EXHIBIT 99
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GRAYS FERRY COGENERATION PARTNERSHIP
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997 AND
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
To the Partners of Grays Ferry Cogeneration Partnership:
We have audited the accompanying balance sheets of Grays Ferry Cogeneration
Partnership (the "Partnership"), as of December 31, 1999 and 1998, and the
related statements of changes in partners' capital, and cash flows for the years
ended December 31, 1999, 1998 and 1997 and the related statements of income for
the year ended December 31, 1999 and for the period from January 9, 1998 (date
of commercial operation) to December 31, 1998. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1999 and
1998, and its cash flows for the years ended December 31, 1999, 1998 and 1997,
and the results of its operations for the year ended December 31, 1999 and for
the period from January 9, 1998 (date of commercial operation) to December 31,
1998 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 2 to the
financial statements, the Partnership has failed to convert the construction
loan to a term loan. As a consequence, the Project Lender has determined that
the Partnership is in default. These actions raise substantial doubt about the
Partnership's ability to continue as a going concern. Management's plans
concerning these matters are also discussed in Note 2. The financial statements
do not include any adjustment that might result from the outcome of these
uncertainties, other than the classification of the Partnership debt as current.
As discussed in Note 8 to the financial statements, in 1999 the Partnership
changed its method of accounting for the cost of start-up activities to conform
with Statement of Position 98-5.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
January 28, 2000
GRAYS FERRY COGENERATION PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
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1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,390,037 $ 18,628,423
Accounts receivable - related parties 2,544,955 10,678,770
Accounts receivable - other 5,901,621 1,805,350
Inventory 1,367,589 2,163,444
Prepaid expenses 123,646 116,976
------------- -------------
Total current assets 28,327,848 33,392,963
PROPERTY, PLANT AND EQUIPMENT:
Plant in service 151,463,731 151,297,117
Accumulated depreciation (14,978,041) (7,402,171)
------------- -------------
Property, plant and equipment - net 136,485,690 143,894,946
------------- -------------
OTHER ASSETS (Net of accumulated amortization of $863,281 and
$426,949 in 1999 and 1998, respectively) 8,890,393 6,875,906
------------- -------------
TOTAL ASSETS $ 173,703,931 $ 184,163,815
============= =============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Construction loan (Notes 2 and 6) $ 79,400,682 $ 94,324,049
Subordinated debt (Note 6) 15,000,000 15,000,000
Accounts payable and accrued liabilities - related parties 760,779 3,503,417
Accounts payable and accrued liabilities - other 11,158,154 15,017,152
Retainage payable 5,581,729
------------- -------------
Total liabilities
106,319,615 133,426,347
PARTNERS' CAPITAL 67,384,316 50,737,468
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 173,703,931 $ 184,163,815
------------- -------------
See notes to financial statements.
- -2-
GRAYS FERRY COGENERATION PARTNERSHIP
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM JANUARY 9, 1998 (DATE OF COMMERCIAL
OPERATION) TO DECEMBER 31, 1998
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1999 1998
REVENUES (Note 4):
Electric energy sales:
Related party $ 14,202,432 $ 50,776,226
Other 36,974,898
Steam sales - related party 14,904,924 14,741,775
Capacity fees:
Electric:
Related party 3,017,100 9,531,900
Other 6,728,400
Steam - related party 2,842,962 3,075,988
------------ ------------
Total revenues 78,670,716 78,125,889
------------ ------------
OPERATING EXPENSES (Note 4):
Fuel and consumables:
Related party 2,423,788 2,531,844
Other 34,579,738 32,394,334
Operation and maintenance:
Related parties 1,681,877 1,527,916
Other 2,777,004 2,819,680
General and administrative:
Related parties 3,029,132 2,772,641
Other 3,103,746 2,373,432
Depreciation 7,575,870 7,402,171
------------ ------------
Total operating expenses 55,171,155 51,822,018
------------ ------------
INCOME FROM OPERATIONS 23,499,561 26,303,871
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 835,733 665,765
Interest expense (11,642,670) (11,674,898)
Interest forgiven (Note 2) 2,887,433
Recovery for business interruption 1,573,511
Other (149,720)
------------ ------------
Total other expense - net (6,495,713) (11,009,133)
------------ ------------
NET INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 17,003,848 15,294,738
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Note 8) (357,000)
------------ ------------
NET INCOME $ 16,646,848 $ 15,294,738
============ ============
See notes to financial statements.
