**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

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| **(Mark One)** |                                                                                                                                                                                                                                                                                                         |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ý         | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                    |
|           | ** **                                                                                                                                                                                                                                                                                                   |
|           | **For the fiscal year ended  December 31, 2004**                                                                                                                                                                                                                                                             |
|           |                                                                                                                                                                                                                                                                                                         |
|           | **OR**                                                                                                                                                                                                                                                                                                       |
|           |                                                                                                                                                                                                                                                                                                         |
| o              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                |
|           | ** **                                                                                                                                                                                                                                                                                                   |
|           | **For the transition period from                      to                      ** |

 

**AES IRONWOOD, L.L.C.**

(Exact name of Registrant asspecified in its charter)

 

| **Delaware**                                                                  | **54-1457573**                        |
|-------------------------------------------------------------------------------|---------------------------------------|
| (State  of other jurisdiction of incorporation  or organization)              | (I.R.S.  Employer Identification No.) |
|                                                                          |                                  |
| **305 Prescott Road, Lebanon, Pennsylvania**                                  | **17042**                             |
| (Address  of principal executive offices)                                     | (Zip  Code)                           |
|                                                                          |                                  |
| Registrant’s  telephone number, including area code: **(717)  228-1328** |
| Securities  Registered Pursuant To Section 12(b) of The Act: **None**         |
| Securities  Registered Pursuant To Section 12(g) of The Act: **None**         |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.Yes  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).Yes  o   No  ý

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K  ý

 

As of June 30, 2004, the last business day of the Registrant’s mostrecently completed second fiscal quarter, and as of March  31 , 2005, AES Ironwood, L.L.C. had onemembership interest outstanding, which was held by AES Ironwood, Inc., theCompany’s parent and a wholly owned subsidiary of The AES Corporation.

 

**All of the Registrant’s equity securities areindirectly owned by The AES Corporation. Registrant meets the conditions set forth in General Instruction I(1)(a)and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosureformat authorized by General Instruction I of Form 10-K.**

 

**DOCUMENTSINCORPORATED BY REFERENCE**

**None**

 

 

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**TABLE OF CONTENTS**

** **
| PART I   |     |
|----------|----------|
|     | ITEM 1.  | Business |   |
|     | ITEM 2.  | Properties |   |
|     | ITEM 3.  | Legal Proceedings |   |
|     | ITEM 4.  | Submission of Matters to a Vote of Security  Holders |   |
|     |     |   |
| PART II  |     |
|     | ITEM 5.  | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |   |
|     | ITEM 6.  | Selected Financial Data |   |
|     | ITEM 7.  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|     | ITEM 7A. | Quantitative and Qualitative Disclosures  About Market Risk |   |
|     | ITEM 8.  | Financial Statements and Supplemental Data |   |
|     | ITEM 9.  | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure |   |
|     | ITEM 9A. | Controls and Procedures |   |
|     |     |   |
| PART III |     |
|     | ITEM 10. | Directors and Executive Officers of the  Registrant |   |
|     | ITEM 11. | Executive Compensation |   |
|     | ITEM 12. | Security Ownership of Certain Beneficial  Owners and Management |   |
|     | ITEM 13. | Certain Relationships and Related  Transactions |   |
|     | ITEM 14. | Principal Accountant Fees and Services |   |
|     |     |   |
| PART IV  |     |
|     | ITEM 15. | Exhibits and Financial Statement Schedules |   |

 

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**CAUTIONARY NOTEREGARDING FORWARD-LOOKING STATEMENTS**

** **

Someof the statements in this Form 10-K, as well as statements made by us inperiodic press releases and other public communications, constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995**.** Certain, but not necessarily all, ofsuch forward-looking statements can be identified by the use of forward-lookingterminology, such as “believes,” “estimates,” “plans,” “projects,” “expects,” “may,”“will,” “should,” “approximately,” or “anticipates” or the negative thereof orother variations thereof or comparable terminology, or by discussion ofstrategies, each of which involves risks and uncertainties**.**We have based these forward-looking statements on our current expectations andprojections about future events based upon our knowledge of facts as of thedate of this Form 10-K and our assumptions about future events**.**

 

Allstatements herein other than of historical facts, including those regardingmarket trends, our financial position, business strategy, projected plans andobjectives of management for future operations of the facility, areforward-looking statements**.** Suchforward-looking statements involve known and unknown risks, uncertainties andother factors outside of our control that may cause our actual results orperformance to be materially different from any future results, performance orachievements expressed or implied by the forward-looking statements**.** These risks, uncertainties and other factors include,among others, the following:

 

•     unexpectedproblems relating to the operations and performance of our facility;

 

•     thefinancial condition of third parties on which we depend, including inparticular, Williams Power Company,Inc., formerly known as Williams Energy Marketing & Trading Company (“Williams”),as the power purchaser and fuel supplier under the Power Purchase Agreement,and The Williams Companies, Inc., as the guarantor of performance under thePower Purchase Agreement;

 

•     unanticipatedeffects of the arbitration decision relating to our Power Purchase Agreementdispute with Williams and the possibility of future disputes or proceedingsregarding the Power Purchase Agreement;

 

•     thecontinued performance of Williams under the Power Purchase Agreement;

 

•     theability of The Williams Companies, Inc**.** or itsaffiliates to avoid a default under the Power Purchase Agreement by continuingto provide adequate security to supplement or replace their guarantee ofWilliams’  performance under the PowerPurchase Agreement;

 

•     ourability to find a replacement power purchaser on favorable or reasonable terms,if necessary;

 

•     anadequate merchant market after the expiration of the Power Purchase Agreement;

 

•     capitalshortfalls and access to additional capital on reasonable terms, or in theevent that the Power Purchase Agreement is terminated;

 

•     inadequateinsurance coverage;

 

•     unexpectedexpenses or lower than expected revenues;

 

•     environmentaland regulatory compliance; and

 

•     terroristsacts and adverse reactions to United States anti-terrorism activities.

 

We have no obligation to publicly update or revise any forward-lookingstatement, whether as a result of new information, future events or otherwise**.**

 

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**PART I**

 

**ITEM 1.****                  Business**

 

**General**

** **

We area Delaware limited liability company formed on October 30, 1998 to develop,construct, own, operate and maintain a 705-megawatt (MW) gas-fired electricgenerating power plant in Lebanon County, Pennsylvania, and to manage theproduction of electric generating capacity, ancillary services and energy atour facility**.** References to “us”, “our”, “we”or “the Company” herein mean AES Ironwood, L.L.C.  We commenced commercial operations onDecember 28, 2001, the “commercial operations date”**.**Since the commercial operation date, our sole business is the ownership andoperation of this facility**.**

 

We ownthe land on which our facility is located**.** Our facility wasdesigned, engineered, procured and constructed for us by Siemens WestinghousePower Corporation (“Siemens Westinghouse”) on a fixed-price, turnkey basisunder the construction agreement (the “Construction Agreement”)**.**For more information, see “- Summary of Principal ProjectContracts – Construction Agreement” below. Siemens Westinghouse is alsoproviding combustion turbine maintenance services and spare parts for ourfacility for an initial term of between eight and ten years, depending on thetiming of scheduled outages, under a maintenance services agreement**.** AES Prescott, L**.**L**.**C**.** (“AESPrescott”), an indirect wholly-owned subsidiary of The AES Corporation,provides development, construction management and operations and maintenanceservices for the project under an operations agreement, referred to as the “Developmentand Operations Services Agreement”**.**

 

Weentered into a Power Purchase Agreement (the “Power Purchase Agreement”) for aterm of 20 years under which Williams is committed to purchase all of the netcapacity, fuel conversion and ancillary services of our facility**.** For more information, see “– Summary of Principal ProjectContracts – Power Purchase Agreement” below. Net capacity is the maximum amountof electricity generated by our facility net of electricity used at ourfacility**.** Fuel conversion services consist ofthe combustion of natural gas in order to generate electric energy**.** Ancillary services consist of services necessary tosupport the transmission of capacity and energy**.**Williams is obligated to supply us with all natural gas necessary to providenet capacity, fuel conversion services and ancillary services under the PowerPurchase Agreement**.** During theterm of the Power Purchase Agreement, substantially all of our revenues will bederived from payments made by Williams under the Power Purchase Agreement**.**

 

**OrganizationalStructure**

** **

All ofour equity interests are owned by AES Ironwood, Inc**.**,a wholly-owned subsidiary of The AES Corporation.  The AES Corporation has provided funds to AESIronwood, Inc**.** so that AES Ironwood, Inc**.** can make equity contributions to us to fund project costs**.**  Under an equitysubscription agreement (the “Equity Subscription Agreement”) dated June 1,1999, with AES Ironwood, Inc., these contributions were limited to $50.1million. As of December 31, 2004, AES Ironwood, Inc. had made contributions tous of $38.8 million. Approximately $9.1 million of the remaining contributionwas supported by a surety bond until June 25, 2002, when the surety bondexpired. At that time the surety bond was replaced by an acceptable letter ofcredit in the amount of $9.1 million. The need for the letter of credit ceasedwith the granting of final acceptance on March 12, 2003. The collateral agenthas released us of this requirement. On March 12, 2003, final acceptance underthe agreement was granted and an Officer’s Certificate has been submitted tothe Collateral Agent indicating that the facility has been fully funded and nofurther contribution will be required. AES Ironwood, Inc**.** currently hasno operations outside of its activities in connection with our facility anddoes not anticipate undertaking any operations not associated with our facility**.** AES Ironwood, Inc**.** has no assetsother than its membership interests in us and AES Prescott**.**AES Prescott has no operations outside of its activities in connection with ourfacility**.** Under a services agreement, The AESCorporation supplies to AES Prescott all of the personnel and servicesnecessary for AES Prescott to comply with its obligations under the operationsagreement, referred to as the “Development and Operations Agreement”**.**  As of December 31,2004, The AES Corporation provided 27 employees to our facility.

 

****The AES Corporation is a leading global power company, with2004 sales of $9.5 billion. The AES Corporation delivers 45,000 megawatts ofelectricity to customers in 27 countries through 117 power facilities and 17distribution companies. Its 30,000 people are committed to operationalexcellence and safely meeting the world’s growing power needs. Approximately23% of The AES Corporation’s revenues come from****

**** ****

****4****

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**** ****

****businessesin North America, 17% from the Caribbean, 41% from South America, 11% fromEurope and Africa, and 8% from Asia.****

 

Thefollowing organizational chart illustrates the relationship among our company,AES Ironwood, Inc**.**, AES Prescott and The AESCorporation:

 

 

Ourprincipal executive offices are located at 305 Prescott Road, Lebanon,Pennsylvania 17042**.** Our telephonenumber is (717) 228-1328**.**

 

***Developments Relating toWilliams***

* *

Underthe Power Purchase Agreement, in the event that Standard & Poors (“S&P”)or Moody’s rates the long-term senior unsecured debt of The Williams Companies,Inc. lower than investment grade, The Williams Companies, Inc., or an affiliatethereof is required to supplement The Williams Companies, Inc. guarantee withadditional alternative security that is acceptable to the Company within 90days after the loss of such investment grade rating. For more information, see– “Summary of Principal Project Contracts – Security”.  According to published sources, The WilliamsCompanies, Inc.’s long term senior unsecured debt has been rated belowinvestment grade since 2002 by both S&P and Moody’s.

 

In anaction related to the ratings downgrade of The Williams Companies, Inc., bothS&P and Moody’s lowered their ratings on the Company’s senior securedbonds. On December 10, 2003 S&P lowered its ratings on the Company’s seniorsecured bonds to “B+” from “BB-” with a negative outlook. On November 27, 2002,Moody’s lowered its ratings on the Company’s senior secured bonds to “B2” from “Ba2”.The Company does not believe that such ratings downgrades will have any otherdirect or immediate effect on the Company, as none of the other financingdocuments or project contracts have provisions that are triggered by areduction of the ratings of the bonds.

 

To satisfy the requirementsof the Power Purchase Agreement, on September 20, 2002, Citibank, N.A. issued a$35 million Irrevocable Standby Letter of Credit (the “Letter of Credit”) onbehalf of Williams. The Letter of Credit does not alter, modify, amend ornullify the guaranty issued by The Williams Companies, Inc. in favor of theCompany and is considered to be additional security to the security amountsprovided by such guaranty. The Letter of Credit became effective on September20, 2002 and expired upon the close of business on July 10, 2003 except thatthe Letter of Credit will be automatically extended without amendment forsuccessive one year periods from the present or any future expiration datehereof, unless Citibank, N.A. provides written notice of its election not torenew the Letter of Credit at least thirty days prior to any such expirationdate. In July 2004, Citibank, N.A. sent notification that the letter of creditwill be extended to July 12, 2005. Additionally, in a Letter Agreement datedSeptember 20, 2002, Williams agreed to (a) provide eligible credit supportprior to the stated expiration date of the Letter of Credit and (b) replenishany portion of the Letter of Credit or eligible credit support that is drawn,reduced, cashed or redeemed, at any time, with an equal amount of eligiblecredit support. Within twenty days prior to the expiration of the Letter ofCredit and/or any expiration date of eligible credit support posted byWilliams, Williams shall post eligible credit support to the Company in placeof the Letter of Credit and/or any expiring eligible credit support unless TheWilliams Companies, Inc. regains and maintains its investment grade status, inwhich case the 

 

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Letter of Credit or eligiblecredit support shall automatically terminate and no additional eligible creditsupport shall be required.  The Company and Williams acknowledge that theposting of such Letter of Credit and Williams’ agreement and performance of therequirements of (a) and (b) as set forth in the immediately preceding sentenceshall be in full satisfaction of Williams’ obligations contained in Section19.3 of the Power Purchase Agreement to provide replacement security due to thedowngrade of The Williams Companies, Inc. below investment grade status.

 

Since the Company depends onThe Williams Companies, Inc. and its affiliates for both revenues and fuelsupply under the Power Purchase Agreement, if The Williams Companies, Inc. andits affiliates were to terminate or default under the Power Purchase Agreement,there would be a severe negative impact to the Company’s cash flow andfinancial condition which could result in a default on the Company’s seniorsecured bonds.  Due to recent declines in pool prices, the Company wouldexpect that if required to seek alternative purchasers of its power as a resultof a default by The Williams Companies, Inc. and its affiliates that any suchalternate revenues would be substantially below the amounts that would havebeen otherwise payable pursuant to the Power Purchase Agreement.  Therecan be no assurance as to the Company’s ability to generate sufficient cashflow to cover operating expenses or debt service obligations in the absence ofa long-term Power Purchase Agreement with Williams or its affiliates.

 

For the twelve months endedDecember 31, 2004, the Company has invoiced Williams approximately $54.5million in respect of fixed payments, fuel conversion services and ancillaryservices. Approximately $52.4 million has been recognized as revenue andapproximately $2.1 million has been deferred consistent with the Company’s revenuerecognition policy discussed in Note 3 to the financial statements.

 

The Company had ongoing disputes, including arbitration with Williams,relating to the parties’ Power Purchase Agreement.  The arbitration was bifurcated into twophases, and an award was issued on Phase I on February 3, 2004.  The primary issue in Phase I related tovarious aspects of the availability of the facility for the year ended December31, 2002, including disputes over the amount of any availability bonus orpenalty.  Phase II of the arbitrationinvolved a dispute concerning the proper duration of facility start-ups andshutdowns, including fuel used during start-ups and shutdowns.  While Phase I of the arbitration was limitedto billing disputes in 2002, many of the same issues are disputed between theparties for 2003 billings.

 

The arbitral panel’s award on Phase I of the arbitration found thatWilliams had misapplied the applicable rules of PJM Interconnection, L.L.C. inthe billing dispute with the Company over the availability of thefacility.  The panel declined, however,to decide the facility’s availability during 43 disputed maintenanceevents.  Instead, it encouraged theparties to reach a mutual resolution of the disputed events by applying thecorrect Pennsylvania-New Jersey-Maryland (“PJM”) rule and, failing mutualagreement, to submit the dispute to a third party engineer for resolution.  The parties are currently discussing possibleresolution of the disputed events, and anticipate submitting any events thatcannot be resolved by mutual agreement to a third party.  Until the matter is fully resolved, theavailability of the facility, and certain payments that are calculated based onavailability, cannot be determined. During 2004 Williams paid approximately $2.2 million in respect ofavailability bonus for 2002 and 2003. Approximately $1.8 million has beenrecorded in operating revenues and approximately $415,000 has been recorded asa reduction of bad debt expense, included in general and administrative costs.The parties are continuing to resolve the outstanding availability issues andexpect resolution during 2005.

 

Also as aresult of the panel’s Phase I Award, the Company will begin pre-funding a cashaccount on a quarterly basis to reflect the maximum amount of a fuel conversionvolume rebate that might be payable to Williams if the facility operates therequisite number of hours to earn the maximum rebate available under the PowerPurchase Agreement.  The maximum theoreticalannual amount of the fuel conversion volume rebate is $1.7 million, but theaccount will not be fully funded during the course of the year if the facilityis not operated a sufficient number of hours to achieve the maximum fuelconversion volume rebate.  Depending onthe amount of facility operation, the Company may be entitled to withdraw someof the funds deposited into the account during the second half of its fiscalyear.  On April 1, 2004, the Companydeposited $71,000. This amount is included with restricted cash. For the twelvemonths ended December 31, 2004, the Company has determined that no additionalliability has occurred and there is no liability for fuel conversion volumerebate for the entire year ended December 31, 2004. The funds will be left inthe restricted account in anticipation of any liability incurred during thefirst quarter of 2005. The Company will reassess this funding requirement foreach subsequent quarter to determine the liability. The funding will beaccomplished by transferring funds from an unrestricted cash account to therestricted account.

 

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On March 12, 2004 the parties settled Phase II of thearbitration between the Company and Williams, which involved Williams’ claims that the duration of start-ups and shutdowns shouldbe shortened, with a corresponding reduction in the volume of fuel consumedduring such operations.  The settlementresolves and releases, without any payment by the Company, Williams’ claim that it should bereimbursed retroactively to the date of commercial operation for excess fuelallegedly consumed during start-ups and shutdowns.  An agreed order of dismissal hasbeen submitted requesting the arbitral panel to dismiss Phase II of thearbitration with prejudice.  Thesettlement of Phase II has no impact on Phase I of the arbitration.  The parties continue to negotiate in aneffort to settle issues left unresolved by the award in Phase I.

 

**Energy Revenues**

** **

TheCompany generates energy revenues under the Power Purchase Agreement with Williams**.** During the 20-year term of the agreement, the Company alsoexpects to sell electric energy and capacity produced by the facility, as wellas ancillary and fuel conversion services**.** Under thePower Purchase Agreement, the Company also generates revenues from meeting (1)base electrical output guarantees and (2) heat rate bonuses when providingefficient fuel conversion services**.**

 

Uponits expiration, or in the event that the Power Purchase Agreement is terminatedprior to its 20-year term, the Company would seek to generate energy revenuesfrom the sale of electric energy and capacity into the merchant market or undernew short- or long-term power purchase or similar agreements**.** There can be no assurances as to whether such effortswould be successful**.**

 

**Operating Expenses**

** **

Underan agreement with AES Prescott, the Company is required to reimburse alloperator costs on a monthly basis**.** Operatorcosts generally consist of all direct costs and overhead**.**Additionally, a monthly operator fee of approximately $425,000, subject toannual adjustment, is payable on each bond payment date**.**

 

**Competition**

** **

Underthe Power Purchase Agreement, Williams is required to purchase all of theCompany’s capacity and energy**.** Therefore,during the 20-year term of the Power Purchase Agreement, competition from othercapacity and energy providers will only become an issue if Williams breachesits agreement and ceases to purchase the Company’s capacity and energy or thePower Purchase Agreement is otherwise terminated or not performed in accordancewith its terms**.** Upon the expiration of the PowerPurchase Agreement or in the event the Power Purchase Agreement is terminatedprior to the expiration of its term, the Company anticipates selling itsfacility’s net capacity, ancillary services and energy under a new PowerPurchase Agreement or into the PJM power pool market**.**At that time, the Company will face competition from other generatingfacilities selling into the PJM power pool market including, possibly, otherfacilities owned by The AES Corporation or its affiliates**.**Competitionand market conditions could have the effect of reducing operating time andtherefore reducing fuel conversion services and associated variable payments.

 

**Employees**

** **

As ofDecember 31, 2004, the Company had nine officers**.**Except for these officers, the Company does not have any employees and does notanticipate having any employees in the future**.**Under the operations agreement, AES Prescott has managed the development andconstruction of and now operates and maintains the Company’s facility**.** The direct labor personnel and the plant operationsmanagement are employees of The AES Corporation which are provided to AESPrescott under the Development and Operations Agreement. As of December 31,2004, The AES Corporation provided 27 employees to the facility.

 

**Insurance**

** **

Asowner of the facility, the Company maintains a comprehensive insurance programas required under its various project contracts and the indenture governing itssenior secured bonds and underwritten by recognized insurance companies**.** Among other insurance policies, the Company also maintainscommercial general liability insurance, permanent property insurance for fullreplacement value of its facility and business interruption insurance coveringat least 12 months of debt service and fixed operation and maintenance expenses**.** The Company has obtained title insurance in an amountequal to the principal amount of the senior secured bonds**.**

 

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AESPrescott, as operator of the Company’s facility, maintains, among otherinsurance policies, workers’ compensation insurance, or evidence ofself-insurance, if required, and comprehensive automobile bodily injury andproperty damage liability insurance**.**

 

**Permits and RegulatoryApprovals**

** **

AESPrescott, as operator of the facility, and the Company, as owner of thefacility, must comply with numerous federal, state and local regulatoryrequirements including environmental requirements in the operation of thefacility**.**

 

OnMarch 31, 1999, the Company received a certification from the Federal EnergyRegulatory Commission (“FERC”) that it is an Exempt Wholesale Generator**.** Certification as an Exempt Wholesale Generator exempts theCompany from regulation under the Public Utility Holding Company Act of 1935**.** The Company will maintain this status so long as itcontinues to make only wholesale sales of electricity, which it intends to do**.** Prior to commercial operation, the Company filed the PowerPurchase Agreement with FERC and obtained approval for the rates containedtherein**.** The Company may also need to obtainFERC approval for sales of electricity at market-based rates after the PowerPurchase Agreement is no longer in effect**.**

 

OnMarch 29, 1999, the Company received its Prevention of SignificantDeterioration Permit, or “air permit,” from the Pennsylvania Department ofEnvironmental Protection**.** The airpermit required that the Company’s facility be constructed in a manner thatwould allow it to meet specified limitations on emissions of air pollutants**.**

 

The Company is operating under Plan Approval 38-05019 (“Plan Approval”).  The plan approval is being amended to reflectchanges in start up time durations and was in a 30 day public review period,which ended on March 31, 2004.  Theamended plan approval language will be incorporated into the Company’s Title VOperating permit. Discussions are ongoing with respect to conditions in thepermit. The Company is operating under a permit shield and the Plan Approval.

 

TheCompany is subject to a number of statutory and regulatory standards andrequired approvals relating to energy, labor and environmental laws**.** Although the necessary environmental permits for thecommencement of construction of its facility have been obtained, the Company isrequired to comply with the terms of its environmental permits and to obtainother permits for the operation of the facility**.**

 

Thepermits that have been obtained and that will be obtained contain ongoingrequirements**.** Failure to satisfy and maintainany of the permit conditions or other applicable requirements could prevent theoperation of the Company’s facility and/or result in additional costs**.**

 

**Summary ofPrincipal Project Contracts**

** **

Whilethe Company believes that the following summaries contain the material terms ofthe principal project contracts, such summaries may not include all of theprovisions of each agreement that each individual investor may feel isimportant**.** These summaries do not restate eachagreement discussed herein and exclude certain definitions and complex legalterminology that may be contained in each relevant agreement**.** You should carefully read each agreement discussed herein,each of which is filed as an exhibit to this Form 10-K**.**

 

**Power PurchaseAgreement**

** **

TheCompany entered into an Amended and Restated Power Purchase Agreement, dated asof February 5, 1999, with Williams for the sale to Williams of all of theelectric energy and capacity produced by its facility as well as ancillaryservices and fuel conversion services**. **During 2003 the Company enteredinto arbitration with Williams to resolve certain disputes regarding the properinterpretation of certain provisions of the Power Purchase Agreement relatingto amounts claimed by the Company to be payable by Williams and amounts by theCompany to Williams. On February 3, 2004 the arbitration panel handed theirdecision to the parties. The arbitration decision covered both revenue andnon-revenue items. The most important item to the Company was in respect of thecalculation of total available capacity. For further information, please see “Legal Proceedings”.

