** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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** **

**FORM 10-K**

**(Mark One)**

| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                     |
|       |   | **For the fiscal year ended December 31, 2003**                                                                                                          |
|       |   |                                                                                                                                                     |
| **OR**     |
|       |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                            |
|       |   |                                                                                                                                                     |
|       |   | **For the transition period from           to          ** |

** **

**Commission file number:  333-40478**

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

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                         |   | **54-1889658**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  of other jurisdiction of incorporation or organization)                      |   | (I.R.S.  Employer Identification No.) |
|                                                                                 |   |                                  |
| **832 Red Oak Lane, Sayreville, NJ**                                                 |   | **08872**                             |
| (Address of  principal executive offices)                                            |   | (Zip Code)                            |
|                                                                                 |   |                                  |
| Registrant’s  telephone number, including area code:   **(732)  238-1462** |
|                                                                                 |
| Securities  Registered Pursuant To Section 12(b) of The Act:  **None**          |
|                                                                                 |
| Securities  Registered Pursuant To Section 12(g) of The Act:  **None**          |

 

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.  Yes ý No o

 

Indicate by check mark if disclosure of delinquentfilers 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 Form 10-K,or any amendment to this Form 10K.  ý

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).  Yes oNo ý

 

As of June 30, 2003, the last business day of theregistrant’s most recently completed second fiscal quarter, and as of March 15,2004, there was one membership interest in AES Red Oak, LLC outstanding, whichwas held by AES Red Oak, Inc., the Company’s parent and a wholly-owned subsidiaryof The AES Corporation.

** **

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

 

**DOCUMENTS INCORPORATED BY REFERENCE**

**None**

 

 

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**TABLEOF CONTENTS**

 
| 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       |   |
| ITEM 9A.                                              | CONTROLS AND  PROCEDURES                                                                    |   |
| PART III                                              |                                                                                        |   |
| ITEM 10.                                              | DIRECTORS AND EXECUTIVE  OFFICERS OF THE REGISTRANT                                         |   |
| ITEM 11.                                              | EXECUTIVE  COMPENSATION                                                                     |   |
| ITEM 12.                                              | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                             |   |
| ITEM 13.                                              | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                             |   |
| ITEM 14.                                              | PRINCIPAL  ACCOUNTING FEES AND SERVICES                                                     |   |
| PART IV                                               |                                                                                        |   |
| ITEM 15.                                              | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                           |   |
| SIGNATURES                                            |                                                                                        |   |

 

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**CAUTIONARY NOTE REGARDING FORWARD**-LOOKING STATEMENTS

** **

Someof the statements in this Form 10-K, as well as statements made by us inperiodic press releases and other public communications, constitute“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Certain,but not necessarily all, of such forward-looking statements can be identifiedby the use of forward-looking terminology, such as “believes,” “estimates,”“plans,” “projects,” “expects,” “may,” “will,” “should,” “approximately,” or“anticipates” or the negative thereof or other variations thereof or comparableterminology, or by discussion of strategies, each of which involves risks anduncertainties. We have based these forward-looking statements on our current expectationsand projections about future events based upon our knowledge of facts as of thedate of this Form 10-K and our assumptions about future events.

 

Allstatements other than of historical facts included herein, including thoseregarding market trends, our financial position, business strategy, projectedplans and objectives of management for future operations of the facility, areforward-looking statements. Such forward-looking statements involve known andunknown risks, uncertainties and other factors outside of our control that maycause our actual results or performance to be materially different from anyfuture results, performance or achievements expressed or implied by theforward-looking statements. These risks, uncertainties and other factorsinclude, among others, the following:

 

•      unexpectedproblems relating to the performance of the facility,

 

•      the financial condition ofthird parties on which we depend, including in particular, Williams PowerCompany, Inc., (“Williams Energy”), formerly Williams Energy Marketing &Trading Company, as fuel supplier under the power purchase agreement we enteredinto with Williams Energy for the sale of all electric energy and capacityproduced by the facility, as well as ancillary and fuel conversion services(the “Power Purchase Agreement”), and The Williams Companies, Inc., as theguarantor of Williams Energy’s performance under the Power Purchase Agreement,

 

•      delaysin, or disputes over, the final completion of our facility,

 

•      continued performance byWilliams Energy (as guaranteed by The Williams Companies, Inc.) under the PowerPurchase Agreement,

 

•      the ability of The WilliamsCompanies, Inc. or its affiliates to avoid a default under the Power PurchaseAgreement by continuing to maintain or provide adequate security to supplementtheir guarantee of Williams Energy’s performance under the Power PurchaseAgreement,

 

•      our ability to find areplacement power purchaser on favorable or reasonable terms, if necessary,

 

•      an adequate merchant marketafter the expiration, or in the event of a termination, of the Power PurchaseAgreement,

 

•      capital shortfalls andaccess to additional capital on reasonable terms, or in the event that thePower Purchase Agreement is terminated,

 

•      the possibility thatWilliams Energy will not request that we run or “dispatch” the facility asprovided under the Power Purchase Agreement,

 

•      inadequate insurancecoverage,

 

•      unexpected expenses or lowerthan expected revenues,

 

•      environmental and regulatorycompliance,

 

•      terrorists acts and adversereactions to United States anti-terrorism activities, and

 

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

 

Wehave no obligation to publicly update or revise any forward-looking statement,whether as a result of new information, future events or otherwise.

 

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**PART I**

** **
| **ITEM 1**. | **BUSINESS** |
|-------------|--------------|

** **

**General**

** **

We area Delaware limited liability company formed on September 13, 1998, to develop,construct, own, lease, operate and maintain a gas-fired electric generatingpower plant in the Borough of Sayreville, Middlesex County, New Jersey andmanage the production of electric generating capacity, ancillary services andenergy at our facility. We reached provisional acceptance on August 11, 2002,risk transfer on August 13, 2002, and took the position that we werecommercially available on September 1, 2002. Williams Energy disputed the September 1, 2002 commercial operation dateand informed us that it recognized commercial availability of the facility asof September 28, 2002.  On November 4,2003, a settlement was reached and a commercial operation date of September 28,2002 was agreed upon.  See Item 3 “LegalProceedings”.  Since our commercialoperation date, our sole business is the ownership, leasing and operation ofthe project.

 

Ourfacility was initially designed, engineered, procured and constructed for us byWashington Group International, Inc. (“WGI”) (as the successor contractor) on afixed-price, turnkey basis. On May 14, 2001, WGI filed a plan of reorganizationalong with voluntary petitions to restructure under Chapter 11 of the U.S.Bankruptcy Code in the U.S. Bankruptcy Court for the District of Nevada in Reno(the “Bankruptcy Court”). As a result of WGI’s bankruptcy filing, on June 20,2001 we made a demand on the Raytheon Company (“Raytheon”) to perform itsobligations under a guarantee which Raytheon had given us of WGI’s performanceobligations under the construction agreement and Raytheon became responsiblefor the construction of our facility. As discussed above, provisional acceptance has been granted and theFacility has commenced commercial operations, however, Raytheon must performcertain agreed upon completion items in order to obtain final acceptance.Raytheon gave notice of Final Acceptance on July 22, 2003 based on its July 8,2003 performance test.  On July 31,2003, we received a letter from the project’s independent engineer stating thatit could not support Raytheon’s claim of final acceptance and it did notconsider the July 8, 2003 performance test valid.  In making this assessment, the independent engineer cited, amongother reasons, (i) modifications made to certain equipment in performance ofthe July 8 performance test which would adversely impact the operations of theplant and other pieces of equipment and (ii) Raytheon’s failure to demonstratecompliance with guaranteed emissions limits. On August 1, 2003, we rejected Raytheon’s claim of final acceptance.  This rejection was based upon Raytheon’sfailure to meet the conditions for final acceptance provided for in theEngineering, Procurement and Construction Services Agreement (“EPC contract”).On August 7, 2003, we received a response from Raytheon in which Raytheonclaims that our rejection of the final acceptance is invalid and improper.  The Company is currently considering itsoptions for resolving this dispute.  See“Summary of Principal Agreements – Construction Agreement”.

 

SiemensWestinghouse Power Corporation provides combustion turbine maintenance servicesand 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, L.L.C., a wholly owned subsidiary of AES Red Oak, Inc., our directcorporate parent, provides development, construction management and operationsand maintenance services for our operating facility under the operationsagreement. We act as construction agent for our affiliate, AES Red Oak UrbanRenewal Corporation (“AES URC”), for the development and construction of partof the facility under a construction agency agreement. We own the land on whichour facility is located, and lease part of the facility from AES URC with anoption to purchase.

 

Wehave entered into a Power Purchase Agreement for a term of 20 years under whichWilliams Energy has committed to purchase all of the net capacity, fuelconversion and ancillary services of our facility. Net capacity is the maximumamount of electricity generated by our facility net of electricity used at ourfacility. Fuel conversion services consist of the combustion of natural gas inorder to generate electric energy. Ancillary services consist of servicesnecessary to support the transmission of capacity and energy. Williams Energyis obligated to supply us with all natural gas necessary to provide netcapacity, fuel conversion services and ancillary services under the PowerPurchase Agreement. During the term of the Power Purchase Agreement,substantially all of our operating

 

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revenueswill be derived from payments made under the Power Purchase Agreement. Undercertain limited circumstances described herein, Williams Energy has the rightto terminate the Power Purchase Agreement.

 

**Organizational Structure**

** **

All ofthe equity interests in our company are owned by AES Red Oak, Inc., a whollyowned subsidiary of The AES Corporation. The AES Corporation is a leading global power company, with 2003 salesof $8.4 billion. AES delivers 45,000 megawatts of electricity to customers in27 countries through 116 power facilities and 17 distribution companies. Its30,000 people are committed to operational excellence and meeting the world’sgrowing power needs. Approximately 26% of AES’s revenues come from businessesin North America, 18% from the Caribbean, 39% from South America, 11% fromEurope and Africa, and 6% from Asia.

 

AESRed Oak, Inc. currently has no operations outside of its activities inconnection with our project and does not anticipate undertaking any unrelatedoperations. AES Red Oak, Inc. also owns all of the equity interests in AESSayreville, L.L.C., (“AES Sayreville”) which provides development, constructionmanagement, and operations and maintenance services to us. AES Sayreville hasno operations outside of its activities in connection with our project. AES RedOak, Inc. has no assets other than its membership interests in us and AESSayreville. The AES Corporation supplies AES Sayreville with personnel and servicesnecessary to carry out its obligations to us.

 

Wealso own all of the equity interests in AES URC, which was organized as anurban renewal corporation under New Jersey law so that portions of our projectcan be designated as redevelopment areas or projects in order to providecertain real estate tax and development benefits for our project. AES URC hasno operations outside of its activities in connection with our project.

 

TheAES Corporation is a public company and is subject to the informational requirementsof the Securities Exchange Act of 1934 and, in accordance therewith, filesreports, proxy statements and other information, including financial reports,with the SEC, which are not incorporated into and do not form a part of thisForm 10-K.

 

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

 

 

Ourprincipal executive offices are located at 832 Red Oak Lane, Sayreville, NJ08872. Our telephone number is (732) 238-1462.

 

**Energy Revenues**

** **

Asmentioned above, we generate energy revenues under the Power Purchase Agreementwith Williams Energy.  During the20-year term of the agreement, we expect to sell electric energy and capacityproduced by the facility, as

 

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well asancillary and fuel conversion services. Under the Power Purchase Agreement, we also generate revenues frommeeting (1) base electrical output guarantees and (2) heat rate rebates throughefficient electrical output.

 

Uponits expiration, or in the event that the Power Purchase Agreement is terminatedprior to its 20-year term or Williams Energy otherwise fails to perform, wewould seek to generate energy revenues from the sale of electric energy andcapacity into the merchant market or under new short or long-term powerpurchase or similar agreements.  Due tocurrent pool prices, however, we would expect that even if we were successfulin finding alternate revenue sources, any such alternate revenues would besubstantially below the amounts that would have been otherwise payable pursuantto the Power Purchase Agreement. There can be no assurances as to our abilityto generate sufficient cash flow to cover operating expenses or our debtservice obligations in the absence of a long-term Power Purchase Agreement withWilliams Energy.

 

Afterthe plant reached provisional acceptance, we elected to confirm reliability forup to 19 days before binding with Williams Energy.  Beginning August 13, 2002 (the date of risk transfer) throughAugust 31, 2002, we operated the facility as a merchant plant with electricrevenues sold to Williams Energy, in its capacity as our Pennsylvania-NewJersey-Maryland (“PJM”) account representative, at spot market prices andbought gas from Williams Energy at spot market prices. Additionally, duringSeptember 2002, we made net electric energy available to Williams Energy duringtimes other than receiving a Williams Energy dispatch notice.  This net electric energy is referred to as“other sales of energy” in the Power Purchase Agreement and is sold at thelocal marginal price commonly referred to as spot market energy.  Gas required for this energy generation waspurchased from Williams Energy at spot market prices.  We recognized merchant revenues of approximately $.2 million and$11.1 million for the years ended December 31, 2003 and 2002,respectively.  Related fuel expenseswere approximately $.9 million and $6.9 million for the years ended December 31,2003 and 2002, respectively.

 

**Competition**

** **

Underthe Power Purchase Agreement, Williams Energy is required to purchase all ofour facility’s capacity and energy for an initial term of 20 years. Therefore,during the term of the Power Purchase Agreement, competition from othercapacity and energy providers will become an issue only if the Power PurchaseAgreement is terminated or not performed in accordance with its terms.Following the term of the Power Purchase Agreement, we anticipate selling ourfacility’s net capacity, ancillary services and energy under a new PowerPurchase Agreement or into the PJM power pool market. At that time, we willface competition from other generating facilities selling into the PJM powerpool market including, possibly, other facilities owned by The AES Corporationor its affiliates.

 

**Employees**

** **

We area Delaware limited liability company and have no employees other than our 7officers.  Our officers receive nocompensation for the services they provide to us or for any transactionsbetween us and our affiliates. Under the operations agreement, AES Sayrevillehas managed the development and construction of and now operates and maintainsour facility. The direct labor personnel and the plant operations management****areemployees of The AES Corporation provided to AES Sayreville under a servicesagreement.  As of December 31, 2003, TheAES Corporation provided 27 employees to work at our facility.

 

**Insurance**

** **

Asowner of our site and lessee and owner of the facility, we maintain acomprehensive insurance program as required under our various project contractsand the indenture governing our senior secured bonds and underwritten byrecognized insurance companies. Among other insurance policies, we alsomaintain commercial general liability insurance, permanent property insurancefor full replacement value of the facility and business interruption insurancecovering at least 18 months of gross revenues less variable operating expenses.We have obtained title insurance in an amount equal to the principal amount ofthe bonds.

 

AESSayreville, as operator of our facility, maintains, among other insurancepolicies, workers’ compensation insurance (or evidence of self-insurance), ifrequired, and comprehensive automobile bodily injury and property damageliability insurance.

 

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**Permits And Regulatory Approvals**

** **

AESSayreville, as operator of our facility, and us, as owner and lessee of ourfacility, must comply with numerous federal, state and local regulatoryrequirements including environmental requirements in the operation of ourfacility.

 

OnNovember 4, 1999, we received a certification from the Federal EnergyRegulatory Commission (“FERC”) that we are an exempt wholesale generator. Certificationas an exempt wholesale generator exempts us from regulation under the PublicUtility Holding Company Act of 1935. We will maintain this status so long as wecontinue to make only wholesale sales of electricity, which we intend to do.Prior to commercial operation, we filed the Power Purchase Agreement with FERCand requested approval for the rates contained therein. On June 22, 2001, wereceived FERC approval at those rates. We may also need to obtain FERC approvalfor sales of electricity at market-based rates after the Power PurchaseAgreement is no longer in effect.

 

OnJanuary 28, 2000, we received our Prevention of Significant DeteriorationPermit, or “air permit,” from the New Jersey Department of EnvironmentalProtection. The appeal period in respect of the air permit expired on February28, 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 the construction agreement, originally WGIand now Raytheon, as project guarantor, are required to construct our facilityto meet these requirements.  Therequired emission standards were met upon provisional acceptance and commercialoperation and no additional modification is currently needed.

 

We aresubject to a number of statutory and regulatory standards and requiredapprovals relating to energy, labor and environmental laws.  The necessary environmental permits for thecommencement of construction and operation of our facility have been obtained.

 

**Summary of Principal Project Contracts**

** **

Whilewe believe that the following summaries contain the material terms of theprincipal project contracts, such summaries may not include all of theprovisions of each agreement that each individual investor may feel isimportant. These summaries do not restate each agreement discussed herein andexclude certain definitions and complex legal terminology that may be containedin each relevant agreement. You should carefully read each agreement discussedherein, each of which is filed as an exhibit to this Form 10- K.

 

**Power PurchaseAgreement**

** **

Weentered into a Fuel Conversion Services, Capacity and Ancillary ServicesPurchase Agreement, dated as of September 17, 1999, with Williams Energy, forthe sale to Williams Energy of all of the electric energy and unforced capacityproduced by our facility as well as ancillary services and fuel conversionservices.

 

**Term**

** **

ThePower Purchase Agreement extends for 20 years from the first contract anniversarydate, which is the last day of the month in which commercial operation occurred(September 30, 2002).

 

Uponnotice from Williams Energy no later than 90 days prior to the end of theinitial term of the Power Purchase Agreement, the term of the Power PurchaseAgreement may be extended by Williams Energy for up to a total of 24 months foreach hour of the initial term during which we are unable to deliver energy orancillary services because of an event of force majeure (other than aninability of the Company to obtain natural gas to operate the facility) thatoccurs after the commercial operation date.

 

Underthe Power Purchase Agreement, the commercial operation date was required tooccur by December 31, 2001, however the Company had the right to extend thecommercial operation date until June 30, 2002 by invoking its right to a freeextension option which was available under the Power Purchase Agreement ifcertain conditions were met.  TheCompany exercised its right to extend the commercial operation date fromDecember 31, 2001 to June 30, 2002, as granted under the free extension option.In addition, the Company had the right under the Power Purchase Agreement toagain extend the commercial operation date from June 30, 2002 to June 30, 2003(the “Second Paid Extension Option”), upon written notification to WilliamsEnergy no later than May 21, 2002 (which

 

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representedan agreed upon extension from the original April 30, 2002 notificationdeadline), by paying Williams Energy (i) an amount equal to the lesser of anyactual damages Williams Energy suffered or incurred after June 30, 2002, as aresult of Williams Energy’s reliance upon delivery by such date, to the extentsaid damages could not be mitigated fully, or $3.0 million and (ii) certainamounts of liquidated damages as calculated pursuant to the Power PurchaseAgreement.  On May 21, 2002, the Companyexercised the Second Paid Extension Option. ** **Asa result of these extensions, we paid liquidated damages to Williams Energy atthe rate of $11,000 per day for the period beginning on July 1, 2002 and endingon August 31, 2002, which amounted to $682,000.  As a result of the dispute over the commercial operation date, wealso paid liquidated damages to Williams Energy at the rate of $22,000 per dayfor the period beginning on September 1, 2002 and ending on September 27, 2002,which amounted to $594,000.  This issuewas resolved as part of the arbitration settlement with Williams. During theperiod of the Second Paid Extension Option, we continued to collect liquidateddamages through August 10, 2002 from Raytheon under the construction agreementin the amount of $108,000 per day.  Asof August 2002, we had received $14 million in liquidated damages from Raytheonunder the construction agreement.  Wedid not receive any liquidated damages under the construction agreement in2003.

 

WilliamsEnergy is currently our sole customer for purchases of capacity, ancillaryservices, and energy and our sole source for fuel.  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 unlikely thatwe would be able to find another purchaser or fuel source on similar terms forthe facility if Williams Energy were not performing under the Power PurchaseAgreement.  Any material failure byWilliams Energy to make capacity and fuel conversion payments or to supply fuelunder the Power Purchase Agreement would have a severe adverse impact on ouroperations.

 

**Purchase and Sale of Capacity**

** **

Duringthe term of the Power Purchase Agreement, we will perform for Williams Energyon an exclusive basis, and Williams Energy will purchase and pay for fuelconversion services. Fuel conversion services include the operation of ourfacility by us to combust natural gas delivered by Williams Energy in order togenerate and deliver energy or to provide ancillary services. We will sell andmake available to Williams Energy on an exclusive basis, and Williams Energywill purchase and pay for, our facility’s net capacity and ability to generateelectric energy. We may not sell, without the consent of Williams Energy in itssole discretion, capacity generated on the site but not from our facility.

 

**Fuel Conversion and Other Services**

** **

WilliamsEnergy must deliver or cause to be delivered to us at the natural gas deliverypoint on an exclusive basis all quantities of natural gas required by us to:

 

•      generatenet electric energy and/or ancillary services;

 

•      performstart-ups;

 

•      performshutdowns; and

 

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

 

WilliamsEnergy at all times retains title to the natural gas delivered to us exceptthat when our facility is operated during any period other than a start-up,shutdown or dispatch period title is transferred to us at the natural gasdelivery point.

 

WilliamsEnergy is solely responsible for all costs and expenses related to the supplyand transportation of natural gas to the natural gas delivery point. We areresponsible for all costs and expenses related to the transportation, gatheringor taxation of natural gas or its use or possession at and after the naturalgas delivery point.

 

Uponthe expiration of the Power Purchase Agreement or any termination of the PowerPurchase Agreement as the result of Williams Energy’s default thereunder, wewill have the right to purchase the gas interconnection facilities fromWilliams Energy, or if Williams Energy does not own the gas interconnectionfacilities, Williams Energy will assign to us all of its rights totransportation services using the gas interconnection facilities.

 

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**Pricing and Payments**

** **

Foreach month of the term after the commercial operation date, Williams Energymust pay us for our facility’s net capacity, successful start-ups andassociated shutdowns, ancillary services and fuel conversion services at theapplicable rates set forth in the Power Purchase Agreement. Each monthlypayment by Williams Energy consists of a total fixed payment, a variableoperations and maintenance payment and an energy exercise fee. The total fixedpayment, which is payable regardless of facility dispatch by Williams Energybut is subject to adjustment based on facility availability, is calculated bymultiplying an unforced capacity rate for each contract year by the temperatureadjusted unforced capacity in the billing month and adding to that the productof the fuel conversion option demand charge and the average facility capacityfor that month. The total fixed payment is anticipated to be sufficient tocover our debt service and fixed operating and maintenance costs and to provideus a return on equity. The variable operations and maintenance payment isintended to cover our variable operating and maintenance costs and escalatesannually based on an escalation index set forth in the Power PurchaseAgreement. The energy exercise fee is intended to compensate us for eachsuccessful start-up. We may receive heat rate bonuses or be required to payheat rate penalties.

 

Priorto the commercial operation date, and during some facility tests thereafter, wepurchased natural gas from Williams Energy. Williams Energy sold us the naturalgas at prices specified in the Power Purchase Agreement, and we sold 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 was 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 interconnects. We are solely responsible for any fines orpenalties resulting from the delivery of the net electric energy at theelectric delivery point when the delivery is made without the authorization ofPJM, Jersey Central Power, which is the host utility, or FERC. We have notincurred any such fine or penalty to date.

 

WilliamsEnergy is entitled to an annual fuel conversion volume rebate if its dispatchof our 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 fuelconversion volume rebate payments and non-dispatch payments must be made toWilliams Energy after debt service and certain other payments but prior to anydistribution to holders of equity interests in our company. Fuel conversionvolume rebate payments and any non-dispatch payments owed to Williams Energyand not paid when due will be paid, together with interest thereon, when fundsbecome available to us at the priority level described above. A separatereserve account must be maintained by us and our lenders and we must deposit tothat account on a monthly basis, from our cash flow, any applicable and unpaidnon-dispatch payment plus a ratable amount of the maximum fuel conversionvolume rebate amount that Williams Energy may have earned. Amounts held in thatreserve account will be used to pay, to the extent owed, the fuel conversionvolume rebate and non-dispatch payments.

 

**Required Authorizations**

** **

Duringthe term of the Power Purchase Agreement, we must, at our own cost and expense,obtain as and when required all approvals, permits, licenses and otherauthorizations from governmental authorities as may be required for us tooperate and maintain our facility, the interconnection facilities andprotective gas apparatus and to perform our obligations under the PowerPurchase Agreement.  We plan to obtainall additional governmental approvals, permits, licenses and authorizations asmay be required with respect to our facility as soon as practicable.

 

**Interconnection and Metering Equipment**

** **

At oursole cost and expense, we designed, constructed and installed and currentlymaintain the GPU interconnection facilities and protective gas apparatus neededto generate and deliver net electric energy and/or ancillary services to theelectric delivery point in order to fulfill our obligations under the PowerPurchase Agreement, including all interconnection facilities and protective gasapparatus that are located at the switchyards and/or substations at ourfacility. Our facility, interconnection facilities and protective gas apparatushave been designed, constructed and completed in a good and workmanlike mannerand in accordance with accepted electrical practices (with respect to ourfacility and interconnection facilities) or in accordance with standard gasindustry practices (with respect to protective gas apparatus), so that theexpected useful life of our facility, the interconnection facilities andprotective gas apparatus will be not less than the term of the Power PurchaseAgreement.

 

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PublicService Electric and Gas (“PSE&G”), under contract with Williams Energy,has installed the natural gas interconnection facilities and natural gasmetering equipment to our satisfaction. PSE&G has also installed gas metering equipment although we arecurrently involved in a dispute with Williams Energy over the location of suchequipment.  All electric meteringequipment and gas metering equipment, whether owned by us or by a third party,must be operated, maintained and tested in accordance with accepted electricalpractices, in the case of the electric metering equipment, and in accordancewith applicable industry standards, in the case of the gas metering equipment.Except under limited circumstances, we may not enter into any modification oramendment of the interconnection agreement with Jersey Central Power withoutthe prior written consent of Williams Energy.

 

As ofDecember 31, 2002, all electrical interconnection and metering equipment hadbeen installed and accepted by Jersey Central Power See “InterconnectionAgreement - Jersey CentralPower’s Obligations”.

 

**Operation and Dispatch**

** **

Ourfacility and the interconnection facilities must be operated in accordance withaccepted electrical practices and applicable requirements and guidelines ofJersey Central Power pursuant to the interconnection agreement. The protectivegas apparatus must be operated in accordance with standard gas industrypractices. If there is a conflict between the terms and conditions of the PowerPurchase Agreement and Jersey Central Power requirements, the Jersey CentralPower requirements control.

