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 June 30, 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 20)
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 June 30, 2001 and June 30,
2000, six months ended June 30, 2001 and period
from March 15, 2000 (inception) through June 30,
2000 and the period from March 15, 2000
(inception) through and June 30, 2001 ........................................3
Condensed Consolidated Balance Sheets,
June 30, 2001 and December 31, 2000 ..........................................4
Condensed Consolidated Statements of Changes in Member's Deficit,
Period from March 15, 2000 (inception) through June 30, 2001 .................5
Condensed Consolidated Statements of Cash Flows, For
the six months ended June 30, 2001, period from
March 15, 2000 (inception) through June 30, 2000
and the period March 15, 2000 (inception) through
June 30, 2001 ................................................................6
Notes to the Condensed Consolidated Financial Statements .........................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ...............................................................17
PART II. OTHER INFORMATION
Item 5. Other Information ....................................................................18
Item 6. Exhibits and Reports on Form 8-K .....................................................19
SIGNATURES .................................................................................................20
(Page 2 of 20)
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 JUNE 30, 2001 AND JUNE 30, 2000, SIX MONTHS ENDED
JUNE 30, 2001 AND PERIOD MARCH 15, 2000 (INCEPTION) THROUGH JUNE 30, 2000 AND
PERIOD FROM MARCH 15, 2000 (INCEPTION) THROUGH JUNE 30, 2001
(DOLLARS IN THOUSANDS)
Three Three March 15, 2000 March 15, 2000
Months Months Six Months (inception) (inception)
Ended Ended Ended through through
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 June 30, 2001
------------- ------------- ------------- -------------- --------------
OPERATING EXPENSES
General administrative
costs........................ $ (13) $ (10) $ (22) $ (172) $ (223)
-------- ------- ------- ------- -------
Operating Loss.................. $ (13) $ (10) $ (22) $ (172) $ (223)
-------- ------- ------- ------- -------
OTHER INCOME/EXPENSE
Interest income................. 602 634 862 754 2,714
-------- ------- ------- ------- -------
Interest expense................ (1,226) (1,004) (1,578) (1,207) (4,177)
NET LOSS............................. $ (637) $ (380) $ (738) $ (625) $(1,686)
======= ======= ======= ======= =======
See notes to condensed consolidated financial statements.
(Page 3 of 20)
AES RED OAK, L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS,
JUNE 30, 2001 AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
As of As of
June 30, 2001 December 31, 2000
------------- -----------------
ASSETS:
Current Assets:
Cash .............................................................................. $ 58 $ 15
Restricted investments-at cost, which approximates market value.................... 67,801 21,795
Receivables........................................................................ 57 21
-------- --------
Total current assets.......................................................... 67,916 21,831
Prepaid construction costs......................................................... - 227,609
Land............................................................................... 4,240 4,240
Construction in progress........................................................... 298,968 117,033
Deferred financing costs - net of accumulated amortization of
$1,054 and $646, respectively................................................. 17,651 18,059
-------- --------
Total assets................................................................ $388,775 $388,772
=========== ===========
LIABILITIES AND MEMBER'S DEFICIT:
Current Liabilities:
Accounts payable.................................................................... $ 766 $ 304
Accrued liabilities................................................................. 73 90
Accrued Interest................................................................... 2,821 2,821
Payable to affiliate............................................................... 1,815 2,505
-------- --------
Total current liabilities..................................................... 5,475 5,720
Bonds payable...................................................................... 384,000 384,000
-------- --------
Total liabilities............................................................. $389,475 $389,720
-------- --------
Commitments (Notes 5 and 6) - -
Member's deficit:
Common stock, $1 par value-10 shares authorized, none issued or outstanding........ - -
Contributed capital................................................................ 986 -
Deficit accumulated during the development stage................................... (1,686) (948)
-------- --------
Total member's deficit........................................................ (700) (948)
-------- --------
Total liabilities and member's deficit...................................... $388,775 $388,772
======== ========
See notes to condensed consolidated financial statements.