 

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**Term**

** **

Theterm of the Power Purchase Agreement extends for 20 years after the firstcontract anniversary date, which is the last day in the month in which thecommercial operation date occurs**.** Thecommercial operation date occurs when:

 

•     theinitial start-up testing of the facility has been successfully completed,

 

•     theCompany has received all approvals from PJM Interconnection, L**.**L**.**C**.**, which is the independent system operator that operatesthe transmission system to which the facility will interconnect, and

 

•     theCompany has obtained all required permits and authorizations for operation ofthe facility**.**

 

Theseprerequisites were met and the facility commenced operations, subject to theterms of the Power Purchase Agreement, on December 28, 2001, accordingly, thePower Purchase Agreement’s initial term is expected to expire on December 31,2021**.**

 

**Purchase and Saleof Capacity and Services**

** **

Duringthe term, commencing with the commercial operation date, the Company must selland make available to Williams on an exclusive basis, and Williams mustpurchase and pay for the Company’s facility’s net capacity and ability togenerate electric energy**.** In addition,during the term, commencing with the commercial operation date, the Companymust perform for Williams on an exclusive basis, and Williams must purchase andpay for fuel conversion services and ancillary services**.**Fuel conversion services consist of the generation of electric energy from fuelprovided by Williams**.** Ancillaryservices consist of services necessary to support the transmission of capacityand energy**.**

 

**Fuel Conversionand Other Services**

** **

Williamsmust deliver or cause to be delivered to the Company at the gas delivery pointon an exclusive basis all quantities of natural gas as the Company requires:

 

•     togenerate net electric energy and/or ancillary services,

 

•     toperform start-ups,

 

•     toperform shutdowns, and

 

•     tooperate the facility during any period other than a start-up, shutdown ordispatch period for any reason**.**

 

**Pricing andPayments**

** **

Foreach month of the term after the commercial operation date, Williams must paythe Company for the facility’s net capacity, successful start-ups andassociated shutdowns, other services and fuel conversion services at theapplicable rates described in the Power Purchase Agreement**.**Each monthly payment by Williams will consist of a total fixed payment, a fuelconversion payment and a start-up payment**.** The totalfixed payment, which is payable regardless of facility dispatch by Williams butis subject to adjustment based on facility availability, is calculated bymultiplying a fixed capacity rate for each contract year by the facility’s netcapacity in the billing month and is anticipated to be sufficient to cover theCompany’s debt service and fixed operating and maintenance costs and to providethe Company a return on equity**.** The fuelconversion payment is intended to cover the Company’s variable operating andmaintenance costs and escalates annually based on an escalation index describedin the Power Purchase Agreement**.** The start-uppayment is intended to cover the Company’s non-fuel variable costs when theplant is starting up to meet a dispatch request**.**In addition, the Company may receive heat rate bonuses or be required to payheat rate penalties**.**

 

Priorto the commercial operation date and during specific facility tests thereafter,the Company purchased natural gas from Williams**.**Williams sold to the Company the natural gas at prices specified in the PowerPurchase Agreement, and the Company sold to Williams at the electric deliverypoint any net electric energy produced during those periods at 90% of theenergy market clearing price**.**

 

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Williamswill be entitled to an annual fuel conversion volume rebate if its dispatch ofthe Company’s facility exceeds specified levels and specified monthlynon-dispatch payments if, under specific circumstances, the facility is notavailable for dispatch**.** All fuelconversion volume rebate payments and non-dispatch payments must be made toWilliams after debt service and specified other payments but prior to anydistribution to holders of the equity interests in our company**.** Fuel conversion volume rebate payments must be paid toWilliams within 30 days after the end of the contract year in which thepayments have been earned and non-dispatch payments must be paid to Williamswithin 20 days after the end of the month on which a payment obligation arises**.** Fuel conversion volume rebate payments and anynon-dispatch payments owed to Williams and not paid when due must be paid,together with interest, when funds become available to the Company at thepriority level described above**.**

 

**Interconnectionand Metering Equipment**

** **

At theCompany’s sole cost and expense, it will maintain, or be responsible for themaintenance of its facility, the interconnection facilities and protective gasapparatus needed to generate and deliver net electric energy and/or ancillaryservices to the electric delivery point in order to fulfill its obligationsunder the Power Purchase Agreement, including all interconnection facilitiesand protective gas apparatus that may be located at any switchyard and/orsubstation to be built at its facility**.** At theCompany’s cost and expense, the interconnection facilities and protective gasapparatus needed to generate and deliver net electric and/or ancillary servicesto the electric delivery point have been completed as required under the PowerPurchase Agreement**.** Theinterconnection facilities and protective gas apparatus have been designed,constructed and completed in a good and workmanlike manner and in accordancewith accepted electrical practices, with respect to the Company’s facility andinterconnection facilities or in accordance with standard gas industrypractices, with respect to protective gas apparatus, so that the expecteduseful life of the Company’s facility, the interconnection facilities andprotective gas apparatus will be not less than the term of the Power PurchaseAgreement**.**

 

TheCompany has been solely responsible for the negotiation and execution of theinterconnection agreement with GPU Energy under which GPU Energy will own andbe responsible for the electric metering equipment and the design,installation, construction and maintenance of the electrical facilities andprotective apparatus, including any transmission equipment and relatedfacilities, necessary to interconnect GPU Energy’s electrical system with theCompany’s facility at the electric delivery point**.**Williams reimbursed the Company for the reasonable GPU Energy costs (i**.**e**.**, transmissionfacility costs, GPU Energy protective apparatus and other equipment, GPU Energyelectric meters, and GPU Energy costs for PJM and other requiredinterconnection-related studies) incurred by the Company**.**

 

Williamswas responsible for the installation and will be responsible for themaintenance and testing of the gas metering equipment, to the extent nototherwise installed, maintained and tested by the supplier of gastransportation services, as reasonably approved by the Company**.**

 

Allelectric metering equipment and gas metering equipment, whether owned by theCompany or by a third party, must be operated, maintained and tested inaccordance with accepted electrical practices, in the case of the electricmetering equipment, and in accordance with applicable industry standards, inthe case of the gas metering equipment.

 

**Operation /Dispatch**

** **

TheCompany’s facility, the interconnection facilities and the protective gasapparatus must be operated in accordance with accepted electrical practices andapplicable requirements and guidelines reasonably adopted by GPU Energy fromtime to time and applied consistently to GPU Energy’s electric generatingfacilities, with respect to our facility and interconnection facilities, or inaccordance with standard gas industry practices, with respect to protective gasapparatus**.** If there is a conflict between theterms and conditions of the Power Purchase Agreement and GPU Energyrequirements, GPU Energy requirements will control**.**

 

TheCompany must operate its facility in parallel with GPU Energy’s electricalsystem with governor control and the net electric energy to be delivered by theCompany under the Power Purchase Agreement must be three-phase, 60 hertz,alternating current at a nominal voltage acceptable to GPU Energy at theelectric delivery point, must not adversely affect the voltage, frequency, waveshape or power factor of  at the electricdelivery point and must be delivered to the electric delivery point in a manneracceptable to GPU Energy**.**

 

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ThePower Purchase Agreement acknowledges that GPU Energy has the right to requirethe Company to disconnect its facility from GPU Energy’s electrical system, orotherwise curtail, interrupt or reduce deliveries of net electric energy, forspecific safety or emergency reasons**.** If the Company’sfacility has been disconnected for these reasons, Williams will continue to beobligated to make total fixed payments for at least 24 hours after theoccurrence of the disconnection of our facility by GPU Energy**.**

 

TheCompany must use commercially reasonable efforts to promptly correct anycondition at our facility which necessitates the disconnection of our facilityfrom GPU Energy’s electrical system or the reduction, curtailment orinterruption of electrical output of its facility**.**Williams will have the exclusive right to schedule the operation of the Company’sfacility or a unit in accordance with the provisions of the Power PurchaseAgreement so long as the scheduling is consistent with the design limitationsof the Company’s facility, applicable law, regulations and permits, andmanufacturers’ reasonable recommendations for operating limits with respect tothe Company’s facility and major components**.**

 

Up totwo times each year, the Company must demonstrate, in accordance with thethen-applicable criteria of PJM the capability of its facility to produce andmaintain, as required for the demonstration, the Company’s facility’s netcapacity**.**

 

**Force Majeure**

** **

Aparty will be excused from performing its obligations under the Power PurchaseAgreement and will not be liable in damages or otherwise to the other party ifand to the extent the party declares that it is unable to perform or isprevented from performing an obligation under the Power Purchase Agreement by aforce majeure condition, except for any obligations and/or liabilities underthe Power Purchase Agreement to pay money, which will not be excused, andexcept to the extent an obligation accrues prior to the occurrence or existenceof a force majeure condition so long as:

 

•     theparty declaring its inability to perform by virtue of force majeure, aspromptly as practicable after the occurrence of the force majeure condition,but in no event more than five days later, gives the other party written noticedescribing, in detail, the nature, extent and expected duration of the forcemajeure condition;

 

•     thesuspension of performance is of no greater scope and of no longer duration thanis reasonably required by the force majeure condition;

 

•     theparty declaring force majeure uses all commercially reasonable efforts toremedy its inability to perform; and

 

•     oncethe party declaring force majeure is able to resume performance of itsobligations excused as a result of the force majeure condition, it promptlygives written notice to the other party**.**

 

Irrespectiveof whether the force majeure condition is declared by Williams or the Company,the time period of a force majeure will be excluded from the calculation of allpayments under the Power Purchase Agreement and Williams must be under noobligation to pay the Company any of the payments described in the PowerPurchase Agreement**.** If Williamsdeclares a force majeure, however, it must, subject to its right to terminatethe Power Purchase Agreement if the force majeure has not been fully correctedor alleviated within 18 months of the declaration, continue to pay the Companyonly the applicable monthly total fixed payment as described in the PowerPurchase Agreement until the earlier of (1) the termination of the forcemajeure condition or (2) the termination of the Power Purchase Agreement**.** Furthermore, if the Company declares a force majeure dueto an action or inaction of GPU Energy that prevents the Company fromdelivering net electric energy to the electric delivery point, Williams mustcontinue to pay the applicable portion of the total fixed payment for the first24 hours of the period**.**Notwithstanding anything to the contrary contained in the Power PurchaseAgreement, except as may expressly be provided in the Power Purchase Agreement,the term force majeure will not include the following nor will the followingexcuse a party’s performance:

 

•     Anyreduction, curtailment or interruption of generation or operation of theCompany’s facility, or of the ability of Williams to accept or transmit net electricenergy, whether in whole or in part, which reduction, curtailment orinterruption is caused by or arises from the acts or omissions of any thirdparty providing services or supplies to the party claiming force majeure,including any vendor or supplier to either party of 

 

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materials, equipment, supplies or services, or any inability of GPUEnergy to deliver net electric energy to Williams, unless, and then only to theextent  that, any acts or omissions woulditself be excused under the Power Purchase Agreement as a force majeure; or

 

•     Anyoutage, whether or not due to the fault or negligence of the Company, of itsfacility attributable to a defect or inadequacy in the manufacture, design orinstallation of its facility that prevents, curtails, interrupts or reduces theability of its facility to generate net electric energy or the ability of theCompany to perform its obligations under the Power Purchase Agreement; or

 

•     Tothe extent that the party claiming force majeure failed to prevent or remedythe force majeure condition by taking all commercially reasonable acts, shortof litigation if the remedy requires litigation, and, except as otherwiseprovided in the Power Purchase Agreement, failed to resume performance underthe Power Purchase Agreement with reasonable dispatch after the termination ofthe force majeure condition; or

 

•     Tothe extent that the claiming party’s failure to perform was caused by lack offunds; or

 

•     Tothe extent Williams is unable to perform due to a shortage of natural gas notcaused by an event of force majeure; or

 

•     Becauseof an increase or decrease in the market price of electric energy/capacity,natural gas or because it is uneconomic for the party to perform its obligationsunder the Power Purchase Agreement**.**

 

Neitherparty will be required to settle any strike, walkout, lockout or other labordispute on terms which, in the sole judgment of the party involved in thedispute, are contrary to its interest**.** Williams willhave the right to terminate the Power Purchase Agreement if a force majeure hasbeen declared by the Company and the effect of the force majeure has not beenfully corrected or alleviated within 18 months after the date the force majeurewas declared**.** Williams, however, will not havethe right to terminate the Power Purchase Agreement if (1) the force majeurewas caused by Williams or (2) the force majeure event does not prevent ormaterially limit Williams’ ability to sell our facility’s net capacity into orthrough the PJM power pool market or to a third party**.**

 

**Events of Default;Termination; Remedies**

** **

Thefollowing will constitute events of default under the Power Purchase Agreement:

 

•     breachof any term or condition of the Power Purchase Agreement, including, but notlimited to, (1) any failure to maintain or to renew any security, (2) anybreach of a representation, warranty or covenant or (3) failure of either partyto make a required payment to the other party;

 

•     theCompany’s facility is not available to provide fuel conversion services toWilliams during any period of 180 consecutive days after the commercialoperation date, except as may be excused by force majeure or the absence ofavailable natural gas, or if the non-availability is caused by an act orfailure to act by Williams where the action is required by the Power PurchaseAgreement;

 

•     theCompany sells or supplies net electric energy, ancillary services or capacityfrom its facility, or agrees to do the same, to any person or entity other thanWilliams, without the prior approval of Williams;

 

•     failureby the Company for 30 consecutive days to perform regular and requiredmaintenance, testing or inspection of the interconnection facilities, itsfacility and/or other electric equipment and facilities;

 

•     failureby the Company for 30 consecutive days to correct or resolve a materialviolation of any code, regulation and/or statute applicable to theconstruction, installation, operation or maintenance of its facility, theinterconnection facilities, protective gas apparatus or any other electricequipment and facilities required to be constructed and operated under thePower Purchase Agreement when the violation impairs the Company’s continuedability to perform under the Power Purchase Agreement;

 

•     involuntarybankruptcy or insolvency of either party and continues for more than 60 days;

 

•     voluntarybankruptcy or insolvency by either party;

 

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•     anymodifications, alterations or other changes to the Company’s facility by or onbehalf of the Company which prevent it from fulfilling, or materially diminishits ability to fulfill its obligations, duties, rights and responsibilitiesunder the Power Purchase Agreement and which after reasonable notice andopportunity to cure, are not corrected;

 

•     therewill be outstanding for more than 60 days any unsatisfied final, non-appealablejudgment against the Company in an amount exceeding $500,000, unless theexistence of the unsatisfied judgment does not materially affect the Company’sability to perform its obligations under the Power Purchase Agreement; and

 

•     (1)The AES Corporation will cease to own, directly or indirectly, beneficially andof record, at least 50 percent of the equity interests in the Company or willcease to possess the power to direct or cause the direction of the Company’smanagement or policies or (2) any person or an affiliate, other than The AESCorporation or an affiliate, authorized to act as a power marketer by FERC willown, directly or indirectly, beneficially or of record, any of the equityinterests in the Company**.**

 

Uponthe occurrence of any event of default, other than an event of default forvoluntary bankruptcy or insolvency, for which no notice will be required or opportunityto cure permitted, the party not in default, to the extent the party has actualknowledge of the occurrence of the event of default, must give prompt writtennotice of the default to the defaulting party**.**The notice must describe, in reasonable detail, the nature of the default and,where known and applicable, the steps necessary to cure the default**.** The defaulting party must have 30 days, but only twobusiness days in the case of a default for failure to make a requested paymentto the non-defaulting party under the Power Purchase Agreement, followingreceipt of the notice either to cure the default or commence in good faith allthe steps as are necessary and appropriate to cure the default if the defaultcannot be completely cured within the 30-day period**.**If the defaulting party fails to cure the default or take the steps as providedunder the preceding paragraph, and immediately upon the occurrence of any eventof default for voluntary bankruptcy or insolvency, the Power Purchase Agreementmay be terminated by the non-defaulting party, without any liability orresponsibility whatsoever, by written notice to the party in default**.** The non-defaulting party may exercise all the rights andremedies as are available to it to recover damages caused by the default**.**

 

**Security**

** **

Williamshas provided the Company a guaranty, issued by The Williams Companies, Inc**.**, of Williams’ performance and payment obligations underthe Power Purchase Agreement**.** Under thePower Purchase Agreement, in the event that S&P or Moody’s rates thelong-term senior unsecured debt of The Williams Companies, Inc**.** lower than investment grade, The Williams Companies, Inc**.** or an affiliate thereof, is required to replace suchWilliams Companies, Inc**.** guaranty,within thirty days, with an alternative security that is acceptable to theCompany after loss of such investment grade rating**.**

 

Underthe Power Purchase Agreement, in the event that S&P or Moody’s rates thelong-term senior unsecured debt of The Williams Companies, Inc. lower than investmentgrade, The Williams Companies, Inc. is required to supplement The WilliamsCompanies, Inc. guarantee with additional alternative security that isacceptable to the Company within 90 days after the loss of such investmentgrade rating.  According to publishedsources, The Williams Companies, Inc.’s long term senior unsecured debt hasbeen rated below investment grade since 2002 by both S&P and Moody’s.

 

Tosatisfy the requirements of the Power Purchase Agreement, on September 20,2002, Citibank, N.A. issued a $35 million Irrevocable Standby Letter of Credit(the “Letter of Credit”) on behalf of Williams. The Letter of Credit does notalter, modify, amend or nullify the guaranty issued by The Williams Companies,Inc. in favor of the Company and is considered to be additional security to thesecurity amounts provided by such guaranty. The Letter of Credit becameeffective on September 20, 2002 and expired upon the close of business on July10, 2003; except that the Letter of Credit will be automatically extendedwithout amendment for successive one year periods from the present or anyfuture expiration date hereof, unless Citibank, N.A. provides written notice ofits election not to renew the Letter of Credit at least thirty days prior toany such expiration date. In July 2004, Citibank, N.A. sent notification thatthe letter of credit will be extended to July 12, 2005. Additionally, in aLetter Agreement dated September 20, 2002, Williams agreed to (a) provideeligible credit support prior to the stated expiration date of the Letter ofCredit and (b) replenish any portion of the Letter of Credit or eligible creditsupport that is drawn, reduced, cashed or redeemed, at any time, with an equalamount of eligible credit support. Within twenty days prior to the 

 

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expiration of the Letter of Credit and/or anyexpiration date of eligible credit support posted by Williams, Williams shallpost eligible credit support to the Company in place of the Letter of Creditand/or any expiring eligible credit support unless The Williams Companies, Inc.regains and maintains its investment grade status, in which case the Letter ofCredit or eligible credit support shall automatically terminate and noadditional eligible credit support shall be required.  The Company andWilliams acknowledge that the posting of such Letter of Credit and Williams’agreement and performance of the requirements of (a) and (b) as set forth inthe immediately preceding sentence shall be in full satisfaction of Williams’obligations contained in Section 19.3 of the Power Purchase Agreement toprovide replacement security due to the downgrade of The Williams Companies,Inc. falling below investment grade status.

 

**Assignment**

 

Generally,neither the Power Purchase Agreement nor any rights, duties, interests orobligations thereunder may be assigned, transferred, pledged or otherwiseencumbered or disposed of, by operation of law or otherwise without the priorwritten consent of the other party**.**

 

TheCompany agreed that it will not sell, transfer, assign, lease or otherwisedispose of its facility or any substantial portion thereof or interest thereinnecessary to perform its obligations under the Power Purchase Agreement to anyperson that is a FERC-authorized power marketer or an affiliate without theprior written consent of Williams, which consent must not be unreasonablywithheld**.**

 

**Construction Agreement**

** **

TheCompany, as assignee of AES Ironwood, Inc**.**, entered intoan Agreement for Engineering, Procurement and Construction Services, dated asof September 23, 1998, as amended, with Siemens Westinghouse for SiemensWestinghouse to perform services in connection with the design, engineering,procurement, site preparation and clearing, civil works, construction,start-up, training and testing and to provide all materials and equipment(excluding operational spare parts), machinery, tools, construction fuels,chemicals and utilities, labor, transportation, administration and otherservices and items (collectively and separately, the “services”) for theCompany’s facility**.**

 

Bymeeting the provisions in Section 6**.**3 of theconstruction agreement, provisional acceptance was granted by the Company onDecember 27, 2001**.** On March 12, 2003, the Companyentered into a settlement agreement with Siemens Westinghouse concerning finalacceptance.  This agreement becameeffective as of that date and final acceptance was granted by the Company as ofthat date. For further information, please see “Legal Proceedings”. The financialimpact of the settlement was recorded in the Company’s financial statements forthe year ended December 31, 2002.

 

**SiemensWestinghouse’s Services and Other Obligations**

** **

SiemensWestinghouse must complete the Company’s project by performing or causing to beperformed all of the services**. **The required services haveincluded: engineering and design; construction and construction management;providing design documents, instruction manuals, a project procedures manualand quality assurance plan; procuring all materials, equipment and supplies andall contractor and subcontractor labor and manufacturing and related services;providing a spare parts list; providing all labor and personnel; obtaining someapplicable permits and providing information to assist the Company in obtainingother applicable permits; performing inspection, expediting, qualitysurveillance and traffic services; transporting, shipping, receiving andmarshalling all materials, equipment and supplies and other items; providingstorage for all materials, supplies and equipment and procurement or disposalof all soil and gravel (including remediation and disposal of specifichazardous materials); providing for design, construction and installation ofelectrical interconnection facilities (including electric metering equipment,automatic regulation equipment, protective apparatus and control systemequipment) and reviewing other GPU Energy interconnections to our facility(including gas and water pipelines); performing performance tests and PowerPurchase Agreement output tests; providing for start-up and initial operationfunctions; and providing specified spare parts, waste disposal services,chemicals, consumables and utilities**.**

 

Theservices also included: training the Company’s personnel prior to provisionalacceptance; providing the Company and its designee with access to the facilitysite; obtaining additional necessary real estate rights; clean-up 

 

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and waste disposal (including hazardous materialsbrought to the facility site by Siemens Westinghouse or the subcontractors);submitting a construction schedule and progress reports; payment of contractortaxes; employee identification and security arrangements; protecting adjoiningutilities and public and private lands from damage; paying appropriateroyalties and license fees; providing final releases and waivers to theCompany; posting collateral or providing other assurances if majorsubcontractors fail to furnish final waivers; maintaining labor relations andproject labor agreements; providing further assurances; coordinating with othercontractors; and causing Siemens Corporation to execute and deliver the relatedguaranty**.**

 

**Contract Price andPayment**

** **

Theadjusted contract price, including base scope changes through the date of theconstruction agreement, was approximately $241.6 million and commencing on theconstruction commencement date was paid in installments in accordance with thepayment and milestone schedule**.** The contractwas adjusted as a result of scope changes**.** The Companymade scheduled payments to Siemens Westinghouse upon receipt of SiemensWestinghouse’s payment request**.** The Companydid not defer any payment**.** The Companywithheld from each scheduled payment 5%, other than our project completionpayment, of the payment until after final acceptance**.**As part of a settlement agreement, dated March 12, 2003, Siemens Westinghouseagreed to waive their right to receive any payments with respect to the finalmilestone payment of $2.2 million and to the retainage of $12.1 million held bythe Company.  Additionally, SiemensWestinghouse made a payment of $4.8 million to the Company in respect of itemsrelated to final acceptance. This amount was recorded as a reduction in thecost of the facility.  The financialimpact of the settlement agreement was recorded in the Company’s financialstatements for the year ended December 31, 2002. Prior to provisionalacceptance, the Company received funds that reduced the cost of the plant thatwas ultimately capitalized. These funds include liquidated damages in theamount of $19.1 million and electric generation revenues during commissioningof $8.4 million. Other costs were added back to the contract price such asinterest paid during construction in the amount of $60.2 million. The result ofsuch additions and subtractions has resulted in a capitalized cost of the plantof approximately $278.2 million.

 

**MechanicalCompletion**

** **

Theagreement sets forth certain conditions that were required to be met in orderfor mechanical completion to occur**.** Theseconditions were deemed to be met on December 27, 2001 when provisionalacceptance was granted**.**

 

**Provisional andFinal Acceptance**

** **

Theagreement sets forth various requirements before provisional acceptance andfinal acceptance of the project would be made by the Company. The Companygranted provisional acceptance on December 27, 2001. As part of a settlementagreement with Siemens Westinghouse, final acceptance was granted on March 12,2003.

 

Becausethe Company has granted final acceptance on March 12, 2003, SiemensWestinghouse will have no liability to the Company for any amounts thereafterarising as performance guarantee payments, other than any interim periodrebates that arose prior to the final acceptance, for failure of our facilityto achieve any or all of the applicable performance guarantees other thanmodifications to the facility as set forth in our settlement agreement**.**

 

**Project Completion**

** **

Projectcompletion will be achieved under the construction agreement when:

 

•     Finalacceptance of our facility will have occurred and the performance guaranteeswith respect to our facility will have been achieved, or in lieu of achievementof the performance guarantees, applicable rebates under the constructionagreement will have been paid, the Company will have elected final acceptance.Pursuant to our arbitration settlement agreement, the Company granted finalacceptance on March 12, 2003;

 

•     Thereliability guarantee will have been achieved;

 

•     SiemensWestinghouse will have demonstrated during the completed performance test thatthe operation of our facility does not exceed the guaranteed emissions limits;

 

•     Therequirements for achieving mechanical completion of our facility will continueto be met;

 

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•     Thepunch list items will have been completed in accordance with the constructionagreement; and

 

•     SiemensWestinghouse will have performed all of the services, other than thoseservices, such as Siemens Westinghouse’s warranty obligations, which by theirnature are intended to be performed after project completion**.**

 

AgreementChange Order No. 71 “Final Acceptance” referred to a list of outstandingtechnical issues that must be completed in order for Project Completion tooccur. The nature of many of these issues is such that it is most economicallyfeasible to complete them at the time of a hot gas path outage. There is no hotgas path outage expected until 2006. The successful completion of the outageand the technical issues should allow Project Completion to be granted.

