** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

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| **(Mark One)** |
|----------------|

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| ý | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|-------------------------------------------------------------------------------------------|
|   | **For the fiscal year ended December  31, 2001**                                          |

 

**OR**

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

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**Commissionfile number:  333-40478**

 

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

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

 

| **Delaware**                                                      |   | **54-1889658**                          |
|-------------------------------------------------------------------|--------|-----------------------------------------|
| *(State or other jurisdiction of  incorporation or organization)* |   | *(I.R.S. Employer Identification  No.)* |
|                                                              |   |                                    |
| **1001  North 19th Street, Arlington, Virginia**                  |   | **22209**                               |
| (Address of principal  executive offices)                         |   | (Zip Code)                              |

 

Registrant’s telephonenumber, including area code: **(703) 522-1315**

 

Securities RegisteredPursuant To Section 12(b) of The Act:  **None**

 

Securities RegisteredPursuant To Section 12(g) of The Act:  **None**

 

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Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the  preceding 12 months (orfor such  shorter  period that the Registrant  was required  to file such  reports) and2) has been subject to such filing requirements for the past 90 days. Yes ýNo o

 

Indicate by check mark if disclosure of delinquent  filers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-K  ý

 

As of March 29, 2002, there was one membership interest outstanding,which was held by AES Red Oak, Inc., the Company’s parent and a wholly-ownedsubsidiary of The AES Corporation.

 

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

 

**DOCUMENTSINCORPORATED BY REFERENCE**

**None**

** **

 

**TABLE OFCONTENTS**

 
| CAUTIONARY  NOTE REGARDING FORWARD-LOOKING STATEMENTS |
|-------------------------------------------------------|
|                                                  | PART  I |
|                                                  |   | ITEM  1. | Business |
|                                                  |   | ITEM  2. | Properties |
|                                                  |   | ITEM  3. | Legal Proceedings |
|                                                  |   | ITEM  4. | Submission  of Matters to a Vote of Security Holders |
|                                                  | PART  II |
|                                                  |   | ITEM  5. | Market  For Registrant’s Common Equity and Related Stockholder Matters |
|                                                  |   | ITEM  6. | Selected Financial Data |
|                                                  |   | ITEM  7. | Management’s  Discussion and Analysis Of Financial Condition and Results of Operations |
|                                                  |   | ITEM  7A. | Quantitative  and Qualitative Disclosure About Market Risk |
|                                                  |   | ITEM  8. | Financial  Statements and Supplemental Data |
|                                                  |   | ITEM  9. | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |
|                                                  | PART  III |
|                                                  |   | ITEM  10. | Directors  and Executive Officers of the Registrant |
|                                                  |   | ITEM  11. | Executive Compensation |
|                                                  |   | ITEM  12. | Security  Ownership of Certain Beneficial Owners and Management |
|                                                  |   | ITEM  13. | Certain  Relationships and Related Transactions |
|                                                  | PART  IV |
|                                                  |   | ITEM  14. | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Some of thestatements in this Form 10-K, as well as statements made by us in periodicpress releases and other public communications, constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  Certain, but not necessarilyall, of such forward-looking statements can be identified by the use offorward-looking terminology, such as “believes,” “estimates,” “plans,”“projects,” “expects,” “may,” “will,” “should,” “approximately,” or“anticipates” or the negative thereof or other variations thereof or comparableterminology, or by discussion of strategies, each of which involves risks anduncertainties.  We have based theseforward-looking statements on our current expectations and projections aboutfuture events based upon our knowledge of facts as of the date of this Form10-K and our assumptions about future events.

 

All statementsother than of historical facts included herein, including those regardingmarket trends, our financial position, business strategy, projected plans andobjectives of management for future operations and the anticipated commercialoperation date of the facility, are forward-looking statements.  Such forward-looking statements involveknown and unknown risks, uncertainties and other factors outside of our controlthat may cause our actual results or performance to be materially differentfrom any future results, performance or achievements expressed or implied bythe forward-looking statements.  Theserisks, uncertainties and other factors include, among others, the following:

 

•                 unexpectedconstruction delays,

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

•                 thefinancial condition of third parties on which we depend, including inparticular, Washington Group International, Inc. (“WGI”), Raytheon Company(“Raytheon”), Williams Energy Marketing & Trading Company (WilliamsEnergy), and Williams Companies Inc.,

•                 continuedperformance by WGI under the construction agreement and the Project CompletionAgreement,

•                 theoutcome and progression of WGI’s bankruptcy proceedings and their impact on us,

•                 ourability to find a replacement contractor on favorable or reasonable terms, ifnecessary,

•                 performanceby Raytheon under its performance guarantee, the Project Completion Agreement,the Owner/Guarantor Supplemental Agreement, and any related agreements,

•                 ourability to finance the Second Paid Extension Option, as defined herein, underthe power purchase agreement, if necessary,

•                 thetermination of the power purchase agreement by Williams Energy in the event ofa significant delay in achieving commercial operations,

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

•                 anadequate merchant market after the expiration, or in the event of a termination,of the power purchase agreement,

•                 capitalshortfalls and access to additional capital on reasonable terms,

•                 inadequateinsurance coverage,

•                 unexpectedexpenses or lower than expected revenues once commercial operations have begun,

•                 environmentaland regulatory compliance,

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

•                 theadditional factors that are unknown to us or beyond our control.

 

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

 

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**PART I**

 

**ITEM 1****.  BUSINESS**

 

**General**

 

We are a Delawarelimited liability company formed on September 13, 1998 to develop, construct,own, lease, operate and maintain a gas-fired electric generating power plant inthe Borough of Sayreville, Middlesex County, New Jersey and manage theproduction of electric generating capacity, ancillary services and energy atour facility.  We are a developmentstage company and currently have no operating revenues.  Under an Engineering Procurement andConstruction Services Agreement dated as of October 15, 1999, as amended (the“construction agreement”) between Washington Group International, Inc. (“WGI”)(formerly Raytheon Engineers & Constructors, Inc) and us, the guaranteedprovisional acceptance date, subject to adjustment, was February 14, 2002, andthe guaranteed final acceptance date is 13.5 months after the provisionalacceptance date.  While there can be noassurances, we expect to achieve provisional acceptance and become commerciallyoperational by approximately June 30, 2002. After our commercial operation date, our sole business will be theownership, leasing and operation of the project.

 

On May 14, 2001,WGI filed a plan of reorganization along with voluntary petitions torestructure under Chapter 11 of the U.S. Bankruptcy Code in the U.S. BankruptcyCourt for the District of Nevada in Reno (the “Bankruptcy Court”).  Prior to this bankruptcy filing, ourfacility was being designed, engineered, procured and constructed for us by WGIon a fixed-price, turnkey basis.  As aresult of WGI’s bankruptcy filing, we made a demand on June 20, 2001 on theRaytheon Company (“Raytheon”) to perform its obligations under a guaranteewhich Raytheon had given us of WGI’s performance obligations under theconstruction agreement.  *See*“–Project Status and Recent Developments” for further information regarding WGIand the status of our facility.  Raytheonis now ultimately responsible for the construction of our facility.

 

SiemensWestinghouse Power Corporation will provide combustion turbine maintenanceservices and spare parts with respect to the turbines for our facility under amaintenance services agreement for an initial term of 16 years from the date ofexecution of the agreement or after the twelfth scheduled outage for a turbine,whichever occurs first, unless we exercise our right to cancel the agreementafter the first major outage of the turbines at approximately the sixth year ofoperation of the facility.  AESSayreville, a wholly owned subsidiary of AES Red Oak, Inc., our directcorporate parent, will provide development, construction management andoperations and maintenance services for our operating facility under theoperations agreement.  We will act asconstruction agent for our affiliate, AES Red Oak Urban Renewal Corporation(“AES URC”), for the development and construction of part of the facility underthe construction agency agreement.  Weown the land on which our facility is located, and lease part of the facilityfrom AES URC with an option to purchase.

 

We have enteredinto a power purchase agreement for a term of 20 years under which WilliamsEnergy Marketing & Trading Company (“Williams Energy”) has committed topurchase all of the net capacity, fuel conversion and ancillary services of ourfacility.  Net capacity is the maximumamount of electricity generated by our facility net of electricity used at ourfacility.  Fuel conversion servicesconsist of the combustion of natural gas in order to generate electricenergy.  Ancillary services consist ofservices necessary to support the transmission of capacity and energy.  Williams Energy is obligated to supply uswith all natural gas necessary to provide net capacity, fuel conversionservices and ancillary services under the power purchase agreement.  We anticipate that during the term of thepower purchase agreement substantially all of our operating revenues will bederived from payments made under the power purchase agreement.  Under certain limited circumstancesdescribed herein, William Energy has the right to terminate the power purchaseagreement.

 

**Organizational Structure**

 

All of the equityinterests in our company are owned by AES Red Oak, Inc., a wholly ownedsubsidiary of The AES Corporation.  TheAES Corporation is obligated to provide funds to AES Red Oak, Inc. so that AESRed Oak, Inc. can make equity contributions to us to fund our projectcosts.  AES Red Oak, Inc. currently hasno operations outside of its activities in connection with our project and doesnot anticipate undertaking any unrelated operations.  AES Red Oak, Inc. also owns all of the equity interests in AESSayreville, L.L.C., which will provide development, construction management,and operations and maintenance services to us. AES Sayreville has no operations outside of its activities in

 

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connection with ourproject.  AES Red Oak, Inc. has noassets other than its membership interests in us and AES Sayreville.  The AES Corporation will supply AESSayreville with personnel and services necessary to carry out its obligationsto us.

 

We also own all ofthe equity interests in AES Red Oak Urban Renewal Corporation, or AES URC,which was organized as an urban renewal corporation under New Jersey law sothat portions of our project can be designated as redevelopment areas orprojects in order to provide certain real estate tax and development benefitsfor our project.  AES URC has nooperations outside of its activities in connection with our project.

 

The AESCorporation is a leading global power company committed to supplyingelectricity in a socially responsible way. At December 31, 2001, the AES Corporation had assets of approximately$37 billion and employedapproximately 38,000 people around the world. The AES Corporation is a public company and is subject to theinformational requirements of the Securities Exchange Act of 1934 and, inaccordance therewith, files reports, proxy statements and other information,including financial reports, with the SEC, which are not incorporated into anddo not form a part of this Form 10-K.

 

The followingorganizational chart illustrates the relationship among us, AES Red Oak, Inc.,AES Sayreville, The AES Corporation, and AES URC:

 

 

Our principalexecutive offices are located at 1001 North 19th Street, Arlington, Virginia,22209, c/o The AES Corporation.  Ourtelephone number is (703) 522-1315.

 

**Project Status and RecentDevelopments**

 

On May 14, 2001,WGI announced that it had filed a plan of reorganization along with voluntarypetitions to restructure under Chapter 11 of the U.S. Bankruptcy Code in theBankruptcy Court.  WGI and Raytheon arecurrently continuing construction of the facility and we, along with theindependent engineer, are carefully monitoring the progress of construction atthe facility for any work slowdowns or stoppages.  Under the construction agreement, a bankruptcy filing by WGIconstituted an event of default.  At thetime of execution of the construction agreement, WGI was prepaid for work underthe agreement in the amount of $237.7 million. WGI provided to us a letter of credit in such amount to secure itsobligations under the construction agreement. Based on correspondence received from WGI preceding the bankruptcyfiling and in accordance with the terms of the construction agreement, on May3, 2001, we requested that the full available amount of such letter of creditbe drawn upon and deposited in the construction account held by the collateralagent.  The collateral agent made suchdrawing on May 4, 2001 in the amount of $95.8 million, which was the thenoutstanding amount of the prepayment letter of credit as it had been reduced byWGI’s achievement of construction milestones under the constructionagreement.  Subsequent to thetermination of the prepayment arrangements with WGI, payments to WGI orRaytheon for achievement of construction

 

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milestones as specifiedin the construction agreement were made in accordance with the terms of theconstruction agreement.

 

On November 9,2001, WGI received an order from the Bankruptcy Court approving WGI’s (1)rejection of the construction agreement and (2) execution of the ProjectCompletion Agreement, by and between WGI and Raytheon (the “PCA”), as discussedbelow.  On November 16, 2001, WGI andRaytheon executed the PCA.  The PCAsuperceded the Interim Agreement for Advance Payments (the “Interim Agreement”),between us, WGI and Raytheon, which had been in place since June 20, 2001.Under the Interim Agreement, we and Raytheon had agreed to fund payments toWGI’s subcontractors working on construction of the facility in accordance withthe terms of their subcontracts as required by the construction agreement, andto pay WGI’s employees who are performing services with respect to theproject.  The Interim Agreement did notchange the construction agreement price, the construction progress milestone dates,the guaranteed completion dates, or the project schedule.  In addition, the Interim Agreement did notrelieve WGI from any obligations it had under the construction agreement, nordid it relieve Raytheon from any obligations it had under its performanceguaranty.  We also reserved the right toset off amounts we funded under the Interim Agreement against any futuremilestone payments payable by us to Raytheon.

 

Under the PCA, WGI(i) assigned to us, as the project owner, certain of the major equipment,subcontracts and vendor contracts relating to the project, (ii) assigned toRaytheon the remaining subcontracts and vendor contracts relating to theproject, (iii) agreed to complete construction of the facility on a costreimbursable basis but otherwise in accordance with the terms of theconstruction agreement, with all funding to come from Raytheon, and (iv)perform obligations under the subcontracts and vendor contracts that had beenassigned to us or Raytheon.  Raytheon,as guarantor under the construction agreement, will, as necessary, fund all ofWGI’s costs and expenses related to WGI’s completion of the project.  Both parties will have limited terminationrights under the PCA.

 

On November 21,2001, we and Raytheon entered into the Owner/Guarantor Supplemental Agreement(“OGSA”) pursuant to which (i) Raytheon and we acknowledged that,notwithstanding the rejection of the construction agreement by WGI, Raytheonwill cause the project to be completed in accordance with the terms of theconstruction agreement pursuant to Raytheon’s performance guaranty obligations,and the construction agreement will have continuing applicability insofar as itdefines (x) the obligations owed to us by Raytheon under its guaranty and (y)our obligations to Raytheon arising from the performance of those obligations,(ii) Raytheon (or their designees) was designated as our agent for purposes ofadministering the subcontracts and vendor contracts assigned by WGI to us,(iii) all future payments from us will be paid in accordance with the terms ofthe construction agreement directly to Raytheon, and (iv) Raytheon willindemnify us with respect to any claims arising out of the subcontracts andvendor contracts assumed by us.

 

Although there canbe no assurances, based upon (i) our current assessment of progress at theconstruction site, (ii) the performance guaranty from Raytheon, (iii) themutual obligations of WGI and Raytheon under the PCA, and (iv) assuming (x)that WGI and Raytheon fulfill their respective obligations under the PCA, and(y) that Raytheon continues to fulfill its obligations under its performanceguarantee and the OGSA, we currently believe that we have sufficient fundsavailable to complete construction of the facility, and expect the facility tobecome commercially operational by approximately June 30, 2002, which isapproximately 4.5 months after the February 14, 2002 guaranteed completion dateunder the construction agreement.  See“Cautionary Note Regarding Forward-Looking Statements.”  Notwithstanding our current belief, if theparties to the PCA fail to perform their obligations, or if Raytheon does notfulfill its obligations under its performance guarantee or the OGSA, we mayexperience significant construction delays and/or may not have sufficient fundsto complete the facility.  See “Note 5. Commitments and Contingencies -Construction Agreement” of the Notes to Consolidated Financial Statements and“Cautionary Note Regarding Forward-Looking Statements.”

 

Under the powerpurchase agreement between us and Williams Energy, we had the right to extendthe required commercial operation date from December 31, 2001 to June 30, 2002(1) by providing an opinion from a third-party engineer that the commercialoperation date will occur no later than June 30, 2002 (the “Free ExtensionOption”), or (2) by giving Williams Energy written notice of such extension nolater than November 30, 2001, and paying to Williams Energy $2.5 million by nolater than January 31, 2002.  On November14, 2001, we exercised our Free Extension Option.  On December 12, 2001, Williams Energy formally accepted therequired opinion of the third-party engineer. As a result, the required commercial operation date under the powerpurchase agreement was extended to June 30, 2002.  In the event that we cannot meet the June 30, 2002 commercialoperation date, we have the right under the power purchase

 

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agreement, upon writtennotification to Williams Energy not later than April 30, 2002, to again extendthe commercial operation date until June 30, 2003 by paying Williams Energy anamount equal to the lesser of any actual damages Williams suffers or incursafter June 30, 2002 as a result of Williams reliance upon the delivery by suchdate or $3.0 million (the “Second Paid Extension Option”).  We must also pay specified amounts rangingfrom $11,000 per day to $50,000 per day of the extension.  During the period of the Second PaidExtension Option, if any, we expect to continue to collect liquidated damagesuntil April 10, 2003 from Raytheon under the construction agreement in theamount of $108,000 per day.

 

In the event thatthe project is not commercially operational by June 30, 2002, and we do nothave sufficient funds to exercise our Second Paid Extension Option, or thefacility does not achieve commercial operation by the commercial operation dateas extended, Williams Energy has the right to terminate the power purchaseagreement.  If Williams Energy terminatesthe power purchase agreement and we cannot find a long-term replacement powerpurchaser on favorable or reasonable terms, we will be required to sell ourcapacity and energy under shorter-term contracts or into the Pennsylvania-NewJersey-Maryland (“PJM”) spot market.  Insuch event, we may not have financial resources sufficient to meet ourfinancial and contractual obligations, including the timely payment ofprincipal and interest on the senior secured bonds.

 

**Competition**

 

Under the powerpurchase agreement, Williams Energy will be required to purchase all of ourfacility’s capacity and energy for an initial term of 20 years.  Therefore, during the term of the powerpurchase agreement, competition from other capacity and energy providers willbecome an issue only if the power purchase agreement is terminated or notperformed in accordance with its terms. Following the term of the power purchase agreement, we anticipateselling facility capacity, ancillary services and energy under a new power purchaseagreement or into the PJM power pool market. At that time, we will face competition from other generating facilitiesselling into the PJM power pool market including, possibly, other facilitiesowned by The AES Corporation or its affiliates.

 

**Employees**

 

Other than theofficers listed under “Directors and Executive Officers of the Registrant”section of this Form 10-K, we have no employees and do not anticipate havingany employees in the future.  Under theoperations agreement, AES Sayreville will manage the development andconstruction of and the operation and maintenance of our facility.  The direct labor personnel and the plantoperations management will be employees of The AES Corporation provided to AESSayreville under a services agreement.

 

**Insurance**

 

As owner of oursite and lessee and owner of the facility, we maintain a comprehensiveinsurance program as required under our various project contracts and theindenture governing our senior secured bonds and underwritten by recognizedinsurance companies.  Among otherinsurance policies, we will maintain commercial general liability insurance,permanent property insurance for full replacement value of the facility andbusiness interruption insurance covering at least 18 months of gross revenuesless variable operating expenses.  Wehave obtained title insurance in an amount equal to the principal amount of thebonds.

 

AES Sayreville, asoperator of our facility, maintains, among other insurance policies, workers’compensation insurance (or evidence of self-insurance), if required, and comprehensiveautomobile bodily injury and property damage liability insurance.

 

**Permits And Regulatory Approvals**

 

AES Sayreville, asoperator of our facility, and us, as owner and lessee of our facility, mustcomply with numerous federal, state and local regulatory requirements includingenvironmental requirements in the operation of our facility.

 

On November 4,1999, we received a certification from the Federal Energy Regulatory Commission(“FERC”) that we are an exempt wholesale generator.  Certification as an exempt wholesale generator exempts us fromregulation

 

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under the Public UtilityHolding Company Act of 1935.  We willmaintain this status so long as we continue to make only wholesale sales ofelectricity, which we intend to do.  Wefiled the power purchase agreement with FERC and requested approval for therates contained therein.  On June 22,2001, we received FERC approval at those rates.  We may also need to obtain FERC approval for sales of electricityat market-based rates after the power purchase agreement is no longer ineffect.

 

On January 28,2000, we received our Prevention of Significant Deterioration Permit, or “airpermit,” from the New Jersey Department of Environmental Protection.  The appeal period in respect of the airpermit expired on February 28, 2000 and no appeal was filed.  The air permit requires that our facility beconstructed in a manner that will allow it to meet specified limitations onemissions of air pollutants.  Under theconstruction agreement, WGI and now the Raytheon, acting as project guarantor,are required to construct our facility to meet these requirements.

 

We are subject toa number of statutory and regulatory standards and required approvals relatingto energy, labor and environmental laws. Although the necessary environmental permits for the commencement ofconstruction of our facility have been obtained, we are required to comply withthe terms of our environmental permits and to obtain other permits for theconstruction and operation of our facility. Several of the permits have not yet been obtained, and some cannot beobtained until operation of our facility has commenced.  Under specific circumstances, delay inreceipt of or failure to obtain the permits could delay completion of theconstruction of our facility or prevent the operation of our facility.

 

Some permits thatwe have obtained in connection with our facility will require amendment priorto commercial operation of our facility and others will require renewal orreissuance during the life of our facility. While we have no reason to believe that the permits cannot be amended orwill not be renewed or reissued, our inability to amend, renew or obtainreissuance of these permits in the future could cause the suspension ofconstruction or operation of our facility.

 

The permits thathave been obtained and that will be obtained contain and will contain ongoingrequirements.  Failure to satisfy andmaintain any permit conditions or other applicable requirements could delay orprevent completion of the construction of our facility, prevent the operationof our facility and result in additional costs.

 

**Summary of Principal ProjectContracts**

 

While we believethat the following summaries contain the material terms of the principalproject contracts, such summaries may not include all of the provisions of eachagreement that each individual investor may feel is important.  These summaries do not restate eachagreement discussed herein and exclude certain definitions and complex legalterminology that may be contained in each relevant agreement.  You should carefully read each agreementdiscussed herein, each of which is filed as an exhibit to this Form 10-K.

** **

**PowerPurchase Agreement**

 

We entered into aFuel Conversion Services, Capacity and Ancillary Services Purchase Agreement,dated as of September 17, 1999 with Williams Energy, for the sale to WilliamsEnergy of all of the electric energy and unforced capacity produced by ourfacility as well as ancillary services and fuel conversion services.

 

**Term**

 

The term of thepower purchase agreement extends for 20 years after the first contractanniversary date, which is the last day of the month in which the commercialoperation date occurs.  The commercialoperation date occurs when:

 

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

 

•              wehave received all approvals necessary to make the contemplated sales; and

 

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

 

The term may beextended by Williams Energy for up to a total of 24 months for each hour duringthe initial term for which we are unable to deliver energy or ancillaryservices because of an event of force majeure.

 

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If the commercialoperation date had not occurred by December 31, 2001 for any reason, includingthe continued existence of or delay caused by a force majeure event affectingus, other than any delay caused by any act or failure to act by Williams Energyor any of its affiliates where the action was required under the power purchaseagreement, Williams Energy would have had the right to terminate the powerpurchase agreement.  However, we had theright to extend the commercial operation date to June 30, 2002 (i) if weprovided an opinion from a third-party engineer that the commercial operationdate would occur no later than June 30, 2002 (the “Free Extension Option”), or(ii) by giving Williams Energy written notice of the extension no later thanNovember 30, 2001, and paying to Williams Energy a specified amount. (the“First Paid Extension Option”).

