue 49 years after the date that
commercial operations begin. The Company was in the development stage
until July 2002, when commercial operations began.
2. BUSINESS RISKS
Several current issues in the power industry could have an effect on the
Company's financial performance. Some of the business risks which could
cause future results to differ from expectations include (1) legislative
and regulatory initiatives regarding deregulation, regulation or
restructuring of the electric utility industry; (2) the extent and timing
of the entry of additional competition in the market in which the Company
operates; (3) state, federal and other rate regulations in the areas in
which the Company does business; (4) changes in or application of
environmental and other laws and regulations to which the Company is
subject to; (5) changes in market conditions, including developments in
energy and commodity supply, volume and pricing; (6) weather and other
natural phenomena; (7) and the direct or indirect effects on the business
resulting from the financial difficulties of competitors of the Company,
including but not limited to, their effects on liquidity in the trading
and power industry, and its effects on the views of the capital markets
regarding the energy or trading industry.
6
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
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 the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates. The most significant estimates
with regard to these financial statements relate to the useful lives and
carrying value of the generation facility and related assets and
depreciation. Additionally, the Company periodically reviews its assets
for impairment requiring the Company to estimate future revenues and cash
flows over the useful lives of the assets.
OPERATIONAL DATA
Operational data including, but not limited to, megawatt ("MW") and
megawatt hours ("MWh") throughout these financial statements are
unaudited.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
carrying amount of these instruments approximates fair value because of
their short maturity.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
Accounts receivable and payable represent amounts due from customers and
owed to vendors, respectively.
INVENTORY
The Company's inventories primarily include small parts. Inventory is
valued at the lower of cost or market using the average cost method. Costs
for large replacement parts estimated to be used within one year are
determined using the specific identification method. For other replacement
parts, costs are generally determined using the weighted average cost
method.
OTHER CURRENT ASSETS
Other current assets include prepaid expenses for insurance and long-term
service agreement (LTSA) payments (See Note 6 for further discussion of
LTSA).
MAJOR MAINTENANCE
As major maintenance occurs, and as parts are replaced on the plants'
steam and combustion turbines, the costs are either expensed or
transferred to property, plant and equipment and depreciated over the
parts' estimated useful lives, generally three to six years, depending on
the nature of maintenance activity performed under the service agreement
(See Note 8).
LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company evaluates the
impairment of long-lived assets, based on the projection of undiscounted
pre-interest expense and pre-tax expense cash flows whenever events or
changes in circumstances indicate that the carrying amounts of such assets
may not be recoverable. In the
7
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
event such cash flows are not expected to be sufficient to recover the
recorded value of the assets, the assets are written down to their
estimated fair values. No impairment was identified in 2004 and 2003.
CONCENTRATION OF CREDIT RISK
The financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of accounts receivable. The
Company's revenues are primarily from sales to Calpine Energy Services,
L.P. ("CES"), a subsidiary of Calpine (See Notes 5 and 9).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable and accounts payable,
approximate their respective fair value because of their short maturity.
INCOME TAXES
The Company is a limited liability company and, for income tax purposes,
is treated as a partnership. The Company's taxable income or loss is
therefore passed through to its members and reported on the respective
members' tax returns. Accordingly, there is no income tax provision or
current or deferred taxes in these financial statements.
REVENUE RECOGNITION
The Company has entered into tolling agreements that have been accounted
for as operating leases. The Company recognizes revenue based on a rate
that is straight-lined over the term of the lease (See Notes 5, 6 and 7).
RECLASSIFICATIONS
We have made certain reclassifications in the consolidated financial
statements for the prior year to conform to the current year's
presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151 ("SFAS 151"),
Inventory Costs, an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Paragraph 5 of
ARB 43, Chapter 4, previously stated that "under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current
period charges". This Statement requires those items to be recognized as a
current-period charge regardless of whether they meet the criterion of "so
abnormal". In addition, this Statement requires that fixed production
overhead costs to be allocated to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of SFAS 151
are applicable to inventory costs incurred during fiscal years beginning
after June 15, 2005. Adoption of this statement is not expected to
materially impact the Company's results of operations, financial position,
or cash flows.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 153 ("SFAS 153"),
Exchanges of Nonmonetary Assets -Accounting Principles Board Opinion No.
