** **

**UNITED STATES SECURITIES ANDEXCHANGECOMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**
| **(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, 2001**                                                                                                                                 |
|            |                                                                                                                                                                             |
| **OR**          |
|            |                                                                                                                                                                             |
| o               | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                    |
|            | **For  the transition period from                        to** |

 

**Commission file number:  333-91391**

** **

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

**(Exactname of registrant as specified in its charter)**

 

| **Delaware**                                                                         |   | **54-1457537**                       |
|--------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or 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**          |

 

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Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.  

Yes  ý   No  o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained 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 March 29,2002, there was one membership interest outstanding, which was held by AESIronwood, Inc., the Company’s parent and a wholly owned subsidiary of The AESCorporation.

 

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

 

**DOCUMENTS INCORPORATED BY REFERENCE**

**None**

 

 

 

**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 and Related Stockholder Matters |
|      | ITEM 6. Selected  Financial Data |
|      | ITEM  7. Management’s Discussion and Analysis of Financial Condition and Results of  Operations |
|      | ITEM  7A. Quantitative and Qualitative Disclosure About Market Risk |
|      | ITEM  8. Financial Statements and Supplemental Data |
|      | ITEM  9. Changes in and Disagreements With Accountants on Accounting and Financial  Disclosure. |
| 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 |
| PART  IV  |
|      | ITEM 14. Exhibits, Financial Statement  Schedules, and Reports on Form 8-K |

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

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 necessarilyall, of such forward-looking statements can be identified by the use offorward-looking terminology, such as “believes,” “estimates,” “plans,”“projects,” “expects,” “may,” “will,” “should,” “approximately,” or“anticipates” or the negative thereof or other variations thereof or comparableterminology, or by discussion of strategies, each of which involves risks anduncertainties.  We have based theseforward-looking statements on our current expectations and projections aboutfuture events based upon our knowledge of facts as of the date of this Form10-K and our assumptions about future events.

 

All statementsother than of historical facts included herein, including those regardingmarket trends, our financial position, business strategy, projected plans andobjectives of management for future operations of the facility, areforward-looking statements. Such forward-looking statements involve known andunknown risks, uncertainties and other factors outside of our control that may causeour actual results or performance to be materially different from any futureresults, performance or achievements expressed or implied by theforward-looking statements.  Theserisks, uncertainties and other factors include, among others, the following:

 

•                  unexpected problems relating to thestart-up, commissioning and performance of the facility,

•                  the financial condition of thirdparties on which we depend, including in particular, Williams Energy, Inc., thepower purchaser under the power purchase agreement,

•                  the continued performance of WilliamsEnergy under the power purchase agreement,

•                  our ability to find a replacementpower purchaser on favorable or reasonable terms, if necessary,

•                  an adequate merchant market after theexpiration of the power purchase agreement,

•                  capital shortfalls and access toadditional capital on reasonable terms,

•                  inadequate insurance coverage,

•                  unexpected expenses or lower thanexpected revenues,

•                  environmental and regulatorycompliance,

•                  terrorists acts and adverse reactionsto United States anti-terrorism activities, and

•                  the additional factors that areunknown to us or beyond our control.

 

We have no obligation topublicly update or revise any forward-looking statement, whether as a result ofnew information, future events or otherwise.

 

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**PARTI**

 

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

** **

**General**

 

We are a Delaware limitedliability company formed to develop, construct, own, operate and maintain a705-megawatt (MW) gas-fired electric generating power plant in Lebanon County,Pennsylvania, and to manage the production of electric generating capacity,ancillary services and energy at our facility. We commenced commercialoperations December 28, 2001. Since the commercial operation date, our solebusiness is the ownership and operation of our project.

 

We own the land on whichour facility is located.  Our facilitywas designed, engineered, procured and constructed for us by SiemensWestinghouse Power Corporation on a fixed-price, turnkey basis under theconstruction agreement. Siemens Westinghouse is also providing combustionturbine maintenance services and spare parts for our facility for an initialterm of between eight and 10 years, depending on the timing of scheduledoutages, under the maintenance services agreement. AES Prescott, L.L.C. (AESPrescott), an indirect wholly-owned subsidiary of The AES Corporation, providesdevelopment, construction management and operations and maintenance servicesfor the project under an operations agreement.

 

We entered into a powerpurchase agreement for a term of 20 years under which Williams Energy, Inc. iscommitted to purchase all of the net capacity, fuel conversion and ancillaryservices of our facility.  Net capacityis the maximum amount of electricity generated by our facility net ofelectricity used at our facility.  Fuelconversion services consist of the combustion of natural gas in order togenerate electric energy.  Ancillaryservices consist of services necessary to support the transmission of capacityand energy.  Williams Energy isobligated to supply us with all natural gas necessary to provide net capacity,fuel conversion services and ancillary services under the power purchaseagreement. During the term of the power purchase agreement substantially all ofour revenues will be derived from payments made under the power purchaseagreement.

 

**Organizational Structure**

 

All of our equityinterests are owned by AES Ironwood, Inc., a wholly-owned subsidiary of The AESCorporation. The AES Corporation will provide funds to AES Ironwood, Inc. sothat AES Ironwood, Inc. can make equity contributions to us to fund projectcosts. AES Ironwood, Inc. currently has no operations outside of its activitiesin connection with our project and does not anticipate undertaking anyoperations not associated with our project. AES Ironwood, Inc. has no assetsother than its membership interests in us and AES Prescott.  AES Prescott has no operations outside ofits activities in connection with our project. Under a services agreement, TheAES Corporation supplies to AES Prescott all of the personnel and servicesnecessary for AES Prescott to comply with its obligations under the operationsagreement.

 

The AES Corporation is aleading global power company committed to supplying electricity in a sociallyresponsible way.  As of December 31,2001, The AES Corporation currently had assets of approximately $37 billion andemployed approximately 38,000 people around the world.  The AES Corporation is a public company and issubject to the informational requirements of the Securities Exchange Act of1934 and, in accordance therewith, files reports, proxy statements and otherinformation, including financial reports, with the SEC.

 

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

 

**Competition**

 

Under the power purchaseagreement, Williams Energy is required to purchase all of our facility’scapacity and energy.  Therefore, duringthe twenty year term of the power purchase agreement, competition from othercapacity and energy providers will only become an issue if Williams Energybreaches its agreement and ceases to purchase our capacity and energy or thepower purchase agreement is otherwise terminated or not performed in accordancewith its terms.  Following the term ofthe power purchase agreement, we anticipate selling our facility’s netcapacity, ancillary services and energy under a new power purchase agreement orinto the Pennsylvania-New Jersey-Maryland (PJM) power pool market.  At that time, we will face competition fromother generating facilities selling into the PJM power pool market including,possibly, other facilities owned by The AES Corporation or its affiliates.

 

**Employees**

 

Other than the officerslisted in the “Directors and Executive Officers of the Registrant” section ofthis Form 10-K, we have no employees and do not anticipate having any employeesin the future.  Under the operationsagreement, AES Prescott has managed the development and construction of and nowoperates and maintains our facility. The direct labor personnel and the plant operations management areemployees of The AES Corporation which are provided to AES Prescott under theservices agreement.

 

**Insurance**

 

As owner of our facility,we maintain a comprehensive insurance program as required under our variousproject contracts and the indenture governing our senior secured bonds andunderwritten by 

 

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recognizedinsurance companies.  Among otherinsurance policies, we also maintain commercial general liability insurance,permanent property insurance for full replacement value of our facility andbusiness interruption insurance covering at least 12 months of debt service andfixed operation and maintenance expenses. We have obtained title insurance in an amount equal to the principalamount of the bonds.

 

AES Prescott, as operatorof our facility, maintains, among other insurance policies, workers’compensation insurance, or evidence of self-insurance, if required, andcomprehensive automobile bodily injury and property damage liability insurance.

 

**Permits and Regulatory Approvals**

 

AES Prescott, as operatorof our facility, and us, as owner of our facility, must comply with numerousfederal, state and local regulatory requirements including environmentalrequirements in the operation of our facility.

 

On March 31, 1999,we received a certification from the Federal Energy Regulatory Commission(FERC) that we are an Exempt Wholesale Generator.  Certification as an Exempt Wholesale Generator exempts us fromregulation under the Public Utility Holding Company Act of 1935.  We will maintain this status so long as wecontinue to make only wholesale sales of electricity, which we intend to do.Prior to commercial operation, we filed the power purchase agreement with FERCand obtained approval for the rates contained therein. We may also need toobtain FERC approval for sales of electricity at market-based rates after thepower purchase agreement is no longer in effect.

 

On March 29, 1999,we received our Prevention of Significant Deterioration Permit, or “air  permit,” from the Pennsylvania Department ofEnvironmental Protection.  The appealperiod in respect of the air permit expired on May 3, 1999 and no appealwas filed.  The air permit required thatour facility be constructed in a manner that would allow it to meet specifiedlimitations on emissions of air pollutants. Under the construction agreement, Siemens Westinghouse was required toconstruct our facility to meet these requirements. At the time of provisionalacceptance, certain emission standards as set by the construction agreement hadnot been achieved; although the emissions were within the limits of ourpermits. Siemens Westinghouse will be performing the necessary modifications tothe facility to ensure the emissions meet EPC requirements.

 

We are subject to anumber of statutory and regulatory standards and required approvals relating toenergy, labor and environmental laws. Although the necessary environmental permits for the commencement ofconstruction of our facility have been obtained, we are required to comply withthe terms of our environmental permits and to obtain other permits for theoperation of our facility.

 

The permits that havebeen obtained and that will be obtained contain ongoing requirements.  Failure to satisfy and maintain any of thepermit conditions or other applicable requirements could delay or preventcompletion of the construction of our facility, prevent the operation of ourfacility and/or result in additional costs.

 

**Summary of Principal ProjectContracts**

 

While we believe that thefollowing summaries contain the material terms of the principal projectcontracts, such summaries may not include all of the provisions of eachagreement that each individual investor may feel is important.  These summaries do not restate eachagreement discussed herein and exclude certain definitions and complex legalterminology that may be contained in each relevant agreement.  You should carefully read each agreementdiscussed herein, each of which was filed as an exhibit in our prior 10-Ks.

** **

**5**

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**Power Purchase Agreement**

** **

We entered into anAmended and Restated Power Purchase Agreement, dated as of February 5,1999, with Williams Energy for the sale to Williams Energy of all of theelectric energy and capacity produced by our facility as well as ancillaryservices and fuel conversion services.

 

**Term**

The term of the powerpurchase agreement extends for 20 years after the first contract anniversarydate, which is the last day in the month in which the commercial operation dateoccurs.  The commercial operation dateoccurs when

 

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

 

•                              wehave received all approvals from PJM Interconnection, L.L.C., which is theindependent system operator that operates the transmission system to which ourfacility will interconnect, and

 

•                              wehave obtained all required permits and authorizations for operation of ourfacility.

 

These prerequisites weremet and the facility commenced operations on December 28, 2001, accordingly,the power purchase agreement’s initial term is expected to expire on December31, 2022.

 

**Purchase and Sale of Capacity andServices**

 

During the term,commencing with the commercial operation date, we must sell and make availableto Williams Energy on an exclusive basis, and Williams Energy must purchase andpay for, our facility’s net capacity and ability to generate electricenergy.  In addition, during the term,commencing with the commercial operation date, we must perform for Williams Energyon an exclusive basis, and Williams Energy must purchase and pay for fuelconversion services, which consist of the generation of electric energy fromfuel provided by Williams Energy.

 

**Fuel Conversion and Other Services**

 

Williams Energy mustdeliver or cause to be delivered to us at the gas delivery point on anexclusive basis all quantities of natural gas as we require:

 

•                              togenerate net electric energy and/or ancillary services,

 

•                              toperform start-ups,

 

•                              toperform shutdowns, and

 

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

 

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**Pricing and Payments**

 

For each month of theterm after the commercial operation date, Williams Energy must pay us for ourfacility’s net capacity, successful start-ups and associated shutdowns, otherservices and fuel conversion services at the applicable rates described in thepower purchase agreement.  Each monthlypayment by Williams Energy will consist of a total fixed payment, a fuelconversion payment and a start-up payment. The total fixed payment, which is payable regardless of facilitydispatch by Williams Energy but is subject to adjustment based on facilityavailability, is calculated by multiplying a fixed capacity rate for eachcontract year by our facility’s net capacity in the billing month and isanticipated to be sufficient to cover our debt service and fixed operating andmaintenance costs and to provide us a return on equity.  The fuel conversion payment is intended tocover our variable operating and maintenance costs and escalates annually basedon an escalation index described in the power purchase agreement. The start-uppayment is intended to cover our non-fuel variable costs when the plant isstarting a dispatch period. In addition, we may receive heat rate bonuses or berequired to pay heat rate penalties.

 

Prior to the commercialoperation date, and during specific facility tests thereafter, we purchasednatural gas from Williams Energy. Williams Energy sold to us the natural gas atprices specified in the power purchase agreement, and we sold to WilliamsEnergy at the electric delivery point any net electric energy produced duringthose periods at 90% of the energy market clearing price.

 

Williams Energy will beentitled to an annual fuel conversion volume rebate if its dispatch of ourfacility exceeds specified levels and specified monthly non-dispatch paymentsif, under specific circumstances, our facility is not available fordispatch.  All fuel conversion volumerebate payments and non-dispatch payments must be made to Williams Energy afterdebt service and specified other payments but prior to any distribution toholders of the equity interests in our company.  Fuel conversion volume rebate payments must be paid to Williams Energywithin 30 days after the end of the contract year in which the payments havebeen earned and non-dispatch payments must be paid to Williams Energy within 20days after the end of the month on which a payment obligation arises.  Fuel conversion volume rebate payments andany non-dispatch payments owed to Williams Energy and not paid when due must bepaid, together with interest, when funds become available to us at the prioritylevel described above.

 

**Interconnection and MeteringEquipment**

 

At our sole cost and expense, we will maintain, or beresponsible for the maintenance of our facility, the interconnection facilitiesand protective gas apparatus needed to generate and deliver net electric energyand/or ancillary services to the electric delivery point in order to fulfillour obligations under the power purchase agreement, including allinterconnection facilities and protective gas apparatus that may be located atany switchyard and/or substation to be built at our facility.  At our cost and expense, the interconnectionfacilities and protective gas apparatus needed to generate and deliver netelectric and/or ancillary services to the electric delivery point have beencompleted as required under the power purchase agreement.  The interconnection facilities andprotective gas apparatus have been designed, constructed and completed in agood and workmanlike manner and in accordance with accepted electricalpractices, with respect to our facility and interconnection facilities or inaccordance with standard gas industry practices, with respect to protective gasapparatus, so that the expected useful life of our facility, theinterconnection facilities and protective gas apparatus will be not less thanthe term of the power purchase agreement.

 

We have been solelyresponsible for the negotiation and execution of the interconnection agreementwith GPU Energy under which GPU Energy will own and be responsible for theelectric metering equipment and the design, installation, construction andmaintenance of the electrical facilities 

 

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and protectiveapparatus, including any transmission equipment and related facilities,necessary to interconnect GPU Energy’s electrical system with our facility atthe electric delivery point. This equipment cost approximately $5.1 million andwas capitalized as part of the facility. Williams Energy reimbursed us for thereasonable GPU Energy costs (i.e., transmission facility costs, GPU Energyprotective apparatus and other equipment, GPU Energy electric meters, and GPUEnergy costs for PJM and other required interconnection-related studies)incurred, or to be reimbursed, by us under the interconnection agreement up toa maximum amount of which is in excess of the costs anticipated to be incurredby us under the interconnection agreement.

 

Williams Energy isresponsible for the installation, maintenance and testing of the gas meteringequipment, to the extent not otherwise installed, maintained and tested by thesupplier of gas transportation services, as reasonably approved by us.

 

All electric meteringequipment, gas metering equipment and oil metering equipment, whether owned byus or by a third party, must be operated, maintained and tested in accordancewith accepted electrical practices, in the case of the electric meteringequipment, and in accordance with applicable industry standards, in the case ofthe gas metering equipment and oil metering equipment.

 

**Operation / Dispatch**

 

Our facility, theinterconnection facilities and the protective gas apparatus must be operated inaccordance with accepted electrical practices and applicable requirements andguidelines reasonably adopted by GPU Energy from time to time and appliedconsistently to GPU Energy’s electric generating facilities, with respect toour facility and interconnection facilities, or in accordance with standard gasindustry practices, with respect to protective gas apparatus.  If there is a conflict between the terms andconditions of the power purchase agreement and GPU Energy requirements, GPUEnergy requirements will control.

 

We must operate ourfacility in parallel with GPU Energy’s electrical system with governor controland the net electric energy to be delivered by us under the power purchaseagreement must be three-phase, 60 hertz, alternating current at a nominalvoltage acceptable to GPU Energy at the electric delivery point, must notadversely affect the voltage, frequency, wave shape or power factor of power atthe electric delivery point and must be delivered to the electric deliverypoint in a manner acceptable to GPU Energy.

 

The power purchaseagreement acknowledges that GPU Energy has the right to require us todisconnect our facility from GPU Energy’s electrical system, or otherwisecurtail, interrupt or reduce deliveries of net electric energy, for specificsafety or emergency reasons.  If ourfacility has been disconnected for these reasons, Williams Energy will continueto be obligated to make total fixed payments for at least 24 hours after theoccurrence of the disconnection of our facility by GPU Energy.

 

We must use commerciallyreasonable efforts to promptly correct any condition at our facility whichnecessitates the disconnection of our facility from GPU Energy’s electricalsystem or the reduction, curtailment or interruption of electrical output ofour facility.  Williams Energy will havethe exclusive right to schedule the operation of our facility or a unit inaccordance with the provisions of the power purchase agreement so long as thescheduling is consistent with the design limitations of our facility,applicable law, regulations and permits, and manufacturers’ reasonablerecommendations for operating limits with respect to our facility and majorcomponents.

 

Up to two times eachyear, we must demonstrate, in accordance with the then-applicable criteria ofPJM applicable generally to independent power and GPU Energy generatingfacilities in PJM of 

 

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similartechnology, the capability of our facility to produce and maintain, as requiredfor the demonstration, our facility’s net capacity.

