76 Route 130 Swedesboro, NJ Telephone: {856} Fax: (856)

Transcription

1 LOGAN GENERATING COMPANY, LP 76 Route 130 Swedesboro, NJ Telephone: {856} Fax: (856) March 28,2013 Union Bank, N.A. 445 South Figueroa Street, G Los Angeles, CA Attention: Jonathan Bigelow RE: Logan Generating Co., LP Pursuant to Section 7.01(e) of the Fifth Amended and Restated Reimbursement and Loan Agreement, the undersigned hereby cettifies that as of March 28, 2012, (i) there does not exist any Default or Event of Default and (ii) there does not exist any default or event of default under any other existing Project Document which could cause a material adverse change. Vety truly yours, ~"~ Warren MacGilltvray President

2 The attached financial statements fairly represent LOGAN GENERATING COMPANY, L.P. Consolidated With KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP financial condition and results of operations and all routine and major maintenance to the Project has been performed substantially in accordance with the Annual Operating Plan for the period ending December 31, Pursuant to Section 7.01 (e) of the Reimbursement and Loan Agreement, the undersigned hereby certifies that, as of Mat ch 28, 2013, (i) there does not exist any Default or Event of Default that has not been waived and (ii) there does not exist any default or event of default under any other existing Project Document which could cause a Material Adverse Change. Logan Generating Company, L.P. Keystone Ut ban Renewal Limited Partnership C:\Users\aeisc le\appdata\locai\m icrosoft\ Windows\ Temporary Internet Fi les\content. Outlook\6FFT I K 4 K\FSCOVER.docx

3 Consolidated Financial Statements LOGAN GENERATING COMPANY, L.P. AND AFFILIATE

4 Index Page(s) Report of Independent Auditors... 1 Consolidated Financial Statements Balance Sheets... 3 Statements of Operations... 4 Statements of Changes in Partners Capital... 5 Statements of Cash Flows

5 Firley, Moran, Freer & Eassa, CPA, P.C Campuswood Drive East Syracuse, NY p: f: Report of Independent Auditors To the General Partner Logan Generating Company, L.P.: Report on the Financial Statements We have audited the accompanying consolidated financial statements of Logan Generating Company, L.P. and Affiliate which comprise the consolidated balance sheets as of, and the related consolidated statements of operations, changes in partners capital and cash flows for the years then ended and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. An Independently Owned Member, McGladrey Alliance McGladrey Alliance is a premier affiliation of independent accounting and consulting firms. McGladrey Alliance member firms maintain their name, autonomy and independence and are responsible for their own client fee arrangements, delivery of services and maintenance of client relationships. 1

6 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Logan Generating Company, L.P. and Affiliate as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. East Syracuse, New York March 12, 2013 sign 2

7 Consolidated Balance Sheets (in thousands of dollars) Assets Current assets Cash and cash equivalents $ 50 $ 50 Restricted cash 2,160 4,817 Accounts receivable 7,018 5,878 Inventory 7,464 9,455 Other current assets Total current assets 17,001 20,553 Construction in progress Land 4,147 4,147 Property and equipment, net of accumulated depreciation of $190,525 and $182,737, respectively 323, ,989 Deferred financing costs, net of accumulated amortization of $6,314 and $5,530, respectively 1,549 1,419 Total assets $ 345,974 $ 356,761 Liabilities and Partners Capital Current liabilities Current portion of long-term debt $ 3,157 $ - Accounts payable 2,488 4,477 Due to affiliates 3,062 3,110 Accrued liabilities 2,311 1,646 Total current liabilities 11,018 9,233 Long-term debt 57,632 60,300 Deferred revenue 190, ,718 Asset retirement obligation Other liabilities Total liabilities 260, ,470 Partners capital 85,234 79,291 Total liabilities and partners capital $ 345,974 $ 356,761 The accompanying notes are an integral part of these consolidated financial statements. 3

8 Consolidated Statements of Operations Years ended (in thousands of dollars) Operating revenues Energy $ 38,851 $ 48,650 Capacity 57,312 56,981 Steam Total operating revenues 96, ,983 Operating expenses Fuel 38,331 46,848 Operations and maintenance 17,625 21,376 General and administrative 4,086 4,420 Depreciation 7,791 7,679 Loss on disposal of assets 15 - Total operating expenses 67,848 80,323 Operating income 28,629 25,660 Other income (expense) Other income 6 30 Interest expense and fees, net (3,231) (3,098) Net income $ 25,404 $ 22,592 The accompanying notes are an integral part of these consolidated financial statements. 4

