<PAGE>
EXHIBIT NO. 99-B
 
 
 
 
 
Certain Confidential Material Contained in this Document has been omitted and
filed separately with the Securities and Exchange Commission Pursuant to Rule
24b-2 of the Securities Exchange Act of 1933, as amended.
Certain Confidential Material Contained in this Document has been omitted and
filed separately with the Securities and Exchange Commission Pursuant to Rule
24b-2 of the Securities Exchange Act of 1933, as amended.
 
 
 
 
 
 
 
 
 
 
 
                       KAMINE/BESICORP SOUTH GLENS FALLS L.P.
 
                                Financial Statements
 
                             December 31, 1997 and 1996
 
                     (With Independent Auditors' Report Thereon)
 
<PAGE>
                            Independent Auditors' Report
 
The Partners
Kamine/Besicorp South Glens Falls L.P.:
 
We have audited the accompanying balance sheets of Kamine/Besicorp South Glens
Falls L.P. as of December 31, 1997 and 1996, and the related statements of
operations, partners' equity (deficiency), and cash flows for each of the years
in the three-year period ended December 31, 1997. These financial statements are
the responsibility of the general partners. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kamine/Besicorp South Glens
Falls L.P. as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1997 in conformity with generally accepted accounting principles.
 
 
 
February 24, 1998
 
<PAGE>
                     KAMINE/BESICORP SOUTH GLENS FALLS L.P.
                                 Balance Sheets
                           December 31, 1997 and 1996
 
<TABLE>
<CAPTION>
 
                           Assets                                  1997         1996
 
 
<S>                                                          <C>             <C>
Current assets:
 Cash                                                          $ 1,642,468    1,127,247
 Cash held in escrow                                               569,565      634,701
 Accounts receivable, net                                        2,688,076    2,247,012
 Other receivables                                                 566,832    1,464,997
 Prepaid expenses and other current assets                         423,618      487,732
 Current portion of loans receivable from affiliate (note 8)       142,635      126,042
                                                                ----------   ----------
     Total current assets                                        6,033,194    6,087,731
                                                                ----------   ----------
Facility under capital lease (note 4)                           51,002,261   51,002,261
 Less accumulated amortization                                   6,190,491    4,153,593
                                                                ----------   ----------
     Facility under capital lease, net                          44,811,770   46,848,668
                                                                ----------   ----------
Other assets:
 Cash held in escrow                                             3,500,000    2,500,000
 Loans receivable from affiliate (note 8)                        2,183,240    2,325,875
     Total other assets                                          5,683,240    4,825,875
                                                                ----------   ----------
     Total assets                                              $56,528,204   57,762,274
                                                                ----------   ----------
                                                                ----------   ----------
              Liabilities and Partners' Equity
 
Current liabilities:
 Current installments of long-term debt (note 5)                   225,684      203,580
 Accounts payable                                                2,011,763    2,408,745
 Amounts due to related parties (notes 2 and 8)                  1,735,740    1,219,417
 Accrued expenses and other current liabilities                    352,177      343,639
 Obligations under capital leases (note 4)                       1,461,239    1,291,054
                                                                ----------   ----------
     Total current liabilities                                   5,786,603    5,466,435
 
Long-term debt, excluding current installments (note 5)          2,949,645    3,175,329
Obligations under capital leases (note 4)                       46,243,650   47,704,890
Deferred gain on sale of Facility (note 3)                         994,724    1,039,939
                                                                ----------   ----------
     Total liabilities                                          55,974,622   57,386,593
                                                                ----------   ----------
Partners' equity (note 2):
 General partners                                                  292,491      198,915
 Limited partners                                                  261,091      176,766
                                                                ----------   ----------
     Total partners' equity                                        553,582      375,681
 
Commitments and contingencies (notes 4, 5, 6 and 7)             ----------   ----------
     Total liabilities and partners' equity                    $56,528,204   57,762,274
                                                                ----------   ----------
                                                                ----------   ----------
See accompanying notes to financial statements.
 