 

**Force Majeure**

 

A party will be excusedfrom performing its obligations under the power purchase agreement and will notbe liable in damages or otherwise to the other party if and to the extent theparty declares that it is unable to perform or is prevented from performing anobligation under the power purchase agreement by a force majeure condition,except for any obligations and/or liabilities under the power purchaseagreement to pay money, which will not be excused, and except to the extent anobligation accrues prior to the occurrence or existence of a force majeurecondition so long as:

 

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

 

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

 

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

 

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

 

Irrespective of whetherthe force majeure condition is declared by Williams Energy or us, the timeperiod of a force majeure will be excluded from the calculation of all paymentsunder the power purchase agreement and Williams Energy must be under noobligation to pay us any of the payments described in the power purchaseagreement.  If Williams Energy declaresa force majeure, however, it must, subject to its right to terminate the powerpurchase agreement if the force majeure has not been fully corrected or alleviatedwithin 18 months of the declaration, continue to pay us only the applicablemonthly total fixed payment as described in the power purchase agreement untilthe earlier of (1) the termination of the force majeure condition or (2) thetermination of the power purchase agreement. Furthermore, if we declare a forcemajeure due to an action or inaction of GPU Energy that prevents us fromdelivering net electric energy to the electric delivery point, Williams Energymust continue to pay the applicable portion of the total fixed payment for the first24 hours of the period.  Notwithstandinganything to the contrary contained in the power purchase agreement, except asmay expressly be provided in the power purchase agreement, the term forcemajeure will not include the following nor will the following excuse a party’sperformance:

 

•                              Anyreduction, curtailment or interruption of generation or operation of ourfacility, or of the ability of Williams Energy to accept or transmit netelectric energy, 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 Energy, unless, and then only to the extent  that, any acts or omissions would itself beexcused under the power purchase agreement as a force majeure; or

 

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•                              Anyoutage, whether or not due to the fault or negligence of us, of our facilityattributable to a defect or inadequacy in the manufacture, design orinstallation of our facility that prevents, curtails, interrupts or reduces theability of our facility to generate net electric energy or the ability of us toperform our obligations under the power purchase agreement; or

 

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

 

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

 

•                              Tothe extent Williams Energy is unable to perform due to a shortage of naturalgas not caused by an event of force majeure; or

 

•                              Becauseof an increase or decrease in the market price of electric energy/capacity,natural gas or because it is uneconomic for the party to perform itsobligations under the power purchase agreement.

 

Neither party will berequired to settle any strike, walkout, lockout or other labor dispute on termswhich, in the sole judgment of the party involved in the dispute, are contraryto its interest.  Williams Energy willhave the right to terminate the power purchase agreement if a force majeure hasbeen declared by us and the effect of the force majeure has not been fullycorrected or alleviated within 18 months after the date the force majeure wasdeclared.  Williams Energy, however,will not have the right to terminate the power purchase agreement if (1) theforce majeure was caused by Williams Energy or (2) the force majeure event doesnot prevent or materially limit Williams Energy’s ability to sell ourfacility’s net capacity into or through the PJM power pool market or to a thirdparty.

 

**Events of Default; Termination;Remedies**

 

The following willconstitute events of default under the power purchase agreement:

 

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

 

•                              ourfacility is not available to provide fuel conversion services to WilliamsEnergy during any period of 180 consecutive days after the commercial operationdate, except as may be excused by force majeure or the absence of availablenatural gas, or if the non-availability is caused by act or failure by WilliamsEnergy where the action is required by the power purchase agreement;

 

•                              wesell or supply net electric energy, ancillary services or capacity from ourfacility, or agree to do the same, to any person or entity other than WilliamsEnergy, without the prior approval of Williams Energy;

 

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•                              failureby us for 30 consecutive days to perform regular and required maintenance,testing or inspection of the interconnection facilities, our facility and/orother electric equipment and facilities;

 

•                              failureby us for 30 consecutive days to correct or resolve a material violation of anycode, regulation and/or statute applicable to the construction, installation,operation or maintenance of our facility, the interconnection facilities,protective gas apparatus or any other electric equipment and facilitiesrequired to be constructed and operated under the power purchase agreement whenthe violation impairs our continued ability to perform under the power purchaseagreement;

 

•                              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 our facility by or on behalf ofus which prevent us from fulfilling, or materially diminishes our ability tofulfill, our obligations, duties, rights and responsibilities under the powerpurchase agreement and which after reasonable notice and opportunity to cure,are not corrected;

 

•                              therewill be outstanding for more than 60 days any unsatisfied final, non-appealablejudgment against us in an amount exceeding $500,000, unless the existence ofthe unsatisfied judgment does not materially affect our ability to perform ourobligations under the power purchase agreement; and

 

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

 

Upon the occurrence ofany event of default, other than an event of default for voluntary bankruptcyor insolvency, for which no notice will be required or opportunity to curepermitted, the party not in default, to the extent the party has actualknowledge of the occurrence of the event of default, must give prompt writtennotice of the default to the defaulting party. The notice must describe, in reasonable detail, the nature of thedefault and, where known and applicable, the steps necessary to cure thedefault.  The defaulting party must have30 days, but only two business days in the case of a default for failure tomake a requested payment to the non-defaulting party under the power purchaseagreement, following receipt of the notice either to cure the default orcommence in good faith all the steps as are necessary and appropriate to curethe default if the default cannot be completely cured within the 30-dayperiod.  If the defaulting party failsto cure the default or take the steps as provided under the precedingparagraph, and immediately upon the occurrence of any event of default forvoluntary bankruptcy or insolvency, the power purchase agreement may beterminated by the non-defaulting party, without any liability or responsibilitywhatsoever, by written 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 Energy hasprovided us a guarantee, issued by The Williams Companies, Inc., of WilliamsEnergy’s performance and payment obligations under the power purchaseagreement.  If The 

 

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WilliamsCompanies, Inc. is no longer rated investment grade, however, the guaranteemust, within 30 days after the loss of the rating, be replaced by a guaranteefrom another affiliate of Williams Energy that is rated investment grade or byother security acceptable to us, including a letter of credit which meets therequirements of the power purchase agreement.

 

**Assignment**

 

Generally, neither thepower purchase agreement nor any rights, duties, interests or obligationsthereunder may be assigned, transferred, pledged or otherwise encumbered ordisposed of, by operation of law or otherwise without the prior written consentof the other party.

 

We agreed that we willnot sell, transfer, assign, lease or otherwise dispose of our facility or anysubstantial portion thereof or interest therein necessary to perform ourobligations under the power purchase agreement to any person that is aFERC-authorized power marketer or an affiliate without the prior writtenconsent of Williams Energy, which consent must not be unreasonably withheld.

 

**Construction Agreement**

** **

We, as assignee of AESIronwood, Inc., entered into an Agreement for Engineering, Procurement andConstruction Services, dated as of September 23, 1998, as amended, with SiemensWestinghouse for Siemens Westinghouse to perform services in connection withthe design, engineering, procurement, site preparation and clearing, civilworks, construction, start-up, training and testing and to provide allmaterials and equipment (excluding operational spare parts), machinery, tools,construction fuels, chemicals and utilities, labor, transportation,administration and other services and items (collectively and separately, the“services”) for our facility. Siemens Westinghouse was granted provisionalacceptance on December 27, 2001.

 

**Siemens Westinghouse’s Services andOther Obligations**

 

Siemens Westinghouse mustcomplete our project by performing or causing to be performed all of theservices.  The required services haveincluded: engineering and design; construction and construction management;providing design documents, instruction manuals, a project procedures manualand quality assurance plan; procuring all materials, equipment and supplies andall contractor and subcontractor labor and manufacturing and related services;providing a spare parts list; providing all labor and personnel; obtaining someapplicable permits and providing information to assist us in obtaining otherapplicable permits; performing inspection, expediting, quality surveillance andtraffic services; transporting, shipping, receiving and marshalling allmaterials, equipment and supplies and other items; providing storage for allmaterials, supplies and equipment and procurement or disposal of all soil andgravel (including remediation and disposal of specific hazardous materials);providing for design, construction and installation of electrical interconnectionfacilities (including electric metering equipment, automatic regulationequipment, protective apparatus and control system equipment) and reviewingother GPU Energy interconnections to our facility (including gas and waterpipelines); performing performance tests and power purchase agreement outputtests; providing for start-up and initial operation functions; and providingspecified spare parts, waste disposal services, chemicals, consumables andutilities.

 

The services have alsoincluded: training our personnel prior to provisional acceptance; providing usand our designee with access to the facility site; obtaining additionalnecessary real estate rights; clean-up and waste disposal (including hazardousmaterials brought to the facility site by Siemens Westinghouse or thesubcontractors); submitting a construction schedule and progress reports;payment of contractor taxes; employee identification and security arrangements;protecting adjoining utilities and 

 

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public and privatelands from damage; paying appropriate royalties and license fees; providingfinal releases and waivers to us; posting collateral or providing otherassurances if major subcontractors fail to furnish final waivers; maintaininglabor relations and project labor agreements; providing further assurances;coordinating with other contractors; and causing Siemens Corporation to executeand deliver the related guaranty.

 

By meeting the provisionsin Section 6.3 of the construction agreement, Provisional Acceptance wasgranted by us on December 27, 2001. Siemens Westinghouse must perform certainagreed upon completion items in order to obtain final acceptance. These itemsinclude but are not limited to modifications during the April outage, describedbelow within Interim Acceptance. After the completion of these items, and afterhaving proven that such modifications will perform as promised final completionis expected to be granted.

 

**Construction and Start-Up**

 

Siemens Westinghouse mustperform certain services in accordance with prudent utility practices,generally accepted standards of professional care, skill, diligence andcompetence applicable to engineering, construction and project managementpractices, all applicable laws, all applicable permits, the real estate rights,the quality assurance plan, GPU Energy electrical interconnection requirements,the environmental requirements and safety precautions described in theconstruction agreement, and all of the requirements necessary to maintain thewarranties granted by the subcontractors under the construction agreement.Siemens Westinghouse must perform the services in accordance with ourconstruction schedule and must cause

 

•                              eachconstruction progress milestone to be achieved on or prior to theapplicable  construction progressmilestone date,

 

•                              eitherprovisional acceptance or interim acceptance of our facility to occur on orprior to the guaranteed provisional acceptance date, and

 

•                              finalacceptance of our facility to occur on or before the  guaranteed final acceptance date.

 

Siemens Westinghouse mustperform the services so that our facility, when operated in accordance with theinstruction manual and the power purchase agreement operating requirements,regardless of whether our facility is operated at 705 megawatts or at adifferent output, on natural gas , respectively, as of provisional acceptance,interim acceptance and final acceptance, will comply with all applicable lawsand applicable permits, GPU Energy electrical interconnection requirements andthe guaranteed emissions limits in accordance with the completed performancetest requirements. 

 

**Contract Price and Payment**

 

The adjusted contractprice, including base scope changes through the date of the constructionagreement, is $241 million and commencing on the construction commencement dateis to be paid in installments in accordance with the payment and milestoneschedule.  The contract price may beadjusted as a result of scope changes. We must make and have made scheduled payments to Siemens Westinghouseupon receipt of Siemens Westinghouse’s payment request unless the independentengineer fails to confirm the matters certified to by Siemens Westinghouse inthe request, in which case we may defer the scheduled payments until thecondition is satisfied. To date we have not deferred any payment.   We withheld from each scheduled payment 5%,other than our project completion payment, of the 

 

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payment untilafter final acceptance.  At finalacceptance, we must pay all retainage except for $1,000,000 and 150% of thecost of completing all punch list items. We must pay our project completion payment, including all remainingretainage within 30 days after project completion.  Upon the termination of the construction agreement, SiemensWestinghouse will be entitled to a termination payment equal to the scheduledpayments due and owing, retainage and termination costs incurred by SiemensWestinghouse and subcontractors.  We arenot obligated to make any payment to Siemens Westinghouse at any time SiemensWestinghouse is in material breach of the construction agreement, unlessSiemens Westinghouse is diligently pursuing a cure.  All payments are subject to release of claims.

 

**Our Required Services**

 

Our responsibilitiesinclude: designating a representative for our project; furnishing SiemensWestinghouse access to the facility site; securing specified applicable permitsand real estate rights; providing specified start-up personnel; furnishingwater, water delivery facilities, specified spare parts, water disposalservices and consumables; providing permanent utilities for the start-up,testing and operation of our facility; providing fuel supply arrangements;providing electrical interconnection facilities arrangements; furnishingapprovals; administering third-party contracts; and causing The AES Corporationto provide a pre-financial closing guaranty.

 

If we fail to meet any ofour obligations under the construction agreement, then, to the extent thatSiemens Westinghouse was reasonably delayed in the performance of the servicesas a direct result thereof, an equitable adjustment to one or more of thecontract price, the guaranteed completion dates, the construction progressmilestone dates, the payment and milestone schedule and our constructionschedule, and, as appropriate, the other provisions of the constructionagreement that may be affected thereby, will be made by agreement between usand Siemens Westinghouse.

 

**Mechanical Completion**

 

Mechanical Completionwill be achieved when: 

 

•                              Allequipment and facilities necessary for the full, safe and reliable operation ofour facility have been properly constructed, installed, insulated and protectedwhere required, and correctly adjusted, and can be safely used for theirintended purposes in accordance with the instruction manual and all applicablelaws and applicable permits;

 

•                              Thetests required for mechanical completion that are identified in theconstruction agreement have been successfully completed;

 

•                              Ourfacility is fully and properly interconnected and synchronized with theelectrical system of GPU Energy in accordance with GPU Energy electricalinterconnection requirements, and all features and equipment of our facilityare capable of operating simultaneously; and

 

•                              Thecomplete performance by Siemens Westinghouse of all the services relating toour facility under the construction agreement, except for any remaining punchlist items, performance tests, power purchase agreement output tests andreliability run, in compliance with the standards of performance described inthe construction agreement, so that our facility meets all of the applicablerequirements described in the construction agreement but excluding theachievement of the guaranteed emission limits and the performance guarantees.

 

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When Siemens Westinghousebelieves that it has achieved mechanical completion, it must deliver to us thenotice of mechanical completion.  Within10 days of receipt of the notice of mechanical completion, if it is satisfiedthat the mechanical completion requirements have been met, we must deliver toSiemens Westinghouse a mechanical completion certificate.  If reasonable cause exists for doing so, wemust notify Siemens Westinghouse in writing that mechanical completion has notbeen achieved, stating the reasons therefor. If mechanical completion has not been achieved as so determined by us,Siemens Westinghouse must promptly do so or perform the additional servicesthat will achieve mechanical completion of our facility and must issue to usanother notice of mechanical completion. The procedure must be repeated as necessary until mechanical completionof our facility has been achieved.

 

Pursuant to the terms andconditions applicable to Agreement Change Order No. 70, 4(e) “ Owner agreesthat, upon the earlier of Provisional Acceptance, Interim Acceptance or FinalCompletion, Owner shell be deemed to have issued a Mechanical Completion Certificatepursuant to Section 6.1.2.2 of the (construction) Contract”.

 

Provisional acceptancewas granted December 27, 2001.

 

**Performance Tests and Power PurchaseAgreement Output Tests**

 

Once mechanicalcompletion has been achieved, Siemens Westinghouse must perform the performancetests and power purchase agreement output tests in accordance with criteriadescribed in the construction agreement. Siemens Westinghouse must give usnotice of the performance tests and power purchase agreement output tests. Wemust arrange for the disposition of output during start-up and testing. SiemensWestinghouse may declare the performance test or the power purchase agreementoutput test to be a completed performance test or a completed power purchaseagreement output test, respectively, if during the tests the operation of ourfacility complies with applicable laws, applicable permits, guaranteedemissions limits and other required standards.

 

**Provisional Acceptance**

 

Provisional acceptancewill be achieved when:

 

•                              SiemensWestinghouse has concluded a completed performance test in which our facility,while operating on natural gas, demonstrates during a minimum of two 2-hourtests an average net electrical output and a net heat rate of 95% (or higher)of the natural gas-based electrical output guarantee and 108% (or lower) of thenatural gas-based heat rate guarantee;

 

•                              SiemensWestinghouse has concluded a completed power purchase agreement output test inwhich our facility demonstrates (1) a level of achievement of 95% (or higher)of the natural gas-based electrical output guarantee, while operating onnatural gas, and (2) to our reasonable satisfaction, the other capabilitiesrequired to be demonstrated under the construction agreement; and

 

•                              Ourfacility has achieved, and continues to satisfy, the requirements of mechanicalcompletion.

 

When Siemens Westinghousebelieves that it has achieved provisional acceptance of our facility, it mustdeliver to us a notice of provisional acceptance.  If we are satisfied that the provisional acceptance requirementshave been met, we must deliver to Siemens Westinghouse a provisional acceptancecertificate.  If reasonable cause existsfor doing so, we must notify Siemens Westinghouse in writing that 

 

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provisionalacceptance of our facility has not been achieved, stating the reasonstherefor.  If we determine thatprovisional acceptance of our facility has not been achieved, SiemensWestinghouse must promptly do so or perform the additional services as willachieve provisional acceptance and, if Siemens Westinghouse believes thatprovisional acceptance of our facility has been achieved, must issue to usanother notice of provisional acceptance. Unless interim acceptance or final acceptance of our facility haspreviously occurred, the procedure must be repeated as necessary untilprovisional acceptance of our facility has been achieved. Upon the earliest tooccur of provisional acceptance, interim acceptance and final acceptance of ourfacility, we must take possession and control our facility and will thereafterbe solely responsible for its operation and maintenance.  After we take possession and control of ourfacility, Siemens Westinghouse must have reasonable access to our facility tocomplete the services. At December 27, 2001, provisional acceptance had beenachieved.

