UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number: 333-40478
AES RED OAK, L.L.C.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1889658
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1001 NORTH 19TH STREET, ARLINGTON, VIRGINIA 22209,
c/o THE AES CORPORATION
(703) 522-1315
(Registrant's address of principal executive offices,)
(zip code and telephone number, including area code)
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 / /
(Page 1 of 19)
AES RED OAK, L.L.C.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Statements of Operations,
Three months ended March 31, 2001, Period from March 15,
2000 (inception) through March 31, 2000 and the Period from
March 15, 2000 (inception) through March 31, 2001.............................3
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 .........................................4
Condensed Consolidated Statements of Changes in Member's Deficit,
Period from March 15, 2000 (inception) through March 31, 2001.................5
Condensed Consolidated Statements of Cash Flows,
Three months ended March 31, 2001, Period of March 15, 2000
(inception) through March 31, 2000 and the Period March 15,
2000 (inception) through March 31, 2001.......................................6
Notes to the Condensed Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................................15
PART II. OTHER INFORMATION
Item 5. Other Information.....................................................................16
Item 6. Exhibits and Reports on Form 8-K......................................................18
SIGNATURES..................................................................................................19
(Page 2 of 19)
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AES RED OAK, L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS,
THREE MONTHS ENDED MARCH 31, 2001, PERIOD MARCH 15, 2000
(INCEPTION) THROUGH MARCH 31, 2000 AND THE PERIOD FROM
MARCH 15, 2000 (INCEPTION) THROUGH MARCH 31, 2001
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 15, 2000 MARCH 15, 2000
MARCH 31, 2001 (INCEPTION) THROUGH (INCEPTION) THROUGH
MARCH 31, 2000 MARCH 31, 2001
------------------------- ----------------------- ------------------------
OPERATING EXPENSES
General administrative costs......... $ (9) $ (162) $ (210)
------- -------- --------
Operating Loss....................... (9) (162) (210)
OTHER INCOME/EXPENSE
Interest income...................... 260 120 2,112
Interest expense..................... (352) (203) (2,951)
------- -------- --------
NET LOSS.................................. $ (101) $ (245) $ (1,049)
======= ======== ========
See notes to condensed consolidated financial statements.
(Page 3 of 19)
AES RED OAK, L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
AS OF AS OF
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
ASSETS:
Current Assets:
Cash $ 76 $ 15
Restricted investments-at cost, which approximates market value.................... 10,663 21,795
Receivables........................................................................ 68 21
----------- -----------
Total current assets............................................................... 10,807 21,831
Prepaid construction costs......................................................... 174,813 227,609
Land 4,240 4,240
Construction in progress........................................................... 181,757 117,033
Deferred financing costs - net of accumulated amortization of
$850 and $646, respectively................................................... 17,855 18,059
----------- -----------
Total assets....................................................................... $ 389,472 $ 388,772
=========== ===========
LIABILITIES AND MEMBER'S DEFICIT:
Current Liabilities:
Accounts payable.................................................................... $ 1,133 $ 304
Accrued liabilities................................................................. 85 90
Accrued Interest................................................................... 2,821 2,821
Payable to affiliate............................................................... 1,496 2,505
----------- -----------
Total current liabilities.......................................................... 5,535 5,720
Bonds payable...................................................................... 384,000 384,000
----------- -----------
Total liabilities.................................................................. $ 389,535 $ 389,720
----------- -----------
Commitments (Notes 4, 5 and 7) - -
Member's deficit:
Common stock, $1 par value-10 shares authorized, none issued or outstanding....... - -
Contributed capital................................................................ 986 -
Deficit accumulated during the development stage................................... (1,049) (948)
------------ -----------
Total member's deficit............................................................. (63) (948)
----------- -----------
Total liabilities and member's deficit............................................. $ 389,472 $ 388,772
=========== ===========
See notes to condensed consolidated financial statements.
(Page 4 of 19)
AES RED OAK, L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S DEFICIT
PERIOD FROM MARCH 15, 2000
(INCEPTION) THROUGH MARCH 31, 2001
(DOLLARS IN THOUSANDS)
COMMON STOCK MEMBER'S
SHARES AMOUNT DEFICIT TOTAL
------ ------ ------- -----
BALANCE, MARCH 15, 2000 (inception)................ - - - -
Net Loss........................................... - - $ (245) $ (245)
--------- ---------
BALANCE, MARCH 31, 2000 - - (245) (245)
Net Loss........................................... - - (703) (703)
--------- ---------
BALANCE, DECEMBER 31, 2000 - - (948) (948)
Contributed Capital................................ - - 986 986
Net Loss........................................... - - (101) (101)
--------- ---------
BALANCE, MARCH 31, 2001............................ - - $ (63) $ (63)
========== =========
See notes to condensed consolidated financial statements.