 

Wemust operate our facility in parallel with Jersey Central Power’s electricalsystem in accordance with the interconnection agreement. When dispatched byWilliams Energy, we must operate our facility and each unit thereof withautomatic regulation equipment in service.

 

ThePower Purchase Agreement acknowledges that Jersey Central Power has the rightto require us to disconnect our facility from its electrical system, orotherwise curtail, interrupt or reduce deliveries of net electric energy, inaccordance with the terms of the interconnection agreement. If our facility hasbeen disconnected for these reasons, Williams Energy will continue to beobligated to make total fixed payments for at least 24 hours after theoccurrence of disconnection of our facility by Jersey Central Power.

 

Wemust use commercially reasonable efforts to correct promptly any condition atour facility which necessitates the disconnection of our facility from JerseyCentral Power’s electrical system or the reduction, curtailment or interruptionof electrical output of our facility.

 

WilliamsEnergy has 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.

 

WilliamsEnergy and our company must perform each of our respective obligations in amanner that avoids the creation of cashout obligations or imbalance penaltiesimposed by the natural gas transporter. Williams Energy must try to minimizeany imbalance charges under a transporter’s tariff and thereafter we will beresponsible for imbalance charges levied by the natural gas transporter to theextent that the charges result from: (i) an imbalance caused by us greater thanthe allocable tolerance in the transporter’s tariff or (ii) our failure topromptly notify Williams Energy of a change in the operation of our facilitythat would cause any imbalance.

 

**Force Majeure**

** **

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

 

•      the party declaring itsinability to perform by virtue of force majeure, as promptly as practicableafter the occurrence of the force majeure condition, but in no event later than5 days thereafter, gives the other party written notice describing, in detail,the nature, extent and expected duration of the force majeure condition;

 

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•      the suspension ofperformance is of no greater scope and of no longer duration than is reasonablyrequired by the force majeure condition;

 

•      the party declaring forcemajeure uses all commercially reasonable efforts to remedy its inability toperform; and

 

•      as soon as the partydeclaring force majeure is able to resume performance of its obligationsexcused as a result of the force majeure condition, it must give prompt writtennotification thereof to the other party.

 

Irrespectiveof whether the force majeure condition is declared by Williams Energy or us,the time 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 Williams Energy declares a force majeure, however, it willcontinue to pay us only the applicable monthly total fixed payment as describedin the Power Purchase Agreement until the earlier of (i) the termination of theforce majeure condition or (ii) the termination of the Power PurchaseAgreement. Furthermore, if a force majeure is declared by us due to an actionor inaction of Jersey Central Power that prevents us from delivering netelectric energy to the electric delivery point, Williams Energy will continueto pay the applicable portion of the total fixed payment for the first 24 hoursof the period.

 

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

 

•      Any reduction, curtailmentor interruption of generation or operation of our facility, or of the abilityof Williams Energy to accept or transmit net electric energy, whether in wholeor in part, which reduction, curtailment or interruption is caused by or arisesfrom the acts or omissions of any third party providing services or supplies tothe party claiming force majeure, including any vendor or supplier to eitherparty of materials, equipment, supplies or services, or any inability of JerseyCentral Power to deliver net electric energy to Williams Energy, unless, andthen only to the extent that, any act or omission would itself be excused underthe Power Purchase Agreement as a force majeure;

 

•      Any outage, whether or notdue to our fault or negligence, attributable to a defect or inadequacy in themanufacture, design or installation of our facility that prevents, curtails,interrupts or reduces the ability of our facility to generate net electricenergy or our ability to perform our obligations under the Power PurchaseAgreement;

 

•      To the extent that the partyclaiming force majeure failed to prevent or remedy the force majeure conditionby taking all commercially reasonable acts (short of litigation, if the remedyrequires litigation) and, except as otherwise provided in the Power PurchaseAgreement, failed to resume performance under the Power Purchase Agreement withreasonable dispatch after the termination of the force majeure condition;

 

•      To the extent that theclaiming party’s failure to perform was caused by lack of funds;

 

•      To the extent WilliamsEnergy is unable to perform due to a shortage of natural gas supply not causedby an event of force majeure; or

 

•      Because of an increase ordecrease in the market price of electric energy/capacity or natural gas orbecause it is uneconomic for the party to perform its obligations under thePower Purchase Agreement.

 

Neitherparty will be required to settle any strike, walkout, lockout or other labordispute on terms which, in the sole judgment of the party involved in thedispute, are contrary to its interest.

 

WilliamsEnergy will 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 toterminate the Power Purchase Agreement if (i) the force majeure was caused byWilliams Energy or (ii) the force majeure event does not prevent or materiallylimit Williams Energy’s ability to sell our facility net capacity into orthrough the PJM power pool market or to a third party.

 

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**Events of Default; Termination; Remedies**

** **

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

 

•      breach of any term orcondition of the Power Purchase Agreement, including, but not limited to, (i)any failure to maintain or to renew any security, (ii) any breach of arepresentation, warranty or covenant or (iii) failure of either party to make arequired payment to the other party;

 

•      our facility is notavailable to provide fuel conversion services or ancillary services to WilliamsEnergy during any period of 180 consecutive days after the occurrence of thecommercial operation date, except as may be excused by force majeure or theabsence of available natural gas, or if non-availability is caused by an act orfailure to act by Williams Energy where the action is required by the PowerPurchase Agreement;

 

•      we sell or supply netelectric energy, ancillary services or capacity from our facility, or agree todo the same, to any person or entity other than Williams Energy, without theprior approval of Williams Energy;

 

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

 

•      our failure for 30consecutive days to correct or resolve a material violation of any code,regulation and/or statute applicable to the construction, installation,operation or maintenance of our facility, the interconnection facilities,protective gas apparatus or any other electric equipment and facilitiesrequired to be constructed and operated under the Power Purchase Agreement whenthe violation impairs our continued ability to perform its obligations underthe Power Purchase Agreement;

 

•      involuntary bankruptcy orinsolvency of either party that continues for more than 60 days;

 

•      voluntary bankruptcy orinsolvency by either party;

 

•      any modifications,alterations or other changes to our facility by or on our behalf which preventus from fulfilling, or materially diminish our ability to fulfill, itsobligations, duties, rights and responsibilities under the Power PurchaseAgreement and which after reasonable notice and opportunity to cure, are notcorrected;

 

•      there will be outstandingfor more than 60 days any unsatisfied final, non-appealable judgment against usin an amount exceeding $500,000, unless the existence of the unsatisfiedjudgment will not materially affect our ability to perform its obligationsunder the Power Purchase Agreement; and

 

•      The AES Corporation willcease to own, directly or indirectly, beneficially and of record, at least 50percent of the equity interests in our company, or will cease to possess thepower to direct or cause the direction of our company’s management or policies,or any person, other than The AES Corporation or an affiliate, authorized toact as a power marketer by FERC or any affiliate of the person will own,directly or indirectly, beneficially or of record, any of the equity interestsin our company.

 

Uponthe occurrence of any event of default, other than a bankruptcy-related eventof default, for which no notice will be required or opportunity to curepermitted, the party not in default, to the extent the party has actualknowledge of the occurrence of the event of default, will give prompt writtennotice of the default to the defaulting party. The notice will set forth, inreasonable detail, the nature of the default and, where known and applicable,the steps necessary to cure the default. The defaulting party will have 30days, two business 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.

 

If thedefaulting party fails to cure the default or take the steps as provided underthe preceding paragraph, and immediately upon the occurrence of insolvency orthe filing of a voluntary petition for bankruptcy, the Power Purchase Agreementmay be terminated by the non-defaulting party, without any liability orresponsibility whatsoever, by written notice to the party in default thereof.The Power Purchase Agreement will then terminate and

 

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thenon-defaulting party may exercise all rights and remedies as are available toit to recover damages caused by the default, seek specific performance orexercise other rights and remedies that it may have in equity or at law.

 

**Security**

** **

ThePower Purchase Agreement requires us to provide $30 million of financialsecurity for our performance and payment obligations prior to commercialoperation and $10 million of financial security for our performance and paymentobligations subsequent to the commercial operation date.  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 asspecified in the Power Purchase Agreement. If the financial security contains an expiration date, either express orimplied, we will renew the financial security not later than 10 days prior tothe expiration date and will provide written notice of the renewal to WilliamsEnergy at the same time. If we fail to renew the financial security as setforth above, Williams Energy is entitled to demand and receive paymentthereunder on or after three days after written notice of the failure is providedto us, and the amount drawn will be deposited in an interest-bearing escrowaccount.

 

Theletter of credit referred to above must be issued by a financial institutionthat at all times during the term of the letter of credit meets and maintainsthe following criteria: (i) a U.S. or foreign bank rated “C” or better byThompson Bankwatch; or (ii) a U.S. or foreign bank, surety company or financialinstitution whose senior debt has the rating listed below by two of the threerating agencies: Standard & Poor’s: “A-” or better; Moody’s: “A3” orbetter; Duff & Phelps: “A-” or better. If the bank, surety company or financial institution fails to maintainthe ratings criteria, then upon 30 days’ written notice from Williams Energy,we are required to obtain equivalent security from another bank, surety companyor financial institution meeting the above stated criteria.

 

Inorder to satisfy this obligation, prior to the commercial operation date weprovided a $30 million letter of credit which was reduced to $10 million on thecommercial operation date.  This letterof credit will remain in effect during the term of the Power PurchaseAgreement.

 

Thepayment obligations of The Williams Companies, Inc. under the guaranty wereoriginally capped at an amount equal to approximately $510 million.  Beginning on January 1 of the first fullyear after the commercial operation date, this guaranty cap is reducedsemiannually by a fixed amount which is based on the amortization of thecompany’s senior secured bonds during the applicable semiannual period.  As of December 31, 2003 the guarantee wascapped at $507.6 million.  Pursuant toSection 18.3 of the Power Purchase Agreement, in the event that Standard &Poors or Moody’s rates the long-term senior unsecured debt of The WilliamsCompanies, Inc. lower than investment grade, The Williams Companies, Inc. isrequired to supplement The Williams Companies, Inc. guarantee with additionalalternative security that is acceptable to the Company within 90 days after theloss of such investment grade rating. According to published sources, The Williams Companies, Inc**.**’slong term senior unsecured debt has been rated below investment grade since2002 by both S&P and Moody’s.

 

Due tothe downgrade of The Williams Companies, Inc. to below investment grade, theCompany and Williams Energy entered into a letter agreement dated November 7,2002 (the “Letter Agreement”), under which Williams Energy agreed to providethe Company (a) a prepayment of $10 million within five business days after executionof the Letter Agreement (the “Prepayment”); (b) alternative credit supportequal to $35 million on or before January 6, 2003 in any of the followingforms: (i) cash, (ii) letter(s) of credit with the Company as the solebeneficiary substantially in the form of the Power Purchase Agreement Letter ofCredit, unless mutually agreed to otherwise, or (iii) a direct obligation ofthe United States Government delivered to a custodial securities account asdesignated by the Company with a maturity of not more than three years; and (c)replenish any portion of the alternative credit support that is drawn, reduced,cashed, or redeemed, at any time, with an equal amount of alternative creditsupport.  In the Letter Agreement, theCompany and Williams Energy acknowledged that the posting of such alternativecredit support and Williams Energy’s agreement and performance of therequirements of (a), (b), and (c), as set forth in the immediately precedingsentence, would be in full satisfaction of Williams Energy’s obligationscontained in Section 18.3 of the Power Purchase Agreement.  In the Letter Agreement, the Company andWilliams Energy expressly agreed that the posting of the Prepayment or anyalternative credit support either now or in the future or any other terms setforth in the Letter Agreement is not intended to and did not modify, alter, oramend in any way, the terms and conditions or relieve The Williams Company,Inc. from any obligations it has under its guarantee of the payment obligationsof Williams Energy under the Power Purchase Agreement.  The guaranty remains in full force andeffect and the Company retains all of its rights and remedies provided by thatguaranty.

 

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Underthe terms of the Letter Agreement, the Company is obligated to return thePrepayment to Williams Energy upon the earlier of (i) The Williams Companies,Inc. regaining its investment grade rating or Williams Energy providing asubstitute guaranty of investment grade rating; (ii) the beginning of ContractYear 20; or (iii) the posting of alternative credit support by Williams Energyas set forth below.  In the case ofitems (i) and (iii) above, except to the extent, in the case of item (iii),Williams Energy elects to have all or a portion of the Prepayment make up acombination of the alternative credit support required to be posted pursuant toSection 18.3(b) of the Power Purchase Agreement, Williams Energy shall have theright to recoup the Prepayment by set-off of any and all amounts owing to theCompany under the Power Purchase Agreement beginning no earlier than the Junein the calendar year after the occurrence of item (i) or (iii) and continuingthereafter until the Prepayment has been fully recovered.  In the case of item (ii) above, WilliamsEnergy shall have the right to immediately set-off all amounts owing to theCompany under the Power Purchase Agreement after the occurrence of item (ii)and continuing thereafter until the Prepayment has been fully recovered.  Except to the extent Williams Energy electsto include the Prepayment as part of the alternative credit support, the amountof alternative credit support posted by Williams Energy pursuant to the LetterAgreement shall be initially reduced by the amount of the Prepayment, andWilliams Energy shall thereafter increase the alternative credit supportproportionately as Williams Energy recoups the Prepayment set-off on thepayment due date of amounts owing to the Company.

 

If theCompany does not return the Prepayment to Williams Energy as set forth in thepreceding paragraph, then the Company shall be considered in default under theLetter Agreement and Williams Energy shall be entitled to enforce any and orall of its contractual rights and remedies as set forth in the Power PurchaseAgreement, including, but not limited to, drawing on the letter of creditpreviously posted by the Company in favor of Williams Energy.

 

WilliamsEnergy made the Prepayment on November 14, 2002 and provided an additional $25million of cash to us on January 6, 2003 as alternative credit support.  As allowed by the Letter Agreement, WilliamsEnergy has elected to have the $10 million Prepayment included as part of thealternative credit support.  In theevent that The Williams Companies, Inc. regain and maintains its investmentgrade status, provides a substitute guaranty of investment grade rating, orposts a letter of credit, we will be required to return the $35 millionalternative credit support to Williams Energy in accordance with the terms ofthe Letter Agreement as described above. As of March 15, 2004, we had cash balances of approximately $33.5million.  See “Item 7-ManagementsDiscussion and Analysis of Financial Condition and Results of Operations -Liquidityand Capital Resources”.

 

**Assignment**

** **

Generally,a party to the Power Purchase Agreement may not assign, transfer, pledge orotherwise encumber or dispose of any rights, duties, interests or obligationsthereunder without the prior written consent of the other party except that (i)Williams Energy may, upon reasonable advance notice to us, assign its rights,duties and obligations under the Power Purchase Agreement to any of itsaffiliates or any other entity, provided that such affiliate or other entity’slong term unsecured debt at such time is rated investment grade by Standard& Poor’s and Moody’s or such affiliate or other entity’s obligations underthe Power Purchase Agreement are guaranteed by an affiliate whose long-termunsecured debt at such time is rated investment grade by Standard & Poor’sand Moody’s and such assignee agrees to be bound by all of the terms andconditions on the Power Purchase Agreement to the same extent as WilliamsEnergy, (ii) we may, upon reasonable advance notice to Williams Energy, assignthe Power Purchase Agreement and any of our rights, interests, duties orobligations thereunder as collateral security to any Lender so long as theassignee agrees to be bound by all of the terms and conditions of the PowerPurchase Agreement to the same extent as we are in the event that such lenderexercises its rights under such assignment and (iii) we may assign any of ourrights, duties and obligations under the Power Purchase Agreement to anyaffiliate provided such affiliate assumes in writing all of our obligationsunder the Power Purchase Agreement and the guaranty of our performance asrequired by the Power Purchase Agreement remains in effect.

 

**ConstructionAgreement**

** **

Weentered into an Agreement for Engineering, Procurement and ConstructionServices, dated as of October 15, 1999, with WGI (as the successor contractor)under which WGI was 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 andequipment (excluding operational spare parts), machinery, tools, constructionfuels, chemicals and utilities, labor, transportation, administration and otherservices and items (collectively and

 

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separately,the “services”) for our facility. Under a Guaranty in our favor, effective asof October 15, 1999, all of WGI’s obligations under the construction agreementare irrevocably and unconditionally guaranteed by Raytheon.

 

WGIfiled for bankruptcy on May 14, 2001, however construction of the facilitycontinued through a series of cooperative agreements executed by us, WGI andRaytheon. On November 9, 2001, the Bankruptcy Court approved WGI’s rejection ofthe construction agreement and the execution of the PCA by WGI and Raytheon.Additionally, on November 21, 2001, we and Raytheon entered into theOwner/Guarantor Supplemental Agreement pursuant to which (i) Raytheon and weacknowledged that, notwithstanding the rejection of the construction agreementby WGI, Raytheon would cause the project to be completed in accordance with theterms of the construction agreement pursuant to Raytheon’s performance guarantyobligations, and the construction agreement will have continuing applicabilityinsofar as it defines (x) the obligations owed to us by Raytheon under itsguaranty and (y) our obligations to Raytheon arising from the performance ofthose obligations, (ii) Raytheon (or their designees) was designated as ouragent for purposes of administering the subcontracts and vendor contractsassigned by WGI to us, (iii) all future payments by us would be paid inaccordance with the terms of the construction agreement directly to Raytheon,and (iv) Raytheon would indemnify us with respect to any claims arising out ofthe subcontracts and vendor contracts assumed by us.

 

Provisionalacceptance of the facility was achieved on August 11, 2002 when we entered intoa settlement agreement with Raytheon. In return for provisional acceptance, Raytheon agreed to perform workidentified in the punch list provided as part of the agreement.  Raytheon was also required to pay a $5million settlement fee, minus outstanding milestones and change-orders for anet payment to the Company for $2.37 million, which it paid in 2002.  Raytheon must perform certain agreed uponcompletion items in order to obtain final acceptance.  See “Completion and Acceptance of our Project – FinalAcceptance”.

 

**Raytheon Services and Other Obligations**

** **

Raytheonmust complete our project by performing or causing to be performed all of theagreed upon services. The services have included: engineering and design;construction and construction management; providing us design documents,instruction manuals, a project procedures manual and quality assurance plan;procurement of all materials, equipment and supplies and all contractor andsubcontractor labor and manufacturing and related services; providing a spareparts list; providing all labor and personnel; obtaining all applicablepermits; performing inspection, expediting, quality surveillance and trafficservices; transporting, shipping, receiving and marshaling all materials,equipment and supplies and other items; providing storage for all materials,supplies and equipment and procurement or disposal of all soil and gravel(including remediation and disposal of specific hazardous materials); providingfor design, construction and installation of electrical interconnectionfacilities (including electric metering equipment, automatic regulationequipment, protective apparatus and control system equipment) and reviewingother utility interconnections to our facility (including gas and waterpipelines); performing performance tests; providing for start-up and initialoperation functions; providing specified spare parts, waste disposal services,chemicals, consumables and utilities.

 

Theservices have also included: training our personnel prior to provisionalacceptance; providing us and our designee with access to the site; obtaining additionalnecessary real estate rights; cleaning-up and waste disposal (includinghazardous materials brought to the site by Raytheon or the subcontractors);submitting a project schedule and progress reports; paying of contractor taxes;making employee identification and security arrangements; protecting adjoiningutilities and public and private lands from damage; paying appropriateroyalties and license fees; providing final releases and waivers to us; postingcollateral or providing other assurances if major subcontractors fail tofurnish final waivers; maintaining labor relations and project laboragreements; providing further assurances; coordinating with other contractors;and causing Raytheon to execute and deliver the related guaranty.

 

Asmentioned above, provisional acceptance was granted by us on August 11,2002.  Raytheon must perform certainagreed upon completion items in order to obtain final acceptance.  See “Completion and Acceptance of ourProject – Final Acceptance”.

 

**Construction and Start-Up**

** **

Raytheonmust perform certain services in accordance with prudent utility practices,generally accepted standards of professional care, skill, diligence andcompetence applicable to engineering, construction and project

 

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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 mustperform the services in accordance with our project schedule and is obligatedto cause:

 

•      each construction progressmilestone to be achieved on or prior to the applicable construction progressmilestone date; and

 

•      final acceptance of ourfacility on or before the guaranteed final acceptance date (see “Completion andAcceptance of Our Project – Final Acceptance “).  Raytheon must perform the services so that our facility, whenoperated in accordance with the instruction manual and the Power PurchaseAgreement operating requirements as of provisional acceptance and finalacceptance, will comply with all applicable laws and applicable permits, theelectrical interconnection requirements and the guaranteed emissions limits inaccordance with the completed performance test requirements.

 

**Contract Price and Payment**

** **

Theadjusted contract price may either be paid in installments in accordance withthe payment and milestone schedule or be prepaid as described in the collateralagency agreement. Initially, the adjusted contract price was prepaid in theamount of $295.7****million ($288.6 million of which was paid at closing), whichincluded base scope changes through March 15, 2000. The contract price may beadjusted as a result of scope changes. The prepayment funds were backed by aprepayment letter of credit in our favor. However, under the constructionagreement, the bankruptcy filing by WGI on May 14, 2001 constituted an event ofdefault under the construction agreement. Accordingly, we requested that thefull available amount of such letter of credit be drawn upon and deposited inthe construction account held by the collateral agent. The collateral agentmade such drawing on May 4, 2001 in the amount of $95.8 million, which was thethen outstanding amount of the prepayment letter of credit as it had beenreduced by WGI’s achievement of construction milestones under the constructionagreement. Subsequent to the termination of the prepayment arrangements withWGI, payments to WGI for achievement of construction milestones as specified inthe construction agreement were made in accordance with the terms of theconstruction agreement.

 

Underthe construction agreement, we are entitled to withhold from each scheduledpayment, other than the last milestone payment, 10% of the requested paymentuntil after final acceptance by us of the facility unless, as discussed below,Raytheon posts a letter of credit in the amount of amounts which wouldotherwise be retained. Within 10 days after the final acceptance, we arerequired to pay all retainage except for (a) 150% of the cost of completing allpunch list items and (b) the lesser of (i) 150% of the cost of repairing orreplacing any items that have already been repaired or replaced by Raytheon and(ii) $1 million. Within 30 days after project completion, we are required topay the sum of the unpaid balance of the contract price, including allretainage, less the amount indicated in (b) of the immediately proceedingsentence. Within 30 days of the first anniversary of the earlier of provisionalacceptance or final acceptance, we are required, so long as project completionhas occurred, to pay all remaining retainage, if any.

 

Underthe construction agreement, in lieu of our retaining these amounts, Raytheon isentitled to post a letter of credit in the amount of the then currentretainage. On March 4, 2002, Raytheon provided us with a letter of credit inthe amount of $29.5 million (which amount represented the outstanding amount ofretainage under the construction agreement on the date the letter of credit wasposted) and we paid Raytheon the amount of the retainage.  Raytheon has subsequently increased theamount of the letter of credit in proportion to the amounts which wouldotherwise be retained by us and we have paid Raytheon the corresponding amountof this retainage.  As of December 31,2003, Raytheon had provided a letter of credit of approximately $30.8million.  We may draw on this letter ofcredit in the event that Raytheon fails to pay us any amount owed to us underthe construction agreement.  As ofDecember 31, 2003 and December 31, 2002, we had drawn $544,000 and $96,000 onthis letter of credit, respectively, for interim rebates which Raytheon thenresumed paying until their notice of Final Acceptance on July 22, 2003.

 

We arecurrently in discussions with Raytheon as to when the performance testing requiredfor final acceptance will occur.  See“Completion and Acceptance of Our Project – Final Acceptance.”

 

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**Our Services**

** **

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

 

If wefail to meet any of our obligations under the construction agreement, then, tothe extent that Raytheon was reasonably delayed in the performance of theservices as a direct result thereof, an equitable adjustment to one or more ofthe contract price, the guaranteed completion dates, the construction progressmilestone dates, the payment and milestone schedule and our project schedule,and, as appropriate, the other provisions of the construction agreement thatmay be affected thereby, will be made by agreement between us and Raytheon.

 

**Completion and Acceptance of Our Project**

** **

***Mechanical Completion***

*** ***

Mechanicalcompletion was achieved on August 13, 2002.

 

***Performance Tests and Power Purchase Agreement Output Tests***

** **

Oncemechanical completion was achieved, Raytheon was required to perform certainperformance tests in accordance with criteria set forth in the constructionagreement. Raytheon gave us notice of the performance tests, we arranged forthe disposition of output during start-up and testing and Raytheon declaredthese performance tests complete since during the tests the operation of ourfacility complied with applicable laws, applicable permits, GuaranteedEmissions Limits and other required standards. Although the performance test met the levels required for thecommencement of commercial operations, they did not meet the levels guaranteedby Raytheon under the construction agreement. Therefore, as provided by the construction agreement, Raytheon had beenpaying us interim rebates until their notice of final acceptance date of July22, 2003, but we contend that these amounts should continue to be paid untilthe final acceptance date, which we contend has not yet occurred. Based on ourinterpretation of the contract, we expect that on the final acceptance dateadditional performance tests will be performed and if specified levels of heatrate and output are not met, Raytheon will be required to pay us a finallump-sum payment which will be based on the amount of the deficiency. Raytheondisputes our position since they contend that the final acceptance date hasalready occurred (See “Final Acceptance”).

 

***Provisional Acceptance***

** **

Provisionalacceptance was achieved on August 11, 2002 and risk transfer occurred on August13, 2002 when:

 

•      Raytheon caused a completedperformance test in which our facility demonstrated an average net electricaloutput of 95% (or higher) of the electrical output guarantee and 105% (orlower) of the gas-based heat rate guarantee; and

 

•      our facility achieved therequirements of mechanical completion.

 

Theindependent engineer and we were satisfied that the provisional acceptancerequirements had been met and delivered to Raytheon a provisional acceptancecertificate on August 11, 2002.  We tookpossession and control of our facility and we are now solely responsible forthe operation and maintenance of the facility although Raytheon continues tohave reasonable access to our facility to complete the services.

