**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-K**

 

**(Mark One)**

**ý****                                ****ANNUAL REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004**

 

**OR**

 

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

 

**Commissionfile number:  333-40478**

 

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

(Exact name ofregistrant 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** |

 

----

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and (2) hasbeen subject to 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   o   No   ý

 

As of June 30, 2004, the last business day of theregistrant’s most recently completed second fiscal quarter, and as of March 30,2005, 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 of the Registrant’s equitysecurities are indirectly owned by The AES Corporation.  Registrant meets the conditions set forth inGeneral Instruction I(1)(a) and (b) of Form 10-K and istherefore filing this Form 10-K with the reduced disclosure formatauthorized by General Instruction I of Form 10-K.**

 

**DOCUMENTSINCORPORATED BY REFERENCE**

**None**

 

 

----

 

**TABLE OFCONTENTS**

 
| CAUTIONARY  NOTE REGARDING FORWARD-LOOKING STATEMENTS |                                                                                        |
|-------------------------------------------------------|---------------------------------------------------------------------------------------------|
| PART I                                           |                                                                                        |   |
| ITEM 1.                                               | BUSINESS                                                                                    |   |
| ITEM 2.                                               | PROPERTIES                                                                                  |   |
| ITEM 3.                                               | LEGAL PROCEEDINGS                                                                           |   |
| ITEM  4.                                              | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |   |
| PART II                                          |                                                                                        |   |
| ITEM  5.                                              | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |   |
| ITEM 6.                                               | SELECTED FINANCIAL DATA                                                                     |   |
| ITEM  7.                                              | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
| ITEM  7A.                                             | QUANTITATIVE  AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                  |   |
| ITEM  8.                                              | FINANCIAL  STATEMENTS AND SUPPLEMENTAL DATA                                                 |   |
| ITEM  9.                                              | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |   |
| 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  AND FINANCIAL STATEMENT SCHEDULES                                                 |   |
| SIGNATURES                                            |                                                                                        |

 

1

----

 

**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Some of the statements in this Form 10-K, as wellas statements made by AES Red Oak, L.L.C. (the “Company”, “we”, “us” or “our”) inperiodic press releases and other public communications, constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  Certain, but not necessarilyall, of such forward-looking statements can be identified by the use offorward-looking terminology, such as “believes,” “estimates,” “plans,” “projects,”“expects,” “may,” “will,” “should,” “approximately,” or “anticipates” or thenegative thereof or other variations thereof or comparable terminology, or bydiscussion of strategies, each of which involves risks and uncertainties. TheCompany has based these forward-looking statements on its current expectationsand projections about future events based upon its knowledge of facts as of thedate of this Form 10-K and its assumptions about future events.

 

All statements other than of historical facts includedherein, including those regarding market trends, the Company’s financialposition, business strategy, projected plans and objectives of management forfuture operations of the facility, are forward-looking statements. Suchforward-looking statements involve known and unknown risks, uncertainties and otherfactors outside of the Company’s control that may cause its actual results orperformance to be materially different from any future results, performance orachievements expressed or implied by the forward-looking statements. Theserisks, uncertainties and other factors include, among others, the following:

 

•                  unexpectedproblems relating to the performance of the facility,

 

•                  thefinancial condition of third parties on which the Company depends, including inparticular, Williams Power Company, Inc., (“Williams Energy”), formerly WilliamsEnergy Marketing & Trading Company, as fuel supplier under the Power PurchaseAgreement entered into with Williams Energy for the sale of all electric energyand capacity produced by the facility, as well as ancillary and fuel conversionservices (the “Power Purchase Agreement”), and The Williams Companies, Inc.,as the guarantor of Williams Energy’s performance under the Power PurchaseAgreement,

 

•                  delaysin, or disputes over, the final completion of the Company’s facility,

 

•                  continuedperformance by Williams Energy (as guaranteed by The Williams Companies, Inc.)under the Power Purchase Agreement,

 

•                  theability of The Williams Companies, Inc. or its affiliates to avoid adefault under the Power Purchase Agreement by continuing to maintain or provideadequate security to supplement their guaranty of Williams Energy’s performanceunder the Power Purchase Agreement,

 

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

 

•                  anadequate merchant market after the expiration, or in the event of atermination, of the Power Purchase Agreement,

 

•                  capitalshortfalls and access to additional capital on reasonable terms, or in theevent that the Power Purchase Agreement is terminated,

 

•                  thepossibility that Williams Energy will not request that the Company runs, or “dispatches”the facility as provided under the Power Purchase Agreement,

 

•                  inadequateinsurance coverage,

 

•                  unexpectedexpenses or lower than expected revenues,

 

•                  environmentaland regulatory compliance,

 

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

 

•                  additionalfactors that are unknown to the Company or beyond the Company’s control.

 

The Company has no obligation to publicly update orrevise any forward-looking statement, whether as a result of new information, futureevents or otherwise.

 

2

----

 

**PART I**

 

**ITEM 1.          BUSINESS**

 

**General**

 

The Company is a Delaware limited liability companyformed on September 13, 1998, to develop, construct, own, lease, operateand maintain a gas-fired electric generating power plant in the Borough ofSayreville, Middlesex County, New Jersey and manage the production of electricgenerating capacity, ancillary services and energy at the Company’s facility. TheCompany reached provisional acceptance on August 11, 2002, risk transferon August 13, 2002, and took the position that the Company wascommercially 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 agreedupon.  See Item 3 “Legal Proceedings”.  Since the Company’s commercial operationdate, its sole business is the ownership, leasing and operation of the project.

 

Our facility was initially designed, engineered,procured and constructed for the Company by Washington Group International, Inc.(“WGI”) (as the successor contractor) on a fixed-price, turnkey basis. On May 14,2001, WGI filed a plan of reorganization along with voluntary petitions torestructure under Chapter 11 of the U.S. Bankruptcy Code in the U.S. BankruptcyCourt for the District of Nevada in Reno (the “Bankruptcy Court”). As a resultof WGI’s bankruptcy filing, on June 20, 2001 the Company made a demand on theRaytheon Company (“Raytheon”) to perform its obligations under a guaranteewhich Raytheon had given the Company of WGI’s performance obligations under theconstruction agreement and Raytheon became responsible for the construction ofthe Company’s facility.  As discussedabove, provisional acceptance has been granted and the facility has commencedcommercial operations, however, Raytheon must perform certain agreed uponcompletion items in order to obtain final acceptance. Raytheon gave notice ofFinal Acceptance on July 22, 2003 based on its July 8, 2003performance test.  On July 31, 2003,the Company received a letter from the project’s independent engineer statingthat it could not support Raytheon’s claim of final acceptance and it did notconsider the July 8, 2003 performance test valid.  In making this assessment, the independentengineer cited, among other reasons, (i) modifications made to certainequipment in performance of the July 8 performance test which wouldadversely impact the operations of the plant and other pieces of equipment and (ii) Raytheon’sfailure to demonstrate compliance with guaranteed emissions limits.  On August 1, 2003, the Company rejectedRaytheon’s claim of final acceptance. This rejection was based upon Raytheon’s failure to meet the conditionsfor final acceptance provided for in the Engineering, Procurement andConstruction Services Agreement (“EPC contract”). On August 7, 2003, theCompany received a response from Raytheon in which Raytheon claims that theCompany’s rejection of the final acceptance is invalid and improper.  The Company and Raytheon have filedcomplaints against each other.  See “Summaryof Principal Agreements – Construction Agreement”.

 

Siemens Westinghouse Power Corporation providescombustion turbine maintenance services and spare parts with respect to theturbines for the Company’s facility under a maintenance services agreement foran initial term of 16 years from the date of execution of the agreement orafter the twelfth scheduled outage for a turbine, whichever occurs first,unless the Company exercises its right to cancel the agreement after the first majoroutage of the turbines. The estimated timeframe for the completion of the firstmajor outages is 2011.

 

The Company has entered into a Power PurchaseAgreement for a term of 20 years under which Williams Energy has committed topurchase all of the net capacity, fuel conversion and ancillary services of itsfacility. Net capacity is the maximum amount of electricity generated by theCompany’s facility net of electricity used at its facility. Fuel conversionservices consist of the combustion of natural gas in order to generate electricenergy. Ancillary services consist of services necessary to support thetransmission of capacity and energy. Williams Energy is obligated to supply theCompany with all natural gas necessary to provide net capacity, fuel conversionservices and ancillary services under the Power Purchase Agreement. During theterm of the Power Purchase Agreement, substantially all of the Company’s operatingrevenues will be derived from payments made under the Power Purchase Agreement.Under certain limited circumstances described herein, Williams Energy has theright to terminate the Power Purchase Agreement.

 

3

----

 

**OrganizationalStructure**

 

All of the equity interests in the Company are ownedby AES Red Oak, Inc., a wholly owned subsidiary of The AES Corporation (“AES”).AES is a leading global power company, with 2004 sales of $9.5 billion. AES’sgenerating assets include interests in 120 facilities in 27 countries totalingapproximately 44 gigawatts of capacity. Its 30,000 people are committed tooperational excellence and meeting the world’s growing power needsApproximately****23% ofAES’s revenues come from businesses in North America, 17% from the Caribbean,41% from South America, 11% from Europe and Africa, and 8% from Asia.****

 

AES Red Oak, Inc. currently has no operationsoutside of its activities in connection with its project and does notanticipate undertaking any unrelated operations. AES Red Oak, Inc. alsoowns all of the equity interests in AES Sayreville, L.L.C., (“AES Sayreville”) whichprovides development, construction management, and operations and maintenanceservices to us. AES Sayreville has no operations outside of its activities in connectionwith its operations. AES Red Oak, Inc. has no assets other than itsmembership interests in the Company and AES Sayreville. The AES Corporation suppliesAES Sayreville with personnel and services necessary to carry out itsobligations to us.

 

The Company also owns all of the equity interests inAES Red Oak Urban Renewal Corporation (“AES URC”), which was organized as anurban renewal corporation under New Jersey law so that portions of its projectcan be designated as redevelopment areas or projects in order to providecertain real estate tax and development benefits for its project. AES URC hasno operations outside of its activities in connection with the Company’s operations.

 

The AES Corporation is a public company and is subjectto the informational requirements of the Securities Exchange Act of 1934 and,in accordance therewith, files reports, proxy statements and other information,including financial reports, with the SEC, which are not incorporated into anddo not form a part of this Form 10-K.

 

The following organizational chart illustrates therelationship among us, AES Red Oak, Inc., AES Sayreville, The AES Corporation,and AES URC:

 

 

The Company’s principal executive offices are locatedat 832 Red Oak Lane, Sayreville, NJ 08872. The Company’s telephone number is (732)238-1462.

 

**EnergyRevenues**

 

As mentioned above, the Company generates energyrevenues under the Power Purchase Agreement with Williams Energy.  During the 20-year term of the agreement, theCompany expects to sell electric energy and capacity produced by the facility,as well as ancillary and fuel conversion services.  Under the Power Purchase Agreement, theCompany also generates revenues from meeting (1) base electrical outputguarantees and (2) heat rate rebates through efficient electrical output.

 

4

----

 

Upon its expiration, or in the event that the PowerPurchase Agreement is terminated prior to its 20-year term or Williams Energyotherwise fails to perform, the Company would seek to generate energy revenuesfrom the sale of electric energy and capacity into the merchant market or undernew short or long-term power purchase or similar agreements.  Due to current pool prices, however, theCompany would expect that even if it were successful in finding alternaterevenue sources, any such alternate revenues would be substantially below theamounts that would have been otherwise payable pursuant to the Power PurchaseAgreement. There can be no assurances as to the Company’s ability to generatesufficient cash flow to cover operating expenses or its debt serviceobligations in the absence of a long-term Power Purchase Agreement withWilliams Energy.

 

After the plant reached provisional acceptance, theCompany elected to confirm reliability for up to 19 days before binding withWilliams Energy.  Beginning August 13,2002 (the date of risk transfer) through August 31, 2002, the Company operatedthe facility as a merchant plant with electric revenues sold to WilliamsEnergy, in its capacity as the Company’s Pennsylvania-New Jersey-Maryland (“PJM”)account representative, at spot market prices and bought gas from WilliamsEnergy at spot market prices. Additionally, during September 2002, theCompany made net electric energy available to Williams Energy during timesother than receiving a Williams Energy dispatch notice.  This net electric energy is referred to as “othersales of energy” in the Power Purchase Agreement and is sold at the localmarginal price commonly referred to as spot market energy.  Gas required for this energy generation waspurchased from Williams Energy at spot market prices.  The Company recognized merchant revenues ofapproximately $.3 million, $.2 million and $11.1 million for the years ended December 31,2004, 2003 and 2002, respectively. Related fuel expenses were approximately $.6 million, $.9 million and$6.9 million for the years ended December 31, 2004, 2003 and 2002, respectively.

 

**Competition**

 

Under the Power Purchase Agreement, Williams Energy isrequired to purchase all of the Company’s facility’s capacity and energy for aninitial term of 20 years. Therefore, during the term of the Power PurchaseAgreement, competition from other capacity and energy providers will become anissue only if the Power Purchase Agreement is terminated or not performed inaccordance with its terms. As current gas market prices have been high,Williams Energy has only dispatched the Company 21% of the time in 2004 and 14%in 2003. Following the term of the Power Purchase Agreement, the Company anticipatesselling its facility’s net capacity, ancillary services and energy under a new PowerPurchase Agreement or into the PJM power pool market. At that time, the Companywill face competition from other generating facilities selling into the PJMpower pool market including, possibly, other facilities owned by The AESCorporation or its affiliates.

 

**Employees**

 

The Company is a Delaware limited liability companyand has no employees other than its 6 officers. The Company’s officers receiveno compensation for the services they provide to the Company or for anytransactions between the Company and its affiliates. Under the operationsagreement, AES Sayreville has managed the development and construction of and nowoperates and maintains the Company’s facility. The direct labor personnel andthe plant operations management****are employeesof The AES Corporation provided to AES Sayreville under a services agreement.  As of December 31, 2004, The AESCorporation provided 27 employees to work at its facility.

 

**Insurance**

 

As owner of the Company’s site and lessee and owner ofthe facility, the Company maintains a comprehensive insurance program asrequired under its various project contracts and the indenture governing itssenior secured bonds and underwritten by recognized insurance companies. Amongother insurance policies, the Company also maintains commercial generalliability insurance, permanent property insurance for full replacement value ofthe facility and business interruption insurance covering at least 18 months ofgross revenues less variable operating expenses. The Company has obtained titleinsurance in an amount equal to the principal amount of the bonds.

 

The Company, or AES Sayreville as operator, maintains,among other insurance policies, workers’ compensation insurance (or evidence ofself-insurance), if required, and comprehensive automobile bodily injury andproperty damage liability insurance.

 

5

----

 

**Permits AndRegulatory Approvals**

 

AES Sayreville, as operator of the Company’s facility,and the Company, as owner of its facility, must comply with numerous federal, stateand local regulatory requirements including environmental requirements in theoperation of its facility.

 

On November 4, 1999, the Company received acertification from the Federal Energy Regulatory Commission (“FERC”) that theCompany is an exempt wholesale generator. Certification as an exempt wholesalegenerator exempts the Company from regulation under the Public Utility HoldingCompany Act of 1935. The Company will maintain this status so long as theCompany continues to make only wholesale sales of electricity, which theCompany intends to do. Prior to commercial operation, the Company filed the PowerPurchase Agreement with FERC and requested approval for the rates containedtherein. On June 22, 2001, the Company received FERC approval at thoserates. The Company may also need to obtain FERC approval for sales ofelectricity at market-based rates after the Power Purchase Agreement is nolonger in effect.

 

On January 28, 2000, the Company received itsPrevention of Significant Deterioration Permit, or “air permit,” from the NewJersey Department of Environmental Protection. The appeal period in respect ofthe air permit expired on February 28, 2000, and no appeal was filed. Theair permit requires that the Company’s facility be constructed in a manner thatwill allow it to meet specified limitations on emissions of air pollutants.Under the construction agreement, originally WGI and now Raytheon, as projectguarantor, are required to construct its facility to meet these requirements.  The required emission standards were met uponprovisional acceptance and commercial operation and no additional modificationis currently needed.

 

The Company is subject to a number of statutory andregulatory standards and required approvals relating to energy, labor and environmentallaws.  The necessary environmentalpermits for the commencement of construction and operation of its facility havebeen obtained.

 

**Summary ofPrincipal Project Contracts**

 

While the Company believes that the followingsummaries contain the material terms of the principal project contracts, suchsummaries may not include all of the provisions of each agreement that eachindividual investor may feel is important. These summaries do not restate eachagreement discussed herein and exclude certain definitions and complex legalterminology that may be contained in each relevant agreement. You shouldcarefully read each agreement discussed herein, each of which is filed as anexhibit to this Form 10- K.

 

**PowerPurchase Agreement**

 

The Company entered into a Fuel Conversion Services, Capacityand Ancillary Services Purchase Agreement, dated as of September 17, 1999,with Williams Energy, for the sale to Williams Energy of all of the electricenergy and unforced capacity produced by its facility as well as ancillaryservices and fuel conversion services.

 

**Term**

 

The Power Purchase Agreement extends for 20 years fromthe first contract anniversary date, which is the last day of the month inwhich commercial operation occurred (September 30, 2002).

 

Upon notice from Williams Energy no later than 90 daysprior to the end of the initial term of the Power Purchase Agreement, the termof the Power Purchase Agreement may be extended by Williams Energy for up to atotal of 24 months for each hour of the initial term during which the Companyis unable to deliver energy or ancillary services because of an event of forcemajeure (other than an inability of the Company to obtain natural gas tooperate the facility) that occurs after the commercial operation date.

 

Under the Power Purchase Agreement, the commercialoperation date was required to occur by December 31, 2001, however, theCompany had the right to extend the commercial operation date until June 30,2002 by invoking its right to a free extension option which was available underthe Power Purchase Agreement if certain conditions were met.  The Company exercised its right to extend thecommercial operation date from December 31, 2001 to June 30, 2002, asgranted under the free extension option. In addition, the Company had the rightunder the Power Purchase Agreement to again extend the commercial operationdate from June 30, 2002 to June 30, 2003 (the 

 

6

----

 

“Second Paid Extension Option”), upon writtennotification to Williams Energy no later than May 21, 2002 (whichrepresented an agreed upon extension from the original April 30, 2002notification deadline), by paying Williams Energy (i) an amount equal tothe lesser of any actual damages Williams Energy suffered or incurred after June 30,2002, as a result of Williams Energy’s reliance upon delivery by such date, tothe extent said 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, theCompany exercised the Second Paid Extension Option. ** **As a result of these extensions, theCompany paid liquidated damages to Williams Energy at the rate of $11,000 perday for the period beginning on July 1, 2002 and ending on August 31,2002, which amounted to $682,000.  As aresult of the dispute over the commercial operation date, the Company also paidliquidated damages to Williams Energy at the rate of $22,000 per day for theperiod 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, the Company continued to collectliquidated damages through August 10, 2002 from Raytheon under theconstruction agreement in the amount of $108,000 per day.  As of August 2002, the Company hadreceived $14 million in liquidated damages from Raytheon under the constructionagreement.  The Company did not receiveany liquidated damages under the construction agreement in 2003 or 2004.

 

Williams Energy is currently the Company’s solecustomer for purchases of capacity, ancillary services, and energy and its solesource for fuel.  Williams Energy’spayments under the Power Purchase Agreement are expected to provide all of itsoperating revenues during the term of the Power Purchase Agreement.  It is unlikely that the Company would be ableto find another purchaser or fuel source on similar terms for the facility ifWilliams 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 adverse impact on the Company’s operations.

 

**Purchase andSale of Capacity**

 

During the term of the Power Purchase Agreement, theCompany will perform for Williams Energy on an exclusive basis, and WilliamsEnergy will purchase and pay for fuel conversion services. Fuel conversionservices include the operation of the Company’s facility by the Company tocombust natural gas delivered by Williams Energy in order to generate anddeliver energy or to provide ancillary services. The Company will sell and makeavailable to Williams Energy on an exclusive basis, and Williams Energy willpurchase and pay for, its facility’s net capacity and ability to generateelectric energy. The Company may not sell, without the consent of WilliamsEnergy in its sole discretion, capacity generated on the site but not from itsfacility.

 

**FuelConversion and Other Services**

 

Williams Energy must deliver or cause to be deliveredto the Company at the natural gas delivery point on an exclusive basis all quantitiesof natural gas required by the Company to:

 

•                  generatenet electric energy and/or ancillary services;

 

•                  performstart-ups;

 

•                  performshutdowns; and

 

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

 

Williams Energy at all times retains title to thenatural gas delivered to the Company except that when the Company’s facility isoperated during any period other than a start-up, shutdown or dispatch periodtitle is transferred to the Company at the natural gas delivery point.

 

Williams Energy is solely responsible for all costs andexpenses related to the supply and transportation of natural gas to the naturalgas delivery point. The Company is responsible for all costs and expensesrelated to the transportation, gathering or taxation of natural gas or its useor possession at and after the natural gas delivery point.

 

Upon the expiration of the Power Purchase Agreement orany termination of the Power Purchase Agreement as the result of WilliamsEnergy’s default thereunder, the Company will have the right to purchase thegas interconnection facilities from Williams Energy, or if Williams Energy doesnot own the gas interconnection

 

7

----

 

facilities, Williams Energy will assign to the Companyall of its rights to transportation services using the gas interconnectionfacilities.

 

**Pricing andPayments**

 

For each month of the term after the commercialoperation date, Williams Energy must pay the Company for its facility’s netcapacity, successful start-ups and associated shutdowns, ancillary services andfuel conversion services at the applicable rates set forth in the PowerPurchase Agreement. Each monthly payment by Williams Energy consists of a totalfixed payment, a variable operations and maintenance payment and an energyexercise fee. The total fixed payment, which is payable regardless of facilitydispatch by Williams Energy but is subject to adjustment based on facilityavailability, is calculated by multiplying an unforced capacity rate for eachcontract year by the temperature adjusted unforced capacity in the billingmonth and adding to that the product of the fuel conversion option demandcharge and the average facility capacity for that month. The total fixedpayment is anticipated to be sufficient to cover the Company’s debt service andfixed operating and maintenance costs and to provide the Company a return onequity. The variable operations and maintenance payment is intended to cover itsvariable operating and maintenance costs and escalates annually based on anescalation index set forth in the Power Purchase Agreement. The energy exercisefee is intended to compensate the Company for each successful start-up. TheCompany may receive heat rate bonuses or be required to pay heat ratepenalties.

 

Prior to the commercial operation date, and duringsome facility tests thereafter, the Company purchased natural gas from WilliamsEnergy. Williams Energy sold the Company the natural gas at prices specified inthe Power Purchase Agreement, and the Company sold to Williams Energy at theelectric delivery point any net electric energy produced during the periods atthe hourly integrated market clearing marginal price for electric energy at thelocation where it was delivered or received, calculated pursuant to the termsof the operating agreement of PJM Interconnection, LLC, which is theindependent system operator that operates the transmission system to which itsfacility interconnects. The Company is 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, JCP&L, which is the host utility, or FERC. The Company has notincurred any such fine or penalty to date.

 

Williams Energy is entitled to an annual fuel conversionvolume rebate if its dispatch of the Company’s facility exceeds specified levelsand monthly non-dispatch payments if, under some circumstances, its facilitydoes not deliver, in whole or in part, the requested net electric energyrequested by Williams Energy. All fuel conversion volume rebate payments andnon-dispatch payments must be made to Williams Energy after debt service andcertain other payments but prior to any distribution to holders of equity interestsin the Company. Fuel conversion volume rebate payments and any non-dispatchpayments owed to Williams Energy and not paid when due will be paid, togetherwith interest thereon, when funds become available to the Company at thepriority level described above. A separate reserve account must be maintainedby the Company and the Company’s lenders and the Company must deposit to thataccount on a monthly basis, from its 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.

 

**RequiredAuthorizations**

 

During the term of the Power Purchase Agreement, theCompany must, at its own cost and expense, obtain as and when required allapprovals, permits, licenses and other authorizations from governmentalauthorities as may be required for the Company to operate and maintain itsfacility, the interconnection facilities and protective gas apparatus and toperform its obligations under the Power Purchase Agreement.  The Company plans to obtain all additionalgovernmental approvals, permits, licenses and authorizations as may be requiredwith respect to its facility as soon as practicable.

 

**Interconnectionand Metering Equipment**

 

At the Company’s sole cost and expense, the Company designed,constructed and installed and currently maintains interconnection facilitiesand protective gas apparatus needed to generate and deliver net electric energyand/or ancillary services to the electric delivery point in order to fulfill itsobligations under the Power Purchase Agreement, including all interconnectionfacilities and protective gas apparatus that are located at the switchyardsand/or substations at the its facility. The Generation Facility andTransmission Interconnection Agreement is with 

 

8

----

 

Jersey Central Power & Light Company (“JCP&L”)d/b/a GPU Energy (“GPU”), and is dated April 27, 1999. GPU has since beenmerged with, and into, FirstEnergy, and JCP&L is now a subsidiary ofFirstEnergy.  The Company’s facility,interconnection facilities and protective gas apparatus have been designed,constructed and completed in a good and workmanlike manner and in accordancewith accepted electrical practices (with respect to its facility andinterconnection facilities) or in accordance with standard gas industrypractices (with respect to protective gas apparatus), so that the expecteduseful life of the Company’s facility, the interconnection facilities andprotective gas apparatus will be not less than the term of the Power PurchaseAgreement.

 

Public Service Electric and Gas (“PSE&G”), undercontract with Williams Energy, has installed the natural gas interconnectionfacilities and natural gas metering equipment to the Company’s satisfaction.  PSE&G has also installed gas meteringequipment, although the Company is currently involved in a dispute with WilliamsEnergy over the location of such equipment. All electric metering equipment and gas metering equipment, whetherowned by the Company or by a third party, must be operated, maintained andtested in accordance with accepted electrical practices, in the case of theelectric metering equipment, and in accordance with applicable industrystandards, in the case of the gas metering equipment. Except under limitedcircumstances, the Company may not enter into any modification or amendment ofthe interconnection agreement with JCP&L without the prior written consentof Williams Energy.

 

As of December 31, 2002, all electrical interconnectionand metering equipment had been installed and accepted by JCP&L — See “InterconnectionAgreement - JCP&L’sObligations”.