 

On November 14,2001, we exercised our Free Extension Option and on December 12, 2001, WilliamsEnergy formally accepted the required opinion of the third-party engineer.  As a result, the commercial operation dateunder the power purchase agreement was extended to June 30, 2002.  If we exercise the Second Paid ExtensionOption, we must  pay Williams Energy anamount equal to the lesser of any actual damages Williams Energy suffers orincurs after June 30, 2002 as a result of Williams Energy’s reliance upondelivery by such date and $3.0 million. We must also pay specified amounts ranging from $11,000 per day to$50,000 per day of the extension. During the period of the Second Paid Extension Option, if any, we expectto continue collecting liquidated damages until April 10, 2003 from thecontractor under the construction agreement in the amount of $108,000 perday.  In the event that the project isnot commercially operational by June 30, 2002, and we do not have sufficientfunds to exercise its Second Paid Extension Option, or the facility does notachieve commercial operation by the commercial operation date as extended,Williams Energy has the right to terminate the power purchase agreement.  If Williams Energy terminates the powerpurchase agreement and we cannot find a long-term replacement power purchaseron favorable or reasonable terms, we will be required to sell our capacity andenergy under shorter-term contracts or into the PJM spot market.  In such event, we may not have financialresources sufficient to meet our financial and contractual obligations,including the timely payment of principal and interest on the senior securedbonds.

 

If the commercialoperation date has not occurred by June 30, 2002 for any reason, including,without limitation, the continued existence of or delay caused by a forcemajeure event affecting us, other than any delay caused by any act or failureto act by Williams Energy or any of its affiliates where the action is requiredunder the power purchase agreement, we have the right to extend our obligationto achieve the commercial operation date up to and including June 30, 2003 bygiving Williams Energy written notice of the estimated extension required nolater than April 30, 2002 and paying to Williams Energy specified amounts (the“Second Paid Extension Option”).

 

If the commercialoperation date does not occur by June 30, 2003 for any reason including thecontinued existence of or delay caused by a force majeure event affecting us,other than as a result of any act or failure to act by Williams Energy or anyof its affiliates, where the action is required under the power purchaseagreement, Williams Energy will have the absolute right to terminate the powerpurchase agreement unless it fails to terminate the power purchase agreementprior to the commercial operation date.

 

**Purchase and Sale of Capacity andFuel Conversion Services**

 

During the term,commencing with the commercial operation date, we will perform for WilliamsEnergy on an exclusive basis, and Williams Energy will purchase and pay for,fuel conversion services.  Fuelconversion services include the operation of our facility by us to combustnatural gas delivered by Williams Energy in order to generate and deliverenergy or to provide ancillary services. We will sell and make available to Williams Energy on an exclusivebasis, and Williams Energy will purchase and pay for, our facility’s netcapacity and ability to generate electric energy.  We may not sell, without the consent of Williams Energy in itssole discretion, capacity generated on the site but not from our facility.

 

Williams Energywill deliver or cause to be delivered to us at the natural gas delivery pointon an exclusive basis all quantities of natural gas required by us to:

 

**•**              generatenet electric energy and/or ancillary services;

 

•              performstart-ups;

 

•              performshutdowns; and

 

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•              operateour facility during any period other than a start-up, shutdown or dispatchperiod for any reason.

 

Williams Energywill at all times retain title to the natural gas delivered to us except thatwhen our facility is operated during any period other than a start-up, shutdownor dispatch period title is transferred to us at the natural gas deliverypoint.

 

Williams Energywill be solely responsible for all costs and expenses related to the supply andtransportation of natural gas to the natural gas delivery point.  We will be responsible for all costs andexpenses related to the transportation, gathering or taxation of natural gas orits use or possession at and after the natural gas delivery point.

 

Williams Energywill be responsible for the construction of all gas interconnectionfacilities.  If the gas interconnectionfacilities have not been constructed and/or Williams Energy is unable for anyreason to deliver natural gas to our facility by the date that our facilitywould otherwise be prepared to begin initial start-up testing, and but for thefailure to provide the natural gas our facility is otherwise ready, or wouldotherwise have been ready, to begin testing, then Williams Energy will commencemaking payments to us for each day of the delay beginning on the start-uptesting date and continuing until the date that natural gas is delivered to ourfacility for initial start-up testing, in an amount for each day of delay whichis equal to one-thirtieth of the applicable total fixed payment.  As of August 10, 2001, the interconnectionfacilities had been constructed by Public Service Electric & Gas forWilliams Energy and were available for gas delivery to the facility.  Upon the expiration of the power purchaseagreement or any termination of the power purchase agreement as the result ofWilliams Energy’s default thereunder, we will have the right to purchase thegas interconnection facilities from Williams Energy, or if Williams Energy doesnot own the gas interconnection facilities, Williams Energy will assign to usall of its rights to transportation services using the gas interconnectionfacilities.

 

**Pricing and Payments**

 

For each month ofthe term after the commercial operation date, Williams Energy will pay us forour facility’s net capacity, successful start-ups and associated shutdowns,ancillary services and fuel conversion services at the applicable rates setforth in the power purchase agreement. Each monthly payment by Williams Energy will consist of a total fixedpayment, a variable operations and maintenance payment and an energy exercisefee.  The total fixed payment, which ispayable regardless of facility dispatch by Williams Energy but is subject toadjustment based on facility availability, is calculated by multiplying anunforced capacity rate for each contract year by the temperature adjustedunforced capacity in the billing month and adding to that the product of thefuel conversion option demand charge and the average facility capacity for thatmonth.  The total fixed payment isanticipated to be sufficient to cover our debt service and fixed operating andmaintenance costs and to provide us a return on equity.  The variable operations and maintenancepayment is intended to cover our variable operating and maintenance costs andescalates annually based on an escalation index set forth in the power purchaseagreement.  The energy exercise fee isintended to compensate us for each successful start-up.  We may receive heat rate bonuses or berequired to pay heat rate penalties.

 

Prior to thecommercial operation date, and during some facility tests thereafter, we willpurchase natural gas from Williams Energy. We purchased natural gas for testing activities in February 2002.  Williams Energy will sell to us the naturalgas at prices specified in the power purchase agreement, and we will sell toWilliams Energy at the electric delivery point any net electric energy producedduring the periods at the hourly integrated market clearing marginal price forelectric energy at the location where it is delivered or received, calculatedpursuant to the terms of the operating agreement of PJM Interconnection, LLC,which is the independent system operator that operates the transmission systemto which our facility will interconnect. We will be solely responsible for any fines or penalties resulting fromthe delivery of the net electric energy at the electric delivery point when thedelivery is made without the authorization of PJM, Jersey Central Power, whichis the host utility, or FERC.

 

Williams Energywill be entitled to an annual fuel conversion volume rebate if its dispatch ofour facility exceeds specified levels and monthly non-dispatch payments if,under some circumstances, our facility does not deliver, in whole or in part,the requested net electric energy requested by Williams Energy.  All fuel conversion volume rebate paymentsand non-dispatch payments will be made to Williams Energy after debt serviceand certain other payments but prior to any distribution to holders of equityinterests in our company.  Fuelconversion volume rebate payments and any non-dispatch payments owed toWilliams Energy and not paid when due will be paid, together with interestthereon, when funds become available to us at the priority level describedabove.  A separate reserve account mustbe maintained by us and our lenders and we must deposit to that account on amonthly basis, from our cash flow, any applicable and

 

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unpaid non-dispatchpayment plus a ratable amount of the maximum fuel conversion volume rebateamount that Williams Energy may have earned. Amounts held in that reserve account will be used to pay, to the extentowed, the fuel conversion volume rebate and non-dispatch payments.

** **

**Project Development**

 

We will provide toWilliams Energy not later than 10 days after the completion of initial start-uptesting, pertinent written data substantiating our facility’s capability toprovide net facility capacity and, no later than 30 days prior to thecommercial operation date, pertinent written data depicting our facility’stemperature-adjusted net capacity and temperature-adjusted unit capacity.

 

We will, at ourown cost and expense, obtain as and when required all approvals, permits,licenses and other authorizations from governmental authorities as may berequired for us to construct, operate and maintain our facility, theinterconnection facilities and protective gas apparatus and to perform itsobligations under the power purchase agreement, and during the term, we willobtain all additional governmental approvals, permits, licenses andauthorizations as may be required with respect to our facility as soon aspracticable.

** **

**Initial Start-Up Testing; CommercialOperation**

 

We will provide toWilliams Energy (i) written notice, at least 30 days in advance, of theexpected commercial operation date and (ii) a copy of the notice of commercialoperation within 5 days after the commercial operation date.  Williams Energy will have the right to bepresent at initial start-up testing of our facility.  Costs and expenses incurred in connection with initial start-uptesting and any testing thereafter to demonstrate our net capacity will beborne by us.  The costs and expensesinclude the cost of natural gas and transmission costs associated with thetransmission of the electrical energy produced.  We will be solely responsible for any fines and penaltiesresulting from the unauthorized delivery of net electric energy at the electricdelivery point.

** **

**Interconnection and MeteringEquipment**

 

At our sole costand expense, we designed, constructed, installed and maintained theinterconnection facilities and protective gas apparatus needed to generate anddeliver net electric energy and/or ancillary services to the electric deliverypoint in order to fulfill our obligations under the power purchase agreement,including all interconnection facilities and protective gas apparatus that maybe located at any switchyard and/or substation to be built at our facility.  Our facility, interconnection facilities andprotective gas apparatus have been designed, constructed and completed in agood and workmanlike manner and in accordance with accepted electricalpractices (with respect to our facility and interconnection facilities) or inaccordance with standard gas industry practices (with respect to protective gasapparatus), so that the expected useful life of our facility, theinterconnection facilities and protective gas apparatus will be not less thanthe term of the power purchase agreement.

 

Williams Energyhas installed the natural gas interconnection facilities and natural gasmetering equipment to our satisfaction. All electric metering equipment and gas metering equipment, whetherowned by us or by a third party, will be operated, maintained and tested inaccordance with accepted electrical practices, in the case of the electricmetering equipment, and in accordance with applicable industry standards, inthe case of the gas metering equipment. Except under limited circumstances, we will not enter into anymodification or amendment of the interconnection agreement with Jersey CentralPower without the prior written consent of Williams Energy.

** **

**Operation and Dispatch**

 

Our facility andthe interconnection facilities will be operated in accordance with acceptedelectrical practices and applicable requirements and guidelines of JerseyCentral Power pursuant to the interconnection agreement.  The protective gas apparatus will be operatedin accordance with standard gas industry practices.  If there is a conflict between the terms and conditions of thepower purchase agreement and Jersey Central Power requirements, the JerseyCentral Power requirements will control.

 

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We will operateour facility in parallel with Jersey Central Power’s electrical system inaccordance with the interconnection agreement. When dispatched by Williams Energy, we will operate our facility andeach unit thereof with automatic regulation equipment in service.

 

The power purchaseagreement acknowledges that Jersey Central Power has the right to require us todisconnect our facility from its electrical system, or otherwise curtail,interrupt or reduce deliveries of net electric energy, in accordance with theterms of the interconnection agreement. If our facility has been disconnected for these reasons, Williams Energywill continue to be obligated to make total fixed payments for at least 24hours after the occurrence of disconnection of our facility by Jersey CentralPower.

 

We will usecommercially reasonable efforts to correct promptly any condition at ourfacility which necessitates the disconnection of our facility from JerseyCentral Power’s electrical system or the reduction, curtailment or interruptionof electrical output of our facility.

 

Williams Energywill have the exclusive right to use the net electric energy and ancillaryservices and to schedule the operation of our facility or a unit thereof inaccordance with the provisions of the power purchase agreement; however, thescheduling must be consistent with the design limitations of our facility,applicable law, regulations and permits, and the agreements and the manuals ofPJM.

 

Williams Energyand our company will perform each of our respective obligations in a mannerthat avoids the creation of cashout obligations or imbalance penalties imposedby the natural gas transporter. Williams Energy will try to minimize any imbalance charges under atransporter’s tariff and thereafter we will be responsible for imbalancecharges levied by the natural gas transporter to the extent that the chargesresult from: (i) an imbalance caused by us greater than the allocable tolerancein the transporter’s tariff or (ii) our failure to promptly notify WilliamsEnergy of a change in the operation of our facility that would cause anyimbalance.

 

If we or one ofour affiliates does not directly operate our facility, we will enter into anagreement with a reputable firm prior to the commercial operation date for theoperation and maintenance of our facility. The choice of the firm will be subject to the prior review and approvalof Williams Energy.

 

**Force Majeure**

 

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

 

•                                          theparty declaring its inability to perform by virtue of force majeure, aspromptly as practicable after the occurrence of the force majeure condition,but in no event later than 5 days thereafter, gives the other party writtennotice describing, in detail, the nature, extent and expected duration of theforce majeure condition;

 

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

 

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

 

•                                          assoon as the party declaring force majeure is able to resume performance of itsobligations excused as a result of the force majeure condition, it will giveprompt written notification thereof to the other party.

 

Irrespective ofwhether the force majeure condition is declared by Williams Energy or us, thetime period of a force majeure will be excluded from the calculation of allpayments under the power purchase agreement and Williams Energy will be underno obligation to pay us any of the payments described in the power purchaseagreement.  If

 

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Williams Energy declaresa force majeure, however, it will continue to pay us only the applicable monthlytotal fixed payment as described in the power purchase agreement until theearlier of (i) the termination of the force majeure condition or (ii) thetermination of the power purchase agreement. Furthermore, if a force majeure declared by us due to an action orinaction of Jersey Central Power that prevents us from delivering net electricenergy to the electric delivery point, Williams Energy will continue to pay theapplicable portion of the total fixed payment for the first 24 hours of theperiod.

 

Notwithstandinganything to the contrary contained in the power purchase agreement, except asmay expressly be provided in the power purchase agreement, the term forcemajeure will not include or excuse a party’s performance in the followingcircumstances:

 

•              Exceptas otherwise set forth in the power purchase agreement, the failure to completeour facility by or to achieve the commercial operation date as extended underthe power purchase agreement, which failure is caused by, arises out of orresults from our acts or omissions, and/or from the acts or omissions of anythird party, unless, and then only to the extent that, any acts or omissions ofthe third party (i) would itself be excused under the power purchase agreementby virtue of a force majeure condition, or (ii) is the result of a failure ofWilliams Energy to provide fuel to our facility under the power purchaseagreement;

 

•                                          Anyreduction, curtailment or interruption of generation or operation of ourfacility, or of the ability of Williams Energy to accept or transmit netelectric energy, whether in whole or in part, which reduction, curtailment orinterruption is caused by or arises from the acts or omissions of any thirdparty providing services or supplies to the party claiming force majeure, includingany vendor or supplier to either party of materials, equipment, supplies orservices, or any inability of Jersey Central Power to deliver net electricenergy to Williams Energy, unless, and then only to the extent that, any actsor omissions would itself be excused under the power purchase agreement as aforce majeure;

 

•                                          Anyoutage, whether or not due to our fault or negligence attributable to a defector inadequacy in the manufacture, design or installation of our facility thatprevents, curtails, interrupts or reduces the ability of our facility togenerate net electric energy or our ability to perform our obligations underthe power purchase agreement;

 

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

 

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

 

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

 

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

 

Neither party willbe required to settle any strike, walkout, lockout or other labor dispute onterms which, in the sole judgment of the party involved in the dispute, arecontrary to its interest.

 

Williams Energywill have the right to terminate the power purchase agreement if we havedeclared a force majeure and the effect of said force majeure has not beenfully corrected or alleviated within 18 months after the date said forcemajeure was declared.  Williams Energy,however, will not have the right to terminate the power purchase agreement if(i) the force majeure was caused by Williams Energy or (ii) the force majeureevent does not prevent or materially limit Williams Energy’s ability to sellour facility net capacity into or through the PJM power pool market or to athird party.

 

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**Events of Default; Termination;Remedies**

 

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

 

•                                          breachof any term or condition of the power purchase agreement, including, but notlimited to, (i) any failure to maintain or to renew any security, (ii) anybreach of a representation, warranty or covenant or (iii) failure of eitherparty to make a required payment to the other party;

 

•                                          ourfacility is not available to provide fuel conversion services or ancillaryservices to Williams Energy during any period of 180 consecutive days after theoccurrence of the commercial operation date, except as may be excused by forcemajeure or the absence of available natural gas, or if non-availability iscaused by act or failure by Williams Energy where the action is required by thepower purchase agreement;

 

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

 

•                                          ourfailure for 30 consecutive days to perform regular and required maintenance,testing or inspection of the interconnection facilities, our facility and/orother electric equipment and facilities where the failure is material;

 

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

 

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

 

•                                          voluntarybankruptcy or insolvency by either party;

 

•                                          anymodifications, alterations or other changes to our facility by or on our behalfwhich prevent us from fulfilling, or materially diminish our ability tofulfill, its obligations, duties, rights and responsibilities under the powerpurchase agreement and which after reasonable notice and opportunity to cure,are not corrected;

 

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

 

•                                          TheAES Corporation will cease to own, directly or indirectly, beneficially and ofrecord, at least 50 percent of the equity interests in our company, or willcease to possess the power to direct or cause the direction of our company’smanagement or policies, or any person, other than The AES Corporation or anaffiliate, authorized to act as a power marketer by FERC or any affiliate ofthe person will own, directly or indirectly, beneficially or of record, any ofthe equity interests in our company.

 

Upon theoccurrence of any event of default, other than a bankruptcy-related event ofdefault, for which no notice will be required or opportunity to cure permitted,the party not in default, to the extent the party has actual knowledge of theoccurrence of the event of default, will give prompt written notice of thedefault to the defaulting party.  Thenotice will set forth, in reasonable detail, the nature of the default and,where known and applicable, the steps necessary to cure the default.  The defaulting party will have 30 days, twobusiness days in the case of a default related to the breach of arepresentation, warranty or covenant, following receipt of the notice either tocure the default or commence in good faith all the steps as are necessary andappropriate to cure the default if the default cannot be completely curedwithin the 30-day period.

 

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If the defaultingparty fails to cure the default or take the steps as provided under thepreceding paragraph, and immediately upon the occurrence insolvency or thefiling of a voluntary petition for bankruptcy, the power purchase agreement maybe terminated by the non-defaulting party, without any liability orresponsibility whatsoever, by written notice to the party in defaulthereof.  The power purchase agreementwill then terminate and the non-defaulting party may exercise all rights andremedies as are available to it to recover damages caused by the default, seekspecific performance or exercise other rights and remedies that it may have inequity or at law.

 

**Security**

 

We have agreed tocompensate Williams Energy for any actual damages it suffers or incurs as theresult of Williams Energy’s reliance upon the delivery of our facility netcapacity, ancillary services and fuel conversion services, by December 31, 2001as such date is extended in accordance with the terms of the power purchaseagreement to the extent said damages cannot be mitigated fully.  We further agree that the damages WilliamsEnergy may suffer under these circumstances will be any and all reasonablecosts incurred by Williams Energy in excess of costs that would have beenincurred had the commercial operation date occurred on or before December 31,2001, as the date may be extended under the power purchase agreement.  We have extended the commercial operationdate to June 30, 2002 through the exercise of our Free Extension Option.

 

Under the powerpurchase agreement, we must provide financial security to Williams Energy forour performance and payment obligations under the power purchase agreement inthe initial amount of $30 million, which will be reduced to $10 million on thecommercial operation date and will remain in effect during the term.  We may, at any time at our option, elect toeither provide the financial security in the form of a guaranty of The AESCorporation or in the form of a single letter of credit, satisfactory toWilliams Energy in form and substance, upon which Williams Energy may draw ifour facility does not achieve the commercial operation date by the datespecified in the power purchase agreement, as the date may be extended, andafter the commercial operation date as specified in the power purchaseagreement.  If the financial securitycontains an expiration date, either express or implied, we will renew thefinancial security not later than 10 days prior to the expiration date and willprovide written notice of the renewal to Williams Energy at the same time.  If we fail to renew the financial securityas set forth above, Williams Energy is entitled to demand and receive paymentthereunder on or after three days after written notice of the failure isprovided to us, and the amount drawn will be deposited in an interest bearingescrow account and will be returned to us at the commercial operation dateunless otherwise drawn on by Williams Energy in satisfaction of our obligationsunder the foregoing security provisions.

 

The letter ofcredit referred to above must be issued by a financial institution that at alltimes during the term of the letter of credit meets and maintains the followingcriteria:  (i) a U.S. or foreign bankrated “C” or better by Thompson Bankwatch; or (ii) a U.S. or foreign bank,surety company or financial institution whose senior debt has the rating listedbelow by two of the three rating agencies: Standard & Poor’s: “A-” orbetter; Moody’s Investors Services (“Moody’s”): “A3” or better; Duff & Phelps:“A-” or better.

 

If the bank,surety company or financial institution fails to maintain the ratings criteria,then upon 30 days, written notice from Williams Energy, we are required toobtain equivalent security from another bank, surety company or financial institutionmeeting the above stated criteria.

 

The paymentobligations of Williams Energy under the power purchase agreement areguaranteed by the Williams Companies, Inc. The payment obligations of the Williams Companies, Inc. under theguarantee are capped at an amount equal to 125% of the sum of the principalamount of our senior secured bonds, plus the maximum debt service reserveaccount balance.  If at any time Moody’sor Standard & Poor’s rates the long term senior unsecured debt of TheWilliams Companies, Inc. lower than investment grade and the rating agency doesnot reestablish within 60 days an investment grade rating for the debt, thenWilliams Energy will provide alternative credit support reasonably acceptableto us within 90 days of the day on which the debt was rated lower thaninvestment grade.  According topublished sources, as of March 29, 2002, the long-term senior unsecured debt ofthe Williams Companies, Inc. was rated as follows: “Baa2” by Moody’s and “BBB”by Standard and Poor’s, both of which ratings are investment grade.  While both ratings agencies have recentlyaffirmed this investment grade rating, on February 1, 2002, Standard &Poor’s placed the senior unsecured debt credit ratings of the WilliamsCompanies, Inc. on credit watch with negative implications and on February 27,2002, Moody’s downgraded the Williams Companies, Inc.’s outlook from stable tonegative.

 

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**ConstructionAgreement**

 

We have enteredinto an Agreement for Engineering, Procurement and Construction Services, datedas of October 15, 1999, with WGI (as the successor contractor) under which WGIwas required to perform services in connection with the design, engineering,procurement, site preparation and clearing, civil works, construction,start-up, training and testing and to provide all materials and equipment(excluding operational spare parts), machinery, tools, construction fuels,chemicals and utilities, labor, transportation, administration and otherservices and items (collectively and separately, the services) for ourfacility.  Under a Guaranty in ourfavor, effective as of October 15, 1999, all of WGI’s obligations under theconstruction agreement are irrevocably and unconditionally guaranteed byRaytheon.  *See* “–Project Status and Recent Developments” above forfurther information regarding WGI, Raytheon and the status of the project.

 

As discussedabove, although WGI filed for bankruptcy on May 14, 2001, construction of thefacility has continued through a series of cooperative agreements executed byus, WGI and Raytheon.  On November 9,2001, the Bankruptcy Court approved WGI’s rejection of the constructionagreement and the execution of the PCA by WGU and Raytheon.  Additionally, on November 21, 2001, we andRaytheon entered into the Owner/Guarantor Supplemental Agreement pursuant towhich (i) Raytheon and we acknowledged that, notwithstanding the rejection ofthe construction agreement by WGI, Raytheon will cause the project to becompleted in accordance with the terms of the construction agreement pursuantto Raytheon’s performance guaranty obligations, and the construction agreementwill have continuing applicability insofar as it defines (x) the obligationsowed to us by Raytheon under its guaranty and (y) our obligations to Raytheonarising from the performance of those obligations, (ii) Raytheon (or theirdesignees) was designated as our agent for purposes of administering thesubcontracts and vendor contracts assigned by WGI to us, (iii) all future paymentsby us will be paid in accordance with the terms of the construction agreementdirectly to Raytheon, and (iv) Raytheon will indemnify us with respect to anyclaims arising out of the subcontracts and vendor contracts assumed by us.

