EXHIBIT 99
Grays Ferry Cogeneration Partnership
Financial Statements for the Years Ended December 31, 1998 and 1997 and
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Partners of Grays Ferry Cogeneration Partnership:
We have audited the accompanying balance sheets of Grays Ferry Cogeneration
Partnership (the "Partnership"), as of December 31, 1998 and 1997, and the
related statements of changes in partners' capital, and cash flows for the
years then ended, and the related statement of income for the period from
January 9, 1998 (date of commercial operation) to December 31, 1998. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1998 and
1997, and its cash flows for the years then ended, and the results of its
operations for the period from January 9, 1998 (date of commercial operation)
to December 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 2 to the
financial statements, PECO Energy has taken action to terminate its power
purchase agreements with the Partnership. As a consequence, the Project Lender
has determined that the Partnership is in default. These actions raise
substantial doubt about the Partnership's ability to continue as a going
concern. Management's plans concerning these matters are also discussed in Note
2. The financial statements do not include any adjustment that might result
from the outcome of these uncertainties, other than the classification of the
Project debt as current.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 26, 1999 (except Note 9, as to which the date is March 10, 1999)
GRAYS FERRY COGENERATION PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $18,628,423 $6,441,729
Accounts receivable - related parties 10,678,770 2,630,093
Accounts receivable - other 1,805,350
Inventory 2,163,444 1,020,469
Prepaid expenses 116,976
----------- ---------
Total current assets 33,392,963 10,092,291
PROPERTY, PLANT AND EQUIPMENTS:
Construction work-in-progress 144,328,197
Plant in service 151,297,117
----------- ---------Total
Property, plant & equipment 151,297,117 144,328,197
Accumulated depreciation (7,402,171)
----------- ---------
Property, plant and equipment - net 143,894,946 144,328,197
OTHER ASSETS (Net of accumulated
amortization of $426,949 in 1998) 6,875,906 6,544,595
----------- ---------
TOTAL ASSETS $184,163,815 $160,965,083
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Construction loan (Notes 2 and 6) $94,324,049 $113,000,000
Subordinated debt (Note 6) 15,000,000
Accounts payable and accrued
liabilities - related parties 3,503,417 558,759
Accounts payable and accrued
liabilites - other 15,017,152 6,381,865
Retainage payable 5,581,729 5,581,729
------------ ---------
Total liabilities 133,426,347 125,522,353
PARTNERS' CAPITAL 50,737,468 35,442,730
----------- ----------
TOTAL LIABILITIES AND PARTNERS'
CAPITAL $184,163,815 160,965,083
============ ===========
See notes to financial statements.
GRAYS FERRY COGENERATION PARTNERSHIP
STATEMENT OF INCOME
PERIOD FROM JANUARY 9, 1998 (Date of Commercial Operation)
TO DECEMBER 31, 1998
REVENUES FROM RELATED PARTIES:
Electric energy sales $50,776,226
Steam sales 14,741,775
Capacity fees:
Electric 9,531,900
Steam 3,075,988
----------
Total revenues 78,125,889
------------
OPERATING EXPENSES:
Fuel and consumables:
Related party 2,531,844
Other 32,394,334
Operation and maintenance:
Related parties 1,527,916
Other 2,819,680
General and administrative:
Related parties 2,772,641
Other 2,373,432
Depreciation 7,402,171
-----------
Total operating expenses 51,822,018
-----------
INCOME FROM OPERATIONS 26,303,871
------------
OTHER INCOME (EXPENSE):
Interest income 665,765
Interest expense (11,674,898)
------------
Total other expense (11,009,133)
-------------
NET INCOME $ 15,294,738
============
See notes to financial statements.
GRAYS FERRY COGENERATION PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1998 AND 1997
Adwin CogenAmerica Trigen Total
(Schuylkill) Schuylkill (Schuylkill) Partners'
Cogeneration, Inc. Cogeneration, Capital
Ind. Inc.