 

WhenSiemens Westinghouse believes that it has achieved project completion, it mustdeliver to the Company a notice of project completion**.**If the Company is satisfied that the project completion requirements have beenmet, the Company must deliver to Siemens Westinghouse a project completioncertificate**.** If reasonable cause exists fordoing so, the Company must notify Siemens Westinghouse in writing that projectcompletion has not been achieved, stating the reasons therefor**.** If the Company’s project completion has not been achievedas so determined by the Company, Siemens Westinghouse must promptly take suchaction or perform the additional services as will achieve project completion andmust issue to the Company another notice of project completion**.** The procedure must be repeated as necessary until projectcompletion is achieved**.**

 

**Price Rebate forFailure to Meet Guarantees**

** **

**PerformanceGuarantees**

** **

***ElectricalOutput***

* *

If theaverage net electrical output of our facility at provisional acceptance orinterim acceptance, whichever is the earlier to occur, is less than the naturalgas-based electrical output guarantee, then Siemens Westinghouse must pay theCompany, as a rebate, for each day during the interim period, an amount equalto $0**.**22 per day for each kilowatt by whichthe average net electrical output is less than the natural gas-based electricaloutput guarantee**.** During performance testingoutput was calculated to be 37,854 kilowatts less than the natural gas-basedelectrical output guarantee**.** The dailycharge for this amount was calculated at $8,328 per day**.**

 

At theconclusion of the April 2002 outage, Siemens-Westinghouse retested the facilityand achieved no improvement in electrical output**.**The daily charge for electrical output shortfall remained at $8,328 per daythrough June 30, 2002**.**

 

Outputwas improved in July 2002 to 3,195 kilowatts less than the natural gas-basedelectrical output guarantee and accordingly the interim rebate was lowered to$645 per day on July 4, 2002, the day the Company began receiving highercapacity payments from Williams**.**This amountwas invoiced to Siemens-Westinghouse until February 28, 2003 and recorded asother income.

 

Underthe terms of the agreement, various provisions relating to electrical outputperformance provided either for a bonus to be paid by the Company to SiemensWestinghouse or for Siemens Westinghouse to pay the Company a rebate based onthe outcome of those performance tests. As a result of our settlementagreement, however, Siemens Westinghouse is deemed to have met but not exceededthe performance guarantees and no bonus will be paid by the Company and norebate will be paid by Siemens Westinghouse.

 

***Heat RateGuarantees***

* *

If theaverage net heat rate of our facility at provisional acceptance and/or interimacceptance, if having occurred before final acceptance, exceeds the naturalgas-based heat rate guarantee, then Siemens Westinghouse must pay the Company,as a rebate, for each day during the interim period, an amount equal to $44 perday for each BTU/KwH by which the measured net heat rate is greater than thenatural gas-based heat rate guarantee**.** Duringperformance testing heat rate was calculated to be 162 BTU/KwH more than the naturalgas-based heat rate guarantee**.** The dailycharge for this amount was calculated at $7,116 per day**.**

 

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At theconclusion of the April 2002 outage Siemens-Westinghouse retested the facilityand achieved an improvement in heat rate**.** Duringperformance testing heat rate was calculated to be 71 BTU/KwH more than thenatural gas-based natural heat rate guarantee**.**The daily charge for this amount has been calculated at $3,118 per day**.** The improvement in heat rate commenced on May 23, 2002,and the lesser amount was invoiced to Siemens-Westinghouse from that date untilFebruary 28, 2003**.**This amount was invoiced toSiemens-Westinghouse until February 28, 2003 and recorded as other income.

 

For the twelve-month periodended December 31, 2003, the Company has invoiced Siemens Westinghouseapproximately $222 thousand in electrical output and heat rate rebates for themonths of January and February, 2003. The amounts invoiced to SiemensWestinghouse in 2003 have been paid by Siemens Westinghouse and are included inother income.  The electrical output and heat rate rebates have ceasedpursuant to the terms of final acceptance granted in Agreement Change Order No.71, dated March 12, 2003. At that time plant performance guarantees were deemedto have been met.

 

Underthe terms of the agreement, various provisions relating to heat performanceprovided either for a bonus to be paid by the Company to Siemens Westinghouseor for Siemens Westinghouse to pay the Company a rebate based on the outcome ofthose performance tests. As a result of our settlement agreement, however,Siemens Westinghouse is deemed to have met but not exceeded the performanceguarantees and no bonus will be paid by the Company and no rebate will be paidby Siemens Westinghouse.

 

**Liability andDamages**

** **

***Consequential Damages***

*** ***

Neitherparty nor any of its contractors, subcontractors or other agents providingequipment, material or services for our project will be liable for anyindirect, incidental, special or consequential loss or damage of any type**.**

 

***Aggregate Liability of Contractor***

*** ***

Thetotal aggregate liability of Siemens Westinghouse and any of itssubcontractors, including liabilities covered by the Delay LD SubCap and theTotal LD SubCap, to us will not in any event exceed an amount equal to thecontract price so long as the limitation of liability will not apply toobligations to remove liens or to make indemnification payments**.**

 

Warrantiesand Guarantees

 

SiemensWestinghouse warrants and guarantees that during the applicable warrantyperiod:

 

•     allmachinery, equipment, materials, systems, supplies and other items comprisingour project must be new and of first-rate quality which satisfies GPU Energygrade standards and in accordance with prudent utility practices and thespecifications described in the construction agreement, suitable for the use ingenerating electric energy and capacity under the climatic and normal operatingconditions and free from defective workmanship or materials,

 

•     itwill perform all of its design, construction, engineering and other services inaccordance with the construction agreement,

 

•     theCompany’s project and its components must be free from all defects caused byerrors or omissions in engineering and design, as determined by reference toprudent utility practices, and must comply with all applicable laws, allapplicable permits, GPU Energy electrical interconnection requirements, thePower Purchase Agreement operating requirements and the guaranteed emissions limits;and

 

•     thecompleted project must perform its intended functions of generating electricenergy and capacity as a complete, integrated operating system as contemplatedin the construction agreement**.** If theCompany notifies Siemens Westinghouse within 30 days after the expiration ofthe applicable warranty period of any defects or deficiencies discovered duringthe applicable warranty period, Siemens Westinghouse must promptly re-performany of the services at its own expense to correct any errors, omissions,defects or deficiencies and, in the case of defective or otherwise deficientmachinery, equipment, materials, systems 

 

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supplies or other items, replace or repair the same at its own expense**.** Siemens Westinghouse warrants and guarantees that, to theextent the Company has made all payments then due to Siemens Westinghouse,title to the Company’s facility and all work, materials, supplies and equipmentmust pass to the Company free and clear of all liens, other than any permittedliens**.** Other than the warranties andguarantees provided in the construction agreement, there are no otherwarranties of any kind, whether statutory, express or implied relating to theservices**.**

 

Duringthe applicable warranty period, Siemens Westinghouse must promptly notify theCompany of any engineering and design defects which are manifested in any ofSiemens Westinghouse’s fleet of 501G combustion turbines under construction,start-up or testing or in operation during the warranty period and which couldreasonably be expected to be common to the fleet or this facility**.** Upon the notification from Siemens Westinghouse of afleet-wide or common defect and otherwise upon notification from us no laterthan 30 days after the expiration of the applicable warranty period of anydefects or deficiencies in our project or any component, the Company must,subject to the provisions of the construction agreement, make the Company’sfacility or the subject equipment available to Siemens Westinghouse for SiemensWestinghouse to re-perform, replace or, at its option, repair the same at itsexpense so that it is in compliance with the standards warranted andguaranteed, all in accordance with the construction agreement**.**

 

***Force Majeure Event***

*** ***

Aforce majeure event means any act or event that prevents the affected partyfrom performing its obligations, other than the payment of money, under theconstruction agreement or complying with any conditions required to be compliedwith under the construction agreement if the act or event is beyond thereasonable control of and not the fault of the affected party and the party hasbeen unable by the exercise of due diligence to overcome or mitigate theeffects of the act or event**.** Force majeureevents include, but are not limited to, acts of declared or undeclared war,sabotage, landslides, revolution, terrorism, flood, tidal wave, hurricane,lightning, earthquake, fire, explosion, civil disturbance, insurrection orriot, act of God or the public enemy, action (including unreasonable delay orfailure to act) of a court or public authority, or strikes or other labordisputes of a regional or national character that are not limited to only theemployees of Siemens Westinghouse or its subcontractors and that are not due tothe breach of a labor contract or applicable law by the party claiming forcemajeure or any of its subcontractors**.** Force majeureevents do not include (1) strikes, work stoppages and labor disputes or unrestof any kind that involve only employees of Siemens Westinghouse or anysubcontractors, except as expressly provided in the preceding sentence, (2)late delivery of materials or equipment, except to the extent caused by a forcemajeure event and (3) economic hardship**.**

 

***Excused Performance***

*** ***

Ifeither party is rendered wholly or partly unable to perform its obligationsbecause of a force majeure event, that party will be excused from whateverperformance is affected by the force majeure event to the extent affected solong as:

 

•     thenon-performing party gives the other party prompt notice describing theparticulars of the occurrence;

 

•     thesuspension of performance is of no greater scope and of no longer duration thanis reasonably required by the force majeure event;

 

•     thenon-performing party exercises all reasonable efforts to mitigate or limitdamages to the other party;

 

•     thenon-performing party uses its best efforts to continue to perform itsobligations under the construction agreement and to correct or cure the eventor condition excusing performance; and

 

•     whenthe non-performing party is able to resume performance of its obligations, thatparty must give the other party written notice to that effect and must promptlyresume performance under the construction agreement**.**

 

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***Scope Changes***

*** ***

TheCompany may order scope changes to the services, in which event one or more ofthe contract price, the construction progress milestone dates, the guaranteedcompletion dates, the payment and milestone schedule, the Company’sconstruction schedule and the performance guarantees will be adjustedaccordingly, if necessary**.** All scopechanges must be authorized by a scope change order and only the Company or itsrepresentative may issue scope change orders**.**As soon as Siemens Westinghouse becomes aware of any circumstances which it hasreason to believe may necessitate a scope change, Siemens Westinghouse mustissue to the Company a scope change order notice at its expense**.** If the Company desires to make a scope change, in responseto a scope change order notice or otherwise, it must submit a scope changeorder request to Siemens Westinghouse**.** SiemensWestinghouse must promptly review the scope change order request and notify theCompany in writing of the options for implementing the proposed scope changeand the effect, if any, each option would have on the contract price, theguaranteed completion dates, the construction progress milestone dates, thepayment and milestone schedule, the Company’s construction schedule and theperformance guarantees**.** No scopechange order will be issued and no adjustment of the contract price, theguaranteed completion dates, the construction progress milestone dates, thepayment and milestone schedule, our construction schedule or the performanceguarantees will be made in connection with any correction of errors, omission,deficiencies, or improper or defective work on the part of Siemens Westinghouseor any subcontractors in the performance of the services**.**Changes due to changes in applicable laws or applicable permits occurring afterthe date of the construction agreement must be treated as scope changes**.**

 

InDecember 2001, the Company reached an agreement with Siemens Westinghouse toeliminate the requirement to use fuel oil as a secondary fuel from theconstruction agreement**.** In a separateagreement, Williams agreed to eliminate the requirement to use fuel oil as asecondary fuel from the Power Purchase Agreement contract**.**The result of the non-use of fuel oil will enhance the reliability of the plantas well as increase the efficiency of the plant**.**

 

**Effect of ForceMajeure Event**

** **

If andto the extent that any force majeure events affect Siemens Westinghouse’sability to meet the guaranteed completion dates, or the construction progressmilestone dates, an equitable adjustment in one or more of the dates, thepayment and milestone schedule and our construction schedule must be made byagreement between the Company and Siemens Westinghouse**.**No adjustment to the performance guarantees and, except as otherwise expresslydescribed below, the contract price must be made as a result of a force majeureevent**.** If Siemens Westinghouse is delayed inthe performance of the services by a force majeure event, then:

 

•       tothe extent that the delay(s) are, in the aggregate, six months or less, SiemensWestinghouse must absorb all of its costs and expenses resulting from thedelay(s); and

 

•       tothe extent that the delay(s) are, in the aggregate, more than six months,Siemens Westinghouse must be reimbursed by the Company for those incrementalcosts and expenses resulting from the delay(s) which are incurred by SiemensWestinghouse after the six-month period**.**

 

**Price Change**

** **

Anincrease or decrease in the contract price, if any, resulting from a scopechange requested by the Company or made under the construction agreement mustbe determined, upon the mutual agreement of the parties**.**

 

**ContinuedPerformance Pending Resolution of Disputes**

** **

If adispute arises regarding the amount of any increase or decrease in SiemensWestinghouse’s costs with respect to a scope change, Siemens Westinghouse mustproceed with the performance of the scope change promptly following ourexecution of the corresponding scope change order**.**

 

Ifhazardous materials were not identified in an environmental site assessmentreport delivered by the Company to Siemens Westinghouse prior to theconstruction commencement date and were not brought onto the facility site bySiemens Westinghouse or any of its subcontractors, then Siemens Westinghousewill be entitled to a scope change under the construction agreement**.**

 

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**Risk of Loss**

** **

Untilthe risk transfer date, which was December 27, 2001, the date at whichprovisional acceptance was achieved, Siemens Westinghouse bore the risk of lossand full responsibility for the costs of replacement, repair or reconstructionresulting from any damage to or destruction of our facility or any materials,equipment, tools and supplies, which are purchased for permanent installationin or for use during construction of our facility**.**Since December 27, 2001, the risk transfer date with respect to the Company’sfacility, the Company has born all risk of loss and full responsibility forrepair, replacement or reconstruction with respect to any loss, damage ordestruction to the Company’s facility**.**

 

**Termination**

** **

***Termination for Company’s Convenience***

*** ***

TheCompany may for its convenience terminate any part of the services or allremaining services at any time upon 30 days’ prior written notice to SiemensWestinghouse specifying the part of the services to be terminated and theeffective date of termination**.** The Companymay elect to suspend completion of all or any part of the services upon 10 days’prior written notice to Siemens Westinghouse or, in emergency situations, uponprior notice as circumstances permit**.**

 

***Termination by Contractor***

*** ***

If theCompany fails to pay to Siemens Westinghouse any payment and its failurecontinues for 20 days, then (1) Siemens Westinghouse may suspend itsperformance of the services upon 10 days’ prior written notice to us, whichsuspension may continue until the time as the payment, plus accrued interest,is paid to Siemens Westinghouse, and/or (2) if the payment has not been madeprior to the commencement of a suspension by Siemens Westinghouse under clause(1) above, Siemens Westinghouse may terminate the construction agreement upon60 days’ prior written notice to the Company so long as the termination doesnot become effective if the payment, plus accrued interest, is made to SiemensWestinghouse prior to the end of the notice period**.**In the event of a suspension, an equitable adjustment to one or more of thecontract price, the guaranteed completion dates, the construction progressmilestone dates, the payment and milestone schedule and the Company’sconstruction schedule, and, as appropriate, the other provisions of theconstruction agreement that may be affected thereby, must be made by agreementbetween us and Siemens Westinghouse**.** If theCompany has suspended completion of all or any part of the services inaccordance with the construction agreement for a period in excess of two yearsin the aggregate, Siemens Westinghouse may, at its option, at any timethereafter so long as the suspension continues to give written notice to theCompany that Siemens Westinghouse desires to terminate the suspended services**.** Unless the Company orders Siemens Westinghouse to resumeperformance of the suspended services within 10 days of the receipt of thenotice from Siemens Westinghouse, the suspended services will be deemed to havebeen terminated by the Company for the convenience of Siemens Westinghouse**.** If the occurrence of one or more force majeure eventsprevents Siemens Westinghouse from performing the services for a period of 365consecutive days, Siemens Westinghouse may, at its option, give written noticeto the Company of its desire to terminate the construction agreement**.**

 

**Consequences ofTermination**

** **

•     Uponany termination, unless the termination is pursuant to any default, SiemensWestinghouse will have been paid all amounts due and owing to it under theconstruction agreement and it is not deemed to constitute a waiver by SiemensWestinghouse of any rights to payment it may have as a result of a non-defaultrelated termination. In the event of a termination pursuant to a default, theCompany may, at its option elect to have ourselves, or our designee, which mayinclude any other affiliate of The AES Corporation or any third-party purchaser,(1) assume responsibility for and take title to and possession of our projectand any or all work, materials or equipment remaining at the facility site and(2) succeed automatically, without the necessity of any further action bySiemens Westinghouse, to the interests of Siemens Westinghouse in any or allitems procured by Siemens Westinghouse for the Company’s project and in any andall contracts and subcontracts entered into between Siemens Westinghouse andany subcontractor with respect to the equipment specified in the constructionagreement with respect to any or all other subcontractors selected by us whichare materially necessary to the timely completion of our 

 

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project. Siemens Westinghouse must use all reasonable efforts to enablethe Company, or its designee, to succeed to Siemens Westinghouse’s intereststhereunder**.**

 

•     Ifany termination occurs, the Company may, without prejudice to any other rightor remedy it may have, at its option, finish the services by whatever method itmay deem expedient**.**

 

**Default andRemedies**

** **

***Contractor’s Default***

*** ***

SiemensWestinghouse’s events of default include: voluntary bankruptcy or insolvency; involuntary bankruptcy orinsolvency; materially adverse misleading or false representation or warranty;improper assignment; failure to maintain required insurance; failure to complywith applicable laws or applicable permits; cessation or abandonment of theperformance of services; termination or repudiation of, or default under therelated guaranty; failure to supply sufficient skilled workers or suitablematerial or equipment; failure to make payment when due for labor, equipment ormaterials; non-occurrence of provisional acceptance, interim acceptance, finalacceptance and construction progress milestones; and failure to remedynon-performance or non-observance of any provision in the constructionagreement**.**

 

***The Company’s Rights and Remedies***

*** ***

IfSiemens Westinghouse is in default of its obligations, the Company will haveany or all of the following rights and remedies, in addition to any otherrights and remedies that may be available to it under the constructionagreement or at law or in equity, and Siemens Westinghouse will have thefollowing obligations:

 

•     TheCompany may, without prejudice to any other right or remedy it may have underthe construction agreement or at law or in equity, terminate the constructionagreement in whole or in part immediately upon delivery of notice to SiemensWestinghouse**.** In case of partial termination,the parties must mutually agree upon a scope change order to make equitableadjustments, including the reduction and/or deletion of obligations of theparties commensurate with the reduced scope Siemens Westinghouse must have aftertaking into account the partial termination, to one or more of the guaranteedcompletion dates, the construction progress milestone dates, the contractprice, the payment and milestone schedule, our construction schedule, theperformance guarantees and the other provisions of the construction agreementwhich may be affected thereby, as appropriate**.**If the parties are unable to reach mutual agreement as to the scope changeorder and the dispute resolution procedures described in the constructionagreement are invoked, the procedures must give due consideration to customaryterms and conditions under which Siemens Westinghouse has entered intosubcontracts with third party prime contractors covering services substantiallysimilar to those services which are not being terminated**.**

 

•     Ifrequested by the Company, Siemens Westinghouse must withdraw from the facilitysite, must assign to the Company its subcontracts, to the extent permittedtherein, as the Company may request, and must remove the materials, equipment,tools and instruments used by, and any debris and waste materials generated by,Siemens Westinghouse in the performance of the services as the Company maydirect, and the Company, without incurring any liability to SiemensWestinghouse (other than the obligation to return to Siemens Westinghouse atthe completion of the Company’s project the materials that are not consumed orincorporated into the Company’s project, solely on an “as is, where is” basiswithout any representation or warranty of any kind whatsoever) may takepossession of any and all designs, drawings, materials, equipment, tools,instruments, purchase orders, schedules and facilities of Siemens Westinghouseat the facility site that the Company deems necessary to complete the services**.**

 

**Assignment**

** **

Generally,neither the Company nor Siemens Westinghouse will have any right to assign ordelegate any of their respective rights or obligations under the constructionagreement either voluntarily or involuntarily or by operation of law**.**

 

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**MaintenanceServices Agreement**

** **

TheCompany, as assignee of AES Ironwood, Inc**.**, has enteredinto the Maintenance Program Parts, Shop Repairs and Scheduled Outage TFAServices Contract, dated as of September 23, 1998, with Siemens Westinghouse bywhich Siemens Westinghouse will provide the Company with, among other things,combustion turbine parts, shop repairs and scheduled outage technical fieldassistance services**.**

 

Themaintenance services agreement became effective on the date of execution andunless terminated early, must terminate upon completion of shop repairsperformed by Siemens Westinghouse following the eighth scheduled outage of theapplicable combustion turbine or 10 years from initial synchronization of theapplicable combustion turbine, whichever occurs first**.**

 

**Scope of Work**

** **

Duringthe term of the maintenance services agreement, and in accordance with thescheduled outage plan, Siemens Westinghouse is required to do the following:

 

•     deliverthe type and quantity of new program parts for installation of the combustionturbine; repair/refurbish program parts and equipment for the combustionturbine;

 

•     providemiscellaneous hardware;

 

•     providethe Company with material safety data sheets for all hazardous materialsSiemens Westinghouse intends to bring/use on the facility site;

 

•     providethe services of a maintenance program engineer to manage the combustion turbinemaintenance program; and

 

•     provideTFA Services.

 

•     TheCompany is responsible for, among other things:

 

•     storingand maintaining parts, materials and tools to be used in or on the combustionturbine;

 

•     maintainingand operating the combustion turbine consistently with the warranty conditions;

 

•     ensuringthat its operationsand maintenance personnel are properly trained;

 

•     transportingprogram parts in need of repair/refurbish; and

 

•     providingSiemens Westinghouse, on a monthly basis, with the required equivalent startsand equivalent base load hours (“EBHs”)**.**

 

TheCompany and Siemens Westinghouse have jointly developed the scheduled outageplan**.** The scheduled outage plan isconsistent with the terms and conditions of the Power Purchase Agreement**.**

 

**Early Replacement**

** **

If itis determined that due to normal wear and tear a program part(s) for thecombustion turbine has failed or will not last until the next scheduled outage,and the part has to be repaired before the scheduled replacement period,Siemens Westinghouse will replace the program part by moving up a new programpart which is otherwise scheduled to be delivered at a later date**.** The contract price for the replacement will not beaffected if the replacement date is less than or equal to one year earlier thanthe scheduled outage during which the program part was scheduled to be replaced**.** If the actual replacement date for a program part is morethan one year earlier than the scheduled outage at which point the program partwas scheduled to be replaced, the early replacement will result in anadjustment to the  payment schedule**.** Siemens Westinghouse has the final decision with regard tothe replacement or refurbishment associated with any program part**.** If the Company disputes Siemens Westinghouse’s decision,the Company may seek to resolve the dispute in accordance with the disputeresolution procedures discussed below**.**

 

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**Parts Life Credit**

** **

Afterapplicable warranty periods described in the maintenance services agreement andthe construction agreement, Siemens Westinghouse will provide a parts lifecredit if a program part requires replacement due to normal wear and tear priorto meeting its expected useful life**.** SiemensWestinghouse has the final decision with regard to actual parts life and thedegree of repair or refurbishment associated with any program parts**.** The parts life credit will be calculated in terms of EBHsand equivalent starts**.** The price ofthe replacement part will be adjusted for inflation**.**If the Company disputes Siemens Westinghouse’s decision, the Company may seekto resolve the dispute in accordance with the dispute resolution proceduresdiscussed below**.**

 

**Contract Price andPayment Terms**

** **

SiemensWestinghouse will invoice the Company monthly and payments are then due within25 days**.** The fees assessed by Siemens Westinghousewill be based on the number of EBHs accumulated by the applicable combustionturbine as adjusted for inflation**.** The contractprice will be the aggregate number of fees as adjusted plus any additionalpayment amount mutually agreed to by the parties under a change order**.**

 

**UnscheduledOutages and Unscheduled Outage Work**

** **

Ifduring the term of the maintenance services agreement an unscheduled outageoccurs resulting from (1) the non-conformity of new program parts; (2) thefailing of a shop repair; (3) a program part requiring replacement due tonormal wear and tear prior to achieving its expected life in terms of EBHs orequivalent starts; or (4) the failure of a service, performed by SiemensWestinghouse, the Company must hire Siemens Westinghouse, to the extent notsupplied by Siemens Westinghouse as a warranty remedy under SiemensWestinghouse’s warranties under the maintenance services agreement to supplyany additional parts, miscellaneous hardware, shop repairs and TFA Servicesunder a change order**.** The Companywill be entitled to any applicable parts life credit with respect to programparts as well as a discount for TFA services**.**If the unscheduled outage occurs within a specified number of EBHs of ascheduled outage and it was anticipated that the additional parts,miscellaneous hardware, shop repairs and TFA services to be used in theunscheduled outage were to be used during the upcoming scheduled outage, theupcoming Scheduled outage must be moved up in time to become the unscheduledoutage/moved-up scheduled outage**.** The Companywill not be required to pay any additional money for the program parts,miscellaneous hardware, shop repairs and TFA Services**.**

 

If anyprogram parts are delivered by Siemens Westinghouse within 15 days of receiptof the change order, the Company will pay to Siemens Westinghouse the price forthe program part described in the maintenance services agreement plus aspecified percentage**.** Any programpart delivered after 30 days of the change order will cost the Company theprice described in the maintenance services agreement minus a specifiedpercentage**.**

 

**Changes inOperating Restrictions**

** **

Themaintenance services agreement requires that each combustion turbine beoperated in accordance with the requirements of the Power Purchase Agreementand prudent utility practices, with 8,000 EBH/year and 100 equivalent startsper year by using natural gas**.** Should theactual operations differ from these operating parameters which cause ascheduled outage to be planned/performed earlier or later than as expected,then, under a change order, an adjustment in the scope, schedule, and pricemust be made**.**

 