(Page 4 of 20)
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 JUNE 30, 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)
Net Loss........................................... - - (637) (637)
----- -----
BALANCE, JUNE 30, 2001............................. - - $(700) $(700)
===== =====
See notes to condensed consolidated financial statements.
(Page 5 of 20)
AES RED OAK, L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, FOR THE SIX MONTHS
ENDED JUNE 30, 2001, THE PERIOD FROM MARCH 15, 2000 (INCEPTION) THROUGH
JUNE 30, 2000 AND THE PERIOD MARCH 15, 2000 (INCEPTION) THROUGH JUNE 30, 2001.
(DOLLARS IN THOUSANDS)
March 15, 2000 March 15, 2000
Six Months Ended (inception) through (inception) through
June 30, 2001 June 30, 2000 June 30, 2001
------------- ------------- -------------
OPERATING ACTIVITIES:
Net loss................................................. $ (738) $ (625) $ (1,686)
Amortization of deferred financing costs................. 408 160 1,054
Change in:
Accounts receivable................................... (36) - (57)
Accounts payable...................................... 462 12 766
Accrued liabilities .................................. (17) - 73
Accrued interest ..................................... - 3,009 2,821
Payable to affiliates................................. (690) 2,337 1,815
--------- --------- ---------
Net cash (used in) provided by operating activities...... (611) 4,893 4,786
--------- --------- ---------
INVESTING ACTIVITIES:
Transfers from (to) prepaid construction costs........... 227,609 (223,611) -
Payments for construction in progress.................... (181,935) (100,894) (298,968)
Payments for land........................................ - (4,240) (4,240)
Change in debt service reserve........................... (46,006) (41,142) (67,801)
--------- --------- ---------
Net cash used in investing activities.................... (332) (369,887) (371,009)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from project debt issuance...................... - 384,000 384,000
Contributed capital...................................... 986 - 986
Payments for deferred financing costs.................... - (18,963) (18,705)
--------- --------- ---------
Net cash provided by financing activities................ 986 365,037 366,281
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 43 43 58
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 15 - -
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 58 $ 43 $ 58
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF OTHER ACTIVITIES:
Interest paid (net of amount capitalized)................ $ 1,164 $ 601 $ 3,211
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Transfer of prepaid construction costs to construction
in progress........................................ $ 131,840 $ 24,962 $ 192,804
========= ========= =========
See notes condensed consolidated financial statements.
(Page 6 of 20)
AES RED OAK, L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS,
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000, PERIOD
FROM MARCH 15, 2000 (INCEPTION) THROUGH JUNE 30, 2000 AND THE PERIOD
FROM MARCH 15, 2000 (INCEPTION) THROUGH JUNE 30, 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 20-year fuel conversion services, capacity and ancillary services
purchase agreement expected to commence on or prior to February 14, 2002,
the Facility's guaranteed completion date under the EPC Contract, as
defined below (see notes 5 and 8).
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. Pursuant to an equity subscription
agreement (see note 4), 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. 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 in 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, but which do not
constitute a part of, and are not incorporated into, this Form 10-Q. 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
(Page 7 of 20)
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.
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.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "
BUSINESS COMBINATIONS." This statement applies to all business
combinations initiated after June 30, 2001. This statement also
applies to all business combinations accounted for using the purchase
accounting method for which the date of acquisition is July 1, 2001 or
later. SFAS No. 141 addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "BUSINESS
COMBINATIONS", and FASB Statement No. 38, "ACCOUNTING FOR
PREACQUISITION CONTINGENCIES OF PURCHASED ENTERPRISES." Under SFAS No.
141 all business combinations within the scope of the statement are to
be accounted for using the purchase accounting method. The Company
believes that SFAS No. 141 will not have any material impact on its
financial position or results of operations
In June 2001, the FASB issued SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS." The provisions of this statement are required to be
applied starting with fiscal years beginning after December 15, 2001.
