1
EXHIBIT 99.4
Financial Statements
of "West Coast Power"
WEST COAST POWER LLC
Consolidated Financial Statements
As of December 31, 2000
Together With Auditors' Report
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
2
To the Member of West Coast Power LLC:
We have audited the accompanying consolidated balance sheets of West Coast Power
LLC (a Delaware limited liability company) as of December 31, 2000 and 1999, and
the related consolidated statements of operations, member equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of West Coast Power LLC as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
- - -------------------------
Arthur Andersen LLP
Houston, Texas
March 19, 2001
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WEST COAST POWER LLC
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2000 AND 1999
2000 1999
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,617,872 $ 42,291,460
Accounts receivable 281,495,024 74,770,187
Less- Contingent revenues receivable (34,895,799) (15,905,719)
------------- -------------
-
Accounts receivable, net 246,599,225 58,864,468
Inventories 30,522,385 15,603,482
Prepaid expenses 3,164,171 2,602,078
Loans to affiliates -- 11,465,643
------------- -------------
Total current assets 321,903,653 130,827,131
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 56,583,322 56,583,322
Plant and equipment 483,185,648 469,919,080
Less- Accumulated depreciation (59,719,649) (30,393,600)
------------- -------------
Property, plant and equipment, net 480,049,321 496,108,802
------------- -------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$9,283,968 and $5,696,859 for 2000 and 1999,
respectively 41,833,689 48,290,798
Deferred financing costs, net of accumulated
amortization of $2,313,084 and $771,030 for 2000 and
1999, respectively 3,855,127 5,397,186
------------- -------------
Total other assets 45,688,816 53,687,984
------------- -------------
Total assets $847,641,790 $680,623,917
============= =============
LIABILITIES AND MEMBER EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 24,000,000 $ 25,000,000
Accounts payable-
Trade 14,799,923 16,166,426
Affiliates 165,757,432 13,696,198
Accrued liabilities 22,952,317 28,146,043
Deferred revenues - 21,927,348
Overhaul and maintenance reserve 2,762,223 11,190,440
------------- -------------
Total current liabilities 230,271,895 116,126,455
LONG-TERM DEBT, net of current maturities 193,904,000 272,500,000
COMMITMENTS AND CONTINGENCIES (Note 7)
MEMBER EQUITY 423,465,895 291,997,462
------------- -------------
Total liabilities and member equity $847,641,790 $680,623,917
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
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WEST COAST POWER LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
-------------- --------------
REVENUES $ 910,145,395 $ 289,578,949
Less- Contingent revenues (34,895,799) (10,849,362)
-------------- --------------
Net revenues 875,249,596 278,729,587
OPERATING COSTS:
Nonaffiliate 50,295,186 54,823,242
Affiliate 507,402,366 152,117,104
-------------- --------------
Total operating costs 557,697,552 206,940,346
-------------- --------------
Operating margin 317,552,044 71,789,241
DEPRECIATION AND AMORTIZATION (34,455,219) (26,397,605)
GENERAL AND ADMINISTRATIVE EXPENSES (4,711,184) (2,077,259)
-------------- --------------
Income from operations 278,385,641 43,314,377
INTEREST EXPENSE (26,518,883) (16,616,034)
OTHER EXPENSE (12,211,623) -
INTEREST INCOME 5,724,794 2,346,407
-------------- --------------
NET INCOME $ 245,379,929 $ 29,044,750
============= =============
The accompanying notes are integral part of these consolidated
financial statements.
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WEST COAST POWER LLC
CONSOLIDATED STATEMENTS OF MEMBER EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
BALANCE, January 1, 1999 $ 134,850,078
Contributions 142,642,634
Net income 29,044,750
Distributions (14,540,000)
--------------
BALANCE, December 31, 1999 291,997,462
Contributions 16,207,956
Net income 245,379,929
Distributions (130,119,452)
--------------
BALANCE, December 31, 2000 $ 423,465,895
=============
The accompanying notes are an integral part of these consolidated
financial statements.
