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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 2001
REGISTRATION STATEMENT NO. 333-57110
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ORION POWER HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4911 52-2087649
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
7 EAST REDWOOD STREET, 10TH FLOOR
BALTIMORE, MARYLAND 21202
(410) 230-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
W. THADDEUS MILLER
EXECUTIVE VICE PRESIDENT AND CHIEF LEGAL OFFICER
ORION POWER HOLDINGS, INC.
7 EAST REDWOOD STREET, 10TH FLOOR
BALTIMORE, MARYLAND 21202
(410) 230-3507
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPY TO:
MARTIN H. NEIDELL, ESQ.
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4982
(212) 806-5836
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] __________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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ORION POWER HOLDINGS, INC.
EXCHANGE OFFER FOR
$400,000,000 12% SENIOR NOTES DUE 2010
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JULY 23, 2001, UNLESS EXTENDED
TERMS OF THE EXCHANGE OFFER:
- We will exchange all outstanding notes that are validly tendered and not
withdrawn prior to the expiration of the exchange offer.
- You may withdraw tendered outstanding notes at any time prior to the
expiration of the exchange offer.
- We believe that the exchange of outstanding notes will not be a taxable
exchange for United States federal income tax purposes, but you should see the
section entitled "Material United States Federal Income Tax Consequences" for
more information.
- The terms of the notes to be issued are substantially identical to the terms
of the outstanding notes, except for transfer restrictions, registration
rights and penalty interest provisions relating to the outstanding notes.
- We will not receive any proceeds from the exchange offer.
- There is no existing market for the notes to be issued, and we do not intend
to apply for their listing on any securities exchange.
YOU SHOULD CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 15 OF
THIS PROSPECTUS BEFORE TENDERING YOUR OUTSTANDING NOTES FOR EXCHANGE.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated June 21, 2001.
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934. In accordance with the Exchange Act, we file annual, quarterly and
current reports, proxy statements and other information with the SEC. Such
reports, proxy statements and other information filed with the SEC can be read
and copies obtained at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048, and Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Room. The SEC maintains an internet site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC, including us.
This prospectus is part of a registration statement on Form S-4 that we
filed with the SEC. This prospectus does not contain all of the information in
that registration statement. For further information with respect to us and the
notes offered hereby, you should review the registration statement. You can
obtain the registration statement from the SEC at the public reference
facilities we referred to above.
You may obtain a copy of any or all of the documents summarized in this
prospectus without charge, by request directed to Investor Relations, Orion
Power Holdings, Inc., 7 East Redwood Street, 10th Floor, Baltimore, Maryland
21202, Telephone (410) 230-3500.
TO OBTAIN TIMELY DELIVERY OF ANY COPIES OF FILINGS REQUESTED FROM US,
PLEASE WRITE OR TELEPHONE US NO LATER THAN JULY 16, 2001.
We have agreed that, if we are not subject to the informational
requirements of Sections 13 or 15(d) of the Exchange Act, we will furnish to
holders and beneficial owners of the notes and to prospective purchasers
designated by such holders the information required to be delivered pursuant to
Rule 144(A)(d)(4) under the Securities Act to permit compliance with Rule 144A
in connection with resales of the notes.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the notes we are offering and our
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus.
OUR COMPANY
We are a fast-growing electric power generating company committed to
delivering a broad range of wholesale energy and related products and services
to independent system operators, utilities, municipalities, cooperatives and
retail aggregators. We are growing our business by strategically acquiring,
developing and modernizing non-nuclear electric generating facilities located in
critical locations across the United States and Canada. We approach our business
with financial discipline, applying a rigorous and multi-faceted approach to
valuing acquisitions and development opportunities, including the strict
application of rate of return targets on invested capital. We currently own 81
plants with an aggregate capacity of 5,926 megawatts. We also have two projects
under construction with a total capacity of 708 megawatts, with announced plans
to develop additional projects with a total capacity of 4,385 megawatts. If we
complete our announced projects, we will have an aggregate capacity of almost
11,000 megawatts in operation.
Our facilities currently in operation are diversified by fuel type and
geographically. The tables below set forth the assets owned by our regional
operating companies:
ORION POWER NEW YORK, L.P. FACILITIES SUMMARY
CAPACITY
ASSET (MW) FUEL TYPE LOCATION SERVED
----- -------- --------- ---------------
Hydroelectric assets............... 650 Water Central and Northern New
York State
Assets located in New York City:
Astoria Generating Station....... 1,265 Natural Gas/Oil New York City -- Queens
Gowanus Generating Station....... 524 Natural Gas/Oil New York
City -- Brooklyn
Narrows Generating Station....... 271 Natural Gas/Oil New York
City -- Brooklyn
Carr Street Generating Station..... 102 Natural Gas/Oil East Syracuse, NY
-----
Total.................... 2,812
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ORION POWER MIDWEST, L.P. FACILITIES SUMMARY
CAPACITY
ASSET (MW) FUEL TYPE LOCATION SERVED
----- -------- --------- ---------------
Avon Lake Generating Station....... 739 Coal Cleveland, OH
Brunot Island Generating Station... 234 Natural Gas/Oil Pittsburgh, PA
Ceredo Generating Station.......... 500 Natural Gas Ceredo, WV
Cheswick Generating Station........ 570 Coal Pittsburgh, PA
Elrama Generating Station.......... 487 Coal Pittsburgh, PA
New Castle Generating Station...... 338 Coal West Pittsburg, PA
Niles Generating Station........... 246 Coal Youngstown, OH
-----
Total.................... 3,114
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Total Portfolio.......... 5,926
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In order to provide a broad range of energy products and services and to
better manage electric and fuel commodity risk, we seek to diversify the fuel
types of our facilities as set forth in the table below:
FUEL TYPE SUMMARY
FUEL TYPE CAPACITY PERCENTAGE
--------- -------- ----------
Coal.................................................. 2,297 39%
Natural Gas/Oil (Dual fuel capability)................ 1,918 32%
Natural Gas........................................... 668 11%
Fuel Oil.............................................. 393 7%
Water................................................. 650 11%
----- ---
Total....................................... 5,926 100%
===== ===
In addition, we manage electric and fuel commodity price risk by attempting
to sell a majority of our output forward through long-term and short-term
contracts and purchase in advance the associated fuel to match the term of those
sales. We target to sell forward approximately 60-75% of our forecasted electric
energy output in advance.
Our executive offices are located at 7 East Redwood Street, 10th Floor,
Baltimore, Maryland 21202, and our telephone number is (410) 230-3500. We are
incorporated in the State of Delaware. Our principal website is located at
www.orionpower.com. The website orionpower.com is an interactive textual
reference only, meaning that the information contained on that website, as well
as any of our other websites, is not part of this prospectus and is not
incorporated in this prospectus by reference.
RECENT DEVELOPMENTS
In April 2001, the third auction of capacity in the New York market was
held by the New York Independent System Operator, known as the NY-ISO, relating
to the summer 2001 capacity season which runs from May 1 until October 31, 2001.
We were successful in selling 2,060 megawatts of capacity from our assets
located in New York City into the auction at a price that approximates the price
cap of $105 per kilowatt year, for total expected revenue of approximately $108
million, which we will recognize over that period. Additionally, we have
continued to sell electricity and purchase the related fuel in the forward
markets in New York City, thereby locking-in forward profit margins for a
substantial portion of our expected summer 2001 output.
Ceredo Electric Generating Station, a new 500 megawatt, natural gas-fired
facility in Wayne County, West Virginia, commenced commercial operation in June
2001. The station consists of six General Electric model 7EA combustion turbines
arranged in a simple-cycle, peaking configuration. Ceredo Electric Generating
Station assists in meeting the demand for electric power during times of peak
usage in the operating region known as the East Central Area Reliability
Council, more commonly referred to as ECAR. The output of this facility is
available for the ECAR energy merchant market and, if needed, to help meet our
supply obligations under the provider of last resort contract with Duquesne
Light Company.
In May 2001, we announced that we had accelerated our development plans for
the 1,650 megawatt, gas-fired Kelson Ridge Generating Station. The facility will
be located in Waldorf, Maryland and will be capable of serving both Washington,
DC and Baltimore, Maryland. We expect the initial phase of 1,100 megawatts to be
completed in two stages of 550 megawatts each in 2003 and 2004, with the second
phase of an additional 550 megawatts to be completed in 2005. The facility is
expected to ultimately be composed of three 550 megawatt blocks, each consisting
of two combustion turbine units, two heat steam recovery generation units and a
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steam generator. We have entered into a letter of intent to purchase the four
combustion turbines and two steam turbines from Seimens Westinghouse Power
Corporation. The output will be committed under contract and/or made available
for the Pennsylvania-New Jersey-Maryland Interconnection wholesale energy
market, known as PJM.
OUR INDUSTRY
Total electric generating capacity in the United States is approximately
783,000 megawatts, installed in approximately 3,000 individual facilities with
an estimated $223 billion in retail sales. The electric utility industry is
currently undergoing substantial change as a result of regulatory initiatives at
the federal and state level designed to produce customer choice and encourage
competition. At the same time, as a result of recent market volatility in
California's power markets, governmental agencies, officials and/or other
interested parties in a number of states, including states that had previously
adopted laws or regulatory plans providing for future retail electric
competition, are urging that deregulation of the retail electric markets in
these states be delayed or reconsidered altogether. While we cannot predict the
future of deregulation in our markets or the ultimate effect that the changing
regulatory environment will have on our business, we continue to believe that
the restructuring in the U.S. electric power industry and supply and demand
dynamics create attractive growth opportunities in the wholesale electric
market.
One result of the deregulation initiatives has been the divestiture of
electric generating assets by regulated utilities. Since 1997, approximately
159,000 megawatts of power generating capacity in the United States have been
sold or transferred or are pending sale or transfer by regulated electric
utilities. According to published sources, additional megawatts of power
generating capacity in the United States will be available for sale or transfer
to wholesale power producers in the future. Additionally, numerous unregulated
owners and developers of power plants have sold and are expected to continue to
sell their assets in the deregulating environment.
The industry has also witnessed growing consumer demand and increasingly
frequent shortages of electricity over the past three years. The summers of
1998, 1999 and 2000 have all been characterized by shortages, brownouts and
blackouts across California and in portions of major cities across the U.S. and
very high peak prices for electricity in the newly created wholesale electricity
markets. We believe that substantial amounts of new electric generating capacity
need to be built to relieve the shortage of electricity and replace old and
obsolete facilities.
As a result of these anticipated divestitures by regulated utilities, sales
by developers and unregulated owners of power plants and the increased demand
for electricity, we believe that the power generation industry offers
significant opportunities for investment.
OUR STRATEGY
Our strategy is to acquire and develop a portfolio of premier non-nuclear
generating facilities in the United States and Canada that provide electricity
and related products for the regions in which they are located, while seeking to
maximize value for our stockholders. Based on the opportunities for investment
in our industry, we believe we will be able to grow our business rapidly and
become one of the ten largest power generators in the U.S., while maintaining
strict financial control. We attempt to have a significant market share in each
region in which we
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choose to compete, and believe we will become a prominent power generator in
each of those regions. Our strategy includes the following key elements:
- Attract and retain talented, entrepreneurial employees;
- Acquire additional high quality generating assets;
- Improve the operating performance and lower the operating costs of our
assets;
- Grow through expansion at our facilities and development of new
locations;
- Build strong relationships with local wholesale customers; and
- Actively manage energy and fuel merchant market risk.
RISK FACTORS
Before tendering their outstanding notes in the exchange offer, holders of
outstanding notes should carefully consider all of the information set forth in
this prospectus, and, in particular, should evaluate the factors set forth in
"Risk Factors." Most of these factors will apply to the registered notes as well
as the outstanding notes. These risks include the following, among others:
- We are subject to fluctuations in the prices for fuel and electric
products and services, which may impair our cash flow and profitability;
- The wholesale power industry is rapidly changing and intensely
competitive, which may adversely affect our ability to operate profitably;
- We are subject to stringent government regulation, which may be
burdensome or lead to significant costs or liabilities;
- We may be unable to execute our strategy of acquiring or developing
additional power generating facilities, which would adversely affect our
ability to grow profitably;
- We will likely need significant additional financing in order to pursue
our strategy, which may include additional equity issuances or borrowings.
If we have difficulty obtaining future financing, our ability to execute
our strategy may be impaired;
- Because we have a limited period of operations, you have limited
information upon which you can evaluate our business; and
- The notes have no prior public market, and we cannot assure you that any
public market will develop or be sustained after this offering.
OUR INITIAL PUBLIC OFFERING
On November 17, 2000, we completed an initial public offering of our common
stock. The net proceeds to us from the offering, after underwriting discounts
and commissions and other expenses, were $452.5 million, $209 million of which
was used to acquire Columbia Electric Corporation. Of the remaining $243.5
million, $100.0 million was used to fund construction of the Ceredo Generating
Station, $23.5 million was used for general corporate operating expenses, and
$120 million will be used for general corporate purposes, which may include
future acquisitions.
OUR SUBSEQUENT PUBLIC OFFERINGS
On June 6, 2001, we and certain selling stockholders completed an
underwritten public offering of 13,000,000 shares of common stock and we
completed an underwritten public offering
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of $200,000,000 aggregate principal amount at maturity of 4.50% convertible
senior notes due 2008.
The net proceeds to us from the offerings, after deducting underwriting
discounts and commissions and other expenses, were approximately $270.7 million
from our sale of common stock and $194.1 million from our sale of convertible
notes.
We expect to use approximately $200 million of the net proceeds of our
common stock and convertible notes offerings to develop a new electric power
generating facility, Kelson Ridge Generating Station. See
"Business -- Construction and Development." Approximately $100 million of the
net proceeds of these offerings will be used to repay indebtedness outstanding
under the Orion Power Midwest, L.P. Credit Facility, which bears a floating rate
of interest equal to 7.698% as of April 30, 2001. The facility, which totals
approximately $1.2 billion, matures in October 2002. The balance of the net
proceeds of the offerings is expected to be used for acquisitions and/or
development projects and for general corporate purposes and working capital
requirements.
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SUMMARY OF THE EXCHANGE OFFER
On April 27, 2000, we issued and sold $375 million aggregate principal
amount of 12% notes due 2010 and on May 23, 2000 we issued an additional $25
million aggregate principal amount of 12% notes due 2010. Both transactions were
exempt from the registration requirements of the Securities Act of 1933.
Simultaneously with these transactions, we entered into a registration rights
agreement with the initial purchasers of these original notes, in which we
agreed to deliver this prospectus to you and to commence this exchange offer. In
this exchange offer, you may exchange your outstanding notes for notes which
have substantially the same terms. You should read the discussion under the
headings "The Exchange Offer" and "Description of the Notes" for further
information regarding the notes to be issued in the exchange offer.
Securities Offered............ Up to $400 million in principal amount of new
12% notes due May 1, 2010, registered under the
Securities Act. The terms of the notes offered
in the exchange offer are substantially
identical to those of the outstanding notes,
except that the transfer restrictions,
registration rights and penalty interest
provisions relating to the outstanding notes do
not apply to the new registered notes.
The Exchange Offer............ We are offering registered notes in exchange
for a like principal amount of our outstanding
unregistered notes. We are offering these
registered notes to satisfy our obligations
under a registration rights agreement which we
entered into with the initial purchasers of the
outstanding notes. You may tender your
outstanding notes for exchange by following the
procedures described under the heading "The
Exchange Offer."
Tenders; Expiration Date;
Withdrawal.................. The exchange offer will expire at 5:00 p.m.,
New York City time, on July 23, 2001, unless we
extend it. If you decide to exchange your
outstanding notes for new notes, you must
acknowledge that you are not engaging in, and
do not intend to engage in, a distribution of
the exchange notes. You may withdraw any notes
that you tender for exchange at any time prior
to the expiration date of this exchange offer.
See "The Exchange Offer -- Terms of the
Exchange Offer" for a more complete description
of the tender and withdrawal provisions.
United States Federal Income
Tax Consequences.............. Your exchange of outstanding notes for
registered notes to be issued in the exchange
offer will not result in any gain or loss to
you for United States federal income tax
purposes. See "Material United Federal Income
Tax Consequences" for a summary of material
United States federal income tax consequences
associated with the exchange of outstanding
notes for the registered notes to be issued in
the exchange offer and the ownership and
disposition of those registered notes.
Use of Proceeds............... We will not receive any cash proceeds from the
exchange offer.
Exchange Agent................ Wilmington Trust Company.
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Shelf Registration
Statement..................... Under certain circumstances, certain holders of
outstanding notes (including holders who are
not permitted to participate in the exchange
offer or who may not freely resell registered
notes received in the exchange offer) may, by
giving us written notice, require us to file,
and cause to become effective, a shelf
registration statement under the Securities
Act, which would cover resales of outstanding
notes by these holders. See "The Exchange
Notes -- Exchange Offer; Registration Rights."
Consequences of Failure to
Exchange Your Outstanding
Notes....................... Outstanding notes not exchanged in the exchange
offer will continue to be subject to the
restrictions on transfer that are described in
the legend on the notes. In general, you may
offer or sell your outstanding notes only if
they are registered under, or offered or sold
under an exemption from, the Securities Act and
applicable state securities laws. We do not
currently intend to register the outstanding
notes under the Securities Act. If your notes
are not tendered and accepted in the exchange
offer, it may become more difficult for you to
sell or transfer your unexchanged notes.
Consequences of Exchanging
Your Outstanding Notes........ Based on interpretations of the staff of the
Securities and Exchange Commission, we believe
that you may offer for resale, resell or
otherwise transfer the notes that we issue in
the exchange offer without complying with the
registration and prospectus delivery
requirements of the Securities Act if:
- you acquire the notes issued in the exchange
offer in the ordinary course of your
business;
- you are not participating, do not intend to
participate, and have no arrangement or
undertaking with anyone to participate, in
the distribution of the notes issued to you
in the exchange offer; and
- you are not an "affiliate" of us, as
described in Rule 405 of the Securities Act.
If any of these conditions are not satisfied
and you transfer any notes issued to you in the
exchange offer without delivering a proper
prospectus or without qualifying for a
registration exemption, you may incur liability
under the Securities Act. We will not be
responsible for, or indemnify you against, any
liability you may incur.
Any broker-dealer that acquires notes in the
exchange offer for its own account in exchange
for outstanding notes which it acquired through
market-making or other trading activities must
acknowledge that it will deliver a prospectus
when it resells or transfers any notes issued
in the exchange offer. See "Plan of
Distribution" for a description of the
prospectus delivery obligations of
broker-dealers in the exchange offer.
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THE EXCHANGE NOTES
The terms of the notes we are issuing in this exchange offer and the
outstanding notes are identical in all material respects, except:
- the notes issued in the exchange offer will have been registered under
the Securities Act;
- the notes issued in the exchange offer will not contain transfer
restrictions and registration rights that relate to the outstanding
notes; and
- the notes issued in the exchange offer will not contain provisions
relating to the payment of penalty interest to be made to the holders of
the outstanding notes under circumstances related to the timing of the
exchange offer.
A brief description of the material terms of the exchange notes follows:
Interest Payment Date......... Interest on the new notes will be payable
semi-annually on November 1 and May 1 of each
year, beginning on November 1, 2001.
Maturity...................... The maturity date for the new notes is May 1,
2010.
Ranking....................... These notes are senior unsecured obligations
and will rank:
- on a parity with any existing and future
senior indebtedness incurred by us, including
our revolving senior credit facility, and
- senior in right of payment to all future
subordinated indebtedness, if any, incurred
by us.
We do not have and, in the future, may not have
any operating assets other than the common
stock of our subsidiaries. As a result, we
depend upon receiving dividends or other
distributions from our direct and indirect
subsidiaries to pay interest on the notes. Our
subsidiaries will not be guarantors of the
notes. Our operating subsidiaries' bank credit
agreements restrict our operating subsidiaries
from paying dividends and making other
distributions to us except in limited
circumstances. As of March 31, 2001, we and our
subsidiaries had approximately $2.4 billion of
principal amount of long-term indebtedness of
which $2.0 billion was secured, and
approximately $220 million of current
liabilities ranking senior to our equity
interest in our operating subsidiaries. We
cannot assure you that our subsidiaries will
have the resources available to pay us any
dividends or make any distributions. See "Risk
Factors -- Risks Relating to the Notes and the
Offering -- We may not be able to service our
corporate-level indebtedness because of our
holding company structure, which could cause us
to default on our debt" and "-- The notes are
structurally subordinated to the obligations of
our subsidiaries."
Optional Redemption........... Before May 1, 2003, we may redeem up to 35% of
these notes with the proceeds of an equity
offering at the redemption price set forth in
this prospectus, plus accrued
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interest. See "Description of the
Notes -- Optional Redemption."
Mandatory Offer to
Repurchase.................... If we sell some assets under certain
circumstances, or experience specific kinds of
changes of control, we must offer to repurchase
the notes at the prices listed in "Description
of the Notes -- Repurchase at the Option of
Holders."
Basic Covenants of
Indenture..................... We will issue the notes being offered in the
exchange offer under an indenture with
Wilmington Trust Company, as trustee, which
also governs the issuance of the outstanding
notes. The indenture, among other things,
restricts our ability and the ability of our
subsidiaries to:
- borrow money;
- pay dividends on stock or repurchase stock;
- make investments;
- use assets as security in other transactions;
- sell certain assets or merge with or into
other companies; and
- engage in certain transactions with
affiliates.
These covenants are subject to significant
exceptions. For more details, see "Description
of the Notes -- Certain Covenants."
Exchange Offer;
Registration Rights........... In connection with our agreement to register
the exchange notes under the Securities Act by
filing the registration statement of which this
prospectus forms a part, we have agreed to:
- cause a registration statement to be filed on
or before March 15, 2001,
- cause the registration statement to be
declared effective on or before July 15,
2001, and
- consummate the exchange offer within 30
business days after the effective date of the
registration statement.
In addition, we have agreed, in certain
circumstances, to file a "shelf registration
statement" that would allow some or all of the
notes to be offered to the public. We have
agreed to cause the shelf registration
statement, if required, to be declared
effective on or prior to 90 days after such
filing obligation arises.
If we fail to meet any or all of the targets
listed above, we will pay additional special
interest to each holder of notes affected with
respect to the first 90-day period immediately
following the occurrence of the first default
in an amount equal to $.05 per week per $1,000
principal amount of notes held by such affected
holder. The amount of this special interest
will increase by an additional $.05 per week
per $1,000 principal amount of notes with
respect to each
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subsequent 90-day period until all such
defaults have been cured, up to a maximum
amount of special interest for all such
defaults of $.50 per week per $1,000 principal
amount of notes over the interest rates that
would otherwise apply to the notes. As soon as
we meet such targets, the interest rates on the
notes will revert to their original levels.
Upon consummation of the exchange offer,
holders of notes will no longer have any rights
under the registration rights agreement, except
to the extent that we have continuing
obligations to file a shelf registration
statement.
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated historical financial data set forth below as of
December 31, 1998, 1999 and 2000, and for the period from March 10, 1998
(inception) to December 31, 1998, and for the years ended December 31, 1999 and
2000, have been derived from our audited consolidated financial statements. The
financial data set forth below as of March 31, 2001, and for the three-month
periods ended March 31, 2000 and 2001, have been derived from our unaudited
consolidated financial statements. You should read the information set forth
below together with the information under "Selected Consolidated Financial and
Operating Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and our consolidated financial statements and the
related notes included elsewhere in this prospectus. We have supplied selected
capacity and other data set forth below under the caption "Operating Data."
We have grown rapidly since our inception and have not owned or operated
our facilities for a substantial period of time. Accordingly, our historical
financial information may not be useful either as a means of understanding our
current financial situation or as an indicator of our future results.
MARCH 10,
1998 YEAR ENDED THREE MONTHS
(INCEPTION) TO DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ------------------------- -----------------------
1998 1999 2000 2000 2001
-------------- ---- ---- ---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Revenue.......................................... $ 314 $ 134,074 $ 957,569 $ 105,506 $ 274,251
-------- ----------- ----------- ---------- ----------
Operating expenses
Fuel........................................... -- 20,463 437,763 30,666 111,728
Gain on derivative financial instruments....... -- -- -- -- (1,521)
Operations and maintenance..................... 24 22,732 97,607 13,964 27,906
General and administrative..................... 2,620 16,755 37,082 5,389 12,778
Taxes other than income tax.................... -- 20,785 60,751 13,519 17,786
Depreciation and amortization.................. 94 18,938 103,196 13,050 32,195
Charge for buyout of operations and maintenance
contracts with related party................. -- -- 19,000 -- --
-------- ----------- ----------- ---------- ----------
Total operating expenses......................... 2,738 99,673 755,399 76,588 200,872
-------- ----------- ----------- ---------- ----------
Operating (loss) income.......................... (2,424) 34,401 202,170 28,918 73,379
Interest expense, net............................ (124) (23,943) (153,389) (14,343) (47,100)
-------- ----------- ----------- ---------- ----------
(Loss) income before (benefit) provision for
income tax..................................... (2,548) 10,458 48,781 14,575 26,279
Income tax (benefit) provision................... (1,006) 4,796 20,242 6,281 11,162
-------- ----------- ----------- ---------- ----------
Net (loss) income................................ $ (1,542) $ 5,662 $ 28,539 $ 8,294 $ 15,117
======== =========== =========== ========== ==========
(LOSS) EARNINGS PER AVERAGE COMMON SHARE:
Basic.......................................... $ (12.94) $ 0.39 $ 0.46 $ 0.23 $ 0.16
======== =========== =========== ========== ==========
Diluted........................................ $ (12.94) $ 0.38 $ 0.44 $ 0.22 $ 0.15
======== =========== =========== ========== ==========
STATEMENT OF CASH FLOWS DATA:
Cash flows from operating activities............. $ (2,335) $ 10,456 $ (2,756) $ 10,407 $ 97,025
Cash flows from investing activities............. (16,407) (1,047,167) (2,113,133) (2,923) (116,807)
Cash flows from financing activities............. 20,345 1,113,657 2,173,174 (7,990) 63,207
OPERATING DATA:
Consolidated EBITDA(a)........................... $ (2,330) $ 53,339 $ 305,366 $ 41,968 $ 105,574
======== =========== =========== ========== ==========
Megawatt hours produced during period............ 7,283 2,793,689 14,801,420 1,455,173 4,732,913
Net capacity owned at end of period (megawatts).. 102 2,613 5,396 2,613 5,396
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(b)............ -- 1.40x 1.26x 1.99x 1.37x
Coverage deficiency of earnings to fixed
charges........................................ $ 2,548 -- -- -- --
======== =========== =========== ========== ==========
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AS OF DECEMBER 31, AS OF
--------------------------------- MARCH 31,
1998 1999 2000 2001
---- ---- ---- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital(c).......................................... $ 3,108 $ 154,245 $ 473,696 $ 418,636
Total assets................................................ 20,450 1,252,007 3,870,190 3,941,479
Total debt, including current portion....................... 2,593 787,680 2,367,898 2,431,355
Total stockholders' equity.................................. 17,068 395,416 1,254,782 1,222,588
---------------
(a) Consolidated EBITDA represents earnings before interest, tax, depreciation
and amortization. EBITDA, as defined, is presented because it is a widely
accepted financial indicator used by some investors and analysts to analyze
and compare companies on the basis of operating performance. EBITDA, as
defined, is not intended to represent cash flows for the period, nor is it
presented as an alternative to operating income or as an indicator of
operating performance. It should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with
generally accepted accounting principles (GAAP) in the United States, is not
indicative of operating income or cash flow from operations as determined
under GAAP and does not give effect to our capital expenditures or debt
service payments. Our method of computation may or may not be comparable to
other similarly titled measures by other companies.