**Warranties**

** **

SiemensWestinghouse warrants that the new program parts, miscellaneous hardware andany shop repairs must conform to standards of design, materials and workmanshipconsistent with generally accepted practices of the electric utility industry**.** The warranty period with respect to program parts,hardware and shop repair is until the earlier of one year from the date ofinstallation of the original program part or hardware, a specific number ofstarts or fired hours after installation of the program parts and hardware, orthree years from the date of delivery of the original program part, hardware,and in the case of shop repair, three years from completion of the work**.** Warranties on the program parts and hardware must notexpire more than one year after the conclusion of the maintenance servicesagreement**.**

 

SiemensWestinghouse will repair or replace any program part or hardware, at its cost,if notified of any failure or non-conformity of the program part or hardwareduring the warranty period**.** SiemensWestinghouse also warrants 

 

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that the services of its personnel and technical informationtransmitted will be competent and consistent with prudent utility practices andthe services will comply in all material respects with laws and will be freefrom defects in workmanship for a period of one year from the date ofcompletion of that item of services**.** Thewarranties on the services must expire no later than one year after thetermination or end of the term of the maintenance services agreement**.**

 

Inaddition, Siemens Westinghouse warrants any program part removed during ascheduled outage and delivered by the Company to the designated facility forrepair will be repaired and delivered by Siemens Westinghouse within 26 weeks**.** If Siemens Westinghouse does not deliver the program partwithin this time frame or does not provide a new program part in lieu of theprogram part being shop repaired and an outage occurs which requires a programpart, Siemens Westinghouse will pay us liquidated damages for each day theprogram part is not repaired and delivered the aggregate of which liquidated damagepayments must not exceed a maximum annual cap**.**If upon reaching the maximum cap on aggregate liquidated damages, SiemensWestinghouse still has not repaired and delivered the program part, the Companymay elect to terminate the maintenance services agreement because SiemensWestinghouse will be considered to have failed to perform its materialobligations**.**

 

Exceptfor the express warranties described in the maintenance services agreement,Siemens Westinghouse makes no other warranties or representations of any kind**.** No implied statutory warranty of merchantability orfitness for a particular purpose applies**.**

 

Thewarranties provided by Siemens Westinghouse are conditioned upon (1) ourreceipt, handling, storage, operation and maintenance of our project, includingany program parts and miscellaneous hardware, being done in accordance with theterms of the combustion turbine instruction manuals; (2) operation of thecombustion turbine in accordance with the terms of the maintenance servicesagreement; (3) repair of accidental damage done consistently with the equipmentmanufacturer’s recommendations; (4) us providing Siemens Westinghouse withaccess to the facility site to perform its services under the maintenanceservices agreement; and (5) hiring Siemens Westinghouse to provide TFAservices, program parts, shop repairs and miscellaneous hardware required todissemble, repair and reassemble the combustion turbine**.**

 

**Termination**

** **

TheCompany may terminate the maintenance services agreement if:

 

•     specificbankruptcy events affecting Siemens Westinghouse occur;

 

•     SiemensWestinghouse fails to perform or observe in any material respect any provisionin the maintenance services agreement and fails to (1) promptly commence tocure and diligently pursue the cure of the failure or (2) remedy the failurewithin 45 days after Siemens Westinghouse receives written notice of thefailure;

 

•     theCompany terminates the construction agreement due to the contractor’s defaultthereunder or due to its inability to obtain construction financing orenvironmental operating permits; or

 

•     thecontractor terminates the construction agreement for any reason other than ourdefault thereunder**.**

 

Notwithstandingthe preceding, the Company may terminate the maintenance services agreement atany time for its convenience following the completion of the first major outageof both combustion turbines**.** In addition,the maintenance services agreement will automatically terminate if:

 

•     theCompany terminates the construction agreement for reasons other than (1) thedefault of the contractor and (2) our inability to obtain permits for ourproject; or

 

•     thecontractor terminates the construction agreement for our default thereunder**.** If the termination occurs, Siemens Westinghouse mustdiscontinue any work or services being performed and continue to protect ourproperty**.** Siemens Westinghouse must transfertitle to and deliver any new program parts and miscellaneous hardware alreadypurchased by us**.** The Company must pay SiemensWestinghouse those amounts owed at the time of termination**.**

 

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**Limitation ofLiability**

** **

TheCompany agreed that the remedies provided in the maintenance services agreementare exclusive and that under no circumstances must the total aggregateliability of Siemens Westinghouse during a given year exceed 100% of thecontract price payable to Siemens Westinghouse for that given year under themaintenance services agreement**.** The Companyfurther agreed that under no circumstances must the total aggregate liabilityof Siemens Westinghouse for liquidated damages during a given year exceed aspecified percentage of the contract price payable to Siemens Westinghouse forthat given year under the maintenance services agreement**.**The Company further agreed that under no circumstances must the total aggregateliability of Siemens Westinghouse exceed a specified percentage of the contractprice payable to Siemens Westinghouse under the maintenance services agreement**.**

 

**Force Majeure**

** **

Neitherparty will be liable for failure to perform any obligation or delay inperformance, excluding payment, to the extent the failure or delay is caused byany act or event beyond the reasonable control of the affected party or SiemensWestinghouse’s suppliers so long as the act or event is not the fault or theresult of negligence of the affected party and the party has been unable byexercise of reasonable diligence to overcome or mitigate the effects of the actor event**.** Force majeure includes:  any act of God; act of civil or militaryauthority; act of war whether declared or undeclared; act (including delay,failure to act, or priority) of any governmental authority; civil disturbance;insurrection or riot; sabotage; fire; inclement weather conditions; earthquake;flood; strikes, work stoppages or other labor difficulties of a regional ornational character which are not limited to only the employees of SiemensWestinghouse or its subcontractors or suppliers and which are not due to thebreach of an applicable labor contract by the party claiming force majeure;embargo; fuel or energy shortage; delay or accident in shipping ortransportation to the extent attributable to another force majeure; changes inlaws which substantially prevents a party from complying with its obligationsin conformity with its requirements under the maintenance services agreement orfailure or delay beyond its reasonable control in obtaining necessarymanufacturing facilities, labor, or materials from usual sources to the extentattributable to another force majeure; or failure of any principal contractorto provide equipment to the extent attributable to another force majeure**.** Force majeure does not include:  (1) economic hardship, (2) changes in marketconditions or (3) except due to an event of force majeure, late delivery ofprogram parts or other equipment**.**

 

If adelay in performance is excusable due to a force majeure, the date of deliveryor time for performance of the work will be extended by a period of timereasonably necessary to overcome the effect of the force majeure and if theforce majeure lasts for a period longer than 30 days and the delay directlyincreases Siemens Westinghouse’s costs or expenses, the Company, afterreviewing Siemens Westinghouse’s additional direct costs and expenses, willreimburse Siemens Westinghouse for its reasonable additional direct costs andexpenses incurred after 30 days from the beginning of the force majeureresulting from the delay**.**

 

**InterconnectionAgreement**

** **

TheCompany has entered into a Generation Facility Transmission InterconnectionAgreement, dated as of March 23, 1999, with GPU Energy for the installation,operation and maintenance of the facilities necessary to interconnect ourfacility to the transmission system of GPU Energy**.**Under the interconnection agreement, the Company and GPU Energy will construct,own, operate and maintain the interconnection facilities**.**The Company will be responsible for all of the costs of construction, operationand maintenance of the interconnection facilities, including those owned by GPUEnergy**.**

 

**Scope**

** **

Theinterconnection agreement became effective on March 23, 1999 (the effectivedate established by FERC), and will continue in full force and effect until amutually agreeable termination date not to exceed the retirement date for theCompany’s facility**.**

 

**The Company’sObligations**

** **

AtDecember 31, 2004, the Company owned, operated and maintained a portion of theinterconnection facilities, including, but not limited to, a 230 kV switchyard,including generator step up transformers, instrument 

 

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transformers, revenue metering, power circuitbreakers, control and protective relay panels, supervisory control and dataacquisition equipment, and protective relaying equipment**.**

 

TheCompany is obligated to modify our portion of the interconnection facilities asmay be required to conform to changes in good utility practice or as requiredby PJM**.**

 

TheCompany is obligated to keep our facility insured against loss or damage inaccordance with the minimum coverages specified in the interconnectionagreement**.**

 

**Operation andMaintenance of Interconnection Facilities**

** **

Theparties are obligated to operate and maintain their respective portions of theinterconnection facilities in accordance with good utility practices and therequirements and guidelines of PJM and GPU Energy**.**

 

GPUEnergy will have the right to disconnect the Company’s facility from itstransmission system and/or curtail, interrupt or reduce the output of theCompany’s facility when operation of the Company’s facility or theinterconnection facilities adversely affects the quality of service rendered byGPU Energy or interferes with the safe and reliable operation of itstransmission system or the regional transmission system**.**GPU Energy, however, is obligated to use reasonable efforts to minimize anydisconnection, curtailment, interruption or reduction in output**.**

 

Inaccordance with good utility practice, GPU Energy may remove theinterconnection facilities from service as necessary to perform maintenance ortesting or to install or replace equipment on the interconnection facilities orthe transmission system**.** GPU Energy isobligated to use due diligence to restore the interconnection facilities toservice as promptly as practicable**.**

 

Inaddition, if the Company fails to operate, maintain, administer, or insure ourfacility or its portion of the interconnection facilities, GPU Energy may,following 30 days’ notice and opportunity to cure the failure, disconnect theCompany’s facility from the transmission system**.**

 

**Force Majeure**

** **

Ifeither party is delayed in or prevented from performing or carrying out itsobligations under the interconnection agreement by reason of force majeure, theparty will not be liable to the other party for or on account of any loss,damage, injury or expense resulting from or arising out of the delay orprevention so long as the party encountering the delay or prevention uses duediligence to remove the cause or causes thereof**.**

 

**Default**

** **

Theevents of default under the interconnection agreement are:

 

•     breachof a material term or condition and uncured failure to provide a requiredschedule, report or notice;

 

•     failureor refusal of a party to permit the representatives of the other party accessto maintenance records, or its interconnection facilities or protectiveapparatus;

 

•     appointmentby a court of a receiver or liquidator or trustee that is not discharged within60 days, issuance by a court of a decree adjudicating a party as bankrupt orinsolvent or sequestering a substantial part of its property that has not beendischarged within 60 days after its entry, or filing of a petition to declare aparty bankrupt or to reorganize a party under the Federal Bankruptcy Code orsimilar state statute that has not been dismissed within 60 days;

 

•     voluntaryfiling by a party of a petition in bankruptcy or consent to the filing of abankruptcy or reorganization petition, an assignment for the benefit ofcreditors, an admission by a party in writing of its inability to pay its debtsas they come due, or consent to the appointment of a receiver, trustee, orliquidator of a party or any part of its property; and

 

•     failureto provide the other party with reasonable written assurance of the party’sability to perform any of the material duties and responsibilities under theinterconnection agreement within 60 days of a reasonable request for theassurance**.**

 

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Uponan event of default, the non-defaulting party may give notice of the event ofdefault to the defaulting party**.** Thedefaulting party will have 60 days following the receipt of the notice to curethe default or to commence in good faith the steps necessary to cure a defaultthat cannot be cured within that 60-day period**.**If the defaulting party fails to cure its default within 60 days or fails totake the steps necessary to cure a default that cannot be cured within a 60-dayperiod, the non-defaulting party will have the right to terminate theinterconnection agreement**.** GPU Energywill have the right to operate and/or to purchase specific equipment,facilities and appurtenances from the Company that are necessary for GPU Energyto operate and maintain its transmission system if (1) the Company commencesbankruptcy proceedings or petitions for the appointment of a trustee or othercustodian, liquidator, or receiver, (2) a court issues a decree for relief ofthe Company or appoints a trustee or other custodian, liquidator, or receiverfor the Company or a substantial part of the Company’s assets and the decree isnot dismissed within 60 days or (3) the Company ceases operation for 30consecutive days without having an assignee, successor, or transferee in place**.**

 

**OperationsAgreement**

** **

TheCompany entered into a Development and Operations Services Agreement, dated asof June 1, 1999, with AES Prescott by which AES Prescott is providingdevelopment and construction management services and, after the commercialoperation date, operating and maintenance services for our facility for aperiod of 27 years**.** Under theoperations agreement, AES Prescott is responsible for, among other things,preparing plans and budgets related to start-up and commercial operation of theCompany’s facility, providing qualified operating personnel, making repairs,purchasing consumables and spare parts (not otherwise provided under themaintenance services agreement) and providing other services as neededaccording to industry standards**.** During fiscalyear 2004, AES Prescott was compensated for the services on a cost plusfixed-fee basis of approximately $425,000 per month**.** The fee is adjusted annually by the change inGross Domestic Product, Implicit Price Deflator**.**  Total fees paid by the Company were $5.2million and $5.1 million for the years ended December 31, 2004 and 2003,respectively.  Under the servicesagreement between AES Prescott and The AES Corporation, The AES Corporationprovides to AES Prescott all of the personnel and services necessary for AESPrescott to comply with its obligations under the operations agreement**.**

 

**Effluent SupplyAgreement**

** **

TheCompany, as assignee of AES Ironwood, Inc**.**, has enteredinto an Effluent Supply Agreement, dated as of March 3, 1998, with the City ofLebanon Authority, by which City of Lebanon Authority will provide effluent tobe used by the Company at the electric generating facility.

 

**Supply of Effluent**

** **

Subsequentto completion of the pipeline connecting the Company’s facility with thewastewater treatment facility owned and operated by City of Lebanon Authorityand throughout the term of the effluent supply agreement, City of LebanonAuthority must make available to the Company a supply of effluent not less than2,160,000 gallons per day**.** In the eventof a shortfall, the Company may elect to accept potable water from City ofLebanon Authority in accordance with the effluent supply agreement**.** The Company will not be obligated to purchase any minimumamount of effluent and will be entitled to seek and obtain water from otheravailable sources**.** City of Lebanon Authority mustuse its best efforts to comply with requests by the Company for excesseffluent, which must not exceed (1) 4,600,000 gallons per day or (2)1,679,000,000 gallons per calendar year**.** In addition,City of Lebanon Authority must use its best efforts to meet the Company’sminimum effluent requirements**.**

 

**Compensation**

** **

TheCompany is obligated to pay City of Lebanon Authority monthly for all effluentdelivered to the point of delivery during the prior month**.**The base rate for effluent supplied is: (1) for 0 to 2,160,000 gallons per day, $0**.**29per thousand gallons and (2) for 2,160,000 or greater gallons per day, $0**.**21 per thousand gallons, which rates are subject to annualadjustments for inflation**.**

 

**Pipeline and Real EstateRights**

** **

TheCompany was solely responsible, at its cost and expense, for constructing andinstalling the pipeline**.**

 

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TheCompany and City of Lebanon Authority cooperated in good faith to obtain the necessaryreal estate rights for constructing, operating, maintaining and accessing thepipeline**.**

 

**Operation andMaintenance**

** **

TheCity of Lebanon Authority must operate and maintain the pipeline in accordancewith the effluent supply agreement, and as compensation. The Company must paythe City of Lebanon Authority $18,250 per year, which amount will be subject toannual adjustment for inflation**.**

 

**CapitalImprovements**

** **

Theeffluent supply agreement provides for capital improvements**.**

 

**Potable Water**

** **

TheCity of Lebanon Authority must make available to the Company on a continuousbasis a potable water supply of not less than 50 gallons per minute**.** The Company will not be obligated to purchase a minimumamount of potable water, but must pay the City of Lebanon Authority for potablewater accepted at the potable delivery point at the rate applicable to theCompany described in City of Lebanon Authority’s applicable rate schedule**.**

 

**Force Majeure**

** **

Ifeither party is unable to carry out any obligation under the effluent supplyagreement due to force majeure, the effluent supply agreement must remain ineffect, but the obligation will be suspended for the period necessary as aresult of the force majeure so long as: (1) the non-performing party gives the other party written notice notlater than 48 hours after the occurrence of the force majeure describing theparticulars of the force majeure; (2) the suspension of performance is of nogreater scope and of longer duration than is required by the force majeure; and(3) the non-performing party uses its best efforts to remedy its inability toperform**.** Notwithstanding the preceding, thesettlement of strikes, lockouts, and other labor disputes will be entirelywithin the discretion of the affected party, and the party will not be requiredto settle any strike, lockout or other labor dispute on terms which it deemsinadvisable**.**

 

**Term**

** **

Theterm of the effluent supply agreement will be 25 years unless terminated earlyas a result of (1) the Company’s inability to obtain financing for the Company’sproject; (2) the Company’s inability to obtain necessary approvals to constructand operate the Company’s project; (3) failure by the Company to deliver thecommencement notice by December 31, 2004, or (4) the occurrence of any event ofdefault**.**

 

**Early Terminationfor Event of Default**

** **

Aparty may terminate the effluent supply agreement (1) upon a bankruptcy eventof the other party or (2) if the other party fails to perform or observe any ofits material obligations under the effluent supply agreement within the timecontemplated by the effluent supply agreement and the failure continues for aperiod of time greater than 30 days from the defaulting party**.**

 

**Pennsy SupplyAgreements**

** **

TheCompany, as assignee of AES Ironwood, Inc**.**, entered intoan Agreement Relating to Real Estate, dated as of October 22, 1998, with PennsySupply, Inc**.** under which Pennsy Supply hasagreed to grant to the Company specific easements and the right to pump waterfrom Pennsy Supply-owned property**.** The easements,which are primarily for access and utility purposes, run from property owned bythe Company, on which it developed and constructed its electric generatingfacility, across property owned by Pennsy Supply and require that the Company’sproperty be used as a power plant**.** Pennsy Supplyhas also agreed to grant to the Company easements with respect to storm-waterfacilities and construction of a rail spur**.** Pennsy Supplywill make water available to the Company during construction and testing of itsfacility and for as long as the Company operates our facility**.** The Company will bear all costs and expenses with respectto water-pumping**.** In consideration for theeasements and the water-pumping rights, the Company has agreed to convey toPennsy Supply title to a parcel of land adjacent to the property owned by theCompany**.**

 

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TheCompany also entered into an Easement and Right of Access Agreement, dated asof April 15, 1999, with Pennsy Supply under which Pennsy Supply has granted theCompany the rights and easements referred to in the prior paragraph as well asspecific other rights and easements required by the Company for theconstruction and operation of its facility**.**

 

**ITEM 2.****                  Properties**

 

TheCompany’s principal property is the land for the facility site, which it owns,and the completed power plant. The facility site is located in South LebanonTownship, Lebanon County, Pennsylvania on an approximately 35-acre parcel ofland. The Company has access, utility, drainage and construction easementsacross neighboring property. The Company is able to use these easements as longas there is no default under the agreements with the owner of the adjacentproperty and the Company is using the facility site for a power plant. Undercertain financing documents, the Company’s rights and interests in our propertyrights are encumbered by mortgages, security agreements, collateral assignmentsand pledges for the benefit of the bondholders and other senior creditors.

 

TheCompany’s facility consists of a nominal 705 megawatt (net) gas-fired combinedcycle electric generating facility. The plant became operational withcommercial acceptance on December 28, 2001.

 

TheCompany’s facility was designed, engineered, procured and constructed for theCompany by Siemens Westinghouse under a fixed-price construction agreement.Among other components, our facility uses two Siemens Westinghouse model 501Gcombustion turbines with hydrogen-cooled generators, two unfired heat recoverysteam generators and one multi-cylinder steam turbine with a hydrogen-cooledgenerator. Siemens Westinghouse has provided the Company with specificcombustion turbine maintenance services and spare parts for an initial term ofbetween eight and ten years, depending on the timing of scheduled outages,under a maintenance services agreement. Under the Power Purchase Agreement,Williams or its affiliates will supply fuel necessary to allow the Company toprovide capacity, fuel conversion and ancillary services to Williams. AESPrescott, the operator, will provide development, construction management andoperations and maintenance services for our facility under an operationsagreement. The Company will provide installation, operation and maintenance offacilities necessary to interconnect our facility to the transmission system ofGPU Energy, under an interconnection agreement.

 

**ITEM 3.****                  LegalProceedings**

 

*Developments Relating toSiemens Westinghouse*

* *

TheCompany previously had a dispute with Siemens Westinghouse over which party wasresponsible for the payment of the cost of electricity and natural gas used bythe project during certain periods prior to the December 28, 2001 commercialacceptance.  On March 12, 2003, theCompany entered into a settlement agreement with Siemens Westinghouse entitled “AgreementChange Order No. 71” concerning final acceptance.  This agreement became effective as of thatdate and final acceptance was granted by us as of that date.

 

Theterms of the agreement include but are not limited to the following items:

 

TheCompany agreed not to pursue the cost of electricity and natural gas used bythe project during certain periods prior to the December 28, 2001 commercialacceptance date. These costs totaled approximately $10.7 million, and were includedin accounts receivable. This amount was originally recorded as a reduction inthe cost of the facility in the 2001 financial statements.

 

TheCompany agreed to pay approximately $156,000 in respect of an outstandingamount claimed by Siemens Westinghouse regarding an April 2002 outage to testand inspect the facility. This amount was included in the Company’s calculationof the April outage and was recorded in Accounts Payable.  Siemens Westinghouse waived their right toreceive any payments with respect to a milestone payment of $2.2 million and tothe retainage amounts relating to performance guarantees of $12.1 million heldby the Company. Additionally, Siemens Westinghouse made a payment of $4.8million to the Company in respect of items related to final acceptance.  This amount was recorded as a reduction inthe cost of the facility.  The financialimpact from the settlement has been recorded in the Company’s financialstatements as of December 31, 2002.  Theeffect of this settlement for fiscal year 2002 was a reduction of insuranceexpense of $291,000 and a $182,000 reduction of depreciation expense as aresult of the reduction in facility cost.

 

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*Developments Relating toWilliams*

* *

The Company had ongoing disputes, including arbitration with Williams,relating to the parties Power Purchase Agreement.  The arbitration was bifurcated into twophases, and an award was issued on Phase I on February 3, 2004.  The primary issue in Phase I related to variousaspects of the availability of the facility for the year ended December 31,2002, including disputes over the amount of any availability bonus orpenalty.  Phase II of the arbitrationinvolved a dispute concerning the proper duration of facility start-ups andshutdowns, including fuel used during start-ups and shutdowns.  While Phase I of the arbitration was limitedto billing disputes in 2002, many of the same issues were disputed between theparties for 2003 billings.

 

The arbitral panel’s award on Phase I of the arbitration found thatWilliams had misapplied the applicable rules of PJM Interconnection, L.L.C. inthe billing dispute with the Company over the availability of thefacility.  The panel declined, however,to decide the facility’s availability during 43 disputed maintenanceevents.  Instead, it encouraged theparties to reach a mutual resolution of the disputed events by applying thecorrect PJM rule and, failing mutual agreement, to submit the dispute to athird party engineer for resolution.  Theparties are currently discussing possible resolution of the disputed events,and anticipate submitting any events that cannot be resolved by mutualagreement to a third party.  Until thematter is fully resolved, the availability of the facility, and certainpayments that are calculated based on availability, cannot be determined.  During 2004 Williams paid approximately $2.2million in respect of availability bonus for 2002 and 2003. Approximately $1.8million has been recorded in operating revenues and approximately $415,000 hasbeen recorded as a reduction of bad debt expense, included in general andadministrative costs. The parties are continuing to resolve the outstandingavailability issues and expect resolution during 2005.

 

Also as aresult of the panel’s Phase I Award, the Company will begin pre-funding a cashaccount on a quarterly basis to reflect the maximum amount of a fuel conversionvolume rebate that might be payable to Williams if the facility operates therequisite number of hours to earn the maximum rebate available under the PowerPurchase Agreement.  The maximumtheoretical annual amount of the fuel conversion volume rebate is $1.7 million,but the account will not be fully funded during the course of the year if thefacility is not operated a sufficient number of hours to achieve the maximumfuel conversion volume rebate.  Dependingon the amount of facility operation, the Company may be entitled to withdrawsome of the funds deposited into the account during the second half of its fiscalyear.  Based on the arbitral award, theCompany does not anticipate any payment for a fuel conversion volume rebatewill be due for 2004. If funding is required, amounts will be classified asrestricted cash. For the three months ended March 31, 2004, the Company hasdetermined that approximately $71,000 should be deposited into this account. OnApril 1, 2004, the Company deposited $71,000. This amount is included withrestricted cash. For the twelve months ended December 31, 2004, the Company hasdetermined that no additional liability has occurred and there is no liabilityfor fuel conversion volume rebate for the entire year ended December 31, 2004.The funds will be left in the restricted account in anticipation of anyliability incurred during the first quarter of 2005. The Company will reassessthis funding requirement for each subsequent quarter to determine theliability. The funding will be accomplished by transferring funds from anunrestricted cash account to the restricted account.

 

On March 12, 2004 the parties settled Phase II of thearbitration between the Company and Williams, which involved Williams’ claims that the duration of start-ups and shutdowns shouldbe shortened, with a corresponding reduction in the volume of fuel consumed duringsuch operations.  The settlement resolvesand releases, without any payment by the Company, Williams’ claim that it should be reimbursed retroactively to thedate of commercial operation for excess fuel allegedly consumed during start-ups and shutdowns.  An agreed order of dismissal has been submitted requesting thearbitral panel to dismiss Phase II of the arbitration with prejudice.  The settlement of Phase II has no impact onPhase I of the arbitration.

 

**ITEM 4.****                  Submissionof Matters to a Vote of Security Holders**

 

Notapplicable pursuant to General Instruction I of the Form 10-K.