 

***Final Acceptance***

** **

Finalacceptance will be achieved when:

 

•      Raytheon has caused acompleted performance test in accordance with the construction agreement to beconcluded in which our facility demonstrates during the performance test anaverage net electrical output of 100% (or higher) of the electrical outputguarantee and 100% (or lower) of the heat rate guarantee;

 

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•      our facility has achieved,and continues to satisfy the requirements for the achievement of, mechanical completion;

 

•      the reliability guaranteehas been achieved under the construction agreement; and

 

•      Raytheon has completedperformance of the services except for (i) punch list items and (ii) servicesthat are required by the terms of the construction agreement to be completedafter the achievement of final acceptance, such as Raytheon’s warrantyobligations.

 

Thereliability guarantee will have been achieved if and only if our facilitydemonstrates an average equivalent availability of not less than 95% whileoperating over a period of at least 30 consecutive days in accordance withapplicable laws, applicable permits, the electrical interconnectionrequirements, the Power Purchase Agreement operating requirements, theguaranteed emissions limits, the instruction manual and the Power PurchaseAgreement.

 

At anytime after provisional acceptance of our facility has been achieved, Raytheonmay, after exhausting all reasonable repair and replacement alternatives inorder to achieve the applicable performance guarantees for final acceptance,and so long as that the reliability guarantee will have been achieved, give tous notice of its intention to elect to declare final acceptance. In that event,Raytheon may elect to use the results of the most recent eligible completedperformance test for the purpose of determining our facility’s level ofachievement of the performance guarantees. Final acceptance will be deemed effective as of the last to occur of (i)the date of our receipt of the declaration and report of the final completedperformance test, or, as applicable, the most recent completed performance testand (ii) the effective date of the achievement of the reliability guarantee.

 

If onor before the guaranteed final acceptance date (i) our facility has achievedprovisional acceptance and (ii) the reliability guarantee has been achieved,then final acceptance of our facility will be deemed to occur on the guaranteedfinal acceptance date.

 

Theguaranteed final acceptance date was originally required to occur 13.5 monthsafter the guaranteed provisional acceptance date as defined under theconstruction agreement, but on March 8, 2003 we entered into a letter agreementwith Raytheon pursuant to which we agreed to extend the guaranteed finalacceptance date to June 30, 2003. Raytheon gave notice of Final Acceptance on July 22, 2003 based on itsJuly 8, 2003 performance test.  On July31, 2003, we received a letter from the project’s independent engineer statingthat it could not support Raytheon’s claim of final acceptance and it did notconsider the July 8, 2003 performance test valid.  In making this assessment, the independent engineer cited, amongother reasons, (i) modifications made to certain equipment in performance ofthe July 8 performance test which would adversely impact the operations of theplant and other pieces of equipment and (ii) Raytheon’s failure to demonstratecompliance with guaranteed emissions limits. On August 1, 2003, we rejected Raytheon’s claim of finalacceptance.  This rejection was basedupon Raytheon’s failure to meet the conditions for final acceptance providedfor in the EPC contract. On August 7, 2003, we received a response fromRaytheon in which Raytheon claims that the Company’s rejection of the finalacceptance is invalid and improper.  Weare currently considering its options for resolving this dispute. At any time,by giving notice to Raytheon, we in our sole discretion may elect to effectfinal acceptance, in which case final acceptance will be deemed effective as ofthe date of the notice, and Raytheon will have no liability to us for anyamounts thereafter arising as performance guarantee payments, other than anyinterim period rebates that arose prior to the election by us, for failure ofour facility to achieve any or all of the performance guarantees applicablethereto.

 

***Project Completion***

** **

Projectcompletion will be achieved under the construction agreement when:

 

•      Final acceptance of ourfacility will have occurred and the performance guarantees with respect to ourfacility will have been achieved (or in lieu of achievement of the performanceguarantees, applicable rebates under the construction agreement will have beenpaid, or we will have elected final acceptance);

 

•      The reliability guaranteewill have been achieved;

 

•      Raytheon will havedemonstrated during the completed performance test that the operation of ourfacility does not exceed the guaranteed emissions limits;

 

•      The requirements forachieving mechanical completion of our facility will continue to be met;

 

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•      The punch list items willhave been completed in accordance with the construction agreement; and

 

•      Raytheon will have performedall of the services, other than those services, such as Raytheon’s warrantyobligations, which by their nature are intended to be performed after projectcompletion.

 

WhenRaytheon believes that it has achieved project completion, it will deliver tous a notice of project completion. If Raytheon is satisfied that the final acceptancerequirements have been met, we will deliver to Raytheon a project completioncertificate. If reasonable cause exists for doing so, we will notify Raytheonin writing that project completion has not been achieved, stating the reasonstherefore. If our project completion has not been achieved as so determined byus, Raytheon will promptly take the action or perform the additional servicesas will achieve project completion and will issue to us another notice ofproject completion. The procedure will be repeated as necessary until projectcompletion is achieved.

 

Raytheonwill be obligated to achieve project completion within 90 days after finalacceptance of our facility. If Raytheon does not achieve our project completionon or before our project completion deadline or if we determine that Raytheonis not proceeding with all due diligence to complete the services in order toachieve project completion by the deadline, we may retain another contractor tocomplete the work at contractor’s expense.

 

As aresult of our ongoing disagreement with Raytheon regarding final acceptance,project completion has not yet occurred.

 

**Price Rebate for Failure to Meet Guarantees**

** **

***Completion Dates***

*** ***

Raytheonguaranteed 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.

 

Ifneither provisional acceptance nor final acceptance of our facility occurred bythe date that is 50 days after the guaranteed provisional acceptance date,Raytheon was obligated to pay us $108,000 per day as liquidated damages, foreach day provisional acceptance or final acceptance is later than the guaranteedprovisional acceptance date. The aggregate amount of such payments thatRaytheon is obligated to make is limited to 13% of the adjusted contract price(approximately $40 million). Since neither provisional nor final acceptance hadoccurred within 50 days of the guaranteed provisional acceptance date ofFebruary 14, 2002, Raytheon began to pay us scheduled late completion paymentsbeginning on April 6, 2002 and ending on August 10, 2002 (the day prior to theprovisional acceptance date).  A totalof $14 million in liquidated damages was received in 2002, and no amounts werereceived in 2003.

 

Pursuantto the construction agreement, if neither provisional acceptance nor finalacceptance of our facility occurred on or before the date that was 90 daysafter the guaranteed provisional acceptance date, Raytheon was required tosubmit for approval by us and the independent engineer a plan to accelerate theperformance of the services as necessary in order to achieve final acceptanceof our facility by the guaranteed final acceptance date. Raytheon submitted therequired plan which was subsequently approved by us and the independentengineer.

 

**Performance Guarantees**

** **

***Electrical Output***

*** ***

Underthe construction contract, if the average net electrical output of our facilityat provisional acceptance or interim acceptance, whichever is the earlier tooccur, is less than the electrical output guarantee, then Raytheon must pay us,as a rebate and not as liquidated damages, for each day during the interimperiod, an amount equal to $0.22 per day for each kilowatt by which the averagenet electrical output is less than the electrical output guarantee.  During performance testing, our output wascalculated to be 13,370 kilowatts less than the electrical outputguarantee.  Accordingly, our dailycharge for this amount has been calculated at $2,941.40 per day. Raytheon hadbeen paying us this amount until their notice of final acceptance date of July22, 2003, but we are disputing this claim of final acceptance and contend thatthese amounts should continue to be paid until the final acceptance date (See“Final Acceptance”).

 

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Uponfinal acceptance, if the average net electrical output of our facility duringthe completed performance test is less than the electrical output guarantee,then Raytheon must pay us, as a bonus, an amount equal to $520 for eachkilowatt by which the average net electrical output is less than the guaranteeminus any interim rebates paid or to be paid by Raytheon.

 

***Heat Rate Guarantees***

*** ***

If theaverage net heat rate of our facility at provisional acceptance or interimacceptance, if having occurred before final acceptance, exceeds the heat rateguarantee, then Raytheon must pay us, as a rebate and not as liquidateddamages, for each day during the interim period, an amount equal to $46 per dayfor each BTU/KwH by which the measured net heat rate is greater than the heatrate guarantee.

 

Uponfinal acceptance, if the net heat rate of our facility during the completedperformance test exceeds the heat rate guarantee, then Raytheon will pay us, asa rebate, a lump sum amount equal to $110,000 for each BTU/KwH by which themeasured heat rate is greater than the heat rate guarantee minus any interimrebates paid or to be paid by Raytheon.

 

Forthe year ended December 31, 2003, we have invoiced Raytheon approximately $1.42million in electrical output and heat rate rebates.  As of December 31, 2003, Raytheon owed approximately $65,000 inrebates.  This amount is reflected inaccounts receivable-other at December 31, 2003.

 

**Liability and Damages**

** **

***Limitation of Liability***

*** ***

In noevent will Raytheon’s liability (i) for provisional acceptance late completionpayments exceed an amount equal to 13% of the contract price, (ii) forperformance guarantee payments arising from the electrical output guaranteeexceed in the aggregate an amount equal to 10% of the contract price, (iii) forperformance guarantee payments arising from the heat rate guarantee exceed inthe aggregate 15% of the contract price and (iv) for all provisional acceptancelate completion payments and performance guarantee payments exceed an amountequal to 34% of the contract price.

 

***Consequential Damages***

*** ***

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

 

**Aggregate Liability of Contractor**

** **

Thetotal aggregate liability of 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**

** **

Raytheonwarrants and guarantees that during the applicable warranty period:

 

•      all machinery, equipment,materials, systems, supplies and other items comprising our project will be newand of first-rate quality which satisfies utility-grade standards and inaccordance with prudent utility practices and the specifications set forth inthe construction agreement, suitable for the use in generating electric energyand capacity under the climatic and normal operating conditions and free fromdefective workmanship or materials;

 

•      it will perform all of itsdesign, construction, engineering and other services in accordance with theconstruction agreement;

 

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•      our project and itscomponents are free from all defects caused by errors or omissions inengineering and design, as determined by reference to prudent utilitypractices, and comply with all applicable laws, all applicable permits, theelectrical interconnection requirements, the Power Purchase Agreement operatingrequirements and the guaranteed emissions limits; and

 

•      the completed projectperforms its intended functions of generating electric energy and capacity as acomplete, integrated operating system as contemplated in the constructionagreement.

 

If wenotify Raytheon within 30 days after the expiration of the applicable warrantyperiod of 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, to the extent we have made all paymentsthen due to Raytheon, title to our facility and all work, materials, suppliesand equipment will pass to us free and clear of all liens, other than anypermitted 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.

 

Uponnotification from us no later than 30 days after the expiration of theapplicable warranty period of any defects or deficiencies in our project or anycomponent thereof, we will, subject to the provisions of the constructionagreement, make our facility or the subject equipment available to Raytheon forRaytheon to re-perform, replace or, at Raytheon’s option, repair the same atRaytheon expense so that it is in compliance with the standards warranted andguaranteed, all in accordance with the construction agreement.

 

**Force Majeure**

** **

***Force Majeure Event***

*** ***

Aforce majeure event will mean any act or event that prevents the affected partyfrom performing its obligations, other than the payment of money, under theconstruction agreement or complying with any conditions required to be compliedwith under the construction agreement if the act or event is beyond thereasonable control of and not the fault of the affected party and the party hasbeen unable by the exercise of due diligence to overcome or mitigate theeffects of the act or event. Force majeure events include, but are not limitedto, acts of declared or undeclared war, sabotage, landslides, revolution,terrorism, flood, tidal wave, hurricane, lightning, earthquake, fire,explosion, civil disturbance, insurrection or riot, act of God or the publicenemy, action, including unreasonable delay or failure to act, of a court orpublic authority, or strikes or other labor disputes of a regional or nationalcharacter that are not limited to only the employees of Raytheon or itssubcontractors 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 do not include (i) acts or omissions ofRaytheon or any subcontractors, except as expressly provided in the foregoingsentence, (ii) late delivery of materials or equipment, except to the extentcaused by a force majeure event, and (iii) economic hardship.

 

**Excused Performance**

** **

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

 

•      the non-performing partygives the other party prompt notice describing the particulars of theoccurrence;

 

•      the suspension ofperformance is of no greater scope and of no longer duration than is reasonablyrequired by the force majeure event;

 

•      the non-performing partyexercises all reasonable efforts to mitigate or limit damages to the otherparty;

 

•      the non-performing partyuses its best efforts to continue to perform its obligations under theconstruction agreement and to correct or cure the event or condition excusingperformance; and

 

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•      when the non-performingparty is able to resume performance of its obligations, that party will givethe other party written notice to that effect and will promptly resumeperformance under the construction agreement.

 

**Scope Changes**

** **

We mayorder scope changes to the services, in which event one or more of the contractprice, the construction progress milestone dates, the guaranteed completiondates, the payment and milestone schedule, our project schedule and theperformance guarantees will be adjusted accordingly, if necessary. All scopechanges will be authorized by a scope change order and only we or ourrepresentative may issue scope change orders.

 

Assoon as Raytheon becomes aware of any circumstances which Raytheon has reasonto believe 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 order notice or otherwise, we will submit a scopechange order request to Raytheon. Raytheon will promptly review the scopechange order request and notify us in writing of the options for implementingthe proposed scope change and the effect, if any, each option would have on thecontract price, the guaranteed completion dates, the construction progressmilestone dates, the payment and milestone schedule, our project schedule andthe performance guarantees.

 

Noscope change order will be issued and no adjustment of the contract price, theguaranteed completion dates, the construction progress milestone dates, thepayment and milestone schedule, our project schedule or the performanceguarantees will be made in connection with any correction of errors, omission,deficiencies, or improper or defective work on the part of Raytheon or anysubcontractors in the performance of the services. Changes due to changes inapplicable laws or applicable permits occurring after the date of theconstruction agreement will be treated as scope changes.

 

**Effect of Force Majeure Event**

** **

If andto the extent that any force majeure events affect Raytheon’s ability to meetthe guaranteed completion dates, or the construction progress milestone dates,an equitable adjustment in one or more of the dates, the payment and milestoneschedule and our project schedule will be made by agreement of us and Raytheon.No adjustment to the performance guarantees and, except as otherwise expresslyset forth below, the contract price will be made as a result of a force majeureevent. If Raytheon is delayed in the performance of the services by a forcemajeure event, then:

 

•      to the extent that thedelay(s) are, in the aggregate, 60 days or less, Raytheon will absorb all ofits costs and expenses resulting from said delay(s); and

 

•      to the extent that thedelay(s) are, in the aggregate, more than 60 days, Raytheon will be reimbursedby us for those incremental costs and expenses resulting from said delay(s)which are incurred by Raytheon after said 60-day period.

 

**Price Change**

** **

Anincrease or decrease in the contract price, if any, resulting from a scopechange requested by us or made under the construction contract will bedetermined by mutual agreement of the parties.

 

**Continued Performance Pending Resolution****ofDisputes**

** **

Notwithstandingany dispute regarding the amount of any increase or decrease in Raytheon’scosts with respect to a scope change, Raytheon will proceed with the performanceof the scope change promptly following our execution of the corresponding scopechange order.

 

**Hazardous Materials**

** **

Ifhazardous materials were not identified in an environmental site assessmentreport delivered by us to Raytheon prior to the commencement date and were notbrought onto the site by Raytheon or any of its subcontractors, then Raytheonwill be entitled to a scope change under the construction agreement.

 

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**Risk of Loss**

** **

Sincethe risk transfer date with respect to our facility, we bear all risk of lossand full responsibility for repair, replacement or reconstruction with respectto any loss, damage or destruction to our facility.

 

**Termination**

** **

***Termination for our Convenience***

*** ***

We mayfor our convenience terminate any part of the services or all remainingservices at any time upon 30 days’ prior written notice to Raytheon specifyingthe part of the services to be terminated and the effective date oftermination. We may elect to suspend completion of all or any part of theservices upon 10 days’ prior written notice to Raytheon, or, in emergencysituations, upon prior notice as circumstances permit.

 

***Termination by Raytheon***

*** ***

If wefail to pay to 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 equitableadjustment to one or more of the contract price, the guaranteed completiondates, the construction progress milestone dates, the payment and milestoneschedule and our project schedule, and, as appropriate, the other provisions ofthe construction agreement that may be affected thereby, will be made byagreement between us and Raytheon. If we have suspended completion of all or anypart of the services in accordance with the construction agreement for a periodin excess of 365 days in the aggregate, Raytheon may, at its option, at anytime thereafter so long as the suspension continues, give written notice to usthat Raytheon desires to terminate the construction agreement. Unless we orderRaytheon to resume performance of the suspended services within 15 days of thereceipt of the notice from Raytheon, the suspended services will be deemed tohave been terminated by us for our convenience. If the occurrence of one ormore force majeure events prevents Raytheon from performing the services for aperiod in the aggregate of 720 days, either party may, at its option, givewritten notice to the other party of its desire to terminate the constructionagreement.

 

***Consequences of Termination***

*** ***

•      Upon any termination, wemay, so long as the termination is pursuant to any default Raytheon will havebeen paid all amounts due and owing to it under the construction agreement,which will not be deemed to constitute a waiver by Raytheon of any rights topayment it may have as a result of a non-default related termination in theevent of a termination pursuant to a default, at our option elect to haveitself, or our designee, which may include any other affiliate or anythird-party purchaser, (i) assume responsibility for and take title to andpossession of our project and any or all work, materials or equipment remainingat the site and (ii) succeed automatically, without the necessity of anyfurther action by Raytheon, to the interests of Raytheon in any or all itemsprocured by Raytheon for our project and in any and all contracts andsubcontracts entered into between Raytheon and any subcontractor with respectto the equipment specified in the construction agreement, and with respect toany or all other subcontractors selected by us which are materially necessaryto the timely completion of our project, Raytheon will use all reasonableefforts to enable us, or our designee, to succeed to Raytheon’s intereststhereunder.

 

•      If any termination occurs,we may, without prejudice to any other right or remedy it may have, at itsoption, finish the services by whatever method we may deem expedient.

 

**Surviving Obligations**

** **

Terminationof the construction agreement (i) will not relieve either party of anyobligation with respect to the confidentiality of the other party’sinformation, (ii) will not relieve either party of any obligation whichexpressly or by implication survives termination of the construction agreementand (iii) except as otherwise provided in any provision of the constructionagreement expressly limiting the liability of either party, will not relieveeither party of any obligations or liabilities for loss or damage to the otherparty arising out of or caused by acts or omissions of the

 

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partyprior to the effectiveness of the termination or arising out of thetermination, and will not relieve Raytheon of its obligations as to portions ofthe services already performed or as to obligations assumed by Raytheon or usprior to the date of termination.

 

**Default and Remedies**

** **

***Raytheon’s Default***

*** ***

Raytheon’sevents of default include: voluntary bankruptcy or insolvency; involuntarybankruptcy or insolvency; materially adverse misleading or false representationor warranty; improper assignment; failure to maintain required insurance;failure to comply with applicable laws or applicable permits; cessation orabandonment of the performance of services; termination or repudiation of, ordefault under the related construction contract guaranty; failure to supplysufficient skilled workers or suitable material or equipment; failure to makepayment when due for labor, equipment or materials; non-occurrence of eitherprovisional acceptance or final acceptance within 90 days after the guaranteedprovisional acceptance date, non-occurrence of construction progress milestonesand failure proceed 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.

 

**Our Rights and Remedies**

** **

IfRaytheon is in default of its obligations, we will have any or all of thefollowing rights and remedies, in addition to any other rights and remediesthat may be available to us under the construction agreement or at law or inequity, and Raytheon will have the following obligations:

 

•      We may, without prejudice toany other right or remedy we may have under the construction agreement or atlaw or in equity, terminate the construction agreement in whole or in partimmediately upon delivery of notice to Raytheon. 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 reachmutual agreement as to said scope change order and the dispute resolutionprocedures set forth in the construction agreement are invoked, the procedureswill give due consideration to customary terms and conditions under whichRaytheon has entered subcontracts with third party prime contractors coveringservices substantially similar to those services which are not beingterminated.

 

•      If requested by us, Raytheonmust withdraw from the site, must assign to us such of contractor’ssubcontracts, to the extent permitted therein, as we may request, and mustremove the materials, equipment, tools and instruments used by, and any debrisand waste materials generated by, Raytheon in the performance of the Servicesas we may direct, and we, without incurring any liability to Raytheon, otherthan the obligation to return to Raytheon at the completion of our project thematerials that are not consumed or incorporated into our project, solely on an“as is, where is” basis without any representation or warranty of any kindwhatsoever, may take possession of any and all designs, drawings, materials,equipment, tools, instruments, purchase orders, schedules and facilities ofRaytheon at the site that we deem necessary to complete the services.

 

**Assignment**

** **

Theparties shall have no right to assign or delegate any of their respectiverights or obligations 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 of our project so long as such assigneehas financial and operational capabilities that are either substantiallysimilar to ours at the time or otherwise are such that the assignment could notreasonably be expected to have a material adverse effect on Raytheon’s rightsand obligations under the construction agreement.

 

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**MaintenanceServices Agreement**

** **

Wehave entered into the Maintenance Program Parts, Shop Repairs and ScheduledOutage Technical Field (“TFA”) Assistance Services Contract, dated as ofDecember 8, 1999, with Siemens Westinghouse by which Siemens Westinghouse willprovide us with, among other things, combustion turbine parts, shop repairs andscheduled outage technical field assistance services.  The fees assessed by Siemens Westinghouse will be based on thenumber of Equivalent Base Load Hours (EBH) or Equivalent Starts, accumulated bythe applicable Combustion Turbine as adjusted for inflation. The Company hasreceived approximately $10.8 million in rotable spare parts under thisagreement.  This amount is recorded asSpare Parts Inventory, under Property, Plant and Equipment, and the remainingamount owed as current and long-term liabilities in the accompanying balancesheets.

 

Themaintenance services agreement became effective on the date of execution andunless terminated early, will terminate upon completion of shop repairsperformed by Siemens Westinghouse following the twelfth scheduled outage of theapplicable combustion turbine or sixteen years from the date of execution,whichever occurs first, unless we exercise our right to terminate the agreementafter the first major outage of the turbines, which will be approximately theeighth year of operation of the facility.

 

**Scope of Work**

** **

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

 

•      deliver the type andquantity of new program parts for installation of the combustion turbine;

 

•      repair/refurbish programparts and equipment for the combustion turbine;

 

•      provide miscellaneoushardware;

 

•      provide us with materialsafety data sheets for all hazardous materials Siemens Westinghouse intends tobring/use on the site;

 

•      provide the services of amaintenance program engineer to manage the combustion turbine maintenanceprogram;

 

•      provide technical fieldassistance, or TFA Services, which involves advice and consultation for thedisassembly, inspection and assembly of various equipment; and

 

•      remove and reinstallinsulation as required to complete inspections.

 

We areresponsible for, among other things:

 

•      storing and maintainingparts, materials and tools to be used in or on the combustion turbine;

 

•      maintaining and operatingthe combustion turbine consistently with the warranty conditions;

 

•      ensuring that our operatorand maintenance personnel are properly trained;

 

•      transporting program partsin need of repair/refurbishing; and

 

•      providing SiemensWestinghouse, on a monthly basis, with the number of equivalent starts and thenumber of equivalent base load hours (“EBHs”) incurred by each combustionturbine.

 

In October of 2003, we performed our first scheduled combustorinspection outage. The costs for repairs and other charges to expense wereapproximately $.75 million and the costs relating to the new parts andinstallation were approximately $2.8 million.

 

We andSiemens Westinghouse will continue to jointly develop the scheduled outageplan. The scheduled outage plan will be consistent with the terms andconditions of the Power Purchase Agreement.

 

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**Early Replacement**

** **

If itis determined that due to normal wear and tear a program part(s) for thecombustion turbine has failed or will not last until the next scheduled outage,and the part has to be repaired before the scheduled replacement period,Siemens Westinghouse will replace the program part by moving up a new programpart which is otherwise scheduled to be delivered at a later date. The contractprice for the replacement will not be affected if the replacement date is lessthan or equal to one year earlier than the scheduled outage during which theprogram part was scheduled to be replaced. If the actual replacement date for aprogram part is more than one year earlier than the scheduled outage at whichpoint the program part was scheduled to be replaced, the early replacement willresult in an adjustment to the payment schedule. Siemens Westinghouse has thefinal decision with regard to the replacement or refurbishment associated withany program part. If we dispute Siemens Westinghouse’s decision, we may seek toresolve the dispute in accordance with the dispute resolution proceduresdiscussed below.

 

**Parts Life Credit**

** **

Afterapplicable warranty periods set forth in the maintenance services agreement andthe construction agreement, Siemens Westinghouse will provide a parts lifecredit if a program part requires replacement due to normal wear and tear priorto meeting its expected useful life. Siemens Westinghouse has the finaldecision with regard to actual parts life and the degree of repair orrefurbishment associated with any program parts. The parts life credit will becalculated in terms of EBHs and Equivalent Starts. The price of the replacementpart 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.

 

**Contract Price and Payment Terms**

** **

SiemensWestinghouse will invoice us monthly and payments are then due within 25 days.The fees assessed by Siemens Westinghouse will be based on the number of EBHsor equivalent starts accumulated by the applicable combustion turbine asadjusted for changes in the consumer price index. The contract price will bethe aggregate number of fees as adjusted plus any additional payment amountmutually agreed to by the parties under a change order.

 

**Unscheduled Outages and Unscheduled OutageWork**

** **

Ifduring the term of the maintenance services agreement an unscheduled outageoccurs resulting from (i) the non-conformity of new program parts; (ii) thefailing of a shop repair; (iii) a program part requiring replacement due tonormal wear and tear prior to achieving its expected life in terms of EBHs orequivalent starts; or (iv) the failure of a service, performed by SiemensWestinghouse, we will hire Siemens Westinghouse, to the extent not supplied bySiemens Westinghouse as a warranty remedy under Siemens Westinghouse’swarranties under the maintenance services agreement, to supply any additionalparts, miscellaneous hardware, shop repairs and TFA Services under a changeorder. We will be entitled to any applicable parts life credit with respect toprogram parts as well as a discount for TFA Services. If the unscheduled outageoccurs within a specified number of EBHs of a scheduled outage and it wasanticipated that the additional parts, miscellaneous hardware, shop repairs andTFA Services to be used in the unscheduled outage were to be used during theupcoming scheduled outage, the upcoming scheduled outage will be moved up intime to become the unscheduled outage/moved-up scheduled outage. We will not berequired to pay any additional money for the program parts, miscellaneoushardware, shop repairs and TFA Services.

