**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2005**

**or**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------------------|

 

**Forthe transition periodfrom             to              **

 

**Commissionfile number 333-40478**

 

**AES REDOAK, L.L.C.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                     | ** ** | **54-1889658**                            |
|------------------------------------------------------------------|------------|-------------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) | ** ** | (I.R.S.  Employer  Identification Number) |
|                                                             |       |                                      |
| **832 Red Oak Lane, Sayreville, NJ**                             | ** ** | **08872**                                 |
| (Address of  principal executive offices)                        | ** ** | (Zip Code)                                |

 

Registrant’s telephone number,including area code:  **(732) 238-1462**

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes ý     No o

 

Indicate by check mark whether registrant isan accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No ý

 

Registrant is a wholly-owned subsidiary ofThe AES Corporation.  Registrant meetsthe conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Qand is filing the Quarterly Report on form 10-Q with the reduceddisclosure format authorized by General Instruction H(2).

 

 

----

 

**AES RED OAK, L.L.C.**

**TABLEOF CONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                            | ** ** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Item 1.**       | **CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)**                                                                                         | ** ** |
| ** **        | **Condensed Consolidated Statements of  Operations, Three Months Ended March 31, 2005 and 2004**                                                | ** ** |
| ** **        | **Condensed Consolidated Balance Sheets, as  of March 31, 2005 and December 31, 2004**                                                     | ** ** |
| ** **        | **Condensed Consolidated Statement of Changes  in Member’s Capital (Deficit), Period from December 31, 2004 through March 31,  2005** | ** ** |
| ** **        | **Condensed Consolidated Statements of Cash  Flows for the Three Months Ended March 31, 2005 and 2004**                                         | ** ** |
| ** **        | **Notes to Condensed Consolidated Financial  Statements**                                                                                            | ** ** |
| **Item  2.**      | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**                                                      | ** ** |
| **Item 4.**       | **CONTROLS AND PROCEDURES**                                                                                                                          | ** ** |
|              |                                                                                                                                                 |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                | ** ** |
| **Item 1.**       | **LEGAL PROCEEDINGS**                                                                                                                                | ** ** |
| **Item 5.**       | **OTHER INFORMATION**                                                                                                                                | ** ** |
| **Item 6.**       | **EXHIBITS**                                                                                                                                         | ** ** |
| ** **        | **SIGNATURES**                                                                                                                                       | ** ** |

 

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.****  CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**AES REDOAK, L.L.C. AND SUBSIDIARY**

**ANINDIRECT, WHOLLY-OWNED SUBIDIARY OF THE AES CORPORATION**

**Condensed Consolidated Statements of Operations,**

**ThreeMonths Ended March 31, 2005 and 2004**

***(dollars in thousands)***

***(Unaudited)***

 
| ** **                        | ** ** | **Three Months  Ended  March 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| OPERATING  REVENUES               |       |                                    |       |   |   |
| Energy                            |       | $                                       | 11,844     |   | $ | 11,628 |   |
|                              |       |                                    |       |   |   |
| OPERATING  EXPENSES               |       |                                    |       |   |   |
| Fuel  conversion volume rebates   |       | 1,632                                   |       | 1,029 |   |
| Corporate  management fees        |       | 416                                     |       | 408 |   |
| Other  operating expens           |       | 3,125                                   |       | 2,591 |   |
| Depreciation  expense             |       | 2,985                                   |       | 2,851 |   |
| Taxes and  insurance              |       | 731                                     |       | 748 |   |
| General and  administrative costs |       | 313                                     |       | 177 |   |
| Total  operating expenses         |       | 9,202                                   |       | 7,804 |   |
| Operating  income                 |       | 2,642                                   |       | 3,824 |   |
|                              |       |                                    |       |   |   |
| OTHER INCOME  (EXPENSE)           |       |                                    |       |   |   |
| Interest  income                  |       | 291                                     |       | 61 |   |
| Interest  expense                 |       | (8,367                                  | )          | (8,478 | ) |
| Letter of  credit fees and other  |       | (299                                    | )          | (261 | ) |
| Total other  income (expense)     |       | (8,375                                  | )          | (8,678 | ) |
| NET LOSS                          |       | $                                       | (5,733     | ) | $ | (4,854 | ) |

 

See notes to condensedconsolidated financial statements.

 

1

----

 

**AES RED OAK, L.L.C. AND SUBSIDIARYAN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF THE AES CORPORATIONCondensed ConsolidatedBalance Sheets,March 31, 2005 and December 31, 2004***(dollarsin thousands, except share amounts)*

** **

***(Unaudited)***

 
| ** **                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                   | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                   |       |               |       |                  |       |
|                                                                                                         |       |               |       |                  |       |
| Current  Assets:                                                                                             |       |               |       |                  |       |
| Cash                                                                                                         |       | $                  | 31         |                  | $          | 5 |   |
| Restricted  cash at cost, which approximates market value                                                    |       | 39,292             |       | 41,584                |       |
| Receivables                                                                                                  |       | 3,955              |       | 4,374                 |       |
| Receivable  from affiliate                                                                                   |       | 42                 |       | 30                    |       |
| Prepaid and  other expenses                                                                                  |       | 464                |       | 599                   |       |
| Total  current assets                                                                                        |       | 43,784             |       | 46,592                |       |
| Land                                                                                                         |       | 4,240              |       | 4,240                 |       |
| Property,  plant, and equipment – net of accumulated depreciation of $30,587 and  $27,614, respectively |       | 398,847            |       | 399,338               |       |
| Deferred  financing costs – net of accumulated amortization of $4,144 and $3,941,  respectively         |       | 14,561             |       | 14,764                |       |
| Other assets                                                                                                 |       | 606                |       | 606                   |       |
|                                                                                                         |       |               |       |                  |       |
| Total assets                                                                                                 |       | $                  | 462,038    |                  | $          | 465,540 |   |
|                                                                                                         |       |               |       |                  |       |
| **LIABILITIES  AND MEMBER’S EQUITY**                                                                    |       |               |       |                  |       |
|                                                                                                         |       |               |       |                  |       |
| Current  Liabilities:                                                                                        |       |               |       |                  |       |
| Accounts  payable                                                                                            |       | $                  | 2,173      |                  | $          | 784 |   |
| Accrued  liabilities                                                                                         |       | 3,349              |       | 1,945                 |       |
| Accrued  interest                                                                                            |       | 2,719              |       | 2,722                 |       |
| Liabilities  under spare parts agreement                                                                     |       | 462                |       | 827                   |       |
| Payable to  affiliate                                                                                        |       | 421                |       | 282                   |       |
| Bond  payable-current portion                                                                                |       | 5,223              |       | 5,072                 |       |
| Payable to  Raytheon                                                                                         |       | 30,302             |       | 30,302                |       |
| Payable to  Williams Energy                                                                                  |       | 10,000             |       | 10,000                |       |
| Total  current liabilities                                                                                   |       | 54,649             |       | 51,934                |       |
|                                                                                                         |       |               |       |                  |       |
| Bonds  payable                                                                                               |       | 364,529            |       | 365,060               |       |
| Other                                                                                                        |       | 168                |       | 141                   |       |
| Total  liabilities                                                                                           |       | $                  | 419,346    |                  | $          | 417,135 |   |
|                                                                                                         |       |               |       |                  |       |
| Member’s  equity:                                                                                       |       |               |       |                  |       |
| Common  stock, $1 par value-10 shares authorized, none issued or outstanding                                 |       | $                  | —     |                  | $          | — |   |
| Contributed  capital                                                                                         |       | 56,893             |       | 56,873                |       |
| Member’s  deficit                                                                                       |       | (14,201            | )          | (8,468                | )          |
| Total member’s  equity                                                                                  |       | 42,692             |       | 48,405                |       |
| Total  liabilities and member’s equity                                                                  |       | $                  | 462,038    |                  | $          | 465,540 |   |

 

See notes to condensedconsolidated financial statements.

The CondensedConsolidated Balance Sheet at December 31, 2004 has been derived from theaudited consolidated financial statements at that date.

 

2

----

 

**AES REDOAK, L.L.C. AND SUBSIDIARYAN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF THE AES CORPORATIONCondensedConsolidated Statement of Changes in Member’s Capital (Deficit)Period from December 31, 2004 through March 31, 2005*(dollars in thousands)(Unaudited)***

 
| ** **                                                     | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                     | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                                           |       |             |       |                    |       |            |       |        |       |   |   |
| BALANCE DECEMBER 31,  2004                                |       | —           |       | $                       | —     |            | $          | 56,873      |       | $ | (8,468 | ) | $ | 48,405 |   |
| Contributed  capital – stock options and restricted stock |       | —           |       | —                  |       | 20              |       | —      |       | 20 |   |
| Net loss                                                       |       | —           |       | —                  |       | —          |       | (5,733      | )          | (5,733 | ) |
| BALANCE MARCH 31,  2005                                   |       | —           |       | $                       | —     |            | $          | 56,893      |       | $ | (14,201 | ) | $ | 42,692 |   |

 

See notes to condensedconsolidated financial statements.

