**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, 2003**                                                                                                                                                                                                                                                                           |
|           |                                                                                                                                                                                                                                                                                                                      |
| **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.**

(Exactname of Registrant as specified 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 whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports)and (2) has been subject to such filing requirements for the past 90 days.Yes  ý   No  o

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K ý

 

As of June 30, 2003, the lastbusiness day of the Registrant’s most recently completed second fiscal quarter,and as of March 30, 2004, AES Ironwood, L.L.C. had one membership interestoutstanding, which was held by AES Ironwood, Inc., the Company’s parent and awholly owned subsidiary of The AES Corporation.

 

**Allof the Registrant’s equity securities are indirectly owned by The AESCorporation.  Registrant meets theconditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and istherefore filing this Form 10-K with the reduced disclosure format authorizedby General Instruction I of Form 10-K.**

 

**DOCUMENTS INCORPORATED 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, Financial Statement Schedules,  and Reports on Form 8-K |   |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Some of thestatements in this Form 10-K, as well as statements made by us in periodicpress releases and other public communications, constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995**.**Certain, but not necessarily all, of such forward-looking statements can beidentified by the use of forward-looking terminology, such as “believes,”“estimates,” “plans,” “projects,” “expects,” “may,” “will,” “should,”“approximately,” or “anticipates” or the negative thereof or other variationsthereof or comparable terminology, or by discussion of strategies, each ofwhich involves risks and uncertainties**.** We have based these forward-lookingstatements on our current expectations and projections about future eventsbased upon our knowledge of facts as of the date of this Form 10-K and ourassumptions about future events**.**

 

All statementsherein other than of historical facts, including those regarding market trends,our financial position, business strategy, projected plans and objectives ofmanagement for future operations of the facility, are forward-lookingstatements**.**Such forward-looking statements involve known and unknown risks, uncertaintiesand other 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, thefollowing:

 

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

 

•                  the financialcondition of third parties on which we depend, including in particular, Williams Power Company, Inc., formerly knownas Williams Energy Marketing & Trading Company (“Williams”), as thepower purchaser and fuel supplier under the power purchase agreement, and TheWilliams Companies, Inc., as the guarantor of performance under the powerpurchase 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;

 

•                  the continuedperformance of Williams under the power purchase agreement;

 

•                  the ability ofThe Williams Companies, Inc**.** or its affiliates to avoid a defaultunder the power purchase agreement by continuing to provide adequate securityto supplement or replace their guarantee of Williams’  performance under the power purchase agreement;

 

•                  our ability tofind a replacement power purchaser on favorable or reasonable terms, ifnecessary;

 

•                  an adequatemerchant 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

 

•                  terrorists actsand adverse reactions to United States anti-terrorism activities.

 

We have noobligation to publicly update or revise any forward-looking statement, whetheras a result of new information, future events or otherwise**.**

 

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**PART I**

 

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

 

**General**

 

We are aDelaware 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 meanAES Ironwood, L.L.C.  We commencedcommercial operations on December 28, 2001**.** Since the commercial operation date, oursole business is the ownership and operation of this facility**.**

 

We own theland on which our facility is located**.** Our facility was designed, engineered,procured and constructed for us by Siemens Westinghouse Power Corporation(Siemens Westinghouse) on a fixed-price, turnkey basis under the constructionagreement**.**Siemens Westinghouse is also providing combustion turbine maintenance servicesand spare parts for our facility for an initial term of between eight and tenyears, depending on the timing of scheduled outages, under a maintenanceservices agreement**.** AES Prescott, L**.**L**.**C**.** (AES Prescott), an indirectwholly-owned subsidiary of The AES Corporation, provides development,construction management and operations and maintenance services for the projectunder an operations agreement**.**

 

We enteredinto a power purchase agreement for a term of 20 years under which Williams iscommitted to purchase all of the net capacity, fuel conversion and ancillaryservices of our facility**.** Net capacity is the maximum amount ofelectricity generated by our facility net of electricity used at our facility**.**Fuel conversion services consist of the combustion of natural gas in order togenerate electric energy**.** Ancillary services consist of servicesnecessary to support 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 the term of the power purchaseagreement, substantially all of our revenues will be derived from payments madeby Williams under the power purchase agreement**.**

 

**OrganizationalStructure**

 

All of ourequity interests are owned by AES Ironwood, Inc**.**, a wholly-owned subsidiaryof The AES Corporation.  The AESCorporation has provided funds to AES Ironwood, Inc**.** so that AES Ironwood, Inc**.**can make equity contributions to us to fund project costs**.**  Under an Equity Subscription Agreement dated June 1, 1999, withAES Ironwood, Inc., these contributions are limited to $50.1 million. As ofDecember 31, 2003, AES Ironwood, Inc. had made net contributions to us of $38.8million. Approximately $9.1 million of the remaining contribution wassupported by a surety bond until June 25, 2002, when the surety bondexpired.  At that time the surety bondwas replaced by an acceptable letter of credit in the amount of $9.1million.  The need for the letter ofcredit ceased with the granting of final acceptance on March 12, 2003.  We notified the collateral agent and theyhave released us of this requirement. On March 12, 2003, final acceptance under the agreement was granted andan Officer’s Certificate has been submitted to the Collateral Agent indicatingthat the facility has been fully funded and no further contribution will berequired.  AES Ironwood, Inc**.**currently has no operations outside of its activities in connection with ourproject and does not anticipate undertaking any operations not associated withour project**.** AES Ironwood, Inc**.** has no assets other than its membershipinterests in us and AES Prescott**.** AES Prescott has no operations outside ofits activities in connection with our project**.** Under a services agreement,The AES Corporation supplies to AES Prescott all of the personnel and servicesnecessary for AES Prescott to comply with its obligations under the operationsagreement**.**  As of December 31, 2003, The AES Corporationprovided 27 employees to our facility.

 

TheAES Corporation is a leading global power company, with 2003 sales of $8.4 billion.AES delivers 45,000 megawatts of electricity to customers in 27 countriesthrough 116 power facilities and 17 distribution companies. Its 30,000 peopleare committed to operational excellence and safely meeting the world’s growingpower needs. Approximately 26% of AES’s revenues come from businesses in NorthAmerica, 18% from the Caribbean, 39% from South America, 11% from Europe andAfrica, and 6% from Asia.

 

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The followingorganizational chart illustrates the relationship among our company, AESIronwood, Inc**.**, AES Prescott and The AES Corporation:

 
|   | The AES Corporation              |   |
|--------|----------------------------------|--------|
|   |                             |   |   |
|   |                             |   |   |
|   | AES Ironwood, Inc**.**           |   |
|   |                             |   |   |
|   |                             |   |   |   |   |
|   |                             |   |   |   |   |
|   | AES Ironwood, L**.**L**.**C**.** |   |   |   | AES Prescott, L**.**L**.**C**.** |   |
|        |                                  |        |  |  |  |  |  |  |  |

 

Our principalexecutive offices are located at 305 Prescott Road, Lebanon, Pennsylvania 17042**.**Our telephone number is (717) 228-1328**.**

 

**Developments Relating to Williams**

 

Under thepower purchase agreement, in the event that S&P or Moody’s rate the longterm senior unsecured debt of The Williams Companies, Inc**.** lower than investmentgrade, The Williams Companies, Inc**.**, or an affiliate thereof, is required toreplace The Williams Companies, Inc**.** guarantee with an alternative securitythat is acceptable to the Company**.** According to published sources, on July23, 2002, S&P lowered the long term senior unsecured debt rating of TheWilliams Companies, Inc**.** to “BB-” from “BBB-”, and further loweredsuch rating to “B” on July 25, 2002**.**On May 23, 2003 S&P upgraded therating to “B+” with a negative outlook.  According to published sources, on July 24, 2002, Moody’s lowered thelong-term senior unsecured debt rating of The Williams Companies, Inc**.**to “B1” from “Baa3**.**” According to published sources, this rating was further lowered onNovember 22, 2002 to “Caa1” by Moody’s, and then upgraded to “B3” on June 4,2003.  Accordingly, The WilliamsCompanies, Inc**.**’s long term senior unsecured debt is currently rated belowinvestment grade by both S&P and Moody’s**.**

 

In an actionrelated to the ratings downgrade of The Williams Companies, Inc., S&Plowered its ratings on the Company’s senior secured bonds to “BB-” from “BBB-”on July 26, 2002, and placed the rating on credit watch. On December 10, 2003S&P lowered its ratings on the Company’s senior secured bonds to “B+” from“BB-” with a negative outlook. On November 27, 2002, Moody’s lowered itsratings on the Company’s senior secured bonds to “B2” from “Ba2”.   The Company does not believe that suchratings downgrades will have any other direct or immediate effect on theCompany, as none of the other financing documents or project contracts haveprovisions that are triggered by a reduction 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. On June 13, 2003, Citibank, N.A. sent notification that the letter ofcredit will be extended to July 12, 2004. Additionally, in a Letter Agreementdated September 20, 2002, Williams agreed to (a) provide eligible creditsupport prior to the stated expiration date of the Letter of Credit and (b)replenish any portion of the Letter of Credit or eligible credit support thatis drawn, reduced, cashed or redeemed, at any time, with an equal amount ofeligible 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 

 

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shall post eligible creditsupport to the Company in place of the Letter of Credit and/or any expiringeligible credit support unless The Williams Companies, Inc. regains andmaintains its investment grade status, in which case the Letter of Credit oreligible credit support shall automatically terminate and no additionaleligible credit support shall be required.  The Company and Williamsacknowledge that the posting of such Letter of Credit and Williams’ agreementand performance of the requirements of (a) and (b) as set forth in theimmediately 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.

 

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.  There canbe no assurance as to the Company’s ability to generate sufficient cash flow tocover operating expenses or debt service obligations in the absence of along-term power purchase agreement with Williams or its affiliates.

 

For the twelve months endedDecember 31, 2003, the Company has invoiced Williams approximately $51.4million in respect of fixed payments, fuel conversion services and ancillaryservices.  Approximately $50.1 millionhas been recognized as revenue and approximately $1.4 million has been deferredconsistent with the Company’s revenue recognition policy discussed in note 3 tothe financial statements.

 

The Companyhas ongoing disputes, including arbitration with Williams, relating to theparties power purchase agreement.  Thearbitration was bifurcated into two phases, and an award was issued on Phase Ion February 3, 2004.  The primary issuein Phase I related to various aspects of the availability of the facility forthe year ended December 31, 2002, including disputes over the amount of anyavailability bonus or penalty.  Phase IIof the 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.

 

The arbitralpanel’s award on Phase I of the arbitration found that Williams had misappliedthe applicable rules of PJM Interconnection, L.L.C. in the billing dispute withthe Company over the availability of the facility.  The panel declined, however, to decide the facility’savailability during 43 disputed maintenance events.  Instead, it encouraged the parties to reach a mutual resolutionof the disputed events by applying the correct Pennsylvania-New Jersey-Maryland(“PJM”) rule and, failing mutual agreement, to submit the dispute to a thirdparty 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.  However, based on the panel’s Award and itsnegotiations with Williams, the Company anticipates it will be paid someportion of its claimed availability bonus for 2002 and 2003 and does not owe anamount for annual availability capacity adjustment or fuel conversion volumerebate.

 

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. Depending on the amount of facility operation, the Company may beentitled to withdraw some of the funds deposited into the account during thesecond half of its fiscal year.  Basedon the arbitral award, the Company does not anticipate any payment for a fuelconversion volume rebate will be due for 2002 or 2003.  If funding is required, amounts will beclassified as restricted cash.

 

On March 12,2004 the parties settled Phase II of the arbitration between theCompany and Williams, whichinvolved 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 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.

 

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**EnergyRevenues**

 

The Companygenerates energy revenues under the power purchase agreement with Williams**.**During the 20-year term of the agreement, the Company also expects to sellelectric energy and capacity produced by the facility, as well as ancillary andfuel conversion services**.** Under the power purchase agreement, theCompany also generates revenues from meeting (1) base electrical outputguarantees and (2) heat rate rebates through efficient electrical output**.**

 

Upon itsexpiration, 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 efforts would be successful**.**

 

**OperatingExpenses**

 

Under anagreement with AES Prescott, L**.**L**.**C**.**, the Company is required to reimburse itall operator costs on a monthly basis**.** Operator costs generally consist of alldirect costs and overhead**.** Additionally, a monthly operator fee ofapproximately $425,000, subject to annual adjustment, is payable on each bondpayment date**.**

 

**Competition**

 

Under thepower purchase agreement, Williams is required to purchase all of the Company’scapacity and energy**.** Therefore, during the 20-year term of thepower purchase agreement, competition from other capacity and energy providerswill only become an issue if Williams breaches its agreement and ceases topurchase the Company’s capacity and energy or the power purchase agreement isotherwise terminated or not performed in accordance with its terms**.**Upon the expiration of the power purchase agreement or in the event the powerpurchase agreement is terminated prior to the expiration of its term, theCompany anticipates selling its facility’s net capacity, ancillary services andenergy under a new power purchase 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**.**Competition and marketconditions could have the effect of reducing operating time and thereforereducing fuel conversion services and associated variable payments.

 

**Employees**

 

As of December31, 2003, the Company had nine officers**.** Except for these officers, the Companydoes not have any employees and does not anticipate having any employees in thefuture**.**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 operations management are employees ofThe AES Corporation which are provided to AES Prescott under the servicesagreement. As of December 31, 2003, The AES Corporation provided 27 employeesto the facility.

 

**Insurance**

 

As owner ofthe facility, the Company maintains a comprehensive insurance program asrequired 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 maintains commercial generalliability insurance, permanent property insurance for full replacement value ofits facility and business interruption insurance covering at least 12 months ofdebt service and fixed operation and maintenance expenses**.** The Company has obtainedtitle insurance in an amount equal to the principal amount of the seniorsecured bonds**.**

 

AES Prescott,as operator of the Company’s facility, maintains, among other insurancepolicies, workers’ compensation insurance, or evidence of self-insurance, ifrequired, and comprehensive automobile bodily injury and property damageliability insurance**.**

 

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**Permitsand Regulatory Approvals**

 

AES Prescott,as operator of the facility, and the Company, as owner of the facility, mustcomply with numerous federal, state and local regulatory requirements includingenvironmental requirements in the operation of the facility**.**

 

On March 31,1999, the Company received a certification from the Federal Energy RegulatoryCommission (FERC) that it is an Exempt Wholesale Generator**.** Certification as an ExemptWholesale Generator exempts the Company from regulation under the PublicUtility Holding Company Act of 1935**.** The Company will maintain this status solong as it continues to make only wholesale sales of electricity, which itintends 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 obtain FERC approval for sales of electricity atmarket-based rates after the power purchase agreement is no longer in effect**.**

 

On March 29,1999, the Company received its Prevention of Significant Deterioration Permit,or “air permit,” from the Pennsylvania Department of Environmental Protection**.**The appeal period in respect of the air permit expired on May 3, 1999 and noappeal was filed**.** The air permit required that the Company’s facility beconstructed in a manner that would allow it to meet specified limitations onemissions of air pollutants**.** Under the construction agreement, SiemensWestinghouse was required to construct the facility to meet these requirements**.**  During the April 2002 outage, SiemensWestinghouse made certain modifications to ensure the facility’s emissionswould be within the limits set by the EPC construction contract. Testing on May22, 2002 indicated the modifications to be successful and at that date thefacility’s emissions were in compliance and Siemens-Westinghouse had met theemission guarantees of the EPC construction contract.

 

The Company isoperating under Plan Approval 38-05019. The plan approval is being amended to reflect changes in start up timedurations and is currently in a 30 day public review period, which ends onMarch 31, 2004.  The amended planapproval language will be incorporated into the Company’s Title V Operatingpermit. The plan approval and draft Title V operating permit should arrive forour review and finalization during the second quarter 2004.

 

The Company issubject to a number of statutory and regulatory standards and requiredapprovals relating to energy, labor and environmental laws**.** Although the necessaryenvironmental permits for the commencement of construction of its facility havebeen obtained, the Company is required to comply with the terms of itsenvironmental permits and to obtain other permits for the operation of thefacility**.**

 

The permitsthat have been obtained and that will be obtained contain ongoing requirements**.**Failure to satisfy and maintain any of the permit conditions or otherapplicable requirements could prevent the operation of the Company’s facilityand/or result in additional costs**.**

 

**Summary of Principal Project Contracts**

 

While theCompany believes that the following summaries contain the material terms of theprincipal 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 each agreement discussed herein and excludecertain definitions and complex legal terminology that may be contained in eachrelevant agreement**.** You should carefully read each agreementdiscussed herein, each of which is filed as an exhibit to this Form 10-K**.**

 

**Power Purchase Agreement**

 

The Companyentered into an Amended and Restated Power Purchase Agreement, dated as ofFebruary 5, 1999, with Williams for the sale to Williams of all of the electricenergy and capacity produced by its facility as well as ancillary services andfuel conversion services.  During 2003 the Company entered intoarbitration 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 

 

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revenue and non-revenue items. The most important item to the Companywas in respect of the calculation of total available capacity.  For further information, please see “LegalProceedings”.

 

**Term**

 

The term ofthe power purchase agreement extends for 20 years after the first contractanniversary date, which is the last day in the month in which the commercialoperation date occurs**.** The commercial operation date occurswhen:

 

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

 

•                  the Company hasreceived all approvals from PJM Interconnection, L**.**L**.**C**.**, which is the independentsystem operator that operates the transmission system to which the facilitywill interconnect, and

 

•                  the Company hasobtained all required permits and authorizations for operation of the 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**.**

 

**Purchaseand Sale of Capacity and Services**

 

During theterm, commencing with the commercial operation date, the Company must sell andmake available to Williams on an exclusive basis, and Williams must purchaseand pay for the Company’s facility’s net capacity and ability to generateelectric energy**.** In addition, during the term, commencing with the commercialoperation date, the Company must perform for Williams on an exclusive basis,and Williams must purchase and pay for fuel conversion services and ancillaryservices**.**Fuel conversion services consist of the generation of electric energy from fuelprovided by Williams**.** Ancillary services consist of servicesnecessary to support the transmission of capacity and energy**.**

 

**FuelConversion and Other Services**

 

Williams mustdeliver or cause to be delivered to the Company at the gas delivery point on anexclusive basis all quantities of natural gas as the Company requires:

 

•                  to generate netelectric energy and/or ancillary services,

 

•                  to performstart-ups,

 

•                  to performshutdowns, and

 

•                  to operate thefacility during any period other than a start-up, shutdown or dispatch periodfor any reason**.**

 

**Pricingand Payments**

 

For each monthof the term after the commercial operation date, Williams must pay the Companyfor the facility’s net capacity, successful start-ups and associated shutdowns,other services and fuel conversion services at the applicable rates describedin the power purchase agreement**.** Each monthly payment by Williams willconsist of a total fixed payment, a fuel conversion payment and a start-uppayment**.**The total fixed payment, which is payable regardless of facility dispatch byWilliams but is subject to adjustment based on facility availability, iscalculated by multiplying a fixed capacity rate for each contract year by thefacility’s net capacity in the billing month and is anticipated to besufficient to cover the Company’s debt service and fixed operating andmaintenance costs and to provide the Company a return on equity**.**The fuel conversion payment is intended to cover the Company’s variableoperating and maintenance costs and escalates annually based on an escalationindex described in the power purchase agreement**.** The start-up payment isintended to cover the Company’s non-fuel variable costs when the plant isstarting up to meet a dispatch request**.** In addition, the Company may receive heatrate bonuses or be required to pay heat rate penalties**.**

 

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Prior to thecommercial operation date, and during specific facility tests thereafter, theCompany purchased natural gas from Williams**.** Williams sold to the Company the naturalgas at prices specified in the power purchase agreement, and the Company soldto Williams at the electric delivery point any net electric energy producedduring those periods at 90% of the energy market clearing price.

