SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from. . . . . . . .to. . . . . . . . . . . . . . . . .
Commission file number 333-89725
AES Eastern Energy, L.P.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Exact name of registrant as specified in its charter)
Delaware 54-1920088
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 N. 19th Street, Arlington, Va. 22209
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 522-1315
N/A
... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
Former name, former address and former fiscal year, if changed since last
report.
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 [ ]
Registrant is a wholly owned subsidiary of The AES Corporation. Registrant meets
the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and
is filing this Quarterly Report on Form 10-Q with the reduced disclosure format
authorized by General Instruction H.
TABLE OF CONTENTS
PART I
Page
Item 1. Condensed Consolidated Financial Statements (Unaudited)
AES EASTERN ENERGY, L.P.
Condensed Consolidated Financial Statements:
Consolidated Statements of Income for the three months ended
March 31, 2002 and March 31, 2001...................................... 3
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 .. 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and March 31, 2001...................................... 5
Statement of Changes in Partners' Capital for the three months ended
March 31, 2002......................................................... 6
Notes to Condensed Consolidated Financial Statements..................... 7
AES NY, L.L.C. (General Partner of AES Eastern Energy, L.P.)*
Condensed Consolidated Balance Sheets:
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001
Notes to Condensed Consolidated Balance Sheets........................... 12
* The condensed consolidated balance sheets of AES NY, L.L.C. contained in this
Quarterly Report on Form 10-Q should be considered only in connection with
its status as the general partner of AES Eastern Energy, L.P.
Item 2. Discussion and Analysis of Results of Operations and
Financial Condition
(a) Results of Operations......................................... 17
(b) Liquidity and Capital Resources............................... 19
PART II
Item 1. Legal Proceedings.................................................. 22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits...................................................... 22
(b) Reports on Form 8-K........................................... 22
Signature.................................................................... 23
2
PART 1 - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
AES Eastern Energy, L.P.
Condensed Consolidated Statements of Income
For the three months ending March 31, 2002 and March 31, 2001
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Three months ended March 31, 2002 2001
---- ----
Operating Revenues
Energy $69,052 $94,087
Capacity 5,452 7,736
Transmission congestion contract 6,337 6,896
Other 3,679 2,686
--------- --------
Total operating revenues 84,520 111,405
Operating Expenses
Fuel 34,542 36,024
Operations and maintenance 3,133 3,492
General and administrative 12,463 14,390
Depreciation and amortization 8,682 8,108
--------- --------
Total Operating Expenses 58,820 62,014
--------- --------
Operating Income 25,700 49,391
Other Income/(Expense)
Interest expense (14,415) (14,956)
Interest income 478 951
Gain on derivative valuation 91 69
-------- --------
Net Income $11,854 $35,455
========= ========
The notes are an integral part of the condensed consolidated financial
statements.
3
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES Eastern Energy, L.P.
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
(Amounts in Thousands)
- --------------------------------------------------------------------------------
March 31, Dec. 31,
2002 2001
-------- -------
ASSETS
Current Assets
Restricted cash:
Operating- cash and cash equivalents $ 2,376 $ 4,193
Revenue Account 33,164 71,606
Accounts receivable - trade 26,704 27,590
Accounts receivable - affiliates - 319
Accounts receivable - other 1,761 2,123
Inventory 26,188 29,615
Prepaid expenses 8,583 6,464
---------- ----------
Total Current Assets 98,776 141,910
---------- ----------
Property, Plant, Equipment and Related Assets
Land 6,900 6,884
Electric generation assets (net of accumulated
depreciation of $69,277 and $62,623) 727,438 732,278
Other intangible assets (net of accumulated
amortization of $21,959 and $19,941) 223,846 225,864
---------- ----------
Total property, plant, equipment and
related assets 958,184 965,026
---------- ---------
Other Assets
Derivative valuation 35,004 55,182
Transmission congestion contract 3,622 -
Rent reserve account 31,339 31,719
---------- ----------
Total Assets $1,126,925 $1,193,837
========== ==========
LIABILITIES
Current Liabilities
Accounts payable $ 788 $ 1,663
Lease financing - current 4,420 6,223
Environmental remediation 15 155
Accrued interest expense 14,177 28,353
Due to The AES Corporation and affiliates 6,615 6,414
Other accrued expenses 10,476 14,397
Other liabilities and accrued expenses 3,146 4,629
---------- ----------
Total Current Liabilities 39,637 61,834
---------- ----------
Long-term liabilities
Lease financing - long term 638,511 639,326
Environmental remediation 10,093 11,442
Defined benefit plan obligation 17,482 16,968
Derivative valuation liability 23,417 26,665
Transmission congestion contract - 3,506
Other liabilities 1,274 1,057
--------- ----------
Total Long-term Liabilities 690,777 698,964
--------- ----------
Total Liabilities 730,414 760,798
Commitments and Contingencies (Note 2)
PARTNERS' CAPITAL 396,511 433,039
---------- ----------
Total Liabilities and Partners' Capital $1,126,925 $1,193,837
========== ==========
The notes are an integral part of the condensed consolidated financial
statements.
4
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES Eastern Energy, L.P.
Condensed Consolidated Statements of Cash Flows
For the three months ending March 31, 2002 and March 31, 2001
(Amounts in Thousands)
- -------------------------------------------------------------------------------------
Three months Three months
ended ended
March 31, 2002 March 31, 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 11,854 $ 35,455
Adjustments to reconcile net income to
Net cash (used in) operating activities:
Depreciation and amortization 8,672 8,108
Gain on transmission congestion
contract valuation (7,128) (6,398)
Gain on derivative (91) (69)
Net defined benefit plan cost 514 385
Changes in current assets and liabilities:
Accounts receivable 1,567 3,408
Inventory 3,427 (2,387)
Prepaid expenses (2,119) 616
Accounts payable (875) 178
Accrued interest expense (14,176) (13,106)
Due to AES Corporation and affiliates 201 1,084
Other liabilities (3,921) (1,838)
Other accrued expenses (2,757) (1,482)
--------- ---------
Net cash (used in) provided by operating activities (4,832) 23,954
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for capital additions (1,829) (2,482)
Decrease in restricted cash 40,259 12,220
Net change in rent reserve account 380 (264)
--------- ---------
Net cash provided by investing activities 38,810 9,474
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (32,560) (32,500)
Payments for deferred financing - (468)
Principal payments on lease obligations (2,618) (460)
Partner's contribution 1,200 -
--------- ---------
Net cash used in financing activities (33,978) (33,428)
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS - -
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - -
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ -
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 27,493 $ 28,062
========= =========
The notes are an integral part of the condensed consolidated financial
statements.
5
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES Eastern Energy, L.P.
Consolidated Statement of Changes in Partners' Capital
For the three months ended March 31, 2002
(Amounts in Thousands)
- -------------------------------------------------------------------------------------------------------------
Accumulated
Other
General Limited Comprehensive Comprehensive
Partner Partner Total Income(loss) Income(loss)
------- ------- -------- ------------- ------------
Balance, December 31, 2001 $4,331 $428,708 $433,039 $28,544
Partners' contribution 12 1,188 1,200
Net income 119 11,735 11,854 $ 11,854
Distributions paid (326) (32,234) (32,560)
Accumulated other comprehensive income(loss) (170) (16,852) (17,022) (17,022) (17,022)
------- --------- --------- ------------ -----------
Comprehensive Income(loss) $11,522 $(5,168)
============ ===========
Balance, March 31, 2002 $3,966 $392,545 $396,511
======= ========= =========
The notes are an integral part of the condensed consolidated financial
statements.