 

Accordingly, notwithstandingWGI’s rejection of the construction agreement, the project is expected to becompleted in accordance with the terms set forth therein and described below.

 

**Raytheon Services and OtherObligations**

 

Raytheon willcomplete our project by performing or causing to be performed all of theservices.  The services will include:engineering and design; construction and construction management; providing usdesign documents, instruction manuals, a project procedures manual and qualityassurance plan; procurement of all materials, equipment and supplies and allcontractor and subcontractor labor and manufacturing and related services;providing a spare parts list; providing all labor and personnel; obtaining allapplicable permits; performing inspection, expediting, quality surveillance andtraffic services; transporting, shipping, receiving and marshaling allmaterials, equipment and supplies and other items; providing storage for allmaterials, supplies and equipment and procurement or disposal of all soil andgravel (including remediation and disposal of specific hazardous materials);providing for design, construction and installation of electricalinterconnection facilities (including electric metering equipment, automaticregulation equipment, protective apparatus and control system equipment) andreviewing other utility interconnections to our facility (including gas andwater pipelines); performing performance tests; providing for start-up andinitial operation functions; providing specified spare parts, waste disposalservices, chemicals, consumables and utilities.

 

The services willalso include: training our personnel prior to provisional acceptance; providingus and our designee with access to the site; obtaining additional necessaryreal estate rights; cleaning-up and waste disposal (including hazardousmaterials brought to the site by Raytheon or the subcontractors); submitting aproject schedule and progress reports; paying of contractor taxes; makingemployee identification and security arrangements; protecting adjoiningutilities and public and private lands from damage; paying appropriateroyalties and license fees; providing final releases and waivers to us; postingcollateral or providing other assurances if major subcontractors fail to furnishfinal waivers; maintaining labor relations and project labor agreements;providing further assurances; coordinating with other contractors; and causingRaytheon to execute and deliver the related guaranty.

 

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**Construction and Start-Up**

 

Raytheon willperform certain services in accordance with prudent utility practices,generally accepted standards of professional care, skill, diligence andcompetence applicable to engineering, construction and project managementpractices, all applicable laws, all applicable permits, the real estate rights,the quality assurance plan, the electrical interconnection requirements, theenvironmental requirements and safety precautions set forth in the constructionagreement, and all of the requirements necessary to maintain the warrantiesgranted by the subcontractors under the construction agreement.  Raytheon will perform the services inaccordance with our project schedule and is obligated to cause:

 

•                                          eachconstruction progress milestone to be achieved on or prior to the applicableconstruction progress milestone date;

 

•                                          provisionalacceptance of our facility to occur on or prior to the guaranteed provisionalacceptance date (February 14, 2002, as may be adjusted under the constructionagreement); and

 

•                                          finalacceptance of our facility to occur on or before the guaranteed finalacceptance date (13.5 months after the guaranteed provisional acceptance date,as defined under the construction agreement).

 

Raytheon willperform the services so that our facility, when operated in accordance with theinstruction manual and the power purchase agreement operating requirements asof provisional acceptance and final acceptance, will comply with all applicablelaws and applicable permits, the electrical interconnection requirements andthe guaranteed emissions limits in accordance with the completed performancetest requirements.

** **

**Contract Price and Payment**

 

The adjustedcontract price may either be paid in installments in accordance with thepayment and milestone schedule or be prepaid as described in the collateralagency agreement.  Initially, theadjusted contract price was prepaid in the amount of $295.7 million ($288.6million of which was paid at closing), which included base scope changesthrough March 15, 2000. The contract price may be adjusted as a result of scopechanges.  The prepayment funds werebacked by a prepayment letter of credit in our favor.  However, under the construction agreement, the bankruptcy filingby WGI on May 14, 2001 constituted an event of default under the constructionagreement.  Accordingly, we requestedthat the full available amount of such letter of credit be drawn upon anddeposited in the construction account held by the collateral agent.  The collateral agent made such drawing onMay 4, 2001 in the amount of $95.8 million, which was the then outstandingamount of the prepayment letter of credit as it had been reduced by WGI’sachievement of construction milestones under the construction agreement.  Subsequent to the termination of theprepayment arrangements with WGI, payments to WGI for achievement ofconstruction milestones as specified in the construction agreement were made inaccordance with the terms of the construction agreement.

 

Under the constructionagreement, we have and will continue to withhold from each scheduled payment,other than the last milestone payment, 10% of the requested payment until afterfinal acceptance by us of the facility. At final acceptance, we will pay all retainage except for 150% of thecost of completing all punch list items and the lesser of (i) 150% of the costof repairing or replacing any items that have already been repaired or replacedby Raytheon and (ii) $1 million.  Wewill pay our project completion payment, including all remaining retainage,within 30 days after project completion. Within 30 days of the first anniversary of the earlier of provisionalacceptance or final acceptance, we will, so long as project completion hasoccurred, pay all remaining retainage. Under the construction agreement, the contractor is entitled to post aletter of credit in the amount of the then current retainage in lieu ofcash.  On March 4, 2002, Raytheonprovided us with a letter of credit in the amount of $29.5 million, whichamount represented the outstanding amount of retainage under the constructionagreement on the date the letter of credit was posted.  We may draw on this letter of credit in theevent that Raytheon fails to pay us any amount owed to us under the constructionagreement.

 

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**Our Services**

 

Ourresponsibilities include: designating a representative for our project;furnishing Raytheon access to the site; securing specified real estate rights;providing specified start-up personnel; furnishing specified spare parts, waterdisposal services and consumables; providing permanent utilities for thestart-up, testing and operation of our facility; providing raw and potablewater arrangements; providing fuel supply arrangements; providing electricalinterconnection facilities arrangements; furnishing approvals; administeringthird-party contracts; causing the AES Corporation to provide a pre-financialclosing guaranty.

 

If we fail to meetany of our obligations under the construction agreement, then, to the extentthat Raytheon was reasonably delayed in the performance of the services as adirect result thereof, an equitable adjustment to one or more of the contractprice, the guaranteed completion dates, the construction progress milestonedates, the payment and milestone schedule and our project schedule, and, asappropriate, the other provisions of the construction agreement that may beaffected thereby, will be made by agreement between us and Raytheon.

 

**Completion and Acceptance of OurProject**

 

***Mechanical Completion***

 

Mechanicalcompletion will be achieved when:

 

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

 

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

 

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

 

•                                          Thecomplete performance by Raytheon of all the services relating to our facilityunder the construction agreement, except for any remaining punch list items, performancetests, power purchase agreement output tests and reliability run applicablethereto, in compliance with the standards of performance set forth in theconstruction agreement, so that our facility meets all of the requirements setforth in the construction agreement applicable thereto but excluding theachievement of the guaranteed emission limits and the performance guarantees.

 

When Raytheonbelieves that it has achieved mechanical completion, it will deliver to us thenotice of mechanical completion.  Within5 days of receipt of the notice of mechanical completion, if we are satisfiedthat the mechanical completion requirements have been met, we will deliver toRaytheon a mechanical completion certificate. If reasonable cause exists for doing so, we will notify Raytheon inwriting that mechanical completion has not been achieved, stating the reasonstherefor.  If mechanical completion hasnot been achieved as so determined by us, Raytheon will promptly take theaction or perform the additional services as will achieve mechanical completionof our facility and will issue to us another notice of mechanicalcompletion.  The procedure will berepeated as necessary until mechanical completion of our facility has beenachieved.

 

**Performance Tests and Power PurchaseAgreement Output Tests**

 

Once mechanicalcompletion has been achieved, Raytheon will perform the performance tests inaccordance with criteria set forth in the construction agreement.  Raytheon will give us notice of theperformance tests.  We will arrange forthe disposition of output during start-up and testing.  Raytheon may declare the performance test tobe a completed performance test if during the tests the operation of ourfacility complies with applicable laws, applicable permits, GuaranteedEmissions Limits and other required standards.

 

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**Provisional Acceptance**

 

Provisionalacceptance will be achieved upon the earlier of final acceptance or when:

 

•                                          Raytheonhas caused a completed performance test in which our facility demonstrates anaverage net electrical output of 95% (or higher) of the electrical outputguarantee and 105% (or lower) of the gas-based heat rate guarantee.

 

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

 

When Raytheonbelieves that it has achieved provisional acceptance of our facility, it willdeliver to us a notice of provisional acceptance.  The guaranteed provisional acceptance date under the constructionagreement was February 14, 2002, but may be adjusted under the constructionagreement.  We currently expect thatRaytheon will achieve provisional acceptance of the facility by approximatelyJune 30, 2002.  If we and theindependent engineer are satisfied that the provisional acceptance requirementshave been met, we will deliver to Raytheon a provisional acceptancecertificate.  If reasonable cause existsfor doing so, we will notify Raytheon writing that provisional acceptance ofour facility has not been achieved, stating the reasons therefor.  If we determine that provisional acceptanceof our facility has not been achieved, Raytheon is required to promptly takethe action or perform the additional services as will achieve provisionalacceptance and, if Raytheon believes that provisional acceptance of ourfacility has been achieved, will issue to us another notice of provisionalacceptance.  Unless final acceptance ofour facility will have previously occurred, the procedure will be repeated asnecessary until provisional acceptance of our facility has been achieved.  Upon the earliest to occur of provisionalacceptance and final acceptance of our facility, we will take possession andcontrol our facility and will thereafter be solely responsible for theoperation and maintenance thereof. After we take possession and control of our facility, Raytheon will havereasonable access to our facility to complete the services.

 

**Final Acceptance**

 

Final acceptancewill be achieved when:

 

•                                          Raytheonhas caused a completed performance test in accordance with the constructionagreement to be concluded in which our facility demonstrates during theperformance test an average net electrical output of 100% (or higher) of theelectrical output guarantee and 100% (or lower) of the heat rate guarantee;

 

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

 

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

 

•                                          Raytheonhas completed performance of the services except for (i) punch list items and(ii) services that are required by the terms of the construction agreement tobe completed after the achievement of final acceptance, such as Raytheon’swarranty obligations.

 

The reliabilityguarantee will have been achieved if and only if our facility demonstrates anaverage equivalent availability of not less than 95% while operating over aperiod of at least 30 consecutive days in accordance with applicable laws,applicable permits, the electrical interconnection requirements, the powerpurchase agreement operating requirements, the guaranteed emissions limits, theinstruction manual and the power purchase agreement.

 

When Raytheonbelieves that it has achieved final acceptance of our facility, it will deliverto us a notice of final acceptance.  Theguaranteed final acceptance date under the construction agreement is 13.5months after the provisional acceptance date. If it is satisfied that the final acceptance requirements have been met,we will deliver to Raytheon a final acceptance certificate.  If reasonable cause exists for doing so, wewill notify Raytheon in writing that final acceptance has not been achieved,stating the reasons therefor.  If wedetermine that final acceptance has not been achieved, Raytheon will promptlytake the action or perform the additional services as will achieve finalacceptance and will issue to us another notice of final acceptance.  The procedure will be repeated as necessaryuntil final acceptance has been achieved or deemed to have occurred.

 

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At any time, bygiving notice to Raytheon, we in our sole discretion may elect to effect finalacceptance, in which case final acceptance will be deemed effective as of thedate of the notice, and Raytheon will have no liability to us for any amountsthereafter arising as performance guarantee payments, other than any interimperiod rebates that arose prior to the election by us, for failure of ourfacility to achieve any or all of the performance guarantees applicablethereto.

 

At any time afterprovisional acceptance of our facility has been achieved, Raytheon may, afterexhausting all reasonable repair and replacement alternatives in order toachieve the applicable performance guarantees for final acceptance, and so longas that the reliability guarantee will have been achieved, give to us notice ofits intention to elect to declare final acceptance.  In that event, Raytheon may elect to use the results of the mostrecent eligible completed performance test for the purpose of determining ourfacility’s level of achievement of the performance guarantees. final acceptancewill be deemed effective as of the last to occur of (i) the date of our receiptof the declaration and report of the final completed performance test, or, asapplicable, the most recent completed performance test and (ii) the effectivedate of the achievement of the reliability guarantee.

 

If on or beforethe guaranteed final acceptance date (i) our facility has achieved provisionalacceptance and (ii) the reliability guarantee has been achieved, then finalacceptance of our facility will be deemed to occur on the guaranteed finalacceptance date.

 

**Project Completion**

 

Project completionwill be achieved under the construction agreement when:

 

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

 

•                                          Thereliability guarantee will have been achieved;

 

•                                          Raytheonwill have demonstrated during the completed performance test that the operationof our facility does not exceed the guaranteed emissions limits;

 

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

 

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

 

•                                          Raytheonwill have performed all of the services, other than those services, such asRaytheon’s warranty obligations, which by their nature are intended to beperformed after project completion.

 

When Raytheonbelieves that it has achieved project completion, it will deliver to us anotice of project completion.  If it issatisfied that the final acceptance requirements have been met, we will deliverto Raytheon a project completion certificate. If reasonable cause exists for doing so, we will notify Raytheon inwriting that project completion has not been achieved, stating the reasonstherefor.  If our project completion hasnot been achieved as so determined by us, Raytheon will promptly take theaction or perform the additional services as will achieve project completionand will issue to us another notice of project completion.  The procedure will be repeated as necessaryuntil project completion is achieved.

 

Raytheon will beobligated to achieve project completion within 90 days after final acceptanceof our facility.  If Raytheon does notachieve our project completion on or before our project completion deadline orif we determine that Raytheon is not proceeding with all due diligence tocomplete the services in order to achieve project completion by the deadline,we may retain another contractor to complete the work at contractor’s expense.

 

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**Price Rebate for Failure to MeetGuarantees**

 

***Completion Dates***

 

Raytheonguarantees that (i) provisional acceptance or final acceptance of our facilitywill be achieved on or before the guaranteed provisional acceptance date and(ii) final acceptance of our facility will be achieved on or before theguaranteed final acceptance date.

 

If neitherprovisional acceptance nor final acceptance of our facility occurs by the datethat is 50 days after the guaranteed provisional acceptance date, Raytheon isobligated to pay us $108,000 per day as provisional acceptance late completionpayments, for each day provisional acceptance or final acceptance is later thanthe guaranteed provisional acceptance date. The aggregate amount of such payments that Raytheon is obligated to makeis limited to 13% of the adjusted contract price (approximately $40 million).  We expect Raytheon to pay us scheduled latecompletion payments starting April 6, 2002 and ending on the provisionalacceptance date (currently expected to be approximately June 30, 2002).

 

If neitherprovisional acceptance nor final acceptance of our facility occurs on or beforethe date that is 90 days after the guaranteed provisional acceptance date,Raytheon will, on that date, submit for approval by us and the independentengineer a plan to accelerate the performance of the services as necessary inorder to achieve final acceptance of our facility by the guaranteed finalacceptance date.  If the plan is notapproved by us and the independent engineer, Raytheon will revise the plan andresubmit a revised plan for approval by us and the independent engineer.

 

**Performance Guarantees**

 

***Electrical Output***

 

If the average netelectrical output of our facility at provisional acceptance is less than theelectrical output guarantee, then Raytheon will pay us, as a rebate, for eachday during the interim period, an amount equal to $0.22 per day for eachkilowatt by which the average net electrical output is less than the electricaloutput guarantee.

 

Upon finalacceptance, if the average net electrical output of our facility during thecompleted performance test is less than the electrical output guarantee, thenRaytheon will pay us, as a rebate, an amount equal to $520 for each kilowatt bywhich the average net electrical output is less than the electrical outputguarantee minus any interim period electrical output rebates.

 

**Heat Rate Guarantees**

 

If the average netheat rate of our facility at provisional acceptance, if having occurred beforefinal acceptance, exceeds the heat rate guarantee, then Raytheon will pay us,as a rebate, for each day during the interim period, an amount equal to $46 perday for each BTU/KwH by which the measured net heat rate is greater than theheat rate guarantee.

 

Upon finalacceptance, if the net heat rate of our facility during the completedperformance test exceeds the heat rate guarantee, then Raytheon will pay us, asa rebate, an amount equal to $110,000 for each BTU/KwH by which the measuredheat rate is greater than the heat rate guarantee.

 

**Liability and Damages**

 

***Limitation of Liability***

 

In no event willRaytheon’s liability (i) for provisional acceptance late completion paymentsexceed an amount equal to 13% of the contract price, (ii) for performanceguarantee payments arising from the electrical output guarantee exceed in theaggregate an amount equal to 10% of the contract price, (iii) for performanceguarantee payments arising from the heat rate guarantee exceed in the aggregate15% of the contract price and (iv) for all provisional acceptance latecompletion payments and performance guarantee payments exceed an amount equalto 34% of the contract price.

 

***Consequential Damages***

 

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

 

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**Aggregate Liability of Contractor**

 

The totalaggregate liability of Raytheon and any of its subcontractors, including,without limitation, liabilities described above, to us will not in any eventexceed an amount equal to the contract price for liability due to eventsoccurring before the provisional acceptance date or 40% of the contract pricefor liability due to events occurring after the provisional acceptance date;however, the limitation of liability will not apply to obligations to removeliens or to make indemnification payments.

 

**Warranties and Guarantees**

 

Raytheon warrantsand guarantees that during the applicable warranty period

 

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

 

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

 

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

 

•                                          thecompleted project will perform its intended functions of generating electricenergy and capacity as a complete, integrated operating system as contemplatedin the construction agreement.

 

If we notifyRaytheon within 30 days after the expiration of the applicable warranty periodof any defects or deficiencies discovered during the applicable warrantyperiod, Raytheon will promptly reperform any of the services at its own expenseto correct any errors, omissions, defects or deficiencies and, in the case ofdefective or otherwise deficient machinery, equipment, materials, systemssupplies or other items, replace or repair the same at its own expense.  Raytheon warrants and guarantees that, tothe extent we have made all payments then due to Raytheon, title to ourfacility and all work, materials, supplies and equipment will pass to us free andclear of all liens, other than any permitted liens.  Other than the warranties and guarantees provided in theconstruction agreement there are no other warranties of any kind, whetherstatutory, express or implied relating to the services.

 

Upon notificationfrom us no later than 30 days after the expiration of the applicable warrantyperiod of any defects or deficiencies in our project or any component thereof,we will, subject to the provisions of the construction agreement, make ourfacility or the subject equipment available to Raytheon for Raytheon tore-perform, replace or, at Raytheon’s option, repair the same at Raytheonexpense so that it is in compliance with the standards warranted andguaranteed, all in accordance with the construction agreement.

 

**Force Majeure**

 

***Force Majeure Event***

 

A force majeureevent will mean any act or event that prevents the affected party fromperforming its obligations, other than the payment of money, under theconstruction agreement or complying with any conditions required to be compliedwith under the construction agreement if the act or event is beyond thereasonable control of and not the fault of the affected party and the party hasbeen unable by the exercise of due diligence to overcome or mitigate theeffects of the act or event.  Forcemajeure events include, but are not limited to, acts of declared or undeclaredwar, sabotage, landslides, revolution, terrorism, flood, tidal wave, hurricane,lightning, earthquake, fire, explosion, civil disturbance, insurrection orriot, act of God or the public enemy, action, including unreasonable delay orfailure to act, of a court or public authority, or strikes or other labordisputes of a regional or national character that are not limited to only

 

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the employees of Raytheonor its subcontractors and that are not due to the breach of a labor contract orapplicable law by the party claiming force majeure or any of itssubcontractors.  Force majeure events donot include (i) acts or omissions of Raytheon or any subcontractors, except asexpressly provided in the foregoing sentence, (ii) late delivery of materialsor equipment, except to the extent caused by a force majeure event, and (iii)economic hardship.

 

**Excused Performance**

 

If either party isrendered wholly or partly unable to perform its obligations because of a forcemajeure event, that party will be excused from whatever performance is affectedby the force majeure event to the extent so affected so long as:

 

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

 

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

 

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

 

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

 

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

 

**Scope Changes**

 

We may order scopechanges to the services, in which event one or more of the contract price, theconstruction progress milestone dates, the guaranteed completion dates, thepayment and milestone schedule, our project schedule and the performanceguarantees will be adjusted accordingly, if necessary.  All scope changes will be authorized by ascope change order and only we or our representative may issue scope changeorders.

 

As soon asRaytheon becomes aware of any circumstances which Raytheon has reason tobelieve may necessitate a scope change, Raytheon will issue to us a scopechange order notice at Raytheon’s expense. If we desire to make a scope change, in response to a scope change ordernotice or otherwise, we will submit a scope change order request toRaytheon.  Raytheon will promptly reviewthe scope change order request and notify us in writing of the options forimplementing the proposed scope change and the effect, if any, each optionwould have on the contract price, the guaranteed completion dates, theconstruction progress milestone dates, the payment and milestone schedule, ourproject schedule and the performance guarantees.

 

No scope changeorder will be issued and no adjustment of the contract price, the guaranteedcompletion dates, the construction progress milestone dates, the payment andmilestone schedule, our project schedule or the performance guarantees will bemade in connection with any correction of errors, omission, deficiencies, orimproper or defective work on the part of Raytheon or any subcontractors in theperformance of the services.  Changesdue to changes in applicable laws or applicable permits occurring after thedate of the construction agreement will be treated as scope changes.

 

**Effect of Force Majeure Event**

 

If and to theextent that any force majeure events affect Raytheon’s ability to meet theguaranteed completion dates, or the construction progress milestone dates, anequitable adjustment in one or more of the dates, the payment and milestoneschedule and our project schedule will be made by agreement of us andRaytheon.  No adjustment to theperformance guarantees and, except as otherwise expressly set forth below, thecontract price will be made as a result of a force majeure event.  If Raytheon is delayed in the performance ofthe services by a force majeure event, then:

 

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•                                          tothe extent that the delay(s) are, in the aggregate, 60 days or less, Raytheonwill absorb all of its costs and expenses resulting from said delay(s); and

 

•                                          tothe extent that the delay(s) are, in the aggregate, more than 60 days, Raytheonwill be reimbursed by us for those incremental costs and expenses resultingfrom said delay(s) which are incurred by Raytheon after said 60 day period.

 

**Price Change**

 

An increase ordecrease in the contract price, if any, resulting from a scope change requestedby us or made under the construction contract will be determined by mutualagreement of the parties.

 

**Continued Performance PendingResolution of Disputes**

 

Notwithstanding anydispute regarding the amount of any increase or decrease in Raytheon’s costswith respect to a scope change, Raytheon will proceed with the performance ofthe scope change promptly following our execution of the corresponding scopechange order.

 

**Hazardous Materials**

 

If hazardousmaterials were not identified in an environmental site assessment reportdelivered by us to Raytheon prior to the commencement date and were not broughtonto the site by Raytheon or any of its subcontractors, then Raytheon will beentitled to a scope change under the construction agreement.

 

**Risk of Loss**

 

With respect toour facility, until the risk transfer date, Raytheon will bear the risk of lossand full responsibility for the costs of replacement, repair or reconstructionresulting from any damage to or destruction of our facility or any materials,equipment, tools and supplies that are purchased for permanent installation inor for use during construction of our facility.

 

After the risktransfer date with respect to our facility, we will bear all risk of loss andfull responsibility for repair, replacement or reconstruction with respect toany loss, damage or destruction to our facility which occurs after the risktransfer date.

 

**Termination**

 

***Termination For Our Convenience***

 

We may for ourconvenience terminate any part of the services or all remaining services at anytime upon 30 days’ prior written notice to Raytheon specifying the part of theservices to be terminated and the effective date of termination.  We may elect to suspend completion of all orany part of the services upon 10 days’ prior written notice to Raytheon, or, inemergency situations, upon prior notice as circumstances permit.