(b) For purposes of calculating the ratios, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest on all
indebtedness, amortization of debt issuance costs and the portion of rental
expense we believe represents interest.
(c) Includes cash held in restricted accounts pursuant to our credit facilities
of $56.9 million as of December 31, 1999, $283.4 million as of December 31,
2000 and $189.4 million as of March 31, 2001.
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RISK FACTORS
You should carefully consider the risks described below before tendering
your notes for exchange in this exchange offer. The risks described in this
section are the ones we consider to be material to your decision whether to
tender your notes for exchange. The risk factors set forth below, other than
those which discuss the consequences of failing to exchange your outstanding
notes in the exchange offer, are generally applicable to both the outstanding
notes and the notes issued in the exchange offer. If any of the following risks
occur, our business, financial condition or results of operations could be
materially harmed. In that case, the trading price of our notes could decline,
and you could lose all or part of your investment.
RISKS RELATING TO THE WHOLESALE POWER MARKET INDUSTRY
WE ARE SUBJECT TO FLUCTUATIONS IN THE PRICES FOR FUEL AND ELECTRIC PRODUCTS
AND SERVICES, WHICH MAY IMPAIR OUR CASH FLOW AND PROFITABILITY.
In the absence of or upon expiration of any power sales or fuel
procurements agreements, we will seek to sell our products, including energy,
capacity and ancillary services, into the competitive wholesale power markets
and purchase the associated fuel. The factors that could negatively impact the
prices for these products in our markets include:
- prevailing market prices for fuel oil, coal, natural gas and other fuels
used in the generation of electricity, including any associated
transportation costs;
- demand for energy products;
- increases in the supply of energy products in the wholesale power
markets;
- the extent of transmission capacity or cost of transmission service into,
or out of, our markets;
- changes in the regulatory framework for wholesale power markets;
- liquidity in the general wholesale electricity market; and
- weather conditions impacting demand for electricity, and, particularly in
the case of our hydroelectric facilities, rainfall.
In addition, unlike most other commodities, electricity products cannot be
easily stored and must be produced concurrently with their use. As a result of
these factors, the wholesale power markets are subject to significant price
fluctuations over relatively short periods of time and are unpredictable, which
may impair our financial position and results of operations.
THE RULES AND REGULATIONS IN THE VARIOUS REGIONAL MARKET STRUCTURES IN WHICH
WE COMPETE ARE SUBJECT TO CHANGE, WHICH MAY IMPACT OUR ABILITY TO COMPETE AND
OUR PROFITABILITY.
The markets in which we operate and intend to operate are subject to
significant regulatory oversight and control. In some markets, including the New
York area, our operating results are as dependent upon the continuance of the
regulatory regime as they are on fluctuations in the market price for
electricity. The rules governing these markets are in their infancy and remain
subject to change. We cannot assure you that we will be able to adapt our
business in a timely manner in response to any changes in the regulatory regimes
in which we operate, which could have a material adverse effect on our revenues
and costs.
Differences in the market and regulatory structures in the various regional
power markets in which we operate will affect our results of operations and
profit margin. An independent system operator administers the New York wholesale
power market, and other independent system operators either currently or are
predicted to administer most of the other regional wholesale power markets in
the United States. A number of changes have recently been approved or proposed
for the New York wholesale energy and capacity markets, which will be or could
be in
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place as early as the summer of 2001. For example, the NY-ISO is expected to
implement a measure which the NY-ISO refers to as an "Automated Mitigation
Procedure," and is also known as a "circuit breaker," under which day-ahead
energy bids will be automatically reviewed and, if necessary, mitigated if
economic or physical withholding is determined. The New York Public Service
Commission has also requested that the Federal Energy Regulatory Commission,
known as FERC, lower the currently effective $1,000 bid cap on a regional basis.
We may also be required to enter different, newly created market structures
if our primary customers or regulatory agencies ask us to do so. For example,
Duquesne Light Company has considered joining the PJM-West market, a newly
created wholesale market that would cover the western portion of the
Mid-Atlantic region, as early as December 2001. If Duquesne Light Company, our
primary customer in the ECAR Region, joins the PJM-West market, we may enter the
newly created wholesale market as well. Additionally, FirstEnergy Corp., in
whose control area our Ohio plants are located, has proposed joining the
Alliance Regional Transmission Organization. We are not yet able to determine
what impact, if any, joining these markets would have on our business or
financial prospects.
Other independent system operators have suggested various forms of
cost-based bidding for energy and related services. Any further market rules or
regulations that could place a cap on market based pricing could adversely
impact our business and results of operations. The independent system operator
may also cause us to experience certain problems, such as billing disputes,
which may result in delayed or disputed collection of revenues from sales of our
products and may increase our earnings volatility. Additionally, any changes in
the rules and regulations of state public utility commissions or other
regulatory bodies in the other markets in which we compete or may compete in the
future may adversely affect our operations and financial condition.
THE WHOLESALE POWER INDUSTRY IS RAPIDLY CHANGING AND INTENSELY COMPETITIVE,
WHICH MAY ADVERSELY AFFECT OUR ABILITY TO OPERATE PROFITABLY.
The wholesale power industry is characterized by intense competition. A
number of our competitors, including domestic and international utilities and
other wholesale power generators have more extensive operating experience,
larger staffs and/or greater financial resources than we do. In addition, many
of the regions in which we operate have implemented or are considering
implementing regulatory initiatives designed to increase competition. For
example, initiatives encouraging industry deregulation and privatization may
cause the disaggregation of vertically integrated utilities into separate
generation, transmission and distribution businesses. Moreover, FERC has
proposed regulatory changes designed to increase access to transmission grids by
utility and non-utility purchasers and sellers of electricity. As a result, a
significant number of additional competitors could become active in the
generation segment of our industry. This competition may negatively impact our
ability to sell energy and related products, which could adversely affect our
results of operations and our ability to grow our business.
WE ARE SUBJECT TO STRINGENT GOVERNMENTAL REGULATION, WHICH MAY BE BURDENSOME
OR LEAD TO SIGNIFICANT COSTS OR LIABILITIES.
Our operations are subject to complex and stringent federal, state and
local energy, environmental and other governmental laws and regulations. The
acquisition, development and operation of our facilities require numerous
permits, approvals and certifications. Further, particularly in relation to our
hydroelectric facilities, we periodically need to obtain from FERC new licenses
for our facilities. We are subject to regulation by FERC as wholesale energy
sellers and to regulation in New York State as an electric corporation. We are
continually in the process of maintaining regulatory compliance to operate our
facilities. If there is a delay in obtaining required regulatory approval or if
we fail to comply with applicable regulations, our business and operations could
be adversely affected.
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Before any acquisition or development of a power generation facility may be
completed, we must obtain a variety of federal, state and local permits,
licenses and approvals, including approval for our financing arrangements in
some jurisdictions. The need to obtain these permits, licenses and approvals can
have the effect of delaying or increasing the cost of an acquisition or
development transaction. If, for any reason, we are not able to obtain all
required permits, licenses and approvals, we may not be able to complete a
desirable acquisition.
The regulatory environment applicable to the power generation and
distribution industry has recently undergone substantial changes, both on a
federal and state level. We are not able to predict whether there will be any
further major changes in this regulatory environment, including potential
regulation of the rates allowed to be charged and the capital structure of
wholesale generating companies such as ourselves, or what the ultimate effect
this changing regulatory environment will have on our business. In addition,
existing market rules and regulations may be revised or reinterpreted, new laws
and regulations may be adopted or become applicable to us or our facilities, and
future changes in laws and regulations may have a detrimental effect on our
business.
THE COSTS OF COMPLIANCE WITH EXISTING AND FUTURE ENVIRONMENTAL REGULATIONS
COULD ADVERSELY AFFECT OUR CASH FLOW AND PROFITABILITY.
Costs of compliance with environmental regulations, and in particular
emission regulations, could have a material impact on our business, particularly
if emission limits are tightened. Environmental laws may limit our ability to
operate our facilities at maximum capacity or at all. We expect our facilities
to be impacted by significant new restrictions on the emissions of sulfur
dioxide, nitrogen oxide, carbon dioxide and other particulates or pollutants,
especially our coal-fired facilities. For affected facilities, we plan to make
capital expenditures to install new emissions control equipment and may be
required to increase the efficiency of existing equipment and/or purchase
emissions allowances or cease operating. Environmental laws are subject to
change, which may materially increase the amount we must invest to bring our
facilities into compliance, or accelerate the time at which these capital
expenditures must be made. In addition, recent lawsuits by the Environmental
Protection Agency and various states highlight the environmental risks faced by
generating facilities in general and coal-fired generating facilities in
particular. The current trend towards more stringent environmental regulations
could materially affect our cash flow and profitability.
RISKS RELATING TO OUR BUSINESS AND OPERATIONS
WE MAY BE UNABLE TO EXECUTE OUR STRATEGY OF ACQUIRING OR DEVELOPING ADDITIONAL
POWER GENERATING FACILITIES, WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO GROW
PROFITABLY.
Our growth depends on our ability to acquire or develop additional
facilities. We have been pursuing this strategy for a very limited period of
time. Moreover, our growth strategy could place a significant strain on our
personnel, management systems and resources.
The successful achievement of our growth strategy will depend on, among
other things, (1) the continuation of the current regulatory environment
encouraging or requiring the divestiture of generating facilities, a trend which
has slowed recently due to the California energy crisis, and (2) our ability to
identify, complete and integrate appropriate acquisition and development
opportunities in a competitive environment on acceptable terms. In recent years,
the wholesale power industry has been characterized by increased competition for
asset purchases and development opportunities. Many facilities are currently
being sold through a competitive process, which puts significant emphasis on the
price received by the seller.
We incur expenses investigating and evaluating potential acquisition and
development opportunities before we can determine whether they are feasible or
economically attractive, including participating in many competitive bidding
processes for power generation facilities
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without any assurance that our bids will be accepted. If we are unable to
complete the acquisition or development of a facility on a timely basis, we
would generally not be able to recover our investment in the project. If we fail
to acquire additional facilities or we acquire additional facilities at prices
that are too high or under unfavorable terms or conditions, we would impair the
achievement of our business strategy and could negatively affect our ability to
generate sufficient cash flow to pay interest on the notes and to meet any other
current and future obligations.
THE DEVELOPMENT AND OPERATION OF OUR FACILITIES INVOLVE RISKS THAT MAY LEAD TO
POOR FINANCIAL PERFORMANCE AND IMPACT OUR ABILITY TO MEET OUR OBLIGATIONS.
The construction, expansion, refurbishment, maintenance and operation of
power generation facilities involve risks relating to the breakdown or failure
of equipment or processes, fuel interruption and performance below expected
levels of output or efficiency. A significant portion of our facilities were
constructed many years ago and may require significant capital expenditures to
maintain peak efficiency. In addition, weather related interference, work
stoppages and other unforeseen problems may disrupt the development and
operations of our facilities and adversely affect our results of operations.
In particular, the success of our facilities depends on the following:
- our ability to integrate, operate, manage and properly maintain our
assets on an efficient, cost-effective basis;
- our ability to attract and retain qualified employees with construction
and development expertise;
- negotiation of satisfactory engineering, construction, fuel supply and
energy sales contracts;
- the receipt of all required regulatory and environmental approvals,
licenses and permits; and
- the availability of financing on satisfactory terms.
While we maintain spare parts in inventory for many critical pieces of
equipment and maintain insurance for property damage between $300 million and
$610 million per occurrence to protect against operating risks, these
protections may not be adequate to cover lost revenues or increased expenses and
penalties. As a result, we may not be able to operate our facilities at a level
necessary to comply with our supply agreements, which could result in
significant losses to us or could limit our ability to produce cash flows
sufficient to enable us to meet our obligations, including under the notes.
WE WILL LIKELY NEED SIGNIFICANT ADDITIONAL FINANCING IN ORDER TO PURSUE OUR
STRATEGY, WHICH MAY INCLUDE ADDITIONAL EQUITY ISSUANCES OR BORROWINGS. IF WE
HAVE DIFFICULTY OBTAINING FUTURE FINANCING, OUR ABILITY TO EXECUTE OUR STRATEGY
MAY BE IMPAIRED.
In order to execute our business strategy, we will need to incur additional
indebtedness at a corporate and/or subsidiary level and/or issue additional
equity. We may not be successful in our attempts to raise additional capital on
favorable terms, if at all.
We anticipate approximately $2.5 billion in capital expenditures during the
next five years, of which approximately $2.2 billion will be used to complete
the construction and development of our announced construction program. This
amount also includes approximately $350 million to be spent over the next seven
years for compliance with environmental regulations and other regulatory
requirements. The regulations are subject to change, which may increase the
aggregate amount we must spend on capital projects or accelerate the timing of
capital expenditures. This will also increase our need for additional financing.
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While we believe that cash flow from our operations, borrowings under our
existing credit facilities and the proceeds of our convertible notes offering
and our common stock offering will provide us with sufficient cash to fund these
expenditures, we cannot assure you that these sources will be sufficient.
It is possible that future indebtedness may include terms that are more
restrictive or burdensome than those in our current debt. This may negatively
impact our ability to operate our business, or severely restrict or prohibit
distributions to us, or otherwise materially affect our ability to meet our
obligations, including under the notes. Our ability to arrange debt financing
and the costs of such capital depends upon numerous factors, including:
- credit availability and maintenance of acceptable credit ratings;
- investor confidence in us and our markets;
- the success of current projects; and
- the perceived profitability of new projects.
BECAUSE WE HAVE A LIMITED PERIOD OF OPERATIONS, YOU HAVE LIMITED INFORMATION
UPON WHICH YOU CAN EVALUATE OUR BUSINESS.
We completed our first acquisition in November 1998 and completed our
largest acquisition in April 2000. We have limited experience operating our
facilities. Our historical financial statements, therefore, may not be helpful
in predicting our future performance.
Prior to our ownership, these facilities operated as integrated parts of,
or sold all of their electric output to, regulated utilities. The utilities, in
turn, sold the electric output of these facilities to consumers at prices based
on rates set by regulatory authorities. We cannot assure you that we will be
successful in operating any of these facilities or any other facilities acquired
in the future in a competitive environment where wholesale and retail
electricity prices will be determined by market forces.
As has been the case in our acquisitions to date, it is likely that, when
we acquire facilities from utilities, we will not have access to the type of
historical financial information that we will report regarding the prior
operation of the facilities. As a result, it may be difficult for investors in
our securities to evaluate the probable impact of major acquisitions on our
financial performance until we have operated the acquired facilities for a
substantial period of time.
THE CONCENTRATION OF OUR SUPPLIERS AND RELIANCE ON A SINGLE CUSTOMER AT OUR
FACILITIES EXPOSE US TO FINANCIAL RISKS IF ANY SUPPLIER OR CUSTOMER SHOULD FAIL
TO PERFORM ITS OBLIGATIONS.
We periodically rely on a single supplier for the provision of fuel, water
and other services required for operation of a facility. At times we rely on a
single customer or a few customers to purchase all or a significant portion of a
facility's output, in some cases under long-term agreements that provide support
for any project debt used to finance the facility. The financial performance of
any facility depends upon the continued performance by customers and suppliers
of their contractual obligations and, in particular, on the credit quality of
our customers and suppliers.
The NY-ISO is the principal customer for our assets located in New York
City, which in turn, sells our products to load serving entities. The following
table sets forth the approximate
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percentage of our revenues attributed to each of our major wholesale customers
for the year ended December 31, 2000:
YEAR ENDED DECEMBER 31, 2000
CUSTOMER %
-------- ----
NY-ISO........................................... 43%
Duquesne Light Company........................... 30%
Niagara Mohawk Power Corporation................. 10%
If any one of these customers fails to meet its obligations under these
agreements, we may be required to enter the wholesale markets or seek to enter
into new contracts for some products in these regions earlier than we currently
anticipate, which may materially adversely affect our results of operations.
Similarly, we have agreed to sell power to Duquesne Light Company at a
fixed price through December 2004 and have purchased a substantial portion of
our coal supply under fixed price term contracts ranging from one to three years
in duration. If any of these coal suppliers fail to meet its obligations under
these agreements, whether by reason of force majeure, bankruptcy or similar
events, we may be required to enter the wholesale markets to acquire coal at
market prices, which may materially adversely affect our results of operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR RISK MANAGEMENT PRACTICES,
WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We have been managing risks associated with our hedging of energy and fuel
market price volatility in the wholesale power markets for only a limited amount
of time. In addition, we do not attempt to hedge all of our future risks. We
cannot assure you that our hedging activities will effectively manage this price
volatility, and we may not be able to successfully manage the risks associated
with wholesale power and fuel markets, including the risk that counterparties
may not perform. If we were to fail in this regard, we could have significant
losses.
WE HAVE ENTERED INTO TRANSITION AGREEMENTS IN CONNECTION WITH THE
ACQUISITION OF OUR FACILITIES, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
In connection with the acquisition of our facilities, we entered into
contracts with Consolidated Edison, Duquesne Light Company and Niagara Mohawk
Power Corporation to sell some or all of our products for a period of time
following completion of the respective acquisitions. Two of these contracts
remain in effect. We currently sell all of our energy output from our
hydroelectric assets to Niagara Mohawk Power Corporation and a substantial
portion of our energy and ancillary services from our assets located in Ohio and
Pennsylvania to Duquesne Light Company. As a result of these agreements, we do
not benefit fully from any increases in the wholesale price of energy, capacity
and ancillary services until these contracts expire. In 2000, approximately 49%
of our revenue resulted from sales under these three agreements. We may also be
exposed to other financial risks, including rising fuel or other costs, under
the contracts. We recently extended our supply agreement with Niagara Mohawk
Power Corporation through September 2004 and, in December 2000, we extended our
provider of last resort contract with Duquesne Light Company through December
2004. We may seek to enter into further supply contracts with respect to the
output of our facilities following termination of these contracts, but we may
not be successful in doing so. In the case of future acquisitions and
development projects, we also cannot assure you that we will be able to secure
any commitments to purchase any or all of our output for any specified period of
time.
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WE HAVE AGREED TO PROVIDE ALL OF THE ENERGY REQUIRED BY DUQUESNE LIGHT COMPANY
TO SATISFY ITS PROVIDER OF LAST RESORT OBLIGATION, WHICH COULD RESULT IN
SIGNIFICANT LOSSES TO US.
Duquesne Light Company is obligated to supply electricity at predetermined
tariff rates to all retail customers in its existing service territory who do
not select another electricity supplier. We are committed to provide 100% of the
energy that Duquesne Light Company needs to meet this obligation under a
contract that we refer to as the provider of last resort contract, that was
recently extended through December 2004. If our obligation under this contract
exceeds our own energy production levels, we would be forced to buy additional
energy from the market at prevailing market prices and, in certain cases where
we failed to deliver the required amount, we could incur penalties during
periods of peak demand of up to $1,000 per megawatt hour. If this situation were
to occur even for a brief period of time during periods of peak energy prices,
we could suffer substantial losses that could materially adversely affect our
results of operations for an entire fiscal year. For example, if one of our
larger facilities were shut down completely during a period of peak demand, with
market prices at $1,000 per megawatt hour, the cost of procuring replacement
power could exceed $14 million per day. We incurred substantial costs in order
to hedge a portion of this risk for the past summer and may do so again in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Market Risks" and "Business -- Orion Power
MidWest, L.P. -- Provider of Last Resort Contract."
CHANGES IN THE MARKET PRICES AND AVAILABILITY OF FUEL SUPPLIES TO GENERATE
ELECTRICITY MAY INCREASE OUR COST OF PRODUCING POWER, WHICH COULD ADVERSELY
IMPACT OUR PROFITABILITY AND FINANCIAL PERFORMANCE.
The market prices and availability of natural gas, coal and oil fluctuate.
Any price increase, delivery disruption or reduction in the availability of
these commodities could affect our ability to operate our facilities and impair
our cash flow and profitability. The provider of last resort contract with
Duquesne Light Company may require us to operate the assets located in Ohio and
Pennsylvania even if a dramatic increase in the price of coal makes it
economically unattractive to do so. We may be subject to further exposure if any
of our future acquisitions are concentrated in natural gas, coal or oil-fired
facilities. We may not be successful in our efforts to mitigate our exposure to
supply and price swings.
Delivery of the natural gas to each of our natural gas-fired facilities
typically depends on a single gas distributor, usually the natural gas utility
for that location. As a result, we are subject to the risk that a natural gas
distributor suffers disruptions or curtailments in its ability to deliver the
natural gas to us or that the amounts of natural gas we are permitted to request
are curtailed. Any disruptions and/or curtailments could materially adversely
affect our ability to operate natural gas-fired generating facilities.
WE MAY INCUR SUBSTANTIAL COSTS IF OUR SUPPLY OF WATER IS IMPAIRED.
Hydroelectric plants require continuous water flow for their operation.
Accordingly, we are subject to the risk that a drought or other water flow
impairment may limit our ability to produce and market electricity from these
facilities. We have agreed with Niagara Mohawk Power Corporation to provide
electricity totaling at least 2.2 million megawatt hours each year (within
quarterly targets) until September 30, 2001. If we fail to provide the minimum
amount we are required to during any quarter, we will have to pay Niagara Mohawk
its replacement costs. In the third and fourth quarters of 1999, we failed to
meet the minimum threshold due to an extended drought in New York State. This
resulted in additional net costs of $1.2 million for the year. We have extended
our supply agreement with Niagara Mohawk Power Corporation through September
2004. Under this supply agreement extension, there are no minimum thresholds for
delivery nor are there provisions for associated penalties.
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WE MAY BE LIABLE FOR SIGNIFICANT ENVIRONMENTAL COSTS RELATING TO OUR
ACQUISITIONS.
Some of the acquisition agreements that we have entered into have required
that we assume specified pre-closing liabilities, primarily related to
environmental and employee matters. We have recorded a liability of
approximately $9.2 million, on an undiscounted basis, for estimated costs of
environmental remediation in connection with our acquisition of the
hydroelectric assets and the assets located in New York City, and a liability of
approximately $4.8 million, on an undiscounted basis, in connection with our
acquisition of the assets located in Ohio and Pennsylvania. We recorded the
liabilities based on valuations performed by independent environmental liability
assessment experts. In conjunction with these valuations, we have developed
remediation plans for the known liabilities. There can be no assurance that the
actual costs of compliance and remediation will not be significantly higher than
our recorded liability. We are likely to be required to assume these types of
liabilities, as well as others, in connection with future acquisitions. As a
result, we may be liable for significant environmental remediation costs and
other liabilities arising from the operation of our facilities by prior owners,
which could materially adversely affect our cash flow and operations.
WE RELY ON TRANSMISSION LINES THAT WE DO NOT OWN OR CONTROL, WHICH MAY HINDER
OUR ABILITY TO DELIVER OUR PRODUCTS.
We depend on transmission and distribution facilities owned and operated by
utilities and other power companies to deliver the electric power products and
services we generate to our customers, who in turn deliver these products to the
ultimate consumers of the power. If transmission is disrupted, our ability to
sell and deliver our products may be hindered, which could materially affect our
cash flow and profitability.
OUR OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL AND QUARTERLY BASIS.
Electric power generation frequently is a seasonal business. Consequently,
our overall operating results in the future may fluctuate substantially on a
seasonal basis, and the pattern of this fluctuation may change depending on the
nature and location of any facilities we acquire and the terms of any contract
to sell electricity that we may enter into. Our quarterly results of operations
will be substantially dependent on weather conditions, and may make period
comparisons less relevant.
IF A CHANGE IN CONTROL OCCURS, IT MAY NEGATIVELY AFFECT OR ALLOW TERMINATION
OF SEVERAL OF OUR IMPORTANT AGREEMENTS.
If a change of control occurs, several of our important agreements may be
negatively affected or terminated, including the employment contracts of our key
officers and directors. A change of control constitutes an event of default
under each of our credit facilities, except the Liberty Electric credit
facility, which would permit the lenders under those credit facilities to
exercise remedies, including accelerating the outstanding indebtedness and
prohibiting any future distributions by our subsidiaries to us. In addition,
following a change of control, each holder of our notes and our convertible
notes may require us to purchase all or a portion of that holder's notes at a
price equal to 101% of the principal amount, plus accrued and unpaid interest,
for the notes and 100% of the principal amount, plus accrued and unpaid
interest, for the convertible notes. We cannot assure you that we will have the
financial resources necessary to repay our indebtedness or repurchase any of
these notes upon a change in control.
WE ARE CONTROLLED BY A LIMITED NUMBER OF STOCKHOLDERS, AND THERE MAY BE
CONFLICTS OF INTEREST BETWEEN THESE STOCKHOLDERS AND OUR PUBLIC STOCKHOLDERS.
GS Capital Partners II, L.P. and affiliated investment partnerships
collectively beneficially own approximately 33% of our outstanding common stock
or, if all the convertible notes are converted and all the outstanding warrants
are exercised, 35%. In addition, Constellation Enterprises, Inc., several
affiliates of Mitsubishi Corporation and Tokyo Electric Power Company
International B.V.
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beneficially own approximately 27% of our outstanding common stock or, if all
the convertible notes are converted and all the outstanding warrants are
exercised, 25%. As a result of their stock ownership, each of our significant
stockholders, individually or in conjunction with one or more other
stockholders, may be deemed to be able to exercise control over at least some of
our activities, including election of directors, approval of significant
corporate transactions, our dividend policy and access to capital.
Each of our significant stockholders, together with its affiliates, has
other business activities and interests in addition to its ownership position in
us. It is possible that the significant stockholders may exercise their control
in ways that serve their individual interests but do not serve the best
interests of our other stockholders or the noteholders. It is also possible that
conflicts or disagreements among the stockholders regarding the proper course
for us may make it difficult for us to take action important to the achievement
of our goals.
GS Capital Partners II, L.P. is controlled by an affiliate of one of the
lead underwriters, Goldman, Sachs & Co. Goldman Sachs is a global investment
banking and securities firm that engages in many activities that could give rise
to conflicts with our interests. For example:
- Goldman Sachs serves as a financial advisor to electric and gas utility
companies, power generation and energy trading companies and as such
assists these companies in raising capital or developing business and
financial strategies that may involve competition with us or give these
companies an advantage in competing with us.
- Goldman Sachs or its affiliates may compete directly with us and Goldman
Sachs has no agreement with us that would prevent it from doing so.
Goldman Sachs and its affiliates, including GS Capital Partners II, L.P.,
regard the investment in us as a financial investment.
- Goldman Sachs and its affiliates may, from time to time, own significant
investments in companies that compete with us, and directors, officers or
employees of Goldman Sachs or its affiliates may serve as directors or
advisors to these competitors.