 

**Operation andDispatch**

 

Our facility and the interconnection facilities must beoperated in accordance with accepted electrical practices and applicable requirementsand guidelines of JCP&L pursuant to the interconnection agreement. Theprotective gas apparatus must be operated in accordance with standard gasindustry practices. If there is a conflict between the terms and conditions ofthe Power Purchase Agreement and JCP&L requirements, the JCP&L requirementscontrol. The Company must operate the facility in parallel with JCP&L’selectrical system in accordance with the interconnection agreement. Whendispatched by Williams Energy, the Company must operate its facility and eachunit thereof with automatic regulation equipment in service.

 

The Power Purchase Agreement acknowledges that JCP&Lhas the right to require the Company to disconnect the Company’s facility fromits electrical system, or otherwise curtail, interrupt or reduce deliveries ofnet electric energy, in accordance with the terms of the interconnectionagreement. If the Company’s facility has been disconnected for these reasons,Williams Energy will continue to be obligated to make total fixed payments forat least 24 hours after the occurrence of disconnection of its facility by JCP&L.

 

The Company must use commercially reasonable effortsto correct promptly any condition at its facility which necessitates the disconnectionof its facility from JCP&L’s electrical system or the reduction,curtailment or interruption of electrical output of its facility.

 

Williams Energy has the exclusive right to use the netelectric energy and ancillary services and to schedule the operation ofthe Company’s facility or a unit thereof in accordance with the provisions ofthe Power Purchase Agreement; however, the scheduling must be consistent withthe design limitations of its facility, applicable law, regulations andpermits, and the agreements and the manuals of PJM.

 

Williams Energy and the Company must perform each of itsrespective obligations in a manner that avoids the creation of cashoutobligations or imbalance penalties imposed by the natural gas transporter.Williams Energy must try to minimize any imbalance charges under a transporter’stariff and thereafter the Company will be responsible for imbalance chargeslevied by the natural gas transporter to the extent that the charges resultfrom: (i) an imbalance caused by the Company greater than the allocabletolerance in the transporter’s tariff or (ii) the Company’s failure topromptly notify Williams Energy of a change in the operation of the Company’s facilitythat would cause any imbalance.

 

**Force Majeure**

 

A party will be excused from performing itsobligations under the Power Purchase Agreement and will not be liable for damagesor otherwise to the other party if and to the extent the party declares that itis unable to perform or 

 

9

----

 

is prevented from performing an obligation under the PowerPurchase Agreement by a force majeure condition, except for any obligationsand/or liabilities under the Power Purchase Agreement to pay money, which willnot be excused, and except to the extent an obligation accrues prior to theoccurrence or existence of a force majeure condition as long as:

 

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

 

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

 

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

 

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

 

Irrespective of whether the force majeure condition isdeclared by Williams Energy or us, the time period of a force majeure will beexcluded from the calculation of all payments under the Power PurchaseAgreement and Williams Energy will be under no obligation to pay the Company anyof the payments described in the Power Purchase Agreement. If Williams Energydeclares a force majeure, however, it will continue to pay the Company only theapplicable monthly total fixed payment as described in the Power PurchaseAgreement until the earlier of (i) the termination of the force majeurecondition or (ii) the termination of the Power Purchase Agreement.Furthermore, if a force majeure is declared by the Company due to an action orinaction of JCP&L that prevents the Company from delivering net electricenergy to the electric delivery point, Williams Energy will continue to pay theapplicable portion of the total fixed payment for the first 24 hours of theperiod.

 

Notwithstanding anything to the contrary contained inthe Power Purchase Agreement, except as may expressly be provided in the PowerPurchase Agreement, the term force majeure will not include or excuse a party’sperformance in the following circumstances:

 

•                  Anyreduction, curtailment or interruption of generation or operation of theCompany’s facility, or of the ability of Williams Energy to accept or transmitnet electric energy, whether in whole or in part, which reduction, curtailmentor interruption is caused by or arises from the acts or omissions of any thirdparty providing services or supplies to the party claiming force majeure,including any vendor or supplier to either party of materials, equipment,supplies or services, or any inability of JCP&L to deliver net electricenergy to Williams Energy, unless, and then only to the extent that, any act oromission would itself be excused under the Power Purchase Agreement as a force majeure;

 

•                  Anyoutage, whether or not due to the Company’s fault or negligence, attributableto a defect or inadequacy in the manufacture, design or installation of itsfacility that prevents, curtails, interrupts or reduces the ability of itsfacility to generate net electric energy or the Company’s ability to perform itsobligations under the Power Purchase Agreement;

 

•                  Tothe extent that the party claiming force majeure failed to prevent or remedythe force majeure condition by taking all commercially reasonable acts (shortof litigation, if the remedy requires litigation) and, except as otherwise providedin the Power Purchase Agreement, failed to resume performance under the PowerPurchase Agreement with reasonable dispatch after the termination of the forcemajeure condition;

 

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

 

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

 

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

 

10

----

 

Neither party will be required to settle any strike,walkout, lockout or other labor dispute on terms which, in the sole judgment ofthe party involved in the dispute, are contrary to its interest.

 

Williams Energy will have the right to terminate the PowerPurchase Agreement if the Company has declared a force majeure and the effectof said force majeure has not been fully corrected or alleviated within 18months after the date said force majeure was declared. Williams Energy,however, will not have the right to terminate the Power Purchase Agreement if (i) theforce majeure was caused by Williams Energy or (ii) the force majeureevent does not prevent or materially limit Williams Energy’s ability to sell theCompany’s facility net capacity into or through the PJM power pool market or toa third party.

 

**Events ofDefault; Termination; Remedies**

 

The following will constitute events of default underthe Power Purchase Agreement:

 

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

 

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

 

•                  theCompany sells or supplies net electric energy, ancillary services or capacityfrom the Company’s facility, or agrees to do the same, to any person or entityother than Williams Energy, without the prior approval of Williams Energy;

 

•                  ourfailure for 30 consecutive days to perform regular and required maintenance,testing or inspection of the interconnection facilities, the Company’s facilityand/or other electric equipment and facilities where the failure is material;

 

•                  ourfailure for 30 consecutive days to correct or resolve a material violation ofany code, regulation and/or statute applicable to the construction,installation, operation or maintenance of the Company’s facility, theinterconnection facilities, protective gas apparatus or any other electricequipment and facilities required to be constructed and operated under the PowerPurchase Agreement when the violation impairs the Company’s continued abilityto perform its obligations under the Power Purchase Agreement;

 

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

 

•                  voluntarybankruptcy or insolvency by either party;

 

•                  anymodifications, alterations or other changes to the Company’s facility by or on itsbehalf which prevent the Company from fulfilling, or materially diminish itsability to fulfill, its obligations, duties, rights and responsibilities underthe Power Purchase Agreement and which after reasonable notice and opportunityto cure, are not corrected;

 

•                  therewill be outstanding for more than 60 days any unsatisfied final, non-appealablejudgment against the Company in an amount exceeding $500,000, unless theexistence of the unsatisfied judgment will not materially affect its ability toperform its obligations under the Power Purchase Agreement; and

 

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

 

Upon the occurrence of any event of default, otherthan a bankruptcy-related event of default, for which no notice will be requiredor opportunity to cure permitted, the party not in default, to the extent theparty has actual knowledge of the occurrence of the event of default, will giveprompt written notice of the default to the defaulting 

 

11

----

 

party. The notice will set forth, in reasonabledetail, the nature of the default and, where known and applicable, the stepsnecessary to cure the default. The defaulting party will have 30 days, twobusiness days in the case of a default related to the breach of arepresentation, warranty or covenant, following receipt of the notice either tocure the default or commence in good faith all the steps as are necessary andappropriate to cure the default if the default cannot be completely curedwithin the 30-day period.

 

If the defaulting party fails to cure the default ortake the steps as provided under the preceding paragraph, and immediately uponthe occurrence of insolvency or the filing of a voluntary petition forbankruptcy, the Power Purchase Agreement may be terminated by thenon-defaulting party, without any liability or responsibility whatsoever, bywritten notice to the party in default thereof. The Power Purchase Agreementwill then terminate and the non-defaulting party may exercise all rights andremedies as are available to it to recover damages caused by the default, seekspecific performance or exercise other rights and remedies that it may have inequity or at law.

 

**Security**

 

The Power Purchase Agreement required the Company toprovide $30 million of financial security for the Company’s performance andpayment obligations prior to commercial operation and $10 million of financialsecurity for its performance and payment obligations subsequent to thecommercial operation date.  The Company may,at any time at its option, elect to either provide the financial security inthe form of a guaranty of The AES Corporation or in the form of a single letterof credit, satisfactory to Williams Energy in form and substance, upon whichWilliams Energy may draw as specified in the Power Purchase Agreement.  If the financial security contains anexpiration date, either express or implied, the Company will renew thefinancial security not later than 10 days prior to the expiration date and willprovide written notice of the renewal to Williams Energy at the same time. If theCompany fails to renew the financial security as set forth above, WilliamsEnergy is entitled to demand and receive payment thereunder on or after threedays after written notice of the failure is provided to us, and the amountdrawn will be deposited in an interest-bearing escrow account.

 

The letter of credit referred to above must be issuedby a financial institution that at all times during the term of the letter of creditmeets and maintains the following criteria: (i) a U.S. or foreign bankrated “C” or better by Thompson Bankwatch; or (ii) a U.S. or foreign bank,surety company or financial institution whose senior debt has the rating listedbelow by two of the three rating agencies: Standard & Poor’s (“S&P”):“A-” or better; Moody’s: “A3” or better; Duff & Phelps: “A-” or better.  If the bank, surety company or financialinstitution fails to maintain the ratings criteria, then upon 30 days’ writtennotice from Williams Energy, the Company is required to obtain equivalentsecurity from another bank, surety company or financial institution meeting theabove stated criteria.

 

In order to satisfy this obligation, prior to the commercialoperation date the Company provided a $30 million letter of credit which wasreduced to $10 million on the commercial operation date.  This letter of credit will remain in effectduring the term of the Power Purchase Agreement.

 

The payment obligations of The Williams Companies, Inc.under the guaranty were originally capped at an amount equal to approximately$510 million.  Beginning on January 1of the first full year after the commercial operation date, this guaranty capis reduced semiannually by a fixed amount which is based on the amortization ofthe company’s senior secured bonds during the applicable semiannualperiod.  As of December 31, 2004 theguaranty was capped at $501.4 million.  Pursuantto Section 18.3 of the Power Purchase Agreement, in the event that S&Por Moody’s rates the long-term senior unsecured debt of The Williams Companies, Inc.lower than investment grade, The Williams Companies, Inc. is required tosupplement The Williams Companies, Inc. guaranty with additionalalternative security that is acceptable to the Company within 90 days after theloss of such investment grade rating. According to published sources, The Williams Companies, Inc.’s longterm senior unsecured debt has been rated below investment grade since 2002 byboth S&P and Moody’s.

 

Due to the downgrade of The Williams Companies, Inc.to below investment grade, the Company and Williams Energy entered into aletter agreement dated November 7, 2002 (the “Letter Agreement”), underwhich Williams Energy agreed to provide the Company (a) a prepayment of$10 million within five business days after execution of the Letter Agreement(the “Prepayment”); (b) alternative credit support equal to $35 million onor before January 6, 2003 in any of the following forms: (i) cash, (ii) letter(s)of credit with the Company as the sole beneficiary substantially in the form ofthe Power Purchase Agreement Letter of Credit, unless mutually agreed tootherwise, or (iii) a direct obligation of the United States Governmentdelivered to a custodial securities account as designated by the Company with amaturity of not more than three years; and (c) replenish any portion ofthe alternative credit 

 

12

----

 

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

 

Under the terms of the Letter Agreement, the Company isobligated to return the Prepayment to Williams Energy upon the earlier of (i) TheWilliams Companies, Inc. regaining its investment grade rating or WilliamsEnergy providing a substitute guaranty of investment grade rating; (ii) thebeginning of Contract Year 20; or (iii) the posting of alternative creditsupport by Williams Energy as set forth below. In the case of items (i) and (iii) above, except to theextent, in the case of item (iii), Williams Energy elects to have all or aportion of the Prepayment make up a combination of the alternative creditsupport required to be posted pursuant to Section 18.3(b) of thePower Purchase Agreement, Williams Energy shall have the right to recoup thePrepayment by set-off of any and all amounts owing to the Company under thePower Purchase Agreement beginning no earlier than the June in thecalendar year after the occurrence of item (i) or (iii) andcontinuing thereafter until the Prepayment has been fully recovered.  In the case of item (ii) above, WilliamsEnergy shall have the right to immediately set-off all amounts owing to theCompany under the Power Purchase Agreement after the occurrence of item (ii) andcontinuing thereafter until the Prepayment has been fully recovered.  Except to the extent Williams Energy electsto include the Prepayment as part of the alternative credit support, the amountof alternative credit support posted by Williams Energy pursuant to the LetterAgreement shall be initially reduced by the amount of the Prepayment, andWilliams Energy shall thereafter increase the alternative credit supportproportionately as Williams Energy recoups the Prepayment set-off on thepayment due date of amounts owing to the Company.

 

If the Company does not return the Prepayment toWilliams Energy as set forth in the preceding paragraph, then the Company shallbe considered in default under the Letter Agreement and Williams Energy shallbe entitled to enforce any and or all of its contractual rights and remedies asset forth in the Power Purchase Agreement, including, but not limited to,drawing on the letter of credit previously posted by the Company in favor ofWilliams Energy.

 

Williams Energy made the Prepayment on November 14,2002 and provided an additional $25 million of cash to the Company on January 6,2003 as the alternative credit support. As allowed by the Letter Agreement, Williams elected to have the $10million Prepayment included as part of the alternative credit support. On September 24,2004, Williams Energy posted a letter of credit and the Company returned the$25 million of alternative credit support. In the event that The WilliamsCompanies, Inc. regains and maintains its investment grade status,provides a substitute guaranty of investment grade rating, or posts a letter ofcredit, the Company will be required to return the remaining $10 millionalternative credit support to Williams Energy in accordance with the terms ofthe Letter Agreement as described above. Williams Energy has notified the Company that it intends to post aletter of credit for the remaining $10 million in June 2005. WilliamsEnergy will recoup the Prepayment by set-off, beginning in July 2005, ofamounts owing to the Company under the Power Purchase Agreement. As of March 30,2005, the Company had cash balances of approximately $40.0 million.  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 maynot assign, transfer, pledge or otherwise encumber or dispose of any rights,duties, interests or obligations thereunder without the prior written consentof the other party except that (i) Williams Energy may, upon reasonableadvance notice to us, assign its rights, duties and obligations under the PowerPurchase Agreement to any of its affiliates or any other entity, provided thatsuch affiliate or other entity’s long term unsecured debt at such time is ratedinvestment grade by S&P and Moody’s or such affiliate or other entity’sobligations under the Power Purchase Agreement are guaranteed by an affiliatewhose long-term unsecured debt at such time is rated investment grade by S&Pand 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) the Company may, upon reasonable advance notice to WilliamsEnergy, assign the Power Purchase Agreement and any of its rights, interests,duties or obligations thereunder as collateral security to any Lender so longas the assignee 

 

13

----

 

agrees to be bound by all of the terms and conditionsof the Power Purchase Agreement to the same extent as the Company in the eventthat such lender exercises its rights under such assignment and (iii) theCompany may assign any of its rights, duties and obligations under the PowerPurchase Agreement to any affiliate provided such affiliate assumes in writingall of the Company’s obligations under the Power Purchase Agreement and theguaranty of its performance as required by the Power Purchase Agreement remainsin effect.

 

**ConstructionAgreement**

 

The Company entered into an Agreement for Engineering,Procurement and Construction Services, dated as of October 15, 1999, withWGI (as the successor contractor) under which WGI was required to performservices in connection with the design, engineering, procurement, sitepreparation and clearing, civil works, construction, start-up, training andtesting and to provide all materials and equipment (excluding operational spareparts), machinery, tools, construction fuels, chemicals and utilities, labor,transportation, administration and other services and items (collectively andseparately, the “services”) for the Company’s facility. Under a Guaranty in itsfavor, effective as of October 15, 1999, all of WGI’s obligations underthe construction agreement are irrevocably and unconditionally guaranteed byRaytheon.

 

WGI filed for bankruptcy on May 14, 2001, howeverconstruction of the facility continued through a series of cooperativeagreements executed by us, WGI and Raytheon. On November 9, 2001, theBankruptcy Court approved WGI’s rejection of the construction agreement and theexecution of the PCA by WGI and Raytheon. Additionally, on November 21,2001, the Company and Raytheon entered into the Owner/Guarantor SupplementalAgreement pursuant to which (i) Raytheon and the Company acknowledged that,notwithstanding the rejection of the construction agreement by WGI, Raytheon wouldcause the project to be completed in accordance with the terms of theconstruction agreement pursuant to Raytheon’s performance guaranty obligations,and the construction agreement will have continuing applicability insofar as itdefines (x) the obligations owed to the Company by Raytheon under its guarantyand (y) the Company’s obligations to Raytheon arising from the performance ofthose obligations, (ii) Raytheon (or their designees) was designated asthe Company’s agent for purposes of administering the subcontracts and vendorcontracts assigned by WGI to us, (iii) all future payments by the Company wouldbe paid in accordance with the terms of the construction agreement directly toRaytheon, and (iv) Raytheon would indemnify the Company with respect toany claims arising out of the subcontracts and vendor contracts assumed by us.

 

Provisional acceptance of the facility was achieved onAugust 11, 2002 when the Company entered into a settlement agreement withRaytheon.  In return for provisional acceptance,Raytheon agreed to perform work identified in the punch list provided as partof the agreement.  Raytheon was alsorequired to pay a $5 million settlement fee, minus outstanding milestones andchange-orders for a net payment to the Company for $2.37 million, which it paidin 2002.  Raytheon must perform certainagreed upon completion items in order to obtain final acceptance.  See “Completion and Acceptance of the Company’sProject – Final Acceptance”.

 

**RaytheonServices and Other Obligations**

 

Raytheon must complete the Company’s project by performingor causing to be performed all of the agreed upon services. The services have included:engineering and design; construction and construction management; providing theCompany design documents, instruction manuals, a project procedures manual andquality assurance plan; procurement of all materials, equipment and suppliesand all contractor and subcontractor labor and manufacturing and relatedservices; providing a spare parts list; providing all labor and personnel;obtaining all applicable permits; performing inspection, expediting, qualitysurveillance and traffic services; transporting, shipping, receiving andmarshaling all materials, equipment and supplies and other items; providingstorage for all materials, supplies and equipment and procurement or disposalof all soil and gravel (including remediation and disposal of specifichazardous materials); providing for design, construction and installation ofelectrical interconnection facilities (including electric metering equipment,automatic regulation equipment, protective apparatus and control systemequipment) and reviewing other utility interconnections to the Company’s facility(including gas and water pipelines); performing performance tests; providingfor start-up and initial operation functions; providing specified spare parts,waste disposal services, chemicals, consumables and utilities.

 

The services have also included: training the Company’spersonnel prior to provisional acceptance; providing the Company and itsdesignee with access to the site; obtaining additional necessary real estaterights; cleaning-up 

 

14

----

 

and waste disposal (including hazardous materials broughtto the site by Raytheon or the subcontractors); submitting a project schedule andprogress reports; paying of contractor taxes; making employee identificationand security arrangements; protecting adjoining utilities and public andprivate lands from damage; paying appropriate royalties and license fees;providing final releases and waivers to us; posting collateral or providingother assurances if major subcontractors fail to furnish final waivers;maintaining labor relations and project labor agreements; providing furtherassurances; coordinating with other contractors; and causing Raytheon toexecute and deliver the related guaranty.

 

As mentioned above, provisional acceptance was grantedby the Company on August 11, 2002. Raytheon must perform certain agreed upon completion items in order toobtain final acceptance.  See “Completionand Acceptance of the Company’s Project – Final Acceptance”.

 

**Constructionand Start-Up**

 

Raytheon was required to perform certain services inaccordance with prudent utility practices, generally accepted standards of professionalcare, skill, diligence and competence applicable to engineering, constructionand project management practices, all applicable laws, all applicable permits,the real estate rights, the quality assurance plan, the electricalinterconnection requirements, the environmental requirements and safetyprecautions set forth in the construction agreement, and all of therequirements necessary to maintain the warranties granted by the subcontractorsunder the construction agreement. Raytheon must perform the services in accordancewith the Company’s project schedule and is obligated to cause:

 

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

 

•                  finalacceptance of the Company’s facility on or before the guaranteed finalacceptance date. See “Completion and Acceptance of the Company’s Project –Final Acceptance “.  Raytheon must performthe services so that its facility, when operated in accordance with theinstruction manual and the Power Purchase Agreement operating requirements asof provisional acceptance and final acceptance, will comply with all applicablelaws and applicable permits, the electrical interconnection requirements andthe guaranteed emissions limits in accordance with the completed performancetest requirements.

 

**Contract Priceand Payment**

 

The adjusted contract price, including base scopechanges through the date of the construction agreement, was $295.7 million andcommencing on the construction commencement date was paid in installments inaccordance with the payment and milestone schedule**.**The contract was adjusted as a result of scope changes**.**The prepayment funds were backed by aprepayment letter of credit in the Company’s favor. However, under theconstruction agreement, the bankruptcy filing by WGI on May 14, 2001constituted an event of default under the construction agreement. Accordingly, theCompany requested that the full available amount of such letter of credit bedrawn upon and deposited in the construction account held by the collateralagent. The collateral agent made such drawing on May 4, 2001 in the amountof $95.8 million, which was the then outstanding amount of the prepaymentletter of credit as it had been reduced by WGI’s achievement of constructionmilestones under the construction agreement. Subsequent to the termination ofthe prepayment arrangements with WGI, payments to WGI for achievement ofconstruction milestones as specified in the construction agreement were made inaccordance with the terms of the construction agreement.

 

Under the construction agreement, Raytheon wasentitled to post a letter of credit in the amount of the then currentretainage. On March 4, 2002, Raytheon provided the Company with a letterof credit in the amount of $29.5 million (which amount represented theoutstanding amount of retainage under the construction agreement on the datethe letter of credit was posted) and the Company paid Raytheon the amount ofthe retainage.  Raytheon has subsequentlyincreased the amount of the letter of credit in proportion to the amounts whichwould otherwise be retained by the Company and the Company has paid Raytheonthe corresponding amount of this retainage. As of December 31, 2003, Raytheon had provided a letter of creditof approximately $30.8 million.  On August 26,2004, the Company drew down approximately $30.3 million under a letter ofcredit posted by Raytheon pursuant to the terms of the EPC Agreement. Prior tothis date, the Company had drawn $0.5 million on this letter of credit.  See “Completion and Acceptance of the Company’sProject – Final Acceptance.”

 

15

----

 

**The Company’sServices**

 

The Company’s responsibilities include: designating arepresentative for the Company’s project; furnishing Raytheon access to thesite; securing specified real estate rights; providing specified start-uppersonnel; furnishing specified spare parts, water disposal services and consumables;providing permanent utilities for the start-up, testing and operation of the Company’sfacility; providing raw and potable water arrangements; providing fuel supplyarrangements; providing electrical interconnection facilities arrangements;furnishing approvals; administering third-party contracts; causing The AESCorporation to provide a pre-financial closing guaranty.

 

If the Company fails to meet any of the Company’s obligationsunder the construction agreement, then, to the extent that Raytheon wasreasonably delayed in the performance of the services as a direct resultthereof, an equitable adjustment to one or more of the contract price, the guaranteedcompletion dates, the construction progress milestone dates, the payment andmilestone schedule and the Company’s project schedule, and, asappropriate, the other provisions of the construction agreement that may beaffected thereby, will be made by agreement between the Company and Raytheon.

 

**Completion andAcceptance of the Company’s Project**

 

***MechanicalCompletion***

 

Mechanical completion was achieved on August 13,2002.

 

***PerformanceTests and Power Purchase Agreement Output Tests***

 

Once mechanical completion was achieved, Raytheon wasrequired to perform certain performance tests in accordance with criteria set forthin the construction agreement. Raytheon gave the Company notice of theperformance tests, the Company arranged for the disposition of output duringstart-up and testing and Raytheon declared these performance tests complete sinceduring the tests the operation of the Company’s facility complied withapplicable laws, applicable permits, Guaranteed Emissions Limits and otherrequired standards.  Although theperformance test met the levels required for the commencement of commercialoperations, they did not meet the levels guaranteed by Raytheon under the constructionagreement.  Therefore, as provided by theconstruction agreement, Raytheon had been paying the Company interim rebatesuntil their notice of final acceptance date of July 22, 2003, but theCompany contends that these amounts should continue to be paid until the finalacceptance date, which the Company contends has not yet occurred. Based on theCompany’s interpretation of the contract, the Company expects that on the finalacceptance date additional performance tests will be performed and if specifiedlevels of heat rate and output are not met, Raytheon will be required to paythe Company a final lump-sum payment which will be based on the amount of thedeficiency. Raytheon disputes the Company’s position since they contend thatthe final acceptance date has already occurred.  See “Final Acceptance”.

 

***ProvisionalAcceptance***

 

Provisional acceptance was achieved on August 11,2002 and risk transfer occurred on August 13, 2002 when:

 

•                  Raytheoncaused a completed performance test in which the Company’s facility demonstratedan average net electrical output of 95% (or higher) of the electrical outputguarantee and 105% (or lower) of the gas-based heat rate guarantee; and

 

•                  ourfacility achieved the requirements of mechanical completion.

 

The independent engineer and the Company were satisfiedthat the provisional acceptance requirements had been met and delivered toRaytheon a provisional acceptance certificate on August 11, 2002.  The Company took possession and control ofthe Company’s facility and the Company is now solely responsible for theoperation and maintenance of the facility although Raytheon continues to have reasonableaccess to its facility to complete the services.

 

***FinalAcceptance***

 

Final acceptance will be achieved when:

 

16

----

 

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

 

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

 

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

 

•                  Raytheonhas completed performance of the services except for (i) punch list itemsand (ii) services that are required by the terms of the constructionagreement to be completed after the achievement of final acceptance, such as Raytheon’swarranty obligations.