6
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
Notes to the Condensed Consolidated Financial Statements
Note 1. Unaudited Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements of AES
Eastern Energy, L.P. (the Partnership) reflect all adjustments which are
necessary, in the opinion of management, for a fair presentation of the
Partnership's consolidated results for the interim periods. All such adjustments
are of a normal recurring nature. The unaudited condensed consolidated financial
statements should be read in conjunction with the Partnership's consolidated
financial statements as of December 31, 2001 and for the year then ended and
notes contained therein, which are set forth in the Partnership's Annual Report
on Form 10-K for the year ended December 31, 2001.
Note 2. Commitments and Contingencies
Coal Purchases - In connection with the acquisition of the Partnership's four
coal-fired electric generating stations (the Plants), the Partnership assumed
from New York State Electric & Gas Corporation (NYSEG) an agreement to purchase
the coal required by the Somerset and Cayuga Plants. Each year, either party can
request renegotiation of the price of one-third of the coal supplied pursuant to
this agreement. During 2001 the coal suppliers were committed to sell and the
Partnership was committed to purchase all three lots of coal for the Somerset
Plant as well as 70% of the anticipated coal purchases for the Cayuga Plant. The
supplier requested renegotiation during 2001 for the 2002 lot but the parties
failed to reach agreement. Therefore, the parties have current commitments with
respect to only two lots in 2002 and 50% of the anticipated coal purchases at
the Cayuga Plant. Either party may request renegotiation during 2002 on the
third lot, and a request could be made to renegotiate the lot for which an
agreement was not reached in the prior year. Therefore, the commitment of the
Partnership that is not subject to renegotiation and possible cancellation for
2003 is one lot plus 50% of the estimated coal usage for the Cayuga Plant. The
termination date for the contract is December 31, 2003. No later than June 30,
2003, the parties shall meet to determine if the agreement is to be extended
under mutually agreeable terms and conditions. If the agreement were not
extended, the Partnership would seek a new coal supplier. As of the acquisition
date of the Plants, the contract prices for the coal purchased through 2002 were
above the market price, and the Partnership recorded a purchase accounting
liability for approximately $15.7 million related to the fulfillment of its
obligation to purchase coal under this agreement. The purchase accounting
liability is amortized as a reduction to coal expense over the life of the
contract. As of March 31, 2002, the remaining liability was approximately $2.6
million.
As of March 31, 2002, the remaining anticipated coal purchases for the year
ending December 31, 2002 were between $99.2 and $129.2 million. Based on the
coal purchase commitments for 2003, the Partnership has expected coal purchases
ranging between $20.7 million and $24.7 million.
Transmission Agreements - On August 3, 1998, AES NY, L.L.C., the general partner
of the Partnership (the General Partner), entered into an agreement for the
purpose of transferring certain rights and obligations from NYSEG to the General
Partner under an existing transmission agreement among Niagara Mohawk Power
Corporation (NIMO), the New York Power Authority, NYSEG and Rochester Gas &
Electric Corporation, and an existing transmission agreement between NYSEG and
NIMO. This agreement provides for the assignment of rights to transmit energy
from the Somerset Plant and other sources to remote load areas and other
delivery points, and was assumed by the Partnership on the date of acquisition
of the Plants. In accordance with its plan, as of the acquisition date, the
Partnership discontinued using this service. The Partnership did not transmit
over these lines but was required to pay the current fees until the effective
cancellation date, November 19, 1999. These fees aggregated approximately $3.4
million over the six months ended December 31, 1999, and were recorded as a
purchase accounting liability. Because the Partnership did not use the lines
during this period, the Partnership received no economic benefit subsequent to
the acquisition.
The Partnership was informed by NIMO that the Partnership would be responsible
for the monthly fees of $500,640 under the existing transmission agreement to
the originally scheduled termination date of October 1, 2004. On October 5,
1999, the Partnership filed a complaint against NIMO alleging that the
Partnership has a right to non-firm transmission service upon six months prior
notice without payment of $500,640 in monthly fees subsequent to the
cancellation date of November 19, 1999.
7
On March 9, 2000, a settlement was reached between the Partnership and NIMO,
which was approved by the Federal Energy Regulatory Commission (FERC). According
to the settlement, the Partnership will continue to pay NIMO a fixed rate of
$500,640 per month during the period of November 20, 1999 to October 1, 2004,
and in turn, will receive a form of transmission service commencing on May 1,
2000, which the Partnership believes will provide an economic benefit over the
period of May 1, 2000 to October 1, 2004.
The Partnership has the right under a Remote Load Wheeling Agreement (RLWA) to
transmit 298 MW over firm transmission lines from the Somerset Plant. The
Partnership has the right to designate alternate points of delivery on NIMO's
transmission system provided that the Partnership is not entitled to receive any
transmission service charge credit on the NIMO system.
On November 1, 2000, the effective date of the final settlement, the
transmission contract was classified as an energy-trading contract as defined in
Emerging Issues Task Force (EITF) No. 98-10, Accounting for Contracts Involved
in Energy Trading and Risk Management Activities. From January 1, 2001 the
contract was accounted for as a derivative under SFAS No. 133. The transmission
contract was entered into because it provided a reasonable settlement for
resolving a FERC issue. The agreement is essentially a swap between the
congestion component of the locational prices posted daily by the New York ISO
in western New York and the more heavily populated areas in eastern New York.
The agreement is a financially settled contract since there is no requirement to
flow power under this agreement. The agreement generates gains or losses from
exposure to shifts or changes in market prices. The Partnership recorded income
of approximately $6.3 million in the first three months of 2002 related to this
contract.
Line of Credit Agreement - On May 14, 1999, the Partnership established a
three-year revolving working capital credit facility of up to $50 million for
the purpose of making funds available to pay for certain operating and
maintenance costs. This facility was terminated as of March 9, 2001. In April
2001, the Partnership entered into a $35 million secured revolving working
capital and letter of credit facility with Union Bank of California, N.A. This
facility has a term of approximately twenty-one months. The Partnership can
borrow up to $35 million for working capital purposes under this facility. In
addition, the Partnership can have letters of credit issued under this facility
up to $25 million, provided that the total amount of working capital borrowings
and letters of credit issuances may not exceed the $35 million limit on the
entire facility. Since the new facility was signed, there have been two
borrowings. The first borrowing was for $7 million on July 13, 2001 at an
interest rate of 8.125%. The borrowing was repaid on July 31, 2001. The second
borrowing was for $8.5 million on January 11, 2002 at an interest rate of
6.125%. The borrowing was repaid in full on February 28, 2002.
Environmental - The Partnership has recorded a liability for environmental
remediation associated with the acquisition of the Plants. On an ongoing basis,
the Partnership monitors its compliance with environmental laws. Because of the
uncertainties associated with environmental compliance and remediation
activities, future costs of compliance or remediation could be higher or lower
than the amount currently accrued.
The Partnership received an information request letter dated October 12, 1999
from the New York Attorney General, which seeks detailed operating and
maintenance history for the Westover and Greenidge Plants. On January 13, 2000,
the Partnership received a subpoena from the New York State Department of
Environmental Conservation (DEC) seeking similar operating and maintenance
history from the Plants. This information is being sought in connection with the
Attorney General's and the DEC's investigations of several electricity
generating stations in New York that are suspected of undertaking modifications
in the past without undergoing an air permitting review. If the Attorney General
or the DEC does file an enforcement action against the Somerset, Cayuga,
Westover, or Greenidge Plants, then penalties may be imposed and further
emission reductions might be necessary at these Plants. The Partnership is
unable to estimate the impact, if any, of these investigations on its financial
condition or results of future operations. On April 14, 2000, the Partnership
received a request for information pursuant to Section 114 of the Clean Air Act
from the U.S. Environmental Protection Agency (EPA) seeking detailed operating
and maintenance history data for the Cayuga and Somerset Plants. The EPA has
commenced an industry-wide investigation of coal-fired electric power generators
to determine compliance with environmental requirements under the Clean Air Act
associated with repairs, maintenance, modifications and operational changes made
to coal-fired facilities over the years. The EPA's focus is on whether the
changes were subject to new source review or new source performance standards,
and whether best available control technology was or should have been used. The
Partnership has provided the requested documentation, and the EPA is currently
evaluating the materials. The Partnership is unable to estimate the impact, if
any, of this investigation on its financial condition or results of future
operations.