- An affiliate of Goldman Sachs currently serves as advisor to
Constellation Power Source, an affiliate of Constellation Enterprises,
for power marketing and related risk management services and receives a
portion of the profits of that activity as compensation. Goldman Sachs
has been providing these advisory services exclusively to Constellation
Power Source. On October 22, 2000, an affiliate of Goldman Sachs entered
into an agreement with Constellation Energy Group, Inc., the parent of
Constellation Enterprises that provides that upon closing, the Goldman
Sachs affiliate will acquire up to a 17.5% interest together with
warrants in Constellation Energy Group's merchant energy businesses in
return for Goldman Sachs' investment of $250 million and contribution of
certain assets that are related to the power marketing and trading
business. In addition, the existing advisory service arrangements will
terminate. Constellation Energy Group's merchant energy businesses, which
include Constellation Power Source, engage in power generation, power
marketing and trading activities. One Goldman Sachs employee is a
director of Constellation Energy Group. Two Goldman Sachs employees are
expected to become directors of the parent company of Constellation
Energy Group's merchant energy business, which is expected to become a
separate publicly traded company. Goldman Sachs' investment represents an
exclusive North American power business arrangement, with certain
exclusions that include our business as well as Goldman Sachs' other
merchant banking activities.
Constellation Enterprises currently owns approximately 16% of our
outstanding shares of common stock. Constellation Energy Group, Inc. develops,
owns and operates generation, transmission and other distribution assets, and
markets and trades power products and related
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fuels throughout North America. We expect that Constellation Energy Group will
continue to compete with us, and there are no restrictions on their ability to
do so.
THE SUBSTANTIAL OWNERSHIP INTEREST IN US BY CERTAIN OF OUR STOCKHOLDERS COULD
HINDER OUR ABILITY TO OBTAIN GOVERNMENTAL APPROVAL FOR FUTURE ACQUISITIONS OR
ENTER ADDITIONAL MARKETS.
Because Constellation Enterprises and private investment partnerships
affiliated with Goldman Sachs have, and will continue to have, a substantial
ownership of our shares following this offering, antitrust regulations and
government agencies responsible for assuring competition in the markets in which
we participate, or may wish to participate in the future, may attribute
ownership of Constellation Enterprises' or Goldman Sachs' assets to us for
purposes of considering competitive effects of possible acquisitions or other
transactions. For example, when we acquire generating assets in the United
States, we may need to obtain approval from FERC, depending upon whether other
facilities, such as generator leads, step-up transformers or filed tariffs, are
transferred with the generating assets. FERC evaluates approvals for
acquisitions such as these by analyzing, among other things, the transaction's
effect on competition. If we were to seek to acquire assets in a market in which
our stockholders had business activities or other ownership interests and our
acquisition required FERC approval, FERC could attribute our stockholders'
interests to us when evaluating the effect on competition thus attributing to us
a larger share of the market. Some of our future acquisitions also may require
approval from state regulators, and some states, like FERC, will consider the
competitive effects of a transaction as part of the approval process. Finally,
our transactions are typically subject to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. The Department of Justice and/or the Federal Trade
Commission may attribute the ownership of our stockholders' assets to us in
preparing their competitive analysis of our transactions. This could limit or
delay our ability to make acquisitions in markets in which Constellation
Enterprises or Goldman Sachs has or obtains a significant market presence.
In addition to affecting our ability to acquire assets in some markets, our
stockholders' business activities and other ownership interests could impair our
ability to sell electricity at market based rates. FERC authorization is
required to sell electricity and electricity-related products at market based
rates in wholesale markets. FERC allows generators, like us, to sell electricity
at market based rates if the seller and its affiliates do not have, or have
adequately mitigated, market power in generation and transmission and cannot
erect other barriers to entry. In order for an affiliate of a
transmission-owning public utility to demonstrate the absence or mitigation of
market power, the public utility must have on file with FERC an open access
transmission tariff for the provision of comparable services. FERC also
considers whether there is evidence of affiliate abuse and/or reciprocal
dealing. To the extent that Constellation Enterprises or Goldman Sachs owns or
obtains generation or transmission assets, or controls a key input to
generation, such as fuel, such that it is able to erect barriers to entry in a
particular geographic market, our ability to transact business in that market at
market based rates could be limited.
WE HAVE SUBSTANTIAL INDEBTEDNESS, WHICH RESTRICTS OUR ACTIVITIES AND COULD
AFFECT OUR ABILITY TO MEET OUR OBLIGATIONS.
We incur substantial indebtedness to finance our acquisitions. As of March
31, 2001, we had total indebtedness of approximately $2.4 billion, with
approximately $28.9 million available for future borrowings under our revolving
credit facility and $28.9 million available for future borrowings under our
subsidiaries' various working capital facilities.
Our substantial indebtedness has important consequences to you. For
example, it:
- requires us to dedicate a substantial portion of our operating
subsidiaries' cash flow to payments on our indebtedness, which reduces
the amount of cash flow available to fund working capital, capital
expenditures, future acquisitions and other corporate requirements;
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- increases our vulnerability to general adverse economic and industry
conditions due to our reduced liquidity and increased need to generate
sufficient cash flow to meet our payment obligations;
- limits our ability to borrow additional funds, which may hinder our
ability to execute our growth strategy or to respond to adverse changes
in governmental regulation;
- places us at a disadvantage to our less leveraged competitors who may be
more able to capitalize on business opportunities and to react to
competitive pressures; and
- subjects us to financial and other restrictive covenants, which, if not
complied with, could result in an event of default and acceleration of
our debt.
Our ability to meet our payment obligations under our debt or to fund
capital expenditures depends on our performance. Our performance is subject to
regulatory, economic, financial, competitive, legislative and other factors that
are beyond our control. We cannot provide you with any assurance that our cash
flow from operations will enable us to meet all of our payment obligations under
our debt, including the notes, or to fund our other liquidity needs.
WE WILL NEED TO REFINANCE THE INDEBTEDNESS UNDER OUR BANK CREDIT FACILITIES
WHEN THIS INDEBTEDNESS BECOMES DUE.
The following table summarizes our outstanding bank credit facilities and
maturity dates as of March 31, 2001:
SOURCE AMOUNT OUTSTANDING FINAL MATURITY DATE
------ ------------------ -------------------
Orion Power New York, L.P. Credit
Facility.................................. $ 647 million December 2002
Orion Power MidWest, L.P. Credit Facility... $1,186 million October 2002
Revolving Credit Facility................... -- December 2002
Liberty Electric Credit Facility............ $ 198 million April 2026
The amounts outstanding above, with the exception of the revolving credit
facility, include letters of credit that have been posted on our behalf under
the credit facilities. We will need to refinance these bank credit facilities
when they become due, which may require regulatory approvals. We cannot assure
you that we will be able to refinance these bank credit facilities on
commercially reasonable terms, or at all, which could have a material adverse
affect on our financial condition. Each of the credit facilities of Orion Power
New York, L.P., Orion Power MidWest, L.P. and Liberty Electric Power, LLC is
secured by substantially all of the assets of the applicable borrower. If we are
unable to refinance these credit facilities, we may be forced to default on our
debt obligations.
RISKS RELATING TO THE NOTES AND THE OFFERING
WE MAY NOT BE ABLE TO SERVICE OUR CORPORATE-LEVEL INDEBTEDNESS BECAUSE OF OUR
HOLDING COMPANY STRUCTURE, WHICH COULD CAUSE US TO DEFAULT ON OUR DEBT.
Our subsidiaries conduct substantially all of our operations. We depend
upon cash dividends and distributions or other transfers from our subsidiaries
to service our corporate-level debt and maintain our cash flow. The debt
agreements of each of our subsidiaries provide that the maximum amount of
dividends or distributions from the subsidiary to us may not exceed $100 million
over the life of the facility for the subsidiary holding our assets located in
New York and $175 million over the life of the facility for the subsidiary
holding our assets located in Ohio and Pennsylvania. Our subsidiaries are
separate and distinct legal entities that have no obligation, contingent or
otherwise, to pay any amounts due under our indebtedness or to make any funds
available to us, whether by dividends, loans or other payments, and they do not
guarantee the payment of our corporate-level indebtedness. In addition, under
our revolving credit facility, we
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are required to reduce all borrowings, other than letters of credit, under the
facility to zero each year for a period of at least 15 consecutive days.
Our bank credit agreements contain customary events of default as well as
matters which are beyond our control. If any event of default occurs, the banks
under the credit agreements would be entitled to prevent distributions to us,
accelerate the repayment of the entire outstanding balance or implement other
remedies. This would prohibit our operating subsidiaries from distributing any
future cash flow to us, which would materially impair our ability to make
payments on the notes.
THE NOTES HAVE NO PRIOR PUBLIC MARKET, AND WE CANNOT ASSURE YOU THAT ANY
PUBLIC MARKET WILL DEVELOP OR BE SUSTAINED AFTER THE OFFERING.
The outstanding notes were issued to, and we believe these securities are
currently owned by, a relatively small number of beneficial owners. The
outstanding notes have not been registered under the Securities Act and will
remain subject to restrictions on transferability if they are not exchanged for
the registered notes. Although the registered notes may be resold or otherwise
transferred by the holders (who are not our affiliates) without compliance with
the registration requirements under the Securities Act, they will constitute a
new issue of securities with no established trading market. There can be no
assurance that such a market will develop. In addition, the registered notes
will not be listed on any national securities exchange. The registered notes may
trade at a discount from the initial offering price of the outstanding notes,
depending upon prevailing interest rates, the market for similar securities, our
operating results and other factors. We have been advised by the initial
purchasers that they currently intend to make a market in the registered notes,
as permitted by applicable laws and regulations; however, the initial purchasers
are not obligated to do so, and any such market-making activities may be
discontinued at any time without notice. In addition, such market-making
activity may be limited during the exchange offer and the pendency of a shelf
registration. Therefore, there can be no assurance that an active market for any
of the registered notes will develop, either prior to or after our performance
of our obligations under the registration rights agreement. If an active public
market does not develop, the market price and liquidity of the registered notes
may be adversely affected.
If a public trading market develops for the registered notes, future
trading prices will depend on many factors, including, among other things,
prevailing interest rates, our financial condition, and the market for similar
securities. Depending on these and other factors, the registered notes may trade
at a discount.
Notwithstanding the registration of the registered notes in the exchange
offer, holders who are "affiliates" (as defined under Rule 405 of the Securities
Act) of us may publicly offer for sale or resale the registered notes only in
compliance with the provisions of Rule 144 under the Securities Act.
Each broker-dealer that receives registered notes for its own account in
exchange for outstanding notes, where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such registered notes. See "Plan of Distribution."
Because we are an affiliate of Goldman, Sachs & Co., one of the initial
purchasers of the notes, following consummation of this exchange offer, Goldman,
Sachs & Co. will be required to deliver a current "market-maker" prospectus and
otherwise comply with the registration requirements of the Securities Act in
connection with any secondary market sale of the notes, which may affect its
ability to continue market-making activities. Following completion of the
exchange offer, we have agreed to make a "market-maker" prospectus available to
Goldman, Sachs & Co. to permit it to engage in market-making transactions.
However, the registration rights agreement also provides that at any time after
consummation of the exchange offer we
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may allow the market-maker prospectus to cease to be effective and usable if:
(1) our board of directors determines in good faith that such action is in our
best interests, or (2) the prospectus contains an untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. As a result, the liquidity of the secondary market for the notes may
be materially adversely affected by the unavailability of a current
"market-maker" prospectus following the exchange offer.
YOU MAY HAVE DIFFICULTY SELLING THE NOTES WHICH YOU DO NOT EXCHANGE.
If you do not exchange your outstanding notes for the notes offered in this
exchange offer, you will continue to be subject to the restrictions on the
transfer of your notes. Those transfer restrictions are described in the
indenture and in the legend contained on the outstanding notes, and arose
because we originally issued the outstanding notes under exemptions from, and in
transactions not subject to, the registration requirements of the Securities Act
of 1933.
In general, you may offer or sell your outstanding notes only if they are
registered under the Securities Act and applicable state securities laws, or if
they are offered and sold under an exemption from those requirements. We do not
intend to register the outstanding notes under the Securities Act.
If a large number of outstanding notes are exchanged for notes issued in
the exchange offer, it may be more difficult for you to sell your unexchanged
notes. In addition, if you do not exchange your outstanding notes in the
exchange offer, you will no longer be entitled to have those notes registered
under the Securities Act.
See "The Exchange Offer -- Consequences of Failure to Exchange Your
Outstanding Notes" for a discussion of the possible consequences of failing to
exchange your notes.
THE NOTES ARE STRUCTURALLY SUBORDINATED TO THE OBLIGATIONS OF OUR
SUBSIDIARIES.
Because we are a holding company and our assets consist primarily of our
equity interests in our operating subsidiaries, our obligations on the notes
will be structurally subordinated to all existing and future indebtedness and
other liabilities of our operating subsidiaries. At March 31, 2001, we and our
operating subsidiaries had approximately $2.4 billion principal amount of long-
term indebtedness, of which $2.0 billion was secured, and approximately $220
million of current liabilities ranking senior to our equity interests in our
operating subsidiaries.
We cannot assure you that, in the event of our dissolution, liquidation,
reorganization or winding up, you will receive any portion of your initial
investment.
WE MAY NOT HAVE SUFFICIENT FUNDS TO PURCHASE ANY NOTES UPON A CHANGE IN
CONTROL.
There is no sinking fund with respect to the notes, and at maturity the
entire outstanding principal amount of the notes will become due and payable. In
addition, if we experience a change in control of the type described under
"Description of the Notes," you may require us to repurchase all or a portion of
your notes prior to maturity. We cannot assure you that we will have sufficient
funds or that we will be able to arrange for additional financing to repay the
notes at maturity or to repurchase the notes tendered to us following a change
in control. Our failure to repurchase any tendered notes or to repay the notes
upon maturity would constitute an event of default under the indenture and, upon
acceleration of the notes in accordance with the indenture, would cause a
default under the terms of our bank credit agreement.
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FORWARD-LOOKING STATEMENTS REGARDING TRANSACTIONS MAY NOT BE CORRECT WHICH
COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks and
relate to future events, our future financial performance or our projected
business results. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology.
Forward-looking statements are only predictions. Actual events or results
may differ materially from any forward-looking statement as a result of various
factors. These factors include:
- political, legal and economic conditions and developments in the United
States;
- state, federal and other legislative and regulatory initiatives affecting
the electric utility industry, including rate regulation, deregulation
and restructuring initiatives;
- changes in the environmental and other laws and regulations to which we
are subject, or the application thereof;
- the extent and timing of the entry of additional competition in our
markets;
- the performance of projects undertaken;
- our ability to execute our strategy of acquiring or developing additional
power generating facilities;
- our ability to obtain the significant future financing our growth
strategy will likely require, whether through equity issuances or
borrowings;
- fluctuations in the prices for electric products and services;
- financial market conditions, changes in commodity prices and interest
rates, and weather and other natural phenomena; and
- other factors including the risks outlined under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements.
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USE OF PROCEEDS
We will not receive any proceeds in connection with the exchange offer. In
consideration for issuing the exchange notes in exchange for the outstanding
notes as described in this prospectus, we will receive, retire and cancel the
outstanding notes. The net proceeds from the sale of the outstanding notes,
after deducting discounts, commissions and offering expenses, were approximately
$390 million. We used substantially all of the net proceeds to purchase our
assets located in Pennsylvania and Ohio.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2001.
You should read the information in this table together with our
consolidated financial statements and the related notes and with "Selected
Consolidated Financial and Operating Data," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
AS OF MARCH 31, 2001
----------------------
(DOLLARS IN THOUSANDS)
LONG-TERM DEBT OBLIGATIONS, INCLUDING CURRENT PORTION:
Orion Power New York, L.P. Credit Facility(a)............. $ 646,557
Orion Power MidWest, L.P. Credit Facility(b).............. 1,186,137
Revolving Credit Facility(c).............................. --
12% senior notes due 2010................................. 400,000
Liberty Electric Credit Facility(d)....................... 198,400
Other notes payable....................................... 261
----------
Total long-term debt, including current portion... 2,431,355
----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 200,000,000 shares
authorized, 93,095,926 shares issued and outstanding... 931
Additional paid-in capital................................ 1,230,467
Deferred compensation(e).................................. (2,960)
Notes receivable.......................................... (6,007)
Accumulated other comprehensive income.................... (47,619)
Retained earnings......................................... 47,776
----------
Total stockholders' equity........................ 1,222,588
----------
Total capitalization.............................. $3,653,943
==========
---------------
(a) This credit facility provides for a $700 million acquisition facility and a
$30 million working capital facility, of which $10 million is used to post a
letter of credit for an indirect wholly owned subsidiary. As of March 31,
2001, $53 million has been permanently repaid and cannot be reborrowed.
(b) This credit facility provides for a $1.11 billion acquisition facility and a
$90 million working capital facility, of which $10 million is used to post a
letter of credit for a wholly owned subsidiary.
(c) This credit facility provides for up to $75 million in working capital loans
or letters of credit.
(d) This credit facility provides for a $334 million construction facility,
including a $5 million working capital facility, of which $5 million is
available to post letters of credit.
(e) As part of our employees' stock option agreements, certain employees
received options to acquire shares of our common stock at the time of each
acquisition. Certain employees received these options at exercise prices
that were determined when they commenced employment, which was less than the
fair value of the common stock at the date of issuance of the options. We
recognized deferred compensation for any difference between exercise price
and fair value.
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables present our selected consolidated financial data. The
information set forth below should be read together with the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical consolidated financial statements and the notes
to those statements included in this prospectus. Our financial data for the
period March 10, 1998 (inception) to December 31, 1998 and the years ended
December 31, 1999 and 2000, and as of December 31, 1998, 1999 and 2000, are
derived from our audited consolidated financial statements, which were audited
by Arthur Andersen LLP, independent public accountants. The balance sheet data
as of March 31, 2001, and statement of income and cash flows data for the three
months ended March 31, 2000 and 2001, are derived from our unaudited financial
statements included elsewhere in this prospectus. In the opinion of management,
the unaudited financial statements have been prepared on a basis consistent with
the audited financial statements which appear elsewhere in this prospectus and
include all adjustments, which are normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for the
unaudited periods. The historical results presented are not necessarily
indicative of future results. We have supplied selected capacity and other data
set forth below under the caption "Operating Data."
MARCH 10, THREE MONTHS
1998 YEAR ENDED ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -----------------------
1998 1999 2000 2000 2001
-------------- ---- ---- ---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Revenue......................................... $ 314 $ 134,074 $ 957,569 $ 105,506 $ 274,251
-------- ----------- ----------- ---------- ----------
Operating expenses:
Fuel.......................................... -- 20,463 437,763 30,666 111,728
Gain on derivative financial instruments...... -- -- -- -- (1,521)
Operations and maintenance.................... 24 22,732 97,607 13,964 27,906
General and administrative.................... 2,620 16,755 37,082 5,389 12,778
Taxes other than income tax................... -- 20,785 60,751 13,519 17,786
Depreciation and amortization................. 94 18,938 103,196 13,050 32,195
Charge for buyout of operations and maintenance
contracts with related party.................. -- -- 19,000 -- --
-------- ----------- ----------- ---------- ----------
Total operating expenses........................ 2,738 99,673 755,399 76,588 200,872
-------- ----------- ----------- ---------- ----------
Operating (loss) income......................... (2,424) 34,401 202,170 28,918 73,379
Interest expense, net........................... (124) (23,943) (153,389) (14,343) (47,100)
-------- ----------- ----------- ---------- ----------
(Loss) income before provision for income tax... (2,548) 10,458 48,781 14,575 26,279
Income tax (benefit) expense.................... (1,006) 4,796 20,242 6,281 11,162
-------- ----------- ----------- ---------- ----------
Net (loss) income............................... $ (1,542) $ 5,662 $ 28,539 $ 8,294 $ 15,117
======== =========== =========== ========== ==========
(LOSS) EARNINGS PER AVERAGE COMMON SHARE:
Basic......................................... $ (12.94) $ 0.39 $ 0.46 $ 0.23 $ 0.16
======== =========== =========== ========== ==========
Diluted....................................... $ (12.94) $ 0.38 $ 0.44 $ 0.22 $ 0.15
======== =========== =========== ========== ==========
STATEMENT OF CASH FLOWS DATA:
Cash flows from operating activities............ $ (2,335) $ 10,456 $ (2,756) $ 10,407 $ 97,025
Cash flows from investing activities............ (16,407) (1,047,167) (2,113,133) (2,923) (116,807)
Cash flows from financing activities............ 20,345 1,113,657 2,173,174 (7,990) 63,207
OPERATING DATA:
Consolidated EBITDA(a).......................... $ (2,330) $ 53,339 $ 305,366 $ 41,968 $ 105,574
======== =========== =========== ========== ==========
Megawatt hours produced during period........... 7,283 2,793,689 14,801,420 1,455,173 4,732,913
Net capacity owned at end of period
(megawatts)................................... 102 2,613 5,396 2,613 5,396
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(b)........... -- 1.40x 1.26x 1.99x 1.37x
Coverage deficiency of earnings to fixed
charges....................................... $ 2,548 -- -- -- --
======== =========== =========== ========== ==========
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AS OF DECEMBER 31,
------------------------------------- AS OF MARCH 31,
1998 1999 2000 2001
--------- ---- ---- ---------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital(c)....................................... $ 3,108 $ 154,245 $ 473,696 $ 418,636
Total assets............................................. 20,450 1,252,007 3,870,190 3,941,479
Total debt, including current portion.................... 2,593 787,680 2,367,898 2,431,355
Total stockholders' equity............................... 17,068 395,416 1,254,782 1,222,588
---------------
(a) Consolidated EBITDA represents earnings before interest, tax, depreciation
and amortization. EBITDA, as defined, is presented because it is a widely
accepted financial indicator used by some investors and analysts to analyze
and compare companies on the basis of operating performance. EBITDA, as
defined, is not intended to represent cash flows for the period, nor is it
presented as an alternative to operating income or as an indicator of
operating performance. It should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with
generally accepted accounting principles (GAAP) in the United States, is not
indicative of operating income or cash flow from operations as determined
under GAAP and does not give effect to our capital expenditures or debt
service payments. Our method of computation may or may not be comparable to
other similarly titled measures by other companies.
(b) For purposes of calculating the ratios, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest on all
indebtedness, amortization of debt issuance costs and the portion of rental
expense we believe represents interest.
(c) Includes cash held in restricted accounts pursuant to our credit facilities
of $56.9 million as of December 31, 1999, $283.4 million as of December 31,
2000 and $189.4 million as of March 31, 2001.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with "Risk
Factors," "Selected Consolidated Financial and Operating Data" and our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
OVERVIEW
We were incorporated in Delaware in March 1998 for the purpose of
acquiring, developing, owning, and operating non-nuclear electric power
generating facilities throughout North America. Commencing in November 1998, in
five separate acquisitions, we directly or through our wholly-owned subsidiaries
acquired and developed our facilities with a total electric generating capacity
of 5,926 megawatts in operation, and approximately an additional 5,000 megawatts
in construction and various stages of development.
Similar to other wholesale power generators, we typically sell three types
of products: energy, capacity, and ancillary services.
Energy. Energy refers to the actual electricity generated by our
facilities and sold to intermediaries for ultimate transmission and distribution
to consumers of electricity. Energy is the only product that is subsequently
distributed to consumers by power retailers.
Capacity. Capacity refers to the physical capability of a facility to
produce energy. In some regional power markets, like the market managed by the
NY-ISO, a market for capacity exists distinct from the market for the energy
produced by that capacity. In other power markets, like the ECAR region in the
Midwest, there is no market for capacity as a separate product, and the value of
the underlying capacity is included in the price of the energy produced.
In the New York market administered by the NY-ISO, wholesale power
generators sell capacity into a regional market to assure power retailers in
that region that they will have access to energy adequate to meet their retail
demand. The sale of capacity in New York represents a commitment by a wholesale
generator to make the energy it produces available to the relevant day-ahead
market, but does not commit the wholesale generator to sell that energy to any
particular power retailer or at any particular price. Power retailers are not
committed to acquire energy from the wholesale generators from whom they
purchase capacity. A wholesale generator will recognize additional revenue when
it sells its energy, either into the market administered by the independent
system operator or to any other third-party purchaser. Utilities and other power
retailers build the cost of acquiring capacity into the retail price for
electricity.
In markets like New York City, where there are constraints on the ability
to transmit power from outside the city into the city and reliability of the
power supply system is a high priority, capacity -- not the energy itself -- may
represent the principal product and significant source of revenue for local
wholesale generators.
Ancillary Services. Ancillary services generally are support products used
to ensure the safe and reliable operation of the electric power supply system.
Examples of ancillary services include:
- automatic generation control, which is used to balance energy supply with
energy demand, referred to in our industry as "load," on a real-time
basis;
- operating reserves, which are used on an hourly or daily basis to
generate additional energy if demand increases, if major generating
resources go off-line or if transmission facilities become unavailable;
- reactive supply and voltage support, which maintain voltages on the
transmission and distribution system within acceptable limits; and
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- black start capability, which is used to restart generating facilities
without reliance on external energy sources.
Markets. We typically sell our products to electric power retailers, which
are the entities that supply power to consumers. Power retailers include
regulated utilities, municipalities, energy supply companies, cooperatives, and
retail "load" aggregators.
We may sell energy and ancillary services in advance under bilateral supply
contracts with specific buyers. Alternatively, we may sell them into regionally
operated day-ahead and real-time markets. Capacity may be sold in monthly,
semi-annual, or annual blocks in a competitive bid market or in advance under
bilateral contracts.
RESULTS OF OPERATIONS
Generally. The principal factor affecting recent changes in our results
has been the timing of the acquisitions of our facilities. We acquired the
existing facilities on the following dates:
- Carr Street Generating Station -- November 19, 1998;
- Hydroelectric assets -- July 30, 1999;
- Assets located in New York City -- August 20, 1999;
- Assets located in Cleveland, Pittsburgh, West Pittsburg and
Youngstown -- April 28, 2000; and
- Assets under construction and development acquired from Columbia
Electric -- December 11, 2000.
Set forth below are key operating metrics which we believe indicate the general
performance of our operations:
MARCH 10, 1998 YEAR ENDED THREE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------------- ------------------
1998 1999 2000 2000 2001
-------------- ------------ ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Consolidated
EBITDA............. $(2,330) $ 53,339 $ 305,366 $ 41,968 $ 105,574
======= ========== =========== ========== ==========
Megawatt hours
produced during
period............. 7,283 2,793,689 14,801,420 1,455,173 4,732,913
Net capacity owned at
end of period
(megawatts)........ 102 2,613 5,396 2,613 5,396
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000
Revenue. Our revenue was $274.3 million for the three months ended March
31, 2001, as compared to revenue of $105.5 million for the three months ended
March 31, 2000. The increase was primarily due to the acquisition in April 2000
of our assets located in Cleveland, Pittsburgh, West Pittsburg and Youngstown.