 

**Interim Acceptance**

 

Interim  acceptance will be achieved when:

 

•                              SiemensWestinghouse has concluded a  completedperformance test in which our facility, while operating on natural gas,demonstrates during the performance test an average net electrical output and anet heat rate (each as measured and corrected to the design operatingconditions, all in accordance with the procedures described in the constructionagreement) of 95% (or higher) of the natural gas-based electrical outputguarantee (but in no event lower than the percentage of the natural gas-basedelectrical output guarantee demonstrated by the applicable completedperformance test and completed power purchase agreement output test atprovisional acceptance, if applicable) and 104% (or lower) of the naturalgas-based heat rate guarantee;

 

•                              Ifneither provisional acceptance nor interim acceptance of our facility hasoccurred, Siemens Westinghouse has concluded a completed power purchaseagreement output test in accordance with the construction agreement to beconcluded in which our facility demonstrates (1) a level of achievement of 95%(or higher) of the natural gas-based electrical output guarantee, while operating on natural gas, and (2) toGPU Energy’s reasonable satisfaction, the other capabilities required to be sodemonstrated under the construction agreement;

 

•                              Ourfacility has achieved, and continues to satisfy the requirements for theachievement of, mechanical completion; and

 

•                              SiemensWestinghouse has completed performance of the services except for (1) punchlist items and (2) services that are required by the terms of the constructionagreement to be completed after the achievement of interim acceptance.

 

When Siemens Westinghousebelieves that it has achieved interim acceptance of our facility, it mustdeliver to us a notice of interim acceptance. If we are satisfied that the interim acceptance requirements have beenmet, we must deliver to Siemens Westinghouse an interim acceptancecertificate.  If reasonable cause existsfor doing so, we must notify Siemens Westinghouse in writing that interimacceptance of our facility has not been achieved, stating the reasonstherefor.  If we determine that interimacceptance has not been achieved, Siemens Westinghouse must promptly take theaction or perform the additional services as will achieve interim acceptanceand, if Siemens Westinghouse believes that interim acceptance of our facilityhas been achieved, must issue to us another notice of interim acceptance.  Unless final acceptance of our facility musthave previously occurred, the procedure must be repeated as necessary untilinterim acceptance of our facility has been achieved. We have planned an outageduring 

 

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April 2002. Theexpectation is that final acceptance will be granted if predeterminedperformance levels are met.

 

**Final Acceptance**

 

Final acceptance will beachieved when:

 

•                              SiemensWestinghouse has concluded a completed performance test in which our facility,while operating on natural gas, demonstrates during the performance test anaverage net electrical output and a net heat rate of 100% (or higher) of eachof the corresponding natural gas-based electrical output guarantees and 100%(or lower) of each of the corresponding natural gas-based heat rate guarantees;

 

•                              Ifneither provisional acceptance nor interim acceptance of our facility hasoccurred or if we have requested that a new completed power purchase agreementoutput test be conducted in connection with final acceptance of our facility,Siemens Westinghouse has concluded a completed power purchase agreement outputtest in which our facility demonstrates (1) a level of achievement of 100% (orhigher) of the natural gas-based electrical output guarantee, while operatingon natural gas, and (2) to GPU Energy’s reasonable satisfaction, the othercapabilities required to be so demonstrated under the construction agreement;

 

•                              ourfacility has achieved, and continues to satisfy the requirements for theachievement of, mechanical completion;

 

•                              thereliability guarantee has been achieved under the construction agreement; and

 

•                              SiemensWestinghouse has completed performance of the services except for (1) punchlist items and (2) services that are required by the terms of the constructionagreement to be completed after the achievement of final acceptance, such asSiemens Westinghouse’s warranty obligations.

 

The reliability guaranteewill have been achieved if and only if our facility demonstrates an averageequivalent availability of not less than 92% while operating over a period ofat least 45 consecutive days in accordance with applicable laws, applicablepermits, GPU Energy electrical interconnection requirements, the power purchaseagreement operating requirements, the guaranteed emissions limits, theinstruction manual and the power purchase agreement.

 

When Siemens Westinghousebelieves that it has achieved final acceptance of our facility, it must deliverto us a notice of final acceptance.  Ifwe are satisfied that the final acceptance requirements have been met, we mustdeliver to Siemens Westinghouse a final acceptance certificate.  If reasonable cause exists for doing so, wemust notify Siemens Westinghouse in writing that final acceptance has not beenachieved, stating the reasons therefor. If we determine that final acceptance has not been achieved, SiemensWestinghouse must promptly do so or perform the additional services as willachieve final acceptance and must issue to us another notice of finalacceptance.  The procedure must berepeated as necessary until final acceptance has been achieved or deemed tohave occurred.

 

At any time, by givingnotice to Siemens Westinghouse, we, in our sole discretion, may elect to effectfinal acceptance, in which case final acceptance will be deemed effective as ofthe date of the notice, and Siemens Westinghouse will have no liability to usfor any amounts thereafter arising as 

 

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performanceguarantee payments, other than any interim period rebates that arose prior tothe election by us, for failure of our facility to achieve any or all of theapplicable performance guarantees.

 

At any time afterprovisional acceptance or interim acceptance of our facility has been achieved,Siemens Westinghouse may, after exhausting all reasonable repair andreplacement alternatives in order to achieve the applicable performanceguarantees for final acceptance, so long as the reliability guarantee will havebeen achieved, give to us notice of its intention to elect to declare finalacceptance.  In that event, SiemensWestinghouse may elect to use the results of the most recent eligible completedperformance test for the purpose of determining our facility’s level ofachievement of the performance guarantees. Final acceptance will be deemed effective as of the last to occur of (1)the date of our receipt of the declaration and report of the final completedperformance test, or, as applicable, the most recent completed performancetest, (2) the date of our receipt of the declaration and report of anyadditional completed power purchase agreement output test required by us inconnection with final acceptance and (3) the effective date of the achievementof the reliability guarantee.

 

If on or before theguaranteed final acceptance date (1) our facility has achieved eitherprovisional acceptance or interim acceptance, (2) the most recent completedperformance test has satisfied the relevant provisions of the constructionagreement and (3) the reliability guarantee has been achieved, then finalacceptance of our facility will be deemed to occur on the guaranteed finalacceptance date.  If (1) on or beforethe guaranteed final acceptance date, our facility has achieved at leastprovisional acceptance or interim acceptance and has achieved all otherrequirements for final acceptance except for the reliability guarantee and (2)within 90 days after the guaranteed final acceptance date, the reliabilityguarantee has been achieved and all other requirements for final acceptancecontinue to be satisfied at that time, then final acceptance of our facilitywill be deemed to occur on the date on which the reliability guarantee isachieved.

 

We expect to reach finalacceptance in June 2002.

 

**Project Completion**

 

Project completion willbe achieved under the construction agreement when:

 

•                              Finalacceptance of our facility will have occurred and the performance guaranteeswith respect to our facility will have been achieved, or in lieu of achievementof the performance guarantees, applicable rebates under the constructionagreement will have been paid, we will have elected final acceptance;

 

•                              Thereliability guarantee will have been achieved;

 

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

 

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

 

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

 

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

 

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When Siemens Westinghousebelieves that it has achieved project completion, it must deliver to us anotice of project completion.  If we aresatisfied that the final acceptance requirements have been met, we must deliverto Siemens Westinghouse a project completion certificate.  If reasonable cause exists for doing so, wemust notify Siemens Westinghouse in writing that project completion has notbeen achieved, stating the reasons therefore. If our project completion has not been achieved as so determined by us,Siemens Westinghouse must promptly take such action or perform the additionalservices as will achieve project completion and must issue to us another noticeof project completion.  The proceduremust be repeated as necessary until project completion is achieved.

 

Siemens Westinghouse willbe obligated to achieve project completion within 180 days after finalacceptance of our facility.  If SiemensWestinghouse does not achieve our project completion on or before our projectcompletion deadline or if we determine that Siemens Westinghouse is notproceeding with all due diligence to complete the services in order to achieveproject completion by the deadline, we may retain another contractor tocomplete the work at the contractor’s expense.

 

**Price Rebate for Failure to MeetGuarantees**

 

### ***  Completion Dates***

 

Siemens Westinghouseguarantees that (1) at least one of provisional acceptance, interim acceptanceor final acceptance of our facility will be achieved on or before theguaranteed provisional acceptance date and (2) final acceptance of our facilitywill be achieved on or before the guaranteed final acceptance date.

 

If none of provisionalacceptance, interim acceptance or final acceptance of our facility occurs bythe date that is 45 days after the guaranteed provisional acceptance date,Siemens Westinghouse must pay us $110,000 per day for each day provisionalacceptance, interim acceptance or final acceptance is later than the guaranteedprovisional acceptance date, but in no event will the aggregate amount of thepayments be greater than the Delay LD SubCap (the aggregate amount of which isequal to 20% of the contract price).

 

Siemens Westinghousebegan paying liquidated damages of $110,000 per day beginning 45 days after theguaranteed provisional acceptance date of May 22, 2001. The liquidated damagesceased to accrue on December 27, 2001, the date upon which provisionalacceptance was granted. At December 31, 2001 we had invoiced SiemensWestinghouse approximately $19 million. At December 31, 2001 SiemensWestinghouse had paid all but $2.97 million, the amount accrued fortwenty-seven days in December.  SiemensWestinghouse paid this amount in January 2002.

 

**Performance Guarantees**

 

* Electrical Output*

 

If the average netelectrical 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 us,as a rebate, for each day during the interim period, an amount equal to $0.22per day for each kilowatt by which the average net electrical output is lessthan the natural gas-based electrical output guarantee. During performancetesting output was calculated to be 37,853.91 kilowatts less than the naturalgas-based electrical output guarantee. The daily charge for this amount hasbeen calculated at $8,327.86 per day. We invoiced Siemens Westinghouse for fourdays ($33,311.44) in December that output was less than the natural gas-basedelectrical output guarantee. This amount was paid on March 15, 2002.

 

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Upon final acceptance, if(1) the average net electrical output of our facility during the naturalgas-fired portion of the completed performance test is less than the naturalgas-based electrical output guarantee, then we must pay Siemens Westinghouse,as a rebate, an amount equal to $550 for each kilowatt by which the average netelectrical output is less than the natural gas-based electrical outputguarantee.

 

Upon final acceptance, ifthe average net electrical output of our facility during the natural gas-firedportion of the completed performance test is greater than the natural gas-basedelectrical output guarantee, then Siemens Westinghouse must pay us as a bonus,an amount equal to 50% of the net incremental revenues received by us duringthe period of the first three years following the commercial operation date asa result of (1) any power purchase agreement concluded with a utility wherebythe utility purchases the excess output, (2) any short-term sales of the excessoutput, and (3) any spot sales of the excess output, in each of the cases (1)through (3) above after subtracting all incremental costs and taxes associatedwith the excess output, so long as the aggregate amount of any bonus does notin any event exceed $275 per kilowatt of excess capacity.

 

* Heat Rate Guarantees*

 

If the average net heatrate of our facility at provisional acceptance and/or interim acceptance, ifhaving occurred before final acceptance, exceeds the natural gas-based heatrate guarantee, then Siemens Westinghouse must pay us, as a rebate, for eachday during the interim period, an amount equal to $44 per day for each BTU/KwHby which the measured net heat rate is greater than the natural gas-based heatrate guarantee. During performance testing heat rate was calculated to be161.72 BTU/KwH less than the natural gas-based natural heat rate guarantee. Thedaily charge for this amount has been calculated at $7,115.68 per day. Weinvoiced Siemens Westinghouse for four days ($28,462.72) in December that heatrate was less than the natural gas-based natural heat rate guarantee. Thisamount was paid on March 15, 2002.

 

Upon final acceptance, ifthe net heat rate of our facility during the natural gas-fired portion of thecompleted performance test exceeds the natural gas-based heat rate guarantee, thenSiemens Westinghouse must pay us, as a rebate, an amount equal to $162,300 foreach BTU/KwH by which the measured heat rate is greater than the naturalgas-based heat rate guarantee.

 

Upon final acceptance, ifthe average net heat rate during the natural gas-fired portion of the completedperformance test is less than the natural gas-based heat rate guarantee, thenwe must pay Siemens Westinghouse, as a bonus, an amount equal to $40,000 foreach BTU/KwH by which the measured heat rate is less that the natural gas-basedheat rate guarantee so long as the aggregate amount of any bonus does not inany event exceed $3,000,000.

 

**Liability and Damages**

 

*  Limitation of Liability*

 

In no event will SiemensWestinghouse’s liability exceed (1) the Delay LD SubCap, the aggregate of whichis equal to 20% of the contract price, and (2) the Total LD SubCap (theaggregate amount of which is equal to 45% of the contract price).

 

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***  Consequential Damages***

* *

Neither party nor any ofits contractors, subcontractors or other agents providing equipment, materialor services for our project will be liable for any indirect, incidental,special or consequential loss or damage of any type.

 

***  Aggregate Liability of Contractor***

 

The total aggregateliability of Siemens Westinghouse and any of its subcontractors, includingliabilities covered by the Delay LD SubCap and the Total LD SubCap, to us willnot in any event exceed an amount equal to the contract price so long as thelimitation of liability will not apply to obligations to remove liens or tomake indemnification payments.

 

**Warranties and Guarantees**

 

Siemens Westinghousewarrants and guarantees that during the applicable warranty period

 

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

 

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

 

•                              ourproject 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

 

•                              thecompleted project must perform its intended functions of generating electricenergy and capacity as a complete, integrated operating system as contemplatedin the construction agreement.  If wenotify Siemens Westinghouse within 30 days after the expiration of theapplicable warranty period of any defects or deficiencies discovered during theapplicable warranty period, Siemens Westinghouse must promptly reperform any ofthe services at its own expense to correct any errors, omissions, defects ordeficiencies and, in the case of defective or otherwise deficient machinery,equipment, materials, systems supplies or other items, replace or repair thesame at its own expense. Siemens Westinghouse warrants and guarantees that, tothe extent we have made all payments then due to Siemens Westinghouse, title toour facility and all work, materials, supplies and equipment must pass to usfree and clear of all liens, other than any permitted liens.  Other than the warranties and guaranteesprovided in the construction agreement, there are no other warranties of anykind, whether statutory, express or implied relating to the services.

 

During the applicablewarranty period, Siemens Westinghouse must promptly notify us of anyengineering and design defects which are manifested in any of SiemensWestinghouse’s fleet of 501G combustion turbines under construction, start-upor 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 

 

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Siemens Westinghouseof a fleet-wide or common defect and otherwise upon notification from us nolater than 30 days after the expiration of the applicable warranty period ofany defects or deficiencies in our project or any component, we must, subjectto the provisions of the construction agreement, make our facility or thesubject equipment available to Siemens Westinghouse for Siemens Westinghouse tore-perform, replace or, at its option, repair the same at its expense so thatit is in compliance with the standards warranted and guaranteed, all inaccordance with the construction agreement.

 

***  Force Majeure Event***

 

A force majeure eventmeans any act or event that prevents the affected party from performing itsobligations, other than the payment of money, under the construction agreementor complying with any conditions required to be complied with under theconstruction agreement if the act or event is beyond the reasonable control ofand not the fault of the affected party and the party has been unable by theexercise of due diligence to overcome or mitigate the effects of the act orevent.  Force majeure events include,but are not limited to, acts of declared or undeclared war, sabotage,landslides, revolution, terrorism, flood, tidal wave, hurricane, lightning,earthquake, fire, explosion, civil disturbance, insurrection or riot, act ofGod or the public enemy, action (including unreasonable delay or failure toact) of a court or public authority, or strikes or other labor disputes of aregional or national character that are not limited to only the employees ofSiemens Westinghouse or its subcontractors and that are not due to the breachof a labor contract or applicable law by the party claiming force majeure orany of its subcontractors.  Forcemajeure events do not include (1) strikes, work stoppages and labor disputes orunrest of any kind that involve only employees of Siemens Westinghouse or anysubcontractors, except as expressly provided in the preceding sentence, (2)late delivery of materials or equipment, except to the extent caused by a forcemajeure event and (3) economic hardship.

 

***  Excused Performance***

 

If either party isrendered wholly or partly unable to perform its obligations because of a forcemajeure event, that party will be excused from whatever performance is affectedby 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;

 

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

 

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

 

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

 

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

 

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***  Scope Changes***

 

We may order scopechanges to the services, in which event one or more of the contract price, the constructionprogress milestone dates, the guaranteed completion dates, the payment andmilestone schedule, our construction schedule and the performance guaranteeswill be adjusted accordingly, if necessary. All scope changes must be authorized by a scope change order and only weor our representative may issue scope change 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 us a scope change order notice at itsexpense.  If we desire to make a scopechange, in response to a scope change order notice or otherwise, we must submita scope change order request to Siemens Westinghouse. Siemens Westinghouse mustpromptly review the scope change order request and notify us in writing of theoptions for implementing the proposed scope change and the effect, if any, eachoption would have on the contract price, the guaranteed completion dates, theconstruction progress milestone dates, the payment and milestone schedule, ourconstruction schedule and the performance guarantees.  No scope change order will be issued and no adjustment of thecontract price, the guaranteed completion dates, the construction progressmilestone dates, the payment and milestone schedule, our construction scheduleor the performance guarantees will be made in connection with any correction oferrors, omission, deficiencies, or improper or defective work on the part ofSiemens Westinghouse or any subcontractors in the performance of theservices.  Changes due to changes inapplicable laws or applicable permits occurring after the date of theconstruction agreement must be treated as scope changes.

 

In December 2001 wereached an agreement with Siemens Westinghouse to eliminate the requirement touse fuel oil as a secondary fuel from the construction agreement. In a separateagreement, Williams Energy agreed to eliminate the requirement to use fuel oilas a secondary fuel from the power purchase agreement contract. The result ofthe non use of fuel oil will enhance the reliability of the plant as well asincrease the efficiency of the plant.

 

**Effect of Force Majeure Event**

 

If and to the extent thatany force majeure events affect Siemens Westinghouse’s ability to meet the guaranteedcompletion dates, or the construction progress milestone dates, an equitableadjustment in one or more of the dates, the payment and milestone schedule andour construction schedule must be made by agreement between us and SiemensWestinghouse.  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 theperformance of the services by a force majeure event, then:

 

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

 

•                              tothe extent that the delay(s) are, in the aggregate, more than six months,Siemens Westinghouse must be reimbursed by us for those incremental costs andexpenses resulting from the delay(s) which are incurred by Siemens Westinghouseafter the six-month period.