29, Accounting for Nonmonetary Transactions ("APB No. 29"). This standard
eliminates the exception in APB No. 29 for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. It
requires exchanges of productive assets to be
8
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
accounted for at fair value, rather than at carryover basis, unless (1)
neither the asset received nor the asset surrendered has a fair value that
is determinable within reasonable limits or (2) the transaction lacks
commercial substance (as defined). A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange.
The new standard SFAS 153 will not apply to the transfers of interests in
assets in exchange for an interest in a joint venture and amends FASB 66,
Accounting for Sales of Real Estate, to clarify that exchanges of real
estate for real estate should be accounted for under APB No. 29. It also
amends FASB Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS 140) to remove
the existing scope exception relating to exchanges of equity method
investments for similar productive assets to clarify that such exchanges
are within the scope of SFAS 140 and not APB 29. SFAS 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. Adoption of this statement is not expected to materially
impact the Company's results of operations, financial position, or cash
flows.
4. PLANT AND EQUIPMENT, NET
Plant and equipment, net is stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets, generally 35 years for our power plant assets,
including interconnect pipelines, with an estimated salvage value of 10
percent of the original cost. For all power plant assets with useful life
of 5 years no salvage value is estimated. As of December 31, 2004 and
2003, the components of property, plant and equipment were as follows:
2004 2003
------------- -------------
Power plant and related equipment
Buildings, Machinery & Equipment $ 494,337,534 $ 492,281,981
Land 2,777,618 2,777,618
Less: Accumulated depreciation (34,461,302) (20,499,080)
------------- -------------
Plant and equipment, net $ 462,653,850 $ 474,560,519
============= =============
In 2002, the Company filed for refunds of sales and use taxes paid during
construction, pursuant to Louisiana's Enterprise Zone Program. The sales
and use taxes were paid over a period from January 2001 through December
2002 and capitalized as a part of the cost for plant and equipment
acquired by the Company. Total refunds of $13,913,014 were recorded as a
reduction of plant and equipment in 2003.
5. RELATED PARTIES
The Company entered into a tolling agreement dated July 27, 2001, with
Calpine Energy Services ("CES"), which is effective for 20 years beginning
July 1, 2002. Under the agreement, the Company has granted CES the right
to receive the output of one train of the Facility consisting of
9
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
approximately one-half of the full capacity. In accordance with the terms
of the contract, CES will supply all fuel necessary to generate the energy
it takes and will pay the Company a capacity charge as well as an
operation and maintenance fee. This arrangement is being accounted for as
an operating lease. The rate established in this agreement varies in the
future, and therefore the Company recognizes revenue based on a rate that
is straight-lined over the life of the lease. The Company recognized
revenues of $44,726,537, $44,166,692, and $25,317,550 in 2004, 2003 and
2002, respectively, based on this agreement, of which $7,631,952, and
$4,167,438 were recorded as other noncurrent asset as of December 31, 2004
and 2003, respectively.
On May 10, 2003, the Company entered into a second tolling agreement with
CES effective through June 30, 2022. The agreement was completed
concurrently with the termination of a previous tolling agreement dated
October 9, 2000, with Aquila Energy Marketing Corporation ("Aquila"),
which was effective for 20 years beginning July 1, 2002 (See Notes 6 and
7). This CES agreement is similar in nature to the agreement described
above. Under this agreement, the Company has granted CES the right to
receive the output of the second train of the Facility consisting of
approximately one-half of the full capacity of the Facility. In accordance
with the terms of the contract, CES will supply fuel necessary to generate
the energy it takes and will pay the Company a capacity charge as well as
an operation and maintenance fee. This agreement is being accounted for as
an operating lease. The rate established in the agreement is fixed and
therefore the lease revenues are recognized on a straight-line basis. The
Company recorded revenues of $29,966,350, $20,858,200, and $0 in 2004,
2003 and 2002, respectively, based on this agreement.