------------ ------------------ ------ --------
BALANCE,
JAN. 1, 1996 $ 2,784,214 $2,658,516 $5,442,730
Capital Con-
tributions 10,000,000 10,000,000 10,000,000 30,000,000
---------- ---------- ----------- ---------
BALANCE,
DEC. 31,1997 12,784,214 12,658,516 10,000,000 35,442,730
Net income for
period 5,098,246 5,098,246 5,098,246 15,294,738
---------- ---------- - ---------- ---------
BALANCE,
DEC. 31, 1998 $17,882,460 $17,756,762 $15,098,246 $50,737,468
========== =========== =========== ===========
See notes to financial statements.
GRAYS FERRY COGENERATION PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
OPERATING ACTIVITIES:
Net income $15,294,738
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 7,402,171
Amortization of other asset 426,949
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable - related parties (8,048,677)
Accounts receivable - other (1,805,350)
Prepaid assets (116,976)
Inventories (1,142,975)
Accounts payable and accrued expenses
- related parties 3,503,417
Accounts payable and accrued expenses
- other 15,017,152
Other assets (758,260)
----------
Net cash provided by operating activities 29,772,189
-----------
INVESTING ACTIVITIES:
Construction expenditures (6,968,920) $(74,253,351)
Decrease in other construction related
expenses (2,439,849)
Decrease in construction related
accruals - related parties (558,759)
Decrease in construction related accruals
- other (6,381,865) (4,812,728)
----------- -----------
Net cash used in investing activities (13,909,544) (81,505,928)
------------ ----------
FINANCING ACTIVITIES:
Proceeds from borrowings under
construction loan agreement and
subordinated debt 15,000,000 57,900,000
Repayment of construction loan agreement(18,675,951)
Partners' capital contributions 30,000,000
Net cash (used in) provided by
financing activities (3,675,951) 87,900,000
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,186,694 6,394,072
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,441,729 47,657
----------- --------
----
CASH AND CASH EQUIVALENTS, END OF PERIOD 18,628,423 $ 6,441,729
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the year for interest,
net of amounts capitalized in 1997 $ 7,770,075 $ -
=========== ============
See notes to financial statements.
Grays Ferry Cogeneration Partnership
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. ORGANIZATION OF PARTNERSHIP
Grays Ferry Cogeneration Partnership, (the "Partnership") was
organized on October 29, 1991 as a Pennsylvania general partnership for the
sole purpose of developing, owning, constructing and operating a 150 megawatt
gas and oil fired qualifying cogeneration facility (the "Project") at the
Schuylkill Station of the TrigenPhiladelphia Energy Corporation ("TPEC") in
Philadelphia, Pennsylvania. For the period from October 29, 1991 (date of
inception) through January 8, 1998, the Partnership was considered a
development stage entity as its sole activity was construction of the Facility.
Pursuant to 20-year electricity and 25-year steam purchase agreements between
the Partnership and its two customers, sales of electricity and steam began in
January 9, 1998, the date of Commercial Operation.
The Partnership's date of Commercial Operation of January 9, 1998 was chosen
because it was the date its customers started paying it for electricity and
steam sold to them under its 20-year electricity purchase agreements and its 25-
year steam purchase agreements. The Partnership believes the date should have
been December 30, 1997 and is litigating this issue as part of the litigation
described in Note 2.
The Partnership's original general partners are Adwin Equipment Company, a
wholly owned subsidiary of Eastern Pennsylvania Development Company, which is a
wholly owned subsidiary of PECO Energy Company ("PECO") and O'Brien
(Schuylkill) Cogeneration, Inc., ("O'Brien"), a wholly owned subsidiary of
O'Brien Environmental Energy, Inc. Subsequent to the original Partnership
formation, Adwin (Schuylkill) Cogeneration, Inc. ("Adwin"), a wholly owned
subsidiary of Adwin Equipment Company, was assigned all rights,
responsibilities, and obligations of the Partnership previously held by Adwin
Equipment Company.