This statement is required to be applied at the beginning of an entity's
fiscal year and to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date. SFAS No. 142
addresses how intangible assets (but not those acquired in a business
combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The statement requires that
goodwill and certain other intangibles with an indefinite life, as
defined in the standard, no longer be amortized. However, goodwill and
intangibles would have to be assessed each year to determine whether an
impairment loss has occurred. Any impairments recognized upon adoption
would be recorded as a change in accounting principle. Future impairments
would be recorded in income from continuing operations. The statement
provides specific guidance for testing goodwill for impairment. The
Company had no goodwill at June 30, 2001. The Company believes that SFAS
No. 142 will not have any material impact on its financial position or
results of operations.
3. 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 June 30, 2001 and June 30, 2000, the six months
(Page 8 of 20)
ended June 30, 2001, the period from March 15, 2000 (inception)
through June 30, 2000, and the period from March 15, 2000 (inception)
through June 30, 2001 are included. All such adjustments are accruals
of a normal and recurring nature. The results of operations for the
three months ended June 30, 2001 and June 30, 2000, the six months
ended June 30, 2001, the period from March 15, 2000 (inception)
through June 30, 2000, and the period from March 15, 2000 (inception)
through June 30, 2001, are not necessarily indicative of the results
of operations to be expected for the full year.
These condensed consolidated 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 and 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.
4. 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 insurance bond issued to the Collateral Agent.
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 of, 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.
5. POWER PURCHASE AGREEMENT
The Company and Williams have entered into a Fuel Conversion Services,
Capacity and Ancillary Services Purchase Agreement (PPA) for the sale of
all 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 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. The payment obligations of Williams
to the Company under the PPA are guaranteed by The Williams Companies,
Inc. The payment obligations of The Williams Companies, Inc. under that
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 letter of credit (PPA Letter of Credit) in the amount of $30
million to support specific payment obligations should the Facility not
achieve commercial operation by the date required under the PPA. Upon
achievement of commercial operation, the stated amount of that letter of
credit will be reduced to $10 million. The repayment obligations with
respect to any drawings under the PPA Letter of Credit are a senior debt
obligation of the Company. The original anticipated commercial operation
date under the PPA was December 31, 2001, but such date can be extended
at the request of the Company until June 30, 2002 at no cost. The Company
currently anticipates that commercial operation of the Facility will
commence on or about February 14, 2002, the guaranteed completion date
under the EPC Contract (see note 6.)
In the event that the Facility does not achieve commercial operation by
June 30, 2002, the Company
(Page 9 of 20)
has the right under the PPA to extend the commercial operation date
until June 30, 2003 by paying Williams specified amounts for each day
of extension. If the Facility has not achieved commercial operation by
the commercial operation date as finally extended under the PPA,
Williams has the right to terminate the PPA. If Williams terminates
the PPA and the Company cannot find a long-term replacement power
purchaser on favorable or reasonable terms, the Company will be
required to sell its capacity and energy under shorter-term contracts
or into the PJM market at spot prices. In such circumstances no
assurances can be given that the Company would 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 6, regarding possible construction
delays).
6. 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 Raytheon Engineers & Constructors, Inc. (REC), as
amended (EPC Contract) for the design, engineering, procurement and
construction of the Facility. Under a guaranty in the Company's favor,
effective as of October 15, 1999, all of REC's obligations under the EPC
Contract were irrevocably and unconditionally guaranteed by Raytheon
Company (Raytheon).
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 REC
and the Company (the "Prepayment Agreement"). In consideration of such
prepayment, the performance of WGI's obligations under the EPC Contract
were secured by a letter of credit (the "Prepayment Letter of Credit")
provided 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 WGI.
On July 7, 2000, WGI International, Inc. acquired certain assets of REC,
including REC's rights and obligations under the EPC Contract. However,
the terms and conditions under the EPC Contract and the Prepayment Letter
of Credit were unchanged by such acquisition, and Raytheon's guaranty
remained in full force and effect.
On May 14, 2001, WGI 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). Under the EPC Contract, a bankruptcy
filing by WGI constituted an event of default. Based on correspondence
received from WGI preceding the bankruptcy filing and in accordance with
the terms of the EPC Contract and 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, which was the then outstanding amount of the Prepayment
Letter of Credit as it had been reduced by WGI's achievement of
construction milestones under the EPC Contract. Subsequent to the
termination of the prepayment arrangements with WGI, payments to WGI for
achievement of construction milestones as specified in the EPC Contract
will be made in accordance with the terms of the EPC Contract.