 

***Termination by Raytheon***

 

If we fail to payto Raytheon any payment and the failure continues for 30 days, then (i)Raytheon may suspend its performance of the services upon 10 days’ priorwritten notice to us, which suspension may continue until the time as thepayment, plus accrued interest thereon, is paid to Raytheon, and/or (ii) if thepayment has not been made prior to the commencement of a suspension by Raytheonunder clause (i) above, Raytheon may terminate the construction agreement upon60 days’ prior written notice to us, however, the termination will not becomeeffective if the payment, plus accrued interest thereon, is made to Raytheonprior to the end of the notice period. If the suspension occurs, an equitable adjustment to one or more of thecontract price, the guaranteed completion dates, the construction progress milestonedates, the payment and milestone schedule and our project schedule, and, asappropriate, the other provisions of the construction agreement that may beaffected thereby, will be made by agreement between us and Raytheon.  If we have suspended completion of all orany part of the services in accordance with the construction agreement for aperiod in

 

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excess of 365 days in theaggregate, Raytheon may, at its option, at any time thereafter so long as thesuspension continues, give written notice to us that Raytheon desires toterminate the construction agreement. Unless we order Raytheon to resume performance of the suspended serviceswithin 15 days of the receipt of the notice from Raytheon, the suspendedservices will be deemed to have been terminated by us for our convenience.  If the occurrence of one or more forcemajeure events prevents Raytheon from performing the services for a period inthe aggregate of 720 days, either party may, at its option, give written noticeto the other party of its desire to terminate the construction agreement.

 

***Consequences of Termination***

 

•                                          Uponany termination, we may, so long as the termination is pursuant to any defaultRaytheon will have been paid all amounts due and owing to it under theconstruction agreement, which will not be deemed to constitute a waiver byRaytheon of any rights to payment it may have as a result of a non-defaultrelated termination in the event of a termination pursuant to a default, at ouroption elect to have itself, or our designee, which may include any otheraffiliate or any third-party purchaser, (i) assume responsibility for and taketitle to and possession of our project and any or all work, materials orequipment remaining at the site and (ii) succeed automatically, without thenecessity of any further action by Raytheon, to the interests of Raytheon inany or all items procured by Raytheon for our project and in any and allcontracts and subcontracts entered into between Raytheon and any subcontractorwith respect to the equipment specified in the construction agreement, and withrespect to any or all other subcontractors selected by us which are materiallynecessary to the timely completion of our project, Raytheon will use all reasonableefforts to enable us, or our designee, to succeed to Raytheon’s intereststhereunder.

 

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

 

**Surviving Obligations**

 

Termination of theconstruction agreement (i) will not relieve either party of any obligation withrespect to the confidentiality of the other party’s information, (ii) will notrelieve either party of any obligation which expressly or by implicationsurvives termination of the construction agreement and (iii) except asotherwise provided in any provision of the construction agreement expresslylimiting the liability of either party, will not relieve either party of any obligationsor liabilities for loss or damage to the other party arising out of or causedby acts or omissions of the party prior to the effectiveness of the terminationor arising out of the termination, and will not relieve Raytheon of itsobligations as to portions of the services already performed or as toobligations assumed by Raytheon or us prior to the date of termination.

 

**Default and Remedies**

** **

***Raytheon’s Default***

 

Raytheon’s eventsof default include: voluntary bankruptcy or insolvency; involuntary bankruptcyor insolvency; materially adverse misleading or false representation orwarranty; improper assignment; failure to maintain required insurance; failureto comply with applicable laws or applicable permits; cessation or abandonmentof the performance of services; termination or repudiation of, or default underthe related construction contract guaranty; failure to supply sufficientskilled workers or suitable material or equipment; failure to make payment whendue for labor, equipment or materials; non-occurrence of either provisionalacceptance or final acceptance within 90 days after the guaranteed provisionalacceptance date, non-occurrence of construction progress milestones and failureto be proceeding under a remediation plan within 90 days after thenon-occurrence; and failure to remedy non-performance or non-observance of anyprovision in the construction agreement.

 

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***Our Rights and Remedies***

 

If Raytheon is indefault of its obligations, we will have any or all of the following rights andremedies, in addition to any other rights and remedies that may be available tous under the construction agreement or at law or in equity, and Raytheon willhave the following obligations:

 

•                                          Wemay, without prejudice to any other right or remedy we may have under theconstruction agreement or at law or in equity, terminate the constructionagreement in whole or in part immediately upon delivery of notice toRaytheon.  In case of the partialtermination, the parties will mutually agree upon a scope change order to makeequitable adjustments, including the reduction and/or deletion of obligationsof the parties commensurate with the reduced scope Raytheon will have aftertaking into account the partial termination, to one or more of the guaranteedcompletion dates, the construction progress milestone dates, the contractprice, the payment and milestone schedule, our project schedule, theperformance guarantees and the other provisions of the construction agreementwhich may be affected thereby, as appropriate. If the parties are unable to reach mutual agreement as to said scopechange order and the dispute resolution procedures set forth in theconstruction agreement are invoked, the procedures will give due considerationto customary terms and conditions under which Raytheon has entered subcontractswith third party prime contractors covering services substantially similar tothose services which are not being terminated.

 

•                                          Ifrequested by us, Raytheon will withdraw from the site, will assign to us suchof contractor’s subcontracts, to the extent permitted therein, as we mayrequest, and will remove the materials, equipment, tools and instruments usedby, and any debris and waste materials generated by, Raytheon in theperformance of the Services as we may direct, and we, without incurring anyliability to Raytheon, other than the obligation to return to Raytheon at thecompletion of our project the materials that are not consumed or incorporatedinto our project, solely on an “as is, where is” basis without anyrepresentation or warranty of any kind whatsoever, may take possession of anyand all designs, drawings, materials, equipment, tools, instruments, purchaseorders, schedules and facilities of Raytheon at the site that we deem necessaryto complete the services.

 

**Assignment**

 

The parties shallhave no right to assign or delegate any of their respective rights orobligations under the construction agreement either voluntarily orinvoluntarily or by operation of law, except that we may, without Raytheon’sapproval, assign any or all of its rights under the construction agreement (a)as collateral security to the financing parties and (b) to any transferee ofour project or a substantial portion so long as such assignee has financial andoperational capabilities that are either substantially similar to those of oursat the time or otherwise are such that the assignment could not reasonably beexpected to have a material adverse effect on Raytheon’s rights and obligationsunder the construction agreement.

 

**MaintenanceServices Agreement**

 

We have enteredinto the Maintenance Program Parts, Shop Repairs and Scheduled Outage TFAServices Contract, dated as of December 8, 1999, with Siemens Westinghouse bywhich Siemens Westinghouse will provide us with, among other things, combustionturbine parts, shop repairs and scheduled outage technical field assistanceservices.

 

The maintenanceservices agreement became effective on the date of execution and unlessterminated early, will terminate upon completion of shop repairs performed bySiemens Westinghouse following the twelfth scheduled outage of the applicablecombustion turbine or sixteen years from the date of execution, whicheveroccurs first, unless we exercise our right to terminate the agreement after thefirst major outage of the turbines, which will be approximately the sixth yearof operation of the facility.

 

**Scope of Work**

 

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

 

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•                                          deliverthe type and quantity of new program parts for installation of the combustionturbine;

 

•                                          repair/refurbishprogram parts and equipment for the combustion turbine;

 

•                                          providemiscellaneous hardware;

 

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

 

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

 

•                                          providetechnical field assistance, or TFA Services, which involves advice andconsultation for the disassembly, inspection and assembly of various equipment.

 

We are responsible for, among other things:

 

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

 

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

 

•                                          ensuringthat our operator and maintenance personnel are properly trained;

 

•                                          transportingprogram parts in need of repair/refurbish; and

 

•                                          providingSiemens Westinghouse, on a monthly basis, with the number of equivalent startsand the number of equivalent base load hours (“EBHs”) incurred by eachcombustion turbine.

 

We and SiemensWestinghouse will jointly develop the scheduled outage plan.  The scheduled outage plan will be consistentwith the terms and conditions of the power purchase agreement.

 

**Early Replacement**

 

If it isdetermined that due to normal wear and tear a program part(s) for thecombustion turbine has failed or will not last until the next scheduled outage,and the part has to be repaired before the scheduled replacement period,Siemens Westinghouse will replace the program part by moving up a new programpart which is otherwise scheduled to be delivered at a later date.  The contract price for the replacement willnot be affected if the replacement date is less than or equal to one year earlierthan the scheduled outage during which the program part was scheduled to bereplaced.  If the actual replacementdate for a program part is more than one year earlier than the scheduled outageat which point the program part was scheduled to be replaced, the earlyreplacement will result in an adjustment to the payment schedule.  Siemens Westinghouse has the final decisionwith regard to the replacement or refurbishment associated with any programpart.  If we dispute SiemensWestinghouse’s decision, we may seek to resolve the dispute in accordance withthe dispute resolution procedures discussed below.

 

**Parts Life Credit**

 

After applicablewarranty periods set forth in the maintenance services agreement and theconstruction agreement, Siemens Westinghouse will provide a parts life creditif a program part requires replacement due to normal wear and tear prior tomeeting its expected useful life. Siemens Westinghouse has the final decision with regard to actual partslife and the degree of repair or refurbishment associated with any program parts.  The parts life credit will be calculated interms of EBHs and equivalent starts. The price of the replacement part will be adjusted for inflation.  If we dispute Siemens Westinghouse’sdecision, we may seek to resolve the dispute in accordance with the disputeresolution procedures discussed below.

 

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**Contract Price and Payment Terms**

 

SiemensWestinghouse will invoice us monthly and payments are then due within 25days.  The fees assessed by Siemens Westinghousewill be based on the number of EBHs accumulated by the applicable combustionturbine as adjusted for changes in the consumer price index.  The contract price will be the aggregatenumber of fees as adjusted plus any additional payment amount mutually agreedto by the parties under a change order.

 

**Unscheduled Outages and UnscheduledOutage Work**

 

If during the termof the maintenance services agreement an unscheduled outage occurs resultingfrom (i) the non-conformity of new program parts; (ii) the failing of a shoprepair; (iii) a program part requiring replacement due to normal wear and tearprior to achieving its expected life in terms of EBHs or equivalent starts; or(iv) the failure of a service, performed by Siemens Westinghouse, we will hireSiemens Westinghouse, to the extent not supplied by Siemens Westinghouse as awarranty remedy under Siemens Westinghouse’s warranties under the maintenanceservices agreement, to supply any additional parts, miscellaneous hardware,shop repairs and TFA Services under a change order.  We will be entitled to any applicable parts life credit withrespect to program parts as well as a discount for TFA Services.  If the unscheduled outage occurs within aspecified number of EBHs of a scheduled outage and it was anticipated that theadditional parts, miscellaneous hardware, shop repairs and TFA Services to beused in the unscheduled outage were to be used during the upcoming scheduledoutage, the upcoming scheduled outage will be moved up in time to become the unscheduledoutage/moved-up scheduled outage.  Wewill not be required to pay any additional money for the program parts,miscellaneous hardware, shop repairs and TFA Services.

 

If any programparts are delivered by Siemens Westinghouse within 15 days of receipt of thechange order, we will pay to Siemens Westinghouse the price for the programpart set forth in the maintenance services agreement plus a specifiedpercentage.  Any program part deliveredafter 30 days of the change order will cost us the price set forth in themaintenance services agreement minus a specified percentage.

 

The remedies setforth in the maintenance services agreement, and discounts on any TFA Servicespurchased by us from Siemens Westinghouse will constitute SiemensWestinghouse’s sole liability and our exclusive remedies for unscheduledoutages whether our claims are based in contract, in tort, or otherwise.  If Siemens Westinghouse fails to send a TFAServices representative by the end of the second day following written receiptof the unscheduled outage, we may hire another qualified person, at its cost,to perform the work.  If the hired partyproceeds to disassemble the combustion turbine to determine the case of theunscheduled outage and Siemens Westinghouse still has not provided personnel toassist with the inspection, we can elect to terminate the maintenance servicesagreement on the basis that Siemens Westinghouse has failed to perform amaterial obligation.

 

**Changes in Operating Restrictions**

 

The maintenanceservices agreement requires that each combustion turbine will be operated inaccordance with the requirements of the power purchase agreement and prudentutility practices, with 8,000 EBH/year and 250 equivalent starts per year byusing natural gas fuel or liquid fuel and water.  Should the actual operations differ from these operatingparameters which causes a scheduled outage to be planned/performed earlier orlater than as expected, then, under a change order, an adjustment in the scope,schedule, and price will be made.

** **

**Warranties**

 

SiemensWestinghouse warrants that the new program parts, miscellaneous hardware andany shop repairs will conform to standards of design, materials and workmanshipconsistent with generally accepted practices of the electric utility industry.  The warranty period with respect to programparts, hardware and shop repair is until the earlier of one year from the dateof installation of the original program part or hardware, a specific number ofstarts or fired hours after installation of the program parts and hardware, orthree years from the date of delivery of the original program part, hardware,and in the case of shop repair, three years from completion of the work.  Warranties on the program parts and hardwarewill not expire more than one year after the conclusion of the maintenanceservices agreement.  SiemensWestinghouse will repair or replace any program part or hardware, at its cost,if notified of any failure or non-conformity of the program part or hardwareduring the warranty period.

 

SiemensWestinghouse also warrants that the services of its personnel and technicalinformation transmitted will be competent and consistent with prudent utilitypractices and the services will comply in all material respects with laws

 

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and will be free fromdefects in workmanship for a period of one year from the date of completion ofthat item of services.  The warrantieson the services will expire no later than one year after the termination or endof the term of the maintenance services agreement.

 

In addition,Siemens Westinghouse warrants any program part removed during a scheduledoutage and delivered by us to the designated facility for repair will berepaired and delivered by Siemens Westinghouse within 26 weeks.  If Siemens Westinghouse does not deliver theprogram part within this time frame or does not provide a new program part inlieu of the program part being shop repaired and an outage occurs whichrequires such a program part, Siemens Westinghouse will pay us liquidateddamages for each day the program part is not repaired and delivered theaggregate of which liquidated damage payments will not exceed a maximum annualcap.  If upon reaching the maximum capon aggregate liquidated damages, Siemens Westinghouse still has not repairedand delivered the program part, we may elect to terminate the maintenanceservices agreement because Siemens Westinghouse will be considered to havefailed to perform its material obligations.

 

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

 

The warrantiesprovided by Siemens Westinghouse are conditioned upon (i) our receipt,handling, storage, operation and maintenance of our project, including anyprogram parts and miscellaneous hardware, being done in accordance with theterms of the combustion turbine instruction manuals; (ii) operation of thecombustion turbine in accordance with the terms of the maintenance servicesagreement; (iii) repair of accidental damage done consistently with theequipment manufacturer’s recommendations; (iv) us providing SiemensWestinghouse with access to the site to perform its services under themaintenance services agreement; and (v) hiring Siemens Westinghouse to provideTFA Services, program parts, shop repairs and miscellaneous hardware requiredto dissemble, repair and reassemble the combustion turbine.

 

**Termination**

 

We may terminatethe maintenance services agreement if (i) specific bankruptcy events affectingSiemens Westinghouse occur; (ii) Siemens Westinghouse fails to perform orobserve in any material respect any provision in the maintenance servicesagreement and fails to (a) promptly commence to cure and diligently pursue thecure of the failure or (b) remedy the failure within 45 days after SiemensWestinghouse receives written notice of the failure; (iii) we terminate theconstruction agreement due to Raytheon’s default thereunder or due to ourinability to obtain construction financing or environmental operating permits;or (iv) Raytheon terminate the construction agreement for any reason other thanour default thereunder.  Notwithstandingthe foregoing, we may terminate the maintenance services agreement at any timefor convenience following the completion of the first major outage of bothcombustion turbine generators.  Inaddition, the maintenance services agreement will automatically terminate if(i) we terminate the construction agreement for reasons other than (a) thedefault of Raytheon and (b) our inability to obtain permits for our project or(ii) the Raytheon terminates the construction agreement for our defaultthereunder.  If such termination,Siemens Westinghouse will discontinue any work or services being performed andcontinue to protect our property. Siemens Westinghouse will transfer title to and deliver any new programparts and miscellaneous hardware already purchased by us.  We will pay Siemens Westinghouse thoseamounts owed at the time of termination.

 

SiemensWestinghouse may also terminate the maintenance services agreement if: (i) wefail to make payments or (ii) specific bankruptcy events affecting usoccur.  Siemens Westinghouse cannotterminate the maintenance services agreement if we pay outstanding amounts duewithin 90 days.  Upon termination,Siemens Westinghouse will stop all work, place no additional orders, protectour property and deliver the property to us upon our instructions.  Siemens Westinghouse will be entitled topayment for work performed up until its termination of the maintenance servicesagreement, all outstanding fees and reasonable costs associated with thetermination.

 

**Limitation of Liability**

 

Each party agreesthat, except to the extent liquidated damages provided in the maintenanceservices agreement are so considered, neither Siemens Westinghouse, nor itssuppliers, nor will we under any circumstances be liable for: any indirect,special, incidental or consequential loss or damage whatsoever; damage to orloss of property or equipment;

 

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loss of profits orrevenues; loss of use of material, equipment or power system; increased costsof any kind, including but not limited to capital cost, fuel cost and cost ofpurchased or replacement power, or claims of our customers.

 

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

 

**Force Majeure**

 

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

 

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

 

**Environmental Compliance**

 

SiemensWestinghouse will indemnify us from any fines, penalties, expense, loss orliability, including the costs of clean-up, incurred by us as a result of (i)Siemens Westinghouse’s failure to meet its obligations under the maintenance servicesagreement or (ii) any spills of hazardous waste or oil, petroleum or petroleumproducts to the environment which are attributable to and occur during SiemensWestinghouse’s performance, or the performance of its contractors orsubcontractors, of the workscope obligations at the site under the maintenanceservices agreement.

 

We will indemnifySiemens Westinghouse from any fines, penalties, expense, loss or liabilityincurred by Siemens Westinghouse as a result of our failure to meet ourobligations under the maintenance services agreement.  We will have no responsibility or liability with regard to anyhazardous waste or oil, petroleum or petroleum products which were spilled bySiemens Westinghouse, or any other of its contractors or subcontractors performingworkscope obligations at the site.

 

**Fleetwide Issue Notification**

 

During the term ofthis agreement, if Siemens Westinghouse becomes aware of a fleetwide issueinvolving the Siemens Westinghouse 501F Combustion Turbine which may have adeleterious effect on our combustion turbines,

 

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Siemens Westinghousewill, within a reasonable time of becoming aware of the fleetwide issues,notify us thereof, and if the fleetwide issue requires an additional repair orreplacement of a program part or miscellaneous hardware to be performed, theadditional repair or replacement will be performed in accordance with theprovisions of the maintenance services agreement.

 

**Interconnection Agreement**

 

We have entered intoa Generation Facility Transmission Interconnection Agreement, dated as of April27, 1999 with Jersey Central Power, for the installation, operation andmaintenance of the facilities necessary to interconnect our facility to JerseyCentral Power’s transmission system. Under the interconnection agreement, we and Jersey Central Power willconstruct, own, operate and maintain the interconnection facilities.  We are responsible for all of the costs ofconstruction, operation and maintenance of the interconnection facilities,including those owned by Jersey Central Power. We have been importing electricity from the transmission system tosupport commissioning of the facility since July 2001 and the interconnectionfacilities are ready to export power to the transmission system.  Project completion and final invoicing areexpected to be received from Jersey Central Power by May 2002.  On March 14, 2002, we requested a finalreview under the interconnection agreement for interconnection permission.

 

**Company Market-Based Tariff Petition**

 

FERC approval ofour company market-based tariff petition was received on June 22, 2001.

 

**Jersey Central Power’s Obligations**

 

We have enteredinto an interconnection installation agreement, by which Jersey CentralPower  has installed, at our cost andexpense the Jersey Central Power interconnection facilities.  The Jersey Central Power interconnectionfacilities, together with the facilities that we have installed , are necessaryto allow the interconnection of our facility with the transmission system ofJersey Central Power.  The JerseyCentral Power interconnection facilities which include, but are not limited to,certain substation protective relaying equipment and two 230 kV 2-cycle circuitbreakers are owned by Jersey Central Power, and maintained and operated byJersey Central Power, at our cost and expense. The remainder of the interconnection facilities will be installed,owned, maintained and operated by us.

 

Jersey CentralPower has completed the installation of the Jersey Central Powerinterconnection facilities necessary to permit us to meet our constructionagreement requirement to energize the switch yard and commence commissioning ofour facility.  Under the InstallationAgreement, Jersey Central Power is eligible to be paid an early completionbonus of $5,000 for each day of early completion of the Jersey Central Powerinterconnection facilities up to and including 30 days.  We have been importing electricity from thetransmission system to support commissioning of the facility since July 2001and the interconnection facilities are ready to export power to thetransmission system.  We have reimbursedJersey Central Power for its actual costs of installing the Jersey Central Powerinterconnection facilities.  Our paymentsto Jersey Central Power consist of advance payments of $100,000 on theexecution date of the interconnection installation agreement, $200,000 upon theissuance of the notice to proceed, $1,700,000 at the closing for financing forour facility.  We have received fromJersey Central Power monthly invoices for work performed for which we paidapproximately $4.0 million to date.  Weare currently receiving credit against the advance payments by us to JerseyCentral Power to offset invoices for recently invoiced work of completing theJersey Central Power interconnection facilities.  Williams Energy is obligated to reimburse us for the cost of theJersey Central interconnection facilities. Project completion and final invoicing are expected to be received fromJersey Central Power by May 2002, and we may be required to pay Jersey CentralPower, if they qualify, an early completion bonus of up to $150,000.

 

**Our Obligations**

 

We  have installed and will own, operate andmaintain a portion of the interconnection facilities, including, but notlimited to, a 230 kV switchyard, including generator step up transformers,instrument transformers, revenue metering, power circuit breakers, control andprotective relay panels, supervisory control and data acquisition equipment,and protective relaying equipment.

 

We are obligatedto give prior notice to Jersey Central Power before undertaking any additions,modifications or replacements to our facility or our interconnection facilitiesthat will increase the generating capacity of our facility or

 

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could reasonably beexpected to affect the transmission system, the Jersey Central PowerInterconnection Facilities or the operation of our facility.  We must reimburse Jersey Central Power forall costs incurred by Jersey Central Power associated with any modifications,additions or replacements that it must make to the transmission system or theJersey Central Power Interconnection Facilities, as reasonably required byJersey Central Power, in connection with our proposed addition, modification orreplacement at our facility.  We areobligated to modify its portion of the interconnection facilities as may berequired to conform to changes in good utility practice or as required by PJMInterconnection, L.L.C., which is the independent system operator that operatesthe transmission system to which our facility will be interconnected.

 

We are obligatedto keep our facility insured against loss or damage in accordance with theminimum coverages specified in the Interconnection Agreement.

 

**Operation and Maintenance ofInterconnection Facilities**

 

The parties areobligated to operate and maintain their respective portions of theinterconnection facilities in accordance with good utility practices and therequirements and guidelines of PJM and Jersey Central Power.

 

Jersey CentralPower will have the right to disconnect our facility from its transmissionsystem and/ or curtail, interrupt or reduce the output of our facility whenoperation of our facility or the interconnection facilities adversely affectsthe quality of service rendered by Jersey Central Power or interferes with thesafe and reliable operation of its transmission system or the regionaltransmission system.  Jersey Central Power,however, is obligated to use reasonable efforts to minimize any disconnection,curtailment, interruption or reduction in output.

 

In accordance withgood utility practice, Jersey Central Power may remove the interconnectionfacilities from service as necessary to perform maintenance or testing or toinstall or replace equipment on the interconnection facilities or thetransmission system.  Jersey CentralPower is obligated to use due diligence to restore the interconnectionfacilities to service as promptly as practicable.