</TABLE>
 
<PAGE>
                     KAMINE/BESICORP SOUTH GLENS FALLS L.P.
                            Statements of Operations
                  Years ended December 31, 1997, 1996 and 1995
 
<TABLE>
<CAPTION>
 
                                                      1997         1996           1995
 
 
<S>                                             <C>             <C>         <C>
Revenues (note 7)                                 $29,168,450   28,935,773     26,024,574
                                                   ----------   ----------     ----------
Operating expenses:
 Amortization of asset under capital lease          2,036,898    2,036,899      2,060,263
 Fuel (note 1)                                     10,718,112   10,151,755      9,893,914
 Operations and maintenance (note 7)                1,576,409    1,565,366      1,596,461
 Overhaul (note 7)                                    429,659      408,773        475,205
 Administrative fee (notes 2 and 8)                   341,522      328,843        318,278
 Insurance                                            367,407      330,215        316,407
 Amortization of organization costs (note 1)               --       42,420         49,155
 Utilities                                            313,099      144,281        216,257
 Property taxes                                       355,816      334,747        319,889
 Other                                                335,466      258,288        373,654
                                                   ----------   ----------     ----------
     Total operating expenses                      16,474,388   15,601,587     15,619,483
                                                   ----------   ----------     ----------
     Income from operations                        12,694,062   13,334,186     10,405,091
                                                   ----------   ----------     ----------
Other income (expense):
 Interest expense                                  (6,381,843)  (6,575,376)    (6,778,629)
 Contract rights (note 8)                            (992,093)    (994,639)    (2,703,132)
 Cash flow fees (note 8)                             (445,432)    (481,622)       (69,070)
 Interest income                                      426,780      403,248        361,085
 Gain on sale of Facility (note 3)                     45,215       45,215         45,216
 Other expenses                                       (53,948)     (41,008)       (41,382)
                                                   ----------   ----------     ----------
     Total other expense                           (7,401,321)  (7,644,182)    (9,185,912)
                                                   ----------   ----------     ----------
     Net income                                   $ 5,292,741    5,690,004      1,219,179
                                                   ----------   ----------     ----------
                                                   ----------   ----------     ----------
See accompanying notes to financial statements.
 
</TABLE>
 
<PAGE>
                     KAMINE/BESICORP SOUTH GLENS FALLS L.P.
                  Statements of Partners' Equity (Deficiency)
                  Years ended December 31, 1997, 1996 and 1995
 
<TABLE>
<CAPTION>
 
                                                    General      Limited         Total
                                                    partners     partners
 
 
<S>                                             <C>             <C>         <C>
Partners' deficiency at December 31, 1994         $  (132,671)     (23,438)      (156,109)
Partners' distributions (note 2)                     (509,378)    (442,393)      (951,771)
Partnership restructuring (note 2)                     50,534      (50,534)            --
Net income (note 2)                                   641,288      577,891      1,219,179
                                                   ----------   ----------     ----------
 
Partners' equity at December 31, 1995                  49,773       61,526        111,299
Partners' distributions (note 2)                   (2,843,800)  (2,581,822)    (5,425,622)
Net income (note 2)                                 2,992,942    2,697,062      5,690,004
                                                   ----------   ----------     ----------
Partners' equity at December 31, 1996                 198,915      176,766        375,681
Partners' distributions (note 2)                   (2,690,406)  (2,424,434)    (5,114,840)
Net income (note 2)                                 2,783,982    2,508,759      5,292,741
                                                   ----------   ----------     ----------
Partners' equity at December 31, 1997             $   292,491      261,091        553,582
                                                   ----------   ----------     ----------
                                                   ----------   ----------     ----------
See accompanying notes to financial statements.
 