 

Williams willbe entitled to an annual fuel conversion volume rebate if its dispatch of theCompany’s facility exceeds specified levels and specified monthly non-dispatchpayments if, under specific circumstances, the facility is not available fordispatch**.**All fuel conversion volume rebate payments and non-dispatch payments must bemade to Williams after debt service and specified other payments but prior toany distribution to holders of the equity interests in our company**.**Fuel conversion volume rebate payments must be paid to Williams within 30 daysafter the end of the contract year in which the payments have been earned andnon-dispatch payments must be paid to Williams within 20 days after the end ofthe month on which a payment obligation arises**.** Fuel conversion volumerebate payments and any non-dispatch payments owed to Williams and not paidwhen due must be paid, together with interest, when funds become available tothe Company at the priority 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 the Company’s cost and expense, theinterconnection facilities and protective gas apparatus needed to generate anddeliver net electric and/or ancillary services to the electric delivery pointhave been completed as required under the power purchase agreement**.**The interconnection 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 expected usefullife of the Company’s facility, the interconnection facilities and protectivegas apparatus will be not less than the term of the power purchase agreement**.**

 

The Companyhas 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**.** This equipment costapproximately $5**.**1 million which was capitalized as part of the facility**.**Williams reimbursed the Company for the reasonable GPU Energy costs (i**.**e**.**,transmission facility costs, GPU Energy protective apparatus and otherequipment, GPU Energy electric meters, and GPU Energy costs for PJM and otherrequired interconnection-related studies) incurred, or to be reimbursed, by theCompany under the interconnection agreement up to a maximum amount of which isin excess of the costs anticipated to be incurred by the Company under theinterconnection agreement**.**

 

Williams wasresponsible for the installation and will be responsible for the maintenanceand testing of the gas metering equipment, to the extent not otherwiseinstalled, maintained and tested by the supplier of gas transportationservices, as reasonably approved by the Company**.**

 

All electricmetering equipment and gas metering equipment, whether owned by the Company orby a third party, must be operated, maintained and tested in accordance withaccepted electrical practices, in the case of the electric metering equipment,and in accordance with applicable industry standards, in the case of the gasmetering equipment and oil metering equipment**.**

 

**Operation/ Dispatch**

 

The Company’sfacility, the interconnection facilities and the protective gas apparatus mustbe operated in accordance with accepted electrical practices and applicablerequirements and guidelines reasonably adopted by GPU Energy from time to timeand applied consistently to GPU Energy’s electric generating facilities, withrespect to our facility and interconnection facilities, or in accordance withstandard gas industry practices, with respect to 

 

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protective gas apparatus**.** If there is a conflict between the termsand conditions of the power purchase agreement and GPU Energy requirements, GPUEnergy requirements will control**.**

 

The Companymust operate its facility in parallel with GPU Energy’s electrical system withgovernor control and the net electric energy to be delivered by the Companyunder the power purchase agreement must be three-phase, 60 hertz, alternatingcurrent at a nominal voltage acceptable to GPU Energy at the electric deliverypoint, must not adversely affect the voltage, frequency, wave shape or powerfactor of power at the electric delivery point and must be delivered to theelectric delivery point in a manner acceptable to GPU Energy**.**

 

The powerpurchase agreement acknowledges that GPU Energy has the right to require theCompany 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’s facility has beendisconnected for these reasons, Williams will continue to be obligated to maketotal fixed payments for at least 24 hours after the occurrence of thedisconnection of our facility by GPU Energy**.**

 

The Companymust use commercially reasonable efforts to promptly correct any condition atour facility which necessitates the disconnection of our facility from GPUEnergy’s electrical system or the reduction, curtailment or interruption ofelectrical output of its facility**.** Williams will have the exclusive right toschedule the operation of the Company’s facility or a unit in accordance withthe provisions of the power purchase agreement so long as the scheduling isconsistent with the design limitations of the Company’s facility, applicablelaw, regulations and permits, and manufacturers’ reasonable recommendations foroperating limits with respect to the Company’s facility and major components**.**

 

Up to twotimes each year, the Company must demonstrate, in accordance with thethen-applicable criteria of PJM applicable generally to independent power andGPU Energy generating facilities in PJM of similar technology, the capabilityof its facility to produce and maintain, as required for the demonstration, theCompany’s facility’s net capacity**.**

 

**Force Majeure**

 

A party willbe excused from performing its obligations under the power purchase agreementand will not be liable in damages or otherwise to the other party if and to theextent the party declares that it is unable to perform or is prevented fromperforming an obligation under the power purchase agreement by a force majeurecondition, except for any obligations and/or liabilities under the powerpurchase agreement to pay money, which will not be excused, and except to theextent an obligation accrues prior to the occurrence or existence of a forcemajeure condition so long as:

 

•                  the partydeclaring its inability to perform by virtue of force majeure, as promptly aspracticable after the occurrence of the force majeure condition, but in noevent more than five days later, gives the other party written noticedescribing, in detail, the nature, extent and expected duration of the force majeurecondition;

 

•                  the suspensionof performance is of no greater scope and of no longer duration than isreasonably required by the force majeure condition;

 

•                  the partydeclaring force majeure uses all commercially reasonable efforts to remedy itsinability to perform; and

 

•                  once the partydeclaring force majeure is able to resume performance of its obligationsexcused as a result of the force majeure condition, it promptly gives writtennotice 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 Williams declares a force majeure,however, it must, subject to its right to terminate the power purchaseagreement if the force majeure has not been fully corrected or alleviatedwithin 18 months of the declaration, continue to pay the Company only theapplicable monthly total fixed payment as described in the power purchaseagreement until the earlier of (1) the termination of the force majeurecondition or (2) the termination of 

 

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the power purchase agreement**.** Furthermore, if the Company declares aforce majeure due to an action or inaction of GPU Energy that prevents theCompany from delivering net electric energy to the electric delivery point,Williams must continue to pay the applicable portion of the total fixed paymentfor the first 24 hours of the period**.** Notwithstanding anything to the contrarycontained in the power purchase agreement, except as may expressly be providedin the power purchase agreement, the term force majeure will not include thefollowing nor will the following excuse a party’s performance:

 

•                  Any reduction,curtailment or interruption of generation or operation of the Company’sfacility, 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 materials, equipment,supplies or services, or any inability of GPU Energy to deliver net electricenergy to Williams, unless, and then only to the extent that, any acts oromissions would itself be excused under the power purchase agreement as a forcemajeure; or

 

•                  Any outage,whether or not due to the fault or negligence of the Company, of its facilityattributable 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

 

•                  To the extentthat the party claiming force majeure failed to prevent or remedy the forcemajeure condition by taking all commercially reasonable acts, short oflitigation if the remedy requires litigation, and, except as otherwise providedin the power purchase agreement, failed to resume performance under the powerpurchase agreement with reasonable dispatch after the termination of the forcemajeure condition; or

 

•                  To the extentthat the claiming party’s failure to perform was caused by lack of funds; or

 

•                  To the extentWilliams is unable to perform due to a shortage of natural gas not caused by anevent of force majeure; or

 

•                  Because of anincrease or decrease in the market price of electric energy/capacity, naturalgas or because it is uneconomic for the party to perform its obligations underthe power purchase agreement**.**

 

Neither partywill be required to settle any strike, walkout, lockout or other labor disputeon terms which, in the sole judgment of the party involved in the dispute, arecontrary to its interest**.** Williams will have the right to terminatethe power purchase agreement if a force majeure has been declared by theCompany and the effect of the force majeure has not been fully corrected oralleviated within 18 months after the date the force majeure was declared**.**Williams, however, will not have the right to terminate the power purchaseagreement if (1) the force majeure was caused by Williams or (2) the forcemajeure event does not prevent or materially limit Williams’ ability to sellour facility’s net capacity into or through the PJM power pool market or to athird party**.**

 

**Eventsof Default; Termination; Remedies**

 

The followingwill constitute events of default under the power purchase agreement:

 

•                  breach of anyterm or condition of the power purchase agreement, including, but not limitedto, (1) any failure to maintain or to renew any security, (2) any breach of arepresentation, warranty or covenant or (3) failure of either party to make arequired payment to the other party;

 

•                  the Company’sfacility is not available to provide fuel conversion services to Williamsduring any period of 180 consecutive days after the commercial operation date,except as may be excused by force majeure or the absence of available naturalgas, or if the non-availability is caused by an act or failure to act byWilliams where the action is required by the power purchase agreement;

 

•                  the Companysells or supplies net electric energy, ancillary services or capacity from itsfacility, or agrees to do the same, to any person or entity other thanWilliams, without the prior approval of Williams;

 

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•                  failure by theCompany for 30 consecutive days to perform regular and required maintenance,testing or inspection of the interconnection facilities, its facility and/orother electric equipment and facilities;

 

•                  failure by theCompany for 30 consecutive days to correct or resolve a material violation ofany code, regulation and/or statute applicable to the construction,installation, operation or maintenance of its facility, the interconnectionfacilities, protective gas apparatus or any other electric equipment andfacilities required to be constructed and operated under the power purchaseagreement when the violation impairs the Company’s continued ability to performunder the power purchase agreement;

 

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

 

•                  voluntarybankruptcy or insolvency by either party;

 

•                  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;

 

•                  there will beoutstanding 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 AESCorporation will cease to own, directly or indirectly, beneficially and ofrecord, 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**.**

 

Upon theoccurrence of any event of default, other than an event of default forvoluntary bankruptcy or insolvency, for which no notice will be required oropportunity to cure permitted, the party not in default, to the extent theparty has actual knowledge of the occurrence of the event of default, must giveprompt written notice 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 two business days in the caseof a default for failure to make a requested payment to the non-defaultingparty under the power purchase agreement, following receipt of the noticeeither to cure the default or commence in good faith all the steps as arenecessary and appropriate to cure the default if the default cannot becompletely cured within the 30-day period**.** If the defaulting party fails to cure thedefault or take the steps as provided under the preceding paragraph, andimmediately upon the occurrence of any event of default for voluntarybankruptcy or insolvency, the power purchase agreement may be terminated by thenon-defaulting party, without any liability or responsibility whatsoever, bywritten notice to the party in default**.** The non-defaulting party may exercise allthe rights and remedies as are available to it to recover damages caused by thedefault**.**

 

**Security**

 

Williams hasprovided the Company a guaranty, issued by The Williams Companies, Inc**.**,of Williams’ performance and payment obligations under the power purchaseagreement**.**Under the power purchase agreement, in the event that S&P or Moody’s ratesthe long-term senior unsecured debt of The Williams Companies, Inc**.**lower than investment grade, The Williams Companies, Inc**.** or an affiliate thereof, isrequired to replace such Williams Companies, Inc**.** guaranty, within thirtydays, with an alternative security that is acceptable to the Company after lossof such investment grade rating**.**

 

According topublished sources, on July 23, 2002, S&P lowered the long term seniorunsecured debt rating of The Williams Companies, Inc**.** to “BB-” from “BBB-”, andfurther lowered such rating to “B” on July 25, 2002**.**On May 23, 2003 S&Pupgraded the rating to “B+” with a negative outlook.   According to published sources, on July 24, 2002, Moody’slowered the long-term senior unsecured debt rating of The Williams Companies, Inc**.**to “B1” from “Baa3**.**” According to published sources, this rating was further lowered onNovember 22, 2002 to “Caa1” by 

 

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Moody’s, and then upgraded to “B3” June 4, 2003.  Accordingly, The Williams Companies, Inc**.**’slong term senior unsecured debt is currently rated below investment grade byboth S&P and Moody’s**.**

 

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. On June 13, 2003, Citibank, N.A. sent notification that the letter ofcredit will be extended to July 12, 2004. Additionally, in a Letter Agreementdated September 20, 2002, Williams agreed to (a) provide eligible creditsupport prior to the stated expiration date of the Letter of Credit and (b)replenish any portion of the Letter of Credit or eligible credit support thatis drawn, reduced, cashed or redeemed, at any time, with an equal amount ofeligible 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 the Company inplace 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 the powerpurchase agreement to provide replacement security due to the downgrade of TheWilliams 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**.**

 

The Companyagreed that it will not sell, transfer, assign, lease or otherwise dispose ofits facility or any substantial portion thereof or interest therein necessaryto perform its obligations under the power purchase agreement to any personthat is a FERC-authorized power marketer or an affiliate without the priorwritten consent of Williams, which consent must not be unreasonably withheld**.**

 

**Construction Agreement**

 

The Company,as assignee of AES Ironwood, Inc**.**, entered into an Agreement forEngineering, Procurement and Construction Services, dated as of September 23,1998, as amended, with Siemens Westinghouse for Siemens Westinghouse to performservices in connection with the design, engineering, procurement, sitepreparation and clearing, civil works, construction, start-up, training andtesting and to provide all materials and equipment (excluding operational spareparts), machinery, tools, construction fuels, chemicals and utilities, labor,transportation, administration and other services and items (collectively andseparately, the “services”) for the Company’s facility**.**

 

By meeting theprovisions in Section 6**.**3 of the construction agreement,provisional acceptance was granted by the Company on December 27, 2001**.**On March 12, 2003, the Company entered into a settlement agreement with SiemensWestinghouse concerning final acceptance. This agreement became effective as of that date and final acceptance wasgranted by the Company as of that date. For further information, please see“Legal Proceedings”. The financial impact of the settlement was recorded in theCompany’s financial statements for the year ended December 31, 2002.

 

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**SiemensWestinghouse’s Services and Other Obligations**

 

SiemensWestinghouse must complete the Company’s project by performing or causing to beperformed all of the services**. **Therequired services have included: engineering and design; construction andconstruction management; providing design documents, instruction manuals, aproject procedures manual and quality assurance plan; procuring all materials,equipment and supplies and all contractor and subcontractor labor andmanufacturing and related services; providing a spare parts list; providing alllabor and personnel; obtaining some applicable permits and providinginformation to assist the Company in obtaining other applicable permits;performing inspection, expediting, quality surveillance and traffic services;transporting, shipping, receiving and marshalling all materials, equipment andsupplies and other items; providing storage for all materials, supplies andequipment and procurement or disposal of all soil and gravel (includingremediation and disposal of specific hazardous materials); providing fordesign, construction and installation of electrical interconnection facilities(including electric metering equipment, automatic regulation equipment,protective apparatus and control system equipment) and reviewing other GPUEnergy interconnections to our facility (including gas and water pipelines);performing performance tests and power purchase agreement output tests;providing for start-up and initial operation functions; and providing specifiedspare parts, waste disposal services, chemicals, consumables and utilities**.**

 

The serviceshave 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 and wastedisposal (including hazardous materials brought to the facility site by SiemensWestinghouse or the subcontractors); submitting a construction schedule andprogress reports; payment of contractor taxes; employee identification andsecurity arrangements; protecting adjoining utilities and public and privatelands from damage; paying appropriate royalties and license fees; providingfinal releases and waivers to the Company; posting collateral or providingother assurances if major subcontractors fail to furnish final waivers;maintaining labor relations and project labor agreements; providing furtherassurances; coordinating with other contractors; and causing SiemensCorporation to execute and deliver the related guaranty**.**

 

**ContractPrice and Payment**

 

The adjustedcontract price, including base scope changes through the date of theconstruction agreement, was $241.6 million and commencing on the constructioncommencement date was paid in installments in accordance with the payment andmilestone schedule**.** The contract was adjusted as a result ofscope changes**.** The Company made scheduled payments to Siemens Westinghouseupon receipt of Siemens Westinghouse’s payment request**.** The Company did not deferany payment**.** The Company withheld from each scheduled payment 5%, otherthan our project completion payment, of the payment until after finalacceptance**.**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 $278.2 million.

 

**MechanicalCompletion**

 

The agreementsets forth certain conditions that were required to be met in order formechanical completion to occur**.** These conditions were deemed to be met onDecember 27, 2001 when provisional acceptance was granted**.**

 

**Provisionaland Final Acceptance**

 

The agreementsets forth various requirements before provisional acceptance and finalacceptance of the project would be made by the Company. The Company grantedprovisional acceptance on December 27, 2001. As part of a settlement agreementwith Siemens Westinghouse, final acceptance was granted on March 12, 2003.

 

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Because theCompany has granted final acceptance on March 12, 2003, Siemens Westinghousewill have no liability to the Company for any amounts thereafter arising asperformance guarantee payments, other than any interim period rebates thatarose prior to the final acceptance, for failure of our facility to achieve anyor all of the applicable performance guarantees other than modifications to thefacility as set forth in our settlement agreement**.**

 

**ProjectCompletion**

 

Projectcompletion will be achieved under the construction agreement when:

 

•                  Final acceptanceof our facility will have occurred and the performance guarantees with respectto our facility will have been achieved, or in lieu of achievement of theperformance guarantees, applicable rebates under the construction agreementwill have been paid, the Company will have elected final acceptance. Pursuantto our arbitration settlement agreement, the Company granted final acceptanceon March 12, 2003;

 

•                  The reliabilityguarantee 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;

 

•                  The requirementsfor achieving mechanical completion of our facility will continue to be met;

 

•                  The punch listitems will have been completed in accordance with the construction agreement;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 2005. The successful completion of the outageand the technical issues should allow Project Completion to be granted.

 

When SiemensWestinghouse believes that it has achieved project completion, it must deliverto the Company a notice of project completion**.** If the Company is satisfiedthat the project completion requirements have been met, the Company mustdeliver to Siemens Westinghouse a project completion certificate**.**If reasonable cause exists for doing so, the Company must notify SiemensWestinghouse in writing that project completion has not been achieved, statingthe reasons therefor**.** If the Company’s project completion hasnot been achieved as so determined by the Company, Siemens Westinghouse mustpromptly take such action or perform the additional services as will achieveproject completion and must issue to the Company another notice of projectcompletion**.**The procedure must be repeated as necessary until project completion isachieved**.**

 

**PriceRebate for Failure to Meet Guarantees**

 

*Completion Dates*

 

SiemensWestinghouse guarantees that (1) at least one of provisional acceptance,interim acceptance or final acceptance of our facility will be achieved on orbefore the guaranteed provisional acceptance date and (2) final acceptance ofour facility will be achieved on or before the guaranteed final acceptance date**.**

 

If none ofprovisional acceptance, interim acceptance or final acceptance of our facilityoccurs by the date that is 45 days after the guaranteed provisional acceptancedate, Siemens Westinghouse must pay the Company $110,000 per day for each dayprovisional acceptance, interim acceptance or final acceptance is later thanthe guaranteed provisional acceptance date, but in no event will the aggregateamount of the payments be greater than the Delay LD SubCap (the aggregateamount of which is equal to 20% of the contract price)**.**

 

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SiemensWestinghouse began paying liquidated damages of $110,000 per day beginning 45days after the guaranteed provisional acceptance date of May 22, 2001**.**The liquidated damages ceased to accrue on December 27, 2001, the date uponwhich provisional acceptance was granted**.** At December 31, 2001, the Company hadinvoiced Siemens Westinghouse approximately $19.1 million**.** At December 31, 2002,Siemens Westinghouse had paid all liquidated damages invoiced to them**. **These amounts were recorded as areduction in the cost of the facility in 2001.

 

**PerformanceGuarantees**

 

***ElectricalOutput***

 

If the averagenet electrical output of our facility at provisional acceptance or interimacceptance, 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**.**22per day for each kilowatt by which the average net electrical output is lessthan the natural gas-based electrical output guarantee**.** During performance testingoutput was calculated to be 37,854 kilowatts less than the natural gas-basedelectrical output guarantee**.** The daily charge for this amount wascalculated 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 forelectrical output shortfall remained at $8,328 per day through June 30, 2002**.**

 

Output wasimproved 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 amount was invoiced toSiemens-Westinghouse until February 28, 2003 and recorded as other income.

 

Under theterms 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.

 

***HeatRate Guarantees***

 

If the averagenet 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**.** During performance testing heat rate wascalculated to be 162 BTU/KwH more than the natural gas-based heat rateguarantee**.**The daily charge for this amount was calculated at $7,116 per day**.**

 

At theconclusion of the April 2002 outage Siemens-Westinghouse retested the facilityand achieved an improvement in heat rate**.** During performance testing heat rate wascalculated to be 71 BTU/KwH more than the natural gas-based natural heat rateguarantee**.**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 amountwas invoiced to Siemens-Westinghouse from that date until February 28, 2003**.**Thisamount was invoiced to Siemens-Westinghouse until February 28, 2003 andrecorded 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.

 

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Under theterms 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.