Trigen (Schuylkill) Cogeneration, Inc. ("Trigen"), a wholly owned subsidiary of
Trigen Energy Corporation and an affiliate of TPEC, Philadelphia Thermal
Development Corporation, ("PTDC"), and Philadelphia United Power Corporation,
("PUPCO"), joined the Partnership as an equal partner as of March 1, 1996.
In a reorganization plan, approximately 40% of the capital stock of O'Brien
Environmental Energy, Inc. was acquired by NRG Energy, Inc., and the Company
was renamed NRG Generating (U.S.) Inc. As a result of this reorganization,
O'Brien became known as NRGG (Schuylkill) Cogeneration, Inc. ("NRGG"). During
1998, NRGG was renamed CogenAmerica Schuylkill, Inc. ("Cogen").
The three general partners are equal partners, with net operating profits and
losses and distributions to be allocated equally to the partners, subject to
the terms and provisions as stated in the Amended and Restated Partnership
Agreement.
2. CONTINUATION OF BUSINESS
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed below, PECO has
taken action to terminate its power purchase
agreements with the Partnership. As a consequence, the Project Lender has
determined that the Partnership is in default. These actions raise substantial
doubt about the Partnership's ability to continue as a going concern. The
financial statements do not include any adjustment that might result from the
outcome of these uncertainties, other than the classification of the Project
debt as current.
Engineering, Procurement and Construction Contract - Although the Partnership
began Commercial Operation on January 9, 1998, the Partnership has not yet
accepted care, custody or control of the Project from Westinghouse Electric
Corporation (the "Contractor") due to the Partnership's concerns over design
and construction issues. This issue is in arbitration.
PECO - In March 1998, the Partnership received notice from PECO that PECO
believes its power purchase agreements with the Partnership are no longer
effective. PECO has refused to pay the rates set forth in the agreements based
on its allegations that the Pennsylvania Public Utilities Commission (the
"PPUC") has denied cost recovery of the power purchase agreements in retail
electric rates.
On March 9, 1998, the Partnership, along with Trigen, NRGG and TPEC
(collectively "Plaintiffs") filed suit against PECO, Adwin and the PPUC
(collectively "Defendants") in United States District Court for the District of
Pennsylvania. The suit sought to enjoin PECO from terminating the power
purchase agreements and to compel PECO to pay the rates set forth in the
agreements. In addition, the Plaintiffs sought actual damages, punitive
damages, attorneys' fees and costs. On March 19, 1998, the federal district
court dismissed the lawsuit for lack of subject matter jurisdiction.
On April 9, 1998, the Plaintiffs filed suit against the Defendants in the Court
of Common Pleas (the "Court") for Philadelphia County in the State of
Pennsylvania. Preliminary injunctive relief against PECO in the form of
specific performance of the electric sale agreements, including payments
according to the contract terms, was granted by the Court on May 6, 1998. A
$50,000 bond required by the Court was posted by the Plaintiffs on May 7, 1998.
On May 8, 1998, PECO sought a stay of the May 6 Order which was denied on May
20, 1998. Also on May 20, 1998, the Court issued a separate order adjudging
PECO to be in civil contempt of the May 6 Order. A coercive sanction of
$50,000 per day, or portion thereof, for nonpayment of all sums owing by PECO
in accordance to the contract terms was included in the May 20, 1998 Order. An
emergency application of stay by PECO of the May 6 Order was denied on May 22,
1998. As a result, PECO complied with the May 6 Order on May 22, 1998.
Construction Loan Default - On March 17, 1998 the Partnership received a notice
of default from the Project Lender stating that PECO's determination that the
power purchase agreements are no longer in effect constitutes a Material
Adverse Effect as defined under the credit agreement. In addition, the
Subordinate Credit Commitment (the "Subordinate Debt") contains cross-default
provisions; accordingly upon notice of default from the Project Lender, the
Partnership was in default on its Subordinate Debt. As of the date of this
report, the default has not been waived; accordingly, the Partnership's long-
term debt has been reclassified as current in the Partnership's balance sheet
(see Note 6). The Project Lender has also restricted the Partnership's ability
to make distributions to related parties for certain transactions, along with
distributions to the Partners of Partnership earnings. In addition, the
interest rate charged under the credit agreement increased to prime plus 2.00%,
and the interest on the Subordinate Debt increased to prime plus 3.5% (9.75%
and 11.25%, respectively, at December 31, 1998), the penalty interest rates.