The revenue from each facility was determined at least in part in accordance
with the various interim capacity and energy agreements then in place, including
the provider of last resort contract with Duquesne Light Company. For the
revenues that were comparable for the periods, a portion of the increase related
to increased fuel costs from period to period, which in turn increased energy
sale prices to offset the cost increase. Other factors in determining our
revenue stream are weather patterns and the seasonality of the energy business.
Extreme temperatures can cause significant fluctuations in our revenue stream.
Forced outages, due to a variety of factors, can also lead to changes in
revenues and those forced outages can be in our own plants as well as other
energy producers' plants, shifting the energy availability and pricing factors
used in the revenue components of our business. While we experienced
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some forced outages during the three months ended March 31, 2001, they did not
have a significant impact on our revenue stream.
Operating Expenses. Our operating expenses consisted of fuel expense,
operations and maintenance expense, taxes other than income taxes (principally
property taxes), general and administrative expenses and depreciation and
amortization expense.
We had fuel expenses of $111.7 million for the three months ended March 31,
2001, as compared with $30.7 million for the three months ended March 31, 2000.
The increase in 2001 was the result of the acquisition of our assets located in
Cleveland, Pittsburgh, West Pittsburg and Youngstown, and higher per unit costs
for natural gas and oil in 2001.
Our gain in derivative financial instruments was $1.5 million for the three
months ended March 31, 2001, as compared to $0 for the three months ended March
31, 2000. This gain reflects the changes in value recognized during the three
months ended March 31, 2001 for the derivative financial instruments (natural
gas, oil and financial tolling agreements) that do not qualify as cash flow
hedges under generally accepted accounting principles. See "Accounting Change"
below for further discussion.
Our operations and maintenance expenses were $27.9 million for the three
months ended March 31, 2001, as compared to $14.0 million for the three months
ended March 31, 2000. The increase was a result of the acquisition of our assets
located in Cleveland, Pittsburgh, West Pittsburg and Youngstown in April 2000.
Other costs included in operations and maintenance expenses are related to
additional maintenance projects performed in conjunction with scheduled capital
improvements or forced outages. These costs may be incurred at different times
during the operating cycle as a result of timing, forced outages, energy needs,
and other external factors. These costs, as they relate to maintenance projects,
follow the seasonal patterns of the energy industry with a higher concentration
of costs in the early part of the second and fourth quarters of a fiscal year,
traditionally the slower periods of energy demand.
Our general and administrative expenses were $12.8 million for the three
months ended March 31, 2001, as compared to $5.4 million for the three months
ended March 31, 2000. The increase was the result of expanded corporate and
regional infrastructure to support our growth.
Taxes other than income taxes amounted to $17.8 million for the three
months ended March 31, 2001, compared to $13.5 million for the three months
ended March 31, 2000. The increase was a result of the acquisition in April 2000
of our assets located in Cleveland, Pittsburgh, West Pittsburg and Youngstown.
The majority of these stem from property taxes related to our facilities and
their locations. We continue to focus on trying to control these costs through
assessment hearings and working with the appropriate authorities to reach
agreement on these costs.
Depreciation and amortization expense was $32.2 million for the three
months ended March 31, 2001, as compared to $13.1 million for the three months
ended March 31, 2000. The increase was a result of the acquisition in April 2000
of our assets located in Cleveland, Pittsburgh, West Pittsburg and Youngstown.
We also added the favorable value of the provider of last resort contract as an
intangible asset in 2000. Capital projects and financing activities will
continue to determine the amount and growth of these costs.
Operating Income. As a result of the above factors, our operating income
was $73.4 million for the three months ended March 31, 2001, as compared to
operating income of $28.9 million for the three months ended March 31, 2000.
Interest Expense. Our interest expense was $52.9 million for the three
months ended March 31, 2001, as compared to $14.7 million for the three months
ended March 31, 2000. The increase in interest expense was due to our new bank
credit agreement for the acquisition of our assets located in Cleveland,
Pittsburgh, West Pittsburg and Youngstown, the $400 million senior
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notes issued in April and May 2000, and the revolving credit facility entered
into in July 2000. Interest expense also includes amortization of deferred
financing costs from the establishment of Orion Power MidWest, L.P.'s credit
facility, the senior notes and the revolving credit facility, all occurring
after March 2000.
Interest Income. Our interest income was $5.8 million for the three months
ended March 31, 2001, as compared to $388,000 for the three months ended March
31, 2000. The increase was due to the increase in cash on hand raised as part of
our initial public offering in November 2000.
Income Tax Provision. Our income tax provision was $11.2 million for the
three months ended March 31, 2001, as compared to $6.3 million for the three
months ended March 31, 2000. The increase was due to higher taxable income for
the equivalent periods and an increase in our effective tax rate to 42.5% due to
the higher proportion of income from our New York City assets and the additional
tax rates applicable to operations within New York City.
Net Income. As a result of the above factors, our net income was $15.1
million for the three months ended March 31, 2001, as compared to $8.3 million
for the three months ended March 31, 2000.
ACCOUNTING CHANGE
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS Nos. 137 and 138. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a cash flow hedge, the effective portions of the changes in fair
value of the derivative are recorded in other comprehensive income and are
recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in fair value of cash flows hedges are
recognized into earnings.
The adoption of the statement resulted in a pre-tax reduction to other
comprehensive income for the three months ended March 31, 2001 of $57.0 million
($33.3 million after taxes). This transition adjustment represented the fair
value of our derivative instruments related to interest rate swaps and commodity
price contracts recognized as cash flow hedges. The reduction in other
comprehensive income for the three months ended March 31, 2001 is attributable
to valuation losses of approximately $11.7 million on our interest rate swaps
offset by the reclassifications out of other comprehensive income of $2.6
million in gains from our commodity contracts.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Revenue. Our revenue was $957.6 million for the year ended December 31,
2000, as compared to revenue of $134.1 million for the year ended December 31,
1999. The increase was primarily due to a full year of operations in 2000 of our
hydroelectric assets and our assets located in New York City, and the
acquisition in April 2000 of our assets located in Cleveland, Pittsburgh, West
Pittsburg and Youngstown. The revenue from each facility was determined at least
in part in accordance with the various interim capacity and energy agreements
then in place, including the provider of last resort contract with Duquesne
Light Company. The provider of last resort contract has been revised and the
term extended through December 2004. Our capacity sale agreement for our assets
located in New York City with Consolidated Edison expired in April 2000, at
which time we began selling our capacity into the market.
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Operating Expenses. Our operating expenses consisted of fuel expense,
operations and maintenance expense, taxes other than income taxes (principally
property taxes), general and administrative expenses and depreciation and
amortization expense.
We had fuel expenses of $437.8 million for the year ended December 31,
2000, as compared with $20.5 million for the year ended December 31, 1999. The
increase in 2000 was the result of our acquisition of our assets located in
Cleveland, Pittsburgh, West Pittsburg and Youngstown, the full year of operation
of our assets located in New York City and higher per unit costs for natural gas
and oil in 2000. From the date of acquisition through November 18, 1999, the
assets located in New York City were being operated under a tolling agreement
where the party buying the power supplied the fuel. This contract terminated
when the NY-ISO began operations. Fuel expense for 2000 also includes $57
million for the purchase of power from May 2000 through October 2000 to
supplement our generating capacity to meet our obligations under the provider of
last resort contract.
Our operations and maintenance expenses were $97.6 million for the year
ended December 31, 2000, as compared to $22.7 million for the year ended
December 31, 1999. The increase was a result of the ownership and operation of
our hydroelectric assets and our assets located in New York City for a full year
in 2000 along with the acquisition in the more recent period of our assets
located in Cleveland, Pittsburgh, West Pittsburg and Youngstown. The year ended
December 31, 1999 reflects the Carr Street facility for the period with partial
periods for our hydroelectric assets and our assets located in New York City.
Taxes other than income taxes amounted to $60.8 million for the year ended
December 31, 2000, as compared to $20.8 million for the year ended December 31,
1999. The increase was a result of the ownership and operation of our
hydroelectric assets and our assets located in New York City for a full year in
2000 along with the acquisition in the more recent period of our assets located
in Cleveland, Pittsburgh, West Pittsburg and Youngstown. The year ended December
31, 1999 reflects the Carr Street facility for the full year and a partial year
for our hydroelectric assets and our assets located in New York City.
Our general and administrative expenses were $37.1 million for the year
ended December 31, 2000, as compared to $16.8 million for the year ended
December 31, 1999. The increase was the result of expanded corporate
infrastructure to support our growth along with the creation of a regional
office for Orion Power MidWest, L.P.
Depreciation and amortization expense was $103.2 million for the year ended
December 31, 2000, as compared to $18.9 million for the year ended December 31,
1999. The increase was a result of the ownership and operation of our
hydroelectric assets and our assets located in New York City for a full year in
2000 along with the acquisition in the more recent period of our assets located
in Cleveland, Pittsburgh, West Pittsburg and Youngstown. We also added the
provider of last resort contract value as an intangible asset in 2000. The year
ended December 31, 1999, reflects the Carr Street facility for the period with
partial periods for our hydroelectric assets and our assets located in New York
City.
Our charge for buyout of operations and maintenance contracts was the
result of the acquisition of the subsidiaries of Constellation Operating
Services in April 2000. We incurred a one-time loss of $19.0 million,
principally a non-cash item. There was no such loss for the year ended December
31, 1999.
Operating Income. As a result of these factors, our operating income was
$202.2 million for the year ended December 31, 2000, as compared to operating
income of $34.4 million for the year ended December 31, 1999.
Interest Expense. Our interest expense was $168.7 million for the year
ended December 31, 2000, as compared to $25.8 million for the year ended
December 31, 1999. The increase in interest expense was due to our new bank
credit agreement for the acquisition of our assets
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located in Cleveland, Pittsburgh, West Pittsburg and Youngstown, the $400
million senior notes issued in April and May 2000, and the revolving credit
facility entered into in July 2000. Additionally, in 2000, we had a full year of
interest expense under our bank credit facility related to the acquisition of
our hydroelectric assets and our assets located in New York City during 1999.
Interest expense also includes amortization of deferred financing costs from the
establishment of Orion Power MidWest, L.P.'s credit facility, the senior notes
and the revolving credit facility, all occurring in 2000.
Interest Income. Our interest income was $15.3 million for the year ended
December 31, 2000, as compared to $1.8 million for the year ended December 31,
1999. The increase was due to the increase of cash on hand from operations
resulting from a full year of operations in 2000 of our hydroelectric assets and
our assets located in New York City, the acquisition during 2000 of our assets
located in Cleveland, Pittsburgh, West Pittsburg and Youngstown, and the
additional cash raised as part of our initial public offering in November 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE PERIOD MARCH 10, 1998 (INCEPTION)
THROUGH DECEMBER 31, 1998
Revenue. Our revenue was $134.1 million for the year ended December 31,
1999, as compared to revenue of $0.3 million for the period from March 10, 1998
(inception) through December 31, 1998. The increase was a result of the
ownership and operation of our hydroelectric assets and our assets located in
New York City in the more recent period, which were acquired after December 31,
1998 and the longer period of operation of the Carr Street facility in 1999. The
revenue from each facility was determined in accordance with the various interim
capacity and energy agreements then in place. Our transition energy sale
agreement with Consolidated Edison expired on November 18, 1999, allowing us to
realize market prices for energy sales after that date. Capacity sales generated
from our assets located in New York City were $71.3 million for the year ended
December 31, 1999.
Operating Expenses. Our operating expenses consisted of fuel expense,
operations and maintenance expense, taxes other than income taxes, general and
administrative expenses and depreciation and amortization expense.
We had fuel expenses of $20.5 million for the year ended December 31, 1999,
as compared with $0 for the period from March 10, 1998 (inception) through
December 31, 1998. Both the Carr Street facility and, until November 18, 1999,
our assets located in New York City were operated under tolling agreements,
which provided that the party buying the power would supply all necessary fuel.
In the third quarter of 1999, we failed to meet the minimum threshold under our
energy contract with Niagara Mohawk Power Corporation due to a drought. This
resulted in additional net costs to meet our obligations of $1.2 million for the
year.
Our operations and maintenance expenses were $22.7 million for the year
ended December 31, 1999, as compared to $24,000 for the period from March 10,
1998 (inception) through December 31, 1998. The increase was a result of the
operation of our hydroelectric assets, our assets located in New York City, and
the Carr Street facility in the more recent period.
Taxes other than income taxes amounted to $20.8 million for the year ended
December 31, 1999, as compared to $0 for the period from March 10, 1998
(inception) through December 31, 1998. This was due to our ownership of the Carr
Street facility during all of 1999, as well as our hydroelectric assets and our
assets located in New York City for a portion of the period.
Our general and administrative expenses were $16.8 million for the year
ended December 31, 1999, as compared to $2.6 million for the period from March
10, 1998 (inception) through December 31, 1998. The increase was the result of
expanded corporate infrastructure to
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support our growth and approximately $6.7 million of transition costs related to
the acquisition of our hydroelectric assets and our assets located in New York
City.
Depreciation and amortization expense was $18.9 million for the year ended
December 31, 1999, as compared to $94,000 for the period from March 10, 1998
(inception) through December 31, 1998. Depreciation and amortization increased
due to the acquisition of our hydroelectric assets, our assets located in New
York City, and the ownership of the Carr Street facility during all of 1999.
Operating Income. As a result of these factors, our operating income was
$34.4 million for the year ended December 31, 1999, as compared to an operating
loss of $2.4 million for the period from March 10, 1998 (inception) through
December 31, 1998.
Interest Expense. Our interest expense was $25.8 million for the year
ended December 31, 1999, as compared to $137,000 for the period from March 10,
1998 (inception) through December 31, 1998. The increase was due to the
additional borrowings we incurred to acquire our hydroelectric assets and our
assets located in New York City.
Interest Income. Our interest income was $1.8 million for the year ended
December 31, 1999, as compared to $13,000 for the period from March 10, 1998
(inception) through December 31, 1998. The increase was due to the cash balances
required to be held under the bank credit facility of Orion Power New York, L.P.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2001, we obtained cash from
operations and from borrowings under the credit facilities of our subsidiaries.
This cash was used to fund operations, service debt obligations, fund
construction of our Ceredo and Liberty Electric Generating Stations, and meet
other cash and liquidity requirements.
Operating activities for the three months ended March 31, 2001 provided
$97.0 million of cash, as compared to $10.4 million of cash provided for the
three months ended March 31, 2000. The change in restricted cash was $94.0
million for the three months ended March 31, 2001, as compared to a change of
$15.0 million for the three months ended March 31, 2000. Investing activities
for the three months ended March 31, 2001 used $116.8 million of cash for
facilities upgrades and improvements as well as continued construction of the
Ceredo and Liberty plants as compared to $2.9 million of cash used for similar
upgrades and improvements in the three months ended March 31, 2000. Financing
activities for the three months ended March 31, 2001, provided $63.2 million of
cash, mostly through additional borrowings as compared to using $8.0 million in
the three months ended March 31, 2000 to repay long-term debt.
As of March 31, 2001, cash and cash equivalents were $179.3 million and
working capital was $418.6 million. Of this working capital, we had restricted
cash of $189.4 million that can only be used pursuant to our credit facilities
in certain circumstances to fund the business activities of our subsidiaries.
During the year ended December 31, 2000, we obtained cash from operations
and from borrowings under the credit facilities of our subsidiaries and the
senior notes, as well as through our initial public offering of common stock.
This cash was used to fund operations, service debt obligations, fund the
acquisitions of our assets located in Cleveland, Pittsburgh, West Pittsburg and
Youngstown and all the capital stock of Columbia Electric Corporation, and meet
other cash and liquidity requirements.
Operating activities for the year ended December 31, 2000 used $2.8 million
of cash. This resulted from a $295.2 million increase in operating assets,
including restricted cash and notes receivable balances, and an $8.0 million net
increase in deferred tax assets. This was offset by a $137.2 million increase in
operating liabilities, $114.5 million of depreciation and amortization,
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$28.5 million of net income, a $18.9 million non-cash charge on buyout for
operations and maintenance contracts and $1.3 million of deferred compensation.
Investing activities for the year ended December 31, 2000 used
approximately $2.1 billion of cash, primarily for the acquisitions of Columbia
Electric Corporation and our assets located in Cleveland, Pittsburgh, West
Pittsburg and Youngstown, with the remaining $137.9 million being used for
facilities upgrades and improvements.
Financing activities for the year ended December 31, 2000 provided
approximately $2.2 billion of cash, consisting of $1.6 billion of borrowings
under the credit facilities of our subsidiaries and the senior notes, of which
$109 million was repaid in the period, and $756.8 million of net proceeds from
the issuance of common stock. This was offset by $55 million used to fund
restricted cash balances as required by the credit facility of Orion Power
MidWest, L.P., $31.8 million paid for financing costs under this credit facility
and the senior notes and $17.1 million of advisory fees paid to our stockholders
in connection with the acquisition of our assets located in Cleveland,
Pittsburgh, West Pittsburg and Youngstown in accordance with our stockholders'
agreement then in effect.
As of December 31, 2000, cash and cash equivalents were $135.8 million and
working capital was $473.7 million. Of this working capital, we had restricted
cash of $283.4 million that can only be used pursuant to our credit facilities
in certain circumstances to fund the business activities of the subsidiaries
that hold our hydroelectric assets, our assets located in New York City, our
assets located in Cleveland, Pittsburgh, West Pittsburg and Youngstown and the
assets in development that we acquired in connection with our purchase of
Columbia Electric Corporation in December 2000.
To supplement generating capacity and to reduce the risk that Orion Power
MidWest, L.P. would not meet its forecasted obligation under the provider of
last resort contract, Orion Power MidWest entered into contracts to purchase
698,400 net megawatt hours for the period of May through October 2000. The cost
to purchase this energy was approximately $57 million and was paid upon delivery
of the energy. Orion Power MidWest resold any excess energy that was not
required to meet the provider of last resort obligation into the market and
realized the prevailing price at that time. The purchase of the supplemental
generating capacity resulted in a net loss after sale of such power of $29.6
million for the year ended December 31, 2000.
The credit facility of Orion Power New York, L.P. is a credit agreement
between Orion Power New York and a group of lending institutions. Under the
credit facility agreement, Orion Power New York incurred $700 million of
indebtedness to finance the acquisition of our hydroelectric assets and our
assets located in New York City, of which $647 million was outstanding at March
31, 2001. Amounts outstanding under the facility bear a floating rate of
interest. In addition, Orion Power New York has a $30 million working capital
revolving credit facility as part of the facility, of which $0 was outstanding
as of March 31, 2001, and $10 million was used to provide a letter of credit in
favor of Consolidated Edison of New York. During 2000, Orion Power New York used
funds from operations to pay down the original outstanding balance on the
working capital revolving credit facility to $0 and to pay down the term loan by
$50 million. This credit facility is available only to Orion Power New York and
not for Orion Power Holdings' operations. It provides, among other things, that
the cumulative amount of dividends and distributions that Orion Power New York
may pay us cannot exceed $100 million over the life of the facility. As of March
31, 2001, Orion Power New York had made distributions of approximately $37.2
million to us. The credit facility has a maturity date of December 2002.
The credit facility of Orion Power MidWest, L.P. is a credit agreement
between Orion Power MidWest and a group of lending institutions. Under the
credit facility, Orion Power MidWest incurred $1.11 billion of indebtedness to
finance the acquisition of our assets located in Cleveland, Pittsburgh, West
Pittsburg and Youngstown, all of which was outstanding at March 31, 2001.
Amounts outstanding under the credit facility bear a floating rate of interest.
In addition,
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Orion Power MidWest has a $90 million working capital facility, of which $76.1
million was outstanding as of March 31, 2001, and $10 million was used to
provide a letter of credit in favor of Duquesne Light Company. This credit
facility is available only to Orion Power MidWest and not for Orion Power
Holdings' operations. It provides, among other things, that the cumulative
amount of dividends and distributions that Orion Power MidWest may pay us cannot
exceed $175 million over the life of the facility. As of March 31, 2001, no
dividends or distributions had been paid. The credit facility has a maturity
date of October 2002.
In April and May 2000, we sold $400 million aggregate principal amount of
12% senior notes due May 1, 2010.
On July 27, 2000, we entered into a revolving credit facility, which
provides for up to $75 million of borrowings for general corporate purposes and
issuances of letters of credit. This facility matures in December 2002. There
were $46 million of letters of credit outstanding as of March 31, 2001.
The Liberty Electric Power, LLC credit facility was assumed by us in
connection with our acquisition of Columbia Electric Corporation in December of
2000. The credit facility provides for up to $334 million of borrowings under
multiple tranches. With the exception of $41 million, the credit facility is
recourse only to the assets and cash flows of Liberty Electric and is non-
recourse to Orion Power. As of March 31, 2001, $198.4 million was outstanding
under the facility. The credit facility is available only to Liberty Electric
and not for Orion Power Holdings' operations. The credit facility has a final
maturity date of April 15, 2026.
We will require cash to meet the debt service obligations under our notes
and credit facilities. Debt service obligations will fluctuate depending on
variations in the interest rate and the balance on the working capital portion
of the facilities. The following table summarizes the outstanding indebtedness
as of March 31, 2001:
SOURCE AMOUNT INTEREST RATE
------ ------ -------------
(DOLLARS IN MILLIONS)
Orion Power New York Credit Facility........................ $ 647 7.46%
Orion Power MidWest Credit Facility......................... 1,186 7.65%
12% Senior Notes due 2010................................... 400 12.00%
Orion Power Holdings Revolving Credit Facility.............. -- N/A
Liberty Electric Credit Facility............................ 198 7.74%
------ -----
Total............................................. $2,431 8.32%(a)
====== =====
---------------
(a) Weighted average interest rate.
We will need to refinance our indebtedness under the Orion Power New York
credit facility, which becomes due in December 2002, and the Orion Power MidWest
credit facility, which becomes due in October 2002. We are currently exploring
financing alternatives to replace this debt. Entering into a new credit facility
and issuing an additional series of notes are among the alternatives we are
considering.
We review potential acquisition and development opportunities on an
on-going basis. In the near future, we may seek to acquire and/or develop
facilities in addition to the Kelson Ridge Generating Station, which, depending
on the size and structure of these acquisitions or development projects, may
require significant cash resources. We currently have not made any commitments
or entered into any binding agreements with respect to any such transaction. We
may incur substantial additional indebtedness to finance future acquisitions and
development opportunities. This indebtedness may be incurred by us or by one or
more of our subsidiaries. Any increase in the level of indebtedness will
increase the amount of interest paid. We may also
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raise additional equity to assist in the financing of these acquisitions and/or
development projects.
In addition, we plan to improve the operational efficiency of our
generating facilities and, in some cases, to expand our facilities on-site. This
on-site expansion may come either through the construction of additional
generating plants at existing sites, referred to in the industry as "brownfield"
development, or through the repowering of existing plants. Our ability to expand
the capacity of our facilities is subject to numerous factors, including
restrictions imposed by environmental regulations. We anticipate maintenance
capital expenditures of between $30 and $40 million annually for the next
several years in connection with our assets. We also may incur significant
additional expenditures for capital improvements following 2001.
Additionally, we expect that capital expenditures on environmental projects
will total approximately $350 million over the next seven years, the majority of
which is expected to be invested between 2002 and 2006. We believe that a
substantial portion of this will be funded out of operating cash flow. This
amount may change, however, and the timing of any necessary capital expenditures
could be accelerated in the event of a change in environmental regulations or
any enforcement proceeding being commenced against us.
In order to execute our business strategy and finance our anticipated
capital expenditures, we may need to incur additional debt and/or issue
additional equity. If we incur additional debt, we will refinance our existing
indebtedness and/or incur new debt in compliance with the restrictions of our
existing indebtedness or with the consent of our existing lenders. Any increase
in our level of indebtedness will increase the amount of interest we must pay.
We may also raise additional equity from the public markets to assist in the
financing of these acquisitions and/or development projects.
We are restricted in our ability to incur additional indebtedness and make
acquisitions and capital expenditures by the terms and conditions of our senior
notes, our revolving credit facility and the credit facilities of our
subsidiaries. We may incur additional indebtedness under:
- the senior notes if the ratio of consolidated cash flow to fixed charges
is at least 2.0 times, taking into account the additional indebtedness;
- the revolving credit facility if we are in compliance with the financial
covenants in the credit facility, taking into account the additional
indebtedness;
- the Orion Power New York, L.P. credit facility with the consent of the
holders of two-thirds of the outstanding debt; and
- the Orion Power MidWest, L.P. credit facility as long as the debt has a
maturity date of 36 months or longer and the provisions of the
indebtedness are no more limiting or restrictive than the senior notes.
We believe we are currently in compliance with all of the covenants under
our credit facilities and senior notes.
Our ability to meet the payment obligations under our indebtedness or to
fund capital expenditures will depend on our future performance, which is
subject to regulatory, economic, financial, competitive, legislative and other
factors that are beyond our control. We believe that our current financial
resources, in combination with additional cash generated from operations, will
most likely be adequate to meet the cash needs for at least the next 12 months,
excluding cash that may be needed for acquisitions or new development projects.
In the event of an acquisition or new development project, we are likely to need
additional capital resources and may need to borrow additional funds or sell
additional equity.
We will fund our operating activities, construction and maintenance and
debt service requirements through a combination of operating cash flows,
financing arrangements and
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additional equity offerings. We expect our future cash flows will increase as a
result of the new power supply agreement with Niagara Mohawk, the revisions and
extension to the provider of last resort contract, and the commencement of
operations of the Ceredo Electric Generating Station. We expect our financing
requirements will be driven by the refinancing of the Orion Power New York and
Orion Power MidWest credit facilities and additional acquisitions or development
projects.
SEASONALITY
Our operations vary depending upon the season and regional weather
conditions, although the impact of seasonality can vary depending upon the
geographic location of our facilities. In many areas, the demand for electric
power peaks during the hot summer months, with energy and capacity prices
correspondingly being the highest at that time. We can earn a substantial amount
of our net income from a few days during the peak demand for electric power on
the hottest days of summer. In some areas, demand also increases during the
coldest winter months. Additionally, hydroelectric plants show seasonality
depending upon the availability of water flows, which generally will be high
during rainy months during the fall or as a result of snowmelt in the late
winter and spring. Prices will generally fluctuate with demand, being highest at
times of greatest demand. This fluctuation is currently somewhat mitigated by
the existence of the hydro-transition power sales agreement and the provider of
last resort contract, both of which have constant prices for the entire year.
Our overall future operating results may reflect different seasonal aspects,
depending upon the location and characteristics of any additional facilities we
acquire or develop.
FINANCIAL MARKET RISKS
We attempt to hedge some aspects of our operations against the effects of
fluctuations in inflation, interest rates, and commodity prices. Because of the
complexity and potential cost of hedging strategies and the diverse nature of
our operations, our results, although hedged, will likely be somewhat materially
affected by fluctuations in these variables and these fluctuations may result in
material improvement or deterioration of operating results. Results would
generally improve with lower interest rates and fuel costs, and with higher
prices for energy, capacity, and ancillary services, except where we are subject
to fixed price agreements such as the provider of last resort contract. Our
operating results are also sensitive to the difference between inflation and
interest rates, and would generally improve when increases in inflation are
higher than increases in interest rates. We do not use derivative financial
instruments for speculative trading purposes.