 

**Price Change**

 

An increase or decreasein the contract price, if any, resulting from a scope change requested by us ormade under the construction agreement must be determined, upon the mutualagreement of the parties.

 

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**Continued Performance PendingResolution of Disputes**

 

If a dispute arisesregarding the amount of any increase or decrease in Siemens Westinghouse’scosts with respect to a scope change, Siemens Westinghouse must proceed withthe performance of the scope change promptly following our execution of thecorresponding scope change order.

 

If hazardous materialswere not identified in an environmental site assessment report delivered by usto Siemens Westinghouse prior to the construction commencement date and werenot brought onto the facility site by Siemens Westinghouse or any of itssubcontractors, then Siemens Westinghouse will be entitled to a scope changeunder the construction agreement.

 

**Risk of Loss**

 

With respect to ourfacility, until the risk transfer date, which is the date at which provisionalacceptance is achieved, Siemens Westinghouse must bear the risk of loss andfull responsibility for the costs of replacement, repair or reconstructionresulting from any damage to or destruction of our facility or any materials,equipment, tools and supplies, which are purchased for permanent installationin or for use during construction of our facility.  After the risk transfer date with respect to our facility, wemust bear all risk of loss and full responsibility for repair, replacement orreconstruction with respect to any loss, damage or destruction to our facilitywhich occurs after the risk transfer date.

 

**Termination**

 

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

 

We may for itsconvenience terminate any part of the services or all remaining services at anytime upon 30 days’ prior written notice to Siemens Westinghouse specifying thepart of the services to be terminated and the effective date oftermination.  We may elect to suspendcompletion of all or any part of the services upon 10 days’ prior writtennotice to Siemens Westinghouse or, in emergency situations, upon prior noticeas circumstances permit.

 

***Termination by Contractor***

 

If we fail to pay toSiemens Westinghouse any payment and our failure continues for 20 days, then(1) Siemens Westinghouse may suspend its performance of the services upon 10days’ prior written notice to us, which suspension may continue until the timeas the payment, plus accrued interest, is paid to Siemens Westinghouse, and/or(2) if the payment has not been made prior to the commencement of a suspensionby Siemens Westinghouse under clause (1) above, Siemens Westinghouse mayterminate the construction agreement upon 60 days’ prior written notice to usso long as the termination does not become effective if the payment, plusaccrued interest, is made to Siemens Westinghouse prior to the end of thenotice period. In the event of a suspension, an equitable adjustment to one ormore of the contract price, the guaranteed completion dates, the constructionprogress milestone dates, the payment and milestone schedule and ourconstruction schedule, and, as appropriate, the other provisions of theconstruction agreement that may be affected thereby, must be made by agreementbetween us and Siemens Westinghouse.  Ifwe have suspended completion of all or any part of the services in accordancewith the construction agreement for a period in excess of two years in theaggregate, Siemens Westinghouse may, at its option, at any time thereafter solong as the suspension continues; give written notice to us that SiemensWestinghouse desires to terminate the suspended services.  Unless we order Siemens Westinghouse toresume performance of the suspended services within 10 days of the receipt ofthe notice from Siemens Westinghouse, the suspended services will be deemed tohave been terminated by us for its convenience.  If the occurrence of one or more force majeure events preventsSiemens 

 

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Westinghouse fromperforming the services for a period of 365 consecutive days, SiemensWestinghouse may, at its option, give written notice to us of its desire toterminate the construction agreement.

 

**Consequencesof Termination**

 

•                              Uponany termination, we may, unless the termination is pursuant to any default,Siemens Westinghouse will be 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, at itsoption elect to have itself, or its designee, which may include any otheraffiliate of The AES Corporation or any third-party purchaser, (1) assumeresponsibility for and take title to and possession of our project and any orall work, materials or equipment remaining at the facility site and (2) succeedautomatically, without the necessity of any further action by SiemensWestinghouse, to the interests of Siemens Westinghouse in any or all itemsprocured by Siemens Westinghouse for our project and in any and all contractsand subcontracts entered into between Siemens Westinghouse and anysubcontractor with respect to the equipment specified in the constructionagreement with respect to any or all other subcontractors selected by us whichare materially necessary to the timely completion of our project, SiemensWestinghouse must use all reasonable efforts to enable us, or our designee, tosucceed to Siemens Westinghouse’s interests thereunder.

 

•                              Ifany termination occurs, we may, without prejudice to any other right or remedyit may have, at its option, finish the services by whatever method we may deemexpedient.

 

**Default and Remedies**

 

***Contractor’s Default***

 

Siemens Westinghouse’sevents of default include: voluntary bankruptcy or insolvency; involuntarybankruptcy or insolvency; materially adverse misleading or false representationor warranty; improper assignment; failure to maintain required insurance;failure to comply with applicable laws or applicable permits; cessation orabandonment of the performance of services; termination or repudiation of, ordefault under the related guaranty; failure to supply sufficient skilledworkers or suitable material or equipment; failure to make payment when due forlabor, equipment or materials; non-occurrence of provisional acceptance,interim acceptance, final acceptance and construction progress milestones; andfailure to remedy non-performance or non-observance of any provision in theconstruction agreement.

 

***Our Rights and Remedies***

 

If Siemens Westinghouseis in default of its obligations, we will have any or all of the followingrights and remedies, in addition to any other rights and remedies that may beavailable to us under the construction agreement or at law or in equity, andSiemens Westinghouse will have the following obligations:

 

•                              Wemay, without prejudice to any other right or remedy we 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 partialtermination, the parties must mutually agree upon a scope change order to makeequitable adjustments, including the reduction and/or deletion of obligationsof the parties commensurate with the reduced scope Siemens Westinghouse musthave after taking into account the partial termination, to one or more of theguaranteed completion dates, the 

 

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construction progress milestone dates, the contractprice, the payment and milestone schedule, our construction schedule, theperformance guarantees and the other provisions of the construction agreementwhich may be affected thereby, as appropriate. If the parties are unable to reach mutual agreement as to the scopechange order and the dispute resolution procedures described in theconstruction agreement are invoked, the procedures must give due considerationto customary terms and conditions under which Siemens Westinghouse has enteredsubcontracts with third party prime contractors covering services substantiallysimilar to those services which are not being terminated.

 

•                              Ifrequested by us, Siemens Westinghouse must withdraw from the facility site,must assign to us its subcontracts, to the extent permitted therein, as we mayrequest, and must remove the materials, equipment, tools and instruments usedby, and any debris and waste materials generated by, Siemens Westinghouse inthe performance of the services as we may direct, and we, without incurring anyliability to Siemens Westinghouse (other than the obligation to return toSiemens Westinghouse at the completion of our project the materials that arenot consumed or incorporated into our project, solely on an “as is, where is”basis without any representation or warranty of any kind whatsoever) may takepossession of any and all designs, drawings, materials, equipment, tools,instruments, purchase orders, schedules and facilities of Siemens Westinghouseat the facility site that we deem necessary to complete the services.

 

**Assignment**

 

Generally, neither we norSiemens Westinghouse will have any right to assign or delegate any of theirrespective rights or obligations under the construction agreement eithervoluntarily or involuntarily or by operation of law.

 

**Maintenance Services Agreement**

** **

We, as assignee of AESIronwood, Inc., have entered into the Maintenance Program Parts, Shop Repairsand Scheduled Outage TFA Services Contract, dated as of September 23, 1998, withSiemens Westinghouse by which Siemens Westinghouse will provide us with, amongother things, combustion turbine parts, shop repairs and scheduled outagetechnical field assistance services.

 

We have determined themaintenance services agreement provides for the purchase of parts that will becapitalized, as well as maintenance items that will be expensed when paid. Theratio of capital items verses expense parts has been determined to beapproximately 74% to 26% respectively.

 

The maintenance servicesagreement became effective on the date of execution and unless terminatedearly, must terminate upon completion of shop repairs performed by SiemensWestinghouse following the eighth scheduled outage of the applicable combustionturbine or 10 years from initial synchronization of the applicable combustionturbine, whichever occurs first.

 

**Scope of Work**

 

During the term of themaintenance services agreement, and in accordance with the scheduled outageplan, Siemens Westinghouse is required to do the following:

 

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

 

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•                              providemiscellaneous hardware;

 

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

 

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

 

•                              provideTFA Services.

 

We are responsible for,among other things:

 

•                              storingand maintaining parts, materials and tools to be4 used in or on the combustionturbine;

 

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

 

•                              ensuringthat its 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”).

 

We and SiemensWestinghouse have jointly developed the scheduled outage plan.  The scheduled outage plan is consistent withthe terms and conditions of the power purchase agreement.

 

**Early Replacement**

 

If it is determined thatdue to normal wear and tear a program part(s) for the combustion turbine hasfailed or will not last until the next scheduled outage, and the part has to berepaired before the scheduled replacement period, Siemens Westinghouse willreplace the program part by moving up a new program part which is otherwisescheduled to be delivered at a later date. The contract price for the replacement will not be affected if thereplacement date is less than or equal to one year earlier than the scheduledoutage during which the program part was scheduled to be replaced.  If the actual replacement date for a programpart is more than one year earlier than the scheduled outage at which point theprogram part was scheduled to be replaced, the early replacement will result inan adjustment to the  paymentschedule.  Siemens Westinghouse has thefinal decision with regard to the replacement or refurbishment associated withany program part.  If we dispute SiemensWestinghouse’s decision, we may seek to resolve the dispute in accordance withthe dispute resolution procedures discussed below.

 

**Parts Life Credit**

 

After applicable warrantyperiods described in the maintenance services agreement and the constructionagreement, Siemens Westinghouse will provide a parts life credit if a programpart requires replacement due to normal wear and tear prior to meeting itsexpected useful life.  SiemensWestinghouse has the final decision with regard to actual parts life and thedegree of repair or refurbishment associated with any program parts.  The parts life credit will be calculated interms of EBHs and equivalent starts. The price of the replacement part will be adjusted for inflation.  If we dispute Siemens Westinghouse’s 

 

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decision, we mayseek to resolve the dispute in accordance with the dispute resolutionprocedures discussed below.

 

**Contract Price and Payment Terms**

 

Siemens Westinghouse willinvoice us monthly and payments are then due within 25 days.  The fees assessed by Siemens Westinghousewill be based on the number of EBHs accumulated by the applicable combustionturbine as adjusted for inflation.  Thecontract price will be the aggregate number of fees as adjusted plus anyadditional payment amount mutually agreed to by the parties under a changeorder.

 

**Unscheduled Outages and UnscheduledOutage Work**

 

If during the term of themaintenance services agreement an unscheduled outage occurs resulting from (1)the non-conformity of new program parts; (2) the failing of a shop repair; (3)a program part requiring replacement due to normal wear and tear prior toachieving its expected life in terms of EBHs or equivalent starts; or (4) thefailure of a service, performed by Siemens Westinghouse, we must hire SiemensWestinghouse, to the extent not supplied by Siemens Westinghouse as a warrantyremedy under Siemens Westinghouse’s warranties under the maintenance servicesagreement to supply any additional parts, miscellaneous hardware, shop repairsand TFA Services under a change order. We will be entitled to any applicable parts life credit with respect toprogram parts as well as a discount for TFA services.  If the unscheduledoutage occurs within a specified number of EBHs of a scheduled outage and itwas anticipated that the additional parts, miscellaneous hardware, shop repairsand TFA services to be used in the unscheduled outage were to be used duringthe upcoming scheduled outage, the upcoming Scheduled outage must be moved upin time to become the unscheduled outage/moved-up scheduled outage.  We will not be required to pay anyadditional money for the program parts, miscellaneous hardware, shop repairsand TFA Services.

 

If any program parts aredelivered by Siemens Westinghouse within 15 days of receipt of the change order,we will pay to Siemens Westinghouse the price for the program part described inthe maintenance services agreement plus a specified percentage.  Any program part delivered after 30 days ofthe change order will cost us the price described in the maintenance servicesagreement minus a specified percentage.

 

**Changes in Operating Restrictions**

 

The maintenance servicesagreement requires that each combustion turbine will be operated in accordancewith the requirements of the power purchase agreement and prudent utilitypractices, with 8,000 EBH/year and 100 equivalent starts per year by usingnatural gas fuel and water.  Should theactual operations differ from these operating parameters which causes ascheduled outage to be planned/performed earlier or later than as expected,then, under a change order, an adjustment in the scope, schedule, and pricemust be made.

 

**Warranties**

 

Siemens Westinghousewarrants that the new program parts, miscellaneous hardware and any shoprepairs must conform to standards of design, materials and workmanshipconsistent with generally accepted practices of the electric utilityindustry.  The warranty period withrespect to program parts, hardware and shop repair is until the earlier of oneyear from the date of installation of the original program part or hardware, aspecific number of starts or fired hours after installation of the programparts and hardware, or three years from the date of delivery of the originalprogram part, hardware, and in the 

 

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case of shoprepair, three years from completion of the work.  Warranties on the program parts and hardware must not expire morethan one year after the conclusion of the maintenance services agreement.

 

Siemens Westinghouse willrepair or replace any program part or hardware, at its cost, if notified of anyfailure or non-conformity of the program part or hardware during the warrantyperiod.  Siemens Westinghouse alsowarrants that the services of its personnel and technical informationtransmitted will be competent and consistent with prudent utility practices andthe services will comply in all material respects with laws and will be freefrom defects in workmanship for a period of one year from the date ofcompletion of that item of services. The warranties on the services must expire no later than one year afterthe termination or end of the term of the maintenance services agreement.

 

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

 

Except for the expresswarranties described in the maintenance services agreement, SiemensWestinghouse makes no other warranties or representations of any kind.  No implied statutory warranty ofmerchantability or fitness for a particular purpose applies.

 

The warranties providedby Siemens Westinghouse are conditioned upon (1) our receipt, handling,storage, operation and maintenance of our project, including any program partsand miscellaneous hardware, being done in accordance with the terms of thecombustion turbine instruction manuals; (2) operation of the combustion turbinein accordance with the terms of the maintenance services agreement; (3) repairof accidental damage done consistently with the equipment manufacturer’srecommendations; (4) us providing Siemens Westinghouse with access to thefacility site to perform its services under the maintenance services agreement;and (5) hiring Siemens Westinghouse to provide TFA services, program parts,shop repairs and miscellaneous hardware required to dissemble, repair andreassemble the combustion turbine.

 

**Termination**

 

We may terminate themaintenance 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;

 

•                              weterminate the construction agreement due to the contractor’s default thereunderor due to our inability to obtain construction financing or environmental operatingpermits; or

 

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

 

Notwithstanding thepreceding, we may terminate the maintenance services agreement at any time forits convenience following the completion of the first major outage of bothcombustion turbines.  In addition, themaintenance services agreement will automatically terminate if:

 

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

 

•                              thecontractor terminates the construction agreement for our defaultthereunder.  If the termination occurs,Siemens Westinghouse must discontinue any work or services being performed andcontinue to protect our property. Siemens Westinghouse must transfer title to and deliver any new programparts and miscellaneous hardware already purchased by us.  We must pay Siemens Westinghouse thoseamounts owed at the time of termination.

 

**Limitation of Liability**

 

We agreed that theremedies provided in the maintenance services agreement are exclusive and thatunder no circumstances must the total aggregate liability of SiemensWestinghouse during a given year exceed 100% of the contract price payable toSiemens Westinghouse for that given year under the maintenance servicesagreement.  We further agreed that underno circumstances must the total aggregate liability of Siemens Westinghouse forliquidated damages during a given year exceed a specified percentage of thecontract price payable to Siemens Westinghouse for that given year under themaintenance services agreement.  Wefurther agreed that under no circumstances must the total aggregate liabilityof Siemens Westinghouse exceed a specified percentage of the contract pricepayable to Siemens Westinghouse under the maintenance services agreement.

 

**Force Majeure**

 

Neither party will beliable for failure to perform any obligation or delay in performance, excludingpayment, to the extent the failure or delay is caused by any act or eventbeyond the reasonable control of the affected party or Siemens Westinghouse’ssuppliers so long as the act or event is not the fault or the result ofnegligence of the affected party and the party has been unable by exercise ofreasonable diligence to overcome or mitigate the effects of the act orevent.  Force majeure includes:  any act of God; act of civil or militaryauthority; act of war whether declared or undeclared; act (including delay,failure to act, or priority) of any governmental authority; civil disturbance;insurrection or riot; sabotage; fire; inclement weather conditions; earthquake;flood; strikes, work stoppages or other labor difficulties of a regional ornational character which are not limited to only the employees of SiemensWestinghouse or its subcontractors or suppliers and which are not due to thebreach of an applicable labor contract by the party claiming force majeure;embargo; fuel or energy shortage; delay or accident in shipping ortransportation to the extent attributable to another force majeure; changes inlaws which substantially prevents a party from complying with its obligationsin conformity with its requirements under the maintenance services agreement orfailure or delay beyond its reasonable control in obtaining necessarymanufacturing facilities, labor, or materials from usual sources to the extentattributable to another force majeure; or failure of any principal contractorto provide equipment to the extent attributable to another force majeure.  Force majeure does not include: (1) economichardship, (2) changes in market conditions or (3) except due to an event offorce majeure, late delivery of program parts or other equipment.

 

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If a delay in performanceis excusable due to a force majeure, the date of delivery or time forperformance 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, we, after reviewing Siemens Westinghouse’sadditional direct costs and expenses, will reimburse Siemens Westinghouse forits reasonable additional direct costs and expenses incurred after 30 days fromthe beginning of the force majeure resulting from the delay.

 

**InterconnectionAgreement**

 

We have entered into aGeneration Facility Transmission Interconnection Agreement, dated as of March23, 1999, with GPU Energy for the installation, operation and maintenance ofthe facilities necessary to interconnect our facility to the transmissionsystem of GPU Energy.  Under the interconnectionagreement, we and GPU Energy will construct, own, operate and maintain theinterconnection facilities.  We will beresponsible for all of the costs of construction, operation and maintenance ofthe interconnection facilities, including those owned by GPU Energy.

 

At December 31, 2001, 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.