 

If anyprogram parts are delivered by Siemens Westinghouse within 15 days of receiptof the change order, we will pay to Siemens Westinghouse the price for theprogram part set forth in the maintenance services agreement plus a specifiedpercentage.

 

Anyprogram part delivered after 30 days of the change order will cost us the priceset forth in the maintenance services agreement minus a specified percentage.

 

Theremedies set forth in the maintenance services agreement, and discounts on anyTFA Services purchased 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. IfSiemens Westinghouse fails to send a TFA Services representative by the end ofthe second day following written receipt of the unscheduled

 

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outage,we may hire another qualified person, at its cost, to perform the work. If thehired party proceeds to disassemble the combustion turbine to determine thecase of the unscheduled outage and Siemens Westinghouse still has not providedpersonnel to assist with the inspection, we can elect to terminate themaintenance services agreement on the basis that Siemens Westinghouse hasfailed to perform a material obligation.

 

**Changes in Operating Restrictions**

** **

Themaintenance services agreement requires that each combustion turbine will beoperated in accordance with the requirements of the Power Purchase Agreementand prudent utility practices, with 8,000 EBH/year and 250 Equivalent Startsper year by using natural gas fuel or liquid fuel and water. Should the actualoperations differ from these operating parameters which causes a scheduledoutage to be planned/performed earlier or later than as expected, then, under achange 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 program parts, hardware and shop repair isuntil the earlier of one year from the date of installation of the originalprogram part or hardware, a specific number of starts or fired hours afterinstallation of the program parts and hardware, or three years from the date ofdelivery of the original program part, hardware, and in the case of shoprepair, three years from completion of the work. Warranties on the programparts and hardware will not expire more than one year after the conclusion ofthe maintenance services agreement. Siemens Westinghouse will repair or replaceany program part or hardware, at its cost, if notified of any failure ornon-conformity of the program part or hardware during 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 andwill be free from defects in workmanship for a period of one year from the dateof completion of that item of services. The warranties on the services willexpire no later than one year after the termination or end of the term of themaintenance services agreement.

 

Inaddition, Siemens Westinghouse warrants that any program part removed during ascheduled outage and delivered by us to the designated facility for repair willbe repaired and delivered by Siemens Westinghouse within 26 weeks. If SiemensWestinghouse does not deliver the program part within this time frame or doesnot provide a new program part in lieu of the program part being shop repairedand an outage occurs which requires such a program part, Siemens Westinghousewill pay us liquidated damages for each day the program part is not repairedand delivered the aggregate of which liquidated damage payments will not exceeda maximum annual cap. If upon reaching the maximum cap on aggregate liquidateddamages, Siemens Westinghouse still has not repaired and delivered the programpart, we may elect to terminate the maintenance services agreement becauseSiemens Westinghouse will be considered to have failed to perform its material obligations.

 

Exceptfor the express warranties set forth in the maintenance services agreement,Siemens Westinghouse makes no other warranties or representations of any kind.No implied statutory warranty of merchantability or fitness for a particularpurpose applies.

 

Thewarranties provided by Siemens Westinghouse are conditioned upon (i) ourreceipt, handling, storage, operation and maintenance of our project, includingany program parts and miscellaneous hardware, being done in accordance with theterms of the combustion turbine instruction manuals; (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) our 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 mayterminate the maintenance services agreement if (i) specific bankruptcy eventsaffecting Siemens Westinghouse occur; (ii) Siemens Westinghouse fails toperform or observe in any material respect any provision in

 

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themaintenance services agreement and fails to (a) promptly commence to cure anddiligently pursue the cure of the failure or (b) remedy the failure within 45days after Siemens Westinghouse receives written notice of the failure; (iii)we terminate the construction agreement due to Raytheon’s default thereunder ordue to our inability to obtain construction financing or environmentaloperating permits; or (iv) Raytheon terminates the construction agreement forany reason other than our default thereunder. Notwithstanding the foregoing, wemay terminate the maintenance services agreement at any time for conveniencefollowing the completion of the first major outage of both combustion turbinegenerators. In addition, the maintenance services agreement will automaticallyterminate if (i) we terminate the construction agreement for reasons other than(a) the default of Raytheon and (b) our inability to obtain permits for ourproject or (ii) Raytheon terminates the construction agreement for our defaultthereunder. If such termination occurs, Siemens Westinghouse will discontinueany work or services being performed and continue to protect our property.Siemens Westinghouse will transfer title to us and deliver any new programparts and miscellaneous hardware already purchased by us. We will pay SiemensWestinghouse those amounts 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 us occur.Siemens Westinghouse cannot terminate the maintenance services agreement if wepay outstanding amounts due within 90 days. Upon termination, Siemens Westinghousewill stop all work, place no additional orders, protect our property anddeliver the property to us upon our instructions. Siemens Westinghouse will beentitled to payment for work performed up until its termination of themaintenance services agreement, and to all outstanding fees and reasonablecosts associated with the termination.

 

**Limitation of Liability**

** **

Eachparty agrees that, except to the extent liquidated damages provided in themaintenance services agreement are so considered, neither Siemens Westinghouse,nor its suppliers, nor will we under any circumstances be liable for: anyindirect, special, incidental or consequential loss or damage whatsoever;damage to or loss of property or equipment; loss of profits or revenues; lossof use of material, equipment or power system; increased costs of any kind,including but not limited to capital cost, fuel cost and cost of purchased orreplacement power, or claims of our customers.

 

Weagree that the remedies provided in the maintenance services agreement areexclusive and that under no circumstances will the total aggregate liability ofSiemens Westinghouse during a given year exceed 100% of the contract pricepayable to Siemens Westinghouse for that given year under the maintenanceservices agreement. We further agree that under no circumstances will the totalaggregate liability of Siemens Westinghouse for liquidated damages during agiven year exceed a specified percentage of the contract price payable toSiemens Westinghouse for that given year under the maintenance servicesagreement. We further agree that under no circumstances will the totalaggregate liability of Siemens Westinghouse exceed a specified percentage ofthe contract price payable to Siemens Westinghouse under the maintenance servicesagreement.

 

**Force Majeure**

** **

Neitherparty will be liable for failure to perform any obligation or delay inperformance, excluding payment, to the extent the failure or delay is caused byany act or event beyond the reasonable control of the affected party or SiemensWestinghouse’s suppliers; so long as the act or event is 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 ofGod; act of civil or military authority; act of war whether declared orundeclared; act, including delay, failure to act, or priority, of anygovernmental authority; civil disturbance; insurrection or riot; sabotage;fire; inclement weather conditions; earthquake; flood; strikes, work stoppages,or other labor difficulties of a regional or national character which are notlimited to only the employees of Siemens Westinghouse or its subcontractors orsuppliers and which are not due to the breach of an applicable labor contractby the party claiming force majeure; embargo; fuel or energy shortage; delay oraccident in shipping or transportation to the extent attributable to another forcemajeure; changes in laws which substantially prevent a party from complyingwith its obligations in conformity with its requirements under the maintenanceservices agreement or failure or delay beyond its reasonable control inobtaining necessary manufacturing facilities, labor, or materials from usualsources to the extent attributable to another force majeure; or failure of anyprincipal contractor to provide equipment to the extent attributable to anotherforce majeure. Force majeure will not include: (i) economic hardship, (ii)changes in market conditions or (iii) except due to an event of force majeure,late delivery of program parts or other equipment.

 

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If adelay in performance is excusable due to a force majeure, the date of deliveryor time for performance of the work will be extended by a period of timereasonably necessary to overcome the effect of the force majeure and if theforce majeure lasts for a period longer than 30 days and the delay directlyincreases Siemens Westinghouse’s costs or expenses, we, after reviewing SiemensWestinghouse’s additional direct costs and expenses, will reimburse SiemensWestinghouse for its reasonable additional direct costs and expenses incurredafter 30 days from the beginning of the force majeure resulting from saiddelay.

 

**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 maintenanceservices agreement or (ii) any spills of hazardous waste or oil, petroleum orpetroleum products to the environment which are attributable to and occurduring Siemens Westinghouse’s performance, or the performance of itscontractors or subcontractors, of the workscope obligations at the site underthe maintenance services agreement.

 

Wewill indemnify Siemens Westinghouse from any fines, penalties, expense, loss orliability incurred by Siemens Westinghouse as a result of our failure to meetour obligations under the maintenance services agreement. We will have noresponsibility or liability with regard to any hazardous waste or oil,petroleum or petroleum products which were spilled by Siemens Westinghouse, orany other of its contractors or subcontractors performing workscope obligationsat the site.

 

**Fleetwide Issue Notification**

** **

Duringthe term of this agreement, if Siemens Westinghouse becomes aware of afleetwide issue involving the Siemens Westinghouse 501F Combustion Turbinewhich may have a deleterious effect on our combustion turbines, SiemensWestinghouse will, within a reasonable time of becoming aware of the fleetwideissues, notify us thereof, and if the fleetwide issue requires an additionalrepair or replacement of a program part or miscellaneous hardware to beperformed, the additional repair or replacement will be performed in accordancewith the provisions of the maintenance services agreement.

 

**InterconnectionAgreement**

** **

Wehave entered into a Generation Facility Transmission Interconnection Agreement,dated as of April 27, 1999 with Jersey Central Power, for the installation,operation and maintenance of the facilities necessary to interconnect ourfacility to Jersey Central Power’s transmission system. Under theinterconnection agreement, we and Jersey Central Power will construct, own,operate and maintain the interconnection facilities. We are responsible for allof the costs of construction, operation and maintenance of the interconnectionfacilities, including those owned by Jersey Central Power. We have beenimporting electricity from the transmission system to support commissioning ofthe facility since July 2001 and the interconnection facilities have exportedpower to the transmission system since that time.  At December 31, 2002, the interconnection facilities andprotective gas apparatus needed to generate and deliver net electric and/orancillary services to the electric delivery point had been completed asrequired under the Power Purchase Agreement.

 

**Company Market-Based Tariff Petition**

** **

FERCapproval of our company market-based tariff petition was received on June 22,2001.

 

**Jersey Central Power’s Obligations**

** **

Wehave entered into an interconnection installation agreement, by which JerseyCentral Power has installed, at our cost and expense, the Jersey Central Powerinterconnection 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 Jersey Central Power interconnection facilities whichinclude, but are not limited to, certain substation protective relayingequipment and two 230 kV 2-cycle circuit breakers, are owned, maintained andoperated by Jersey Central Power, at our cost and expense. The remainder of theinterconnection facilities have been installed and are owned, maintained andoperated by us.

 

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JerseyCentral Power 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.  We have been importingelectricity from the transmission system to support commissioning of thefacility since July 2001 and the interconnection facilities have exported powerto the transmission system since that time. The cost of these interconnection facilities was approximately $5.1million, and is included on the balance sheet as property, plant and equipment.

 

**Our Obligations**

** **

Wehave installed and own, operate and maintain a portion of the interconnectionfacilities, including, but not limited to, a 230 kV switchyard, includinggenerator step up transformers, instrument transformers, revenue metering,power circuit breakers, control and protective relay panels, supervisorycontrol and data acquisition equipment, and protective relaying equipment.

 

We areobligated to give prior notice to Jersey Central Power before undertaking anyadditions, modifications or replacements to our facility or our interconnectionfacilities that will increase the generating capacity of our facility or couldreasonably be expected to affect the transmission system, the Jersey CentralPower Interconnection Facilities or the operation of our facility. We mustreimburse Jersey Central Power for all costs incurred by Jersey Central Powerassociated with any modifications, additions or replacements that it must maketo the transmission system or the Jersey Central Power InterconnectionFacilities, as reasonably required by Jersey Central Power, in connection withour proposed addition, modification or replacement 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 areobligated to keep our facility insured against loss or damage in accordancewith the minimum coverages specified in the Interconnection Agreement.

 

**Operation and Maintenance of InterconnectionFacilities**

** **

Theparties are obligated to operate and maintain their respective portions of theinterconnection facilities in accordance with good utility practices and therequirements and guidelines of PJM and Jersey Central Power.

 

JerseyCentral Power will have the right to disconnect our facility from itstransmission system and/or curtail, interrupt or reduce the output of ourfacility when operation of our facility or the interconnection facilitiesadversely affects the quality of service rendered by Jersey Central Power orinterferes with the safe and reliable operation of its transmission system orthe regional transmission system. Jersey Central Power, however, is obligatedto use reasonable efforts to minimize any disconnection, curtailment,interruption or reduction in output.

 

Inaccordance with good utility practice, Jersey Central Power may remove theinterconnection facilities from service as necessary to perform maintenance ortesting or to install or replace equipment on the interconnection facilities orthe transmission system. Jersey Central Power is obligated to use due diligenceto restore the interconnection facilities to service as promptly aspracticable.

 

Inaddition, if we fail to operate, maintain, administer, or insure our facilityor its portion of the interconnection facilities, Jersey Central Power may,following 30 days notice and opportunity to cure the failure, disconnect ourfacility from the transmission system.

 

**Revenue Metering**

** **

Revenuemeters, which are part of the interconnection facilities, will be installed tomeasure the transfer of electrical energy between the parties at the point ofinterconnection. The revenue meters have been installed at our expense and willbe owned, maintained and repaired by Jersey Central Power, also at our expense.Jersey Central Power has provided, at our expense, telemetering equipment whichhas been installed by us, to retrieve certain information. The revenue metersare to be tested at least once every two years, or more frequently at ourrequest. Any revenue meter found to be inaccurate by greater than 1% is to beadjusted, repaired or replaced.

 

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**Land Rights and Access**

** **

Wehave granted to Jersey Central Power the right of reasonable access and allnecessary rights of way, easements, and licenses as Jersey Central Power mayrequire to install, operate, maintain, replace and remove the revenue metersand other portions of the Jersey Central Power Interconnection Facilities.

 

**Force Majeure**

** **

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

 

**Default**

** **

Theevents of default under the interconnection agreement are:

 

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

 

•      failure or refusal of aparty to permit the representatives of the other party access to maintenancerecords, or its interconnection facilities or protective apparatus;

 

•      appointment by a court of areceiver or liquidator or trustee that is not discharged within 60 days,issuance by a court of a decree adjudicating a party as bankrupt or insolventor sequestering a substantial part of its property that has not been dischargedwithin 60 days after its entry, or filing of a petition to declare a partybankrupt or to reorganize a party under the Federal Bankruptcy Code or similarstate statute that has not been dismissed within 60 days;

 

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

 

•      failure to provide the otherparty with reasonable written assurance of the party’s ability to perform anyof the material duties and responsibilities under the interconnection agreementwithin 60 days of a reasonable request for the assurance.

 

Uponan event of default, the non-defaulting party may give notice of the event ofdefault 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 party fails to cure its default within 60 daysor fails to take the steps necessary to cure a default that cannot be curedwithin a 60-day period, the non-defaulting party will have the right toterminate the interconnection agreement.

 

JerseyCentral Power will have the right to operate and/or to purchase specificequipment, facilities and appurtenances from us that are necessary for JerseyCentral Power to operate and maintain its transmission system if (i) wecommence bankruptcy proceedings or petitions for the appointment of a trusteeor other custodian, liquidator, or receiver; (ii) a court issues a decree forrelief of our company or appoints a trustee or other custodian, liquidator, orreceiver for our company or a substantial part of our assets and the decree isnot dismissed within 60 days or (iii) we cease operation for 30 consecutivedays without having an assignee, successor, or transferee in place.

 

**OperationsAgreement and Services Agreement**

** **

Weentered into a Development and Operations Services Agreement (the “OperationsAgreement”), dated as of March 10, 2000, with AES Sayreville under which AESSayreville is providing, operating and maintenance services for our facilityfor a period of 32 years. Under the Operations Agreement, AES Sayreville isresponsible for, among other things, preparing plans and budgets related tostart-up and commercial operation of our facility, providing qualifiedoperating personnel, making repairs, purchasing consumables and spare parts(not otherwise provided under the maintenance services agreement) and providingother services as needed according to industry standards.

 

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AESSayreville is compensated for its maintenance and operation services on a costbasis, and it also receives certain management fees which it passes on to TheAES Corporation.  For the years endedDecember 31, 2003 and 2002, we paid AES Sayreville a total of $5.3 million and$4.4 million, respectively, for their services.

 

Undera services agreement between AES Sayreville and The AES Corporation, The AESCorporation has and continues to provide to AES Sayreville all of the personneland services necessary for AES Sayreville to comply with its obligations underthe operations agreement.

 

**Water SupplyAgreement**

** **

Wehave entered into a Water Supply Agreement dated as of December 22, 1999 withthe Borough of Sayreville under which the Borough will provide untreated waterto our facility.

 

**Supply of Untreated Water**

** **

***Untreated Water Supply***

*** ***

TheBorough of Sayreville is in the final stages of approval of the Lagoon WaterPipeline, Lagoon Pumping Station, and Sayreville Interconnection Number 2.  The Company was responsible for selection ofa contractor and for payment of all costs. The pipeline construction has been completed.  The construction contract for the Pumping Station was awarded andis completed.  Startup and commissioningof this system started May 1, 2002. Subsequent to the completion of the Lagoon Pumping Station and theLagoon Water Pipeline, the Borough has made available to our facility a supplyof untreated water from the South River that is up to 4.6 million gallons perday and 1.53 billion gallons per year. The Borough must use reasonable efforts to maintain the Lagoon’s waterlevel at an elevation of 29 feet, but during periods when water cannot be drawnfrom the South River, the Lagoon’s water level must not be drawn to elevationsbelow 20 feet. 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 the Lagoonis needed to ensure a supply of treated water to Borough treated watercustomers, the Borough must supply our facility with water drawn from theDuhernal acquifer and transported through the Duhernal water pipeline.

 

***Compensation***

*** ***

Thecost of the pipeline and pumping station was approximately $678,000 and $1.71million, respectively.  The Company haspaid the pipeline and pumping station projects in full, and as of December 31, 2003. In addition to the amountsdiscussed in the preceding paragraph, we paid the Borough an initial payment of$150,000 from the bond proceeds, which was credited to our account and is beingused 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 must pay the Borough for those additional costs. We must pay theBorough monthly for all untreated water delivered to the point of deliveryduring the prior month. The base rate for untreated water supplied from theSouth River is $216 per million gallons, which includes $53 per million gallonsto cover operations, maintenance and administrative costs and $163 per milliongallons to cover past infrastructure costs. The operations and maintenance ratewill be escalated in accordance with the percentage changes in water rates thatare applicable to other Borough water customers. The base rate for untreatedwater delivered from the Duhernal acquifer is $932 per million gallons whichincludes $785 to cover the operations, maintenance and administrative costs and$147 to cover acquisition costs. The operations and maintenance portion of thebase 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.

 

Withrespect to each contract year there is a minimum bill amount, which isinitially $300,000 per year. One-twelfth of the minimum bill amount must bepaid each month. The minimum bill amount is adjusted as follows:

 

•      For the first contract yearit is reduced by the amount of the initial payment;

 

•      it is reduced by an amountequal to the product of (x) the quantity of untreated water that would havebeen delivered but for service interruptions by the Borough and (y) the ratefor untreated water delivered from the South River; and

 

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•      starting with 8th contractyear and with six months’ prior written notice, we have the right to reduce theminimum bill amount for any contract year by reducing the annual quantity ofwater to be provided by up to 15%. Starting with the 21st contract year we mayreduce the annual quantity to be delivered without limit.

 

***Service Interruptions***

*** ***

In theevent that there is an interruption in the delivery of untreated waterattributable to a break in the infrastructure, the Borough will provide ashortfall notice and the Borough and we will agree on the best way to repairthe 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.

 

**Infrastructure and Real Estate Rights—TheLagoon Water Pipeline, Lagoon Pumping Station and Sayreville InterconnectionNumber 2**

** **

TheBorough has designed, at our expense, the Lagoon Water Pipeline, Lagoon PumpingStation and Sayreville Interconnection Number 2 in conformance with standardwater system practice. The Borough was responsible for obtaining, at ourexpense, all necessary government approvals. The Borough and we have cooperatedto obtain, at our expense, the real estate rights necessary for theconstruction, operation and maintenance of the Lagoon Water Pipeline, LagoonPumping Station and Sayreville Interconnection Number 2. The Borough was notrequired to exercise its power of eminent domain to obtain the necessary realestate rights. We obtained easement rights from two adjacent property ownersand the Borough of Sayreville. We also obtained permission from the New JerseyState House Commission to cross property designated as “Green Acres” by the NewJersey Department of Protection. Upon completion and testing of the LagoonWater Pipeline, Lagoon Pumping Station and Sayreville Interconnection Number 2,we executed, without being compensated by the Borough, the documents necessaryto evidence the Borough’s ownership of those facilities in November 2003.

 

**Operation and Maintenance of Infrastructure**

** **

TheBorough will operate and maintain all infrastructure necessary to supply theuntreated water to the project boundary. We will reimburse the Borough for itsassociated maintenance and replacement costs.

 

TheBorough will own and maintain metering equipment to measure the delivery ofuntreated water from each source to the point of delivery and will transmit asignal of the measurements to the Borough, which uses the information tocompile billing invoices. At least once every five years, or more often ifrequested by either party, we must test the metering equipment. If the testsreveal that the metering equipment is inaccurate, the equipment must berecalibrated or replaced and a billing adjustment may be made.

 

**Infrastructure Studies and Additions**

** **

We payfor the actual cost, subject to a mutually agreed upon cap, of infrastructurestudies to determine the costs and benefits of (i) installing a new pipelineand (ii) improving the existing South River intake 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 fromthe improvements will pay a pro-rata portion of the costs of the improvements.

 

If theBorough or we reasonably determines that capital improvements to theinfrastructure are required, the party will notify the other party and theparties will meet in good faith to determine the scope of the capitalimprovements. We will pay for our costs and expenses arising from the capitalimprovements as well as those of the Borough. If we damage eitherinfrastructure or capital improvements, we will restore the damaged portionsthereof or pay the Borough to restore the damaged portions.

 

**Land Development Plan**

** **

Weentered into an agreement with the Borough of Sayreville by which we willdevelop and implement a plan to replace trees which were removed duringclearing of the Facility site.  The LandDevelopment Plan is required for final site approval.   The estimated cost of the plan is approximately $425,000.  We are in the process of selecting acontractor to perform the service and no payments have been made as of December31, 2003.  On July 23, 2003, the

 

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projectwas secured by a letter of credit issued by Union Bank of California for$425,000 with the Borough of Sayreville as the beneficiary.  This irrevocable standby letter of creditcurrently has an expiration date of June 30, 2004 and represents the amountpotentially due if there is a failure of AES Red Oak, LLC to take actionregarding the plan.

 

**Additional Obligations of the Parties**

** **

***Additional Obligations of the Borough***

*** ***

TheBorough must use its best efforts to either (i) amend its existing permit,which limits pumping from the Lagoons to 1,000,000 gallons of water per day or(ii) obtain or change any other permits necessary to allow it to meet itsobligations under the water supply agreement. The Borough must provide us withwritten invoices by not later than the 15th of each month. The amounts dueunder the invoices are due within 30 days of receipt. The Borough must provideus and the financing parties with escorted access to any infrastructure orother property owned by the Borough to which we or the financing partiesreasonably request access.

 

***Our Additional Obligations***

*** ***

Wemust provide the Borough with notice of any violation by the Borough ofapplicable government approvals related to the delivery of untreated water. Notlater than the 15th day of each month, we must provide the Borough with adetailed invoice listing any amounts due to us under the water supply agreement.

 

**Force Majeure**

** **

Ifeither party is unable to carry out any obligation under the water supplyagreement due to an event of force majeure, the water supply agreement willremain in effect but the obligation will be suspended for the periodnecessitated by the force majeure, as long as:

 

•      the affected party gives theother party written notice within 48 hours of the occurrence of the forcemajeure;

 

•      the suspension ofperformance is of no greater scope and no longer than required by the forcemajeure; and

 

•      the non-performing partyuses its best efforts to remedy its inability to perform.

 

**Term**

** **

Thewater supply agreement has a term of 30 years with an option to extend for upto 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.

 
| **ITEM 2**. | **PROPERTIES** |
|-------------|----------------|

** **

Ourprincipal property is the project site, on which our facility is located, whichwe own. The site is located in the Borough of Sayreville, Middlesex County, NewJersey on an approximately 62-acre parcel of land. We have access, utility andconstruction easements and licenses across neighboring property. We have titleinsurance in connection with our property rights.

 

Underour financing documents, our rights and interests in our property areencumbered by mortgages, security agreements, collateral assignments andpledges for the benefit of our bondholders and other senior creditors.

 

Ourfacility consists of an approximately 830 megawatt (net) gas-fired combinedcycle electric generating facility. Our facility was designed, engineered,procured and constructed for us by WGI and Raytheon, as successor guarantor,under a fixed-price, turnkey construction agreement.  Among other components, our facility uses three SiemensWestinghouse model 501F combustion turbines, three heat recovery steamgenerators and one multicylinder steam turbine. Under a maintenance servicesagreement, Siemens Westinghouse is providing us with specific combustionturbine maintenance services and spare parts in respect of each combustionturbine until sixteen

 

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yearsafter 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 the facility.Under the Power Purchase Agreement, Williams Energy or its affiliates issupplying the fuel necessary to allow us to provide capacity, fuel conversionand ancillary services to Williams Energy. AES Sayreville has provideddevelopment, construction management, and operations and maintenance servicesfor our facility under an operations agreement. We have provided installation,operation and maintenance of facilities necessary to interconnect our facilityto Jersey Central Power’s transmission system under an interconnectionagreement.

 
| **ITEM 3**. | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

** **

**OnNovember 4, 2003, the Company and Williams Energy, through arbitration, settleda dispute regarding the date of commercial operation and the properinterpretation of certain provisions of the Power Purchase Agreement relatingto amounts we claimed were payable by Williams Energy. The arbitration relatedto disputed amounts of approximately $7.6 million, which included a $594,000payment extension dispute and a $7 million commercial operation start datedispute.  Under the settlement, Williamsmade a cash payment to us of $4,050,153 on November 14, 2003, which included$225,055 of interest from October 2002 to the payment date, and the CommercialOperation Date was deemed to be September 28, 2002.  The related revenue had been substantially recorded in 2002, withthe remaining amount recorded in the fourth quarter of 2003.This paymentsettles all payment obligations between the parties for the month of September2002 with respect to the Commercial Operation Date under the Power PurchaseAgreement.  From our perspective, thecash payment has the economic effect of recognizing a Commercial Operation Dateprior to of September 28, 2002. We are currently disputing $802,000 of merchantprice, testing gas and other charges with Williams Energy that we contendWilliams Energy owes to us. These charges were not part of the arbitrationdiscussed above.**

** **
| **ITEM 4.** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|-------------|---------------------------------------------------------|

** **

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

 

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**PART II**

** **
| **ITEM 5.** | **MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS** |
|-------------|---------------------------------------------------------------------------------|

** **

Thereis no market for our equity interests. All of our member interests are owned byour parent, AES Red Oak, Inc., a wholly owned subsidiary of The AESCorporation. ** **On December 22, 2003,we declared and paid a $1.05 million dividend to AES Red Oak, Inc.

 
| **ITEM 6.** | **SELECTED  FINANCIAL DATA** |
|-------------|------------------------------|

** **

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

 
| **ITEM 7**. | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

** **

** **

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

 

**General**

** **

Wewere formed on September 13, 1998 to develop, construct, own, operate andmaintain our facility. We were dormant until March 15, 2000, the date of thesale of our senior secured bonds. We obtained $384 million of project financingfrom the sale of the senior secured bonds. The total cost of the constructionof our facility was approximately $450****million, which was financed by theproceeds from our sale of the senior secured bonds, equity contributions,operating revenues and the amount of liquidated damages received from Raytheonthrough August 10, 2002 under the Construction Agreement, as described below.In late September 2000, we consummated an exchange offer whereby the holders ofour senior secured bonds exchanged their privately placed senior secured bondsfor registered senior secured bonds.