 

3

----

 

**AES REDOAK, L.L.C. AND SUBSIDIARYAN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF THE AES CORPORATIONCondensedConsolidated Statements of Cash Flows for the Three Months EndedMarch 31, 2005 and 2004*(dollars in thousands)(Unaudited)***

 
| ** **                                                | ** ** | **Three months  Ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                | ** ** | **2004** | ** ** |
|                                                      |       |                                    |       |   |   |
| **OPERATING  ACTIVITIES:**                                |       |                                    |       |   |   |
| Net loss                                                  |       | $                                       | (5,733     | ) | $ | (4,854 | ) |
| Amortization  of deferred financing costs                 |       | 203                                     |       | 203 |   |
| Depreciation                                              |       | 2,985                                   |       | 2,851 |   |
| Loss on  disposal of assets                               |       | 60                                      |       | — |   |
| Change in                                                 |       |                                    |       |   |   |
| Accounts  receivable - trade                              |       | 419                                     |       | (19 | ) |
| Receivable -  from affiliates                             |       | (12                                     | )          | 51 |   |
| Prepaid  expenses                                         |       | 135                                     |       | (190 | ) |
| Other assets                                              |       | —                                  |       | (37 | ) |
| Accounts  payable                                         |       | 1,389                                   |       | 2,247 |   |
| Accrued  liabilities                                      |       | 549                                     |       | 798 |   |
| Accrued  interest                                         |       | (3                                      | )          | (2 | ) |
| Payable to  affiliates                                    |       | 139                                     |       | 17 |   |
| Other                                                     |       | 27                                      |       | 24 |   |
|                                                      |       |                                    |       |   |   |
| Net cash  provided by operating activities                |       | 158                                     |       | 1,089 |   |
|                                                      |       |                                    |       |   |   |
| **INVESTING  ACTIVITIES:**                                |       |                                    |       |   |   |
| Payments for  capital additions                           |       | (1,699                                  | )          | (653 | ) |
| Payments  under long-term spare parts agreement and other |       | (365                                    | )          | (1,523 | ) |
| Restricted  cash                                          |       | 2,292                                   |       | 1,444 |   |
|                                                      |       |                                    |       |   |   |
| Net cash provided  by (used in) investing activities      |       | 228                                     |       | (732 | ) |
|                                                      |       |                                    |       |   |   |
| **FINANCING  ACTIVITIES:**                                |       |                                    |       |   |   |
| Payment of  principal on bonds payable                    |       | (380                                    | )          | (392 | ) |
| Contributions  from parent                                |       | 20                                      |       | 23 |   |
|                                                      |       |                                    |       |   |   |
| Net cash  used in financing activities                    |       | (360                                    | )          | (369 | ) |
|                                                      |       |                                    |       |   |   |
| **NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS** |       | 26                                      |       | (12 | ) |
|                                                      |       |                                    |       |   |   |
| **CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD**       |       | 5                                       |       | 38 |   |
| **CASH AND  CASH EQUIVALENTS, END OF PERIOD**             |       | $                                       | 31         |   | $ | 26 |   |
|                                                      |       |                                    |       |   |   |
| **SUPPLEMENTAL  DISCLOSURE:**                             |       |                                    |       |   |   |
| Interest  paid                                            |       | $                                       | 8,167      |   | $ | 8,278 |   |
| Liabilities  accrued for capital additions                |       | $                                       | 855        |   | $ | 236 |   |

 

See notes to condensedconsolidated financial statements.

 

4

----

 

**AESRED OAK, L.L.C. AND SUBSIDIARYAN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF THE AES CORPORATIONNotes to CondensedConsolidated Financial Statements**

 

**1.****                                      ORGANIZATION**

 

**General**

** **

AES Red Oak, L.L.C. (the “Company”)is a Delaware limited liability company formed on September 13,1998, to develop, construct, own, lease, operate and maintain a gas-firedelectric generating power plant in the Borough of Sayreville, Middlesex County,New Jersey and manage the production of electric generating capacity, ancillaryservices and energy at the Company’s facility. The Company reached provisional acceptanceon August 11, 2002, risk transfer on August 13, 2002, and took theposition that the Company was commercially available on September 1,2002.  Williams Power Company, Inc.,(“Williams Energy”) disputed the September 1, 2002 commercial operation dateand informed the Company that it recognized commercial availability of thefacility as of September 28, 2002. On November 4, 2003, a settlement was reached and a commercialoperation date of September 28, 2002 was agreed upon. Since the Company’scommercial operation date, its sole business is the ownership, leasing andoperation of the project.

 

Our facility was initiallydesigned, engineered, procured and constructed for the Company by WashingtonGroup International, Inc. (“WGI”) (as the successor contractor) on afixed-price, turnkey basis. On May 14, 2001, WGI filed a plan ofreorganization along with voluntary petitions to restructure under Chapter 11of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District ofNevada in Reno (the “Bankruptcy Court”). As a result of WGI’s bankruptcyfiling, on June 20, 2001 the Company made a demand on the Raytheon Company(“Raytheon”) to perform its obligations under a guarantee which Raytheon hadgiven the Company of WGI’s performance obligations under the constructionagreement and Raytheon became responsible for the construction of the Company’sfacility.  As discussed above,provisional acceptance has been granted and the facility has commencedcommercial operations, however, Raytheon must perform certain agreed uponcompletion items in order to obtain final acceptance. Raytheon gave notice offinal acceptance on July 22, 2003 based on its July 8, 2003performance test.  On July 31, 2003,the Company received a letter from the project’s independent engineer statingthat it could not support Raytheon’s claim of final acceptance and it did notconsider the July 8, 2003 performance test valid.  In making this assessment, the independentengineer cited, among other reasons, (i) modifications made to certainequipment in performance of the July 8 performance test which wouldadversely impact the operations of the plant and other pieces of equipment and (ii) Raytheon’sfailure to demonstrate compliance with guaranteed emissions limits.  On August 1, 2003, the Company rejectedRaytheon’s claim of final acceptance. This rejection was based upon Raytheon’s failure to meet the conditionsfor final acceptance provided for in the Engineering, Procurement andConstruction Services Agreement (“EPC contract”). On August 7, 2003, theCompany received a response from Raytheon in which Raytheon claims that theCompany’s rejection of the final acceptance is invalid and improper.  The Company and Raytheon have filedcomplaints against each other.  See Note6.

 

Siemens Westinghouse PowerCorporation provides combustion turbine maintenance services and spare partswith respect to the turbines for the Company’s facility under a maintenanceservices agreement for an initial term of 16 years from the date of executionof the agreement or after the twelfth scheduled outage for a turbine, whicheveroccurs first, unless the Company exercises its right to cancel the agreementafter the first major outage of the turbines. The estimated timeframe for thecompletion of the first major outages is 2011.

 

The Company has entered intoa Power Purchase Agreement for a term of 20 years under which Williams Energyhas committed to purchase all of the net capacity, fuel conversion andancillary services of its facility. Net capacity is the maximum amount ofelectricity generated by the Company’s facility net of electricity used at itsfacility. Fuel conversion services consist of the combustion of natural gas inorder to generate electric energy. Ancillary services consist of servicesnecessary to support the transmission of capacity and energy. Williams Energyis obligated to supply the Company with all natural gas necessary

 

5

----

 

to provide net capacity, fuel conversionservices and ancillary services under the Power Purchase Agreement. During theterm of the Power Purchase Agreement, substantially all of the Company’soperating revenues will be derived from payments made under the Power PurchaseAgreement. Under certain limited circumstances, Williams Energy has the rightto terminate the Power Purchase Agreement.

 

**OrganizationalStructure**

** **

All of the equity interestsin the Company are owned by AES Red Oak, Inc., a wholly owned subsidiaryof The AES Corporation (“AES”). AES is a leading global power company, with2004 sales of $9.5 billion. AES’s generating assets include interests in 120facilities in 27 countries totaling approximately 44 gigawatts of capacity. Its30,000 people are committed to operational excellence and meeting the world’sgrowing power needs. Approximately****23% of AES’s revenues come from businesses in NorthAmerica, 17% from the Caribbean, 41% from South America, 11% from Europe andAfrica, and 8% from Asia.****

 

AES Red Oak, Inc.currently has no operations outside of its activities in connection with itsproject and does not anticipate undertaking any unrelated operations. AES RedOak, Inc. also owns all of the equity interests in AES Sayreville, L.L.C.,(“AES Sayreville”) which provides development, construction management, and operationsand maintenance services to us. AES Sayreville has no operations outside of itsactivities in connection with its operations. AES Red Oak, Inc. has noassets other than its membership interests in the Company and AES Sayreville.The AES Corporation supplies AES Sayreville with personnel and servicesnecessary to carry out its obligations to us.