 

**Scope**

 

The interconnectionagreement will become effective on the effective date established by FERC andwill continue in full force and effect until a mutually agreeable terminationdate not to exceed the retirement date for our facility.

 

**Our Obligations**

 

At December 31, 2001, weowned, operated and maintained a portion of the interconnection facilities,including, but not limited to, a 230 kV switchyard, including generator step uptransformers, instrument transformers, revenue metering, power circuitbreakers, control and protective relay panels, supervisory control and dataacquisition equipment, and protective relaying equipment.

 

We will reimburse GPUEnergy for its actual costs of installing the interconnection facilities.  Our payments to GPU Energy consisted of anadvance payment of $500,000 on the execution date of the interconnectionagreement, another payment of $40,000 within 30 days of the execution date ofthe interconnection agreement (for work undertaken by GPU Energy prior toDecember 17, 1998), a payment of $1,000,000 at financial closing, June 25,1999, and monthly invoices for the work performed.

 

We are obligated tomodify our portion of the interconnection facilities as may be required toconform to changes in good utility practice or as required by PJM.

 

We are obligated to keepour facility insured against loss or damage in accordance with the minimumcoverages specified in the interconnection agreement.

 

**Operation and Maintenance ofInterconnection Facilities**

 

The parties are obligatedto operate and maintain their respective portions of the interconnectionfacilities in accordance with good utility practices and the requirements andguidelines of PJM and GPU Energy.

 

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GPU Energy will have theright to disconnect our facility from its transmission system and/or curtail,interrupt or reduce the output of our facility when operation of our facilityor the interconnection facilities adversely affects the quality of servicerendered by GPU Energy or interferes with the safe and reliable operation ofits transmission system or the regional transmission system. GPU Energy,however, is obligated to use reasonable efforts to minimize any disconnection,curtailment, interruption or reduction in output.

 

In accordance with goodutility practice, GPU Energy may remove the interconnection facilities fromservice as necessary to perform maintenance or testing or to install or replaceequipment on the interconnection facilities or the transmission system.  GPU Energy is obligated to use due diligenceto restore the interconnection facilities to service as promptly aspracticable.

 

In addition, if we failto operate, maintain, administer, or insure our facility or its portion of theinterconnection facilities, GPU Energy may, following 30 days’ notice andopportunity to cure the failure, disconnect our facility from the transmissionsystem.

 

**Force Majeure**

 

If either party isdelayed in or prevented from performing or carrying out its obligations underthe interconnection agreement by reason of force majeure, the party will not beliable to the other party for or on account of any loss, damage, injury orexpense resulting from or arising out of the delay or prevention so long as theparty encountering the delay or prevention uses due diligence to remove thecause or causes thereof.

 

**Default**

 

The events of defaultunder the interconnection agreement are:

 

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

 

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

 

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

 

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

 

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

 

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Upon an event of default,the non-defaulting party may give notice of the event of default to thedefaulting party.  The defaulting partywill have 60 days following the receipt of the notice to cure the default or tocommence in good faith the steps necessary to cure a default that cannot becured within that 60-day period.  If thedefaulting party fails to cure its default within 60 days or fails to take thesteps necessary to cure a default that cannot be cured within a 60-day period,the non-defaulting party will have the right to terminate the interconnectionagreement.  GPU Energy will have theright to operate and/or to purchase specific equipment, facilities andappurtenances from us that are necessary for GPU Energy to operate and maintainits transmission system if (1) we commence bankruptcy proceedings or petitionsfor the appointment of a trustee or other custodian, liquidator, or receiver,(2) a court issues a decree for relief of us or appoints a trustee or othercustodian, liquidator, or receiver for us or a substantial part of our assetsand the decree is not dismissed within 60 days or (3) we cease operation for 30consecutive days without having an assignee, successor, or transferee in place.

 

**OperationsAgreement**

** **

We entered into aDevelopment and Operations Services Agreement, dated as of June 1, 1999, withAES Prescott by which AES Prescott is providing development and constructionmanagement services and, after the commercial operation date, operating andmaintenance services for our facility for a period of 27 years.  Under the operations agreement, AES Prescottis responsible for, among other things, preparing plans and budgets related tostart-up and commercial operation of our facility, providing qualifiedoperating personnel, making repairs, purchasing consumables and spare parts(not otherwise provided under the maintenance services agreement) and providingother services as needed according to industry standards.  AES Prescott is being compensated for theservices on a cost plus fixed-fee basis of $400,000 per month. The fee isadjusted annually by the change in Gross Domestic Product, Implicit PriceDeflator. Under the services agreement between AES Prescott and The AESCorporation, The AES Corporation provides to AES Prescott all of the personnel and services necessary forAES Prescott to comply with its obligations under the operations agreement.

 

**EffluentSupply Agreement**

 

We, as assignee of AESIronwood, Inc., have entered into an Effluent Supply Agreement, dated as ofMarch 3, 1998, with the City of Lebanon Authority, by which City of LebanonAuthority will provide effluent to be used by us at the electric generatingfacility to be constructed in South Lebanon Township, Pennsylvania.

 

**Supply of Effluent**

 

***Effluent Supply***

 

Subsequent to completionof the pipeline connecting our facility with the wastewater treatment facilityowned and operated by City of Lebanon Authority and throughout the term of theeffluent supply agreement, City of Lebanon Authority must make available to usa supply of effluent not less than 2,160,000 gallons per day.  In the event of a shortfall, we may elect toaccept potable water from City of Lebanon Authority in accordance with theeffluent supply agreement.  We will notbe obligated to purchase any minimum amount of effluent and will be entitled toseek and obtain water from other available sources.  City of Lebanon Authority must use its best efforts to complywith requests by us for excess effluent, which must not exceed (1) 4,600,000gallons per day or (2) 1,679,000,000 gallons per calendar year.  In addition, City of Lebanon Authority mustuse its best efforts to meet our minimum effluent requirements.

 

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**Compensation**

 

We are obligated to payCity of Lebanon Authority monthly for all effluent delivered to the point ofdelivery during the prior month.  Thebase rate for effluent supplied will be: (1) for 0-2,160,000 gallons per day, $0.29 per thousand gallons and (2)for 2,160,000 or greater gallons per day, $0.21 per thousand gallons, whichrates will be subject to annual adjustments for inflation.

 

**Pipeline and Real Estate Rights**

 

***Concerning thePipeline***

 

We have been solelyresponsible, at our cost and expense, for constructing and installing thepipeline.

 

We and City of LebanonAuthority must cooperate in good faith to obtain the necessary real estaterights for constructing, operating, maintaining and accessing the pipeline.

 

**Operation and Maintenance**

 

The City of LebanonAuthority must operate and maintain the pipeline in accordance with theeffluent supply agreement, and as compensation, we must pay to City of LebanonAuthority $18,250 per year, which amount will be subject to annual adjustmentfor inflation.

 

**Capital Improvements**

 

The effluent supplyagreement provides for capital improvements.

 

**Potable Water**

 

The City of LebanonAuthority must make available to us on a continuous basis a potable watersupply of not less than 50 gallons per minute. We will not be obligated to purchase a minimum amount of potable water,but must pay the City of Lebanon Authority for potable water accepted at thepotable delivery point at the rate applicable to us described in City ofLebanon Authority’s applicable rate schedule.

 

**Force Majeure**

 

If either party is unableto carry out any obligation under the effluent supply agreement due to forcemajeure, the effluent supply agreement must remain in effect, but theobligation will be suspended for the period necessary as a result of the forcemajeure 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 toperform.  Notwithstanding the preceding,the settlement of strikes, lockouts, and other labor disputes will be entirelywithin the discretion of the affected party, and the party will not be requiredto settle any strike, lockout or other labor dispute on terms which it deemsinadvisable.

 

**Term**

 

The term of the effluentsupply agreement will be 25 years unless terminated early as a result of (1)our inability to obtain financing for our project; (2) our inability to obtainnecessary approvals to 

 

34

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construct andoperate our project; (3) failure by us to deliver the commencement notice byDecember 31, 2004, or (4) the occurrence of any event of default.

 

**Early Termination for Event ofDefault**

 

A party may terminate theeffluent supply agreement (1) upon a bankruptcy event of the other party or (2)if the other party fails to perform or observe any of its material obligationsunder the effluent supply agreement within the time contemplated by theeffluent supply agreement and the failure continues for a period of timegreater than 30 days from the defaulting party.

 

**PennsySupply Agreements**

 

We, as assignee of AESIronwood, Inc., entered into an Agreement Relating to Real Estate, dated as ofOctober 22, 1998, with Pennsy Supply, Inc. under which Pennsy Supply has agreedto grant to us specific easements and the right to pump water from PennsySupply-owned property.  The easements,which are primarily for access and utility purposes, would run from propertyowned by us, on which it will develop and construct its electric generating facility,across property owned by Pennsy Supply and require that our property be used asa power plant. Pennsy Supply has also agreed to grant to us easements withrespect to storm-water facilities and construction of a rail spur.  Pennsy Supply will make water available tous during construction and testing of our facility and for as long as weoperate our facility.  We will bear allcosts and expenses with respect to water-pumping.  In consideration for the easements and the water-pumping rights,we have agreed to convey to Pennsy Supply title to a parcel of land adjacent tothe property owned by us.

 

We also entered into anEasement and Right of Access Agreement, dated as of April 15, 1999, with PennsySupply under which Pennsy Supply has granted us the rights and easementsreferred to in the prior paragraph as well as specific other rights andeasements required by us for the construction and operation of our facility.

 

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

 

Our principal property isthe land for the facility site, which we own and the completed powerplant.  The facility site is located inSouth Lebanon Township, Lebanon County, Pennsylvania on an approximately35-acre parcel of land.  We have access,utility, drainage and construction easements across neighboring property.  We are able to use these easements as longas there is no default under the agreements with the owner of the adjacentproperty and we are using the facility site for a power plant.  We have constructed a rail spur tofacilitate the transportation of heavy equipment to the facility site, but willnot maintain rights in the rail spur after construction has beencompleted.  We have title insurance inconnection with our property rights. In June and December 2001 we purchased twoparcels of land of approximately 15 acres, contiguous to the existing propertyfor approximately $619,000.

 

Under certain financingdocuments, our rights and interests in our property rights are encumbered bymortgages, security agreements, collateral assignments and pledges for thebenefit of the bondholders and other senior creditors.

 

Our facility consists ofa 705 megawatt (net) gas-fired combined cycle electric generatingfacility.  The plant became operationalwith commercial acceptance on December 28, 2001.

 

Our facility is located in South Lebanon Township,Lebanon County, Pennsylvania on property owned by us.  Our facility was designed, engineered, procured and constructedfor us by Siemens Westinghouse under a fixed-price construction agreement.  Among other components, our facility uses 

 

35

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two SiemensWestinghouse model 501G combustion turbines with hydrogen-cooled generators,two unfired heat recovery steam generators and one multi-cylinder steam turbinewith a hydrogen-cooled generator. Siemens Westinghouse has provided us with specific combustion turbinemaintenance services and spare parts for an initial term of between eight and10 years, depending on the timing of scheduled outages, under a maintenanceservices agreement.  Under the powerpurchase agreement, Williams Energy or its affiliates will supply fuelnecessary to allow us to provide capacity, fuel conversion and ancillaryservices to Williams Energy. AES Prescott, the operator, will providedevelopment, construction management and operations and maintenance servicesfor our facility under an operations agreement.  We will provide installation, operation and maintenance offacilities necessary to interconnect our facility to the transmission system ofGPU Energy, under an interconnection agreement.

 

**ITEM3.****                             LegalProceedings**

 

We have enteredinto arbitration with the Contractor over a dispute about which party isresponsible for the payment of the cost of electricity and natural gas used bythe project during certain periods prior to the December 28, 2001 commercialacceptance. The costs total approximately $10.6 million, which is includedwithin accounts receivable- other. Any amounts not recovered will be treated asincreases to property, plant and equipment, and will only affect futureprofitability in the form of increased depreciation, allocated over fortyyears. Our legal counsel has indicated that the construction contract is clearin respect of fuel cost and electricity reimbursement and that we will besuccessful in recovering the disputed amounts. We believe this part of thecontract is also clear as to Contractor’s liability. The original draft of thecontract was modified to include contractor fuel reimbursement during theperiod after synchronization of the steam turbine until such time as provisionalacceptance was granted.

 

**ITEM4.****                             Submissionof Matters to a Vote of Security Holders**

 

Not applicable pursuant to General Instruction I ofthe Form 10-K.

 

36

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**PART II**

 

**ITEM5.****                             Marketfor Registrant’s Common Equity and Related Stockholder Matters**

 

There is no marketfor our equity interests. All of our member interests are owned by our parent,AES Ironwood, Inc., a subsidiary of The AES Corporation.

 

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

 

Not applicable pursuant to General Instruction I ofthe Form 10-K.

 

**ITEM7.****                             Management’sDiscussion 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.  The following discussion involvesforward-looking statements.  Our actualresults may differ significantly from the results suggested by theseforward-looking statements.

 

**General**

 

We were formed on October 30, 1998 to develop,construct, own, operate and maintain the facility.  We were dormant until June 25, 1999, the date of the sale of thesenior secured bonds.  We commencedcommercial operations on December 28, 2001. We obtained $308.5 million of project financing from the sale of thesenior secured bonds.  The total cost ofthe construction of our facility is estimated to be approximately $335 million,which was financed by the proceeds from the sale of the senior secured bondsand the equity contributions described below. In May 2000, we consummated anexchange offer whereby the holders of the senior secured bonds exchanged theirprivately placed senior secured bonds for registered senior secured bonds. Asof December 31, 2001 $332.5 million had been capitalized. The remaining $2.5million has been funded and is expected to be paid in May 2002.

 

**Equity Contributions**

 

Under an Equity Subscription Agreement, AES Ironwood,Inc. is obligated to contribute up to approximately $50.1 million in the formof either subordinated debt or equity to us to fund project costs. As ofDecember 31, 2001, $30 million had been contributed in the form of subordinateddebt. AES Ironwood, Inc.’s obligation to make the contributions is supported byan acceptable bond. In January 2002 this debt was converted to equity. OnFebruary 26, 2002, an additional $8.8 million of equity was contributed.

 

**Results of Operations**

 

As of December 31, 2001, Property, Plant,and Equipment, and as of December 31, 2000, Construction in Progress, which includescapitalized facility construction costs, was $332.5 million and $298.7 million,respectively. Construction in Progress also includes the capitalization ofconstruction related interest cost incurred on the portion of the bond proceedsexpended during the construction period, which amounts were $60.3 million and$33.1 million as of December 31, 2001 and December 31, 2000, respectively, andare included as assets on the Balance Sheets. Additionally, the cost of purchasing land for construction of ourfacility has been separately identified on the Balance Sheets.

 

For the year ended December 31, 2001, theyear ended December 31, 2000 and the period from 

 

37

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June 25, 1999(inception) through December 31, 1999 interest cost incurred on the bondproceeds not spent on construction of our facility was approximately $0.2million, $2.9 million and $5.8 million respectively, and is included asinterest expense in the Statement of Operations.

 

A portion of the proceeds from the saleof the senior secured bonds had not yet been expended on construction and wereinvested by the trustee . For the year ended December 31, 2001, the year endedDecember 31, 2000 and the period from June 25, 1999 (inception) through December31, 1999, the interest income earned on these invested funds was approximately$0.5, $2.6 million and $3.2 million, respectively, and is included in theStatement of Operations.

 

For the year ended December 31, 2001, theyear ended December 31, 2001 and the period from June 25, 1999 (inception)through December 31, 1999, general and administrative costs of $354,000,$257,000 and $169,000, respectively, were incurred.  These costs did not directly relate to construction and areincluded as expenses in the Statement of Operations.

 

Forthe year ended December 31, 2000 and the period from June 25, 1999 (inception)through December 31, 1999, non-capitalizable costs plus interest cost and lessinterest income resulted in a net loss of approximately $.5 million and $2.6million, respectively. These net losses resulted in a deficiency of earnings tofixed charges for the periods ended December 31, 2000 and December 31, 1999 ofapproximately $30.3 million and $17.4 million, respectively. The results ofoperations may not be comparable with the results of operations during futureperiods, especially when our facility commences commercial operations. Theplant commenced commercial operations on December 28, 2001. For the year endedDecember 31, 2001 non-capitalizable costs plus interest cost and less interestincome and net revenues resulted in a net income of approximately $1 million.This net income resulted in a deficiency of earnings to fixed charges of $29.2million.

 

Wedeclared the facility to be commercially available on December 28, 2001.Revenues include electric generation and capacity payments invoiced to WilliamsEnergy. Due to the Plant achieving commercial operations late in December of2001, operating revenues recognized in 2001 are not necessarily indicative offuture operating revenues earned during a full year of operations. Operatingexpenses include a pro- rate share of monthly expenses, primarily labor anddepreciation. Senior debt interest of approximately $146,000 was included withtotal interest.

 

**Liquidity and Capital Resources**

 

We believe that the net proceeds from the sale of thesenior secured bonds, together with the equity contributions, has beensufficient to (1) fund the engineering, procurement, construction, testing andcommissioning of our facility until it is placed in commercial operation, (2)pay certain fees and expenses in connection with the financing and developmentof our project and (3) pay project costs, including interest on the seniorsecured bonds. We will also depend on revenues under the power purchaseagreement, and after the power purchase agreement expires, we will depend onmarket sales of electricity.

 

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

 

The minimum cash flow from Williams will beapproximately $3.9 million per month. Net operating costs will be approximately$1.3 million per month. The balance left will provide for senior debt interestand principal payments. Additionally, a significant monthly expenditure is forpayment of our long term service agreement with Siemens Westinghouse. Thisagreement provides that we pay approximately $400 per gas turbine perequivalent operating hour. In the event we are not required to 

 

38

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dispatch thefacility, there is no charge. While operating at base load, the estimatedmonthly payment for the long term service agreement could be as much as$450,000.

 

As of December 31, 2001, we had commitments totaling$241 million arising from the construction of our facility of which $239million had been paid.