- -3-
GRAYS FERRY COGENERATION PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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ADWIN COGENAMERICA TRIGEN TOTAL
(SCHUYLKILL) SCHUYLKILL, (SCHUYLKILL) PARTNERS'
COGENERATION, INC. INC. COGENERATION, INC. CAPITAL
BALANCE, JANUARY 1, 1996 $ 2,784,214 $ 2,658,516 $ 5,442,730
Capital contributions 10,000,000 10,000,000 $10,000,000 30,000,000
------------ ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 12,784,214 12,658,516 10,000,000 35,442,730
Net income for period 5,098,246 5,098,246 5,098,246 15,294,738
------------ ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 17,882,460 17,756,762 15,098,246 50,737,468
Assignment of partnership
interest (Note 2) (17,882,460) 8,941,230 8,941,230
Net income for period 8,323,424 8,323,424 16,646,848
------------ ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ - $35,021,416 $32,362,900 $67,384,316
============ =========== =========== ===========
See notes to financial statements.
- -4-
GRAYS FERRY COGENERATION PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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1999 1998 1997
OPERATING ACTIVITIES:
Net income $ 16,646,848 $ 15,294,738
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 7,575,870 7,402,171
Amortization of other assets 436,332 426,949
Cumulative effect of change in accounting principle 357,000
Changes in assets and liabilities which provided (used) cash:
Accounts receivable - related parties 6,988,836 (8,048,677)
Accounts receivable - other (4,096,271) (1,805,350)
Prepaid assets (6,670) (116,976)
Inventories 795,855 (1,142,975)
Accounts payable and accrued expenses - related parties 3,055,461 3,503,417
Accounts payable and accrued expenses - other (3,858,998) 15,017,152
Other assets (2,450,819) (758,260)
------------ ------------
Net cash provided by operating activities 25,443,444 29,772,189
------------ ------------
INVESTING ACTIVITIES:
Construction expenditures (47,489) (6,968,920) $(74,253,351)
Decrease in other construction related expenses (2,439,849)
Decrease in construction related accruals - related parties (558,759)
Decrease in construction related accruals - other (10,710,974) (6,381,865) (4,812,728)
------------ ------------ ------------
Net cash used in investing activities (10,758,463) (13,909,544) (81,505,928)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings under construction loan agreement
and subordinated debt 15,000,000 57,900,000
Repayment of construction loan agreement (14,923,367) (18,675,951)
------------ ------------ ------------
Partners' capital contributions 30,000,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (14,923,367) (3,675,951) 87,900,000
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (238,386) 12,186,694 6,394,072
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,628,423 6,441,729 47,657
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,390,037 $ 18,628,423 $ 6,441,729
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the year for interest, net of amounts capitalized in 1997 $ 7,702,252 $ 7,770,075 $
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
During 1999, $476,125 of adjustments were made to plant in service due to change orders received for construction,
reducing accrued expenses by $668,854, and the write-off of accounts receivable of $1,144,979.
See notes to financial statements.
- -5-
GRAYS FERRY COGENERATION PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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1. ORGANIZATION OF PARTNERSHIP
Grays Ferry Cogeneration Partnership, (the "Partnership") was organized on
October 29, 1991 as a Pennsylvania general partnership for the sole purpose of
developing, owning, constructing and operating a 150 megawatt gas and oil fired
qualifying cogeneration facility (the "Project") at the Schuylkill Station of
the Trigen-Philadelphia Energy Corporation ("TPEC") in Philadelphia,
Pennsylvania. For the period from October 29, 1991 (date of inception) through
January 8, 1998, the Partnership was considered a development stage entity as
its sole activity was construction of the facility. Pursuant to 20-year
electricity and 25-year steam purchase agreements between the Partnership and
its two customers, sales of electricity and steam began in January 9, 1998, the
date of Commercial Operation.
The Partnership's date of Commercial Operation of January 9, 1998 was chosen
because it was the date its customers started paying it for electricity and
steam sold to them under its 20-year electricity purchase agreements and its
25-year steam purchase agreements.
The Partnership's original general partners are Adwin Equipment Company, a
wholly owned subsidiary of Eastern Pennsylvania Development Company, which is a
wholly owned subsidiary of PECO Energy Company ("PECO") and O'Brien (Schuylkill)
Cogeneration, Inc., ("O'Brien"), a wholly owned subsidiary of O'Brien
Environmental Energy, Inc. Subsequent to the original Partnership formation,
Adwin (Schuylkill) Cogeneration, Inc. ("Adwin"), a wholly owned subsidiary of
Adwin Equipment Company, was assigned all rights, responsibilities, and
obligations of the Partnership previously held by Adwin Equipment Company. Then
on April 23, 1999, Adwin assigned its share of the Partnership equally to the
remaining partners.
Trigen (Schuylkill) Cogeneration, Inc. ("Trigen"), a wholly owned subsidiary of
Trigen Energy Corporation and an affiliate of TPEC, Philadelphia Thermal
Development Corporation, ("PTDC"), and Philadelphia United Power Corporation,
("PUPCO"), joined the Partnership as an equal partner as of March 1, 1996.
In a reorganization plan, approximately 40% of the capital stock of O'Brien
Environmental Energy, Inc. was acquired by NRG Energy, Inc., and the Company was
renamed NRG Generating (U.S.) Inc. As a result of this reorganization, O'Brien
became known as NRGG (Schuylkill) Cogeneration, Inc. ("NRGG"). During 1998, NRGG
was renamed CogenAmerica Schuylkill, Inc. ("Cogen").