8
By letter dated May 25, 2000, the DEC issued a Notice of Violation (NOV) to
NYSEG for violations of the Clean Air Act and the Environmental Conservation Law
at the Greenidge and Westover Plants related to NYSEG's alleged failure to
obtain an air permitting review for repairs and improvements made during the
1980s and 1990s, which was prior to the acquisition of the Plants by the
Partnership. Pursuant to the purchase agreement relating to the acquisition of
the Plants from NYSEG, the Partnership agreed to assume responsibility for
environmental liabilities that arose while NYSEG owned the Plants. On September
12, 2000, the Partnership agreed with NYSEG that the Partnership will assume the
defense of and responsibility for the NOV, subject to a reservation of its right
to assert applicable exceptions to its contractual undertaking to assume
preexisting environmental liabilities. The financial and operational effect of
this NOV is still being discussed with the DEC.
The Partnership is unable to estimate the effect of this NOV on its financial
condition or results of future operations. It is possible that the DEC NOV and
other potential enforcement actions arising out of the Attorney General, DEC,
and EPA investigations may result in penalties and the potential requirement to
install additional air pollution control equipment and could require the
Partnership to make substantial expenditures.
Nitrogen Oxide and Sulfur Dioxide Emission Allowances - The Plants emit nitrogen
oxide (NOX) and sulfur dioxide (SO2) as a result of burning coal to produce
electricity. The Plants have been allocated allowances by the DEC to emit NOX
during the ozone season, which runs from May 1 to September 30. Each NOX
allowance authorizes the emission of one ton of NOX during the ozone season. The
Plants are also subject to SO2 emission allowance requirements imposed by the
EPA. Each SO2 allowance authorizes the emission of one ton of SO2 during the
calendar year. Both NOX and SO2 allowances may be bought, sold, or traded. If
NOX and/or SO2 emissions exceed the allowance amounts allocated to the Plants,
then the Partnership may need to purchase additional allowances on the open
market or otherwise reduce its production of electricity to stay within the
allocated amounts. The Plants were net sellers of NOX allowances in 2001, and
are also expected to have a surplus of NOX allowances in 2002. The Plants were
self-sufficient with respect to SO2 allowances in 2001; however, it is expected
that the Plants may have a shortfall of approximately 10,000 to 13,000 SO2
allowances in 2002 assuming the Plants are operated at capacities similar to
2001. At current market prices, the cost could range from $1.7 million to $2.2
million to purchase sufficient SO2 allowances for 2002.
On October 16, 2001, AES Greenidge was awarded a Federal Clean Coal Grant that,
if accepted, will fund 50% of the capital costs and 30% of the operations and
maintenance costs for backend technology. This technology will include a single
bed, in-duct Selective Catalytic Reduction (SCR) unit in combination with
low-NOX combustion technology, on Greenidge Unit 4 firing on coal and biomass.
It will also include a Circulating Dry Scrubber (CDS) for SO2, Mercury and acid
gas removal. AES Greenidge's share of the project's costs will be approximately
$9.8 million.
The Partnership is obligated to make payments under the Coal Hauling Agreement
with Somerset Railroad Corporation (SRC), an affiliated company, in an amount
sufficient, when added with funds available from other sources, to enable SRC to
pay, when due, all of its operating expenses and other expenses, including
interest on and principal of outstanding indebtedness. As of March 31, 2002 and
2001, The Partnership recorded $1.0 million and $1.3 million, respectively, as
operating expenses and other accrued liabilities under this agreement. On August
14, 2000, SRC entered into a $26 million credit facility with Fortis Capital
Corp. which replaced in its entirety a credit facility for the same amount
previously provided to SRC by an affiliate of CIBC World Markets. The new credit
facility provided by Fortis Capital Corp. consists of a 14-year term note
(maturing on May 6, 2014), with principal and interest payments due quarterly.
The current interest rate on the loans under this credit facility is equal to a
Base Rate plus 0.625% for the Base Rate loans and LIBOR plus 1.375% for LIBOR
loans. The principal amount of SRC's outstanding indebtedness under this credit
facility was approximately $22.8 million as of March 31, 2002.
The agreements governing the leases of the Somerset and Cayuga Plants include
negative covenants restricting the Partnership's ability to incur indebtedness
and to make payments to its partners (which are referred to as restricted
payments). The incurrence of indebtedness covenant states that neither the
Partnership nor any of its subsidiaries may create, incur, assume, suffer to
exist, guarantee or otherwise become directly or indirectly liable with respect
to indebtedness except for permitted indebtedness. Neither SRC nor the limited
liability company that owns SRC may incur any indebtedness, other than the SRC
credit facility or a replacement facility or other than any operating leases in
respect of rail assets, without the written consent of the institutional
investors that organized the trusts that own the Somerset and Cayuga Plants and
lease them to the Partnership. These agreements do permit
9
the Partnership to incur indebtedness for certain purposes and subject to
applicable limits, including indebtedness to finance modifications to the
Somerset and Cayuga Plants required by law and up to $100,000,000 of additional
indebtedness, provided that no more than $75,000,000 of such additional
indebtedness may be incurred to provide working capital and no more than
$50,000,000 of such additional indebtedness may be secured by liens upon the
Partnership's assets and no more than $25,000,000 of such additional
indebtedness may be incurred for purposes other than to provide working capital.
The covenant restricting incurrence of indebtedness will restrict the
Partnership's future ability to obtain additional debt financing for working
capital, capital expenditures or other purposes.
Note 3. Comprehensive Income
Comprehensive Income - In 1999, the Partnership adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which
establishes rules for the reporting of comprehensive income and its components.
As of March 31, 2002, the Partnership has recorded $11.5 million of other
comprehensive income due to the adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In the years prior to the
adoption of SFAS No. 133, the Partnership did not have any items of other
comprehensive income.
On January 1, 2001, the Partnership adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which, as amended and
interpreted, established new accounting and reporting standards for derivative
instruments and hedging activities. The Statement requires that the Partnership
recognize all derivatives, as defined in the Statement, on the balance sheet at
fair value. Derivatives, or any portion thereof, that are not effective hedges
are adjusted to fair value through income. Derivatives that are effective hedges
are adjusted to fair value through other comprehensive income (loss) until the
hedged items are recognized in earnings. The adoption of SFAS No. 133 on January
1, 2001, resulted in a cumulative reduction of Other Comprehensive Income (OCI)
in Partner's Capital of $66.3 million.
The Partnership utilizes derivative financial instruments to hedge commodity
price risk. The Partnership utilizes electric derivative instruments, including
swaps and forwards, to hedge the risk related to forecasted electricity sales
over the next four years. The majority of the Partnership's electric derivatives
are designated and qualify as cash flow hedges. No hedges were derecognized or
discontinued during the three months ended March 31, 2002. No significant
amounts of hedge ineffectiveness were recognized in earnings during the three
months ended March 31, 2002.
Gains and losses on derivatives reported in accumulated other comprehensive
income are reclassified into earnings when the hedged forecasted sale occurs.
Approximately $3 million of other comprehensive income is expected to be
recognized as an addition to earnings over the next twelve months. Amounts
recorded in other comprehensive income during the three months ended March 31,
2002, were as follows (in millions):
Balance as of December 31, 2001 $28.5
Reclassified to earnings 11.9
Change in fair value (28.9)
------
Balance, March 31, 2002 $11.5
======
In addition to the electric derivatives classified as cash flow hedge contracts,
the Partnership has a Transmission Congestion Contract that is a derivative
under the definition of SFAS No.133, but does not qualify for hedge accounting.