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WEST COAST POWER LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 and 1999
2000 1999
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 245,379,929 $ 29,044,750
Adjustments to reconcile net income to net cash provided by (used
in) operating activities-
Depreciation and amortization 34,455,219 26,397,605
Changes in assets and liabilities that provided (used) cash-
Accounts receivable (206,724,837) (6,076,473)
Contingent receivables 18,990,080 (22,849,885)
Inventories (14,918,903) (65,213)
Prepaid expenses (562,093) (1,554,054)
Payables 150,694,731 22,449,400
Accrued liabilities (5,193,726) (84,399,090)
Overhaul and maintenance reserve (8,428,217) 8,065,007
Deferred revenues (21,927,348) (3,023,449)
Other assets, net 2,870,000 (5,901,933)
-------------- -------------
Net cash provided by (used in) operating activities 194,634,835 (37,913,335)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,266,570) (3,523,332)
Business acquisitions, net of cash acquired -- (352,500,064)
-------------- -------------
Net cash used in investing activities (13,266,570) (356,023,396)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 10,000,000 378,366,037
Repayments of borrowings (89,596,000) (80,866,037)
Loans to affiliates 11,465,643 (11,465,643)
Contributions 16,207,956 142,642,634
Distributions (130,119,452) (14,540,000)
-------------- -------------
Net cash provided by (used in) financing activities (182,041,853) 414,136,991
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (673,588) 20,200,260
CASH AND CASH EQUIVALENTS, beginning of year 42,291,460 22,091,200
-------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 41,617,872 $ 42,291,460
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 27,315,568 $ 15,086,581
============== =============
The accompanying notes are an integral part of these consolidated
financial statements.
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WEST COAST POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND NATURE OF OPERATIONS:
Background
Prior to 1999, Dynegy Power Corp. (DPC), a wholly owned subsidiary of Dynegy
Inc. (Dynegy), and NRG Energy, Inc. (NRG), a majority owned subsidiary of
Northern States Power until its merger with New Centuries Energies to form Xcel
Energy, Inc., in August 2000 (collectively, the Sponsors) each held a 50 percent
interest in two limited liability companies: El Segundo Power, LLC (ESP), and
Long Beach Generation LLC (LBG) (collectively, the Historical LLCs). In May
1999, the Sponsors acquired the assets and liabilities which make up Cabrillo
Power I LLC (Cabrillo I) and Cabrillo Power II LLC (Cabrillo II) (collectively,
the New LLCs). Effective June 30, 1999, the Sponsors formed WCP Holdings LLC
(Holdings) and West Coast Power LLC (WCP), a Delaware limited liability company.
The Sponsors have an equal interest in Holdings and share in profits and losses
equally. WCP is wholly owned by Holdings and serves as a holding company for the
Historical LLCs and New LLCs.
Upon formation of WCP, the assets and liabilities of the Historical LLCs were
contributed to WCP by the Sponsors and were recorded at their historical costs
because the transfer represented a reorganization of entities under common
control. These financial statements include the results of operations of the
Historical LLCs for all of 2000 and 1999 and the results of operations of the
New LLCs since the date of their acquisition. Operations are governed by the
executive committee with two representatives from each Sponsor.
Nature of Operations
ESP owns a 1,020-megawatt (MW) plant located in El Segundo, California,
consisting of four steam electric generating units. ESP's assets were purchased
from the Southern California Edison Company (SCE) through a competitive bid
process for $88.3 million on April 4, 1998. The facility operates as a merchant
plant, selling energy and ancillary services, as defined in the California
Independent System Operator (ISO) tariff, to the deregulated California
wholesale electric market. The facility also maintained a Must-Run Agreement
(MRA) with the ISO that was terminated by the ISO on December 31, 1999.
LBG owns a 560-MW plant located in Long Beach, California, consisting of seven
60-MW gas turbine generators, and also owns two 70-MW steam turbine units. LBG's
assets were purchased from SCE on April 1, 1998, through a competitive bid
process for $29.8 million. The facility operates as a merchant plant, selling
energy and ancillary services through the deregulated California wholesale
electric market.
Cabrillo I owns a 965-MW plant located in Carlsbad, California, consisting of
five steam electric generating units and one combustion turbine. Cabrillo I's
assets were purchased from San Diego Gas & Electric (SDG&E) on May 22, 1999, at
a purchase price of $283.4 million. The facility operates as a merchant plant,
selling energy and ancillary services to the California wholesale electric
market. The facility also maintains an MRA with the ISO.
Cabrillo II owns 17 combustion turbines with an aggregate capacity of 253 MW
located throughout San Diego County, California. Cabrillo II's assets were
purchased on May 22, 1999, from SDG&E through a competitive bid process for a
purchase price of $69.1 million. The facility operates as a merchant plant,
selling energy and ancillary services to the California wholesale electric
market. The facility also maintains an MRA with the ISO.