 

**Concentration of Credit Risk**

 

Williams Energycurrently is our sole customer for purchases of capacity, ancillary services,and energy, and our sole source for fuel. Williams Energy’s payments under the power purchase agreement areexpected to provide all of our revenues during the term of the power purchaseagreement.  It is uncertain whether wewould be able to find another purchaser or fuel source on similar terms for ourfacility if Williams Energy were not performing under the power purchaseagreement.  Any material failure byWilliams Energy to make capacity and fuel conversion payments or to supply fuelunder the power purchase agreement would have a severe impact on ouroperations.  The payment obligations ofWilliams Energy under the power purchase agreement are guaranteed by theWilliams Companies, Inc.  The paymentobligations of the Williams Companies, Inc. are capped at an amount equal to125% of the sum of the principal amount of our senior secured bonds, plus themaximum debt service reserve account balance.

 

If at any timeMoody’s or Standard & Poor’s rates the long term senior unsecured debt ofThe Williams Companies, Inc. lower than investment grade and the rating agencydoes not reestablish within 60 days an investment grade rating for the debt,then Williams Energy is to provide alternative credit support reasonablyacceptable to us within 90 days of the day on which the debt was rated lowerthan investment grade.  According topublic sources, at March 29, 2002, the long-term senior unsecured debt of theWilliams Companies, Inc. was rated as follows: “Baa2” by Moody’s and “BBB” byStandard and Poor’s, both of which ratings are investment grade.  While both ratings agencies have recentlyaffirmed this investment grade rating, on February 1, 2002, Standard &Poor’s placed the senior unsecured debt credit ratings of the WilliamsCompanies, Inc. on credit watch with negative implications and on February 27,2002, Moody’s downgraded the Williams Companies, Inc.’s outlook from stable to negative.

 

**Business Strategy and Outlook**

 

Under our overall business strategy, we are committedto market and sell all of our net capacity, fuel conversion and ancillaryservices to Williams Energy during the 20-year term of the power purchaseagreement.  After expiration of thepower purchase agreement, we anticipate selling our facility’s capacity,ancillary services and energy under a power purchase agreement or into thePennsylvania/New Jersey/Maryland power pool market.  We intend to cause the facility to be managed, operated andmaintained in compliance with the project contracts and all applicable legalrequirements.

 

**Critical Accounting Policies**

 

**General**

 

We prepare its financial statements in accordance withaccounting principles generally accepted in the United States of America. Assuch, it is required to make certain estimates, judgments and assumptions thatit believes are reasonable based upon the information available. Theseestimates and assumptions affect the reported amounts of assets and liabilitiesat the date of 

 

39

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the financial statements and the reported amounts ofrevenues and expenses during the periods presented. The significant accountingpolicies which we believe are most critical to understanding and evaluating itsreported financial results include the following: Property Plant and Equipment;Long-Lived Assets and Contingencies.

 

**Property,Plant and Equipment**

 

Property, plant and equipment is recorded at cost andis depreciated over its useful life. The estimated lives of our generationfacilities range from 5 to 40 years. A significant decrease in the estimateduseful life of a material amount of our property, plant or equipment could havea material adverse impact on our operating results in the period in which theestimate is revised and subsequent periods.

 
| **Description  of Asset** |   | **Depreciable Life** |   | **Value (000's)** |    |
|---------------------------|--------|----------------------|--------|-------------------|---------|
| Vehicles                  |   | 5                    |   | $                 | 151     |   |
| Turbine Parts             |   | 7                    |   | 6,998             |    |
| CT Prts                   |   | 12                   |   | 10,218            |    |
| Furniture and Fixtures    |   | 15                   |   | 261               |    |
| Turbine Parts             |   | 15                   |   | 1,623             |    |
| Turbine Parts             |   | 20                   |   | 2,856             |    |
| Turbine Parts             |   | 24                   |   | 7,500             |    |
| Bond Costs                |   | 25                   |   | 5,441             |    |
| CT Prts                   |   | 28                   |   | 10,338            |    |
| Bal of EPC                |   | 40                   |   | 239,019           |    |
| Plant equip               |   | 40                   |   | 48,114            |    |
|                      |   |                 |   | $                 | 332,519 |   |

 

**Long-LivedAsset**

 

We evaluate the impairment of its long-lived assetsbased on the projection of undiscounted cash flows whenever events or changesin circumstances indicate that the carrying amounts of such assets may not berecoverable. Estimates of future cash flows used to test the recoverability of specificlong-lived assets are based on expected cash flows from the use and eventualdisposition of the asset. A significant reduction in actual cash flows andestimated cash flows may have a material adverse impact on our operatingresults and financial condition.

 

**Contingencies**

 

We have enteredinto arbitration with the Contractor over a dispute about which party isresponsible for the payment of the cost of electricity and natural gas used bythe project during certain periods prior to the December 28, 2001 commercialacceptance. The costs total approximately $10.6 million, which is includedwithin accounts receivable- other. Any amounts not recovered will be treated asincreases to property, plant and equipment, and will only affect futureprofitability in the form of increased depreciation, allocated over fortyyears. Our legal 

 

40

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counsel has indicated that the construction contract is clear in respectof fuel cost and electricity reimbursement and that we will be successful inrecovering the disputed amounts. We believe this part of the contract is alsoclear as to Contractor’s liability. The original draft of the contract wasmodified to include contractor fuel reimbursement during the period after synchronizationof the steam turbine until such time as provisional acceptance was granted.

 

 

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

 

The bonds have anaggregate principal amount of $308.5 million. The bonds bear interest at afixed rate per annum of 8.857% and are due 2025.  Interest on these bonds is payable quarterly in arrears onFebruary 28, May 31, August 31 and November 30 of each year.  The bonds are secured ratably by a lien onand security interest in shared collateral, which consists of substantially allof our assets. In addition, the indenture accounts, the debt service reserveaccount and the debt service reserve letter of credit (other than to the extentof the debt service reserve letter of credit provider’s right to specificproceeds there under) are separate collateral solely for the benefit of theholders of the bonds.  The fair value ofthese bonds at December 31, 2001 was approximately $290.1 million. We are notsubject to interest rate risk as the interest rates associated with ouroutstanding indebtedness are fixed over the life of the bonds.  We currently have no other financial orderivative financial instruments.  We donot believe that we face other material risks requiring disclosure pursuant toItem 305 of Regulation S-K.

 

41

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

 

AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDARY

OF THE AES CORPORATION

** **

**Index to Financial Statements**

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

 

42

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**INDEPENDENT AUDITORS’ REPORT**

 

To the Member ofAES Ironwood, L.L.C.:

 

We have audited the accompanying balance sheets of AESIronwood, L.L.C. (an indirect wholly owned subsidiary of The AES Corporation)(the Company) as of December 31, 2001 and 2000, and the related statements ofoperations, changes in member’s deficit and cash flows for the years then endedand the period from June 25, 1999 (inception) through December 31, 1999.  These financial statements are the responsibilityof the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America.  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements presentfairly, in all material respects, the financial position of AES Ironwood,L.L.C., as of December 31, 2001 and 2000, and the results of its operations andits cash flows for the years then ended, and the period from June 25, 1999(inception) through December 31, 1999, in conformity with accounting principlesgenerally accepted in the United States of America.

 
| /s/ Deloitte &  Touche LLP                   |
|--------------------------------------------------|
| McLean, Virginia                                 |
|                                             |
| February 26, 2002  (March 29, 2002 as to Note 6) |

 

43

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AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDIARY

OF THE AES CORPORATION

 

BALANCE SHEETS,

DECEMBER 31, 2001AND  2000

(DOLLARS IN THOUSANDS)

 
|                                                                                        |   | **December  31,   2001** |    | **December  31,   2000** |   |
|---------------------------------------------------------------------------------------------|--------|--------------------------|---------|--------------------------|--------|
| ASSETS:                                                                                     |   |                     |    |                     |   |
|                                                                                        |   |                     |    |                     |   |
| Current Assets:                                                                             |   |                     |    |                     |   |
| Cash and cash equivalents                                                                   |   | $                        | 7,594   |                     | $      | 445 |   |
| Interest receivable                                                                         |   | 39                       |    | 93                       |   |
| Accounts receivable — other                                                            |   | 17,863                   |    | 299                      |   |
| Accounts receivable — parent and affiliates                                            |   | 365                      |    | 73                       |   |
| Investments held by trustee-at cost, which  approximates market value                       |   | 5,413                    |    | 16,263                   |   |
|                                                                                        |   |                     |    |                     |   |
| Total current assets                                                                        |   | 31,274                   |    | 17,173                   |   |
|                                                                                        |   |                     |    |                     |   |
| Land                                                                                        |   | 1,143                    |    | 528                      |   |
| Construction in progress                                                                    |   | —                   |    | 298,697                  |   |
| Property, plant, and equipment-net of accumulated  depreciation of $85 and $0, respectively |   | 332,519                  |    | —                   |   |
| Restricted cash-certificate of deposit                                                      |   | 77                       |    | 385                      |   |
| Deferred financing costs-net of accumulated  amortization of $363 and $218, Respectively    |   | 3,272                    |    | 3,417                    |   |
| Other assets                                                                                |   | 268                      |    | 410                      |   |
|                                                                                        |   |                     |    |                     |   |
| Total assets                                                                                |   | $                        | 368,553 |                     | $      | 320,610 |   |
|                                                                                        |   |                     |    |                     |   |
| LIABILITIES AND MEMBER’S DEFICIT:                                                      |   |                     |    |                     |   |
|                                                                                        |   |                     |    |                     |   |
| Current Liabilities:                                                                        |   |                     |    |                     |   |
| Accounts payable                                                                            |   | $                        | 16,023  |                     | $      | 159 |   |
| Accrued interest                                                                            |   | 2,277                    |    | 2,277                    |   |
| Payable to affiliates                                                                       |   | 788                      |    | 970                      |   |
| Payable to parent                                                                           |   | 1,161                    |    | 754                      |   |
| Retention payable                                                                           |   | 11,941                   |    | 11,122                   |   |
| Bonds payable, current                                                                      |   | 1,974                    |    | —                   |   |
|                                                                                        |   |                     |    |                     |   |
| Total current liabilities                                                                   |   | 34,164                   |    | 15,282                   |   |
|                                                                                        |   |                     |    |                     |   |
| Bonds payable                                                                               |   | 306,526                  |    | 308,500                  |   |
| Subordinated loan payable to parent                                                         |   | 30,000                   |    | —                   |   |
|                                                                                        |   |                     |    |                     |   |
| Total liabilities                                                                           |   | 370,690                  |    | 323,782                  |   |
|                                                                                        |   |                     |    |                     |   |
| Commitments and Contingencies (Notes 4,5,6 and 7)                                           |   |                     |    |                     |   |
|                                                                                        |   |                     |    |                     |   |
| Member’s deficit:                                                                      |   |                     |    |                     |   |
| Common stock, $1 par value-10 shares authorized,  none issued or Outstanding                |   | —                   |    | —                   |   |
| Deficit accumulated during the development stage                                            |   | (2,137                   | )       | (3,172                   | )      |
|                                                                                        |   |                     |    |                     |   |
| Total member’s deficit                                                                 |   | (2,137                   | )       | (3,172                   | )      |
|                                                                                        |   |                     |    |                     |   |
| Total liabilities and member’s deficit                                                 |   | $                        | 368,553 |                     | $      | 320,610 |   |

 

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 31,2001 AND 2000, AND THE

PERIOD FROM JUNE 25, 1999(INCEPTION) THROUGH DECEMBER 31, 1999

(DOLLARS IN THOUSANDS)

 
|                             |   | **Year Ended    December 31, 2001** |   | **Year Ended    December 31, 2000** |   | **June 25,  1999   (inception)   through   December 31, 1999** |   |
|----------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|----------------------------------------------------------------|--------|
| OPERATING REVENUES               |   |                                |   |                                |   |                                                           |   |
| Energy                           |   | $                                   | 1,158  |                                | $      | —                                                         |   | $ | — |   |
|                             |   |                                |   |                                |   |                                                           |   |
| OPERATING EXPENSES               |   |                                |   |                                |   |                                                           |   |
| Operating expenses               |   | (105                                | )      | $                                   | — |                                                           | $      | — |   |
| General and administrative costs |   | (354                                | )      | (257                                | )      | (169                                                           | )      |
|                             |   |                                |   |                                |   |                                                           |   |
| Operating Loss                   |   | 699                                 |   | (257                                | )      | (169                                                           | )      |
|                             |   |                                |   |                                |   |                                                           |   |
| OTHER INCOME/EXPENSE             |   |                                |   |                                |   |                                                           |   |
| Interest income                  |   | 489                                 |   | 2,661                               |   | 3,283                                                          |   |
| Interest expense                 |   | (153                                | )      | (2,935                              | )      | (5,755                                                         | )      |
|                             |   |                                |   |                                |   |                                                           |   |
| NET INCOME (LOSS)                |   | $                                   | 1,035  |                                | $      | (531                                                           | )      | $ | (2,641 | ) |

 

See notes to financialstatements.

 

45

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AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDIARY

OF THE AES CORPORATION

 

STATEMENTS OF CHANGES INMEMBER’S DEFICIT,

YEARS ENDED DECEMBER 31,2001 AND 2000, AND THE

PERIOD FROM JUNE 25, 1999(INCEPTION) THROUGH DECEMBER 31, 1999

(DOLLARS IN THOUSANDS)

 
|                       |   | **COMMON  STOCK** |   | **ACCUMULATED**

**DEFICIT** |   |   |      |
|----------------------------|--------|-------------------|--------|------------------------------|--------|--------|-----------|
|                       |   | **SHARES**        |   | **AMOUNT**                   |   |   | **TOTAL** |   |
| BALANCE, JUNE 25, 1999     |   | —            |   | $                            | — |   | $         | — |   | $ | — |   |
| Net loss                   |   | —            |   | —                       |   | (2,641 | )         | (2,641 | ) |
|                       |   |              |   |                         |   |   |      |   |   |
| BALANCE, DECEMBER 31, 1999 |   | —            |   | —                       |   | (2,641 | )         | (2,641 | ) |
| Net loss                   |   | —            |   | —                       |   | (531   | )         | (531 | ) |
|                       |   |              |   |                         |   |   |      |   |   |
| BALANCE, DECEMBER 31, 2000 |   | —            |   | —                       |   | (3,172 | )         | (3,172 | ) |
| Net income                 |   | —            |   | —                       |   | 1,035  |      | 1,035 |   |
|                       |   |              |   |                         |   |   |      |   |   |
| BALANCE, DECEMBER 31, 2001 |   | —            |   | $                            | — |   | $         | (2,137 | ) | $ | (2,137 | ) |

 

See notes to financialstatements.

 

46

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AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDIARY

OF THE AES CORPORATION

 

STATEMENTS OF CASH FLOWS,

 YEARS ENDED DECEMBER 31, 2001 AND 2000, ANDTHE

PERIOD FROM JUNE 25, 1999(INCEPTION) THROUGH DECEMBER 31, 1999

(DOLLARS IN THOUSANDS)

 
|                                                                           |   | **Year Ended  December 31, 2001** |          | **Year Ended  December 31, 2000** |         | **June 25,  1999  (inception)   through   December 31, 1999** |         |
|--------------------------------------------------------------------------------|--------|-----------------------------------|---------------|-----------------------------------|--------------|---------------------------------------------------------------|--------------|
| OPERATING ACTIVITIES:                                                          |   |                              |          |                              |         |                                                          |         |
| Net income (loss)                                                              |   | $                                 | 1,035         |                              | $            | (531                                                          | )            | $ | (2,641 | ) |
| Amortization of deferred financing costs                                       |   | 145                               |          | 174                               |         | 44                                                            |         |
| Depreciation                                                                   |   | 85                                |          | —                            |         | —                                                        |         |
| Change in:                                                                     |   |                              |          |                              |         |                                                          |         |
| Interest receivable                                                            |   | 54                                |          | 344                               |         | (437                                                          | )            |
| Accrued interest                                                               |   | —                            |          | (152                              | )            | 2,429                                                         |         |
| Accounts receivable — parent and affiliates                               |   | (292                              | )             | —                            |         | —                                                        |         |
| Certificate of deposit                                                         |   | 308                               |          | —                            |         | —                                                        |         |
| Other assets                                                                   |   | 142                               |          | —                            |         | —                                                        |         |
| Net cash provided by (used in) operating activities                            |   | 1,477                             |          | (165                              | )            | (605                                                          | )            |
|                                                                           |   |                              |          |                              |         |                                                          |         |
| INVESTING ACTIVITIES:                                                          |   |                              |          |                              |         |                                                          |         |
| Payments for construction in progress                                          |   | (33,907                           | )             | (54,227                           | )            | (243,742                                                      | )            |
| Change in construction related payables                                        |   | 16,908                            |          | (18,730                           | )            | 31,735                                                        |         |
| Payments for land                                                              |   | (615                              | )             | —                            |         | (528                                                          | )            |
| Change in other receivables                                                    |   | (17,564                           | )             | (372                              | )            | —                                                        |         |
| Change in debt service reserve                                                 |   | 10,850                            |          | 74,450                            |         |  (91,098                                                 | )            |
| Purchase of other assets                                                       |   | —                            |          | —                            |         | (1,138                                                        | )            |
| Net cash (used in) provided by investing activities                            |   | (24,328                           | )             | 1,121                             |         | (304,771                                                      | )            |
|                                                                           |   |                              |          |                              |         |                                                          |         |
| FINANCING ACTIVITIES:                                                          |   |                              |          |                              |         |                                                          |         |
| Proceeds from project debt issuance                                            |   | —                            |          | —                            |         | 308,500                                                       |         |
| Payments for deferred financing costs                                          |   | —                            |          | (1,144                            | )            | (2,491                                                        | )            |
| Loan from parent                                                               |   | 30,000                            |          | —                            |         | —                                                        |         |
|                                                                           |   |                              |          |                              |         |                                                          |         |
| Net cash provided by (used in) financing activities                            |   | 30,000                            |          | (1,144                            | )            | 306,009                                                       |         |
|                                                                           |   |                              |          |                              |         |                                                          |         |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           |   | 7,149                             |          | (188                              | )            | 633                                                           |         |
|                                                                           |   |                              |          |                              |         |                                                          |         |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                 |   | 445                               |          | 633                               |         | —                                                        |         |
|                                                                           |   |                              |          |                              |         |                                                          |         |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                       |   | $                                 | 7,594         |                              | $            | 445                                                           |         | $ | 633 |   |
|                                                                           |   |                              |          |                              |         |                                                          |         |
| SUPPLEMENTAL DISCLOSURE:                                                       |   |                              |          |                              |         |                                                          |         |
| Reclassification of Construction in Progress to  Property, plant and equipment |   | $                                 | 332,500  |                              | —  |                                                          | —  |   |
| Interest paid (net of amounts capitalized)                                     |   | $                                 | 153           |                              | $            | 3,093                                                         |         | $ | 3,326 |   |

 

See notes to financialstatements.