Adwin's partnership interest was assigned to the Partnership on April 23, 1999
in connection with the resolution of the litigation described in Note 2. The two
remaining general partners are equal partners, with net operating profits and
losses and distributions to be allocated to them equally subject to the terms
and provisions as stated in the Amended and Restated Partnership Agreement.
2. CONTINUATION OF BUSINESS
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed below, in 1998, PECO
had taken action to terminate its power purchase agreements with the
Partnership. As a consequence, the banking agent ("Project Lender") determined
that the Partnership was in default on its Credit Agreement. The events of
default with the Project Lender have continued through the date of this report,
as the Partnership has been unable to convert its construction loan to a term
loan as required in its Credit Agreement. Management is currently in the process
of negotiating a term loan with the Project Lender.
Due to the continuing events of default, the Partnership's long-term debt has
been reclassified as current in the Partnership's balance sheets. These actions
raise substantial doubt about the Partnership's ability to continue as a going
concern. The financial statements do not include any adjustment that might
result from the outcome of these uncertainties, other than the classification of
the Project debt as current.
E-1
PECO - In March 1998, the Partnership received notice from PECO that PECO
believed its power purchase agreements with the Partnership were no longer
effective. PECO refused to pay the rates set forth in the agreements based on
its allegations that the Pennsylvania Public Utilities Commission (the "PPUC")
had denied cost recovery of the power purchase agreements in retail electric
rates.
On March 9, 1998, the Partnership, along with Trigen, NRGG and TPEC
(collectively "Plaintiffs") filed suit against PECO, Adwin and the PPUC
(collectively "Defendants") in United States District Court for the District of
Pennsylvania. The suit sought to enjoin PECO from terminating the power purchase
agreements and to compel PECO to pay the rates set forth in the agreements. In
addition, the Plaintiffs sought actual damages, punitive damages, attorneys'
fees and costs. On March 19, 1998, the federal district court dismissed the
lawsuit for lack of subject matter jurisdiction.
On April 9, 1998, the Plaintiffs filed suit against the Defendants in the Court
of Common Pleas (the "Court") for Philadelphia County in the State of
Pennsylvania. Preliminary injunctive relief against PECO in the form of specific
performance of the electric sale agreements, including payments according to the
contract terms, was granted by the Court on May 6, 1998. A $50,000 bond required
by the Court was posted by the Plaintiffs on May 7, 1998. On May 8, 1998, PECO
sought a stay of the May 6 Order which was denied on May 20, 1998. Also on May
20, 1998, the Court issued a separate order adjudging PECO to be in civil
contempt of the May 6 Order. A Coercive sanction of $50,000 per day, or portion
thereof, for nonpayment of all sums owing by PECO in accordance to the contract
terms was included in the May 20, 1998 Order. An emergency application of stay
by PECO of the May 6 Order was denied on May 22, 1998. As a result, PECO
complied with the May 6 Order on May 22, 1998.
On March 10, 1999, the Court of Common Pleas granted the Partnership's motion
for partial summary judgment effectively deciding the issue of liability on the
contract claim against PECO and in favor of the Partnership. This action had the
effect of limiting the scope of the trial to the amount of damages PECO would
have had to pay the Partnership and the counts of fraud, conversion, breach of
the implied covenant of good faith and fair dealing and breach of fiduciary
duties. Subsequently, the litigation was settled pursuant to a Final Settlement
Decree and Order of the Court of Common Pleas, Philadelphia County, dated April
23, 1999. The settlement was comprised of an amendment to the Power Purchase
Agreements which increased the electric rates paid in 2001-2004 and decreased
the electric rates paid in 2005-2017, and the assignment of PECO's Partnership
interest to the Partnership.
CONSTRUCTION LOAN DEFAULT - On March 17, 1998 the Partnership received a notice
of default from the Project Lender stating that PECO's determination that the
power purchase agreements were no longer in effect constituted a material
adverse effect as defined under the credit agreement. As of the date of this
report, the default has not been waived; accordingly, the Partnership's
long-term debt has been reclassified as current in the Partnership's balance
sheets (see Note 6). The Project Lender has also restricted the Partnership's
ability to make distributions to related parties for certain transactions, along
with distributions to the Partners of Partnership earnings. In addition, the
interest rate charged under the credit agreement increased to prime plus 2.00%,
the penalty interest rate. The Project Lender waived interest accrued at the
penalty rate through April 16, 1999 in connection with the settlement of the
Partnership's litigation with PECO described above.