 

The reliability guarantee will have been achieved ifand only if the Company’s facility demonstrates an average equivalentavailability of not less than 95% while operating over a period of at least 30consecutive days in accordance with applicable laws, applicable permits, theelectrical interconnection requirements, the Power Purchase Agreement operatingrequirements, the guaranteed emissions limits, the instruction manual and the PowerPurchase Agreement.

 

At any time after provisional acceptance of theCompany’s facility has been achieved, Raytheon may, after exhausting allreasonable repair and replacement alternatives in order to achieve theapplicable performance guarantees for final acceptance, and so long as that thereliability guarantee will have been achieved, give to the Company notice ofits intention to elect to declare final acceptance. In that event, Raytheon mayelect to use the results of the most recent eligible completed performance testfor the purpose of determining the Company’s facility’s level of achievement ofthe performance guarantees.  Finalacceptance will be deemed effective as of the last to occur of (i) thedate of the Company’s 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 reliabilityguarantee.

 

If on or before the guaranteed final acceptance date (i) theCompany’s facility has achieved provisional acceptance and (ii) thereliability guarantee has been achieved, then final acceptance of its facilitywill be deemed to occur on the guaranteed final acceptance date.

 

The guaranteed final acceptance date was originallyrequired to occur 13.5 months after the guaranteed provisional acceptance dateas defined under the construction agreement, but on March 8, 2003 theCompany entered into a letter agreement with Raytheon pursuant to which theCompany agreed to extend the guaranteed final acceptance date to June 30,2003.  Raytheon gave notice of FinalAcceptance 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 the July 8,2003 performance test valid.  In makingthis assessment, the independent engineer cited, among other reasons, (i) modificationsmade to certain equipment in performance of the July 8 performance testwhich would adversely impact the operations of the plant and other pieces ofequipment and (ii) Raytheon’s failure to demonstrate compliance withguaranteed emissions limits.  On August 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 Raytheonin which Raytheon claims that the Company’s rejection of the final acceptanceis invalid and improper.

 

On August 26, 2004, the Company drew downapproximately $30.3 million under a letter of credit posted by Raytheonpursuant to the terms of the EPC Agreement. Prior to this date, the Company haddrawn $544,000 on this letter of credit. The Company believes that Raytheonsubstantially breached the EPC Agreement, due, among other things, to the facility’sfailure to achieve compliance with certain performance tests, and Raytheon’sfailure to complete other services under the EPC Agreement and certainamendments thereto, including a Settlement Agreement dated August 6, 2002,that purported to resolve disputes over whether Raytheon had achievedMechanical Completion and Provisional Acceptance. As a result, the Companyclaims that Raytheon’s breaches have caused damages in excess of the amount ofthe letter of credit. Raytheon disputes these claims and has failed and refusedto pay costs and damages to the Company despite the Company’s demands for suchpayment.

 

17

----

 

 

On August 27, 2004, Raytheon filed a constructionlien claim for $30,963,662 in Middlesex County against the real property andimprovements owned by the Company under the New Jersey Construction LienLaw.  Among other things, Raytheon claims therein that the draw of theLetter of Credit represents a debt to Raytheon owed by the Company.

 

On October 28, 2004, the Company received acomplaint filed by Raytheon in the State of New York. In the complaint,Raytheon is seeking to recover $30,302,269, which represents the amount Red Oakdrew down on the letter of credit on August 26, 2004, attorneys’ fees andcosts, and also to recover up to $110 million of net expense Raytheon claims tohave incurred in good faith under the governing guaranty and construction agreements.  The Company filed an answer and counterclaimon December 13, 2004, in which it denied liability to Raytheon, assertedvarious defenses and countersued Raytheon for breach of the EPC Agreement andSettlement Agreement, breach of express warranties under the EPC Agreement, andfraudulent misrepresentation and concealment. The Company claimed damages of not less than $140 million and attorneys’fees and costs to the extent allowable. Raytheon moved to dismiss the Company’s fraudulent misrepresentation andconcealment claim and to limit the Company’s damages on January 14,2005.  The Company filed its oppositionto the motion to dismiss and also filed an amended counterclaim on February 18,2005. Thereafter, Raytheon agreed to withdraw its motion to dismiss.  On March 4,2005, Raytheon filed a motion for summary judgment that seeks the return of$16,311,711 of the Letter of Credit draw.  The Company has not yet filedits opposition to the motion, and Raytheon has not yet filed an answer to theamended counterclaim. The Company has recorded the $30.3 million as a currentliability, but has not accrued any additional amounts with respect to Raytheon’sclaims.  The Company believes it has meritorious defenses to the claimsasserted by Raytheon against it and intends to defend the lawsuit and pursueits counterclaims vigorously.

 

***ProjectCompletion***

 

Project completion will be achieved under theconstruction agreement when:

 

•                  Finalacceptance of the Company’s facility will have occurred and the performance guaranteeswith respect to its facility will have been achieved (or in lieu of achievementof the performance guarantees, applicable rebates under the constructionagreement will have been paid, or the Company will have elected finalacceptance);

 

•                  Thereliability guarantee will have been achieved;

 

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

 

•                  Therequirements for achieving mechanical completion of the Company’s facility willcontinue to be met;

 

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

 

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

 

When Raytheon believes that it has achieved projectcompletion, it will deliver to the Company a notice of project completion. If theCompany is satisfied that the final acceptance requirements have been met, theCompany will deliver to Raytheon a project completion certificate. If reasonablecause exists for doing so, the Company will notify Raytheon in writing thatproject completion has not been achieved, stating the reasons therefore. If theCompany’s project completion has not been achieved as so determined by us,Raytheon will promptly take the action or perform the additional services aswill achieve project completion and will issue to the Company another notice ofproject completion. The procedure will be repeated as necessary until projectcompletion is achieved.

 

Raytheon will be obligated to achieve projectcompletion within 90 days after final acceptance of the Company’s facility. IfRaytheon does not achieve its project completion on or before the Company’s projectcompletion deadline or if the Company determines that Raytheon is not proceedingwith all due diligence to complete the services in order to achieve projectcompletion by the deadline, the Company may retain another contractor tocomplete the work at contractor’s expense.

 

18

----

 

As a result of the Company’s ongoing disagreement withRaytheon regarding final acceptance, project completion has not yet occurred.

 

**Price Rebatefor Failure to Meet Guarantees**

 

***Completion Dates***

 

Raytheon guaranteed that (i) provisionalacceptance or final acceptance of the Company’s facility will be achieved on orbefore the guaranteed provisional acceptance date and (ii) finalacceptance of the Company’s facility will be achieved on or before theguaranteed final acceptance date.

 

If neither provisional acceptance nor final acceptanceof the Company’s facility occurred by the date that is 50 days after the guaranteedprovisional acceptance date, Raytheon was obligated to pay the Company $108,000per day as liquidated damages, for each day provisional acceptance or finalacceptance is later than the guaranteed provisional acceptance date. Theaggregate amount of such payments that Raytheon is obligated to make is limitedto 13% of the adjusted contract price (approximately $40 million). Sinceneither provisional nor final acceptance had occurred within 50 days of theguaranteed provisional acceptance date of February 14, 2002, Raytheon beganto pay the Company scheduled late completion payments beginning on April 6,2002 and ending on August 10, 2002 (the day prior to the provisionalacceptance date).  A total of $14 millionin liquidated damages was received in 2002, and no amounts were received in 2003or 2004.

 

Pursuant to the construction agreement, if neitherprovisional acceptance nor final acceptance of the Company’s facility occurredon or before the date that was 90 days after the guaranteed provisional acceptancedate, Raytheon was required to submit for approval by the Company and theindependent engineer a plan to accelerate the performance of the services asnecessary in order to achieve final acceptance of the Company’s facility by theguaranteed final acceptance date. Raytheon submitted the required plan whichwas subsequently approved by the Company and the independent engineer.

 

**PerformanceGuarantees**

 

***Electrical Output***

 

Under the construction contract, if the average netelectrical output of the Company’s facility at provisional acceptance orinterim acceptance, whichever is the earlier to occur, is less than theelectrical output guarantee, then Raytheon must pay us, as a rebate and not asliquidated damages, for each day during the interim period, an amount equal to$0.22 per day for each kilowatt by which the average net electrical output isless than the electrical output guarantee. During performance testing, the Company’s output was calculated to be13,370 kilowatts less than the electrical output guarantee.  Accordingly, the Company’s daily charge forthis amount has been calculated at $2,941.40 per day. Raytheon had been payingthe Company this amount until their notice of final acceptance date of July 22,2003, but the Company is disputing this claim of final acceptance and contends thatthese amounts should continue to be paid until the final acceptance date. See “FinalAcceptance”.

 

Upon final acceptance, if the average net electricaloutput of the Company’s facility during the completed performance test is lessthan the electrical output guarantee, then Raytheon must pay us, as a bonus, anamount equal to $520 for each kilowatt by which the average net electricaloutput is less than the guarantee minus any interim rebates paid or to be paidby Raytheon.

 

***Heat RateGuarantees***

 

If the average net heat rate of the Company’s facilityat provisional acceptance or interim acceptance, if having occurred beforefinal acceptance, exceeds the heat rate guarantee, then Raytheon must pay us,as a rebate and not as liquidated damages, for each day during the interimperiod, an amount equal to $46 per day for each BTU/KwH by which the measurednet heat rate is greater than the heat rate guarantee.

 

Upon final acceptance, if the net heat rate of theCompany’s facility during the completed performance test exceeds the heat rateguarantee, then Raytheon will pay us, as a rebate, a lump sum amount equal to$110,000 for each BTU/KwH by which the measured heat rate is greater than theheat rate guarantee minus any interim rebates paid or to be paid by Raytheon.

 

19

----

 

As of December 31, 2004, Raytheon owedapproximately $65,000 in rebates that were invoiced in 2003.  This amount is reflected in accountsreceivable at December 31, 2004.  TheCompany did not invoice interim rebates in 2004, pending resolution of theFinal Acceptance date with Raytheon.

 

**Liability andDamages**

 

***Limitation ofLiability***

 

In no event will Raytheon’s liability (i) forprovisional acceptance late completion payments exceed an amount equal to 13% ofthe contract price, (ii) for performance guarantee payments arising fromthe electrical output guarantee exceed in the aggregate an amount equal to 10%of the contract price, (iii) for performance guarantee payments arisingfrom the heat rate guarantee exceed in the aggregate 15% of the contract priceand (iv) for all provisional acceptance late completion payments andperformance guarantee payments exceed an amount equal to 34% of the contractprice.

 

***ConsequentialDamages***

 

Neither party nor any of its contractors,subcontractors or other agents providing equipment, material or services forthe Company’s project will be liable for any indirect, incidental, special orconsequential loss or damage of any type.

 

**AggregateLiability of Contractor**

 

The total aggregate liability of Raytheon and any ofits subcontractors, including, without limitation, liabilities described above,to the Company will not in any event exceed an amount equal to the contractprice for liability due to events occurring before the provisional acceptancedate or 40% of the contract price for liability due to events occurring afterthe provisional acceptance date; however, the limitation of liability will notapply to obligations to remove liens or to make indemnification payments.

 

**Warranties andGuarantees**

 

Raytheon warrants and guarantees that during theapplicable warranty period:

 

•                  allmachinery, equipment, materials, systems, supplies and other items comprisingthe Company’s project will be new and of first-rate quality which satisfiesutility-grade standards and in accordance with prudent utility practices andthe specifications set forth in the construction agreement, suitable for theuse in generating electric energy and capacity under the climatic and normaloperating conditions and free from defective workmanship or materials;

 

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

 

•                  ourproject and its components are free from all defects caused by errors oromissions in engineering and design, as determined by reference to prudentutility practices, and comply with all applicable laws, all applicable permits,the electrical interconnection requirements, the Power Purchase Agreementoperating requirements and the guaranteed emissions limits; and

 

•                  thecompleted project performs its intended functions of generating electric energyand capacity as a complete, integrated operating system as contemplated in theconstruction agreement.

 

If the Company notifies Raytheon within 30 days afterthe expiration of the applicable warranty period of any defects or deficienciesdiscovered during the applicable warranty period, Raytheon will promptlyreperform any of the services at its own expense to correct any errors,omissions, defects or deficiencies and, in the case of defective or otherwisedeficient machinery, equipment, materials, systems supplies or other items,replace or repair the same at its own expense. Raytheon warrants and guaranteesthat, to the extent the Company has made all payments then due to Raytheon,title to the Company’s facility and all work, materials, supplies and equipmentwill pass to the Company free and clear of all liens, other than any permittedliens. Other than the warranties and guarantees provided in the construction agreementthere are no other warranties of any kind, whether statutory, express orimplied relating to the services.

 

20

----

 

Upon notification from the Company no later than 30days after the expiration of the applicable warranty period of any defects or deficienciesin the Company’s project or any component thereof, the Company will, subject tothe provisions of the construction agreement, make the Company’s facility orthe subject equipment available to Raytheon for Raytheon to re-perform, replaceor, at Raytheon’s option, repair the same at Raytheon expense so that it is incompliance with the standards warranted and guaranteed, all in accordance withthe construction agreement.

 

**Force Majeure**

 

***Force MajeureEvent***

 

A force majeure event will mean any act or event thatprevents the affected party from performing its obligations, other than thepayment of money, under the construction agreement or complying with anyconditions required to be complied with under the construction agreement if theact or event is beyond the reasonable control of and not the fault of theaffected party and the party has been unable by the exercise of due diligenceto overcome or mitigate the effects of the act or event. Force majeure eventsinclude, but are not limited to, acts of declared or undeclared war, sabotage,landslides, revolution, terrorism, flood, tidal wave, hurricane, lightning,earthquake, fire, explosion, civil disturbance, insurrection or riot, act ofGod or the public enemy, action, including unreasonable delay or failure toact, of a court or public authority, or strikes or other labor disputes of aregional or national character that are not limited to only the employees ofRaytheon or its subcontractors and that are not due to the breach of a laborcontract or applicable law by the party claiming force majeure or any of itssubcontractors. Force majeure events do not include (i) acts or omissionsof Raytheon or any subcontractors, except as expressly provided in theforegoing sentence, (ii) late delivery of materials or equipment, exceptto the extent caused by a force majeure event, and (iii) economic hardship.

 

**ExcusedPerformance**

 

If either party is rendered wholly or partly unable toperform its obligations because of a force majeure event, that party will beexcused from whatever performance is affected by the force majeure event to theextent so affected so long as:

 

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

 

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

 

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

 

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

 

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

 

**Scope Changes**

 

The Company may order scope changes to the services,in which event one or more of the contract price, the construction progress milestonedates, the guaranteed completion dates, the payment and milestone schedule, theCompany’s project schedule and the performance guarantees will be adjustedaccordingly, if necessary. All scope changes will be authorized by a scopechange order and only the Company or its representative may issue scope changeorders.

 

As soon as Raytheon becomes aware of any circumstanceswhich Raytheon has reason to believe may necessitate a scope change, Raytheonwill issue to the Company a scope change order notice at Raytheon’s expense. Ifthe Company desires to make a scope change, in response to a scope change ordernotice or otherwise, the Company will submit a scope change order request toRaytheon. Raytheon will promptly review the scope change order request andnotify the Company in writing of the options for implementing the proposedscope change and the effect, if any, each option would have on the contractprice, the guaranteed completion dates, the construction 

 

21

----

 

progress milestone dates, the payment and milestoneschedule, the Company’s project schedule and the performance guarantees.

 

No scope change order will be issued and no adjustmentof the contract price, the guaranteed completion dates, the constructionprogress milestone dates, the payment and milestone schedule, the Company’s projectschedule or the performance guarantees will be made in connection with anycorrection of errors, omission, deficiencies, or improper or defective work onthe part of Raytheon or any subcontractors in the performance of the services.Changes due to changes in applicable laws or applicable permits occurring afterthe date of the construction agreement will be treated as scope changes.

 

**Effect ofForce Majeure Event**

 

If and to the extent that any force majeure eventsaffect Raytheon’s ability to meet the guaranteed completion dates, or the constructionprogress milestone dates, an equitable adjustment in one or more of the dates,the payment and milestone schedule and the Company’s project schedule willbe made by agreement of the Company and Raytheon. No adjustment to theperformance guarantees and, except as otherwise expressly set forth below, thecontract price will be made as a result of a force majeure event. If Raytheonis delayed in the performance of the services by a force majeure event, then:

 

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

 

•                  tothe extent that the delay(s) are, in the aggregate, more than 60 days, Raytheonwill be reimbursed by the Company for those incremental costs and expensesresulting from said delay(s) which are incurred by Raytheon after said 60-dayperiod.

 

**Price Change**

 

An increase or decrease in the contract price, if any,resulting from a scope change requested by the Company or made under the constructioncontract will be determined by mutual agreement of the parties.

 

**ContinuedPerformance Pending Resolution****of Disputes**

 

Notwithstanding any dispute regarding the amount ofany increase or decrease in Raytheon’s costs with respect to a scope change,Raytheon will proceed with the performance of the scope change promptlyfollowing the Company’s execution of the corresponding scope change order.

 

**HazardousMaterials**

 

If hazardous materials were not identified in anenvironmental site assessment report delivered by the Company to Raytheon priorto the commencement date and were not brought onto the site by Raytheon or anyof its subcontractors, then Raytheon will be entitled to a scope change underthe construction agreement.

 

**Risk of Loss**

 

Since the risk transfer date with respect to theCompany’s facility, the Company bear all risk of loss and full responsibilityfor repair, replacement or reconstruction with respect to any loss, damage ordestruction to its facility.

 

**Termination**

 

***Termination for theCompany’s Convenience***

 

The Company may for its convenience terminate any partof the services or all remaining services at any time upon 30 days’ prior writtennotice to Raytheon specifying the part of the services to be terminated and theeffective date of termination. The Company may elect to suspend completion ofall or any part of the services upon 10 days’ prior written notice to Raytheon,or, in emergency situations, upon prior notice as circumstances permit.

 

22

----

 

***Termination byRaytheon***

 

If the Company fails to pay to Raytheon any paymentand the failure continues for 30 days, then (i) Raytheon may suspend its performanceof the services upon 10 days’ prior written notice to us, which suspension maycontinue until the time as the payment, plus accrued interest thereon, is paidto Raytheon, and/or (ii) if the payment has not been made prior to thecommencement of a suspension by Raytheon under clause (i) above, Raytheonmay terminate the construction agreement upon 60 days’ prior written notice tous; however, the termination will not become effective if the payment, plusaccrued interest thereon, is made to Raytheon prior to the end of the noticeperiod. If the suspension occurs, an equitable adjustment to one or more of thecontract price, the guaranteed completion dates, the construction progressmilestone dates, the payment and milestone schedule and the Company’s projectschedule, and, as appropriate, the other provisions of the construction agreementthat may be affected thereby, will be made by agreement between the Company andRaytheon. If the Company has suspended completion of all or any part of theservices in accordance with the construction agreement for a period in excessof 365 days in the aggregate, Raytheon may, at its option, at any timethereafter so long as the suspension continues, give written notice to theCompany that Raytheon desires to terminate the construction agreement. Unless theCompany orders Raytheon to resume performance of the suspended services within15 days of the receipt of the notice from Raytheon, the suspended services willbe deemed to have been terminated by the Company for the Company’s convenience.If the occurrence of one or more force majeure events prevents Raytheon fromperforming the services for a period in the aggregate of 720 days, either partymay, at its option, give written notice to the other party of its desire toterminate the construction agreement.

 

***Consequences ofTermination***

 

•                  Uponany termination, the Company may, so long as the termination is pursuant to anydefault Raytheon will have been paid all amounts due and owing to it under theconstruction agreement, which will not be deemed to constitute a waiver byRaytheon of any rights to payment it may have as a result of a non-defaultrelated termination in the event of a termination pursuant to a default, at theCompany’s option elect to have itself, or its designee, which may include anyother affiliate or any third-party purchaser, (i) assume responsibilityfor and take title to and possession of the Company’s project and any or allwork, materials or equipment remaining at the site and (ii) succeedautomatically, without the necessity of any further action by Raytheon, to theinterests of Raytheon in any or all items procured by Raytheon for the Company’sproject and in any and all contracts and subcontracts entered into betweenRaytheon and any subcontractor with respect to the equipment specified in theconstruction agreement, and with respect to any or all other subcontractorsselected by the Company which are materially necessary to the timely completionof the Company’s project, Raytheon will use all reasonable efforts to enable theCompany, or the Company’s designee, to succeed to Raytheon’s intereststhereunder.

 

•                  Ifany termination occurs, the Company may, without prejudice to any other rightor remedy it may have, at its option, finish the services by whatever method theCompany may deem expedient.

 

**SurvivingObligations**

 

Termination of the construction agreement (i) willnot relieve either party of any obligation with respect to the confidentiality ofthe other party’s information, (ii) will not relieve either party of anyobligation which expressly or by implication survives termination of theconstruction agreement and (iii) except as otherwise provided in anyprovision of the construction agreement expressly limiting the liability ofeither party, will not relieve either party of any obligations or liabilitiesfor loss or damage to the other party arising out of or caused by acts oromissions of the party prior to the effectiveness of the termination or arisingout of the termination, and will not relieve Raytheon of its obligations as toportions of the services already performed or as to obligations assumed byRaytheon or the Company prior to the date of termination.

 

**Default andRemedies**

 

***Raytheon’s Default***

 

Raytheon’s events of default include: voluntarybankruptcy or insolvency; involuntary bankruptcy or insolvency; materially adversemisleading or false representation or warranty; improper assignment; failure tomaintain required insurance; failure to comply with applicable laws orapplicable permits; cessation or abandonment 

 

23

----

 

of the performance of services; termination orrepudiation of, or default under the related construction contract guaranty;failure to supply sufficient skilled workers or suitable material or equipment;failure to make payment when due for labor, equipment or materials;non-occurrence of either provisional acceptance or final acceptance within 90days after the guaranteed provisional acceptance date, non-occurrence ofconstruction progress milestones and failure proceed under a remediation planwithin 90 days after the non-occurrence; and failure to remedy non-performanceor non-observance of any provision in the construction agreement.

 

**The Company’s Rightsand Remedies**

 

If Raytheon is in default of its obligations, theCompany will have any or all of the following rights and remedies, in additionto any other rights and remedies that may be available to the Company under theconstruction agreement or at law or in equity, and Raytheon will have thefollowing obligations:

 

•                  TheCompany may, without prejudice to any other right or remedy the Company mayhave under the construction agreement or at law or in equity, terminate theconstruction agreement in whole or in part immediately upon delivery of noticeto Raytheon. In case of the partial termination, the parties will mutuallyagree upon a scope change order to make equitable adjustments, including thereduction and/or deletion of obligations of the parties commensurate with the reducedscope Raytheon will have after taking into account the partial termination, toone or more of the guaranteed completion dates, the construction progressmilestone dates, the contract price, the payment and milestone schedule, theCompany’s project schedule, the performance guarantees and the other provisionsof the construction agreement which may be affected thereby, as appropriate. Ifthe parties are unable to reach mutual agreement as to said scope change orderand the dispute resolution procedures set forth in the construction agreementare invoked, the procedures will give due consideration to customary terms andconditions under which Raytheon has entered subcontracts with third party primecontractors covering services substantially similar to those services which arenot being terminated.

 

•                  Ifrequested by us, Raytheon must withdraw from the site, must assign to theCompany such of contractor’s subcontracts, to the extent permitted therein, as theCompany may request, and must remove the materials, equipment, tools andinstruments used by, and any debris and waste materials generated by, Raytheonin the performance of the Services as the Company may direct, and we, withoutincurring any liability to Raytheon, other than the obligation to return toRaytheon at the completion of the Company’s project the materials that are notconsumed or incorporated into the Company’s project, solely on an “as is, whereis” basis without any representation or warranty of any kind whatsoever, maytake possession of any and all designs, drawings, materials, equipment, tools,instruments, purchase orders, schedules and facilities of Raytheon at the site thatthe Company deems necessary to complete the services.

 

**Assignment**

 

The parties shall have no right to assign or delegateany of their respective rights or obligations under the construction agreementeither voluntarily or involuntarily or by operation of law, except that theCompany may, without Raytheon’s approval, assign any or all of its rights underthe construction agreement (a) as collateral security to the financingparties and (b) to any transferee of the Company’s project or asubstantial portion of its project so long as such assignee has financial andoperational capabilities that are either substantially similar to the Company’sat the time or otherwise are such that the assignment could not reasonably beexpected to have a material adverse effect on Raytheon’s rights and obligationsunder the construction agreement.

 

**MaintenanceServices Agreement**

 

The Company has entered into the Maintenance ProgramParts, Shop Repairs and Scheduled Outage Technical Field Assistance (“TFA”) ServicesContract (the “Maintenance Services Agreement”), dated as of December 8,1999, with Siemens Westinghouse by which Siemens Westinghouse will provide theCompany with, among other things, combustion turbine parts, shop repairs andscheduled outage technical field assistance services.  The fees assessed by Siemens Westinghousewill be based on the number of Equivalent Base Load Hours (“EBH”) or EquivalentStarts (“ES”), accumulated by the applicable Combustion Turbine as adjusted forinflation. The Company has received approximately $11.0 million in rotablespare parts under this agreement.  Thisamount is 

 

24

----

 

recorded as Spare Parts Inventory, under Property,Plant and Equipment, and the remaining amount owed as current and long-termliabilities in the accompanying balance sheets.

 

The maintenance services agreement became effective onthe date of execution and unless terminated early, will terminate uponcompletion of shop repairs performed by Siemens Westinghouse following thetwelfth scheduled outage of the applicable combustion turbine or sixteen yearsfrom the date of execution, whichever occurs first, unless the Company exercisesits right to terminate the agreement after the first major outage of the turbines.The estimated timeframe for the completion of the first major outages is 2011.

 

**Scope of Work**

 

During the term of the maintenance services agreement,and in accordance with the scheduled outage plan, Siemens Westinghouse isrequired to do the following:

 

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

 

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

 

•                  providemiscellaneous hardware;

 

•                  providethe Company with material safety data sheets for all hazardous materialsSiemens Westinghouse intends to bring/use on the site;

 

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

 

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

 

•                  removeand reinstall insulation as required to complete inspections.

 

The Company is responsible for, among other things:

 

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

 

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

 

•                  ensuringthat the Company’s operator and maintenance personnel are properly trained;

 

•                  transportingprogram parts in need of repair/refurbishing; and

 

•                  providingSiemens Westinghouse, on a monthly basis, with the number of equivalent startsand the number of equivalent base hours incurred by each combustion turbine.