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2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Cash and Cash Equivalents
WCP considers all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of market or cost using last-in, first-out
(LIFO) or average cost and are comprised of the following at December 31, 2000
and 1999:
2000 1999
------------ -----------
Emissions credits (average cost) $12,872,541 $ --
Materials and supplies (average cost) 10,372,169 11,016,854
Fuel oil (LIFO) 7,277,675 4,586,628
------------ -----------
$30,522,385 $15,603,482
============ ===========
Emission credits represent costs paid by WCP to acquire additional NOx credits.
WCP uses these credits to comply with emission caps imposed by various
environmental laws under which it must operate.
Plant and Equipment
Plant and equipment costs are being depreciated on a straight-line basis over
estimated useful lives of 3 to 29 years.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying amounts of
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down is required. If this review indicates that the
assets will not be recoverable, the carrying value of WCP's assets would be
reduced to their estimated market value.
Goodwill
Goodwill represents the excess purchase cost over the estimated fair value of
the assets acquired and liabilities assumed and is being amortized on a
straight-line basis over prorated 3 to 27 year estimated useful lives based on
the useful life of the related plant and equipment.
Overhaul and Maintenance Reserves
WCP accrues major overhaul and maintenance costs expected to be incurred that
are not covered by the operations and maintenance agreements. Other maintenance
and repair costs are charged to expense as incurred.
Federal Income Taxes
WCP is not a taxable entity for federal income tax purposes. Accordingly, there
is no provision for income taxes in the accompanying financial statements.
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Revenue Recognition
Revenues from the sale of energy and ancillary services are recorded based upon
output delivered and/or service provided multiplied by contract terms where
applicable and/or market pricing. Revenues received from the MRA are primarily
derived from availability payments and amounts based on reimbursing variable
costs. Historically, virtually all of WCP's sales have been to the ISO and the
California Power Exchange. Revenues identified as being subject to future
resolution are accounted for as discussed in Note 7.
Environmental Costs
Environmental costs relating to current operations are expensed. Liabilities are
recorded when an environmental assessment indicates that remedial efforts are
probable and the costs can be reasonably estimated.
Risk Management Activities
WCP enters into various derivative instruments to protect itself from
fluctuating prices and interest rates. WCP uses physical forward contracts to
hedge a portion of its exposure to price fluctuations of natural gas and
electricity. Hedging gains and losses are recognized when the related sales
transactions occur. WCP also enters into interest rate swap agreements, which
effectively exchange variable interest rate debt for fixed interest rate debt.
The agreements are used to reduce the exposure to possible increases in interest
rates. WCP enters into these swap agreements with major financial institutions.
Concentration of Credit Risk
WCP sells its electricity production to purchasers of electricity in California,
which, during the year ended December 31, 2000, included the California Power
Exchange (PX) and the California Independent System Operator (ISO). Given recent
developments in the California power and natural gas markets (see Note 7), the
concentration of WCP's receivables from customers in the California market
exposes WCP to substantial credit risk. Management believes that its net
receivables from customers in the California market will ultimately be fully
collected and has taken steps as discussed in Note 7 to limit its future
exposure to credit risk in the California market.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires estimates and assumptions that
affect the reported amounts of assets and liabilities as well as certain
disclosures. WCP's financial statements include amounts that are based on
management's best estimates and judgments. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
WCP's financial instruments consist primarily of cash and cash equivalents,
accounts receivable, accounts payable and debt instruments. The carrying amounts
of cash and cash equivalents, accounts receivable and accounts payable are
representative of their respective fair values due to the short-term maturity of
these instruments. The fair value of WCP's debt instruments is discussed in Note
6. WCP has entered into certain interest rate swap agreements in order to fix
its effective interest rate as discussed in Note 6 and electricity and gas
options as discussed in Note 3.
New Accounting Pronouncements
WCP must adopt Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective
January 1, 2001. Provisions in SFAS No. 133 will affect the accounting and
disclosure for certain contractual arrangements and operations of WCP beginning
in 2001.