The notice of default from the Project Lender described above resulted in a
cross-default on the Partnership's subordinate debt. As of the date of this
report, the default has not been waived; accordingly, the Partnership's
subordinate debt has been reclassified as current in the Partnership's balance
sheets (see Note 6). In addition, the interest rate charged on the subordinate
debt increased to prime plus 3.5%, the penalty rate. Westinghouse Electric
Corporation ("Contractor") waived interest accrued at the penalty rate through
April 23, 1999 in connection with the settlement of the Partnership's litigation
with PECO described above.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CAPITALIZED PROJECT COSTS - Construction of the Project was
originally scheduled to be completed on or about December 8, 1997
(see Notes 1 and 5), at an estimated cost of $158,000,000.
$128,000,000 was provided from the proceeds of the credit
agreements (see Note 6), and $30,000,000 was provided from
partners' capital contributions (see Note 7). The remainder has
been financed through accounts and retainage payable. Capitalized
Project costs include costs incurred in the development and
construction of the gas and oil fired 150-megawatt cogeneration
facility. The majority of these costs represent expenditures made
under the Engineering, Procurement and
E-2
Construction contract between the Partnership and the Contractor.
Other costs represent expenditures for legal, consulting,
engineering and financing activities relating to the Project. All
costs related to the design and construction of the Project from
the date the initial purchase power agreement was reached up to
the date of Commercial Operation on January 9, 1998, have been
capitalized as construction work-in-progress when incurred and
now are classified as plant in service, except deferred financing
fees which are included in other assets.
Substantially all of the property, plant and equipment is being
depreciated over 20 years, the life of the Project's electric and
contingent capacity sales agreements (see Note 4).
(b) REVENUE RECOGNITION - The Partnership's primary source of
revenues is from the sale of steam to TPEC and the sale of
electricity generated by the Project to PECO. Pursuant to the
Steam Sales Agreement, TPEC is obligated to purchase all of its
steam requirements from the Project as defined in the agreement.
Under the provisions of the Power Purchase Agreements, PECO has
agreed to purchase, or accept delivery of, the net electric
output from the Project, up to the lesser of 150 megawatts or the
amount of electric output for which the Federal Energy Regulatory
Commission ("FERC") has certified the Project.
(c) SEGMENT REPORTING - The Partnership currently operates the
Project, which produces two forms of salable energy from one
generation process. Revenues from each of the two forms are
disclosed on the statement of income.
(d) INVENTORY - Inventory, which is recorded on the first-in,
first-out basis, consists of the following at December 31:
1999 1998
Fuel $ 716,276 $1,532,987
Spare Parts 651,313 630,457
---------- ----------
$1,367,589 $2,163,444
========== ==========
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value
amounts presented in these notes to the financial statements have
been determined by the Partnership using available market
information and appropriate methodologies. However, considerable
judgment is required in interpreting market data to develop the
estimates of fair value. The estimates presented herein are not
necessarily indicative of the amounts that the Partnership could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. Such fair value
estimates are based on pertinent information available to
management as of December 31, 1999 and 1998, and have not been
comprehensively revalued for purposes of these financial
statements since such date. Current estimates of fair value may
differ significantly from the amounts presented herein.
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the provisions of SFAS NO.
107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS
PAYABLE, AND OTHER CURRENT ASSETS - The carrying amounts of
these items approximate fair value because of the short
maturity of these instruments.
CONSTRUCTION LOAN AND SUBORDINATED DEBT - Rates currently
available to the Partnership for debt with similar terms and
maturity are used to estimate the fair value of the debt
issued.
E-3
Accordingly, the fair value of the Construction Loan and
Subordinated Debt approximates the carrying value.
(f) ACCOUNTING FOR INCOME TAXES - The Partnership is not a taxpaying
entity for income tax purposes. Taxable income or loss from the
Partnership is reportable by the Partners on their respective
income tax returns. Accordingly, there is no recognition of
income taxes in the financial statements.
(g) INTEREST RATE HEDGING - The Partnership entered into interest
rate swap agreements in order to hedge against future increases
in interest rates. For swap contracts that effectively hedge
interest rate exposures, the net cash amounts paid or received on
the contract are accrued and recognized as an adjustment to
interest expense over the period of the contract.
(h) FUEL COLLAR AGREEMENT - The Partnership entered into a commodity
collar transaction (the "Collar") in order to hedge against
future fluctuations in the price of natural gas. During the first
quarter of 1999, fuel costs were below the floor price in the
Collar and the Partnership was required to make payments to the
counterparty which were recorded as a component of fuel costs.
During the remainder of the year, the fuel costs were within the
cap and floor range and no payments were required of either
party. The Collar is in effect through December 31, 2000.
(i) USE OF ESTIMATES - The preparation of the Partnership's financial
statements in conformity with generally accepted accounting
principles necessarily 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 balance sheet dates and the amounts of expenses during the
reporting periods. Actual results could differ from those
estimates.
(j) CASH AND CASH EQUIVALENTS - The Partnership classifies all
investments with terms to maturity of less than three months upon
purchase as cash and cash equivalents. Cash and cash equivalents
at December 31, 1999 and 1998 consist primarily of a money market
investment account, which is carried at market, which
approximates cost.