 

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**PART II**

 

**ITEM 5.**                  **Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of EquitySecurities**

 

Thereis no market for the Company’s equity interests. All of the Company’s memberinterests are owned by its parent, AES Ironwood, Inc., a subsidiary of The AESCorporation. During December 2002 the Company declared and paid $4.3 million individends to AES Ironwood, Inc. The documents pertaining to the financing ofthe Company indicate certain prerequisites for the payment of dividends. Amongthese are:  project accounts have beenestablished, no event of default has occurred and is continuing, the commercialoperation date has occurred and the senior debt coverage ratio as defined inthe agreement is 1.2 to 1 or better. As the coverage ratios were not met forthe years ended 2003 and 2004, no such dividends were declared or paid in 2003and 2004.

 

**ITEM 6.****                  SelectedFinancial Data**

 

Notapplicable pursuant to General Instruction I of the Form 10-K.

 

**ITEM 7.****                  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Thefollowing discussion and analysis should be read in conjunction with ourfinancial statements and the notes thereto included elsewhere in this annualreport. The following discussion involves forward-looking statements. Ouractual results may differ significantly from the results suggested by theseforward-looking statements.

 

**General**

** **

Wewere formed on October 30, 1998 to develop, construct, own, operate andmaintain the facility. We were dormant until June 25, 1999, the date of thesale of the senior secured bonds. We granted provisional acceptance on December27, 2001.  We commenced commercialoperations subject to the Power Purchase Agreement on December 28, 2001. Weobtained $308.5 million of project financing from the sale of the seniorsecured bonds. The total cost of the construction of our facility was estimatedto be approximately $339.1 million, which was financed by the proceeds from thesale of the senior secured bonds and the equity contributions described below.As a result of the Siemens Westinghouse settlement, the facility cost wasreduced by approximately $7.3 million. In May 2000, we consummated an exchange offer whereby the holders of thesenior secured bonds exchanged their privately placed senior secured bonds forregistered senior secured bonds.

 

During 2004 the PJM power market, into which our facility’s generationis distributed, experienced a general decline in the amount paid forelectricity. This, in combination with a marked increase in the cost of naturalgas, was a major factor in Williams’ decision to dispatch our facility on avery limited basis. During 2004, our facility was called on to generate 16.4%of the year as compared to 10.9% during 2003. Revenue from capacitypayments will be the same during the life of the Power Purchase Agreement (seeNote 3). Payments for fuel conversion services are expected to vary withdispatch notices from Williams. We would expect to generate greater revenuesfrom fuel conversion services during periods of greater dispatch. Since revenuefrom capacity payments comprises most of our revenues, a change from year toyear in dispatch percentage may not have an equal effect on total revenue.

 

Theresult of this lower dispatch resulted in much lower payments for fuelconversion services. We believe that the fixed capacity payments are sufficientto meet the cash demands of our business, but we require the additional revenuefrom such fuel conversion services to be profitable.

 

Theprojection for 2005 based on dispatch profiles from Williams, is that we willoperate approximately 20%. During January and February 2005 we were notdispatched.

 

We areconcerned that Williams will not dispatch our facility in a manner that wouldincrease our profitability. As a result, our management is researching ways toenhance our facility’s performance. Any savings in starting the facility orimproved performance will also benefit Williams, with the result that Williamswould find it more economically feasible to dispatch our facility.

 

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** **

**Equity Contributions**

** **

Pursuant to an Equity Subscription Agreement, Ironwoodwas required to contribute up to $50.1 million to the Company to fundconstruction after the bond proceeds had been fully utilized. As of December 31,2004, Ironwood had made net contributions of $38.8 million of equity capital.Nofurther funds are required to be contributed.

 

**Results of Operations**

** **

For the years ended December 31, 2004, 2003 and2002, operating revenues were approximately $54.1 million, $50.1 million and$51.9 million respectively. Operating revenues consist of capacity payments ofapproximately $4.0 million per month. Consistent with our revenue recognitionpolicy discussed in Note 3 to the financial statements, a portion of the amountcollected has been deferred. The remaining revenue consists of fuel conversionand heat rate bonus payments.

 

For the years ended December 31, 2004, 2003 and2002, depreciation expense was approximately $10.8 million, $10.6 million and$10.1 million respectively.  The increasein 2004 is due to full year’s depreciation of capitalized outage costs incurredin 2003.

 

For the years ended December 31, 2004, 2003 and2002, corporate management fees were approximately $5.2 million, $5.1 millionand $5.0 million respectively.

 

For the years ended December 31, 2004, 2003 and2002, operating costs were approximately $4.1 million, $5.8 million and $5.4million respectively. Gas costs of approximately $950,000 and $362,000 wereincurred in 2003 and 2002, respectively. The amounts represent cost for fuelused to perform the facility’s winter capability test during these years. Thefacility was dispatched in February 2004, and was able to perform the testat no cost. As a result, fuel cost for 2004 was approximately $46,000.

 

For the years ended December 31, 2004, 2003 and2002, general and administrative costs of $7.2 million, $9.3 million and $10.6million, respectively, were incurred. The decrease of general andadministrative costs in the year ended December 31, 2004 as compared tothe year ended December 31, 2003 primarily relates to lower costs forlegal expense, insurance expense and bad debt expense. The decrease in legalfees is primarily due to the costs related to the dispute with Williams duringthe year ended December 31, 2003. Insurance costs have decreased as theexperience factor of the Siemens fleet of similar combustion turbinesincreases.

 

For the years ended December 31, 2004, 2003 and2002 loss on disposal of assets was $357,000, $978,000, and $0 respectively.During 2002 we commenced installation of an auxiliary boiler to increase theefficiency of the facility. The arbitration settlement of March 2003determined that we have no obligation to install the auxiliary boiler as therewould be no economic benefit produced by its installation. On July 24,2003, the Company entered into a contract with a sales assistance company tofacilitate the sale of the boiler. Total costs associated with the auxiliaryboiler were approximately $886,000. In December 2003, the fair value lessselling costs of the auxiliary boiler was estimated to be $450,000 and wasincluded in asset held for sale. In November 2004, the fair value lessselling costs of the auxiliary boiler was estimated to be $100,000 and isincluded in asset held for sale. Approximately $436,000 was expensed in 2003 and was included in loss ondisposal of assets in the statement of operations. Approximately $350,000 hasbeen expensed in 2004 with respect to this asset.  In 2003, emission credits, included in otherassets, were sold to AES Eastern Energy, L.P., an indirect wholly ownedsubsidiary of The AES Corporation at a fair market price resulting in a netloss of $431,000.  Additionally in 2003, a vehicle was sold at a loss of$111,000.

 

For the years ended December 31, 2004, 2003 and2002, interest expense was approximately $26.4 million, $27.0 million and $27.2million respectively. The decreasing amounts are due to lower interest as aresult of amortizing the bonds payable.

 

For the years ended December 31, 2004, 2003 and2002, the interest income earned on invested funds was approximately $183,000,$84,000 and $138,000, respectively. Interest earned is typically dependent upon average cash balances.However, in November 2004, Williams paid the undisputed amounts withrespect to 2002 and 2003 availability bonus. Accompanying this payment wasapproximately $65,000 in interest on the payments.

 

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Other income in 2004, representing $15,000, consistedof sales of scrap. Other income in 2003 consisted of $222,000 from SiemensWestinghouse relating to their payment of performance guarantees and $10,000from the sale of excess fuel compared to $3.5 million from Siemens Westinghouserelating to their payment of performance guarantees and $1.3 million from thesale of excess fuel in 2002.

 

For the year ended 2004, we had a net incomeof $197,000 compared to a net losses of $8.3 million and $1.6 million for theyears ended December 31, 2003 and December 31, 2002,respectively.  The net income for fiscalyear 2004 was primarily attributable to collecting the undisputed availabilitybonus for contract years 2002 and 2003 in the amount of approximately $2.2million. Additionally there was no arbitration in fiscal year 2004, and as aresult legal expense for that year is substantially lower than fiscal years2003 and 2002. The increased net loss for 2003 is primarily attributable toWilliams dispatching the facility 10.9% during 2003 compared to 28.4% in 2002,the absence of the $3.5 million payment from Siemens Westinghouse we receivedin 2002 with respect to heat rate and output rebates and the absence of $1.3million from the sale of excess fuel in 2002. Additionally, we incurredincreased expenses due to arbitration, higher security costs, and other smalleroperating items. Revenue from capacity payments will be the same duringthe life of the Power Purchase Agreement (see Note 3 to the financialstatements). Payments for fuel conversion services are expected to vary withdispatch notices from Williams. We would expect to generate greater revenuesfrom fuel conversion services during periods of greater dispatch. Since revenuefrom capacity payments comprises most of our revenues, a change from year toyear in dispatch percentage may not have an equal effect on total revenue.

 

**Liquidity and Capital Resources**

** **

The minimum cash flow from Williams under the PowerPurchase Agreement is approximately $4.0 million per month or approximately $48million annually. Net operating cash outflows are approximately $1.3 millionper month. The balance left will provide for senior debt interest and principalpayments. We expect that current dispatch scenarios from Williams will yieldcash flows in 2005 similar to 2004. Consistent with our revenue recognition policydiscussed in Note 3 to the financial statements, a portion of the amountcollected has been deferred. Additionally, a significant monthly expenditure isfor payment of our long term service agreement with Siemens Westinghouse. Thisagreement provides that we pay approximately $400 per gas turbine perequivalent operating hour. In the event we are not required to dispatch thefacility, there is no charge. While operating at base load, the estimatedmonthly payment for the long term service agreement could be as much as$450,000. We believe that our cash flows are sufficient to fund our futureoperations and to satisfy our outstanding obligations.

 

We believe that cash flows from the sale ofelectricity under the Power Purchase Agreement will be sufficient to payongoing project costs, including principal and interest on the senior securedbonds. After the Power Purchase Agreement expires, we will depend on marketsales of electricity.

 

In order to provide liquidity in the event of cashflow shortfalls, the debt service reserve account contains an amount equal tothe debt service reserve account required balance through cash funding,issuance of the debt service reserve letter of credit or a combination of thetwo.

 

For the years ended December 31, 2004, 2003 and2002 cash provided from operating activities was approximately $15.5 million,$4.6 million and $5.9 million respectively. The increase in cash provided fromoperating activities was due to higher income and changes in working capital.Net income for the year ended December 31, 2004 was $197 thousand comparedto net losses of $8.3 million and $1.6 million for the years ended December 31,2003 and 2002, respectively. Additions to net income to arrive at cash providedfrom operating activities include such non-cash expenses as depreciation andamortization of deferred financing costs. For the years ended December 2004,2003 and 2002 depreciation expense was $10.8 million, $10.6 million and $10.1million respectively, and amortization expense for the years ended December 31,2004, 2003 and 2002 was $136,000, $137,000 and $145,000 respectively.Additionally deferred revenue of $2.1 million, $1.4 million and $0 for theyears ended December 31, 2004, 2003 and 2002, respectively, were added tonet income.

 

For the year ended December 31, 2004 net cashused in investing activities was $2.0 million compared to net cash provided byinvesting activities of $3.4 million for the year ended December 31, 2003.Net cash used in investing activities for the year ended December 31, 2002was approximately $17.2 million. Cash used in investing activities in 2004 wasprimarily for payments for property, plant and equipment. Cash from investingactivities in  2003 was primarily due tothe terms of Agreement Change Order 71, of final acceptance (See Note 8). Aspart of the agreement, approximately $4.8 million of construction relatedreceivables from Siemens Westinghouse was 

 

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received. Cash used in investing activities in 2002 wasprimarily due to changes in construction related payables and payments ofretention to Siemens as part of final acceptance terms of Agreement ChangeOrder 71.

 

For the years ended December 31, 2004 net cashused in financing activities was approximately $8.5 million compared to $6.8million for the year ended December 31, 2003. The higher amount of cashused in 2004 was due to higher bond principle payments. Net cash provided byfinancing activities for the year ended December 31, 2002 wasapproximately $4.8 million. Capital contributions in 2003 of approximately $8.8million from Ironwood were partially offset by dividends paid of approximately$4.3 million.

 

On December 30, 2001, we provided the collateralagent with a debt service reserve letter of credit in an initial stated amountof approximately $17.3 million.

 

We believe that cash flows from the sale ofelectricity and/or minimum capacity payments under the Power Purchase Agreementand funds available to be drawn under the debt service reserve letter of creditand the power purchase letter of credit will be sufficient to pay projectcosts, including ongoing expenses and principal and interest on our seniorsecured bonds as described above and fund costs of our commercial operations.These beliefs are subject to certain assumptions, risks and uncertainties,including those set forth above under the caption “Cautionary Note RegardingForward-Looking Statements” and there can be no assurances.

 

Cash balances at December 31, 2004 and 2003 areas follows:

 
| **Unrestricted Cash (balance in000’s)** | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Checking  account – general             |       | $                          | 17         |                       | $          | 21 |   |
| Cash  Management Account                     |       | 146                        |       | 389                        |       |
| Revenue  Account                             |       | 7,161                      |       | 1,953                      |       |
| Distribution  Account                        |       | 3                          |       | 3                          |       |
| Total  Unrestricted Cash                     |       | $                          | 7,327      |                       | $          | 2,366 |   |

 
| **Restricted Cash (balances in 000’s)** | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Bond  Interest Account                       |       | $                          | 2,212      |                       | $          | 2,241 |   |
| Bond  Principal Payment Account              |       | 596                        |       | 535                        |       |
| Operating  and Maintenance Account           |       | 1,050                      |       | 1,047                      |       |
| Major  Maintenance Reserve Account           |       | 710                        |       | 707                        |       |
| Debt Reserve  LOC Account                    |       | 27                         |       | 26                         |       |
| Fuel  Conversion Volume Rebate Account       |       | 71                         |       | —                     |       |
| Total  Restricted Cash                       |       | $                          | 4,666      |                       | $          | 4,556 |   |

* *

***Concentration of Credit Risk inWilliams and Affiliates***

* *

Williams currently is our sole customer for purchasesof capacity, ancillary services, and energy, and our sole source for fuel.Williams’ payments under the Power Purchase Agreement are expected to provideall of our revenues during the term of the Power Purchase Agreement. It isuncertain whether we would be able to find another purchaser or fuel source onsimilar terms for our facility if Williams were not performing under the PowerPurchase Agreement. Any material failure by Williams to make capacity and fuelconversion payments or to supply fuel under the Power Purchase Agreement wouldhave a severe impact on our operations. The payment obligations of Williamsunder the Power Purchase Agreement are guaranteed by The Williams Companies,Inc. The payment obligations of The Williams Companies, Inc. are capped at anamount equal to 125% of the sum of the principal amount of our senior securedbonds, plus the maximum debt service reserve account balance.  At December 31, 2004, this amount wasapproximately $395 million.

 

Under the Power Purchase Agreement, in the event thatStandard & Poors or Moody’s rates the long-term senior unsecured debt ofThe Williams Companies, Inc. lower than investment grade, The WilliamsCompanies, Inc. is required to supplement The Williams Companies, Inc.guarantee with additional alternative security that is acceptable to theCompany within 90 days after the loss of such investment grade rating.  According to published sources, The 

 

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Williams Companies, Inc.’s long term senior unsecureddebt has been rated below investment grade since 2002 by both S&P and Moody’s.

 

In an action related to the ratings downgrade of TheWilliams Companies, Inc., S&P lowered its ratings on the our senior securedbonds to “BB-” from “BBB-” on July 26, 2002, and placed the rating oncredit watch. On December 10, 2003 S&P lowered its ratings on oursenior secured bonds to “B+” from “BB-” with a negative outlook. On November 27,2002, Moody’s lowered its ratings on our senior secured bonds to “B2” from “Ba2”.   We do not believe that such ratingsdowngrades will have any other direct or immediate effect on us, as none of theother financing documents or project contracts has provisions that aretriggered by a reduction of the ratings of the bonds.

 

Tosatisfy the requirements of the Power Purchase Agreement, on September 20,2002, Citibank, N.A. issued a $35 million Irrevocable Standby Letter of Crediton behalf of Williams. The Letter of Credit does not alter, modify, amend ornullify the guaranty issued by The Williams Companies, Inc. in favor of us andis considered to be additional security to the security amounts provided bysuch guaranty. The Letter of Credit became effective on September 20, 2002and expired upon the close of business on July 10, 2003; except that theLetter of Credit will be automatically extended without amendment forsuccessive one year periods from the present or any future expiration datehereof, unless Citibank, N.A. provides written notice of its election not torenew the Letter of Credit at least thirty days prior to any such expirationdate. In July 2004, Citibank, N.A. sent notification that the letter ofcredit will be extended to July 12, 2005. Additionally, in a LetterAgreement dated September 20, 2002, Williams agreed to (a) provideeligible credit support prior to the stated expiration date of the Letter ofCredit and (b) replenish any portion of the Letter of Credit or eligible creditsupport that is drawn, reduced, cashed or redeemed, at any time, with an equal amountof eligible credit support. Within twenty days prior to the expiration of theLetter of Credit and/or any expiration date of eligible credit support postedby Williams, Williams shall post eligible credit support to us in place of theLetter of Credit and/or any expiring eligible credit support unless TheWilliams Companies, Inc. regains and maintains its investment grade status, inwhich case the Letter of Credit or eligible credit support shall automaticallyterminate and no additional eligible credit support shall be required.  Weand Williams acknowledge that the posting of such Letter of Credit and Williams’agreement and performance of the requirements of (a) and (b) as set forth inthe immediately preceding sentence shall be in full satisfaction of Williams’obligations contained in Section 19.3 of the Power Purchase Agreement toprovide replacement security due to the downgrade of The Williams Companies,Inc. below investment grade status.

 

Our dependence on The Williams Companies, Inc. and itsaffiliates under the Power Purchase Agreement exposes us to possible loss ofrevenues and fuel supply, which in turn, could negatively impact our cash flowand financial condition and could result in a default under our senior securedbonds. There can be no assurance as to our ability to generate sufficient cashflow to cover operating expenses or our debt service obligations in the absenceof a long term Power Purchase Agreement with Williams or its affiliates.

 

**Business Strategy and Outlook**

** **

Under our overall business strategy, we are committedto market and sell all of our net capacity, fuel conversion and ancillaryservices to Williams during the 20-year term of the Power Purchase Agreement.After expiration of the Power Purchase Agreement, we anticipate selling ourfacility’s capacity, ancillary services and energy under a Power PurchaseAgreement or into the PJM power market. We intend to cause the facility to bemanaged, operated and maintained in compliance with the project contracts andall applicable legal requirements.

 

**Recent and New AccountingPronouncements**

 

In January 2003,the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46(FIN 46), Consolidation of Variable Interest Entities, an Interpretation ofAccounting Research Bulletin No. 51 (ARB No. 51).  In October 2003,FASB Staff Position No. 46-6, “Effective Date of FIN 46, Consolidation ofVariable Interest Entities” deferred the effective date of FIN 46 for variableinterests held by a public entity in a variable interest entity (“VIE”) thatwas created or acquired before February 1, 2003 to the end of the firstinterim or annual period ending after December 15, 2003.  In December 2003,FASB issued FIN 46 (revised December 2003), Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51 (“FIN 46(r)”), whichclarified some requirements and incorporated several staff positions that theCompany was already required to apply.  In addition, FIN 46(r) deferredthe effective date for VIEs that were created or acquired before February 1,2003 and were not considered special purpose entities (“SPEs”) prior to theissuance of the interpretation until the first reporting period ending after March 

 

35

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15, 2004.  FIN 46(r)defines a VIE as (i) any entity in which the equity investors at risk in suchentity do not have the characteristics of a controlling financial interest, or(ii) any entity that does not have sufficient equity at risk to finance itsactivities without additional subordinated financial support from otherparties.  It requires the consolidation of the VIE by the primarybeneficiary.  The adoption of FIN 46(r) requires us to include disclosuresfor non SPE VIEs created or acquired on or after February 1, 2003 in ourfinancial statements related to the total assets and the maximum exposure toloss resulting from our interests in VIEs.  The adoption of FIN 46(r) forVIEs created or acquired prior to February 1, 2003 did not have an impacton the our financial statements.

 

**Critical Accounting Policies**

** **

**General**

 

We prepare our financial statements in accordance withaccounting principles generally accepted in the United States of America. Assuch, we are required to make certain estimates, judgments and assumptions thatwe believe are reasonable based upon the information available. These estimatesand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the periods presented. The significant accounting policieswhich we believe are most critical to understanding and evaluating our reportedfinancial results include the following: Revenue Recognition, Property Plant and Equipment and Contingencies.

 

**Revenue Recognition**

 

We generate energy revenues under our Power PurchaseAgreement with Williams. During the 20-year term of the agreement, we expect tosell electric energy and capacity produced by the facility, as well asancillary and fuel conversion services. Under the Power Purchase Agreement, wealso generate revenues from meeting (1) base electrical output guarantees and(2) heat rate bonuses through efficient fuel conversion. Revenues from thesales of electric energy are recorded based on output delivered at rates asspecified under contract terms. Revenues from capacity are recorded on astraight-line basis over the life of the contract. Amounts billed in excess ofrevenue recognized are recorded as deferred revenue. Revenues for ancillary andother services are recorded when the services are rendered.

 

Upon its expiration, or in the event that the PowerPurchase Agreement is terminated prior to its 20 year term, we would seek togenerate energy revenues from the sale of electric energy and capacity into themerchant market or under new short- or long-term power purchase or similaragreements. There can be no assurances as to whether such efforts would besuccessful.

 

**Property, Plant and Equipment**

 

Property, plant and equipment is recorded at cost andis depreciated over its useful life. The plant is depreciated using a tenpercent salvage value. The estimated lives of our generation facilities rangefrom 5 to 40 years. A significant decrease in the estimated useful life of amaterial amount of our property, plant or equipment could have a materialadverse impact on our operating results in the period in which the estimate isrevised and subsequent periods.

 
| **Description of Asset**   | ** ** | **Depreciable  Life** | ** ** | **Net Book Value at  December 31, 2004** | ** **  | **Net Book Value at  December 31, 2003** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------------------------------|-------------|-----------------------------------------------|------------|
| ** **                 | ** ** | ** **            | ** ** | **(in thousands)**                            | ** **  | **(in thousands)**                            | ** ** |
|                       |       |                  |       |                                          |        |                                          |       |
| Plant                      |       | 40                    |       | $                                             | 219,121     |                                          | $          | 224,627 |   |
| Buildings                  |       | 40                    |       | 812                                           |        | 833                                           |       |
| Land  Improvements         |       | 40                    |       | 10,368                                        |        | 10,643                                        |       |
| Equipment                  |       | 40                    |       | 1,975                                         |        | 2,023                                         |       |
| Rotable  Turbine Parts     |       | 7-28                  |       | 43,104                                        |        | 46,992                                        |       |
| Development  Costs         |       | 25                    |       | 21,431                                        |        | 22,513                                        |       |
| Furniture  & Fixtures  |       | 15                    |       | 646                                           |        | 696                                           |       |
| Data  Processing Equipment |       | 7                     |       | 361                                           |        | 440                                           |       |
| Vehicles                   |       | 5                     |       | 183                                           |        | 228                                           |       |
| Projects                   |       | N/A                   |       | 3,691                                         |        | 1,934                                         |       |
| Spare Parts                |       | N/A                   |       | 2,710                                         |        | 2,406                                         |       |
| ** **                 | ** ** | ** **            | ** ** | **$**                                         | **304,402** | ** **                                    | **$**      | **313,335** | ** ** |

 

36

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**Contingencies**

 

We had ongoing disputes, including anarbitration with Williams, relating to the parties Power PurchaseAgreement.  The arbitration wasbifurcated into two phases, and an award was issued on Phase I on February 3,2004.  The primary issue in Phase Irelated to various aspects of the availability of the Facility for the yearended December 31, 2002, including disputes over the amount of anyavailability bonus or penalty.  Phase IIof the arbitration involved a dispute concerning the proper duration offacility start-ups and shutdowns, including fuel used during start-ups andshutdowns.  While Phase I of thearbitration was limited to billing disputes in 2002, many of the same issuesare disputed between the parties for 2003 billings.

 

The arbitral panel’s award on Phase I of thearbitration found that Williams had misapplied the applicable rules of PJMInterconnection, L.L.C. (“PJM”) in the billing dispute with us over theavailability of the facility.  The paneldeclined, however, to decide the facility’s availability during 43 disputedmaintenance events.  Instead, itencouraged the parties to reach a mutual resolution of the disputed events byapplying the correct PJM rule and, failing mutual agreement, to submit thedispute to a third party engineer for resolution.  The parties are currently discussing possibleresolution of the remaining eleven disputed events, and anticipate submittingany events that cannot be resolved by mutual agreement to a third party.  Until the matter is fully resolved, theavailability of the Facility, and certain payments that are calculated based onavailability, cannot be determined.  However,based on the panel’s Award and its negotiations with Williams, we anticipate wewill be paid some portion of our claimed availability bonus for 2002 and 2003and that we do not owe an amount for annual availability capacity adjustment orfuel conversion volume rebate.