 

TheCompany reached provisional acceptance on August 11, 2002, risk transfer onAugust 13, 2002, and took the position that we were commercially available onSeptember 1, 2002.  Williams Energydisputed the September 1, 2002, commercial operation date and informed theCompany that it recognized commercial availability of the facility as ofSeptember 28, 2002.  On November 4,2003, a settlement was reached and a commercial operation date of September 28,2002 was agreed upon.  See “Item 3 –Legal Proceedings”.

 

Sinceachieving commercial operations, under the Power Purchase Agreement withWilliams Energy, we are eligible to receive variable operations and maintenancepayments, total fixed minimum capacity payments, energy exercise fee payments(each as defined in the Power Purchase Agreement) and other payments for thedelivery of fuel conversion, capacity and ancillary services.  During 2003 the PJM market, into which ourfacility’s generation is distributed, experienced a general decline in theamount paid for electricity. There was also a marked increase in the cost ofnatural gas. As a result, Williams Energy dispatched our facility on a verylimited basis. During 2003, our facility was called on to generate only 14% ofthe year. Accordingly, the minimum capacity payments have been our primarysource of operating revenues, representing $62.0 million of our total revenuesof $64.2 million for the twelve months ended December 31, 2003.

 

Basedupon current market conditions and projections from Williams Energy, we anticipatea comparable dispatch level in 2004.  Inthe event that these market conditions do not improve, and Williams Energy doesnot dispatch our facility at all in 2004, we believe that the fixed capacitypayments are sufficient to meet the cash demands of our business, but we willrequire the additional revenue from such fuel conversion services to beprofitable.

 

We areconcerned that Williams Energy will not dispatch our facility in a manner thatwill increase our profitability. As a result, our management is researchingways to enhance our facility’s performance. We believe that any savings instarting the facility or improved performance will also benefit WilliamsEnergy, with the result that Williams Energy may find it more economicallyfeasible to dispatch our facility.

 

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Thefollowing discussion presents certain financial information for the years endedDecember 31, 2003, 2002 and 2001.

 

**Equity Contributions**

** **

Underan equity subscription agreement, AES Red Oak, Inc. agreed to contribute up toapproximately $56.7 million to us to fund project costs.  As of December 31, 2002 all $56.7 millionhad been contributed.  The Equity thatAES Red Oak Inc. provided to us was provided to it by The AES Corporation.

 

**Results of Operations**

** **

Thefirst full year of operation in 2003 yielded a net loss of $0.3 million.  We commenced commercial operations in August2002 and had a net loss for the year ended December 31, 2002 of $3.0 million.  For the year ended December 31, 2001,non-capitalizable costs and net interest expense resulted in a net loss ofapproximately $2.0 million.  At December31, 2003, 2002 and 2001, these net losses resulted in earnings in excess(deficiency) of fixed charges of approximately $1.9 million, $(23.1) millionand $(32.3) million, respectively. Due to our commencement of operations inAugust 2002, these results of operations may not be comparable with the resultsof operations during future periods.

 

Operatingrevenues for the year ended December 31, 2003 were approximately $64.2 million,as compared with $26.2 million for the partial year of operations endedDecember 31, 2002.  Revenues fromSeptember 2002 through December 2003 consist of capacity sales and ancillaryservices under the Power Purchase Agreement. Revenues for the period of Augustand part of September 2002 consisted of merchant revenue.  These amounts include fixed payments of$62.0 million and $15.2 million for the twelve month periods ending December31, 2003 and 2002, respectively. The remaining amount of revenue relates tovariable revenue which we receive when dispatched, and merchant revenue weearned prior to our commercial operation date in September 2002. We have nocontrol over when the facility is dispatched, as that decision is made byWilliams Energy based on several factors including market conditions.

 

Operatingexpenses were $30.9 million for the twelve months ended December 31, 2003,which represents the first full year of operations. These costs are largely ofa recurring nature and are discussed below. Operating expenses for the twelvemonth period ending December 31, 2002 were $16.8 million, representing apartial year of operations.

 

Fuelpurchased from Williams Energy during the period of merchant operations andtesting was $0.9 million for the year ended December 31, 2003, as compared to$6.9 million for the year ended December 31, 2002. We purchased more fuel in2002 in connection with the merchant operations we conducted in the periodprior to the commercial operation date.

 

Thefuel conversion volume rebate was $5.8 million for the year ended December 31,2003 as compared to $1.6 million for the partial year of operations in thetwelve months ended December 31, 2002. This cost represents payments to Williamsand is based upon a twelve month facility utilization factor.

 

Corporatemanagement fees were $1.6 million for the twelve months ended December 31, 2003as compared to $0.6 million for the partial year of operations in the twelvemonth period ended December 31, 2002. Corporate management fees are charged ona monthly basis based on a fixed amount which is adjusted annually forinflation.

 

Otheroperating expenses, which represent the reimbursement of operating andmaintenance expenses paid to AES Sayreville, L.L.C., were $7.2 million for theyear ended December 31, 2003 as compared to $2.0 million for the partial yearof operations in the twelve months ended December 31, 2002.

 

Depreciationexpense was $11.4 million for the year ended December 31, 2003 as compared to$4.4 million for the partial year of operations in the twelve months endedDecember 31, 2002.

 

Generaland administrative costs for the years ended December 31, 2003, 2002 and 2001,were $4.0 million, $1.2 million, and $68,000, respectively. These costs did notdirectly relate to construction and are included as expenses in the Statementsof Operations. The increase of general and administrative costs in the yearended December 31, 2003 compared to the year ended December 31, 2002 reflects afull year of operations in the current year and less than five months in theprior year period. The increase of general and administrative costs in the year

 

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endedDecember 31, 2002 compared to the year ended December 31, 2001 reflects thestart of operations in August 2002.

 

Therewere no operating revenues or operating expenses, other than general andadministrative costs, for the year ended December 31, 2001, as the facility wasnot operational.

 

Totalother income (expense) for the years ended December 31, 2003, 2002 and 2001 wasapproximately $(33.6) million, $(12.5) million, and $(1.9) million,respectively, and is comprised of other income and expense, liquidated damagesreceived and paid and interest income and expense.

 

Otherincome for the years ended December 31, 2003 and December 31, 2002 wasapproximately $1,427,000 and $957,000, respectively.  These amounts consist of interim rebates received from Raytheonunder the construction agreement as a result of their failure to meet heat rateand output performance guarantees.  Wedid not recognize any other income in the year ended December 31, 2001, sinceno interim rebates were due under the construction agreement.

 

Otherexpense for the year ended December 31, 2003 and 2002 was approximately $1.0million and $0.4 million, respectively. These amounts consist of fees paid to Dresdner Bank pursuant to our debtservice reserve letter of credit and reimbursement agreement and power purchaseagreement letter of credit and reimbursement agreement.  See “Liquidity and Capital Resources” for adescription of these letters of credit. These fees were higher in 2003 than in 2002, because the fees related tothese letters of credit were capitalized as part of the facility costs prior tothe commencement of commercial operations.

 

Forthe year ended December 31, 2002, we recognized revenue of $1.8 million forliquidated damages received from Raytheon for late completion payments and aconstruction related outage in November 2002. This revenue was recognized after the commercial operation date. We didnot recognize revenue related to any liquidated damages in the year endedDecember 31, 2001 since no liquidated damages were due under the constructionagreement.

 

For theyears ended December 31, 2003 and 2002, we expensed $.2 million and $1.8million, respectively of liquidated damages paid to Williams Energy as a resultof our extension of the commercial operation date and a construction relatedoutage in November 2002.  This expensewas recognized after the commercial operation date. We did not incur anyliquidated damages for the year ended December 31, 2001.

 

Proceedsfrom the sale of the senior secured bonds were held in the constructionaccount, pending application to construction costs, and were invested by thetrustee. For the years ended December 31, 2003, 2002 and 2001, the interestincome earned on these invested funds, the security collateral received fromWilliams Energy and other available funds was approximately $495,000, $125,000and $1.7 million, respectively.  The$495,000 of interest income earned for the year ended December 31, 2003included $225,055 of interest on amounts owed by, and paid as part of thearbitration settlement with, Williams Energy. See “Item 3 – Legal Proceedings”. The amount of interest income earnedon the proceeds from the senior secured bonds for the year ended December 31,2002 compared to the year ended December 31, 2001 decreased as a result of alower average balance in the construction account resulting from our use of thebond proceeds for construction of the facility.

 

Priorto our commencement of commercial operations in 2002, construction relatedinterest costs incurred on the portion of the bond proceeds expended during theconstruction period were capitalized to Construction in Progress. For the yearsended December 31, 2002 and 2001, capitalized construction related interestcosts were approximately $20.9 million and $30.3 million, respectively.  On August 13, 2002, the risk transfer date,the balance of Construction in Progress was****transferred to Property, Plant andEquipment.  For the years ended December31, 2003, 2002 and 2001, interest costs incurred on the bond proceeds not spenton construction of our facility were approximately $34.2 million, $13.2 millionand $3.6 million, respectively. The increase in interest expense for the yearended December 31, 2003 compared to the year ended December 31, 2002 is theresult of expensing interest costs for a full year in 2003, compared to thecapitalizing of construction-related interest for most of the year endedDecember 31, 2002. The increase in interest expense for the year ended December31, 2002 compared to the year ended December 31, 2001 is a result of expensinginterest costs incurred after the completion of construction, compared with ahigher level of interest capitalized during construction in 2001.

 

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OnAugust 13, 2002, the risk transfer date, the balance of construction inprogress was transferred to Property, Plant and Equipment.  As of December 31, 2003, Property Plant andEquipment adjusted for depreciation was $409 million, which includesgeneration, building and office equipment.

 

**Liquidity and Capital Resources**

** **

*Sources and Uses of Cash*

 

Sinceachieving commercial operations under the Power Purchase Agreement withWilliams Energy we are eligible to receive variable operations and maintenancepayments, total fixed payments, energy exercise payments (each as defined inthe Power Purchase Agreement) and other payments for the delivery of fuelconversion, capacity and ancillary services. We currently anticipate being dispatched by Williams Energy beginning inApril 2004 but can provide no assurance that this will occur.  If the facility is not dispatched, ouroperating revenues will consist of minimum capacity payments under the PowerPurchase Agreement.  Any futureoperating revenues, including any minimum capacity payments received in theevent that Williams Energy does not dispatch the facility, will be used to fundour generation expenses and other operations and maintenance expenses and tomeet the obligations described below.

 

SinceSeptember 28, 2002, Williams Energy has not dispatched the facility to a significantdegree, outside the peak summer months. The minimum capacity payments providedfor under the Power Purchase Agreement have been our primary source ofoperating revenues, representing $62.0 million of our total revenues of $64.2million in 2003.  The minimum cash flowfrom Williams under the power purchase agreement is approximately $3.8 millionper month for October through May and $7.9 million per month from June throughSeptember.

 

During2003, the Company’s first full year of operations, net cash provided byoperating activities was $14.8 million, which included non-cash depreciation of$11.4 million, and amortization of $.8 million.  We currently anticipate that the plant will be dispatched infuture periods to a similar degree as it was during 2003, that operating cashflow will be comparable to 2003 in 2004 and that operating cash requirementswill be similar in 2004 and 2005 as they were during this first year ofoperation.  We also believe that cash flowsfrom the sale of electricity and/or minimum capacity payments under the PowerPurchase Agreement and funds available to be drawn under the debt servicereserve letter of credit or the power purchase letter of credit (each asdescribed above) will be sufficient to pay project costs, including ongoingexpenses and principal and interest on our senior secured bonds as describedbelow, fund costs of our commercial operations and pay fees and expenses inconnection with the Power Purchase Agreement letter of credit (as describedabove).

 

Wehave provided the collateral agent with a debt service reserve letter of creditin an initial stated amount of $22.0 million. We have also provided WilliamsEnergy a $10 million letter of credit under the Power Purchase Agreement, whichwe refer to as the power purchase letter of credit, to support specific paymentobligations under the Power Purchase Agreement. The repayment obligations withrespect to any drawings under the power purchase letter of credit are oursenior debt obligation. The interest rate on these loans would be the sum of a)the higher of (i) the Federal Funds Rate plus .50% and (ii) the Agent’s primerate and b) an applicable margin rate which is based upon the rating of oursenior secured bonds. Since our senior secured bonds are currently rated belowinvestment grade, our working capital facility is unavailable and we arerequired to pay higher fees for draws on any of our project support agreements.

 

As discussed below, in the event we arerequired to return the $35 million alternate credit support to Williams Energywe may also use a portion of operating revenues for this purpose.  Under the terms of the Letter Agreement,Williams Energy shall have the right to recoup the Prepayment by set-off of anyand all amounts owing to the Company under the Power Purchase Agreement noearlier than the June in the calendar year after the occurrence of regainingits investment grade rating or the beginning of the twentieth year after thecommercial operation date, whichever comes first (Note 7). In the event theCompany regains its investment grade status, the Company will also have accessto its $2.5 million working capital agreement (Note 6). After the PowerPurchase Agreement expires, we plan to depend on revenues generated from marketsales of electricity.  These beliefs aresubject to certain assumptions, risks and uncertainties, including those setforth above under the caption “Cautionary Note Regarding Forward-LookingStatements” and there can be no assurances.

 

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*Debt Service*

 

OnMarch 15, 2000, we issued $384 million in senior secured bonds for the purposeof providing financing for the construction of the Facility and to the fund,through the construction period, interest payments to the bondholders.  In September 2000, we consummated anexchange offer whereby the holders of the senior secured bonds exchanged theirprivately placed senior secured bonds for registered senior secured bonds.

 

Thesenior secured bonds were issued in two series: 8.54% senior secured bonds due2019 (the “2019 Bonds”) in an aggregate principal amount of $224 million and9.20% senior secured bonds due 2029 (the “2029 Bonds”) in an aggregateprincipal amount of $160 million. Principal repayment dates on the 2019 Bonds are February 28, May 31,August 31, and November 30 of each year, with the final payment due November30, 2019.  Quarterly principalrepayments on the 2019 Bonds commenced on August 31, 2002.  Annual principal repayments over the life ofthe 2019 Bonds range from 1.0799% of original principal amount or $2.4 millionto 11.2819% of original principal amount or $25.3 million.  Quarterly principal repayment of the 2029Bonds does not commence until February 28, 2019.

 

Theannual interest and principal payments on the 2019 and 2029 Bonds are scheduledas follows:

 

| **Year**            |   | **Interest**       |    | **Principal** |   |
|---------------------|--------|--------------------|---------|---------------|--------|
|                |   | **(in thousands)** |    |
| 2004                |   | $                  | 33,113  |          | $      | 5,230 |   |
| 2005                |   | 32,579             |    | 5,071         |   |
| 2006                |   | 32,111             |    | 7,101         |   |
| 2007                |   | 31,502             |    | 6,105         |   |
| 2008                |   | 31,020             |    | 8,122         |   |
| 2009 and thereafter |   | 317,561            |    | 343,733       |   |
| **Total  Payments** |   | $                  | 477,886 |          | $      | 375,362 |   |

 

We are current on debt payments throughFebruary 29, 2004.

 

We areprohibited from making any distributions unless we have required minimumbalances in certain accounts and have met certain other conditions contained inthe Indenture and the Collateral Agency and Intercreditor Agreement governingthe senior secured bonds.

 

*Maintenance Agreement*

 

Wehave entered into the Maintenance Program Parts, Shop Repairs and ScheduledOutage TFA Services Contract, dated as of December 8, 1999, with SiemensWestinghouse by which Siemens Westinghouse will provide us with, among otherthings, combustion turbine parts, shop repairs and scheduled outage technicalfield assistance services**.**

 

Themaintenance services agreement became effective on the date of execution andunless terminated early, will terminate upon completion of shop repairsperformed by Siemens Westinghouse following the twelfth scheduled outage of theapplicable combustion turbine or 16 years from the effective date of thecontract, whichever occurs first**.**

 

Themaintenance services agreement indicates that we will pay a fixed amount,adjusted for inflation, over the term of the agreement. The payments are basedon a stated amount for each equivalent base load hour of the combustionturbines, but if a scheduled maintenance outage occurs prior to 8,000equivalent base load hours being accumulated since the last scheduledmaintenance outage for that turbine, the Company will be invoiced the remainingamount to equate to 8,000 hours. The total of these payments for the twelvemonths ended December 31, 2003 was approximately $2.8 million, which included amaintenance outage and related payment as the turbine was far short of the8,000 hour level. Assuming the same dispatch hours and the performance of onemaintenance outage, a comparable level of payments would be expected for thetwelve months ended December 31, 2004.

 

*Operations Agreement*

 

Weentered into a Development and Operations Services Agreement, dated as of March1,2000, with AES Sayreville, L.L.C. by which AES Sayreville, L.L.C. isproviding development and construction management services and, after thecommercial operation date, operating and maintenance services for our facilityfor a period of

 

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32 years**.** Under the operations agreement, AES Sayreville, L.L.C isresponsible for, among other things, preparing plans and budgets related tostart-up and commercial operation of our facility, providing qualifiedoperating personnel, making repairs, purchasing consumables and spare parts(not otherwise provided under the maintenance services agreement) and providingother services as needed according to industry standards**.** During fiscal year 2002,AES Sayreville, L.L.C was compensated for the services on a cost plus fixed-feebasis of $133,000 per month**.** The fee is adjusted annually by the change in Gross DomesticProduct, Implicit Price Deflator**.** Total fees paid by us were $1.6 million for the year ended December 31,2003.  Under the services agreement betweenAES Sayreville, L.L.C and The AES Corporation, The AES Corporation provides toAES Sayreville, L.L.C all of the personnel and services necessary for AESSayreville, L.L.C to comply with its obligations under the operations agreement**.**

 

The following tableis an estimate of management fees paid through the end of the contract, usingan annual inflation rate of 2.7%:

 
| **Year**            |   | **Fees**            |   |
|---------------------|--------|---------------------|--------|
|                |   | **(in  thousands)** |   |
| 2004                |   | $                   | 1,639  |   |
| 2005                |   | 1,683               |   |
| 2006                |   | 1,729               |   |
| 2007                |   | 1,775               |   |
| 2008                |   | 1,823               |   |
| 2009 and thereafter |   | 73,034              |   |
| **Total Payments**  |   | $                   | 81,683 |   |

 

*Other Commitments*.

 

As discussed in “Item 1-Business-PowerPurchase Agreement -Security” andFootnote 7 to the Consolidated Financial Statements, pursuant to Section 18.3of the Power Purchase Agreement, in the event that Standard & Poors(“S&P”) or Moody’s rates the long-term senior unsecured debt of TheWilliams Companies, Inc. lower than investment grade, The Williams Companies,Inc. is required to supplement The Williams Companies, Inc. guarantee withadditional alternative security that is acceptable to us.  Due to the downgrade of The WilliamsCompanies, Inc. to below investment grade in 2002, Williams Energy has providedwith $35 million cash as alternate credit support.  In the event that the Williams Companies, Inc. regains andmaintains its investment grade status, provides a substitute guaranty ofInvestment Grade rating, or posts a letter of credit, we will be required toreturn the $35 million alternative credit support to Williams Energy. Under theterms of the Letter Agreement, Williams Energy shall have the right to recoupthe Prepayment by set-off of any and all amounts owing to the Company under thePower Purchase Agreement no earlier than the June in the calendar year afterthe occurrence of regaining its investment grade rating or the beginning ofcalendar year 20, whichever comes first (Note 7). In the event the Companyregains its investment grade status, the Company will also have access to its$2.5 million working capital agreement (Note 6).  As of December 31, 2003, the Company had cash balances ofapproximately $35 million.  In the eventthe Company is required to return the $35 million alternative credit support toWilliams, we believe that we would use all or a portion of our current cashbalances and cash generated from future operations, with any remaining balancededucted from the monthly amounts due to us from Williams Energy.  This belief is subject to certainassumptions, risks and uncertainties, including those set forth above under thecaption “Cautionary Note Regarding Forward-Looking Statements” and there can beno assurances that our operating revenues will generate sufficient cash.

 

We have entered into an agreement with the Borough of Sayreville bywhich we will develop and implement a plan to replace trees which were removedduring clearing of the Facility site. The Land Development Plan is required for final site approval.   The estimated cost of the plan is approximately$425,000.  We are in the process ofselecting a contractor to perform the service and no payments have been made asof December 31, 2003.  On July 23, 2003,the project was secured by a letter of credit issued by Union Bank ofCalifornia for $425,000 with the Borough of Sayreville as the beneficiary.  This irrevocable standby letter of creditcurrently has an expiration date of June 30, 2004 and represents the amountpotentially due if there is a failure of AES Red Oak, LLC to take actionregarding the plan.

 

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As of December 31, 2003, we also had a capital commitment of $114,000related to a road modification project. It is also anticipated that we will incur capital expenditures ofapproximately $400,000 in 2004 related to general improvements of the facility.

 

We have also entered into a contract with the Borough of Sayreville(the “Borough”) pursuant to which the Borough will provide untreated water tous. The contract has a term of 30 years with an option to extend for up to fouradditional five-year terms. We are contractually committed to a minimum annualpayment of $300,000.

 

Under the construction agreement, we were entitled to retain certainamounts from each scheduled payment until after final acceptance by us of thefacility unless Raytheon posted a letter of credit in the amount of amountswhich would otherwise be retained.  Asof December 31, 2003, Raytheon had provided a letter of credit of approximately$30.8 million and we had paid Raytheon for any amounts previouslyretained.  We may draw on this letter ofcredit in the event that Raytheon fails to pay us any amount owed to us underthe construction agreement.  As ofDecember 31, 2003 and December 31, 2002, we had drawn $544,000 and $96,000on this letter of credit, respectively, for interim rebates which Raytheon hadagreed to pay until their notice of Final Acceptance on July 22, 2003.

 

As discussed in Item 1–”Business–Construction Agreement–Completion andAcceptance of Our Project–Final Completion” we are currently disputing thefinal completion of the project with Raytheon.

 

**Risks that May Impact Our Liquidity**

 

Williams Energy is currently our sole customer for purchases ofcapacity, ancillary services, and energy and our sole source for fuel. WilliamsEnergy’s payments under the Power Purchase Agreement are expected to provideall of our operating revenues during the term of the Power Purchase Agreement.

 

The payment obligations of the Williams Companies, Inc. under itsguaranty of Williams Energy’s obligations under the Power Purchase Agreementwere originally capped at an amount equal to approximately $510 million.Beginning on January 1 of the first full year after the commercial operationdate, this guaranty cap is to be reduced semiannually by a fixed amount whichis based on the amortization of our senior secured bonds during the applicablesemiannual period.  As of December 31,2003, the guarantee was capped at $507.6 million.

 

Due to the downgrade of The Williams Companies, Inc. to belowinvestment grade, the Company and Williams Energy entered into a letteragreement dated November 7, 2002 (the “Letter Agreement”) under which WilliamsEnergy agreed to provide the Company with a $10 million prepayment (the“Prepayment”) and certain additional collateral.  A description of the collateral that supports Williams Energy’sobligations under the Power Purchase Agreement is set forth under “Item1-Business Power Purchase Agreement-Security” and Footnote 7 to ourConsolidated Financial Statements”.

 

Since we depend on Williams Energy for both revenues and fuel supplyunder the Power Purchase Agreement, if Williams Energy were to terminate ordefault under the Power Purchase Agreement, there would be a severe negativeimpact to our cash flow and financial condition which could result in a defaulton our senior secured bonds.  Due to thecurrent pool prices, we would expect that if we were required to seek alternatepurchasers of our power in the event of a default of Williams Energy, even ifwe were successful in finding alternate revenue sources, any such alternaterevenue sources would be substantially below the amounts that would have beenotherwise payable pursuant to the Power Purchase Agreement. There can be noassurance as to our ability to generate sufficient cash flow to cover operatingexpenses or our debt service obligations in the absence of a long-term powerpurchase agreement with Williams Energy.

 

In addition to the factors discussed above, and/or the other factorslisted under the “Cautionary Note Regarding Forward-Looking Statements,” if wedo not receive final rebates from Raytheon and/or the working capital agreementcontinues to be unavailable as a result of the ratings on our senior securedbonds, we could experience a negative impact on our cash flow and financialcondition.

 

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**Business Strategy and Outlook**

 

Our overall business strategy is to market and sell all of our netcapacity, fuel conversion and ancillary services to Williams Energy during the20-year term of the Power Purchase Agreement. After expiration of the PowerPurchase Agreement, or in the event the Power Purchase Agreement is terminatedprior to its 20-year term or Williams Energy otherwise fails to perform, wewould seek to sell our facility’s capacity, ancillary services and energy inthe spot market or under a short or long-term power purchase agreement or intothe PJM power pool market.  Due torecent declines in pool prices, however, we would expect that even if we weresuccessful in finding alternate revenue sources, any such alternate revenueswould be substantially below the amounts that would have been otherwisereceivable pursuant to the Power Purchase Agreement.  There can be no assurances as to whether such efforts would besuccessful.