This contract is recorded at fair value on the balance sheet with changes in the
fair value recognized through earnings. In 2000, this contract was also recorded
at fair value with changes in fair value recorded through income under the
requirements of EITF No. 98-10, Accounting for Contracts Involved in Energy
Trading and Risk Management Activities.
Note 4. New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, entitled, "Goodwill and Other
Intangible Assets". This standard eliminates the amortization of goodwill, and
requires goodwill to be reviewed periodically for impairment. This standard also
requires the useful lives of previously recognized assets to be adjusted
accordingly. This standard is effective for fiscal years beginning after
December 15, 2001, for all goodwill and other intangible assets recognized on
the Partnership's balance sheet at that date, regardless of when the assets were
initially recognized. The Partnership will continue to amortize the other
intangible assets currently recorded on the balance sheet. Any impairment will
be determined in accordance with the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of," and SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived
Assets." The Partnership has until June 30, 2002 to determine if an impairment
exists and has not determined the effects of this standard on its financial
reporting.
10
In July 2001, the FASB issued SFAS No. 143, entitled "Accounting for Asset
Retirement Obligations". This standard is effective for fiscal years beginning
after June 15, 2002, and provides accounting requirements for asset retirement
obligations associated with tangible long-lived assets. The Partnership has not
determined the effects of this standard on its financial reporting.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." The provisions of this statement are effective
for financial statements issued for fiscal years beginning after December 15,
2001, and address reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 provides guidance for developing estimates of future cash flows
used to test assets for recoverability and requires that assets to be disposed
of be classified as held for sale when certain criteria are met. The statement
also extends the reporting of discontinued operations to all components of an
entity and provides guidance for recognition of a liability for obligations
associated with disposal activity. The Partnership believes that the initial
adoption of the provisions of SFAS No. 144 will not have any material impact on
its financial position or results of operations.
Note 5. Reclassifications
Certain 2001 amounts have been reclassified in the condensed consolidated
financial statements to conform with the 2002 presentation.
11
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES NY, L.L.C.
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
(Amounts in Thousands)
- -----------------------------------------------------------------------------------------
March 31, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets
Restricted cash:
Operating - cash and cash equivalents $ 3,585 $ 5,805
Revenue account 33,164 71,606
Accounts receivable - trade 26,704 27,590
Accounts receivable - affiliates 2,935 3,254
Accounts receivable - other 2,515 2,316
Inventory 26,188 29,615
Prepaid expenses 8,710 6,539
---------- ----------
Total Current Assets 103,801 146,725
Property, Plant, Equipment and Related Assets
Land 7,350 7,334
Electric generation assets(net of accumulated
depreciation of $73,818 and $66,962) 728,337 733,473
Other intangible assets(net of accumulated
amortization of $21,958 and $19,941) 223,847 225,864
---------- ----------
Total property, plant, equipment
and related assets 959,534 966,671
Other Assets
Derivative valuation asset 35,004 55,182
Transmission congestion contract 3,621 -
Rent reserve account 31,339 31,719
----------- -----------
Total Assets $1,133,299 $1,200,297
=========== ============
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities
Accounts payable $ 788 $1,663
Lease financing - Current 4,420 6,223
Environmental remediation 30 155
Accrued interest expense 14,177 28,353
Due to The AES Corporation and affiliates 6,843 6,586
Other accrued expenses 10,678 14,772
Other liabilities 3,147 4,629
---------- ----------
Total Current Liabilities 40,083 62,381
Long-term liabilities
Lease financing - long-term 638,511 639,326
Environmental remediation 11,847 13,420
Defined benefit plan obligation 17,175 16,630
Other liabilities 1,274 1,058
Derivative valuation liability 23,417 26,665
Transmission Congestion Contract - 3,506
---------- ----------
Total Long-term Liabilities 692,224 700,605
---------- ----------
Total Liabilities 732,307 762,986
Commitments and Contingencies (Note 3)
Minority Interest 396,983 432,938
Member's Equity 4,009 4,373
----------- ----------
Total Liabilities and Member's Equity $1,133,299 $1,200,297
=========== ===========
The notes are an integral part of the condensed consolidated financial
statements.
12
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
Note 1. Condensed Consolidated Balance Sheets
The accompanying unaudited condensed consolidated balance sheets of AES NY,
L.L.C. (the Company) reflect all adjustments which are necessary, in the opinion
of management, for a fair presentation of the Company's consolidated financial
position for the interim periods. All such adjustments are of a normal recurring
nature. The unaudited condensed consolidated balance sheets should be read in
conjunction with the Company's consolidated balance sheet as of December 31,
2001 and notes contained therein, which are set forth in the Annual Report on
Form 10-K of AES Eastern Energy, L.P. (AEE) for the year ended December 31,
2001.
Note 2. Plants Placed on Long-Term Cold Standby
During the fourth quarter of 2000, AES Creative Resources, L.P. (ACR) placed its
AES Hickling and AES Jennison plants (ACR Plants) on long-term cold standby. The
long-term cold standby designation means that these plants require more than 14
days to be brought on-line. The Company is currently evaluating the future of
these plants. AES Hickling will be fully depreciated at the end of the current
year. AES Jennison is currently fully depreciated.
Note 3. Commitments and Contingencies
Coal Purchases - In connection with the acquisition by AEE of its four
coal-fired electric generating stations (the AEE Plants), AEE assumed from New
York State Electric & Gas Corporation (NYSEG) an agreement to purchase the coal
required by the AEE Somerset and Cayuga plants. Each year either party can
request renegotiation of the price of one-third of the coal supplied pursuant to
this agreement. During 2001, the coal suppliers were committed to sell and AEE
was committed to purchase all three lots of coal for the Somerset Plant as well
as 70% of the anticipated coal purchases for the Cayuga Plant. The supplier
requested renegotiation during 2001 for the 2002 lot, but the parties failed to
reach agreement. Therefore, the parties have current commitments with respect to
only two lots in 2002 and 50% of the anticipated coal purchases at the Cayuga
Plant. Either party may request renegotiation during 2002 on the third lot, and
a request could be made to renegotiate the lot for which an agreement was not
reached in the prior year. Therefore, the commitment of AEE that is not subject
to renegotiation and possible cancellation for 2003 is one lot plus 50% of the
estimated coal usage for Cayuga. The termination date for the contract is
December 31, 2003. No later than June 30, 2003, the parties shall meet to
determine if the agreement is to be extended under mutually agreeable terms and
conditions. If the agreement were not extended, AEE would seek a new coal
supplier. As of the acquisition date of the Plants, the contract prices for the
coal purchased through 2002 were above the market price, and AEE recorded a
purchase accounting liability for approximately $15.7 million related to the
fulfillment of its obligation to purchase coal under this agreement. The
purchase accounting liability is amortized as a reduction to coal expense over
the life of the contract. As of March 31, 2001, the remaining liability was
approximately $2.6 million.
As of March 31, 2001, the remaining anticipated coal purchases for the year
ending December 31, 2001 was between $99.2 and $129.2 million. Based on the coal
purchase commitments for 2003, AEE has expected coal purchases ranging between
$20.7 million and $24.7 million.