 

Also as a result of the panel’s Phase IAward, we will begin pre-funding a cash account on a quarterly basis to reflectthe maximum amount of a fuel conversion volume rebate that might be payable toWilliams if the Facility operates the requisite number of hours to earn themaximum rebate available under the Power Purchase Agreement.  The maximum theoretical amount of the fuelconversion volume rebate is $1.7 million, but the account will not be fullyfunded during the course of the year if the facility is not operated a sufficientnumber of hours to achieve the maximum fuel conversion volume rebate.  Depending on the amount of facilityoperation, we may be entitled to withdraw some of the funds deposited into theaccount during the second half of our fiscal year.  Based on the arbitral award, there was norequired payment for a fuel conversion volume rebate for 2002, 2003, or 2004.

 

On March 12, 2004 the partieshave settled Phase II of the arbitration between Williams and us, whichinvolved Williams’ claims that the duration of start-ups and shutdowns shouldbe shortened, with a corresponding reduction in the volume of fuel consumedduring such operations.  The settlementresolves and releases, without any payment by us, Williams’ claim that it should be reimbursed retroactively to thedate of commercial operation for excess fuel allegedly consumed during start-ups and shutdowns.  An agreed order of dismissal has been submitted requesting thearbitral panel to dismiss Phase II of the arbitration with prejudice.  The settlement of Phase II has no impact onPhase I of the arbitration.  The partiescontinue to negotiate in an effort to settle issues left unresolved by theAward in Phase I.

 

**Commitments**

 

**(a) Bonds**

 

Interest on the Bonds is payable quarterly inarrears.  Quarterly principal payments onthe Bonds commenced on February 28, 2002. The final maturity date for the Bonds is November 30, 2025.

 

Principal and interest is payable as follows at December 31,2004 (in thousands):

 

37

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| **Year**        | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Total** | ** ** |
|-----------------|------------|---------------|------------|--------------|------------|-----------|------------|
| 2005            |       | $             | 7,032      |         | $          | 25,931    |       | $ | 32,963 |   |
| 2006            |       | 7,156         |       | 25,304       |       | 32,460    |       |
| 2007            |       | 9,132         |       | 24,605       |       | 33,737    |       |
| 2008            |       | 11,352        |       | 23,723       |       | 35,075    |       |
| 2009            |       | 9,624         |       | 22,774       |       | 32,398    |       |
| 2010-2025       |       | 251,120       |       | 199,542      |       | 450,662   |       |
| Total  payments |       | $             | 295,416    |         | $          | 321,879   |       | $ | 617,295 |   |

 

**(b) Operations Agreement**

** **

We entered into a Development and Operations ServicesAgreement, dated as of June 1, 1999, with AES Prescott by which AESPrescott is providing development and construction management services and,after the commercial operation date, operating and maintenance services for ourfacility for a period of 27 years**.** Under theoperations agreement, AES Prescott is responsible for, among other things,preparing plans and budgets related to start-up and commercial operation of ourfacility, providing qualified operating personnel, making repairs, purchasingconsumables and spare parts (not otherwise provided under the maintenanceservices agreement) and providing other services as needed according toindustry standards**.** During fiscalyear 2004, AES Prescott was compensated for the services on a cost plusfixed-fee basis of approximately $425,000 per month**.** The fee is adjusted annually by the change inGross Domestic Product, Implicit Price Deflator**.**  Total fees paid by us were $5.2 million forthe year ended December 31, 2004. Under the services agreement between AES Prescott and The AESCorporation, The AES Corporation provides to AES Prescott all of the personneland services necessary for AES Prescott to comply with its obligations underthe operations agreement**.**

 

The following table is an estimate of management feesto be paid through the end of the contract, using an annual inflation rate of2.7% (in thousands):

 
| **Year**        | ** ** | **Management Fee** | ** ** |
|-----------------|------------|--------------------|------------|
| 2005            |       | $                  | 5,358      |   |
| 2006            |       | 5,506              |       |
| 2007            |       | 5,622              |       |
| 2008            |       | 5,750              |       |
| 2009            |       | 5,884              |       |
| 2010-2026       |       | 114,661            |       |
| Total  payments |       | $                  | 142,781    |   |

 

**(c) InterconnectionAgreement**

** **

We entered into an interconnection agreement with GPUEnergy (“GPU”) to transmit the electricity generated by the facility to thetransmission grid so that it may be sold as prescribed under the Power PurchaseAgreement. The agreement is in effect for the life of the facility yet may beterminated by mutual consent of both GPU and us under certain circumstances asdetailed in the agreement. Costs associated with the agreement are based onelectricity transmitted via GPU at a variable price, the PJM Tariff, as chargedby GPU to the Company, which is comprised of both service cost and assetrecovery cost, as determined by GPU and approved by the Federal EnergyRegulatory Committee. The Company is obligated to pay approximately $214,000per year as a maintenance fee for the interconnection equipment. The term ofthis agreement is twenty-five years. The total of these payments wasapproximately $214,000 for the each year ended December 31, 2004, 2003 and2002, respectively.

 

The following table is an estimate of interconnectionagreement maintenance fees to be paid through the end of the contract (inthousands):

 
| **Year**        | ** ** | **Interconnection  Agreement  Maintenance Fee** | ** ** |
|-----------------|------------|-------------------------------------------------|------------|
| 2005            |       | $                                               | 214        |   |
| 2006            |       | 214                                             |       |
| 2007            |       | 214                                             |       |
| 2008            |       | 214                                             |       |
| 2009            |       | 214                                             |       |
| 2010-2026       |       | 3,638                                           |       |
| Total  payments |       | $                                               | 4,708      |   |

 

38

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**Other Commitments**

 

**MaintenanceServices Agreement**

 

We entered into the Maintenance Program Parts, ShopRepairs and Scheduled Outage TFA Services Contract (the “Maintenance ServicesAgreement”), dated as of September 23, 1998, with Siemens Westinghouse bywhich Siemens Westinghouse will provide the Company with, among other things,combustion turbine parts, shop repairs and scheduled outage technical fieldassistance services**.** TheMaintenance Services Agreement became effective on the date of execution andunless terminated early, will terminate upon completion of shop repairs performedby Siemens Westinghouse following the eighth scheduled outage of the applicablecombustion turbine or 10 years from the effective date of the contract,whichever occurs first, unless we exercise our right to terminate the agreementafter the first major outage of the turbines.

 

The Maintenance Services Agreement indicates that wewill pay fees each month based on a stated amount for each equivalent base loadhour (“EBH”) of the combustion turbines, adjusted for inflation, over the termof the agreement.  However, if ascheduled maintenance outage occurs prior to 8,000 EBHs being accumulated sincethe last scheduled maintenance outage for that turbine, the Company will beinvoiced the remaining amount to equate to 8,000 hours (“true-up”). In theevent the Company is not required to dispatch the facility, there is no chargefor that month. Accordingly, no amounts have been included in the ContractualObligations table below.

 

The total of these payments was approximately $1.8million, $2.9 million and $4.8 million for the years ended December 31,2004, 2003 and 2002, respectively, which included true-ups for one plannedmaintenance outage in each fiscal year ended December 31, 2003 and 2002,as the turbines were far short of the 8,000 EBH level. Assuming a similardispatch level in 2005 as in 2004, a comparable level of payments would beexpected for the year ended December 31, 2005. Based upon our currentestimates, assuming a certain number of EBH’s and equivalent starts (“ES”), theremaining minimum payments to Siemens Westinghouse would approximate $20.7million through the period ending the 10 year term of the contract.

 

**Contractual Obligations**

 
| **($000’s)**                              | ** ** | **Total** | ** ** | **2005** | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **2010 &  Thereafter** | ** ** | **Commitments  Reference** | ** ** | **Footnote  reference** | ** ** |
|------------------------------------------------|------------|-----------|------------|----------|------------|---------------|------------|---------------|------------|----------------------------|------------|----------------------------|------------|-------------------------|------------|
| Debt Service  Obligations (including interest) |       | $         | 617,295    |     | $          | 32,963        |       | $             | 66,197     |                       | $          | 67,473                     |       | $                       | 450,662    |   | (a) |   | (5) |   |
| Operations  Agreement                          |       | 142,781   |       | 5,358    |       | 11,128        |       | 11,634        |       | 114,661                    |       | (b)                        |       | (8)                     |       |
| Interconnection  Agreement                     |       | 4,708     |       | 214      |       | 428           |       | 428           |       | 3,638                      |       | (c)                        |       | (8)                     |       |
| Total                                          |       | $         | 764,784    |     | $          | 38,535        |       | $             | 77,753     |                       | $          | 79,535                     |       | $                       | 568,961    |   |   |   |   |   |
|                                                |            |           |            |          |            |               |            |               |            |                            |            |                            |            |                         |            |  |  |  |  |  |  |  |  |  |

 

**ITEM7A.**               Quantitativeand Qualitative Disclosures About Market Risk

** **

The bonds have an aggregate principal amount of $295.4million at December 31, 2004. We are not subject to interest rate risk asthe interest rates associated with our outstanding indebtedness are fixed overthe life of the bonds. We currently have no other financial or derivativefinancial instruments. We do not believe that we face other material risks requiringdisclosure pursuant to Item 305 of Regulation S-K.

 

In an action related to the ratings downgrade of TheWilliams Companies, Inc., S&P lowered its ratings on our senior securedbonds to “BB-” from “BBB-” on July 26, 2002, and placed the rating on creditwatch. On December 10, 2003 S&P lowered its ratings on our seniorsecured bonds to “B+” from “BB-” with a negative outlook. On November 27,2002, Moody’s lowered its ratings on our senior secured bonds to “B2” from “Ba2”.   We do not believe that such ratingsdowngrades will have any other direct or immediate effect on us, as none of theother 

 

39

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financing documents or project contracts haveprovisions that are triggered by a reduction of the ratings of the bonds.

 

During 2004, the PJM market, into which our facility’sgeneration is distributed, continues to experience a general decline in theamount paid for electricity. This, in combination with a marked increase in thecost of natural gas, was a major factor in Williams’ decision to dispatch ourfacility on a very limited basis. Based upon current market conditions andprojections from Williams, we anticipate a comparable dispatch level in2005.  In the event that these marketconditions do not improve, and Williams does not dispatch our facility at allin 2005, we believe that the fixed capacity payments are sufficient to meet thecash demands of our business, but we require the additional revenue from suchfuel conversion services to be profitable.

 

40

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**ITEM 8.****                  FinancialStatements and Supplemental Data**

 

**AES IRONWOOD, L.L.C.**

**AN INDIRECT WHOLLY OWNED SUBSIDIARY**

**OF THE AES CORPORATION**

** **

**Index to Financial Statements**

** **

Report of Independent Registered Public Accounting Firm

Balance Sheets

Statements of Operations

Statements of Changes inMember’s Capital

Statements of Cash Flows

Notes to FinancialStatements

41

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Member ofAES Ironwood, L.L.C.:

 

Wehave audited the accompanying balance sheets of AES Ironwood, L.L.C. (an indirect wholly owned subsidiary of TheAES Corporation) (the “Company”) as of December 31, 2004 and 2003, and therelated statements of operations, changes in member’s capital, and cash flowsfor each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on the financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, such financial statements present fairly, in all materialrespects, the financial position of AESIronwood, L.L.C.**as of December 31,2004 and 2003, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2004, in conformity withaccounting principles generally accepted in the United States of America.

 

As morefully discussed in Note 7, the Company’s dependence upon Williams PowerCompany, Inc. under the Power Purchase Agreement exposes the Company topossible loss of revenues and fuel supply. There can be no assurances as to theCompany’s ability to generate sufficient cash flow to cover operating expensesor debt service obligations in the absence of a Power Purchase Agreement withWilliams Power Company, Inc. and related guaranty by The Williams Companies,Inc. or their affiliates.

 

 

McLean, Virginia

March 24,2005

 

42

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AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDIARY

OF THE AES CORPORATION

 

BALANCE SHEETS,

DECEMBER 31, 2004 AND 2003

(DOLLARS IN THOUSANDS)

 
| ** **                                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS:                                                                                               |       |     |       |     |       |
|                                                                                                  |       |     |       |     |       |
| Current  assets:                                                                                      |       |     |       |     |       |
| Cash and  cash equivalents                                                                            |       | $        | 7,327      |     | $          | 2,366 |   |
| Interest  receivable                                                                                  |       | 16       |       | 4        |       |
| Accounts  receivable — net                                                                       |       | 4,453    |       | 4,445    |       |
| Prepaid  insurance                                                                                    |       | 745      |       | 813      |       |
| Prepaid  expenses — other                                                                        |       | 232      |       | 233      |       |
| Inventory —  fuel                                                                                |       | —   |       | 7        |       |
| Asset held  for sale                                                                                  |       | 100      |       | 450      |       |
| Total  current assets                                                                                 |       | 12,873   |       | 8,318    |       |
|                                                                                                  |       |     |       |     |       |
| Land                                                                                                  |       | 1,143    |       | 1,143    |       |
| Property,  plant, and equipment-net of accumulated depreciation of $31,572 and $20,744,  respectively |       | 304,402  |       | 313,335  |       |
| Deferred  financing costs-net of accumulated amortization of $781 and $645,  respectively             |       | 2,854    |       | 2,990    |       |
| Restricted  cash including debt service reserve                                                       |       | 4,666    |       | 4,556    |       |
| Total assets                                                                                          |       | $        | 325,938    |     | $          | 330,342 |   |
|                                                                                                  |       |     |       |     |       |
| LIABILITIES  AND MEMBER’S CAPITAL:                                                               |       |     |       |     |       |
|                                                                                                  |       |     |       |     |       |
| Current  liabilities:                                                                                 |       |     |       |     |       |
| Accounts  payable                                                                                     |       | $        | 56         |     | $          | 61 |   |
| Accrued  interest                                                                                     |       | 2,180    |       | 2,227    |       |
| Payable to  AES and affiliates                                                                        |       | 2,132    |       | 2,146    |       |
| Note payable                                                                                          |       | —   |       | 292      |       |
| Bonds  payable, current                                                                               |       | 7,032    |       | 6,356    |       |
| Total  current liabilities                                                                            |       | 11,400   |       | 11,082   |       |
|                                                                                                  |       |     |       |     |       |
| Deferred  revenue                                                                                     |       | 3,505    |       | 1,392    |       |
| Bonds  payable                                                                                        |       | 288,384  |       | 295,416  |       |
|                                                                                                  |       |     |       |     |       |
| Total  liabilities                                                                                    |       | 303,289  |       | 307,890  |       |
|                                                                                                  |       |     |       |     |       |
| Commitments  and Contingencies (Notes 5, 6, 7 and 8)                                                  |       |     |       |     |       |
|                                                                                                  |       |     |       |     |       |
| Member’s  capital:                                                                               |       |     |       |     |       |
| Common  stock, $1 par value-10 shares authorized, none issued or outstanding                          |       | —   |       | —   |       |
| Contributed  capital                                                                                  |       | 38,800   |       | 38,800   |       |
| Member’s  deficit                                                                                |       | (16,151  | )          | (16,348  |       |
|                                                                                                  |       |     |       |     |       |
| Total member’s  capital                                                                          |       | 22,649   |       | 22,452   |       |
|                                                                                                  |       |     |       |     |       |
| Total  liabilities and member’s capital                                                          |       | $        | 325,938    |     | $          | 330,342 |   |

 

See notes to financialstatements.

 

43

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AES IRONWOOD,L.L.C.

AN INDIRECT WHOLLYOWNED SUBSIDIARY

OF THE AESCORPORATION

 

STATEMENTS OF OPERATIONS,

YEARS ENDED DECEMBER 31,2004, 2003 AND 2002

(DOLLARS INTHOUSANDS)

 
| ** **                        | ** ** | **Year Ended  December 31, 2004** | ** ** | **Year Ended  December 31, 2003** | ** ** | **Year Ended  December 31, 2002** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| OPERATING  REVENUES               |       |                                   |       |                                   |       |                                   |       |
| Energy                            |       | $                                      | 54,131     |                                   | $          | 50,055                                 |       | $ | 51,852 |   |
|                              |       |                                   |       |                                   |       |                                   |       |
| OPERATING  EXPENSES               |       |                                   |       |                                   |       |                                   |       |
| Depreciation                      |       | 10,828                                 |       | 10,629                                 |       | 10,103                                 |       |
| Corporate  management fees        |       | 5,215                                  |       | 5,110                                  |       | 5,042                                  |       |
| Operating  costs                  |       | 4,070                                  |       | 5,776                                  |       | 5,385                                  |       |
| General and  administrative costs |       | 7,192                                  |       | 9,254                                  |       | 10,589                                 |       |
| Loss on  disposal of assets       |       | 357                                    |       | 978                                    |       | —                                 |       |
| Operating  income                 |       | 26,469                                 |       | 18,308                                 |       | 20,733                                 |       |
|                              |       |                                   |       |                                   |       |                                   |       |
| OTHER  INCOME/EXPENSE             |       |                                   |       |                                   |       |                                   |       |
| Other income                      |       | 15                                     |       | 253                                    |       | 4,774                                  |       |
| Interest  income                  |       | 183                                    |       | 84                                     |       | 138                                    |       |
| Interest  expense                 |       | (26,470                                | )          | (26,956                                | )          | (27,244                                | )          |
| NET INCOME  (LOSS)                |       | $                                      | 197        |                                   | $          | (8,311                                 | )          | $ | (1,599 | ) |

 

See notes tofinancial statements.

 

44

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AES IRONWOOD,L.L.C.

AN INDIRECT WHOLLYOWNED SUBSIDIARY

OF THE AESCORPORATION

 

STATEMENTS OF CHANGES INMEMBER’S CAPITAL,

YEARS ENDED DECEMBER 31,2004, 2003 AND 2002

(DOLLARS INTHOUSANDS)

 
|                            |   | **Common Stock** |       | **Additional  Paid - in** |   | **Accumulated** |       |        |       |
|---------------------------------|--------|------------------|------------|---------------------------|--------|-----------------|------------|-------------|------------|
|                            |   | **Shares**       | ** ** | **Amount**                |   | **Capital**     | ** ** | **Deficit** | ** ** | **Total** |   |
| BALANCE DECEMBER 31,  2001 |   | —           |       | $                         | — | ** **      | **—** | ** **  | ** ** | (2,137 | ) | $ | (2,137 | ) |
| Net loss                        |   | —           |       | —                    |   | **—**      | ** ** | (1,599)     |       | (1,599 | ) |
| Dividends  paid                 |   | —           |       | —                    |   | —          |       | (4,301      | )          | (4,301 | ) |
| Contributed  capital            |   | —           |       | —                    |   | 8,800           |       | —      |       | 8,800 |   |
| Conversion  of debt to equity   |   | —           |       | —                    |   | 30,000          |       | —      |       | 30,000 |   |
| BALANCE DECEMBER 31,  2002 |   | —           |       | —                    |   | 38,800          |       | (8,037      | )          | 30,763 |   |
| Net loss                        |   | —           |       | —                    |   | —          |       | (8,311      | )          | (8,311 | ) |
| BALANCE DECEMBER 31,  2003 |   | —           |       | —                    |   | 38,800          |       | (16,348     | )          | 22,452 |   |
| Net income                      |   | —           |       | —                    |   | —          |       | 197         |       | 197 |   |
| BALANCE DECEMBER 31,  2003 |   | —           |       | $                         | — |            | $          | 38,800      |       | $ | (16,151 | ) | $ | 22,649 |   |
|                                 |        |                  |            |                           |        |                 |            |             |            |  |  |  |  |  |  |

 

See notes tofinancial statements.

 

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AES IRONWOOD,L.L.C.

AN INDIRECT WHOLLY OWNED SUBSIDIARYOF THE AES CORPORATION STATEMENTS OF CASH FLOWS, YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002(DOLLARS IN THOUSANDS)

 
| ** **                                                          | ** ** | **Year Ended  December 31, 2004** | ** ** | **Year Ended  December 31, 2003** | ** ** | **Year Ended  December 31, 2002** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| OPERATING  ACTIVITIES:                                              |       |                                   |       |                                   |       |                                   |       |
| Net income  (loss)                                                  |       | $                                      | 197        |                                   | $          | (8,311                                 | )          | $ | (1,599 | ) |
| Amortization  of deferred financing costs                           |       | 136                                    |       | 137                                    |       | 145                                    |       |
| Depreciation                                                        |       | 10,828                                 |       | 10,629                                 |       | 10,103                                 |       |
| Loss on  disposal of assets                                         |       | 357                                    |       | 978                                    |       | —                                 |       |
| Change in:                                                          |       |                                   |       |                                   |       |                                   |       |
| Interest  receivable                                                |       | (12                                    | )          | 4                                      |       | 31                                     |       |
| Accounts  receivable                                                |       | (8                                     | )          | 864                                    |       | 301                                    |       |
| Prepaid  insurance                                                  |       | 1,916                                  |       | 1,480                                  |       | (2,293                                 | )          |
| Prepaid  expense - other                                            |       | 1                                      |       | (15                                    | )          | (218                                   | )          |
| Inventory                                                           |       | 7                                      |       | 19                                     |       | (26                                    | )          |
| Other assets                                                        |       | —                                 |       | 753                                    |       | (485                                   | )          |
| Certificate  of deposit                                             |       | —                                 |       | 77                                     |       | —                                 |       |
| Accounts  payable                                                   |       | (5                                     | )          | (2,605                                 | )          | (1,357                                 | )          |
| Accrued  interest                                                   |       | (47                                    | )          | (35                                    | )          | (15                                    | )          |
| Account  payable-parent and affiliates                              |       | (14                                    | )          | (727                                   | )          | 1,289                                  |       |
| Deferred  revenue                                                   |       | 2,113                                  |       | 1,392                                  |       | —                                 |       |
| Net cash  provided by operating activities                          |       | 15,469                                 |       | 4,640                                  |       | 5,876                                  |       |
|                                                                |       |                                   |       |                                   |       |                                   |       |
| INVESTING  ACTIVITIES:                                              |       |                                   |       |                                   |       |                                   |       |
| Payments for  property, plant and equipment                         |       | (1,901                                 | )          | (2,647                                 | )          | (328                                   | )          |
| Change in  construction related payables                            |       | —                                 |       | —                                 |       | (12,000                                | )          |
| Change in  construction related receivables                         |       | —                                 |       | 4,826                                  |       | 7,426                                  |       |
| Withdrawals  from (payments to) restricted cash accounts            |       | (110                                   | )          | 1,247                                  |       | (390                                   | )          |
| Change in  retention payable                                        |       | —                                 |       | —                                 |       | (11,941                                | )          |
| Net cash  (used in) provided by investing activities                |       | (2,011                                 | )          | 3,426                                  |       | (17,233                                | )          |
|                                                                |       |                                   |       |                                   |       |                                   |       |
| FINANCING  ACTIVITIES:                                              |       |                                   |       |                                   |       |                                   |       |
| Payments for  bonds payable                                         |       | (6,356                                 | )          | (4,752                                 | )          | (1,976                                 | )          |
| Contributed  capital                                                |       | —                                 |       | —                                 |       | 8,800                                  |       |
| Payment of  dividends                                               |       | —                                 |       | —                                 |       | (4,301                                 | )          |
| Payments on  note payable                                           |       | (2,141                                 | )          | (2,036                                 | )          | 2,328                                  |       |
| Net cash  (used in) provided by financing activities                |       | (8,497                                 | )          | (6,788                                 | )          | 4,851                                  |       |
|                                                                |       |                                   |       |                                   |       |                                   |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS               |       | 4,961                                  |       | 1,278                                  |       | (6,506                                 | )          |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD                     |       | 2,366                                  |       | 1,088                                  |       | 7,594                                  |       |
| CASH AND  CASH EQUIVALENTS, END OF PERIOD                           |       | $                                      | 7,327      |                                   | $          | 2,366                                  |       | $ | 1,088 |   |
|                                                                |       |                                   |       |                                   |       |                                   |       |
| SUPPLEMENTAL  DISCLOSURE:                                           |       |                                   |       |                                   |       |                                   |       |
| Interest  paid (net of amounts capitalized)                         |       | $                                      | 26,517     |                                   | $          | 26,956                                 |       | $ | 27,244 |   |
| Conversion  of subordinated loan payable to parent to equity        |       | $                                      | —     |                                   | $          | —                                 |       | $ | 30,000 |   |
| Transfer of  property, plant & equipment to asset held for sale |       | $                                      | —     |                                   | $          | 450                                    |       | $ | — |   |
| Insurance  carrier financing                                        |       | $                                      | 1,849      |                                   | $          | 2,590                                  |       | $ | — |   |

 

See notes tofinancial statements

 

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AES IRONWOOD,L.L.C.

AN INDIRECTWHOLLY OWNED SUBSIDIARY

OF THE AESCORPORATION

 

NOTES TOFINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31,2004, 2003 AND 2002

 

**1.**     ORGANIZATION

** **

AES Ironwood, L.L.C. (the “Company) was formed on October 30,1998, in the state of Delaware to develop, construct, and operate a705-megawatt (MW) gas-fired, combined cycle electric generating facility inSouth Lebanon Township, Pennsylvania (the “Facility”). The Company wasconsidered dormant until June 25, 1999, at which time the ProjectFinancing and certain related agreements were consummated (hereinafter, “Inception”).The Plant includes two Westinghouse 501 G combustion turbines, two heatrecovery steam generators, and one steam turbine. The Plant produces and sellselectricity, as well as provides fuel conversion and ancillary services,solely to Williams Power Company, Inc., formerly known as Williams EnergyMarketing & Trading Company (“Williams”) under a Power Purchase Agreementwith a term of 20 years that commenced on December 28, 2001, thecommercial operation date.