</TABLE>
 
<PAGE>
                     KAMINE/BESICORP SOUTH GLENS FALLS L.P.
                            Statements of Cash Flows
                  Years ended December 31, 1997, 1996 and 1995
 
<TABLE>
<CAPTION>
                                                               1997        1996           1995
 
<S>                                                      <C>            <C>         <C>
Cash flows from operating activities:
 Net income                                                $ 5,292,741   5,690,004      1,219,179
 Adjustments to reconcile net income to net cash
  provided by operating activities:
     Amortization of Facility under capital lease            2,036,898   2,036,899      2,060,263
     Amortization of deferred financing costs and
       deferred organization and start-up costs                     --      42,420         49,155
     Amortization of deferred gain                             (45,215)    (45,215)       (45,216)
     Changes in operating assets and liabilities:
       Increase in escrow accounts                            (934,864) (1,066,384)    (1,538,789)
       Decrease (increase) in receivables                      457,101    (704,186)       224,898
       Decrease (increase) in prepaid expenses and other
          current assets                                        64,114     (59,972)       272,686
       (Decrease) increase in accounts payable                (396,982)    528,402       (965,537)
       Increase in due to related parties                      516,323     426,798        217,378
       Increase (decrease) in accrued expenses and other
          current liabilities                                    8,538      91,761        (62,528)
       Decrease in accrued interest under capital lease             --          --       (175,789)
                                                            ----------  ----------     ----------
 
          Net cash provided by operating activities          6,998,654   6,940,527      1,255,700
                                                            ----------  ----------     ----------
Cash flows from financing activities:
 Payments on capital lease obligation                       (1,291,055) (1,116,153)      (890,164)
 Proceeds from long-term debt                                       --          --        424,092
 Payments on long-term debt                                   (203,580)   (197,060)      (576,985)
 Decrease in loans receivable from affiliate                   126,042     111,243         74,813
 Partners' distributions                                    (5,114,840) (5,425,622)      (951,771)
                                                            ----------  ----------     ----------
          Net cash used in financing activities             (6,483,433) (6,627,592)    (1,920,015)
                                                            ----------  ----------     ----------
          Net increase (decrease) in cash                      515,221     312,935       (664,315)
Cash at beginning of year                                    1,127,247     814,312      1,478,627
                                                            ----------  ----------     ----------
Cash at end of year                                        $ 1,642,468   1,127,247        814,312
                                                            ----------  ----------     ----------
                                                            ----------  ----------     ----------
Supplemental disclosure of cash flow information - cash
 paid during the year for interest                         $ 6,381,843   6,606,816      6,960,374
                                                            ----------  ----------     ----------
                                                            ----------  ----------     ----------
Noncash investing and financing activities -
 capital lease repricing adjustment (note 4)               $        --          --        547,739
                                                            ----------  ----------     ----------
                                                            ----------  ----------     ----------
See accompanying notes to financial statements.
 
</TABLE>
 
<PAGE>
                       KAMINE/BESICORP SOUTH GLENS FALLS L.P.
 
                            Notes to Financial Statements
 
                             December 31, 1997 and 1996
 
 
 
(1)   Organization and Summary of Significant Accounting Policies
 
Organization
 
Kamine/Besicorp South Glens Falls L.P. (the Partnership) is a Delaware limited
partnership formed on February 27, 1989. The Partnership was organized for the
purpose of constructing, owning and operating a 59-megawatt cogeneration
facility (the Facility or the Project) on the premises of Fort James Corporation
(Fort James), formerly James River Paper Company, Inc. in South Glens Falls, New
York (premises sold to Encore Paper Company (Encore) in March 1992). The
Facility is operated as a PURPA qualifying cogeneration facility using natural
gas as the primary source of energy.
 
The general partners of the Partnership are Kamine South Glens Falls Cogen Co.,
Inc. (KSGFCCI) and Beta South Glens Falls Inc. (a subsidiary of Besicorp Group
Inc. (Besicorp)), each of which retains a 42.5% interest in the Partnership.
Affiliates of the general partners, Kamine Development Corp. (KDC) and Beta C&S
Limited, each own a 7.5% limited partner interest. On May 3, 1995, KSGFCCI
restructured its 42.5% general partner interest in the Project to a 32.4%
limited partner interest and a 10.1% general partner interest. KDC and KSGFCCI
assigned the economic rights of their limited partner interests to a trust, with
Chemical Bank as trustee, on May 3, 1995.
 