 

**Liabilityand Damages**

 

***ConsequentialDamages***

 

Neither partynor any of its contractors, subcontractors or other agents providing equipment,material or services for our project will be liable for any indirect,incidental, special or consequential loss or damage of any type**.**

 

***Aggregate Liabilityof Contractor***

 

The totalaggregate liability of Siemens Westinghouse and any of its subcontractors,including liabilities covered by the Delay LD SubCap and the Total LD SubCap,to us will not in any event exceed an amount equal to the contract price solong as the limitation of liability will not apply to obligations to removeliens or to make indemnification payments**.**

 

Warranties andGuarantees

 

SiemensWestinghouse warrants and guarantees that during the applicable warrantyperiod:

 

•                  all machinery,equipment, materials, systems, supplies and other items comprising our projectmust be new and of first-rate quality which satisfies GPU Energy gradestandards 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,

 

•                  it will performall of its design, construction, engineering and other services in accordancewith the construction agreement,

 

•                  the Company’sproject and its components must be free from all defects caused by errors oromissions in engineering and design, as determined by reference to prudentutility practices, and must comply with all applicable laws, all applicablepermits, GPU Energy electrical interconnection requirements, the power purchaseagreement operating requirements and the guaranteed emissions limits; and

 

•                  the completedproject must perform its intended functions of generating electric energy andcapacity as a complete, integrated operating system as contemplated in theconstruction agreement**.** If the Company notifies SiemensWestinghouse within 30 days after the expiration of the applicable warrantyperiod of any defects or deficiencies discovered during the applicable warrantyperiod, Siemens Westinghouse must promptly re-perform any of the services atits own expense to correct any errors, omissions, defects or deficiencies and,in the case of defective or otherwise deficient machinery, equipment,materials, systems supplies or other items, replace or repair the same at itsown 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 and guarantees provided in the constructionagreement, there are no other warranties of any kind, whether statutory,express or implied relating to the services**.**

 

During theapplicable 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 a fleet-wide or commondefect and otherwise upon notification from us no later than 30 days after theexpiration 

 

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of the applicable warranty period of any defects or deficiencies in ourproject or any component, the Company must, subject to the provisions of theconstruction agreement, make the Company’s facility or the subject equipmentavailable to Siemens Westinghouse for Siemens Westinghouse to re-perform,replace or, at its option, repair the same at its expense so that it is incompliance with the standards warranted and guaranteed, all in accordance withthe construction agreement**.**

 

***Force Majeure Event***

 

A forcemajeure event means any act or event that prevents the affected party fromperforming 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 majeure events include, but are notlimited to, acts of declared or undeclared war, sabotage, landslides,revolution, terrorism, flood, tidal wave, hurricane, lightning, earthquake,fire, explosion, civil disturbance, insurrection or riot, act of God or thepublic enemy, action (including unreasonable delay or failure to act) of acourt or public authority, or strikes or other labor disputes of a regional ornational character that are not limited to only the employees of SiemensWestinghouse or its subcontractors and that are not due to the breach of alabor contract or applicable law by the party claiming force majeure or any ofits subcontractors**.** Force majeure events do not include (1)strikes, work stoppages and labor disputes or unrest of any kind that involveonly employees of Siemens Westinghouse or any subcontractors, except asexpressly provided in the preceding sentence, (2) late delivery of materials orequipment, except to the extent caused by a force majeure event and (3)economic hardship**.**

 

***Excused Performance***

 

If eitherparty is rendered wholly or partly unable to perform its obligations because ofa force majeure event, that party will be excused from whatever performance isaffected by the force majeure event to the extent affected so long as:

 

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

 

•                  the suspensionof performance is of no greater scope and of no longer duration than isreasonably 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

 

•                  when thenon-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**.**

 

***Scope Changes***

 

The Companymay order scope changes to the services, in which event one or more of thecontract 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 scope changes must be authorized by ascope change order and only the Company or its representative may issue scopechange orders**.** As soon as Siemens Westinghouse becomes aware of anycircumstances which it has reason to believe may necessitate a scope change,Siemens Westinghouse must issue to the Company a scope change order notice atits 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**.** Siemens Westinghouse must promptly reviewthe scope change order request and notify the Company in writing of the optionsfor implementing the proposed scope change and the effect, if any, each optionwould have on the contract price, the guaranteed completion dates, theconstruction progress milestone dates, the payment and milestone schedule, theCompany’s construction schedule and the performance guarantees**.**No scope change order will be issued and no adjustment of 

 

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the contract price, the guaranteed completion dates, the constructionprogress milestone dates, the payment and milestone schedule, our constructionschedule or the performance guarantees will be made in connection with anycorrection of errors, omission, deficiencies, or improper or defective work onthe part of Siemens Westinghouse or any subcontractors in the performance ofthe services**.** Changes due to changes in applicable laws or applicablepermits occurring after the date of the construction agreement must be treatedas scope changes**.**

 

In December2001, the Company reached an agreement with Siemens Westinghouse to eliminatethe requirement to use fuel oil as a secondary fuel from the constructionagreement**.**In a separate agreement, Williams agreed to eliminate the requirement to usefuel oil as a secondary 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**.**

 

**Effectof Force Majeure Event**

 

If and to theextent that any force majeure events affect Siemens Westinghouse’s ability tomeet the guaranteed completion dates, or the construction progress milestonedates, an equitable adjustment in one or more of the dates, the payment andmilestone schedule and our construction schedule must be made by agreementbetween the Company and Siemens Westinghouse**.** No adjustment to theperformance guarantees and, except as otherwise expressly described below, thecontract price must be made as a result of a force majeure event**.**If Siemens Westinghouse is delayed in the performance of the services by aforce majeure event, then:

 

•                  to the extentthat 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

 

•                  to the extentthat the delay(s) are, in the aggregate, more than six months, SiemensWestinghouse must be reimbursed by the Company for those incremental costs andexpenses resulting from the delay(s) which are incurred by Siemens Westinghouseafter the six-month period**.**

 

**PriceChange**

 

An increase ordecrease in the contract price, if any, resulting from a scope change requestedby the Company or made under the construction agreement must be determined,upon the mutual agreement of the parties**.**

 

**ContinuedPerformance Pending Resolution of Disputes**

 

If a disputearises 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**.**

 

If hazardousmaterials were not identified in an environmental site assessment reportdelivered by the Company to Siemens Westinghouse prior to the constructioncommencement date and were not brought onto the facility site by SiemensWestinghouse or any of its subcontractors, then Siemens Westinghouse will beentitled to a scope change under the construction agreement**.**

 

**Riskof Loss**

 

Until the risktransfer date, which was December 27, 2001, the date at which provisionalacceptance was achieved, Siemens Westinghouse bore the risk of loss and fullresponsibility for the costs of replacement, repair or reconstruction resultingfrom any damage to or destruction of our facility or any materials, equipment,tools and supplies, which are purchased for permanent installation in or foruse during construction of our facility**.** Since December 27, 2001, the risktransfer date with respect to the Company’s facility, the Company has born allrisk of loss and full responsibility for repair, replacement or reconstructionwith respect to any loss, damage or destruction to the Company’s facility**.**

 

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**Termination**

 

***Termination forCompany’s Convenience***

 

The Companymay for its convenience terminate any part of the services or all remainingservices at any time upon 30 days’ prior written notice to Siemens Westinghousespecifying the part of the services to be terminated and the effective date oftermination**.** The Company may elect to suspend completion of all or anypart of the services upon 10 days’ prior written notice to Siemens Westinghouseor, in emergency situations, upon prior notice as circumstances permit**.**

 

***Termination byContractor***

 

If the Companyfails to pay to Siemens Westinghouse any payment and its failure continues for20 days, then (1) Siemens Westinghouse may suspend its performance of theservices upon 10 days’ prior written notice to us, which suspension maycontinue until the time as the payment, plus accrued interest, is paid to SiemensWestinghouse, and/or (2) if the payment has not been made prior to thecommencement of a suspension by Siemens Westinghouse under clause (1) above,Siemens Westinghouse may terminate the construction agreement upon 60 days’prior written notice to the Company so long as the termination does not becomeeffective if the payment, plus accrued interest, is made to SiemensWestinghouse prior to the end of the notice period**.** In the event of asuspension, an equitable adjustment to one or more of the contract price, theguaranteed completion dates, the construction progress milestone dates, thepayment and milestone schedule and the Company’s construction schedule, and, asappropriate, the other provisions of the construction agreement that may beaffected thereby, must be made by agreement between us and Siemens Westinghouse**.**If the Company 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 resume performance of thesuspended services within 10 days of the receipt of the notice from SiemensWestinghouse, the suspended services will be deemed to have been terminated bythe Company for the convenience of Siemens Westinghouse**.** If the occurrence of one ormore force majeure events prevents Siemens Westinghouse from performing theservices for a period of 365 consecutive days, Siemens Westinghouse may, at itsoption, give written notice to the Company of its desire to terminate theconstruction agreement**.**

 

**Consequencesof Termination**

 

•                  Upon anytermination, 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-partypurchaser, (1) assume responsibility for and take title to and possession ofour project and any or all work, materials or equipment remaining at thefacility site and (2) succeed automatically, without the necessity of anyfurther action by Siemens Westinghouse, to the interests of SiemensWestinghouse in any or all items procured by Siemens Westinghouse for theCompany’s project and in any and all contracts and subcontracts entered intobetween Siemens Westinghouse and any subcontractor with respect to theequipment specified in the construction agreement with respect to any or allother subcontractors selected by us which are materially necessary to thetimely completion of our project. Siemens Westinghouse must use all reasonableefforts to enable the Company, or its designee, to succeed to SiemensWestinghouse’s interests thereunder**.**

 

•                  If anytermination occurs, the Company may, without prejudice to any other right orremedy it may have, at its option, finish the services by whatever method itmay deem expedient**.**

 

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**Defaultand Remedies**

 

***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 Rightsand Remedies***

 

If SiemensWestinghouse is in default of its obligations, the Company will have any or allof the following rights and remedies, in addition to any other rights andremedies that may be available to it under the construction agreement or at lawor in equity, and Siemens Westinghouse will have the following obligations:

 

•                  The Company may,without prejudice to any other right or remedy it may have under theconstruction 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 mutuallyagree upon a scope change order to make equitable adjustments, including thereduction and/or deletion of obligations of the parties commensurate with thereduced scope Siemens Westinghouse must have after taking into account thepartial termination, to one or more of the guaranteed completion dates, theconstruction progress milestone dates, the contract price, the payment andmilestone schedule, our construction schedule, the performance guarantees andthe other provisions of the construction agreement which may be affectedthereby, as appropriate**.** If the parties are unable to reach mutualagreement as to the scope change order and the dispute resolution proceduresdescribed in the construction agreement are invoked, the procedures must givedue consideration to customary terms and conditions under which SiemensWestinghouse has entered into subcontracts with third party prime contractorscovering services substantially similar to those services which are not beingterminated**.**

 

•                  If requested bythe Company, Siemens Westinghouse must withdraw from the facility site, mustassign to the Company its subcontracts, to the extent permitted therein, as theCompany may request, and must remove the materials, equipment, tools andinstruments used by, and any debris and waste materials generated by, SiemensWestinghouse in the performance of the services as the Company may direct, andthe Company, without incurring any liability to Siemens Westinghouse (otherthan the obligation to return to Siemens Westinghouse at the completion of theCompany’s project the materials that are not consumed or incorporated into theCompany’s project, solely on an “as is, where is” basis without anyrepresentation or warranty of any kind whatsoever) may take possession of anyand all designs, drawings, materials, equipment, tools, instruments, purchaseorders, schedules and facilities of Siemens Westinghouse at the facility site thatthe 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**.**

 

**Maintenance Services Agreement**

 

The Company,as assignee of AES Ironwood, Inc**.**, has entered into the Maintenance ProgramParts, Shop Repairs and Scheduled Outage TFA Services Contract, dated as ofSeptember 23, 1998, with Siemens Westinghouse by which Siemens Westinghousewill provide the Company with, among other things, combustion turbine parts,shop repairs and scheduled outage technical field assistance services**.**

 

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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**.**

 

**Scopeof Work**

 

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

 

•                  deliver the typeand quantity of new program parts for installation of the combustion turbine;repair/refurbish program parts and equipment for the combustion turbine;

 

•                  providemiscellaneous hardware;

 

•                  provide theCompany with material safety data sheets for all hazardous materials SiemensWestinghouse intends to bring/use on the facility site;

 

•                  provide theservices of a maintenance program engineer to manage the combustion turbinemaintenance program; and

 

•                  provide TFAServices**.**

 

•                  The Company isresponsible for, among other things:

 

•                  storing andmaintaining parts, materials and tools to be used in or on the combustionturbine;

 

•                  maintaining andoperating the combustion turbine consistently with the warranty conditions;

 

•                  ensuring thatits operator and 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”)**.**

 

The Companyand Siemens Westinghouse have jointly developed the scheduled outage plan**.**The scheduled outage plan is consistent with the terms and conditions of thepower purchase agreement**.**

 

**EarlyReplacement**

 

If it is determinedthat due to normal wear and tear a program part(s) for the combustion turbinehas failed or will not last until the next scheduled outage, and the part hasto be repaired before the scheduled replacement period, Siemens Westinghousewill replace the program part by moving up a new program part which isotherwise scheduled to be delivered at a later date**.** The contract price for thereplacement will not be affected if the replacement date is less than or equalto one year earlier than the scheduled outage during which the program part wasscheduled to be replaced**.** If the actual replacement date for aprogram part is more than one year earlier than the scheduled outage at whichpoint the program part was scheduled to be replaced, the early replacement willresult in an adjustment to the payment schedule**.** Siemens Westinghouse hasthe final decision with regard to the replacement or refurbishment associatedwith any program part**.** If the Company disputes SiemensWestinghouse’s decision, the Company may seek to resolve the dispute inaccordance with the dispute resolution procedures discussed below**.**

 

**PartsLife 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**.** Siemens Westinghouse has the finaldecision with regard to actual parts life and the degree of repair orrefurbishment associated with any program parts**.** The parts life 

 

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credit will be calculated in terms of EBHs and equivalent starts**.**The price of the 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**.**

 

**ContractPrice and Payment Terms**

 

SiemensWestinghouse will invoice the Company monthly and payments are then due within25 days**.**The fees assessed by Siemens Westinghouse will be based on the number of EBHsaccumulated by the applicable combustion turbine as adjusted for inflation**.**The contract price will be the aggregate number of fees as adjusted plus anyadditional payment amount mutually agreed to by the parties under a changeorder**.**

 

**UnscheduledOutages and Unscheduled Outage Work**

 

If during theterm of the maintenance services agreement an unscheduled outage occursresulting from (1) the non-conformity of new program parts; (2) the failing ofa shop repair; (3) a program part requiring replacement due to normal wear andtear prior to achieving its expected life in terms of EBHs or equivalentstarts; or (4) the failure of a service, performed by Siemens Westinghouse, theCompany must hire Siemens Westinghouse, to the extent not supplied by SiemensWestinghouse as a warranty remedy under Siemens Westinghouse’s warranties underthe maintenance services agreement to supply any additional parts, miscellaneoushardware, shop repairs and TFA Services under a change order**.**The Company will be entitled to any applicable parts life credit with respectto program parts as well as a discount for TFA services**.** If the unscheduled outageoccurs within a specified number of EBHs of a scheduled outage and it wasanticipated that the additional parts, miscellaneous hardware, shop repairs andTFA services to be used in the unscheduled outage were to be used during theupcoming scheduled outage, the upcoming Scheduled outage must be moved up intime to become the unscheduled outage/moved-up scheduled outage**.**The Company will not be required to pay any additional money for the programparts, miscellaneous hardware, shop repairs and TFA Services**.**

 

If any programparts are delivered by Siemens Westinghouse within 15 days of receipt of thechange order, the Company will pay to Siemens Westinghouse the price for theprogram part described in the maintenance services agreement plus a specifiedpercentage**.**Any program part delivered after 30 days of the change order will cost theCompany the price described in the maintenance services agreement minus aspecified percentage**.**

 

**Changesin Operating 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 fuel and water**.** Should the actualoperations differ from these operating parameters which cause a scheduledoutage to be planned/performed earlier or later than as expected, then, under achange order, an adjustment in the scope, schedule, and price must 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 isuntil the earlier of one year from the date of installation of the originalprogram part or hardware, a specific number of starts or fired hours afterinstallation of the program parts and hardware, or three years from the date ofdelivery of the original program part, hardware, and in the case of shoprepair, three years from completion of the work**.** Warranties on the programparts and hardware must not expire more than one year after the conclusion ofthe maintenance services agreement**.**

 

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**.** Siemens Westinghouse also warrants thatthe services of its personnel and technical information transmitted will becompetent and consistent with prudent utility practices and the services willcomply in all material respects with laws and will be free from defects inworkmanship for a period of one year from the date of completion of that itemof services**.** The warranties on the 

 

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services must expire no later than one year after the termination orend of the term of the maintenance services agreement**.**

 

In addition, SiemensWestinghouse warrants any program part removed during a scheduled outage anddelivered by the Company to the designated facility for repair will be repairedand delivered by Siemens Westinghouse within 26 weeks**.** If Siemens Westinghousedoes not deliver the program part within this time frame or does not provide anew program part in lieu of the program part being shop repaired and an outageoccurs which requires a program part, Siemens Westinghouse will pay usliquidated damages for each day the program part is not repaired and deliveredthe aggregate of which liquidated damage payments must not exceed a maximumannual 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**.**

 

Except for theexpress warranties described in the maintenance services agreement, SiemensWestinghouse makes no other warranties or representations of any kind**.**No implied statutory warranty of merchantability or fitness for a particularpurpose applies**.**

 

The warrantiesprovided by Siemens Westinghouse are conditioned upon (1) our receipt,handling, storage, operation and maintenance of our project, including anyprogram 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**

 

The Companymay 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;

 

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

 

•                  the contractorterminates the construction agreement for any reason other than our defaultthereunder**.**

 

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 servicesagreement will automatically terminate if:

 

•                  the Companyterminates the construction agreement for reasons other than (1) the default ofthe contractor and (2) our inability to obtain permits for our project; or

 

•                  the contractorterminates the construction agreement for our default thereunder**.**If the termination occurs, Siemens Westinghouse must discontinue any work orservices being performed and continue to protect our property**.**Siemens Westinghouse must transfer title to and deliver any new program partsand miscellaneous hardware already purchased by us**.** The Company must paySiemens Westinghouse those amounts owed at the time of termination**.**

 

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**Limitationof Liability**

 

The Companyagreed that the remedies provided in the maintenance services agreement areexclusive and that under no circumstances must the total aggregate liability ofSiemens Westinghouse during a given year exceed 100% of the contract pricepayable to Siemens Westinghouse for that given year under the maintenance servicesagreement**.**The Company further agreed that under no circumstances must the total aggregateliability of Siemens Westinghouse for liquidated damages during a given yearexceed a specified percentage of the contract price payable to SiemensWestinghouse for that 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**.**

 

**ForceMajeure**

 

Neither partywill be liable for failure to perform any obligation or delay in performance,excluding payment, to the extent the failure or delay is caused by any act orevent 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 military authority; act of war whether declared or undeclared;act (including delay, failure to act, or priority) of any governmentalauthority; civil disturbance; insurrection or riot; sabotage; fire; inclementweather conditions; earthquake; flood; strikes, work stoppages or other labordifficulties of a regional or national character which are not limited to onlythe employees of Siemens Westinghouse or its subcontractors or suppliers andwhich are not due to the breach of an applicable labor contract by the partyclaiming force majeure; embargo; fuel or energy shortage; delay or accident inshipping or transportation to the extent attributable to another force majeure;changes in laws which substantially prevents a party from complying with itsobligations in conformity with its requirements under the maintenance servicesagreement or failure or delay beyond its reasonable control in obtainingnecessary manufacturing facilities, labor, or materials from usual sources tothe extent attributable to another force majeure; or failure of any principalcontractor to provide equipment to the extent attributable to another forcemajeure**.**Force majeure does not include:  (1)economic hardship, (2) changes in market conditions or (3) except due to anevent of force majeure, late delivery of program parts or other equipment**.**

 

If a delay inperformance is excusable due to a force majeure, the date of delivery or timefor performance of the work will be extended by a period of time reasonablynecessary to overcome the effect of the force majeure and if the force majeurelasts for a period longer than 30 days and the delay directly increases SiemensWestinghouse’s costs or expenses, the Company, after reviewing SiemensWestinghouse’s additional direct costs and expenses, will reimburse SiemensWestinghouse for its reasonable additional direct costs and expenses incurredafter 30 days from the beginning of the force majeure resulting from the delay**.**

 

**Interconnection Agreement**

 

The Companyhas entered into a Generation Facility Transmission Interconnection Agreement,dated as of March 23, 1999, with GPU Energy for the installation, operation andmaintenance of the facilities necessary to interconnect our facility to thetransmission system of GPU Energy**.** Under the interconnection agreement, theCompany and GPU Energy will construct, own, operate and maintain theinterconnection facilities**.** The Company will be responsible for allof the costs of construction, operation and maintenance of the interconnectionfacilities, including those owned by GPU Energy**.**

 

Theinterconnection facilities and protective gas apparatus needed to generate anddeliver net electric and/or ancillary services to the electric delivery pointwere completed in 2001, as required under the power purchase agreement**.**

 

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**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**.**

 

**TheCompany’s Obligations**

 

At December31, 2003, 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 transformers, revenuemetering, power circuit breakers, control and protective relay panels,supervisory control and data acquisition equipment, and protective relayingequipment**.**

 

The Companyreimbursed GPU Energy for its actual costs of installing the interconnectionfacilities**.**The Company’s payments to GPU Energy have consisted of an advance payment of$500,000 on the execution date of the interconnection agreement, anotherpayment of $40,000 within 30 days of the execution date of the interconnectionagreement (for work undertaken by GPU Energy prior to December 17, 1998), apayment of $1,000,000 at financial closing, June 25, 1999, and monthly invoicesfor the work performed**.**