 

The Company and Siemens Westinghouse will continue to jointlydevelop the scheduled outage plan. The scheduled outage plan will be consistentwith the terms and conditions of the Power Purchase Agreement.

 

**EarlyReplacement**

 

If it is determined that due to normal wear and tear aprogram part(s) for the combustion turbine has failed or will not last untilthe next scheduled outage, and the part has to be repaired before the scheduledreplacement period, Siemens Westinghouse will replace the program part bymoving up a new program part which is otherwise scheduled to be delivered at alater date. The contract price for the replacement will not be affected if thereplacement date is less than or equal to one year earlier than the scheduledoutage during which the program part was scheduled to be replaced. If theactual replacement date for a program part is more than one year earlier thanthe scheduled outage at which point the program part was scheduled to be replaced,the early replacement will result in an adjustment to the payment schedule.Siemens Westinghouse has the final decision with regard to the replacement 

 

25

----

 

or refurbishment associated with any program part. If theCompany disputes Siemens Westinghouse’s decision, the Company may seek toresolve the dispute in accordance with the dispute resolution proceduresdiscussed below.

 

**Parts LifeCredit**

 

After applicable warranty periods set forth in themaintenance services agreement and the construction agreement, Siemens Westinghousewill provide a parts life credit if a program part requires replacement due tonormal wear and tear prior to meeting its expected useful life. SiemensWestinghouse has the final decision with regard to actual parts life and thedegree of repair or refurbishment associated with any program parts. The partslife credit will be calculated in terms of EBH’s and ES’s. The price of thereplacement part will be adjusted for inflation. If the Company disputesSiemens Westinghouse’s decision, the Company may seek to resolve the dispute inaccordance with the dispute resolution procedures discussed below.

 

**Contract Priceand Payment Terms**

 

Siemens Westinghouse will invoice the Company monthlyand payments are then due within 25 days. The fees assessed by Siemens Westinghousewill be based on the number of EBH’s or ES’s accumulated by the applicablecombustion turbine as adjusted for changes in the consumer price index. Thecontract price will be the aggregate number of fees as adjusted plus anyadditional payment amount mutually agreed to by the parties under a changeorder.

 

**UnscheduledOutages and Unscheduled Outage Work**

 

If during the term of the maintenance servicesagreement an unscheduled outage occurs resulting from (i) thenon-conformity of new program parts; (ii) the failing of a shop repair; (iii) aprogram part requiring replacement due to normal wear and tear prior to achievingits expected life in terms of EBH’s or ES’s; or (iv) the failure of aservice, performed by Siemens Westinghouse, the Company will hire SiemensWestinghouse, to the extent not supplied by Siemens Westinghouse as a warrantyremedy under Siemens Westinghouse’s warranties under the maintenance servicesagreement, to supply any additional parts, miscellaneous hardware, shop repairsand TFA Services under a change order. The Company will be entitled to anyapplicable parts life credit with respect to program parts as well as adiscount for TFA Services. If the unscheduled outage occurs within a specifiednumber of EBH’s of a scheduled outage and it was anticipated that theadditional parts, miscellaneous hardware, shop repairs and TFA Services to beused in the unscheduled outage were to be used during the upcoming scheduledoutage, the upcoming scheduled outage will be moved up in time to become theunscheduled outage/moved-up scheduled outage. The Company will not be requiredto pay any additional money for the program parts, miscellaneous hardware, shoprepairs and TFA Services.

 

If any program parts are delivered by SiemensWestinghouse within 15 days of receipt of the change order, the Company willpay to Siemens Westinghouse the price for the program part set forth in themaintenance services agreement plus a specified percentage.

 

Any program part delivered after 30 days of the changeorder will cost the Company the price set forth in the maintenance servicesagreement minus a specified percentage.

 

The remedies set forth in the maintenance servicesagreement, and discounts on any TFA Services purchased by the Company from SiemensWestinghouse will constitute Siemens Westinghouse’s sole liability and theCompany’s exclusive remedies for unscheduled outages whether its claims arebased in contract, in tort, or otherwise. If Siemens Westinghouse fails to senda TFA Services representative by the end of the second day following writtenreceipt of the unscheduled outage, the Company may hire another qualifiedperson, at its cost, to perform the work. If the hired party proceeds todisassemble the combustion turbine to determine the case of the unscheduledoutage and Siemens Westinghouse still has not provided personnel to assist withthe inspection, the Company can elect to terminate the maintenance servicesagreement on the basis that Siemens Westinghouse has failed to perform amaterial obligation.

 

**Changes inOperating Restrictions**

 

The maintenance services agreement requires that eachcombustion turbine will be operated in accordance with the requirements of the PowerPurchase Agreement and prudent utility practices, with 8,000 EBH’s/year and 250ES/ year by using natural gas and water. Should the actual operations differfrom these operating parameters which 

 

26

----

 

causes a scheduled outage to be planned/performedearlier or later than as expected, then, under a change order, an adjustment inthe scope, schedule, and price will be made.

 

**Warranties**

 

Siemens Westinghouse warrants that the new programparts, miscellaneous hardware and any shop repairs will conform to standards ofdesign, materials and workmanship consistent with generally accepted practicesof the electric utility industry. The warranty period with respect to programparts, hardware and shop repair is until the earlier of one year from the dateof installation of the original program part or hardware, a specific number ofstarts or fired hours after installation of the program parts and hardware, or threeyears from the date of delivery of the original program part, hardware, and inthe case of shop repair, three years from completion of the work. Warranties onthe program parts and hardware will not expire more than one year after theconclusion of the maintenance services agreement. Siemens Westinghouse willrepair or replace any program part or hardware, at its cost, if notified of anyfailure or non-conformity of the program part or hardware during the warrantyperiod.

 

Siemens Westinghouse also warrants that the servicesof its personnel and technical information transmitted will be competent andconsistent with prudent utility practices and the services will comply in allmaterial respects with laws and will be free from defects in workmanship for aperiod of one year from the date of completion of that item of services. The warrantieson the services will expire no later than one year after the termination or endof the term of the maintenance services agreement.

 

In addition, Siemens Westinghouse warrants that anyprogram part removed during a scheduled outage and delivered by the Company tothe designated facility for repair will be repaired and delivered by SiemensWestinghouse within 26 weeks. If Siemens Westinghouse does not deliver theprogram part within this time frame or does not provide a new program part inlieu of the program part being shop repaired and an outage occurs whichrequires such a program part, Siemens Westinghouse will pay the Company liquidateddamages for each day the program part is not repaired and delivered theaggregate of which liquidated damage payments will not exceed a maximum annual cap.If upon reaching the maximum cap on aggregate liquidated damages, SiemensWestinghouse still has not repaired and delivered the program part, the Companymay elect to terminate the maintenance services agreement because SiemensWestinghouse will be considered to have failed to perform its materialobligations.

 

Except for the express warranties set forth in themaintenance services agreement, Siemens Westinghouse makes no other warrantiesor representations of any kind. No implied statutory warranty ofmerchantability or fitness for a particular purpose applies.

 

The warranties provided by Siemens Westinghouse areconditioned upon (i) the Company’s receipt, handling, storage, operationand maintenance of the Company’s project, including any program parts andmiscellaneous hardware, being done in accordance with the terms of the combustionturbine instruction manuals; (ii) operation of the combustion turbine inaccordance with the terms of the maintenance services agreement; (iii) repairof accidental damage done consistently with the equipment manufacturer’srecommendations; (iv) the Company’s providing Siemens Westinghouse withaccess to the site to perform its services under the maintenance servicesagreement; and (v) hiring Siemens Westinghouse to provide TFA Services,program parts, shop repairs and miscellaneous hardware required to dissemble,repair and reassemble the combustion turbine.

 

**Termination**

 

The Company may terminate the maintenance servicesagreement if (i) specific bankruptcy events affecting Siemens Westinghouseoccur; (ii) Siemens Westinghouse fails to perform or observe in anymaterial respect any provision in the maintenance services agreement and failsto (a) promptly commence to cure and diligently pursue the cure of thefailure or (b) remedy the failure within 45 days after SiemensWestinghouse receives written notice of the failure; (iii) the Company terminatesthe construction agreement due to Raytheon’s default thereunder or due to theCompany’s inability to obtain construction financing or environmental operatingpermits; or (iv) Raytheon terminates the construction agreement for anyreason other than the Company’s default thereunder. Notwithstanding theforegoing, the Company may terminate the maintenance services agreement at anytime for convenience following the completion of the first major outage of bothcombustion turbine generators. In addition, the maintenance services agreementwill automatically terminate if (i) the Company terminates theconstruction agreement for reasons other than (a) the default of Raytheonand (b) the Company’s inability to obtain permits for the Company’s projector (ii) Raytheon terminates the construction agreement for the Company’s defaultthereunder. 

 

27

----

 

If such termination occurs, Siemens Westinghouse will discontinueany work or services being performed and continue to protect the Company’s property.Siemens Westinghouse will transfer title to the Company and deliver any newprogram parts and miscellaneous hardware already purchased by the Company. TheCompany will pay Siemens Westinghouse those amounts owed at the time oftermination.

 

Siemens Westinghouse may also terminate the maintenanceservices agreement if: (i) the Company fails to make payments or (ii) specificbankruptcy events affecting the Company occur. Siemens Westinghouse cannotterminate the maintenance services agreement if the Company pays outstandingamounts due within 90 days. Upon termination, Siemens Westinghouse will stopall work, place no additional orders, protect the Company’s property anddeliver the property to the Company upon the Company’s instructions. SiemensWestinghouse will be entitled to payment for work performed up until itstermination of the maintenance services agreement, and to all outstanding feesand reasonable costs associated with the termination.

 

**Limitation ofLiability**

 

Each party agrees that, except to the extentliquidated damages provided in the maintenance services agreement are so considered,neither Siemens Westinghouse, nor its suppliers, nor will the Company under anycircumstances be liable for: any indirect, special, incidental or consequentialloss or damage whatsoever; damage to or loss of property or equipment; loss ofprofits or revenues; loss of use of material, equipment or power system;increased costs of any kind, including but not limited to capital cost, fuelcost and cost of purchased or replacement power, or claims of the Company’s customers.

 

The Company agrees that the remedies provided in themaintenance services agreement are exclusive and that under no circumstances willthe total aggregate liability of Siemens Westinghouse during a given yearexceed 100% of the contract price payable to Siemens Westinghouse for thatgiven year under the maintenance services agreement. The Company further agreesthat under no circumstances will the total aggregate liability of SiemensWestinghouse for liquidated damages during a given year exceed a specifiedpercentage of the contract price payable to Siemens Westinghouse for that givenyear under the maintenance services agreement. The Company further agrees that underno circumstances will the total aggregate liability of Siemens Westinghouseexceed a specified percentage of the contract price payable to SiemensWestinghouse under the maintenance services agreement.

 

**Force Majeure**

 

Neither party will be liable for failure to performany obligation or delay in performance, excluding payment, to the extent thefailure or delay is caused by any act or event beyond the reasonable control ofthe affected party or Siemens Westinghouse’s suppliers; so long as the act orevent is deemed to be a force majeure and is not the fault or the result ofnegligence of the affected party and the party has been unable by exercise ofreasonable diligence to overcome or mitigate the effects of the act or event.Force majeure includes: any act of God; act of civil or military authority; actof war whether declared or undeclared; act, including delay, failure to act, orpriority, of any governmental authority; civil disturbance; insurrection orriot; sabotage; fire; inclement weather conditions; earthquake; flood; strikes,work stoppages, or other labor difficulties of a regional or national characterwhich are not limited to only the employees of Siemens Westinghouse or itssubcontractors or suppliers and which are not due to the breach of an applicablelabor contract by the party claiming force majeure; embargo; fuel or energyshortage; delay or accident in shipping or transportation to the extentattributable to another force majeure; changes in laws which substantiallyprevent a party from complying with its obligations in conformity with itsrequirements under the maintenance services agreement or failure or delaybeyond its reasonable control in obtaining necessary manufacturing facilities,labor, or materials from usual sources to the extent attributable to anotherforce majeure; or failure of any principal contractor to provide equipment tothe extent attributable to another force majeure. Force majeure will notinclude: (i) economic hardship, (ii) changes in market conditions or (iii) exceptdue to an event of force majeure, late delivery of program parts or otherequipment.

 

If a delay in performance is excusable due to a forcemajeure, the date of delivery or time for performance of the work will be extendedby a period of time reasonably necessary to overcome the effect of the forcemajeure and if the force majeure lasts for a period longer than 30 days and thedelay directly increases Siemens Westinghouse’s costs or expenses, the Company,after reviewing Siemens Westinghouse’s additional direct costs and expenses,will reimburse Siemens Westinghouse for its reasonable additional direct costs andexpenses incurred after 30 days from the beginning of the force majeureresulting from said delay.

 

28

----

 

**EnvironmentalCompliance**

 

Siemens Westinghouse will indemnify the Company fromany fines, penalties, expense, loss or liability, including the costs ofclean-up, incurred by the Company as a result of (i) Siemens Westinghouse’sfailure to meet its obligations under the maintenance services agreement or (ii) anyspills of hazardous waste or oil, petroleum or petroleum products to theenvironment which are attributable to and occur during Siemens Westinghouse’sperformance, or the performance of its contractors or subcontractors, of theworkscope obligations at the site under the maintenance services agreement.

 

The Company will indemnify Siemens Westinghouse fromany fines, penalties, expense, loss or liability incurred by Siemens Westinghouseas a result of the Company’s failure to meet its obligations under the maintenanceservices agreement. The Company will have no responsibility or liability withregard to any hazardous waste or oil, petroleum or petroleum products whichwere spilled by Siemens Westinghouse, or any other of its contractors orsubcontractors performing workscope obligations at the site.

 

**FleetwideIssue Notification**

 

During the term of this agreement, if SiemensWestinghouse becomes aware of a fleetwide issue involving the Siemens Westinghouse501F combustion turbine which may have a deleterious effect on the Company’s combustionturbines, Siemens Westinghouse will, within a reasonable time of becoming awareof the fleetwide issues, notify the Company thereof, and if the fleetwide issuerequires an additional repair or replacement of a program part or miscellaneoushardware to be performed, the additional repair or replacement will beperformed in accordance with the provisions of the maintenance servicesagreement.

 

**InterconnectionAgreement**

 

The Company has entered into a Generation FacilityTransmission Interconnection Agreement, dated as of April 27, 1999 with JCP&L,for the installation, operation and maintenance of the facilities necessary tointerconnect the Company’s facility to JCP&L’s transmission system. Underthe interconnection agreement, the Company and JCP&L constructed, own,operate and maintain the interconnection facilities. The Company is responsiblefor all of the costs of construction, operation and maintenance of the interconnectionfacilities, including those owned by JCP&L. The Company has been importingelectricity from the transmission system to support commissioning of thefacility since July 2001 and the interconnection facilities have exportedpower to the transmission system since that time.  At December 31, 2002, the interconnectionfacilities and protective gas apparatus needed to generate and deliver netelectric and/or ancillary services to the electric delivery point had beencompleted as required under the Power Purchase Agreement.

 

**CompanyMarket-Based Tariff Petition**

 

FERC approval of the Company’s market-based tariffpetition was received on June 22, 2001.

 

**JCP&L’s Obligations**

 

The Company has entered into an interconnectioninstallation agreement, by which JCP&L has installed, at the Company’s costand expense, the JCP&L interconnection facilities. The JCP&L interconnectionfacilities, together with the facilities that the Company has installed, arenecessary to allow the interconnection of the Company’s facility with thetransmission system of JCP&L. The JCP&L interconnection facilitieswhich include, but are not limited to, certain substation protective relayingequipment and two 230 kV 2-cycle circuit breakers, are owned, maintainedand operated by JCP&L, at the Company’s cost and expense. The remainder ofthe interconnection facilities have been installed and are owned, maintained andoperated by the Company.

 

JCP&L has completed the installation of the JCP&Linterconnection facilities necessary to permit the Company to meet the Company’sconstruction agreement requirement to energize the switch yard and commencecommissioning of the Company’s facility. The Company has been importing electricity from the transmission systemto support commissioning of the facility since July 2001 and theinterconnection facilities have exported power to the transmission system sincethat time.  The cost of theseinterconnection facilities was approximately $5.1 million, and is included onthe balance sheet as property, plant and equipment.

 

29

----

 

**The Company’s Obligations**

 

The Company has installed and owns, operates andmaintains a portion of the interconnection facilities, including, but notlimited to, a 230 kV switchyard, including generator step up transformers,instrument transformers, revenue metering, power circuit breakers, control andprotective relay panels, supervisory control and data acquisition equipment,and protective relaying equipment.

 

The Company is obligated to give prior notice to JCP&Lbefore undertaking any additions, modifications or replacements to the Company’sfacility or its interconnection facilities that will increase the generatingcapacity of the Company’s facility or could reasonably be expected to affectthe transmission system, the JCP&L Interconnection Facilities or theoperation of the Company’s facility. The Company must reimburse JCP&L forall costs incurred by JCP&L associated with any modifications, additions orreplacements that it must make to the transmission system or the JCP&L InterconnectionFacilities, as reasonably required by JCP&L, in connection with the Company’sproposed addition, modification or replacement at the Company’s facility. TheCompany is obligated to modify its portion of the interconnection facilities asmay be required to conform to changes in good utility practice or as requiredby PJM Interconnection, L.L.C., which is the independent system operator thatoperates the transmission system to which the Company’s facility will beinterconnected.

 

The Company is obligated to keep the Company’s facilityinsured against loss or damage in accordance with the minimum coveragesspecified in the Interconnection Agreement.

 

**Operation andMaintenance of Interconnection Facilities**

 

The parties are obligated to operate and maintaintheir respective portions of the interconnection facilities in accordance with goodutility practices and the requirements and guidelines of PJM and JCP&L.

 

JCP&L will have the right to disconnect theCompany’s facility from its transmission system and/or curtail, interrupt or reducethe output of the Company’s facility when operation of the Company’s facilityor the interconnection facilities adversely affects the quality of service renderedby JCP&L or interferes with the safe and reliable operation of its transmissionsystem or the regional transmission system. JCP&L, however, is obligated touse reasonable efforts to minimize any disconnection, curtailment, interruptionor reduction in output.

 

In accordance with good utility practice, JCP&L mayremove the interconnection facilities from service as necessary to performmaintenance or testing or to install or replace equipment on theinterconnection facilities or the transmission system. JCP&L is obligatedto use due diligence to restore the interconnection facilities to service aspromptly as practicable.

 

In addition, if the Company fails to operate,maintain, administer, or insure its facility or its portion of theinterconnection facilities, JCP&L may, following 30 days notice andopportunity to cure the failure, disconnect the Company’s facility from thetransmission system.

 

**RevenueMetering**

 

Revenue meters, which are part of the interconnectionfacilities, will be installed to measure the transfer of electrical energy betweenthe parties at the point of interconnection. The revenue meters have beeninstalled at the Company’s expense and will be owned, maintained and repairedby JCP&L, also at the Company’s expense. JCP&L has provided, at theCompany’s expense, telemetering equipment which has been installed by us, toretrieve certain information. The revenue meters are to be tested at least onceevery two years, or more frequently at the Company’s request. Any revenue meterfound to be inaccurate by greater than 1% is to be adjusted, repaired orreplaced.

 

**Land Rightsand Access**

 

The Company has granted to JCP&L the right ofreasonable access and all necessary rights of way, easements, and licenses as JCP&Lmay require to install, operate, maintain, replace and remove the revenuemeters and other portions of the JCP&L interconnection facilities.

 

30

----

 

**Force Majeure**

 

If either party is delayed in or prevented fromperforming or carrying out its obligations under the interconnection agreement byreason of force majeure, the party will not be liable to the other party for oron account of any loss, damage, injury or expense resulting from or arising outof the delay or prevention; however, the party encountering the delay orprevention will use due diligence to remove the cause or causes thereof.

 

**Default**

 

The events of default under the interconnectionagreement are:

 

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

 

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

 

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

 

•                  voluntaryfiling by a party of a petition in bankruptcy or consent to the filing of abankruptcy or reorganization petition, an assignment for the benefit of creditors,an admission by a party in writing of its inability to pay its debts as theycome due, or consent to the appointment of a receiver, trustee, or liquidatorof a party or any part of its property; and

 

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

 

Upon an event of default, the non-defaulting party maygive notice of the event of default to the defaulting party. The defaultingparty will have 60 days following the receipt of the notice to cure the defaultor to commence in good faith the steps necessary to cure a default that cannotbe cured within that 60-day period. If the defaulting party fails to cureits default within 60 days or fails to take the steps necessary to cure adefault that cannot be cured within a 60-day period, the non-defaultingparty will have the right to terminate the interconnection agreement.

 

JCP&L will have the right to operate and/or topurchase specific equipment, facilities and appurtenances from the Company thatare necessary for JCP&L to operate and maintain its transmission system if (i) theCompany commences bankruptcy proceedings or petitions for the appointment of atrustee or other custodian, liquidator, or receiver; (ii) a court issues adecree for relief of the Company or appoints a trustee or other custodian,liquidator, or receiver for the Company or a substantial part of the Company’s assetsand the decree is not dismissed within 60 days or (iii) the Company ceasesoperation for 30 consecutive days without having an assignee, successor, ortransferee in place.

 

**OperationsAgreement and Services Agreement**

 

The Company entered into a Development and OperationsServices Agreement (the “Operations Agreement”), dated as of March 10,2000, with AES Sayreville under which AES Sayreville is providing, operatingand maintenance services for the Company’s facility for a period of 32 years.Under the Operations Agreement, AES Sayreville is responsible for, among otherthings, preparing plans and budgets related to start-up and commercialoperation of the Company’s facility, providing qualified operating personnel,making repairs, purchasing consumables and spare parts (not otherwise providedunder the maintenance services agreement) and providing other services asneeded according to industry standards.

 

AES Sayreville is compensated for its maintenance andoperation services on a cost basis, and it also receives certain managementfees which it passes on to The AES Corporation. For the years ended December 31, 2004, 2003 

 

31

----

 

and 2002, the Company paid AES Sayreville a total of$5.3 million, $5.3 million and $4.4 million, respectively, for their services.

 

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

 

**WaterSupply Agreement**

 

The Company has entered into a Water Supply Agreementdated as of December 22, 1999 with the Borough of Sayreville (“Borough”) underwhich the Borough will provide untreated water to the Company’s facility.

 

**Supply ofUntreated Water**

 

***Untreated WaterSupply***

 

The Borough of Sayreville is in the final stages ofapproval of the Lagoon Water Pipeline, Lagoon Pumping Station, and SayrevilleInterconnection Number 2.  The Company wasresponsible for selection of a contractor and for payment of all costs.  The pipeline construction has beencompleted.  The construction contract forthe Pumping Station was awarded and is completed.  Startup and commissioning of this systemstarted May 1, 2002.  Subsequent tothe completion of the Lagoon Pumping Station and the Lagoon Water Pipeline, theBorough has made available to the Company’s facility a supply of untreatedwater from the South River that is up to 4.6 million gallons per day and 1.53 billiongallons per year.  The Borough must usereasonable efforts to maintain the Lagoon’s water level at an elevation of 29feet, but during periods when water cannot be drawn from the South River, theLagoon’s water level must not be drawn to elevations below 20 feet. During periodswhen either the Lagoon’s water level is below 20 feet and water cannot be drawnfrom the South River or when water from the Lagoon is needed to ensure a supplyof treated water to Borough treated water customers, the Borough must supplythe Company’s facility with water drawn from the Duhernal aquifer andtransported through the Duhernal water pipeline.

 

***Compensation***

 

The cost of the pipeline and pumping station wasapproximately $678,000 and $1.71 million, respectively.  The Company has paid the pipeline and pumpingstation projects in full, as of December 31, 2003. In addition, the Company paidthe Borough an initial payment of $150,000 from the bond proceeds, which was creditedto the Company’s account and was used to offset the cost of untreated waterpurchased during the Company’s project’s start-up and testing phase and duringthe first year of operation.  If theBorough incurs additional costs from Middlesex Water Company as a result of theBorough providing the Company with Duhernal Water, the Company also must paythe Borough for those additional costs. The Company must pay the Boroughmonthly for all untreated water delivered to the point of delivery during theprior month. The base rate for untreated water supplied from the South River is$216 per million gallons, which includes $53 per million gallons to coveroperations, maintenance and administrative costs and $163 per million gallonsto cover past infrastructure costs. The operations and maintenance rate will beescalated in accordance with the percentage changes in water rates that areapplicable to other Borough water customers. The base rate for untreated waterdelivered from the Duhernal aquifer is $932 per million gallons which includes$785 to cover the operations, maintenance and administrative costs and $147 tocover acquisition costs. The operations and maintenance portion of the baserate for water delivered from the Duhernal aquifer is also subject toescalation in accordance with the percentage changes in water rates that areapplicable to other Borough water customers.

 

With respect to each contract year there is a minimumbill amount, which is initially $300,000 per year. One-twelfth of the minimumbill amount must be paid each month. The minimum bill amount is adjusted asfollows:

 

•                  Forthe first contract year it is reduced by the amount of the initial payment;

 

•                  itis reduced by an amount equal to the product of (x) the quantity of untreatedwater that would have been delivered but for service interruptions by theBorough and (y) the rate for untreated water delivered from the South River;and

 

32

----

 

•                  startingwith 8th contract year and with six months prior written notice, the Companyhas the right to reduce the minimum bill amount for any contract year byreducing the annual quantity of water to be provided by up to 15%. Starting withthe 21st contract year the Company may reduce the annual quantity to bedelivered without limit.

 

***ServiceInterruptions***

 

In the event that there is an interruption in thedelivery of untreated water attributable to a break in the infrastructure, the Boroughwill provide a shortfall notice and the Borough and the Company will agree onthe best way to repair the infrastructure and restore service. If the Boroughfails to restore service within a reasonable period of time, the Company may,at the Company’s expense, contract with contractors reasonably approved by theBorough to remedy the interruption.