As of March 31, 2001, we were party to four interest rate swap agreements
designed to fix the variable rate of interest on $350 million of the credit
facility of Orion Power New York, L.P. The weighted average fixed rate of
interest for the related swap agreements are approximately 7.0%. In addition, we
were party to four interest rate swap agreements designed to fix the variable
rate of interest on $600 million of the credit facility of Orion Power MidWest,
L.P. The weighted average fixed rate of interest for the related swap agreement
is approximately 7.42%. As of March 31, 2001, if we sustained a 100 point basis
change in interest rates for all variable rate debt, the change would have
affected net pretax income by $2.4 million.
As of March 31, 2001, the fair value of our financial instruments, except
for the fixed rate component of the Liberty Electric credit facility and the
senior notes, approximates their carrying value due to their short-term nature
or due to the fact the interest rate paid on the debt is variable. The carrying
amount of the senior notes and the fixed rate component of the Liberty Electric
credit facility as of March 31, 2001 was $505.8 million with fair value of
$579.7 million. The fair value was estimated using discounted cash flow
analysis, based on our incremental borrowing rate and the approximate carrying
value based on the quoted market prices for similar types of borrowing
arrangements.
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As of March 31, 2001, we had sold forward 1,292,800 total megawatt hours
for 2001-2002, which will produce a net margin of $54.0 million. We have entered
into these financial derivative contracts to hedge our exposure to the impact of
price fluctuations related to the forward price of power. We also enter into
derivative commodity instruments to hedge our exposure to the impact of price
fluctuations on gas and oil prices. The derivative instruments related to the
price of gas and oil do not qualify for hedge treatment under generally accepted
accounting principles. However, we believe they provide a strong economic hedge
of this risk.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the SEC staff released Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition," to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101 is
effective December 31, 2000. Adoption of SAB No. 101 will not have a material
impact on our current revenue recognition policies.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." This standard revises the methods
for accounting for securitizations and other transfers of financial assets and
collateral as outlined in SFAS No. 125, and requires certain additional
disclosures. We do not expect the adoption of this standard to have a material
effect on our financial position or results of operations.
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BUSINESS
GENERAL
We are a fast growing independent electric power generating company formed
in March 1998 to acquire, develop, own and operate power-generating facilities
in the newly deregulated wholesale markets throughout the United States and
Canada. Since our inception, we have invested nearly $4 billion in 81 power
plants currently in operation with a total capacity of 5,926 megawatts, with an
additional 5,000 megawatts in construction and various stages of development.
INDUSTRY OVERVIEW
DEREGULATION AND OPPORTUNITY
The United States electric power industry, including companies generating,
transmitting, distributing and retailing power, is undergoing significant change
driven in large part by the shift towards deregulation. This industry
historically has been characterized by vertically integrated electric utility
monopolies with the ability to sell electricity to a captive customer base.
Deregulation, however, has created the opportunity for consumer choice and a
substantial increase in competition. This competition has been implemented to
varying degrees on the wholesale level in the sale of electricity by generators,
marketers and others to utilities and other electric distributors, as well as on
the retail level in the sale of electricity to consumers.
The passage of the Energy Policy Act in 1992 significantly expanded the
opportunities available to exempt wholesale power generators like us. Under this
law, the Federal Energy Regulatory Commission, or FERC, has required owners and
operators of electric transmission facilities to give wholesale generators and
other wholesale market participants access to transmission lines on a
non-discriminatory basis. This right enables us, as well as other wholesale
generators, to sell the energy that we produce into competitive markets for
wholesale energy. The Energy Policy Act also created a new class of
generators -- exempt wholesale power generators -- that are not subject to
portions of the regulatory structure otherwise generally applicable to electric
utilities and their holding companies. FERC adopted, and the U.S. Court of
Appeals upheld, Order Nos. 888 and 889, providing for nondiscriminatory open-
access electric transmission services by public utilities, separate from
wholesale sales of electricity. This development has opened wholesale power
sales to additional competition. Certain aspects of Order No. 888 are being
reviewed by the Supreme Court of the United States and any reversal of that
order could make it more difficult or expensive to gain access to certain
markets. In December 1999, FERC issued Order No. 2000 encouraging transmission
owners to participate in Regional Transmission Organizations, or RTOs. FERC's
goal in encouraging participation in these organizations is to enhance wholesale
competition by addressing inefficiencies existing in the current administration
of the transmission grid. The proposed RTOs throughout the country are at
various stages of development. As of early 2001, new regulatory initiatives to
increase competition in the domestic power generation industry had been adopted
or were being considered at the federal level and by many states.
Certain states have adopted deregulation initiatives for the electric power
industry. As of March 2001, 25 states, including where we own or are
constructing generation facilities, such as Maryland, New York, Ohio,
Pennsylvania and West Virginia, have enacted some form of legislation or issued
comprehensive regulatory orders to restructure their electric power industries
in order to promote competition in the wholesale and/or retail sale of electric
power. Similar restructuring is being considered or studied in virtually every
other state.
While we do not own any generating assets in California, recent
developments in the California electric industry have had a significant impact
on the pace and direction of deregulation in other states. California
implemented deregulation in a manner that, combined with numerous
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other factors, resulted in high price spikes and the failure of the California
Power Exchange spot market. As a result, one of the major investor-owned
utilities filed for bankruptcy protection under Chapter 11 of the Bankruptcy
Code and another major investor-owned utility is at risk of insolvency. In
recent months, the Department of Energy has required generators to supply power
to California utilities, although it has ended that requirement. In light of
these developments, the federal government and many states are reevaluating
existing deregulation initiatives and may be slowing consideration of pending
initiatives until the California situation is understood and resolved.
Consumer demand for reliable power throughout the United States has been
increasing. The growing population in urban and developing areas of the country
requires additional power, as evidenced by electricity shortages, brownouts and
blackouts in portions of the country and very high peak prices for electricity
in the wholesale electric market. Additionally, many old power plants will need
to be replaced by environmentally cleaner, cheaper and more efficient sources of
power.
As a result of anticipated utility divestitures of generating facilities
associated with deregulation initiatives and the need to replace inefficient
generating facilities, we believe there exists a significant opportunity for
investment in the power generation industry. We are one of many companies
actively pursuing the opportunities created by this evolving industry. In our
case, we are doing so by seeking to acquire and develop a portfolio of
generating facilities in order to operate as a competitive electric generating
and wholesale supply company in a deregulated marketplace.
MARKET FUNDAMENTALS
Generally, electric generating facilities can be categorized into three
categories (baseload, intermediate and peaking) based on their operating
characteristics in the production of energy for the region they serve. The
various tiers of baseload, intermediate and peaking facilities serving a
particular area or region are often referred to as the "generation stack" for
that area or region. Our current facilities are weighted towards baseload and
intermediate units, though our assets include several peaking units near the top
of the generation dispatch stack in the New York City, Ohio and Pennsylvania
markets. The operating assets located in Ohio and Pennsylvania are predominately
baseload facilities.
In many areas, especially in large cities, the demand for electricity is
greater than the capacity of electric transmission lines to supply electricity
from outside regions. This creates a need for a power plant to be located within
the area, known as a load pocket. Load pockets that cover large regions may
themselves contain smaller load pockets. The existence of a load pocket may
require selected generating units inside the load pocket to produce electricity,
even though less costly sources of electricity may exist outside of the load
pocket. The construction of additional electric transmission facilities can
reduce or eliminate load pockets by increasing transmission capacity.
Additionally, the construction of generating units within a load pocket may
increase competition and may reduce market prices. Our assets currently serve
load pockets in Cleveland, New York City and Pittsburgh.
We look to acquire or develop generating facilities that are located in
load pockets because we believe these facilities will have a more stable revenue
stream, which reduces the seasonality of our business. The elimination of a load
pocket in which we own a generating facility through either the construction of
additional transmission or generating capacity could negatively impact our
business. In addition, restrictive rules governing market prices within a load
pocket could negatively impact our business.
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BUSINESS STRATEGY
Our strategy is to acquire and develop a portfolio of premier non-nuclear
generating facilities in deregulating markets in the United States and Canada
that provide electricity and related products for the regions in which they are
located, while seeking to maximize value for our stockholders. We believe that
by operating a carefully assembled portfolio of generating assets in a
cost-efficient manner and marketing our output to our customers with a
competitively priced bundled product that limits the amount of commodity price
risk, we will be able to compete effectively in the newly deregulated market for
wholesale electric power. We approach our business with financial discipline,
applying a rigorous and multi-faceted approach to valuing investment
opportunities. We also place a high priority on integrating acquired and newly
developed assets and related employees into our operations.
Based on the opportunities for investment in our industry, we believe we
will be able to grow our business rapidly and become one of the ten largest
power generators in the U.S. while maintaining strict financial control. We
attempt to have a significant market share in each region in which we choose to
compete, and believe we will become a prominent power generator in each of those
regions. Our strategy to build and operate this business includes the following
key elements:
Attract and Retain Talented, Entrepreneurial Employees. We believe that
the quality of our employees will be the most critical factor in our success. We
hire high quality employees from a variety of different backgrounds, including
in the wholesale and unregulated power industry, utility operations, financial
services and commodity trading, and offer them superior tools and training,
which we couple with substantial authority and responsibility. We strive to
align our employees' interests with those of our shareholders. We are committed
to a flat, non-hierarchical organization that offers our employees internal
growth opportunities. To achieve our growth targets, our employees must be
motivated to work together and focused on expanding our business. Meaningful
amounts of their expected compensation are tied to increasing stockholder value,
including incentive cash compensation and stock option plans. A substantial
number of our employees participate in our stock option program, and our
executive officers and employees own, either directly or indirectly through
stock options, own over 5% of our common stock on a fully diluted basis.
Assemble and Maintain a Competitive Portfolio of U.S. and Canadian
Generating Facilities. We employ a rigorous, multifaceted approach to our
investment opportunities. We believe that access to the complementary skill sets
of our key management members provides us with a significant competitive
advantage in successfully completing acquisition opportunities. As we grow our
asset base to meet the market opportunity, we will continue to focus on the
following:
- High Quality Facilities. In determining which generating facilities or
development projects to pursue, we focus on those properties or
portfolios that have a proven and successful operating history, have been
well-maintained, and have a long remaining anticipated useful life.
- Critical Locations. We target power generating facilities that are
critical to the functioning of the electric grid for the region that they
serve, such as our facilities serving capacity constrained areas in New
York City, Pittsburgh and certain parts of Ohio. These types of
generating facilities typically are located in or near large metropolitan
areas or in very rural areas.
- Low Cost Producers. We are interested in facilities that have relatively
low marginal costs of producing energy and related products and services.
These facilities are more likely to produce energy for economic reasons,
whether they operate in a bid-based market or a cost-based dispatch pool,
and, consequently, provide some protection against fluctuating wholesale
prices of energy. Low marginal production costs can result from a variety
of
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factors, including low cost fuel, efficiency in converting fuel into
energy, and low per unit operation and maintenance costs. Our
hydroelectric assets and our coal-fired assets are examples of this
latter type of generating facility.
- Fuel Diversity. We intend to continue assembling a portfolio of
facilities using a variety of fuel types in order to create a natural
hedge against some of the risks of fluctuating fuel prices. Our current
facilities illustrate this diversity, as they use fuel oil, natural gas,
coal and water to generate power. We do not expect to acquire
nuclear-powered generating facilities.
- Geographic Diversity. We intend to continue to target facilities serving
a variety of markets throughout North America. We evaluate acquisition
opportunities in a number of states. We compete in two different large
markets and serve multiple submarkets like New York City, eastern New
York, western New York, Pittsburgh and northern Ohio. Additionally, we
are currently constructing facilities in Philadelphia and West Virginia
and are in a late stage of development for a facility in Maryland. Our
goal is to continue to diversify into additional markets in the future.
Optimize Performance of Facilities. We are committed to optimizing the
performance of our facilities to meet the demands of a competitive market. We
will do so by improving the operating efficiency of our facilities, which
historically have been operated in a regulated environment that often did not
encourage cost efficiency. We increase our employees' authority and
responsibility by eliminating layers of management. We believe that this allows
us to increase productivity and operating efficiency to maximize profitability.
We also have opportunities to improve fuel procurement practices to lower
overall fuel costs and increase fuel quality.
Grow Through Redevelopment of Existing Facilities and Development of New
Facilities. We are focused on growing our business through the development and
construction of power generating facilities. We believe that there is
significant need for additional generating capacity throughout North America to
replace aging and inefficient facilities, as well as to satisfy increasing
demand. These new facilities may be created through the redevelopment of
existing assets or through development at new sites.
We are capitalizing on the existing infrastructure at our current plants by
expanding and modernizing certain generating units. The existing assets at these
sites allow us to build additional generating capacity at critical sites. New
power generation facilities are currently under construction at two sites and
under development at two additional sites. We expect to commence the
construction, siting and permitting of new power plants to meet the need to
provide efficient, low-cost energy and related products to areas of North
America where demand is projected to exceed the current power supply.
In pursuing this strategy, we intend to use our management and technical
knowledge, and expertise in finance, fuel, operations and power marketing, which
we believe provide us with a competitive advantage. We believe that we can
maximize the return on our investments in these new and existing facilities by
utilizing and building upon our current infrastructure and organization. Given
the early stages of development of some of these facilities, we may in the
future elect not to pursue these activities or we may not otherwise be able to
do so.
Build Strong Relationships with Local Customers. We seek to sell a
majority of our power under contracts of varying lengths. Therefore, we strive
to build strong relationships with the electric utilities, municipalities,
cooperatives and retail aggregators in the regions in which we generate energy,
including the companies that sell us our facilities. We believe that these
entities will continue to be the primary providers of electricity to retail
consumers in a deregulated environment, and that they will need products in
addition to energy, such as capacity, operating reserves, voltage support, and
automatic generation control, in order to reliably serve their customers' needs.
By providing these services, we believe that we can earn a better return than
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would be available by primarily selling commodity energy into the spot markets
as they develop. In order to facilitate the development of these relationships,
we will operate our facilities on a decentralized basis, using local management
with expertise in the local power markets.
As an initial step in building these relationships, we have entered into
transition contracts to sell energy and other products to Niagara Mohawk Power
Corporation and Duquesne Light Company, from whom we purchased assets. We
recently extended the period during which we will supply energy to Duquesne
Light Company until December 31, 2004. See "-- Orion Power MidWest,
L.P. -- Provider of Last Resort Contract." Additionally, we have agreed to
extend the energy sales contract with Niagara Mohawk Power Corporation through
September 2004. See "-- Orion Power New York, L.P. -- Hydroelectric Assets." We
also are seeking to enter into new relationships with other entities that
provide retail electric service.
Actively Manage Energy and Fuel Merchant Market Risk. We are focused on
maximizing the net margin of energy and related products while minimizing risk.
Our electric markets and fuels group actively markets output from and manages
fuel procurement for the facilities on a monthly, daily and real-time basis. We
operate a 24-hour, seven-day-per-week service desk to dispatch facilities,
manage our contractual positions and respond to operational issues on a
real-time basis.
We do not engage in speculative trading of electricity or fuel. A key
component to our risk management strategy is to sell a majority of our output
forward through long-term and short-term contracts and purchase in advance the
associated fuel to match the term of those sales. We believe that this approach
allows us to successfully manage electric and fuel commodity risk while
maximizing our profit margins.
2000 ACQUISITIONS OF FACILITIES
On April 28, 2000, we purchased seven generating plants located in Ohio and
Pennsylvania with a capacity of 2,614 megawatts from Duquesne Light Company. The
net purchase price for the assets was approximately $1.8 billion in cash. In
connection with this acquisition, we assumed approximately $24.4 million of
liabilities relating to employee benefits and environmental remediation and
assumed Duquesne Light Company's responsibility as provider of last resort for a
specified period.
On December 11, 2000, we purchased from Columbia Energy Group (now a
subsidiary of NiSource Inc.) all the outstanding stock of Columbia Electric
Corporation, a power generation company with natural-gas-fired projects in
various stages of construction or development. Columbia Electric had divested
its partial ownership interest in facilities already in operation prior to our
acquisition. The net purchase price for this acquisition was $209 million in
cash. In connection with this acquisition, we assumed a $334 million credit
facility, of which approximately $198 million was outstanding as of March 31,
2001. We also assumed from Columbia Energy Group construction contract and
tolling agreement guarantees of approximately $5 million and equity investment
obligations of approximately $41 million, all of which remained outstanding as
of March 31, 2001. As part of the Columbia Electric acquisition, we also assumed
a tolling agreement for the Liberty Electric Generating Station.
OPERATIONS
We operate our business on a decentralized basis. The majority of
day-to-day operating decisions are made by employees either at the facilities or
in our regional offices. This allows employees in our headquarters to focus on
those activities that benefit from economies of scale, that require
inter-regional coordination and that continue to grow our business.
We currently own 5,926 megawatts of generating capacity. We have
historically generated energy totaling over 20 million megawatt hours per year.
Capacity refers to the net tested,
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operational capability of a generating facility to produce energy in the summer.
The capacity of a particular facility will vary seasonally, typically as a
result of differences in ambient air temperature. As a result, capacity is
typically measured twice -- once for the summer and once for the winter. Our
portfolio utilizes four primary fuels: coal, natural gas, oil, and water. Many
of our facilities that burn natural gas have the ability to switch between
burning either natural gas or oil as the primary fuel type. No one fuel type
currently accounts for as much as 50% of our capacity.
CORPORATE OPERATIONS
Our corporate headquarters are located in Baltimore, Maryland. The
corporate office is focused on selected activities, including corporate
administration, accounting, financing, power sales, fuel procurement, asset
management, risk management and business development. As of December 31, 2000,
there were 54 employees located in the corporate office, including all of the
executive officers. We conduct our day-to-day operations by subsidiaries which
are wholly-owned either by us or by another one of our subsidiaries.
We centralize some aspects of asset management, risk management, power
sales, and fuel procurement, including information technology, payroll and human
resources. The combined power sales and fuel procurement group, which, as of
December 31, 2000, totaled 18 employees, focuses on optimizing the net margin
earned on sales of energy, capacity, and ancillary services after taking out the
cost of fuel and limiting the amount of risk in our activities. This group
concentrates solely on power sales and fuel procurement for our assets and is
not authorized by senior management to engage in speculative trading or
activities for unaffiliated third parties.
Our business development team, consisting of six people, focuses on
maximizing value and growing our business, both through new acquisitions and new
project development. Most of our corporate employees, including all of our
executive officers, are directly involved in our business development efforts.
We instituted a risk management committee to help monitor our business
activities. The committee meets at least once per month and has a broad mandate
to review all areas of our business, set policies for managing risk positions,
and direct management on appropriate actions to reduce our significant risks.
ORION POWER NEW YORK, L.P.
Facilities. Our regional operating company, Orion Power New York, L.P.,
which is headquartered outside Syracuse, New York manages our assets located in
New York State. Orion Power New York manages a total of 74 power generation
facilities of which 72 are currently operational. Total aggregate capacity of
these facilities is approximately 2,812 megawatts. The facilities consist of 70
hydroelectric facilities, of which 68 are active, three facilities located in
New York City and the Carr Street Generating Station in East Syracuse. In April
2000, we acquired three subsidiaries of Constellation Operating Services that,
pursuant to strategic alliance agreements, operated the assets located in New
York. As of December 31, 2000, Orion Power New York employed 383 people as
direct employees.
We have not owned these facilities for a substantial period of time, and
therefore, our historical financial and operating results do not provide a
longer term perspective on the operation of the assets located in New York.
Assets Located in New York City. We currently bid the energy produced by
the assets located in New York City into the energy and ancillary services
markets operated by the New York independent system operator (NY-ISO). Because
our assets located in New York City serve a transmission-constrained area, bids
for energy produced by these facilities are subject to market power mitigation
measures as implemented by the NY-ISO, in addition to the New York
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City capacity regulations. The market power mitigation measures provide that if
the energy bid price for our assets located in New York City exceeds the market
price at a specified location reference point outside New York City by 5% or
more, our bid price is replaced with an energy reference price that approximates
our cost of production. All units that are dispatched will then receive the
market clearing price. Due to the fact that our units are located in critical
areas in New York City and are often dispatched for uneconomic reasons, we
receive the greater of the market clearing price or the cost of production.
Hydroelectric Assets. We have sold all of the output of the hydroelectric
assets, including energy, capacity, and ancillary services, to Niagara Mohawk
Power Corporation on a bilateral basis through September 30, 2001. Under this
contract, we receive an annual fixed payment, totaling $71.8 million for the
period October 1999 through September 2000 and $73.6 million for the period
October 2000 through September 2001, and a variable payment of $20 per megawatt
hour for all generation above approximately 2.2 million megawatt hours. The
actual targets are set on a quarterly basis to reflect the seasonal fluctuations
in energy production from our hydroelectric assets, and payments are made
monthly. If we fail to meet the minimum generation threshold, we are obligated
to pay penalties to Niagara Mohawk. The 2.2 million megawatt hour target is
approximately 78% of the average generation for the units over the last ten
years. Generation at hydroelectric facilities, however, varies based on
precipitation. We recently entered into a three year agreement to extend our
supply agreement with Niagara Mohawk Power Corporation from October 2001 through
September 2004. There are no penalties for under-delivery in the extended
contract. This extension is pending New York Public Service Commission approval.
Carr Street. We have entered into a gas tolling agreement with
Constellation Power Source covering the Carr Street Generating Station, which
continues until 2003. Under this agreement, Constellation Power Source has the
exclusive right to all energy, capacity and ancillary services produced by the
plant. Constellation Power Source pays for, and is responsible for, all fuel
used by the plant during the term of the gas tolling agreement. We are currently
paid approximately $3.6 million per annum as a fixed fee and $3.15 per megawatt
hour generated, both of which escalate by approximately 2.5% per annum. We have
guaranteed certain aspects of the plant's operating performance and failure to
meet these guarantees could result in penalties.
ORION POWER MIDWEST, L.P.
Facilities. Our regional operating company, Orion Power MidWest, L.P.,
which is headquartered near Pittsburgh, Pennsylvania, manages our assets located
in Ohio, Pennsylvania and West Virginia. The assets consist of seven power
generating facilities, six of which are active, located in western Pennsylvania
and Ohio, and one generating facility, the Ceredo Electric Generating Station in
West Virginia, which we acquired from Columbia Energy Group in December 2000.
The remaining seven facilities were acquired from Duquesne Light Company in
April 2000, three of which Duquesne had recently acquired in an asset swap with
FirstEnergy Corp. The other four (including the retired facility) have
historically been owned and operated by Duquesne Light Company. The operating
facilities have a total aggregate capacity of approximately 3,114 megawatts,
with five facilities using coal as their primary fuel source, one facility using
oil and one facility using natural gas. The majority of the coal units operate
as baseload units because of their low production costs per megawatt hour. In
addition, in connection with the Duquesne acquisition we entered into the
provider of last resort contract with Duquesne Light Company. As of December 31,
2000, Orion Power MidWest, L.P. employed 452 people in the direct operation of
the eight facilities managed.
We have not owned these facilities for a substantial period of time, and
therefore, our historical financial and operating results do not provide a
longer term perspective on the operation of these assets.
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Provider of Last Resort Contract. As part of our acquisition of seven
facilities located in Ohio and western Pennsylvania in April 2000, we entered
into the provider of last resort contract with Duquesne Light Company. Under the
contract, we are obligated for a specific period to provide energy to Duquesne
Light Company to meet its obligations to satisfy the demands of any customer in
the Duquesne Light Company service area that does not elect to buy energy from a
competitive supplier as allowed by the Pennsylvania state deregulatory
initiatives or that elects to return to Duquesne Light Company as the designated
provider of last resort. Under this contract, we must provide all of the energy
necessary to meet the contractual requirements with no minimum and no maximum
quantity and Duquesne Light Company must buy all of the energy needed to satisfy
its provider of last resort obligation from us.
The provider of last resort contract is a wholesale contract between us and
Duquesne Light Company, and we have no responsibility for selling energy
directly to the related retail customers, nor are we obligated to provide
capacity. Therefore, we have no involvement in billing retail customers or
collecting amounts owed by retail customers.
The Duquesne Light Company service area covers approximately 580,000 retail
customers. According to information provided by Duquesne Light Company, the peak
demand for the Duquesne Light Company control area was approximately 2,673
megawatts, and the total amount of electricity consumed was approximately
14,103,000 megawatt hours in 2000. As of December 31, 2000, approximately 79% of
the customers in the Duquesne Light Company control area, as measured by energy
consumption, received energy from Duquesne Light Company as the provider of last
resort. The peak provider of last resort load was approximately 2,335 megawatts
for 2000. The total amount of electricity consumed by provider of last resort
customers was approximately 10,811,387 megawatt hours for 2000.
Under the provider of last resort contract, the prices we receive are a
specified portion of Duquesne Light Company's current retail rates, which have
been approved by the Pennsylvania Public Utility Commission. Our average gross
selling price was approximately $40 per megawatt hour for 2000. From this
amount, Duquesne Light Company deducts the Pennsylvania gross receipts tax of
4.4%, $1 per megawatt hour for ancillary services that Duquesne Light Company
procures from another party and transmission line losses. Based on recent
historical patterns of usage for each of Duquesne Light Company's rate classes,
we expect our average gross selling price in 2001 will be almost $41 per
megawatt hour.
The provider of last resort contract continues in effect for each rate
class until the amount of Duquesne Light Company's stranded costs allocated to
that rate class have been recovered through the surcharge being added to each
customer's monthly bill. For two rate classes, all stranded costs have already
been recovered, and therefore the provider of last resort obligation is
satisfied for these rate classes. The remaining rate classes are projected to
complete stranded cost recovery between 2001 and 2003, with most rate classes
expected to have completed stranded cost recovery before the summer of 2002.
Accordingly, we expect the majority of the original provider of last resort
contract obligations to end during early 2002.
We have reached agreement with Duquesne Light Company, which was approved
by FERC, to extend the provider of last resort contract until December 31, 2004
and to amend the price and certain other terms. The new agreement will become
effective for each Duquesne Light Company retail customer class as that class
comes off the retail tariff that relates to the existing contract, which, based
on historic patterns, should occur in early 2002. The extension differs from the
existing tariff and contract in certain respects, including:
- The penalty for failure to deliver energy will be reduced from $1,000 to
$100 per megawatt hour under most circumstances where Duquesne Light
Company is required to reduce power provided to consumers;
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- We will be paid rates that are approximately nine percent higher per
megawatt hour, although the actual increase depends on actual demand in
each rate class;
- We will be responsible for only a pro rata share of transmission line
losses in the Duquesne Light Company control area, together with the
other electric generation suppliers operating in the area, instead of
being responsible for all transmission line losses as the existing
contract provides; and
- A customer switching rule has been added, retroactive to January 1, 2000,
that will reduce our risks associated with unintended abuses related to
customers' right to switch service providers.