 

The Company isobligated to modify our portion of the interconnection facilities as may berequired to conform to changes in good utility practice or as required by PJM**.**

 

The Company isobligated to keep our facility insured against loss or damage in accordancewith the minimum coverages specified in the interconnection agreement**.**

 

**Operationand Maintenance of Interconnection Facilities**

 

The partiesare 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**.**

 

GPU Energywill have the right to disconnect the Company’s facility from its transmissionsystem and/or curtail, interrupt or reduce the output of the Company’s facilitywhen operation of the Company’s facility or the interconnection facilitiesadversely affects the quality of service rendered by GPU Energy or interfereswith the safe and reliable operation of its transmission system or the regionaltransmission system**.** GPU Energy, however, is obligated to usereasonable efforts to minimize any disconnection, curtailment, interruption orreduction in output**.**

 

In accordancewith good utility practice, GPU Energy may remove the interconnectionfacilities from service as necessary to perform maintenance or testing or toinstall or replace equipment on the interconnection facilities or thetransmission system**.** GPU Energy is obligated to use duediligence to restore the interconnection facilities to service as promptly aspracticable**.**

 

In addition,if the Company fails to operate, maintain, administer, or insure our facilityor its portion of the interconnection facilities, GPU Energy may, following 30days’ notice and opportunity to cure the failure, disconnect the Company’sfacility from the transmission system**.**

 

**ForceMajeure**

 

If eitherparty 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 due diligenceto remove the cause or causes thereof**.**

 

**Default**

 

The events ofdefault under the interconnection agreement are:

 

•                  breach of amaterial term or condition and uncured failure to provide a required schedule,report or notice;

 

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•                  failure orrefusal of a party to permit the representatives of the other party access tomaintenance records, or its interconnection facilities or protective apparatus;

 

•                  appointment by acourt of a receiver or liquidator or trustee that is not discharged within 60days, 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;

 

•                  voluntary filingby a party of a petition in bankruptcy or consent to the filing of a bankruptcyor reorganization petition, an assignment for the benefit of creditors, anadmission by a party in writing of its inability to pay its debts as they comedue, or consent to the appointment of a receiver, trustee, or liquidator of aparty or any part of its property; and

 

•                  failure toprovide 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**.**

 

Upon an eventof default, the non-defaulting party may give notice of the event of default tothe defaulting party**.** The defaulting party will have 60 daysfollowing the receipt of the notice to cure the default or to commence in goodfaith the steps necessary to cure a default that cannot be cured within that60-day period**.** If the defaulting party fails to cure its default within 60days or fails to take the steps necessary to cure a default that cannot becured within a 60-day period, the non-defaulting party will have the right toterminate the interconnection agreement**.** GPU Energy will have the right to operateand/or to purchase specific equipment, facilities and appurtenances from theCompany that are necessary for GPU Energy to operate and maintain itstransmission system if (1) the Company commences bankruptcy proceedings orpetitions for the appointment of a trustee or other custodian, liquidator, orreceiver, (2) a court issues a decree for relief of the Company or appoints atrustee or other custodian, liquidator, or receiver for the Company or asubstantial part of the Company’s assets and the decree is not dismissed within60 days or (3) the Company ceases operation for 30 consecutive days withouthaving an assignee, successor, or transferee in place**.**

 

**Operations Agreement**

 

The Companyentered into a Development and Operations Services Agreement, dated as of June1, 1999, with AES Prescott by which AES Prescott is providing development andconstruction management services and, after the commercial operation date,operating and maintenance services for our facility for a period of 27 years**.**Under the operations agreement, AES Prescott is responsible for, among otherthings, preparing plans and budgets related to start-up and commercialoperation of the Company’s facility, providing qualified operating personnel,making repairs, purchasing consumables and spare parts (not otherwise providedunder the maintenance services agreement) and providing other services asneeded according to industry standards**.** During fiscal year 2003, AES Prescott wascompensated for the services on a cost plus fixed-fee basis of approximately$425,000 per month**.** The fee is adjusted annually by the change in Gross DomesticProduct, Implicit Price Deflator**.** Total fees paid by the Company were $5.1 million and $5.0 million forthe years ended December 31, 2003 and 2002, respectively.  Under the services agreement between AESPrescott and The AES Corporation, The AES Corporation provides to AES Prescottall of the personnel and services necessary for AES Prescott to comply with itsobligations under the operations agreement**.**

 

**Effluent Supply Agreement**

 

The Company,as assignee of AES Ironwood, Inc**.**, has entered into an Effluent SupplyAgreement, dated as of March 3, 1998, with the City of Lebanon Authority, bywhich City of Lebanon Authority will provide effluent to be used by the Companyat the electric generating facility to be constructed in South LebanonTownship, Pennsylvania**.**

 

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**Supplyof Effluent**

 

Subsequent tocompletion 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 event of a shortfall, the Companymay elect to accept potable water from City of Lebanon Authority in accordancewith the effluent supply agreement**.** The Company will not be obligated topurchase any minimum amount of effluent and will be entitled to seek and obtainwater from other available sources**.** City of Lebanon Authority must use itsbest efforts to comply with requests by the Company for excess effluent, whichmust not exceed (1) 4,600,000 gallons per day or (2) 1,679,000,000 gallons percalendar year**.** In addition, City of Lebanon Authority must use its bestefforts to meet the Company’s minimum effluent requirements**.**

 

**Compensation**

 

The Company isobligated to pay City of Lebanon Authority monthly for all effluent deliveredto the point of delivery during the prior month**.** The base rate for effluentsupplied is:  (1) for 0 to 2,160,000gallons per day, $0**.**29 per thousand gallons and (2) for2,160,000 or greater gallons per day, $0**.**21 per thousand gallons, which rates aresubject to annual adjustments for inflation**.**

 

**Pipelineand Real Estate Rights**

 

The Companywas solely responsible, at its cost and expense, for constructing andinstalling the pipeline**.**

 

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

 

**Operationand Maintenance**

 

The City ofLebanon Authority must operate and maintain the pipeline in accordance with theeffluent supply agreement, and as compensation. The Company must pay to TheCity of Lebanon Authority $18,250 per year, which amount will be subject toannual adjustment for inflation**.**

 

**CapitalImprovements**

 

The effluentsupply agreement provides for capital improvements**.**

 

**PotableWater**

 

The City ofLebanon Authority must make available to the Company on a continuous basis apotable water supply of not less than 50 gallons per minute**.** The Company will not beobligated to purchase a minimum amount of potable water, but must pay the Cityof Lebanon Authority for potable water accepted at the potable delivery pointat the rate applicable to the Company described in City of Lebanon Authority’sapplicable rate schedule**.**

 

**ForceMajeure**

 

If eitherparty is unable to carry out any obligation under the effluent supply agreementdue to force majeure, the effluent supply agreement must remain in effect, butthe obligation will be suspended for the period necessary as a result of theforce majeure so long as:  (1) thenon-performing party gives the other party written notice not later than 48hours after the occurrence of the force majeure describing the particulars ofthe force majeure; (2) the suspension of performance is of no greater scope andof longer duration than is required by the force majeure; and (3) thenon-performing party uses its best efforts to remedy its inability to perform**.**Notwithstanding the preceding, the settlement of strikes, lockouts, and otherlabor disputes will be entirely within the discretion of the affected party,and the party will not be required to settle any strike, lockout or other labordispute on terms which it deems inadvisable**.**

 

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**Term**

 

The term ofthe effluent supply agreement will be 25 years unless terminated early as aresult 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**.**

 

**EarlyTermination for Event of Default**

 

A party mayterminate the effluent supply agreement (1) upon a bankruptcy event of theother party or (2) if the other party fails to perform or observe any of itsmaterial 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 Supply Agreements**

 

The Company,as assignee of AES Ironwood, Inc**.**, entered into an Agreement Relating toReal Estate, dated as of October 22, 1998, with Pennsy Supply, Inc**.**under which Pennsy Supply has agreed to grant to the Company specific easementsand the right to pump water from Pennsy Supply-owned property**.**The easements, which are primarily for access and utility purposes, would runfrom property owned by the Company, on which it will develop and construct itselectric generating facility, across property owned by Pennsy Supply andrequire that the Company’s property be used as a power plant**.**Pennsy Supply has also agreed to grant to the Company easements with respect tostorm-water facilities and construction of a rail spur**.** Pennsy Supply will makewater available to the Company during construction and testing of its facilityand for as long as the Company operates our facility**.** The Company will bear all costsand expenses with respect to water-pumping**.** In consideration for the easements andthe water-pumping rights, the Company has agreed to convey to Pennsy Supplytitle to a parcel of land adjacent to the property owned by the Company**.**

 

The Companyalso entered into an Easement and Right of Access Agreement, dated as of April15, 1999, with Pennsy Supply under which Pennsy Supply has granted the Companythe rights and easements referred to in the prior paragraph as well as specificother rights and easements required by the Company for the construction andoperation of its facility**.**

 

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

 

The Company’sprincipal property is the land for the facility site, which it owns, and thecompleted power plant. The facility site is located in South Lebanon Township,Lebanon County, Pennsylvania on an approximately 35-acre parcel of land. TheCompany has access, utility, drainage and construction easements acrossneighboring property. The Company is able to use these easements as long asthere is no default under the agreements with the owner of the adjacentproperty and the Company is using the facility site for a power plant. TheCompany has title insurance in connection with its property rights. In June andDecember 2001, the Company purchased two parcels of land of approximately 15acres, contiguous to the existing property for approximately $619,000.

 

Under certainfinancing documents, the Company’s rights and interests in our property rightsare encumbered by mortgages, security agreements, collateral assignments andpledges for the benefit of the bondholders and other senior creditors.

 

The Company’sfacility consists of a 705 megawatt (net) gas-fired combined cycle electricgenerating facility. The plant became operational with commercial acceptance onDecember 28, 2001.

 

The Company’sfacility was designed, engineered, procured and constructed for the Company bySiemens Westinghouse under a fixed-price construction agreement. Among othercomponents, our facility uses two Siemens Westinghouse model 501G combustionturbines with hydrogen-cooled generators, two unfired heat recovery steamgenerators 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 

 

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agreement. Under the power purchase agreement, Williams or itsaffiliates will supply fuel necessary to allow the Company to provide capacity,fuel conversion and ancillary services to Williams. AES Prescott, the operator,will provide development, construction management and operations and maintenanceservices for our facility under an operations agreement. The Company willprovide installation, operation and maintenance of facilities necessary tointerconnect our facility to the transmission system of GPU Energy, under aninterconnection agreement.

 

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

 

*Developments Relating to Siemens Westinghouse*

 

The Companypreviously 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“Agreement Change Order No. 71” concerning final acceptance.  This agreement became effective as of thatdate and final acceptance was granted by us as of that date.

 

The terms ofthe agreement include but are not limited to the following items:

 

The Companyagreed not to pursue the cost of electricity and natural gas used by the projectduring certain periods prior to the December 28, 2001 commercial acceptancedate. These costs totaled approximately $10.7 million, and were included inaccounts receivable. This amount was originally recorded as a reduction in thecost of the facility in the 2001 financial statements.

 

The Companyagreed to pay approximately $156,000 in respect of an outstanding amountclaimed by Siemens Westinghouse regarding an April 2002 outage to test andinspect the facility. This amount was included in the Company’s calculation ofthe 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 our financial statements as ofDecember 31, 2002.  The effect of thissettlement for fiscal year 2002 was a reduction of insurance expense of$291,000 and a $182,000 reduction of depreciation expense as a result of thereduction in facility cost.

 

*Developments Relating to Williams*

 

The Companyhas ongoing disputes, including an arbitration with Williams, relating to theparties power purchase agreement.  Thearbitration was bifurcated into two phases, and an award was issued on Phase Ion February 3, 2004.  The primary issuein Phase I related to various aspects of the availability of the Facility forthe year ended December 31, 2002, including disputes over the amount of anyavailability bonus or penalty.  Phase IIof the 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.

 

The arbitralpanel’s award on Phase I of the arbitration found that Williams had misappliedthe applicable rules of PJM Interconnection, L.L.C. in the billing dispute withthe Company over the availability of the facility.  The panel declined, however, to decide the facility’savailability during 43 disputed maintenance events.  Instead, it encouraged the parties to reach a mutual resolutionof the disputed events by applying the correct PJM rule and, failing mutualagreement, to submit the dispute to a third party engineer for resolution.  The parties are currently discussingpossible resolution of the disputed events, and anticipate submitting anyevents 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,the Company anticipates it will be paid some portion of its claimedavailability bonus for 2002 and 2003 and does not owe an amount for annualavailability capacity adjustment or fuel conversion volume rebate.

 

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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 amount of the fuel conversion volume rebate is $1.7 million, butthe 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. Depending on the amount of facility operation, the Company may beentitled to withdraw some of the funds deposited into the account during thesecond half of its fiscal year.  Basedon the arbitral award, the Company does not anticipate any payment for a fuelconversion volume rebate will be due for 2002 or 2003. The funds will berecorded as restricted cash.

 

On March 12,2004 the parties have settled Phase II of the arbitration between theCompany and Williams, whichinvolved 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 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.

 

| **ITEM 4****.** | **Submission of Matters to a Vote of Security  Holders** |
|-----------------|----------------------------------------------------------|

** **

 

Not applicablepursuant to General Instruction I of the Form 10-K.

 

**PARTII**

 
| **ITEM 5****.** | **Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities** |
|-----------------|------------------------------------------------------------------------------------------------------------------------|

** **

 

There is nomarket 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 ratio was not met for theyear ended 2003, no such dividends were declared or paid in 2003.

 
| **ITEM 6****.** | **Selected Financial Data** |
|-----------------|-----------------------------|

 

Not applicablepursuant to General Instruction I of the Form 10-K.

 

| **ITEM 7****.** | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |
|-----------------|-------------------------------------------------------------------------------------------------|

** **

 

The followingdiscussion and analysis should be read in conjunction with our financialstatements and the notes thereto included elsewhere in this annual report. Thefollowing discussion involves forward-looking statements. Our actual resultsmay differ significantly from the results suggested by these forward-lookingstatements.

 

**General**

 

We were formedon October 30, 1998 to develop, construct, own, operate and maintain thefacility. We were dormant until June 25, 1999, the date of the sale of thesenior secured bonds. We granted provisional acceptance on December 27,2001.  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.

 

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During 2003the PJM power pool market, into which our facility’s generation is distributed,experienced a general decline in the amount paid for electricity. This, incombination with a marked increase in the cost of natural gas, was a major factorin Williams’ decision to dispatch our facility on a very limited basis. During2003, our facility was called on to generate only 10.9% of the year as comparedto 28.4% during 2002. Revenue from capacity payments will be the same duringthe life of the power purchase agreement (see Note 3). Payments for fuelconversion services are expected to vary with dispatch notices from Williams.We would expect to generate greater revenues from fuel conversion servicesduring periods of greater dispatch. Since revenue from capacity paymentscomprises most of our revenues, a change from year to year in dispatchpercentage may not have an equal effect on total revenue.

 

The result ofthis lower dispatch resulted in much lower payments for fuel conversionservices. We believe that the fixed capacity payments are sufficient to meetthe cash demands of our business, but we require the additional revenue fromsuch fuel conversion services to be profitable.

 

The projectionfor 2004 based on dispatch profiles from Williams, is that we will operateapproximately 20.0%. During January 2004 we did not operate; however we weredispatched in February, a month in which we typically do not expect to operate.

 

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.

 

**EquityContributions**

 

Under anEquity Subscription Agreement, AES Ironwood, Inc. was obligated to contributeup to approximately $50.1 million in the form of either subordinated debt orequity to us to fund project costs. In 2001 AES Ironwood, Inc. provided a $30million subordinated loan to us under the equity subscription agreement. InJanuary 2002, the $30 million payable to AES Ironwood, Inc. was converted to anequity contribution. As of December 31, 2002 AES Ironwood, Inc. had made netcontributions to us of $38.8 million. Approximately $9.1 million of the remaining contribution was supportedby a surety bond until June 25, 2002, when the surety bond expired. At thattime the surety bond was replaced by an acceptable letter of credit in theamount of $9.1 million. The need for the letter of credit ceased with thegranting of final acceptance on March 12, 2003. We notified the collateralagent and they have released us of this requirement.

 

**Resultsof Operations**

 

For the yearsended December 31, 2003, 2002 and 2001, operating revenues were approximately$50.1 million, $51.9 million and $1.2 million respectively. Operating revenuesconsist of capacity payments of approximately $4.0 million per month.Consistent with our revenue recognition policy discussed in Note 3 to thefinancial statements, a portion of the amount collected has been deferred. Theremaining revenue consists of fuel conversion and heat rate bonus payments.Operating revenues in 2003 and 2002 reflect full years of operation. Operatingrevenues in 2001 reflected operation for a portion of the month of December.

 

For the yearsended December 31, 2003, 2002 and 2001, depreciation expense was approximately$10.6 million, $10.1 million and $85,000 respectively. Depreciation expense in2003 and 2002 reflects full years of operation. Depreciation expense in 2001reflected operation for a portion of the month of December.

 

For the yearsended December 31, 2003, 2002 and 2001, operating fees were approximately $5.1million, $5.0 million and $0 respectively. Operating fees in 2003 and 2002reflect full years of operation. Operating fees in 2001 reflected operation fora portion of the month of December and operating expenses that were not capitalizedas part of the construction of the facility.

 

For the yearsended December 31, 2003, 2002 and 2001, operating costs were approximately $5.8million, $5.4 million and $0 respectively. Operating costs in 2003 and 2002reflect full years of operation. Operating costs in 2001 reflected operationfor a portion of the month of December and management services and fees thatwere not capitalized as part of the construction of the facility.

 

For the yearsended December 31, 2003, 2002 and 2001, general and administrative costs of$9.3 million, $10.6 million and $374,000, respectively, were incurred. Thesewere costs that did not directly relate to construction and are included asexpenses in the Statement of Operations. The decrease from December 31, 2003 toDecember 31, 2002 is due to lower costs for cost of fuel oil sales,contributions, legal expense, and bad debt expense, partially 

 

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offset by higher costs for insurance. The amounts in 2003 and 2002 reflectthe impact of a full year of operation compared to operation for a portion ofthe month of December in 2001.

 

For the years ended December31, 2003, 2002 and 2001 loss on disposal of assets was $978,000, $0, and $0respectively. Two assets were sold at a loss during 2003. Emission credits,included in other assets, were sold to AES Eastern Energy, L.P., an indirectwholly owned subsidiary of The AES Corporation at a fair market price resultingin a net loss of $431 thousand.  Additionally, a vehicle was sold at aloss of $111 thousand. During 2002 we commenced installation of an auxiliaryboiler to increase the efficiency of the facility. The arbitration settlementof March 2003 determined that we have no obligation to install the auxiliaryboiler as there would be no economic benefit produced by its installation. OnJuly 24, 2003, the Company entered into a contract with a sales assistancecompany to facilitate the sale of the boiler. Total costs associated with theauxiliary boiler were approximately $886,000. The fair value less selling costsof the auxiliary boiler is $450,000 and is included in asset held for sale.Approximately $436,000 has been expensed and is included in loss on disposal ofassets in the statement of operations.

 

For the yearsended December 31, 2003, 2002 and 2001, interest expense was approximately$27.0 million, $27.2 million and $153,000 respectively. The increase for 2003and 2002 versus 2001 reflects the impact of a full year of operation in 2003and 2002 compared to operation for a portion of the month of December in 2001.Prior to commercial operations, all interest was capitalized.

 

For the yearsended December 31, 2003, 2002 and 2001, the interest income earned on investedfunds was approximately $84,000, $138,000 and $489,000, respectively.

 

Other incomein 2003 consisted of $222,000 from Siemens Westinghouse relating to theirpayment of performance guarantees and $10,000 from the sale of excess fuelcompared to $3.5 million from Siemens Westinghouse relating to their payment ofperformance guarantees and $1.3 million from the sale of excess fuel in 2002.

 

For the yearended 2003, we had a net loss of $8.3 million versus net loss of $1.6 millionfor 2002.  For fiscal year 2001, we hada net income of $1.0 million. The increased net loss for 2003 is primarilyattributable to Williams dispatching the facility 10.9% during 2003 compared28.4% in 2002, the absence of the $3.5 million payment from SiemensWestinghouse we received in 2002 in respect of heat rate and output rebates andthe absence of $1.3 million from the sale of excess fuel in 2002. Additionally,we incurred increased expenses due to arbitration, higher security costs, andother smaller operating items. The facility was in operation for a portion ofDecember 2001. Revenue from capacity payments will be the same during the lifeof the power purchase agreement (see Note 3). Payments for fuel conversionservices are expected to vary with dispatch notices from Williams. We wouldexpect to generate greater revenues from fuel conversion services duringperiods of greater dispatch. Since revenue from capacity payments comprisesmost of our revenues, a change from year to year in dispatch percentage may nothave an equal effect on total revenue.