9 Consolidated Statements of Changes in Partners Capital Years ended (in thousands of dollars) Total Partners capital at December 31, 2010 $ 75,199 Capital distributions (18,500) Net income 22,592 Partners capital at December 31, ,291 Capital distributions (19,461) Net income 25,404 Partners capital at December 31, 2012 $ 85,234 The accompanying notes are an integral part of these consolidated financial statements. 5

10 Consolidated Statements of Cash Flows Years ended (in thousands of dollars) Cash flows from operating activities Net income $ 25,404 $ 22,592 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in deferred revenue (15,902) (15,901) Depreciation 7,791 7,679 Amortization of deferred financing costs Accretion of asset retirement obligations Loss on disposal of assets 15 - Changes in operating assets and liabilities: Accounts receivable (1,140) 8,386 Inventory 1,991 (3,106) Other assets Accounts payable (2,215) 855 Due to affiliates (48) 224 Accrued liabilities 479 (241) Net cash provided by operating activities 17,258 21,848 Cash flows from investing activities Decrease (increase) in restricted cash 2,657 (673) Capital expenditures (223) (657) Net cash provided by (used in) investing activities 2,434 (1,330) Cash flows from financing activities Proceeds from long-term debt--capital lease financing Repayments of long-term debt--capital lease financing (151) - Deferred financing costs (720) (2,019) Proceeds from working capital loan 14,000 2,500 Repayment of working capital loan (14,000) (2,500) Capital distributions (19,461) (18,500) Net cash used in financing activities (19,692) (20,519) Net decrease in cash and cash equivalents - (1) Cash and cash equivalents Beginning of year End of year $ 50 $ 50 Supplemental disclosure of cash flow information Cash paid for interest $ 464 $ 296 Noncash investing and financing activities Capital expenditures which were accrued but not paid $ 241 $ 23 Capital expenditures previously accrued which were paid $ 23 $ - Construction in progress placed in service $ 835 $ - Deferred financing costs which were accrued but not paid $ 194 $ - The accompanying notes are an integral part of these consolidated financial statements. 6

11 1. Organization and Business Logan Generating Company, L.P. Logan Generating Company, L.P. ( the Company ) is a Delaware limited partnership formed in The general partner of the Company is EIF Logan, LLC ( EIF Logan ) (formerly Cogentrix/Logan, LLC) and the limited partner is Logan Power, L.P. ( Logan Power ). The net operating profits and losses of the Company are allocated to EIF Logan and Logan Power (collectively, the Partners ) based on the following ownership percentages: General Partner EIF Logan 50.1% Limited Partner Logan Power 49.9% All distributions, other than liquidating distributions, will be made based on the Partners percentage interests, as shown above, in accordance with the project documents and at such times and in such amounts as the general partner of the Company determines. Keystone Urban Renewal Limited Partnership Keystone Urban Renewal Limited Partnership ( Urban ) is a Delaware limited partnership formed in The general partner of Urban is Keystone Cogeneration Company, L.P. ( Keystone ) and the limited partner is Granite Generating Company, L.P. ( Granite ). The operating profits and losses of Urban are allocated to Keystone and Granite based on the following ownership percentages: General Partner Keystone 99% Limited Partner Granite 1% All distributions, other than liquidating distributions, will be made based on Keystone s and Granite s percentage interests, as shown above, in accordance with the project documents and at such times and in such amounts as the general partner determines. Calypso Energy Holdings, LLC ( Calypso ) indirectly owns 100% of the membership and partnership interests of each EIF Logan, Logan Power, Urban, Keystone, Granite and ultimately the Company. The following entities (managed by EIF Management, LLC) collectively hold 100% of the membership interests of Calypso: EIF Calypso, LLC 80% EIF Calypso II, LLC 20% Prior to May 2011, the 20% interest in Calypso was owned by Cogentrix Energy, LLC ( CELLC ). The Company, together with Urban, was formed to develop, construct, own and operate a 225- megawatt ( MW ) pulverized coal-fired cogeneration station (the Facility ) in the Township of Logan, New Jersey. Urban holds title to the land upon which the Facility is situated, as well as the Facility itself. The Company leases the Facility from Urban pursuant to a facilities lease agreement. The lease commenced on the first funding date of the Facility s construction and will terminate upon any of the following (1) the merger of the Company and Urban, (2) mutual consent among the Company and Urban and the Township of Logan, or (3) final payment of the facilities lease agreement. The Facility produces energy to be sold to Atlantic City Electric Company ( AE ) (Note 10) and process steam for sale to Ferro Corporation for use in its industrial operations. The Facility began commercial operations in