Transmission Agreements - On August 3, 1998, the Company entered into an
agreement for the purpose of transferring certain rights and obligations from
NYSEG to the Company under an existing transmission agreement among Niagara
Mohawk Power Corporation (NIMO), the New York Power Authority, NYSEG and
Rochester Gas & Electric Corporation, and an existing transmission agreement
between NYSEG and NIMO. This agreement provides for the assignment of rights to
transmit energy from the Somerset Plant and other sources to remote load areas
and other delivery points, and was assumed by AEE on the date of acquisition of
the Plants. In accordance with its plan, as of the acquisition date, AEE
discontinued using this service. AEE did not transmit over these lines but was
required to pay the current fees until the effective cancellation date, November
19, 1999. These fees aggregated approximately $3.4 million over the six months
ended December 31, 1999, and were recorded as a purchase accounting liability.
Because AEE did not use the lines during this period, AEE received no economic
benefit subsequent to the acquisition.
AEE was informed by NIMO that AEE would be responsible for the monthly fees of
$500,640 under the existing transmission agreement to the originally scheduled
termination date of October 1, 2004. On October 5, 1999, AEE filed a complaint
against NIMO alleging that AEE has a right to non-firm transmission service upon
six months prior notice without payment of $500,640 in monthly fees subsequent
to the cancellation date of November 19, 1999.
13
On March 9, 2000, a settlement was reached between AEE and NIMO, which was
approved by the Federal Energy Regulatory Commission (FERC). According to the
settlement, AEE will continue to pay NIMO a fixed rate of $500,640 per month
during the period of November 20, 1999 to October 1, 2004 and, in turn, will
receive a form of transmission service commencing on May 1, 2000, which AEE
believes will provide an economic benefit over the period of May 1, 2000 to
October 1, 2004.
AEE has the right under a Remote Load Wheeling Agreement (RLWA) to transmit 298
MW over firm transmission lines from the Somerset Plant. AEE has the right to
designate alternate points of delivery on NIMO's transmission system provided
that AEE is not entitled to receive any transmission service charge credit on
the NIMO system.
On November 1, 2000, the effective date of the final settlement, the
transmission contract was classified as an energy-trading contract as defined in
Emerging Issues Task Force (EITF) No. 98-10, Accounting for Contracts Involved
in Energy Trading and Risk Management Activities. From January 1, 2001 the
contract was accounted for as a derivative under SFAS No. 133. The transmission
contract was entered into because it provided a reasonable settlement for
resolving a FERC issue. The agreement is essentially a swap between the
congestion component of the locational prices posted daily by the New York ISO
in western New York and the more heavily populated areas in eastern New York.
The agreement is a financially settled contract since there is no requirement to
flow power under this agreement. The agreement generates gains or losses from
exposure to shifts or changes in market prices. AEE recorded income of
approximately $6.3 million in the first three months of 2002 related to this
contract.
Line of Credit Agreement - On May 14, 1999, AEE established a three-year
revolving working capital credit facility of up to $50 million for the purpose
of making funds available to pay for certain operating and maintenance costs.
This facility was terminated as of March 9, 2001. In April 2001, AEE entered
into a $35 million secured revolving working capital and letter of credit
facility with Union Bank of California, N.A. This facility has a term of
approximately twenty-one months. AEE can borrow up to $35 million for working
capital purposes under this facility. In addition, AEE can have letters of
credit issued under this facility up to $25 million, provided that the total
amount of working capital borrowings and letters of credit issuances may not
exceed the $35 million limit on the entire facility. Since the new facility was
signed, there have been two borrowings. The first borrowing was for $7 million
on July 13, 2001 at an interest rate of 8.125%. The borrowing was repaid on July
31, 2001. The second borrowing was for $8.5 million on January 11, 2002 at an
interest rate of 6.125%. The borrowing was repaid in full on February 28, 2002.
Environmental - The Company has recorded a liability for environmental
remediation associated with the acquisition of the AEE Plants and the ACR
Plants. On an ongoing basis, the Company monitors its compliance with
environmental laws. Because of the uncertainties associated with environmental
compliance and remediation activities, future costs of compliance or remediation
could be higher or lower than the amount currently accrued.
AEE received an information request letter dated October 12, 1999 from the New
York Attorney General, which seeks detailed operating and maintenance history
for the Westover and Greenidge Plants. On January 13, 2000, the Company received
a subpoena from the New York State Department of Environmental Conservation
(DEC) seeking similar operating and maintenance history from the AEE and ACR
Plants. This information is being sought in connection with the Attorney
General's and the DEC's investigations of several electricity generating
stations in New York that are suspected of undertaking modifications in the past
without undergoing an air permitting review. If the Attorney General or the DEC
does file an enforcement action against the Somerset, Cayuga, Westover, or
Greenidge Plants, then penalties may be imposed and further emission reductions
might be necessary at these Plants. The Company is unable to estimate the
impact, if any, of these investigations on its financial condition or results of
operations.
On April 14, 2000, AEE received a request for information pursuant to Section
114 of the Clean Air Act from the U.S. Environmental Protection Agency (EPA)
seeking detailed operating and maintenance history data for the Cayuga and
Somerset Plants. The EPA has commenced an industry-wide investigation of
coal-fired electric power generators to determine compliance with environmental
requirements under the Clean Air Act associated with repairs, maintenance,
modifications and operational changes made to coal-fired facilities over the
years. The EPA's focus is on whether the changes were subject to new source
review or new source performance standards, and whether best available control
technology was or should have been used. AEE has provided the requested
documentation and the EPA is currently evaluating the materials. AEE is unable
to estimate the impact, if any, of this investigation on its financial condition
or results of future operations.
14
By letter dated May 25, 2000, the DEC issued a Notice of Violation (NOV) to
NYSEG for violations of the Clean Air Act and the Environmental Conservation Law
at the Greenidge and Westover Plants related to NYSEG's alleged failure to
obtain an air permitting review for repairs and improvements made during the
1980s and 1990s, which was prior to the acquisition of the Plants by AEE.
Pursuant to the purchase agreement relating to the acquisition of the Plants
from NYSEG, AEE agreed to assume responsibility for environmental liabilities
that arose while NYSEG owned the Plants. On September 12, 2000, AEE agreed with
NYSEG that AEE will assume the defense of and responsibility for the NOV,
subject to a reservation of its right to assert applicable exceptions to its
contractual undertaking to assume preexisting environmental liabilities. The
financial and operational effect of this NOV is still being discussed with the
DEC.
The Company is unable to estimate the effect of this NOV on its financial
condition or results of future operations. It is possible that the DEC NOV and
other potential enforcement actions arising out of the Attorney General, DEC,
and EPA investigations may result in penalties and the potential requirement to
install additional air pollution control equipment and could require AEE to make
substantial expenditures.
Nitrogen Oxide and Sulfur Dioxide Emission Allowances - The AEE Plants emit
nitrogen oxide (NOX) and sulfur dioxide (SO2) as a result of burning coal to
produce electricity. The six Plants have been allocated allowances by the DEC to
emit NOX during the ozone season, which runs from May 1 to September 30. Each
NOX allowance authorizes the emission of one ton of NOX during the ozone season.
The six Plants are also subject to SO2 emission allowance requirements imposed
by the EPA. Each SO2 allowance authorizes the emission of one ton of SO2 during
the calendar year. Both NOX and SO2 allowances may be bought, sold, or traded.
If NOX and/or SO2 emissions exceed the allowance amounts allocated to the six
Plants, then the Company may need to purchase additional allowances on the open
market or otherwise reduce its production of electricity to stay within the
allocated amounts. The Plants were net sellers of NOX allowances in 2001. The
Plants were self-sufficient with respect to SO2 allowances in 2000 and 2001;
however, it is expected that the Plants may have a shortfall of approximately
10,000 to 13,000 SO2 allowances in 2002 assuming the Plants are operated at
capacities similar to 2001. At current market prices, the cost could range from
$1.7 million to $2.2 million to purchase sufficient SO2 allowances for 2002.