 

**Liquidityand Capital Resources**

 

The minimumcash flow from Williams under the power purchase agreement is approximately$4.0 million per month or approximately $48 million annually. Net operatingcash outflows are approximately $1.3 million per month. The balance left willprovide for senior debt interest and principal payments. We expect that currentdispatch scenarios from Willams will yield cash flows in 2004 similar to 2003.Consistent with our revenue recognition policy discussed in Note 3 to thefinancial statements, a portion of the amount collected has been deferred.Additionally, a significant monthly expenditure is for payment of our long termservice agreement with Siemens Westinghouse. This agreement provides that wepay approximately $400 per gas turbine per equivalent operating hour. In theevent we are not required to dispatch the facility, there is no charge. Whileoperating at base load, the estimated monthly payment for the long term serviceagreement could be as much as $450,000. We believe that our cash flows are sufficientto fund our future operations and to satisfy our outstanding obligations.

 

We believethat cash flows from the sale of electricity under the power purchase agreementwill be sufficient to pay ongoing project costs, including principal andinterest on the senior secured bonds. After the power purchase agreementexpires, we will depend on market sales of electricity.

 

In order toprovide liquidity in the event of cash flow shortfalls, the debt servicereserve account contains an amount equal to the debt service reserve accountrequired balance through cash funding, issuance of the debt service reserveletter of credit or a combination of the two.

 

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For the yearsended December 31, 2003 and 2002 cash provided from operating activities wasapproximately $4.6 million and $5.9 million respectively.  Additions to net income to arrive at cashprovided from operating activities include such non-cash expenses as depreciationand amortization of deferred financing costs. For the years ended December 2003 and 2002 depreciation expense was$10.6 million and $10.1 million respectively and amortization expense for theyears ended December 31, 2003 and 2002 was $137,000 and $145,000 respectively.

 

For the yearended December 31, 2003 net cash provided by investing activities was $3.4million compared to net cash used in investing activities of $17.2 million forthe year ended December 31, 2002. The amount in 2002 was due the terms ofAgreement Change Order 71, of final acceptance (See Note 8). As part of theagreement, approximately $11.1 million of retainage originally due to SiemensWestinghouse was reversed.

 

For the yearsended December 31, 2003 and 2002 net cash used in financing activities wasapproximately $6.8 million compared to net cash provided by financingactivities of $4.9 million for the year ended December 31, 2002.  The higher amount of cash used in 2003 wasdue to higher bond principle payments and a full years payment of a notepayable for financed insurance costs. Additionally, in 2002 there was a capital contribution of $8.8 millionoffset by dividends paid of $4.3 million.

 

We believethat cash flows from the sale of electricity and/or minimum capacity paymentsunder the power purchase agreement and funds available to be drawn under thedebt service reserve letter of credit and the power purchase letter of creditwill be sufficient to pay project costs, including ongoing expenses andprincipal and interest on our senior secured bonds as described above and fundcosts of our commercial operations. These beliefs are subject to certain assumptions, risks anduncertainties, including those set forth above under the caption “CautionaryNote Regarding Forward-Looking Statements” and there can be no assurances.

 

Cash balancesat December 31, 2003 and 2002 are as follows:

 
| **Unrestricted Cash (balance in  000’s)** |   | **December  31, 2003** |   | **December  31, 2002** |   |
|------------------------------------------------|--------|------------------------|--------|------------------------|--------|
| Checking account – general                |   | $                      | 21     |                   | $      | 25 |   |
| Cash Management Account                        |   | 389                    |   | 355                    |   |
| Revenue Account                                |   | 1,953                  |   | 537                    |   |
| Distribution Account                           |   | 3                      |   | —                 |   |
| Operating and Maintenance Account              |   | —                 |   | 171                    |   |
| Total Unrestricted Cash                        |   | $                      | 2,366  |                   | $      | 1,088 |   |

 
| **Restricted Cash (balances in  000’s)** |   | **December  31, 2003** | ** ** | **December  31, 2002** | ** ** |
|-----------------------------------------------|--------|------------------------|------------|------------------------|------------|
| Bond Interest Account                         |   | $                      | 2,241      |                   | $          | 2,289 |   |
| Bond Principal Payment Account                |   | 535                    |       | 499                    |       |
| Operating and Maintenance Account             |   | 1,047                  |       | 0                      |       |
| Major Maintenance Reserve Account             |   | 707                    |       | 707                    |       |
| Debt Reserve LOC Account                      |   | 26                     |       | 26                     |       |
| Construction Account                          |   | —                 |       | 2,282                  |       |
| Total Restricted Cash                         |   | $                      | 4,556      |                   | $          | 5,803 |   |

 

**Concentration of Credit Risk in Williams and Affiliates**

 

Williamscurrently is our sole customer for purchases of capacity, ancillary services,and energy, and our sole source for fuel. Williams’ payments under the powerpurchase agreement are expected to provide all of our revenues during the termof the power purchase agreement. It is uncertain whether we would be able tofind another purchaser or fuel source on similar terms for our 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 ouroperations. The payment obligations of Williams under the power purchaseagreement are guaranteed by The Williams Companies, Inc. The Guaranty by TheWilliams Companies, Inc., dated June 25, 1999 indicated the total aggregateliability to be approximately $408 million; as reduced from time to time asprovided by a reduction schedule described in the guaranty (“Guaranty Cap”). AtDecember 31, 2003, this amount was approximately $402 million.

 

Under thepower purchase agreement, in the event that S&P or Moody’s rate the longterm senior unsecured debt of The Williams Companies, Inc**.** lower than investmentgrade, The Williams Companies, Inc**.**, or an affiliate thereof, is required toreplace The Williams Companies, Inc**.** guarantee with an alternative securitythat is acceptable to us**.** According to published sources, on July23, 2002, S&P lowered the long term senior unsecured debt rating of TheWilliams Companies, Inc**.** to “BB-” from “BBB-”, and further loweredsuch rating to “B” on July 25, 2002**.**On May 23, 2003 S&P upgraded therating to “B+” with a negative outlook.  According to published sources, on July 24, 2002, Moody’s lowered thelong-term senior unsecured debt rating of The Williams Companies, Inc**.**to “B1” from “Baa3**.**” According to published sources, this rating was further lowered onNovember 22, 2002 to “Caa1” by Moody’s, and then upgraded to “B3” on June 4,2003.  Accordingly, The WilliamsCompanies, Inc**.**’s long term senior unsecured debt is currently rated belowinvestment grade by both S&P and Moody’s**.**

 

In an actionrelated to the ratings downgrade of The Williams Companies, Inc., S&P loweredits ratings on the our senior secured bonds to “BB-” from “BBB-” on July 26,2002, and placed the rating on credit watch. On December 10, 2003 S&Plowered its ratings on our senior secured bonds to “B+” from “BB-” with anegative outlook. On November 27, 2002, Moody’s lowered its ratings on oursenior secured bonds to “B2” from “Ba2”.  We do not believe that such ratings downgrades will have any otherdirect or immediate effect on us, as none of the other financing documents orproject contracts has provisions that are triggered by a reduction of theratings 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 us andis considered to be additional security to the security amounts provided bysuch guaranty. The Letter of Credit became effective on September 20, 2002 andexpired upon the close of business on July 10, 2003; except that the Letter ofCredit will be automatically extended without amendment for successive one yearperiods from the present or any 

 

35

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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. On June 13, 2003, Citibank, N.A. sent notification that the letter ofcredit will be extended to July 12, 2004. Additionally, in a Letter Agreementdated September 20, 2002, Williams agreed to (a) provide eligible creditsupport prior to the stated expiration date of the Letter of Credit and (b)replenish any portion of the Letter of Credit or eligible credit support thatis drawn, reduced, cashed or redeemed, at any time, with an equal amount ofeligible 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 andWilliams’ agreement and performance of the requirements of (a) and (b) as setforth in the immediately preceding sentence shall be in full satisfaction ofWilliams’ obligations contained in Section 19.3 of the power purchase agreementto provide replacement security due to the downgrade of The Williams Companies,Inc. below investment grade status.

 

Our dependenceon The Williams Companies, Inc. and its affiliates under the power purchaseagreement exposes us to possible loss of revenues and fuel supply, which inturn, could negatively impact our cash flow and financial condition and couldresult in a default under our senior secured bonds. There can be no assuranceas to our ability to generate sufficient cash flow to cover operating expensesor our debt service obligations in the absence of a long term power purchaseagreement with Williams or its affiliates.

 

**BusinessStrategy and Outlook**

 

Under ouroverall business strategy, we are committed to market and sell all of our netcapacity, fuel conversion and ancillary services to Williams during the 20-yearterm of the power purchase agreement. After expiration of the power purchaseagreement, we anticipate selling our facility’s capacity, ancillary servicesand energy under a power purchase agreement or into the Pennsylvania/NewJersey/Maryland power pool 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 Accounting Pronouncements**

 

InJuly 2001, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standard (SFAS) No. 143, entitled “Accounting for AssetRetirement Obligations.”  This standardwas effective for fiscal years beginning after June 15, 2002 and providesaccounting requirements for asset retirement obligations associated withlong-lived assets.  Under the Statement,the asset retirement obligation is recorded at fair value in the period inwhich it is incurred by increasing the carrying amount of the relatedlong-lived asset.  The liability isaccreted to its present value in each subsequent period and the capitalizedcost is depreciated over the useful life of the related asset. The adoption ofthis standard did not have a material effect on our financial statements.

 

InApril 2002, the FASB issued SFAS No. 145, entitled “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  This statement eliminatesthe current requirement that gains and losses on debt extinguishment must beclassified as extraordinary items in the income statement.  Instead, such gains and losses will beclassified as extraordinary items only if they are deemed to be unusual andinfrequent, in accordance with the current GAAP criteria for extraordinaryclassification.  In addition, SFAS No.145 eliminates an inconsistency in lease accounting by requiring thatmodifications of capital leases that result in reclassification as operatingleases be accounted for consistent with sale-leaseback accounting rules.  The statement also contains othernonsubstantive corrections to authoritative accounting literature.  The changes related to debt extinguishmentare effective for fiscal years beginning after May 15, 2002, and the changesrelated to lease accounting are effective for transactions occurring after May15, 2002. The adoption of this standard did not have a material effect on ourfinancial statements.

 

InJune 2002, the FASB issued SFAS No. 146, entitled “Accounting for CostsAssociated with Exit or Disposal Activities,” which addresses accounting forrestructuring and similar costs.  SFASNo. 146 supersedes previous accounting guidance, principally Emerging IssuesTask Force (“EITF”) Issue No. 94-3 and is effective for restructuringactivities initiated after December 31, 2002.

 

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SFASNo. 146 requires that the liability for costs associated with an exit ordisposal activity be recognized when the liability is incurred.  Under EITF Issue No. 94-3, a liability foran exit cost was recognized at the date of a company’s commitment to an exitplan.  SFAS No. 146 also establishesthat the liability should initially be measured and recorded at fairvalue.  adoption of this standard didnot have a material effect on our financial statements as we have norestructuring activities through December 31, 2003.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities” (“SFAS No. 149”).  SFAS No.149 amends and clarifies the accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts, and for hedging activities under SFAS No. 133.  The amendmentsset forth in SFAS No. 149 require that contracts with comparablecharacteristics be accounted for similarly.  In particular, this statementclarifies under what circumstances a contract with an initial net investmentmeets the characteristics of a derivative according to SFAS No. 133 and when aderivative contains a financing component that warrants special reporting inthe statement of cash flows.  In addition, the statement amends thedefinition of an underlying to conform it to language used in FASB InterpretationNo. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others, and amends certainother existing pronouncements.

 

Therequirements of SFAS No. 149 are effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003.  The provisions of the statement that relate to SFAS No.133 implementation issues that have been effective for fiscal quarters thatbegan prior to June 15, 2003 should continue to be applied in accordance withtheir respective effective dates. The adoption of this standard did not have amaterial effect on our financial statements as we have no derivativeinstruments.

 

InMay 2003, the FASB adopted SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity”.  Thisstatement establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modifiedafter May 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. The adoption of this standard didnot have a material effect on our financial statements.

 

InNovember 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others”. This interpretation establishes new disclosure requirements for allguarantees, but the measurement criteria are applicable to guarantees issuedand modified after December 31, 2002. The adoption of this interpretation didnot have any effect on our financial statements.

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN No. 46, Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51 (“FIN No. 46”).  In October 2003, FASB StaffPosition No. 46-6, “Effective Date of FIN No. 46, Consolidation of VariableInterest Entities” deferred the effective date of FIN No. 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 first interimor annual period 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 we were alreadyrequired to apply.  In addition, FIN 46(r) deferred the effective date forVIEs that were created or acquired before February 1, 2003 and were notconsidered special purpose entities (“SPEs”) prior to the issuance of theinterpretation until the end of the first quarter ending March 31, 2004. FIN 46(r) defines a VIE as (i) any entity in which the equity investors at riskin such entity do not have the characteristics of a controlling financialinterest, or (ii) any entity that does not have sufficient equity at risk tofinance its activities without additional subordinated financial support fromother parties.  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 that were considered SPEsprior to the issuance of the interpretation did not have a significant impacton our financial statements.  We have assessed the impact of theprovisions of FIN 46(r) on our financial statements for VIEs created oracquired prior to February 1, 2003 that were not considered SPEs prior to theissuance of the interpretation, and do not believe that the impact will bematerial.

 

**CriticalAccounting Policies**

 

**General**

 

We prepare ourfinancial statements in accordance with accounting principles generallyaccepted in the United States of America. As such, we are required to makecertain estimates, judgments and assumptions that we believe 

 

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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 generateenergy revenues under our power purchase agreement with Williams. During the20-year term of the agreement, we expect to sell electric energy and capacityproduced by the facility, as well as ancillary and fuel conversion services.Under the power purchase agreement, we also generate revenues from meeting (1)base electrical output guarantees and (2) heat rate rebates through efficientelectrical output. Revenues from the sales of electric energy are recordedbased on output delivered at rates as specified under contract terms. Revenuesfrom capacity are recorded on a straight-line basis over the life of thecontract. Amounts billed in excess of revenue recognized are recorded asdeferred revenue.  Revenues forancillary and other services are recorded when the services are rendered.

 

Upon itsexpiration, or in the event that the power purchase agreement is terminatedprior to its 20 year term, we would seek to generate energy revenues from thesale of electric energy and capacity into the merchant market or under newshort- or long-term power purchase or similar agreements. There can be noassurances as to whether such efforts would be successful.

 

**Property, Plant and Equipment**

 

Property,plant and equipment is recorded at cost and is depreciated over its usefullife. The plant is depreciated using a ten percent salvage value based onestimates from a third party engineer. We believe a 10% salvage value isreasonable, but we intend to periodically re-evaluate this percentage. Theestimated lives of our generation facilities range from 5 to 40 years. Asignificant decrease in the estimated useful life of a material amount of ourproperty, plant or equipment could have a material adverse impact on ouroperating results in the period in which the estimate is revised and subsequentperiods.

 
| **Description  of  Asset** |   | **Depreciable  Life** |       | **Net  Book Value at  December 31, 2003** |        | **Net  Book Value at  December 31, 2002** |   |
|----------------------------|--------|-----------------------|------------|-------------------------------------------|-------------|-------------------------------------------|--------|
|                       |   |                  |       | **(in  thousands)**                       |        | **(in  thousands)**                       |   |
|                       |   |                  |       |                                      |        |                                      |   |
| Plant                      |   | 40                    |       | $                                         | 224,627     |                                      | $      | 230,369 |   |
| Buildings                  |   | 40                    |       | 833                                       |        | 461                                       |   |
| Land Improvements          |   | 40                    |       | 10,643                                    |        | 10,894                                    |   |
| Equipment                  |   | 40                    |       | 2,023                                     |        | 2,921                                     |   |
| Rotable Turbine Parts      |   | 7-28                  |       | 46,992                                    |        | 47,351                                    |   |
| Development Costs          |   | 25                    |       | 22,513                                    |        | 23,595                                    |   |
| Furniture & Fixtures   |   | 15                    |       | 696                                       |        | 741                                       |   |
| Data Processing Equipment  |   | 7                     |       | 440                                       |        | 499                                       |   |
| Vehicles                   |   | 5                     |       | 228                                       |        | 566                                       |   |
| Projects                   |   | na                    |       | 1,934                                     |        | 3,060                                     |   |
| Spare Parts                |   | na                    |       | 2,406                                     |        | 2,288                                     |   |
|                       |   |                  |       |                                      |        |                                      |   |
|                       |   |                  | ** ** | $                                         | **313,335** |                                      | $      | **322,745** | ** ** |

 

**Contingencies**

 

We haveongoing disputes, including an arbitration with Williams, relating to theparties power purchase agreement.  Thearbitration was bifurcated into two phases, and an award was issued on Phase Ion February 3, 2004.  The primary issuein Phase I related to various aspects of the availability of the facility forthe year ended December 31, 2002, including disputes over the amount of anyavailability bonus or penalty.  Phase IIof the arbitration involves a dispute concerning the proper duration offacility start-ups and shutdowns, including fuel used 

 

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during start-ups and shutdowns. While Phase I of the arbitration was limited to billing disputes in2002, many of the same issues are disputed between the parties for 2003billings.

 

The arbitralpanel’s award on Phase I of the arbitration found that Williams had misappliedthe applicable rules of PJM Interconnection, L.L.C. in the billing dispute withus over the availability of the facility. The panel declined, however, to decide the facility’s availabilityduring 43 disputed maintenance events. Instead, it encouraged the parties to reach a mutual resolution of thedisputed events by applying the correct PJM rule and, failing mutual agreement,to submit the dispute to a third party engineer for resolution.  The parties are currently discussingpossible resolution of the disputed events, and anticipate submitting anyevents 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 our negotiations with Williams,we anticipate we will be paid some portion of our claimed availability bonusfor 2002 and 2003 and that we do not owe an amount for annual availability capacityadjustment or fuel conversion volume rebate.

 

Also as aresult of the panel’s Phase I Award, we will begin pre-funding a cash accounton a quarterly basis to reflect the maximum amount of a fuel conversion volumerebate that might be payable to Williams if the facility operates the requisitenumber of hours to earn the maximum rebate available under the power purchaseagreement.  The maximum theoreticalamount of the fuel conversion volume rebate is $1.7 million, but the accountwill not be fully funded during the course of the year if the facility is notoperated a sufficient number of hours to achieve the maximum fuel conversionvolume rebate.  Depending on the amountof facility operation, we may be entitled to withdraw some of the fundsdeposited into the account during the second half of our fiscal year.  Based on the arbitral award, we do notanticipate any payment for a fuel conversion volume rebate will be due for 2002or 2003.

 

On March 12,2004 the parties have settled Phase II of the arbitration betweenWilliams and us, 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 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.

 

We will continueto discuss with Williams the calculation of these amounts but are unable topredict the outcome of these discussions and their potential impact on ourability to collect these revenue items either for 2003 or in the future.