12 The Company is managed by Power Services Company, LLC ( PSC ), pursuant to a management services agreement. PSC subcontracts with Power Plant Management Services, LLC ( PPMS ) to perform these services. The Logan Facility is operated by U.S. Operating Services Company, LLC ( USOSC ), pursuant to an operation and maintenance agreement. USOSC has a Technical Services Agreement with PSC to help support in the performance of these services. PSC subcontracts with NAES Corporation ( NAES ) to assist PSC with required services under the agreement. PSC and USOSC are currently wholly-owned subsidiaries of Calypso (Note 11). 2. Summary of Significant Accounting Policies Basis of Presentation The Company follows the Consolidation Topic of the Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) which provides guidance on consolidation of variable interest entities ( VIE ). The guidance requires that consideration be given to the activities that most significantly impact an entity s financial performance, and who has the power to direct those activities, when determining whether a VIE exists and who is the primary beneficiary of the VIE. The Company has determined that Urban is a VIE of the Company primarily due to its lease arrangements with Urban. The Company has determined that it has the power to direct the activities that most significantly impact Urban s economic performance, and therefore the Company consolidates Urban into its financial statements. All material intercompany transactions have been eliminated. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. Restricted Cash Restricted cash includes cash and cash equivalents that are held in accounts restricted for debt service and other specifically designated accounts under a reimbursement and loan agreement. Restricted cash associated with transactions expected to occur beyond one year are classified as long-term. All other restricted accounts are classified as current assets. Inventory Fuel is valued using the average cost method and includes the fuel contract purchase price as well as the transportation and related costs incurred to deliver the fuel to the Facility (Note 3). Spare parts are recorded at the lower of average cost or market and consist of Facility equipment components and maintenance supplies required to be readily available in order to facilitate routine maintenance activities (Note 3). The Company performs periodic assessments to determine the existence of obsolete, slow-moving and non-usable spare parts and records necessary provisions to reduce such spare parts to net realizable value. 8

13 Emission Allowances Emission allowances are valued under the weighted average costing method subject to the lower of cost or market principle. In applying the lower of cost or market principle, a reduction in the carrying value is not recognized so long as the Company will recover/pass-through the cost in its operating margin. The historical cost of emission allowances is calculated as follows: Granted from regulatory body emission allowances obtained via grants are not assigned any value by the Partnership as their cost is zero. Acquired as part of an acquisition emission allowances are recorded at fair value as of the acquisition date, subject to pro rata reduction if overall purchase price is less than the entity s fair value. Purchased from third parties emission allowances that are transferable and can be purchased or sold in the normal course of business are recorded at cost. At, approximately $-0- and $23,000, in emission allowances are classified as current and included in other current assets in the accompanying consolidated balance sheets. Derivative Instruments In accordance with guidance on accounting for derivative instruments and hedging activities all derivatives should be recognized at fair value. Derivatives or any portion thereof, that are not designated as, and effective as, hedges must be adjusted to fair value through earnings. Derivative contracts are classified as either assets or liabilities on the consolidated balance sheets. Certain contracts that require physical delivery may qualify for and be designated as normal purchases/normal sales. Such contracts are accounted for on an accrual basis. The Company reviewed all of its financial instruments and contracts and determined that none of them met the definition of a derivative. Fair Value Measurements FASB issued guidance that defines fair value, provides guidance for measuring fair value and requires certain disclosures. This guidance does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. A fair value hierarchy was established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3: Unobservable inputs that reflect the reporting entity s own assumptions. A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At, the Company does not have any assets or liabilities remeasured at fair value on a recurring basis. 9