 

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AES IRONWOOD, L.L.C.

AN INDIRECT WHOLLY OWNEDSUBSIDARY

OF THE AES CORPORATION

 

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31,2001 AND 2000 AND THE PERIOD FROM JUNE 25, 1999 (INCEPTION) THROUGH DECEMBER31, 1999

 

**1.****                                      ORGANIZATION**

** **

We were formed on October 30, 1998, in the state ofDelaware to develop, construct, and operate a 705-megawatt (MW) gas-fired,combined cycle electric generating facility in South Lebanon Township,Pennsylvania (the Plant).  We wereconsidered dormant until June 25, 1999, at which time the Project Financing andcertain related agreements were consummated (hereinafter, Inception).  The Plant includes two Westinghouse 501 Gcombustion turbines, two heat recovery steam generators, and one steamturbine.  The Plant produces and sellselectricity, as well as provides fuel conversion and ancillary services, solelyto Williams Energy Marketing and Trading Company (Williams) under a powerpurchase agreement (the PPA) with a term of 20 years. We commenced commercialoperations on December 28, 2001, the commercial operation date.  We declared the facility available for thelast three days of December 2001. Although the facility did not operate duringthis time, Williams paid approximately $422,000 in capacity payments.

 

We are a wholly-owned subsidiary of AES Ironwood, Inc.(Ironwood), which is a wholly owned subsidiary of The AES Corporation(AES).  Ironwood has no assets otherthan its ownership interests in us and AES Prescott, L.L.C. (Prescott), anotherwholly owned subsidiary of Ironwood (see Note 8).  Ironwood has no operations and is not expected to have anyoperations.  Its only income will befrom distributions it receives from us and Prescott.  The equity that Ironwood is to provide to us will be provided toIronwood by AES, which owns all of the stock of Ironwood.  AES files quarterly and annual auditedreports with the Securities and Exchange Commission under the 1934 ExchangeAct, which are publicly available. Ironwood’s equity contribution obligations are required to be supportedby either an insurance bond or letter of credit.  Currently those obligations are supported by an insurance bondissued to the collateral agent (see Note 6).

 

On June 25, 1999, we issued $308.5 million in seniorsecured bonds (see Note 4) for the purpose of providing financing for theconstruction of the Plant and to fund, through the construction period,interest payments to the bondholders. On May 12, 2000, we consummated an exchange offer whereby the holders ofthe senior bonds exchanged their privately placed senior secured bonds forregistered senior secured bonds.

 

Pursuant to an Equity Subscription Agreement, Ironwoodwill contribute up to $50.1 million to us to fund construction after the bondproceeds had been fully utilized.  As ofDecember 31, 2001, Ironwood has contributed $30 million in the form ofsubordinated debt. Cash is drawn as funds are required (see Note 5).

 

** 2.****                                   SIGNIFICANTACCOUNTING POLICIES**

 

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

 

*Cashand Cash Equivalents*–We consider unrestricted cash on hand, deposits in banks, and 

 

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investments with original maturities of three monthsor less to be cash and cash equivalents for the purpose of the statement ofcash flows.

 

*InvestmentsHeld by Trustee*–We are required to maintain a construction funding account for the payment ofcertain qualifying construction costs and a construction interest account fromwhich quarterly interest payments are to be made. The construction fund accountwill be used to make the remaining construction milestone payment. As ofDecember 31, 2001, these amounts were invested in a combination of money marketfunds and commercial paper.  The balancein the construction funding account was approximately $3.1 million and $1.9million as of December 31, 2001 and December 31, 2000, respectively.  The balance in the construction interestaccount was approximately $2.3 million and $14.4 million as of December 31,2001 and December 31, 2000, respectively.

 

*Constructionin Progress*–Costs incurred in developing the Plant, including progress payments,engineering costs, management and development fees, interest, and other costsrelated to construction were capitalized. Total interest capitalized on the project financing debt wasapproximately $60.3 million and $33.1 million as of December 31, 2001 andDecember 31, 2000, respectively. Certain costs related to construction activities were paid by AES priorto the issuance of the bonds.  Theseamounts include approximately $105.4 million of construction progress paymentsand $20.1 million in other incurred costs. These costs are reflected within construction in progress, and werereimbursed to AES out of the bond proceeds. All construction in progress wastransferred to property, plant, and equipment on December 28, 2001.

 

*Property,Plant, and*Equipment –Property, plant, and equipment is recorded at cost.  Depreciation, after consideration of salvage value, is computedusing the straight-line method over the estimated useful lives of the assets,which range from five to forty years. Maintenance and repairs are charged to expense as incurred.

 
| **Description  of Asset** |   | **Depreciable Life** |   | **Value (000's)** |    |
|---------------------------|--------|----------------------|--------|-------------------|---------|
| Vehicles                  |   | 5                    |   | $                 | 151     |   |
| Turbine Parts             |   | 7                    |   | 6,998             |    |
| CT Prts                   |   | 12                   |   | 10,218            |    |
| Furniture and Fixtures    |   | 15                   |   | 261               |    |
| Turbine Parts             |   | 15                   |   | 1,623             |    |
| Turbine Parts             |   | 20                   |   | 2,856             |    |
| Turbine Parts             |   | 24                   |   | 7,500             |    |
| Bond Costs                |   | 25                   |   | 5,441             |    |
| CT Prts                   |   | 28                   |   | 10,338            |    |
| Bal of EPC                |   | 40                   |   | 239,019           |    |
| Plant equip               |   | 40                   |   | 48,114            |    |
|                      |   |                 |   |              |    |
|                      |   |                 |   | $                 | 332,519 |   |

 

*Long-Lived Asset*– We evaluate the impairment of its long-livedassets based on the projection of undiscounted cash flows whenever events orchanges in circumstances indicate that the carrying amounts of such assets maynot be recoverable. Estimates of future cash flows used to test therecoverability of specific long-lived assets are based on expected cash flowsfrom the use and 

 

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eventual disposition of the asset. A significantreduction in actual cash flows and estimated cash flows may have a materialadverse impact on our operating results and financial condition.

 

*OtherAssets*– Pursuant to the provisions of 25 Pa.Code Section123, Nitrogen Oxide, (NOx), Allowance Requirements, which establishes a NOxbudget and a NOx allowance trading program for NOx affected sources for thepurpose of achieving air quality standards, we purchased approximately$1,138,000 in NOx allowances in 1999. The NOx allowances were purchased for NOxemissions during the ozone seasons for the first two full years of operations.These amounts are reported as other assets and will be amortized as they areutilized.

 

*DeferredFinancing Costs*– Financing costs are deferred and are beingamortized using the straight-line method over approximately 26 years, whichdoes not differ materially from the effective interest method of amortization.

 

*AccountsPayable and Retention Payable*– Amounts currently payable forconstruction billings and those amounts billed by Siemens Westinghouse PowerCorporation (the Contractor) in accordance with the engineering, procurement,and construction contract (the EPC) but retained by us until construction iscomplete are included in accounts payable and retention payable,respectively.  These liabilities areexpected to be paid from the investment balances (bonds proceeds) and theequity subscription agreement proceeds. The final milestone payment is expectedto be paid during the second quarter of 2002. This milestone is approximately$2.5 million and represents the final milestone of the construction contract.

 

*RevenueRecognition**–*Revenues from the sale of electricity are recorded based upon output deliveredand capacity provided at rates specified under contract terms.

 

*Useof Estimates*– The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect reportedamounts of assets and liabilities and disclosures of contingent assets andliabilities as of the date of the financial statements, as well as the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

*IncomeTaxes*– We are a limited liability corporation and aretreated as a partnership for tax purposes. Therefore, we do not pay income taxes, and no provision for income taxeshas been reflected in the accompanying financial statements.

 

*Reclassifications*– Certain reclassifications have been made to the 2000 and1999 amounts to conform to the 2001 presentation.

 

**3.****                                      DERIVATIVEINSTRUMENTS**

** **

Effective January 1, 2001, we adopted SFAS No. 133, *Accounting For Derivative Instruments And HedgingActivities*, which, as amended, establishes new accounting andreporting standards for derivative instruments and hedging activities. Weproduce and sell electricity, as well as provide fuel conversion and ancillaryservices, solely to Williams under the power purchase agreement. We do notbelieve that the power purchase agreement meets the definition of a derivativeunder SFAS 133 and, as such should not be accounted for as a derivative.

 

We have no othercontracts that meet the definition of a derivative or an embeddedderivative under SFAS No. 133, as amended. Therefore, there was no impact ofthe adoption of provisions of SFAS 133, as amended, on our financial statementsas of January 1, 2001 or for the year ended December

 

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31, 2001.

 

In December 2001, the FASBrevised its earlier conclusion, Derivatives Implementation Group (“DIG”) IssueC-15, related to contracts involving the purchase or sale of electricity.  Contracts for the purchaseor sale of electricity, both forward and option contracts, including capacitycontracts, may qualify for the normal purchases and sales exemption and are notrequired to be accounted for as derivatives under SFAS No. 133.  In orderfor contracts to qualify for this exemption, they must meet certain criteria,which include the requirement for physical delivery of the electricity to bepurchased or sold under the contract only in the normal course ofbusiness.  Additionally, contracts that have a price based on anunderlying that is not clearly and closely related to the electricity beingsold or purchased or that are denominated in a currency that is foreign to thebuyer or seller are not considered normal purchases and normal sales and arerequired to be accounted for as derivatives under SFAS No. 133.  Thisrevised conclusion is effective beginning April 1, 2002.  We are currentlyassessing the impact of revised DIG Issue C-15 on its financial condition andresults of operations.

 

**4.****                                      BONDSPAYABLE**

 

On June 25, 1999, we issued $308.5 million of 8.857%senior secured bonds due in 2025 (the Bonds) to qualified institutional buyersand/or institutional accredited investors, pursuant to a transaction exemptfrom registration under the Securities and Exchange Act of 1933 (the Act) inaccordance with Rule 144A of the Act. On May 12, 2000, we consummated an exchange offer whereby theholders of the senior secured bonds exchanged their privately placed seniorsecured bonds for registered senior secured bonds.

 

*RegistrationRights* – We were obligated to register the Bonds under theAct with the Securities and Exchange Commission within 220 days of the initialsale of the Bonds.  The registration wasnot completed within the required time frame. As a result, effective January 30, 2000, the interest rate payableon the Bonds, previously fixed at 8.857%, increased by 50 basis points untilthe consummation of the exchange offer on May 12, 2000, when such interest ratewas reduced back to 8.857%.

 

The net proceeds of the bonds (after deferredfinancing costs), approximately $305.2 million, were used to fund theconstruction of the Plant and, during the construction period, for interestpayments to bondholders.

 

Interest on the Bonds is payable quarterly inarrears.  Quarterly principal paymentson the Bonds commence 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 follows atDecember 31 (in thousands)

 
| **Year**       |   | **Principal** |    | **Interest** |   | **Total** |   |
|----------------|--------|---------------|---------|--------------|--------|-----------|--------|
| 2002           |   | $             | 1,974   |         | $      | 27,259    |   | $ | 29,233 |   |
| 2003           |   | 4,751         |    | 26,991       |   | 31,742    |   |
| 2004           |   | 6,355         |    | 26,426       |   | 32,781    |   |
| 2005           |   | 7,034         |    | 26,078       |   | 33,112    |   |
| 2006           |   | 7,157         |    | 25,305       |   | 32,462    |   |
| 2007-2025      |   | 281,229       |    | 270,697      |   | 551,926   |   |
|           |   |          |    |         |   |      |   |
| Total payments |   | $             | 308,500 |         | $      | 402,756   |   | $ | 711,256 |   |

 

*OptionalRedemption* – The Bonds are subject to optional redemption byus, in whole or in part, at any time at a redemption price equal to 100% of theprincipal amount plus accrued interest, together with a premium calculatedusing a discount rate equal to the interest rate on comparable U.S. Treasurysecurities plus 50 basis points.

 

*MandatoryRedemption* – The Bonds are subject to mandatory redemption byus, in whole or in part, at a redemption price equivalent to 100% of theprincipal amount plus accrued interest under certain situations pursuant toreceiving insurance proceeds or liquidated damages from certain failuresrelated to the performance of the facility under the EPC with the Contractor,or in certain instances in which payments are received under the PPA withWilliams under the event of default, at which time we have terminated the PPA.

 

Collateral for the Bonds consists of the Plant andrelated facilities, all agreements relating to the operation of the project,our bank and investment accounts, and all ownership interests in our company asprescribed under the trust indenture (the Indenture).  We are also bound by a collateral agency agreement (theCollateral Agency Agreement) and an equity subscription agreement (the EquitySubscription Agreement) (see Note 5).

 

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

 

*CollateralAgency Agreement*–The Collateral Agency Agreement requires us to fund or provide the funding fora debt service reserve fund.  TheCompany has therefore entered into a Debt Service Reserve Letter of CreditAgreement dated June 1, 1999, which commenced 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. The Letter of Credit in the amount $17.3 million has been obtained fromDresdner Bank AG to fulfill our requirement under the Collateral AgencyAgreement.

 

*Covenants*– TheIndenture, Collateral Agency Agreement, and Equity Subscription Agreementcontain specific covenants and requirements that we must meet. These covenantsprimarily entail the restriction of payments, reporting requirements, and thecreation and maintenance of debt service reserve and construction relatedaccounts.

 

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**5.****                                      EQUITYSUBSCRIPTION AGREEMENT**

 

We, along with Ironwood, have entered into an EquitySubscription Agreement, pursuant to which Ironwood, has agreed to contribute upto approximately $50.1 million to us to fund project costs. This amount issecured by an acceptable bond issued by Ironwood. Ironwood will fund theseamounts as they come due upon the earlier of (a) expenditure of all funds thathave been established for construction or (b) the occurrence, and during thecontinuation of, an event of default, as defined under the indenture governingits senior secured bonds. A portion of this equity requirement may be made inthe form of affiliate debt, between us and Ironwood, which would be subordinateto the senior secured bonds.

 

At December 31, 2001, Ironwood had issued $30.0million in subordinated debt to us under the equity subscription agreement. Thesubordinated debt is repayable using available cash pursuant to Section 3.10 ofthe Collateral Agency and Intercreditor Agreement. In January of 2002, the $30million payable to Ironwood was converted to an equity contribution. OnFebruary 26, 2002, Ironwood contributed an additional $8.8 million in equity tous.

 

**6.****                                      POWERPURCHASE AGREEMENT**

 

We have entered into a power purchase agreement withWilliams for the sale of all electric energy and capacity produced by thefacility, as well as ancillary and fuel conversion services. The term of thepower purchase agreement is 20 years, commencing on December 28, 2001, thecommercial operation date. Payment obligations to us are guaranteed by TheWilliams Companies, Inc. Such payment obligations under the guarantee arecapped at an amount equal to 125% of the sum of the principal amount of thesenior secured bonds plus the maximum debt service reserve account requiredbalance.  We have provided WilliamsEnergy a letter of credit to support the project’s payment obligations.  The amount available to be drawn under theletter of credit is capped at $30 million. To date, no amounts have been drawnunder this letter of credit. The repayment obligations with respect to drawingsunder the letter of credit are a senior debt obligation of our company. Theminimum cash flow from Williams will be approximately $3.9 million per month.Net operating costs will be approximately $1.3 million per month. The balanceleft will provide for senior debt interest and principal payments. Additionally,a significant monthly expenditure is for payment of our long term serviceagreement with Siemens Westinghouse. This agreement provides that we payapproximately $400 per gas turbine per equivalent operating hour. In the eventwe 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.

 

As of December 31, 2001, we had commitments totaling$241 million arising from the construction of our facility of which $239million had been paid.

 

*FuelConversion and Other Services*– Williams has the obligation to deliver, on an exclusive basis,all quantities of natural gas required by the Plant to generate electricity orancillary services, to start up or shut down the Plant, and to operate thePlant during any period other than a start-up, shut-down, or required dispatchby Williams for any reason.

 

*Concentration of Credit Risk*– Williams Energy currently is our solecustomer for purchases of capacity, ancillary services, and energy, and oursole source for fuel.  Williams Energy’spayments under the power purchase agreement are expected to provide all of ourrevenues during the term of 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 Energy were not performing 

 

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under the power purchaseagreement.  Any material failure byWilliams Energy to make capacity and fuel conversion payments or to supply fuelunder the power purchase agreement would have a severe impact on ouroperations.  The payment obligations ofWilliams Energy under the power purchase agreement are guaranteed by the WilliamsCompanies, Inc.  The payment obligationsof the Williams Companies, Inc. are capped at an amount equal to 125% of thesum of the principal amount of our senior secured bonds, plus the maximum debtservice reserve account balance.

 

If at any time Moody’s orStandard & Poor’s rates the long term senior unsecured debt of The WilliamsCompanies, Inc. lower than investment grade and the rating agency does notreestablish within 60 days an investment grade rating for the debt, thenWilliams Energy is to provide alternative credit support reasonably acceptableto us within 90 days of the day on which the debt was rated lower thaninvestment grade.  According to publicsources, at March 29, 2002, the long-term senior unsecured debt of the WilliamsCompanies, Inc. was rated as follows: “Baa2” by Moody’s and “BBB” by Standardand Poor’s, both of which ratings are investment grade.  While both ratings agencies have recentlyaffirmed this investment grade rating, on February 1, 2002, Standard &Poor’s placed the senior unsecured debt credit ratings of the WilliamsCompanies, Inc. on credit watch with negative implications and on February 27,2002, Moody’s downgraded the Williams Companies, Inc.’s outlook from stable tonegative.