(k) DEFERRED FINANCING COSTS - Deferred financing costs of $7,230,101
and $6,544,596 at December 31, 1999 and 1998, respectively, are
amortized over the life of the credit agreements and are included
in other assets.
(l) IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets and certain
identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability is
assessed based on the future cash flows expected to result from
the use of the asset and its eventual disposition. If the sum of
the undiscounted cash flows is less than the carrying value of
the asset, an impairment loss is recognized. Any impairment loss,
if indicated, is measured as the amount by which the carrying
amount of the asset exceeds the estimated fair value of the
asset.
(m) REAL ESTATE TAXES - The Partnership has accrued real estate taxes
as required in the Facility Lease (see Note 4). The Partnership
has made its best estimate of its anticipated real estate taxes,
but has not yet been billed by its local taxing authority.
However, management does not believe that actual taxes due will
be materially different than the amounts currently accrued.
4. RELATED PARTY AGREEMENTS AND TRANSACTIONS
FACILITY LEASE - The Project is located at 2600 Christian Street, Philadelphia,
Pennsylvania, on the site of TPEC's Schuylkill Station and PECO's Schuylkill
Station, which is owned by PECO. The Partnership has leased a portion of the
land which TPEC has leased from PECO. The lease agreement with TPEC commenced on
the date construction began, March 8, 1996, and will terminate 25 years from the
date of Commercial
E-4
Operation. The Partnership is obligated to pay TPEC $1 per year as rent. The
Partnership is required to pay any increase in taxes, assessments and fees
assessed against the site or the facility during the lease term.
DOCK FACILITY SERVICE AGREEMENT - The Partnership has an agreement with PTDC and
TPEC, an affiliate of PTDC, for fuel oil transportation and storage services.
The Partnership pays operating fees based on the number of barrels received at,
or delivered to, the dock as well as a storage fee for barrels stored for use by
the Project. These fees are adjusted annually based on the Consumer Price Index
("CPI"). During 1999, 1998 and 1997, the Partnership incurred costs associated
with these services of $156,399, $199,640 and $100,923, respectively, of which
$13,297 and $12,862 is included in accounts payable at December 31, 1999 and
1998, respectively. The entrance to the Schuylkill Station of TPEC, which is
also the entrance to the Project, was upgraded in 1997. The Partnership had
previously agreed to reimburse TPEC for its share of the cost which amounted to
$250,000.
OPERATIONS AND MAINTENANCE AGREEMENT - PUPCO, a Delaware corporation, an
affiliate of TPEC, manages and performs all operation and maintenance of the
Project subsequent to the Commercial Operation date in accordance with a 25-year
agreement. Prior to Commercial Operation, PUPCO was reimbursed for certain costs
incurred during mobilization and received a monthly fee of $25,000 limited to
$150,000 in total monthly fees. After Commercial Operation begins, the
Partnership is required to pay PUPCO an annual operating fee of $600,000 as
detailed in the agreement. A portion of the operating fee, $400,000, is adjusted
annually based on changes in the CPI. As an additional fee, PUPCO will receive
30% of all payments received by the Partnership pursuant to the Contingent
Capacity Purchase Addendum (Phase 1). The Partnership was billed by PUPCO annual
operating fees of $786,240 and $600,000 in 1999 and 1998, respectively, capacity
fees of $757,416 in 1999 and 1998, and reimbursable expenses of $1,685,662 and
$1,647,658 for 1999 and 1998, respectively, of which $256,584 and $1,497,003 was
included in accounts payable at December 31, 1999 and 1998, respectively.
Included in the billings in 1998 and 1997 were $29,192 and $32,851 of fees and
reimbursable expenses, respectively, which were capitalized as construction
cost.
STEAM SALE AGREEMENT - The Partnership has a 25-year agreement with TPEC in
which the Partnership sells all of the steam produced by the plant to TPEC. The
price for low- and high-pressure steam is determined based on a function of
weighted average fuel price, CPI and the City of Philadelphia Tariff Water and
Sewer Rates. The agreement requires TPEC to pay for a minimum of 3.3 Mlbs on an
annual basis upon Commercial Operation. During 1999, 1998 and 1997, $17,747,886,
$18,113,962 and $851,182, respectively, was billed by the Partnership to TPEC
for steam produced and capacity charges. Of the amounts billed in 1998 and 1997,
$296,199 and $851,182, respectively, were capitalized as a reduction of
construction costs as such sales occurred as a result of plant testing. Accounts
receivable as of December 31, 1999 and 1998 include $2,544,955 and $3,985,346,
respectively, due from TPEC for these billings.