 

We intend to cause our facility to be managed, operated and maintainedin compliance with the project contracts and all applicable legal requirements.

 

**Recent and New Accounting Pronouncements**

 

InJuly 2001, the Financial Accounting Standards Board  (“FASB”) issued SFAS No. 143, entitled “Accountingfor Asset Retirement Obligations.”  Thisstandard is effective for fiscal years beginning after June 15, 2002 andprovides accounting requirements for asset retirement obligations associatedwith long-lived assets.  Under theStatement, the asset retirement obligation is recorded at fair value in theperiod in which it is incurred by increasing the carrying amount of the relatedlong-lived asset.  The liability isaccreted to its present value in each subsequent period and the capitalizedcost is depreciated over the useful life of the related asset. The adoption ofthis standard did not have a material effect on the Company’s financialstatements.

 

InJune 2002, the FASB issued SFAS No. 146, entitled “Accounting for CostsAssociated with Exit or Disposal Activities,” which addresses accounting forrestructuring and similar costs.  SFASNo. 146 supersedes previous accounting guidance, principally Emerging IssuesTask Force (“EITF”) Issue No. 94-3.  TheCompany will adopt the provisions of SFAS No. 146 for restructuring activitiesinitiated after December 31, 2002. SFAS No. 146 requires that the liability forcosts associated with an exit or disposal activity be recognized when theliability is incurred.  Under EITF IssueNo. 94-3, a liability for an exit cost was recognized at the date of acompany’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially bemeasured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing futurerestructuring costs as well as the amount recognized. The adoption of thisstandard did not have a material effect on the Company’s financial statements.

 

InApril 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.”  SFAS No. 149 amends andclarifies the accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts, and for hedgingactivities under SFAS No. 133.  The amendments set forth in SFAS No. 149require that contracts with comparable characteristics be accounted forsimilarly.  In particular, this statement clarifies under whatcircumstances a contract with an initial net investment meets thecharacteristics of a derivative according to SFAS No. 133 and when a derivativecontains a financing component that warrants special reporting in the statementof cash flows.  In addition, the statement amends the definition of anunderlying to conform it to language used in FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others, and amends certain otherexisting pronouncements.

 

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

 

InMay 2003, the FASB adopted SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  ThisStatement establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity.  This Statement is effective for financial instruments enteredinto or modified after May 31, 2003, and otherwise is effective at thebeginning of

 

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the first interim periodbeginning after June 15, 2003.  The adoption of this pronouncement willnot have a material effect on our financial position, results of operations, orcash flows.

 

InNovember 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  Thisinterpretation establishes new disclosure requirements for all guarantees, butthe measurement criteria are applicable to guarantees issued and modified afterDecember 31, 2002. The adoption of this interpretation did not have anyimmediate material effect on the Company’s financial statements.

 

In January 2003, the FASB issued FIN No. 46, Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51 (“FIN No. 46”).  InOctober 2003, FASB Staff Position No. 46-6, “Effective Date of FIN No. 46,Consolidation of Variable Interest Entities” deferred the effective date of FINNo. 46 for variable interests held by a public entity in a variable interestentity (“VIE”) that was created or acquired before February 1, 2003 to the endof the first interim or annual period ending after December 15, 2003.  InDecember 2003, FASB issued FIN 46 (revised December 2003), Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46(r)”),which clarified some requirements and incorporated several staff positions thatthe Company was already required to apply.  In addition, FIN 46(r)deferred the effective date for VIEs that were created or acquired beforeFebruary 1, 2003 and were not considered special purpose entities (“SPEs”)prior to the issuance of the interpretation until the end of the firstreporting period ending after March 15, 2004.  FIN 46(r) defines a VIE as(i) any entity in which the equity investors at risk in such entity do not havethe characteristics of a controlling financial interest, or (ii) any entitythat does not have sufficient equity at risk to finance its activities withoutadditional subordinated financial support from other parties.  It requiresthe consolidation of the VIE by the primary beneficiary.  The adoption ofFIN 46(r) requires the Company to include disclosures for non SPE VIEs createdor acquired on or after February 1, 2003 in its condensed consolidatedfinancial statements related to the total assets and the maximum exposure toloss resulting from the Company’s interests in VIEs.  The adoption of FIN46(r) for VIEs created or acquired prior to February 1, 2003 that wereconsidered SPEs prior to the issuance of the interpretation did not have asignificant impact on the Company’s consolidated financial statements. The Company has assessed the impact of the provisions of FIN 46(r) on itsconsolidated financial statements for VIEs created or acquired prior toFebruary 1, 2003 that were not considered SPEs prior to the issuance of theinterpretation, and does not believe that the impact will be material.

 

**Critical Accounting Policies**

 

*General–* We prepare our financial statementsin accordance with accounting principles generally accepted in the UnitedStates of America. As such, we are required to make certain estimates,judgments and assumptions that we believe are reasonable based upon theinformation available. These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the periods presented. Thesignificant accounting policies which we believe are most critical tounderstanding and evaluating our reported financial results include thefollowing:  Revenue Recognition,Property, Plant and Equipment and Contingencies.

 

*Revenue*Recognition*—*  We generate energy revenues under the Power Purchase Agreementwith Williams Energy.  During the20-year term of the agreement, we expect to sell capacity and electric energyproduced by the facility, as well as ancillary services and fuel conversionservices.  Under the Power PurchaseAgreement, we also generate revenues from meeting (1) base electrical outputguarantees and (2) heat rate rebates through efficient electrical output.  Revenues from the sales of electric energyand capacity are recorded based on output delivered and capacity provided atrates as specified under contract terms. Revenues for ancillary and other services are recorded when the servicesare rendered. Amounts that are in dispute are reserved for accordingly, basedon the probability that they will be realized.

 

*Property, Plant and Equipment —*  Property, plant and equipment is recorded atcost and is depreciated, after consideration for salvage value, over its usefullife.  The estimated lives of ourgeneration facilities range from five to thirty-six years.  A significant decrease in the estimateduseful life of a material amount of our property, plant or equipment could havea material adverse impact on our operating results in the period in which theestimate is revised and in subsequent periods. The depreciable lives of our property plant and equipment by categoryare as follows:

 

43

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| **Description of Asset**           |   | **Depreciable  Life** |   | **December  31, 2003  ($000’s)** |    |
|------------------------------------|--------|-----------------------|--------|---------------------------------------|---------|
| Buildings                          |   | 35                    |   | $                                     | 1,767   |   |
| Vehicles                           |   | 5                     |   | 112                                   |    |
| Computers                          |   | 6                     |   | 772                                   |    |
| Furniture and Fixtures             |   | 10                    |   | 515                                   |    |
| Combustion Turbine Generator Parts |   | 9-36                  |   | 45,367                                |    |
| Gas Heaters                        |   | 35                    |   | 1,119                                 |    |
| Spare Parts Inventory              |   | —                |   | 12,751                                |    |
| Plant                              |   | 35                    |   | 362,390                               |    |
|                               |   |                  |   | $                                     | 424,793 |   |

 

*Commitments and Contingencies–* The Company hadentered into arbitration with Williams Energy to resolve certain disputesregarding the date of commercial operation and the proper interpretation ofcertain provisions of the Power Purchase Agreement relating to the amountsclaimed by the Company to be payable by Williams Energy.  On November 4, 2003, the Company and WilliamsEnergy settled this dispute.  The Companyis also disputing $802,000 of merchant price, testing gas and other chargeswith Williams Energy that the Company contends is owed from Williams. This wasnot part of the above arbitration.

 

The Company’s facility was initially designed, engineered, procured andconstructed for us by Washington Group International, Inc. (“WGI”) (as thesuccessor contractor) on a fixed-price, turnkey basis. On May 14, 2001, WGIfiled 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 (the “Bankruptcy Court”). As a result of WGI’sbankruptcy filing, on June 20, 2001 we made a demand on the Raytheon Company(“Raytheon”) to perform its obligations under a guarantee which Raytheon hadgiven us of WGI’s performance obligations under the construction agreement andRaytheon became responsible for the construction of our facility.  As discussed above, provisional acceptancehas been granted and the Facility has commenced commercial operations, however,Raytheon must perform certain agreed upon completion items in order to obtainfinal acceptance. Raytheon gave notice of Final Acceptance on July 22, 2003based on its July 8, 2003 performance test. On July 31, 2003, the Company received a letter from the project’sindependent engineer stating that it could not support Raytheon’s claim offinal acceptance and it did not consider the July 8, 2003 performance testvalid.  In making this assessment, theindependent engineer cited, among other reasons, (i) modifications made tocertain equipment in performance of the July 8 performance test which wouldadversely impact the operations of the plant and other pieces of equipment and(ii) Raytheon’s failure to demonstrate compliance with guaranteed emissionslimits.  On August 1, 2003, the Companyrejected Raytheon’s claim of final acceptance. This rejection was based upon Raytheon’s failure to meet the conditionsfor final acceptance provided for in the EPC contract. On August 7, 2003, theCompany received a response from Raytheon in which Raytheon claims that theCompany’s rejection of the final acceptance is invalid and improper.  The Company is currently considering its optionsfor resolving this dispute.

** **
| **ITEM 7A.** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK** |
|--------------|----------------------------------------------------------------|

 

We issued and have outstanding two series of bonds, registered underthe Securities Act of 1933.  As ofDecember 31, 2003, the aggregate outstanding principal amount of these bondswas $375.4 million.  We are not subjectto interest rate risk as the interest rates associated with our outstandingindebtedness are fixed over the life of the bonds.

 

We currently have no other financial or derivative financialinstruments. We do not believe that we face other material market risksrequiring disclosure pursuant to Item 305 of Regulation S-K.

 

During 2003 the PJM market, into which our facility’s generation isdistributed, experienced a general decline in the amount paid for electricity.This, in combination with a marked increase in the cost of natural gas, was amajor factor in Williams’ decision to dispatch our facility on a very limitedbasis. Based upon current market conditions and projections from Williams, weanticipate a comparable dispatch level in 2004.  In the event that these market conditions do not improve, andWilliams does not dispatch our facility at all in 2004, we believe that the

 

44

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fixed capacity payments aresufficient to meet the cash demands of our business, but we require theadditional revenue from such fuel conversion services to be profitable.

 

45

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| **ITEM 8.** | **FINANCIAL  STATEMENTS AND SUPPLEMENTAL DATA** |
|-------------|-------------------------------------------------|

 

**AES Red Oak L.L.C. and Subsidiary(An Indirect, Wholly OwnedSubsidiary 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 Capital |
|                                                         |
| Consolidated Statements of Cash Flows                        |
|                                                         |
| Notes to Consolidated Financial Statements                   |

 

46

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**INDEPENDENT AUDITORS’ REPORT**

 

To the Member ofAES Red Oak, L.L.C. and Subsidiary:

 

We have audited the accompanying balance sheets of AES Red Oak, L.L.C.(an indirect wholly owned subsidiary of The AES Corporation) (the “Company”) asof December 31, 2003 and 2002 and the related statements of operations, changesin member’s capital and cash flows for the years ended December 31, 2003, 2002and 2001. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements present fairly, in allmaterial respects, the financial position of AES Red Oak,  L.L.C., as of December 31, 2003 and 2002,and the results of its operations and its cash flows for the years endedDecember 31, 2003, 2002 and 2001, in conformity with accounting principlesgenerally accepted in the United States of America.

 

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

 

 
| Deloitte & Touche LLP |   |
|---------------------------|--------|
| McLean, Virginia          |
| March 15, 2004            |

 

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**AES RED OAK, L.L.C. AND SUBSIDIARYAN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION**

 

**Consolidated Balance Sheets****,December 31, 2003 and 2002***(dollars in thousands, except share amounts)*

 
|                                                                                                       |   | **2003** |    | **2002** |   |
|------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| **ASSETS:**                                                                                                |   |     |    |     |   |
|                                                                                                       |   |     |    |     |   |
| Current Assets:                                                                                            |   |     |    |     |   |
| Cash                                                                                                       |   | $        | 38      |     | $      | 23 |   |
| Restricted cash at cost, which approximates  market value                                                  |   | 34,837   |    | 7,749    |   |
| Receivables                                                                                                |   | 4,070    |    | 8,442    |   |
| Receivable from affiliate                                                                                  |   | 51       |    | 309      |   |
| Prepaid and other expenses                                                                                 |   | 628      |    | 230      |   |
| Total current assets                                                                                       |   | 39,624   |    | 16,753   |   |
| Land                                                                                                       |   | 4,240    |    | 4,240    |   |
| Property, plant, and equipment – net of  accumulated depreciation of $15,830 and $4,438, respectively |   | 408,963  |    | 417,659  |   |
| Deferred financing costs – net of  accumulated amortization of $3,128 and $2,315, respectively        |   | 15,577   |    | 16,390   |   |
| Other assets                                                                                               |   | 219      |    | 141      |   |
| Total assets                                                                                               |   | $        | 468,623 |     | $      | 455,183 |   |
|                                                                                                       |   |     |    |     |   |
| **LIABILITIES AND MEMBER’S EQUITY**                                                                   |   |     |    |     |   |
| Current Liabilities:                                                                                       |   |     |    |     |   |
| Accounts payable                                                                                           |   | $        | 398     |     | $      | 1,175 |   |
| Accrued liabilities                                                                                        |   | 956      |    | 1,516    |   |
| Accrued interest                                                                                           |   | 2,759    |    | 2,804    |   |
| Liabilities under spare parts agreement –  current portion                                            |   | 4,520    |    | —   |   |
| Payable to affiliate                                                                                       |   | 131      |    | 18       |   |
| Bond payable-current portion                                                                               |   | 5,230    |    | 6,219    |   |
| Other current liabilities                                                                                  |   | 35,000   |    | 10,000   |   |
| Total current liabilities                                                                                  |   | 48,994   |    | 21,732   |   |
|                                                                                                       |   |     |    |     |   |
| Bonds payable                                                                                              |   | 370,132  |    | 375,361  |   |
|                                                                                                       |   |     |    |     |   |
| Liabilities under spare parts agreement and  other                                                         |   | 2,017    |    | 9,325    |   |
| Total liabilities                                                                                          |   | $        | 421,143 |     | $      | 406,418 |   |
|                                                                                                       |   |     |    |     |   |
| Commitments and Contingencies (Note 8)                                                                     |   |     |    |     |   |
|                                                                                                       |   |     |    |     |   |
| Member’s equity:                                                                                      |   |     |    |     |   |
| Common stock, $1 par value-10 shares authorized,  none issued or outstanding                               |   | $        | —  |     | $      | — |   |
| Contributed capital                                                                                        |   | 56,775   |    | 56,736   |   |
| Member’s deficit                                                                                      |   | (9,295   | )       | (7,971   | )      |
| Total member’s equity                                                                                 |   | 47,480   |    | 48,765   |   |
| Total liabilities and member’s equity                                                                 |   | $        | 468,623 |     | $      | 455,183 |   |

 

See notes toconsolidated financial statements.

 

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**AES RED OAK, L.L.C. AND SUBSIDIARYAN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION**

 

**Consolidated Statements of Operations****,years ended December 31, 2003,  2002 and  2001**

*(dollars in thousands)*

 
|                                  |   | **Year Ended  December 31,  2003** |   | **Year Ended  December 31,  2002** |   | **Year Ended  December 31,  2001** |   |
|---------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
| OPERATING REVENUES                    |   |                               |   |                               |   |                               |   |
| Energy                                |   | $                                  | 64,206 |                               | $      | 26,244                             |   | $ | — |   |
|                                  |   |                               |   |                               |   |                               |   |
| OPERATING EXPENSES                    |   |                               |   |                               |   |                               |   |
| Fuel costs                            |   | 906                                |   | 6,898                              |   | —                             |   |
| Fuel conversion volume rebate         |   | 5,793                              |   | 1,645                              |   | —                             |   |
| Corporate management fees             |   | 1,608                              |   | 594                                |   | —                             |   |
| Other operating expenses              |   | 7,207                              |   | 1,990                              |   | —                             |   |
| Depreciation expense                  |   | 11,392                             |   | 4,438                              |   | —                             |   |
| General administrative costs          |   | 4,002                              |   | 1,237                              |   | 68                                 |   |
| Total operating expenses              |   | 30,908                             |   | 16,802                             |   | 68                                 |   |
|                                  |   |                               |   |                               |   |                               |   |
| Operating income (loss)               |   | $                                  | 33,298 |                               | $      | 9,442                              |   | $ | (68 | ) |
|                                  |   |                               |   |                               |   |                               |   |
| OTHER INCOME (EXPENSE)                |   |                               |   |                               |   |                               |   |
| Interest income                       |   | $                                  | 495    |                               | $      | 125                                |   | $ | 1,655 |   |
| Other income- interim rebates         |   | 1,427                              |   | 957                                |   | —                             |   |
| Liquidated damages received           |   | —                             |   | 1,810                              |   | —                             |   |
| Interest expense                      |   | (34,232                            | )      | (13,163                            | )      | (3,592                             | )      |
| Other expense - letter of credit fees |   | (1,013                             | )      | (379                               | )      | —                             |   |
| Liquidated damages paid               |   | (249                               | )      | (1,810                             | )      | —                             |   |
| Total other income (expense)          |   | (33,572                            | )      | (12,460                            | )      | (1,937                             | )      |
|                                  |   |                               |   |                               |   |                               |   |
| NET LOSS                              |   | $                                  | (274   | )                                  | $      | (3,018                             | )      | $ | (2,005 | ) |

 

See notes to consolidated financialstatements.

 

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**AES RED OAK, L.L.C. AND SUBSIDIARYAN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION**

 

**Consolidated Statements of Changes inMember’s Capital****,years ended December 31, 2003,  2002and  2001***(dollars in thousands)*

 
|                       |   | **Common  Stock** |   | **Contributed** |   | **Member’s** |   | **Member’s** |   |
|----------------------------|--------|-------------------|--------|-----------------|--------|-------------------|--------|-------------------|--------|
|                       |   | **Shares**        |   | **Amount**      |   | **Capital**       |   | **Deficit**       |   | **Equity** |   |
| 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 | ) |
| Contributed capital        |   | —            |   | —          |   | 55,750            |   | —            |   | 55,750 |   |
| Dividends                  |   | —            |   | —          |   | —            |   | (2,000            | )      | (2,000 | ) |
| Net loss                   |   | —            |   | —          |   | —            |   | (3,018            | )      | (3,018 | ) |
| BALANCE, DECEMBER 31, 2002 |   | —            |   | $               | — |              | $      | 56,736            |   | $ | (7,971 | ) | $ | 48,765 |   |
| Contributed capital        |   | —            |   | —          |   | 39                |   | —            |   | 39 |   |
| Dividends                  |   | —            |   | —          |   | —            |   | (1,050            | )      | (1,050 | ) |
| Net loss                   |   | —            |   | —          |   | —            |   | (274              | )      | (274 | ) |
| BALANCE, DECEMBER 31, 2003 |   | —            |   | $               | — |              | $      | 56,775            |   | $ | (9,295 | ) | $ | 47,480 |   |

 

See notes to consolidated financialstatements.

 

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**AES RED OAK, L.L.C. AND SUBSIDIARYAN INDIRECT, WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATION**

 

**Consolidated Statements of Cash Flows****, for the yearsended December 31, 2003,  2002and  2001******(*dollars inthousands)*

 
|                                                                   |   | **Year Ended  December 31,  2003** |    | **Year Ended  December 31,  2002** |   | **Year Ended  December 31,  2001** |   |
|------------------------------------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|------------------------------------|--------|
| **OPERATING ACTIVITIES**:                                              |   |                               |    |                               |   |                               |   |
| Net loss                                                               |   | $                                  | (274    | )                                  | $      | (3,018                             | )      | $ | (2,005 | ) |
| Amortization of deferred financing costs                               |   | 813                                |    | 853                                |   | 816                                |   |
| Depreciation                                                           |   | 11,392                             |    | 4,438                              |   | —                             |   |
| Change in:                                                             |   |                               |    |                               |   |                               |   |
| Accounts receivable – trade                                       |   | 4,372                              |    | (8,442                             | )      | 21                                 |   |
| Receivable from affiliate                                              |   | 258                                |    | (184                               | )      | (125                               | )      |
| Prepaid expenses                                                       |   | (398                               | )       | (230                               | )      | —                             |   |
| Other assets                                                           |   | (78                                | )       | (141                               | )      | —                             |   |
| Accrued interest                                                       |   | (45                                | )       | (17                                | )      | —                             |   |
| Accrued liabilities                                                    |   | (560                               | )       | 1,454                              |   | (28                                | )      |
| Payable to affiliate                                                   |   | 113                                |    | (64                                | )      | (2,423                             | )      |
| Accounts payable                                                       |   | (777                               | )       | 293                                |   | 578                                |   |
| Net cash provided by (used in) operating  activities                   |   | $                                  | 14,816  |                               | $      | (5,058                             | )      | $ | (3,166 | ) |
|                                                                   |   |                               |    |                               |   |                               |   |
| **INVESTING ACTIVITIES**:                                              |   |                               |    |                               |   |                               |   |
| Payments for capital additions                                         |   | (2,696                             | )       | (24,029                            | )      | (42,926                            | )      |
| Payments under long term spare parts  agreement                        |   | (2,788                             | )       | (1,175                             | )      | —                             |   |
| Change in:                                                             |   |                               |    |                               |   |                               |   |
| Retention payable                                                      |   | —                             |    | (29,478                            | )      | 29,478                             |   |
| Restricted cash                                                        |   | (27,088                            | )       | (1,688                             | )      | 15,734                             |   |
| Net cash (used in) provided by investing  activities                   |   | $                                  | (32,572 | )                                  | $      | (56,370                            | )      | $ | 2,286 |   |
|                                                                   |   |                               |    |                               |   |                               |   |
| **FINANCING ACTIVITIES**:                                              |   |                               |    |                               |   |                               |   |
| Payment of principal on bonds payable                                  |   | (6,218                             | )       | (2,420                             | )      | —                             |   |
| Contribution from parent                                               |   | 39                                 |    | 55,750                             |   | 986                                |   |
| Security proceeds from Williams under PPA                              |   | 25,000                             |    | 10,000                             |   | —                             |   |
| Dividends paid to parent                                               |   | (1,050                             | )       | (2,000                             | )      | —                             |   |
| Net cash provided by financing activities                              |   | $                                  | 17,771  |                               | $      | 61,330                             |   | $ | 986 |   |
| **NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**               |   | $                                  | 15      |                               | $      | (98                                | )      | $ | 106 |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                     |   | $                                  | 23      |                               | $      | 121                                |   | $ | 15 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                           |   | $                                  | 38      |                               | $      | 23                                 |   | $ | 121 |   |
| **SUPPLEMENTAL DISCLOSURE OF OTHER ACTIVITIES**:                       |   |                               |    |                               |   |                               |   |
| Interest paid (net of amounts capitalized)                             |   | $                                  | 33,537  |                               | $      | 8,437                              |   | $ | — |   |
| Transfer of prepaid construction costs to  construction in progress    |   | $                                  | —  |                               | $      | —                             |   | $ | 31,840 |   |
| Receipt of spare parts under long-term  service agreement              |   | $                                  | 289     |                               | $      | 10,500                             |   | $ | — |   |
| Transfer of construction in progress to  property, plant and equipment |   | $                                  | 344     |                               | $      | 411,597                            |   | $ | — |   |

 

See notes to consolidated financialstatements.

 

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**AESRED OAK L.L.C. AND SUBSIDIARYAN INDIRECT WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATIONNOTES TO CONSOLIDATED FINANCIALSTATEMENTSYEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 

**1.****              ORGANIZATION**

 

AES Red Oak, L.L.C. (the “Company”) was formed on September 13, 1998,in the State of Delaware, to develop, construct, own and operate an830-megawatt (MW) gas-fired, combined cycle electric generating facility (the“Facility”) in the Borough of Sayreville, Middlesex County, New Jersey. TheCompany was considered dormant until March 15, 2000 (hereinafter, inception),at which time it consummated a project financing and certain relatedagreements. On March 15, 2000, the Company issued $384 million in seniorsecured bonds for the purpose of providing financing for the construction ofthe Facility and to fund, through the construction period, interest payments tothe bondholders (see Note 6). In late September 2000, the Company consummatedan exchange offer whereby the holders of the senior secured bonds exchangedtheir privately placed senior secured bonds for registered senior securedbonds.

 

The Facility, consists of three Westinghouse 501 FD combustionturbines, three unfired heat recovery steam generators, and one multicylindersteam turbine. The Facility produces and sells electricity, as well as providesfuel conversion and ancillary services, solely to Williams Energy Marketing& Trading Company (“Williams Energy”) under a 20-year Fuel ConversionServices, Capacity and Ancillary Services Purchase Agreement (the “PowerPurchase Agreement”).  The term of thePower Purchase Agreement is twenty years from the last day of the month inwhich commercial operation commenced, which was September 2002.  The Company reached provisional acceptanceon August 11, 2002, risk transfer on August 13, 2002, and took the position thatthe Facility was commercially available on September 1, 2002.  Williams Energy disputed the September 1,2002, commercial operation date and informed the Company that it recognizedcommercial availability of the facility as of September 28, 2002.  On November 4, 2003, a settlement wasreached and a commercial operation date of September 28, 2002 was agreed upon(see Note 7 ).

 

After the Facility reached provisional acceptance, the Company electedto confirm reliability for up to 19 days before binding with Williams Energy.As more fully described in Notes 3 and 7, beginning August 13, 2002 (the risktransfer date) through August 31, 2002, the Company operated the Facility as amerchant plant with electric revenues sold to Williams Energy, in its capacityas the Company’s PJM account representative, at spot market prices and boughtgas from Williams Energy at spot market prices. Additionally, during September2002, the Company made net electric energy available to Williams Energy duringtimes when it had not received a Williams Energy dispatch notice. This netelectric energy is referred to as “other sales of energy” in the Power PurchaseAgreement and is sold at the local marginal price commonly referred to as spotmarket energy. Gas required for this energy generation was purchased fromWilliams Energy at spot market prices.