(Page 5 of 19)
AES RED OAK, L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 2001, PERIOD FROM MARCH 15, 2000
(INCEPTION) THROUGH MARCH 31, 2000 AND THE
PERIOD FROM MARCH 15, 2000 (INCEPTION)
THROUGH MARCH 31, 2001.
(DOLLARS IN THOUSANDS)
MARCH 15, 2000 MARCH 15,2000
THREE MONTHS ENDED (INCEPTION) THROUGH (INCEPTION) THROUGH
MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 2001
-------------- -------------- --------------
OPERATING ACTIVITIES:
Net loss.................................................. $ (101) $ (245) $ (1,049)
Amortization of deferred financing costs.................. 204 10 850
Change in:
Accounts Receivable....................................... - (47) (68)
Accounts Payable.......................................... 829 213 1,133
Accrued Liabilities ...................................... (5) - 85
Accrued interest ......................................... - 1,598 2,821
Payable to affiliates..................................... (1,009) 1,129 1,496
----------------- ---------------- ----------------
Net cash (used in) provided by operating activities....... (129) 2,705 5,268
----------------- ---------------- ----------------
INVESTING ACTIVITIES:
Prepaid construction costs................................ - (288,573) (288,573)
Payments for construction in progress..................... (11,928) (26,398) (67,997)
Payments for land......................................... - (4,240) (4,240)
Change in debt service reserve............................ 11,132 (48,749) (10,663)
----------------- ---------------- ----------------
Net cash used in investing activities..................... (796) (367,960) (371,473)
----------------- ----------------- -----------------
FINANCING ACTIVITIES:
Proceeds from project debt issuance....................... - 384,000 384,000
Contributed Capital....................................... 986 - 986
Payments for deferred financing costs..................... - (18,719) (18,705)
---------------- ----------------- -----------------
Net cash provided by financing activities................. 986 365,281 366,281
---------------- ---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 61 26 76
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 15 - -
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 76 $ 26 $ 76
================= ================= =================
SUPPLEMENTAL DISCLOSURE OF OTHER ACTIVITES:
Interest paid (net of amount capitalized)................. $ 352 $ - $ 2,677
================= ================= =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITES:
Transfer of prepaid construction costs to
construction in progress................................. $ 52,796 $ - $ 113,760
================= ================= =================
See notes condensed consolidated financial statements.
(Page 6 of 19)
AES RED OAK, L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, THREE MONTHS ENDED
MARCH 31, 2001, PERIOD FROM MARCH 15, 2000 (INCEPTION) THROUGH MARCH 31, 2000
AND THE PERIOD FROM MARCH 15, 2000 (INCEPTION) THROUGH MARCH 31, 2001
1. ORGANIZATION
AES Red Oak, L.L.C. (the Company) was formed on September 13, 1998, in
the State of Delaware, to develop, construct, own and operate an
830-megawatt (MW) gas-fired, combined cycle electric generating facility
(the facility) in Sayreville, New Jersey. The Company was considered
dormant until March 15, 2000, at which time it consummated a project
financing and certain related agreements. The facility, currently under
construction, will consist of three Westinghouse 501 FD combustion
turbines, three unfired heat recovery steam generators, and one
multicylinder steam turbine. The facility will produce and sell
electricity, as well as provide fuel conversion and ancillary services,
solely to Williams Energy Marketing and Trading Company (Williams) under
a power purchase agreement with a term of 20 years that is expected to
commence on or prior to February 14, 2002, the facility's guaranteed
completion date under the EPC, as defined below (see notes 4 and 7).
The Company is in the development stage and is not expected to generate
any operating revenues until the facility achieves commercial operations.
As with any new business venture of this size and nature, operation of
the facility could be affected by many factors. Management of the Company
believes that the assets of the Company are realizable.