ELECTRIC AND CONTINGENT CAPACITY SALES AGREEMENTS - The Partnership has two
20-year electric sale agreements with PECO, commencing at the Commercial
Operation date, whereby the Partnership supplies PECO with electric output at
costs defined by the agreements. The terms of agreements require PECO to
purchase or accept delivery of the net electric output from the power plant of
the lesser of 150 megawatts or the amount of electric output for which the FERC
has certified the power plant. The two parties also entered into a 20-year
Contingent Capacity Purchase Addendum which requires PECO to purchase electric
capacity from the Partnership. The addendum term commenced on the date of
Commercial Operation. During 1999, 1998 and 1997, $17,219,532, through April 23,
1999, when PECO transferred its Partnership interest to the remaining payments
(see Note 1) and ceased being considered a related party, $61,932,981 and
$1,778,911, respectively, was billed by the Partnership to PECO for electricity
produced and capacity charges. Of the amounts billed in 1999, 1998 and 1997, $0,
$1,624,855 and $1,778,911, respectively, were applied as a reduction of
construction costs as such sales occurred as a result of plant testing. Accounts
receivable as of December 31, 1999 and 1998 include $5,606,051 and $6,693,424,
respectively, due from PECO for these billings. As a result of the Project, PECO
was required to construct an interconnection between its facility and the
Partnership's facility. The costs associated with the interconnection,
$2,355,426, were reimbursed to PECO by the Partnership during 1997. Other
amounts paid to PECO during 1997 for reimbursement of expenses were $6,000 for
the Partnership's portion of a joint thermal modeling study.
STEAM VENTURE AGREEMENT - On September 17, 1993, TPEC, PUPCO and the Partnership
entered into an Amended and Restated Steam Venture Agreement for the purpose of
the Partnership designing, constructing, starting-up, and testing and owning a
cogeneration facility, with the assistance of the other two participants. The
agreement required the Partnership to pay PUPCO quarterly fees of $150,000 up to
Commercial Operation. Amounts billed in 1997 were capitalized as construction
costs. After Commercial Operation commenced, PUPCO receives annual fees of
$1,200,000 payable in monthly installments. Two-thirds of the annual fee is
subject to an escalation of 3% per annum. During 1998 the Partnership was billed
$1,200,000 by PUPCO under this agreement, of which $25,806 was capitalized as
construction
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cost. The Partnership was billed $1,224,000 during 1999. Accounts payable at
December 31, 1999 and 1998, include $102,000 and $1,200,000, respectively,
related to these billings. In addition, during 1997, the Partnership incurred
PUPCO mobilization fees of $150,000.
FUEL MANAGEMENT AGREEMENT - From the commencement of Commercial Operation
through February 28, 1999, the Partnership had an agreement with Exelon
Corporation, a subsidiary of PECO, for fuel management services. Under the terms
of the agreement, the Partnership paid Exelon a fee based on the amount of
natural gas and liquid fuels delivered to the Project. During 1998, the
Partnership incurred costs associated with these services of $176,480, of which
$4,474 was capitalized as construction costs and $176,480 was included in
accounts payable at December 31, 1998. On February 28, 1999, the agreement with
Exelon was terminated by mutual consent among the parties. The Partnership was
billed $31,336 in fuel management service fees by Exelon through February 28,
1999, all of which was paid by December 31, 1999.
On February 28, 1999 the Partnership entered into an agreement with PUPCO for
fuel management services substantially identical to the services provided under
the previous agreement with Exelon. Under the terms of the agreement, the
Partnership reimburses PUPCO for all reasonable labor and other out-of-pocket
costs incurred in the provision of its services. During 1999, PUPCO billed the
Partnership $50,885 for the services, of which $4,523 remained in accounts
payable at December 31, 1999.
CONSTRUCTION MANAGEMENT - NRGG received fees and reimbursed expenses for
management services provided to the Project and for acting as the Partnership's
representative to administer all third-party contracts during the construction
phase. The arrangement commenced on March 8, 1996 and ceased upon Commercial
Operation. During 1998, NRGG billed the Partnership fees and reimbursed expenses
of $56,250 and $214,795, respectively, all of which were capitalized as
construction cost.
MANAGEMENT SERVICES AND OTHER - In accordance with the Partnership agreement,
the Partnership is required to pay its Managing Partner $150,000 per year for
providing management services to the Partnership. NRGG acted as Managing Partner
through November 15, 1998 and billed the Partnership fees and reimbursable
expenses of $131,250 and $36,719, respectively, of which $118,750 was included
in accounts payable at December 31, 1998. Of these fees, $3,387 was capitalized
as construction cost. Effective November 15, 1998, Trigen became the Managing
Partner and billed the Partnership fees of $156,480 and $18,750 for the years
ended December 31, 1999 and 1998, respectively, of which $13,040 and $18,750 was
included in accounts payable as of December 31, 1999 and 1998, respectively.
Trigen also billed the Partnership reimbursable expenses of $154,083 for the
year ended December 31, 1999, of which $80,701 was included in accounts payable
as of December 31, 1999. In addition, the Partnership purchases demineralized
water from Trigen. For the years ended December 31, 1999 and 1998, the
Partnership purchased $2,132,296 and $2,206,869, respectively, of demineralized
water from Trigen of which $46,671 was capitalized as a construction cost prior
to commercial operation during 1998 and $290,634 and $498,322 was included in
accounts payable as of December 31, 1999 and 1998, respectively.