 

**Commitments**

 

**Bonds**

 

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

 

Principal andinterest is payable as follows for the years ending December 31 (in thousands):

 
| **Year**       |   | **Principal** |    | **Interest** |   | **Total** |   |
|----------------|--------|---------------|---------|--------------|--------|-----------|--------|
|           |   |          |    |         |   |      |   |
| 2004           |   | $             | 6,356   |         | $      | 26,517    |   | $ | 32,873 |   |
| 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    |   |
| 2009-2025      |   | 260,744       |    | 222,316      |   | 483,060   |   |
| Total payments |   | $             | 301,772 |         | $      | 348,396   |   | $ | 650,168 |   |

 

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**Operations Agreement**

 

We enteredinto a Development and Operations Services Agreement, dated as of June 1, 1999,with AES Prescott by which AES Prescott is providing development andconstruction management services and, after the commercial operation date,operating and maintenance services for our facility for a period of 27 years**.**Under the operations agreement, AES Prescott is responsible for, among otherthings, preparing plans and budgets related to start-up and commercialoperation of our facility, providing qualified operating personnel, makingrepairs, purchasing consumables and spare parts (not otherwise provided underthe maintenance services agreement) and providing other services as neededaccording to industry standards**.** During fiscal year 2002, AES Prescott wascompensated for the services on a cost plus fixed-fee basis of $425,000 permonth**.** The fee is adjusted annually by the change inGross Domestic Product, Implicit Price Deflator**.**  Total fees paid by us were $5.1 million for the year endedDecember 31, 2003.  Under the servicesagreement between AES Prescott and The AES Corporation, The AES Corporation providesto AES Prescott all of the personnel and services necessary for AES Prescott tocomply with its obligations under the operations agreement**.**

 

The followingtable is an estimate of management fees to be paid through the end of thecontract, using an annual inflation rate of 2.7% (in thousands):

** **
| **Year**       |   | **Management  Fee** |    |
|----------------|--------|---------------------|---------|
| 2004           |   | $                   | 5,215   |   |
| 2005           |   | 5,356               |    |
| 2006           |   | 5,501               |    |
| 2007           |   | 5,649               |    |
| 2008           |   | 5,802               |    |
| 2009-2025      |   | 126,424             |    |
| Total payments |   | $                   | 153,947 |   |

 

**Maintenance Agreement**

 

The Company,as assignee of AES Ironwood, Inc**.**, has entered into the Maintenance ProgramParts, Shop Repairs and Scheduled Outage TFA Services Contract, dated as ofSeptember 23, 1998, with Siemens Westinghouse by which Siemens Westinghousewill provide the Company with, among other things, combustion turbine parts,shop repairs and scheduled outage technical field assistance services**.**

 

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

 

Themaintenance services agreement indicates that we will pay a fixed amount,adjusted by inflation over the term, of the agreement. The payments are alsobased on the equivalent operating hours of the combustion turbines. The planthas typically been dispatched during the months of June, July, August, andSeptember. The remaining months have typically seen little or no activity. Theamounts shown in the table under maximum indicate dispatching the plant at baseload for approximately 85% of the year. We do not believe this will be a likelyoccurrence:

 

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(inthousands)

 
| **Year**        |   | **Minimum** |   | **Maximum** |   |
|-----------------|--------|-------------|--------|-------------|--------|
| 2004            |   | $           | -0-    |        | $      | 6,801 |   |
| 2005            |   | -0-         |   | 5,978       |   |
| 2006            |   | -0-         |   | 6,139       |   |
| 2007            |   | -0-         |   | 6,305       |   |
| 2008            |   | -0-         |   | 6,475       |   |
| 2009            |   | -0-         |   | 6,650       |   |
| 2010            |   | -0-         |   | 6,829       |   |
| Total  payments |   | -0-         |   | $           | 45,177 |   |
|                 |        |             |        |             |        |  |  |

 

**ContractualObligations**

** **
| **Contractual  Obligations (000's)** |   | **Total** |    | **Less then 1  year** |   | **2-3****years** |       | **3-5****years** |   | **After****5 years** |   |   |       |
|--------------------------------------|--------|-----------|---------|-----------------------|--------|------------------|------------|------------------|--------|----------------------|--------|--------|------------|
|                                 |   |      |    |                  |   |             |       |             |   |                 |   |   |       |
| Debt  Obligations                    |   | $         | 650,168 |                  | $      | 32,873           |       | $                | 65,423 |                 | $      | 68.812 |       | $ | 483,060 |   |   |   |
|                                 |   |      |    |                  |   |             |       |             |   |                 |   |   |       |
| Management  Fees                     |   | 153,947   |    | 5,215                 |   | 10,857           |       | 11,451           |   | 126,424              |   |   |       |
|                                 |   |      |    |                  |   |             |       |             |   |                 |   |   |       |
| Maintenance  Agreement               |   | 45,177    |    | 6,801                 |   | 12,117           |       | 12,780           |   | 13,479               |   |   |       |
|                                 |   |      |    |                  |   |             |       |             |   |                 |   |   |       |
| **TOTAL**                            |   | **$**     | 849,292 | ** **            | **$**  | 44,889           | ** ** | **$**            | 88,397 | ** **           | **$**  | 93,043 | ** ** | **$** | 622,963 |   |   |   |

 

**ITEM 7A****.       Quantitative and Qualitative Disclosures About Market Risk**

** **

The bonds have an aggregateprincipal amount of $301.8 million at December 31, 2003.  The bonds are fair valued using factors suchas our company’s credit ratings and the credit ratings of counter parties such asThe Williams Companies Inc.  During2003 the PJM market, into which our facility’s generation is distributed,experienced a general decline in the amount paid for electricity. This incombination with a marked increase in the cost of natural gas, was a majorfactor in Williams’ decision to dispatch our facility on a very limited basis.Based upon current market conditions and projections from Williams, weanticipate a comparable dispatch level in 2004. In the event that these marketconditions do not improve, and Williams does not dispatch our facility at allin 2004, 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. We are not subject to interest rate risk as the interest ratesassociated with our outstanding indebtedness are fixed over the life of thebonds. We currently have no other financial or derivative financialinstruments. We do not believe that we face other material risks requiringdisclosure pursuant to Item 305 of Regulation S-K.

 

In an action related to theratings downgrade of The Williams Companies, Inc., S&P lowered its ratingson our senior secured bonds to “BB-” from “BBB-” on July 26, 2002, and placedthe rating on credit watch. On December 10, 2003 S&P lowered its ratings onour senior secured bonds to “B+” from “BB-” with a negative outlook. OnNovember 27, 2002, Moody's lowered its ratings on our senior secured bonds to“B2” from “Ba2”.   We do not believethat such ratings downgrades will have any other direct or immediate effect onus, as none of the other financing documents or project contracts haveprovisions that are triggered by a reduction of the ratings of the bonds.

 

During 2003,the PJM market, into which our facility’s generation is distributed,experienced a general decline in the amount paid for electricity. This, incombination with a marked increase in the cost of natural gas, was a majorfactor in Williams’ decision to dispatch our facility on a very limited basis.Based upon current market conditions and projections from Williams, weanticipate a comparable dispatch level in 2004.  In the event that these market conditions do not improve, andWilliams does not dispatch our facility at all in 2004, we believe that thefixed capacity payments are sufficient to meet the cash demands of ourbusiness, but we require the additional revenue from such fuel conversionservices to be profitable.

 

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**ITEM 8****.****                             Financial Statements andSupplemental Data**

 

**AESIRONWOOD, L.L.C.AN INDIRECT WHOLLY OWNED SUBSIDIARYOF THE AES CORPORATION**

 

**Indexto Financial Statements**

 
| Independent Auditors’ Report              |   |
|------------------------------------------------|--------|
|                                           |   |
| Balance Sheets                                 |   |
|                                           |   |
| Statements of Operations                       |   |
|                                           |   |
| Statements of Changes in Member’s Capital |   |
|                                           |   |
| Statements of Cash Flows                       |   |
|                                           |   |
| Notes to Financial Statements                  |   |

 

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**INDEPENDENT AUDITORS’ REPORT**

 

To the Member of

AES Ironwood, L.L.C.:

 

We have audited the accompanying balancesheets of AES Ironwood, L.L.C. (an indirect wholly owned subsidiary of The AESCorporation) (the “Company”) as of December 31, 2003 and 2002 and the relatedstatements of operations, changes in member’s capital and cash flows for theyears ended December 31, 2003, 2002 and 2001. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statementspresent fairly, in all material respects, the financial position of AESIronwood, L.L.C., as of December 31, 2003 and 2002, and the results of itsoperations and its cash flows for the years ended December 31, 2003, 2002 and2001, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

As more fully discussed in Note 7, theCompany’s dependence upon Williams Power Company, Inc. under the Power PurchaseAgreement exposes the Company to possible loss of revenues and fuel supply.There can be no assurances as to the Company’s ability to generate sufficientcash flow to cover operating expenses or debt service obligations in theabsence of a Power Purchase Agreement with Williams Power Company, Inc. andrelated guaranty by The Williams Companies, Inc. or their affiliates.

 
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|
| McLean, Virginia              |
|                          |
| March 12, 2004                |

 

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AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDIARY

OF THE AES CORPORATION

 

BALANCE SHEETS,

DECEMBER 31, 2003 AND 2002

(DOLLARS IN THOUSANDS, exceptpar values)

 
|                                                                                                 |   | **December  31,  2003** |    | **December  31,  2002** |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
| ASSETS:                                                                                              |   |                    |    |                    |   |
|                                                                                                 |   |                    |    |                    |   |
| Current assets:                                                                                      |   |                    |    |                    |   |
| Cash and cash equivalents                                                                            |   | $                       | 2,366   |                    | $      | 1,088 |   |
| Interest receivable                                                                                  |   | 4                       |    | 8                       |   |
| Accounts receivable — net                                                                       |   | 4,445                   |    | 10,135                  |   |
| Prepaid expenses                                                                                     |   | 1,046                   |    | 2,511                   |   |
| Inventory — fuel                                                                                |   | 7                       |    | 26                      |   |
| Asset held for sale                                                                                  |   | 450                     |    | —                  |   |
| Total current assets                                                                                 |   | 8,318                   |    | 13,768                  |   |
|                                                                                                 |   |                    |    |                    |   |
| Land                                                                                                 |   | 1,143                   |    | 1,143                   |   |
| Property, plant, and equipment-net of accumulated depreciation of  $20,744 and $10,188, respectively |   | 313,335                 |    | 322,745                 |   |
| Restricted cash-certificate of deposit                                                               |   | —                  |    | 77                      |   |
| Deferred financing costs-net of accumulated amortization of $645 and  $508, respectively             |   | 2,990                   |    | 3,127                   |   |
| Restricted cash including debt service reserve                                                       |   | 4,556                   |    | 5,803                   |   |
| Other assets                                                                                         |   | —                  |    | 753                     |   |
| Total assets                                                                                         |   | $                       | 330,342 |                    | $      | 347,416 |   |
|                                                                                                 |   |                    |    |                    |   |
| LIABILITIES AND MEMBER’S CAPITAL:                                                               |   |                    |    |                    |   |
|                                                                                                 |   |                    |    |                    |   |
| Current liabilities:                                                                                 |   |                    |    |                    |   |
| Accounts payable                                                                                     |   | $                       | 61      |                    | $      | 2,666 |   |
| Accrued interest                                                                                     |   | 2,227                   |    | 2,262                   |   |
| Payable to AES and affiliates                                                                        |   | 2,146                   |    | 2,873                   |   |
| Note payable                                                                                         |   | 292                     |    | 2,328                   |   |
| Bonds payable, current                                                                               |   | 6,356                   |    | 4,751                   |   |
| Total current liabilities                                                                            |   | 11,082                  |    | 14,880                  |   |
|                                                                                                 |   |                    |    |                    |   |
| Deferred revenue                                                                                     |   | 1,392                   |    | —                  |   |
| Bonds payable                                                                                        |   | 295,416                 |    | 301,773                 |   |
|                                                                                                 |   |                    |    |                    |   |
| Total liabilities                                                                                    |   | 307,890                 |    | 316,653                 |   |
|                                                                                                 |   |                    |    |                    |   |
| 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                                                                                |   | (16,348                 | )       | (8,037                  | )      |
|                                                                                                 |   |                    |    |                    |   |
| Total member’s capital                                                                          |   | 22,452                  |    | 30,763                  |   |
|                                                                                                 |   |                    |    |                    |   |
| Total liabilities and member’s capital                                                          |   | $                       | 330,342 |                    | $      | 347,416 |   |

 

See notes to financialstatements.

 

44

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AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDIARY

OF THE AES CORPORATION

 

STATEMENTS OF OPERATIONS,

YEARS ENDED DECEMBER 31, 2003,2002 AND 2001

(DOLLARS IN THOUSANDS)

 
|                              |   | **Year Ended  December 31, 2003** |   | **Year Ended  December 31, 2002** |   | **Year Ended  December 31, 2001** |   |
|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
| OPERATING REVENUES                |   |                              |   |                              |   |                              |   |
| Energy                            |   | $                                 | 50,055 |                              | $      | 51,852                            |   | $ | 1,158 |   |
|                              |   |                              |   |                              |   |                              |   |
| OPERATING EXPENSES                |   |                              |   |                              |   |                              |   |
| Depreciation                      |   | 10,629                            |   | 10,103                            |   | 85                                |   |
| Operating fee                     |   | 5,110                             |   | 5,042                             |   | —                            |   |
| Operating costs                   |   | 5,776                             |   | 5,385                             |   | —                            |   |
| General and administrative  costs |   | 9,254                             |   | 10,589                            |   | 374                               |   |
| Loss on disposal of assets        |   | 978                               |   | —                            |   | —                            |   |
| Operating income                  |   | 18,308                            |   | 20,733                            |   | 699                               |   |
|                              |   |                              |   |                              |   |                              |   |
| OTHER INCOME/EXPENSE              |   |                              |   |                              |   |                              |   |
| Other income                      |   | 253                               |   | 4,774                             |   | —                            |   |
| Interest income                   |   | 84                                |   | 138                               |   | 489                               |   |
| Interest expense                  |   | (26,956                           | )      | (27,244                           | )      | (153                              | )      |
| NET (LOSS) INCOME                 |   | $                                 | (8,311 | )                                 | $      | (1,599                            | )      | $ | 1,035 |   |

 

See notes to financialstatements.

 

45

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AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDIARY

OF THE AES CORPORATION

 

STATEMENTS OFCHANGES IN MEMBER’S CAPITAL,

YEARS ENDED DECEMBER 31, 2003,2002 AND 2001

(DOLLARS IN THOUSANDS)

 
|                            |   | **Common  Stock** |       | **Contributed  Capital** |       | **Accumulated  Deficit** |       | **Total** |       |
|---------------------------------|--------|-------------------|------------|--------------------------|------------|--------------------------|------------|-----------|------------|
|                            |   | **Shares**        |       | **Amount**               |       |                     |       |      |
|                            |   |              | ** ** |                     | ** ** |                     | ** ** |      | ** ** |   | ** ** |
| BALANCE DECEMBER 31, 2000       |   | —            |       | $                        | —     |                     | $          | —    |       | $ | (3,172 | ) | $ | (3,172 | ) |
| Net income                      |   | —            |       | —                   |       | —                   |       | 1,035     |       | 1,035 |   |
|                            |   |              |       |                     |       |                     |       |      |       |   |   |
| 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 |   |

 

See notes to financialstatements.

 

46

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AES IRONWOOD, L.L.C.

AN INDIRECTWHOLLY OWNED SUBSIDIARYOF THE AES CORPORATION STATEMENTS OF CASH FLOWS, YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001(DOLLARS IN THOUSANDS)

 
|                                                                           |   | **Year Ended  December 31, 2003** |   | **Year Ended  December 31, 2002** |   | **Year Ended  December 31, 2001** |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
| OPERATING ACTIVITIES:                                                          |   |                              |   |                              |   |                              |   |
| Net (loss) income                                                              |   | $                                 | (8,311 | )                                 | $      | (1,599                            | )      | $ | 1,035 |   |
| Amortization of deferred financing costs                                       |   | 137                               |   | 145                               |   | 145                               |   |
| Depreciation                                                                   |   | 10,629                            |   | 10,103                            |   | 85                                |   |
| Loss on disposal of assets                                                     |   | 978                               |   | —                            |   | —                            |   |
| Change in:                                                                     |   |                              |   |                              |   |                              |   |
| Interest receivable                                                            |   | 4                                 |   | 31                                |   | 54                                |   |
| Accounts receivable                                                            |   | 864                               |   | 301                               |   | —                            |   |
| Prepaid expense                                                                |   | 1,465                             |   | (2,511                            | )      | —                            |   |
| Inventory                                                                      |   | 19                                |   | (26                               | )      | —                            |   |
| Other assets                                                                   |   | 753                               |   | (485                              | )      | 142                               |   |
| Certificate of deposit                                                         |   | 77                                |   | —                            |   | 308                               |   |
| Accounts payable                                                               |   | (2,605                            | )      | (1,357                            | )      | —                            |   |
| Accrued interest                                                               |   | (35                               | )      | (15                               | )      | —                            |   |
| Payable to AES and affiliates                                                  |   | (727                              | )      | 1,289                             |   | (292                              | )      |
| Deferred revenue                                                               |   | 1,392                             |   | —                            |   | —                            |   |
| Net cash provided by operating activities                                      |   | 4,640                             |   | 5,876                             |   | 1,477                             |   |
|                                                                           |   |                              |   |                              |   |                              |   |
| INVESTING ACTIVITIES:                                                          |   |                              |   |                              |   |                              |   |
| Payments for construction in progress                                          |   | —                            |   | —                            |   | (33,907                           | )      |
| Payments for property, plant and equipment                                     |   | (2,647                            | )      | (328                              | )      | —                            |   |
| Change in construction related payables                                        |   | —                            |   | (12,000                           | )      | 16,908                            |   |
| Payments for land                                                              |   | —                            |   | —                            |   | (615                              | )      |
| Change in construction related receivables                                     |   | 4,826                             |   | 7,426                             |   | (17,564                           | )      |
| Withdrawals from (payments to) restricted  cash accounts                       |   | 1,247                             |   | (390                              | )      | 10,850                            |   |
| Change in retention payable                                                    |   | —                            |   | (11,941                           | )      | —                            |   |
| Net cash provided by (used in) in investing  activities                        |   | 3,426                             |   | (17,233                           | )      | (24,328                           | )      |
|                                                                           |   |                              |   |                              |   |                              |   |
| FINANCING ACTIVITIES:                                                          |   |                              |   |                              |   |                              |   |
| Payments of bonds payable                                                      |   | (4,752                            | )      | (1,976                            | )      |                              |   |
| Loan from parent                                                               |   | —                            |   | —                            |   | 30,000                            |   |
| Contributed capital                                                            |   | —                            |   | 8,800                             |   | —                            |   |
| Payment of dividends                                                           |   | —                            |   | (4,301                            | )      | —                            |   |
| (Payments on) borrowings from note payable                                     |   | (2,036                            | )      | 2,328                             |   | —                            |   |
| Net cash (used in) provided by financing  activities                           |   | (6,788                            | )      | 4,851                             |   | 30,000                            |   |
|                                                                           |   |                              |   |                              |   |                              |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                          |   | 1,278                             |   | (6,506                            | )      | 7,149                             |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                                |   | 1,088                             |   | 7,594                             |   | 445                               |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                       |   | $                                 | 2,366  |                              | $      | 1,088                             |   | $ | 7,594 |   |
|                                                                           |   |                              |   |                              |   |                              |   |
| SUPPLEMENTAL DISCLOSURE:                                                       |   |                              |   |                              |   |                              |   |
| Reclassification of construction in  progress to property, plant and equipment |   | $                                 | — |                              | $      | —                            |   | $ | 332,500 |   |
| Interest paid (net of amounts capitalized  of $27.1 million in 2001)           |   | $                                 | 26,956 |                              | $      | 27,244                            |   | $ | 153 |   |
| Conversion of subordinated loan payable to  parent to equity                   |   | $                                 | — |                              | $      | 30,000                            |   | $ | — |   |
| Transfer of property, plant & equipment  to asset held for sale            |   | $                                 | 450    |                              | $      | —                            |   | $ | — |   |

 

See notes to financialstatements.

 

47

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AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDIARY

OF THE AES CORPORATION

 

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2003,2002 AND 2001

 

**1.****              ORGANIZATION**

 

AES Ironwood, L.L.C. (the “Company) was formed on October 30, 1998, inthe state of Delaware to develop, construct, and operate a 705-megawatt (MW)gas-fired, combined cycle electric generating facility in South LebanonTownship, Pennsylvania (the “Plant”). The Company was considered dormant untilJune 25, 1999, at which time the Project Financing and certain relatedagreements were consummated (hereinafter, “Inception”). The Plant includes twoWestinghouse 501 G combustion turbines, two heat recovery steam generators, andone steam turbine. The Plant produces and sells electricity, as well as providesfuel conversion and ancillary services, solely to Williams Power Company, Inc.,formerly known as Williams Energy Marketing & Trading Company (“Williams”)under a power purchase agreement with a term of 20 years that commenced onDecember 28, 2001, the commercial operation date.  

 

The Company is a wholly-owned subsidiary of AES Ironwood, Inc.(“Ironwood”), which is a wholly owned subsidiary of The AES Corporation(“AES”). Ironwood has no assets other than its ownership interests in theCompany and AES Prescott, L.L.C. (“Prescott”), another wholly owned subsidiaryof Ironwood (see Note 9). Ironwood has no operations and is not expected tohave any operations. Its only income is distributions it receives from theCompany and Prescott. The additional equity that Ironwood is required toprovide to the Company pursuant to the Equity Subscription Agreement (asdescribed below see Note 6) will be provided to Ironwood by AES, which owns allof the stock of Ironwood.

 

On June 25, 1999, the Company issued $308.5 million in senior securedbonds (see Note 5) for the purpose of providing financing for the constructionof the Plant and to fund, through the construction period, interest payments tothe bondholders. On May 12, 2000, the Company consummated an exchange offerwhereby the holders of the senior bonds exchanged their privately placed seniorsecured bonds for registered senior secured bonds.