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WCP will record the impact of the adoption as a cumulative effect adjustment in
2001. Adoption of SFAS No. 133 will not affect WCP's net income. The table below
reflects the amounts that will be recorded as assets, liabilities and other
comprehensive income upon adoption of SFAS No. 133 on January 1, 2001:
Interest Commodity
Rate Financial
Swaps Instruments
----------- ----------
Derivative assets $ -- $1,376,320
Derivative liabilities 1,523,871 --
----------- ----------
Other comprehensive income (loss) $(1,523,871) $1,376,320
=========== ==========
Upon adoption of SFAS No. 133, WCP will account for its physical forward
contracts as normal purchases and sales that are exempt from derivative
accounting treatment under SFAS No. 133 because of the contracts will result in
physical delivery.
Reclassifications
Certain reclassifications have been made to conform the prior year presentation
to the current year presentation.
3. NATURAL GAS AND ELECTRICITY OPTIONS:
WCP has purchased and sold gas and electricity options to manage the operating
margins of its plants during 2001. The purchased gas call options have a fair
value of approximately $1.4 million. The sold electricity call options have a
fair value of approximately $(12.2) million. The purchased gas calls are
accounted for as hedges and, accordingly, changes in the market value of these
contracts and the premiums paid are deferred until the actual natural gas
purchases occur. The sold electricity options do not qualify for hedge
accounting, and changes in the market value of these contracts are recorded
currently. For the year ended December 31, 2000, WCP had recorded expense of
approximately $12.2 million related to the sold electricity options, which has
been included in other expense in the consolidated statement of operations.
4. RELATED PARTIES:
Affiliates of WCP provide various services for WCP. Charges for these services
are included in WCP's operating and general and administrative expenses and
consisted of the following for the years ended December 31, 2000 and 1999:
2000 1999
------------- -------------
Operating expenses-
Fuel $482,937,131 $147,503,316
EMA charges 9,091,528 3,869,387
OMSA and O&M charges 15,373,707 744,401
------------- -------------
$507,402,366 $152,117,104
============= =============
ASMA fees included in general and
administrative expenses $ 776,403 $ 491,659
============= =============
WCP purchases fuel for its plants under various natural gas supply agreements
(GSAs) with Dynegy Marketing and Trade (DMT). Charges for fuel are based upon
similar terms and conditions as could be obtained from third parties.
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WCP contracted with Dynegy Power Marketing, Inc., an affiliate of WCP, to
provide all power scheduling, power marketing and trading and risk management
for WCP under an energy management agreement (the EMA). Additionally, WCP
contracted with DMT to provide all scheduling and marketing of fuel supply for
WCP under the EMA.
WCP has also contracted with NRG West Coast, Inc., an affiliate of WCP, to
manage the Operations and Management Services Agreement (the OMSA). These
services consist primarily of overseeing the operations and maintenance efforts
of SCE and SDG&E. SCE operated ESP and LBG until April 2000, when NRG took over
operations of the facility under a renegotiated OMSA. Fees for such services are
subject to executive committee approval if the amounts exceed a certain
percentage of the applicable annual approved budget.
WCP contracted with Dynegy Power Management Services, L.P., an affiliate of WCP,
to manage the Administrative Services Management Agreement (the ASMA) which
provides administrative services such as business management and accounting to
WCP. Fees for such services are subject to executive committee approval if the
amounts exceed a certain percentage of the applicable annual approved budget.
5. OPERATION AND
MAINTENANCE AGREEMENTS:
For the New LLCs' acquisition, WCP was required to enter into an operation and
maintenance (O&M) agreement with SDG&E, which will expire in May 2001. For 1999,
the Historical LLCs were operated under an O&M agreement with SCE which expired
in early 2000. The SDG&E and SCE O&M agreements are cost-plus agreements based
on SDG&E's and SCE's estimates of the direct and indirect service costs for
operating and maintaining the plant sites. Expenses related to such services of
$14,129,740 and $25,900,000 were included in operating costs in the accompanying
consolidated statements of operations for the years ended December 31, 2000 and
1999, respectively.
6. LONG-TERM DEBT:
WCP entered into a credit agreement with Bank of America Securities LLC, as
agent, to arrange with a syndicate of banks a five-year, $322,500,000 amortizing
term loan with a balloon payment and a $40,000,000 working capital facility line
of credit (the Credit Agreement); the Credit Agreement matures in June 2004. At
December 31, 2000, no amounts were outstanding under the working capital
facility. The fair value of WCP's debt instruments is considered to approximate
the carrying amount of these instruments as their interest rates are based on
the London Interbank Offering Rate (LIBOR). The interest rate used on the
outstanding loan balance is based upon LIBOR plus 2.0 percent, increasing in
year three to 2.125 percent. WCP paid interest on these borrowings totaling
$27,315,568 in 2000 and $13,218,000 in 1999.