The Company's revenue from the agreements above includes $870,041,
$149,961 and $7,260,033 in 2004, 2003, and 2002, respectively, for the
sale of purchased power to CES. The cost of this power was recorded as
purchase power expense - related parties.
As a result of the two 20-year tolling agreements with CES, all of the
output from the Acadia Power Plant is currently marketed by CES.
The Company's accounts receivable related to the agreements noted above
were $6,450,902 and $6,187,895 as of December 31, 2004 and 2003,
respectively.
The minimum lease rentals to be received by the Company in connection with
the above tolling agreements are $64 million, $64 million, $66 million,
$68 million and $68 million for the years 2005 through 2009, respectively.
Minimum lease rentals for 2010 and thereafter are $848 million.
The Company has contracted with Calpine Central, LP ("CCLP"), a subsidiary
of Calpine, to provide project management services, which have included
the design, construction, and operation of the Facility. The project
management agreement dated February 29, 2000, terminates at the fiftieth
anniversary of the commercial operation date (See Note 1). The Company
agrees to reimburse costs incurred by CCLP included in the approved
operating budget and future operating budgets. Based on this agreement,
the Company reimbursed CCLP for $5,436,243, $2,934,888, and $1,575,505 in
2004, 2003 and 2002, respectively.
The Subsidiary has a Pipeline Operating Agreement with Cleco Energy, LLC,
a subsidiary of Cleco, dated March 1, 2002. The agreement covers all
operations, repair, improvements, alterations, inspections, testing,
protection and other operations and activities that are necessary to
maintain the facility in accordance with federal safety and maintenance
standards promulgated
10
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
under CFR part 192 and the regulations of the Louisiana Office of
Conservation, and to accomplish the business objectives of the Subsidiary.
Based on this agreement, the Subsidiary was reimbursed for these services
which totaled $106,853, $96,061, and $209,819 in 2004, 2003 and 2002,
respectively.
The Company has an Agreement for Electric Service with Cleco Power, LLC
("Cleco Power"), the successor to Cleco Utility Group, Inc., an affiliate
of Cleco, dated December 15, 2001. The agreement covers electrical
purchases of the Facility for a five-year period pursuant to Cleco Power's
Louisiana Public Service Commission ("LPSC") Rate Schedule GS and its
Rider Schedule for Long-Term Economic Development Services, subject to
approval by the LPSC. Based on this agreement, the Company paid
$1,081,173, $2,117,600, and $7,839,121 for services received in 2004, 2003
and 2002, respectively from Cleco Power.
The Company has a Phase Shifting Transformer Funding Agreement with Cleco
Power, dated January 4, 2001. The agreement covers the purchase and
installation of a Phase Shifting Transformer. The installation of this
project concluded in 2003. Based on this agreement, the Company paid $0,
$1,052,238, and $0 for the purchase and installation of the transformer in
2004, 2003 and 2002, respectively to Cleco Power.
The Company has an Interconnection and Operating Agreement with Cleco
Power, dated February 25, 2000, pursuant to which the Company's generation
facilities are interconnected to Cleco Power's adjacent transmission
facilities and the transmission system of Entergy Services, Inc. The
Company is obligated to construct, own, operate and maintain all the
interconnection facilities and equipment on its side of the point of
interconnections, and Cleco Power is obligated to construct, own, operate,
and maintain the interconnection facilities and equipment on its side of
the point of interconnection. Based on this agreement, the Company has
reimbursed Cleco Power its construction costs and operating costs for
these customer specific interconnection facilities. The Company reimbursed
Cleco Power for those costs which totaled $45,594, $67,478, and $68,584,
in 2004, 2003 and 2002, respectively.
6. OTHER SIGNIFICANT AGREEMENTS
On October 9, 2000, the Company entered into a tolling agreement with
Aquila that was effective for 20 years beginning July 1, 2002. Under the
agreement, the Company granted Aquila the right to receive the output of
one train of the facility. In accordance with the terms of the contract,
Aquila supplied all fuel necessary to generate the energy it took and paid
the Company a capacity charge as well as an operation and maintenance fee.