On October 16, 2001, AES Greenidge was awarded a Federal Clean Coal Grant that,
if accepted, will fund 50% of the capital costs for backend technology and 30%
of the operations and maintenance costs for a test and demonstration period.
This technology will include a single bed, in-duct Selective Catalytic Reduction
(SCR) unit in combination with low-NOX combustion technology, on Greenidge Unit
4 firing on coal and biomass. It will also include a Circulating Dry Scrubber
(CDS) for SO2, Mercury and acid gas removal. AES Greenidge's share of the costs
for the 54 month project will be approximately $9.8 million.
In October 1999, ACR entered into a consent order with the DEC to resolve
alleged violations of the water quality standards in the groundwater
downgradient of an ash disposal site. The consent order included a suspended
$5,000 civil penalty and a requirement to submit a work plan to initiate closure
of the landfill by October 8, 2000. The consent order also called for a site
investigation, which was carried out and indicated that there is a possibility
that some groundwater remediation at the site may be required. AEE2, L.L.C.
contributed one-half of the costs to close the landfill, which were
approximately $2 million, and will contribute additional costs for long-term
groundwater monitoring. While the actual closure costs may exceed $1.6 million,
which is included in the environmental remediation liability, management does
not expect any added closure costs to be material.
ACR has recently reported that concentrations of a number of chemicals in a few
groundwater wells increased in the year ending December 31, 2001, since the
Jennison and Hickling Plants were placed on long-term cold standby. AES Creative
Resources, L.P. has notified the DEC and anticipates determining what
remediation is needed, if any. Until ACR develops a plan with the DEC, the
Company cannot estimate if this will have a material effect on its operations.
AEE is obligated to make payments under the Coal Hauling Agreement with Somerset
Railroad Corporation (SRC), an affiliated company, in an amount sufficient, when
added with funds available from other sources, to enable SRC to pay, when due,
all of its operating expenses and other expenses, including interest on and
principal of outstanding indebtedness. As of March 31, 2002 and 2001, AEE had
recorded $1.0 million and $1.3 million, respectively, as operating expenses and
other accrued liabilities under this agreement. On August 14, 2000, SRC entered
into a $26 million credit facility with Fortis Capital Corp. which replaced in
its entirety a credit facility for the same amount previously provided to SRC by
an affiliate of CIBC World Markets.
15
The new credit facility provided by Fortis Capital Corp. consists of a 14-year
term note (maturing on May 6, 2014), with principal and interest payments due
quarterly. The current interest rate on the loans under this credit facility is
equal to a Base Rate plus 0.625% for the Base Rate loans and LIBOR plus 1.375%
for LIBOR loans. The principal amount of SRC's outstanding indebtedness under
this credit facility was approximately $22.8 million as of March 31, 2002.
The agreements governing the leases of the Somerset and Cayuga Plants include
negative covenants restricting AEE's ability to incur indebtedness and to make
payments to its partners (which are referred to as restricted payments). The
incurrence of indebtedness covenant states that neither AEE nor any of its
subsidiaries may create, incur, assume, suffer to exist, guarantee or otherwise
become directly or indirectly liable with respect to indebtedness except for
permitted indebtedness. Neither SRC nor the limited liability company that owns
SRC may incur any indebtedness, other than the SRC credit facility or a
replacement facility or other than any operating leases in respect of rail
assets, without the written consent of the institutional investors that
organized the trusts that own the Somerset and Cayuga Plants and lease them to
us. These agreements do permit us to incur indebtedness for certain purposes and
subject to applicable limits, including indebtedness to finance modifications to
the Somerset and Cayuga Plants required by law and up to $100,000,000 of
additional indebtedness, provided that no more than $75,000,000 of such
additional indebtedness may be incurred to provide working capital and no more
than $50,000,000 of such additional indebtedness may be secured by liens upon
our assets and no more than $25,000,000 of such additional indebtedness may be
incurred for purposes other than to provide working capital. The covenant
restricting incurrence of indebtedness will restrict our future ability to
obtain additional debt financing for working capital, capital expenditures or
other purposes.
Note 4. Comprehensive Income
In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income"; which establishes rules for the
reporting of comprehensive income and its components. As of March 31, 2002, the
Company has recorded $11.5 million of other comprehensive income due to the
adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". In the years prior to the adoption of SFAS No. 133, the Company did
not have any items of other comprehensive income.
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which, as amended and interpreted,
established new accounting and reporting standards for derivative instruments
and hedging activities. The Statement requires that the Company recognize all
derivatives, as defined in the Statement, on the balance sheet at fair value.
Derivatives, or any portion thereof, that are not effective hedges are adjusted
to fair value through income. Derivatives that are effective hedges are adjusted
to fair value through other comprehensive income (loss) until the hedged items
are recognized in earnings. The adoption of SFAS No. 133 on January 1, 2001
resulted in a cumulative reduction of Other Comprehensive Income (OCI) in
member's equity of $66.3 million.
AEE utilizes derivative financial instruments to hedge commodity price risk. AEE
utilizes electric derivative instruments, including swaps and forwards, to hedge
the risk related to forecasted electricity sales over the next four years. The
majority of AEE's electric derivatives are designated and qualify as cash flow
hedges. No hedges were derecognized or discontinued during the three months
ended March 31, 2002. No significant amounts of hedge ineffectiveness were
recognized in earnings during the three months ended March 31, 2002.
Gains and losses on derivatives reported in accumulated other comprehensive
income are reclassified into earnings when the hedged forecasted sale occurs.
Approximately, $3 million of other comprehensive income is expected to be
recognized as an addition to earnings over the next twelve months. Amounts
recorded in other comprehensive income during the three months ended March 31,
2002, were as follows (in millions):
Balance, December 31, 2001 $28.5
Reclassified to earnings 11.9
Change in fair value (28.9)
------
Balance, March 31, 2002 $11.5
======
In addition to the electric derivatives classified as cash flow hedge contracts,
AEE has a Transmission Congestion Contract that is a derivative under the
definition of SFAS No. 133, but does not qualify for hedge accounting. This
contract is recorded at fair value on the balance sheet with changes in the fair
value recognized through earnings. In 2000, this contract was also recorded at
fair value with changes in fair value recorded through income under the
requirements of EITF No. 98-10, Accounting for Contracts Involved in Energy
Trading and Risk Management Activities.
16
Note 5. New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, entitled, "Goodwill and Other
Intangible Assets". This standard eliminates the amortization of goodwill, and
requires goodwill to be reviewed periodically for impairment. This standard also
requires the useful lives of previously recognized assets to be adjusted
accordingly. This standard is effective for fiscal years beginning after
December 15, 2001, for all goodwill and other intangible assets recognized on
the Company's balance sheet at that date, regardless of when the assets were
initially recognized. AEE will continue to amortize the other intangible assets
currently recorded on the balance sheet. Any impairment will be determined in
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," and SFAS No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets." The Company
has until June 30, 2002 to determine if an impairment exists and has not
determined the effects of this standard on its financial reporting.
In July 2001, the FASB issued SFAS No. 143, entitled "Accounting for Asset
Retirement Obligations". This standard is effective for fiscal years beginning
after June 15, 2002, and provides accounting requirements for asset retirement
obligations associated with tangible long-lived assets. The Company has not
determined the effects of this standard on its financial reporting.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." The provisions of this statement are effective
for financial statements issued for fiscal years beginning after December 15,
2001, and address reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 provides guidance for developing estimates of future cash flows
used to test assets for recoverability and requires that assets to be disposed
of be classified as held for sale when certain criteria are met. The statement
also extends the reporting of discontinued operations to all components of an
entity and provides guidance for recognition of a liability for obligations
associated with disposal activity. The Company believes that the initial
adoption of the provisions of SFAS No. 144 will not have any material impact on
its financial position or results of operations.