The Facility began commercial operations on November 12, 1991. Substantially all
revenues from the Facility are generated by selling power to one customer,
Niagara Mohawk Power Corporation (NIMO). Sales to NIMO approximated 98% of total
revenues in 1997, 1996 and 1995.
 
The Partnership conveyed ownership of the Facility to the County of Saratoga
Industrial Development Agency (IDA). The tax-exempt status of the IDA exempts
the Project from property taxes during IDA ownership. Payments in lieu of real
property taxes are made to the IDA under an agreement dated January 1, 1991. The
IDA has appointed the Partnership as its agent and was to convey the Facility to
the Partnership in accordance with an installment sale agreement.
 
The Partnership's interest in the Facility was sold to General Electric Capital
Corporation (GECC) on December 22, 1994 and leased back by the Partnership. GECC
entered into a Trust Agreement with Manufacturers and Traders Trust Company
(M&T) as of December 9, 1994 to engage M&T as Owner Trustee. In connection with
the sale of the Partnership's interest in the Facility, the installment sale
agreement was assigned to M&T.
 
Summary of Significant Accounting Policies
 
Gain on Sale
 
The gain from the sale of the Facility has been deferred and is being recognized
on a straight-line basis over the lease term.
 
(1), Continued
 
Amortization of Capital Lease
 
Amortization of the Facility under capital lease is computed using the
straight-line method over the lease term.
 
Deferred Organization and Start-up Costs
 
The deferred organization and start-up costs were amortized on a straight-line
basis over a 60-month period commencing on the date the Facility was placed in
service. Amortization expense charged to operations for the years ended December
31, 1997, 1996 and 1995 was $0, $42,420 and $49,155, respectively.
 
Revenue Recognition
 
<PAGE>
Revenues are recognized as earned.
 
Income Taxes
 
Income taxes have not been provided, since the Partnership is not a taxable
entity. The partners report their respective share of the Partnership's taxable
income or loss on their respective income tax returns.
 
Fuel Sales
 
Sales of fuel and transportation associated with excess natural gas pipeline
capacity purchased by the Partnership to support peak fuel requirements have
been treated as a reduction to fuel expense. Total sales related to disposition
of such excess capacity in 1997, 1996 and 1995 totaled $5,959,845, $7,038,129
and $3,317,199, respectively.
 
Escrow Accounts
 
An escrow arrangement has been established for receipt of all revenues and
payment of all obligations of the Partnership. The security agent is Summit Bank
(Summit). Amounts in the collection account, which represent general funds, are
classified as cash on the balance sheets. Funds in other accounts, which are set
aside for specific purposes, are classified as escrow accounts. The escrow
accounts at December 31, 1997 and 1996 consist of a current account principally
for the payment of taxes and insurance, and two long-term accounts - a reserve
for lease payments and an alternate steam host reserve.
 
Financial Instruments
 
The carrying values of the Partnership's financial instruments at December 31,
1997 approximate their estimated fair value. The carrying amounts of accounts
receivable, accounts payable, and accrued expenses and other current liabilities
approximate fair
 
(1), Continued
 
value due to the short-term maturity of such instruments. Management believes
that the carrying amount of loans receivable and long-term debt approximates
fair value based on rates that would be offered by the Partnership for issuance
of loans and rates that would be offered to the Partnership for debt with
similar maturities and characteristics.
 
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
 
The Partnership adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," as of January 1, 1996. The
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairments whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to the future net cash flows expected to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less the cost to sell. Adoption of this
Statement did not have an impact on the Partnership's financial position or
results of operations.
 
Use of Estimates
 
In conformity with generally accepted accounting principles, management of the
Partnership has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and revenues and expenses and the disclosure
of contingent assets and liabilities in preparing the accompanying financial
statements. Actual results could differ from those estimates.
 
Liabilities for loss contingencies arising from claims, assessments, litigation,
fines and penalties and other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
 
Risks and Uncertainties
 
The Partnership is principally engaged in a single line of business, the
production and sale of electric power to one
<PAGE>
customer, NIMO.
 