 

**Infrastructureand Real Estate Rights—The Lagoon Water Pipeline, Lagoon Pumping Station andSayreville Interconnection Number 2**

 

The Borough has designed, at the Company’s expense,the Lagoon Water Pipeline, Lagoon Pumping Station and Sayreville InterconnectionNumber 2 in conformance with standard water system practice. The Borough wasresponsible for obtaining, at the Company’s expense, all necessary governmentapprovals. The Borough and the Company have cooperated to obtain, at theCompany’s expense, the real estate rights necessary for the construction,operation and maintenance of the Lagoon Water Pipeline, Lagoon Pumping Stationand Sayreville Interconnection Number 2. The Borough was not required toexercise its power of eminent domain to obtain the necessary real estate rights.The Company obtained easement rights from two adjacent property owners and theBorough of Sayreville. The Company 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,the Company executed, without being compensated by the Borough, the documentsnecessary to evidence the Borough’s ownership of those facilities in November 2003.

 

**Operation andMaintenance of Infrastructure**

 

The Borough will operate and maintain allinfrastructure necessary to supply the untreated water to the project boundary.The Company will reimburse the Borough for its associated maintenance andreplacement costs.

 

The Borough will own and maintain metering equipmentto measure the delivery of untreated water from each source to the point of deliveryand will transmit a signal of the measurements to the Borough, which uses theinformation to compile billing invoices. At least once every five years, ormore often if requested by either party, the Company must test the meteringequipment. If the tests reveal that the metering equipment is inaccurate, theequipment must be recalibrated or replaced and a billing adjustment may be made.

 

**InfrastructureStudies and Additions**

 

The Company pays for the actual cost, subject to amutually agreed upon cap, of infrastructure studies to determine the costs and benefitsof (i) installing a new pipeline and (ii) improving the existingSouth River intake structure. The Company will have the right to pay for theupgrades, improvements and/or new infrastructure that may be identified asnecessary or desirable by the studies in exchange for the benefits allowed withtheir implementation. Other water users that benefit from the improvements willpay a pro-rata portion of the costs of the improvements.

 

If the Borough or the Company reasonably determinesthat capital improvements to the infrastructure are required, the party willnotify the other party and the parties will meet in good faith to determine thescope of the capital improvements. The Company will pay for its costs andexpenses arising from the capital improvements as well as those of the Borough.If the Company damages either infrastructure or capital improvements, theCompany will restore the damaged portions thereof or pay the Borough to restorethe damaged portions.

 

**LandDevelopment Plan**

 

The Company entered into an agreement with the Boroughof Sayreville by which the Company will develop and implement a plan to replacetrees which were removed during clearing of the facility site.  The Land 

 

33

----

 

Development Plan is required for final site approval. Theestimated 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 December 31,2004.  On July 23, 2003, the projectwas secured by a letter of credit issued by Union Bank of California for$425,000 with the Borough of Sayreville as the beneficiary.  This irrevocable standby letter of credit hadan expiration date of June 30, 2004, but was automatically extended foranother one-year period. On August 19, 2004, AES secured a performancebond for $539,493 relating to the tree replacement and other site improvements.This bond replaces the previous letter of credit and represents the amountpotentially due if there is a failure of AES Red Oak, LLC to take actionregarding the plan.

 

**AdditionalObligations of the Parties**

 

***AdditionalObligations of the Borough***

 

The Borough must use its best efforts to either (i) amendits existing permit, which limits pumping from the Lagoons to 1,000,000 gallonsof water per day or (ii) obtain or change any other permits necessary toallow it to meet its obligations under the water supply agreement. The Borough mustprovide the Company with written invoices by not later than the 15th of eachmonth. The amounts due under the invoices are due within 30 days of receipt.The Borough must provide the Company and the financing parties with escortedaccess to any infrastructure or other property owned by the Borough to which theCompany or the financing parties reasonably request access.

 

***The Company’sAdditional Obligations***

*** ***

The Company must provide the Borough with notice ofany violation by the Borough of applicable government approvals related to the deliveryof untreated water. Not later than the 15th day of each month, the Company mustprovide the Borough with a detailed invoice listing any amounts due to theCompany under the water supply agreement.

 

**Force Majeure**

 

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

 

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

 

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

 

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

 

**Term**

 

The water supply agreement has a term of 30 years withan option to extend for up to four additional five year terms. The agreementmay be terminated by the Company and by the Borough under some circumstancesincluding; (i) the Company’s failure to deliver a commencement notice onor prior to December 31, 2003; (ii) the occurrence of a bankruptcyevent affecting the other party; and (iii) failure of a party to perform amaterial obligation within the time contemplated and the continuation of thefailure for a period of 30 days or more.

 

**ITEM 2.**                              PROPERTIES

** **

The Company’s principal property is the project site, onwhich the Company’s facility is located, which the Company owns. The site islocated in the Borough of Sayreville, Middlesex County, New Jersey on anapproximately 62-acre parcel of land. The Company has access, utility andconstruction easements and licenses across neighboring property. The Companyhas title insurance in connection with the Company’s property rights.

 

Under the Company’s financing documents, its rightsand interests in the Company’s property are encumbered by mortgages, securityagreements, collateral assignments and pledges for the benefit of the Company’sbondholders and other senior creditors.

 

34

----

 

The Company’s facility consists of an approximately830 megawatt (net) gas-fired combined cycle electric generating facility. TheCompany’s facility was designed, engineered, procured and constructed for theCompany by WGI and Raytheon, as successor guarantor, under a fixed-price,turnkey construction agreement.  Amongother components, the Company’s facility uses three Siemens Westinghouse model501F combustion turbines, three heat recovery steam generators and onemulticylinder steam turbine. Under a maintenance services agreement, SiemensWestinghouse is providing the Company with specific combustion turbinemaintenance services and spare parts in respect of each combustion turbineuntil sixteen years after execution of the agreement or the twelfth plannedoutage of the combustion turbine, whichever is earlier, unless the Company exercisesits right to cancel the agreement after the first major outage of thecombustion turbines which will be after approximately the eighth year ofoperation of the facility. Under the Power Purchase Agreement, Williams Energyor its affiliates is supplying the fuel necessary to allow the Company toprovide capacity, fuel conversion and ancillary services to Williams Energy.AES Sayreville has provided development, construction management, andoperations and maintenance services for the Company’s facility under anoperations agreement. The Company has provided installation, operation andmaintenance of facilities necessary to interconnect the Company’s facility to JCP&L’stransmission system under an interconnection agreement.

 

**ITEM 3.**                              LEGAL PROCEEDINGS

 

***Williams Energy***-On November 4, 2003, the Company and Williams Energy, through arbitration,settled a dispute regarding the date of commercial operation and the properinterpretation of certain provisions of the Power Purchase Agreement relatingto amounts the Company claimed were payable by Williams Energy. The arbitrationrelated to 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 the Company of $4,050,153 on November 14, 2003,which included $225,055 of interest from October 2002 to the payment date,and the Commercial Operation Date was deemed to be September 28,2002.  The related revenue had beensubstantially recorded in 2002, with the remaining amount recorded in thefourth quarter of 2003. This payment settled all payment obligations betweenthe parties for the month of September 2002 with respect to the CommercialOperation Date under the Power Purchase Agreement.  From the Company’s perspective, the cashpayment has the economic effect of recognizing a Commercial Operation Date priorto of September 28, 2002. The Companyis currently disputing $1.4 million of merchant price, testing gas andother charges with Williams Energy that the Companycontends Williams Energy owes to us. These chargeswere not part of the arbitration discussed above.

 

*Raytheon* - OnOctober 28, 2004, the Company received a complaint filed by Raytheon inthe State of New York. In the complaint, Raytheon is seeking to recover$30,302,269, which represents the amount Red Oak drew down on the letter ofcredit on August 26, 2004, attorneys’ fees and costs, and also to recoverup to $110 million of net expense Raytheon claims to have incurred in goodfaith under the governing guaranty and construction agreements.  The Company filed an answer and counterclaimon December 13, 2004, in which it denied liability to Raytheon, assertedvarious defenses and countersued Raytheon for breach of the EPC Agreement andSettlement Agreement, breach of express warranties under the EPC Agreement, andfraudulent misrepresentation and concealment. The Company claimed damages of not less than $140 million and attorneys’fees and costs to the extent allowable. Raytheon moved to dismiss the Company’s fraudulent misrepresentation andconcealment claim and to limit Company’s damages on January 14, 2005.  The Company filed its opposition to themotion to dismiss and also filed an amended counterclaim on February 18,2005.  Thereafter, Raytheon agreed to withdraw its motion to dismiss.  OnMarch 4, 2005, Raytheon filed a motion for summary judgment that seeks thereturn of $16,311,711 of the Letter of Credit draw.  Company has not yetfiled its opposition to the motion, and Raytheon has not yet filed an answer tothe amended counterclaim. The Company has recorded the $30.3 million asa current liability, but has not accrued any additional amounts with respect toRaytheon’s claims. The Company believes it has meritorious defenses to theclaims asserted by Raytheon against it and intends to defend the lawsuit andpursue its counterclaims vigorously.

 

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

 

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

 

35

----

 

 

**PART II**

 

**ITEM5.**                              MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

There is no market for the Company’s equity interests.All of the Company’s member interests are owned by the Company’s parent, AESRed Oak, Inc., a wholly owned subsidiary of The AES Corporation. ** **On December 22,2003, the Company declared and paid a $1.05 million dividend to AES Red Oak, Inc.No dividends were paid in 2004.

 

**ITEM 6.**                              SELECTED FINANCIAL DATA

** **

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

 

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

** **

The following discussion and analysis should be readin conjunction with the Company’s financial statements and the notes thereto includedelsewhere in this annual report. The following discussion involvesforward-looking statements. The Company’s actual results may differ significantlyfrom the results suggested by these forward-looking statements. See “CautionaryNote Regarding Forward-Looking Statements.”

 

**General**

 

AES Red Oak, L.L.C. (“the Company”) was formed on September 13,1998 to develop, construct, own, operate and maintain the Company’s facility. TheCompany was dormant until March 15, 2000, the date of the sale of theCompany’s senior secured bonds. The Company obtained $384 million of projectfinancing from the sale of the senior secured bonds. The total cost of theconstruction of the Company’s facility was approximately $450****million, which was financed by the proceeds from theCompany’s sale of the senior secured bonds, equity contributions, operatingrevenues and the amount of liquidated damages received from Raytheon through August 10,2002 under the Construction Agreement, as described below. In late September 2000,the Company consummated an exchange offer whereby the holders of the Company’s seniorsecured bonds exchanged their privately placed senior secured bonds forregistered senior secured bonds.

 

The Company reached provisional acceptance on August 11,2002, risk transfer on August 13, 2002, and took the position that theCompany 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 agreedupon.  See “Item 3 – Legal Proceedings”.

 

Since achieving commercial operations, under the PowerPurchase Agreement with Williams Energy, the Company is eligible to receivevariable operations and maintenance payments, total fixed minimum capacity payments,energy exercise fee payments (each as defined in the Power Purchase Agreement)and other payments for the delivery of fuel conversion, capacity and ancillaryservices.  During 2003 the PJM market,into which the Company’s generation is distributed, experienced a generaldecline in the amount paid for electricity. There was also a marked increase inthe cost of natural gas. As a result, Williams Energy dispatched the Company’s facilityon a very limited basis. The Company’s facility was called on to generate only 21%of the year in 2004 and only 14% of the year in 2003. Accordingly, the minimumcapacity payments have been the Company’s primary source of operating revenues,representing $62.5 million and $62.0 million of the Company’s total revenuesfor the years ended December 31, 2004 and 2003, respectively.

 

Based upon current market conditions and projectionsfrom Williams Energy, the Company anticipates a dispatch level in 2005 to bewithin the range of the levels for 2003 and 2004.  In the event that these market conditions donot improve, and Williams Energy does not dispatch the Company’s facility atall in 2005, the Company believes that the fixed capacity payments aresufficient to meet the cash demands of the Company’s business, but the Company willrequire the additional revenue from such fuel conversion services to beprofitable.

 

The Company is concerned that Williams Energy will notdispatch the Company’s facility in a manner that will increase itsprofitability. As a result, the Company’s management is researching ways toenhance its facility’s 

 

36

----

 

performance. The Company believes that any savings instarting the facility or improved performance will also benefit Williams Energy,with the result that Williams Energy may find it more economically feasible todispatch the Company’s facility.

 

The following discussion presents certain financialinformation for the years ended December 31, 2004, 2003 and 2002.

 

**EquityContributions**

 

Under an equity subscription agreement, AES Red Oak, Inc.agreed to contribute up to approximately $56.7 million to the Company to fundproject costs.  As of December 31,2002 all $56.7 million had been contributed, and there have been no furthercontributions other than employee stock issuances.  The equity that AES Red Oak Inc. provided tothe Company was provided to it by The AES Corporation.

 

**Results ofOperations**

 

Net income for 2004 was $0.8 million, while the firstfull year of operation in 2003 yielded a net loss of $0.3 million.  The Company commenced commercial operationsin August 2002 and had a net loss for the year ended December 31,2002 of $3.0 million.

 

Operating revenues were approximately $69.7 million,$64.2 million and $26.2 million for the years ended December 31, 2004,2003 and the partial year of operations ended December 31, 2002,respectively. These amounts included fixed payments of $62.5 million, $62.0million and $15.2 million for the years ended December 31, 2004, 2003 and2002, respectively.  Revenues from September 2002through December 2004 consist of capacity sales and ancillary services underthe Power Purchase Agreement. Revenues for the period of August and partof September 2002 consisted of merchant revenue in this partial year ofoperations. The remaining amount of revenue relates to variable revenue which theCompany receives when dispatched, and merchant revenue the Company earned priorto the Company’s commercial operation date in September 2002. The Companyhas no control over when the facility is dispatched, as that decision is madeby Williams Energy based on several factors including market conditions.

 

Operating expenses were $34.5 million and $30.9million for the years ended December 31, 2004 and 2003, respectively and$16.8 million for the partial year of operations ended December 31, 2002.  These costs are largely of a recurring natureand are discussed below.

 

Fuel purchased from Williams Energy during the periodof merchant operations and testing was $0.6 million, $0.9 million and $6.9million for the years ended December 31, 2004, 2003 and 2002,respectively. The Company purchased more fuel in 2002 in connection with themerchant operations the Company conducted in the period prior to the commercialoperation date.

 

The fuel conversion volume rebate was $5.9 million and$5.8 million for the years ended December 31, 2004 and 2003, respectivelyand $1.6 million for the partial year of operations ended December 31, 2002.This cost represents payments to Williams and is based upon a twelve monthfacility utilization factor.

 

Corporate management fees were $1.6 million for eachof the years ended December 31, 2004 and 2003 and was $0.6 million for thepartial year of operations ended December 31, 2002. Corporate managementfees are charged on a monthly basis based on a fixed amount which is adjustedannually for inflation.

 

Other operating expenses were $10.6 million and $7.2million for the years ended December 31, 2004 and 2003, respectively and$2.0 million for the partial year of operations ended December 31, 2002.  Maintenance costs were higher in the 2004period, largely the result of two planned combustor inspection outages,compared to only one in 2003, and other unplanned maintenance costs.

 

Depreciation expense was $11.8 million and $11.4million for the years ended December 31, 2004 and 2003, respectively andwas $4.4 million for the partial year of operations ended December 31, 2003.The increase in depreciation expense results from additional parts placed inservice after planned combustor inspection outages.

 

General and administrative costs were $1.1 million and$1.7 million for the years ended December 31, 2004 and 2003, respectivelyand $0.4 million for the partial year of operations ended December 31,2002. The decrease of general and administrative costs in the year ended December 31,2004 as compared to the year ended December 31, 

 

37

----

 

2003 primarily relates to higher legal fees in the2003 period related to the dispute with Williams Energy of the Commercial OperationDate.

 

Total other income (expense) was approximately $(34.4)million and $(33.6) million for the years ended December 31, 2004 and2003, respectively and $(12.5) million for the partial year of operations endedDecember 31, 2002. These costs are comprised of other income and expense,liquidated damages received and paid and interest income and expense.

 

Other income from interim rebates was approximately$1.4 million for the years ended December 31, 2003, and $1.0 million forthe partial year of operations ended December 31, 2002. These amountsconsist of interim rebates received from Raytheon under the constructionagreement as a result of their failure to meet heat rate and output performanceguarantees.  The Company did not invoiceinterim rebates in 2004, pending resolution of the Final Acceptance date withRaytheon.

 

Other (expenses) included letter of credit fees whichwere approximately $(1.0) million for each of the years ended December 31,2004 and 2003 and $(.4) million for the partial year of operations ended December 31,2002. These amounts consist of fees paid to Dresdner Bank pursuant to theCompany’s debt service reserve letter of credit and reimbursement agreement andPower Purchase Agreement letter of credit and reimbursement agreement.  See “Liquidity and Capital Resources” for adescription of these letters of credit.

 

For the year ended December 31, 2002, the Companyrecognized revenue of $1.8 million, for liquidated damages received fromRaytheon for late completion payments and a construction related outage in November 2002.  This revenue was recognized in 2002 after thecommercial operation date.

 

For the years ended December 31, 2003 and 2002, theCompany expensed $.2 million and $1.8 million, respectively of liquidateddamages paid to Williams Energy as a result of the Company’s extension of thecommercial operation date and a construction related outage in November 2002.  This expense was recognized in 2002 after thecommercial operation date. The Company did not incur any liquidated damages forthe year ended December 31, 2004.

 

Interest income earned on invested funds, including thesecurity collateral received from Williams Energy, the proceeds of the letterof credit from Raytheon and other available funds, was approximately $.5million for each of the years ended December 31, 2004 and 2003, respectivelyand $.1 million for the partial year of operations ended December 31, 2002.  The interest income earned for the year endedDecember 31, 2003 included $.2 million of interest on amounts owed by, andpaid as part of the arbitration settlement with, Williams Energy.  See “Item 3 – Legal Proceedings”. Excludingthe interest on the arbitration settlement, interest income was approximately$.2 million higher in 2004, as compared to 2003, primarily relating to higherinterest rates. The amount of interest income earned for the year ended December 31,2003 compared to the year ended December 31, 2002 decreased as a result ofa lower average balance in the construction account resulting from the Company’suse of the bond proceeds for construction of the facility.

 

Interest (expense) was approximately $(33.8) millionand $(34.2) million for the years ended December 31, 2004 and 2003,respectively and $(13.2) million for the partial year of operations ended December 31,2002. The decrease from 2003 as compared to 2004 resulted from lower principalbalances after scheduled repayments. Interest expense was lower in 2002, ascompared to 2004 and 2003, as interest costs prior to commencement ofcommercial operations were capitalized.

 

On August 13, 2002, the risk transfer date, thebalance of construction in progress was transferred to Property, Plant andEquipment.  As of December 31, 2004,Property Plant and Equipment adjusted for accumulated depreciation was $399.3million, which includes generation, building and office equipment.

 

**Liquidity andCapital Resources**

 

*Sources and Uses of Cash*

 

Since achieving commercial operations under the PowerPurchase Agreement with Williams Energy the Company is eligible to receivevariable operations and maintenance payments, total fixed payments, energyexercise payments (each as defined in the Power Purchase Agreement) and otherpayments for the delivery of fuel conversion, capacity and ancillaryservices.  The Company currentlyanticipates being dispatched by Williams 

 

38

----

 

Energy beginning in April 2005 but can provide noassurance that this will occur.  If thefacility is not dispatched, the Company’s operating revenues will consist ofminimum capacity payments under the Power Purchase Agreement.  Any future operating revenues, including anyminimum capacity payments received in the event that Williams Energy does notdispatch the facility, will be used to fund the Company’s generation expensesand other operations and maintenance expenses and to meet the obligationsdescribed below.

 

Since September 28, 2002, Williams Energy has notdispatched the facility to a significant degree, outside the peak summer months.The minimum capacity payments provided for under the Power Purchase Agreementhave been the Company’s primary source of operating revenues, representing$62.5 million of the Company’s total revenues of $69.7 million in 2004.  The minimum cash flow from Williams under thePower Purchase Agreement is approximately $3.8 million per month for October throughMay and $7.9 million per month from June through September.

 

During 2004, net cash provided by operating activitieswas $14.1 million. The Company currently anticipates that the plant will bedispatched in future periods within a similar range as it was during 2004 and2003 and that operating cash flow will be comparable to 2004 in 2005.  The Company also believes that cash flowsfrom the sale of electricity and/or minimum capacity payments under the PowerPurchase Agreement and funds available to be drawn under the debt servicereserve letter of credit or the power purchase letter of credit will besufficient to pay project costs, including ongoing expenses and principal andinterest on the Company’s senior secured bonds, fund costs of the Company’s commercialoperations and pay fees and expenses in connection with the letters of credit.

 

The Company has provided the collateral agent with adebt service reserve letter of credit in an initial stated amount of $22.0million. The Company has also provided Williams Energy a $10 million letter ofcredit under the Power Purchase Agreement, which the Company refers to as thepower purchase letter of credit, to support specific payment obligations underthe Power Purchase Agreement. The repayment obligations with respect to anydrawings under the power purchase letter of credit are the Company’s seniordebt obligation. The interest rate on these loans would be the sum of a) thehigher of (i) the Federal Funds Rate plus .50% and (ii) the Agent’sprime rate and b) an applicable margin rate which is based upon the rating ofthe Company’s senior secured bonds. Since the Company’s senior secured bondsare currently rated below investment grade, the Company’s working capitalfacility has been unavailable and the Company is required to pay higher feesfor draws on any of the Company’s project support agreements.

 

As discussed below, WilliamsEnergy has notified the Company that it intends to post a letter of credit forthe remaining $10 million in June 2005. Under the terms of the LetterAgreement, Williams Energy has the right to recoup the Prepayment by set-off ofany and all amounts owing to the Company under the Power Purchase Agreement noearlier than the June in the calendar year after the earlier of (i) TheWilliams Companies, Inc. regaining its investment grade rating or WilliamsEnergy providing a substitute guaranty of investment grade rating; (ii) thebeginning of Contract Year 20; or (iii) the posting of alternative creditsupport by Williams Energy, whichever comes first (Note 7). Williams Energywill recoup the Prepayment by set-off, beginning in July 2005, of amountsowing to the Company under the Power Purchase Agreement. The Company iscurrently reviewing financing facilities, comparable to the working capitalagreement which expired March 31, 2005, that would allow for funds to beavailable for future working capital requirements, as needed (Note 6). Afterthe Power Purchase Agreement expires, the Company plans to depend on revenuesgenerated from market sales of electricity. These beliefs are subject to certain assumptions, risks anduncertainties, including those set forth above under the caption “CautionaryNote Regarding Forward-Looking Statements” and there can be no assurances.

 

39

----

 

*Contractual Obligations*

 

A summary of the Company’scontractual obligations and commitments as of December 31, 2004 ispresented in the table below. 

 
| **($000’s)**         | ** ** | **Total** | ** ** | **2005** | ** ** | **2006-  2007** | ** ** | **2008-  2009** | ** ** | **2010 and  Thereafter** | ** ** | **Notes  Reference** | ** ** |
|---------------------------|------------|-----------|------------|----------|------------|-----------------|------------|-----------------|------------|--------------------------|------------|----------------------|------------|
| Debt Service  Obligations |       | $         | 814,670    |     | $          | 37,648          |       | $               | 76,821     |                     | $          | 81,699               |       | $ | 618,502 |   | (a) |   |
|                      |       |      |       |     |       |            |       |            |       |                     |       |                 |       |   |   |   |   |   |
| Operations  Agreement     |       | 63,374    |       | 1,672    |       | 3,470           |       | 3,645           |       | 54,587                   |       | (b)                  |       |
|                      |       |      |       |     |       |            |       |            |       |                     |       |                 |       |
| Water Supply  Agreement   |       | 8,400     |       | 300      |       | 600             |       | 600             |       | 6,900                    |       | (c)                  |       |
|                      |       |      |       |     |       |            |       |            |       |                     |       |                 |       |
| TOTAL                     |       | $         | 886,444    |     | $          | 39,620          |       | $               | 80,891     |                     | $          | 85,944               |       | $ | 679,989 |   |   |   |

 

*(a) Debt Service Obligations(including interest)*

 

The senior secured bonds were issued in two series:8.54% senior secured bonds due 2019 (the “2019 Bonds”) in an aggregateprincipal amount of $224 million and 9.20% senior secured bonds due 2029 (the “2029Bonds”) in an aggregate principal amount of $160 million.  Principal repayment dates on the 2019 Bondsare February 28, May 31, August 31, and November 30 of eachyear, with the final payment due November 30, 2019.  Quarterly principal repayments on the 2019Bonds commenced on August 31, 2002. Annual principal repayments over the life of the 2019 Bonds range from1.0799% of original principal amount or $2.4 million to 11.2819% of originalprincipal amount or $25.3 million. Quarterly principal repayment of the 2029 Bonds does not commence until February 28,2019.

 

*(b) Operations Agreement*

 

The Company entered into an Operations Agreement (the “OperationsAgreement”), dated as of March 1, 2000 with AES Sayreville, L.L.C. bywhich AES Sayreville, L.L.C. provides operating and maintenance services for theCompany’s facility for a period of 32 years. “See Item 1 – Business”. The feeis adjusted annually by the change in Gross Domestic Product, Implicit PriceDeflator, which the Company has assumed will be 2.5% on average.  Total fees paid by the Company were $1.6million for the year ended December 31, 2004.  Under the services agreement between AESSayreville, L.L.C and The AES Corporation, The AES Corporation provides to AESSayreville, L.L.C all of the personnel and services necessary for AESSayreville, L.L.C to comply with its obligations under the Operations Agreement.These obligations are not recorded in the Company’s consolidated financialstatements until services are rendered.

 

*(c) Water Supply Agreement*

 

The Company has also entered into a contract (the “WaterSupply Agreement”), dated as of December 22, 1999, with the Borough ofSayreville (the “Borough”) pursuant to which the Borough will provide untreatedwater to the Company. The contract has a term of 30 years with an option toextend for up to four additional five-year terms. The Company is contractuallycommitted to a minimum annual payment of $300,000. These obligations are notrecorded in the Company’s consolidated financial statements until period haselapsed.

 

*Other Commitments*.

 

*Maintenance Services Agreement*

 

The Company has entered into the Maintenance ProgramParts, Shop Repairs and Scheduled Outage TFA Services Contract (the “MaintenanceServices Agreement”), dated as of December 8, 1999, with SiemensWestinghouse by which Siemens Westinghouse will provide the Company with, amongother things, combustion turbine parts, shop repairs and scheduled outagetechnical field 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, unless the Company exercises its right toterminate the agreement after the first major outage of the turbines.