 

In addition, if wefail to operate, maintain, administer, or insure our facility or its portion ofthe interconnection facilities, Jersey Central Power may, following 30 daysnotice and opportunity to cure the failure, disconnect our facility from thetransmission system.

** **

**Revenue Metering**

 

Revenue meters,which are part of the interconnection facilities, will be installed to measurethe transfer of electrical energy between the parties at the point ofinterconnection.  The revenue metershave been  installed at our expense andwill be owned, maintained and repaired by Jersey Central Power, also at ourexpense.  Jersey Central Power has  installed, at our expense, telemeteringequipment  which has been  installed by us, to retrieve certaininformation.  The revenue meters are tobe tested at least once every two years, or more frequently at ourrequest.  Any revenue meter found to beinaccurate by greater than 1% is to be adjusted, repaired or replaced.

 

**Land Rights and Access**

 

We have granted toJersey Central Power the right of reasonable access and all necessary rights ofway, easements, and licenses as Jersey Central Power may require to install,operate, maintain, replace and remove the revenue meters and other portions ofthe Jersey Central Power Interconnection Facilities.

** **

**Force Majeure**

 

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

 

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**Default**

 

The events of default under the interconnectionagreement are:

 

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

 

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

 

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

 

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

 

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

 

Upon an event of default, the non-defaulting party maygive notice of the event of default to the defaulting party.  The defaulting party will have 60 daysfollowing the receipt of the notice to cure the default or to commence in goodfaith the steps necessary to cure a default that cannot be cured within that60-day period.  If the defaulting partyfails to cure its default within 60 days or fails to take the steps necessaryto cure a default that cannot be cured within a 60-day period, thenon-defaulting party will have the right to terminate the interconnectionagreement.

 

Jersey Central Power will have the right to operateand/or to purchase specific equipment, facilities and appurtenances from usthat are necessary for Jersey Central Power to operate and maintain itstransmission system if (i) we commence bankruptcy proceedings or petitions forthe appointment of a trustee or other custodian, liquidator, or receiver; (ii)a court issues a decree for relief of our company or appoints a trustee orother custodian, liquidator, or receiver for our company or a substantial partof our assets and the decree is not dismissed within 60 days or (iii) we ceaseoperation for 30 consecutive days without having an assignee, successor, ortransferee in place.

** **

**Operations Agreement and Services Agreement**

 

We have entered into a Development and OperationsServices Agreement, dated as of March 10, 2000, with AES Sayreville under whichAES Sayreville has provided development and construction management servicesand, after the commercial operation date, operating and maintenance servicesfor our facility for a period of 32 years. Under the operations agreement, AES Sayreville will be responsible for,among other things, preparing plans and budgets related to start-up andcommercial operation of our facility, providing qualified operating personnel,making repairs, purchasing consumables and spare parts (not otherwise providedunder the maintenance services agreement) and providing other services asneeded according to industry standards.

 

AES Sayreville continues to be  compensated for the services on a cost plusfixed-fee basis.

 

Under a services agreement between AES Sayreville andThe AES Corporation, The AES Corporation has and continues to provide to AES Sayreville all of the personnel andservices necessary for AES Sayreville to comply with its obligations under theoperations agreement.

** **

**Water Supply Agreement**

 

We have enteredinto a Water Supply Agreement dated as of December 22, 1999 with the Borough ofSayreville under which the Borough will provide untreated water to ourfacility.

 

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**Supply of Untreated Water**

 

***Untreated Water Supply***

 

Subsequent to the completion of the Lagoon PumpingStation and the Lagoon Water Pipeline, the Borough will make available to ourfacility a supply of untreated water from the South River that is not less than4.6 million gallons per day and 1.53 billion gallons per year.  The Borough will use reasonable efforts tomaintain the Lagoon’s water level at an elevation of 29 feet, but duringperiods when water cannot be drawn from the South River, the Lagoon’s waterlevel will be drawn to elevations below 29 feet.  The Borough will supply us with water drawn from the South Riverwhen the Lagoon’s water level is 20 feet or higher.  During periods when either the Lagoon’s water level is below 20feet and water cannot be drawn from the South River or when water from theLagoon is needed to ensure a supply of treated water to Borough treated watercustomers, the Borough will supply our facility with water drawn from theDuhernal acquifer and transported through the Duhernal water pipeline.

 

The Borough will use reasonable efforts to comply withour requests for untreated water in excess of 4.6 million gallons per day and1.533 billion gallons per year.

 

***Compensation***

 

We have paid the Borough an initial payment of$150,000 from the bond proceeds, which will be credited to our account and willbe used to offset the cost of untreated water purchased during our project’sstart-up and testing phase and during the first year of operation.  If the Borough incurs additional costs fromMiddlesex Water Company as a result of the Borough providing us with DuhernalWater, we also will pay the Borough for those additional costs.  We will pay the Borough monthly for alluntreated water delivered to the point of delivery during the prior month.  The base rate for untreated water suppliedfrom the South River is $216 per million gallons, which includes $53 permillion gallons to cover operations, maintenance and administrative costs and$163 per million gallons to cover past infrastructure costs.  The operations and maintenance rate will beescalated in accordance with the percentage changes in water rates that areapplicable to other Borough water customers. The base rate for untreated water delivered from the Duhernal acquiferis $932 per million gallons which includes $785 to cover the operations,maintenance and administrative costs and $147 to cover acquisition costs.  The operations and maintenance portion ofthe base rate for water delivered from the Duhernal acquifer is also subject toescalation in accordance with the percentage changes in water rates that areapplicable to other Borough water customers.

 

With respect to each contract year there will be a minimumbill amount, which will initially be $300,000 per year.  One-twelfth of the minimum bill amount willbe paid each month.  The minimum billamount will be adjusted as follows:

 

•              For the first contract year itwill be reduced by the amount of the initial payment;

 

•                                          Itwill be reduced by an amount equal to the product of (x) the quantity ofuntreated water that would have been delivered but for service interruptions bythe Borough and (y) the rate for untreated water delivered from the SouthRiver; and

 

•                                          Startingwith 8th contract year and with six months’ prior written notice, we have theright to reduce the minimum bill amount for any contract year by reducing theannual quantity of water to be provided by up to 15%. Starting with the 21stcontract year we may reduce the annual quantity to be delivered without limit.

 

***Service Interruptions***

 

In the event that there is an interruption in thedelivery of untreated water attributable to a break in the infrastructure, theBorough will provide a shortfall notice and the Borough and we will agree onthe best way to repair the infrastructure and restore service.  If the Borough fails to restore servicewithin a reasonable period of time, we may, at our expense, contract withcontractors reasonably approved by the Borough to remedy the interruption.

 

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**Infrastructure and Real EstateRights—The Lagoon Water Pipeline, Lagoon Pumping Station and SayrevilleInterconnection Number 2**

 

The Borough has designed, at our expense, the LagoonWater Pipeline, Lagoon Pumping Station and Sayreville Interconnection Number 2in conformance with standard water system practice.  The Borough was responsible for obtaining, at our expense, allnecessary government approvals.  The Boroughand we have cooperated to obtain, at our expense, the real estate rightsnecessary for the construction, operation and maintenance of the Lagoon WaterPipeline, Lagoon Pumping Station and Sayreville Interconnection Number 2.  The Borough was not required to exercise itspower of eminent domain to obtain the necessary real estate rights.  We obtained easement rights from twoadjacent property owners and the Borough of Sayreville.  We are in final negotiations with the lastland owner and expect signing by the end of April 2002.  We also obtained permission from the NewJersey State House Commission to cross property designated as “Green Acres” bythe New Jersey Department of Protection. Upon completion and testing of the Lagoon Water Pipeline, Lagoon PumpingStation and Sayreville Interconnection Number 2, we will execute, without beingcompensated by the Borough, the documents as are necessary to evidence theBorough’s ownership of those facilities. We are and were responsible for selecting a contractor to construct theLagoon Water Pipeline, Lagoon Pumping Station and Sayreville InterconnectionNumber 2 and we have paid or in the process of paying  for all costs associated with the construction and constructioninspection of those facilities.  The Projectis ready to receive water from Sayreville Interconnection Number 2 since theFall 2001 and we expect testing of the Lagoon Pumping Station in April 2002.

 

**Operation and Maintenance ofInfrastructure**

 

The Borough will operate and maintain all infrastructurenecessary to supply the untreated water to the project boundary.  We will reimburse the Borough for itsassociated maintenance and replacement costs.

 

We will own and maintain metering equipment to measurethe delivery of untreated water from each source to the point of delivery andwill transmit a signal of the measurements to the Borough, which will use theinformation to compile billing invoices. At least once every five years, or more often if requested by eitherparty, we shall test the metering equipment. If the tests reveal that the metering equipment is inaccurate, theequipment must be recalibrated or replaced and a billing adjustment may bemade.

 

The Borough will own and maintain metering equipment,which it may elect to read monthly, to confirm the quantities of untreatedwater supplied from each source.  Theequipment will be tested and recalibrated or replaced if necessary in the samemanner that our metering equipment is tested.

 

**Infrastructure Studies and Additions**

 

We will pay for the actual cost, subject to a mutuallyagreed upon cap, of infrastructure studies to determine the costs and benefitsof (i) installing a new pipeline and (ii) improving the existing South Riverintake structure.  We will have theright to pay for the upgrades, improvements and/or new infrastructure that maybe identified as necessary or desirable by the studies in exchange for thebenefits allowed with their implementation. Other water users that benefit from the improvements will pay a pro-rataportion of the costs of the improvements.

 

If the Borough or we reasonably determines thatcapital improvements to the infrastructure are required, the party will notifythe other party and the parties will meet in good faith to determine the scopeof the capital improvements.  We willpay for our costs and expenses arising from the capital improvements as well asthose of the Borough.  If we damageeither infrastructure or capital improvements, we will restore the damagedportions thereof or pay the Borough to restore the damaged portions.

 

**Additional Obligations of the Parties**

 

***Additional Obligations of the Borough***

 

The Borough will use its best efforts to either (i)amend its existing permit, which limits pumping from the Lagoons to 1,000,000gallons of water per day or (ii) obtain or change any other permits necessaryto allow it to meet its obligations under the water supply agreement.  The Borough will provide us with writteninvoices by not later than the 15th of each month.  The amounts due under the invoices will be due within 30 days ofreceipt.  The Borough will

 

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provide us and the financing parties with escorted access to anyinfrastructure or other property owned by the Borough to which we or thefinancing parties reasonably request access.

 

***Our Additional Obligations***

 

We will provide the Borough with notice of anyviolation by the Borough of applicable government approvals related to thedelivery of untreated water.  Not laterthan the 15th day of each month, we will provide the Borough with a detailedinvoice listing any amounts due to us under the water supply agreement.

 

**Force Majeure**

 

If either party is unable to carry out any obligationunder the water supply agreement due to an event of force majeure, the watersupply agreement will remain in effect but the obligation will be suspended forthe period necessitated by the force majeure, as long as:

 

•                                          theaffected party gives the other party written notice within 48 hours of theoccurrence of the force majeure;

 

•                                          thesuspension of performance is of no greater scope and no longer than required bythe force majeure; and

 

•                                          thenon-performing party uses its best efforts to remedy its inability to perform.

 

**Term**

 

The water supply agreement has a term of 30 years withan option to extend for up to four additional five year terms.  The agreement may be terminated by us and bythe Borough under some circumstances including; (i) our failure to deliver acommencement notice on or prior to December 31, 2003; (ii) the occurrence of abankruptcy event affecting the other party; and (iii) failure of a party toperform a material obligation within the time contemplated and the continuationof the failure for a period of 30 days or more.

 

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**ITEM2.****  PROPERTIES**

 

Since we are a development stage company, ourprincipal property is the project site, which we own, and the construction inprogress.  We will lease our site for a25 year term to AES URC, who will construct and own part of the facility on thesite.  AES URC will lease to us the siteand that part of the facility owned by AES URC and at the end of the lease termwe will have an option to purchase that part of the facility so that we willown all of the site and facility.  Thesite is located in the Borough of Sayreville, Middlesex County, New Jersey onan approximately 62-acre parcel of land. We have access, utility and construction easements and licenses acrossneighboring property.  We have titleinsurance in connection with our property rights.

 

Under our financing documents, our rights andinterests in our property are encumbered by mortgages, security agreements,collateral assignments and pledges for the benefit of our bondholders and othersenior creditors.

 

Upon completion of construction, our facility willconsist of an approximately 830 megawatt (net) gas-fired combined cycleelectric generating facility.  We expectour facility to become operational on or about June 30, 2002, although wecannot assure you of this.  We expect tosell all of our facility’s capacity, and provide fuel conversion and ancillaryservices, to Williams Energy under a 20-year power purchase agreement.  We will not receive material revenues underthe power purchase agreement or otherwise before our facility becomesoperational.

 

Our facility is located on property that we own in theBorough of Sayreville, Middlesex County, New Jersey.  Our facility is being designed, engineered, procured andconstructed for us by Raytheon under a fixed-price, turnkey constructionagreement.  Among other components, ourfacility uses three Siemens Westinghouse model 501F combustion turbines, threeheat recovery steam generators and one multicylinder steam turbine.  Under a maintenance services agreement, SiemensWestinghouse will provide us with specific combustion turbine maintenanceservices and spare parts in respect of each combustion turbine until sixteenyears after execution of the agreement or the twelfth planned outage of thecombustion turbine, whichever is earlier, unless we exercise our right tocancel the agreement after the first major outage of the combustion turbineswhich will be after approximately the sixth year of operation of thefacility.  Under the power purchaseagreement, Williams Energy or its affiliates will supply fuel necessary toallow us to provide capacity, fuel conversion and ancillary services toWilliams Energy.  AES Sayreville hasprovided development, construction management, and operations and maintenanceservices for our facility under an operations agreement.  We have provided installation, operation andmaintenance of facilities necessary to interconnect our facility to JerseyCentral Power’s transmission system under an interconnection agreement.

 

**ITEM3.****  LEGAL PROCEEDINGS**

 

Neither we nor AES URC is party to any legalproceedings.

 

**ITEM4.****  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

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

 

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**PART II**

 

**ITEM 5.****     MARKET FOR REGISTRANT’S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS**

 

There is no market for our equity interests.  All of our member interests are owned by ourparent, AES Red Oak, Inc., a wholly-owned subsidiary of The AES Corporation.

 

**ITEM6.****  SELECTEDFINANCIAL DATA**

 

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

 

**ITEM7.****  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis should be readin conjunction with our financial statements and the notes thereto includedelsewhere in this annual report.  Thefollowing discussion involves forward-looking statements.  Our actual results may differ significantlyfrom the results suggested by these forward-looking statements.  See “Cautionary Note RegardingForward-Looking Statements.”

 

**General**

 

We were formed on September 13, 1998 to develop,construct, own, operate and maintain our facility.  We are in the development stage and have no operatingrevenues.  We were dormant until March15, 2000, the date of the sale of our senior secured bonds.  We obtained $384.0 million of projectfinancing from the sale of the senior secured bonds.  The total cost of the construction of our facility is estimatedto be approximately $446.4 million, which has and will continue to be financedby the proceeds from our sale of the senior secured bonds, equitycontributions, and expected cash flow from liquidated damages, as describedbelow.  In late September 2000, weconsummated an exchange offer whereby the holders of our senior secured bondsexchanged their privately placed senior secured bonds for registered seniorsecured bonds.

 

Our facility is still under construction and isexpected to be completed and operational by approximately June 30, 2002.  We cannot assure that these expectationswill be met.  See “Cautionary NoteRegarding Forward-Looking Statements.”

 

The following discussion presents certain financialinformation for the year ended December 31, 2001, the period from March 15,2000 (inception) through December 31, 2000, and the period from March 15, 2000(inception) through December 31, 2001.

 

**Equity Contributions**

 

Under an equity subscription agreement, AES Red Oak,Inc. is obligated to contribute up to approximately $55.7 million to us to fundproject costs.  AES Red Oak Inc.’sobligation to make the contributions is, and will be, supported by anacceptable letter of credit or an acceptable bond.  As of March 28, 2002, AES Red Oak, Inc. has contributedapproximately $42.7 million in the form of equity funding to help financeproject costs.

 

**Results of Operations**

 

As of December 31, 2001 and 2000, Construction inProgress, which includes capitalized facility construction costs andcapitalized interest costs, was $387.6 million and $117.0 millionrespectively.  As discussed in greaterdetail below, Construction in Progress also includes the capitalization ofconstruction related interest cost incurred on the portion of the bond proceedsexpended on qualifying assets during the construction period.

 

On May 3, 2001, we requested the collateral agent todraw the full available amount of the prepayment letter of credit and depositthe proceeds of such drawing in the construction account held by the collateralagent.  The collateral

 

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agent made such drawing on May 4, 2001 in the amount of $95.8 million,the balance of the letter of credit on that date.  Subsequent to the termination of the Interim Agreement with WGI,payments to WGI or to Raytheon for achievement of construction milestones asspecified in the construction agreement were made in accordance with the termsof the construction agreement from funds available in the construction account.  As of December 31, 2001 and 2000, thebalance of the construction account was $6.1 million and $21.8 million,respectively.

 

For the year ended December 31, 2001, the period fromMarch 15, 2000 (inception) through December 31, 2000, and the period from March15, 2000 (inception) through December 31, 2001, general and administrativecosts of $68,000, $201,000 and $269,000, respectively, were incurred.  These costs did not directly relate toconstruction and are included as expenses in the Statements of Operations.

 

The portion of the proceeds from the sale of thesenior secured bonds that were held in the construction account pending theirapplication on construction, were invested by the trustee.  For the year ended December 31, 2001, theperiod from March 15, 2000 (inception) through December 31, 2000, and theperiod from March 15, 2000 (inception) through December 31, 2001, the interestincome earned on these invested funds was approximately $1.6 million, $1.9million and $3.5 million, respectively, and is included in the Statements of Operations.

 

As noted above, construction related interest costsincurred on the portion of the bond proceeds expended during the constructionperiod is capitalized to Construction in Progress.  For the year ended December 31, 2001, the period from March 15,2000 (inception) through December 31, 2000, and the period from March 15, 2000(inception) through December 31, 2001, capitalized construction relatedinterest costs were approximately $30.3 million, $24.2 million and $54.5million, respectively, and are included within Construction In Progress on theBalance Sheets.  For the year endedDecember 31, 2001, the period from March 15, 2000 (inception) through December31, 2000, and the period from March 15, 2000 (inception) through December 31,2001, interest costs incurred on the bond proceeds not spent on construction ofour facility was approximately $3.6 million, $2.6 million and  $6.2 million, respectively, and are includedas interest expense in the Statements of Operations.

 

For the year ended December 31, 2001, the period fromMarch 15, 2000 (inception) through December 31, 2000, and the period from March15, 2000 (inception) through December 31, 2001, non-capitalizable costs lessnet interest expense resulted in a net loss of approximately  $2.0 million, $1.0 million, and $3.0million, respectively.  At December 31,2001 and 2000, these net losses resulted in a deficiency of earnings to fixedcharges of approximately $32.3 million****and$25.9 million, respectively.  Theresults of operations may not be comparable with the results of operationsduring future periods, especially when our facility commences commercialoperations.

 

**Liquidity and Capital Resources**

 

We believe that (i) the net proceeds from the sale ofthe senior secured bonds, (ii) the equity contribution from AES Red Oak, Inc,(iii) expected liquidated damages from Raytheon in the amount of $108,000 perday, and (iv) cash flows, if any, from the expected sale of electricity duringthe testing phase of our facility will be sufficient to (1) fund theengineering, procurement, construction, testing and commissioning of ourfacility until it is placed in commercial operation, (2) pay certain fees andexpenses in connection with the financing and development of our project and(3) pay project costs, including interest on the senior secured bonds.  After our facility is placed in commercialoperation, we will depend on revenues under the power purchase agreement, andafter the power purchase agreement expires, we will depend revenues generatedfrom market sales of electricity.  Thebalance of  the construction account andthe amount remaining available under the equity contribution agreement areapproximately $5.9 million and $13.0 million, respectively, at March 29,2002.  Additionally, we expect to receiveapproximately $9.2 million in liquidated damages from Raytheon (assuming a June30, 2002 commercial operations date). We estimate that the amount of the remaining expenditures necessary toreach commercial operations is approximately $25.6 million.  Based on our current and expected sources ofliquidity, we believe that we have or have access to sufficient liquidity toreach commercial operations on or about June 30, 2002.

 

If necessary, we also have access to liquidity underseveral letters of credit and other agreements.  Under the construction agreement, the contractor is entitled topost a letter of credit in the amount of the then current retainage in lieu ofcash.  On March 4, 2002, Raytheonprovided us with a letter of credit in the amount of $29.5 million, whichamount represented the outstanding amount of retainage under the constructionagreement on the date the letter of credit was posted.  We may draw on this letter of credit in theevent that Raytheon fails to pay us any amount owed to us under 

 

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the construction agreement, including a failure to pay liquidateddamages, as described above. Furthermore, we have provided the collateral agent with a debt servicereserve letter of credit in an initial stated amount of $22.0 million.  The collateral agent may draw on the debtservice reserve letter of credit commencing on the earlier of the guaranteedprovisional acceptance date under the construction agreement or the commercialoperation date of the facility.  We alsohave a working capital agreement that, prior to the earlier of the commercialoperation date or the guaranteed provisional acceptance date, we can borrow upto $1 million for the purchase or transportation of gas for use at the project.  After the provisional acceptance date andthe commercial operation date the available amount under the working capitalagreement can be increased to a maximum aggregate principal amount of $2.5million that can be used for operating and maintenance costs.  From time to time we may request anincreased commitment under the working capital agreement that the lenders may,at their sole discretion and by unanimous consent, grant to us.

 

As of December 31, 2001, apart from commitments forunpaid scope changes estimated to be $300,000 arising from the construction ofour facility, we have committed to six major additional capital expenditurestotaling $11.5 million.  Theseexpenditures are for a water pipeline for approximately $678,000, roadmodifications for approximately $537,000, a water pumping station for anestimated $2.0 million, an administration office building for $1.7 million, afuel gas heater for $1.3 million and the construction of the Jersey CentralPower interconnection facilities for $5.3 million.  As of December 31, 2001, the road modifications and their relatedexpenditures have been completed and paid. The construction of the Jersey Central Power interconnection facilitiesare essentially complete, except for equipment testing.  To date, we have paid $4.0 million to GPUfor these facilities.  The remainingbalance of the pipeline is approximately $36,000 and it is expected that thisbalance will be paid in April 2002.  Wehave also installed a fuel gas heater and have paid $670,000 towards thisproject.  The majority of the remainingcapital expenditures are expected to be paid by the end of May 2002.

 

We have provided Williams Energy a letter of creditunder the power purchase agreement in the amount of $30 million to supportspecific payment obligations should the facility not achieve commercialoperation by the date required under the power purchase agreement.  Upon achievement of commercial operation,the stated amount of that letter of credit will be reduced to $10 million.  The repayment obligations with respect toany drawings under this letter of credit are a senior debt obligation of ours.

 

After we achieve commercial operations, we expect toreceive variable operations and maintenance payments, total fixed 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 under the power purchase agreement. These payments will be our only source of operating revenues and will beused to fund our generation expenses and other operations and maintenanceexpenses, as well as providing senior debt service coverage ratios greater than1.2 to 1, as required during the term of the power purchase agreement.