Revenues recognized under this agreement were $0, $16,053,598, and
$23,784,443 in 2004, 2003 and 2002, respectively. Revenue includes $0, $0,
and $579,087 in 2004, 2003 and 2002, respectively, for sale of purchased
power to Aquila. The cost of this purchased power was recorded as purchase
power expense - related parties (See Note 5). On May 9, 2003, the Company
terminated its tolling agreement with Aquila (See Note 7).
The Company entered into an interconnection and operating agreement with
Entergy Gulf States, Inc. ("Entergy"), as amended and restated January 4,
2001. The agreement states that Entergy will reimburse the Company for
costs incurred by the Company for transmission system upgrades, totaling
approximately $4,740,000. Entergy will reimburse the Company for these
costs through future transmission credits or cash payments, as applicable.
The Company received in a combination of cash and credit reimbursements of
$484,934, $1,593,122, and $1,538,727 in 2004,
11
ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 and 2002, respectively, based on this agreement. Total deferred
transmission credit balances as of December 31, 2004 and 2003 were
$1,123,217, and $1,608,151 respectively, which were included in Other
Current Assets.
The Company entered into a Procurement and Marketing Agreement dated
October 9, 2003 with ONEOK Energy Marketing and Trading Company, L.P.
("ONEOK"), pursuant to which ONEOK shall arrange for the provision of
replacement power and test fuel, and the sale of test power and natural
gas that is not used by the Company's generation facility, as requested by
the Company from time to time. The Company shall pay ONEOK for all actual
costs incurred for this service (as defined in the agreement) plus a
service fee applicable to each MWh of replacement power and each MMBtu of
test fuel procured and/or sold during such month and a fixed fee. No
expenses were incurred by the Company in relation to this agreement in
2004, 2003 and 2002.
7. CONTRACT TERMINATION
The Company had previously entered into a tolling agreement dated October
9, 2000, with Aquila, which was effective for 20 years beginning July 1,
2002. Under the agreement, the Company had granted Aquila the right to
receive the output of one train of the Facility, consisting of
approximately one-half of the full capacity of the 1,160-MW Facility. On
May 9, 2003, the Company terminated its 580-MW, 20-year tolling agreement
with Aquila in return for a cash settlement of $105.5 million, which was
recognized as a gain in other income and expenses. CAH and Acadia Holdings
agreed to allocate the distributions as follows: (i) CAH received $105.5
million cash distribution in 2003; (ii) Acadia Holdings is entitled to
receive an annual priority cash distribution of $14.0 million starting
from July 2003 through June 30, 2022; (iii) all distributions in excess of
the first $14.0 million are allocated between members in accordance with
their respective interest; (iv) the priority distributions include imputed
interest based on the rate of approximately 11.6%. Imputed interest for
2004 and 2003 of $5.7 and $3.8 million was recorded as an adjustment to
the Members' capital balances.
8. SIGNIFICANT EVENTS
UNSCHEDULED OUTAGES
On June 30, 2004, Combustion Gas Turbine CT-12 failed. This Siemens
Westinghouse turbine was not under warranty at the time of failure.
However, the replacement cost for the damaged components are described
under the terms of the Long Term Service Agreement between the Company and
Siemens Westinghouse, which will be escalated as a result of the forced
outage. The cost of repairs performed by the third party contractors of
$5.5 million was included in plant operating expense for 2004.
On August 3, 2004, it was discovered that the exhaust cylinder for CT-12
had two cracked struts, requiring a second forced outage to replace the
cracked cylinder. The cost of repairs performed by the third party
contractors of $2.7 million was included in plant operating expense for
2004.
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ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
The Company entered into a long-term service agreement for spare parts,
maintenance and related technical services on May 3, 2002. The term of the
agreement, with respect to each of the Company's four combustion turbines
began upon the commercial operation date, and terminates on an individual
combustion turbine basis, at the end of the scheduled maintenance
following the second major inspection of each respective combustion
turbine or sixteen years, whichever comes first. The maintenance and
payment schedules are based on estimates of when maintenance will occur on
the turbines based on the number of run hours. The actual timing of
maintenance may vary based on actual hours run versus estimated hours run
due to operational and performance considerations. The agreement is
cancelable by the Company in whole or part at any time by providing
written notice to the counterparty. Upon notice to cancel by the Company,
the Company is subject to a declining cancellation fee. At December 31,
2004, the contingent cancellation fee was $2,000,000.