Management intends to vigorously pursue enforcement of the power purchase
agreements, which if successful, should result in a cure of the construction
loan and Subordinate Debt default.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Capitalized Project Costs - Construction of the Project was
originally scheduled to be completed on or about December 8, 1997 (see Notes 1
and 5), at an estimated cost of $158,000,000. $128,000,000 was provided from
the proceeds of the credit agreements (see Note 6), and $30,000,000 was
provided from partners' capital contributions (see Note 7). The remainder has
been financed through accounts and retainage payable. Capitalized Project costs
include costs incurred in the development and construction of the gas and oil
fired 150-megawatt cogeneration facility. The majority of these costs
represent expenditures made under the Engineering, Procurement, and
Construction contract between the Partnership and the Contractor. Other costs
represent expenditures for legal, consulting, engineering and financing
activities relating to the Project. All costs related to the design and
construction of the Project up to the date of Commercial Operation on January
9, 1998, have been capitalized as construction work-in-progress when incurred
and now are classified as plant in service, except deferred financing fees
which are included in other assets. Substantially all of the property, plant
and equipment is being depreciated over 20 years, the life of the Project's
electric and contingent capacity sales agreements (see Note 4).
(b) Revenue Recognition - The Partnership's primary source of revenues is from
the sale of steam to TPEC and the sale of electricity generated by the Project
to PECO. Pursuant to the Steam Sales Agreement, TPEC is obligated to purchase
all of its steam requirements from the Project as defined in the agreement.
Under the provisions of the Power Purchase Agreements, PECO has agreed to
purchase, or accept delivery of, the net electric output from the Project, up
to the lesser of 150 megawatts or the amount of electric output for which the
Federal Energy Regulatory Commission ("FERC") has certified the Project.
(c) Segment Reporting - The Partnership currently operates the Project, which
produces two forms of salable energy from one generation process. Revenues from
each of the two forms are disclosed on the statement of income.
(d) Inventory - Inventory, which is recorded on the first-in, first-out basis,
consists of the following at December 31:
1998 1997
Fuel $1,532,987 $1,020,469
Spare Parts 630,457
---------- ---------
$2,163,444 $1,020,469
========== ==========
(e) Fair Value of Financial Instruments - The amounts reported in the balance
sheets for accounts receivable, accounts payable and debt approximate fair
value.
(f) Accounting for Income Taxes - The Partnership is not a taxpaying entity
for income tax purposes. Taxable income or loss from the Partnership is
reportable by the Partners on their respective income tax returns.
Accordingly, there is no recognition of income taxes in the financial
statements.
(g) Interest Rate Hedging - The Partnership entered into interest rate swap
agreements in order to hedge against future increases in interest rates. For
swap contracts that effectively hedge interest
rate exposures, the net cash amounts paid or received on the contract are
accrued and recognized as an adjustment to interest
expense over the period of the contract.
(h) Use of Estimates - The preparation of the Partnership's financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates and the amounts of expenses
during the reporting periods. Actual results could differ from those
estimates.
(i) Reclassifications - Certain amounts in the 1997 financial statements have
been reclassified to conform to current year presentation.
(j) Cash and Cash Equivalents - The Partnership classifies all investments
with terms to maturity of less than three months upon purchase as cash and cash
equivalents. Cash and cash equivalents at December 31, 1998 consist primarily
of a money market investment account, which is carried at market, which
approximates cost.
(k) Deferred Financing Costs - Deferred financing costs of $6,544,596 are
amortized over the life of the credit agreements and are included in other
assets.