On September 30, 1999, WCP entered into two interest rate swap agreements
related to WCP's debt. One agreement effectively fixed the interest rate at
6.435 percent for the first $60,000,000 and matures June 2004. The second swap
agreement effectively fixed the interest rate at 6.230 percent for an
incremental $40,000,000 and matures in June 2002. At December 31, 2000, the fair
values of the swaps maturing in 2004 and 2002, were $(1,237,090) and $(286,781),
respectively. These swaps are accounted for as hedges and any realized gains or
losses on these contracts are recorded as interest expense in the consolidated
statement of operations.
The credit agreement is secured by all of WCP's assets and membership interests.
The Sponsors have provided limited guarantees for environmental capital
expenditures and interest. Environmental capital expenditures, as defined in the
Credit Agreement, will be funded by the Sponsors, who will make capital
contributions or subordinated loans to WCP to the extent necessary for
environmental capital expenditures up to an aggregate of $80 million.
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Future principal maturities under the term loan are as follows:
2001 $ 24,000,000
2002 18,000,000
2003 18,000,000
2004 157,904,000
-------------
$217,904,000
=============
7. COMMITMENTS AND CONTINGENCIES:
California Power and Natural Gas Markets
Since the fourth quarter of 2000, the power and natural gas markets in
California have experienced substantial volatility driven principally by a
fundamental imbalance in supply and demand and the retail electricity price caps
imposed on the state's two largest utilities. Both Pacific Gas & Electric
Company and Southern California Edison Company have defaulted on payments to the
ISO and the PX as well as other creditors. As a result, the credit rating of
both utilities has been cut to non-investment grade status, and the ISO and the
PX have defaulted on payments due WCP.
WCP is actively seeking the collection of its outstanding accounts receivable.
However, due to previously discussed payment defaults, coupled with the lag time
between receipts of revenues, payment of expenses and the increased fuel cost,
WCP has been forced to defer payment for a portion of its fuel cost. This
deferral of payment has caused WCP to be out of compliance with the terms of its
GSAs. WCP's noncompliance has also caused WCP to be out of compliance with the
terms of its Credit Agreement.
The executive committee of WCP has taken steps to address WCP's liquidity issues
created by the California market situation as well as the resulting events of
noncompliance under WCP's GSAs and Credit Agreement. These steps include (a) a
negotiated deferral of payments owed under the GSAs, (b) negotiating a
forbearance agreement with certain key creditors and (c) seeking alternative
creditworthy purchasers for WCP's prospective operations.
Under the forbearance agreement being negotiated, certain WCP creditors would
grant forbearances with respect to the past events of noncompliance discussed
above, subject to certain parameters as described therein. WCP's management has
had substantive discussions regarding the proposed forbearance terms with the
lead member of its bank syndicate. A forbearance agreement has been presented to
the bank consortium for its review and approval. Management believes that the
forbearance agreement presented to the bank consortium will be executed and that
the terms of that agreement will be sufficient to remedy the noncompliance
issues under the Credit Agreement.
The state of California, through legislation appropriating funds for power
purchases by the Department of Water Resources (DWR), has entered the market as
a purchaser of electricity for resale to the utilities. In March 2001, WCP
entered into an agreement to sell power to the DWR through 2004. The agreement,
which became effective on the date it was announced, provides for sales by WCP's
subsidiaries of an aggregate of 1,000 MW through the remainder of 2001 and a
substantial portion of WCP's capacity during the period from January 1, 2002,
through December 31, 2004.
The executive committee of WCP is actively monitoring the financial and
liquidity impacts imposed on WCP by the current situation. It believes the
combination of the forbearance agreement, the DWR agreement and the desire of
the conflicted parties to resolve, on a long-term basis, the pertinent issues
giving rise to the current situation will provide financial stability for WCP.
However, a prolonged impasse on resolving the market issue, the inability of WCP
to meet its commitments under the forbearance agreement or a continuing edict to
produce electricity with delayed compensation for this service will negatively
impact WCP's available discretionary cash flow, results of operations, financial
position and, potentially, its financial stability.