We or Duquesne Light Company have the right to terminate the extension
period in the event Duquesne Light Company enters into an agreement to join a
market such as PJM-West or FirstEnergy, in whose control area our Ohio
facilities are located, joins the Alliance Regional Transmission Organization
and such event results in policies that differ or are likely to differ from the
terms of our contract with Duquesne Light Company and would materially affect
either party.
Given the expected demand for energy from provider of last resort customers
and the historic energy generation from our assets located in Ohio and
Pennsylvania and our peaking power plant under construction in West Virginia, we
generally expect to produce more energy than needed to meet our provider of last
resort obligations. We will attempt to sell this excess energy into the market
and will receive the prevailing market price at the time. The provider of last
resort demand, however, will fluctuate on a continuous, real-time basis, and
will likely peak during summer and winter, on weekdays, and during some hours of
the day. This could cause the provider of last resort demand to be greater than
the amount of energy we are able to generate at any given moment from the plants
we acquired from Duquesne Light Company or from our Ceredo Electric Generating
Station. As a result, we may need to purchase energy from the market to cover
our contractual obligations. This is likely to occur at times of higher market
prices, although the price we receive will be determined as described above and
will not fluctuate with the market. This situation could also arise or worsen if
we have operational problems at one or more of our generating facilities that
reduce their ability to produce energy. Failure to provide sufficient energy
could give rise to penalties under the contracts. A severe under-delivery of
energy that forces Duquesne Light Company to deny some customers energy could
give rise to penalties of $1,000 per megawatt hour under the initial provider of
last resort contract or $100 per megawatt hour under the extension. This risk
should diminish as the number of rate classes eligible for provider of last
resort service is reduced.
ORION POWER DEVELOPMENT COMPANY, INC.
Orion Power Development Company, Inc., which is based in Baltimore,
Maryland, manages our assets under development and construction. Our development
company's primary objective will be to grow our portfolio of generating assets
in a timely manner by developing efficient generating facilities in strategic
locations that can provide wholesale customers with reliable, low-cost
electricity and related products and services. Our development team has
extensive experience in business development, power plant siting, system design,
equipment procurement, construction management, economic analysis and risk
management. Our development team seeks to identify attractive market
opportunities and transmission constrained areas and then pursues a structured
approach tailored to the needs of the specific markets. Our development team
works closely with all members of the Orion Power team to execute our overall
growth strategy.
With the exception of the Ceredo Electric Generating Station in Ceredo,
West Virginia, which will be owned and managed by Orion Power MidWest, L.P., the
facilities which we purchased from Columbia Energy Group in December 2000 will
be owned and managed through Orion Power Development Company, Inc.
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CONSTRUCTION AND DEVELOPMENT
A primary facet of our strategy is to continue to grow by developing
additional capacity at our facilities by repowering or adding units at existing
facilities and by building new facilities throughout the U.S. and Canada.
For example, in 2000, we restored a unit at the Astoria Generating Station
in New York City that was shut down by the prior owner in 1993. We have been
granted the right to operate this unit for up to three years in order to
increase capacity in New York City and enhance electric reliability. The
restored unit is capable of producing approximately 175 megawatts of energy.
We currently have two projects that are under construction:
- Liberty Electric Generating Station, located south of Philadelphia,
Pennsylvania, is a 568 megawatt, natural gas fired facility under
construction, which will consist of two General Electric model 7FA class
combustion turbine-generators supplying steam to a single Toshiba steam
turbine-generator. The output of this facility is contracted under a
tolling agreement for a term of approximately 14 years. Under this
agreement, the counterparty will have the exclusive right to receive all
energy, capacity and ancillary services produced by the plant. The
counterparty will pay for, and be responsible for, all fuel used by the
plant under the tolling agreement. This facility is scheduled for
completion in April 2002.
- Brunot Island Generating Station, located near downtown Pittsburgh,
Pennsylvania, is currently a 234 megawatt peaking facility. We have begun
the conversion of many of the existing simple cycle, oil fired units on
site back to their original combined cycle operation and the upgrade of
the on-site natural gas pipeline to allow for natural gas to become the
primary fuel source. We will also upgrade environmental control equipment
to reduce our air emissions. Our objective is to increase capacity at
Brunot Island by 140 megawatts and significantly reduce production costs.
This project is scheduled for final completion by the summer of 2002.
We are currently pursuing a number of development opportunities:
- Astoria Generating Station is in the engineering design and permitting
phase of modernizing two of three large power generation units. As
currently envisioned, we intend to install new natural gas fired
combustion turbines to repower the units and to retire the third unit,
resulting in an increase in total capacity of approximately 585
megawatts. In addition to increasing Astoria's total capacity to
approximately 1,850 megawatts, this project would significantly lower air
emissions from the plant's current levels and lower our cost of producing
energy, making the Astoria plant even more competitive in the New York
City and New York State energy markets. We believe that the permit,
design and development process in New York could take up to two more
years to complete before we can begin construction. We currently believe
that the first phase of this project represents approximately 385
megawatts of additional capacity and is expected to be in service by the
summer of 2004. The second phase of the modernization is scheduled to be
in service in 2005.
- Kelson Ridge Generating Station, to be located in Waldorf, Maryland
serving both Washington, DC and Baltimore, Maryland, will be a 1,650
megawatt gas fired facility which we expect will be constructed in two
phases. We expect the initial phase to be completed in two stages of 550
megawatts each in 2003 and 2004. The facility will be comprised of three
550 megawatt blocks, each consisting of two combustion turbine units, two
heat steam recovery generation units and a steam generator. The output
will likely be committed under a contract and/or made available for the
PJM wholesale merchant energy market.
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- Henderson Generating Station, to be located in Henderson County,
Kentucky, will be designed as a 500 megawatt gas fired, simple cycle
peaking plant. We expect to construct this facility in two phases of 250
megawatts. Henderson is expected to meet the demand for electric power
during times of peak usage in the ECAR region.
- We have plans over the long-term to develop additional power plants at
both the Avon Lake and the Niles locations. Preliminary plans project
from 550 to 1,100 megawatts of additional capacity at Avon Lake depending
on forecast market conditions and up to 550 megawatts of additional
capacity at Niles, which may include the shutdown of some existing older,
coal-fired capacity. We are currently evaluating the costs and benefits
of repowering with clean-coal technology compared to natural gas as the
primary fuel for these projects.
Given the early stage of all of the aforementioned projects, we may elect
not to pursue these activities or we may otherwise not be able to do so.
In September 2000, we entered into a letter of intent for the delivery over
the next four years of 10 combustion turbine generators from Siemens
Westinghouse Power Corporation as part of our development efforts. The total
purchase price is substantially payable at various times in 2003 and 2004. We
paid a deposit of $5 million in each of the third quarter of 2000 and the first
quarter of 2001. Furthermore, as part of our acquisition of Columbia Electric
Corporation, we acquired the rights to the eight turbine generators to be
delivered by GE Power Systems, which are being installed in the projects under
construction.
Additionally, we entered into letters of intent to purchase combustion
turbines, heat recovery steam generators and steam turbines from Siemens
Westinghouse Power Corporation in connection with the Kelson Ridge development
project. We paid $8 million in the first quarter of 2001 and expect to pay
approximately $281 million in total.
The following table outlines our projects currently in construction and
under development:
UNDER CONSTRUCTION
CURRENTLY
PLANNED TARGETED
CAPACITY OPERATION
FACILITY (MW) PRIMARY FUEL TYPE LOCATION SERVED DATE
-------- -------- ----------------- --------------- ---------
Brunot Island
Repowering 140 Natural Gas Pittsburgh, PA mid-2002
Liberty 568 Natural Gas Philadelphia, PA mid-2002
-----
TOTAL UNDER
CONSTRUCTION 708
-----
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UNDER DEVELOPMENT
CURRENTLY
PLANNED TARGETED
CAPACITY OPERATION
FACILITY (MW) PRIMARY FUEL TYPE LOCATION SERVED DATE
-------- -------- ----------------- --------------- ---------
Astoria Repowering
Phase 1 385 Natural Gas New York, NY 2004
Phase 2 200 Natural Gas New York, NY 2005
Henderson
Phase 1 250 Natural Gas Henderson County, KY 2004
Future Phases 250 Natural Gas Henderson County, KY TBD
Kelson Ridge
Phase 1 1,100 Natural Gas Charles County, MD 2003-2004
Phase 2 550 Natural Gas Charles County, MD 2005
Avon Lake Repowering
Phase 1 550 Evaluating (Coal or Natural Gas) Cleveland, OH TBD
Future Phases 550 Evaluating (Coal or Natural Gas) Cleveland, OH TBD
Niles 550 Evaluating (Coal or Natural Gas) Youngstown, OH TBD
-----
TOTAL UNDER
DEVELOPMENT 4,385
-----
TOTAL PROJECTS
ANNOUNCED 5,093
=====
The actual commercial operation dates of these facilities will be dependent
on various factors, including timely delivery of and performance of the
turbines, transformers and other major equipment, timely construction of the gas
and electric interconnection lines and any unusual conditions at the sites or
otherwise which may impact construction, and we cannot assure you that these
facilities will operate as scheduled.
RECENT MARKET DEVELOPMENTS
New York Market Framework. The New York wholesale energy market has
recently been reorganized, with the NY-ISO taking over responsibility for daily
operation of the transmission system and the administration of bid-based markets
for energy, capacity, and ancillary services. The day-ahead and real-time energy
and ancillary services markets started on November 18, 1999. The capacity market
began with an auction in early April 2000 for the summer 2000 six-month capacity
period.
Under the NY-ISO, generators like us are able to sell energy to any
wholesale customer in the state. These sales may be done under bilateral
contracts, in which pricing and other provisions are determined through private
negotiation, or by bidding into the day-ahead and real-time energy and ancillary
services markets. The NY-ISO has only recently been formed, and the markets it
operates are new. The NY-ISO has experienced problems in administering New
York's competitive wholesale energy markets since its inception. As a result,
some parties involved in New York's wholesale market and certain members of the
NY-ISO have asked that the NY-ISO and, in some instances, FERC review the
structure of the wholesale market. Consequently, the NY-ISO is in the process of
reviewing and revising market rules and the implementation of its software. This
process has created some uncertainty for future market conditions in New York.
There can be no assurance that changes to New York's competitive wholesale
energy markets
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will not adversely affect our operations. The NY-ISO has the ability to revise
prices, which could lead to delayed or disputed collection of amounts due to us
for sales of energy and ancillary services. The NY-ISO also has the ability, in
some cases subject to FERC approval, to impose cost-based pricing and/or price
caps.
The NY-ISO applied to FERC to impose a cost-based price with respect to the
ten minute spinning reserve and ten minute non-spinning reserve markets. FERC
granted the NY-ISO's request with respect to the ten-minute non-spinning reserve
market. In July 2000, FERC imposed a bid cap of $1,000 per megawatt hour to be
consistent with the independent system operators in the Mid-Atlantic and New
England. This cap was in place through April 2001, and parties have requested
extensions of the cap. Other independent system operators have suggested various
forms of cost-based bidding for energy and related services.
The NY-ISO recently announced it will implement a measure known as the
"Automated Mitigation Procedure" under which day-ahead energy bids will be
automatically reviewed and, if necessary, mitigated if economic or physical
withholding is determined by the summer of 2001. A number of changes have
recently been proposed for the New York wholesale market, which could be in
place as early as the summer of 2001. These include the following:
- A number of programs that will allow energy demand, commonly referred to
as "load", to respond to high prices in emergency and non-emergency
situations. The lack of load-responsive programs has been cited as one of
the major reasons for retaining bid caps.
- The New York Public Service Commission has announced that it will request
that FERC lower the $1,000 bid cap on a regional basis.
The NY-ISO has established a capacity market, beginning with the summer
2000 capacity season, to ensure that there is enough generation capacity to meet
retail energy demand and ancillary services requirements. All power retailers
are required to demonstrate commitments for capacity sufficient to meet their
peak forecasted load plus a reserve requirement, currently set at 18%. As an
extra reliability measure, power retailers located in New York City are required
to procure the majority of this capacity (currently 80% of their peak forecasted
load) from generating units located in New York City. Since New York City is
currently short of this capacity requirement and the existing capacity is owned
by only a few entities, a price cap of $105 per kilowatt year has been
instituted for in-city generators. In 2000, in two separate auctions, we sold an
average of 1,983 megawatts at the price cap of $105 per kilowatt year.
Additionally, for the 2001 summer capacity period, we sold 2,060 megawatts at a
price that approximates the price cap. This price cap and other rules relating
to the capacity market may be reviewed by regulatory agencies from time to time
and may change.
Midwest Market Framework. The assets managed by Orion Power MidWest, L.P.
are located in an operating region known as the East Central Area Reliability
Council, more commonly referred to as the ECAR region. The ECAR region covers
part or all of the following states: Indiana, Kentucky, Maryland, Michigan,
Ohio, Pennsylvania, Virginia and West Virginia. There is no ISO or similar
entity in place for the entire ECAR region, although the utilities in the region
are proposing at least three plans for an independent system operator and/or a
regional transmission operator. The ECAR market is characterized by substantial
costs for transmitting power from one location to another, because each
independent utility charges a tariff to use its transmission facilities.
Therefore, moving power across multiple control areas becomes expensive and may
become difficult or impossible at times of maximum demand.
The current market in the ECAR region is relatively illiquid and is
dominated by private bilateral contracts between parties. Notwithstanding the
general lack of liquidity, markets do exist for several areas within the ECAR
region. The ECAR region also lacks a specific capacity market and well-developed
markets for ancillary services.
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Given the competing proposals currently under consideration and the many
divergent interests which exist in the ECAR region, we expect that any adoption
of ISOs or similar entities will be gradual. Some entities, including Duquesne
Light Company, have considered joining the PJM-West market, a newly created
wholesale market that would cover the western portion of the Mid-Atlantic region
as early as December 2001. If Duquesne Light Company, our primary customer in
the ECAR Region, joins the PJM-West market, we may enter the newly created
wholesale market as well. FirstEnergy Corp., a utility in whose control area our
Ohio plants are located, has proposed to join the Alliance Regional Transmission
Organization. We are unable to determine what impact, if any, joining these
markets would have on our business or financial prospects.
REGULATION
We are subject to complex and stringent energy, environmental, and other
governmental laws and regulations at the federal, state, and local levels in
connection with the development, ownership, and operation of our electric
generation facilities. The federal and state energy laws and regulations create
burdens and risks for our operations, as well as opportunities for further
acquisitions of facilities at attractive prices.
FEDERAL ENERGY REGULATION
The Federal Energy Regulatory Commission, or FERC, is an independent agency
within the Department of Energy that regulates the transmission and wholesale
sale of electricity in interstate commerce under the authority of the Federal
Power Act. FERC is also responsible for licensing and inspecting private,
municipal and state-owned hydroelectric projects. FERC determines whether a
public utility qualifies for exempt wholesale generator status under the Public
Utility Holding Company Act, which was amended by the Energy Policy Act of 1992.
Federal Power Act. The Federal Power Act gives FERC exclusive rate-making
jurisdiction over wholesale sales of electricity and transmission of electricity
in interstate commerce. FERC regulates the owners of facilities used for the
wholesale sale of electricity and its transmission in interstate commerce as
"public utilities" under the Federal Power Act. The Federal Power Act also gives
FERC jurisdiction to review certain transactions and numerous other activities
of public utilities.
Under the Federal Power Act, an entity that sells electricity at wholesale
is a public utility, subject to FERC's jurisdiction. Public utilities are
required to obtain FERC's acceptance of their rate schedules for wholesale sales
of electricity. Because we are selling electricity in the wholesale market, we
are deemed to be a public utility for purposes of the Federal Power Act. In most
cases, FERC does not actively regulate the rates for facilities operated by
wholesale generating companies like ours. Accordingly, FERC has granted
market-based rate authority for the Carr Street facility, our hydroelectric
assets, our assets located in Ohio and Pennsylvania and, subject to various
market power mitigation measures, our assets located in New York City.
Market-based rate authority enables us to price based upon market conditions
rather than upon our costs.
Usually, FERC's orders which grant us market-based rate authority, reserve
the right to revoke or revise our market-based rate authority on a prospective
basis if FERC subsequently determines that we possess excessive market power. If
we lost our market-based rate authority or if significant new mitigation rules
were adopted, we may be required to obtain FERC's acceptance of a
cost-of-service rate schedule and may become subject to the accounting,
record-keeping and reporting requirements that are imposed only on utilities
with cost-based rate schedules. When FERC considers our request for market-based
rate authority in connection with a new acquisition or development project, it
may include generation owned or controlled by our stockholders in determining
whether we possess market power.
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FERC also regulates the rates, terms, and conditions for electricity
transmission in interstate commerce. Tariffs established under FERC regulation
give us access to transmission lines, which enable us to sell the energy we
produce into competitive markets for wholesale energy.
In April 1996, FERC issued an order requiring all public utilities to file
"open access" transmission tariffs that give wholesale generators, as well as
other wholesale sellers and buyers of electricity, access to transmission
facilities on a non-discriminatory basis. This order is being reviewed by the
Supreme Court of the United States. All utilities filed open access tariffs.
Some utilities are seeking permission from FERC to recover costs associated with
stranded investments through add-ons to their transmission rates. To the extent
that FERC permits these charges, the cost of transmission may be too high on
some systems to be of practical use to wholesale sellers like us.
FERC is also encouraging the voluntary restructuring of transmission
operations through the use of independent system operators and regional
transmission groups. The result of establishing these entities typically is to
eliminate or reduce transmission charges imposed by successive transmission
systems. The full effect of these changes on us is uncertain at this time, in
part, because it has not been determined which of these entities will control
the transmission systems connected to certain of our generating facilities.
The Federal Power Act also gives FERC exclusive authority to license
non-federal hydroelectric projects on navigable waterways and federal lands.
FERC hydroelectric licenses are issued for 30 to 50 years. The hydroelectric
assets are licensed by FERC from 2004 through 2036. Individual hydroelectric
facilities, representing approximately 90 megawatts of capacity, have licenses
that expire over the next ten years. Facilities representing approximately 160
megawatts of capacity have new or initial license applications pending before
FERC. Upon expiration of a FERC license, the federal government can take over
the project and compensate the licensee, or FERC can issue a new license to
either the existing licensee or a new licensee. In addition, upon license
expiration, FERC can decommission an operating project and even order that it be
removed from the river at the owner's expense. In deciding whether to issue a
license, FERC gives equal consideration to a full range of licensing purposes
related to the potential value of a stream or river. It is not uncommon for the
relicensing process to take between four and ten years to complete. Generally,
the relicensing process begins at least five years before the license expiration
date and FERC issues annual licenses to permit a hydroelectric facility to
continue operations pending conclusion of the relicensing process. We expect
that FERC will issue us new or initial hydroelectric licenses for all the
facilities with pending applications. Presently, there are no applications for
competing licenses and there is no indication that FERC will decommission or
order any of the projects to be removed.
Nonetheless, there remains the possibility that FERC will not issue new or
initial licenses for our projects, which could have a material adverse effect on
our operations and revenue. In addition, several interested parties have
intervened or are likely to intervene in our licensing proceedings. These
interested parties may be able to impose conditions and affirmative obligations
on our hydropower operations, which could add significant costs to our
operations or reduce revenues. In the past, FERC has issued licenses with
conditions that have rendered the operation of the relevant projects uneconomic.
Therefore, there is no guarantee that the hydroelectric licenses issued by FERC
will permit us to operate the projects profitably. Finally, the relicensing
process itself is costly, time consuming, and could affect adversely our
hydroelectric revenues.
The remainder of our hydroelectric assets have licenses that expire over an
approximate 30 year period, are exempt from licensing because they are small
facilities with five megawatts or less or are not within FERC's jurisdiction
because they are not located on navigable waterways or federal land. Many of the
existing licenses contain conditions that have one or more operational
constraints, including restricting energy production, impacting the time of year
or day
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in which generation occurs, raising operating costs, and requiring certain
minimum river flow releases, which directly affect our ability to generate
energy.
Public Utility Holding Company Act. The Public Utility Holding Company
Act, known as PUHCA, provides that any entity that owns, controls or has the
power to vote 10% or more of the outstanding voting securities of an "electric
utility company," or a holding company for an electric utility company, is
subject to regulation under the Holding Company Act.
Registered holding companies under the Holding Company Act are required to
limit their utility operations to a single, integrated utility system and divest
any other operations that are not functionally related to the operation of the
utility system. In addition, a company that is a subsidiary of a holding company
registered under the Holding Company Act is subject to financial and
organizational regulation, including approval by the SEC of certain financings
and transactions. Under the Energy Policy Act of 1992, however, FERC can
determine that a company engaged exclusively in the business of owning or
operating an eligible facility used for the generation of electric energy for
sale at wholesale is an "exempt wholesale generator." Accordingly, it is exempt
from the Holding Company Act requirements. In the case of facilities previously
operated by regulated utilities, FERC can make an exempt wholesale generator
determination only after the state utility commission finds that allowing the
facility or facilities to be eligible for exempt wholesale generator status will
benefit consumers, is in the public interest, and does not violate state law.
Each of our operating subsidiaries has been designated by FERC as an exempt
wholesale generator.
We do not expect to engage in any activities that will subject us to
regulation under PUHCA. In addition, our certificate of incorporation prohibits
us from engaging in any activities that will subject us to regulation under the
PUHCA without the consent of Goldman, Sachs & Co. until Goldman, Sachs & Co. and
its affiliates own less than 5% of our outstanding common stock. If we were to
lose our exempt wholesale generator status, we would become subject to
regulation under the Holding Company Act. It would be difficult for us to comply
with the Holding Company Act absent a substantial restructuring.
STATE ENERGY REGULATION
At the state level, public utility commissions are responsible for
approving rates and other terms and conditions under which public utilities
purchase electric power from independent producers and sell retail electric
power to consumers. In addition, most state laws require approval from the state
commission before an electric utility operating in the state may divest or
transfer electric generation facilities. These laws also give the commissions
authority to regulate the financial activities of electric utilities selling
electricity to consumers in their states.
State public utility commissions have authority to promulgate regulations
for implementing some federal laws. Power sales agreements, which we enter into,
are also potentially subject to review by state public utility commissions. In
particular, the state public utility commissions review the process by which the
utility has entered into power sales agreements. States may also assert
jurisdiction over the siting, construction, and operation of our facilities, as
well as the issuance of securities and the sale or other transfer of assets.
New York. In 1996, the New York Public Service Commission began
proceedings to introduce retail competition in New York State. These
initiatives, in conjunction with FERC's "open access" rules, led to the
formation of an ISO responsible for centralized control and operation of the
state-wide electric transmission grid. They also led to a spot market and a
related competitive electric energy auction. This auction is open on a
non-discriminatory basis to all electric service providers. Other aspects of New
York's restructuring plan include market power mitigation through utility
divestiture of fossil fuel generation plants, the unbundling and establishment
of separate rates for historic utility functions, and market mitigation measures
at the wholesale level.
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Under the New York Public Service Law, the New York Public Service
Commission has jurisdiction over corporations engaged in the production of
electricity and transfers of electric generation facilities located in the
State. The New York Public Service Commission reviewed and approved each of our
transactions to acquire our assets located in New York, and made the necessary
findings to permit us to seek exempt wholesale generator status from FERC.
Moreover, while the NY-ISO is an independent entity, it is considered an
"electric corporation" subject to the New York Public Service Law.
In addition, the New York Public Service Commission has determined that
certain requirements of the Public Service Law apply to new forms of electric
service providers, which differ from traditional electric utilities. As a
result, even though we do not engage in the sale of electricity at retail in New
York State, our assets located in New York are subject to "lightened regulation"
by the New York Public Service Commission. Under the lightened regulation
regime, our assets located in New York are subject to provisions of the Public
Service Law that relate to enforcement, investigation, safety, reliability,
system improvements, construction, excavation, and the issuance of securities.
The provisions relating to the issuance of securities apply to our subsidiaries
that operate our assets located in New York, but not to a holding company such
as Orion Power Holdings.
Pennsylvania. In December 1996, Pennsylvania adopted the Electricity
Generation Customer Choice and Competition Act, which is now part of the Public
Utility Code. The Act is a comprehensive restructuring plan that allows direct
access to be phased in over a three-year period beginning January 1, 1999 and
culminating in full retail choice by January 1, 2001. Under this plan, one-third
of each customer class will be eligible for direct access each year.
Pennsylvania opened its retail electric market to competition on January 1,
1999. The Act required each utility to submit its restructuring plan to the
Pennsylvania Public Utility Commission for approval. The Pennsylvania Public
Utility Commission is authorized to permit, but may not require, utilities to
divest their generation assets.
In addition, the Pennsylvania restructuring plan authorizes utilities to
implement a non-bypassable Competitive Transition Charge to collect stranded
costs, subject to approval by the Pennsylvania Public Utility Commission, and
permits securitization of stranded costs.
The Pennsylvania Public Utility Code also requires that the Pennsylvania
Public Utility Commission approve any transfers or acquisitions of property
"used or useful in public service." The Pennsylvania Public Utility Commission
approved the transaction between Duquesne Light Company and Orion Power MidWest.
Unlike New York, however, Pennsylvania does not have a regulatory regime for
wholesale generators in the state. Therefore, we do not expect to be subject to
regulation by the Pennsylvania Public Utility Commission. However, if we do
become subject to regulation by the Pennsylvania Public Utility Commission,
additional costs may be imposed on the operations of our assets located in Ohio
and Pennsylvania.
Ohio. The Ohio legislature passed a statute in 1999 providing for
implementation of retail competition beginning in 2001. The statute delegated to
the Ohio Public Utilities Commission the responsibility for developing certain
restructuring rules, including rules relating to market monitoring, stranded
cost recovery, and consumer protection. The Ohio Public Utilities Commission
proceedings are in a very early stage, and we cannot predict what effect they
will have on us. Similar to the case with Pennsylvania, we do not expect to be
subject to regulation by the commission. If we do become subject to regulation
by the Ohio Public Utilities Commission, however, additional costs may be
imposed on the operations of our assets located in Ohio and Pennsylvania.
West Virginia. In 1998, the West Virginia Legislature enacted HB 4277,
which authorized the Public Service Commission to consider whether restructuring
was in the public interest and, if so, to submit a restructuring plan for
Legislative approval. In January 2000, the Commission issued
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an order finding restructuring in the public interest and submitting a long-term
plan for transition to competitive power supply markets and consumer choice.
During the 2000 legislative session, the West Virginia Legislature approved
the Commission's plan. However, the plan cannot be implemented until the
Legislature passes tax measures included in the restructuring plan. In late
2000, the Legislature decided to delay consideration of the tax changes that
were necessary before the restructuring plan could be implemented. Consideration
of the tax measures was delayed to give the Legislature the opportunity to seek
an independent review of the differences between the proposed restructured
markets in West Virginia and those that are experiencing difficulty in other
regions of the United States. It is anticipated that the Legislature and the
Governor will await independent evaluations of the Commission's proposed plan
before proceeding to implement deregulation and the development of competitive
power supply markets in West Virginia.