CES DISPUTE
IN a series of written notices commencing in May 2004, CES notified the
Company that CES was invoking certain rights regarding dispute resolution
under the two CES tolling agreements mentioned in Note 5 above and
requested that the Company conduct a simultaneous capacity test of both
Power Blocks of the Company's electric generation facility in the manner
specified within the notices. CES notified the Company that it may
withhold up to one-half of the monthly payments due to the Company under
the two CES tolling agreements, and may take other action, including,
without limitation, (i) unwinding Calpine's interest in the Company, (ii)
terminating the two CES tolling agreements, (iii) asserting claims against
Cleco Power for alleged flawed interconnection studies, and/or (iv)
seeking reimbursement for the alleged overpayment of capacity fees from
August 2003. CES has indicated that the dispute is primarily based upon
transmission constraints that, according to CES' allegations, limit CES'
ability to deliver the Company's capacity and energy to the wholesale
market. On September 27, 2004, CES sent a letter to the Company claiming
to be a notice of default under the two tolling agreements. In the letter,
CES claimed that the Company's refusal to conduct the requested
simultaneous capacity test was a default under the two CES tolling
agreements. Although CES did not expressly so state, the Company believed
that CES might attempt to use the test results as an alleged basis to
reduce its monthly payments to the Company under the two CES tolling
agreements. The Company performed the requested simultaneous test under
protest on October 12, 2004, while reserving all of its rights to assert
that such capacity test is not required by the testing provisions of the
two CES tolling agreements and does not entitle CES to any reduction in
its monthly capacity payments to the Company. Standard capacity test
results were comparable to previous tests and were within the parameters
of the two CES tolling agreements. Supplemental capacity testing was
suspended due to a minor mechanical problem with one of the Power Blocks.
Since the test, CES has sent a letter to the Company requesting that it
maintain, preserve and in some instances, produce records specified in the
letter relating to the test. The two CES tolling agreements allow CES and
the Company the right, under current conditions, to require up to four
capacity tests in any given contract year. The Company can give no
assurance as to the results of any such testing in the future. Under the
tolling agreements, binding arbitration is a means of resolving the
alleged dispute, although neither party has invoked arbitration to date.
The Company and CES are actively discussing resolution of the transmission
constraints with the regional transmission providers. There is no
assurance that these
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ACADIA POWER PARTNERS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
discussions will resolve any of CES's allegations of transmission
constraints. Through December 2004 and continuing in 2005, CES has
remitted full payment of the monthly tolling fees to the Company.
At this point, the Company is not aware of any formal arbitration
initiated by CES against the Company in connection with this dispute, but
in the event that it cannot avoid arbitration, the Company intends to
defend itself vigorously. In connection with any such arbitration (whether
instigated by the Company or CES), or upon the development of additional
material information, the Company expects to become able to estimate the
range of potential losses related to this dispute. Currently, the Company
is not able to develop such estimates. There is no assurance, however,
that the Company will not be liable for all or a portion of CES' claims or
any additional amount under the provisions of the two CES tolling
agreements, and a final adverse arbitration decision awarding substantial
monetary damages could have a material adverse impact on the Company's
financial condition, cash flows and results of operations.
10. SUBSEQUENT EVENT
On March 8, 2005, the Company received a letter from CES requesting a
refund of approximately $3.1 million less the $0.8 million outstanding
receivable from CES. CES claims errors in calculating the heat rate
performance of the Company's facility from January 2003 through July 2004.
The Company is reviewing the information supplied by CES and plans to
resolve this issue, including a refund if necessary, in 2005. The
Company's cost, and the timing of any accrual that the Company may be
required to make in connection with this matter cannot be estimated at
this time. As of December 31, 2004 the Company had reserved $0.4 million
for its receivable from CES. Based upon the limited information available,
the loss is currently estimated at a range of $0 to $2.7 million.
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