The regulated investor-owned utility industry is currently subject to
considerable market pressures and changes in the federal and state regulatory
environment in which it operates. These pressures are resulting in industry
consolidation and pressure to disaggregate electric generation, transmission and
distribution assets and to adjust cost structures to meet market conditions. The
utility to which the Partnership sells its power, NIMO, made a filing on October
10, 1995 to the Public Service Commission of the State of New York (the
Commission) setting forth numerous restructuring proposals, including a
significant reduction in the price for power purchased from
 
(1), Continued
 
independent power producers currently under contract with NIMO. NIMO stated in
such filing that its financial viability is threatened. In early 1996, NIMO
suspended payment of dividends on its common stock. On August 1, 1996, NIMO
proposed to buy out 44 independent power contracts in exchange for a combination
of cash and securities. An agreement in principle was announced on March 10,
1997 whereby NIMO would restructure or terminate the power contracts for
combinations of cash and/or debt securities, common stock and new agreements. On
July 10, 1997, NIMO announced that a master restructuring agreement was signed
with respect to 29 independent power contracts including the one held by the
partnership. On September 25, 1997, NIMO announced that it had reached an
agreement in principle with the staff of the New York Department of Public
Service on a rate and restructuring plan (including recommended approval of the
master restructuring agreement). After a series of hearings and testimony by
interested parties, on December 29, 1997 the assigned Administrative Law Judge
recommended approval on the rate and restructuring plan with some modifications.
On February 24, 1998, the Commission approved the master restructuring
agreement. Any restructuring remains subject to the approval of third parties
for both the Partnership and NIMO and there is no assurance that a restructuring
will be completed or that changes will not occur. The outcome of the industry
trends, regulatory changes, the NIMO negotiations and NIMO's financial viability
cannot presently be determined.
 
Reclassification
 
Certain items in the 1996 and 1995 financial statements have been reclassified
to conform with the 1997 presentation.
 
(2)   Allocation of Income, Losses and Cash Distributions
 
A separate capital account has been established and maintained for each partner.
Each such account is (a) increased by the amount of such partner's capital
contributions, any profits and items of income and gain allocated to such
partner, any increase in such partner's share of the liabilities of the
Partnership and the amount of partnership liabilities assumed by the partner;
and (b) decreased by the amount of cash and the fair market value of any
partnership assets distributed to such partner, the amount of losses allocated
to such partner, any decrease in such partner's share of the liabilities of the
Partnership and the amount of any partner liabilities assumed by the Partnership
(subject to certain provisions).
 
Profits and losses for any calendar year or portion of such year are allocated
among the partners in proportion to their percentage ownership interests, except
that to the extent any allocation of losses would reduce any limited partner's
adjusted capital account balance, as defined and agreed by the partners, below
zero, such portion of losses shall be specially allocated to the general
partners in equal shares and, in turn, any subsequent profits shall be allocated
so as to reverse the effect of such special allocation of losses.
 
(2), Continued
 
The partners' capital accounts were restructured in 1995 to reflect KSGFCCI's
change in its general partner interest from 42.5% to 10.1% in exchange for a
32.4% limited partner interest. The net effect of this change is a $50,534
decrease in the general partners' deficiency account balance and a similar
increase in the limited partners' deficiency account balance.
 
Net cash flow, as defined, for each calendar quarter is distributed to the
partners in accordance with their percentage ownership interests. In addition,
amounts required for payment of New York State franchise taxes by the partners,
based upon a percentage rate of each partner's pro rata share of partnership
revenues pursuant to Article 9,
<PAGE>
Section 186 of the New York State Tax Code, are distributed to the partners when
tax payments are due. All partners' distributions in 1997, 1996 and 1995 were
for payment of such taxes, as well as net cash flow distributions.
 
In addition to their respective shares of partnership cash flow, the general
partners and/or their affiliates receive an administrative fee of $300,000 per
annum (escalated for changes in the Employment Cost Index) and contractual
rights to cash flow development fees.
 