Maryland. In April 1999, Maryland's Governor signed the Electric Customer
Choice and Competition Act into law. This law established the legal framework
for the restructuring and deregulation of the electric utility industry in
Maryland. The Act deregulates the generation, supply, and pricing of electricity
and provides that retail electric choice will be fully available to all
customers by July 2002. As a consequence of restructuring, the Maryland Public
Service Commission no longer has statutory responsibility for the oversight of
generation facilities, but will continue its ongoing review of the maintenance
and operation of electric utility transmission and distribution facilities in
the State. Since the Act removes generation from the Maryland Public Service
Commission's jurisdiction, our Maryland generating assets will not be subject to
regulation by the Maryland Commission. If we do become subject to regulation by
the Maryland Commission, additional costs may be imposed on the operations of
our assets located in Maryland.
Kentucky. In 1998, the Kentucky Legislature passed legislation creating
the Kentucky Electricity Restructuring Task Force. In December 1999, the Task
Force issued its Findings and Recommendations under its initial authorization.
These findings are also found in the Final Report Special Task Force on
Electricity Restructuring, issued in September 2000. The first finding was that
there was no compelling reason to move quickly towards restructuring in
Kentucky. The Task Force based this finding on a number of facts, including
Kentucky's current low electricity rates and the possibility that Congress will
pass a nationwide restructuring bill. The Task Force advocated a wait-and-see
approach that would allow Kentucky to monitor progress in other states and
develop options to protect Kentucky's existing low rates.
In April 2000, the Kentucky General Assembly reauthorized the Task Force.
Under the reauthorization, the Task Force is to monitor developments related to
electricity restructuring and make recommendations it deems appropriate for
consideration by the 2002 General Assembly and the Governor. The Task Force is
charged with reporting to the Legislative Research Commission and the Governor
no later than November 15, 2001.
ENVIRONMENTAL REGULATIONS
The construction and operation of electric generating facilities are
subject to extensive environmental and land use regulation in the United States.
Those regulations applicable to us primarily involve the discharge of emissions
into the water and air as well as the use of water, but can also include
wetlands preservation, endangered species, waste disposal, and noise regulation.
These laws and regulations often require a lengthy and complex process of
obtaining and renewing licenses, permits, and approvals from federal, state, and
local agencies. If these laws and regulations are changed, modifications to our
facilities may be required.
Clean Air Act. In late 1990, Congress passed the Clean Air Act Amendments
of 1990, which affect existing facilities as well as new project development.
The act and many state laws require
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significant reductions in SO(2) (sulfur dioxide) and NO(x) (nitrogen oxide)
emissions that result from burning fossil fuels.
The 1990 Amendments create a marketable commodity called an
SO(2)"allowance." All non-exempt facilities over 25 megawatts that emit SO(2)
must hold or obtain allowances in order to operate. Each allowance gives the
owner the right to emit one ton of SO(2). All non-exempt facilities that existed
in 1990 have an assigned number of allowances. If additional allowances are
needed, they can be purchased from facilities having excess allowances. Our
assets located in New York currently have more allowances than needed, while our
assets located in Ohio and Pennsylvania require additional allowances or the
installation of SO(2) controls. We believe that the additional costs of
obtaining the number of allowances needed for future projects should not
materially affect our ability to purchase and operate such facilities.
The 1990 Amendments also require states to impose annual operating permit
fees. While such permit fees may be substantial and will be greater for
coal-fired projects like our assets located in Ohio and Pennsylvania than for
those burning gas or other fuels, such fees are not expected to significantly
increase our costs.
The 1990 Amendments also contain other provisions that could materially
affect our projects. Various provisions may require permits, inspections, or
installation of additional pollution control technology.
The 1990 Amendments expand the enforcement authority of the federal
government by increasing the range of civil and criminal penalties for
violations of the Clean Air Act. They enhance administrative civil penalties and
add a citizen suit provision. These enforcement provisions also include enhanced
monitoring, record-keeping, and reporting requirements for existing and new
facilities.
The Ozone Transport Assessment Group, composed of state and local air
regulatory officials from the 37 eastern states, has recommended additional NOx
emission reductions that go beyond current federal standards. These
recommendations include reductions from utility and industrial boilers during
the summer ozone season.
As a result of the Ozone Transport Assessment Group's recommendations, on
October 27, 1998, the EPA issued a rule requiring 22 Eastern states and the
District of Columbia to reduce emissions of NO(x) (a precursor of ozone) in
those states. Among other things, the EPA's rule establishes an ozone season,
which runs from May through September, and a NO(x) emission budget for each
identified state, including New York, Ohio and Pennsylvania. The EPA rule
requires states to implement controls sufficient to meet their NO(x) budget by
May 1, 2003. The states use a marketable commodity called a NO(x) "allowance"
allocation to implement the NO(x) emission budget. Our assets will be subject to
NO(x) reduction requirements under the EPA rule. Due to relatively low NO(x)
emissions from our facilities, however, our assets located in New York are
unlikely to be impacted by this rulemaking. In contrast, the assets located in
Ohio and Pennsylvania will be affected significantly. Beginning in 2003, the EPA
rule will result in a requirement for substantial NO(x) reductions or the
purchase of additional NO(x) allowances at the assets located in Pennsylvania,
which will likely result in significant capital expenditures by us. The same
requirement will impact our Ohio assets in 2004.
The EPA recently granted several state petitions under Section 126 of the
Clean Air Act. Section 126 allows the EPA to set limits for specific sources of
emissions originating in other states. As a result, the EPA will require
reductions in NO(x) emissions at the majority of our fossil energy facilities at
levels consistent with those required under the EPA rule. Consistent with the
EPA's rule, reductions have been proposed which would need to be achieved by May
1, 2004 through the implementation of controls or the purchase of emission
allowances. We believe that our assets located in New York City are already in
compliance with these limits. We anticipate capital expenditures of
approximately $350 million at the assets located in Ohio and Pennsylvania
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through 2010 to address these anticipated air emissions issues. We expect that
the majority of these expenditures under the EPA rule and the EPA's Section 126
initiative will occur between 2002 and 2008. However, particularly given the
trend towards more stringent environmental regulation, it is possible that the
amount we must spend to bring the facilities into compliance may change
materially. In addition, the time at which these capital expenditures must be
made could be accelerated, and operations could be halted at these facilities
until any necessary improvements are made.
In October and November 1999, the EPA and several states filed suits or
announced their intention to file suits against a number of coal-fired power
plants in Midwestern and Eastern states. These suits relate to alleged
violations of the Clean Air Act. More specifically, they derive from the
deterioration prevention and non-attainment provisions of the Clean Air Act's
new source review requirements. In 1999, the EPA requested information relating
to the Avon Lake Generating Station and Niles Generating Station from the
previous owner of these facilities. This was part of the EPA's broader industry
information request, and forms the basis for the agency's new source review
actions against coal-fired power plants. Although there have not been any new
source review-related suits filed against the Avon Lake Generating Station or
the Niles Generating Station, there can be no assurance that either of them will
not be the target of any such action in the future. Based on the levels of
emissions control that the EPA and/or states are seeking in these new source
review enforcement actions, we believe that significant additional costs and
penalties could be incurred, planned capital expenditures could be accelerated,
or operations could be halted at these stations if they ever became targets of a
new source review enforcement action.
Individual states can also regulate air emissions, the costs of compliance
with which could be significant. For example, in 1999, New York Governor George
Pataki introduced new emission requirements for generation facilities in the
State, which must be achieved by 2003. The New York State requirements, among
other things, require year-round reductions in nitrogen oxide emissions, which
were previously limited to summertime reductions. Additionally, under these
requirements, we have to reduce our sulfur dioxide emissions from our New York
power plants. These emission reductions would be phased in between January 1,
2003 and January 1, 2007. Compliance with these emission reductions
requirements, if they become effective, could have a material adverse impact on
the operation of our assets located in New York. While we anticipate that we
should be able to satisfy these constraints, additional constraints may be added
in various jurisdictions that may affect our facilities and increase our costs
of compliance.
The 1990 Amendments required the EPA to evaluate the public health impacts
of emissions of mercury, a hazardous air pollutant, from power plants. The EPA
has not proposed emissions controls because commercially viable control
technologies have not been developed for utility boilers. However, the EPA has
announced that it intends to propose regulations by 2003 and issue final rules
by 2004. When emissions controls are mandated, all coal-fired utility boilers
would be affected and the cost of compliance could be substantial.
The Kyoto Protocol regarding greenhouse gas emissions and global warming
was signed by the United States, thereby committing the United States to
significant reductions in greenhouse gas emissions between 2008-2012. The U.S.
Senate must ratify the agreement for the protocol to take effect. Future
initiatives on this issue and the ultimate effect of the Kyoto Protocol are
unknown at this time. Fossil fuel-fired power plants, however, are believed to
be significant sources of carbon dioxide emissions, which constitute a principal
greenhouse gas. Therefore, the power industry's compliance costs with mandated
federal greenhouse gas reductions could be significant.
Clean Water Act. Our facilities are subject to a variety of state and
federal regulations governing existing and potential water/wastewater and
stormwater discharges from the facilities. Generally, federal regulations
promulgated through the Clean Water Act govern overall
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water/wastewater and stormwater discharges through permits. Under current
provisions of the Clean Water Act, existing permits must be renewed at least
every five years, at which time permit limits come under extensive review and
can be modified to account for more stringent regulations. In addition, the
permits can be modified at any time. Many of our facilities need to renew their
Clean Water Act permits over the next two years. Major issues to be addressed
when permits are renewed include the impact of intake screens and cooling
systems on fish, as well as the adverse impact of discharging large quantities
of warm water to public rivers and lakes. The cost of addressing any of these
environmental issues could be substantial.
In addition, changes to the environmental permits of our coal or other fuel
suppliers may increase the cost of fuel, which in turn could have a significant
impact on our operations.
Emergency Planning and Community Right-to-Know Act. In April 1997, the EPA
expanded the list of industry groups required to report the Toxic Release
Inventory under Section 313 of the Emergency Planning and Community
Right-to-Know Act to include electric utilities. Our operating facilities will
be required to complete a toxic chemical inventory release form for each listed
toxic chemical manufactured, processed, or otherwise used in excess of threshold
levels for the applicable reporting year. The purpose of this requirement is to
inform the EPA, states, localities, and the public about releases of toxic
chemicals to the air, water, and land that can pose a threat to the community.
Changes in the laws governing disposal of coal ash generated by our
coal-fired plants to classify coal ash as a hazardous waste or otherwise
restrict the disposal of coal ash could increase our costs and expose us to
greater potential liabilities for environmental remediation. The ash disposal
sites used by our coal-fired facilities are permitted under state regulations.
Those sites under our operational control have approved closure plans in place,
and funds have been budgeted to accomplish the closures.
Comprehensive Environmental Response, Compensation and Liability Act. The
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
among other things, imposes cleanup requirements for threatened or actual
releases of hazardous substances that may endanger public health or welfare of
the environment. Under CERCLA, joint and several liability may be imposed on
waste generators, site owners, and operators and others regardless of fault or
the legality of the original disposal activity. Although all waste substances
generated by the facilities are generally not regarded as hazardous substances,
some products used in the operations and the disposal of such products are
governed by CERCLA and similar state statutes. As a result of CERCLA's no-fault,
retroactive liability scheme, we cannot assure you that we would be free from
substantial liabilities in the future.
Consent Orders. The assets located in New York City are subject to a
consent order issued by the New York State Department of Environmental
Conservation. The consent order requires active investigation and remediation of
past releases of petroleum and other substances at the facilities by the prior
owner. The consent order also contains obligations related to compliance with
air emission and opacity regulations, corrective action requirements for solid
waste management units, and investigation and implementation of measures to
reduce water contamination and the killing of fish. The total liability assumed
and recorded by Orion Power New York associated with these obligations was $9.2
million in the aggregate. We intend to fund this liability with cash flow from
operations.
COMPETITION
We have many strong and well capitalized competitors in the wholesale power
generation industry. These are both domestic and international organizations,
many of whom have extensive and diversified operating expertise and financial
resources that are greater than those we possess. We face competition in the
markets for energy, capacity, and ancillary services, as well as intense
competition for the acquisition and development of additional facilities.
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We anticipate increasing competition from international companies for
acquisitions as the market continues to deregulate. As a result, it may be more
difficult for us to compete effectively in future competitive bidding
situations. In recent years, the industry has been characterized by increasingly
strong competition with respect to the acquisition of existing electric
generating facilities. This includes a trend away from negotiated transactions
and towards competitive bidding.
Following the expiration of our various transition power and capacity
agreements, we will be subject to competition in the market for energy,
capacity, and ancillary services. We will principally compete on the basis of
the price of our products, although we will also compete to a lesser extent on
the basis of reliability and availability. The continuing deregulation of the
industry is likely to increase competition and may place downward pressure on
energy prices.
EMPLOYEES
As of December 31, 2000, we employed approximately 890 people. Of these
employees, approximately 554 are covered by collective bargaining agreements.
The collective bargaining agreements expire at various dates between June 2001
and June 2006. We have never experienced a work stoppage, strike, or labor
dispute. We consider relations with our employees to be good.
FACILITIES/PROPERTIES
Our corporate offices currently occupy approximately 15,340 square feet of
leased office space in Baltimore, Maryland, which lease expires in 2005, subject
to renewal options.
In addition to our corporate office space, we lease or own various real
property and facilities relating to our assets and development activities. Our
principal facilities are generally described under the descriptions of our three
operating subsidiaries contained elsewhere. We believe that we have title to our
facilities in accordance with standards generally accepted in the energy
industry, subject to exceptions which, in our opinion, would not have a material
adverse effect on the use or value of the facilities. Substantially all of our
assets are pledged to our bank lenders under our credit facilities.
We believe that all of our existing office and generating facilities,
including the facilities under construction, are adequate for our needs through
calendar year 2001. If we require additional space, we believe that we will be
able to secure space on commercially reasonable terms without undue disruption
to our operations.
Our total lease expense for all of our properties described above was
approximately $1.2 million for 2000, and will be approximately $1.5 million for
2001.
LEGAL PROCEEDINGS
We are involved in various litigation matters in the ordinary course of our
business. We are not currently involved in any litigation that we expect, either
individually or in the aggregate, will have a material adverse effect on our
financial condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
NAME AGE POSITION
---- --- --------
Frederic V. Salerno(a)(b).... 57 Chairman of the Board of Directors
Jack A. Fusco................ 38 Chief Executive Officer, President and Director
Scott B. Helm................ 36 Executive Vice President and Chief Financial
Officer
W. Thaddeus Miller........... 50 Executive Vice President and Chief Legal Officer
E. Thomas Webb............... 47 Senior Vice President
Michael J. Gluckman.......... 63 Senior Vice President of Corporate Development
Edward A. Crooke............. 62 Director
Richard A. Friedman.......... 43 Director
Tsutomu Kajita............... 47 Director
Douglas F. Londal............ 35 Director
Cheryl Mills(a)(b)........... 36 Director
Terence M. O'Toole........... 41 Director
Vincent Tese(a)(b)........... 58 Director
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(a) Member of Audit Committee.
(b) Member of Compensation Committee.
Each of our directors will hold office until the next annual meeting of our
stockholders, or until his or her successor has been duly elected and qualified.
Our officers are elected by our board of directors and serve at the discretion
of the Board.
FREDERIC V. SALERNO joined us in April 2000 as non-executive Chairman of
our Board of Directors. He is currently the Vice Chairman and Chief Financial
Officer of Verizon Communications, effective with the closing of the merger of
Bell Atlantic Corporation and GTE in June 2000. Since 1997, he has been the
Senior Executive Vice President and Chief Financial Officer of Strategy and
Business Development at Bell Atlantic. Prior to his position at Bell Atlantic,
he served as Vice Chairman of Finance and Business Development at NYNEX
Corporation from 1994 to 1997, and served as President of Worldwide Services
Group from 1991 to 1994, and as a director of NYNEX from 1991 to 1997. Mr.
Salerno joined New York Telephone in 1965. He currently serves as a director of
Viacom, Inc. and The Bear Stearns Companies Inc. Mr. Salerno holds a B.S. from
Manhattan College and an M.B.A. from Adelphi University.
JACK A. FUSCO has been our Chief Operating Officer since our inception in
March 1998. He was appointed President and Chief Executive Officer in November
1999. Mr. Fusco has over 17 years of experience in various areas of the power
generation industry. Prior to joining us, Mr. Fusco was a Vice President at
Goldman Sachs Power, an affiliate of Goldman, Sachs & Co., beginning in 1997.
Prior to joining Goldman, Sachs & Co., Mr. Fusco was Executive Director of
International Development and Operations for Pacific Gas & Electric's
non-regulated subsidiary PG&E Enterprises. In that role, he was responsible for
the development and implementation of PG&E's International Business Strategy and
the launching of International Generating Company, an international wholesale
power producer. Mr. Fusco holds a B.S. in Mechanical Engineering from California
State University, and is a Registered Professional Mechanical Engineer in the
State of California.
SCOTT B. HELM joined us in September 1998 as Chief Financial Officer and
was appointed Executive Vice President in November 1999. He is responsible for
managing our accounting and
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finance functions. Prior to joining us, he was a Vice President in the
Investment Banking Division of Goldman, Sachs & Co., commencing in 1994, where
he generally focused on commodity, cyclical and industrial clients. Mr. Helm
holds a B.S.B.A. from Washington University.
W. THADDEUS MILLER joined us in June 1999 as Chief Legal Officer, and was
appointed Executive Vice President in November 1999. Mr. Miller has been
advising us on legal matters since our inception. Prior to joining us, Mr.
Miller was a Vice President and Associate General Counsel for Goldman, Sachs &
Co., commencing in 1994 specializing in commodities, with particular emphasis on
energy matters, where he advised our stockholder, GS Capital Partners II, L.P.,
on certain legal matters in connection with its investment in us. Prior to
joining Goldman, Sachs & Co., Mr. Miller was a partner with Watson, Farley &
Williams, an international law firm. He has been practicing law for over 20
years. Mr. Miller holds a B.S. from the United States Merchant Marine Academy
(Kings Point) and a J.D. from St. John's University School of Law.
E. THOMAS WEBB joined us in September 1998 as Vice President of Asset
Management. In November 1999, he was appointed as Senior Vice President. Prior
to joining us Mr. Webb was employed by Pacific Gas & Electric from 1977 to
August 1998 in a variety of posts, including power plant management, and
transmission and distribution operations. Mr. Webb has over 23 years of
experience in the power generation industry. Mr. Webb holds a B.S. in Mechanical
Engineering from California Polytechnic State University and an M.B.A. from St.
Mary's College of California. Mr. Webb is a Registered Professional Mechanical
Engineer in the State of California.
MICHAEL J. GLUCKMAN joined us in December 2000 in connection with the
acquisition of Columbia Electric Corporation, where he was President and Chief
Executive Officer since 1996. Dr. Gluckman has over 30 years of experience in
the energy industry, including research and development for all forms of fossil
and renewable generation, development and assessment of advanced gas turbine
technology, assessment of emerging electric markets, as well as a broad range of
project development activities. Prior to joining Columbia Electric Corporation
in 1996, Dr. Gluckman served as President and CEO of Paradigm Power
Incorporated. Dr. Gluckman also spent 17 years with the Electric Power Research
Institute. Dr. Gluckman holds a B.S. degree from the University of Cape Town in
South Africa and a Ph.D. in chemical engineering from the City College of the
City University of New York.
EDWARD A. CROOKE assumed the position of Vice Chairman of Constellation
Energy Group in October 2000, a position he previously held before retiring in
January 2000. Upon completion of the separation of Constellation Energy Group
and BGE Corp., Mr. Crooke will become Chairman, President and Chief Executive
Officer of BGE Corp., a holding company focused on retail energy and related
services. Prior to becoming Vice Chairman of Constellation Energy Group in 1999,
he was Chairman, President and Chief Executive Officer of Constellation
Enterprises from 1998 through 1999 and President and Chief Operating Officer of
Baltimore Gas and Electric Company from 1992 through 1998. Mr. Crooke has worked
for Constellation Energy Group and its affiliates for 32 years. He serves on the
Board of Directors of Baltimore Equitable Insurance, Allfirst Financial, Inc.,
Allfirst Bank, Corporate Office Properties Trust and Associated Electric & Gas
Insurance Services Limited. Mr. Crooke received a B.A. from the University of
Maryland and an M.B.A. from Loyola College.
RICHARD A. FRIEDMAN is Co-Head of Goldman, Sachs & Co.'s Merchant Banking
Division, and Head of the Firm's Principal Investment Area. He joined Goldman,
Sachs & Co. in 1981, became a Partner in 1990, and was made a Managing Director
in 1996. He is Chairman of the Board of AMF Bowling Inc., and on the Board of
Directors of Carmike Cinemas, Inc., and Polo Ralph Lauren Corporation. Mr.
Friedman received a B.A. from Brown University and an M.B.A. from the University
of Chicago Graduate School of Business.
TSUTOMU KAJITA is Executive Vice President and Treasurer of Diamond
Generating Corporation (one of our stockholders). Since 1993 he has been
responsible for investment in
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and development of international wholesale power projects. Prior to that he was
a Vice President of Diamond Energy, Inc., a company engaged in the wholesale
power business. He has worked for Mitsubishi Corporation and its affiliates,
including Diamond Energy, for 20 years. Mr. Kajita holds a B.A. in Law from Keio
University in Tokyo and an M.B.A. from Babson College.
DOUGLAS F. LONDAL is a Managing Director of Goldman, Sachs & Co. in the
Merchant Banking Division. He joined Goldman, Sachs & Co. in 1991 and was made a
Managing Director in 1999. He serves on the Board of Directors of 21st Century
Newspapers, Inc., Ruth's Chris Steak House, Inc. and Village Voice Media. Mr.
Londal received a B.A. from the University of Michigan and an M.B.A. from the
University of Chicago Graduate School of Business.
CHERYL D. MILLS is Senior Vice President for Corporate Policy and Public
Programming at Oxygen Media. Prior to joining Oxygen in 1999, Ms. Mills, an
attorney, was Deputy Counsel to the President at the White House from 1993
through 1999. She currently serves on the Board of Directors of Cendant
Corporation, National Partnership for Women and Families, the Stanford Law
School Board of Visitors, the Leadership Conference Education Fund, The Jackie
Robinson Foundation, the Robert F. Kennedy Memorial Foundation, and the William
J. Clinton Presidential Library Foundation Board of Trustees. Ms. Mills earned
her B.A. from the University of Virginia and a J.D. from Stanford Law School.
TERENCE M. O'TOOLE is a Managing Director of Goldman, Sachs & Co. in the
Merchant Banking Division. He joined Goldman, Sachs & Co. in 1983, became a
Partner in 1992, and was made a Managing Director in 1996. He is Chairman of the
Board of Amscan Holdings, Inc., and serves on the Board of Directors of 21st
Century Newspapers, Inc., AMF Bowling, Inc., TBG Information Investors, L.L.C.,
VoiceStream Wireless Corporation, and Western Wireless Corporation. Mr. O'Toole
received a B.S. from Villanova University and an M.B.A. from the Stanford
University Graduate School of Business.
VINCENT TESE has been Chairman of Wireless Cable International Inc. since
April 1995. Mr. Tese was Chairman of Cross Country Wireless Inc. from October
1994 to July 1995 and was a corporate officer and a general partner of Cross
Country Wireless Inc.'s predecessors, Cross Country Wireless Cable-I, L.P. and
Cross Country Wireless Cable West, L.P. from 1990 until October 1994, Mr. Tese
was the Director of Economic Development for the State of New York from June
1987 to December 1994. Mr. Tese is currently Chairman of the Audit Committee and
a member of the Board of Directors of The Bear Stearns Companies, Inc. He also
serves on the boards of Allied Waste Industries, Inc., Bowne and Company, Inc.
and Cablevision, Inc. He received a B.A. from Pace University in 1966 and a J.D.
from Brooklyn Law School in 1972 and the L.L.M. from New York University School
of Law in 1973.
COMPENSATION OF DIRECTORS
Each of Ms. Mills and Mr. Tese receives $20,000 annually and $1,500 per
board meeting. We also granted each of them options to purchase 12,000 shares,
of which 10,000 vest over the two years following the grant date and the
remaining options vest over the year following the grant date. In addition, we
reimburse them for reasonable expenses they incur in attending board or
committee meetings. Except as described in our director agreement with Mr.
Salerno, no other directors receive compensation.
BOARD COMMITTEES
Our board has two standing committees: an audit committee and a
compensation committee. The audit committee selects the independent public
accountants to audit our annual financial statements, establishes the scope and
oversees the annual audit and reviews our financial statements and accounting
practices. The audit committee also is responsible for risk management and
control and credit policies. The compensation committee approves and administers
compensation and employee benefit plans. Our board may establish other
committees from time to time to facilitate the management of our business and
affairs.
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EXECUTIVE COMPENSATION
The following table sets forth information for the calendar years ended
December 31, 2000, 1999 and 1998 concerning the annual compensation paid or
accrued by us to our executive officers ("Named Executive Officers").
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION NUMBER OF
----------------- SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION (a) YEAR ($) ($) OPTIONS(#) ($)(b)
------------------------------- ---- ------ ----- ---------- ------------
Jack A. Fusco(c)..................... 2000 334,712 450,008 393,738 8,705
President and Chief Executive 1999 203,167 200,000 434,762 884
Officer 1998 108,333 133,333 21,263 1,315
Scott B. Helm(d)..................... 2000 284,712 400,005 329,364 8,055
Executive Vice President and 1999 186,250 200,000 404,607 802
Chief Financial Officer
W. Thaddeus Miller(e)................ 2000 264,193 375,003 323,955 10,348
Executive Vice President and 1999 149,000 232,333 316,382 205
Chief Legal Officer
E. Thomas Webb(f).................... 2000 229,577 325,000 231,870 10,889
Senior Vice President 1999 153,163 200,000 213,480 1,741
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(a) We do not have any executive officers other than those named in the table,
except for Michael J. Gluckman who commenced employment in December 2000.
(b) We paid insurance premiums for term life insurance, a 401k match and a 401k
bonus for 2000 in the amount of $8,705 for Mr. Fusco, $8,055 for Mr. Helm,
$10,348 for Mr. Miller and $10,889 for Mr. Webb.
(c) Mr. Fusco has been our Chief Operating Officer since June 1998 and he also
became our President and Chief Executive Officer in 1999. His 1999 bonus
compensation includes a one-time discretionary bonus in addition to the
bonus under his employment agreement.
(d) Mr. Helm has been our Chief Financial Officer since September 1998 and he
also became an Executive Vice President in 1999. His 1999 bonus
compensation includes a one-time discretionary bonus in addition to the
bonus under his employment agreement.
(e) Mr. Miller commenced his employment in June 1999 as Chief Legal
Officer/General Counsel and also became an Executive Vice President in
1999. His 1999 bonus compensation includes a one-time discretionary bonus
and a one-time sign on bonus of $32,333 in addition to the regular bonus
under this employment agreement.