14 Property and Equipment Property and equipment are recorded at cost, net of accumulated depreciation. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives ( EUL ) of the related assets using the straight-line method (Note 4). The Company s depreciation is based on its Facility being considered as a single property unit. Certain components of the Facility will require replacement or overhaul several times over its estimated life. Costs associated with overhauls are recorded as an expense in the period incurred. However, in instances where a replacement of a Facility component is significant and the Company can reasonably estimate the original cost of the component being replaced, the Company will write off the replaced component and capitalize the cost of the replacement. The component will be depreciated over the lesser of the EUL of the component or the remaining useful life of the Facility. The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property and equipment is used, and the effects of obsolescence, demand, competition, and other economic factors. Deferred Financing Costs Deferred financing costs, which consist of the costs incurred to obtain financing, are deferred and amortized into interest expense in the accompanying consolidated statements of operations using the effective interest method over the term of the related financing (Note 5). Asset Retirement Obligations Asset retirement obligations, including those conditioned on future events, are recorded at fair value in the period in which they are incurred, if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the related longlived asset in the same period. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the EUL of the long-lived asset. If the asset retirement obligation is settled for other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement. The Company records at fair value all reclamation costs the Company would incur to perform environmental clean-up of land under lease to the Company. Revenue Recognition Revenues derived from the power purchase agreement (Note 10) are recognized as the lesser of the cumulative amount billable under the agreement or the cumulative estimated average revenue to be recovered over the term of the agreement. Accordingly, the Company has deferred recognition of revenue for certain amounts billed under the long-term power purchase agreement at December 31, 2012 and Revenues from the sale of energy and steam are recorded based on monthly output delivered as specified under contractual terms or current market conditions and are recorded on a gross basis on the accompanying consolidated statements of operations as energy and steam revenues, respectively, with the associated costs recorded in operating expenses. 10

15 Income Taxes The Company and Urban are both treated as disregarded entities for income tax purposes. As such, income or loss from operations is recognized in the income tax return of their sole owner, Calypso. Accordingly, income taxes are not included in the accompanying consolidated financial statements. Events Occurring After Report Date The Company and Urban have evaluated events and transactions that occurred between December 31, 2012 and March 12, 2013, which is the date the consolidated financial statements were available to be issued, for possible disclosure and recognition in the consolidated financial statements. There were no such events or transactions identified by either the Company or Urban. 3. Inventory Inventory consisted of the following components as of December 31: (in thousands of dollars) Coal $ 3,746 $ 5,814 Fuel oil Limestone Spare parts 3,418 3, Property and Equipment Property and equipment consisted of the following components as of December 31: $ 7,464 $ 9,455 (in thousands of dollars) Facility and improvements $ 509,839 $ 509,022 Other equipment 3,704 3, , ,726 Less: Accumulated depreciation (190,525) (182,737) The EUL for significant property and equipment categories are as follows: $ 323,018 $ 329,989 Facility and improvements (1) Other equipment 10 to 60 years 3 to 7 years (1) Facility improvements are depreciated over the lesser of 10 to 60 years or the remaining useful life of the Facility. 11