(3)   Sale of Facility
 
The Partnership's interest in the Facility was sold on December 22, 1994 to GECC
for $51,550,000. Proceeds from the sale were used to repay outstanding loans,
pay a fee to GECC and to partially fund transaction costs. A gain on sale of
$1,131,608 was deferred and is being recognized over the term of the lease. In
1997, 1996 and 1995, $45,215, $45,215 and $45,216, respectively, of the gain was
recognized.
 
(4)   Lease of Facility
 
The Partnership entered into a Lease Agreement with M&T on December 22, 1994 to
lease the Facility for 25 years with an option to renew for up to three years at
a fair market rental value. The lease is recorded as a capital lease. The lease
was subject to repricing to account for changes in assumptions and estimated
costs related to certain transaction expenses and the construction costs of
other equipment.
 
On December 20, 1995 (the repricing date), construction of other equipment was
completed and all rights, title and interest in such equipment were transferred
to M&T. In addition, the rental payments were revised on the repricing date to
account for the changes in assumptions and estimated costs. As a result of the
change in rental payments, the Facility under capital lease and related lease
obligation were decreased by $547,739 on December 20, 1995.
 
(4), Continued
 
At December 31, 1997, the future minimum annual lease payments for the capital
lease obligation are as follows:
 
<TABLE>
<CAPTION>
 
<S>                                  <C>
1998                                   $  7,315,460
1999                                      7,315,460
2000                                      7,315,460
2001                                      7,315,460
2002                                      7,315,460
Thereafter                               72,888,888
                                        -----------
                                        109,466,188
Less interest                            61,761,299
                                        -----------
Future minimum annual lease payments   $ 47,704,889
                                        -----------
                                        -----------
 
</TABLE>
 
 
(5)  Financing
 
On December 9, 1994 a Term Loan, Working Capital and Letter of Credit Financing
Agreement was entered into with GECC. It provided for a Tranche A Term Loan for
up to $750,000 to fund construction for certain alterations to the Facility that
was purchased by GECC. In connection therewith, the Tranche A Term Loan was
repaid in December 1995. In addition, a Tranche B Term Loan for up to $4,250,000
was provided ($3,175,329 and $3,378,909 outstanding at December 31, 1997 and
1996, respectively) to fund transaction costs not funded by the sale proceeds
and a loan to a related party which will be repaid over 12 years (see note 8).
An amendment to the Tranche B Term Loan was entered into on December 20, 1995
which fixed the interest rate at 10.21% effective December 1, 1995. In addition,
a Working Capital Commitment of $2,000,000 is available to the Partnership, as
well as up to $4,000,000 for Letters of Credit related to fuel obligations. At
December 31, 1997 and 1996, there were no borrowings outstanding under the
Working Capital Commitment. At December 31, 1997, the Partnership had open
letters of credit of $1,452,926.
 
The total amounts of long-term debt due under the Tranche B Term Loan during
each of the next five years are as follows:
 
 
<PAGE>
<TABLE>
<CAPTION>
 
<S>                               <C>
Year ending December 31:
 
   1998                             $225,684
   1999                              250,187
   2000                              276,522
   2001                              307,373
   2002                              340,746
                                     -------
                                     -------
 
</TABLE>
 
 
(6)  Lease of Land
 
The Facility is on a parcel of land owned by Encore adjacent to its paper mill.
The land is leased to the Partnership for a nominal amount. In 1994, the lease
was amended to extend the term to 40 years from December 22, 1994. The lease has
been assigned to M&T in connection with the sale of the Facility.
 
 
 
(7)  Commitments and Contingencies
 
Commitments
 
Affiliates of the Partnership entered into a Power Purchase Agreement (PPA) with
NIMO dated as of June 5, 1987 with approval by the Commission on September 1,
1987. The PPA was assigned to the Partnership. NIMO agreed to purchase
electricity generated by the Facility for a term of 20 years from the date of
commercial operation at the higher of $.06 per kilowatt-hour or actual avoided
cost, as defined.
 