The Company is a wholly owned subsidiary of AES Red Oak, Inc. (Red Oak),
which is a wholly-owned subsidiary of The AES Corporation (AES). Red Oak
has no assets other than its ownership interests in the Company and AES
Sayreville, L.L.C. Red Oak has no operations and is not expected to have
any operations. Red Oak's only income will be from distributions it
receives from the Company and AES Sayreville, L.L.C., once the Company
achieves commercial operation. The equity that Red Oak is to provide to
the Company will be provided to Red Oak by AES, which owns all of the
equity interest of Red Oak. AES files quarterly and annual audited
reports with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which are publicly available. Red Oak's equity
contribution obligations are required to be supported by either an
insurance bond or letter of credit. Currently those obligations are
supported by an insurance bond issued to the collateral agent.
The Company owns all of the equity interests in AES Red Oak Urban Renewal
Corporation (URC), which was organized as an urban renewal corporation
under New Jersey Law. As an urban renewal corporation under New Jersey
law, portions of the facility can be designated as redevelopment areas in
order to provide real estate tax and development benefits to the
facility. URC has no operations outside of its activities in connection
with the facility.
(Page 7 of 19)
On March 15, 2000, the Company issued $384 million in senior secured
bonds for the purpose of providing financing for the construction of the
facility and to fund, through the construction period, interest payments
to the bondholders. In late September 2000, the Company consummated an
exchange offer whereby the holders of the senior secured bonds exchanged
their privately placed senior secured bonds for registered senior secured
bonds.
In February 2001, the Company reclassified $986,000, a payable to
affiliate (AES Corporation) to contributed capital. This amount
represented expenditures paid by the AES Corporation prior to March 15,
2000.
Pursuant to an equity subscription agreement (see note 3), Red Oak has
agreed to contribute up to approximately $55.7 million to the Company to
fund construction after the bond proceeds have been fully utilized.
2. BASIS OF PRESENTATION
In the Company's opinion, all adjustments necessary for a fair
presentation of the unaudited results of operations for the three months
ended March 31, 2001, the period from March 15, 2000 (inception) through
March 31, 2000 and the period from March 15, 2000 (inception) through
March 31, 2001 are included. All such adjustments are accruals of a
normal and recurring nature. The results of operations for the three
months ended March 31, 2001, the period from March 15, 2000 (inception)
through March 31, 2000 and the period from March 15, 2000 (inception)
through March 31, 2001, are not necessarily indicative of the results of
operations to be expected for the full year.
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
for interim financial information, with the instructions to the Form
10-Q, and with Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the Unites States of America for complete financial
statements. Because the accompanying condensed consolidated financial
statements do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of
America, they should be read in conjunction with the audited financial
statements for the period ended December 31, 2000 and notes thereto
included in the Company's Form 10-K for the fiscal year ended December
31, 2000.
3. EQUITY SUBSCRIPTION AGREEMENT
The Company, along with Red Oak, has entered into an Equity Subscription
Agreement, pursuant to which Red Oak has agreed to contribute up to
approximately $55.7 million to the Company to fund project costs. This
amount is secured by an acceptable bond issued by Red Oak. Red Oak will
fund these amounts as they come due upon the earlier of (a) expenditure
of all funds that have been established for construction or (b) the
occurrence, and during the continuation of, an event of default, as
defined under the indenture governing its senior secured bonds. A portion
of this equity requirement may be made in the form of affiliate debt,
between Red Oak and the Company, which would be subordinate to the senior
secured bonds.
4. POWER PURCHASE AGREEMENT
The Company and Williams have entered into a power purchase agreement
(PPA) for the sale of all electric energy and capacity produced by the
facility, as well as ancillary services and fuel conversion services. The
term of the PPA is 20 years, commencing on the Commercial Operation
(Page 8 of 19)
Date, which is defined in the PPA as the day the initial start up testing
procedures have been successfully completed and notified to Williams by
the Company. Payment obligations to the Company are guaranteed by The
Williams Companies, Inc. Such payment obligations under the guarantee are
capped at an amount equal to 125% of the sum of the principal amount of
the senior secured bonds plus the maximum debt service reserve account
required balance. The Company has provided Williams a guaranty issued by
AES of specific payment obligations should the facility not achieve
commercial operation by February 14, 2002, the guaranteed completion date
under the EPC (see note 5). AES's liability under the guaranty is capped
at $30 million. The Company has the option, and may be required under
specific conditions described in the PPA, to replace the guaranty issued
by AES with a letter of credit issued by a commercial bank. In such case,
the repayment obligations with respect to drawings under the letter of
credit are to be a senior debt obligation of the Company.
5. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION - The Company entered into an Agreement for Engineering,
Procurement and Construction Services, dated as of October 15, 1999,
between the Company and Washington Group International, Inc. (New
Contractor) (as successor in interest to Raytheon Engineers &
Constructors, Inc. (Contractor)), as amended (EPC) for the design,
engineering, procurement and construction of the facility. The Company
prepaid the EPC in the amount of $288.6 million, representing a
discounted fixed price. In consideration of the prepayment, the
Contractor issued in favor of the Company a letter of credit with an
initial amount of $237.7 million to be reduced over the construction
period. As of March 31, 2001, the letter of credit has been reduced by
approximately $113.8 million representing completion of certain
construction milestones (see note 7).
On July 7, 2000, Morrison Knudsen Corporation completed its acquisition
of the Contractor and formed the New Contractor. The New Contractor is
comprised of Morrison Knudsen Corporation, the Contractor and
Westinghouse Government Services Group. As a result of this acquisition
and the formation of the New Contractor, the terms and conditions under
the EPC and the letter of credit obligation were unchanged.
On May 14, 2001, the New Contractor announced that it had filed a plan of
reorganization along with voluntary petitions to restructure under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for
the District of Nevada in Reno. Under the EPC, a bankruptcy filing by the
New Contractor constitutes an event of default (see note 7). If it
becomes necessary to replace the New Contractor, the Company may
experience significant construction delays that could extend the expected
commercial operation date beyond February 14, 2002, the guaranteed
completion date under the EPC.
MAINTENANCE SERVICES AGREEMENT - The Company has entered into an
agreement with Siemens Westinghouse Power Corporation (Siemens). Siemens
will provide the Company with specific combustion turbine maintenance
services and spare parts for an initial term of between six and sixteen
years. For the first six years of operation, the Company is committed to
pay $306 per kilowatt hour of service. The value of this commitment is
difficult to ascertain at this time due to the unknown operational mode
Williams will require from the Company.
WATER SUPPLY - The Company has entered into a contract with the Borough
of Sayreville (the Borough) by which the Borough will provide untreated
water to the Company. The contract has a term of 30 years with an option
to extend for up to four additional five-year terms. The Company
(Page 9 of 19)
is contractually committed to a minimum annual payment of $300,000. Based
on estimated maximum usage, the Company believes that its annual payment
will not exceed approximately $400,000.
INTERCONNECTION AGREEMENT - The Company has entered into an
interconnection agreement with Jersey Central Power & Light Company d/b/a
GPU Energy (GPU) to transmit the electricity generated by the facility to
the transmission grid so that it may be sold as prescribed under the
Company's PPA. The agreement is in effect for the life of the facility,
yet may be terminated by mutual consent of both GPU and the Company under
certain circumstances as detailed in the agreement. Costs associated with
the agreement are based on electricity transmitted via GPU at a variable
price, the PJM (Pennsylvania/New Jersey/Maryland) Tariff as charged by
GPU to the Company, which is comprised of both service cost and asset
recovery cost, as determined by GPU and approved by the Federal Energy
Regulatory Commission.
WATER SUPPLY PIPELINE - The Borough will design the Lagoon Water
Pipeline, Lagoon Pumping Station and Sayreville Interconnection Number 2
in conformance with standard water system practice. The Company is
responsible for selection of a contractor and for payment of all costs.
The pipeline construction has been completed. The construction contract
for the Pumping Station has not been awarded. The value of the pumping
station is estimated to be approximately $2.0 million.
6. DERIVATIVE INSTRUMENTS
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which, as amended,
establishes accounting and reporting standards for derivative instruments
and hedging activities.
The Company will produce and sell electricity, as well as provide fuel
conversion and ancillary services, solely to Williams under a long term
Power Purchase Agreement (PPA).
The Financial Accounting Standards Board reached a tentative conclusion
in April 2001 that option contracts for the purchase and sale of
electricity that meet the definition of a derivative under SFAS No. 133
are not subject to the normal purchases and sales exemption, and as such,
should be accounted for as derivatives effective July 1, 2001. The
Company is currently assessing the impact of this tentative conclusion on
its financial condition and results of operations. The Company does not
currently believe that the PPA should be accounted for as a derivative.
The Company has no other contracts that meet the definition of a
derivative or an embedded derivative under Statement 133.