(l) Real Estate Taxes - The Partnership has accrued real estate taxes as
required in the Facility Lease (see Note 4). The Partnership has made its best
estimate of its anticipated real estate taxes, but has not yet been billed by
its local taxing authority. However, management does not believe that actual
taxes due will be materially different than the amounts currently accrued.
4. RELATED PARTY AGREEMENTS AND TRANSACTIONS
Facility Lease - The Project is located at 2600 Christian Street, Philadelphia,
Pennsylvania, on the site of TPEC's Schuylkill Station and PECO's Schuylkill
Station, which is owned by PECO. The Partnership has leased a portion of the
land which TPEC has leased from PECO. The lease agreement with TPEC commenced
on the date construction began, March 8, 1996, and will terminate 25 years from
the date of Commercial Operation. The Partnership is obligated to pay TPEC $1
per year as rent. The Partnership is required to pay any increase in taxes,
assessments and fees assessed against the site or the Facility during the lease
term.
Dock Facility Service Agreement - The Partnership has an agreement with PTDC
and TPEC, an affiliate of PTDC, for fuel oil transportation and storage
services. The Partnership pays operating fees based on the number of barrels
received at, or delivered to, the dock as well as a storage fee for barrels
stored for use by the Project. These fees are adjusted annually based on the
Consumer Price Index ("CPI"). During 1998 and 1997, the Partnership incurred
costs associated with these services of $199,640 and $100,923, respectively, of
which $12,862 and $100,923 is included in accounts payable at December 31, 1998
and 1997, respectively. The entrance to the Schuylkill Station of TPEC, which
is also the entrance to the Project, was upgraded in 1997. The Partnership had
previously agreed to reimburse TPEC for its share of the cost which amounted to
$250,000.
Operations and Maintenance Agreement - PUPCO, a Delaware corporation, an
affiliate of TPEC, manages and performs all operation and maintenance of the
Project subsequent to the Commercial Operation date in accordance with a 25-
year agreement. Prior to Commercial Operation, PUPCO was reimbursed for certain
costs incurred during mobilization and received a monthly fee of
$25,000 limited to $150,000 in total monthly fees. After Commercial Operation
begins, the Partnership is required to pay PUPCO an annual operating fee of
$600,000 as detailed in the agreement. A portion of the operating fee,
$400,000, is adjusted annually based on
changes in the CPI. As an additional fee, PUPCO will receive 30% of all
payments received by the Partnership pursuant to the Contingent Capacity
Purchase Addendum (Phase 1). The Partnership was billed by PUPCO annual
operating fees of $600,000 and a capacity fee of $757,416, and reimbursable
expenses of $1,647,658 for 1998, of which $1,497,003 was included in accounts
payable at December 31, 1998. Included in those billings were $29,192 and
$32,851 of fees and reimbursable expenses, respectively, which were capitalized
as construction cost.
Steam Sale Agreement - The Partnership has a 25-year agreement with TPEC in
which the Partnership sells all of the steam produced by the plant to TPEC.
The price for low- and high-pressure steam is determined based on a function of
weighted average fuel price, CPI and the City of Philadelphia Tariff Water and
Sewer Rates. The agreement requires TPEC to pay for a minimum of 3.3 Mlbs on
an annual basis upon Commercial Operation. During 1998 and 1997, $18,113,962
and $851,182, respectively, was billed by the Partnership to TPEC for steam
produced and capacity charges. Of the amounts billed in 1998 and 1997, $296,199
and $851,182, respectively, were capitalized as a reduction of construction
costs as such sales occurred as a result of plant testing. Accounts receivable
as of December 31, 1998 and 1997 include $3,985,346 and $851,182, respectively,
due from TPEC for these billings.