5. OTHER SIGNIFICANT CONTRACTS
GAS SUPPLY AGREEMENT - The Partnership has a gas sales agreement with Aquila
Energy Marketing Corporation ("Aquila"), a Delaware corporation, providing for
the purchase of natural gas to meet the power plant's requirements. The purchase
of gas as stated in the agreement is divided into two tiers based on quantity
purchased. The price of the first tier, for daily purchases up to 32,000 million
British Thermal units (MMBtu) is based on the gas spot market plus a premium.
The second tier, for daily purchases above the initial 32,000 MMBtu, is also
based on the gas spot market plus a premium. The premium on second tier gas
purchases is subject to annual negotiations effective for years beginning
January 1, 1999 and after. In addition, beginning in 2001 the price of both
tiers is indexed based on the electricity rate received by the Project. The
agreement also has a pricing provision for winter quantity gas delivered to
certain redelivery points as defined in the agreement. The initial term of the
gas sales agreement is 192 months from the initial delivery and may be extended
for one-year renewal periods unless terminated by either party. During 1999 and
1998, the Partnership purchased $28,071,455 and $14,691,090, respectively, of
gas under this agreement.
GAS TRANSPORTATION ARRANGEMENTS - The Partnership and the Philadelphia Authority
for Industrial Development ("PAID") entered into a service agreement dated
January 28, 1996, whereby PAID agreed to deliver non-interruptible local gas
service to the Project for up to 50,000 Dekatherms ("Dth") per day from the date
of Commercial Operation via an established agreement with Philadelphia Gas Works
("PGW"). The agreement between the Partnership and PAID is
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for a period of 25 years and may be extended at the mutual agreement of the two
parties. The Partnership is committed to purchase transportation services for a
minimum annual quantity based in part, on steam sales to Trigen. In addition,
TPEC permanently released capacity of 15,000 Dth to the Partnership beginning
November 1, 1997. TPEC retained first refusal privileges on this released
capacity in the event that the Partnership does not require the additional
capacity. During 1999 and 1998, the Partnership purchased $3,627,758 and
$3,187,640, respectively, of transportation services under these agreements.
ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT - The Partnership has a
$116,300,000 engineering, procurement and construction contract (the "EPC") with
the Contractor. The contract guaranteed that the Project would be provisionally
completed by December 8, 1997, the projected date of Commercial Operation.
Provisions of the contract included rebates to the Partnership of $70,000 a day
should the Contractor fail to complete the Project on schedule as well as bonus
payments to the Contractor should the Project be completed prior to schedule.
The contract was not completed on time. As such, a rebate in the amount of
$1,722,000 was recorded in accounts receivable at December 31, 1998 and this
amount was received during 1999. The Partnership and the Contractor resolved all
of their differences related to the completion of the EPC contract on April 26,
1999 when they executed an amendment to that contract. The amendment fixed the
date of Provisional Acceptance at April 26, 1999 and adjusted the amounts
remaining payable under the contract on the date of the amendment downward
$2,417,000 for late completion and other items.
COMBUSTION TURBINE PARTS SUPPLY AND REPAIR AND SCHEDULED OUTAGE SERVICES
AGREEMENT - The Partnership entered into a combustion turbine parts supply and
repair and scheduled outage services agreement with Westinghouse Electric
Corporation as of August 29, 1997. The agreement requires the Partnership to
purchase from the Contractor parts and miscellaneous hardware for the gas
turbine comprising a portion of the Project, repair of parts for the gas turbine
comprising a portion of the Project, and scheduled outage services and technical
field assistance for unscheduled outages as defined in the agreement. The
Partnership was billed $360,000 for 1998 services provided and has estimated the
same amount for 1999. On April 26, 1999, the parties signed an Amendment to the
original agreement which provides a $400,000 credit towards the purchase of
Contractor services. The Partnership applied the credit toward the 1999 and 1998
expenses. The amount included in accounts payable to the Contractor on December
31, 1999 was $182,600.
6. CREDIT AGREEMENTS
CONSTRUCTION CREDIT AGREEMENT - On March 1, 1996 the Partnership entered into a
$125,000,000 Credit Agreement (the "Agreement") to provide construction and term
loan financing for the purpose of financing a major portion of the Project
facility. The Agreement provides the Partnership with $113,000,000 of
construction loan commitments (the "Construction Loan") which are convertible to
term loan commitments (the "Term Loan") after completion of certain criteria as
stated in the Agreement, $7,000,000 in letter of credit commitments (the "LOC
Commitment"), and $5,000,000 in working capital loan commitments (the "WC
Loan"). Upon completion of the Project, the Construction Loan is due and payable
or may be converted to a 15-year Term Loan, payable in quarterly installments
through the year 2013. The Term Loan is available only to repay the Construction
Loan. Substantially all of the Partnership's assets have been pledged as
collateral under the Agreement.