7. SUBSEQUENT EVENT
At the time of issuance of the senior secured bonds, the Company prepaid
the discounted fixed price of the EPC in accordance with the EPC
Prepayment Coordination Agreement, dated as of March 14, 2000 between the
New Contractor and the Company (the "Prepayment Agreement"). In
consideration of such prepayment, the performance of all the New
Contractor's obligations under the EPC were secured by a letter of credit
(the "Prepayment Letter of Credit") in favor of the Collateral Agent with
an initial stated amount of $237.7 million, such amount to be reduced
over the construction period as construction milestones were met by the
new Contractor. As of May 4,
(Page 10 of 19)
2001, the stated amount of the letter of credit was $95.8 million.
Pursuant to the terms of the Prepayment Letter of Credit (see note 5),
such letter of credit can be drawn upon and the prepayment arrangements
terminated upon the occurrence of certain bankruptcy related actions with
respect to the New Contractor which constitute an event of default under
the EPC. Based on recent correspondence from the New Contractor, the
Company believed that such an event of default under the EPC had occurred
and was continuing. As a result, in accordance with the terms of the
Collateral Agency Agreement, the Company on May 3, 2001 requested the
Collateral Agent to draw the full available amount of such letter of
credit and deposit the proceeds of such drawing in the Construction
Account held by the Collateral Agent. The Collateral Agent made such
drawing on May 4, 2001 in the amount of $95.8 million. Subsequent to the
termination of the prepayment arrangements with the New Contractor,
payments to the New Contractor for achievement of construction milestones
as specified in the EPC will be made in accordance with the terms of the
EPC.
On May 14, 2001, the New Contractor announced that it had filed a plan of
reorganization along with voluntary petitions to restructure under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for
the District of Nevada in Reno (Bankruptcy Court).
The New Contractor is currently continuing construction of the Red Oak
Project and the Company is carefully monitoring the progress of
construction at the facility for any work slowdowns or stoppages, neither
of which has been noted to date.
Under a guaranty in the Company's favor, effective as of October 15,
1999, all of the New Contractor's obligations under the EPC are
irrevocably and unconditionally guaranteed by Raytheon Company. If it
becomes necessary, the Company will exercise its rights under this
guaranty.
Although there can be no guarantees, based upon the Company's current
assessment of progress at the construction site, and the performance
guaranty from Raytheon Company, and assuming that the New Contractor
continues performance under the EPC, the Company currently believes that
the facility will become commercially operational on or prior to February
14, 2002, the guaranteed completion date under the EPC.
Notwithstanding the Company's current belief, if it becomes necessary to
replace the New Contractor under the EPC, the Company may experience
significant construction delays. Additionally, the Company may not be
able to find a replacement contractor on favorable or reasonable terms.
In the event the commercial operation date of the facility is
significantly delayed or the Company cannot find a replacement on
favorable or reasonable terms, the Company may not have financial
resources sufficient to meet its financial and contractual obligations,
including the timely payment of principal and interest on the senior
secured bonds.
Other than with respect to developments that may have a material impact
on the Company or its business operations, the Company is under no
obligation nor does it intend to continuously provide updates of the New
Contractor's bankruptcy proceedings. However, copies of all pleadings
filed with the Bankruptcy Court are available from the office of the
clerk of the Bankruptcy Court.
(Page 11 of 19)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-Q, as well as statements made by
the Company in periodic press releases and other public communications,
constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Certain, but not
necessarily all, of such forward-looking statements can be identified
by the use of forward-looking terminology, such as "believes,"
"estimates," "plans," "projects," "expects," "may," "will," "should,"
"approximately," or "anticipates" or the negative thereof or other
variations thereof or comparable terminology, or by discussion of
strategies, each of which involves risks and uncertainties. The Company
has based these forward-looking statements on its current expectations
and projections about future events based upon its knowledge of facts
as of the date of this Form 10-Q and its assumptions about future
events.
All statements other than of historical facts included herein,
including those regarding market trends, the Company's financial
position, business strategy, projected plans and objectives of
management for future operations and the anticipated commercial
operation date of the facility, are forward-looking statements. Such
forward-looking statements involve known and unknown risks,
uncertainties and other factors outside of the Company's control that
may cause the actual results or performance of the Company to be
materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements.