 

40

----

 

The Maintenance Services Agreement indicates that theCompany will pay fees each month based on a stated amount for each equivalentbase load hour (“EBH”) of the combustion turbines, adjusted for inflation, overthe term of the agreement.  However, if ascheduled maintenance outage occurs prior to 8,000 EBH’s being accumulatedsince the last scheduled maintenance outage for that turbine, the Company willbe invoiced the remaining amount to equate to 8,000 hours (“true-up”). In theevent the Company is not required to dispatch the facility, there is no chargefor that month. Accordingly, no amounts have been included in the ContractualObligations table above.

 

The total of these payments was approximately $6.8million, $4.7 million and $1.2 million for the years ended December 31,2004, 2003 and 2002, respectively, which included true-ups for two plannedmaintenance outages in 2004 and one in 2003, as the turbines were far short ofthe 8,000 EBH level. Assuming a similar dispatch level in 2005 as in 2004, andthe performance of one planned hot gas maintenance outage, a comparable levelof payments would be expected for the year ended December 31, 2005. Basedupon the Company’s current estimates, assuming a certain number of EBH’s andequivalent starts (“ES”), the first major outages would be completed by 2011and the remaining minimum payments to Siemens Westinghouse would approximate $32million through that period.

 

*Power Purchase Agreement*

 

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, Williams Energy has provided the Company $10million of cash and has posted a $25 million letter of credit as alternatecredit support.  In the event that theWilliams Companies, Inc. regains and maintains its investment gradestatus, provides a substitute guaranty of investment grade rating, or posts aletter of credit, the Company will be required to return the $10 millionprepayment to Williams Energy. 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 ofregaining its investment grade rating or the posting of alternative creditsupport by Williams Energy whichever comes first (Note 7). The Company iscurrently reviewing financing facilities, comparable to the working capitalagreement which expired March 31, 2005, that would allow for funds to beavailable for future working capital requirements, as needed (Note 6).  As of December 31, 2004, the Company hadcash balances of approximately $41.6 million. Williams Energy has notified the Company that it intends to post aletter of credit for the remaining $10 million in June 2005. WilliamsEnergy will recoup the Prepayment by set-off, beginning in July 2005, ofamounts owing to the Company under the Power Purchase Agreement. The $10million prepayment, which is currently reported as restricted cash, will thenbe reported as unrestricted cash as amounts are effectively repaid to WilliamsEnergy. This belief is subject to certain assumptions, risks and uncertainties,including those set forth above under the caption “Cautionary Note RegardingForward-Looking Statements” and there can be no assurances that the Company’soperating revenues will generate sufficient cash.

 

*Land Development Plan*

 

The Company has entered into an agreement with theBorough of Sayreville by which the Company will develop and implement a plan toreplace trees which were removed during clearing of the facility site.  The Land Development Plan is required for finalsite 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 December 31,2004.  On July 23, 2003, the projectwas secured by a letter of credit issued by Union Bank of California for$425,000 with the Borough of Sayreville as the beneficiary.  This irrevocable standby letter of credit hadan expiration date of June 30, 2004, but was automatically extended foranother one-year period. On August 19, 2004, AES secured a performancebond for $539,493 relating to the tree replacement and other site improvements.This bond replaces the previous letter of credit and represents the amountpotentially due if there is a failure of AES Red Oak, LLC to take actionregarding the plan.

 

*Other*

 

It is anticipated that the Company will incur capitalexpenditures of approximately $1.5 million in 2005 related to generalimprovements of the facility, and another $1.3 million relating to the ConstructionAgreement.

 

41

----

 

**Risks that May Impactthe Company’s Liquidity**

 

Williams Energy is currently the Company’s solecustomer for purchases of capacity, ancillary services, and energy and theCompany’s 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.

 

The payment obligations of the Williams Companies, Inc.under its guaranty of Williams Energy’s obligations under the Power PurchaseAgreement were originally capped at an amount equal to approximately $510million. Beginning on January 1 of the first full year after thecommercial operation date, this guaranty cap is to be reduced semiannually by afixed amount which is based on the amortization of the Company’s senior securedbonds during the applicable semiannual period. As of December 31, 2004, the guarantee was capped at $501.4million.

 

Due to the downgrade of The Williams Companies, Inc.to below investment grade, the Company and Williams Energy entered into aletter agreement dated November 7, 2002 (the “Letter Agreement”) underwhich Williams Energy agreed to provide the Company with a $10 millionprepayment (the “Prepayment”) and certain additional collateral.  A description of the collateral that supportsWilliams Energy’s obligations under the Power Purchase Agreement is set forthunder “Item 1-Business Power Purchase Agreement-Security” and Footnote 7 to theCompany’s Consolidated Financial Statements.

 

Since the Company depends on Williams Energy for bothrevenues and fuel supply under the Power Purchase Agreement, if Williams Energywere to terminate or default under the Power Purchase Agreement, there would bea severe negative impact to the Company’s cash flow and financial conditionwhich could result in a default on the Company’s senior secured bonds.  Due to the current pool prices, the Company wouldexpect that if it were required to seek alternate purchasers of the Company’s powerin the event of a default of Williams Energy, even if the Company wassuccessful in finding alternate revenue sources, any such alternate revenuesources would be substantially below the amounts that would have been otherwisepayable pursuant to the Power Purchase Agreement. There can be no assurance as tothe Company’s ability to generate sufficient cash flow to cover operatingexpenses or the Company’s debt service obligations in the absence of a long-termpower purchase agreement with Williams Energy.

 

In addition to the factors discussed above, and/or theother factors listed under the “Cautionary Note Regarding Forward-LookingStatements,” if a working capital facility continues to be unavailable, theCompany could experience a negative impact on the its cash flow and financialcondition, which may result in draws upon its letters of credit.

 

**BusinessStrategy and Outlook**

 

The Company’s overall business strategy is to marketand sell all of the Company’s net capacity, fuel conversion and ancillaryservices to Williams Energy during the 20-year term of the Power PurchaseAgreement. After expiration of the Power Purchase Agreement, or in the eventthe Power Purchase Agreement is terminated prior to its 20-year term orWilliams Energy otherwise fails to perform, the Company would seek to sell theCompany’s facility’s capacity, ancillary services and energy in the spot marketor under a short or long-term power purchase agreement or into the PJM powerpool market.  Due to recent declines inpool prices, however, the Company would expect that even if it were successfulin finding alternate revenue sources, any such alternate revenues would besubstantially below the amounts that would have been otherwise receivablepursuant to the Power Purchase Agreement. There can be no assurances as to whether such efforts would besuccessful.

 

The Company intends to cause the Company’s facility tobe managed, operated and maintained in compliance with the project contractsand all applicable legal requirements.

 

**Recent and NewAccounting Pronouncements**

 

In January 2003, the Financial AccountingStandards Board (“FASB”) issued FIN No. 46, Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51 (“FIN No. 46”). In October 2003, FASB Staff Position No. 46-6, “Effective Date of FINNo. 46, Consolidation of Variable Interest Entities” deferred theeffective date of FIN No. 46 for variable interests held by a publicentity in a variable interest entity (“VIE”) that was created or acquiredbefore February 1, 2003 to the end of the first interim or annual periodending after December 15, 2003.  In December 2003, FASB issuedFIN 46 (revised December 2003), Consolidation of Variable InterestEntities, an 

 

42

----

 

Interpretation of ARB No. 51 (“FIN 46(R)”), whichclarified some requirements and incorporated several staff positions that theCompany was already required to apply.  In addition, FIN 46(R) deferredthe effective date for VIEs that were created or acquired before February 1,2003 and were not considered special purpose entities (“SPEs”) prior to theissuance of the interpretation until the end of the first reporting periodending after March 15, 2004.  FIN 46(R) defines a VIE as (i) anyentity in which the equity investors at risk in such entity do not have thecharacteristics 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 consolidated financialstatements related to the total assets and the maximum exposure to lossresulting from the Company’s interests in VIEs.  The adoption of FIN 46(R)did not have a material effect on the Company’s financial position, results ofoperations, or cash flows.

 

**CriticalAccounting Policies**

 

*General*– The Company prepares theCompany’s financial statements in accordance with accounting principlesgenerally accepted in the United States of America. As such, the Company isrequired to make certain estimates, judgments and assumptions that the Company believesare reasonable based upon the information available. These estimates andassumptions affect the reported amounts of assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the periods presented. The significant accounting policies which theCompany believes are most critical to understanding and evaluating the Company’sreported financial results include the following:  Revenue Recognition, Property, Plant andEquipment and Contingencies.

 

*Revenue Recognition —*  The Company generates energy revenues underthe Power Purchase Agreement with Williams Energy.  During the 20-year term of the agreement, theCompany expects to sell capacity and electric energy produced by the facility,as well as ancillary services and fuel conversion services.  Under the Power Purchase Agreement, theCompany also generates revenues from meeting (1) base electrical outputguarantees and (2) heat rate rebates through efficient electricaloutput.  Revenues from the sales ofelectric energy and capacity are recorded based on output delivered andcapacity provided at rates as specified under contract terms.  Revenues for ancillary and other services arerecorded when the services are rendered. Amounts that are in dispute are reservedfor accordingly, based on 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 the Company’sgeneration facilities range from five to thirty-six years.  A significant decrease in the estimateduseful life of a material amount of the Company’s property, plant or equipmentcould have a material adverse impact on the Company’s operating results in theperiod in which the estimate is revised and in subsequent periods.  The depreciable lives and original costs ofthe Company’s property plant and equipment by category are as follows:

 
| **Description of Asset**            | ** ** | **Depreciable Life** | ** ** | **Original Costs at  December 31, 2004** | ** ** | **Original Costs at  December 31, 2003** | ** ** |
|-------------------------------------|------------|----------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | ** **           | ** ** | **(in thousands)**                            | ** ** | **(in thousands)**                            | ** ** |
| Buildings                           |       | 35                   |       | $                                             | 1,767      |                                          | $          | 1,767 |   |
| Vehicles                            |       | 5                    |       | 112                                           |       | 112                                           |       |
| Computers                           |       | 6                    |       | 772                                           |       | 772                                           |       |
| Furniture  and Fixtures             |       | 10                   |       | 515                                           |       | 515                                           |       |
| Combustion  Turbine Generator Parts |       | 9-36                 |       | 53,345                                        |       | 45,367                                        |       |
| Gas Heaters                         |       | 35                   |       | 1,119                                         |       | 1,119                                         |       |
| Spare Parts  Inventory              |       | —               |       | 5,379                                         |       | 12,751                                        |       |
| Plant                               |       | 35                   |       | 363,943                                       |       | 362,390                                       |       |
|                                |       |                 |       | $                                             | 426,952    |                                          | $          | 424,793 |   |

 

*Spare Parts Inventory* – Spareparts inventory consists of rotable and other spare parts, primarily coveredunder the Maintenance Services Agreement discussed in Note 8.  Inventory is reported at cost and is includedin Property, Plant and Equipment, once received from Siemens Westinghouse.  The liability for these spare parts isreflected as 

 

43

----

 

current and long-term liabilities in the accompanying balance sheets.For financial reporting purposes, payments made to Siemens Westinghouse aretreated as a reduction of the liability in the accompanying balance sheet,except for the portion that is considered maintenance expense when a scheduledoutage occurs.  Spare parts begin to bedepreciated over their useful lives once placed in service.

 

*Commitments and Contingencies*–

 

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

 

On August 26, 2004, the Company drew downapproximately $30.3 million under a letter of credit posted by Raytheonpursuant to the terms of the EPC Agreement. Prior to this date, the Company haddrawn $544,000 on this letter of credit. The Company believes that Raytheonsubstantially breached the EPC Agreement, due, among other things, to the facility’sfailure to achieve compliance with certain performance tests, and Raytheon’sfailure to complete other services under the EPC Agreement and certainamendments thereto, including a Settlement Agreement dated August 6, 2002,that purported to resolve disputes over whether Raytheon had achievedMechanical Completion and Provisional Acceptance. As a result, the Companyclaims that Raytheon’s breaches have caused damages in excess of the amount ofthe letter of credit. Raytheon disputes these claims and has failed and refusedto pay costs and damages to the Company despite the Company’s demands for suchpayment.

 

On August 27, 2004, Raytheon filed a constructionlien claim for $30,963,662 in Middlesex County against the real property andimprovements owned by the Company under the New Jersey Construction LienLaw.  Among other things, Raytheon claims therein that the draw of theLetter of Credit represents a debt to Raytheon owed by the Company.

 

On October 28, 2004, the Company received acomplaint filed by Raytheon in the State of New York. In the complaint,Raytheon is seeking to recover $30,302,269, which represents the amount Red Oakdrew down on the letter of credit on August 26, 2004, attorneys’ fees andcosts, and also to recover up to $110 million of net expense Raytheon claims tohave incurred in good faith under the governing guaranty and constructionagreements.  The Company filed an answerand counterclaim on December 13, 2004, in which it denied liability toRaytheon, asserted various defenses and countersued Raytheon for breach of theEPC Agreement and Settlement Agreement, breach of express warranties under theEPC Agreement, and fraudulent misrepresentation and concealment.  The Company claimed damages of not less than$140 million and attorneys’ fees and costs to the extent allowable.  Raytheon moved to dismiss the Company’sfraudulent misrepresentation and concealment claim and to limit the Company’sdamages on January 14, 2005.  TheCompany filed its opposition to the motion to dismiss and also filed an amendedcounterclaim on February 18, 2005.  Thereafter,Raytheon agreed to withdraw its motion to dismiss.  On March 4, 2005,Raytheon filed a motion for summary judgment that seeks the return of$16,311,711 of the Letter of Credit draw.  The Company has not yet filedits opposition to the motion, and Raytheon has not yet filed an answer to theamended counterclaim. The Company has recorded the $30.3 million as a currentliability, but has not accrued any 

 

44

----

 

additionalamounts with respect to Raytheon’s claims.  The Company believes it hasmeritorious defenses to the claims asserted by Raytheon against it and intendsto defend the lawsuit and pursue its counterclaims vigorously.

 

*Williams Energy*- 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 andWilliams Energy settled this dispute. The Company is also disputing $1.4 million****ofmerchant price, testing gas and other charges with Williams Energy that theCompany contends is owed from Williams. This was not part of the abovearbitration.

 

 

**ITEM7A.**                    QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The Company issued and has outstanding two series ofbonds, registered under the Securities Act of 1933.  As of December 31, 2004, the aggregateoutstanding principal amount of these bonds was $370.1 million. The Company isnot subject to interest rate risk as the interest rates associated with theCompany’s outstanding indebtedness are fixed over the life of the bonds.

 

The Company currently has no other financial orderivative financial instruments. The Company does not believe that the it facesother material market risks requiring disclosure pursuant to Item 305 ofRegulation S-K.

 

During 2003 the PJM market, into which the Company’s facility’sgeneration is distributed, experienced a general decline in the amount paid forelectricity. This, in combination with a marked increase in the cost of naturalgas, was a major factor in Williams’ decision to dispatch the Company’s facilityon a very limited basis. These market conditions continued through 2004. Basedupon current market conditions and projections from Williams, the Company anticipatesa dispatch level in 2005 comparable to the range over the last two years.  In the event that these market conditions donot improve, and Williams does not dispatch the Company’s facility at all in2005, the Company believes that the fixed capacity payments are sufficient tomeet the cash demands of the Company’s business, but the Company requires theadditional revenue from such fuel conversion services to be profitable.

 

45

----

 

**ITEM8.**                             FINANCIALSTATEMENTS AND SUPPLEMENTAL DATA

 

**AESRed Oak L.L.C. and Subsidiary(An Indirect, Wholly OwnedSubsidiary Of The AES Corporation)**

 

**IndexTo Consolidated Financial Statements**

 
| Report of Independent Registered Public  Accounting Firm     |   |
|--------------------------------------------------------------|--------|
|                                                         |   |
| 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

----

 

**Report of Independent Registered Public Accounting Firm**

 

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

 

We have audited the accompanying consolidated balancesheets of AES Red Oak, L.L.C. and Subsidiary (an indirect wholly ownedsubsidiary of The AES Corporation) (the “Company”) as of December 31, 2004and 2003 and the related consolidated statements of operations, changes inmember’s capital and cash flows for each of the three years in the period endedDecember 31, 2004. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thefinancial statements based on our audits.

 

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required tohave, nor were we engaged to perform, an audit of its internal control overfinancial reporting.  Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of AES RedOak, L.L.C., and Subsidiary as of December 31, 2004 and 2003, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States of America.

 

As more fully discussed in Note 7, the Company’sdependence upon Williams Power Company, Inc., formerly Williams EnergyMarketing & Trading Company, under the Power Purchase Agreementexposes the Company to possible loss of revenues and fuel supply. There can beno assurances as to the Company’s ability to generate sufficient cash flow tocover operating expenses or debt service obligations in the absence of a PowerPurchase Agreement with Williams Power Company, Inc. and related guarantyby The Williams Companies, Inc. or their affiliates.

 

 

Deloitte & Touche LLPMcLean, Virginia

March 24, 2005

 

47

----

 

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

 

**ConsolidatedBalance Sheets,**December 31, 2004 and 2003*(dollars in thousands, exceptshare amounts)*

 
| ** **                                                                                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS:**                                                                                                  |       |     |       |     |       |
|                                                                                                         |       |     |       |     |       |
| Current  Assets:                                                                                             |       |     |       |     |       |
| Cash                                                                                                         |       | $        | 5          |     | $          | 38 |   |
| Restricted  cash at cost, which approximates market value                                                    |       | 41,584   |       | 34,837   |       |
| Receivables                                                                                                  |       | 4,374    |       | 4,070    |       |
| Receivable  from affiliate                                                                                   |       | 30       |       | 51       |       |
| Prepaid and  other assets                                                                                    |       | 599      |       | 628      |       |
| Total  current assets                                                                                        |       | 46,592   |       | 39,624   |       |
| Land                                                                                                         |       | 4,240    |       | 4,240    |       |
| Property,  plant, and equipment – net of accumulated depreciation of $27,614 and  $15,830, respectively |       | 399,338  |       | 408,963  |       |
| Deferred  financing costs – net of accumulated amortization of $3,941 and $3,128  respectively          |       | 14,764   |       | 15,577   |       |
| Other assets                                                                                                 |       | 606      |       | 219      |       |
| Total assets                                                                                                 |       | $        | 465,540    |     | $          | 468,623 |   |
|                                                                                                         |       |     |       |     |       |
| **LIABILITIES  AND MEMBER’S EQUITY**                                                                    |       |     |       |     |       |
| ** **                                                                                                   |       |     |       |     |       |
| Current  Liabilities:                                                                                        |       |     |       |     |       |
| Accounts  payable                                                                                            |       | $        | 784        |     | $          | 398 |   |
| Accrued  liabilities                                                                                         |       | 1,945    |       | 956      |       |
| Accrued  interest                                                                                            |       | 2,722    |       | 2,759    |       |
| Liabilities  under spare parts agreement – current portion                                              |       | 827      |       | 4,520    |       |
| Payable to  affiliate                                                                                        |       | 282      |       | 131      |       |
| Bond  payable-current portion                                                                                |       | 5,072    |       | 5,230    |       |
| Payable to  Raytheon.                                                                                        |       | 30,302   |       | —   |       |
| Payable to  Williams                                                                                         |       | 10,000   |       | 35,000   |       |
| Total  current liabilities                                                                                   |       | 51,934   |       | 48,994   |       |
|                                                                                                         |       |     |       |     |       |
| Bonds  payable                                                                                               |       | 365,060  |       | 370,132  |       |
| Other  liabilities                                                                                           |       | 141      |       | 2,017    |       |
| Total  liabilities                                                                                           |       | $        | 417,135    |     | $          | 421,143 |   |
|                                                                                                         |       |     |       |     |       |
| Commitments  and Contingencies (Note 8)                                                                      |       |     |       |     |       |
|                                                                                                         |       |     |       |     |       |
| Member’s  capital:                                                                                      |       |     |       |     |       |
| Common  stock, $1 par value-10 shares authorized, none issued or outstanding                                 |       | $        | —     |     | $          | — |   |
| Contributed  capital                                                                                         |       | 56,873   |       | 56,775   |       |
| Member’s  deficit                                                                                       |       | (8,468   | )          | (9,295   | )          |
| Total member’s  capital                                                                                 |       | 48,405   |       | 47,480   |       |
| Total  liabilities and member’s capital                                                                 |       | $        | 465,540    |     | $          | 468,623 |   |

 

See notes toconsolidated financial statements.

 

48

----

 

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

** **

**ConsolidatedStatements of Operations,**years ended December 31, 2004, 2003 and 2002*(dollars in thousands)*

 
| ** **                       | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** | **Year Ended  December 31,  2002** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| OPERATING  REVENUES              |       |                                    |       |                                    |       |                                    |       |
| Energy                           |       | $                                       | 69,682     |                                    | $          | 64,206                                  |       | $ | 26,244 |   |
|                             |       |                                    |       |                                    |       |                                    |       |
| OPERATING  EXPENSES              |       |                                    |       |                                    |       |                                    |       |
| Fuel costs                       |       | 627                                     |       | 906                                     |       | 6,898                                   |       |
| Fuel  conversion volume rebate   |       | 5,859                                   |       | 5,793                                   |       | 1,645                                   |       |
| Corporate  management fees       |       | 1,642                                   |       | 1,608                                   |       | 594                                     |       |
| Other  operating expenses        |       | 10,631                                  |       | 7,207                                   |       | 1,990                                   |       |
| Depreciation  expense            |       | 11,788                                  |       | 11,392                                  |       | 4,438                                   |       |
| Property  taxes and insurance    |       | 2,801                                   |       | 2,284                                   |       | 794                                     |       |
| General  administrative costs    |       | 1,149                                   |       | 1,718                                   |       | 443                                     |       |
| Total  operating expenses        |       | 34,497                                  |       | 30,908                                  |       | 16,802                                  |       |
| Operating  income                |       | $                                       | 35,185     |                                    | $          | 33,298                                  |       | $ | 9,442 |   |
|                             |       |                                    |       |                                    |       |                                    |       |
| OTHER INCOME  (EXPENSE)          |       |                                    |       |                                    |       |                                    |       |
| Interest  income                 |       | $                                       | 476        |                                    | $          | 495                                     |       | $ | 125 |   |
| Other  income- interim rebates   |       | —                                  |       | 1,427                                   |       | 957                                     |       |
| Liquidated  damages received     |       | —                                  |       | —                                  |       | 1,810                                   |       |
| Interest  expense                |       | (33,798                                 | )          | (34,232                                 | )          | (13,163                                 | )          |
| Letter of  credit fees and other |       | (1,036                                  | )          | (1,013                                  | )          | (379                                    | )          |
| Liquidated  damages paid         |       | —                                  |       | (249                                    | )          | (1,810                                  | )          |
| Total other  income (expense)    |       | (34,358                                 | )          | (33,572                                 | )          | (12,460                                 | )          |
| NET INCOME  (LOSS)               |       | $                                       | 827        |                                    | $          | (274                                    | )          | $ | (3,018 | ) |

 

See notes toconsolidated financial statements.

 

49

----

 

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

 

**ConsolidatedStatements of Changes in Member’s Capital,**years ended December 31, 2004, 2003 and 2002*(dollars in thousands)*

 
| ** **                       | ** ** | **Common Stock** | ** ** | **Contributed** | ** ** | **Member’s** | ** ** | **Member’s** | ** ** |
|----------------------------------|------------|------------------|------------|-----------------|------------|-------------------|------------|-------------------|------------|
| ** **                       | ** ** | **Shares**       | ** ** | **Amount**      | ** ** | **Capital**       | ** ** | **Deficit**       | ** ** | **Equity** | ** ** |
| 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 |   |
| Contributed  capital             |       | —           |       | —          |       | $                 | 98         |              | —     |   | $ | 98 |   |
| Net income                       |       | —           |       | —          |       | —            |       | 827               |       | 827 |   |
| BALANCE, DECEMBER 31,  2004 |       | —           |       | $               | —     |              | $          | 56,873            |       | $ | (8,468 | ) | $ | 48,405 |   |

 

See notes to consolidatedfinancial statements.