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Litigation
Class Action Lawsuits--There have been multiple class action lawsuits filed
which name WCP as a defendant. These lawsuits are based on the events occurring
in the California power market during the summer of 2000. The complaints allege
violations of California's Business and Professions Code, Unfair Trade Practices
Act and various other statutes. Specifically, the named plaintiffs allege that
the defendants, including the owners of in-state generation and various power
markets, conspired to manipulate the California wholesale power market to the
detriment of California consumers. Included among the acts forming the basis of
the plaintiffs' claims are the alleged improper sharing of generation outage
data, improper withholding of generation capacity and the manipulation of power
market bid practices. The plaintiffs seek unspecified treble damages.
These lawsuits are at preliminary stages. Defendants have yet to file answers
and, as noted above, the suits have been removed to federal court. The named
plaintiffs have filed, or will shortly file, motions to remand the cases back to
California state court. The defendants in the five lawsuits have formed various
joint defense groups in an effort to coordinate the defense of the claims and to
share certain costs of defense.
CAISO FERC Filing--On March 1, 2001, the California Independent System Operator
Corporation (CAISO) and the California Electricity Oversight Board (EOB) filed a
motion with the FERC proposing, among other things, that they be given access to
cost information that generators have filed with the FERC and that the FERC keep
all sales in California subject to refund. WCP will vigorously oppose this
motion because it believes that there is no basis for giving the state of
California, a significant market participant, access to confidential generator
information on bids and costs. In addition, WCP believes that there is no basis
for the FERC to extend refund exposure on a generic, blanket basis, as such an
extension would contradict the FERC's carefully crafted refund structure
designed to minimize the obvious disincentives that refund exposure creates for
suppliers.
FERC Orders--On December 15, 2000, the FERC issued an order that, among other
things, applied a "soft" price cap of $150/megawatt hour (MWh) to sales to the
PX and the ISO. The "soft" cap allowed prices to exceed $150/MWh when justified
by costs. In March 2001, the FERC issued orders that presumptively approved
prices up to $273/MWh during January 2001 and $430/MWh during February 2001
based on the FERC's calculation of the marginal cost of producing power in the
least efficient generating unit. The orders directed electricity suppliers to
either refund a portion of their January and February sales or justify their
prices above this approved price. The orders, if finalized, would obligate WCP
to refund approximately $45 million in revenues. The FERC stated in its order
that it would address December 2000 transactions in a separate order. These
orders implement a departure from standard cost-based ratemaking and is likely
to be appealed by both buyers and sellers of power.
WCP is also subject to various other legal proceedings and claims that arise in
the normal course of business. In the opinion of management, the amount of
ultimate liability with respect to its litigation matters will not have a
material adverse effect on WCP's financial position or results of operations.
Contingent Revenues
During December 2000, WCP entered into an interim agreement with the ISO. WCP
has accrued an incremental $34,895,799 in revenues that management believes to
be associated with sales under this agreement. There is an ongoing
reconciliation process between the ISO and WCP regarding this matter and,
accordingly, the $34,895,799 has been reserved as contingent. While there can be
no assurance that these disputed amounts will be collected, management believes
the contingent revenues are realizable based on contractual interpretations and
compliance with required processes. Upon collection of this amount, such revenue
will be recognized in earnings.
14
-8-
As of December 31, 1999, WCP had accrued certain reserves pertaining to
contingent revenues totaling $37,833,000 related to 1999 and prior periods.
These reserves were provided for various disputes with customers that were
subject to contract interpretations, compliance with processes and filed market
disputes. Cash received totaling $11.4 million associated with deferred revenues
was loaned in 1999 to the Sponsors until resolution of the disputed items. These
reserves were settled during 2000, and all loans to affiliates were repaid.
Adjustments related to the settlement were applied against the contingent
reserves with an insignificant impact on the consolidated statement of
operations in 2000.
8. ACQUISITION OF CABRILLO I AND CABRILLO II:
In May 1999, the Sponsors acquired the assets and liabilities of Cabrillo I and
Cabrillo II from a third party. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the purchase cost, net of working
capital, was allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. Consideration for the
acquisition included cash paid of $352,500,000 and the assumption of $95,928,000
in liabilities.
The following unaudited pro forma information presents a summary of consolidated
results of operations of WCP for the year ended December 31, 1999, as if the
acquisition of the New LLCs by the Sponsors and subsequent transfer to WCP had
occurred on January 1, 1999:
Revenues $300,418,772
Net income 23,593,479