Electric and Contingent Capacity Sales Agreements - The Partnership has two 20
year electric sale agreements with PECO, commencing at the Commercial Operation
date, whereby the Partnership supplies PECO with electric output at costs
defined by the agreements. The terms of agreements require PECO to purchase or
accept delivery of the net electric output from the power plant of the lesser
of 150 megawatts or the amount of electric output for which the FERC has
certified the power plant. The two parties also entered into a 20-year
Contingent Capacity Purchase Addendum which requires PECO to purchase electric
capacity from the Partnership. The addendum term commenced on the date of
Commercial Operation. During 1998 and 1997, $61,932,981 and $1,778,911,
respectively, was billed by the Partnership to PECO for electricity produced
and capacity charges. Of the amounts billed in 1998 and 1997, $1,624,855 and
$1,778,911, respectively, were applied as a reduction of construction costs as
such sales occurred as a result of plant testing. Accounts receivable as of
December 31, 1998 and 1997 include $6,693,424 and $1,778,911, respectively, due
from PECO for these billings. As a result of the Project, PECO was required to
construct an interconnection between its facility and the Partnership's
facility. The costs associated with the interconnection, $2,355,426, were
reimbursed to PECO by the Partnership during 1997. Other amounts paid to PECO
during 1997 for reimbursement of expenses were $6,000 for the Partnership's
portion of a joint thermal modeling study.
Steam Venture Agreement - On September 17, 1993, TPEC, PUPCO and the
Partnership entered into an Amended and Restated Steam Venture Agreement for
the purpose of the Partnership designing, constructing, starting-up, and
testing and owning a cogeneration facility, with the assistance of the other
two participants. The agreement required the Partnership to pay PUPCO
quarterly fees of $150,000 up to Commercial Operation. Amounts billed in 1997
were capitalized as construction costs; however, $252,635 was in accounts
payable at December 31, 1997. After Commercial Operation commenced, PUPCO
receives annual fees of $1,200,000 payable in monthly installments. Two-thirds
of the annual fee is subject to an escalation of 3% per annum. During 1998 the
Partnership was billed $1,200,000 by PUPCO under this agreement, of which
$25,806 was capitalized as construction cost. Accounts payable at December 31,
1998, include $1,200,000 related to these billings. In addition, during 1997,
the Partnership incurred PUPCO mobilization fees of $150,000.
Fuel Management Agreement - During 1998, the Partnership had an agreement with
Exelon Corporation, a subsidiary of PECO, for fuel management services. Under
the terms of the agreement, the Partnership was to pay Exelon a fee based on
the amount of natural gas and liquid fuels delivered to the Project. During
1998, the
Partnership incurred costs associated with these services of $176,480, of which
$4,474 was capitalized as construction costs and $176,480 was included in
accounts payable at December 31, 1998.
Construction Management - NRGG received fees and reimbursed expenses for
management services provided to the Project and for acting as the Partnership's
representative to administer all third-party contracts during the construction
phase. The arrangement commenced on March 8, 1996 and ceased upon Commercial
Operation. During 1998, NRGG billed the Partnership fees and reimbursed
expenses of $56,250 and $214,795, respectively, all of which was capitalized as
construction cost. Accounts payable at December 31, 1997 included $205,201 of
such fees and expenses.
Management Services and Other - In accordance with the Partnership agreement,
the Partnership is required to pay it's Managing Partner $150,000 per year for
providing management services to the Partnership. NRGG acted as Managing
Partner through November 15, 1998 and billed the Partnership fees and
reimbursable expenses of $131,250 and $36,719, respectively of which $118,750
was included in accounts payable at December 31, 1998. Of these fees, $3,387
was capitalized as construction cost. Effective November 15, 1998, Trigen
became the Managing Partner and billed the Partnership fees of $18,750 for the
year ended December 31, 1998, all of which was included in accounts payable as
of December 31, 1998. In addition, the Partnership purchases demineralized
water from Trigen. For the year ended December 31, 1998, the Partnership
purchased $2,206,869 of demineralized water from Trigen of which $46,671 was
capitalized as a construction cost prior to commercial operation and $498,322
was included in accounts payable as of December 31, 1998.