 

50

----

 

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

 

**Consolidated Statements of Cash Flows, for the years**ended December 31, 2004, 2003 and 2002(*dollars in thousands)*

 
| ** **                                                             | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** | **Year Ended  December 31,  2002** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **OPERATING  ACTIVITIES:**                                             |       |                                    |       |                                    |       |                                    |       |
| Net income  (loss)                                                     |       | $                                       | 827        |                                    | $          | (274                                    | )          | $ | (3,018 | ) |
| Amortization  of deferred financing costs                              |       | 813                                     |       | 813                                     |       | 853                                     |       |
| Depreciation                                                           |       | 11,788                                  |       | 11,392                                  |       | 4,438                                   |       |
| Loss on  disposal of asset                                             |       | 46                                      |       | —                                  |       | —                                  |       |
| Change in:                                                             |       |                                    |       |                                    |       |                                    |       |
| Accounts  receivable                                                   |       | (304                                    | )          | 4,372                                   |       | (8,442                                  | )          |
| Receivable  from affiliate                                             |       | 21                                      |       | 258                                     |       | (184                                    | )          |
| Prepaid and  other assets                                              |       | 29                                      |       | (398                                    | )          | (230                                    | )          |
| Other assets                                                           |       | (387                                    | )          | (78                                     | )          | (141                                    | )          |
| Accounts  payable                                                      |       | 386                                     |       | (777                                    | )          | 293                                     |       |
| Accrued  liabilities                                                   |       | 753                                     |       | (560                                    | )          | 1,454                                   |       |
| Accrued  interest                                                      |       | (37                                     | )          | (45                                     | )          | (17                                     | )          |
| Payable to  affiliate                                                  |       | 151                                     |       | 113                                     |       | (64                                     | )          |
|                                                                   |       |                                    |       |                                    |       |                                    |       |
| Net cash  provided by (used in) operating activities                   |       | 14,086                                  |       | 14,816                                  |       | (5,058                                  | )          |
| **INVESTING  ACTIVITIES:**                                             |       |                                    |       |                                    |       |                                    |       |
| Payments for  capital additions                                        |       | (1,973                                  | )          | (2,696                                  | )          | (24,029                                 | )          |
| Payments  under long term spare parts agreement                        |       | (5,569                                  | )          | (2,788                                  | )          | (1,175                                  | )          |
| Retention  payable                                                     |       | —                                  |       | —                                  |       | (29,478                                 | )          |
| Restricted  cash                                                       |       | (6,747                                  | )          | (27,088                                 | )          | (1,688                                  | )          |
|                                                                   |       |                                    |       |                                    |       |                                    |       |
| Net cash  (used in) investing activities                               |       | (14,289                                 | )          | (32,572                                 | )          | (56,370                                 | )          |
| **FINANCING  ACTIVITIES:**                                             |       |                                    |       |                                    |       |                                    |       |
| Payment of  principal on bonds payable                                 |       | (5,230                                  | )          | (6,218                                  | )          | (2,420                                  | )          |
| Contribution  from parent                                              |       | 98                                      |       | 39                                      |       | 55,750                                  |       |
| Security  proceeds from (repayment to) Williams under PPA              |       | (25,000                                 | )          | 25,000                                  |       | 10,000                                  |       |
| Proceeds  from Raytheon letter of credit under EPC agreement           |       | 30,302                                  |       | —                                  |       | —                                  |       |
| Dividends  paid to parent                                              |       | —                                  |       | (1,050                                  | )          | (2,000                                  | )          |
| Net cash  provided by financing activities                             |       | 170                                     |       | 17,771                                  |       | 61,330                                  |       |
| **NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**              |       | $                                       | (33        | )                                       | $          | 15                                      |       | $ | (98 | ) |
| **CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD**                    |       | $                                       | 38         |                                    | $          | 23                                      |       | $ | 121 |   |
| **CASH AND  CASH EQUIVALENTS, END OF PERIOD**                          |       | $                                       | 5          |                                    | $          | 38                                      |       | $ | 23 |   |
| **SUPPLEMENTAL  DISCLOSURE OF OTHER ACTIVITIES:**                      |       |                                    |       |                                    |       |                                    |       |
| Interest  paid (net of amounts capitalized)                            |       | $                                       | 33,022     |                                    | $          | 33,537                                  |       | $ | 8,437 |   |
| Receipt of  spare parts under long-term service agreement              |       | $                                       | 205        |                                    | $          | 289                                     |       | $ | 10,500 |   |
| Transfer of  construction in progress to property, plant and equipment |       | $                                       | 223        |                                    | $          | 344                                     |       | $ | 411,597 |   |

 

See notes to consolidatedfinancial statements.

 

51

----

 

**AES RED OAK L.L.C. AND SUBSIDIARYAN INDIRECT WHOLLY OWNED SUBSIDIARY OF THE AES CORPORATIONNOTES TO CONSOLIDATEDFINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

 

**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 an 830-megawatt(MW) gas-fired, combined cycle electric generating facility (the “Facility”) inthe Borough of Sayreville, Middlesex County, New Jersey. The Company wasconsidered dormant until March 15, 2000 (hereinafter, inception), at whichtime it consummated a project financing and certain related agreements. On March 15,2000, the Company issued $384 million in senior secured bonds for the purposeof providing financing for the construction of the facility and to fund,through the construction period, interest payments to the bondholders (see Note6). In late September 2000, the Company consummated an exchange offer wherebythe holders of the senior secured bonds exchanged their privately placed seniorsecured bonds for registered senior secured bonds.

 

The Company is a wholly owned subsidiary of AES RedOak, Inc. (“Red Oak”), which is a wholly-owned subsidiary of The AESCorporation (“AES”). Red Oak has no assets other than its ownership interestsin the Company and AES Sayreville, L.L.C. (see Note 9). Red Oak has nooperations and is not expected to have any operations. Red Oak’s only income isdistributions (if any) it receives from the Company and AES Sayreville, L.L.C.  The equity that Red Oak provided to theCompany was provided to Red Oak by AES, which owns all of the equity interestsin Red Oak. Pursuant to an equity subscription agreement (see Note 6), Red Oakagreed to contribute up to approximately $56.7 million to the Company to fundconstruction after the bond proceeds have been fully utilized.

 

The Company owns all of the equity interests in AESRed Oak Urban Renewal Corporation (“AES URC”), which was organized as an urbanrenewal corporation under New Jersey Law. As an urban renewal corporation underNew Jersey law, portions of the facility can be designated as redevelopmentareas in order to provide certain real estate tax and development benefits tothe facility. URC has no operations outside of its activities in connectionwith the facility.

 

**2.**              OPERATIONS

 

During 2002, as further discussed in Note 7, thecredit ratings of the long-term senior unsecured debt of The Williams Companies, Inc.were downgraded to below investment grade. Since achieving commercial operations, under the Power PurchaseAgreement with Williams Energy, the Company is eligible to receive variableoperations and maintenance payments, total fixed payments, energy exercise feepayments (each as defined in the Power Purchase Agreement) and other paymentsfor the delivery of fuel conversion, capacity and ancillary services.  Since September 28, 2002, WilliamsEnergy has not requested that the Company run the facility or “dispatch” thefacility to a significant degree, outside the peak summer months. The minimumcapacity payments provided for under the Power Purchase Agreement have been theCompany’s primary source of operating revenues, representing $62.5 million ofthe Company’s total revenues of $69.7 million for the twelve months ended December 31,2004.  The Company has used theseoperating revenues, together with interest income from the investment ofavailable cash balances and the $10 million Prepayment from Williams (Note 7)to fund its generation expenses, other operations and maintenance expenses anddebt service costs.  As discussed in Note7, in the event that The Williams Companies, Inc. regains and maintains itsinvestment grade status, Williams Energy provides a substitute guaranty ofinvestment grade rating, or posts a letter of credit, the Company will berequired to return the $10 million alternative credit support prepayment providedby Williams Energy in accordance with the terms of the Letter Agreement. WilliamsEnergy has notified the Company that it intends to post a letter of credit forthe remaining $10 million in June 2005.

 

The Company currently anticipates being dispatched byWilliams Energy beginning in April 2005 but can provide no assurance thatthis will occur.  In the event that thefacility is not dispatched, the Company’s operating revenues will consist ofminimum capacity payments under the Power Purchase Agreement.  The Company has also 

 

52

----

 

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.

 

The Company currently believes that its sources ofliquidity will be adequate to meet its needs through the end of 2005.  This belief is based on a number ofassumptions, including but not limited to the continued performance andsatisfactory financial condition of the third parties on which the Companydepends, particularly Williams Energy as fuel supplier and purchaser of allelectric energy and capacity produced by the facility as well as ancillary andfuel conversion services of the Company (as provided by the Power PurchaseAgreement) and The Williams Companies, Inc. as guarantor of WilliamsEnergy’s performance under the Power Purchase Agreement.  Known and unknown risks, uncertainties andother factors outside the Company’s control may cause actual results to differmaterially from its current expectations. These risks, uncertainties and factors include but are not limited torisks and uncertainties related to the financial condition and continuedperformance of the third parties on which the Company depends, includingWilliams Energy and The Williams Companies and its affiliates, the possibilitythat the facility will not be dispatched to a significant degree, delays in ordisputes over the completion of the facility, the possibility of unexpectedproblems related to the performance of the facility, the possibility ofunexpected expenses or lower than expected revenues and additional factors thatare unknown to the Company or beyond its control.

 

Since the Company depends on Williams Energy for bothrevenues and fuel supply under the Power Purchase Agreement, if Williams Energywere to terminate or default under the Power Purchase Agreement, there would bea severe negative impact on the Company’s cash flow and financial conditionwhich could result in a default on its senior secured bonds.  Due to recent declines in pool prices, theCompany would expect that if it were required to seek alternative purchasers ofits power as a result of a default by Williams Energy that any such alternaterevenues would be substantially below the amounts that would have beenotherwise payable pursuant to the Power Purchase Agreement.  There can be no assurance as to the Company’sability to generate sufficient cash flow to cover operating expenses or itsdebt service obligations in the absence of a long-term power purchase agreementwith Williams Energy.

 

**3.**              SIGNIFICANTACCOUNTING POLICIES

 

*Principles of Consolidation* - Theconsolidated financial statements include the accounts of the Company and AESURC, its wholly owned subsidiary. All intercompany transactions and balanceshave been eliminated in consolidation.

 

*Cash and Cash Equivalents* - TheCompany considers unrestricted cash on hand, deposits in banks, and investmentswith original maturities of three months or less to be cash and cashequivalents for the purpose of the statement of cash flows.

 

*Restricted Cash and Investments* -The Company is prohibited from making any distributions unless it has requiredminimum balances in certain accounts and has met certain other conditionscontained in the Indenture and the Collateral Agency and IntercreditorAgreement governing the senior secured bonds. The $41.6 million balance of restrictedcash consists of cash to be used to repay the drawdown of the letter of creditfrom Raytheon and the prepayment credit support amount owed to Williams (See Note7 - Power Purchase Agreement).  TheCompany had the required minimum balances and had met the required conditionswhen it made distributions of $1.05 million and $2.0 million to AES Red 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 and the original costs ofthe Company’s property, plant and equipment by category are as follows:

 

53

----

 

 
| **Description of Asset**            | ** ** | **Depreciable Life** | ** ** | **Original Costs at  December 31, 2004** | ** ** | **Original Costs at  December 31, 2003** | ** ** |
|-------------------------------------|------------|----------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | ** **           | ** ** | **(in thousands)**                            | ** ** | **(in thousands)**                            | ** ** |
| Buildings                           |       | 35                   |       | $                                             | 1,767      |                                          | $          | 1,767 |   |
| Vehicles                            |       | 5                    |       | 112                                           |       | 112                                           |       |
| Computers                           |       | 6                    |       | 772                                           |       | 772                                           |       |
| Furniture and  Fixtures             |       | 10                   |       | 515                                           |       | 515                                           |       |
| Combustion  Turbine Generator Parts |       | 9-36                 |       | 53,345                                        |       | 45,367                                        |       |
| Gas Heaters                         |       | 35                   |       | 1,119                                         |       | 1,119                                         |       |
| Spare Parts  Inventory              |       | —               |       | 5,379                                         |       | 12,751                                        |       |
| Plant                               |       | 35                   |       | 363,943                                       |       | 362,390                                       |       |
|                                |       |                 |       | $                                             | 426,952    |                                          | $          | 424,793 |   |

 

*Spare Parts Inventory* – Spareparts inventory consists of rotable and other spare parts, primarily coveredunder the Maintenance Services Agreement discussed in Note 8.  Inventory is reported at cost and is includedin Property, Plant and Equipment, once received from Siemens Westinghouse.  The liability for these spare parts isreflected as current and long-term liabilities in the accompanying balancesheets. For financial reporting purposes, payments made to Siemens Westinghouseare treated as a reduction of the liability in the accompanying balance sheet,except for the portion that is considered maintenance expense when a scheduledoutage occurs.

 

*Deferred Financing Costs* -Financing costs are deferred and are being amortized using the straight-linemethod over the life of the bonds, which does not differ materially from theeffective interest method of amortization.

 

*Revenue Recognition —*  The Company generates energy revenues underthe Power Purchase Agreement with Williams Energy.  During the 20-year term of the agreement,the Company expects to sell capacity and electric energy produced by thefacility, as well as ancillary services and fuel conversion services.  Under the Power Purchase Agreement, revenues aregenerated from meeting (1) base electrical output guarantees and (2) heat-raterebates through efficient electrical output. Revenues from the sales of electric energy and capacity are recordedbased on output delivered and capacity provided at rates as specified undercontract terms.  Revenues for ancillaryand other services are recorded when the services are rendered.

 

*Use of Estimates* - Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires the Company to makeestimates and assumptions that affect reported amounts of assets and liabilitiesand disclosures 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 alimited liability company and is treated as a disregarded entity for taxpurposes. Therefore, it does not pay income taxes, and no provision for incometaxes has been reflected in the accompanying financial statements.

 

*Reclassifications* – Certainreclassifications have been made to prior period amounts to conform to the 2004presentation.

 

**4.  CONCENTRATION OF CREDIT RISK IN WILLIAMSENERGY AND ITS AFFILIATES**

 

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

 

54

----

 

obligations of Williams Energy under the PowerPurchase Agreement are guaranteed by The Williams Companies, Inc.  The payment obligations of The WilliamsCompanies, Inc. under the guaranty are capped at an amount equal toapproximately $510 million.  Beginning onJanuary 1 of the first full year after the commercial operation date, thisguaranty cap is to be reduced semiannually by a fixed amount which is based onthe amortization of the Company’s senior secured bonds during the applicablesemiannual period (see Note 7). As of December 31, 2004, the guarantee wascapped at $501.4 million.

 

The Company’s dependence upon The Williams Companies, Inc.and its affiliates under the Power Purchase Agreement exposes the Company topossible loss of revenues and fuel supply, which in turn, could negativelyimpact its cash flow and financial condition and may result in a default on itssenior secured 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 ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the Financial AccountingStandards Board (“FASB”) issued FIN No. 46, Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51 (“FIN No. 46”). In October 2003, FASB Staff Position No. 46-6, “Effective Dateof FIN No. 46, Consolidation of Variable Interest Entities” deferred theeffective date of FIN No. 46 for variable interests held by a publicentity in a variable interest entity (“VIE”) that was created or acquiredbefore February 1, 2003 to the end of the first interim or annual periodending after December 15, 2003.  In December 2003, FASB issuedFIN 46 (revised December 2003), Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51 (“FIN 46(R)”), which clarifiedsome requirements 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 andwere not considered special purpose entities (“SPEs”) prior to the issuance ofthe interpretation until the end of the first reporting period ending after March 15,2004.  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 consolidated financialstatements related to the total assets and the maximum exposure to lossresulting from the Company’s interests in VIEs.  The adoption of FIN 46(R)did not have a material effect on the Company’s financial position, results ofoperations, or cash flows.

 

**6.**              BONDS PAYABLE

 

On March 15, 2000, the Company issued $224million of 8.54% senior secured bonds due 2019 (“2019 Bonds”) and $160 millionof 9.20% senior secured bonds due 2029 (2029 Bonds and together with the 2019Bonds, the “Bonds”) to qualified institutional buyers and/or institutionalaccredited investors, pursuant to a transaction exempt from registration underthe Securities and Exchange Act of 1933 (the Act) in accordance with Rule 144Aof the Act. In late September 2000, the Company consummated an exchange offerwhereby the holders of the Bonds exchanged their privately placed bonds forregistered bonds. The net proceeds of the bonds (after deferred financingcosts), approximately $365 million, were used to prepay Washington GroupInternational, Inc. (“WGI”) and other construction costs of the Companyand were also used, during the construction period, for interest payments tobondholders.

 

*Future Maturities of Debt* -Principal on the Bonds is payable quarterly in arrears.  Principal payments on the 2019 Bondscommenced 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 and November 30, 2029, respectively.

 

55

----

 

* Interest & Principal RepaymentSchedule:*

 
| **Year**             | ** ** | **Interest**       | ** ** | **Principal** | ** ** |
|----------------------|------------|--------------------|------------|---------------|------------|
| ** **           | ** ** | **(in thousands)** | ** ** |
| 2005                 |       | $                  | 32,578     |          | $          | 5,072 |   |
| 2006                 |       | 32,111             |       | 7,100         |       |
| 2007                 |       | 31,502             |       | 6,106         |       |
| 2008                 |       | 30,940             |       | 8,122         |       |
| 2009                 |       | 30,117             |       | 12,520        |       |
| 2010 and  thereafter |       | 287,290            |       | 331,212       |       |
| **Total  Payments**  |       | $                  | 444,538    |          | $          | 370,132 |   |

 

*Optional Redemption* - The Bondsare subject to optional redemption by the Company, in whole or in part, at anytime at a redemption price equal to 100% of the principal amount plus accruedinterest, together with a premium calculated using a discount rate equal to theinterest rate on comparable U.S. Treasury securities plus 50 basis points.

 

*Mandatory Redemption* - The Bondsare subject to 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* - The Trust IndentureAgency (the Indenture) contains limitations on the Company incurring additionalindebtedness, granting liens on the Company’s property, distributing equity andpaying subordinated indebtedness issued by affiliates of the Company, enteringinto transactions with affiliates, amending, terminating or assigning any ofthe Company’s contracts and fundamental changes or disposition of assets.

 

Collateral for the Bonds consists of the facility andrelated entities, all agreements relating to the operation of the project, the bankand investment accounts of the Company, and all ownership interests in theCompany, as prescribed under the Indenture. The Company is also bound by acollateral agency agreement (the Collateral Agency Agreement) and an equitysubscription agreement (the Equity Subscription Agreement).

 

*Collateral Agency Agreement* - TheCollateral Agency Agreement requires the Company to fund or provide the fundingor a letter of credit for a debt service reserve fund. The debt service reservefund letter of credit was posted at financial closing in the amount of $22million dollars, and has an expiration date of March 15, 2007. The amountrequired for funding the debt service reserve fund is equal to six monthsscheduled payments of principal and interest on the bonds.

 

*Equity Subscription Agreement* -The Company, along with Red Oak, entered into an Equity Subscription Agreement,pursuant to which Red Oak agreed to contribute up to approximately $56.7million to the Company to fund project costs. As of December 31, 2002, RedOak had contributed the entire $56.7 million to the Company, including thereclassification of a $986,000 payable to an affiliate (AES Corporation) tocontributed capital in February 2001. The equity that Red Oak provided tothe Company was provided by AES. The Company does not have access to additionalliquidity pursuant to this agreement as Red Oak has fulfilled its fundingobligations thereunder.

 

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

 

*Bond Ratings and Effect on Working CapitalAgreement*.  Inconnection with the initial financing of the facility, the Company had enteredinto a working capital agreement pursuant to which it could borrow up to $2.5million for use in connection with the payment of operating and maintenancecosts of the project.  The obligation ofthe banks that were party to the working capital agreement to extend loans to theCompany under the working capital agreement were subject to, among others, thefollowing conditions precedent:

 

56

----

 

•                                         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.

 

As the Company’s senior secured bonds have been ratedlower than “BBB-” by S&P and lower than “Baa3” by Moody’s since 2002, fundshad not been available to the Company under the working capital agreement. Theterm of this working capital agreement expired on March 15, 2005. The Companyis currently reviewing comparable financing facilities that would allow forfunds to be available for future working capital requirements, as needed. Further,as a result of the bond ratings downgrades the Company must pay higher fees fordraws on its project support agreements. There can be no assurance that the ratings on the senior secured bondsof the Company will be increased or that lenders will provide a comparablereplacement of the working capital agreement.

 

**7.**              POWER PURCHASEAGREEMENT

 

*General*.  The Company and Williams Energy have enteredinto a Power Purchase Agreement for the sale of all capacity produced by the facility,as well as ancillary services and fuel conversion services. Under the PowerPurchase Agreement, Williams Energy has the obligation to deliver, on anexclusive basis, all quantities of natural gas and fuel oil required by the facilityto generate electricity or ancillary services, to start-up or shut-down theplant, and to operate the facility during any period other than a start-up,shut-down, or required dispatch by Williams Energy for any reason. The term ofthe Power Purchase Agreement is 20 years from the first contract anniversarydate, which is the last day of the month in which commercial availabilityoccurs.  As part of the arbitrationsettlement with Williams Energy, described below, the Company recognizes September 28,2002 as the commercial availability date.

 

Under the Power Purchase Agreement, the commercialoperation date was required to occur by December 31, 2001, however theCompany had the right to extend the commercial operation date until June 30,2002 by invoking its right to a free extension option which was available underthe Power Purchase Agreement if certain conditions were met.  The Company exercised its right to extend thecommercial operation date from December 31, 2001 to June 30, 2002, asgranted under the free extension option. In addition, the Company had the rightunder the Power Purchase Agreement to again extend the commercial operationdate (the Second Paid Extension Option) from June 30, 2002 to June 30,2003, upon written notification to Williams Energy no later than May 21,2002 (which represented an agreed upon extension from the original April 30,2002 notification deadline), by paying Williams Energy (i) an amount equalto the lesser of any actual damages Williams Energy suffered or incurred after June 30,2002, as a result of Williams Energy’s reliance upon delivery by such date, tothe extent said damages cannot be mitigated fully, or $3.0 million and (ii) certainamount of liquidated damages as calculated pursuant to the Power PurchaseAgreement.  On May 21, 2002, theCompany 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, 2002which in aggregate amounted to $682,000. The Company had also paid liquidated damages to Williams Energy at therate of $22,000 per day for the period beginning on September 1, 2002, andending on September 27, 2002 which in aggregate amounted to $594,000.  During the period of the Second PaidExtension Option, the Company continued to collect liquidated damages through August 10,2002 from Raytheon under the construction agreement in the amount of $108,000per day.  As of December 31, 2003,the Company had received $14 million in liquidated damages from Raytheon underthe construction agreement, but none subsequent to that date.

 

The Company entered into arbitration with WilliamsEnergy to resolve certain disputes regarding the date of commercial operationand the proper interpretation of certain provisions of the Power PurchaseAgreement relating to the amounts claimed by the Company to be payable byWilliams Energy.  Williams Energy haswithheld or offset from amounts invoiced by the Company amounts that WilliamsEnergy believes were improperly invoiced based on 

 

57

----

 

Williams Energy’s interpretation of the Power PurchaseAgreement.  The arbitration related todisputed amounts of approximately $7.6 million, which included a $594,000payment extension option dispute and a $7.0 million commercial operation startdate dispute. On November 4, 2003, the Company and Williams Energy settledthis dispute.  Under the settlement,Williams made a cash payment to the Company 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 the remaining amount recorded in the fourth quarter of 2003. This paymentsettles all payment obligations between the parties for the month of September 2002with respect to the commercial operation date under the Power PurchaseAgreement.  From the Company’sperspective, the cash payment has the economic effect of recognizing acommercial operation date prior to September 28, 2002. The Company is alsodisputing $1.4 million****of merchantprice, testing gas and other charges with Williams Energy that the Companycontends is owed by Williams Energy. This was not part of the above arbitration.

 

  *Guaranties.*  TheCompany provided Williams Energy a letter of credit (Power Purchase AgreementLetter of Credit) in the amount of $30 million to support specific paymentobligations should the facility not achieve commercial operation by the daterequired under the Power Purchase Agreement. Upon the commencement ofcommercial operations in September 2002, the stated amount of that letterof credit 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 PowerPurchase Agreement are guaranteed by The Williams Companies, Inc.  The payment obligations of The WilliamsCompanies, Inc. under the guaranty are capped at an amount equal to approximately$510 million.  Beginning on January 1of the first full year after the commercial operation date, this guaranty capis to be reduced semiannually by a fixed amount which is based on theamortization of the Company’s senior secured bonds during the applicablesemiannual period.

 

Pursuant to Section 18.3 of the Power PurchaseAgreement, in the event that S&P’s or Moody’s rates the long-term seniorunsecured debt of The Williams Companies, Inc. lower than investmentgrade, The Williams Companies, Inc. is required to supplement The WilliamsCompanies, Inc. guaranty with additional alternative security that isacceptable to the Company within 90 days after the loss of such investmentgrade rating.  According to publishedsources, The Williams Companies, Inc.’s long term senior unsecured debthas been rated below investment grade since 2002 by both S&P and Moody’s.

 

Due to the downgrade of The Williams Companies, Inc.to below investment grade, the Company and Williams Energy entered into aletter agreement dated November 7, 2002 (the “Letter Agreement”), underwhich Williams Energy agreed to provide the Company (a) a prepayment of$10 million within five business days after execution of the Letter Agreement(the “Prepayment”); (b) alternative credit support equal to $35 million onor before January 6, 2003 in any of the following forms (i) cash, (ii) letter(s)of credit with the Company as the sole beneficiary substantially in the form ofthe Power Purchase Agreement Letter of Credit, unless mutually agreed tootherwise, or (iii) a direct obligation of the United States Governmentdelivered to a custodial securities account as designated by the Company with amaturity of not more than three years; and (c) replenish any portion ofthe alternative credit support that is drawn, reduced, cashed, or redeemed, atany time, with an equal amount of alternative credit support.  In the Letter Agreement, the Company andWilliams Energy acknowledged that the posting of such alternative creditsupport and Williams Energy’s agreement and performance of the requirements of(a), (b), and (c) as set forth in the immediately preceding sentence, wouldbe in full satisfaction of Williams Energy’s obligations contained in Section 18.3of the Power Purchase Agreement.  In theLetter Agreement, the Company and Williams Energy expressly agreed that theposting of the Prepayment or any alternative credit support either now or inthe future or any other terms set forth in the Letter Agreement, was notintended, and did not modify, alter, or amend in any way, the terms andconditions or relieve The Williams Company, Inc. from any obligations ithas under its guaranty of the payment obligations of Williams Energy under thePower Purchase Agreement.  The guarantyremains in full force and effect, and the Company retains all of its rights andremedies provided by that guaranty.

 

Under the terms of the Letter Agreement, the Companyis obligated to return the Prepayment to Williams Energy upon the earlier of (i) TheWilliams Companies, Inc. regaining its investment grade rating or WilliamsEnergy providing a substitute guaranty of investment grade rating; (ii) thebeginning of Contract Year 20; or (iii) the posting of alternative creditsupport by Williams Energy as set forth below. In the case of items (i) and (iii) above, 

 

58

----

 

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 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 fullyrecovered.  In the case of item (ii) above,Williams Energy shall have the right to immediately set-off all amounts owingto the Company under the Power Purchase Agreement after the occurrence of item (ii) andcontinuing thereafter until the Prepayment has been fully recovered.  Except to the extent Williams Energy electsto include the Prepayment as part of the alternative credit support, the amountof alternative credit support posted by Williams Energy pursuant to the LetterAgreement shall be initially reduced by the amount of the Prepayment, andWilliams Energy shall thereafter increase the alternative credit supportproportionately as Williams Energy recoups the Prepayment set-off on thepayment due date of amounts owing to the Company.

 

If the Company does not return the Prepayment toWilliams Energy as set forth in the preceding paragraph, then the Company shallbe considered in default under the Letter Agreement and Williams Energy shallbe entitled to enforce any and or all of its contractual rights and remedies asset forth in the Power Purchase Agreement, including, but not limited to,drawing on the letter of credit previously posted by the Company in favor ofWilliams Energy.