 

The Company is a wholly-owned subsidiary of AESIronwood, Inc. (“Ironwood”), which is a wholly owned subsidiary of The AESCorporation (“AES”). Ironwood has no assets other than its ownership interestsin the Company and AES Prescott, L.L.C. (“Prescott”), another wholly ownedsubsidiary of Ironwood (see Note 9). Ironwood has no operations and is notexpected to have any operations. Its only income is distributions it receivesfrom the Company and Prescott.

 

On June 25, 1999, the Company issued $308.5million in senior secured bonds (see Note 5) for the purpose of providingfinancing for the construction of the Plant and to fund, through theconstruction period, interest payments to the bondholders. On May 12, 2000, theCompany consummated an exchange offer whereby the holders of the senior bondsexchanged their privately placed senior secured bonds for registered seniorsecured bonds.

 

Pursuant to an Equity Subscription Agreement, Ironwoodwas required to contribute up to $50.1 million to the Company to fundconstruction after the bond proceeds had been fully utilized. As of December 31,2004, Ironwood had made net contributions of $38.8 million of equity capital.No further contributions are required..

 

**2.**     OPERATIONS

** **

During 2002, as further discussed in Note 7, the credit ratings of thelong-term senior unsecured debt of The Williams Companies, Inc. were downgradedto below investment grade.  Sinceachieving commercial operations, under the Power Purchase Agreement withWilliams Energy, the Company is eligible to receive variable operations andmaintenance payments, total fixed payments, energy exercise fee payments (eachas defined in the Power Purchase Agreement) and other payments for the deliveryof fuel conversion, capacity and ancillary services.  Since December 28, 2001, Williams Energyhas not requested that the Company dispatch the facility to a significantdegree. The minimum capacity payments provided for under the Power PurchaseAgreement have been the Company’s primary source of operating revenues,representing $48.2 million of the Company’s total revenues of $54.1 million forthe twelve months ended December 31, 2004. Approximately $3.5 million has been deferred consistent with thecompany’s revenue recognition policy discussed in Note 3 to the financialstatements.

 

The Company has used these operating revenues,together with interest income from the investment of operating funds to pay itsgeneration expenses and other operations and maintenance expenses.

 

The Company currently has not been dispatched byWilliams in 2005 and can provide no assurance that the Company will bedispatched.  In the event that thefacility is not dispatched, the Company’s operating revenues will consist ofminimum capacity payments under the Power Purchase Agreement.  The Company has also provided the debtservice reserve letter of credit ($17.3 million) that may be utilized if necessaryto fund obligations as they become due.

 

The Company currently believes that its sources ofliquidity will be adequate to meet its needs through the end of 2005.  This belief is based on a number ofassumptions, including but not limited to the continued performance 

 

47

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and satisfactory financial condition of the thirdparties on which the Company depends, particularly Williams as fuel supplierand purchaser of all electric energy and capacity produced by the facility aswell as ancillary and fuel conversion services of the Company (as providedby  the Power Purchase Agreement) and TheWilliams Companies, Inc. as guarantor of Williams’  performance under the Power PurchaseAgreement.  Known and unknown risks,uncertainties and other factors outside the Company’s control may cause actualresults to differ materially from its current expectations.  These risks, uncertainties and factorsinclude but are not limited to risks and uncertainties related to the financialcondition and continued performance of the third parties on which the Companydepends, including Williams and The Williams Companies, Inc. and itsaffiliates, the possibility of unexpected problems related to the performanceof the facility, the possibility of unexpected expenses or lower than expectedrevenues and additional factors that are unknown to the Company or beyond itscontrol.

 

Since the Company depends on Williams for bothrevenues and fuel supply under the Power Purchase Agreement, if Williams wereto terminate or default under the Power Purchase Agreement, there would be asevere negative impact on the Company’s cash flow and financial condition whichcould result in a default on its senior secured bonds.  Due to recent declines in pool prices, theCompany would expect that if it were required to seek alternative purchasers ofits power as a result of a default by Williams that any such alternate revenueswould be substantially below the amounts that would have been otherwise payablepursuant to the Power Purchase Agreement. There can be no assurance as to the Company’s ability to generatesufficient cash flow to cover operating expenses or its debt serviceobligations in the absence of a long-term Power Purchase Agreement withWilliams.

 

**3.**     SIGNIFICANTACCOUNTING POLICIES

** **

*Basis of Presentation*– These financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America.

 

*Cash and Cash Equivalents*–The Company considers unrestricted cash on hand, deposits in banks, andinvestments with original maturities of three months or less to be cash andcash equivalents for the purpose of the statement of cash flows.

 

*Restricted Cash*–Restricted cash in the amount of approximately $4.7 million as of December 31,2004 and $4.6 million as of December 31, 2003 consists of accounts theCompany is required under the Collateral Agency Agreement (see Note 5) tomaintain for the construction, maintenance, and debt service of the facility.

 

*Property, Plant, and**Equipment* – Property, plant, and equipment is recorded atcost. Depreciation, after consideration of salvage value, is computed using thestraight-line method over the estimated useful lives of the assets, which rangefrom five to forty years. Maintenance and repairs are charged to expense asincurred.

 
| **Description of Asset**   | ** ** | **Depreciable  Life** | ** ** | **Net Book Value at  December 31, 2004** | ** **  | **Net Book Value at  December 31, 2003** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------------------------------|-------------|-----------------------------------------------|------------|
| ** **                 | ** ** | ** **            | ** ** | **(in thousands)**                            | ** **  | **(in thousands)**                            | ** ** |
|                       |       |                  |       |                                          |        |                                          |       |
| Plant                      |       | 40                    |       | $                                             | 219,121     |                                          | $          | 224,627 |   |
| Buildings                  |       | 40                    |       | 812                                           |        | 833                                           |       |
| Land  Improvements         |       | 40                    |       | 10,368                                        |        | 10,643                                        |       |
| Equipment                  |       | 40                    |       | 1,975                                         |        | 2,023                                         |       |
| Rotable  Turbine Parts     |       | 7-28                  |       | 43,104                                        |        | 46,992                                        |       |
| Development  Costs         |       | 25                    |       | 21,431                                        |        | 22,513                                        |       |
| Furniture  & Fixtures  |       | 15                    |       | 646                                           |        | 696                                           |       |
| Data  Processing Equipment |       | 7                     |       | 361                                           |        | 440                                           |       |
| Vehicles                   |       | 5                     |       | 183                                           |        | 228                                           |       |
| Projects                   |       | N/A                   |       | 3,691                                         |        | 1,934                                         |       |
| Spare Parts                |       | N/A                   |       | 2,710                                         |        | 2,406                                         |       |
| ** **                 | ** ** | ** **            | ** ** | **$**                                         | **304,402** | ** **                                    | **$**      | **313,335** | ** ** |

 

48

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*Long- Lived Assets*–The Company evaluates the impairment of our long-lived assets based on theprovisions of Statement of Financial Accounting Standards No. 144 (“SFAS No.144”).  The Company has determined thatthe value of one of its assets was impaired and has reduced the recorded valueaccordingly (See Note 12).

 

*Other Assets*–Pursuant to the provisions of 25 Pennsylvania Code Section 123, NitrogenOxide (NOx), Allowance Requirements, which establishes a NOx budget and a NOxallowance trading program for NOx affected sources for the purpose of achievingair quality standards, the Company purchased approximately $1.1 million in NOxallowances in 1999. The NOx allowances were purchased for NOx emissions duringthe ozone seasons for the first two full years of operations. These amounts arereported as other assets and will be amortized as they are utilized.Approximately $384 thousand in NOx were used during the 2002 NOx season. In July 2003the remaining NOx were sold at a loss; recorded in loss on sale of assets forthe year ended December 31, 2003 (see Note 9).

 

*Deferred Financing Costs*–Financing costs are deferred and are being amortized using the straight-linemethod over approximately 26 years, which does not differ materially from theeffective interest method of amortization.

 

*Prepaid Expenses*–Prepaid expenses at December 31, 2004 consists of prepaid insurance in theamount of approximately $745,000, prepaid taxes in the amount of approximately$168,000, prepaid leases in the amount of approximately $31,000, and prepaidrating agency review fees in the amount of $33,000. Prepaid expenses at December 31,2003 consisted of prepaid insurance in the amount of approximately $811,000,prepaid taxes in the amount of approximately $166,000, prepaid leases in theamount of approximately $29,000, and prepaid rating agency review fees in theamount of $38,000.

 

*Revenue Recognition**–* The Company generates energyrevenues under our Power Purchase Agreement with Williams. Under the terms ofthe 20-year term of the agreement, the Company sells electric energy and capacityproduced by the facility, as well as ancillary and fuel conversion services.Under the Power Purchase Agreement, the Company also generates revenues frommeeting (1) base electrical output guarantees and (2) heat rate bonuses throughefficient electrical output. Revenues from the sales of electric energy arerecorded based on output delivered at rates as specified under contract terms.In accordance with EITF 91-6, “Revenue Recognition of Long-Term Power SalesContracts”, the Company recognizes fixed capacity revenues on the straight-linebasis over the life of the agreement. Differences between the actual capacitypayments and the straight-line method are recorded as deferred revenue.Revenues for ancillary and other services are recorded when the services arerendered.  Upon its expiration, or in theevent that the Power Purchase Agreement is terminated prior to its 20-yearterm, the Company would seek to generate energy revenues from the sale ofelectric energy and capacity into the merchant market or under new short- orlong-term power purchase or similar agreements. There can be no assurances asto whether such efforts would be successful (see Note 7).

 

*Use of Estimates*–The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requires theCompany to make estimates and assumptions that affect reported amounts ofassets and liabilities and disclosures of contingent assets and liabilities asof the date of the financial statements, as well as the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

*Income Taxes*– TheCompany is a limited liability company and is treated as a disregarded entityfor tax purposes. Therefore, the Company does not pay income taxes, and noprovision for income taxes has been reflected in the accompanying financialstatements.

 

*Accounts Receivable* - As of December 31,2004, accounts receivable of approximately $4.5 million consists of unpaidinvoices from Williams.  As of December 31,2003, accounts receivable of approximately $4.4 million consists of unpaidinvoices from Williams Energy of approximately $5.5 million and unpaid invoicesfrom Siemens Westinghouse of approximately $193,000, less allowance fordoubtful accounts of approximately $1.3 million.

 

*Other income* – For the year endedDecember 31, 2004, other income consisted of $8,000 from the sale ofexcess fuel compared to $222,000 from Siemens Westinghouse relating to theirpayment of performance guarantees and $10,000 from the sale of excess fuel forthe year ended December 31, 2003.

 

*Reclassifications*–Certain reclassifications have been made to the 2003 and 2002 amounts toconform to the 2004 presentation.

 

49

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**4.**     RECENTAND NEW ACCOUNTING PRONOUNCEMENTS

** **

In January 2003, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. 46 (FIN 46), Consolidationof Variable Interest Entities, an Interpretation of Accounting ResearchBulletin No. 51 (ARB No. 51”).  In October 2003, FASB Staff PositionNo. 46-6, “Effective Date of FIN 46, Consolidation of Variable InterestEntities” deferred the effective date of FIN 46 for variable interests held bya public entity in a variable interest entity (“VIE”) that was created oracquired before February 1, 2003 to the end of the first interim or annualperiod ending after December 15, 2003.  In December 2003, FASBissued FIN 46 (revised December 2003), Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51 (“FIN 46(r)”), which clarified somerequirements and incorporated several staff positions that the Company wasalready required to apply.  In addition, FIN 46(r) deferred the effectivedate for VIEs that were created or acquired before February 1, 2003 andwere not considered special purpose entities (“SPEs”) prior to the issuance ofthe interpretation until the first reporting period ending after March 15,2004.  FIN 46(r) defines a VIE as (i) any entity in which the equityinvestors at risk in such entity do not have the characteristics of acontrolling financial interest, or (ii) any entity that does not havesufficient equity at risk to finance its activities without additionalsubordinated financial support from other parties.  It requires theconsolidation of the VIE by the primary beneficiary.  The adoption of FIN46(r) requires the Company to include disclosures for non SPE VIEs created oracquired on or after February 1, 2003 in its financial statements relatedto the total assets and the maximum exposure to loss resulting from the Company’sinterests in VIEs.  The adoption of FIN 46(r) for VIEs created or acquiredprior to February 1, 2003 did not have an impact on the Company’sfinancial statements.

 

**5.**     BONDSPAYABLE

** **

On June 25, 1999, the Company issued $308.5million of 8.857% senior secured bonds due in 2025 (the Bonds) to qualifiedinstitutional buyers and/or institutional accredited investors, pursuant to atransaction exempt from registration under the Securities Act of 1933 (the Act)in accordance with Rule 144A under the Act. On May 12, 2000, the Companyconsummated an exchange offer whereby the holders of the senior secured bondsexchanged their privately placed senior secured bonds for registered seniorsecured bonds. The net proceeds of the bonds (after deferred financing costs),approximately $305.2 million, were used to fund the construction of the Plantand, during the construction period, for interest payments to bondholders.

 

In an action related to the ratings downgrade of TheWilliams Companies, Inc., S&P lowered its ratings on the Company’s seniorsecured bonds to “BB-” from “BBB-” on July 26, 2002, and placed the ratingon credit watch. On December 10, 2003 S&P lowered its ratings on theCompany’s senior secured bonds to “B+” from “BB-” with a negative outlook. On November 27,2002, Moody’s lowered its ratings on the Company’s senior secured bonds to “B2”from “Ba2”.   The Company does notbelieve that such ratings downgrades will have any other direct or immediateeffect on the Company, as none of the other financing documents or projectcontracts have provisions that are triggered by a reduction of the ratings ofthe bonds.

 

Interest on the Bonds is payable quarterly in arrears.Quarterly principal payments on the Bonds commenced on February 28, 2002.The final maturity date for the Bonds is November 30, 2025.

 

Principal and interest is payable as follows at December 31(in thousands)

 
| **Year**        | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Total** | ** ** |
|-----------------|------------|---------------|------------|--------------|------------|-----------|------------|
|            |       |          |       |         |       |      |       |
| 2005            |       | $             | 7,032      |         | $          | 25,931    |       | $ | 32,963 |   |
| 2006            |       | 7,156         |       | 25,304       |       | 32,460    |       |
| 2007            |       | 9,132         |       | 24,605       |       | 33,737    |       |
| 2008            |       | 11,352        |       | 23,723       |       | 35,075    |       |
| 2009            |       | 9,624         |       | 22,774       |       | 32,398    |       |
| 2010-2025       |       | 251,120       |       | 199,542      |       | 450,662   |       |
| Total  payments |       | $             | 295,416    |         | $          | 321,879   |       | $ | 617,295 |   |

 

*Optional Redemption*– The Bonds are subject to optional redemption by the Company, in whole or inpart, at any time at a redemption price equal to 100% of the principal amountplus accrued interest, together with a premium calculated using a discount rateequal to the interest rate on comparable U.S. Treasury securities plus 50 basispoints.

 

50

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*Mandatory Redemption*– The Bonds are subject to mandatory redemption by the Company, in whole or inpart, at a redemption price equivalent to 100% of the principal amount plusaccrued interest under certain situations pursuant to receiving insuranceproceeds or liquidated damages from certain failures related to the performanceof the facility under the EPC with the Contractor, or in certain instances inwhich payments are received under the Power Purchase Agreement  with Williams under the event of default, atwhich time the Company has terminated the Power Purchase Agreement.

 

Collateral for the Bonds consists of the Plant andrelated facilities, all agreements relating to the operation of the project,the Company’s bank and investment accounts, and all ownership interests in theCompany as prescribed under the trust indenture (the Indenture). The Company isalso bound by a collateral agency agreement (the Collateral Agency Agreement)and an equity subscription agreement (the Equity Subscription Agreement) (seeNote 6).

 

*Indenture*– TheIndenture contains limitations on the Company incurring additional indebtedness;granting liens on the Company’s property; distributing equity and payingsubordinated indebtedness issued by affiliates; entering into transactions withaffiliates; and amending, terminating, or assigning any of the contracts andfundamental changes or disposition of assets.

 

*Collateral Agency Agreement*–The Collateral Agency Agreement requires the Company to fund or provide thefunding for a debt service reserve fund. The Company has therefore entered intoa Debt Service Reserve Letter of Credit Agreement dated June 1, 1999,which commenced on December 28, 2001. The amount required for funding thedebt service reserve fund is equal to six months scheduled payments ofprincipal and interest on the Bonds plus interest on the Debt Service ReserveLetter of Credit. A Letter of Credit issued December 31, 2001 and expiringDecember 31, 2006 in the amount $17.3 million has been obtained fromDresdner Bank AG to fulfill our requirement under the Collateral AgencyAgreement.

 

*Covenants*– TheIndenture, Collateral Agency Agreement, and Equity Subscription Agreementcontain specific covenants and requirements that the Company must meet.  These covenants primarily entail therestriction of payments, reporting requirements, and the creation andmaintenance of debt service reserve and construction- related accounts.

 

**6.**     EQUITYSUBSCRIPTION AGREEMENT

** **

The Company, along with Ironwood, has entered into anEquity Subscription Agreement, pursuant to which Ironwood, agreed to contributeup to approximately $50.1 million to the Company to fund project costs. Thisamount is secured by an acceptable bond issued by Ironwood. Ironwood will fundthese amounts as they come due upon the earlier of (a) expenditure of all fundsthat have been established for construction or (b) the occurrence, and duringthe continuation of, an event of default, as defined under the indenturegoverning its senior secured bonds. A portion of this equity requirement may bemade in the form of affiliate debt, between the Company and Ironwood, whichwould be subordinate to the senior secured bonds.

 

Pursuant to an Equity Subscription Agreement, Ironwoodwas required to contribute up to $50.1 million to the Company to fundconstruction after the bond proceeds had been fully utilized. As of December 31,2004, Ironwood had made net contributions of $38.8 million of equity capital.No further funds are required to be contributed.

 

**7.**     POWERPURCHASE AGREEMENT

 

The Company has entered into a Power PurchaseAgreement with Williams for the sale of all electric energy and capacityproduced by the facility, as well as ancillary and fuel conversion services.The term of the Power Purchase Agreement is 20 years, commencing on December 28,2001, the commercial operation date. Payment obligations to the Company areguaranteed by The Williams Companies, Inc. Such payment obligations under theguarantee are capped at an amount equal to 125% of the sum of the principalamount of the senior secured bonds plus the maximum debt service reserveaccount required balance. The payment obligations of Williams under the PowerPurchase Agreement are guaranteed by The Williams Companies, Inc. At December 31,2004, this amount was approximately $395.3 million.

 

*Fuel Conversion and Other Services*–Williams has the obligation to deliver, on an exclusive basis, all quantitiesof natural gas required by the Plant to generate electricity or ancillaryservices, to start up or shut down 

 

51

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the Plant, and to operate the Plant during any periodother than a start-up, shut-down, or required dispatch by Williams for anyreason.

 

*Concentration of Credit Risk*–Williams currently is the Company’s sole customer for purchases of capacity,ancillary services, and energy, and the Company’s sole source for fuel.Williams’ Energy’s payments under the Power Purchase Agreement are expected toprovide all of the Company’s revenues during the term of the Power PurchaseAgreement. It is uncertain whether the Company would be able to find anotherpurchaser or fuel source on similar terms for the Company’s facility ifWilliams were not performing under the Power Purchase Agreement. Any materialfailure by Williams to make capacity and fuel conversion payments or to supplyfuel under the Power Purchase Agreement would have a severe impact on theCompany’s operations. The payment obligations of Williams under the PowerPurchase Agreement are guaranteed by The Williams Companies, Inc. The paymentobligations of The Williams Companies, Inc. are capped at an amount equal to 125%of the sum of the principal amount of the Company’s senior secured bonds, plusthe maximum debt service reserve account balance.  At December 31, 2004, this amount wasapproximately $395 million.

 

In an action related to the ratings downgrade of TheWilliams Companies, Inc., S&P and Moody’s lowered their ratings on theCompany’s senior secured bonds. On December 10, 2003 S&P lowered itsratings on the Company’s senior secured bonds to “B+” from “BB-” with anegative outlook. On November 27, 2002, Moody’s lowered its ratings on theCompany’s senior secured bonds to “B2” from “Ba2”. The Company does not believethat such ratings downgrades will have any other direct or immediate effect onthe Company, as none of the other financing documents or project contracts haveprovisions that are triggered by a reduction of the ratings of the bonds.

 

Tosatisfy the requirements of the Power Purchase Agreement, on September 20,2002, Citibank, N.A. issued a $35 million Irrevocable Standby Letter of Credit(the “Letter of Credit”) on behalf of Williams. The Letter of Credit does notalter, modify, amend or nullify the guaranty issued by The Williams Companies,Inc. in favor of the Company and is considered to be additional security to thesecurity amounts provided by such guaranty. The Letter of Credit becameeffective on September 20, 2002 and expired upon the close of business on July 10,2003; except that the Letter of Credit will be automatically extended withoutamendment for successive one year periods from the present or any futureexpiration date hereof, unless Citibank, N.A. provides written notice of itselection not to renew the Letter of Credit at least thirty days prior to anysuch expiration date. In July 2004, Citibank, N.A. sent notification thatthe letter of credit will be extended to July 12, 2005. Additionally, in aLetter Agreement dated September 20, 2002, Williams agreed to (a) provideeligible credit support prior to the stated expiration date of the Letter ofCredit and (b) replenish any portion of the Letter of Credit or eligible creditsupport that is drawn, reduced, cashed or redeemed, at any time, with an equalamount of eligible credit support. Within twenty days prior to the expirationof the Letter of Credit and/or any expiration date of eligible credit supportposted by Williams, Williams shall post eligible credit support to the Companyin place of the Letter of Credit and/or any expiring eligible credit supportunless The Williams Companies, Inc. regains and maintains its investment gradestatus, in which case the Letter of Credit or eligible credit support shallautomatically terminate and no additional eligible credit support shall berequired.  The Company and Williams acknowledge that the posting of suchLetter of Credit and Williams’ agreement and performance of the requirements of(a) and (b) as set forth in the immediately preceding sentence shall be in fullsatisfaction of Williams’ obligations contained in Section 19.3 of thePower Purchase Agreement to provide replacement security due to the downgradeof The Williams Companies, Inc. below investment grade status.

 

Sincethe Company depends on The Williams Companies, Inc. and its affiliates for bothrevenues and fuel supply under the Power Purchase Agreement, if The WilliamsCompanies, Inc. and its affiliates were to terminate or default under the PowerPurchase Agreement, there would be a severe negative impact to the Company’scash flow and financial condition which could result in a default on theCompany’s senior secured bonds.  Due to recent declines in pool prices,the Company would expect that if required to seek alternative purchasers of itspower as a result of a default by The Williams Companies, Inc. and itsaffiliates that any such alternate revenues would be substantially below theamounts that would have been otherwise payable pursuant to the Power PurchaseAgreement.  There can be no assurance as to the Company’s ability togenerate sufficient cash flow to cover operating expenses or debt serviceobligations in the absence of a long-term Power Purchase Agreement withWilliams or its affiliates.

 

The Company has ongoing disputes, includingarbitration with Williams, relating to the parties Power PurchaseAgreement.  The arbitration wasbifurcated into two phases, and an award was issued on Phase I on February 3,2004.  The primary issue in Phase Irelated to various aspects of the availability of the facility for the yearended December 31, 2002, including disputes over the amount of anyavailability bonus or penalty.  Phase IIof the 

 

52

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arbitration involves a dispute concerning the proper duration offacility start-ups and shutdowns, including fuel used during start-ups andshutdowns.  While Phase I of thearbitration was limited to billing disputes in 2002, many of the same issuesare disputed between the parties for 2003 billings. (See Note 8)

 

**8.**     COMMITMENTSAND CONTINGENCIES

** **

*Maintenance*– TheCompany, as assignee of AES Ironwood, Inc., has entered into the MaintenanceProgram Parts, Shop Repairs and Scheduled Outage TFA Services Contract, datedas of September 23, 1998, with Siemens Westinghouse by which SiemensWestinghouse will provide the Company with, among other things, combustionturbine parts, shop repairs and scheduled outage technical field assistanceservices. The Contractor provided the Company with specific combustion turbinemaintenance services and spare parts for an initial term of between eight andten years under a maintenance service agreement. The fees assessed by SiemensWestinghouse will be based on the number of Equivalent Base Load Hoursaccumulated by the applicable Combustion Turbine as adjusted forinflation.  The fees to SiemensWestinghouse are capitalized when paid. Each outage is analyzed and thecumulative fees and other costs related to the outage are capitalized as partof the facility or expensed accordingly.

 

The maintenance services agreement became effective onthe date of execution and unless terminated early, must terminate upon completionof shop repairs performed by Siemens Westinghouse following the eighthscheduled outage of the applicable combustion turbine or 10 years from initialsynchronization of the applicable combustion turbine, whichever occurs first.

 

Additionally, a significant monthly expenditure is forpayment of the Company’s long term service agreement with Siemens Westinghouse.This agreement provides that the Company pays approximately $400 per gasturbine per equivalent operating hour, adjusted for inflation. In the event theCompany is not required to dispatch the facility, there is no charge. Whileoperating at base load, the monthly payment for the long term service agreementcould be as much as $450,000. The total of these payments was approximately$1.8 million, $2.9 million and $4.8 million for the years ended December 31,2004, 2003 and 2002, respectively, which included true-ups for two plannedmaintenance outages in 2003 and 2002. These payments are included withProperty, Plant and Equipment until an outage occurs. At that time anallocation between additions to Property, Plant and Equipment and OperatingExpense is performed. The allocation is determined by the value of newcapitalizable parts received and amounts expended with no future value.