 

The Company is a wholly owned subsidiary of AES Red Oak, Inc. (“RedOak”), which is a wholly-owned subsidiary of The AES Corporation (“AES”). RedOak has no assets other than its ownership interests in the Company and AESSayreville, L.L.C. (see Note 9). Red Oak has no operations and is not expectedto have any operations. Red Oak’s only income is distributions (if any) itreceives from the Company and AES Sayreville, L.L.C.  Pursuant to an equity subscription agreement (see Note 6), RedOak agreed to contribute up to approximately $56.7 million to the Company tofund construction after the bond proceeds have been fully utilized. As ofDecember 31, 2002, all $56.7 million had been contributed, including thereclassification of a $986,000 payable to an affiliate (AES Corporation) tocontributed capital in February 2001. This amount represented expenditures paidby the AES Corporation prior to March 15, 2000.

 

 The equity that Red Oak providedto the Company was provided to Red Oak by AES, which owns all of the equityinterests in Red Oak. AES files quarterly and annual audited reports with theSecurities and Exchange Commission under the Securities Exchange Act of 1934,which are publicly available, but which do not constitute a part of, and arenot incorporated into, this Form 10-K.

 

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The Companyowns all of the equity interests in AES Red Oak Urban Renewal Corporation (“AESURC”), which was organized as an urban renewal corporation under New JerseyLaw. 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 operationsoutside of its activities in connection with the Facility.

 

**2.****              OPERATIONS**

 

During 2002, as further discussed in Note 7, the credit ratings of thelong-term senior unsecured debt of The Williams Companies, Inc. were downgradedto below investment grade.  Sinceachieving commercial operations, under the Power Purchase Agreement withWilliams Energy, the Company is eligible to receive variable operations andmaintenance payments, total fixed payments, energy exercise fee payments (eachas defined in the Power Purchase Agreement) and other payments for the deliveryof fuel conversion, capacity and ancillary services.  Since September 28, 2002, Williams Energy has not requested thatthe Company run the facility or “dispatch” the facility to a significantdegree, outside the peak summer months. The minimum capacity payments providedfor under the Power Purchase Agreement have been our primary source ofoperating revenues, representing $62.0 million of our total revenues of $64.2million for the twelve months ended December 31, 2003.  The Company has used these operatingrevenues, together with interim rebates received from Raytheon under theconstruction agreement, interest income from the investment portion of theproceeds from the sale of the senior secured bonds and the $10 millionPrepayment from Williams (Note 7) to fund its generation expenses, otheroperations and maintenance expenses and debt service costs.  As discussed in Note 7, in the event thatThe Williams  Companies, Inc. regainsand maintains its investment grade status, Williams Energy provides asubstitute guaranty of investment grade rating, or posts a letter of credit,the Company will be required to return the $35 million alternative creditsupport provided by Williams Energy in accordance with the terms of the LetterAgreement.

 

The Company currently anticipates being dispatched by Williams Energybeginning in April 2004 but can provide no assurance that this will occur.  In the event that the facility is notdispatched, the Company’s operating revenues will consist of minimum capacitypayments under the Power Purchase Agreement. The Company has also provided two letters of credit, the Power PurchaseAgreement Letter of Credit ($10 million) and the debt service reserve letter ofcredit ($22 million) (Notes 6 and 7) that may be utilized if necessary to fundobligations as they become due.   In theevent the Company regains its investment grade status, the Company will alsohave access to its $2.5 million working capital agreement (Note 6).

 

The Company currently believes that its sources of liquidity will beadequate to meet its needs through the end of 2004.  This belief is based on a number of assumptions, including butnot limited to the continued performance and satisfactory financial conditionof the third parties on which the Company depends, particularly Williams Energyas fuel supplier and purchaser of all electric energy and capacity produced bythe facility as well as ancillary and fuel conversion services of the Company(as provided by  the Power PurchaseAgreement) and The Williams Companies, Inc. as guarantor of Williams Energy’sperformance under the Power Purchase Agreement.  Known and unknown risks, uncertainties and other factors outsidethe Company’s control may cause actual results to differ materially from itscurrent expectations.  These risks,uncertainties and factors include but are not limited to risks anduncertainties related to the financial condition and continued performance ofthe third parties on which the Company depends, including Williams Energy andThe Williams Companies and its affiliates, the possibility that the facilitywill not be dispatched to a significant degree, delays in or disputes over thecompletion of the facility, the possibility of unexpected problems related tothe performance of the facility, the possibility of unexpected expenses orlower than expected revenues and additional factors that are unknown to theCompany or beyond its control.

 

Since the Company depends on Williams Energy for both revenues and fuelsupply under the Power Purchase Agreement, if Williams Energy were to terminateor default under the Power Purchase Agreement, there would be a severe negativeimpact on the Company’s cash flow and financial condition which could result ina default on its senior secured bonds. Due to recent declines in pool prices, the Company would expect that ifit were required to seek alternative purchasers of its power as a result of adefault by Williams Energy that any such alternate revenues would besubstantially below the amounts that would have been otherwise payable pursuantto the Power Purchase

 

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Agreement.  There can be no assurance as to theCompany’s ability to generate sufficient cash flow to cover operating expensesor its debt service obligations in the absence of a long-term power purchaseagreement with Williams Energy.

 

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

 

*Principles of Consolidation* - The consolidatedfinancial statements include the accounts of the Company and AES URC, itswholly owned subsidiary. All intercompany transactions and balances have beeneliminated in consolidation.

 

*Cash and Cash Equivalents* - The Companyconsiders unrestricted cash on hand, deposits in banks, and investments withoriginal maturities of three months or less to be cash and cash equivalents forthe purpose of the statement of cash flows.

 

*Restricted Cash and Investments* - The Companyis prohibited from making any distributions unless it has required minimumbalances in certain accounts and has met certain other conditions contained inthe Indenture and the Collateral Agency and Intercreditor Agreement governingthe senior secured bonds. These minimum balances totaled $3.3 million atDecember 31, 2003. The $31.5 million balance of restricted cash consists ofcash to be used to repay the Alternative Credit Support amount owed to Williams(See Note 7 - Power Purchase Agreement). The Company had the required minimum balances and had met the requiredconditions when it made distributions of $1.05 million and $2.0 million to AESRed Oak, Inc. on December 31, 2003 and 2002, respectively.

 

*Property, Plant and Equipment —*Property,plant and equipment is recorded at cost. Depreciation, after consideration of salvage value, is computed usingthe straight-line method over the estimated useful lives of the assets, whichrange from five to thirty-six years. Maintenance and repairs are charged to expense as incurred.  The depreciable lives of our property, plantand equipment by category are as follows:

 
| **Description of Asset**           |   | **Depreciable  Life** |   | **December  31, 2003  (in thousands)** |    |
|------------------------------------|--------|-----------------------|--------|----------------------------------------|---------|
| Buildings                          |   | 35                    |   | $                                      | 1,767   |   |
| Vehicles                           |   | 5                     |   | 112                                    |    |
| Computers                          |   | 6                     |   | 772                                    |    |
| Furniture and Fixtures             |   | 10                    |   | 515                                    |    |
| Combustion Turbine Generator Parts |   | 9-36                  |   | 45,367                                 |    |
| Gas Heaters                        |   | 35                    |   | 1,119                                  |    |
| Spare Parts Inventory              |   | —                |   | 12,751                                 |    |
| Plant                              |   | 35                    |   | 362,390                                |    |
|                               |   |                  |   | $                                      | 424,793 |   |

 

*Deferred Financing Costs* - Financing costs aredeferred and are being amortized using the straight-line method over the lifeof the bonds, which does not differ materially from the effective interestmethod of amortization.

 

Revenue*Recognition —*  TheCompany generates energy revenues under the Power Purchase Agreement withWilliams Energy.  During the 20-year termof the agreement, the Company expects to sell capacity and electric energyproduced by the facility, as well as ancillary services and fuel conversionservices.  Under the Power PurchaseAgreement, revenues are generated from meeting (1) base electrical outputguarantees and (2) heat-rate rebates through efficient electrical output.  Revenues from the sales of electric energyand capacity are recorded based on output delivered and capacity provided atrates as specified under contract terms. Revenues for ancillary and other services are recorded when the servicesare rendered.

 

Upon its expiration, or in the event that the Power Purchase Agreementis terminated prior to its 20-year term or Williams Energy otherwise fails toperform, the Company would seek to generate energy revenues from the sale ofelectric energy and capacity into the merchant market or under new short- orlong-term power purchase or similar

 

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agreements.  Due to recent declines in pool prices,however, the Company would expect that even being successful in findingalternate revenue sources, any such alternate revenues would be substantiallybelow the amounts that would have been otherwise earned pursuant to the PowerPurchase Agreement.

 

After the plant reached provisional acceptance, the Company elected toconfirm reliability for up to 19 days before binding with Williams Energy.  Beginning August 13, 2002 (the date of risktransfer) through August 31, 2002, the Company operated the facility as amerchant plant and sold electric revenues to Williams Energy, in its capacityas our PJM account representative, at spot market prices and bought gas fromWilliams Energy at spot market prices. Additionally, during September 2002, the Company made net electricenergy available to Williams Energy during times when it had not received aWilliams Energy dispatch notice.  Thisnet electric energy is referred to as “other sales of energy” in the PowerPurchase Agreement and is sold at the local marginal price commonly referred toas spot market energy.  Gas required forthis energy generation was purchased from Williams Energy at spot marketprices.  The Company recognized merchantrevenues of approximately $11.1 million and fuel expenses of approximately $6.9million for the year ended December 31, 2002. These amounts are included within energy revenues and operating costs inthe accompanying condensed consolidated statements of operations for the yearended December 31, 2002. Since September 28, 2002, Williams Energy has notrequested that the Company run the facility or “dispatch” the facility to asignificant degree. The minimum capacity payments provided for under the PowerPurchase Agreement have been our primary source of operating revenues, representing$62.0 million of our total revenues of $64.2 million for the twelve monthsended December 31, 2003.

 

*Reclassifications* – Certain reclassificationshave been made to 2002 amounts to conform to the 2003 presentation.

 

*Use of Estimates* - The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires the Company to make estimatesand assumptions that affect reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities as of the date of thefinancial statements, as well as the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

*Income Taxes* - The Company is a limited liabilitycompany and is treated as a disregarded entity for tax purposes. Therefore, itdoes not pay income taxes, and no provision for income taxes has been reflectedin the accompanying financial statements.

 

*Start-Up Costs* - The Company follows AICPAStatement of Position (SOP) 98-5, Reporting on the Costs of Start-UpActivities, which requires that start-up and organizational costs be expensedas incurred. As such, no costs to which SOP 98-5 applies have been capitalizedin the accompanying balance sheets.

 

*Spare Parts Inventory* – Spare parts inventoryconsists of rotable and other spare parts, primarily covered under theMaintenance Services Agreement discussed in Note 8.  Inventory is reported at cost and is included in Property, Plantand Equipment.  The liability for thesespare parts is reflected as current and long-term liabilities in theaccompanying balance sheets.

 

*Recent Accounting Pronouncements*- In July2001, the Financial Accounting Standards Board  (“FASB”) issued SFAS No.143, entitled “Accounting for Asset Retirement Obligations.”  This standard is effective for fiscal yearsbeginning after June 15, 2002 and provides accounting requirements for assetretirement obligations associated with long-lived assets.  Under the Statement, the asset retirementobligation is recorded at fair value in the period in which it is incurred byincreasing the carrying amount of the related long-lived asset.  The liability is accreted to its presentvalue in each subsequent period and the capitalized cost is depreciated overthe useful life of the related asset. The adoption of this standard did nothave a material effect on the Company’s financial statements.

 

In June 2002, the FASB issued SFAS No. 146, entitled “Accounting forCosts Associated with Exit or Disposal Activities,” which addresses accountingfor restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principallyEmerging Issues Task Force (“EITF”) Issue No. 94-3.  The Company will adopt

 

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the provisions of SFAS No. 146for restructuring activities initiated after December 31, 2002. SFAS No. 146requires that the liability for costs associated with an exit or disposalactivity be recognized when the liability is incurred.  Under EITF Issue No. 94-3, a liability foran exit cost was recognized at the date of a company’s commitment to an exitplan.  SFAS No. 146 also establishesthat the liability should initially be measured and recorded at fairvalue.  Accordingly, SFAS No. 146 mayaffect the timing of recognizing future restructuring costs as well as theamount recognized. The adoption of this standard did not have a material effecton the Company’s financial statements.

 

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

 

**4.****              CONCENTRATION OFCREDIT RISK IN WILLIAMS ENERGY AND ITS AFFILIATES**

 

Williams Energy is currently the Company’s sole customer for purchasesof capacity, ancillary services, and energy and its sole source for fuel.  Williams Energy’s payments under the PowerPurchase Agreement are expected to provide all of the Company’s operatingrevenues during the term of the Power Purchase Agreement.  It is unlikely that the Company would beable to find another purchaser or fuel source on similar terms for its Facilityif Williams Energy were not performing under the Power Purchase Agreement.  Any material failure by Williams Energy tomake capacity and fuel conversion payments or to supply fuel under the PowerPurchase Agreement would have a severe impact on the Company’s operations, andmay result in a default on the Company’s debt. The payment obligations of Williams Energy under the Power PurchaseAgreement are guaranteed by The Williams Companies, Inc.  The payment obligations of The WilliamsCompanies, Inc. under the guaranty are capped at an amount equal toapproximately $510 million.  Beginningon January 1 of the first full year after the commercial operation date, thisguaranty cap is to be reduced semiannually by a fixed amount which is based onthe amortization of our senior secured bonds during the applicable semiannualperiod (see Note 7).

 

The Company’s dependence upon The Williams Companies, Inc. and itsaffiliates under the Power Purchase Agreement exposes the Company to possibleloss of revenues and fuel supply, which in turn, could negatively impact itscash flow and financial condition and may result in a default on its seniorsecured bonds.  There can be noassurances as to the Company’s ability to generate sufficient cash flow tocover operating expenses or its debt service obligations in the absence of along-term power purchase agreement with Williams Energy.

 

**5.****              NEW ACCOUNTINGPRONOUNCEMENTS**

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN No. 46, Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51 (“FIN No. 46”).  In October 2003, FASB StaffPosition No. 46-6, “Effective Date of FIN No. 46, Consolidation of VariableInterest Entities” deferred the effective date of FIN No. 46 for variableinterests held by a public entity in a variable interest entity (“VIE”) that wascreated or acquired before February 1, 2003 to the end of the first interim orannual period ending after December 15, 2003.  In December 2003, FASBissued FIN 46 (revised December 2003), Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51 (“FIN 46(r)”), which clarified somerequirements and incorporated several staff positions that the Company wasalready required to apply.  In addition, FIN 46(r) deferred the effectivedate for VIEs that were created or acquired before February 1, 2003 and werenot considered special purpose entities (“SPEs”) prior to the issuance of theinterpretation until the end of the first reporting period ending after March15, 2004.  FIN 46(r) defines a VIE as (i) any entity in which the equityinvestors at risk in such entity do not have the characteristics of acontrolling financial interest, or (ii) any entity that does not havesufficient equity at risk to finance its activities without additionalsubordinated financial support from other parties.  It requires theconsolidation of the VIE by the primary beneficiary.  The adoption of FIN46(r) requires the Company to include disclosures for non SPE VIEs created oracquired on or after February 1, 2003 in its condensed consolidated financialstatements related to the total assets and the maximum exposure to lossresulting from the Company’s

 

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interests in VIEs.  Theadoption of FIN 46(r) for VIEs created or acquired prior to February 1, 2003that were considered SPEs prior to the issuance of the interpretation did nothave a significant impact on the Company’s consolidated financialstatements.  The Company has assessed the impact of the provisions of FIN46(r) on its consolidated financial statements for VIEs created or acquiredprior to February 1, 2003 that were not considered SPEs prior to the issuanceof the interpretation, and does not believe that the impact will be material.

 

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

 

The requirements of SFAS No. 149 are effective for contracts enteredinto or modified after June 30, 2003 and for hedging relationships designatedafter June 30, 2003.  The provisions of the statement that relate to SFASNo. 133 implementation issues that have been effective for fiscal quarters thatbegan prior to June 15, 2003, should continue to be applied in accordance withtheir respective effective dates. The adoption of this standard did not have amaterial effect on the Company’s financial statements.

 

In May 2003, the FASB adopted SFAS No. 150, “Accounting for CertainFinancial Instruments with characteristics of both Liabilities andEquity”.  This Statement establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity.  This Statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003.  The adoption of this pronouncement will not have a material effecton our financial position, results of operations, or cash flows.

 

**6.****              BONDS PAYABLE**

 

On March 15, 2000, the Company issued $224 million of 8.54% seniorsecured bonds due 2019 (“2019 Bonds”) and $160 million of 9.20% senior securedbonds due 2029 (2029 Bonds and together with the 2019 Bonds, the “Bonds”) toqualified institutional buyers and/or institutional accredited investors,pursuant to a transaction exempt from registration under the Securities andExchange Act of 1933 (the Act) in accordance with Rule 144A of the Act. In lateSeptember 2000, the Company consummated an exchange offer whereby the holdersof the Bonds exchanged their privately placed bonds for registered bonds. Thenet proceeds of the bonds (after deferred financing costs), approximately $365million, were used to prepay WGI and other construction costs of the Plant andwere also used, during the construction period, for interest payments tobondholders.

 

*Future**Maturitiesof Debt* - Principal on the Bonds is payable quarterly inarrears.  Principal payments on the 2019Bonds commenced on August 31, 2002. Quarterly principal repayment of the 2029Bonds does not commence until February 28, 2019.  The final maturity date for the Bonds is November 30, 2019 andNovember 30, 2029, respectively.

 

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*Interest & Principal Repayment Schedule:*

 

 
| **Year**            |   | **Interest**        |    | **Principal** |   |
|---------------------|--------|---------------------|---------|---------------|--------|
|                |   | **(in  thousands)** |    |
| 2004                |   | $                   | 33,113  |          | $      | 5,230 |   |
| 2005                |   | 32,579              |    | 5,071         |   |
| 2006                |   | 32,111              |    | 7,101         |   |
| 2007                |   | 31,502              |    | 6,105         |   |
| 2008                |   | 31,020              |    | 8,122         |   |
| 2009 and thereafter |   | 317,561             |    | 343,733       |   |
| **Total Payments**  |   | $                   | 477,886 |          | $      | 375,362 |   |

 

*Optional Redemption* - The Bonds are subject tooptional redemption by the Company, in whole or in part, at any time at aredemption price equal to 100% of the principal amount plus accrued interest,together with a premium calculated using a discount rate equal to the interestrate on comparable U.S. Treasury securities plus 50 basis points.

 

*Mandatory Redemption* - The Bonds are subjectto mandatory redemption by the Company, in whole or in part, at a redemptionprice equivalent to 100% of the principal amount plus accrued interest undercertain situations pursuant to receiving insurance proceeds, eminent domainproceeds, liquidated damages under the construction agreement, or in certaininstances in which payments are received under the Power Purchase Agreement ifthe Company terminates the Power Purchase Agreement as a result of a default byWilliams.

 

*Indenture* - TheTrust Indenture Agency (the Indenture) contains limitations on the Companyincurring additional indebtedness, granting liens on the Company’s property,distributing equity and paying subordinated indebtedness issued by affiliatesof the Company, entering into transactions with affiliates, amending,terminating or assigning any of the Company’s contracts and fundamental changesor disposition of assets.

 

Collateral for the Bonds consists of the Facility and related entities,all agreements relating to the operation of the project, the bank andinvestment accounts of the Company, and all ownership interests in the Company,as prescribed under the Indenture. The Company is also bound by a collateralagency agreement (the Collateral Agency Agreement) and an equity subscription agreement(the Equity Subscription Agreement).

 

*Collateral Agency Agreement* - The CollateralAgency Agreement requires the Company to fund or provide the funding or aletter of credit for a debt service reserve fund. The debt service reserve fundletter of credit was posted at financial closing in the amount of $22 milliondollars. The amount required for funding the debt service reserve fund is equalto six months scheduled payments of principal and interest on the bonds.

 

*Equity Subscription Agreement* - The Company,along with Red Oak, entered into an Equity Subscription Agreement, pursuant towhich Red Oak agreed to contribute up to approximately $56.7 million to theCompany to fund project costs. As of December 31, 2002, Red Oak had contributedthe entire $56.7 million to the Company, including the reclassification of a$986,000 payable to an affiliate (AES Corporation) to contributed capital inFebruary 2001. The equity that Red Oak provided to the Company was provided byAES. The Company does not have access to additional liquidity pursuant to thisagreement as Red Oak has fulfilled its funding obligations thereunder.

 

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

 

*Bond Ratings and Effect on Working Capital Agreement*.  In connection with the initial financing ofthe Facility, the Company entered into a working capital agreement pursuant towhich it could borrow up to $2.5 million from time to time for use inconnection with the payment of operating and maintenance costs of theproject.  The obligation of the banksthat are party to the working capital agreement to extend loans to the Companyunder the working capital agreement is subject to, among others, the followingconditions precedent:

 

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•                                          TheCompany’s senior secured bonds must be rated “BBB-”or higher by S&P and“Baa3” or higher by Moody’s;

 

•                                          nodefault or event of default under the working capital agreement shall haveoccurred and be continuing; and

 

•                                          noevent has occurred and is continuing which could reasonably be expected to havea material adverse effect on the Company.

 

In an action related to the ratings downgrade of The WilliamsCompanies, Inc and current market conditions. S&P lowered its ratings onthe Company’s senior secured bonds to “B+” on December 10, 2003.  On November 11, 2002, Moody’s had loweredthe ratings to “B2” with a negative outlook.  As a result of the Company’s senior secured bonds having a rating lowerthan “BBB-” by S&P and lower than “Baa3” by Moody’s, funds currently arenot available to the Company under the working capital agreement and will notbe available unless the ratings of the senior secured bonds of the Companysatisfy the condition precedent contained in the working capitalagreement.  Further, as a result of thebond ratings downgrades the Company must pay higher fees for draws on itsproject support agreements.  There canbe no assurance that the ratings on the senior secured bonds of the Companywill be increased or that the lenders will waive any of the conditionsprecedent set forth in the working capital agreement.

 

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

 

*General*. The Company and Williams Energy have entered into a Power PurchaseAgreement for the sale of all capacity produced by the Facility, as well asancillary services and fuel conversion services. Under the Power PurchaseAgreement, Williams Energy has the obligation to deliver, on an exclusive basis,all quantities of natural gas and fuel oil required by the Facility to generateelectricity or ancillary services, to start-up or shut-down the plant, and tooperate the Facility during any period other than a start-up, shut-down, orrequired dispatch by Williams Energy for any reason. The term of the PowerPurchase Agreement is 20 years from the first contract anniversary date, whichis the last day of the month in which commercial availability occurs.  As part of the arbitration settlement withWilliams Energy, described below, the Company recognizes September 28, 2002 asthe commercial availability date.

 

Under the Power Purchase Agreement, the commercial operation date wasrequired to occur by December 31, 2001, however the Company had the right to extendthe commercial operation date until June 30, 2002 by invoking its right to afree extension option which was available under the Power Purchase Agreement ifcertain conditions were met.  TheCompany exercised its right to extend the commercial operation date fromDecember 31, 2001 to June 30, 2002, as granted under the free extension option.In addition, the Company had the right under the Power Purchase Agreement toagain extend the commercial operation date (the Second Paid Extension Option)from June 30, 2002 to June 30, 2003, upon written notification to WilliamsEnergy no later than May 21, 2002 (which represented an agreed upon extensionfrom the original April 30, 2002 notification deadline), by paying WilliamsEnergy (i) an amount equal to the lesser of any actual damages Williams Energysuffered or incurred after June 30, 2002, as a result of Williams Energy’sreliance upon delivery by such date, to the extent said damages cannot bemitigated fully, or $3.0 million and (ii) certain amount of liquidated damagesas calculated pursuant to the Power Purchase Agreement.  On May 21, 2002, the Company exercised the Second Paid Extension Option.  As of December 31, 2002, the Company hadpaid liquidated damages to Williams Energy at the rate of $11,000 per day forthe period beginning on July 1, 2002 and ending on August 31, 2002 which inaggregate amounted to $682,000.  TheCompany had also paid liquidated damages to Williams Energy at the rate of$22,000 per day for the period beginning on September 1, 2002, and ending onSeptember 27, 2002 which in aggregate amounted to $594,000.  During the period of the Second PaidExtension Option, the Company continued to collect liquidated damages throughAugust 10, 2002 from Raytheon under the construction agreement in the amount of$108,000 per day.  As of December 31,2003, the Company had received $14 million in liquidated damages from Raytheonunder the construction agreement.

 

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The Company entered into arbitration with Williams Energy to resolvecertain disputes regarding the date of commercial operation and the properinterpretation of certain provisions of the Power Purchase Agreement relatingto the amounts claimed by the Company to be payable by Williams Energy.  Williams Energy has withheld or offset fromamounts invoiced by the Company amounts that Williams Energy believes wereimproperly invoiced based on Williams Energy’s interpretation of the PowerPurchase Agreement.  The arbitrationrelated to disputed amounts of approximately $7.6 million, which included a$594,000 payment extension option dispute and a $7.0 million commercialoperation start date dispute. On November 4, 2003, the Company and WilliamsEnergy settled this dispute.  Under thesettlement, Williams made a cash payment to us of $4,050,153 on November 14,2003, which included $225,055 of interest from October 2002 to the paymentdate, and the commercial operation date was agreed to be September 28, 2002.The related revenue had been substantially recorded in September 2002, with theremaining amount recorded in the fourth quarter of 2003.   This payment settles all paymentobligations between the parties for the month of September 2002 with respect tothe commercial operation date under the Power Purchase Agreement.  From the Company’s perspective, the cashpayment has the economic effect of recognizing a commercial operation dateprior to September 28, 2002. The Company is also disputing $802,000 of merchantprice, testing gas and other charges with Williams Energy that the Companycontends is owed by Williams Energy. This was not part of the abovearbitration.

 

*Guaranties.* The Company provided Williams Energy a letter of credit (Power PurchaseAgreement Letter of Credit) in the amount of $30 million to support specificpayment obligations should the Facility not achieve commercial operation by thedate required under the Power Purchase Agreement. Upon the commencement ofcommercial operations in September 2002, the stated amount of that letter ofcredit was reduced to $10 million. The repayment obligations with respect toany drawings under the Power Purchase Agreement Letter of Credit are a seniordebt obligation of the Company.