As of May 22, 1992, the Partnership entered into an amendment to the PPA whereby
the amount of electricity to be sold was increased from approximately 49
megawatts (original capacity) to 55 megawatts in the summer period and 59
megawatts in the winter period (subject to adjustment based on performance).
Revenues for the original capacity continued to be earned based on the higher of
$.06 per kilowatt-hour or actual avoided cost, as defined, for the amount of
electricity generated. For the additional capacity, NIMO was to make payments at
$.06 per kilowatt-hour for five years from the date of the amendment, with the
difference between $.06 and actual energy-only tariff rates to be accumulated in
an adjustment account and recorded as an asset or liability (deferred revenue).
After the five-year period, the additional capacity was to be sold to NIMO at
statutory required minimum rates less the amount required to liquidate the
adjustment account over the remaining life of the PPA. The adjustment account
balance was secured by a lien on the Facility that was subordinate to GECC's
security.
 
An amendment to the PPA was entered into as of January 4, 1994 and became
effective on November 5, 1994. The amendment requires NIMO to purchase
electricity generated by the Facility for 35 years from November 5, 1994. In
addition, the NIMO adjustment account at that date was eliminated.
 
The Partnership entered into an Energy Service Agreement (ESA) with Fort James
dated as of October 31, 1989. Fort James was to purchase mill requirements for
steam from the Facility at the mill's energy cost according to formulas and
methodology set forth in the ESA for a term of 20 years from the date of
commercial operation. The ESA provided for a share of the Facility's revenues to
be paid to Fort James. As of March 12, 1992, all of Fort James' rights, title
and interest in and to the ESA, except its right to receive a share of the
Facility's revenues, were transferred to Encore. This ESA was terminated on
August 15, 1994. As of October 21, 1994, the Partnership entered into a new ESA
with Encore for a term of 35 years with pricing terms as defined in the ESA.
 
(7), Continued
 
The Partnership entered into a Peak Shaving Agreement with NIMO as of June 29,
1992. Under this agreement, NIMO can take the Partnership's contracted natural
gas, subject to defined limitations, for up to 35 days from every November 15 to
April 16 of the following year. As compensation, the Partnership receives a fee
of $.25 to $.75 per decatherm of gas plus the cost of alternate fuel or the cost
of the gas. Revenues realized pursuant to this agreement were $316,431 in 1996.
There were no revenues realized pursuant to this agreement in 1997 or 1995.
 
The Partnership entered into an Operations and Maintenance Agreement (O&M
Agreement) with Stewart & Stevenson Operations, Inc. (the Operator) as of
January 31, 1991. The O&M Agreement was amended and
<PAGE>
restated as of October 21, 1994 to conform with the plan for operations
associated with the amended and restated PPA. Under the amended agreement, the
Operator will operate and maintain the Facility for a period of 12 years and one
successive 6-year term, unless 12 months' prior notice is given by the
Partnership to the Operator. Compensation includes a fee of (INFORMATION DELETED
- SUBJECT OF A CONFIDENTIALITY REQUEST) per year plus (INFORMATION DELETED -
SUBJECT OF A CONFIDENTIALITY REQUEST) per Operating Hour, both amounts subject
to annual escalation beginning January 1, 1995 based upon changes in the
Producer Price Index (PPI). The Operator is paid a fee for major facility
overhauls at a rate that ranges from (INFORMATION DELETED - SUBJECT OF A
CONFIDENTIALITY REQUEST) to (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY
REQUEST) per Equivalent Operating Hour, as defined. This fee is also subject to
annual escalations based upon changes in the PPI. The agreement also provides
for the Partnership to pay the Operator a mobilization fee of (INFORMATION
DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) prior to the acceptance date, as
defined. The agreement also provides for the Operator to receive a bonus or be
obligated to pay a penalty based on a performance factor, as defined. The
Partnership will reimburse the Operator for letter of credit fees and insurance
premiums based upon evidence by the Operator that such expenses have been paid.
 