16 5. Long-term Debt Long-term debt consisted of the following components as of December 31: (in thousands of dollars) As of December 31, 2012 For the Year Ended December 31, 2012 Description Commitment Amount Due Date Balance Outstanding Interest Expense Commitment Fees Letter of Credit Fees NJEDA bonds (1) (8) $ 90,000 1/1/15 $ 9,950 $ 429 N/A N/A 12/15/24 50,350 Reimbursement and (2) (7) loan agreement Bond letter of credit (3) (6) (7) (8) 10,195 1/1/ N/A $ 1,649 Bond letter of credit (3) (6) (7) (8) 51,592 1/1/ $ - - Debt service reserve letter of credit (4) (6) (7) 4,300 1/1/ Working capital (5) (7) 5,000 1/1/ N/A Capital lease obligation (9) 640 2/8/ N/A N/A 60,789 Less: Current portion 3,157 $ 57,632 (in thousands of dollars) As of December 31, 2011 For the Year Ended December 31, 2011 Description Commitment Amount Due Date Balance Outstanding Interest Expense Commitment Fees Letter of Credit Fees NJEDA bonds (1) (8) $ 90,000 1/1/15 $ 60,300 $ 295 N/A N/A Reimbursement and (2) (7) loan agreement Bond letter of credit (3) (6) (7) (8) 61,787 1/1/ N/A $ 1,568 Debt service reserve letter of credit (4) (6) (7) 4,300 1/1/ $ Working capital (5) (7) 5,000 1/1/ N/A 60,300 Less: Current portion - $ 60,300 (1) (2) (3) (4) New Jersey Economic Development Authority ( NJEDA ) bonds are variable rate bonds which are remarketed by an agent for interest periods not to exceed 270 days. The weighted average interest rates on the bonds were 0.70% and 0.49% for the years ended, respectively. Remarketing fees paid were $60,000 in 2012 and The bonds are secured by an irrevocable letter of credit. The reimbursement and loan agreement is collateralized by substantially all of the assets of the Facility. See (7) below. Effective March 30, 2011, the fees of this letter of credit are 2.375% (plus a fronting fee of 0.25%) of the face amount of the letter of credit paid quarterly. A onetime upfront fee of 2.00% ($1,236,000) of the face amount of the letter of credit was also charged and is included in deferred financing costs in the consolidated balance sheet as of December 31, Prior to March 30, 2011, fees ranged from 1.625% to 1.875% (plus a fronting fee of 0.25%) of the face amount of the letter of credit. All fees are included in interest expense in the accompanying consolidated statements of operations. Effective March 30, 2011, the fees of this letter of credit are 2.375% of the face amount of the letter of credit paid quarterly and a commitment fee of 0.75%, based on the unborrowed portion will be charged and is payable quarterly in arrears. A onetime upfront fee of 2.00% ($86,000) of the face amount of the letter of credit was also charged and is included in deferred financing costs in the consolidated balance sheet as of December 31, Prior to March 30, 2011, fees of this letter of credit ranged from 1.75% to 1.875% (plus a commitment fee of 0.50%) of the face amount of the letter of credit. All fees are included in interest expense in the accompanying consolidated statements of operations. 12

17 (5) (6) (7) The Company is required to repay the loan to zero for a minimum of one week per year. Interest on any outstanding balance is payable quarterly and calculated based on various short term indices at the Company s option to be determined for each drawing of the commitment. Effective March 30, 2011, the commitment fee on the working capital line of credit is 0.75%, based on the unborrowed portion will be charged and is payable quarterly in arrears. A onetime upfront fee of 2.00% ($100,000) of the face amount of the letter of credit was also charged and is included in deferred financing costs in the consolidated balance sheet as of December 31, Prior to March 30, 2011, the commitment fee was paid quarterly and was 0.50% on the unborrowed portion. As of, there were no amounts outstanding under the letter of credit commitments. On March 30, 2011, the Company and Urban executed a Fifth Amended and Restated Reimbursement and Loan Agreement and amended and extended the Debt Service Reserve Letter of Credit, Bond Letter of Credit and Working Capital Facility. All Credit Facilities were extended to January 1, As a result, the bond amortization schedule was adjusted to remove all repayments in 2011 and 2012 and reduce principal payments in 2013 and 2014 to $750,000 per quarter and the Debt Service Reserve Letter of Credit was reduced from $28,800,000 to $4,300,000. Drawn rates under the facilities described in the previous paragraph are LIBOR plus 2.375% or Base Rate plus 1.375%. Base Rate shall mean the higher of (i) the rate of interest announced publicly by the Administrative Agent from time to time in New York as its prime rate, (ii) ½ of one percent above the Federal Funds rate in effect from time to time and (iii) one percent above the one-month LIBOR rate. (8) On December 21, 2012, the Company and NJEDA refinanced a portion of the bonds such that the bonds were separated into two separate CUSIPs. As a result of the refinancing, the original CUSIP is now stated at $9,950,000 and has principal payments in 2013 and 2014 of $750,000 per quarter and an additional payment of $3,950,000 on January 1, The new CUSIP is stated at $50,350,000 and has a balloon payment due on December 15, In connection with the refinancing, the original bond letter of credit associated with the NJEDA bonds ($61,787,000) was reduced to $10,195,000. In addition, a new bond letter of credit for $51,592,000 was created to secure the new CUSIP. The fees related to each of the bond letters of credit are 2.375% (plus a fronting fee of 0.25%) of the face amount of the bond letters of credit paid quarterly. The due date of both bond letters of credit is January 1, The Company incurred costs of approximately $914,000 associated with the bond refinancing and the bond letter of credit modification. These costs are included in deferred financing costs in the consolidated balance sheet as of December 31, (9) In February 2012 the Company entered into a capital lease arrangement with a financing company. The capital lease arrangement requires monthly installments of approximately $14,000, including interest at 2.92% through February The capital lease arrangement is collateralized by the related asset with a carrying value of approximately $635,000 at December 31, Accrued interest payable of $5,000 and $8,000 are included in accrued liabilities in the consolidated balance sheets as of, respectively. Future minimum principal payments as of December 31, 2012 are as follows: (in thousands of dollars) 2013 $ 3, , , Thereafter 4 50,350 $ 60,789 In connection with the various agreements discussed above, certain financial covenants must be met and reported on an annual basis. The Company was in compliance with all debt covenants at. 13