 

The payment obligations of Williams Energy under the Power PurchaseAgreement are guaranteed by The Williams Companies, Inc.  The payment obligations of The WilliamsCompanies, Inc. under the guaranty are capped at an amount equal toapproximately $510 million.  Beginningon January 1 of the first full year after the commercial operation date, thisguaranty cap is to be reduced semiannually by a fixed amount which is based onthe amortization of our senior secured bonds during the applicable semiannualperiod.

 

Pursuant to Section 18.3 of the Power Purchase Agreement, in the eventthat Standard & Poors or Moody’s rates the long-term senior unsecured debtof The Williams Companies, Inc. lower than investment grade, The WilliamsCompanies, Inc. is required to supplement The Williams Companies, Inc.guarantee with additional alternative security that is acceptable to theCompany within 90 days after the loss of such investment grade rating.  According to published sources, on July 23,2002, S&P lowered the long-term senior unsecured debt rating of TheWilliams Companies, Inc. to “BB-” from “BBB-” and further lowered such ratingto “B” on July 25, 2002.  On May 23,2003 S&P upgraded the rating to B+ with a negative outlook. On July 24,2002, Moody’s lowered the long-term senior unsecured debt rating of TheWilliams Companies, Inc. “B1” from “Baa3.” According to published sources, this rating was further lowered onNovember 22, 2002 to “Caa1” by Moody’s, but then upgraded to B3 on June 4,2003. Accordingly, The Williams Companies, Inc**.**’s long term seniorunsecured debt is currently rated below investment grade by both S&P andMoody’s.

 

Due to the downgrade of The Williams Companies, Inc. to belowinvestment grade, the Company and Williams Energy entered into a letteragreement dated November 7, 2002 (the “Letter Agreement”), under which WilliamsEnergy agreed to provide the Company (a) a prepayment of $10 million withinfive business days after execution of the Letter Agreement (the “Prepayment”);(b) alternative credit support equal to $35 million on or before January 6, 2003in any of the following forms (i) cash, (ii) letter(s) of credit with theCompany as the sole beneficiary substantially in the form of the Power PurchaseAgreement Letter of Credit, unless mutually agreed to otherwise, or (iii) adirect obligation of the United States Government delivered to a custodialsecurities account as designated by the Company with a maturity of not morethan three years; and (c) replenish any portion of the alternative creditsupport that is drawn, reduced, cashed, or redeemed, at any time, with an equalamount of alternative credit support. In the Letter Agreement, the Company and Williams Energy acknowledgedthat the posting of such alternative credit support and Williams Energy’sagreement  and performance of therequirements of (a), (b), and (c) as set forth

 

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in the immediately precedingsentence, would be in full satisfaction of Williams Energy’s obligationscontained in Section 18.3 of the Power Purchase Agreement.  In the Letter Agreement, the Company andWilliams Energy expressly agreed that the posting of the Prepayment or anyalternative credit support either now or in the future or any other terms setforth in the Letter Agreement, was not intended, and did not modify, alter, oramend in any way, the terms and conditions or relieve The Williams Company,Inc. from any obligations it has under its guaranty of the payment obligationsof Williams Energy under the Power Purchase Agreement.  The guaranty remains in full force andeffect, and the Company retains all of its rights and remedies provided by thatguaranty.

 

Under the terms of the Letter Agreement, the Company is obligated toreturn the Prepayment to Williams Energy upon the earlier of (i) The WilliamsCompanies, Inc. regaining its investment grade rating or Williams Energyproviding a substitute guaranty of investment grade rating; (ii) the beginningof Contract Year 20; or (iii) the posting of alternative credit support byWilliams Energy as set forth below.  Inthe case of items (i) and (iii) above, except to the extent, in the case ofitem (iii), Williams Energy elects to have all or a portion of the Prepaymentmake up a combination of the alternative credit support required to be postedpursuant to Section 18.3(b) of the Power Purchase Agreement, Williams Energyshall have the right to recoup the Prepayment by set-off of any and all amountsowing to the Company under the Power Purchase Agreement beginning no earlierthan the June in the calendar year after the occurrence of item (i) or (iii)and continuing thereafter until the Prepayment has been fully recovered.  In the case of item (ii) above, WilliamsEnergy shall have the right to immediately set-off all amounts owing to theCompany under the Power Purchase Agreement after the occurrence of item (ii)and continuing thereafter until the Prepayment has been fully recovered.  Except to the extent Williams Energy electsto include the Prepayment as part of the alternative credit support, the amountof alternative credit support posted by Williams Energy pursuant to the LetterAgreement shall be initially reduced by the amount of the Prepayment, andWilliams Energy shall thereafter increase the alternative credit supportproportionately as Williams Energy recoups the Prepayment set-off on thepayment due date of amounts owing to the Company.

 

If the Company does not return the Prepayment to Williams Energy as setforth in the preceding paragraph, then the Company shall be considered indefault under the Letter Agreement and Williams Energy shall be entitled toenforce any and or all of its contractual rights and remedies as set forth inthe Power Purchase Agreement, including, but not limited to, drawing on theLetter of Credit previously posted by the Company in favor of Williams Energy.

 

Williams Energy made the Prepayment on November 14, 2002 and providedan additional $25 million of cash to the Company on January 6, 2003 as thealternative credit support.  As allowedby the Letter Agreement, Williams has elected to have the $10 millionPrepayment included as part of the alternative credit support.  In the event that Williams regains andmaintains its investment grade status, provides a substitute guaranty ofinvestment grade rating, or posts a letter of credit, the Company will berequired to return the $35 million alternative credit support to WilliamsEnergy in accordance with the terms of the Letter Agreement as described above.

 

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

 

*Construction Agreement* - The Company enteredinto an Agreement for Engineering, Procurement and Construction (EPC) services,dated as of October 15, 1999, between the Company and WGI (as the successorcontractor), as amended for the design, engineering, procurement, sitepreparation and clearing, civil works, construction, start-up, training andtesting and to provide all materials and equipment (excluding operational spareparts), machinery, tools, construction fuels, chemicals and utilities, labor,transportation, administration and other services and items (collectively andseparately, the “services”) of the Facility. Under a guaranty in the Company’sfavor, effective as of October 15, 1999, all of WGI’s obligations under theconstruction agreement are irrevocably and unconditionally guaranteed byRaytheon. In 2001, as a result of WGI’s bankruptcy filing, the Company made ademand on Raytheon to perform its obligations under the Raytheon guarantee andWGI, Raytheon and the Company entered into agreements pursuant to whichRaytheon became responsible for the construction of the Facility*.*

 

Under the construction agreement, in lieu of the Company’s retainage,Raytheon is entitled to post a letter of credit in the amount of the thencurrent retainage.  As of December 31,2003, Raytheon had provided a letter of credit of approximately $30.3million.  The Company may draw on thisletter of credit in the event that Raytheon

 

61

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fails to pay us any amount owedto us under the construction agreement. As of December 31, 2003 and December 31, 2002, the Company had drawn$544,000 and $96,000 on this letter of credit, respectively, for interimrebates which Raytheon then resumed paying until their notice of FinalAcceptance described below.

 

Provisional acceptance has been granted and the Facility has commencedcommercial operations, however, Raytheon must perform certain agreed uponcompletion items in order to obtain final acceptance. Raytheon gave notice ofFinal Acceptance on July 22, 2003 based on its July 8, 2003 performancetest.  On July 31, 2003, the Companyreceived a letter from the project’s independent engineer stating that it couldnot support Raytheon’s claim of final acceptance and it did not consider theJuly 8, 2003 performance test valid.  Inmaking this assessment, the independent engineer cited, among other reasons,(i) modifications made to certain equipment in performance of the July 8performance test which would adversely impact the operations of the plant andother pieces of equipment and (ii) Raytheon’s failure to demonstrate compliancewith guaranteed emissions limits.  OnAugust 1, 2003, the Company rejected Raytheon’s claim of final acceptance.  This rejection was based upon Raytheon’sfailure to meet the conditions for final acceptance provided for in the EPCcontract. On August 7, 2003, the Company received a response from Raytheon inwhich Raytheon claims that the Company’s rejection of the final acceptance isinvalid and improper.  The Company iscurrently considering its options for resolving this dispute.

 

*Maintenance Services* – Pursuant to amaintenance services agreement dated December 5, 1999, Siemens Westinghouse isto provide the Company with specific combustion turbine maintenance servicesand spare parts for twelve maintenance periods or until December 8, 2015.  As of December 31, 2003, the Company hasreceived approximately $10.8 million in rotable spare parts under thisagreement.  This amount is recorded as spareparts inventory, or as Property, Plant and Equipment when placed in service,and the remaining amount owed as current and long-term liabilities in theaccompanying balance sheets.  The feesassessed by Siemens Westinghouse are based on the number of Equivalent BaseLoad Hours accumulated by the applicable Combustion Turbine as adjusted forinflation.  For financial reportingpurposes the payments made to Siemens Westinghouse are treated as a reductionof the liabilities under the spare-parts agreement in the accompanying balancesheet, except for the portion that is considered maintenance expense when ascheduled outage occurs.

 

The maintenance services agreement became effective on the date ofexecution and unless terminated early, will terminate upon completion of shoprepairs performed by Siemens Westinghouse following the twelfth scheduledoutage of the applicable combustion turbine or sixteen years from the date ofexecution, whichever occurs first, unless the Company exercises its right toterminate the agreement after the first major outage of the turbines, whichwill be approximately the eighth year of operation of the facility.

 

Additionally, a significant monthly expenditure for payment of theCompany’s long term service agreement with Siemens Westinghouse may berequired, depending upon equivalent base hours. This agreement provides thatthe Company pay approximately $346 per gas turbine per equivalent base hour,with a true-up clause should an inspection outage be required based upon thenumber of equivalent starts. In the event the Company is not required todispatch the facility, there is no charge for that month.

 

*Water Supply and Water Supply Pipeline* – TheCompany has entered into a contract with the Borough of Sayreville (the“Borough”) by which the Borough will provide untreated water to the Company.The contract has a term of 30 years with an option to extend for up to fouradditional five-year terms. The Company is contractually committed to a minimumannual payment of $300,000.

 

*Interconnection Agreement (GPU)* – The Companyhas entered into an interconnection agreement with Jersey Central Power &Light Company d/b/a GPU Energy (“GPU”) to transmit the electricity generated bythe Facility to the transmission grid so that it may be sold as prescribedunder the Power Purchase Agreement. 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. Costsassociated with the agreement are based on electricity transmitted via GPU at avariable price and the PJM (Pennsylvania/New Jersey/Maryland) Tariff as chargedby GPU, which is comprised of both service cost and asset recovery cost, asdetermined by GPU and approved by the

 

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Federal Energy Regulatory Committee.The Company has been importing electricity from the transmission system tosupport commissioning of the Facility since July 2001 and the interconnectionfacilities have exported power to the transmission system since that time.

 

*Interconnection Installation Agreement (GPU)* –The Company entered into an interconnection agreement with GPU on April 27,1999 to design, furnish, install and own certain facilities required tointerconnect the Company with the transmission system.  Under the terms of this agreement, GPUprovided all labor, supervision, materials and equipment necessary to performthe interconnection installation. The cost of these interconnection facilitieswas approximately $5.1 million.

 

*Interconnection Services Agreement (PJM)* – TheCompany entered into an interconnection agreement with the Independent SystemOperator (“ISO”) of the PJM Control Area on December 24, 2001, as requiredunder the PJM Open Access Transmission Tariff. This agreement includesspecifications for each generating unit that will be interconnected to theTransmission System, confirms Capacity Interconnection Rights and includes theCompany’s agreement to abide by all rules and procedures pertaining togeneration in the PJM Control Area.

 

*Land Development Plan* – The Company enteredinto an agreement with the Borough of Sayreville by which the Company willdevelop and implement a plan to replace trees which were removed duringclearing of the Facility site.  The LandDevelopment Plan is required for final site approval.   The estimated cost of the plan is approximately $425,000.  The Company is in the process of selecting acontractor to perform the service and no payments have been made as of December31, 2003.  On July 23, 2003, the projectwas secured by a letter of credit issued by Union Bank of California for$425,000 with the Borough of Sayreville as the beneficiary.  This irrevocable standby letter of creditcurrently has an expiration date of June 30, 2004 and represents the amountpotentially due if there is a failure of AES Red Oak, LLC to take actionregarding the plan.

 

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

 

Effective March 2000, the Company entered into a 32-year developmentand construction management agreement with AES Sayreville, L.L.C.(“Sayreville”), another wholly owned subsidiary of Red Oak, to provide certainsupport services required by the Company for the development and constructionof the Facility. Under this agreement Sayreville has also provided operationsmanagement services for the Plant since the commencement of commercialoperation. Minimum amounts payable under the contract during 2003 were $133,000per month. Since commercial operation was achieved, payments for operationsmanagement services have been approximately $399,000 per quarter.

 

During the construction period, the construction management fees havebeen paid to Sayreville from the investment balances or from equity funding.For the years ended December 31, 2002 and 2001, $1 million, $1.5 million, inconstruction management fees were incurred and charged to construction inprogress, respectively.  AES willcontinue to supply Sayreville with the personnel, operational and maintenanceservices necessary to carry out its obligations to the Company.

 

The Company had accounts receivable from affiliates of $51,000 and$309,000 as of December 31, 2003 and 2002, respectively.  The Company had accounts payable to itsparent and affiliates of $131,000 and $18,000 as of December 31, 2003 and 2002,respectively.  Accounts receivable fromaffiliates generally represents charges for certain projects that the Companyhas paid for and invoiced to its affiliates. Accounts payable to parent and affiliates represent general amounts owedto the Company’s parent and affiliates for shared services.

 

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

 

The estimated fair values of the Company’s financial instruments havebeen determined using available market information. The estimates are notnecessarily indicative of the amounts the Company could realize in a currentmarket exchange. The use of different market assumptions and/or estimationmethodologies may have a material effect on the estimated fair value amounts.

 

63

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The fair value of the Company’s restricted investments approximatestheir carrying value. The Bonds had a carrying amount of $375.4 million and$381.6 million at December 31, 2003 and 2002, respectively.  The Bonds had a fair value of approximately$399 million and $261 million, respectively, at December 31, 2003 and2002.

 

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

 

Under the provisions of Statement of Financial Accounting Standards No.131, “Disclosure About Segments of an Enterprise and Related Information”, theCompany’s business is expected to be operated as one reportable segment, withoperating income or loss being the measure of performance evaluated by thechief operating decision maker. As described in Notes 1 and 6, the Company’sprimary customer is Williams, which is expected to provide all of the revenuesof the Company during the term of the Power Purchase Agreement.

 

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**SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

The following table summarizes the unaudited quarterly statements ofoperations for the Company for 2001-2003.

** **
|                             |   | **AES Red  Oak, LLC**                 |   |
|----------------------------------|--------|---------------------------------------|--------|
|                             |   | **Quarter  Ended  December 31, 2003** |   | **Quarter  Ended  September 30, 2003** |   | **Quarter  Ended  June 30, 2003** |   | **Quarter  Ended  March 31, 2003** |   |
|                             |   | **(dollars in thousands)**            |   |
| OPERATING REVENUES               |   |                                  |   |   |   |   |   |   |   |
| Energy                           |   | $                                     | 11,639 |   | $ | 25,799 |   | $ | 15,747 |   | $ | 11,021 |   |
| OPERATING EXPENSES               |   |                                  |   |   |   |   |   |   |   |
| Operating expenses               |   | (5,976                                | )      | (7,549 | ) | (6,689 | ) | (6,692 | ) |
| General and administrative costs |   | (1,047                                | )      | (1,025 | ) | (977 | ) | (953 | ) |
| Total Operating Expense          |   | (7,023                                | )      | (8,574 | ) | (7,666 | ) | (7,645 | ) |
| OPERATING INCOME                 |   | 4,616                                 |   | 17,225 |   | 8,081 |   | 3,376 |   |
|                             |   |                                  |   |   |   |   |   |   |   |
| OTHER INCOME/EXPENSE             |   |                                  |   |   |   |   |   |   |   |
| Interest income                  |   | 294                                   |   | 57 |   | 67 |   | 77 |   |
| Interest expense                 |   | (8,551                                | )      | (8,575 | ) | (8,492 | ) | (8,614 | ) |
| Liquated damages received        |   | 12                                    |   | 202 |   | 610 |   | 603 |   |
| Other expense                    |   | (252                                  | )      | (255 | ) | (255 | ) | (251 | ) |
| Liquated damages paid            |   | (249                                  | )      | — |   | — |   | — |   |
| Total Other Income/Expenses      |   | (8,746                                | )      | (8,571 | ) | (8,070 | ) | (8,185 | ) |
| NET INCOME (LOSS)                |   | $                                     | (4,130 | ) | $ | 8,654 |   | $ | 11 |   | $ | (4,809 | ) |

 
|                             |   | **AES Red  Oak, LLC**                 |   |
|----------------------------------|--------|---------------------------------------|--------|
|                             |   | **Quarter  Ended  December 31, 2002** |   | **Quarter  Ended  September 30, 2002** |   | **Quarter  Ended  June 30, 2002** |   | **Quarter  Ended  March 31, 2002** |   |
|                             |   | **(dollars  in thousands)**           |   |
| OPERATING REVENUES               |   |                                  |   |   |   |   |   |   |   |
| Energy                           |   | $                                     | 11,184 |   | $ | 15,060 |   | $ | — |   | $ | — |   |
| OPERATING EXPENSES               |   |                                  |   |   |   |   |   |   |   |
| Operating expenses               |   | (6,148                                | )      | (9,417 | ) | — |   | — |   |
| General and administrative costs |   | (406                                  | )      | (675 | ) | (134 | ) | (22 | ) |
| Total Operating Expense          |   | (6,554                                | )      | (10,092 | ) | (134 | ) | (22 | ) |
| OPERATING INCOME                 |   | 4,630                                 |   | 4,968 |   | (134 | ) | (22 | ) |
|                             |   |                                  |   |   |   |   |   |   |   |
| OTHER INCOME/EXPENSE             |   |                                  |   |   |   |   |   |   |   |
| Interest income                  |   | 30                                    |   | 34 |   | 36 |   | 25 |   |
| Interest expense                 |   | (8,589                                | )      | (4,310 | ) | (183 | ) | (81 | ) |
| Other income                     |   | 618                                   |   | 339 |   | — |   | — |   |
| Liquated damages received        |   | 1,810                                 |   | — |   | — |   | — |   |
| Other expense                    |   | (379                                  | )      | — |   | — |   | — |   |
| Liquated damages paid            |   | (1,810                                | )      | — |   | — |   | — |   |
| Total Other Income/Expenses      |   | (8,320                                | )      | (3,937 | ) | (147 | ) | (56 | ) |
| NET INCOME (LOSS)                |   | $                                     | (3,690 | ) | $ | 1,031 |   | $ | (281 | ) | $ | (78 | ) |

 

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|                             |   | **AES Red  Oak, LLC**                 |   |
|----------------------------------|--------|---------------------------------------|--------|
|                             |   | **Quarter  Ended  December 31, 2001** |   | **Quarter  Ended  September 30, 2001** |   | **Quarter  Ended  June 30, 2001** |   | **Quarter  Ended  March 31, 2001** |   |
|                             |   | **(dollars  in thousands)**           |   |
| OPERATING REVENUES               |   |                                  |   |   |   |   |   |   |   |
| Energy                           |   | $                                     | — |   | $ | — |   | $ | — |   | $ | — |   |
| OPERATING EXPENSES               |   |                                  |   |   |   |   |   |   |   |
| Operating expenses               |   | —                                |   | — |   | — |   | — |   |
| General and administrative costs |   | (11                                   | )      | (35 | ) | (13 | ) | (9 | ) |
| Total Operating Expense          |   | (11                                   | )      | (35 | ) | (13 | ) | (9 | ) |
| OPERATING INCOME                 |   | (11                                   | )      | (35 | ) | (13 | ) | (9 | ) |
|                             |   |                                  |   |   |   |   |   |   |   |
| OTHER INCOME/EXPENSE             |   |                                  |   |   |   |   |   |   |   |
| Interest income                  |   | 250                                   |   | 543 |   | 602 |   | 260 |   |
| Interest expense                 |   | (688                                  | )      | (1,326 | ) | (1,226 | ) | (352 | ) |
| Other income                     |   | —                                |   | — |   | — |   | — |   |
| Other expense                    |   | —                                |   | — |   | — |   | — |   |
| Total Other Income/Expenses      |   | (438                                  | )      | (783 | ) | (624 | ) | (92 | ) |
| NET INCOME (LOSS)                |   | $                                     | (449   | ) | $ | (818 | ) | $ | (637 | ) | $ | (101 | ) |

 

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| **ITEM 9.** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-------------------------------------------------------------------------------------------|

 

None.

 
| **ITEM 9A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

 

*DisclosureControls and Procedures *Under the direction of our Chief ExecutiveOfficer and Chief Financial Officer, we evaluated our disclosure controls andprocedures (as defined in the Securities Exchange Act of 1934 (the “ExchangeAct”) Rules 13a-15(e) and 15d – 15(e)) required by paragraph (b) of ExchangeAct Rules 13a – 15 or 15d – 15, and concluded that our disclosure controls andprocedures were effective as of December 31, 2003.

 

*Changes inInternal Controls*  Based on management’s evaluation that wasconducted during the fourth fiscal quarter under the direction of our ChiefExecutive Officer and Chief Financial Officer, we determined that there was nochange in internal control over financial reporting during the quarter endedDecember 31, 2003 that has materially affected, or is reasonably likely tomaterially affect, such internal control over financial reporting.

 

**PARTIII**

 
| **ITEM 10.** | **DIRECTORS AND EXECUTIVE OFFICERS OF THE  REGISTRANT** |
|--------------|---------------------------------------------------------|

 

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

 
| **ITEM 11.** | **EXECUTIVE COMPENSATION** |
|--------------|----------------------------|

 

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

 
| **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT** |
|--------------|---------------------------------------------------------------------|

 

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

 
| **ITEM 13.** | **CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS** |
|--------------|-----------------------------------------------------|

 

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

 
| **ITEM 14.** | **PRINCIPAL ACCOUNTING FEES AND SERVICES** |
|--------------|--------------------------------------------|

** **

 

Theaggregate fees billed for each of the last two fiscal years for professionalservices rendered by the principal accountant for the audit of the registrant’sannual financial statements and review of the financial statements included inthe registrant’s Form 10Q (17CFR249.308a) or services that or normally providedby the accountant in connection with statutory and regulatory filings orengagements for those fiscal years were approximately $219,000 and $140,000 forthe years ended December 31, 2003 and 2002, respectively.

 

Theregistrant’s board of directors serves as its audit committee. All audit andnon-audit services to be provided to the registrant by its principal accountantare approved by the board of directors. No pre-approval policies are in place.

 

Therewere no other fees paid to the principal accountant for the years endedDecember 31, 2003 and 2002, respectively.

 

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**PARTIV**

 
| **ITEM 15.** | **EXHIBITS, FINANCIAL STATEMENT 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 Financial Statement and SupplementaryData.

 

2.                                       ConsolidatedFinancial Statement Schedules Filed:Please refer to Item 8 - Consolidated Financial Statement and SupplementaryData.

 

3.                                       Exhibits Filed:

 

**Unless otherwiseindicated, all exhibits to this Form 10-K are incorporated herein by referencefrom the identically numbered exhibit of AES Red Oak, L.L.C.’s RegistrationStatement 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                                                                                                                                                                                                |

 

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                       |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   | 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                                                      |

 

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                              |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   | 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.                                                                                                                                                                                                         |

 

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                       |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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. (Power                                                                          |

 

71

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                              |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   | Purchase Agreement  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).         |
|                |   |                                                                                                                                                                                                                                                         |
| 10.26**             |   | Letter Agreement, dated November 7, 2002, between AES Red Oak, L.L.C.  and Williams Energy Marketing & Trading Company.                                                                                                                                  |
|                |   |                                                                                                                                                                                                                                                         |
| 10.27               |   | Letter Agreement, dated March 5, 2003 between AES Red Oak, L.L.C. and  Raytheon Company.                                                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                         |
| 12*                 |   | Computation of Ratios of Earnings (Deficiency) to Fixed Charges.                                                                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                         |
| 21*                 |   | Subsidiary of the Registrant.                                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                         |
| 31*                 |   | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                      |
|                |   |                                                                                                                                                                                                                                                         |
| 32*                 |   | Section 1350 Certifications                                                                                                                                                                                                                                  |

 

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* Filed herewith.

 

** Previously filed as an exhibit to the Company’s Quarterly Report onForm 10-Q for the period ended September 30, 2002 and incorporated by referenceherein.

 

b)             Reports on Form 8-K

 

No Current Reports on Form 8-K were filed by the registrant during thefourth quarter of the fiscal year ended December 31, 2003.

 

72

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**Supplementary Information to be FurnishedWith Reports filed Pursuant 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 to security holdersduring the fiscal year ended December 31, 2003. No annual report or proxy materialswill be sent to security holders subsequent to the filing of this annual reporton Form 10-K.

 

73

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|   | **AES RED OAK, L.L.C.** |
|--------|-------------------------|
|   |
|   |
|   |                    | /s/ A.W. Bergeron |   |
|   | By:                     | A.W. Bergeron |
|   | Title:                  | President |
|   |                    |   |
|   |                    | /s/ Pam Strunk |   |
|   | By:                     | Pam Strunk |
|   | Title:                  | Chief Financial Officer |
|   |                    |   |
|   |                    | /s/ Thomas P. Keating |   |
|   | By:                     | Thomas P. Keating |
|   | Title:                  | Principal Accounting Officer |

 

Date: March 15, 2004

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Signature**          |   |     | **Title** |           | **Date** |
|------------------------|--------|----------|-----------|----------------|----------|
| /s/ A. W Bergeron      |   |     |      |           |     |
| A. W Bergeron          |   | Director |      | March 15, 2004 |
|                   |   |     |      |           |
| /s/ Edward P. Convery  |   |     |      |           |     |
| Edward P. Convery      |   | Director |      | March 15, 2004 |
|                   |   |     |      |           |
| /s/ Dan  Rothaupt |   |     |      |           |     |
| Dan  Rothaupt     |   | Director |      | March 15, 2004 |

 

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