The Partnership has entered into various contracts for the supply and
transportation of natural gas to the Project. Natural gas is being supplied by
Renaissance Energy Ltd. (a Canadian corporation) from dedicated reserves.
Transportation of natural gas by pipelines is by TransCanada Pipelines Limited
from Burstall, Saskatchewan, Canada to Emerson, Manitoba, Canada; by Great Lakes
Gas Transmission Company to Crystal Falls, Michigan; by ANR Pipeline Company to
Lebanon, Ohio; by CNG Transmission Corporation to West Schenectady, New York;
and by NIMO to the Facility.
 
The aforementioned agreements have been assigned to M&T in connection with the
sale of the Facility.
 
In addition, the Facility has the capacity to utilize Number 2 fuel oil as an
alternative fuel. The Partnership maintains an open account with Sprague Energy
Corporation to purchase such fuel.
 
(7), Continued
 
Contingencies
 
The Partnership and certain related parties, including the general and limited
partners, have been named as defendants in a lawsuit. The plaintiff alleges that
on or about October 11, 1988, the plaintiff was awarded the contracts for the
construction of the Facility and a separate cogeneration facility located in
Carthage, New York. The complaint alleges breach of contract, unjust enrichment,
promissory estoppel, fraud and/or negligent misrepresentation. The plaintiff is
seeking $7,446,000 in damages under its causes of action, plus unspecified
punitive damages from all parties named in the lawsuit.
 
On January 15, 1991, the defendants answered the complaint and denied all the
material allegations and asserted various affirmative defenses. On February 28,
1995, the defendants filed a motion for summary judgment dismissing the
plaintiff's claims. On May 22, 1996, the court dismissed the claim alleging
breach of contract. The court declined to issue a summary judgment ruling on the
remaining claims. On September 25, 1996, the defendants appealed the court's
failure to dismiss the remaining claims. The plaintiff appealed the court's
dismissal of the claim alleging breach of contract. On March 12, 1997 the
appellate court upheld the ruling of May 22, 1996. On June 9, 1997 the court
ordered that the case be submitted to non-binding mediation via the commercial
division's Alternative Dispute Resolution Program. Mediation was unsuccessful.
Management and legal counsel believe that the lawsuit has little or no merit.
The ultimate outcome of this litigation cannot presently be determined.
 
(8)  Related-party Transactions
 
Affiliates of the general partners receive an administrative fee for managing
the operations of the Partnership. Administrative fee amounts in 1997, 1996 and
1995 were $341,522, $328,843 and $318,278, respectively.
 
On December 9, 1994, the Partnership entered into an interfacility loan
agreement with Kamine/Besicorp Carthage L.P. (KBC) and Kamine/Besicorp Natural
Dam L.P. (KBND). The agreement allows the Partnership to
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borrow funds or advance funds to the extent of available cash, as defined in the
loan agreement. Such loans to or from either KBC or KBND are required when there
are insufficient funds available to pay certain current obligations. At December
31, 1997 and 1996, there are no outstanding amounts due to or from KBC and KBND.
 
On December 22, 1994, the Partnership advanced $2,637,973 to Kamine/Besicorp
GlenCarthage Partnership. The loan receivable is payable in quarterly
installments over 12 years and carries an interest rate based on either the
Commercial Paper Rate or the annual yield on 10-year U.S. Treasury obligations,
as defined, plus 4.5%. The interest rate was fixed on December 1, 1995 at
10.21%, based on the 10-year U.S. Treasury yield at that time, plus 4.5%.
 
(8), Continued
 
The Partnership has an agreement with the two developers for additional fees for
development work, management and administrative services. These fees (cash flow
fees and contract rights) have been assigned by the developers to
Kamine/Besicorp GlenCarthage Partnership, in which the developers are partners.
This partnership has the right to receive these fees when the Partnership has
sufficient funds available in accordance with payment priority, provided that
the developers provide management and administrative services. The contract
rights, as defined, are payable through March 31, 2007. For 1997, 1996 and 1995,
the Partnership recorded contract rights expense of $992,093, $994,639 and
$2,703,132, respectively. Cash flow fees are payable over the life of the
Project based on 8.5% of cash flows from operations, as defined. Cash flow fees
paid to related parties in 1997, 1996 and 1995 were $445,432, $481,622 and
$69,070, respectively.
 
 
 
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