** **

**Risks that May Impact Our Liquidity**

 

In addition to the factors listed under the caption“Cautionary Note Regarding Forward-Looking Statements,” if we do not receiveanticipated liquidated damages from Raytheon or anticipated cash flows from thesale of electricity during the testing phase of our facility, we couldexperience a material and adverse impact our current and future financialcondition, results of operations, liquidity, and accordingly, our ability tomake principal and interest payments on the bonds.  Additionally, a significant delay in our ability to reachcommercial operations could result in, among other things, (i) a serious cashflow shortage to fund further construction and (ii) the termination of thepower purchase agreement by Williams Energy which could also  materially and adversely impact our currentand future financial condition, results of operations, liquidity, andaccordingly, our ability to make principal and interest payments on the bonds.

 

Although there can be no assurances, based upon (i)our current assessment of progress at the construction site, (ii) theperformance guaranty from Raytheon, (iii) the mutual obligations of WGI andRaytheon under the PCA, and (iv) assuming (x) that WGI and Raytheon fulfilltheir respective obligations under the PCA, and (y) that Raytheon continues tofulfill its obligations under its performance guarantee and the OGSA, wecurrently believe that we have sufficient funds available to completeconstruction of the facility, and expect the facility to become commerciallyoperational by approximately June 30, 2002, which is approximately 4.5 monthsafter the February 14, 2002 guaranteed completion date under the constructionagreement.  Notwithstanding our currentbelief, if the parties to the PCA fail to perform their obligations, or ifRaytheon does not fulfill its obligations under its performance guarantee orthe OGSA, we may

 

39

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experience significant construction delays and/or may not havesufficient funds to complete the facility. See “Business–Project Status and Recent Developments” above.

 

In the event that the project is not commerciallyoperational by June 30, 2002, and we do not have sufficient funds to exerciseour Second Paid Extension Option, or the facility does not achieve commercialoperation by the commercial operation date as extended, Williams Energy has theright to terminate the power purchase agreement.  If Williams Energy terminates the power purchase agreement and wecannot find a long-term replacement power purchaser on favorable or reasonableterms, we will be required to sell our capacity and energy under shorter-termcontracts or into the Pennsylvania-New Jersey-Maryland (“PJM”) spotmarket.  In such event, we may not havefinancial resources sufficient to meet our financial and contractualobligations, including the timely payment of principal and interest on thesenior secured bonds.  See“BusinessProject Status and Recent Developments” above.

 

**Concentration of Credit Risk**

 

Williams Energy currently is our sole customer forpurchases of capacity, ancillary services, and energy, and our sole source forfuel.  Williams Energy’s payments under the power purchase agreement areexpected to provide all of our operating revenues during the term of the powerpurchase agreement.   It is uncertain whether we would be able tofind another purchaser or fuel source on similar terms for our facility ifWilliams Energy were not performing under the power purchase agreement. Any material failure by Williams Energy to make capacity and fuel conversionpayments or to supply fuel under the power purchase agreement would have asevere impact on our operations.  The payment obligations of WilliamsEnergy under the power purchase agreement are guaranteed by the WilliamsCompanies, Inc.  The payment obligations of the Williams Companies, Inc.are capped at an amount equal to 125% of the sum of the principal amount of oursenior secured bonds, plus the maximum debt service reserve account balance.

 

If at any time Moody’s or Standard & Poor’s ratesthe long term senior unsecured debt of The Williams Companies, Inc. lower thaninvestment grade and the rating agency does not reestablish within 60 days aninvestment grade rating for the debt, then Williams Energy is to providealternative credit support reasonably acceptable to us within 90 days of theday on which the debt was rated lower than investment grade.  According to published sources, as of March29, 2002, the long-term senior unsecured debt of the Williams Companies, Inc.was rated as follows: “Baa2” by Moody’s and “BBB” by Standard and Poor’s, bothof which ratings are investment grade. While both ratings agencies have recently affirmed this investment graderating, on February 1, 2002, Standard & Poor’s placed the senior unsecureddebt credit ratings of the Williams Companies, Inc. on credit watch withnegative implications and on February 27, 2002, Moody’s downgraded the WilliamsCompanies, Inc.’s outlook from stable to negative.

 

**Business Strategy and Outlook**

 

Our overall business strategy is to market and sellall of our net capacity, fuel conversion and ancillary services to WilliamsEnergy during the 20-year term of the power purchase agreement.  After expiration of the power purchaseagreement, we anticipate selling our facility’s capacity, ancillary servicesand energy under a power purchase agreement or into the PJM power poolmarket.  We intend to cause our facilityto be managed, operated and maintained in compliance with the project contractsand all applicable legal requirements.

 

**Recent Accounting Pronouncements**

 

In July 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations.” This standard is effective for fiscal years beginning after June 15,2002, and provides accounting requirements for asset retirement obligationsassociated with tangible long-lived assets. We believe there will be no material impact on our financial reportingrelating to the initial adoption of this standard.

 

In December 2001, the FASB revised its earlier conclusion, DerivativesImplementation Group (“DIG”) Issue C-15, related to contracts involving thepurchase or sale of electricity.  Contracts for the purchase or sale ofelectricity, both forward and option contracts, including capacity contracts,may qualify for the normal purchases and sales exemption and are not requiredto be accounted for as derivatives under SFAS No. 133.  In order forcontracts to qualify for this exemption, they must meet certain criteria, whichinclude the requirement for physical delivery of the electricity to bepurchased or sold under the contract only in the normal course ofbusiness.  Additionally, contracts that have a price based on anunderlying that is not clearly and closely related to the electricity beingsold or purchased or that are

 

40

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denominated in a currency that is foreign to the buyer or seller arenot considered normal purchases and normal sales and are required to beaccounted for as derivatives under SFAS No. 133.  This revised conclusionis effective beginning April 1, 2002.  We are currently assessing theimpact of revised DIG Issue C-15 on our financial condition and results ofoperations.

 

**Critical Accounting Policies**

* *

*General*–We prepare our financial statements in accordance with accounting principlesgenerally accepted in the United States of America.  As such, we are required to make certain estimates, judgments andassumptions that we believes are reasonable based upon the informationavailable.  These estimates andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the periods presented.  Thesignificant accounting policies which we believe are most critical tounderstanding and evaluating our reported financial results include thefollowing: Construction in Progress and Long-Lived Assets.

* *

*Construction in Progress –*Costs incurred in developing the facility,including progress payments, engineering costs, management and developmentfees, interest, and other costs related to construction are capitalized.  Once our facility becomes operational, allamounts will be reclassified into property, plant and equipment, and will bedepreciated over the estimated useful lives of the respective asset.  Facility improvements will be capitalizedand repairs and maintenance costs will be expensed as incurred.

* *

*Long-Lived Assets*– We will evaluate the impairment of our long-lived assets based on theprojection of undiscounted cash flows whenever events or changes incircumstances indicate that the carrying amounts of such assets may not berecoverable.  Estimates of future cashflows will be used to test therecoverability of specific long-lived assets are based on expected cash flowsfrom the use and eventual disposition of the asset.  A significant reduction in actual cash flows and estimated cashflows may have a material adverse impact on our operating results and financialcondition.

 

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**ITEM 7A.****  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

We issued and have outstanding two series of bonds,registered under the Securities Act of 1933, for an aggregate amount of $384million.  Our Series A Bonds are for$224 million and bear interest at 8.54%. Our Series B Bonds are for $160million and bear interest at 9.20%. Interest on the bonds is payable on eachFebruary 28, May 31, August 31, and November 30, and commenced on May 31, 2000.Principal of the Series A Bonds will be payable on the same dates as interest,beginning August 31, 2002. Principal of the Series B Bonds will be payable onthe same dates as interest, beginning February 28, 2019. The bonds and ourother senior indebtedness which consists of bank letter of credit facilitiesare secured ratably by a lien on and security interest in shared collateral,which consists of substantially all of our assets.  In addition, the accounts established under our bond indenture,the debt service reserve account and the debt service reserve letter of credit(other than to the extent of the debt service reserve letter of creditprovider’s right to specific proceeds thereunder) are separate collateralsolely for the benefit of the holders of our bonds.  The fair value of these bonds at December 31, 2001 and 2000 wasapproximately $389.7 million and $413 million, respectively.  We are not subject to interest rate risk asthe interest rates associated with our outstanding indebtedness are fixed overthe life of the bonds.  We currentlyhave no other financial or derivative financial instruments.  We do not believe that we face othermaterial risks requiring disclosure pursuant to Item 305 of Regulation S-K.

 

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**ITEM8.****  FINANCIAL STATEMENTS AND SUPPLEMENTALDATA**

 

**AES Red Oak L.L.C.**

**(A Development Stage Enterprise, And An Indirect Wholly Owned**

**Subsidiary Of The AES Corporation)**

 

**Index To Consolidated Financial Statements**

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

 

43

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**INDEPENDENTAUDITORS’ REPORT**

 

To the Member of

AES Red Oak, L.L.C.:

 

We have audited the accompanying consolidated balancesheets of AES Red Oak, L.L.C. (an indirect wholly owned subsidiary of The AESCorporation and a development stage enterprise) (the Company) as of December31, 2001 and 2000, and the related consolidated statements of operations, changesin member’s deficit and cash flows for the year ended December 31, 2001, theperiod from March 15, 2000 (inception) through December 31, 2000, and theperiod from March 15, 2000 (inception) through December 31, 2001.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

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

 

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of AES RedOak, L.L.C., as of December 31, 2001 and 2000, and the results of itsoperations and its cash flows for the year ended December 31, 2001, the periodfrom March 15, 2000 (inception) through December 31, 2000, and the period fromMarch 15, 2000 (inception) through December 31, 2001, in conformity withaccounting principles generally accepted in the United States of America.

 

/s/  Deloitte & Touche LLP

McLean, Virginia

 

February 28, 2002

March 14, 2002 as to Note 11

 

44

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

**(A Development Stage Enterprise)**

 

**ConsolidatedBalance Sheets****,**

**December 31, 2001 and 2000**

***(dollars inthousands, except share amounts)***

 
|                                                                                               |   | **2000** |    | **2001** |   |
|----------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| **ASSETS:**                                                                                        |   |     |    |     |   |
| Current Assets:                                                                                    |   |     |    |     |   |
| Cash                                                                                               |   | $        | 121     |     | $      | 15 |   |
| Restricted  investments-at cost, which approximates market value                                   |   | 6,061    |    | 21,795   |   |
| Receivables                                                                                        |   | —   |    | 21       |   |
| Receivable from  affiliate                                                                         |   | 1,866    |    | —   |   |
| Total current  assets                                                                              |   | 8,048    |    | 21,831   |   |
|                                                                                               |   |     |    |     |   |
| Prepaid  construction costs                                                                        |   | —   |    | 227,609  |   |
| Land                                                                                               |   | 4,240    |    | 4,240    |   |
| Construction in  progress                                                                          |   | 387,568  |    | 117,033  |   |
| Deferred  financing costs – net of accumulated amortization of $1,462 and $646,  respectively |   | 17,243   |    | 18,059   |   |
| Total assets                                                                                       |   | $        | 417,099 |     | $      | 388,772 |   |
|                                                                                               |   |     |    |     |   |
| **LIABILITIES AND MEMBER’S DEFICIT:**                                                         |   |     |    |     |   |
|                                                                                               |   |     |    |     |   |
| Current  Liabilities:                                                                              |   |     |    |     |   |
| Accounts payable                                                                                   |   | $        | 882     |     | $      | 304 |   |
| Retainage  payable                                                                                 |   | 29,478   |    | —   |   |
| Accrued  liabilities                                                                               |   | 62       |    | 90       |   |
| Accrued Interest                                                                                   |   | 2,821    |    | 2,821    |   |
| Payable to  affiliate                                                                              |   | 1,823    |    | 2,505    |   |
| Bond  payable-current portion                                                                      |   | 2,419    |    | —   |   |
| Total current  liabilities                                                                         |   | 37,485   |    | 5,720    |   |
|                                                                                               |   |     |    |     |   |
| Bonds payable                                                                                      |   | 381,581  |    | 384,000  |   |
| Total  liabilities                                                                                 |   | $        | 419,066 |     | $      | 389,720 |   |
|                                                                                               |   |     |    |     |   |
| Commitments and  Contingencies (Notes 5 and 6)                                                     |   |     |    |     |   |
|                                                                                               |   |     |    |     |   |
| Member’s  deficit:                                                                            |   |     |    |     |   |
| Common stock, $1  par value-10 shares authorized, none issued or outstanding                       |   | —   |    | —   |   |
| Contributed  capital.                                                                              |   | 986      |    | —   |   |
| Deficit  accumulated during the development stage                                                  |   | (2,953   | )       | (948     | )      |
| Total member’s deficit                                                                        |   | (1,967   | )       | (948     | )      |
| Total  liabilities and member’s deficit                                                       |   | $        | 417,099 |     | $      | 388,772 |   |

 

See notes to consolidatedfinancial statements.

 

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

**(A Development Stage Enterprise)**

 

**Consolidated Statements of Operations****,**

**year ended December 31, 2001, periodfrom March 15, 2000 (inception) through December 31,**

**2000, and period from March 15, 2000(inception) through December 31, 2001**

***(dollars in thousands)***

 
|                          |   | **Year  Ended****December 31,** |   | **March 15, 2000 (inception)   through****December 31,** |   | **March 15, 2000 (inception)  through  December 31,** |   |
|-------------------------------|--------|--------------------------------------|--------|---------------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                          |   | **2001**                             |   | **2000**                                                      |   | **2001**                                              |   |
| OPERATING  EXPENSES           |   |                                 |   |                                                          |   |                                                  |   |
| General  administrative costs |   | $                                    | (68    | )                                                             | $      | (201                                                  | )      | $ | (269 | ) |
| Operating Loss                |   | $                                    | (68    | )                                                             | $      | (201                                                  | )      | $ | (269 | ) |
|                          |   |                                 |   |                                                          |   |                                                  |   |
| OTHER  INCOME/EXPENSE         |   |                                 |   |                                                          |   |                                                  |   |
| Interest income               |   | 1,655                                |   | 1,852                                                         |   | 3,507                                                 |   |
| Interest expense              |   | (3,592                               | )      | (2,599                                                        | )      | (6,191                                                | )      |
|                          |   |                                 |   |                                                          |   |                                                  |   |
| NET LOSS                      |   | $                                    | (2,005 | )                                                             | $      | (948                                                  | )      | $ | (2,953 | ) |

 

See notes to consolidatedfinancial statements.

 

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

**(A Development Stage Enterprise)**

 

**Consolidated Statements of Changes in Member’s Deficit****,**

**year ended December 31, 2001, periodform March 15, 2000 (inception) through**

**December 31, 2000, and period fromMarch 15, 2000**

**(inception) through December 31, 2001**

***(dollars in thousands)***

*** ***
|                                 |   | **Common  Stock** |   |       |   |                                 |   |                       |   |
|--------------------------------------|--------|-------------------|--------|------------|--------|--------------------------------------|--------|----------------------------|--------|
|                                 |   | **Shares**        |   | **Amount** |   | **Additional**

**Paid-in  Capital** |   | **Member’s  Deficit** |   | **Total** |   |
| BALANCE, MARCH  15, 2000 (inception) |   | —            |   | $ —   |   | $ —                             |   | $ —                   |   | $ — |   |
| Net Loss                             |   | —            |   | —     |   | —                               |   | (948                       | )      | (948 | ) |
|                                 |   |              |   |       |   |                                 |   |                       |   |   |   |
| BALANCE,  DECEMBER 31, 2000          |   | —            |   | $ —   |   | $ —                             |   | $ (948                     | )      | $ (948 | ) |
| Contributed  Capital                 |   | —            |   | —     |   | 986                                  |   | —                     |   | 986 |   |
| Net Loss                             |   | —            |   | —     |   | —                               |   | (2,005                     | )      | (2,005 | ) |
| BALANCE,  DECEMBER 31, 2001          |   | $ —          |   | $ —   |   | $ 986                                |   | $ (2,953                   | )      | $ (1,967 | ) |

*** ***

See notes to consolidatedfinancial statements.

 

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

**(A Development Stage Enterprise)**

 

**Consolidated Statements of Cash Flows****, for theyear**

**ended December 31, 2001, the periodfrom March 15, 2000 (inception) through December 31**

**2000, and the period March 15, 2000(inception) through December 31, 2001.**

***(dollars in thousands)***

** **
|                                                                |   | **Year Ended  December 31, 2001** |    | **March 15, 2000 (inception)   through  December 31 2000** |   | **March 15, 2000  (inception) through****   December 31, 2001** |   |
|---------------------------------------------------------------------|--------|-----------------------------------|---------|------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
| **OPERATING ACTIVITIES:**                                           |   |                              |    |                                                       |   |                                                                 |   |
| Net loss                                                            |   | $                                 | (2,005  | )                                                          | $      | (948                                                                 | )      | $ | (2,953 | ) |
| Amortization of  deferred financing costs                           |   | 816                               |    | 646                                                        |   | 1,462                                                                |   |
| Change in:                                                          |   |                              |    |                                                       |   |                                                                 |   |
| Accounts  receivable                                                |   | 21                                |    | (21                                                        | )      | —                                                               |   |
| Receivable from  affiliate                                          |   | (1,866                            | )       | —                                                     |   | (1,866                                                               | )      |
| Accounts payable                                                    |   | 578                               |    | 304                                                        |   | 882                                                                  |   |
| Accrued  liabilities                                                |   | (28                               | )       | 90                                                         |   | 62                                                                   |   |
| Accrued interest                                                    |   | —                            |    | 2,821                                                      |   | 2,821                                                                |   |
| Payable to  affiliates                                              |   | (682                              | )       | 2,505                                                      |   | 1,823                                                                |   |
| Net cash (used  in) provided by operating activities                |   | (3,166                            | )       | 5,397                                                      |   | 2,231                                                                |   |
|                                                                |   |                              |    |                                                       |   |                                                                 |   |
| **INVESTING ACTIVITIES:**                                           |   |                              |    |                                                       |   |                                                                 |   |
| Prepaid  construction costs                                         |   | —                            |    | (288,573                                                   | )      | (288,573                                                             | )      |
| Payments for  construction in progress                              |   | (42,926                           | )       | (56,069                                                    | )      | (98,995                                                              | )      |
| Retainage  payable                                                  |   | 29,478                            |    | —                                                     |   | 29,478                                                               |   |
| Payments for  land                                                  |   | —                            |    | (4,240                                                     | )      | (4,240                                                               | )      |
| Change in  investments held by trustee                              |   | 15,734                            |    | (21,795                                                    | )      | (6,061                                                               | )      |
|                                                                |   |                              |    |                                                       |   |                                                                 |   |
| Net cash  provided by (used in) investing activities                |   | 2,286                             |    | (370,677                                                   | )      | (368,391                                                             | )      |
|                                                                |   |                              |    |                                                       |   |                                                                 |   |
| **FINANCING ACTIVITIES:**                                           |   |                              |    |                                                       |   |                                                                 |   |
| Proceeds from  project debt issuance                                |   | —                            |    | 384,000                                                    |   | 384,000                                                              |   |
| Contributed  capital                                                |   | 986                               |    | —                                                     |   | 986                                                                  |   |
| Payments for  deferred financing costs                              |   | —                            |    | (18,705                                                    | )      | (18,705                                                              | )      |
| Net cash  provided by financing activities                          |   | 986                               |    | 365,295                                                    |   | 366,281                                                              |   |
|                                                                |   |                              |    |                                                       |   |                                                                 |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                      |   | 106                               |    | 15                                                         |   | 121                                                                  |   |
|                                                                |   |                              |    |                                                       |   |                                                                 |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                 |   | 15                                |    | —                                                     |   | —                                                               |   |
|                                                                |   |                              |    |                                                       |   |                                                                 |   |
|                                                                |   |                              |    |                                                       |   |                                                                 |   |
| **CASH AND CASH EQUIVALENTS, END OF  PERIOD**                       |   | $                                 | 121     |                                                       | $      | 15                                                                   |   | $ | 121 |   |
|                                                                |   |                              |    |                                                       |   |                                                                 |   |
| **SUPPLEMENTAL DISCLOSURE OF OTHER  ACTIVITIES:**                   |   |                              |    |                                                       |   |                                                                 |   |
| Interest paid  (net of amount capitalized)                          |   | $                                 | 3,761   |                                                       | $      | 2,325                                                                |   | $ | 6,086 |   |
|                                                                |   |                              |    |                                                       |   |                                                                 |   |
| **SUPPLEMENTAL DISCLOSURE OF NON-CASH  ACTIVITIES**:                |   |                              |    |                                                       |   |                                                                 |   |
| Transfer of  prepaid construction costs to construction in progress |   | $                                 | 227,609 |                                                       | $      | 60,964                                                               |   | $ | 288,573 |   |

** **

 

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**AES RED OAK L.L.C. (A Development Stage Enterprise)**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEAR ENDED DECEMBER 31, 2001, THE PERIOD FROM MARCH 15, 2000(INCEPTION)**

**THROUGH DECEMBER 31, 2000, AND THE PERIOD FROM MARCH 15, 2000(INCEPTION)**

**THROUGH DECEMBER 31, 2001**

 

**1.**                   **ORGANIZATION**

 

AES Red Oak, L.L.C. (the Company) was formed onSeptember 13, 1998, in the State of Delaware, to develop, construct, own andoperate an 830-megawatt (MW) gas-fired, combined cycle electric generatingfacility (the Facility) in the Borough of Sayreville, Middlesex County, NewJersey.  The Company was considereddormant until March 15, 2000 (hereinafter, inception), at which time itconsummated a project financing and certain related agreements.  On March 15, 2000, the Company issued $384million in senior secured bonds for the purpose of providing financing for theconstruction of the Facility and to fund, through the construction period,interest payments to the bondholders (see note 3). In late September 2000, theCompany consummated an exchange offer whereby the holders of the senior securedbonds exchanged their privately placed senior secured bonds for registeredsenior secured bonds.

 

The Facility, currently under construction, willconsist of three Westinghouse 501 FD combustion turbines, three unfired heatrecovery steam generators, and one multicylinder steam turbine.  The Facility will produce and sellelectricity, as well as provide fuel conversion and ancillary services, solelyto Williams Energy Marketing & Trading Company (Williams) under a 20-yearFuel Conversion Services, Capacity and Ancillary Services Purchase Agreement(the PPA) expected to commence on or about June 30, 2002, approximately 4.5months after the Facility’s guaranteed completion date under the constructionagreement of February 14, 2002, as defined below (see note 5).

 

The Company is in the development stage and is notexpected to generate any operating revenues until the Facility achievescommercial operations.  As with any newbusiness venture of this size and nature, operation of the Facility could beaffected by many factors.  Management ofthe Company believes that the assets of the Company are realizable.

 

The Company is a wholly owned subsidiary of AES RedOak, Inc. (Red Oak), which is a wholly-owned subsidiary of The AES Corporation(AES). Red Oak has no assets other than its ownership interests in the Companyand AES Sayreville, L.L.C. (see note 6). Red Oak has no operations and is not expected to have any operations.  Red Oak’s only income will be from distributionsit receives from the Company and AES Sayreville, L.L.C., once the Companyachieves commercial operations. Pursuant to an equity subscription agreement (see notes 3 and 11), RedOak has agreed to contribute up to approximately $55.7 million to the Companyto fund construction after the bond proceeds have been fully utilized.  The equity that Red Oak is to provide to theCompany will be provided to Red Oak by AES, which owns all of the equityinterests in Red Oak.  AES filesquarterly and annual audited reports with the Securities and ExchangeCommission under the Securities Exchange Act of 1934, which are publiclyavailable, but which do not constitute a part of, and are not incorporatedinto, this Form 10-K.  Red Oak’s equitycontribution obligations are required to be supported by either an insurancebond or letter of credit.  Currentlythose obligations are supported by an insurance bond issued to the CollateralAgent (see note 3).