5. OTHER SIGNIFICANT CONTRACTS
Gas Supply Agreement - The Partnership has a Gas Sales Agreement with Aquila
Energy Marketing Corporation ("Aquila"), a Delaware corporation, providing for
the purchase of natural gas to meet the power plant's requirements. The
purchase of gas as stated in the agreement is divided into two tiers based on
quantity purchased. The price of the first tier, for daily purchases up to
32,000 million British Thermal units (MMBtu) is based on the gas spot market
plus a premium. The second tier, for daily purchases above the initial 32,000
MMBtu, is also based on the gas spot market plus a premium. The premium on
second tier gas purchases is subject to annual negotiations effective for years
beginning January 1, 1999 and after. In addition, beginning in 2001 the price
of both tiers is indexed based on the electricity rate received by the Project.
The agreement also has a pricing provision for winter quantity gas delivered to
certain redelivery points as defined in the agreement. The initial term of the
Gas Sales Agreement is 192 months from the initial delivery and may be extended
for one-year renewal periods unless terminated by either party. During 1998,
the Partnership purchased $14,691,090 of gas under this agreement.
Gas Transportation Arrangements - The Partnership and the Philadelphia
Authority for Industrial Development ("PAID") entered into a Service Agreement
dated January 28, 1996, whereby PAID agreed to deliver non-interruptible local
gas service to the Project for up to 50,000 Dekatherms ("Dth") per day from the
date of Commercial Operation via an established agreement with Philadelphia Gas
Works ("PGW"). The agreement between the Partnership and PAID is for a period
of 25 years and may be extended at the mutual agreement of the two parties.
The Partnership is committed to purchase transportation services for a minimum
annual quantity based in part, on steam sales to Trigen. In addition, TPEC
permanently released capacity of 15,000 Dth to the Partnership beginning
November 1, 1997. TPEC retained first refusal privileges on this released
capacity in the event that the Partnership does not require the additional
capacity. During 1998, the Partnership purchased $3,187,640 of transportation
services under these agreements.
Engineering, Procurement and Construction Contract - The Partnership has a
$116,300,000 engineering, procurement and construction contract (the "EPC")
with the Contractor. The contract guaranteed that the Project would be
provisionally completed by December 8, 1997, the projected date of Commercial
Operation. Provisions of the contract included rebates to the Partnership of
$70,000 a day should the Contractor fail to complete the Project on schedule as
well as bonus payments to the Contractor should the Project be completed prior
to schedule. The contract was not completed on time. As such, a rebate in the
amount of $1,722,000 has been recorded in accounts receivable at December 31,
1998. The Partnership believes this accrual is based on a conservative
estimate. Currently, the Partnership and the Contractor are in arbitration over
the completion of the EPC contract (see Note 2). Provisional acceptance of the
Project has not yet occurred.
Combustion Turbine Parts Supply and Repair and Scheduled Outage Services
Agreement - The Partnership entered into a combustion turbine parts supply and
repair and scheduled outage services agreement with Westinghouse Electric
Corporation as of August 29, 1997. The agreement requires the Partnership to
purchase from the Contractor parts and miscellaneous hardware for the gas
turbine comprising a portion of the Project, repair of parts for the gas
turbine comprising a portion of the Project, and scheduled outage services and
technical field assistance for unscheduled outages as defined in the agreement.
6. CREDIT AGREEMENTS
On March 1, 1996 the Partnership entered into a $125,000,000 Credit Agreement
(the "Agreement") to provide construction and term loan financing for the
purpose of financing a major portion of the Project facility. The Agreement
provides the Partnership with $113,000,000 of construction loan commitments
(the "Construction Loan") which are convertible to term loan commitments (the
"Term Loan") after completion of certain criteria as stated in the Agreement,
$7,000,000 in letter of credit commitments (the "LOC Commitment"), and
$5,000,000 in working capital loan commitments (the "WC Loan"). Upon
completion of the Project, the Construction Loan is due and payable or may be
converted to a 15-year Term Loan, payable in quarterly installments through the
year 2013. The Term Loan is available only to repay the Construction Loan.
Substantially all of the Partnership's assets have been pledged as collateral
under the Agreement.