The Partnership had $79,400,682 and $94,324,049 outstanding under the
Construction Loan at December 31, 1999 and 1998, respectively. The Partnership
has pledged $3,000,000 and $5,000,000 under its LOC Commitment for outstanding
letters of credit as of December 31, 1999 and 1998, respectively.
Interest on balances outstanding under the Construction Loan and the WC Loan
prior to conversion of Construction Loan to Term Loan, is based on either the
base rate, as defined in the Agreement, or LIBOR plus 1.1% as elected by the
Partnership at the time of borrowing, and was 7.60% and 6.66% at December 31,
1999 and 1998, respectively. Interest on balances outstanding under the Term
Loan and the WC Loan, subsequent to conversion of Construction Loan to Term
Loan, is based on the rates as noted during the Construction Loan period and is
subject to an increase in the percentage as defined in the Agreement. Interest
on letters of credit outstanding under the LOC Commitment is currently 1.1%, and
is subject to periodic increases during the term of the Agreement. The LOC
Commitment also is subject to a fee of 0.125%, due quarterly.
The Agreement provides for commitment fees of 0.375% on the unused Construction
Loan, WC Loan and LOC Commitment.
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To protect the Project Lender from the uncertainty of interest rate changes
during the term of the loan, the Partnership entered into an agreement (the
"Swap Agreement") with Chase Manhattan Bank (the "Counterparty"), a
participating bank in the Loan Agreement on March 1, 1996. Under the Swap
Agreement, the Partnership agreed to swap interest payments with the
Counterparty. Effective December 8, 1997, the Partnership is obligated to make
fixed interest payments at a rate of 7.18% from effective date of December 8,
1997 through termination date of December 8, 2012 on a balance of $56,500,000 at
December 8, 1997 and decreasing in accordance with the Swap Agreement. The
Counterparty is obligated to make variable interest payments based on a
three-month LIBOR, which was 6.1% and 5.2% at December 31, 1999 and 1998,
respectively, on the same balance.
SUBORDINATE CREDIT AGREEMENT - The Partnership also has a Subordinate Credit
Commitment with the Project's Contractor. The Contractor agreed to lend the
Partnership $15,000,000 to provide additional funding for the construction of
the Project. The funds were made available after the Construction Loan
commitments described above were exhausted and the Partners made their equity
contribution of $30,000,000 used for the continuation of the Project's
construction. The term of the Subordinate Debt is nine years and interest on the
Subordinate Debt is calculated using the prime rate for the first four years and
prime rate plus 1.5% for the remaining years. During 1998, the Partnership
borrowed the full $15,000,000 available under the Subordinate Debt, all of which
remains outstanding at December 31, 1999. During 1998, the Partnership received
a notice of default from the Project Lender. Such default resulted in a
cross-default on the Partnership's subordinate debt. (See Note 2).
7. CAPITAL CONTRIBUTIONS
During 1997, the Construction Loan (see Note 6) was fully utilized. Each of the
Partners made an equity contribution of $10,000,000. The last contributions were
made December 29, 1997.
8. NEW ACCOUNTING PRONOUCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), REPORTING ON THE COSTS OF START-UP
ACTIVITIES. This statement, which requires that costs related to start-up
activities generally be expensed as incurred, is effective for fiscal years
beginning after December 25, 1998. The Company recorded a $357,000 charge
against income in the year ended December 31, 1999 as the cumulative effect of
change in accounting principle due to adoption of this pronouncement. As these
costs were incurred prior to the year ended December 31, 1997, pro forma income
for the year ended December 31, 1997, assuming the method is applied
retroactively, would not be materially different from the income as reported.
Therefore, no pro forma disclosure of the effect of this change in accounting
principal is necessary.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENT AND HEDGING ACTIVITIES. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. This statement, as amended by SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, is effective for fiscal years
beginning after June 15, 2000. The Partnership is in the process of analyzing
the impact that SFAS No. 133 will have on its financial position and results of
operations when such statement is adopted.
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9. COMMITMENTS AND CONTINGENCIES
The Partnership is committed to purchase non-interruptible local gas service for
the Project from the Philadelphia Authority for Industrial Development ("PAID")
through a service agreement dated January 28, 1996. The agreement between the
Partnership and PAID is for a period of 25 years and may be extended at the
mutual agreement of the two parties. The service agreement requires the
Partnership to purchase a minimum annual quantity of gas transportation. The
minimum annual amounts, based on the minimum quantities and costs per the
agreement are as follows:
MINIMUM
YEAR ANNUAL AMOUNT
2000 $ 880,000
2001 1,184,000
2002 - 2016 688,000
2017 - 2022 536,000
These minimums are subject to downward revisions for the amount of gas
delivered to Trigen as well as the quantity of steam produced at the
Schuylkill station.
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