 

The Company also owns all ofthe equity interests in AES Red Oak Urban Renewal Corporation (“AES URC”),which was organized as an urban renewal corporation under New Jersey law sothat portions of its project can be designated as redevelopment areas orprojects in order to provide certain real estate tax and development benefitsfor its project. AES URC has no operations outside of its activities in connectionwith the Company’s operations.

 

**2.****                                      BASISOF PRESENTATION**

 

In the Company’s opinion, all adjustmentsnecessary for a fair presentation of the unaudited results of operations forthe interim periods presented herein are included. All such adjustments includeaccruals of a normal recurring nature. Certain reclassifications have been madeto prior-period amounts to conform to the 2005 presentation. The results ofoperations for the three-month periods presented herein are not necessarilyindicative of the results of operations to be expected for the full year orfuture periods.

 

These financial statements have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America for interim financial information and with the instructionsto Form 10-Q and Regulation S-X. Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles (“GAAP”) for complete financial statements. Theaccompanying condensed consolidated financial statements are unaudited and theyshould be read in conjunction with the audited financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2004.

 

**3.**                                      **CONCENTRATION OF CREDIT RISK IN WILLIAMS ENERGY AND AFFILIATES**

 

Williams Energy is currently the Company’ssole customer for purchases of capacity, ancillary services, and energy and itssole source for fuel.  Williams Energy’spayments under the Power Purchase Agreement are expected to provide all of theCompany’s operating revenues during the 20 year-term of the Power PurchaseAgreement.  It is unlikely that theCompany would be able to find another purchaser or fuel source on similar termsfor its facility if Williams Energy were not performing under the PowerPurchase Agreement.  Any material failureby Williams Energy to make capacity and fuel conversion payments or to supplyfuel under the Power Purchase Agreement would have a severe impact on theCompany’s operations, and may result in a default on the Company’s debt.  The payment obligations of Williams

 

6

----

 

Energy under the Power Purchase Agreement areguaranteed by The Williams Companies, Inc. The payment obligations of The Williams Companies, Inc. under theguaranty are capped at an amount equal to approximately $510 million.  Beginning on January 1 of the first fullyear after the commercial operation date, this guaranty cap is to be reducedsemiannually by a fixed amount which is based on the amortization of theCompany’s senior secured bonds during the applicable semiannual period. As of March 31,2005, the guaranty was capped at $501.4 million.

 

The minimum capacitypayments provided for under the Power Purchase Agreement have been the Company’sprimary source of operating revenues, representing $11.5 million of totalrevenues of $11.8 million for the three months ending March 31, 2005 and$11.4 million of total revenues of $11.6 million for the three months ended March 31,2004.  The minimum cash flow fromWilliams Energy under the Power Purchase Agreement is approximately $3.8million per month for October through May and $7.9 million per monthfrom June through September.

 

The Company currentlyanticipates that the plant will be dispatched in future periods to a similarrange as it was during the first two years of full operation in 2003 and 2004,and that operating cash flow and operating cash requirements in 2005 will alsobe in a comparable range of the first two years of operation.  The Company also believes that cash flowsfrom the sale of electricity and/or minimum capacity payments under the PowerPurchase Agreement, and funds available to be drawn under the debt servicereserve letter of credit or the power purchase letter of credit, will besufficient to fund operating expenses and debt service costs.

 

The Company’s dependenceupon The Williams Companies, Inc. and its affiliates under the PowerPurchase Agreement exposes the Company to possible loss of revenues and fuel supply,which in turn, could negatively impact its cash flow and financial conditionand may result in a default on its senior secured bonds.  There can be no assurances as to the Company’sability to generate sufficient cash flow to cover operating expenses or itsdebt service obligations in the absence of a long-term power purchase agreementwith Williams Energy.

 

**4.**                                      BONDS PAYABLE

** **

On March 15, 2000, the Company issued$384 million in senior secured bonds for the purpose of providingfinancing for the construction of the facility and to fund, through theconstruction period, interest payments to the bondholders. In September 2000,the Company consummated an exchange offer whereby the holders of the seniorsecured bonds exchanged their privately placed senior secured bonds forregistered senior secured bonds.

 

The senior secured bonds were issued in twoseries: 8.54% senior secured bonds due 2019 (the “2019 Bonds”) in an aggregateprincipal amount of $224 million and 9.20% senior secured bonds due 2029(the “2029 Bonds”) in an aggregate principal amount of $160 million.Principal repayment of the 2019 Bonds commenced with the quarterly payment on August 31,2002. Annual principal repayments on the Bonds are scheduled as follows:

 
| ** **                                           | ** ** | ** **   | ** ** | **(in thousands)** | ** ** |
|------------------------------------------------------|------------|--------------|------------|--------------------|------------|
| **Year**                                             | ** ** | **Interest** | ** ** | **Principal**      | ** ** |
| 2005  (remaining subsequent to March 31, 2005). |       | $            | 24,410     |               | $          | 4,692 |   |
| 2006                                                 |       | 32,111       |       | 7,100              |       |
| 2007                                                 |       | 31,502       |       | 6,106              |       |
| 2008                                                 |       | 30,940       |       | 8,122              |       |
| 2009                                                 |       | 30,117       |       | 12,520             |       |
| Thereafter                                           |       | 287,290      |       | 331,212            |       |
| Total                                                |       | $            | 436,370    |               | $          | 369,752 |   |

 

Principal repayment dates on the 2019 Bondsare February 28, May 31, August 31, and

 

7

----

 

November 30 of each year, with the finalpayment due November 30, 2019. Quarterlyprincipal repayment of the 2029 Bonds does not commence until February 28,2019.  The Company made a principalpayment of $380,000 in February 2005.

 

**5.****                                      POWERPURCHASE AGREEMENT**

 

The Company and WilliamsEnergy have entered into a Power Purchase Agreement for the sale of allcapacity produced by the facility, as well as ancillary services and fuelconversion services. Under the Power Purchase Agreement, Williams Energy hasthe obligation to deliver, on an exclusive basis, all quantities of natural gasrequired by the facility to generate electricity or ancillary services, tostart-up or shut-down the plant, and to operate the facility during any periodother than a start-up, shut-down, or required dispatch by Williams Energy forany reason. The term of the Power Purchase Agreement is 20 years from the firstcontract anniversary date, which is the last day of the month in whichcommercial availability occurred.  Aspart of the arbitration settlement with Williams Energy, described below, theCompany recognizes September 28, 2002 as the commercial availability date.

 

The Company entered intoarbitration with Williams Energy to resolve certain disputes regarding the dateof commercial operation and the proper interpretation of certain provisions ofthe Power Purchase Agreement relating to the amounts claimed by the Company tobe payable by Williams Energy. On November 4, 2003, the Company andWilliams Energy settled this dispute. From the Company’s perspective, the settlement had the economic effectof recognizing a commercial operation date prior to September 28, 2002.The Company is also disputing approximately $1.6 million of merchant price,testing gas and other charges with Williams Energy that the Company contends isowed by Williams Energy. This was not part of the above arbitration.

 

The Company providedWilliams Energy a letter of credit (“Power Purchase Agreement Letter of Credit”)in the amount of $30 million to support specific payment obligations should thefacility not achieve commercial operation by the date required under the PowerPurchase Agreement. Upon the commencement of commercial operations in September 2002,the stated amount of that letter of credit was reduced to $10 million. Therepayment obligations with respect to any drawings under the Power PurchaseAgreement Letter of Credit are a senior debt obligation of the Company.

 

The payment obligations ofWilliams Energy under the Power Purchase Agreement are guaranteed by TheWilliams Companies, Inc.  Thepayment obligations of The Williams Companies, Inc. under the guaranty arecapped at an amount equal to approximately $510 million.  Beginning on January 1 of the first fullyear after the commercial operation date, this guaranty cap is to be reducedsemiannually by a fixed amount which is based on the amortization of theCompany’s senior secured bondsduring the applicable semiannual period. As of March 31, 2005 the guarantywas capped at $501.4 million.

 

Pursuant to Section 18.3of the Power Purchase Agreement, in the event that Standard & Poors orMoody’s rates the long-term senior unsecured debt of The Williams Companies, Inc.lower than investment grade, The Williams Companies, Inc. is required tosupplement The Williams Companies, Inc. guaranty with additionalalternative security that is acceptable to the Company within 90 days after theloss of such investment grade rating. According to published sources, The Williams Companies, Inc.’s longterm senior unsecured debt has been rated below investment grade since 2002 byboth S&P and Moody’s.