These risks, uncertainties and other factors include, among others, the
following:
o unexpected construction delays,
o unexpected problems relating to the start-up, commissioning
and performance of the facility,
o the financial condition of third parties on which we depend,
including in particular, Washington Group International,
Inc.,
o continued performance by Washington Group under the EPC
contract,
o the Company's ability to find a replacement contractor on
favorable or reasonable terms, if necessary,
o an adequate merchant market after the expiration of the
power purchase agreement,
o capital shortfalls and access to additional capital on
reasonable terms,
o inadequate insurance coverage,
o unexpected expenses or lower than expected revenues once
commercial operations have begun,
o environmental and regulatory compliance, and
o the additional factors that are unknown to the Company or
beyond its control.
The Company has no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events or otherwise.
(Page 12 of 19)
GENERAL
The Company was formed on September 13, 1998 to develop, construct,
own, operate and maintain its facility. The Company was dormant until
March 15, 2000, the date of the sale of the senior secured bonds. The
Company is in the development stage and has no operating revenues. The
Company obtained $384.0 million of project financing from the sale its
senior secured bonds. The total cost of the construction of the
Company's facility is estimated to be approximately $439.8 million,
which will be financed by the proceeds from the sale of its senior
secured bonds and the equity contribution described below. In late
September 2000, the Company consummated an exchange offer whereby the
holders of the senior secured bonds exchanged their privately placed
senior secured bonds for registered senior secured bonds.
The Company's facility is still under construction and is expected to
be completed and operational on or prior to February 14, 2002, the
guaranteed completion date under the EPC contract. The Company cannot
assure that these expectations will be met. See "Note 7. Subsequent
Event" of the Notes to Condensed Consolidated Financial Statements and
"--Cautionary Note Regarding Forward-Looking Statements."
EQUITY CONTRIBUTIONS
In February 2001, the Company reclassified $986,000, a payable to
affiliate ("AES Corporation"), to contributed capital. This amount
represents expenditures paid by the AES Corporation prior to March 15,
2000.
Under the equity subscription agreement, Red Oak is obligated to
contribute up to approximately $55.7 million to the Company to fund
project costs. Red Oak's obligation to make the contributions is, and
will be, supported by an acceptable letter of credit or an acceptable
bond.
RESULTS OF OPERATIONS
As of March 31, 2001 and December 31, 2000, Construction in Progress,
which includes capitalized facility construction costs, was $181.8
million and $117.0 million, respectively. For the three months ended
March 31, 2001 and 2000, capitalized facility construction costs were
$64.7 million and $26.4 million, respectively. As discussed in greater
detail below, Construction in Progress also includes the capitalization
of construction related interest cost incurred on the portion of the
bond proceeds expended during the construction period. These
capitalized costs are included as assets on the Balance Sheets.
The Company prepaid the EPC contract in the amount of $288.6 million
and in consideration of the prepayment the Contractor issued in favor
of the Company a letter of credit. As of March 31, 2001, the letter of
credit has been reduced by approximately $113.8 million, representing
completion of certain construction milestones resulting in prepaid
construction costs in the amount of $174.8 million and included as
assets on the Balance Sheet as of March 31, 2001. The cost of
purchasing land for construction of the Company's facility has been
separately identified on the Balance Sheets.
The Company had the right to draw upon the prepayment letter of credit
referred to above and terminate the prepayment arrangements upon the
occurrence of certain bankruptcy related actions with respect
Washington Group which constituted an event of default under the EPC
contract. Based on recent correspondence from Washington Group, the
Company believed that
(Page 13 of 19)
such an event of default under the EPC contract had occurred and was
continuing. As a result, in accordance with the terms of the Collateral
Agency Agreement, the Company on May 3, 2001 requested the Collateral
Agent to draw the full available amount of such letter of credit and
deposit the proceeds of such drawing in the Construction Account held
by the Collateral Agent. The Collateral Agent made such drawing on May
4, 2001 in the amount of $95.8 million, the balance of the letter of
credit on that date. Subsequent to the termination of the prepayment
arrangements with Washington Group, payments to Washington Group for
achievement of construction milestones as specified in the EPC contract
will be made in accordance with the terms of the EPC contract. In
future periods, payments made to Washington Group under the EPC
contract will be paid from the Construction Account.
For the three months ended March 31, 2001, the period from March 15,
2000 (inception) through March 31, 2000 and the period from March 15,
2000 (inception) through March 31, 2001, general and administrative
costs of $9,000, $162,000 and $210,000, respectively, were incurred.