On June 20, 2001, as a result of WGI's bankruptcy filing the Company made
a demand on Raytheon to perform its obligations under the Raytheon
guarantee.
(Page 10 of 20)
Since the date of its bankruptcy filing, WGI has continued with
construction of the Facility. To provide for continued performance, the
Company, WGI and Raytheon entered into an Interim Agreement for Advance
Payments (Interim Agreement), dated June 20, 2001. The term of the
Interim Agreement, as amended, currently expires on August 17, 2001, but
is expected to be extended upon execution by WGI and Raytheon of a term
sheet for the Project Completion Agreement, as discussed below. Under the
Interim Agreement, the Company and Raytheon have agreed to fund payments
to WGI's subcontractors working on construction of the Facility in
accordance with the terms of their subcontracts as required by the EPC
Contract, and to pay WGI's employees who are performing services with
respect to the project. The maximum amount that the Company has agreed to
fund under the Interim Agreement is $17.5 million with the balance of
funding under the Interim Agreement being provided by Raytheon pursuant
to its obligations under the Raytheon Guaranty. In June 2001 and July
2001, the Company paid approximately $14.5 million and $3.0 million,
respectively, under the Interim Agreement and accordingly, has no further
funding obligations under that agreement. Any amounts advanced by the
Company under the Interim Agreement will be deducted from milestone
payments otherwise payable by the Company to WGI under the EPC Contract.
The Interim Agreement provides for weekly budgeting and weekly status
updates. The Interim Agreement does not change the EPC Contract price,
the construction progress milestone dates, the guaranteed completion
dates, or the project schedule. In addition, the Interim Agreement does
not relieve WGI from any obligations it has under the EPC Contract, nor
does it relieve Raytheon from any obligations it has under its
performance guarantee. The Company is carefully monitoring the progress
of construction at the Facility for any work slowdowns or stoppages,
neither of which has been material to date.
Although there can be no assurances, based upon the Company's current
assessment of progress at the construction site, and the performance
guaranty from Raytheon, and assuming that Raytheon continues to fulfill
its obligations under its performance guarantee, the Company currently
believes that it has sufficient funds available to complete construction
of the Facility, and that the Facility is expected to become commercially
operational on or about February 14, 2002, the guaranteed completion date
under the EPC Contract (see note 8).
Notwithstanding the Company's current belief, if it becomes necessary to
replace WGI as the primary contractor working on the Project or if
Raytheon does not fulfill its obligations under its performance
guarantee, the Company may not have sufficient funds to complete
construction of the Facility and/or may experience significant
construction delays. In the event the commercial operation date of the
Facility is significantly delayed, the PPA may be terminated by Williams
and 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 WGI'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.
MAINTENANCE SERVICES - The Company has entered into a maintenance
services 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
(Page 11 of 20)
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 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 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 and the PJM (Pennsylvania/New Jersey/Maryland) Tariff as charged by
GPU, which is comprised of both service cost and asset recovery cost, as
determined by GPU and approved by the Federal Energy Regulatory
Committee.
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 been awarded. The value of the pumping
station is estimated to be approximately $2.0 million.
7. 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 Company does not believe that the PPA
meets the definition of a derivative under SFAS No. 133, and as such,
should not be accounted for as a derivative.
The Company has no other contracts that meet the definition of a
derivative or an embedded derivative under SFAS No. 133.