 

Due to the downgrade of TheWilliams Companies, Inc. to below investment grade, the Company andWilliams Energy entered into a letter agreement dated November 7, 2002(the “Letter Agreement”), under which Williams Energy agreed to provide theCompany (a) a prepayment of $10 million within five business days afterexecution of the Letter Agreement (the “Prepayment”); (b) alternativecredit support equal to $35 million on or before January 6, 2003 in any ofthe following forms: (i) cash, (ii) letter(s) of credit with theCompany as the sole beneficiary substantially in the form of the Power PurchaseAgreement Letter of Credit, unless mutually agreed to otherwise, or (iii) adirect obligation of the United States Government delivered to a custodialsecurities account as designated by the Company with a maturity of not morethan three years; and (c) replenish any portion of the alternative creditsupport that is drawn, reduced, cashed, or redeemed, at any time, with an equalamount of alternative credit support.  Inthe Letter

 

8

----

 

Agreement, the Company andWilliams Energy acknowledged that the posting of such alternative creditsupport and Williams Energy’s agreement and performance of the requirements of(a), (b), and (c), as set forth in the immediately preceding sentence, would bein full satisfaction of Williams Energy’s obligations contained in Section 18.3of the Power Purchase Agreement.  In theLetter Agreement, the Company and Williams Energy expressly agreed that theposting of the Prepayment or any alternative credit support either now or inthe future or any other terms set forth in the Letter Agreement is not intendedto and did not modify, alter, or amend in any way, the terms and conditions orrelieve The Williams Company, Inc. from any obligations it has under itsguaranty of the payment obligations of Williams Energy under the Power PurchaseAgreement.  The guaranty remains in fullforce and effect and the Company retains all of its rights and remediesprovided by that guaranty.

 

Under the terms of theLetter Agreement, the Company is obligated to return the Prepayment to WilliamsEnergy upon the earlier of (i) The Williams Companies, Inc. regainingits investment grade rating or Williams Energy providing a substitute guarantyof investment grade rating; (ii) the beginning of Contract Year 20; or (iii) theposting of alternative credit support by Williams Energy as set forthbelow.  In the case of items (i) and(iii) above, except to the extent, in the case of item (iii), WilliamsEnergy elects to have all or a portion of the Prepayment make up a combinationof the alternative credit support required to be posted pursuant to Section 18.3(b) ofthe Power Purchase Agreement, Williams Energy shall have the right to recoupthe Prepayment by set-off of any and all amounts owing to the Company under thePower Purchase Agreement beginning no earlier than the June in thecalendar year after the occurrence of item (i) or (iii) andcontinuing thereafter until the Prepayment has been fully recovered.  In the case of item (ii) above, WilliamsEnergy shall have the right to immediately set-off all amounts owing to theCompany under the Power Purchase Agreement after the occurrence of item (ii) andcontinuing thereafter until the Prepayment has been fully recovered.  Except to the extent Williams Energy electsto include the Prepayment as part of the alternative credit support, the amountof alternative credit support posted by Williams Energy pursuant to the LetterAgreement shall be initially reduced by the amount of the Prepayment, andWilliams Energy shall thereafter increase the alternative credit supportproportionately as Williams Energy recoups the Prepayment set-off on thepayment due date of amounts owing to the Company.

 

If the Company does not returnthe Prepayment to Williams Energy as set forth in the preceding paragraph, thenthe Company shall be considered in default under the Letter Agreement andWilliams Energy shall be entitled to enforce any and or all of its contractualrights and remedies as set forth in the Power Purchase Agreement, including,but not limited to, drawing on the Letter of Credit previously posted by theCompany in favor of Williams Energy.

 

Williams Energy made thePrepayment on November 14, 2002 and provided an additional $25 million ofcash to the Company on January 6, 2003 as the alternative creditsupport.  As allowed by the LetterAgreement, Williams elected to have the $10 million Prepayment included as partof the alternative credit support. On September 24, 2004, Williams Energyposted a letter of credit and the Company returned the $25 million ofalternative credit support. In the event that The Williams Companies, Inc.regains and maintains its investment grade status,provides a substitute guaranty of investment grade rating, or posts a letter ofcredit, the Company will be required to return the remaining $10 millionalternative credit support to Williams Energy in accordance with the terms ofthe Letter Agreement as described above. Williams Energy has notified the Company that it intends to post aletter of credit for the remaining $10 million in June 2005. As of May 13,2005, the Company had cash balances of approximately $44.4 million.  See “Item 2-Managements Discussion and Analysis ofFinancial Condition and Results of Operations-Liquidity and Capital Resources”.

 

**6.****                                          COMMITMENTSAND CONTINGENCIES**

 

*Construction Agreement*- The Company entered into an Agreement for Engineering, Procurement andConstruction (EPC) services, dated as of October 15, 1999 (the “EPC Agreement”),between the Company and WGI (as the successor contractor), as amended for thedesign, engineering, procurement, site preparation and clearing, civil works,construction, start-up, training and testing and to provide all materials andequipment (excluding operational spare parts), machinery, tools, construction

 

9

----

 

fuels, chemicalsand utilities, labor, transportation, administration and other services anditems (collectively and separately, the “services”) of the facility. Under aguaranty in the Company’s favor, effective as of October 15, 1999, all ofWGI’s obligations under the EPC Agreement are irrevocably and unconditionallyguaranteed by Raytheon. In 2001, as a result of WGI’s bankruptcy filing, theCompany made a demand on Raytheon to perform its obligations under the Raytheonguaranty and WGI, Raytheon and the Company entered into agreements pursuant towhich Raytheon became responsible for the construction of the facility*.*

 

On August 26, 2004, the Company drew downapproximately $30.3 million under a letter of credit posted by Raytheonpursuant to the terms of the EPC Agreement. Prior to this date, the Company haddrawn $544,000 on this letter of credit. The Company believes that Raytheon substantiallybreached the EPC Agreement, due, among other things, to the facility’s failureto achieve compliance with certain performance tests, and Raytheon’s failure tocomplete other services under the EPC Agreement and certain amendments thereto,including a Settlement Agreement dated August 6, 2002, that purported toresolve disputes over whether Raytheon had achieved Mechanical Completion andProvisional Acceptance. As a result, the Company claims that Raytheon’sbreaches have caused damages in excess of the amount of the letter of credit.Raytheon disputes these claims and has failed and refused to pay costs anddamages to the Company despite the Company’s demands for such payment.

 

On August 27, 2004, Raytheon filed aconstruction lien claim for approximately $30.3 million in Middlesex Countyagainst the real property and improvements owned by the Company under the NewJersey Construction Lien Law.  Among other things, Raytheon claims thereinthat the draw of the Letter of Credit represents a debt to Raytheon owed by theCompany.

 

On October 28, 2004, the Company received acomplaint filed by Raytheon in the State of New York. In the complaint,Raytheon is seeking to recover approximately $30.3 million, which representsthe amount Red Oak drew down on the letter of credit on August 26, 2004,attorneys’ fees and costs, and also to recover up to $110 million of netexpense Raytheon claims to have incurred in good faith under the governingguaranty and construction agreements. The Company filed an answer and counterclaim on December 13, 2004,in which it denied liability to Raytheon, asserted various defenses andcountersued Raytheon for breach of the EPC Agreement and Settlement Agreement,breach of express warranties under the EPC Agreement, and fraudulentmisrepresentation and concealment.  TheCompany claimed damages of not less than $140 million and attorneys’ fees andcosts to the extent allowable.  Raytheonmoved to dismiss the Company’s fraudulent misrepresentation and concealmentclaim and to limit the Company’s damages on January 14, 2005.  The Company filed its opposition to themotion to dismiss and also filed an amended counterclaim on February 18,2005. Thereafter, Raytheon agreed to withdraw its motion to dismiss.  On March 4,2005, Raytheon filed a motion for summary judgment that seeks the return ofapproximately $16.3 million of the Letter of Credit draw.  TheCompany filed its opposition on April 12, 2005, and Raytheon filed a replyon April 25, 2005.  In addition, on April 8,2005, Raytheon renewed its motion to dismiss the fraudulent misrepresentationand concealment claims in the Company’s amended counterclaim and to limit theCompany’s damages.  The Company filed itsopposition to the renewed motion to dismiss on April 29, 2005.  Oral argument on both motions has beenscheduled for May 26, 2005.  Raytheon hasnot yet filed an answer to the amended counterclaim. The Company has recordedthe $30.3 million as a current liability, but has not accrued any additionalamounts with respect to Raytheon’s claims.  The Company believes it hasmeritorious defenses to the claims asserted by Raytheon against it and intendsto defend the lawsuit and pursue its counterclaims vigorously.