These costs did not directly relate to construction and are included
as expenses in the Statement of Operations.
A portion of the proceeds from the sale of the senior secured bonds
has not yet been expended on construction and was invested by the
trustee. For the three months ended March 31, 2001, the period from
March 15, 2000 (inception) through March 31, 2000 and the period from
March 15, 2000 (inception) through March 31, 2001, the interest income
earned on these invested funds was approximately $260,000, $120,000 and
$2.1 million, respectively, and is included in the Statement of
Operations.
As noted above, for the three months ended March 31, 2001, the period
from March 15, 2000 (inception) through March 31, 2000 and the period
from March 15, 2000 (inception) through March 31, 2001, the
construction related interest costs incurred on the portion of the
bond proceeds expended during the construction period is capitalized
to Construction in Progress, was approximately $8.1 million,
$1.4 million and $32.3 million respectively, and is included on the
Balance Sheets. For the three months March 31, 2001, the period from
March 15, 2000 (inception) through March 31, 2000 and the period from
March 15, 2000 (inception) through March 31, 2001, interest cost
incurred on the bond proceeds not spent on construction of the
Company's facility was approximately $352,000, $203,000 and
$3.0 million respectively, and is included as interest expense in the
Statements of Operations.
For the three months ended March 31, 2001, the period from March 15,
2000 (inception) through March 31, 2000 and the period from March 15,
2000 (inception) through March 31, 2001, non-capitalizable costs plus
interest cost and less interest income resulted in a net loss of
approximately $101,000, $245,000 and $1.0 million, respectively. The
results of operations may not be comparable with the results of
operations during future periods, especially when the Company's
facility commences commercial operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that the net proceeds from the sale of the senior
secured bonds, together with the equity contribution, will be
sufficient to (1) fund the engineering, procurement, construction,
testing and commissioning of the Company's facility until it is placed
in commercial operation, (2) pay certain fees and expenses in
connection with the financing and development of the Company's project
and (3) pay project costs, including interest on the senior secured
bonds. After the Company's facility is placed in commercial operation,
it will depend on revenues under the power purchase agreement, and
after the power purchase agreement expires, it will depend on revenues
generated from market sales of electricity.
(Page 14 of 19)
In order to provide liquidity in the event of cash flow shortfalls, the
debt service reserve account will contain an amount equal to the debt
service reserve account required balance through cash funding, issuance
of the debt service reserve letter of credit or a combination of the
two.
As of March 31, 2001, apart from commitments totaling $541,000 arising
from the construction of our facility, we have committed to three
additional capital expenditures totaling $3.2 million. These
expenditures are for a water pipeline for approximately $678,000, road
modifications for $537,000 and a water pumping station for an estimated
$2.0 million. As of March 31, 2001, the road modifications and their
related expenditures have been completed and paid. We expect to pay the
remaining balance of the pipeline, approximately $100,000 in May 2001.
The entire cost of the water pumping station will be paid in fiscal
year 2001 from equity contributions under the Equity Subscription
Agreement from The AES Corporation.
On May 14, 2001, Washington Group announced that it had filed a plan of
reorganization along with voluntary petitions to restructure under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for
the District of Nevada in Reno. Washington Group is currently
continuing construction of the facility and the Company is carefully
monitoring the progress of construction at the facility for any work
slowdowns or stoppages, neither of which has been noted to date.
Although there can be no guarantees, based upon the Company's current
assessment of progress at the construction site, and the performance
guaranty from Raytheon Company, and assuming that Washington Group
continues performance under the EPC contract, the Company currently
believes that the facility will become commercially operational on or
prior to February 14, 2002, the guaranteed completion date under the
EPC contract.
Notwithstanding the Company's current belief, if it becomes necessary
to replace Washington Group under the EPC contract, the Company may
experience significant construction delays. Additionally, the Company
may not be able to find a replacement contractor on favorable or
reasonable terms. In the event the commercial operation date of the
facility is significantly delayed or the Company cannot find a
replacement on favorable or reasonable terms, the Company may not have
financial resources sufficient to meet its financial and contractual
obligations, including the timely payment of principal and interest on
the senior secured bonds. See "Note 7. Subsequent Event" of the Notes
to Condensed Consolidated Financial Statements and "--Cautionary Note
Regarding Forward-Looking Statements."