 

**7.****                                      COMMITMENTSAND CONTINGENCIES**

 

*Construction*– We enteredinto a fixed-price turnkey agreement with Siemens Westinghouse (the Contractor)for the design, engineering, procurement, and construction of the Plant. As ofDecember 31, 2001 and 2000, we were liable to the Contractor for a retentionpayment as part of the total contract price due at the completion of thecontract for approximately $11.9 million and $11.1 million, respectively.

 

If none of provisionalacceptance, interim acceptance or final acceptance of our facility occurs by thedate that is 45 days after the guaranteed provisional acceptance date, SiemensWestinghouse must pay us $110,000 per day for each day provisional acceptance,interim acceptance or final acceptance is later than the guaranteed provisionalacceptance date, but in no event will the aggregate amount of the payments begreater than the Delay LD SubCap (the aggregate amount of which is equal to 20%of the contract price).

 

Siemens Westinghousebegan paying liquidated damages of $110,000 per day beginning 45 days after theguaranteed provisional acceptance date of May 22, 2001. The liquidated damagesceased to accrue on December 27, 2001, the date upon which provisionalacceptance was granted. At December 31, 2001 we had invoiced SiemensWestinghouse approximately $19.1 million. At December 31, 2001 SiemensWestinghouse had paid all but $2.97 million, the amount accrued fortwenty-seven days in December.  SiemensWestinghouse paid this amount in January 2002.

 

We have enteredinto arbitration with the Contractor over a dispute about which party isresponsible for the payment of the cost of electricity and natural gas used bythe project during certain periods prior to the December 28, 2001 commercialacceptance. The costs total approximately $10.6 million, which is includedwithin accounts receivable-other. Any amounts not recovered will be treated asincreases to property, plant and equipment, and will only affect futureprofitability in the form of increased depreciation, allocated over fortyyears. Our legal counsel has indicated that the construction contract is clearin respect of fuel cost and electricity reimbursement and that we will besuccessful in recovering the disputed amounts. We believe this part of thecontract is also clear as to Contractor’s liability. The original draft of thecontract was modified to include contractor fuel reimbursement during theperiod after synchronization of the 

 

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steam turbine untilsuch time as provisional acceptance was granted.

 

*Maintenance*–  We, as assignee of AES Ironwood, Inc., haveentered into the Maintenance Program Parts, Shop Repairs and Scheduled OutageTFA Services Contract, dated as of September 23, 1998, with SiemensWestinghouse by which Siemens Westinghouse will provide us with, among otherthings, combustion turbine parts, shop repairs and scheduled outage technicalfield assistance services. The Contractor provided us with specific combustionturbine maintenance services and spare parts for an initial term of betweeneight and ten years under a maintenance service agreement. The fees assessed bySiemens Westinghouse will be based on the number of Equivalent Base Load Hoursaccumulated by the applicable Combustion Turbine as adjusted for inflation.

 

We have determined themaintenance services agreement provides for the purchase of parts that will becapitalized, as well as maintenance items that will be expensed when paid. Theratio of capital items verses expense parts has been determined to beapproximately 74% to 26% respectively.

 

The maintenance servicesagreement became effective on the date of execution and unless terminatedearly, must terminate upon completion of shop repairs performed by SiemensWestinghouse following the eighth scheduled outage of the applicable combustionturbine or 10 years from initial synchronization of the applicable combustionturbine, whichever occurs first.

 

*WaterSupply*–  We entered into a contract with the City ofLebanon Authority (the Authority) for the purchase of 50 percent of the wateruse of the Plant.  The contract has aterm of 25 years.  Costs associated withthe use of water by the Plant under this contract are based on gallons used perday at prices specified under the contract terms.  We also entered into an agreement with Pennsy Supply, Inc.(Pennsy), which will provide the remaining 50 percent of the water use of thePlant.

 

*InterconnectionAgreement*–  We entered into an interconnection agreementwith GPU Energy (GPU) to transmit the electricity generated by the Plant to thetransmission grid so that it may be sold as prescribed under the PPA.  The agreement is in effect for the life ofthe Plant, yet may be terminated by mutual consent of both GPU and us undercertain circumstances as detailed in the agreement.  Costs associated with the agreement are based on electricitytransmitted via GPU at a variable price, the PJM (Pennsylvania/NewJersey/Maryland) Tariff, as charged by GPU to the Company, which is comprisedof both service cost and asset recovery cost, as determined by GPU and approvedby the Federal Energy Regulatory Committee (FERC). We are obligated to payapproximately $204,000 per year as a maintenance fee for the interconnectionequipment. The term of this agreement is twenty- five years.

 

**8.****                                      RELATEDPARTY TRANSACTIONS**

 

Effective June 1999, we entered into a 27-yeardevelopment and construction management agreement with Prescott to providecertain support services required by us for the development and construction ofthe Plant.  Under this agreementPrescott will also provide operations management services for the Plant oncecommercial operation is attained. Minimum amounts payable under the contract during the constructionperiod were $125,000 per month. Beginning on December 28, 2001, the date commercial operations wasachieved, payments for operations management services increased toapproximately $400,000 per month.

 

During the construction period, the constructionmanagement fees were paid to Prescott from the 

 

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investment balances or from parent funding.  As of December 31, 2001, $3.9 million inconstruction management fees were incurred and charged to construction inprogress, and $327,500 was payable to Prescott.  As of December 31, 2000, $2.4 million in construction managementfees were incurred and charged to construction in progress, and $246,500 waspayable to Prescott.

 

We had accounts receivable from parent and affiliatesin the amount of $365 thousand and $73 thousand as of December 31, 2001 and2000, respectively.  We had accountspayables to our parent and affiliates of $1.6 million and $754 thousand as ofDecember 31, 2001 and 2000, respectively. We had accounts payables to affiliates of $788 thousand and $970thousands as of December 31, 2001 and 2000, respectively.  Accounts receivable from parent andaffiliates generally represents charges for certain AES projects that we havepaid for and invoiced to our parent and affiliates. Accounts payable aregenerally amounts owed for shared services to our parent and affiliates.

 

**9.****                                      FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

The estimated fair values of our financial instrumentshave been determined using available market information.  The estimates are not necessarily indicativeof the amounts we could realize in a current market exchange.  The use of different market assumptionsand/or estimation methodologies may have a material effect on the estimatedfair value amounts.

 

The Bonds had a carrying amount of $308.5 million witha fair value of approximately $290.1 million at December 31, 2001.  The estimated fair value of the Bonds atDecember 31, 2000 based on quoted market prices of similarly rated bonds withsimilar maturities did not differ materially from their carrying value.

 

Cash and cash equivalents and investments held bytrustee are carried at cost which

 

**10.****                               SEGMENTINFORMATION**

 

Under the provisions of Statement of FinancialAccounting Standards No. 131, *Disclosure About Segments of an Enterprise andRelated Information*, our business is expected to be operated as onereportable segment, with operating income or loss being the measure ofperformance evaluated by the chief operating decision-maker.  As described in Notes 1 and 5, our primarycustomer will be Williams, which is expected to provide all of our revenuesduring the term of the PPA.

 

*********************

 

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**SELECTED QUARTERLY FINANCIALDATA    (UNAUDITED)**

 

The followingtable summarizes the unaudited quarterly statements of operations for theCompany for 2001. Operations began on December 28, 2001, therefore 3 days ofthe quarter ended December 31, included operations and 87 days represented thedevelopment stage.

 
| AES Ironwood, LLC.     |
|------------------------|
| Quarter Ended          |
| December 31, 2001      |
| (dollars in thousands) |

 
| OPERATING REVENUES                |   |   |   |
|-----------------------------------|--------|--------|--------|
| Energy                            |   | $      | 1,158  |   |
| OPERATING EXPENSES                |   |   |   |
| Operating expenses                |   | (105   | )      |
| General and administrative  costs |   | (99    | )      |
| OPERATING INCOME                  |   | 954    |   |
|                              |   |   |   |
| OTHER INCOME/EXPENSE              |   |   |   |
| Interest income                   |   | 89     |   |
| Interest expense                  |   | (139   | )      |
| NET INCOME                        |   | $      | 904    |   |

 

57

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

 

None.

 

58

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**PARTIII**

 

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

 

We are a Delaware limited liability company and haveno employees other than our officers. Our officers receive no compensation for their services to us or for anytransaction between us and any of our affiliates.  We are managed by our Board of Directors under the terms of ourLimited Liability Company Agreement, dated as of November 1, 1998.  The following table sets forth the names,ages and positions of our directors and executive officers and their positionswith us.  Our directors are electedannually and each elected director holds office until the director’s successoris elected and qualified or the director resigns or is removed.  Our officers are elected from time to timeby vote of the Board of Directors.

 
| **Name**             |   | **Age** |   | **Position**                          |
|----------------------|--------|---------|--------|---------------------------------------|
| Roger Naill,         |   | 54      |   | Director                              |
| John Ruggirello      |   | 51      |   | Director and  Vice President          |
| Barry Sharp          |   | 42      |   | Director, Sr.  Vice President and CFO |
| Peter Norgeot        |   | 37      |   | President                             |
| Patricia Rollin      |   | 40      |   | Vice President                        |
| Ginger  Beamesderfer |   | 35      |   | Vice President                        |
| Michael Carlson      |   | 50      |   | Vice President                        |
| Scott Miller         |   | 32      |   | Vice President                        |
| Ron Rodrique         |   | 34      |   | Vice President                        |
| Maureen Shearer      |   | 38      |   | Secretary                             |
| Leith Mann           |   | 48      |   | Assistant  Secretary                  |

 

Roger Naill, 54,has served as one of our directors since November 1998.  He is Vice President of The AES Corporationand heads The AES Corporation Corporate Strategic Planning Group.  He assumed that position in 1981.  Mr. Naill spends approximately 95% of histime in his capacity as Senior Vice President of The AES Corporation.

 

John Ruggirello,51, has served as one of our Directors and Vice Presidents since November1998.  He is Senior Vice President ofThe AES Corporation.  Mr. Ruggirelloalso serves as the President of AES Enterprise, a business development andplant operations division serving the Mid-Atlantic United States since1994.  Prior to his current position,Mr. Ruggirello was plant manager of AES Beaver Valley.  Mr. Ruggirello spends approximately 20%of his time in his capacity as Senior Vice President of The AES Corporation.

 

Barry Sharp, 42,has served as one of our Directors, Vice Presidents and as our Chief FinancialOfficer since November 1998.  He iscurrently Senior Vice President and Chief Financial Officer of The AESCorporation.  He joined The AESCorporation as Director of Finance and Administration in 1986.  Prior to The AES Corporation, he heldvarious positions with Arthur Anderson & Company and Marriott.  Mr. Sharp spends approximately 95% of histime in his capacity as Senior Vice President and Chief Financial Officer ofThe AES Corporation.

 

59

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Peter Norgeot, 37,has served as our President since November 2000. Mr. Norgeot joined AESIronwood  in October 1999 as PlantManager. He was previously Plant Manager at AES Barry, UK. Prior to this heworked at AES Thames and AES Medway. He joined The AES Corporation in 1988.

 

Patricia Rollin,40, has served as one of our Vice Presidents since November 1998.  She is also a Vice President of AES Enterprise.  She served as Director of Investor Relationsof The AES Corporation from 1994 through 1995. She joined The AES Corporation Corporate Strategic Planning in 1984.

 

GingerBeamesderfer, 35, has served as one of our Vice Presidents since November2000.  She joined The AES Corporation in1997, working on the development of the AES Ironwood Project.

 

Michael Carlson,50, has served as one of our Vice Presidents since August 2001.  He joined The AES Corporation in 2001.

 

Scott Miller, 32,has served as one of our Vice Presidents since November 2000.He 2000.  He joined The AES Corporation in 1991 andhas worked at AES Thames, AES Barry and development work for AES Haripur andAES Meghnaghat prior to joining AES Ironwood.

 

Ron Rodrique, 34,has served as one of our Vice Presidents since November 2000.  He joined The AES Corporation in 1990working at AES Placerita prior to joining AES Ironwood.

 

Michael Romaniw,33 has served as our Treasurer of AES Ironwood, L.L.C. since April 2000.  He is also Vice President of AES Ironwood,Inc and AES Prescott L.L.C. He joined The AES Corporation in 1999 previouslyworking as a tax consultant for Ernst & Young LLP.

 

Maureen B.Shearer, 38, has served as our Secretary since November 1998.  She is currently Corporate Paralegal of TheAES Corporation and has held that position since 1995.  She joined The AES Corporation as anExecutive Assistant in 1989.  Prior tojoining The AES Corporation, Ms. Shearer served active duty with the U.S. CoastGuard.

 

Leith Mann, 48 hasserved as our Assistant Secretary since April 2000.  She is also Vice President of AES Ironwood, Inc and AES PrescottL.L.C. She has also served as Assistant Secretary for The AES Corporation sinceFebruary 2000. She joined The AES Corporation in 1981.

 

**ITEM11.****                      ExecutiveCompensation**

 

Not applicable pursuant to General Instruction I ofthe Form 10-K.

 

**ITEM 12.****                     ****Security Ownership of Certain Beneficial Owners andManagement**

** **

Not applicable pursuant to General Instruction I ofthe Form 10-K.

 

**ITEM****13.****                      CertainRelationships And Related Transactions**

 

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

 

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**PART IV**

 

**ITEM14.****                      Exhibits,Financial Statement Schedules, and Reports on Form 8-K**

 

a)             The following documents are filed as part of thisreport:

 

1.             FinancialStatements Filed:

 

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

 

2.             FinancialStatement Schedules Filed:

 

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

 

3.             Exhibits Filed:

 

Unless otherwiseindicated, all exhibits to this Form 10-K are incorporated herein by referencefrom the identically numbered exhibit of AES Ironwood, L.L.C.’s RegistrationStatement of 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.                                                                                                                                                                                                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 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  February 5, 1999, by and between the PPA Guarantor and our Company.                                                                                                                                                                                                                                                                                                                                                                        |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2                |   | Amended and Restated  Power Purchase Agreement, dated as of February 5, 1999, and Amendment No. 1  to Amended and Restated Power Purchase Agreement, dated as of June 18, 1999,  between our Company and the Power Purchaser. (Portions of this exhibit have  been omitted pursuant to a request for confidential treatment.)                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3                |   | Engineering,  Procurement and Construction Services Agreement, dated as of September 23,  1998 (the “EPC Contract”), as amended, by and between our Company and the  Contractor. (Portions of this exhibit have been omitted pursuant to a request  for confidential treatment.)                                                                                                                                                                        |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4                |   | Guaranty, dated as of  September 23, 1998, by and between Siemens Corporation and our Company.                                                                                                                                                                                                                                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5                |   | Maintenance Program  Parts, Shop Repairs and Scheduled Outage TFA Services Contract, dated as of  September 23, 1998, and Amendment No. 1 to Maintenance Program Parts, Shop  Repairs and Scheduled Outage TFA Services Contract, dated as of January 13,  1999 (the “Maintenance Services Agreement”), by and between our Company and  the Contractor. (Portions of this exhibit have been omitted pursuant to a  request for confidential treatment.) |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6                |   | Development and  Operations Services Agreement, dated as of June 1, 1999, by and between our  Company and Prescott.                                                                                                                                                                                                                                                                                                                                               |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7                |   | Effluent Supply  Agreement, dated as of March 3, 1998, by and between our Company and City of  Lebanon Authority.                                                                                                                                                                                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8                |   | Generation Facility  Transmission Interconnection Agreement, dated as of March 23, 1999, by and  between our Company and Metropolitan Edison Company d/b/a GPU Energy.                                                                                                                                                                                                                                                                                            |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.9                |   | Agreement Relating to  Real Estate, dated as of October 23, 1998, by and between our Company and  Pennsy Supply, Inc.                                                                                                                                                                                                                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.10               |   | Easements and Right of  Access Agreement, dated as of April 15, 1999, by and between our Company and  Pennsy Supply, Inc.                                                                                                                                                                                                                                                                                                                                         |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 12*                 |   | Computation of Ratios  of Earnings / (Deficiency) to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

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* Filed herewith.

 

61

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No current reports on Form 8-K were filed by theregistrant during the fourth quarter of the fiscal year ended December 31,2001.

 

**SupplementaryInformation to be Furnished With Reports filed Pursuant to**

**Section15(d) of the Act by Registrants Which Have Not Registered**

**SecuritiesPursuant to Section 12 of the Act.**

 

No annual reportor proxy materials have been sent to security holders during the fiscal yearended December 31, 2001.  No annualreport or proxy materials will be sent to security holders subsequent to thefiling of this annual report on Form 10-K.

 

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**SIGNATURES**

** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                                                     | **AES IRONWOOD, L.L.C.** |
|----------------------------------------------------------|--------------------------|
|                                                     |                     |
|                                                     |                     |
|                                                     | /s/ Barry Sharp          |   |
|                                                     | By:                      | Barry Sharp |
|                                                     | Title:                   | Senior-Vice President,  Chief Financial Officer |
| Date:       March 29, 2002 |                     |   |
|                                                          |                          |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**       |   | **Title**                                                   |   | **Date**       |
|---------------------|--------|-------------------------------------------------------------|--------|----------------|
|                |   |                                                        |   |           |
|                |   |                                                        |   |           |
| /s/ Barry Sharp     |   | Director, Sr. Vice  President,                              |   | March 29, 2002 |
| Barry Sharp         |   | Chief Financial Officer  (and principal accounting officer) |   |           |
|                |   |                                                        |   |           |
| /s/ Peter Norgeot   |   | President                                                   |   | March 29, 2002 |
| Peter Norgeot       |   |                                                        |   |           |
|                |   |                                                        |   |           |
| /s/ John Ruggirello |   | Director, Vice President                                    |   | March 29, 2002 |
| John Ruggirello     |   |                                                        |   |           |
|                |   |                                                        |   |           |
| /s/ Roger Naill     |   | Director                                                    |   | March 29, 2002 |
| Roger Naill         |   |                                                        |   |           |

 

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