The Partnership had $94,324,049 outstanding under the Construction Loan at
December 31, 1998. The Partnership has pledged $5,000,000 under its LOC
Commitment for outstanding letters of credit as of December 31, 1998.
Interest on balances outstanding under the Construction Loan and the WC Loan
prior to conversion of Construction Loan to Term Loan, is based on either the
base rate, as defined in the Agreement, or LIBOR plus 1.1% as elected by the
Partnership at the time of borrowing, and was 6.66% at December 31, 1998.
Interest on balances outstanding under the Term Loan and the WC Loan,
subsequent to conversion of Construction Loan to Term Loan, is based on the
rates as noted during the Construction Loan period and is subject to an
increase in the percentage as defined in the Agreement. Interest on letters of
credit outstanding under the LOC Commitment is currently 1.1%, and is subject
to periodic increases during the term of the Agreement. The LOC Commitment also
is subject to a fee of 0.125%, due quarterly.
The Agreement provides for commitment fees of 0.375% on the unused Construction
Loan, WC Loan and LOC Commitment.
To protect the Project Lender from the uncertainty of interest rate changes
during the term of the loan, the Partnership entered into an agreement (the
"Swap Agreement") with Chase Manhattan Bank
(the "Counterparty"), a participating bank in the Loan Agreement on March 1,
1996. Under the Swap Agreement, the Partnership agreed to swap interest
payments with the Counterparty. Effective December 8, 1997, the Partnership is
obligated to make fixed interest payments at a rate of 7.18% from effective
date of December 8, 1997 through termination date of December 8, 2012 on a
balance of $56,500,000 at December 8, 1997 and decreasing in accordance with
the Swap Agreement. The Counterparty is obligated to make variable interest
payments based on a three-month LIBOR, which was 5.2% at December 31, 1998, on
the same balance.
The Partnership also has a Subordinate Credit Commitment with the Project's
Contractor. The Contractor agreed to lend the Partnership $15,000,000 to
provide additional funding for the construction of the Project. The funds are
available after the Construction Loan commitments described above have been
exhausted and the Partners have made their equity contribution of $30,000,000
to be used for the continuation of the Project's construction. The term of the
Subordinate Debt is nine years and interest on the Subordinate Debt will be
calculated using the prime rate for the first four years and prime rate plus
1.5% for the remaining years. During 1998, the Partnership borrowed the full
$15,000,000 available under the Subordinate Debt.
During 1998, the Partnership received a notice of default from the Project
Lender. Such default resulted in a cross-default on the Partnership's
Subordinate Debt. See Note 2.
7. CAPITAL CONTRIBUTIONS
During 1997, the Construction Loan (see Note 6) was fully utilized. Each of the
Partners made an equity contribution of $10,000,000. The last contributions
were made December 29, 1997.
8. NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), Reporting
on the Costs of Start-Up Activities. This statement, which requires that costs
related to start-up activities generally be expensed as incurred, is effective
for fiscal years beginning after December 25, 1998. At this time, the
Partnership has not determined the impact the adoption of this standard will
have on the Partnership's financial statements.
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, ("SFAS No. 133") Accounting for
Derivative Instruments and Hedging Activities. This statement, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities, is effective for fiscal years beginning after June 15,
1999. At this time, the Partnership has not determined the impact the adoption
of this standard will have on the Partnership's financial statements.
9. SUBSEQUENT EVENTS
On February 28, 1999, the 20 year agreement with Exelon for fuel management
services was terminated by mutual consent among the parties.
On March 10, 1999, the Court of Common Pleas granted the Partnership's motion
for partial summary judgement effectively deciding the issue of liability on
the contract claim against PECO and in favor of the Partnership in the matter
discussed in Note 2. The trial will now be limited to the amount of damages
PECO must pay the Partnership and the counts of fraud, conversion, breach of
the implied covenant of good faith and fair dealing and breach of fiduciary
duties. The trial is scheduled to begin March 29, 1999.
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