8. SUBSEQUENT EVENT
Since the execution of the Interim Agreement described above, Raytheon,
the Company and WGI has been negotiating a series of arrangements under
which the Project will be completed in accordance with the terms of the
EPC Contract. The Company currently expects that Raytheon and WGI will,
prior to August 17, 2001, enter into a term sheet agreement for a Project
Completion Agreement (PCA). Under the PCA, WGI will (i) assign to the
Company, as the project owner, all
(Page 12 of 20)
of the subcontracts and vendor contracts relating to the project, (ii)
agree to complete construction of the Facility on a cost reimbursable
basis but otherwise in accordance with the terms of the EPC Contract,
with all funding to come from Raytheon, and (iii) perform obligations
under the subcontracts and vendor contracts as the subagent of
Raytheon. Raytheon, in its capacity as a performance surety, will, as
necessary, fund all of WGI's costs and expenses related to WGI's
completion of the project. Both parties will have limited termination
rights under the PCA.
Execution of the PCA by WGI will be subject to the approval of the
Bankruptcy Court and there can be no assurance that the PCA will be
approved or concerning the impact on the Company if the PCA is not
approved by the Bankruptcy Court. The Company expects that upon execution
of the PCA, WGI will reject the EPC Contract.
At the same time as the PCA is executed by Raytheon and WGI, the Company
and Raytheon will execute an agreement pursuant to which (i) Raytheon and
the Company will acknowledge that, notwithstanding the rejection of the
EPC Contract by WGI, Raytheon remains bound under its performance
guaranty obligations, and the EPC Contract will have continuing
applicability insofar as it defines (x) the obligations owed to the
Company by Raytheon under its guaranty and (y) the obligations of the
Company to Raytheon arising from the performance of those obligations,
(ii) Raytheon (or their designees) will be designated as the Company's
agent for purposes of administering the subcontracts and vendor
contracts, (iii) all future payments from the Company will be paid in
accordance with the terms of the EPC Contract directly to Raytheon, and
(iv) Raytheon will indemnify the Company with respect to any claims
arising out of the subcontracts and vendor contracts assumed by the
Company.
(Page 13 of 20)
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 WGI under the EPC Contract,
o the Company's ability to find a replacement contractor on
favorable or reasonable terms, if necessary,
o performance by Raytheon Company under its performance
guarantee,
o the termination of the PPA by Williams Energy in the event of
a significant delay in achieving commercial operations,
o the Company's ability to find a replacement power purchaser 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 14 of 20)
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 of 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 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 6. Commitments And Contingencies--
Construction" and "Note 8. 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 represented 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 June 30, 2001 and December 31, 2000, Construction in Progress, which
includes capitalized facility construction costs, was $299.0 million and $117.0
million, respectively. For the six months ended June 30, 2001 and the period
from March 15, 2000 (inception) through December 31, 2000, capitalized facility
construction costs were $182.0 million and $117.0 million, respectively. For the
three months ended June 30, 2001, the three months ended June 30, 2000, the
period from March 15, 2000 (inception) through June 30, 2000, and the period
from March 15, 2000 (inception) through June 30, 2001, capitalized facility
construction costs were $117.2 million, $34.5 million, $60.9 million and $299.0
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.
As discussed above, on May 3, 2001, the Company requested the Collateral Agent
to draw the full available amount of the Prepayment 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 Interim Agreement with WGI, payments to WGI or to
Raytheon for achievement of construction milestones as specified in the EPC
Contract will be made in accordance with the terms of the EPC Contract from
funds available in the Construction Account.
(Page 15 of 20)
For the three months ended June 30, 2001 and June 30, 2000, for the six months
ended June 30, 2001, for the period from March 15, 2000 (inception) through June
30, 2000, and the period March 15, 2000 (inception) through June 30, 2001,
general and administrative costs of $13,000, $10,000, $22,000, $172,000 and
$223,000, 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 June 30, 2001 and June 30, 2000, the six months ended June 30,
2001, the period from March 15, 2000 (inception) through June 30, 2000, and the
period from March 15, 2000 (inception) through June 30, 2001, the interest
income earned on these invested funds was approximately $602,000, $634,000,
$862,000 $754,000 and $ 2.7 million, respectively, and is included in the
Statement of Operations.