 

*LandDevelopment Plan* – The Company entered into anagreement with the Borough of Sayreville by which the Company will develop andimplement a plan to replace trees which were removed during clearing of thefacility site.  The Land Development Planis required for final site approval.  The estimated cost of the plan is approximately $425,000.  The Company is in the process of selecting acontractor to perform the service and no payments have been made as of March 31,2005.  On July 23, 2003, the projectwas secured by a letter of credit issued by Union Bank of California for$425,000 with the Borough of Sayreville as the beneficiary.  This irrevocable standby letter of credit hadan expiration

 

10

----

 

date of June 30, 2004, but was automaticallyextended for another one-year period. On August 19, 2004, AES secured aperformance bond for $539,493 relating to the tree replacement and other siteimprovements. This bond replaces the previous letter of credit and representsthe amount potentially due if there is a failure of AES Red Oak, LLC to takeaction regarding the plan.

 

**7.****                                      NEWACCOUNTING PRONOUNCEMENTS**

 

 *ImplicitVariable Interest Entities*.  In March 2005, theFASB issued Staff Position (FSP) No. FIN 46(R)-5,“Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities”. This FSP clarifies that whenapplying the variable interest consolidation model, a reporting enterpriseshould consider whether it holds an implicit variable interest in a variableinterest entity (VIE) or potential VIE. FSP No. FIN46(R)-5 is effective as of April 1, 2005.Management is currently evaluating the effect that adoption of thisinterpretation will have on the Company’s financial position and results ofoperations.

 

***Asset Retirement Obligations***.  In March 2005, the FASBissued FASB Interpretation No. (FIN) 47 “Accounting for Conditional AssetRetirement Obligations, an interpretation of FASB Statement No. 143”,which clarifies the term “conditional asset retirement obligation” as used inSFAS No. 143 “Accounting for Asset Retirement Obligations”. Specifically,FIN 47 provides that an asset retirement obligation is conditional when eitherthe timing and (or) method of settling the obligation is conditioned on afuture event. Accordingly, an entity is required to recognize a liability forthe fair value of a conditional asset retirement obligation if the fair valueof the liability can be reasonably estimated. Uncertainty about the timing and(or) method of settlement of a conditional asset retirement obligation shouldbe factored into the measurement of the liability when sufficient informationexists. This interpretation also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation. FIN 47 is effective for fiscal years ending after December 15,2005. Management is currently evaluating the effect that adoption of thisinterpretation will have on the Company’s financial position and results ofoperations.

*** ***

**8.**                                      RELATED PARTY TRANSACTIONS

** **

Effective March 2000,the Company entered into a 32-year development and constructionmanagement agreement with AES Sayreville, L.L.C. (“Sayreville”), another whollyowned subsidiary of Red Oak, to provide certain support services required bythe Company for the development and construction of the facility. Under thisagreement Sayreville has also provided operations management services for theCompany since the commencement of commercial operation. Minimum amounts payableunder the contract during 2005 were approximately $138,000 per month. Corporatemanagement fees were $.4 million for each of the three-month periods ended March 31,2005 and 2004. Corporate management fees are charged on a monthly basis basedon a fixed amount which is adjusted annually for inflation.

 

AES Sayreville iscompensated for its maintenance and operation services on a cost basis, and italso receives certain management fees which it passes on to The AESCorporation.  For the three-month periodsended March 31, 2005 and 2004 the Company paid AES Sayreville a total of$1.2 million and $1.0 million, respectively, for their services. AES willcontinue to supply Sayreville with the personnel, operational and maintenanceservices necessary to carry out its obligations to the Company.

 

The Company had accountsreceivable from affiliates of $42,000 and $36,000 as of March 31, 2005 andDecember 31, 2004, respectively. The Company had accounts payable to its parent and affiliates of$421,000 and $282,000 as of March 31, 2005 and December 31, 2004,respectively.  Accounts receivable fromaffiliates generally represents charges for certain projects that the Companyhas paid for and invoiced to its affiliates. Accounts payable to parent and affiliates represent general amounts owedto the Company’s parent and affiliates for shared services.

 

11

----

 

**Item 2.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Cautionary Note Regarding Forward-LookingStatements**

 

Some of the statements inthis Form 10-Q, as well as statements made by AES Red Oak, L.L.C. (“theCompany”) in periodic press releases and other public communications,constitute “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Certain,but not necessarily all, of such forward-looking statements can be identifiedby the use of forward-looking terminology, such as “believes,” “estimates,” “plans,”“projects,” “expects,” “may,” “will,” “should,” “approximately,” or “anticipates”or the negative thereof or other variations thereof or comparable terminology,or by discussion of strategies, each of which involves risks and uncertainties.The Company has based these forward-looking statements on its currentexpectations and projections about future events based upon its knowledge offacts as of the date of this Form 10-Q and its assumptions aboutfuture events.

 

All statements other than ofhistorical facts included herein, including those regarding market trends, theCompany’s financial position, business strategy, projected plans and objectivesof management for future operations of the facility, are forward-lookingstatements. Such forward-looking statements involve known and unknown risks,uncertainties and other factors outside of the Company’s control that may causeits actual results or performance to be materially different from any futureresults, performance or achievements expressed or implied by theforward-looking statements. These risks, uncertainties and other factorsinclude, among others, the following:

 

•                  unexpected problems relating to the performance of thefacility,

 

•                  the financial condition of third parties onwhich the Company depends, including in particular, Williams Power Company, Inc.,(“Williams Energy”), formerly Williams Energy Marketing & TradingCompany, as fuel supplier under the power purchase agreement entered into withWilliams Energy for the sale of all electric energy and capacity produced bythe facility, as well as ancillary and fuel conversion services (the “PowerPurchase Agreement”), and The Williams Companies, Inc., as the guarantorof Williams Energy’s performance under the Power Purchase Agreement,

 

•                  delays in, or disputes over, the final completionof the Company’s facility,

 

•                  continued performance by Williams Energy (asguaranteed by The Williams Companies, Inc.) under the Power PurchaseAgreement,

 

•                  the ability of The Williams Companies, Inc.or its affiliates to avoid a default under the Power Purchase Agreement bycontinuing to maintain or provide adequate security to supplement theirguaranty of Williams Energy’s performance under the Power Purchase Agreement,

 

•                  the Company’sability to find a replacement power purchaser on favorable or reasonable terms,if necessary,

 

•                  an adequate merchant market after theexpiration, or in the event of a termination, of the Power Purchase Agreement,

 

•                  capital shortfalls and access to additional capitalon reasonable terms, or in the event that the Power Purchase Agreement isterminated,

 

•                  the possibility that Williams Energy will notrequest that the Company run or “dispatch” the facility as provided under thePower Purchase Agreement,

 

•                  inadequate insurance coverage,

 

12

----

 

•                  unexpected expenses or lower than expected revenues,

 

•                  environmental and regulatory compliance,

 

•                  terrorists acts and adverse reactions to United Statesanti-terrorism activities, and

 

•                  additional factors that are unknown to the Company or beyondthe Company’s control.

 

The Company has noobligation to publicly update or revise any forward-looking statement, whetheras a result of new information, future events or otherwise.

 

**General**

 

The Company is a Delaware limited liabilitycompany formed on September 13, 1998 to develop, construct, own, operateand maintain the Company’s facility. The Company was dormant until March 15,2000, the date of the sale of the Company’s senior secured bonds. The Companyobtained $384 million of project financing from the sale of the senior securedbonds.

 

The Company reached provisional acceptance onAugust 11, 2002, risk transfer on August 13, 2002, and in asettlement with Williams Energy reached on November 4, 2003, a commercialoperation date of September 28, 2002 was agreed upon.

 

**Liquidity and Capital Resources**

 

Under the Power PurchaseAgreement with Williams Energy, the Company is eligible to receive variableoperations and maintenance payments, total fixed minimum capacity payments,energy exercise fee payments (each as defined in the Power Purchase Agreement)and other payments for the delivery of fuel conversion, capacity and ancillaryservices. During 2003 the Pennsylvania-New Jersey-Maryland market, into whichthe Company’s generation is distributed, experienced a general decline in theamount paid for electricity. There was also a marked increase in the cost ofnatural gas. As a result, Williams Energy dispatched the Company’s facility ona very limited basis. The Company’s facility was called on to generate only 21%of the year in 2004 and only 14% of the year in 2003.  Accordingly, the minimum capacity paymentsprovided for under the Power Purchase Agreement have been the Company’s primarysource of operating revenues, representing $11.5 million of total revenues of$11.8 million for the three months ending March 31, 2005 and $11.4 millionof total revenues of $11.6 million for the three months ended March 31,2004.  The minimum cash flow fromWilliams Energy under the power purchase agreement is approximately $3.8million per month for October through May and $7.9 million per monthfrom June through September. The Company’s restricted cash balancefluctuates seasonally due to these payment terms. The Company is entitled touse the proceeds from the Prepayment from Williams Energy for operations asneeded, but will be required to return these funds to Williams Energy asdiscussed below.