 

The Company owns all of the equity interests in AESRed Oak Urban Renewal Corporation (URC), which was organized as an urbanrenewal corporation under New Jersey Law. As an urban renewal corporation under New Jersey law, portions of theFacility can be designated as redevelopment areas in order to provide certainreal estate tax and development benefits to the Facility.  URC has no operations outside of itsactivities in connection with the Facility.

 

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                In February 2001,the Company reclassified $986,000, a payable to affiliate (AES Corporation) tocontributed capital.  This amountrepresented expenditures paid by the AES Corporation prior to March 15, 2000.

 

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

* *

*Principlesof Consolidation* - The consolidated financial statementsinclude the accounts of the Company and AES URC, its wholly ownedsubsidiary.  All intercompanytransactions and balances have been eliminated in consolidation.

* *

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

* *

*RestrictedInvestments* - The Company is required to maintain aconstruction funding account for the payment of certain qualifying constructioncosts and a construction interest account from which quarterly interestpayments are to be made.  The balancesin the construction funding account and the construction interest account were$6.0 and $0.1 million, respectively, as of December 31, 2001 and $17.3 millionand $4.5 million, respectively, as of December 31, 2000. These amounts werefully invested in money market accounts.

* *

*Constructionin Progress* - Costs incurred in developing the Facility,including progress payments, engineering costs, management and developmentfees, interest, and other costs related to construction are capitalized.  Total interest capitalized on the projectfinancing debt was approximately  $54.5million and $24.2 million as of December 31, 2001 and 2000, respectively.  Certain costs related to constructionactivities were paid by AES prior to the issuance of the bonds.  These amounts of approximately $12.4million, are reflected within construction in progress, and were reimbursed toAES out of the bond proceeds.

* *

*Long-Lived Assets* - The Company will evaluate the impairment of our long-lived assets based on theprojection of undiscounted cash flows whenever events or changes incircumstances indicate that the carrying amounts of such assets may not berecoverable.  Estimates of future cashflows will be used to test therecoverability of specific long-lived assets are based on expected cash flowsfrom the use and eventual disposition of the asset.  A significant reduction in actual cash flows and estimated cashflows may have a material adverse impact on our operating results and financialcondition.

* *

*Prepaymentof Construction Contract*- The Company originally prepaid aportion of the construction agreement in the amount of $288.6 million on March 15,2000 to Washington Group International, Inc. (WGI) (formerly Raytheon Engineers& Constructors, Inc.). WGI’s obligations under the construction agreementwere initially secured by a letter of credit issued October 11, 2000 by Bank ofAmerica in the Company’s favor.  Theletter of credit represented the value of all unperformed work to date.  On May 14, 2001, WGI announced that it hadfiled a plan of reorganization along with voluntary petitions to restructureunder Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court forthe District of Nevada in Reno (Bankruptcy Court).  Under the construction agreement, a bankruptcy filing by WGIconstituted an event of default.  Basedon correspondence received from WGI preceding the bankruptcy filing and inaccordance with the terms of the construction contract, on May 3, 2001, theCompany requested the full available amount of such letter of credit be drawnupon and deposited in the construction account held by the collateral agent.  The collateral agent made such drawing onMay 4, 2001 in the amount of $95.8 million, which was the then outstandingamount of the prepayment letter of credit as it had been reduced by the WGI’sachievement of construction milestones under the construction agreement.  Subsequent to the termination of theprepayment arrangements with WGI, payments to WGI for achievement ofconstruction milestones as specified in the construction agreement were made inaccordance with the terms of the construction agreement.  The Company reclassified amounts from theprepaid construction account to the construction in progress as the letter ofcredit was reduced.  As ofDecember 31, 2001 and 2000, the amount of the letter of credit was $0 and$177.5 million, respectively.

 

*DeferredFinancing Costs* - Financing costs are deferred and are beingamortized using the straight-line method over the life of the bonds, which doesnot differ materially from the effective interest method of amortization.

 

50

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

 

*IncomeTaxes* - The Company is a limited liability corporation and istreated as a partnership for tax purposes. Therefore, it does not pay income taxes, and no provision for incometaxes has been reflected in the accompanying financial statements.

 

*Start-UpCosts* - The  Companyfollows AICPA Statement of Position (SOP) 98-5, *Reporting on the Costs of Start-UpActivities,*which requires that start-up and organizational costs beexpensed as incurred.  As such, no coststo which SOP 98-5 applies have been capitalized in the accompanying balancesheets.

 

**3.****                   BONDS PAYABLE**

 

On March 15, 2000, the Company issued $224 million of8.54% senior secured bonds due 2019 (2019 Bonds) and $160 million of 9.20%senior secured bonds due 2029 (2029 Bonds and together with the 2019 Bonds, theBonds) to qualified institutional buyers and/or institutional accreditedinvestors, pursuant to a transaction exempt from registration under theSecurities and Exchange Act of 1933 (the Act) in accordance with Rule 144A ofthe Act.  In late September 2000, theCompany consummated an exchange offer whereby the holders of the Bondsexchanged their privately placed bonds for registered bonds.  The net proceeds of the bonds (afterdeferred financing costs), approximately $365 million, were used to prepay WGI andother construction costs of the Plant and will also be used, during theconstruction period, for interest payments to bondholders.

* *

*FutureMaturities of Debt* - Principal on the Bonds is payablequarterly in arrears, commencing on August 31, 2002.  The final maturity date for the Bonds is November 30, 2019 andNovember 30, 2029, respectively.

 

51

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*Principal& Interest Repayment Schedule :*

* *

| **Year**            |   | **Interest**       |    | **Principal** |   |
|---------------------|--------|--------------------|---------|---------------|--------|
|                |   | **(in thousands)** |    |
| 2002                |   | $                  | 33,824  |          | $      | 2,419 |   |
| 2003                |   | 33,536             |    | 6,219         |   |
| 2004                |   | 33,113             |    | 5,230         |   |
| 2005                |   | 32,579             |    | 5,071         |   |
| 2006                |   | 32,111             |    | 7,101         |   |
| 2007 and thereafter |   | 380,083            |    | 357,960       |   |
| **Total Payments**  |   | $                  | 545,246 |          | $      | 384,000 |   |

* *

*OptionalRedemption* - The Bonds are subject to optional redemption bythe Company, in whole or in part, at any time at a redemption price equal to100% of the principal amount plus accrued interest, together with a premiumcalculated using a discount rate equal to the interest rate on comparable U.S.Treasury securities plus 50 basis points.

* *

*MandatoryRedemption* - The Bonds are subject to mandatory redemption bythe Company, in whole or in part, at a redemption price equivalent to 100% ofthe principal amount plus accrued interest under certain situations pursuant toreceiving insurance proceeds, eminent domain****proceeds, liquidated damagesunder the construction agreement, or in certain instances in which payments arereceived under the PPA if the Company terminates the PPA as a result of adefault by Williams.

* *

*Indenture*- The Indenture contains limitations on the Company incurringadditional indebtedness, granting liens on the Company’s property, distributingequity and paying subordinated indebtedness issued by affiliates of theCompany, entering into transactions with affiliates, amending, terminating orassigning any of the Company’s contracts and fundamental changes or dispositionof assets.

 

Collateral for the Bonds consists of the Facility andrelated entities, all agreements relating to the operation of the project, thebank and investment accounts of the Company, and all ownership interests in theCompany, as prescribed under the trust indenture agency (the Indenture).  The Company is also bound by a collateralagency agreement (the Collateral Agency Agreement) and an equity subscriptionagreement (the Equity Subscription Agreement).

* *

*CollateralAgency Agreement* - The Collateral Agency Agreement requiresthe Company to fund or provide the funding or a letter of credit for a debtservice reserve fund.  The debt servicereserve fund letter of credit was posted at financial closing in the amount of$22 million dollars.  The amountrequired for funding the debt service reserve fund is equal to six monthsscheduled payments of principal and interest on the bonds.

* *

*EquitySubscription Agreement* - The Company, along with Red Oak, hasentered into an Equity Subscription Agreement, pursuant to which Red Oak hasagreed to contribute up to approximately $55.7 million to the Company to fundproject costs.  This amount is securedby an insurance bond obtained by Red Oak. Red Oak will fund these amounts as they come due upon the earlier of (a)expenditure of all funds that have been established for construction or (b) theoccurrence and during the continuation of an event of default, as defined underthe Indenture.  A portion of this equityrequirement may be made in the form of affiliate debt between Red Oak and theCompany, which is subordinate to the Bonds (see note 11).

* *

*Covenants*- The Indenture, Collateral Agency Agreement and Equity Subscription Agreement,contain specific covenants and requirements to be met by the Company.

** **

**4.****                   POWER PURCHASEAGREEMENT**

 

The Company and Williams have entered into a powerpurchase agreement (PPA) for the sale of all capacity produced by the Facility,as well as ancillary services and fuel conversion services.  The term of the PPA is 20 years, commencingon the commercial operation date, which is defined in the PPA as the day theinitial start up testing procedures have been successfully completed andnotified to Williams by the Company. The payment obligations of Williams to the Company under the PPA areguaranteed by The Williams Companies, Inc. The 

 

52

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payment obligations of The Williams Companies, Inc. under thatguarantee are capped at an amount equal to 125% of the sum of the principalamount of the senior secured bonds plus the maximum debt service reserveaccount required balance.  The Companyhas provided Williams a letter of credit (PPA Letter of Credit) in the amountof $30 million to support specific payment obligations should the Facility notachieve commercial operation by the date required under the PPA.  Upon achievement of commercial operation,the stated amount of that letter of credit will be reduced to $10 million.  The repayment obligations with respect toany drawings under the PPA Letter of Credit are a senior debt obligation of theCompany.  The original anticipatedcommercial operation date under the PPA was December 31, 2001, but such datewas extended under the PPA at the request of the Company until June 30, 2002 atno cost, as described in the succeeding paragraph.  The Company currently anticipates that commercial operation ofthe Facility will commence on or about June 30, 2002, approximately 4.5 monthsafter the guaranteed completion date of February 14, 2002 under theconstruction agreement (see note 5).

 

Under the PPA between the Company and Williams, theCompany had the right to extend the required commercial operation date fromDecember 31, 2001 to June 30, 2002 (1) by providing an opinion from athird-party engineer that the commercial operation date will occur no laterthan June 30, 2002 (the “Free Extension Option”), or (2) by giving Williamswritten notice of such extension no later than November 30, 2001, and paying toWilliams $2.5 million by no later than January 31, 2002.  On November 14, 2001, the Company exercisedits Free Extension Option.  On December12, 2001, Williams formally accepted the required opinion of the third-partyengineer.  As a result, the requiredcommercial operation date under the power purchase agreement was extended toJune 30, 2002.  In the event that theCompany cannot meet the June 30, 2002 commercial operation date, it has theright under the power purchase agreement, upon written notification to Williamsnot later than April 30, 2002, to again extend the commercial operation dateuntil June 30, 2003 by paying Williams an amount equal to the lesser of anyactual damages Williams suffers or incurs after June 30, 2002 as a result ofWilliams reliance upon the delivery by such date or $3.0 million (the “SecondPaid Extension Option”).  The Companymust also pay specified amounts ranging from $11,000 per day to $50,000 per dayof the extension.  During the period ofthe Second Paid Extension Option, if any, the Company expects to continue tocollect liquidated damages until April 10, 2003 from Raytheon Company(Raytheon) under the construction agreement in the amount of $108,000 per day.

 

In the event that the project is not commerciallyoperational by June 30, 2002, and the Company does not have sufficient funds toexercise its Second Paid Extension Option, or the Facility does not achievecommercial operation by the commercial operation date as extended, Williams hasthe right to terminate the PPA.  IfWilliams terminates the PPA and the Company cannot find a long-term replacementpower purchaser on favorable or reasonable terms, the Company will be requiredto sell its capacity and energy under shorter-term contracts or into the PJMspot market.  In such event, the Companymay not have financial resources sufficient to meet its financial andcontractual obligations, including the timely payment of principal and intereston the senior secured bonds.

 

*FuelConversion and Other Services* - Williams has the obligationto deliver, on an exclusive basis, all quantities of natural gas and fuel oilrequired 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 for anyreason.

 

*Concentration of Credit Risk -*Williams Energy currently the Company’s solecustomer for purchases of capacity, ancillary services, and energy, and itssole source for fuel.  Williams Energy’s payments under the PPA areexpected to provide all of our revenues during the term of the PPA.  It is uncertain whether the Company would beable to find another purchaser or fuel source on similar terms for its facilityif Williams Energy were not performing under the PPA.  Any materialfailure by Williams Energy to make capacity and fuel conversion payments or tosupply fuel under the PPA would have a severe impact on the Company’s operations. The payment obligations of Williams Energy under the PPA are guaranteed by theWilliams Companies, Inc.  The payment obligations of the WilliamsCompanies, Inc. are capped at an amount equal to 125% of the sum of theprincipal amount of our senior secured bonds, plus the maximum debt servicereserve account balance.

 

If at any time Moody’sInvestors Services or Standard & Poor’s rates the long term seniorunsecured debt of The Williams Companies, Inc. lower than investment grade andthe rating agency does not reestablish within 60 days an investment graderating for the debt, then Williams Energy is to provide alternative creditsupport reasonably acceptable to the Company within 90 days of the day on whichthe debt was rated lower than investment grade.  According to published sources, as of March 4, 2002, thelong-term senior unsecured debt of the Williams Companies, Inc. was rated asfollows: “Baa2” by Moody’s and “BBB” by Standard and Poor’s, both of whichratings are investment grade.  While bothratings agencies have recently affirmed this investment grade rating, onFebruary 1, 2002, Standard & Poor’s placed the senior unsecured debt creditratings of the Williams Companies, Inc. on credit watch with negativeimplications and on February 27, 2002, Moody’s downgraded the WilliamsCompanies, Inc.’s outlook from stable to negative.

 

**5.**                   **COMMITMENTS AND CONTINGENCIES**

 

*ConstructionAgreement* - The Company has entered into an Agreement forEngineering, Procurement and Construction services, dated as of October 15,1999, between the Company and WGI (as the successor contractor), as amended forthe design, engineering, procurement, site preparation and clearing, civilworks, construction, start-up, training and testing and to provide allmaterials and equipment (excluding operational spare parts), machinery, tools,construction fuels, chemicals and utilities, labor, transportation,administration and other services and items (collectively and separately, theservices) of the Facility.  Under aguaranty in the Company’s favor, effective as of October 15, 1999, all of theWGI’s obligations under the construction agreement are irrevocably andunconditionally guaranteed by the Raytheon Company (Raytheon).

 

On June 20, 2001, as a result of WGI’s bankruptcy filing(see note 2) the Company made a demand on Raytheon to perform its obligationsunder the Raytheon guarantee.

 

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On November 9, 2001, WGI received an order from theBankruptcy Court approving WGI’s (1) rejection of the construction agreementand (2) execution of the Project Completion Agreement (PCA), as describedbelow.  On November 16, 2001, WGI andRaytheon executed the PCA.  The PCAsuperceded the Interim Agreement for Advance Payments, between the Company, WGIand Raytheon, which had been in place since June 20, 2001. Under the InterimAgreement, the Company and Raytheon had agreed to fund payments to WGI’ssubcontractors working on construction of the Facility in accordance with theterms of their subcontracts as required by the construction agreement, and topay WGI’s employees who are performing services with respect to theproject.  The Interim Agreement did notchange the construction agreement price, the construction progress milestonedates, the guaranteed completion dates, or the project schedule.  In addition, the Interim Agreement did notrelieve WGI from any obligations it had under the construction agreement, nordid it relieve Raytheon from any obligations it had under its performanceguaranty.  The Company also reserved theright to set off our maximum funding amount, our cap, under the InterimAgreement against any future milestone payments payable by the Company toRaytheon.

 

Under the PCA, WGI will (i)assign to the Company, as the project owner, certain of the major equipment,subcontracts and vendor contracts relating to the project, (ii) assign toRaytheon the remaining subcontracts and vendor contracts relating to theproject, (iii) agree to complete construction of the facility on a costreimbursable basis but otherwise in accordance with the terms of theconstruction agreement, with all funding to come from Raytheon, and (iv)perform obligations under the subcontracts and vendor contracts as the subagentof Raytheon.  Raytheon, as guarantorunder the construction agreement, will, as necessary, fund all of WGI’s costsand expenses related to WGI’s completion of the project.  Both parties will have limited terminationrights under the PCA.

 

On November 21, 2001, theCompany and Raytheon entered into the Owner/Guarantor Supplemental Agreement(“OGSA”) pursuant to which (i) Raytheon and the Company will acknowledge that,notwithstanding the rejection of the construction agreement by WGI, Raytheonwill cause the project to be completed in accordance with the terms of theconstruction agreement pursuant to Raytheon’s performance guaranty obligations,and the construction agreement will have continuing applicability insofar as itdefines (x) the obligations owed to the Company by Raytheon under its guarantyand (y) the obligations of the Company to Raytheon arising from the performanceof those obligations, (ii) Raytheon (or their designees) will be designated asthe Company’s agent for purposes of administering the subcontracts and vendorcontracts assigned by WGI to the Company, (iii) all future payments from theCompany will be paid in accordance with the terms of the construction agreementdirectly to Raytheon, and (iv) Raytheon will indemnify the Company with respectto any claims arising out of the subcontracts and vendor contracts assumed bythe Company.  Although there can be noassurances, based upon (i) the Company’s current assessment of progress at theconstruction site, (ii) the performance guaranty from Raytheon, (iii) themutual obligations of WGI and Raytheon under the PCA, and (iv) assuming (x)that WGI and Raytheon fulfill their respective obligations under the PCA, and(y) that Raytheon continues to fulfill its obligations under its performanceguarantee and the OGSA, the Company currently believes that it has sufficientfunds available to complete construction of the facility, and expects thefacility to become commercially operational on or about June 30, 2002,which is approximately 4.5 months after the February 14, 2002 guaranteedcompletion date under the constructionagreement.  See “Cautionary NoteRegarding Forward-Looking Statements.” Notwithstanding the Company’s currentbelief, if the parties to the PCA fail to perform their obligations, or ifRaytheon does not fulfill its obligations under its performance guarantee orthe OGSA, the Company may experience significant construction delays and/or maynot have sufficient funds to complete the facility.

 

In the event the commercial operation date of theFacility is significantly delayed, the PPA may be terminated by Williams andthe Company may not have financial resources sufficient to meet its financialand contractual obligations, including the timely payment of principal andinterest on the senior secured bonds. Other than with respect to developments that may have a material impacton the Company or its business operations, the Company is under no obligationnor does it intend to continuously provide updates of WGI’s bankruptcyproceedings.  However, copies of allpleadings filed with the Bankruptcy Court are available from the office of theclerk of the Bankruptcy Court.

* *

*MaintenanceServices –* The Company has entered into a maintenanceservices agreement with Siemens Westinghouse Power Corporation (Siemens).Siemens will provide the Company with specific combustion turbine maintenanceservices and spare parts for an initial term of between six and sixteenyears.  For the first six years ofoperation, the Company is committed to pay $306 per equivalent operating hourof service.  The value of this 

 

54

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commitment is difficult to ascertain at this time due to the unknownoperational mode Williams will require from the Company.

* *

*WaterSupply* – The Company has entered into a contract with theBorough of Sayreville (the Borough) by which the Borough will provide untreatedwater to the Company.  The contract hasa term of 30 years with an option to extend for up to four additional five-yearterms.  The Company is contractuallycommitted to a minimum annual payment of $300,000.  Based on estimated maximum usage, the Company believes that itsannual payment will not exceed approximately $400,000.

* *

*InterconnectionAgreement (GPU)* – The Company has entered into aninterconnection agreement with Jersey Central Power & Light Company d/b/aGPU Energy (GPU) to transmit the electricity generated by the Facility to thetransmission grid so that it may be sold as prescribed under the PPA.  The agreement is in effect for the life ofthe Facility, yet may be terminated by mutual consent of both GPU and theCompany under certain circumstances as detailed in the agreement.  Costs associated with the agreement arebased on electricity transmitted via GPU at a variable price and the PJM(Pennsylvania/New Jersey/Maryland) Tariff as charged by GPU, which is comprisedof both service cost and asset recovery cost, as determined by GPU and approvedby the Federal Energy Regulatory Committee. On June 22, 2001, FERC approved the Company’s Market – Based Tariffpetition.  The Company has beenimporting electricity from the transmission system to support commissioning ofthe facility since July 2001 and the interconnection facilities are ready toexport power to the transmission system. Project completion and final invoicing are expected to be received fromJersey Central Power by March 2002.

* *

*InterconnectionInstallation Agreement (GPU)* – The Company entered into aninterconnection agreement with GPU on April 27, 1999 to design, furnish installand own certain facilities required to interconnect the Company with thetransmission system.  Under the terms ofthis agreement GPU will provide all labor, supervision, materials and equipmentnecessary to perform the interconnection installation.  The cost of these interconnection facilitiesis estimated to be $5.3 million.  TheCompany has paid $1.5 million and $2.3 million to GPU for these facilities asof December 31, 2001 and 2000, respectively.

* *

*InterconnectionServices Agreement (PJM)* – The Company has entered into an interconnection agreement withthe Independent System Operator (ISO) of the PJM Control Area on December 24,2001 as required under the PJM Open Access Transmission Tariff.  This agreement includes specifications foreach generating unit that will be interconnected to the Transmission System,confirms Capacity Interconnection Rights and includes the Companyagreement  to abide by all rules andprocedures pertaining to generation in the PJM Control Area.

* *

*WaterSupply Pipeline –* The Borough is in the final stages ofdesign and approval of the Lagoon Water Pipeline, Lagoon Pumping Station andSayreville Interconnection Number 2. The Company is responsible for selectionof a contractor and for payment of all costs. The pipeline construction has been completed.  The construction contract for the Pumping Station has beenawarded and is approximately 90% completed. Startup and Commissioning of this system is expected to be conducted atthe beginning of April 2002.  Theproject has been ready to receive water from Sayreville Interconnection Number2 since the Fall 2001 and testing of the Lagoon Pumping Station is expected inApril 2002.  The cost of the pipelineand pumping station are estimated to be approximately $678,000 and $2.0million, respectively.  The Company haspaid the pipeline project in full and has paid approximately $190,000 towardsthe Pumphouse Project at the end of December 31, 2001.

* *

*GasInterconnection –*Williams is responsible for theconstruction of all natural gas interconnection facilities necessary for thedelivery of natural gas up to the Company’s natural gas delivery point.  This includes metering equipment, valves andpiping.  Upon the expiration of the PPAor termination of the PPA, the Company has the right to purchase the naturalgas interconnection facilities from Williams. As of August 10, 2001, the interconnection facilities have beenconstructed by Public Service Electric & Gas for Williams and are availablefor gas delivery to the Facility.

 

*OtherConstruction Costs* – The Company has also made roadmodifications at a cost of approximately 

 

55

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$537,000, is in the process of constructing an administration buildingfor an estimated $1.7 million, and is installing a fuel gas heater for anestimated $1.3 million.  The Company haspaid $902,000 towards the fuel gas heater project and $1,100,000 towards theadministration building.  The majorityof the remaining capital expenditures are expected to be paid by the end of May2002.

 

**6.****                   RELATED PARTYTRANSACTIONS**

 

Effective March 2000, the Company entered into a32-year development and construction management agreement with AES Sayreville,L.L.C. (Sayreville), another wholly owned subsidiary of Red Oak, to providecertain support services required by the Company for the development andconstruction of the Plant.  Under thisagreement Sayreville will also provide operations management services for thePlant once commercial operation is attained. Minimum amounts payable under the contract during the constructionperiod are $125,000 per month.  Oncecommercial operation is achieved, payments for operations management serviceswill be approximately $375,000 per quarter.