18 6. Operating Leases The Company leases certain equipment under noncancelable operating leases expiring at various dates through The Company incurred lease expense of approximately $20,000, which is included in operations and maintenance expense and general and administrative expense in the accompanying consolidated statements of operations, in each of the years ended December 31, 2012 and Future minimum lease payments as of December 31, 2012, are as follows: (in thousands of dollars) 2013 $ Payment in Lieu of Taxes On December 31, 2009, Urban entered into a PILOT agreement with the Township of Logan. The agreement commenced on January 1, 2010 and expires on December 31, PILOT payments are due quarterly and will be expensed as incurred over the term of the agreement. For the years ended, the Partnership expensed approximately $2,320,000 and $2,252,000, respectively, related to this PILOT, which are included in general and administrative in the accompanying consolidated statements of operations, for the years ended December 31, 2012 and Fair Value of Financial Instruments The fair value of the Company s bonds approximates the carrying value as of December 31, 2012 and 2011, due to the variable nature of the interest obligation thereon. The Company s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, other assets, accounts payable, due to affiliates, and accrued liabilities. These instruments approximate their fair values as of due to their short-term nature. 9. Concentration of Credit Risk Credit risk is the risk of loss the Company would incur if counterparties fail to perform their contractual obligations. The Company primarily conducts business with counterparties in the energy industry. This concentration of counterparties may impact the Company s overall exposure to credit risk, either positively or negatively, in that its counterparties may be similarly affected by changes in economic, regulatory or other conditions. The Company mitigates potential credit losses by dealing, where practical, with counterparties that are rated at investment grade by a major credit rating agency or have a history of reliable performance within the energy industry. $ 30 14

19 Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable. Cash and cash equivalents and restricted cash balances customarily exceed federally insured limits. At, the Company s significant credit risk is primarily concentrated with AE and its coal suppliers. Revenues from AE comprise approximately 99.7% of the Company s revenues in each of the years ended. As of December 31, 2012 and 2011, AE represented approximately 98.5% and 99.6%, respectively, of the outstanding accounts receivable balance. The Company has a coal supply contract with ICG, LLC ( ICG ) through December 21, The contract provides for 100% of the Company s coal requirements subject to an election by the Company to substitute coal from another source for at least one-year with 90-days notice. If the amount provided from another source is greater than 60% for two consecutive years, ICG s obligation to supply coal for the remainder of the contract is reduced by the amount substituted during the two-year period. In March 2012, the Company provided written notice to ICG to reduce its obligation to purchase coal by 150,000 tons in 2012 and 400,000 tons in In June 2012, the Company entered into a coal transaction agreement with Consol Energy, Inc. ( Consol ) through December 31, The Consol coal transaction agreement requires the Company to purchase 150,000 tons of coal in 2012 and 300,000 tons of coal in Commitments and Contingencies Power Purchase Agreement The Company has a power purchase agreement ( PPA ) expiring in 2024 with AE for sale of 200 MW of the Facility s energy output as dispatched by AE. The PPA provides AE with dispatch rights over the Facility and provides for capacity, energy and incentive payments. The pricing structure which is based on a contractual formula escalates annually by a measure of inflation and electricity price index formulas. Capacity rates increased significantly beginning in 2005 and were reduced significantly beginning in Power Sales Agreement The Company has a supplemental power sales agreement ( PSA ) with AE for the sale of up to 20 MWs of excess energy which renews annually until terminated by either party with at least 30 days notice. The PSA provides for energy payments based on locational marginal prices, net of an administrative fee paid to AE. Capacity payments are based on the Company s excess unforced capacity payable (as defined in the agreement) at rates based on the results of capacity auctions conducted by the PJM Interconnection ( PJM ). The Company received payments under the PSA of approximately $1,132,000 and $3,468,000 from AE in 2012 and 2011, respectively, of which the Company recognized approximately $1,148,000 and $2,879,000 in energy revenue for the years ended, respectively. At, approximately $69,000 and $53,000, respectively of excess energy and excess capacity payments under the PSA are recorded in accounts receivable in the accompanying consolidated balance sheets. Lime Supply Agreement The Company has a full requirements lime supply agreement with Graymont (PA) Inc., for supply of the Facility s lime requirements. The contract has an initial term of 20 years, commencing on September 22, 1994, with a five-year automatic extension if neither party cancels the contract. The Company is required to purchase a minimum of 80% of annual estimated requirements or 1,500 tons per 60 day period. The initial cost is escalated annually each October based on price index formulas as defined in the agreement. 15