 

The Company currentlyanticipates that the facility will be dispatched in future periods to a similarrange as it was during the first two years of full operation in 2003 and 2004,and that operating cash flow and operating cash requirements in 2005 will alsobe in a comparable range of the first two years of operation.  The Company also believes that cash flowsfrom the sale of electricity and/or minimum capacity payments under the PowerPurchase Agreement, and funds available to be drawn under the debt servicereserve letter of credit or the power purchase letter of credit, will besufficient to fund operating expenses and debt service costs.

 

The Company has providedWilliams Energy a $10 million letter of credit under the Power PurchaseAgreement, which The Company refers to as the power purchase letter of credit,to support specific payment obligations under the Power Purchase Agreement. Therepayment obligations with respect to any drawings under the power purchaseletter of credit are the Company’s senior debt obligation.

 

Due to the downgrade of TheWilliams Companies, Inc.’s debt to below investment grade, the WilliamsCompanies, Inc. is required to supplement The Williams Companies, Inc.guaranty with additional

 

13

----

 

alternative security that is acceptable to us.  Since The Williams Companies, Inc. debtrating fell below investment grade in 2002, Williams Energy has provided theCompany with $35 million of cash as alternate credit support.  Williams Energy made the Prepayment on November 14,2002 and provided an additional $25 million of cash to the Company on January 6,2003 as the alternative credit support. As allowed by the Letter Agreement, Williams elected to have the $10million Prepayment included as part of the alternative credit support. On September 24,2004, Williams Energy posted a letter of credit and the Company returned the$25 million of alternative credit support. In the event that The WilliamsCompanies, Inc. regains and maintains itsinvestment grade status, provides a substitute guaranty of investment graderating, or posts a letter of credit, the Company will be required to return theremaining $10 million alternative credit support to Williams Energy inaccordance with the terms of the Letter Agreement as described above.  Williams Energy has notified the Company thatit intends to post a letter of credit for the remaining $10 million in June 2005.

 

As of March 31, 2005,approximately $370 million aggregate principal amount of senior secured bonds,issued in two tranches, were outstanding. Quarterly principal repayments on the 2019 Bonds commenced on August 31,2002 and are due on February 28, May 31, August 31, and November 30of each year.  Quarterly principalrepayment of the 2029 Bonds does not commence until February 28,2019.  The Company has provided thecollateral agent with a debt service reserve letter of credit in an initialstated amount of $22.0 million which the collateral agent may draw upon if theCompany fails to meet the Company obligations under the senior secured bonds.

 

The Company entered into anagreement with the Borough of Sayreville by which the Company will develop andimplement a plan to replace trees which were removed during clearing of thefacility site.  The Land Development Planis required for final site approval.  The estimated cost of the plan is approximately $425,000.  The Company is in the process of selecting acontractor to perform the service and no payments have been made as of March 31,2005.  On July 23, 2003, the projectwas secured by a letter of credit issued by Union Bank of California for$425,000 with the Borough of Sayreville as the beneficiary.  This irrevocable standby letter of credit hadan expiration date of June 30, 2004, but was automatically extended foranother one-year period. On August 19, 2004, AES secured a performancebond for $539,493 relating to the tree replacement and other site improvements.This bond replaces the previous letter of credit and represents the amountpotentially due if there is a failure of AES Red Oak, LLC to take actionregarding the plan.

 

For the three months ended March 31,2005, the Company incurred costs related to capital additions of approximately$1.7 million, including general improvements of the facility,EPC related costs and planned maintenance outages. The Company expects to incurapproximately $1.3 million of such costs for the remainder of 2005.

 

Under the construction agreement, the Companywas entitled to retain certain amounts from each scheduled payment until afterfinal acceptance by the Company of the facility unless Raytheon posted a letterof credit in the amount of payments that would otherwise be retained.  On August 26, 2004, the Companydrew down approximately $30.3 million under a letter of credit posted byRaytheon pursuant to the terms of the EPC Agreement. Prior to this date, theCompany had drawn $544,000 on this letter of credit. The Company believes thatRaytheon substantially breached the EPC Agreement, due, among other things, tothe facility’s failure to achieve compliance with certain performance tests,and Raytheon’s failure to complete other services under the EPC Agreement andcertain amendments thereto, including a Settlement Agreement dated August 6,2002, that purported to resolve disputes over whether Raytheon had achievedMechanical Completion and Provisional Acceptance. As a result, the Companyclaims that Raytheon’s breaches have caused damages in excess of the amount ofthe letter of credit. Raytheon disputes these claims and has failed and refusedto pay costs and damages to the Company despite the Company’s demands for suchpayment.

 

On October 28, 2004,the Company received a complaint filed by Raytheon in the State of New York. Inthe complaint, Raytheon is seeking to recover approximately $30.3 million,which represents the amount Red Oak drew down on the letter of credit on August 26,2004, attorneys’ fees and costs, and also to recover up to $110 million of netexpense Raytheon claims to have incurred in good faith under the

 

14

----

 

governing guaranty and construction agreements.  The Company filed an answer and counterclaimon December 13, 2004, in which it denied liability to Raytheon, assertedvarious defenses and countersued Raytheon for breach of the EPC Agreement andSettlement Agreement, breach of express warranties under the EPC Agreement, andfraudulent misrepresentation and concealment. The Company claimed damages of not less than $140 million and attorneys’fees and costs to the extent allowable. Raytheon moved to dismiss the Company’s fraudulent misrepresentation andconcealment claim and to limit the Company’s damages on January 14,2005.  The Company filed its oppositionto the motion to dismiss and also filed an amended counterclaim on February 18,2005. Thereafter, Raytheon agreed to withdraw its motion to dismiss.  On March 4,2005, Raytheon filed a motion for summary judgment that seeks the return ofapproximately $16.3 million of the Letter of Credit draw.  The Companyfiled its opposition on April 12, 2005, and Raytheon filed a reply on April 25,2005.  In addition, on April 8,2005, Raytheon renewed its motion to dismiss the fraudulent misrepresentationand concealment claims in the Company’s amended counterclaim and to limit theCompany’s damages.  The Company filed itsopposition to the renewed motion to dismiss on April 29, 2005.  Oral argument on both motions has beenscheduled for May 26, 2005.  Raytheon hasnot yet filed an answer to the amended counterclaim. The Company has recordedthe $30.3 million as a current liability, but has not accrued any additionalamounts with respect to Raytheon’s claims.  The Company believes it hasmeritorious defenses to the claims asserted by Raytheon against it and intendsto defend the lawsuit and pursue its counterclaims vigorously.

 

Since the Company depends onWilliams Energy for both revenues and fuel supply under the Power PurchaseAgreement, if Williams Energy were to terminate or default under the PowerPurchase Agreement, there would be a severe negative impact to the Company’scash flow and financial condition which could result in a default on theCompany’s senior secured bonds.  Due tothe current power pool prices, the Company would expect that if the Companywere required to seek alternate purchasers of its power in the event of adefault of Williams Energy, even if the Company was successful in findingalternate revenue sources, any such alternate revenue sources would besubstantially below the amounts that would have been otherwise payable pursuantto the Power Purchase Agreement. There can be no assurance as to the Company’sability to generate sufficient cash flow to cover operating expenses or theCompany’s debt service obligations in the absence of a long-term power purchaseagreement with Williams Energy.

 

In addition to the factorsdiscussed above, and/or the other factors listed under the “Cautionary NoteRegarding Forward-Looking Statements,” if a working capital facility continuesto be unavailable, the Company could experience a negative impact on its cashflow and financial condition, which may make it necessary to draw upon itsletters of credit.

 

The following discussionpresents certain financial information for the three months ended March 31,2005 and 2004.

 

**Energy Revenues**

 

The Company generates energy revenues underthe Power Purchase Agreement with Williams Energy. During the 20-yearterm of the agreement, the Company expects to sell electric energy and capacityproduced by the facility, as well as ancillary and fuel conversion services.Under the Power Purchase Agreement, the Company also generates revenues frommeeting (1) base electrical output guarantees and (2) heat raterebates through efficient electrical output.

 

Upon its expiration, or in the event that thePower Purchase Agreement is terminated prior to its 20-year term, theCompany would seek to generate energy revenues from the sale of electric energyand capacity into the merchant market or under new short- or long-term powerpurchase or similar agreements. Due to recent declines in pool prices, however,the Company would expect that even if it were successful in finding alternaterevenue sources, any such alternate revenues would be substantially below theamounts that would have been otherwise payable pursuant to the Power PurchaseAgreement. There can be no assurances as to whether such efforts would besuccessful.

 

15

----

 

**Operating Expenses**

 

Under an agreement with AES Sayreville,L.L.C., a wholly-owned subsidiary of AES Red Oak, Inc. (“Red Oak”), whichis a wholly-owned subsidiary of The AES Corporation (“AES”), the Company isrequired to reimburse all operator costs on a monthly basis. Operator costsgenerally consist of all direct costs and overhead associated with running thefacility. Additionally, an operator fee of approximately $400,000, subject toannual adjustment, is payable on each bond payment date.