 

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

 

**8.**              COMMITMENTS ANDCONTINGENCIES

 

*Construction Agreement* - TheCompany entered into an Agreement for Engineering, Procurement and Construction(EPC) services, dated as of October 15, 1999, between the Company and WGI(as the successor contractor), as amended for the design, engineering,procurement, site preparation and clearing, civil works, construction,start-up, training and testing and to provide all materials and equipment(excluding operational spare parts), machinery, tools, construction fuels,chemicals and utilities, labor, transportation, administration and otherservices and items (collectively and separately, the “services”) of the facility.Under a guaranty in the Company’s favor, effective as of October 15, 1999,all of WGI’s obligations under the construction agreement are irrevocably andunconditionally guaranteed by Raytheon. In 2001, as a result of WGI’sbankruptcy filing, the Company made a demand on Raytheon to perform itsobligations under the Raytheon guaranty and WGI, Raytheon and the Companyentered into agreements pursuant to which Raytheon became responsible for theconstruction of the facility*.*

 

Provisional acceptance has been granted and the facilityhas commenced commercial operations, however, Raytheon must perform certainagreed upon completion items in order to obtain final acceptance. Raytheon gavenotice of Final Acceptance on July 22, 2003 based on its July 8, 2003performance test.  On July 31, 2003,the Company received a letter from the project’s independent engineer statingthat it could not support Raytheon’s claim of final acceptance and it did notconsider the July 8, 2003 performance test valid.  In making this assessment, the independentengineer cited, among other reasons, (i) modifications made to certainequipment in performance of the July 8, 2003 performance test which wouldadversely impact the operations of the plant and other pieces of equipment and (ii) Raytheon’sfailure to demonstrate compliance with guaranteed emissions limits.  On August 1, 2003, the Company rejectedRaytheon’s claim of final acceptance. This rejection was based upon Raytheon’s failure to meet the conditionsfor final acceptance provided for in the 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.

 

59

----

 

On August 26, 2004, the Company drew downapproximately $30.3 million under a letter of credit posted by Raytheonpursuant to the terms of the EPC Agreement. Prior to this date, the Company haddrawn $544,000 on this letter of credit. The Company believes that Raytheonsubstantially breached the EPC Agreement, due, among other things, to thefacility’s failure to achieve compliance with certain performance tests, andRaytheon’s failure to complete other services under the EPC Agreement andcertain amendments thereto, including a Settlement Agreement dated August 6,2002, that purported to resolve disputes over whether Raytheon had achievedMechanical Completion and Provisional Acceptance. As a result, the Companyclaims that Raytheon’s breaches have caused damages in excess of the amount ofthe letter of credit. Raytheon disputes these claims and has failed and refusedto pay costs and damages to the Company despite the Company’s demands for suchpayment.

 

On October 28, 2004, the Company received acomplaint filed by Raytheon in the State of New York. In the complaint,Raytheon is seeking to recover $30,302,269, which represents the amount Red Oakdrew down on the letter of credit on August 26, 2004, attorneys’ fees andcosts, and also to recover up to $110 million of net expense Raytheon claims tohave incurred in good faith under the governing guaranty and constructionagreements.  The Company filed an answerand counterclaim on December 13, 2004, in which it denied liability toRaytheon, asserted various defenses and countersued Raytheon for breach of theEPC Agreement and Settlement Agreement, breach of express warranties under theEPC Agreement, and fraudulent misrepresentation and concealment.  The Company claimed damages of not less than$140 million and attorneys’ fees and costs to the extent allowable.  Raytheon moved to dismiss the Company’sfraudulent misrepresentation and concealment claim and to limit Company’s damageson January 14, 2005.  The Companyfiled its opposition to the motion to dismiss and also filed an amendedcounterclaim on February 18, 2005.  Thereafter,Raytheon agreed to withdraw its motion to dismiss.  On March 4, 2005,Raytheon filed a motion for summary judgment that seeks the return of$16,311,711 of the Letter of Credit draw.  The Company has not yet filedits opposition to the motion, and Raytheon has not yet filed an answer to theamended counterclaim. The Company has recorded the $30.3 million as a currentliability, but has not accrued any additional amounts with respect to Raytheon’sclaims.  The Company believes it has meritorious defenses to the claimsasserted by Raytheon against it and intends to defend the lawsuit and pursueits counterclaims vigorously.

 

*Maintenance Services* – TheCompany has entered into the Maintenance Program Parts, Shop Repairs andScheduled Outage TFA Services Contract (“Maintenance Services Agreement”),dated as of December 8, 1999, with Siemens Westinghouse by which SiemensWestinghouse will provide the Company with, among other things, combustionturbine parts, shop repairs and scheduled outage technical field assistanceservices**.** The Maintenance Services Agreementbecame effective on the date of execution and unless terminated early, willterminate upon completion of shop repairs performed by Siemens Westinghousefollowing the twelfth scheduled outage of the applicable combustion turbine or16 years from the effective date of the contract, whichever occurs first,unless the Company exercises its right to terminate the agreement after the firstmajor outage of the turbines.

 

The Maintenance Services Agreement indicates that theCompany will pay fees each month based on a stated amount for each equivalentbase load hour of the combustion turbines, adjusted for inflation, over theterm of the agreement.  However, if ascheduled maintenance outage occurs prior to 8,000 equivalent base load hoursbeing accumulated since the last scheduled maintenance outage for that turbine,the Company will be invoiced the remaining amount to equate to 8,000 hours (“true-up”).In the event the Company is not required to dispatch the facility, there is nocharge for that month.

 

The total of these payments was approximately $6.8million, $4.7 million and $1.2 million for the years ended December 31,2004, 2003 and 2002, respectively, which included true-ups for two plannedmaintenance outages, as the turbines were far short of the 8,000 EBH level. Assuminga similar dispatch level in 2005 as in 2004, and the performance of one plannedhot gas maintenance outage, a comparable level of payments would be expectedfor the year ended December 31, 2005. Based upon the Company’s currentestimates, assuming a certain number of equivalent base hours and equivalentstarts, the first major outages would be completed by 2011 and the remainingminimum payments to Siemens Westinghouse would approximate $32 million throughthat period.

 

As of December 31, 2004, the Company had receivedapproximately $11.0 million in rotable spare parts under this agreement.  This amount is recorded as spare partsinventory, or as Property, Plant and Equipment when placed in service. Theremaining amount owed to Siemens is recorded as current and long-termliabilities in the accompanying balance sheets. For financial reporting purposes, payments made to Siemens Westinghouseare 

 

60

----

 

treated as a reduction of the liability in the accompanying balancesheet, except for the portion that is considered maintenance expense when ascheduled outage occurs.

 

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

 

*Interconnection Agreement*– TheCompany entered into an interconnection agreement with Jersey Central Power &Light Company (“JCP&L”) d/b/a GPU Energy (“GPU”), and is dated April 27,1999. GPU has since been merged with, and into, FirstEnergy, and JCP&L isnow a subsidiary of FirstEnergy.  Thisagreement is to transmit the electricity generated by the facility to thetransmission grid so that it may be sold as prescribed under the Power PurchaseAgreement. The agreement is in effect for the life of the facility, yet may beterminated by mutual consent of both GPU and the Company under certaincircumstances as detailed in the agreement. Costs associated with the agreementare based on electricity transmitted via GPU at a variable price and the PJM(Pennsylvania/New Jersey/Maryland) Tariff as charged by GPU, which is comprisedof both service cost and asset recovery cost, as determined by GPU and approvedby the Federal Energy Regulatory Committee. The Company has been importingelectricity from the transmission system to support commissioning of thefacility since July 2001 and the interconnection facilities have exportedpower to the transmission system since that time.

 

*Interconnection Services Agreement (PJM)*– The Company entered into an interconnection agreement with the IndependentSystem Operator (“ISO”) of the PJM Control Area on December 24, 2001, asrequired under 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* – TheCompany entered into an agreement with the Borough of Sayreville by which theCompany 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. Theestimated 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 December 31,2004.  On July 23, 2003, the projectwas secured by a letter of credit issued by Union Bank of California for$425,000 with the Borough of Sayreville as the beneficiary.  This irrevocable standby letter of credit hadan expiration date of June 30, 2004, but was automatically extended foranother one-year period. On August 19, 2004, AES secured a performancebond for $539,493 relating to the tree replacement and other site improvements.This bond replaces the previous letter of credit and represents the amountpotentially due if there is a failure of AES Red Oak, LLC to take actionregarding the plan.

 

**9.**              RELATED PARTYTRANSACTIONS

 

Effective March 2000, the Company entered into a32-year development and construction management agreement with AES Sayreville,L.L.C. (“Sayreville”), another wholly owned subsidiary of Red Oak, to providecertain support services required by the Company for the development andconstruction of the facility. Under this agreement Sayreville has also providedoperations management services for the Company since the commencement ofcommercial operation. Minimum amounts payable under the contract during 2004were approximately $137,000 per month. Corporate management fees were $1.6million for each of the years ended December 31, 2004 and 2003 and was$0.6 million for the partial year of operations ended December 31, 2002.Corporate management fees are charged on a monthly basis based on a fixed amountwhich is adjusted annually for inflation.

 

AES Sayreville is compensated for its maintenance andoperation services on a cost basis, and it also receives certain managementfees which it passes on to The AES Corporation. For the years ended December 31, 2004, 2003 and 2002, the Companypaid AES Sayreville a total of $5.3 million, $5.3 million and $4.4 million,respectively, for their services. AES will continue to supply Sayreville with thepersonnel, operational and maintenance services necessary to carry out itsobligations to the Company.

 

61

----

 

The Company had accounts receivable from affiliates of$30,000 and $51,000 as of December 31, 2004 and 2003, respectively.  The Company had accounts payable to itsparent and affiliates of $282,000 and $131,000 as of December 31, 2004 and2003, respectively.  Accounts receivablefrom affiliates generally represents charges for certain projects that theCompany has paid for and invoiced to its affiliates.  Accounts payable to parent and affiliates representgeneral amounts owed to the Company’s parent and affiliates for shared services.

 

**10.**       FAIR VALUE OF FINANCIALINSTRUMENTS

 

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

 

The fair value of the Company’s restricted investmentsapproximates their carrying value. The Bonds had a carrying amount of $370.1million and $375.4 million at December 31, 2004 and 2003, respectively.  The Bonds had a fair value of approximately $415.4million and $399.0 million, respectively, at December 31, 2004 and 2003.

 

**11.**       SEGMENT INFORMATION

 

Under the provisions of Statement of FinancialAccounting Standards No. 131, “Disclosure About Segments of an Enterprise andRelated Information”, the Company’s business is expected to be operated as onereportable segment, with operating income or loss being the measure ofperformance evaluated by the chief operating decision maker. As described in Notes1 and 6, the Company’s primary customer is Williams, which is expected toprovide all of the revenues of the Company during the term of the PowerPurchase Agreement.

 

62

----

 

**SELECTEDQUARTERLY FINANCIAL DATA (UNAUDITED)**

 

The following table summarizes the unaudited quarterlystatements of operations for the Company for the years ended December 31,2004 and 2003, respectively.

 
| ** **                        | ** ** | **AES Red Oak, LLC**                      | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **Quarter Ended  December 31, 2004** | ** ** | **Quarter Ended  September 30, 2004** | ** ** | **Quarter Ended  June 30, 2004** | ** ** | **Quarter Ended  March 31, 2004** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)**                | ** ** |
| OPERATING  REVENUES               |       |                                      |       |   |   |   |   |   |   |
| Energy                            |       | $                                         | 12,235     |   | $ | 27,904 |   | $ | 17,915 |   | $ | 11,628 |   |
| OPERATING  EXPENSES               |       |                                      |       |   |   |   |   |   |   |
| Operating  expenses               |       | (7,484                                    | )          | (9,022 | ) | (9,215 | ) | (7,627 | ) |
| General and  administrative costs |       | (448                                      | )          | (213 | ) | (311 | ) | (177 | ) |
| Total  Operating Expense          |       | (7,932                                    | )          | (9,235 | ) | (9,526 | ) | (7,804 | ) |
| OPERATING  INCOME                 |       | 4,303                                     |       | 18,669 |   | 8,389 |   | 3,824 |   |
|                              |       |                                      |       |   |   |   |   |   |   |
| OTHER  INCOME/EXPENSE             |       |                                      |       |   |   |   |   |   |   |
| Interest  income                  |       | 199                                       |       | 158 |   | 58 |   | 61 |   |
| Interest  expense                 |       | (8,386                                    | )          | (8,463 | ) | (8,471 | ) | (8,478 | ) |
| Other  expense                    |       | (278                                      | )          | (240 | ) | (257 | ) | (261 | ) |
| Total Other  Income/Expenses      |       | (8,465                                    | )          | (8,545 | ) | (8,670 | ) | (8,678 | ) |
| NET INCOME  (LOSS)                |       | $                                         | (4,162     | ) | $ | 10,124 |   | $ | (281 | ) | $ | (4,854 | ) |

 
| ** **                        | ** ** | **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 | ) |

 

63

----

 

**ITEM9.**     CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

** **

None.

 

**ITEM 9A.****                    CONTROLSAND PROCEDURES**

 

*Evaluation of Disclosure Controls andProcedures.*  We carried out an evaluation, underthe supervision and with the participation of our management, including thechief executive officer (“CEO”) and chief financial officer (“CFO”), of theeffectiveness of our “disclosure controls and procedures” (as defined in theSecurities Exchange Act of 1934 Rules 13a-15(e) and 15-d-15(e) as required by paragraph (b) of the Exchange Act Rules 13a-15or 15d-15) as of December 31, 2004.  The Company’s management,including the CEO and CFO, is engaged in a comprehensive effort to review,evaluate and improve our controls; however, management does not expect that ourdisclosure controls or our internal controls over financial reporting willprevent all errors and all fraud.  A control system, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurancethat the control system’s objectives will be met.

 

Based upon the controls evaluation performed, the CEO and CFO haveconcluded that as of December 31, 2004, our disclosure controls andprocedures were effective to provide reasonable assurance that materialinformation relating to us and our consolidated subsidiaries is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

*Changes in Internal Controls*. In the course of our evaluation of disclosure controls and procedures,management considered certain internal control areas in which the Company hasmade and are continuing to make changes to improve and enhance controls. Based upon that evaluation, the CEO and CFO concluded that there were nochanges in our internal controls over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15or 15d-15 that occurred during the fourth quarter ended December 31,2004, that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

*Compliance with Section 404 of theSarbanes Oxley Act of 2002*.  Beginning with theyear ending December 31, 2006, Section 404 of the Sarbanes-Oxley Actof 2002 will require us to include an internal control report of managementwith our annual report on Form 10-K.  The internal controlreport must contain (1) a statement of management’s responsibility forestablishing and maintaining adequate internal controls over financialreporting for our Company, (2) a statement identifying the framework usedby management to conduct the required evaluation of the effectiveness of ourinternal controls over financial reporting, (3) management’s assessment ofthe effectiveness of our internal controls over financial reporting as of theend of our most recent fiscal year, including a statement as to whether or notour internal controls over financial reporting are effective, and (4) astatement that our independent auditors have issued an attestation report onmanagement’s assessment of our internal controls over financial reporting.

 

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

 

64

----

 

**PART III**

 

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

 

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

 

**ITEM11.**                      EXECUTIVECOMPENSATION

 

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

 

**ITEM12.**                      SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

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

 

**ITEM13.**                      CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

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

 

**ITEM14.**                      PRINCIPALACCOUNTING FEES AND SERVICES

 

**   Audit Fees**

 

The aggregate fees billed for each of the last twofiscal years for professional services rendered by the principal accountant forthe audit of the registrant’s annual financial statements, included inregistrant’s form 10-K, and review of the financial statements includedin the registrant’s Form 10Q (17CFR249.308a) or services that are normallyprovided by the accountant in connection with statutory and regulatory filingsor engagements for those fiscal years were approximately $241,000 and $219,000 forthe years ended December 31, 2004 and 2003, respectively.

 

The registrant’s board of directors serves as itsaudit committee. All audit and non-audit services to be provided to theregistrant by its principal accountant are approved by the board of directors. Apre-approval policy is in place with The AES Corporation Audit Committee.

 

**AllOther Fees**

 

There were no other fees paid to the principalaccountant for the years ended December 31, 2004 and 2003, respectively.

 

65

----

 

**PART IV**

 

**ITEM15.**                      EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES.

 

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:None.

 

3.                                       ExhibitsFiled:

 

**Unless otherwise indicated, all exhibits tothis Form 10-K are incorporated herein by reference from theidentically numbered exhibit of AES Red Oak, L.L.C.’s Registration Statement ofForm S-4 (333-40478).**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                |
|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3                       |       | Amended and Restated Limited Liability  Company Agreement, dated as of November 23, 1999, of AES Red Oak, L.L.C.                                                                                                                                                                                                          |
|                    |       |                                                                                                                                                                                                                                                                                                                           |
| 4.1(a)                  |       | Trust Indenture, dated as of March 1,  2000, by and among AES Red Oak, L.L.C., the Trustee and the Depositary Bank.                                                                                                                                                                                                       |
|                    |       |                                                                                                                                                                                                                                                                                                                           |
| 4.1(b)                  |       | First Supplemental Indenture, dated as of March 1,  2000, by and among AES Red Oak, L.L.C., the Trustee and the Depositary Bank.                                                                                                                                                                                          |
|                    |       |                                                                                                                                                                                                                                                                                                                           |
| 4.2                     |       | Collateral Agency and Intercreditor  Agreement, dated as of March 1, 2000, by and among AES Red Oak, L.L.C.,  the Trustee, the Collateral Agent, the Debt Service Reserve Letter of Credit  Provider, the Power Purchase Agreement Letter of Credit Provider, the Working  Capital Provider and the Depositary Bank. |
|                    |       |                                                                                                                                                                                                                                                                                                                           |
| 4.3                     |       | Debt Service Reserve Letter of Credit and  Reimbursement Agreement, dated as of March 1, 2000, by and among AES Red  Oak, L.L.C., the Debt Service Reserve Letter of Credit Provider and the Banks  named therein.                                                                                                        |
|                    |       |                                                                                                                                                                                                                                                                                                                           |
| 4.4                     |       | Power Purchase Agreement Letter of Credit  and Reimbursement Agreement, dated as of March 1, 2000, by and among AES  Red Oak, L.L.C., the Power Purchase Agreement Letter of Credit Provider and  the Banks named therein.                                                                                                |
|                    |       |                                                                                                                                                                                                                                                                                                                           |
| 4.5                     |       | Global Bond, dated March 15, 2000,  evidencing 8.54% Senior Secured Bonds of AES Red Oak, L.L.C., Series A  due 2019 in the principal amount of $224,000,000.                                                                                                                                                        |
|                    |       |                                                                                                                                                                                                                                                                                                                           |
| 4.6                     |       | Global Bond, dated March 15, 2000,  evidencing 9.20% Senior Secured Bonds of AES Red Oak, L.L.C., Series B  due 2029 in the principal amount of $160,000,000.                                                                                                                                                        |

 

66

----

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                     |
|-------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7                     |       | Equity Subscription Agreement, dated as of March 1,  2000, by and among AES Red Oak, L.L.C., AES Red Oak, Inc. and the  Collateral Agent.                                                                                                 |
|                    |       |                                                                                                                                                                                                                                                |
| 4.8                     |       | Working Capital Agreement, dated as of March 1,  2000, by and among AES Red Oak, L.L.C., Working Capital Provider, and the  Banks named therein.                                                                                               |
|                    |       |                                                                                                                                                                                                                                                |
| 4.9                     |       | Security Agreement, dated as of March 1,  2000, by and between AES Red Oak, L.L.C. and the Collateral Agent.                                                                                                                                   |
|                    |       |                                                                                                                                                                                                                                                |
| 4.10                    |       | Pledge and Security Agreement, dated as of March 1,  2000, by and between AES Red Oak, Inc. and the Collateral Agent.                                                                                                                     |
|                    |       |                                                                                                                                                                                                                                                |
| 4.11                    |       | Pledge and Security Agreement, dated as of March 1,  2000, by and between AES Red Oak, L.L.C. and the Collateral Agent.                                                                                                                        |
|                    |       |                                                                                                                                                                                                                                                |
| 4.12                    |       | Consent to Assignment, dated as of March 1,  2000, by and between Williams Energy Marketing & Trading Company and  the Collateral Agent, and consented to by AES Red Oak, L.L.C. (with respect  to the Power Purchase Agreement).     |
|                    |       |                                                                                                                                                                                                                                                |
| 4.13                    |       | Consent to Assignment, dated as of March 1,  2000, by and between The Williams Companies, Inc. and the Collateral  Agent, and consented to by AES Red Oak, L.L.C. (with respect to the PPA  Guaranty)                                     |
|                    |       |                                                                                                                                                                                                                                                |
| 4.14                    |       | Consent to Assignment, dated as of March 1,  2000, by and between Raytheon Engineers & Constructors, Inc.  and the Collateral Agent, and consented to by AES Red Oak, L.L.C. (with  respect to the construction agreement).      |
|                    |       |                                                                                                                                                                                                                                                |
| 4.15                    |       | Consent to Assignment, dated as of March 1,  2000, by and between Raytheon Company and the Collateral Agent, and consented  to by AES Red Oak, L.L.C. (with respect to the EPC Guaranty).                                                      |
|                    |       |                                                                                                                                                                                                                                                |
| 4.16                    |       | Consent to Assignment, dated as of March 1,  2000, by and between Siemens Westinghouse Power Corporation and the  Collateral Agent, and consented to by AES Red Oak, L.L.C. (with respect to  the Maintenance Services Agreement).             |
|                    |       |                                                                                                                                                                                                                                                |
| 4.17                    |       | Consent to Assignment, dated as of March 1,  2000, by and between AES Sayreville, L.L.C. and the Collateral Agent, and  consented to by AES Red Oak, L.L.C. (with respect to the Development and  Operations Services Agreement).              |
|                    |       |                                                                                                                                                                                                                                                |
| 4.18                    |       | Consent to Assignment, dated as of March 1,  2000, by and between Jersey Central Power and Light Company d/b/a GPU Energy  and the Collateral Agent, and consented to by AES Red Oak, L.L.C. (with  respect to the Interconnection Agreement). |

 

67

----

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                   |
|-------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.19                    |       | Consent to Assignment, dated as of March 1,  2000, by and between the Borough of Sayreville and the Collateral Agent, and  consented to by AES Red Oak, L.L.C. (with respect to the Water Supply  Agreement).                                                                                                                                                                |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1                    |       | Fuel Conversion Services, Capacity and  Ancillary Services Purchase Agreement, dated as of September 17, 1999,  and Amendment No. 1, dated as of February 21, 2000, by and between  AES Red Oak, L.L.C. and Williams Energy Marketing & Trading Company.  (Portions of this exhibit have been omitted pursuant to a request for  confidential treatment.) |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2(a)                 |       | Agreement for Engineering, Procurement and  Construction Services, dated as of October 15, 1999, and Amendment No. 1,  dated as of February 23, 2000, by and between AES Red Oak, L.L.C. and  Raytheon Engineers & Constructors, Inc. (Portions of this  exhibit have been omitted pursuant to a request for confidential treatment.)                |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2(b)                 |       | EPC Contract Prepayment Coordination  Agreement, dated as of March 14, 2000, between AES Red Oak, L.L.C. and  Raytheon Engineers and Constructors, Inc. (Portions of this exhibit have  been omitted pursuant to a request for confidential treatment.)                                                                                                                 |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3                    |       | Guaranty, dated as of October 15,  1999, by Raytheon Company in favor of AES Red Oak, L.L.C. (Portions of this  exhibit have been omitted pursuant to a request for confidential treatment.)                                                                                                                                                                                 |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4                    |       | Maintenance Program Parts, Shop Repairs and  Scheduled Outage TFA Services Contract, dated as of December 8, 1999,  and Amendment No. 1, dated February 15, 2000, by and between AES  Red Oak, L.L.C. and Siemens Westinghouse Power Corporation. (Portions of this  exhibit have been omitted pursuant to a request for confidential treatment.)                  |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5                    |       | Development and Operations Services  Agreement, dated as of March 1, 2000, by and between AES Sayreville,  L.L.C. and AES Red Oak, L.L.C.                                                                                                                                                                                                                                    |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7                    |       | Water Supply Agreement, dated as of December 22,  1999, by and between AES Red Oak, L.L.C. and the Borough of Sayreville.                                                                                                                                                                                                                                                    |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8                    |       | General Facility Transmission  Interconnection Agreement, dated as of April 27, 1999, by and between  Jersey Central Power & Light Company d/b/a GPU Energy and AES Red  Oak, L.L.C.                                                                                                                                                                                |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.9                    |       | Mortgage, Security Agreement and Assignment  of Leases and Income, dated as of March 1, 2000, by and between AES Red  Oak, L.L.C. and the Mortgagee.                                                                                                                                                                                                                         |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.10                   |       | Assignment of Leases and Income, dated as  of March 1, 2000, by                                                                                                                                                                                                                                                                                                              |

 

68

----

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                            |
|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **              | ** ** | 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  Purchase Agreement Guaranty). (Portions of this exhibit have       |

 

69

----

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

 

----

* Filed herewith.

 

** Previously filed as an exhibit to the Company’sQuarterly Report on Form 10-Q for the period ended September 30,2002 and incorporated by reference herein.

 

70

----

 

**SupplementaryInformation to be Furnished With 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 tosecurity holders during the fiscal year ended December 31, 2004. No annualreport or proxy materials will be sent to security holders subsequent to thefiling of this annual report on Form 10-K.

 

71

----

 

**SIGNATURES**

 

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

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

 

Date: March 30, 2005

 

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

 
| **Signature**                | ** ** | **Title**  | ** ** | **Date**             |
|------------------------------|------------|------------|------------|----------------------|
| ** **                   | ** ** | ** ** | ** ** | ** **           |
|   /s/ A. W Bergeron     |       |       |       |                 |   |
|   A. W Bergeron         |       | Director   |       | March 24,  2005 |
|                         |       |       |       |                 |
|   /s/ Edward P. Convery |       |       |       |                 |   |
|   Edward P. Convery     |       | Director   |       | March 30,  2005 |
|                         |       |       |       |                 |
|   /s/ Dan Rothaupt      |       |       |       |                 |   |
|   Dan Rothaupt          |       | Director   |       | March 30,  2005 |

 

72

----