 

**2.****              OPERATIONS**

 

Since achieving commercial operations inDecember 2001 the Company is eligible to receive variable operations andmaintenance payments, total fixed payments, energy exercise fee payments (SeeNote 7) and other payments for the delivery of fuel conversion, capacity andancillary services.  Since December 28,2001, Williams has not requested that the Company dispatch the facility to asignificant degree. The minimum capacity payments provided for under the powerpurchase agreement have been the Company’s primary source of operatingrevenues, representing $47.6 million of the Company’s total for the twelvemonths ended December 31, 2003 compared to $46.9 million for the twelve monthsended December 31, 2002.  At December31, 2003, approximately $1.4 million has been deferred consistent with the Company’srevenue recognition policy discussed in Note 3 to the financial statements.

 

The Company has used these operatingrevenues, together with interest income from the investment of operating fundsto pay its generation expenses and other operations and maintenanceexpenses.  

 

The Company currently has been dispatched byWilliams in February 2004 but can provide no assurance that the Company willcontinue to be dispatched.  In the eventthat the facility is not dispatched, the Company’s

 

48

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operating revenues will consist of minimum capacity payments under thepower purchase agreement.

 

The Company currently believes that itssources of liquidity will be adequate to meet its needs through the end of2004.  This belief is based on a numberof assumptions, including but not limited to the continued performance andsatisfactory financial condition of the third parties on which the Companydepends, particularly Williams as fuel supplier and purchaser of all electricenergy and capacity produced by the facility as well as ancillary and fuelconversion services of the Company (as provided by the Power PurchaseAgreement) and The Williams 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 and its affiliates, thepossibility of unexpected problems related to the performance of the facility,the possibility of unexpected expenses or lower than expected revenues andadditional factors that are unknown to the Company or beyond its control.

 

Since the Company depends on Williams forboth revenues and fuel supply under the Power Purchase Agreement, if Williamswere to terminate or default under the Power Purchase Agreement, there would bea severe negative impact on the Company’s cash flow and financial conditionwhich could 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 service obligationsin the absence of a long-term power purchase agreement with Williams.

 

**3.****              SIGNIFICANTACCOUNTING POLICIES**

 

*Basis ofPresentation* – These financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.

 

*Cash and CashEquivalents –* The Company considers unrestricted cashon hand, deposits in banks, and investments with original maturities of threemonths or less to be cash and cash equivalents.

 

*Restricted Cash –*Restricted cash in the amount of approximately $4.6 million as of December 31,2003 and $5.8 million as of December 31, 2002 consists of accounts the Companyis required under the Collateral Agency Agreement (see Note 5) to maintain forthe construction, maintenance, and debt service of the plant. 

 

*Property, Plant, and**Equipment* – Property, plant, and equipmentis recorded at cost. Depreciation, after consideration of salvage value, iscomputed using the straight-line method over the estimated useful lives of theassets, which range from five to forty years. Maintenance and repairs arecharged to expense as incurred.

 
| **Description  of  Asset** |   | **Depreciable  Life** |   | **Net Book Value at  December 31, 2003** |        | **Net Book Value at  December 31, 2002** |   |
|----------------------------|--------|-----------------------|--------|------------------------------------------|-------------|------------------------------------------|--------|
|                       |   |                  |   | **(in thousands)**                       |        | **(in thousands)**                       |   |
|                       |   |                  |   |                                     |        |                                     |   |
| Plant                      |   | 40                    |   | $                                        | 224,627     |                                     | $      | 230,369 |   |
| Buildings                  |   | 40                    |   | 833                                      |        | 461                                      |   |
| Land  Improvements         |   | 40                    |   | 10,643                                   |        | 10,894                                   |   |
| Equipment                  |   | 40                    |   | 2,023                                    |        | 2,921                                    |   |
| Rotable  Turbine Parts     |   | 7-28                  |   | 46,992                                   |        | 47,351                                   |   |
| Development  Costs         |   | 25                    |   | 22,513                                   |        | 23,595                                   |   |
| Furniture  & Fixtures  |   | 15                    |   | 696                                      |        | 741                                      |   |
| Data  Processing Equipment |   | 7                     |   | 440                                      |        | 499                                      |   |
| Vehicles                   |   | 5                     |   | 228                                      |        | 566                                      |   |
| Projects                   |   | na                    |   | 1,934                                    |        | 3,060                                    |   |
| Spare  Parts               |   | na                    |   | 2,406                                    |        | 2,288                                    |   |
|                       |   |                  |   |                                     |        |                                     |   |
|                       |   |                  |   | $                                        | **313,335** |                                     | $      | **322,745** | ** ** |

 

49

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*Long- Lived Assets –*The Company evaluates the impairment of its long-lived assets based on theprovisions of Statement of Financial Accounting Standards (SFAS) No 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”.  The Company has determined that the value ofone of its assets was impaired in 2003 and has reduced the recorded valueaccordingly (See Note 12).

 

*Other Assets –*Pursuant to the provisions of 25 Pennsylvania. Code Section 123, Nitrogen Oxide(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. InJuly 2003 the remaining NOx were sold.

 

*Deferred FinancingCosts –* Financing costs are deferred and are beingamortized using the effective interest method of amortization.

 

*Prepaid Expenses andNote Payable –* Prepaid expenses at December 31, 2003include prepaid insurance in the amount of approximately $811,000, prepaidtaxes in the amount of approximately $166,000, prepaid leases in the amount ofapproximately $29,000, and prepaid rating agency review fees in the amount of$38,000. Prepaid expenses at December 31, 2002 included prepaid insurance inthe amount of approximately $2.3 million prepaid taxes in the amount ofapproximately $161,000, prepaid leases in the amount of approximately $30,000,and prepaid rating agency review fees in the amount of $27,000.  The note payable in the amount ofapproximately $292,000 at December 31, 2003 is a note for the financing of theCompany’s insurance. The note payable in the amount of $2.33 million atDecember 31, 2002 represents the initial financing of the Company’s insurance.

 

*Revenue Recognition*– The Company generates energy revenues under its power purchase agreement withWilliams. Under the terms of the 20-year term of the agreement, the Companysells electric energy and capacity produced by the Plant, as well as ancillaryand fuel conversion services. Under the power purchase agreement, the Companyalso generates revenues from meeting (1) base electrical output guarantees and(2) heat rate rebates through efficient electrical output. Revenues from thesales of electric energy are recorded based on output delivered at rates asspecified under contract terms. In accordance with Emerging Issues Task Force(“EITF”) 91-6, “Revenue Recognition of Long-Term Power Sales Contracts”, theCompany recognizes fixed capacity revenues on the straight-line basis over thelife of the agreement. Differences between the actual capacity payments and thestraight-line method are recorded as deferred revenue.  Revenues for ancillary and other servicesare recorded when the services are rendered. Upon its expiration, or in the event that the power purchase agreementis terminated prior to its 20-year term, the Company would seek to generateenergy revenues from the sale of electric energy and capacity into the merchantmarket or under new short- or long-term power purchase or similar agreements.There can be no assurances as to whether such efforts would be successful.

 

*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.

 

50

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*Income Taxes –*The Company is a limited liability company and is treated as a disregardedentity for tax purposes. Therefore, the Company does not pay income taxes, andno provision for income taxes has been reflected in the accompanying financialstatements.

 

*Reclassifications –*Certain reclassifications have been made to the 2002 and 2001 amounts toconform to the 2003 presentation.

 

*Accounts Receivable* - As of December 31, 2003,accounts receivable of approximately $4.4 million consists of unpaid invoicesfrom Williams of approximately $5.5 million, from Siemens Westinghouse ofapproximately $193,000, less allowance for doubtful accounts of approximately$1.3 million.  As of December 31, 2002,accounts receivable of approximately $10.1 million consists of unpaid invoicesfrom Williams Energy of approximately $5.8 million, from Siemens Westinghouseof approximately $4.8 million, from sales of excess fuel inventory ofapproximately $717,000, less allowance for doubtful accounts of approximately$1.2 million.  Activity in allowance fordoubtful accounts is summarized as follows:

 

Allowance forDoubtful Accounts:

 
| Balance December 31, 2001             |   | $         | 0         |   |
|---------------------------------------|--------|-----------|-----------|--------|
| Increase January 1- December 31, 2002 |   | 1,227,433 |      |
| Balance December 31, 2002             |   | 1,227,433 |      |
| Increase January 1- December 31, 2003 |   | 28,402    |      |
| Balance December 31, 2003             |   | $         | 1,255,835 |   |

 

*Other income* – For the year ended December 31,2003, other income consisted of $222,000 from Siemens Westinghouse relating totheir payment of performance guarantees and $10,000 from the sale of excessfuel compared to $3.5 million from Siemens Westinghouse relating to theirpayment of performance guarantees and $1.3 million from the sale of excess fuelfor the year ended December 31, 2002.

 

**4.****              RECENT AND NEWACCOUNTING PRONOUNCEMENTS**

 

InJuly 2001, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standard (SFAS) No. 143, entitled “Accounting for AssetRetirement Obligations.”  This standardwas effective for fiscal years beginning after June 15, 2002 and providesaccounting requirements for asset retirement obligations associated withlong-lived assets.  Under the Statement,the asset retirement obligation is recorded at fair value in the period inwhich it is incurred by increasing the carrying amount of the relatedlong-lived asset.  The liability isaccreted to its present value in each subsequent period and the capitalizedcost is depreciated over the useful life of the related asset. The adoption ofthis standard did not have a material effect on the Company’s financialstatements. 

 

In April 2002, the FASB issued SFAS No. 145,entitled “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASBStatement No. 13, and Technical Corrections.” This statement eliminates the current requirement that gains and losseson debt extinguishment must be classified as extraordinary items in the income statement.  Instead, such gains and losses will beclassified as extraordinary items only if they are deemed to be unusual andinfrequent, in accordance with the current GAAP criteria for extraordinaryclassification.  In addition, SFAS No.145 eliminates an inconsistency in lease accounting by requiring thatmodifications of capital leases that result in reclassification as operatingleases be accounted for consistent with sale-leaseback accounting rules.  The statement also contains othernonsubstantive corrections to authoritative accounting literature.  The changes related to debt extinguishmentare effective for fiscal years beginning after May 15, 2002, and the changesrelated to lease accounting are effective for transactions occurring after May15, 2002. The adoption of this standard did not have a material effect on theCompany’s financial statements. 

 

In June 2002, the FASB issued SFAS No. 146, entitled“Accounting for Costs Associated with Exit or Disposal Activities,” whichaddresses accounting for restructuring and similar costs.  SFAS No. 146 supersedes previous accountingguidance, principally Emerging Issues Task Force (“EITF”) Issue No. 94-3 and iseffective for restructuring activities initiated after December 31, 2002. SFASNo. 146 requires that the liability for costs associated with an exit ordisposal activity be recognized when the liability is incurred.  Under EITF Issue No. 94-3, a liability foran exit cost was recognized at the date of a company’s commitment to an exitplan.  SFAS No. 146 also establishesthat the liability should initially be measured and recorded at fairvalue.  Accordingly, SFAS No. 146 mayaffect the timing of recognizing future restructuring costs as well as theamount recognized. The adoption of this standard did not have a material effecton the Company’s financial statements. 

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“SFAS No. 149”).  SFAS No. 149 amends and clarifies the accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts, and for hedging activities under SFAS No.133.  The amendments set forth in SFAS No. 149 require that contracts withcomparable characteristics be accounted for similarly.  In particular,this statement clarifies under what circumstances a contract with an initialnet investment meets the characteristics of a derivative according to SFAS No.133 and when a derivative contains a financing component that warrants specialreporting in the statement of cash flows.  In addition, the statementamends the definition of an underlying to conform it to language used in FASBInterpretation

 

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No.45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others, and amends certainother existing pronouncements. 

 

The requirements of SFAS No. 149 are effective forcontracts entered into or modified after June 30, 2003 and for hedging relationshipsdesignated after June 30, 2003.  The provisions of the statement thatrelate to SFAS No. 133 implementation issues that have been effective forfiscal quarters that began prior to June 15, 2003 should continue to be appliedin accordance with their respective effective dates. The adoption of thisstandard did not have a material effect on the Company’s financial statements. 

 

In May 2003, the FASB adopted SFAS No. 150,“Accounting for Certain Financial Instruments with characteristics of both Liabilitiesand Equity”.  This statement establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity.  This statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003.  The adoption of this standard did not have a material effect on theCompany’s financial position, results of operations, or cash flows. 

 

In November 2002, the FASB issued FASBInterpretation No. 45 (FIN 45), “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers”.  This interpretationestablishes new disclosure requirements for all guarantees, but the measurementcriteria are applicable to guarantees issued and modified after December 31,2002. The adoption of this interpretation did not have any effect on theCompany’s financial statements. 

 

In January 2003, the FASB issued FIN No. 46,Consolidation of Variable Interest Entities, an Interpretation of ARB No.51.  In October 2003, FASB StaffPosition No. 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, FASB issued FIN 46 (revised December 2003),Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51(“FIN 46(r)”), which clarified some requirements and incorporated several staffpositions that the Company was already required to apply.  In addition, FIN 46(r) deferred theeffective date for VIEs that were created or acquired before February 1, 2003and were not considered special purpose entities (“SPEs”) prior to the issuanceof the interpretation until the end of the first quarter ending March 31,2004.  FIN 46(r) defines a VIE as (i)any entity in which the equity investors at risk in such entity do not have thecharacteristics of a controlling financial interest, or (ii) any entity thatdoes not have sufficient equity at risk to finance its activities withoutadditional subordinated financial support from other parties.  It requires the consolidation of the VIE bythe primary beneficiary.  The adoptionof FIN 46(r) requires the Company to include disclosures for non SPE VIEscreated or acquired on or after February 1, 2003 in its financial statementsrelated to the total assets and the maximum exposure to loss resulting from theCompany’s interests in VIEs.  Theadoption of FIN 46(r) for VIEs created or acquired prior to February 1, 2003 thatwere considered SPEs prior to the issuance of the interpretation did not have asignificant impact on the Company’s financial statements.  The Company has assessed the impact of theprovisions of FIN 46(r) on its financial statements for VIEs created oracquired prior to February 1, 2003 that were not considered SPEs prior to theissuance of the interpretation, and does not believe that the impact will bematerial.

 

**5.****              BONDS PAYABLE**

 

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) ofapproximately $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 downgradeof The Williams Companies, Inc., (see Note 7) S&P lowered its ratings onthe Company’s senior secured bonds to “BB-” from “BBB-” on July 26, 2002, andplaced the rating on credit watch. 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 believe that such ratings downgrades willhave any other direct 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.  

 

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

 

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Principal and interest is payable as followsfor the years ending December 31 (in thousands):

 
| **Year**        |   | **Principal** |    | **Interest** |   | **Total** |   |
|-----------------|--------|---------------|---------|--------------|--------|-----------|--------|
| 2004            |   | $             | 6,356   |         | $      | 26,517    |   | $ | 32,873 |   |
| 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    |   |
| 2009-2025       |   | 260,744       |    | 222,316      |   | 483,060   |   |
| Total  payments |   | $             | 301,772 |         | $      | 348,396   |   | $ | 650,168 |   |

 

*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.

 

*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 plant under the EPC with the Contractor, or in certain instances inwhich payments are received under the power purchase agreement with Williamsunder the event of default, at which time the Company has terminated the powerpurchase agreement.

 

Collateral for the Bonds consists of thePlant and related facilities, all agreements relating to the operation of theproject, the Company’s bank and investment accounts, and all ownershipinterests in the Company as prescribed under the trust indenture (theIndenture). The Company is also bound by a collateral agency agreement (theCollateral Agency Agreement) and an equity subscription agreement (the EquitySubscription Agreement) (see Note 6).

 

*Indenture*–The Indenture contains limitations on the Company incurring additionalindebtedness; granting liens on the Company’s property; distributing equity andpaying subordinated indebtedness issued by affiliates; entering intotransactions with affiliates; and amending, terminating, or assigning any ofthe contracts and fundamental 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, whichcommenced on December 28, 2001. The amount required for funding the debtservice reserve fund is equal to six months scheduled payments of principal andinterest on the Bonds plus interest on the Debt Service Reserve Letter ofCredit. A Letter of Credit issued December 31, 2001 and expiring December 31,2006 in the amount $17.3 million has been obtained from Dresdner Bank AG tofulfill our requirement under the Collateral Agency Agreement. Additionally, the Collateral Agency Agreementrequires the funding of certain accounts that the Company records as restrictedcash. The balances in these accounts are as follows:

 
| **Restricted  Cash (balances in 000’s)** |   | **December  31, 2003** |   | **December  31, 2002** |   |
|-----------------------------------------------|--------|------------------------|--------|------------------------|--------|
| Bond Interest Account                         |   | $                      | 2,241  |                   | $      | 2,289 |   |
| Bond Principal Payment Account                |   | 535                    |   | 499                    |   |
| Operating and Maintenance Account             |   | 1,047                  |   | 0                      |   |
| Major Maintenance Reserve Account             |   | 707                    |   | 707                    |   |
| Debt Reserve LOC Account                      |   | 26                     |   | 26                     |   |
| Construction Account                          |   | —                 |   | 2,282                  |   |
| Total Restricted Cash                         |   | $                      | 4,556  |                   | $      | 5,803 |   |

 

*Covenants*–The Indenture, 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 and maintenanceof debt service reserve and construction- related accounts.

 

**6.****              EQUITY SUBSCRIPTIONAGREEMENT**

 

The Company, along with Ironwood, has enteredinto an Equity Subscription Agreement, pursuant to which Ironwood, agreed tocontribute up to approximately $50.1 million to the Company to fund projectcosts.

 

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In 2001, Ironwood provided $30.0 million inthe form of subordinated debt to the Company under the equity subscriptionagreement. In January of 2002, this $30.0 million payable to Ironwood wasconverted to an equity contribution. As of December 31, 2003; AES Ironwood,Inc. had made net contributions to the Company of $38.8 million. The remaining$9.1 million contribution was supported by a surety bond until June 25, 2002,when the surety bond expired. At that time the surety bond was replaced by anacceptable letter of credit in the amount of $9.1 million. The need for theletter of credit ceased with the granting of final acceptance on March 12,2003. The Company notified the collateral agent and they have released theCompany of this requirement.

 

Ironwood had a Letter of Credit agreement inrelation to its equity subscription agreement. The initial amount of the bondunder this agreement was $50.1 million. On July 10, 2002, the surety bond wasreplaced by an acceptable letter of credit in the amount of $9.1 million. As aresult of the Siemens Westinghouse settlement (see Note 8) and final acceptanceof the Plant, the need for the letter of credit ceased.  The collateral agent has therefore releasedIronwood of this requirement.

 

**7.****              POWER PURCHASEAGREEMENT**

 

The Company has entered into a power purchaseagreement with Williams for the sale of all electric energy and capacityproduced by the Plant, as well as ancillary and fuel conversion services. Theterm 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. The payment obligations of Williamsunder the power purchase agreement are guaranteed by The Williams Companies,Inc. The Guaranty by The Williams Companies, Inc., dated June 25, 1999indicated the total aggregate liability to be approximately $408 million; asreduced from time to time as provided by a reduction schedule described in theguaranty (“Guaranty Cap”). At December 31, 2003, this amount was approximately$402 million.

 

*Fuel Conversion andOther Services*– Williams has the obligation todeliver, on an exclusive basis, all quantities of natural gas required by thePlant to generate electricity or ancillary services, to start up or shut downthe Plant, and to operate the Plant during any period other than a start-up,shut-down, or required dispatch by Williams for any reason.

 

*Concentration ofCredit Risk*– Williams currently is the Company’s solecustomer for purchases of capacity, ancillary services, and energy, and theCompany’s sole source for fuel. Williams’ payments under the power purchaseagreement are expected to provide all of the Company’s revenues during the termof the power purchase agreement. It is uncertain whether the Company would beable to find another purchaser or fuel source on similar terms for theCompany’s Plant if Williams were not performing under the power purchaseagreement. 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 the Company’s operations. The payment obligations ofWilliams under the power purchase agreement are guaranteed by The WilliamsCompanies, Inc.