 

**Performance Guarantees**

 

*Electrical Output*

 

Under the EPC Agreement, ifthe average net electrical output of the Company’s facility at provisionalacceptance or interim acceptance, whichever is the earlier to occur, is lessthan the electrical output guarantee, then Raytheon must pay us, as a rebateand not as liquidated damages, for each day during the interim period, anamount equal to $0.22 per day for each kilowatt by which the average netelectrical output is less than the electrical output guarantee.  During performance testing, the Company’soutput was calculated to be 13,370 kilowatts less than the electrical outputguarantee.  Accordingly, the Company’sdaily charge for this amount has been calculated at $2,941.40 per day. Raytheonpaid the Company this amount until their notice of final acceptance date of July 22,2003, but the Company is disputing this claim of final acceptance and contendthat these amounts should continue to be paid until the final acceptance date.

 

Upon final acceptance, ifthe average net electrical output of the Company’s facility during thecompleted performance test is less than the electrical output guarantee, thenRaytheon must pay us, as a bonus, an amount equal to $520 for each kilowatt bywhich the average net electrical output is less than the guaranty minus anyinterim rebates paid or to be paid by Raytheon.

 

*Heat Rate Guarantees*

 

If the average net heat rateof the Company’s facility at provisional acceptance or interim acceptance, ifhaving occurred before final acceptance, exceeds the heat rate guarantee, thenRaytheon must pay us, as a rebate and not as liquidated damages, for each dayduring the interim period, an amount equal to $46 per day for each BTU/KwH bywhich the measured net heat rate is greater than the heat rate guarantee.

 

Upon final acceptance, ifthe net heat rate of the Company’s facility during the completed performancetest exceeds the heat rate guarantee, then Raytheon will pay us, as a rebate, alump sum amount equal to $110,000 for each BTU/KwH by which the measured heatrate is greater than the heat rate  minus any interim rebates paid or tobe paid by Raytheon.

 

The Company has not invoicedRaytheon for the three month periods ended March 31, 2004 and 2005, forelectrical output and heat rate rebates. As of March 31, 2005, Raytheonowed approximately $65,000 in rebates for amounts invoiced in 2003.

 

**Recent and New Accounting Pronouncements**

 

Implicit Variable InterestEntities.  InMarch 2005, the FASB issued Staff Position (FSP) No. FIN 46(R)-5, “Implicit Variable Interests under FASBInterpretation No. 46 (revised December 2003), Consolidation ofVariable Interest Entities”. This FSP clarifies that when applying the variableinterest consolidation model, a reporting enterprise should consider whether itholds an implicit variable interest in a variable interest entity (VIE) orpotential VIE. FSP No. FIN 46(R)-5is effective as of April 1, 2005. Management is currently evaluating theeffect that adoption of FSP No. FIN 46(R)-5will have on the Company’s financial position and results of operations.

 

16

----

 

***Asset Retirement Obligations***.  In March 2005, the FASBissued FASB Interpretation No. (FIN) 47 “Accounting for Conditional AssetRetirement Obligations, an interpretation of FASB Statement No. 143”,which clarifies the term “conditional asset retirement obligation” as used inSFAS No. 143 “Accounting for Asset Retirement Obligations”. Specifically,FIN 47 provides that an asset retirement obligation is conditional when eitherthe timing and (or) method of settling the obligation is conditioned on afuture event. Accordingly, an entity is required to recognize a liability forthe fair value of a conditional asset retirement obligation if the fair valueof the liability can be reasonably estimated. Uncertainty about the timing and(or) method of settlement of a conditional asset retirement obligation shouldbe factored into the measurement of the liability when sufficient informationexists. This interpretation also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation. FIN 47 is effective for fiscal years ending after December 15,2005. Management is currently evaluating the effect that adoption of thisinterpretation will have on the Company’s financial position and results ofoperations.

*** ***

**Results of Operations**

 

Under the Power PurchaseAgreement with Williams Energy, the Company is eligible to receive variableoperations and maintenance payments, total fixed payments, energy exercise fees(each as defined in the Power Purchase Agreement) and other payments for thedelivery of fuel conversion, capacity and ancillary services. The Company’sfacility was dispatched at a minimum level in each of the quarters ended March 31,2005 and 2004. Accordingly, the minimum capacity payments have been theCompany’s primary source ofoperating revenues.

 

***Forthe Three Months Ended March 31, 2005 and 2004***

 

Operating revenues were$11.8 million and $11.6 million for the three months ended March 31, 2005and March 31, 2004, respectively. These amounts include fixed payments of $11.5 million and $11.4 millionfor the quarters ending March 31, 2005 and 2004, respectively. Theremaining amount of revenue relates to variable revenue that the Companyreceives when its facility is dispatched and ancillary services. The Companyhas no control over when its facility is dispatched, as that decision is madeby Williams Energy based on several factors including market conditions.

 

The fuel conversion volumerebate was $1.6 million and $1.0 million for the three months ended March 31,2005 and March 31, 2004, respectively. This cost represents a charge paidto Williams Energy under the Power Purchase Agreement based upon utilization ofthe facility. The increase in the expense during the current three monthperiod, compared to same period last year, is due to the utilization factor forthe prior twelve-month period exceeding 20%.

 

Corporate management feeswere $.4 million for each of the three-month periods ended March 31, 2005and March 31, 2004. Corporate management fees are charged on a monthlybasis based on a fixed amount that is adjusted annually for inflation.

 

Other operating expenses,which represent the reimbursement of operating and maintenance expenses paid toAES Sayreville, L.L.C., were $3.1 million and $2.6 million for the three monthsended March 31, 2005 and March 31, 2004, respectively. The increasein the current-year period relates to higher maintenance costs and salaries andbenefits.

 

General and administrativeexpenses were $.3 million and $.2 million for the three months ended March 31,2005 and March 31, 2004, respectively. The increase was primarily due tohigher legal and audit fees.

 

Total other income (expense)was $(8.4) million and $(8.7) million for the three months ended March 31,2004 and 2003, respectively, and was primarily comprised of interest expense,interest income, and letter of credit fees. Interest income was $0.2 millionhigher during the current three-month period, as compared to the same periodlast year, due to higher interest rates and higher average cash balances.

 

17

----

 

**Concentration of Credit Risk**

 

Williams Energy is currentlythe Company’s sole customer for purchases of capacity, ancillary services, andenergy and its sole source for fuel. Williams Energy’s payments under the Power Purchase Agreement areexpected to provide all of Company’s operating revenues during the term of thePower Purchase Agreement.  It is unlikelythat the Company would be able to find another purchaser or fuel source onsimilar terms for its facility if Williams Energy were not performing under thePower Purchase Agreement.  Any materialfailure by Williams Energy to make capacity and fuel conversion payments or tosupply fuel under the Power Purchase Agreement would have a severe impact onCompany’s operations, and may result in a default on its debt.  The payment obligations of Williams Energyunder the Power Purchase Agreement are guaranteed by The Williams Companies, Inc.  The payment obligations of The WilliamsCompanies, Inc. under the guaranty are capped at an amount equal toapproximately $510 million.  Beginning onJanuary 1 of the first full year after the commercial operation date, thisguaranty cap is to be reduced semiannually by a fixed amount which is based onthe amortization of Company’s senior secured bonds during the applicablesemiannual period. As of March 31, 2005, the guaranty was capped at $501.4million.

 

The Company’s dependenceupon The Williams Companies, Inc. and its affiliates under the PowerPurchase Agreement exposes the Company to possible loss of revenues and fuelsupply, which in turn, could negatively impact its cash flow and financialcondition and may result in a default on its senior secured bonds.  There can be no assurances as to the Company’sability to generate sufficient cash flow to cover operating expenses or itsdebt service obligations in the absence of a long-term power purchase agreementwith Williams Energy.

 

**Critical Accounting Policies**

 

General — The Companyprepares its financial statements in accordance with accounting principlesgenerally accepted in the United States of America. As such, the Company isrequired to make certain estimates, judgments and assumptions that the Companybelieves are reasonable based upon the information available. These estimatesand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the periods presented. The significant accounting policieswhich the Company believes are most critical to understanding and evaluatingCompany’s reported financial results include the following:  Restricted Cash, Revenue Recognition,Property, Plant and Equipment and Contingencies.

 

*Restricted Cash* — The Company hasrecorded the drawdown on the Raytheon letter of credit and the Prepayment fromWilliams Energy as restricted cash. The proceeds from the Raytheon letter ofcredit are deposited in the construction account. The Prepayment from WilliamsEnergy, which the Company is entitled to use for operations as needed, isdeposited in the revenue account.