 

*Water Supply*– TheCompany entered into a contract with the City of Lebanon Authority (the “Authority”)for the purchase of 50 percent of the water use of the Plant. The contract hasa term of 25 years. Costs associated with the use of water by the Plant underthis contract are based on gallons used per day at prices specified under thecontract terms. The Company also entered into an agreement with Pennsy Supply,Inc, which will provide the remaining 50 percent of the water use of the Plant.The total of these payments was approximately $82,000, $70,000 and $83,000 forthe years ended December 31, 2004, 2003 and 2002, respectively.

 

*Interconnection Agreement*–The Company entered into an interconnection agreement with GPU Energy (“GPU”)to transmit the electricity generated by the Plant to the transmission grid sothat it may be sold as prescribed under the Power Purchase Agreement. Theagreement is in effect for the life of the Plant yet may be terminated bymutual consent of both GPU and the Company under certain circumstances asdetailed in the agreement. Costs associated with the agreement are based onelectricity transmitted via GPU at a variable price, the PJM Tariff, as chargedby GPU to the Company, which is comprised of both service cost and assetrecovery cost, as determined by GPU and approved by the Federal EnergyRegulatory Committee. The Company is obligated to pay approximately $214,000per year as a maintenance fee for the interconnection equipment. The term ofthis agreement is twenty-five years. The total of these payments wasapproximately $214,000, $214,000 and $214,000 for the years ended December 31,2004, 2003 and 2002, respectively.

 

*Power Purchase Agreement*TheCompany has ongoing disputes, including arbitration with Williams, relating tothe parties Power Purchase Agreement. The arbitration was bifurcated into two phases, and an award was issuedon Phase I on February 3, 2004.  Theprimary issue in Phase I related to various aspects of the availability of thefacility for the year ended December 31, 2002, including disputes over theamount of any availability bonus or penalty. Phase II of the arbitration involves a dispute concerning the properduration of facility start-ups and shutdowns, including fuel used duringstart-ups and shutdowns.  While Phase Iof the arbitration was limited to billing disputes in 2002, many of the sameissues are disputed between the parties for 2003 billings.

 

53

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The arbitral panel’s award on Phase I of thearbitration found that Williams had misapplied the applicable rules ofPennsylvania – New Jersey - Maryland Interconnection, L.L.C. (“PJM”) in thebilling dispute with the Company over the availability of the facility.  The panel declined, however, to decide thefacility’s availability during 43 disputed maintenance events.  Instead, it encouraged the parties to reach amutual resolution of the disputed events by applying the correct PJM rule and,failing mutual agreement, to submit the dispute to a third party engineer forresolution.  The parties are currentlydiscussing possible resolution of the disputed events, and anticipate submittingany events that cannot be resolved by mutual agreement to a third party.  Until the matter is fully resolved, theavailability of the facility, and certain payments that are calculated based onavailability, cannot be determined. During 2004 Williams paid approximately $2.2 million in respect ofavailability bonus for 2002 and 2003. Approximately $1.8 million has beenrecorded in operating revenues and approximately $415,000 has been recorded asa reduction of bad debt expense, included in general and administrative costs.The parties are continuing to resolve the outstanding availability issues andexpect resolution during 2005.

 

Also as a result of the panel’s Phase I Award, theCompany will begin pre-funding a cash account on a quarterly basis to reflectthe maximum amount of a fuel conversion volume rebate that might be payable toWilliams if the facility operates the requisite number of hours to earn themaximum rebate available under the Power Purchase Agreement.  The maximum theoretical annual amount of thefuel conversion volume rebate is $1.7 million, but the account will not befully funded during the course of the year if the facility is not operated asufficient number of hours to achieve the maximum fuel conversion volumerebate.  Depending on the amount offacility operation, the Company may be entitled to withdraw some of the fundsdeposited into the account during the second half of its fiscal year.  On April 1, 2004, the Company deposited$71,000. This amount is included with restricted cash. For the twelve monthsended December 31, 2004, the Company has determined that no additionalliability has occurred and there is no liability for fuel conversion volumerebate for the entire year ended December 31, 2004. The funds will be leftin the restricted account in anticipation of any liability incurred during thefirst quarter of 2005. The Company will reassess this funding requirement foreach subsequent quarter to determine the liability. The funding will beaccomplished by transferring funds from an unrestricted cash account to the restrictedaccount.

 

On March 12, 2004 the parties settled Phase II ofthe arbitration between the Company and Williams, which involved Williams’claims that the duration of start-ups and shutdowns should be shortened, with acorresponding reduction in the volume of fuel consumed during suchoperations.  The settlement resolves andreleases, without any payment by the Company, Williams’ claim that it should bereimbursed retroactively to the date of commercial operation for excess fuelallegedly consumed during start-ups and shutdowns.  An agreed order of dismissal has beensubmitted requesting the arbitral panel to dismiss Phase II of the arbitrationwith prejudice.  The settlement of PhaseII has no impact on Phase I of the arbitration. The parties continue to negotiate in an effort to settle issues leftunresolved by the Award in Phase I.

 

**9.**     RELATEDPARTY TRANSACTIONS

 

Effective June 1999, the Company entered into a27-year development and construction management agreement with Prescott thatprovides certain support services required by the Company for the developmentand construction of the Plant. Under this agreement Prescott also providesoperations management services for the Plant. Payments for operationsmanagement services are approximately $400,000 per month, adjusted annually forinflation.

 

During the construction period, the constructionmanagement fees were paid to Prescott from the investment balances or fromparent funding. For the years ended December 31, 2004, 2003 and 2002approximately $5.2 million, $5.1 million and $5.0 million in management feeswere incurred and charged to operating expenses.

 

Accounts receivable from parent and affiliatesgenerally represents charges for certain AES projects that the Company has paidfor and invoiced to the Company’s parent and affiliates. Accounts payable aregenerally amounts owed for shared services to the Company’s parent andaffiliates. Accounts payable to AES and affiliates as of December 31, 2004and 2003 amounted to $2.1 million and $2.1 million, respectively.

 

During 2003, emission credits, included in otherassets, were sold to AES Eastern Energy, L.P., an indirect wholly ownedsubsidiary of The AES Corporation at a fair market price for a net loss of $431thousand.

 

The Company is the primary source of funding for theAES Ironwood Foundation, a non-profit organization founded to provide socialresponsibility to the local communities. The Company does not consolidate thefinancial statements of the AES Ironwood Foundation into its financial statements.The Company’s discretionary funding for 

 

54

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theyears ended December 31, 2004, December 31, 2003 and December 31,2002 were approximately $112,000, $107,000, and $376,000 respectively

 

**10.**  FAIRVALUE OF FINANCIAL INSTRUMENTS

** **

The estimated fair values of the Company’s financialinstruments have been determined using available market information. Theestimates are not necessarily indicative of the amounts the Company couldrealize in a current market exchange. The use of different market assumptionsand/or estimation methodologies may have a material effect on the estimatedfair value amounts.

 

The Bonds had a carrying amount of $295.4 million witha fair value of approximately $328.9 million at December 31, 2004 versus acarrying amount of $301.8 million with a fair value of approximately $325.9million at December 31, 2003. The estimated fair value of the Bonds at December 31,2004 and 2003 is based on quoted market prices of similarly rated bonds withsimilar maturities.

 

**11.**  SEGMENTINFORMATION

** **

Under the provisions of Statement of FinancialAccounting Standards No. 131, *DisclosureAbout Segments of an Enterprise and Related Information*, the Company’sbusiness is expected to be operated as one reportable segment, with operatingincome or loss being the measure of performance evaluated by the chiefoperating decision-maker. As described in Notes 1 and 7, the Company’s primarycustomer is Williams, which provides all of the Company’s operating revenues duringthe term of the Power Purchase Agreement.

 

**12.**  ASSETHELD FOR SALE

** **

During2002 the Company commenced installation of an auxiliary boiler to increase theefficiency of the facility. The arbitration settlement of March 2003determined that the Company has no obligation to install the auxiliary boileras there would be no economic benefit produced by its installation. On July 24,2003, the Company entered into a contract with a sales assistance company tofacilitate the sale of the boiler. As of September 2003 total costs of theauxiliary boiler were approximately $886,000. The fair value less selling costsof the auxiliary boiler was estimated to be approximately $450,000 and includedin asset held for sale. Approximately $436,000 was written off in 2003 andincluded in loss on disposal of assets in the statement of operations for theyear ended December 31, 2003.

 

InNovember 2004 the fair value less selling costs of the auxiliary boilerwas re-evaluated to be $100,000. Approximately $350,000 was written off in 2004and is included in loss on disposal of assets in the statement of operationsfor the year ended December 31, 2004.

 

TheCompany believes that the asset will be sold during 2005.

 

55

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**SELECTED QUARTERLY FINANCIALDATA    (UNAUDITED)**

 

The following table summarizes the unaudited quarterlystatements of operations for the Company for the years ended December 31,2004 and 2003. Certain prior year amounts have been reclassified on thefinancial statements to conform with the 2004 presentation.

 

AESIronwood, L.L.C.

QuartersEnded December 31, 2004, September 30, 2004, June 30, 2004, March 31,2004

(dollarsin thousands)

 
| ** **                        | ** ** | **Quarter Ended 2004** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **December 31**   | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
| OPERATING REVENUES                |       |                   |       |   |   |   |   |   |   |
| Energy                            |       | $                      | 12,985     |   | $ | 13,878 |   | $ | 13,304 |   | $ | 13,964 |   |
| OPERATING  EXPENSES               |       |                   |       |   |   |   |   |   |   |
| Operating  expenses               |       | 4,783                  |       | 5,507 |   | 4,990 |   | 4,833 |   |
| General and  administrative costs |       | 1,463                  |       | 1,762 |   | 1,943 |   | 2,024 |   |
| Loss on  disposal of assets       |       | 357                    |       | — |   | — |   | — |   |
| OPERATING  INCOME                 |       | 6,382                  |       | 6,609 |   | 6,371 |   | 7,107 |   |
|                              |       |                   |       |   |   |   |   |   |   |
| OTHER  INCOME/EXPENSE             |       |                   |       |   |   |   |   |   |   |
| Other Income                      |       | —                 |       | 8 |   | 1 |   | 6 |   |
| Interest  income                  |       | 115                    |       | 33 |   | 19 |   | 16 |   |
| Interest  expense                 |       | (6,565                 | )          | (6,600 | ) | (6,635 | ) | (6,670 | ) |
| NET (LOSS)  INCOME                |       | $                      | (68        | ) | $ | 50 |   | $ | (244 | ) | $ | 459 |   |

 

 

AESIronwood, L.L.C.

QuartersEnded December 31, 2003, September 30, 2003, June 30, 2003, March 31,2003

(dollarsin thousands)

 
| ** **                        | ** ** | **Quarter Ended 2003** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **December 31**   | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
| OPERATING REVENUES                |       |                   |       |   |   |   |   |   |   |
| Energy (1)                        |       | $                      | 12,150     |   | $ | 13,619 |   | $ | 12,209 |   | $ | 12,077 |   |
| OPERATING  EXPENSES               |       |                   |       |   |   |   |   |   |   |
| Operating  expenses               |       | 4,782                  |       | 5,451 |   | 5,699 |   | 5,583 |   |
| General and  administrative costs |       | 2,809                  |       | 1,913 |   | 2,333 |   | 2,199 |   |
| Loss on  disposal of assets       |       | 164                    |       | 814 |   | — |   | — |   |
| OPERATING  INCOME                 |       | 4,395                  |       | 5,441 |   | 4,177 |   | 4,295 |   |
|                              |       |                   |       |   |   |   |   |   |   |
| OTHER  INCOME/EXPENSE             |       |                   |       |   |   |   |   |   |   |
| Other Income                      |       | 12                     |       | 2 |   | 6 |   | 233 |   |
| Interest  income                  |       | 14                     |       | 16 |   | 33 |   | 21 |   |
| Interest  expense                 |       | (6,699                 | )          | (6,726 | ) | (6,753 | ) | (6,778 | ) |
| NET (LOSS)  INCOME                |       | $                      | (2,278     | ) | $ | (1,267 | ) | $ | (2,537 | ) | $ | (2,229 | ) |
|                                   |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 9.****                  Changesin and Disagreements With Accountants on Accounting and Financial Disclosure.**

 

None.

 

**ITEM 9A.**               Controls andProcedures

 

*Evaluation of Disclosure Controls andProcedures.*  We carried out an evaluation, underthe supervision and with the participation of our management, including thechief executive officer (“CEO”) and chief financial officer (“CFO”), of theeffectiveness of our “disclosure controls and procedures” (as defined in theSecurities Exchange Act of 1934 Rules 13a-15(e) and 15-d-15 (e) asrequired by paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15) as of December 31,2004.  The Company’s management, including the CEO and CFO, is engaged ina comprehensive effort to review, evaluate and improve our controls; however,management does not expect that our disclosure controls or our internalcontrols over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met.

 

Based upon the controls evaluation performed,the CEO and CFO have concluded that as of December 31, 2004, ourdisclosure controls and procedures were effective to provide reasonableassurance that material information relating to us and our consolidatedsubsidiaries is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.

 

*Changes in Internal Controls*. In the course of our evaluation of disclosure controls and procedures,management considered certain internal control areas in which the Company hasmade and are continuing to make changes to improve and enhance controls. Based upon that evaluation, the CEO and CFO concluded that there were nochanges in our internal controls over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rules13a-15 or 15d-15 that occurred during the fourth quarter ended December 31,2004, that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

*Compliance with Section 404 of theSarbanes Oxley Act of 2002*.  Beginning with theyear ending December 31, 2006, Section 404 of the Sarbanes-Oxley Actof 2002 will require us to include an internal control report of managementwith our annual report on Form 10-K.  The internal control report mustcontain (1) a statement of management’s responsibility for establishing andmaintaining adequate internal controls over financial reporting for ourCompany, (2) a statement identifying the framework used by management toconduct the required evaluation of the effectiveness of our internal controlsover financial reporting, (3) management’s assessment of the effectiveness ofour internal controls over financial reporting as of the end of our most recentfiscal year, including a statement as to whether or not our internal controlsover financial reporting are effective, and (4) a statement that ourindependent auditors have issued an attestation report on management’sassessment of our internal controls over financial reporting.

 

Management developed a comprehensive plan inorder to achieve compliance with Section 404 within the prescribed periodand to review, evaluate and improve the design and effectiveness of ourcontrols and procedures on an on-going basis. The comprehensive compliance plan includes (1) documentation andassessment of the adequacy of our internal controls over financial reporting,(2) remediation of control weaknesses, (3) validation through testing thatcontrols are functioning as documented and (4) implementation of a continuousreporting and improvement process for internal controls over financialreporting.  As a result of this initiative, the Company has made and willcontinue to make changes from time to time in our internal controls overfinancial reporting.

 

**PART III**

**ITEM10.**               Directorsand Executive Officers of the Registrant

** **

Not applicable pursuant to General Instruction I ofForm 10-K.

 

**ITEM11.**               ExecutiveCompensation

** **

Not applicable pursuant to General Instruction I ofForm 10-K.

 

57

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**ITEM12.**               SecurityOwnership of Certain Beneficial Owners and Management

** **

Not applicable pursuant to General Instruction I ofForm 10-K.

 

**ITEM13.**               CertainRelationships And Related Transactions

** **

Not applicable pursuant to General Instruction I ofForm 10-K.

 

**ITEM14.**               PRINCIPALACCOUNTANT FEES AND SERVICES

** **

**AuditFees**

 

Theaggregate fees billed for each of the last two fiscal years for professionalservices rendered by the principal accountant for the audit of the registrant’sannual financial statements included on Form 10-K and review of the financialstatements included in the registrant’s Form 10-Q (17 CFR 249.308a) or servicesthat are normally provided by the accountant in connection with statutory andregulatory filings or engagements for those fiscal years were approximately$212,000 and $208,500 for the years ended December 31, 2004 and 2003,respectively.

 

**Audit-Related,Tax and All Other Fees**

 

Otherthan the audit fees described above, there were no other fees paid to theprincipal accountants for the years ended December 31, 2004 and 2003,respectively.

 

**Pre-Approvalof Services Provided by Deloitte & Touche**

 

Theregistrant’s board of directors serves as its audit committee. All audit andnon-audit services to be provided to the registrant by its principal accountantare approved by the board of directors. A pre-approval policy is in place withThe AES Corporation Audit Committee.

 

**PART IV**

** **

**ITEM15.**               Exhibitsand Financial Statement Schedules

** **

a)     The followingdocuments are filed as part of this report:

 

1.             FinancialStatements Filed:

 

Please refer to Item 8 - Financial Statements and Supplementary Data.

 

2.             FinancialStatement Schedules Filed: None

 

Please refer to Item 8 - Financial Statements and Supplementary Data.

 

3.             ExhibitsFiled:

 

Unless otherwise indicated, all exhibits to this Form10-K are incorporated herein by reference from the identically numbered exhibitof AES Ironwood, L.L.C.’s Registration Statement on Form S-4 (333-91391).

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                 |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| 3                   |       | Amended and Restated Limited Liability  Company Agreement, dated as of October 4, 1999, of our Company.                                    |
|                |       |                                                                                                                                            |
| 4.1                 |       | Indenture and the First Supplemental  Indenture, dated as of June 1, 1999, by and among our Company, the  Trustee and the Depositary Bank. |

 

58

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| 4.2    |   | Collateral Agency and Intercreditor  Agreement, dated as of June 1, 1999, by and among our Company, the  Trustee, the Collateral Agent, the DSR LOC Provider, the CP LOC Provider and  the Depositary Bank. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                             |
| 4.3    |   | Debt Service Reserve Letter of Credit and  Reimbursement Agreement, dated as of June 1, 1999, by and among our  Company, the DSR LOC Provider and the Banks named therein.                                  |
|   |   |                                                                                                                                                                                                             |
| 4.4    |   | Construction Period Letter of Credit and  Reimbursement Agreement, dated as of June 1, 1999, by and among our  Company, the CP LOC Provider and the Banks named therein.                                    |
|   |   |                                                                                                                                                                                                             |
| 4.5    |   | Global Bonds, dated June 25, 1999,  evidencing 8.857% Senior Secured Bonds of our Company due 2025 in the  principal amount of $308,500,000.                                                                |
|   |   |                                                                                                                                                                                                             |
| 4.6    |   | Equity Subscription Agreement, dated as of June 1,  1999, by and among our Company, AES Ironwood and the Collateral Agent.                                                                                  |
|   |   |                                                                                                                                                                                                             |
| 4.7    |   | Security Agreement, dated as of June 1,  1999, by and between our Company and the Collateral Agent.                                                                                                         |
|   |   |                                                                                                                                                                                                             |
| 4.8    |   | Pledge and Security Agreement, dated as of June 1,  1999, by and between AES Ironwood and the Collateral Agent.                                                                                             |
|   |   |                                                                                                                                                                                                             |
| 4.9    |   | Consent to Assignment, dated as of June 1,  1999, by and between the Power Purchaser and the Collateral Agent, and  consented to by our Company.                                                            |
|   |   |                                                                                                                                                                                                             |
| 4.10   |   | Consent to Assignment, dated as of June 1,  1999, by and between the PPA Guarantor and our Company, and consented to by  our Company.                                                                       |
|   |   |                                                                                                                                                                                                             |
| 4.11   |   | Consent to Assignment, dated as of June 1,  1999, by and between the Contractor and the Collateral Agent, and consented  to by our Company (with respect to the construction agreement).                    |
|   |   |                                                                                                                                                                                                             |
| 4.12   |   | Consent to Assignment, dated as of June 1,  1999, by and between the Contractor and the Collateral Agent, and consented  to by our Company (with respect to the Maintenance Services Agreement).            |
|   |   |                                                                                                                                                                                                             |
| 4.13   |   | Consent to Assignment, dated as of June 1,  1999, by and between Siemens Corporation and the Collateral Agent, and  consented to by our Company.                                                            |
|   |   |                                                                                                                                                                                                             |
| 4.14   |   | Consent to Assignment, dated as of June 1,  1999, by and between Prescott and the Collateral Agent, and consented to by  our Company.                                                                       |
|   |   |                                                                                                                                                                                                             |
| 4.15   |   | Consent to Assignment, dated as of June 1,  1999, by and between Metropolitan Edison Company d/b/a GPU Energy and the  Collateral Agent, and consented to by our Company.                                   |
|   |   |                                                                                                                                                                                                             |
| 4.16   |   | Consent to Assignment, dated as of June 1,  1999, by and between City of Lebanon Authority and the Collateral Agent, and  consented to by our Company.                                                      |
|   |   |                                                                                                                                                                                                             |
| 4.17   |   | Consent to Assignment, dated as of June 1,  1999, by and between Pennsy Supply, Inc. and the Collateral Agent, and  consented to by our Company.                                                            |
|   |   |                                                                                                                                                                                                             |
| 4.18   |   | Assignment and Assumption Agreement, dated June 25,  1999, by and between AES Ironwood, Inc. and AES Ironwood, L.L.C. (with  respect to the construction agreement).                                        |
|   |   |                                                                                                                                                                                                             |
| 4.19   |   | Assignment and Assumption Agreement, dated June 25,  1999, by and between AES Ironwood, Inc. and AES Ironwood, L.L.C. (with  respect to the Maintenance Services Agreement).                                |

 

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| 10.1   |   | Guaranty, dated as of June 18, 1999,  by and between the PPA Guarantor and our Company.                                                                                                                                                                                                                                                                                                                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2   |   | Amended and Restated Power Purchase  Agreement, dated as of February 5, 1999, and Amendment No. 1 to Amended  and Restated Power Purchase Agreement, dated as of June 18, 1999,  between our Company and the Power Purchaser. (Portions of this exhibit have  been omitted pursuant to a request for confidential treatment.)                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3   |   | Engineering, Procurement and Construction  Services Agreement, dated as of September 23, 1998 (the “EPC Contract”),  as amended, by and between our Company and the Contractor. (Portions of this  exhibit have been omitted pursuant to a request for confidential treatment.)                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4   |   | Guaranty, dated as of September 23,  1998, by and between Siemens Corporation and our Company.                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5   |   | Maintenance Program Parts, Shop Repairs and  Scheduled Outage TFA Services Contract, dated as of September 23, 1998,  and Amendment No. 1 to Maintenance Program Parts, Shop Repairs and Scheduled  Outage TFA Services Contract, dated as of January 13, 1999 (the “Maintenance  Services Agreement”), by and between our Company and the Contractor.  (Portions of this exhibit have been omitted pursuant to a request for  confidential treatment.) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6   |   | Development and Operations Services  Agreement, dated as of June 1, 1999, by and between our Company and  Prescott.                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7   |   | Effluent Supply Agreement, dated as of March 3,  1998, by and between our Company and City of Lebanon Authority.                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8   |   | Generation Facility Transmission  Interconnection Agreement, dated as of March 23, 1999, by and between  our Company and Metropolitan Edison Company d/b/a GPU Energy.                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.9   |   | Agreement Relating to Real Estate, dated as  of October 23, 1998, by and between our Company and Pennsy Supply, Inc.                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.10  |   | Easements and Right of Access Agreement,  dated as of April 15, 1999, by and between our Company and Pennsy  Supply, Inc.                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11  |   | Letter Agreement, dated September 20,  2002 between the Company and Williams Marketing and Trading Company. **                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12  |   | Irrevocable Standby Letter of Credit Issued  by Citibank N.A. **                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 12     |   | Computation of Earnings/(Deficiency) to  Fixed Charges *                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.1   |   | Certification pursuant to Section 302  of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2   |   | Certification pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32     |   | Certification pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                                                                                                                                                                    |

 

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*              Filedherewith.

**           Previouslyfiled as an exhibit to the Company’s current report on Form 8-K filed in September 20,2002 and incorporated by reference herein.

 

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**Supplementary Information to be Furnished With Reportsfiled Pursuant to**

**Section 15(d) of the Act by Registrants WhichHave Not Registered**

**Securities Pursuant to Section 12 of the Act.**

** **

No annual report or proxy materials have been sent tosecurity holders during the fiscal year ended December 31, 2004. No annualreport or proxy materials will be sent to security holders subsequent to thefiling of this annual report on Form 10-K.

 

61

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**SIGNATURES**

** **

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| ** ** | **AES  IRONWOOD, L.L.C.**        |
|------------|----------------------------------|
| ** ** | ** **                       |
| ** ** | ** **                       |
|       |   /s/  A. W. Bergeron  |   |
|       | By:                              | A. W. Bergeron |
|       | Title:                           | President |
|       |                             |
|       |                             |
|       |   /s/  Michael Carlson |   |
|       | By:                              | Michael Carlson |
|       | Title:                           | Chief Financial  Officer |
|            |                                  |  |  |

 

 

Date:       March 24,2005

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 

 
| **Signature**         | ** ** | **Title** | ** ** | **Date**            |
|-----------------------|------------|-----------|------------|---------------------|
|                  |       |      |       |                |
| /s/ A. W. Bergeron    |       | Director  |       | March 24, 2005 |
| A. W. Bergeron        |       |      |       |                |
|                  |       |      |       |                |
| /s/ Edward P. Convery |       | Director  |       | March 30, 2005 |
| Edward P. Convery     |       |      |       |                |
|                  |       |      |       |                |
| /s/ Dan Rothaupt      |       | Director  |       | March 24, 2005 |
| Dan Rothaupt          |       |      |       |                |

 

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