Item 2. Discussion and analysis of results of operations and financial condition
Results of Operations for the three months ended March 31, 2002
- ---------------------------------------------------------------
The information in this Management's Discussion and Analysis should be read in
conjunction with the accompanying consolidated financial statements, the related
Notes to the Financial Statements and the selected financial data. Forward
looking statements in this Management's Discussion and Analysis are qualified by
the cautionary statement in the Forward Looking Statements section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Significant Accounting Policies
General
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the periods presented. The significant accounting policies which we
believe are most critical to understanding and evaluating our reported financial
results include the following: Revenue Recognition, Property, Plant and
Equipment, Contingencies and Derivatives.
Revenue Recognition
Revenues from the sale of electricity are recorded based upon output delivered
and rates specified under contract terms. Revenues generated from commodity
forwards, swaps and options, which are entered into for the hedging of
forecasted sales, are recorded based on settlement accounting with the net
amount received recognized as revenue. Revenues for ancillary and other services
are recorded when the services are rendered.
17
Property, Plant and Equipment
Electric generation assets that existed at the date of acquisition are recorded
at fair market value. Somerset and Cayuga, which represent $650 million of the
electric generation assets, are subject to a leasing arrangement accounted for
as a financing. Additions or improvements thereafter are recorded at cost.
Depreciation is computed using the straight-line method over the 34-year and
28-year lease terms for Somerset and Cayuga, respectively, and over the
estimated useful lives for the other fixed assets, which range from 7 to 35
years. The lease expiration date for the Cayuga lease is November 13, 2027 and
the lease expiration date for the Somerset lease is February 13, 2033. A
significant decrease in the estimated useful life of a material amount of our
property, plant or equipment could have a material adverse impact on our
operating results in the period in which the estimate is revised and subsequent
periods. Maintenance and repairs are charged to expense as incurred.
Contingencies
We accrue for loss contingencies when the amount of the loss is probable and
estimable. We are subject to various environmental regulations, and we are
involved in certain legal proceedings. If our actual environmental and/or legal
obligations are materially different from our estimates, the recognition of the
actual amounts may have a material impact on our operating results and financial
condition.
Derivatives
On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended and interpreted,
established new accounting and reporting standards for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives (including
derivatives embedded in other contracts) be recorded as either assets or
liabilities at fair value on the balance sheet. Changes in the derivative's fair
value are to be recognized in earnings in the period of change, unless hedge
accounting criteria are met. Hedge accounting allows the derivative's gains or
losses in fair value to offset the related results of the hedged item. We
utilize derivative financial instruments to manage commodity price risk.
Although the majority of our derivative instruments qualify for hedge
accounting, SFAS No. 133 resulted in more variation to our results of operations
from changes in commodity prices. For the three months ended March 31, 2002, we
recognized $6.3 million of income pursuant to SFAS No. 133 related to
derivatives, which did not qualify for hedge accounting.
Results of Operations
- ---------------------
(Amounts in Millions)
%
For the Quarter Ended March 31, 2002 2001 Change
------ ------ -------
Energy Revenue $69.1 $94.1 (26.6)
Capacity Revenue 5.5 7.7 (28.6)
Transmission Congestion Contract 6.3 6.9 (8.7)
Other 3.7 2.7 37.0
Energy Revenues for the three months ended March 31, 2002 were $69.1 million,
compared to $94.1 million for the comparable period of the prior calendar year,
a decrease of 26.6%. The decrease in Energy Revenues is primarily due to lower
market prices and lower demand. Market prices for peak and offpeak electricity
were 43.9% and 37.6% lower than the comparable period of the prior calendar
year. Demand for peak and offpeak electricity was 4.5% and 5.8% lower than the
comparable period of the prior calendar year. Capacity Revenues for the three
months ended March 31, 2002 were $5.5 million, compared to $7.7 million for the
comparable period of the prior calendar year, a decrease of 28.6%. The decrease
in capacity revenue is primarily due to the expiration of a long term capacity
contract in April 2001. Capacity sales on the open market for the winter
capacity period (November-May) were at lower rates. Transmission Congestion
Contract income for the three months ended March 31, 2002 was $6.3 million,
compared to $6.9 million for the comparable period of the prior calendar year, a
decrease of 8.7%. This agreement is essentially a swap between the congestion
component of the locational prices posted by the New York ISO in western New
York and the more populated areas in eastern New York. The transmission contract
was entered into because it provided a reasonable settlement for resolving a
FERC dispute between the Partnership and Niagara Mohawk Power Corporation.
18
Operating Expenses
- -------------------- %
For the Quarter Ended March 31, 2002 2001 Change
------ ------ -------
Fuel expense $34.5 $36.0 (4.2)
Operations and maintenance 3.1 3.5 (11.4)
General and administrative 12.5 14.4 (13.2)
Depreciation and amortization 8.7 8.1 7.4
Fuel Expenses for the three months ended March 31, 2002 were $34.5 million,
compared to $36.0 million for the comparable period of the prior calendar year,
a decrease of 4.2%. The decrease in Fuel Expenses is primarily due to lower
operating levels due to lower demand. Operations and maintenance expense for the
three months ended March 31, 2002 was $3.1 million, compared to $3.5 million for
the comparable period of the prior calendar year, a decrease of 11.4%. This
decrease is primarily due to outage expenses incurred in the first quarter of
2001. General and administrative expense for the three months ended March 31,
2002 was $12.5 million, compared to $14.4 million for the comparable period of
the prior calendar year, a decrease of 13.2%. This decrease is primarily due to
reversal of accruals for potential environmental liabilities which were resolved
at a lower cost than projected. Depreciation and amortization expense for the
three months ended March 31, 2002 was $8.7 million, compared to $8.1 million for
the comparable period of the prior calendar year, an increase of 7.4%.
Other Expenses
- -------------------- %
For the Quarter Ended March 31, 2002 2001 Change
------ ------ -------
Interest expense $14.4 $15.0 (4.0)
Interest Income 0.5 1.0 (50.0)
Other Income/Expenses for the three months ended March 31, 2002 were net
expenses of $13.9 million, compared to net expenses of $14.0 million for the
comparable period of the prior calendar year, a decrease of 0.7%.
Liquidity and Capital Resources
- -------------------------------
Net working capital at March 31, 2002 and December 31, 2001 was $59.1 million
and $80.0 million, respectively.
Cash flow from our operations during the second half of 2001 was sufficient to
cover the aggregate rental payments under the leases of Somerset and Cayuga paid
January 2, 2002. We believe that cash flow from our full years' operations will
be sufficient to cover aggregate rental payments due on July 2, 2002 and January
2, 2003. We also believe that future cash flows will be sufficient to cover
future rent payments. The lease expiration date for the Cayuga lease is November
13, 2027 and the lease expiration date for the Somerset lease is February 13,
2033.
We are obligated to make payments under the Coal Hauling Agreement with Somerset
Railroad Corporation (SRC), an affiliated company, in an amount sufficient, when
added with funds available from other sources, to enable SRC to pay, when due,
all of its operating expenses and other expenses, including interest on and
principal of outstanding indebtedness. As of March 31, 2002 and 2001, we had
recorded $1.0 million and $1.3 million, respectively, as operating expenses and
other accrued liabilities under this agreement. On August 14, 2000, SRC entered
into a $26 million credit facility with Fortis Capital Corp. which replaced in
its entirety a credit facility for the same amount previously provided to SRC by
an affiliate of CIBC World Markets. The new credit facility provided by Fortis
Capital Corp. consists of a 14-year term note (maturing on May 6, 2014),
with principal and interest payments due quarterly. The current interest rate on
the loans under this credit facility is equal to a Base Rate plus 0.625% for the
Base Rate loans and LIBOR plus 1.375% for LIBOR loans. The principal amount of
SRC's outstanding indebtedness under this credit facility was approximately
$22.8 million as of March 31, 2002.