20 Ash Management Services Agreement The Company has an agreement with Headwaters Resources ( Headwaters ) for the disposal of all the Facility s Coal Ash. The agreement has an initial term of 20 years, commencing on September 22, 1994, with five year automatic extensions if neither party cancels the agreement. The Pennsylvania Department of Environmental Protection ( PADEP ) revised the standards required for Beneficial Use of Coal Ash in the State of Pennsylvania and as a result, effective November 1, 2011, Headwaters now transports the Facility s Coal Ash to the Gloucester County Landfill, which is located in Swedesboro, New Jersey, where it is disposed of. Other The Company experiences routine litigation in the normal course of business. Management is of the opinion that none of this routine litigation will have a material adverse effect on the Company s financial position or results of operations. 11. Related-Party Transactions Operations and Maintenance Agreement The Company is party to an Operation and Maintenance Agreement ( O&M agreement ) with USOSC for the operation and maintenance ( O&M ) of the Logan Project. The O&M agreement expires on October 1, Thereafter, the O&M agreement will be automatically renewed for periods of five years or until terminated by either party with six months advance notice. Operating fees and pass-through costs incurred for 2012 and 2011 were $11,221,000 and $11,236,000, respectively, which are included in operations and maintenance in the accompanying consolidated statements of operations. As of, the Company owed USOSC $2,907,000 and $2,968,000, respectively, which are included in due to affiliates in the accompanying consolidated balance sheets. Under the terms of the O&M agreement, approximately $2,846,000 and $2,909,000 of the amounts owed at, respectively, are subordinate to debt service for the bonds. USOSC is party to a Technical Services Agreement ( TSA ) with PSC for services to assist in the day-to-day O&M of the Logan Project. PSC and NAES, an independent third-party O&M provider, are parties to a subcontract ( NAES agreement ) for NAES to perform all tasks commercially and reasonably necessary to operate, maintain and manage the Company, including administering, managing, monitoring and performing all of USOSC s obligations and responsibilities of the O&M agreement between USOSC and the Company. The NAES agreement expires on August 23, Management Services Agreement The Company has a management services agreement with PSC to provide day-to-day management and administration services to the Logan Project. This agreement expires on October 31, PSC and PPMS, an independent third party management services provider, are parties to a subcontract formalized under a Project Management and Administrative Services Agreement ( PMAS ) for the Logan Project. The PMAS agreement expires on August 23, Thereafter, the PMAS agreement will be automatically renewed for periods of two years or until terminated by either party with three months advance notice. Under the PMAS, PPMS provides overall project management, administrative, and related support services as may be necessary to the Company and oversees the execution of the NAES agreement on behalf of the Company. Management fees and PMAS pass-through costs incurred in 2012 and 2011 were $1,378,000 and $1,205,000, respectively, which are included in operations and maintenance in the accompanying consolidated statements of operations. As of, the Company owed PSC $151,000 and $138,000, respectively, which are included in due to affiliates in the accompanying consolidated balance sheets. Under the terms of the agreement, all of the amounts owed at December 31, 2012 and 2011 are subordinate to debt service for the bonds. 16

21 Water Supply Agreement The Company has a water supply agreement with Granite Water Supply Company, Inc. ( GWSC ), a wholly-owned subsidiary of Granite, to provide water to the Facility. The Company recognized approximately $267,000 and $255,000 of expenses under the agreement during the years ended, respectively, which are included in operations and maintenance in the accompanying consolidated statements of operations. As of, the Company owed GWSC approximately $4,000, which is included in due to affiliates in the accompanying consolidated balance sheets. * * * * * 17