 

During the construction period, the constructionmanagement fees have been paid to Sayreville from the investment balances orfrom equity funding.  For the year endedDecember 31, 2001, the period from March 15, 2000 (inception) through December31, 2000, and for the period form March 15, 2000 (inception) through December31, 2001, $1,500,000, $1,250,000, and $2,750,000, in construction managementfees were incurred and charged to construction in progress, respectively.  AES will supply Sayreville with thepersonnel and services necessary to carry out its obligations to the Company.

** **

**7.****                   PROJECT COST**

 

The total cost of the construction of our facility isestimated to be approximately $446.4 million, up from an original cost of$439.8 million, which has and will continue to be financed by the proceeds fromour sale of the senior secured bonds, ($384.0 million) equity contributions,($55.7 million) and expected cash flow from liquidated damages ($9.2 million,assuming a June 30, 2002 commercial operation date).  The increase in cost has been caused by the cancellation of thediscount in the price of the construction agreement after the draw back of theprepayment amount (see note 2) and due to an increase in the interest costcapitalized during the construction period.

 

If the Company does not receive any anticipatedliquidated damages from Raytheon or any anticipated cash flows from the sale ofelectricity during the testing phase of our facility, the Company couldexperience a severe impact on its current and future financial condition,results of operations, liquidity, and accordingly, its ability to makeprincipal and interest payments on the bonds. Additionally, a significant delay in the Company’s ability to reachcommercial operations could result in, among other things, (i) a serious cashflow shortage to fund further construction and (ii) the termination of thepower purchase agreement by Williams.

 

Although there can be no assurances, based upon (i)the Company’s current assessment of progress at the construction site, (ii) theperformance guaranty from Raytheon, (iii) the mutual obligations of WGI andRaytheon under the PCA, and (iv) assuming (x) that WGI and Raytheon fulfilltheir respective obligations under the PCA, and (y) that Raytheon continues tofulfill its obligations under its performance guarantee and the OGSA, theCompany currently believes that it has sufficient funds available to completeconstruction of the Facility, and expect the Facility to become commerciallyoperational by approximately June 30, 2002.

 

**8.****                   FAIR VALUE OFFINANCIAL INSTRUMENTS**

 

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

 

The fair value of the Company’s restricted investmentsapproximates their carrying value.  TheBonds had a carrying amount of $384 million at December 31, 2001 and 2000.  The Bonds 

 

56

----

 

had a fair value of approximately $389.7 million and $413.0 million,respectively, at December 31, 2001 and 2000.

 

**9.****                   SEGMENTINFORMATION**

 

Under the provisions of Statement of FinancialAccounting Standards No. 131, *Disclosure About Segments of an Enterprise andRelated Information*, the Company’s business is expected to beoperated as one reportable segment, with operating income or loss being themeasure of performance evaluated by the chief operating decision maker.  As described in notes 1 and 5, the Company’sprimary customer will be Williams, which is expected to provide all of therevenues of the Company during the term of the PPA.

 

**10.****            DERIVATIVEINSTRUMENT**

 

                On January 1, 2001, the Companyadopted SFAS No. 133, Accounting for Derivative Instruments and HedgingActivities, which, as amended, established new accounting and reportingstandards for derivative instruments and hedging activities. SFAS No. 133requires that an entity recognize all derivatives (including derivativesembedded in other contracts) as either assets or liabilities on the balancesheet and measure those instruments at fair value. Changes in the derivative’sfair value are to be recognized currently in earnings unless specific hedgeaccounting criteria are met. Hedge accounting allows a derivative’s gains orlosses in fair value to offset related results of a hedged item in thestatement of operations and requires that a company formally document, designate,and assess the effectiveness of transactions that receive hedge accounting.

 

SFASNo. 133 allows hedge accounting for fair value and cash flow hedges. SFAS No.133 provides that the gain or loss on a derivative instrument designated andqualifying as a fair value hedge, as well as the offsetting gain or loss on thehedged item attributable to the hedged risk, be recognized currently inearnings in the same accounting period. SFAS No. 133 provides that theeffective portion of the gain or loss on a derivative instrument designated andqualifying as a cash flow hedge be reported as a component of othercomprehensive income in stockholder’s equity and be reclassified into earningsin the same period or periods during which the hedged transaction affectsearnings. The remaining loss on the derivative, if any, must be recognizedcurrently in earnings.

 

Asexplained in note 1, the Company will produce and sell electricity, as well asprovide fuel conversion and ancillary services, solely to Williams under thePPA. The Company believes the PPA, although meeting the definition of aderivative under SFAS No. 133, qualifies for the normal purchase and salesexception and thus is not required to be accounted for as a derivative. TheDerivatives Implementation Group (DIG) of the Financial Accounting StandardsBoard is currently discussing the accounting treatment under SFAS No. 133 forcontracts similar to the PPA. The DIG may conclude that such contracts arerequired to be accounted for as derivatives. The Company has no other contractsthat meet the definition of a derivative or an embedded derivative under SFASNo. 133. Therefore, there was no significant impact on the Company’s financialstatements at January 1, 2001 or at December 31, 2001.

 

In December 2001, the FASB revised its earlierconclusion, Derivatives Implementation Group (“DIG”) Issue C-15, related tocontracts involving the purchase or sale of electricity.  Contracts forthe purchase or sale of electricity, both forward and option contracts, includingcapacity contracts, may qualify for the normal purchases and sales exemptionand are not required to be accounted for as derivatives under SFAS No.133.  In order for contracts to qualify for this exemption, they must meetcertain criteria, which include the requirement for physical delivery of theelectricity to be purchased or sold under the contract only in the normalcourse of business.  Additionally, contracts that have a price based on anunderlying that is not clearly and closely related to the electricity beingsold or purchased or that are denominated in a currency that is foreign to thebuyer or seller are not considered normal purchases and normal sales and arerequired to be accounted for as derivatives under SFAS No. 133.  Thisrevised conclusion is effective beginning April 1, 2002.   The Company is currently assessing theimpact of revised DIG Issue C-15 on its financial condition and results ofoperations.

 

**11.****            SUBSEQUENT EVENTS**

 

As of March 4, 2002, the Company has drawn down $42.7million under the Equity Subscription Agreement.

 

                On March 14, 2002,the Company requested final review of the as built installation by GPU inaccordance with the Interconnection Agreement for interconnection permission.

57

----

 

 

**ITEM9.****  Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.**

 

None.

 

58

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**PART III**

 

**ITEM10.****  DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

We are a Delaware limited liability company and haveno employees other than our officers. Our officers receive no compensation for the services they provide to usor for any transaction between us and any of our affiliates.  We are managed by our board of directors underthe terms of our the Amended and Restated Limited Liability Company Agreement,dated as of November 23, 1999. The following table sets forth the names, agesand positions of our directors and executive officers as of December 31, 2001.Our directors are elected annually and each elected director holds office untilthe director’s successor is elected and qualified or the director resigns or isremoved.  Our officers are elected fromtime to time by vote of the board of directors.

 
| **NAME**            |   | **AGE** |   | **POSITIONS**                        |   |
|---------------------|--------|---------|--------|--------------------------------------|--------|
| John R. Ruggirello  |   | 51      |   | President and Director               |   |
| Barry J. Sharp      |   | 42      |   | Director and Chief Financial Officer |   |
| Albert Bergeron     |   | 41      |   | Vice President                       |   |
| Charles B. Falter   |   | 37      |   | Vice President                       |   |
| Patricia L. Rollin  |   | 41      |   | Vice President                       |   |
| Bart R. Rossi       |   | 53      |   | Vice President                       |   |
| Joel Abramsom       |   | 31      |   | Vice President                       |   |
| Edward C. Hall, III |   | 42      |   | Vice President                       |   |
| Kevin Polchow       |   | 40      |   | Vice President                       |   |
| Michael Romaniw     |   | 32      |   | Vice President and Treasurer         |   |
| Maureen B. Shearer  |   | 37      |   | Secretary                            |   |
| Roger Naill         |   | 54      |   | Director                             |   |

 

*JohnRuggirello*has served as our Director and President since1998. Mr. Ruggirello is Senior Vice President of The AES Corporation. Mr.Ruggirello also serves as the President of AES Enterprise, a businessdevelopment and plant operations division serving the Mid-Atlantic UnitedStates since 1994.  Prior to his currentposition, Mr. Ruggirello was plant manager of AES Beaver Valley.  Mr. Ruggirello spends approximately 20% ofhis time in his capacity as Senior Vice President of The AES Corporation.

* *

*BarrySharp* has served as our Director and Chief Financial Officersince 1998.  Mr. Sharp is currentlySenior Vice President and Chief Financial Officer of The AES Corporation.  He joined The AES Corporation as Director ofFinance and Administration in 1986. Prior to The AES Corporation, he held various positions with ArthurAnderson & Company and Marriott. Mr. Sharp spends approximately 95% of his time in his capacity as SeniorVice President and Chief Financial Officer of The AES Corporation.

* *

*AlbertBergeron *has servedas our Vice President since 2000.  Mr.Bergeron is currently the Construction and Plant Manager for our project.  He joined AES in 1989 at our ConnecticutFacility, AES Thames and has served in various O&M roles at that plantincluding Vice President of AES Connecticut Management.

* *

*CharlesFalter*has served as our Vice President since 1998.  Mr. Falter was the Project Director for ourproject through March 15, 2000 and now works as a Project Director on other AESprojects.  He joined The AES Corporationas a Project Engineer in 1988.

 

59

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*PatriciaRollin*has served as our Vice President since 1998. Ms.Rollin is also a Vice President of AES Enterprise.  She served as Director of Investor Relations of The AES Corporationfrom 1994 through 1995.  She joined TheAES Corporation Corporate Strategic Planning Group in 1984.

* *

*BartRossi* has served as our Vice President since 1998.  Mr. Rossi is currently a project EngineeringDirector at The AES Corporation.  Heassumed that position in 1996.  Prior tojoining The AES Corporation, Mr. Rossi served as a Chief Engineer for EbascoServices, Inc.

* *

*JoelAbramsom*has served as our Vice President since 1998.  Mr. Abramson is currently a Project Managerof The AES Corporation and has held that position since 1995.

* *

*EdwardHall, III* has served as our Vice President since 1998.  Mr. Hall is currently Executive VicePresident of AES Endeavor, focused on business development in New York, NewEngland and Canada.  He joined The AESCorporation in 1988.

* *

*                Kevin Polchow*hasserved as our Vice President since 1998. Mr. Polchow is currently the Tax Director of The AES Corporation.  He assumed that position in 1994.  Prior to joining The AES Corporation, Mr.Polchow served as a Senior Manager at Deloitte & Touche LLP.

* *

*MichaelRomaniw*has served as our Vice President and Treasurer since2000.  Mr. Romaniw is currently TaxManager of The AES Corporation and has held that position since 1999.  Prior to joining The AES Corporation, Mr.Romaniw was with Ernst & Young LLP.

* *

*MaureenB. Shearer*has served as our Secretary since 1999.  She is currently Corporate Paralegal of TheAES Corporation and has held that position since 1995.  She joined The AES Corporation as anExecutive Assistant in 1989.  Prior tojoining The AES Corporation, Ms. Shearer was on active duty with the U.S. CoastGuard.

* *

*RogerF. Naill*has served as our Director since 1999.  Mr. Naill is Senior Vice President of TheAES Corporation and heads The AES Corporation Corporate Strategic PlanningGroup.  He assumed that position in1981. Mr. Naill spends approximately 95% of his time in his capacity as SeniorVice President of The AES Corporation.

 

**ITEM11.****  EXECUTIVECOMPENSATION**

 

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

 

**ITEM12.****  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

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

 

**ITEM13.****  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

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

 

60

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**PART IV**

 

**ITEM14.****  EXHIBITS, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

a)             Thefollowing documents are filed as part of this report:

 

1.                                                 ConsolidatedFinancial Statements Filed:

Please refer to Item 8 - Consolidated FinancialStatement and Supplementary Data.

 

2.                                                 ConsolidatedFinancial Statement Scheduled Filed:

Please refer to Item 8 - Consolidated FinancialStatement and Supplementary Data.

 

3.                                                 ExhibitsFiled:

 

**Unlessotherwise indicated, all exhibits to this Form 10-K are incorporated herein byreference from the identically numbered exhibit of AES Red Oak, L.L.C.’sRegistration Statement of Form S-4 (333-40478).**

** **
| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                    |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3                  |   | Amended and Restated Limited Liability Company  Agreement, dated as of November 23, 1999 of AES Red Oak, L.L.C.                                                                                                                                                                                                                                                    |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.1(a)             |   | Trust Indenture, dated as of March 1, 2000, by and  among AES Red Oak, L.L.C., the Trustee and the Depositary Bank.                                                                                                                                                                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.1(b)             |   | First Supplemental Indenture, dated as of March 1,  2000, by and among AES Red Oak, L.L.C., the Trustee and the Depositary Bank.                                                                                                                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.2                |   | Collateral Agency and Intercreditor Agreement, dated  as of March 1, 2000, by and among AES Red Oak, L.L.C., the Trustee, the  Collateral Agent, the Debt Service Reserve Letter of Credit Provider, the  Power Purchase Agreement Letter of Credit Provider, the Working Capital  Provider and the Depositary Bank.                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.3                |   | Debt Service Reserve Letter of Credit and  Reimbursement Agreement, dated as of March 1, 2000, by and among AES Red Oak,  L.L.C., the Debt Service Reserve Letter of Credit Provider and the Banks  named therein.                                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.4                |   | Power Purchase Agreement Letter of Credit and  Reimbursement Agreement, dated as of March 1, 2000, by and among AES Red Oak,  L.L.C., the Power Purchase Agreement Letter of Credit Provider and the Banks  named therein.                                                                                                                                         |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.5                |   | Global Bond, dated March 15, 2000, evidencing 8.54%  Senior Secured Bonds of AES Red Oak, L.L.C., Series A due 2019 in the  principal amount of $224,000,000.                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.6                |   | Global Bond, dated March 15, 2000, evidencing 9.20%  Senior Secured Bonds of AES Red Oak, L.L.C., Series B due 2029 in the  principal amount of $160,000,000.                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.7                |   | Equity Subscription Agreement, dated as of March 1,  2000, by and among AES Red Oak, L.L.C., AES Red Oak, Inc. and the Collateral  Agent.                                                                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.8                |   | Working Capital Agreement, dated as of March 1,  2000, by and among AES Red Oak, L.L.C., Working Capital Provider, and the  Banks named therein.                                                                                                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.9                |   | Security Agreement, dated as of March 1, 2000, by  and between AES Red Oak, L.L.C. and the Collateral Agent.                                                                                                                                                                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.10               |   | Pledge and Security Agreement, dated as of March 1,  2000, by and between AES Red Oak, Inc. and the Collateral Agent.                                                                                                                                                                                                                                              |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.11               |   | Pledge and Security Agreement, dated as of March 1,  2000, by and between AES Red Oak, L.L.C. and the Collateral Agent.                                                                                                                                                                                                                                            |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.12               |   | Consent to Assignment, dated as of March 1, 2000, by  and between Williams Energy Marketing & Trading Company and the  Collateral Agent, and consented to by AES Red Oak, L.L.C. (with respect to  the Power Purchase Agreement).                                                                                                                              |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.13               |   | Consent to Assignment, dated as of March 1, 2000, by  and between The Williams Companies, Inc. and the Collateral Agent, and  consented to by AES Red Oak, L.L.C. (with respect to the PPA Guaranty)                                                                                                                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.14               |   | Consent to Assignment, dated as of March 1, 2000, by  and between Raytheon Engineers & Constructors, Inc. and the Collateral  Agent, and consented to by AES Red Oak, L.L.C. (with respect to the  construction agreement).                                                                                                                                    |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.15               |   | Consent to Assignment, dated as of March 1, 2000, by  and between Raytheon Company and the Collateral Agent, and consented to by  AES Red Oak, L.L.C. (with respect to the EPC Guaranty).                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.16               |   | Consent to Assignment, dated as of March 1, 2000, by  and between Siemens Westinghouse Power Corporation and the Collateral Agent,  and consented to by AES Red Oak, L.L.C. (with respect to the Maintenance  Services Agreement).                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.17               |   | Consent to Assignment, dated as of March 1, 2000, by  and between AES Sayreville, L.L.C. and the Collateral Agent, and consented to  by AES Red Oak, L.L.C. (with respect to the Development and Operations  Services Agreement).                                                                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.18               |   | Consent to Assignment, dated as of March 1, 2000, by  and between Jersey Central Power and Light Company d/b/a GPU Energy and the  Collateral Agent, and consented to by AES Red Oak, L.L.C. (with respect to  the Interconnection Agreement).                                                                                                                     |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 4.19               |   | Consent to Assignment, dated as of March 1, 2000, by  and between the Borough of Sayreville and the Collateral Agent, and consented  to by AES Red Oak, L.L.C. (with respect to the Water Supply Agreement).                                                                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.1               |   | Fuel Conversion Services, Capacity and Ancillary  Services Purchase Agreement, dated as of September 17, 1999, and Amendment  No. 1, dated as of February 21, 2000, by and between AES Red Oak, L.L.C. and  Williams Energy Marketing & Trading Company.  (Portions of this exhibit have been omitted pursuant to a  request for confidential treatment.) |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.2(a)            |   | Agreement for Engineering, Procurement and  Construction Services, dated as of October 15, 1999, and Amendment No. 1,  dated as of February 23, 2000, by and between AES Red Oak, L.L.C. and  Raytheon Engineers & Constructors, Inc.   (Portions of this exhibit have been omitted pursuant to a request for  confidential treatment.)                   |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.2(b)            |   | EPC Contract Prepayment Coordination Agreement,  dated as of March 14, 2000, between AES Red Oak, L.L.C. and Raytheon  Engineers and Constructors, Inc.   (Portions of this exhibit have been omitted pursuant to a request for  confidential treatment.)                                                                                                     |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.3               |   | Guaranty, dated as of October 15, 1999, by Raytheon  Company in favor of AES Red Oak, L.L.C.   (Portions of this exhibit have been omitted pursuant to a request for  confidential treatment.)                                                                                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.4               |   | Maintenance Program Parts, Shop Repairs and  Scheduled Outage TFA Services Contract, dated as of December 8, 1999, and  Amendment No. 1, dated February 15, 2000, by and between AES Red Oak, L.L.C.  and Siemens Westinghouse Power Corporation.   (Portions of this exhibit have been omitted pursuant to a request for  confidential treatment.)           |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.5               |   | Development and Operations Services Agreement, dated  as of March 1, 2000, by and between AES Sayreville, L.L.C. and AES Red Oak,  L.L.C.                                                                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.7               |   | Water Supply Agreement, dated as of December 22,  1999, by and between AES Red Oak, L.L.C. and the Borough of Sayreville.                                                                                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.8               |   | General Facility Transmission Interconnection  Agreement, dated as of April 27, 1999, by and between Jersey Central Power  & Light Company d/b/a GPU Energy and AES Red Oak, L.L.C.                                                                                                                                                                            |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.9               |   | Mortgage, Security Agreement and Assignment of  Leases and Income, dated as of March 1, 2000, by and between AES Red Oak,  L.L.C. and the Mortgagee.                                                                                                                                                                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.10              |   | Assignment of Leases and Income, dated as of March  1, 2000, by and between AES Red Oak, L.L.C. and the Collateral Agent.                                                                                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.11              |   | Financial Agreement, dated as of December 3, 1999,  by and between AES Red Oak Urban Renewal Corporation and the Borough of  Sayreville.                                                                                                                                                                                                                           |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.12              |   | Promissory Note, dated as of March 15, 2000, of AES  Red Oak Urban Renewal Corporation to AES Red Oak, L.L.C.                                                                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.13              |   | Ground Lease Agreement, dated as of March 1, 2000,  by and between AES Red Oak, L.L.C. and AES Red Oak Urban Renewal Corporation.                                                                                                                                                                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.14              |   | Sublease Agreement, dated as of March 1, 2000, by  and between AES Red Oak Urban Renewal Corporation and AES Red Oak, L.L.C.                                                                                                                                                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.15              |   | Memorandum of Ground Lease, dated as of March 1,  2000, by and between AES Red Oak, L.L.C. and AES Red Oak Urban Renewal  Corporation.                                                                                                                                                                                                                             |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.16              |   | Memorandum of Sublease, dated as of March 1, 2000,  by and between AES Red Oak Urban Renewal Corporation and AES Red Oak, L.L.C.                                                                                                                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.17              |   | Construction Agency Agreement, dated as of March 1,  2000, by and between AES Red Oak Urban Renewal Corporation and AES Red Oak,  L.L.C.                                                                                                                                                                                                                           |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.18              |   | Leasehold Mortgage, Security Agreement and  Assignment of Leases and Income, dated as of March 1, 2000, by and between  AES Red Oak Urban Renewal Corporation and AES Red Oak, L.L.C.                                                                                                                                                                              |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.19              |   | Assignment of Mortgage, dated as of March 1, 2000,  by AES Red Oak, L.L.C. in favor of the Collateral Agent.                                                                                                                                                                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.20              |   | URC Security Agreement, dated as of March 1, 2000,  by and between AES Red Oak Urban Renewal Corporation and AES Red Oak, L.L.C.                                                                                                                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.21              |   | Assignment of Leases and Income, dated as of March  1, 2000, by and between AES Red Oak Urban Renewal Corporation and AES Red  Oak, L.L.C.                                                                                                                                                                                                                         |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.22              |   | Assignment of Assignment of Leases and Income, dated  as of March 1, 2000, by AES Red Oak, L.L.C. in favor of the Collateral Agent.                                                                                                                                                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.23              |   | Guaranty, dated as of March 1, 2000, by The Williams  Companies, Inc. in favor of AES Red Oak, L.L.C. (PPA Guaranty).  (Portions of this exhibit have been  omitted pursuant to a request for confidential treatment.)                                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.24              |   | Project Completion Agreement dates as of November  16, 2001, by and between Raytheon Company and Washington Group International,  Inc. (incorporated herein by reference from Exhibit 10.1 to the Form 8-K  filed on December 12, 2001, File No. 333-40478).                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 10.25              |   | Owner/Guarantor Supplemental Agreement, dated as of  November 21, 2001, by and among AES Red Oak, L.L.C. and Raytheon Company  (incorporated herein by reference from Exhibit 10.2 to the Form 8-K filed on  December 12, 2001, File No. 333-40478).                                                                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 12*                |   | Computation of Ratios of Earnings (Deficiency) to  Fixed Charges.                                                                                                                                                                                                                                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                                                                                               |
| 21*                |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                    |
|                    |        |                                                                                                                                                                                                                                                                                                                                                                    |  |

 

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*              Filed herewith.

 

b)            Reportson Form 8-K

 

A Current Report on Form 8-K (Item 5) was filed by theregistrant on December 12, 2001.  Noother Current Reports on Form 8-K were filed by the registrant during thefourth quarter of the fiscal year ended December 31, 2001.

 

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**Supplementary Information to be Furnished With Reports filedPursuant toSection 15(d) of the Act by Registrants Which Have Not RegisteredSecurities Pursuant to Section 12 of the Act.**

 

No annual report or proxy materials have been sent tosecurity holders during the fiscal year ended December 31, 2001.  No annual report or proxy materials will besent to security holders subsequent to the filing of this annual report on Form10-K.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | **AES  RED OAK, L.L.C.** |                    |
|--------|--------------------------|-------------------------|
|   |                     |
|   |                     | /s/ Barry Sharp         |   |
|   | By:                      | Barry Sharp             |   |
|   | Title:                   | Chief Financial Officer |   |
|        |                          |                         |  |  |  |  |  |

 

Date: March 29, 2002

 

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

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

 

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