 

*Revenue Recognition* — The Companygenerates energy revenues under the Power Purchase Agreement with WilliamsEnergy.  During the 20-year term ofthe agreement, the Company expects to sell capacity and electric energyproduced by the facility, as well as ancillary services and fuel conversionservices.  Under the Power PurchaseAgreement, revenues are generated from meeting (1) base electrical outputguarantees and (2) heat-rate rebates through efficient electricaloutput.  Revenues from the sales ofelectric energy and capacity are recorded based on output delivered andcapacity provided at rates as specified under contract terms.  Revenues for ancillary and other services arerecorded when the services are rendered. Amounts that are in dispute arereserved accordingly, based on the probability that they will be realized.

 

Upon its expiration, or inthe event that the Power Purchase Agreement is terminated prior to its 20-yearterm or Williams Energy otherwise fails to perform, the Company would seek togenerate energy revenues from the sale of electric energy and capacity into themerchant market or under new short- or long-term power purchase or similaragreements.  Due to recent declines inpower pool prices, however, the Company

 

18

----

 

would expect that even if it found alternaterevenue sources, any such alternate revenues would be substantially below theamounts that would have been otherwise earned pursuant to the Power PurchaseAgreement.

 

*Property, Plant and Equipment —* Property, plant and equipment is recorded atcost.  Depreciation, after considerationof salvage value, is computed using the straight-line method over the estimateduseful lives of the assets, which range from five to thirty-six years.  Maintenance and repairs are charged toexpense as incurred.  The depreciablelives of the Company’s property, plant and equipment by category are asfollows:

 
| **Description of Asset**            | ** ** | **Depreciable Life** | ** ** | **March 31, 2005** | ** ** |
|-------------------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                          | ** ** | ** **           | ** ** | **(000’s)**        | ** ** |
| Buildings                           |       | 35                   |       |                    | $          | 1,767 |   |
| Vehicles                            |       | 5                    |       |                    | 182        |   |
| Computers                           |       | 6                    |       |                    | 756        |   |
| Furniture  and Fixtures             |       | 10                   |       |                    | 515        |   |
| Combustion  Turbine Generator Parts |       | 9-36                 |       |                    | 53,345     |   |
| Gas Heaters                         |       | 35                   |       |                    | 1,119      |   |
| Spare Parts  Inventory              |       | —               |       |                    | 5,558      |   |
| Plant                               |       | 35                   |       |                    | 366,192    |   |
| Subtotal                            |       |                 |       | 429,434                 |       |
| Accumulated  Depreciation           |       |                 |       | (30,587                 | )          |
| Property,  Plant and Equipment, net |       |                 |       | $                       | 398,847    |   |

 

*Contingencies*

 

On October 28, 2004, the Companyreceived a complaint filed by Raytheon in the State of New York. In the complaint,Raytheon is seeking to recover approximately $30.3 million, which representsthe amount Red Oak drew down on the letter of credit on August 26, 2004,attorneys’ fees and costs, and also to recover up to $110 million of netexpense Raytheon claims to have incurred in good faith under the governingguaranty and construction agreements. The Company filed an answer and counterclaim on December 13, 2004,in which it denied liability to Raytheon, asserted various defenses andcountersued Raytheon for breach of the EPC Agreement and Settlement Agreement,breach of express warranties under the EPC Agreement, and fraudulentmisrepresentation and concealment.  TheCompany claimed damages of not less than $140 million and attorneys’ fees andcosts to the extent allowable.  Raytheonmoved to dismiss the Company’s fraudulent misrepresentation and concealmentclaim and to limit the Company’s damages on January 14, 2005.  The Company filed its opposition to themotion to dismiss and also filed an amended counterclaim on February 18,2005.  Thereafter, Raytheon agreed towithdraw its motion to dismiss.  On March 4, 2005, Raytheonfiled a motion for summary judgment that seeks the return of approximately $16.3 million of the Letter of Creditdraw.  The Company filed its opposition on April 12, 2005, andRaytheon filed a reply on April 25, 2005. In addition, on April 8, 2005, Raytheon renewed its motion todismiss the fraudulent misrepresentation and concealment claims in the Company’samended counterclaim and to limit the Company’s damages.  The Company filed its opposition to therenewed motion to dismiss on April 29, 2005.  Oral argument on both motions has beenscheduled for May 26, 2005.  Raytheon hasnot yet filed an answer to the amended counterclaim. The Company has recordedthe $30.3 million as a current liability, but has not accrued any additionalamounts with respect to Raytheon’s claims.  The Company believes it hasmeritorious defenses to the claims asserted by Raytheon against it and intendsto defend the lawsuit and pursue its counterclaims vigorously.

 

The Company is disputingapproximately $1.6 million of merchant price, testing gas and other chargeswith Williams Energy that the Company contends is owed from Williams. This wasnot part of the arbitration relating to the commercial operation date which wassettled in November, 2003.

 

19

----

 

# **Item 4.** CONTROLSAND PROCEDURES

# ** **

*Evaluationof Disclosure Controls and Procedures.*  Wecarried out an evaluation, under the supervision and with the participation ofour management, including the chief executive officer (“CEO”) and chieffinancial officer (“CFO”), of the effectiveness of our “disclosure controls andprocedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15-d-15 (e) as required byparagraph (b) of the Exchange Act Rules 13a-15 or 15d-15)as of March 31, 2005.  The Company’s management, including the CEOand CFO, is engaged in a comprehensive effort to review, evaluate and improveour controls; however, management does not expect that our disclosure controlsor our internal controls over financial reporting will prevent all errors andall fraud.  A control system, no matter how well designed and operated,can provide only reasonable, not absolute, assurance that the control system’sobjectives will be met.

 

Based upon the controls evaluation performed, the CEO and CFO haveconcluded that as of March 31, 2005, our disclosure controls andprocedures were effective to provide reasonable assurance that materialinformation relating to us and our consolidated subsidiaries is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

*Changes inInternal Controls*.  In the course of ourevaluation of disclosure controls and procedures, management considered certaininternal control areas in which the Company has made and are continuing to makechanges to improve and enhance controls.  Based upon that evaluation, theCEO and CFO concluded that there were no changes in our internal controls overfinancial reporting identified in connection with the evaluation required byparagraph (d) of Exchange Act Rules 13a-15 or 15d-15 thatoccurred during the first quarter ended March 31, 2005, that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

*Compliancewith Section 404 of the Sarbanes Oxley Act of 2002*. Beginning with the year ending December 31, 2006, Section 404 of theSarbanes-Oxley Act of 2002 will require us to include an internal controlreport of management with our annual report on Form 10-K.  Theinternal control report must contain (1) a statement of management’sresponsibility for establishing and maintaining adequate internal controls overfinancial reporting for our Company, (2) a statement identifying theframework used by management to conduct the required evaluation of theeffectiveness of our internal controls over financial reporting, (3) management’sassessment of the effectiveness of our internal controls over financialreporting as of the end of our most recent fiscal year, including a statementas to whether or not our internal controls over financial reporting areeffective, and (4) a statement that our independent auditors have issuedan attestation report on management’s assessment of our internal controls overfinancial reporting.

 

Management developed a comprehensive plan in order to achievecompliance with Section 404 within the prescribed period and to review,evaluate and improve the design and effectiveness of our controls andprocedures on an on-going basis.  Thecomprehensive compliance plan includes (1) documentation and assessment ofthe adequacy of our internal controls over financial reporting, (2) remediationof control weaknesses, (3) validation through testing that controls arefunctioning as documented and (4) implementation of a continuous reportingand improvement process for internal controls over financial reporting. As a result of this initiative, the Company has made and will continue to makechanges from time to time in our internal controls over financial reporting.

 

**PART II.****OTHER INFORMATION**

 

**Item 1.****LEGAL PROCEEDINGS**

See Note6 to the Company’s condensed, consolidated financial statements.

 

**Item 5.****OTHER INFORMATION**

None.

 

20

----

 

**Item 6.****  EXHIBITS**

 

**(a)****          Exhibits**
| 31.1   |   | Certification by Chief Executive Officer Required by Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                          |
| 31.2   |   | Certification by Chief Financial Officer Required by Rule 13a-14(a) or  15d– 14(a) of the Securities Exchange Act of 1934 |
|   |   |                                                                                                                                          |
| 32     |   | Section 1350  Certifications                                                                                                             |

 

21

----

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
| ** **              | **AES  RED OAK, L.L.C.** |
|-------------------------|--------------------------|
|                    |                     |   |
| Date: May 13, 2005 | By:                      | /s/ A.W. BERGERON |
|                    |                     | **A.W. Bergeron** |
|                    |                     | President |
|                    |                     |   |
| Date: May 13, 2005 | By:                      | /s/ THOMAS P. KEATING |
|                    |                     | **Thomas P. Keating** |
|                    |                     | Chief Financial Officer |

 

22

----