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At March 9, 2001, our $20 million Credit Suisse First Boston working capital
credit facility was terminated. In April 2001, we entered into a $35 million
secured revolving working capital and letter of credit facility with Union Bank
of California, N.A. This facility has a term of approximately twenty-one months.
We can borrow up to $35 million for working capital purposes under this
facility. In addition, we can have letters of credit issued under this facility
up to $25 million, provided that the total amount of working capital borrowings
and letters of credit issuances may not exceed the $35 million limit on the
entire facility. Since the new facility was signed, there have been two
borrowings. The first borrowing was for $7 million on July 13, 2001 at an
interest rate of 8.125%. The borrowing was repaid on July 31, 2001. The second
borrowing was for $8.5 million on January 11, 2002 at an interest rate of
6.125%. The borrowing was repaid in full on February 28, 2002.
The agreements governing the leases of Somerset and Cayuga include negative
covenants restricting our ability to incur indebtedness and to make payments to
our partners (which are referred to as restricted payments). The incurrence of
indebtedness covenant states that neither we nor any of our subsidiaries may
create, incur, assume, suffer to exist, guarantee or otherwise become directly
or indirectly liable with respect to indebtedness except for permitted
indebtedness. Neither SRC nor the limited liability company that owns SRC may
incur any indebtedness, other than the SRC credit facility or a replacement
facility or other than any operating leases in respect of rail assets, without
the written consent of the institutional investors that organized the trusts
that own Somerset and Cayuga and lease them to us. These agreements do permit us
to incur indebtedness for certain purposes and subject to applicable limits,
including indebtedness to finance modifications to Somerset and Cayuga required
by law and up to $100,000,000 of additional indebtedness, provided that no more
than $75,000,000 of such additional indebtedness may be incurred to provide
working capital and no more than $50,000,000 of such additional indebtedness may
be secured by liens upon our assets and no more than $25,000,000 of such
additional indebtedness may be incurred for purposes other than to provide
working capital. The covenant restricting incurrence of indebtedness will
restrict our future ability to obtain additional debt financing for working
capital, capital expenditures or other purposes.
The restricted payment covenant states that, neither we nor any of our
subsidiaries may make any distribution (other than to us or to any of our
subsidiaries) unless it is made on or within 10 business days after a rent
payment date, and the following conditions are also satisfied:
(1) all rent under the leases for Somerset and Cayuga including
deferrable payments, must have been paid to date;
(2) amounts on deposit or deemed on deposit in the rent reserve account
and the additional liquidity account established in connection with the
pass through trust certificates issued to finance the acquisition of
Somerset and Cayuga must be equal to or greater than the rent reserve
account required balance or the additional liquidity required balance,
as applicable;
(3) no lease material default, lease event of default or event of
default under any permitted indebtedness shall have occurred and be
then continuing;
(4) no amounts may be outstanding under the working capital credit
facility;
(5) we have no indemnity currently due and payable under specified
provisions of the participation agreements relating to the Somerset and
Cayuga leases or any other operative document or any obligation to fund
the indemnity accounts (as defined in the leases) under the leases;
(6) the coverage ratios for each of the two semiannual rent payment
periods immediately preceding the rent payment date (based on actual
operating history) must be equal to or greater than the required
coverage ratio and the pro forma coverage ratios for each of the four
semiannual periods immediately succeeding this rent payment date must
be equal to or greater than the required coverage ratio; and
(7) with respect to the SRC credit facility or any replacement
facility, no event of default shall have occurred and be then
continuing under the facilities and the remaining term of the SRC
credit facility or any replacement facility shall not be less than 30
days.
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Investing Activities
We incurred approximately $1.8 million and $2.5 million in capital expenditures
with regard to our assets for the three months ended March 31, 2002 and 2001,
respectively. We will make capital expenditures thereafter according to the
maintenance program for our electricity generating stations. In addition to
capital requirements associated with the ownership and operation of our
electricity generating stations, we will have significant fixed charge
obligations in the future, principally with respect to the leases.
Compliance with environmental standards will continue to be reflected in our
capital expenditures and operating costs. Based on the current status of
regulatory requirements, we do not anticipate that any capital expenditures or
operating expenses associated with our compliance with current laws and
regulations will have a material effect on our results of operations or our
financial condition, other than the expenditures for the SCRs at Somerset and
Cayuga, including the construction of new landfill space to manage ash from
Somerset's SCR system operations and the construction of a SCR system on Cayuga
Unit 1, which became operational on June 7, 2001, and expenditures for possible
installation of a SCR system on Cayuga Unit 2, the U.S. Department of Energy
Power Plant Improvement project on Greenidge Unit 4 and the Westover Overfire
Air Project.
The AES Corporation contributed approximately $1.2 million to us in the first
quarter of 2002. The contribution was accounted for as a partner's contribution
and was related to the construction of the SCR on Unit 1 of Cayuga, which became
operational on June 7, 2001.
Credit Rating Discussion
Credit ratings affect our ability to execute our commercial strategies in a
cost-effective manner. In determining our credit rating, the rating agencies
consider a number of factors. Quantitative factors that appear to have
significant weight include, among other things, earnings before interest, taxes
and depreciation and amortization ("EBITDA"); operating cash flow; total debt
outstanding; fixed charges such as interest expense, lease payments; liquidity
needs and availability and various ratios calculated from these factors.
Qualitative factors appear to include, among other things, predictability of
cash flows, business strategy, industry position and contingencies. As of the
filing date, the pass through trust certificates issued to finance the
acquisition of Somerset and Cayuga carry an investment grade rating (BBB-) from
Standard & Poor's Ratings Services and Fitch IBCA, Inc. rating agencies and a
non-investment grade rating (Ba1) from Moody's Investors Service, Inc. rating
agency.
Trigger Events
Our commercial agreements typically include adequate assurance provisions
relating to trade credit and some agreements have credit rating triggers. These
trigger events typically would give counterparties the right to suspend or
terminate credit if our credit ratings were downgraded. Under such
circumstances, we would need to post collateral to continue transacting
risk-management business with many of our counterparties under either adequate
assurance or specific credit rating trigger clauses. The cost of posting
collateral would have a negative effect on our profitability. If such collateral
was not posted, our ability to continue transacting business as before the
downgrade would be impaired. As of the filing date, we have not received any
notice of any counterparty requesting additional collateral.
Financing Activities
Cash flow from operations in excess of the aggregate rental payments under our
leases is permitted, if certain criteria are met, to be paid in the form of a
distribution to AES NY, LLC. On January 11, 2002, we made a distribution payment
of $32.5 million.
Forward-looking Statements
Certain statements contained in this Form 10-Q are forward-looking statements as
that term is defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements speak only as of the date hereof.
Forward-looking statements can be identified by the use of forward-looking
terminology such as "believe," "expects," "may," "intends," "will," "should" or
"anticipates" or the negative forms or other variations of these terms or
comparable terminology, or by discussions of strategy. Future results covered by
the forward-looking statements may not be achieved. Forward-looking statements
are subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. The most significant risks, uncertainties and other
factors are discussed under the heading "Business (a) General Development of
Business" in our Annual Report on Form 10-K, and you are urged to read this
section and carefully consider such factors.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 2 to our Condensed Consolidated Financial Statements and Note 3
to the Condensed Consolidated Balance Sheets of AES NY, L.L.C. in Part I.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AES EASTERN ENERGY, L.P.
By: AES NY, L.L.C., as General Partner
By:/s/ Daniel J. Rothaupt
--------------------------------
Daniel J. Rothaupt
President
By:/s/ Amy Conley
---------------------------------
Amy Conley
Vice President
(principal financial officer)
Date: May 15, 2002
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