 

Under the power purchase agreement, in theevent that S&P or Moody’s rate the long term senior unsecured debt of TheWilliams Companies, Inc**.** lower than investment grade, The WilliamsCompanies, Inc**.**, or an affiliate thereof, is required to replace TheWilliams Companies, Inc**.** guarantee with an alternative securitythat is acceptable to the Company. According to published sources, on July 23,2002, S&P lowered the long term senior unsecured debt rating of TheWilliams Companies, Inc**.** to “BB-” from “BBB-”, and further loweredsuch rating to “B” on July 25, 2002**.**On May 23, 2003 S&P upgraded therating to “B+” with a negative outlook.  According to published sources, on July 24, 2002, Moody’s lowered the long-termsenior unsecured debt rating of The Williams Companies, Inc**.** to “B1” from “Baa3**.**”  According to published sources, this ratingwas further lowered on November 22, 2002 to “Caa1” by Moody’s, and thenupgraded to “B3”on June 4, 2003. Accordingly, The Williams Companies, Inc**.**’s long term seniorunsecured debt is currently rated below investment grade by both S&P andMoody’s**.**

 

In an action related to the ratings downgradeof The Williams Companies, Inc., S&P lowered its ratings on the Company’ssenior secured bonds to “BB-” from “BBB-” on July 26, 2002, and placed therating on 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. OnNovember 27, 2002, Moody’s lowered its ratings on the Company’s senior securedbonds to

 

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“B2” from “Ba2”.   The Companydoes not believe that such ratings downgrades will have any other direct orimmediate effect on the Company, as none of the other financing documents orproject contracts has provisions that are triggered by a reduction of theratings of the bonds.  

 

To satisfy the requirements of the power purchaseagreement, on September 20, 2002, Citibank, N.A. issued a $35 million IrrevocableStandby Letter of Credit (the “Letter of Credit”) on behalf of Williams. TheLetter of Credit does not alter, modify, amend or nullify the guaranty issuedby The Williams Companies, Inc. in favor of the Company and is considered to beadditional security to the security amounts provided by such guaranty. TheLetter of Credit became effective on September 20, 2002 and expired upon theclose of business on July 10, 2003; except that the Letter of Credit will beautomatically extended without amendment for successive one year periods fromthe present or any future expiration date hereof, unless Citibank, N.A.provides written notice of its election not to renew the Letter of Credit atleast thirty days prior to any such expiration date. On June 13, 2003,Citibank, N.A. sent notification that the letter of credit will be extended toJuly 12, 2004. Additionally, in a Letter Agreement dated September 20, 2002,Williams agreed to (a) provide eligible credit support prior to the statedexpiration date of the Letter of Credit and (b) replenish any portion of theLetter of Credit or eligible credit support that is drawn, reduced, cashed orredeemed, at any time, with an equal amount of eligible credit support. Withintwenty days prior to the 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. below investment grade status. 

 

Since the Company depends on Williams and itsaffiliates for both revenues and fuel supply under the power purchase agreement,if Williams 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 Williams 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. 

 

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 Plant for the year endedDecember 31, 2002, including disputes over the amount of any availability bonusor penalty.  Phase II of the arbitrationinvolves 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 thearbitration found that Williams had misapplied the applicable rules of PJMInterconnection, L.L.C. in the billing dispute with the Company over theavailability of the Plant.  The paneldeclined, however, to decide the plant’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 possible resolution of thedisputed events, and anticipate submitting any events that cannot be resolvedby mutual agreement to a third party. Until the matter is fully resolved, the availability of the Plant, andcertain payments that are calculated based on availability, cannot bedetermined.  However, based on thepanel’s award and its negotiations with Williams, the Company anticipates it willbe paid some portion of its claimed availability bonus for 2002 and 2003 anddoes not owe an amount for annual availability capacity adjustment or fuelconversion volume rebate.  

 

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Also as a result of the panel’s Phase IAward, the Company will begin pre-funding a cash account on a quarterly basisto reflect the maximum amount of a fuel conversion volume rebate that might bepayable to Williams if the Plant operates the requisite number of hours to earnthe maximum rebate available under the power purchase agreement. The timing ofthe pre-funding has yet to be determined, and the Company is discussing thenature and timing of the pre-funding with Williams. The funding may begin asearly as the second quarter of 2004. The maximum theoretical amount of the fuel conversion volume rebate is$1.7 million, but the account will not be fully funded during the course of theyear if the Plant is not operated a sufficient number of hours to achieve themaximum fuel conversion volume rebate. Depending on the amount of facility operation, the Company may beentitled to withdraw some of the funds deposited into the account during thesecond half of its fiscal year.  Basedon the arbitral award, the Company does not anticipate any payment for a fuelconversion volume rebate will be due for 2002 or 2003.

 

On March 12, 2004 the parties settled PhaseII of the arbitration between the Company and Williams, which involvedWilliams’ claims that the duration of start-ups and shutdowns should beshortened, with a corresponding reduction in the volume of fuel consumed duringsuch operations.  The settlementresolves and releases, without any payment by the Company, Williams’ claim thatit should be reimbursed retroactively to the date of commercial operation forexcess fuel allegedly 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 issuesleft unresolved by the Award in Phase I.

 

**8.****              COMMITMENTS ANDCONTINGENCIES**

 

*Construction*–The Company entered into a fixed-price turnkey agreement with SiemensWestinghouse (the Contractor) for the design, engineering, procurement, andconstruction of the Plant. 

 

Since provisional acceptance, interimacceptance or final acceptance did not occur prior to the guaranteedprovisional acceptance date, Siemens Westinghouse began paying liquidateddamages of $110,000 per day beginning 45 days after the guaranteed provisionalacceptance date of May 22, 2001. The liquidated damages ceased to accrue onDecember 27, 2001, the date upon which provisional acceptance was granted. AtDecember 31, 2001 the Company had invoiced Siemens Westinghouse approximately$19.1 million. At December 31, 2001 Siemens Westinghouse had paid all but $3.0million, the amount accrued for twenty-seven days in December 2001. SiemensWestinghouse paid this amount in January 2002.

 

The Company previously had a dispute withSiemens Westinghouse over which party was responsible for the payment of thecost of electricity and natural gas used by the project during certain periodsprior to the December 28, 2001 commercial acceptance.  On March 12, 2003, the Company entered into a settlementagreement with Siemens Westinghouse entitled “Agreement Change Order No. 71”concerning final acceptance.  Thisagreement became effective as of that date and final acceptance was granted bythe Company as of that date.  As part ofa settlement agreement, dated March 12, 2003, Siemens Westinghouse agreed towaive their right to receive any payments with respect to the final milestonepayment of $2.2 million and to the retainage of $11.9 million held by theCompany. Additionally, Siemens Westinghouse made a payment of $4.8 million tothe Company in respect of items related to final acceptance. This amount wasrecorded as a reduction in the cost of the Plant.  The effects of the settlement have been recorded in the Company’sfinancial statements as of December 31, 2002. As a result of the settlement agreement, the Company agreed, among otherthings, not to pursue the cost of electricity and natural gas used by theproject during certain periods prior to the December 28, 2001 commercialacceptance date.

 

*Maintenance*–The Company, as assignee of AES Ironwood, Inc., has entered into theMaintenance Program Parts, Shop Repairs and Scheduled Outage TFA ServicesContract, dated as of September 23, 1998, with Siemens Westinghouse by whichSiemens Westinghouse will provide the Company with, among other things,combustion turbine parts, shop repairs and scheduled outage technical fieldassistance services. The Contractor provided the Company with specificcombustion turbine maintenance services and spare parts for an initial term ofbetween eight and ten years under a maintenance service agreement. The feesassessed by Siemens Westinghouse will be based on the number of Equivalent BaseLoad Hours accumulated 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 Plant or expensed accordingly.

 

The maintenance services agreement becameeffective on the date of execution and unless terminated early, must terminateupon completion of shop repairs performed by Siemens Westinghouse following theeighth scheduled outage of the applicable combustion turbine or 10 years frominitial synchronization of the applicable combustion turbine, whichever occursfirst.

 

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Additionally, a significant monthlyexpenditure is for payment of the Company’s long term service agreement withSiemens Westinghouse. This agreement provides that the Company paysapproximately $400 per gas turbine per equivalent operating hour, adjusted forinflation. In the event the Company is not required to dispatch the Plant,there is no charge. While operating at base load, the monthly payment for thelong term service agreement could be as much as $450,000.

 

*Water Supply*–The Company 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. Thecontract has a term of 25 years. Costs associated with the use of water by thePlant under this contract are based on gallons used per day at prices specifiedunder the contract terms. The Company also entered into an agreement withPennsy Supply, Inc, which will provide the remaining 50 percent of the wateruse of the Plant.

 

*InterconnectionAgreement*– The Company entered into aninterconnection agreement with GPU Energy (“GPU”) to transmit the electricitygenerated by the Plant to the transmission grid so that it may be sold asprescribed under the power purchase agreement. The agreement is in effect forthe life of the Plant yet may be terminated by mutual consent of both GPU andthe Company under certain circumstances as detailed in the agreement. Costsassociated with the agreement are based on electricity transmitted via GPU at avariable price, the PJM (Pennsylvania/New Jersey/Maryland) 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 $204,000per year as a maintenance fee for the interconnection equipment. The term ofthe maintenance agreement is twenty-five years.

 

*Power Purchase Agreement* The Companyhas entered into a power purchase agreement for a term of twenty years withWilliams, the Company’s sole customer for purchases of capacity, ancillaryservices and the Company’s sole source for fuel.  (See Note 7)

 

**9.****              RELATED PARTYTRANSACTIONS**

 

Effective June 1999, the Company entered intoa 27-year development and construction management agreement with Prescott toprovide 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, theconstruction management fees were paid to Prescott from the investment balancesor from parent funding. For the years ended December 31, 2003 and 2002,approximately $5.1 million and $5.0 million in management fees were incurredand charged to operating expenses, and $424,900 and $421,000 was payable toPrescott for the years then ended respectively. For the year ended December 31,2001, $3.9 million in construction management fees were incurred and charged toconstruction in progress, and $327,500 was payable to Prescott.

 

Accounts receivable from parent andaffiliates generally represents charges for certain AES projects that theCompany has paid for and invoiced to the Company’s parent and affiliates.Accounts payable are generally amounts owed for shared services to theCompany’s parent and affiliates. Accounts receivable from parent and affiliateswere in the amount of $0 as of December 31, 2003 and 2002.  Accounts payable to AES and affiliates as ofDecember 31, 2003 and 2002 amounted to $2.1 million and $2.9 million,respectively.

 

Emission credits, included in other assets, weresold to AES Eastern Energy, L.P., an indirect wholly owned subsidiary of TheAES Corporation at a fair market price for a net loss of $431,000.

 

The Company is the primary source ofcontributions for the AES Ironwood Foundation (the "Foundation"), anon-profit organization founded to provide social responsibility to the localcommunities. The Company does not consolidate the financial statements of theFoundation into its financial statements as the Company does not control theoperations of the Foundation, nor does the Company hold an ownership interestin the Foundation. The Company’s discretionary funding for the yeas endedDecember 31, 2003, 2002 and 2001 was approximately $107,000. $376,000 and $0respectively.

 

**10.****       FAIR VALUE OF FINANCIALINSTRUMENTS**

 

The estimated fair values of the Company’sfinancial instruments have been determined using available market information.The estimates 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.

 

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The Bonds had a carrying amount of $301.8million with a fair value of approximately $325.9 million at December 31, 2003versus a carrying amount of $306.5 million with a fair value of approximately$214.0 million at December 31, 2002. The estimated fair value of the Bonds atDecember 31, 2003 and 2002 is based on quoted market prices of similarly ratedbonds with similar maturities.

 

**11.****       SEGMENT INFORMATION**

 

Under the provisions of Statement ofFinancial Accounting Standards No. 131, *DisclosureAbout Segments of an Enterprise and Related Information*, theCompany’s business is expected to be operated as one reportable segment, withoperating income or loss being the measure of performance evaluated by thechief operating decision-maker. As described in Notes 1 and 7, the Company’sprimary customer is Williams, which provides all of the Company’s operatingrevenues during the term of the power purchase agreement.

 

**12.****       ASSET HELD FOR SALE**

 

During 2002 the Company commenced installation of anauxiliary boiler to increase the efficiency of the Plant. The arbitrationsettlement of March 2003 determined that the Company has no obligation toinstall the auxiliary boiler as there would be no economic benefit produced byits installation. On July 24, 2003, the Company entered into a contract with asales assistance company to facilitate the sale of the boiler. As of September2003 total costs of the auxiliary boiler were approximately $886 thousand. Thefair value less selling costs of the auxiliary boiler is estimated to beapproximately $450 thousand and is included in asset held for sale.Approximately $436 thousand has been written off and is included in loss ondisposal of assets in the statement of operations for the year ended December31, 2003. 

 

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**SELECTED QUARTERLY FINANCIAL DATA   (UNAUDITED)**

 

Subsequent to theissuance of its financial statements for the quarterly period ended September30, 2003, the Company determined that revenues from fixed capacity payments hadnot been properly recognized in accordance with EITF Issue No. 91-6, “RevenueRecognition of Long-Term Power Sales Contracts”. Under EITF Issue No. 91-6, asit applies to the Company’s Power Purchase Agreement,  fixed capacity revenues should be reflected on the straight-linebasis over the life of the power purchase agreement. Differences between theactual capacity payments and the straight-line method are recorded as deferredrevenue.

 

As a result, theoperating results for each of the three quarters in the period ended September30, 2003 have been restated from the amounts previously reported.  The Company has not restated the results forthe 2002 quarters as the effects are not material.

 

A summary of thesignificant effects of the restatement is as follows (in thousands):

 
|             |   | **September  2003**          |   | **September  2003** |   | **June 2003**                |   | **June 2003**    |   | **March 2003**               |   | **March 2003**   |   |
|------------------|--------|------------------------------|--------|---------------------|--------|------------------------------|--------|------------------|--------|------------------------------|--------|------------------|--------|
|             |   | **As  previously  reported** |   | **As  restated**    |   | **As  previously  reported** |   | **As  restated** |   | **As  previously  reported** |   | **As  restated** |   |
| Revenues         |   | $                            | 13,967 |                | $      | 13,619                       |   | $                | 12,557 |                         | $      | 12,209           |   | $ | 12,425 |   | $ | 12,077 |   |
| Operating Income |   | 5,789                        |   | 5,441               |   | 4,525                        |   | 4,177            |   | 4,643                        |   | 4,295            |   |
| Net Loss         |   | $                            | (919   | )                   | $      | (1,267                       | )      | $                | (2,189 | )                            | $      | (2,537           | )      | $ | (1,881 | ) | $ | (2,229 | ) |

 

The following table summarizes the unaudited quarterly statements ofoperations for the Company for the years ended December 31, 2003 and 2002:

 
| AES Ironwood, L.L.C.                                                                 |   |
|--------------------------------------------------------------------------------------|--------|
| Quarters Ended December 31, 2003, September 30, 2003, June 30, 2003,  March 31, 2003 |   |
| (dollars in thousands)                                                               |   |

 
|                             |   |                                 |   |             |   |        |   |         |   |
|----------------------------------|--------|--------------------------------------|--------|------------------|--------|-------------|--------|--------------|--------|
|                             |   | **Quarter Ended 2003 (as restated)** |   |
| OPERATING REVENUES               |   | **December 31**                      |   | **September 30** |   | **June 30** |   | **March 31** |   |
| Energy                           |   | $                                    | 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 | ) |
|                             |   |                                 |   |             |   |        |   |         |   |

 

AES Ironwood, L.L.C.
| Quarters Ended December 31, 2002, September 30, 2002, June 30, 2002,  March 31, 2002 |   |
|--------------------------------------------------------------------------------------|--------|
| (dollars in thousands)                                                               |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |
|                                                                                 |   | **Quarter Ended 2002** |   |
| OPERATING REVENUES                                                                   |   | **December 31** |   | **September 30** |   | **June 30** |   | **March 31** |   |
| Energy                                                                               |   | $ | 11,983 |   | $ | 14,528 |   | $ | 12,809 |   | $ | 12,532 |   |
| OPERATING EXPENSES                                                                   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                                   |   | 3,369 |   | 6,535 |   | 5,677 |   | 4,606 |   |
| General and administrative costs                                                     |   | 5,903 |   | 1,874 |   | 1,591 |   | 1,564 |   |
| OPERATING INCOME                                                                     |   | 2,711 |   | 6,119 |   | 5,541 |   | 6,362 |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |
| OTHER INCOME/EXPENSE                                                                 |   |   |   |   |   |   |   |   |   |
| Other Income                                                                         |   | 1,531 |   | 489 |   | 1,300 |   | 1,454 |   |
| Interest income                                                                      |   | 41 |   | 45 |   | 19 |   | 33 |   |
| Interest expense                                                                     |   | (6,795 | ) | (6,805 | ) | (6,813 | ) | (6,831 | ) |
| NET (LOSS) INCOME                                                                    |   | $ | (2,512 | ) | $ | (152 | ) | $ | 47 |   | $ | 1,018 |   |

 

59

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**ITEM 9.** Changes in and Disagreements With Accountants on Accounting and FinancialDisclosure.

None.

 

**ITEM 9A.**               **Controls and Procedures**

 

Evaluation of DisclosureControls and Procedures .Our President and our Principal Financial Officer, based on the evaluation ofour “disclosure controls and procedures” (as defined in the Securities ExchangeAct of 1934 Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) ofExchange Act Rules 13a-15 or 15d-15, have concluded that as of December 31,2003, our disclosure controls and procedures were effective and designed toensure that information required to be disclosed by us in reports that we fileunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms.

 

Changes in Internal Controlover Financial Reporting. There have been no changes in our internal control over financialreporting identified in connection with the evaluation required by paragraph(d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our fiscalquarter ended December 31, 2003 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**PART III**

**ITEM 10.               Directorsand Executive Officers of the Registrant**

 

 Not applicable pursuant to GeneralInstruction I of Form 10-K.

 

**ITEM 11.               ExecutiveCompensation**

 

Not applicable pursuantto General Instruction I of Form 10-K.

 

**ITEM 12.               SecurityOwnership of Certain Beneficial Owners and Management**

 

Not applicable pursuantto General Instruction I of Form 10-K.

 

**ITEM 13.               CertainRelationships And Related Transactions**

 

Not applicable pursuantto General Instruction I of Form 10-K.

 

**ITEM 14.        PRINCIPAL ACCOUNTANT FEES AND SERVICES**

** **

**Audit Fees**

 

The aggregate fees billed for each of the last twofiscal years for professional services rendered by the principal accountant forthe audit of the registrant’s annual financial statements and review of thefinancial statements included in the registrant’s Form 10-Q (17 CFR 249.308a)or services that are normally provided by the accountant in connection withstatutory and regulatory filings or engagements for those fiscal years wereapproximately $208,500 and $219,000 for the years ended December 31, 2003 and2002, respectively.

 

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

 

Other than the audit fees described above, there wereno other fees paid to the principal accountants for the years ended December31, 2003 and 2002, respectively.

 

**Pre-Approval of Services Provided by Deloitte & Touche**

 

The registrant’s board of directors serves asits audit committee. All audit and non-audit services to be provided to theregistrant by its principal accountant are subject to pre-approval policies asspecified by the registrant’s board of directors.

 

60

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 **PART IV**  **ITEM 15****.****                                   Exhibits, FinancialStatement Schedules, and Reports on Form 8-K**  a)        The following documents are filed as part ofthis report:  1.         Financial Statements Filed:  Please refer to Item 8 - FinancialStatements and Supplementary Data.  2.                                              FinancialStatement Schedules Filed:  Please referto Item 8 - Financial Statements and Supplementary Data.  3.                                             ExhibitsFiled:  Unless otherwise indicated, allexhibits to this Form 10-K are incorporated herein by reference from theidentically numbered exhibit of AES Ironwood, L.L.C.’s Registration Statementon 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.                                                                  |
|               |   |                                                                                                                                                                                                        |
| 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.                                                                       |

 61

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| 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).                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 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.                                                                                                                                                                                                                                                                                                                                                  |

 62

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| 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 inSeptember 20, 2002 and incorporated by reference herein.  b)                        *Reports onForm 8-K*. No current reports on Form 8-K were filed by theregistrant during the fourth quarter of the fiscal year ended December 31,2003.  **SupplementaryInformation to be Furnished With Reports filed Pursuant to Section 15(d) of theAct by Registrants Which Have Not Registered Securities Pursuant to Section 12of the Act.**  No annual reportor proxy materials have been sent to security holders during the fiscal yearended December 31, 2003. No annual report or proxy materials will be sent tosecurity holders subsequent to the filing of this annual report on Form10-K.  63

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  **SIGNATURES**  Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized. 
|   | **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 30, 2004  Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated. 
| **Signature**         |   | **Title** |   | **Date**       |
|-----------------------|--------|-----------|--------|----------------|
|                  |   |      |   |           |
|                  |   |      |   |           |
| /s/ A. W. Bergeron    |   | Director  |   | March 30, 2004 |
| A. W. Bergeron        |   |      |   |           |
|                  |   |      |   |           |
| /s/ Edward P. Convery |   | Director  |   | March 30, 2004 |
| Edward P. Convery     |   |      |   |           |
|                  |   |      |   |           |
| /s/ Dan Rothaupt      |   | Director  |   | March 30, 2004 |
| Dan Rothaupt          |   |      |   |           |

 

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