BUSINESS STRATEGY AND OUTLOOK
The Company's overall business strategy is to market and sell all of
its net capacity, fuel conversion and ancillary services to Williams
during the 20-year term of the power purchase agreement. After
expiration of the power purchase agreement, the Company anticipates
selling its facility's capacity, ancillary services and energy under a
power purchase agreement or into the PJM power pool market. The Company
intends to cause its facility to be managed, operated and maintained in
compliance with the project contracts and all applicable legal
requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risks are not materially different from those
market risks described in its annual report on Form 10-K for the fiscal
year ended December 31, 2000.
(Page 15 of 19)
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
At the time of issuance of the senior secured bonds, the Company prepaid
the discounted fixed price of the EPC contract in accordance with the EPC
Prepayment Coordination Agreement, dated as of March 14, 2000 between
Washington Group (as successor in interest to Raytheon Engineers &
Constructors, Inc.) and the Company (the "Prepayment Agreement"). In
consideration of such prepayment, the performance of all Washington
Group's obligations under the EPC contract were secured by a letter of
credit (the "Prepayment Letter of Credit") in favor of the Collateral
Agent with an initial stated amount of $237.7 million, such amount to be
reduced over the construction period as construction milestones were met
by Washington Group. As of May 4, 2001, the stated amount of the letter of
credit was $95.8 million.
Pursuant to the terms of the Prepayment Letter of Credit (see note 5),
such letter of credit can be drawn upon and the prepayment arrangements
terminated upon the occurrence of certain bankruptcy related actions with
respect to Washington Group which constitute an event of default under the
EPC contract. Based on recent correspondence from Washington Group, the
Company believed that such an event of default under the EPC contract had
occurred and was continuing. As a result, in accordance with the terms of
the Collateral Agency Agreement, the Company on May 3, 2001 requested the
Collateral Agent to draw the full available amount of such letter of
credit and deposit the proceeds of such drawing in the Construction
Account held by the Collateral Agent. The Collateral Agent made such
drawing on May 4, 2001 in the amount of $95.8 million. Subsequent to the
termination of the prepayment arrangements with Washington Group, payments
to the Washington Group for achievement of construction milestones as
specified in the EPC contract will be made in accordance with the terms of
the EPC contract.
On May 14, 2001, Washington Group announced that it had filed a plan of
reorganization along with voluntary petitions to restructure under Chapter
11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
District of Nevada in Reno (Bankruptcy Court).
Washington Group is currently continuing construction of the facility and
the Company is carefully monitoring the progress of construction at the
facility for any work slowdowns or stoppages, neither of which has been
noted to date.
Under a guaranty in the Company's favor, effective as of October 15, 1999,
all of Washington Group's obligations under the EPC contract are
irrevocably and unconditionally guaranteed by Raytheon Company. If it
becomes necessary, the Company will exercise its rights under this
guaranty.
Although there can be no guarantees, based upon the Company's current
assessment of progress at the construction site, and the performance
guaranty from Raytheon Company, and assuming that Washington Group
continues performance under the EPC contract, the Company currently
believes that the facility will become commercially operational on or
prior to February 14, 2002, the guaranteed completion date under the EPC
contract.
Notwithstanding the Company's current belief, if it becomes necessary to
replace Washington Group under the EPC contract, the Company may
experience significant construction delays.
(Page 16 of 19)
Additionally, the Company may not be able to find a replacement
contractor on favorable or reasonable terms. In the event the commercial
operation date of the facility is significantly delayed or the Company
cannot find a replacement on favorable or reasonable terms, the Company
may not have financial resources sufficient to meet its financial and
contractual obligations, including the timely payment of principal and
interest on the senior secured bonds.
Other than with respect to developments that may have a material impact on
the Company or its business operations, the Company is under no obligation
nor does it intend to continuously provide updates of Washington Group's
bankruptcy proceedings. However, copies of all pleadings filed with the
Bankruptcy Court are available from the office of the clerk of the
Bankruptcy Court.
(Page 17 of 19)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
NONE
b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2001.
(Page 18 of 19)
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 RED OAK, L.L.C.
Date: May 15, 2001 By: /s/ JOHN RUGGIRELLO
---------------------------
JOHN RUGGIRELLO
President
Date: May 15, 2001 By: /s/ BARRY SHARP
----------------------------------
BARRY SHARP
Vice President and Chief Financial
Officer (and principal accounting
officer)
(Page 19 of 19)