As noted above, for the three months ended June 30, 2001 and June 30, 2000, the
six months ended June 30, 2001, the period from March 15, 2000 (inception)
through June 30, 2000, and the period from March 15, 2000 (inception) through
June 30, 2001, 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 $7.2 million, $7.5 million, $15.3
million, $8.9 million and $39.5 million, respectively, and is included on the
Balance Sheets. For the three months June 30, 2001 and June 30, 2000, the six
months ended June 30, 2001, the period from March 15, 2000 (inception) through
June 30, 2000, and the period from March 15, 2000 (inception) through June 30,
2001, interest cost incurred on the bond proceeds not spent on construction of
the Company's Facility was approximately $ 1.2 million, $1.0 million, $1.6
million, $1.2 million and $4.2 million, respectively, and is included as
interest expense in the Statements of Operations.
For the three months ended June 30, 2001 and June 30, 2000, the six months ended
June 30, 2001, the period from March 15, 2000 (inception) through June 30, 2000,
and the period from March 15, 2000 (inception) through June 30, 2001,
non-capitalizable costs plus interest cost and less interest income resulted in
a net loss of approximately $637,000, $380,000, $738,000, $625,000 and $1.7
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 PPA, and after the power purchase agreement
expires, it will depend on revenues generated from market sales of electricity.
In order to provide liquidity in the event of cash flow shortfalls, the Company
has provided the Collateral Agent with a debt service reserve letter of credit
in an initial stated amount of $22 million. The Collateral Agent may draw on
the debt service reserve letter of credit commencing on the earlier of the
guaranteed provisional acceptance date under the EPC Contract or the commercial
operation date of the Facility.
As of June 30, 2001, apart from commitments for unpaid scope changes totaling
$541,000 arising from the
(Page 16 of 20)
construction of our Facility, the Company has committed to four additional
capital expenditures totaling $4.9 million. These expenditures are for a water
pipeline for approximately $678,000, road modifications for approximately
$537,000, a water pumping station for an estimated $2.0 million and
administration office building for $1.7 million. As of June 30, 2001, the road
modifications and their related expenditures have been completed and paid. The
remaining balance of the pipeline is approximately $36,000. The entire cost of
the water pumping station and the administration office building will be paid in
fiscal year 2001 from equity contributions under the Equity Subscription
Agreement.
On May 14, 2001, WGI 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. WGI is
currently continuing construction of the Facility and the Company and the
independent engineer are carefully monitoring the progress of construction at
the Facility for any work slowdowns or stoppages, neither of which has been
material to date. Although there can be no assurances, based upon the Company's
current assessment of progress at the construction site, and the performance
guaranty from Raytheon Company, and assuming that WGI continues performance
under the EPC Contract and that Raytheon fulfills its obligations under its
performance guarantee, the Company currently believes that the Facility will
become commercially operational on or about February 14, 2002, the guaranteed
completion date under the EPC Contract.
Notwithstanding the Company's current belief, if WGI rejects the EPC Contract in
its bankruptcy proceeding and does not enter into the PCA, or fails to perform
its obligations under the PCA, or if Raytheon does not fulfill its obligations
under its guarantee, the Company may experience significant construction delays
and/or may not have sufficient funds to complete the Facility. Furthermore, in
the event that the project is not commercially operational by June 2002, and the
Company does not have sufficient funds to purchase extensions of the required
commercial operation date under the PPA, or the Facility does not achieve
commercial operation by the commercial operation date as extended, Williams has
the right to terminate the PPA. If Williams terminates the PPA and the Company
cannot find a long-term replacement power purchaser on favorable or reasonable
terms, the Company will be required to sell its capacity and energy under
shorter-term contracts or into the PJM spot market. In such event, 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 6. Commitments And
Contingencies--Construction" and "Note 8. 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 17 of 20)
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
References in Notes 6 and 8 to the Notes to the Consolidated Financial
Statements to events occurring after June 30, 2001 relating to WGI and
Raytheon are incorporated by reference into this Item 5.
(Page 18 of 20)
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
June 30, 2001.
(Page 19 of 20)
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: August 14, 2001 By: /s/ BARRY SHARP
----------------------------------
BARRY SHARP
Vice President and Chief Financial
Officer (and principal accounting officer)
(Page 20 of 20)