(f) Mr. Webb commenced employment in September 1998 as Vice President of Asset
Management and became a Senior Vice President in 1999. His 1999 bonus
compensation includes a one-time discretionary bonus in addition to the
bonus under his employment agreement.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND 2000 YEAR END OPTION VALUES
NUMBER OF
SHARES SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON VALUE 2000 YEAR END (#) 2000 YEAR END ($)(b)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#)(a) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
Jack A. Fusco............... -- -- 248,996 600,767 $3,488,756 $6,225,848
Scott B. Helm............... -- -- 221,336 512,635 $3,118,362 $5,456,079
W. Thaddeus Miller.......... -- -- 176,697 463,640 $2,483,317 $4,775,022
E. Thomas Webb.............. -- -- 112,182 333,168 $1,313,836 $2,801,379
---------------
(a) The Named Executive Officers did not exercise any options in 2000.
(b) Assumes, for all unexercised in-the-money options, the difference between
the fair market value ($24.625 per share) at December 31, 2000 and the
exercise price of the option.
OPTION GRANTS IN 2000
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------------------------------
PERCENT
NUMBER OF OF TOTAL
SECURITIES OPTIONS MARKET
UNDERLYING GRANTED TO EXERCISE PRICE ON
OPTIONS EMPLOYEES OR BASE DATE OF
GRANTED IN FISCAL PRICE GRANT VEST EXPIRATION
NAME DATE (#) YEAR ($/SH) ($) DATE DATE
---- ---- ---------- ---------- -------- -------- ---- ----------
Jack A. Fusco........ 4/24/00 143,738 4.05 $10.00 $15.50 4/24/03 4/24/10
11/14/00 100,000 2.82 20.00 20.00 11/14/03 11/14/10
11/14/00 150,000 4.23 20.00 20.00 11/13/05 11/14/10
Scott B. Helm........ 4/24/00 129,364 3.65 10.00 15.50 4/24/03 4/24/10
11/14/00 80,000 2.26 20.00 20.00 11/14/03 11/14/10
11/14/00 120,000 3.39 20.00 20.00 11/13/05 11/14/10
W. Thaddeus Miller... 4/24/00 123,955 3.50 10.00 15.50 4/24/03 4/24/10
11/14/00 80,000 2.26 20.00 20.00 11/14/03 11/14/10
11/14/00 120,000 3.39 20.00 20.00 11/13/05 11/14/10
E. Thomas Webb....... 4/24/00 35,935 1.01 10.00 15.50 4/24/03 4/24/10
4/24/00 35,935 1.01 15.50 15.50 4/24/03 4/24/10
11/14/00 60,000 1.69 20.00 20.00 11/14/03 11/14/10
11/14/00 100,000 2.82 20.00 20.00 11/13/05 11/14/10
---------------------
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
OPTION TERM
--------------------------------
NAME 0% ($) 5% ($) 10% ($)
---- ------ ------ -------
Jack A. Fusco........ $790,559 $901,956 $1,013,353
-- 100,000 200,000
-- 150,000 300,000
Scott B. Helm........ 711,502 811,759 912,016
-- 80,000 160,000
-- 120,000 240,000
W. Thaddeus Miller... 681,753 777,818 873,883
-- 80,000 160,000
-- 120,000 240,000
E. Thomas Webb....... 197,643 225,492 253,342
-- 27,850 55,699
-- 60,000 120,000
-- 100,000 200,000
1998 STOCK INCENTIVE PLAN
In February 1999, our board of directors adopted and our stockholders
approved our 1998 Stock Incentive Plan. In connection with our initial public
offering in November 2000, our board of directors approved an amendment to the
plan, which was approved by our stockholders, to increase the maximum number of
shares that may be awarded under the plan to 7,500,000 shares and to modify the
definition of change of control. The plan, as amended, provides for the granting
of stock options, stock appreciation rights, share awards, performance awards
and restricted stock to our or our subsidiaries' employees, officers, and
directors. The 1998 stock incentive plan provides for the grant of incentive
stock options intended to qualify under Section 422 of the Internal Revenue Code
and stock options that do not so qualify. The maximum number of shares that may
be awarded to an employee during any three year period is 1,500,000, and the
maximum amount of dollar denominated performance units that may be awarded to
any employee is $1,000,000. The 1998 stock incentive plan is designed to comply
with the requirements for "performance-based compensation" under Section 162(m)
of the Internal Revenue Code, and the conditions for exemption from the
short-swing profit recovery rules under Rule 16b-3 under the Exchange Act.
The purpose of the 1998 stock incentive plan is to provide an incentive to
our directors, officers, employees and consultants and to encourage them to
devote their abilities to the
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success of our business. The 1998 stock incentive plan is administered by, and
awards may be granted by, the compensation committee of our board. Generally,
the compensation committee has the right to grant options and other awards to
eligible participants and to determine the terms and conditions of option and
other award agreements, including the vesting schedule of options and other
awards and the exercise price of options.
The 1998 stock incentive plan provides that the term of any option may not
exceed ten years. In the event of a change in control (as defined below) of our
company, all outstanding stock options, stock appreciation rights, and
performance units become immediately and fully vested and any restrictions on
restricted stock lapse.
Change in control generally means:
- the acquisition of 30% or more of our combined voting power of our voting
securities, unless the acquisition is by one of our subsidiaries, any of
our employee benefit plans or by any of our stockholders who, together
with its affiliates, upon consummation of this offering, beneficially
owned 30% or more of the combined voting power of our voting securities;
- a merger, consolidation, reorganization or other transaction, unless our
shareholders continue to control at least 50% of our voting power or the
original members of our board of directors continue to hold a majority of
the board seats after the transaction;
- our complete dissolution or liquidation; or
- the sale of all of our assets or substantially all of our assets.
In the event of a change in capitalization, the compensation committee will
adjust the maximum number and class of shares which may be granted under the
1998 stock incentive plan or to any individual in any three calendar year
period, the number and class of shares which are subject to any outstanding
options and the purchase price of the options.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Effective November 2000, we entered into amended and restated employment
agreements with Jack A. Fusco, our President and Chief Executive Officer, Scott
B. Helm, our Chief Financial Officer and Executive Vice President, and W.
Thaddeus Miller, our Chief Legal Officer and Executive Vice President, and
entered into an employment agreement with E. Thomas Webb, our Senior Vice
President of Operations. Effective December 2000, we entered into an employment
agreement with Michael J. Gluckman, our Senior Vice President of Corporate
Development.
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The following table provides information about the employment agreements of
each of our named executive officers:
OPTION GRANTS
(SHARES OF COMMON STOCK)
-----------------------------------------
FIVE- THREE-
YEAR YEAR
BONUS EXPIRATION STOCK VESTING VESTING ADDITIONAL
NAME SALARY($)(a) RANGE(b)(c)(d) DATE(e) PURCHASES(f) OPTIONS(g) OPTIONS(h) OPTIONS(i)
---- ------------ -------------- ---------- ------------ ---------- ---------- ----------
Jack A. Fusco........ $475,000 75-150% May 2003 20,000 shares 150,000 100,000 At least 50,000
Scott B. Helm........ 420,000 75-150% August 2003 40,000 shares 120,000 80,000 At least 40,000
W. Thaddeus Miller... 400,000 75-150% May 2004 22,500 shares 120,000 80,000 At least 40,000
E. Thomas Webb....... 342,000 50-100% November 2005 15,000 shares 100,000 60,000 At least 30,000
---------------
(a) Subject to annual inflationary increases.
(b) Discretionary annual cash bonus equal to the specified range, based upon
performance criteria to be established in the future.
(c) In 2000, the bonus was guaranteed and was to be not less than the annual
base salary for 2000.
(d) On May 18, 2001, Messrs. Fusco, Helm and Miller received additional
one-time longevity incentive bonuses in the amount of $150,000 for Mr.
Fusco and $125,000 for each of Messrs. Helm and Miller.
(e) Unless earlier terminated in accordance with the agreement.
(f) Each of the executive officers entered into a stock purchase agreement to
purchase the specified number of shares at a purchase price of $10.00 per
share and issued to us a limited recourse promissory note in a principal
amount equal to two-thirds of the purchase price of such stock.
(g) Each of the executive officers was granted stock options to purchase the
specified number of shares at the initial public offering price of $20.00
per share, with the options vesting ratably over a five-year period.
(h) Each of the executive officers was granted stock options to purchase the
specified number of shares at the initial public offering price of $20.00
per share, with the options vesting ratably over a three-year period.
(i) Each of the executive officers is entitled to stock option grants on
January 1, 2002 and each January 1 thereafter during the employment term to
purchase not less than the specified number of shares at the fair market
value of the common stock at the date of grant, with the options vesting
ratably over a three-year period.
Each agreement provides that in the event of termination by us without
cause or by the employee for good reason, the employee will be entitled to
receive from us within 15 days following his termination:
- Any earned and unpaid base salary;
- A cash payment of two times the employee's annual base salary;
- A cash payment equal to two times the amount of the most recent bonus
paid to or earned by the employee in the last fiscal year; and
- Benefits accrued under any other benefit plan, program or arrangement in
which the employee was a participant on the date of termination.
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If the employee owes us monies under the note to the stock purchase
agreement on the date of his termination, then cash payment amounts for salary
and bonus in excess of the employee's 2000 salary shall first be applied to
satisfy the monies owed to us under the note.
Good reason means:
- Our breach of the employment agreement or any related agreement;
- A reduction in the employee's title, duties or responsibilities;
- The relocation of the employee or our headquarters to any location
outside of Baltimore, Maryland (and, in the case of Mr. Miller, New
York); and
- A change in control as defined in the 1998 stock incentive plan.
In addition, termination for good reason due to our breach, relocation or a
change in control automatically triggers the vesting of all stock options held
by each employee. The employment agreement also provides that each employee will
not compete with us for a period of one year after the termination of the
employee's employment.
DIRECTOR AGREEMENT
On April 5, 2000, we entered into a director agreement with Frederic V.
Salerno, who is the Chairman of our Board of Directors. Mr. Salerno will use
reasonable best efforts to attend all board meetings, serve on subcommittees and
perform such other duties and services appropriate for his position as Chairman.
In addition, we agreed to indemnify Mr. Salerno for his activities as a director
and reimburse Mr. Salerno for all reasonable business expenses.
The director agreement is for a two-year term, subject to earlier
termination due to death, mutual agreement, cause, a fiduciary resignation or
good reason as set forth in the director agreement.
Under the director agreement, Mr. Salerno is subject to a non-disclosure
covenant and a covenant prohibiting the solicitation of our employees and
customers. He is also subject to a non-competition covenant which prohibits him
from becoming employed by any entity that is principally engaged in our line of
business (other than his current employer).
In connection with the director agreement, we also entered into an option
agreement with Mr. Salerno under our 1998 stock incentive plan. Under his option
agreement, he has the option to purchase 322,600 shares at an exercise price of
$15.50 per share. The option has a five-year term. The option vested and became
exercisable with respect to 50% of the shares on the first anniversary of the
grant date. The remaining 50% will vest and become exercisable the day before
the second anniversary of the grant date. The option will become immediately
vested and exercisable if Mr. Salerno is terminated without cause, resigns as a
result of a fiduciary conflict, or resigns for good reason. The option will also
immediately vest and become exercisable upon a change in control, as defined in
our 1998 stock incentive plan.
In addition, we entered into a stock purchase agreement with Mr. Salerno.
Under his stock purchase agreement, Mr. Salerno may purchase 645,200 shares of
our common stock at $15.50 per share paying for one-half of this stock with a
limited recourse promissory note.
We also entered into an investor rights agreement with Mr. Salerno, which
sets forth certain rights, obligations and restrictions with respect to his
shares. The provisions of this agreement terminated automatically upon the
closing of our initial public offering in November 2000.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information about the beneficial ownership
of our common stock as of June 18, 2001 by (1) each person who is the beneficial
owner of more than five percent of the outstanding shares of our common stock,
(2) each of our directors, (3) each of our executive officers, and (4) all of
our executive officers and directors as a group. Except as otherwise indicated,
the persons or entities listed below have sole voting and investment power with
respect to all shares of common stock beneficially owned by them. For the
purposes of this table, "beneficial ownership" is determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, pursuant to which a person
or group of persons is deemed to have "beneficial ownership" of any shares of
common stock that such person has the right to acquire within 60 days after the
date of this prospectus.
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF SHARES
NAME OWNED OUTSTANDING
---- ------------ -----------
5% STOCKHOLDERS:
Entities affiliated with The Goldman Sachs Group,
Inc.(a)................................................ 40,851,000 37.2%
Constellation Energy Group, Inc. and affiliates(b)........ 17,205,900 16.5%
Mitsubishi Corporation and affiliates(c).................. 6,967,742 6.7%
Tokyo Electric Power Company International B.V.(d)........ 4,645,161 4.5%
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Jack A. Fusco(e).......................................... 434,261(f) *
Scott B. Helm(e).......................................... 404,795(g) *
W. Thaddeus Miller(e)..................................... 323,373(h) *
E. Thomas Webb(e)......................................... 211,954(i) *
Michael J. Gluckman(e).................................... 15,432(j) *
Frederic V. Salerno(k).................................... 483,900 *
Edward A. Crooke(l)....................................... 17,205,900 16.5%
Richard A. Friedman(m).................................... 40,851,000 37.2%
Tsutomu Kajita(n)......................................... 6,967,742 6.7%
Douglas F. Londal(o)...................................... 40,851,000 37.2%
Terence M. O'Toole(p)..................................... 40,851,000 37.2%
Cheryl Mills.............................................. 5,140(q) *
Vincent Tese.............................................. 5,140(r) *
All directors and executive officers as a group (13
people)(l)(m)(n)(o) (p)(q)(r).......................... 66,908,637 59.7%
---------------
* Less than one percent.
(a) Based on a Schedule 13D filed with the SEC on December 11, 2000. Consists
of 14,984,097 shares and 2,966,742 warrants held by GS Capital Partners II,
L.P., 5,956,795 shares and 1,179,401 warrants held by GS Capital Partners
II Offshore, L.P., 552,685 shares and 109,427 warrants held by GS Capital
Partners II Germany C.L.P., 773,101 shares and 152,234 warrants held by
Stone Street Fund 1998, L.P., 233,322 shares and 45,945 warrants held by
Bridge Street Fund 1998, L.P., 8,796,383 shares and 1,445,976 warrants held
by GS Capital Partners III, L.P., 2,418,232 shares and 397,515 warrants
held by GS Capital Partners III Offshore, L.P., 406,086 shares and 66,753
warrants held by GS Capital Partners III Germany C.L.P., 197,579 shares and
21,844 warrants held by Stone Street Fund 2000, L.P., and 131,720 shares
and 14,563 warrants held by Bridge Special Opportunities Fund 2000, L.P. an
affiliate of The Goldman Sachs Group, Inc., of which Goldman, Sachs & Co.
(an underwriter in this offering) is an indirect wholly-owned subsidiary,
is either the general partner, managing general partner or investment
manager of each of these entities. The Goldman Sachs Group, Inc. and
Goldman, Sachs & Co. each disclaims beneficial ownership of the shares
owned by such investment partnerships to the extent attributable to
partnership
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interests therein held by persons other than The Goldman Sachs Group, Inc. and
its affiliates. The address of each of these funds is 85 Broad Street, New York,
New York 10004.
(b) Based on a Schedule 13G filed with the SEC on February 14, 2001. 250 W.
Pratt Street, Baltimore, Maryland 21201. Represents common stock held by
wholly-owned subsidiary, Constellation Enterprises, Inc. and includes
705,900 warrants.
(c) Based upon information provided to us by Mitsubishi Corporation on June 7,
2001. Consists of 2,941,935 shares held by DGC Nevada Development, Inc.,
348,388 shares held by Mitsubishi International Corporation, and 3,677,419
shares held by Diamond Cayman, Inc. The address of each of these entities
is 6-3 Marunouchi 2-chome, Chiyoda-ku Tokyo 100-8086 Japan.
(d) Based on a Schedule 13G filed with the SEC on March 28, 2001. Official 1,
De Boelelaan 7, 1083HJ, Amsterdam, The Netherlands.
(e) 7 East Redwood, Baltimore, Maryland 21202.
(f) Includes 414,161 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(g) Includes 364,795 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(h) Includes 300,573 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(i) Includes 196,954 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(j) Includes 12,432 shares subject to stock options that are exercisable within
60 days of the date of this prospectus.
(k) Includes 161,300 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus. 1095 Avenue of the Americas,
New York, New York 10036.
(l) 250 W. Pratt Street, Baltimore, Maryland 21201. Mr. Crooke, who is Vice
Chairman of Constellation Energy Group, an affiliate of Constellation
Enterprises, disclaims beneficial ownership of the securities owned by
Constellation Energy Group and its affiliates, except to the extent of his
pecuniary interest in those securities.
(m) 85 Broad Street, New York, New York 10004. Mr. Friedman, who is a Managing
Director of Goldman, Sachs & Co., disclaims beneficial ownership of the
securities owned by affiliates of Goldman, Sachs & Co., except to the
extent of his pecuniary interest in those securities.
(n) 333 South Grand Avenue, Suite 3000, Los Angeles, California 90071. Mr.
Kajita, who is Executive Vice President and Treasurer of Diamond Generating
Corporation, a wholly-owned subsidiary of Mitsubishi Corporation, disclaims
beneficial ownership of the securities owned by Mitsubishi and its
affiliates, except to the extent of his pecuniary interest in those
securities.
(o) 85 Broad Street, New York, New York 10004. Mr. Londal, who is a Managing
Director of Goldman, Sachs & Co., disclaims beneficial ownership of the
securities owned by affiliates of Goldman, Sachs & Co., except to the
extent of his pecuniary interest in those securities.
(p) 85 Broad Street, New York, New York 10004. Mr. O'Toole, who is a Managing
Director of Goldman, Sachs & Co., disclaims beneficial ownership of the
securities owned by affiliates of Goldman, Sachs & Co., except to the
extent of his pecuniary interest in those securities.
(q) Represents 5,140 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(r) Represents 5,140 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(s) Includes 8,566,795 shares subject to warrants and stock options that are
exercisable within 60 days of the date of this prospectus.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
STOCKHOLDERS' AGREEMENT
GENERAL
GS Capital Partners II, L.P. and other private investment partnerships
affiliated with Goldman, Sachs & Co., Constellation Enterprises, affiliates of
Mitsubishi Corporation, Tokyo Electric Power Company International B.V. and we
were parties to a stockholders' agreement, most provisions of which terminated
automatically upon the closing of our initial public offering in November 2000.
IPO FEES
Pursuant to the stockholders' agreement, prior to our public offering,
Goldman, Sachs & Co. had the right to provide all investment banking services on
arms-length terms, conditions and pricing. We paid $16.4 million to Goldman,
Sachs & Co. in connection with our initial public offering in the form of a
discount from the initial public offering price of the shares of common stock.
ADVISORY FEES
Pursuant to the stockholders' agreement, in addition to any other fees
payable with respect to any of our financings or paid under our strategic
alliance agreements, we paid 1% of the aggregate consideration paid in each
acquisition transaction as an advisory fee to our stockholders in proportion to
the percentage holding of each stockholder. For the year ended December 31,
2000, we paid a total of $9.4 million to GS Capital Partners II, L.P. and
affiliated investment partnerships, $4.7 million to Constellation Enterprises,
$1.8 million to affiliates of Mitsubishi Corporation and $1.2 million to Tokyo
Electric Power Company International B.V. In 1999, we paid a total of $6.8
million to GS Capital Partners II, L.P. and affiliated investment partnerships
and $2.9 million to Constellation Power Source (which was then our stockholder).
This provision terminated automatically upon the closing of our initial public
offering.
In connection with our acquisition of Columbia Electric Corporation in
December 2000, we have accrued $2.5 million in advisory fees payable to Goldman,
Sachs & Co.
EQUITY INVESTMENTS
Pursuant to the stockholders' agreement, at the time of our formation in
March 1998, GS Capital Partners II, L.P. and affiliated investment partnerships
and Constellation Power Source irrevocably committed to provide us with
additional equity capital subject to an aggregate maximum investment for each
stockholder. Our other stockholders made similar commitments when they first
purchased our stock in November 1999. The price at which each stockholder
purchased stock upon the capital calls was set forth in the stockholders'
agreement at $10.00 per share for GS Capital Partners II, L.P. and affiliated
investment partnerships and Constellation Enterprises and at $15.50 per share
for our other stockholders, and was determined through arms-length negotiations
and reflected our status and prospects at the time of the commitment. All
commitments to provide equity under the stockholders' agreement have been
satisfied.
The following table sets forth the equity investments to date for each of
our principal stockholders:
INVESTOR AMOUNT
-------- ------
Entities affiliated with The Goldman Sachs Group, Inc. ... $368,975,000
Constellation Power Source, Inc. and affiliates........... 206,025,000
Mitsubishi Corporation and affiliates..................... 120,000,000
Tokyo Electric Power Company International B.V. .......... 80,000,000
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In March 1998, November 1998, December 1998, June 1999, July 1999,
September 1999 and April 2000, GS Capital Partners II, L.P. and affiliated
investment partnerships and Constellation Enterprises made equity investments
pursuant to capital calls based upon their respective commitments described
above. These funds were primarily used to finance acquisitions. GS Capital
Partners II, L.P. and affiliated investment partnerships purchased 30,000,000
shares and Constellation Enterprises and affiliates purchased 17,500,000 shares
pursuant to those capital calls.
Pursuant to the stockholders' agreement, in connection with several capital
calls, we issued warrants to GS Capital Partners II, L.P. and affiliated
investment partnerships to purchase a total of 5,034,257 shares of our common
stock at an exercise price of $10.00 per share and 1,366,143 shares at an
exercise price of $15.50 per share, and to Constellation Enterprises to purchase
a total of 705,900 shares at an exercise price of $10.00 per share. All of these
warrants expire ten years from the date of issuance.
Under the stockholders' agreement, Goldman, Sachs & Co. was entitled to a
fee of 5% of the proceeds received by us in a private placement of equity (other
than capital calls under the stockholders' agreement) for acting as our agent in
the transaction. The placement of equity with affiliates of Mitsubishi
Corporation and Tokyo Electric Power Company International B.V. in November 1999
qualified as such a private placement and, under the stockholders' agreement,
Goldman, Sachs & Co. would have been entitled to a fee of $10 million. In
connection with the negotiation of an amendment to the stockholders' agreement,
however, Goldman, Sachs & Co. agreed to reduce this fee to a total of $4 million
in cash for all private placements. Of this amount, $2.4 million was earned in
November 1999 and $1.6 million was earned in April 2000 at the time of capital
calls against the prior commitments. We have satisfied all our obligations set
forth in the stockholders' agreement to pay fees in connection with any future
placements of equity with new stockholders.
In April 2000, our existing stockholders made equity investments to help
finance the acquisition of the assets located in Ohio and Pennsylvania. First,
all our existing stockholders satisfied their remaining commitments under the
stockholders' agreement at $10.00 per share for GS Capital Partners II, L.P. and
affiliated investment partnerships and Constellation Enterprises and at $15.50
per share for affiliates of Mitsubishi Corporation and Tokyo Electric Power
Company International B.V. Second, GS Capital Partners II, L.P. and affiliated
investment partnerships invested approximately $69 million and Constellation
Enterprises invested approximately $31 million over and above the amount that
they had previously committed to invest pursuant to the stockholders' agreement
at $15.50 per share.
The stockholders' agreement provides that our certificate of incorporation
and bylaws shall provide for indemnification, advancement of expenses and
limitation of the personal liability of our directors to the fullest extent
permitted by law, and that such provisions may not be amended, repealed or
otherwise modified in any manner adverse to any director until at least six
years from the closing of our initial public offering. In addition, pursuant to
the stockholders' agreement, all transactions between us and any of our
stockholders or their affiliates shall occur only after arms-length negotiations
which result in market-based price, terms and conditions.
NOTES
In April and May 2000, Goldman, Sachs & Co. acted as one of several initial
purchasers of $400 million of our outstanding notes, purchasing $250 million of
notes at customary arms-length discounts. As of March 31, 2001, Goldman, Sachs &
Co. did not hold any of our notes. For a discussion of the notes, see
"Description of the Notes."
COMMON STOCK AND CONVERTIBLE NOTE OFFERING
In May 2001, Goldman, Sachs & Co. acted as one of several underwriters of
13 million shares of common stock and $200 million of convertible notes at
customary arms-length discounts.
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ORION POWER MIDWEST, L.P. CREDIT FACILITY
In connection with the credit facility of Orion Power MidWest, L.P. entered
into in April 2000, Goldman Sachs Credit Partners L.P. acted as an arranger,
syndication agent, joint book runner and lender. We entered into the credit
facility after arms-length negotiations and at market terms and conditions. As
of March 31, 2001, Goldman Sachs Credit Partners L.P., as a lender, has received
interest payments and fees under this credit facility totaling approximately
$7.5 million.
CONSTELLATION POWER SOURCE STRATEGIC ALLIANCE AGREEMENT
We entered into a strategic alliance agreement with Constellation Power
Source, pursuant to which Constellation Power Source was the exclusive provider
of, and had the right of first refusal for, power marketing and risk management
services for our facilities. We terminated this agreement upon closing of our
initial public offering. We did not pay any money to Constellation Power Source
under this agreement other than payments made to Constellation Power Source
under the other agreements described below.
We paid approximately $200,000 in 1999 to Constellation Power Source for
rent, telephone and information technology support.
In a related agreement, affiliates of Constellation Power Source agreed not
to compete with us for the acquisition of existing non-nuclear generation assets
for the period that the strategic alliance agreement is in effect. Our
termination of the strategic alliance agreement also had the effect of
terminating the non-compete.
CONSTELLATION OPERATING SERVICES STRATEGIC ALLIANCE AGREEMENT
We entered into a strategic alliance agreement with Constellation Operating
Services pursuant to which it was the exclusive provider of day-to-day operating
and maintenance services for each of the generation facilities we acquired a
controlling interest in (including our existing facilities). This agreement
terminated in April 2000 upon the completion of our acquisition of Constellation
Operating Services' subsidiaries.
We also entered into separate, site-specific, market-based, arms-length
contracts with subsidiaries of Constellation Operating Services, essentially on
a cost plus basis, to perform day-to-day operations and maintenance services at
certain facilities. These agreements terminated in April 2000 upon the
completion of our acquisition of Constellation Operating Services' subsidiaries.
AGENCY AGREEMENT
In April 2000, in connection with Orion Power MidWest, L.P.'s obligations
under the Provider of Last Resort Contract, we entered into an agency and sale
agreement with Constellation Power Source which expired April 30, 2001. The
agreement provided that Constellation Power Source would act as Orion Power
MidWest, L.P.'s agent to sell its excess energy to third-party purchasers and
purchase energy on behalf of Orion Power MidWest, L.P. to enable Orion Power
MidWest, L.P. to meet its obligations as the provider of last resort. In return,
Constellation Power Source was entitled to receive a monthly fee ranging from
$60,000, to $150,000 depending on the season and between 23% and 38% of net
revenue generated from its agency sales (over certain revenue benchmarks). We
paid approximately $2.7 million in 2000 and $2.5 million for the three months
ended March 31, 2001 to Constellation Power Source as a fee under this
agreement. This agreement has expired.
TOLLING AGREEMENTS
We have entered into a five year gas tolling agreement with Constellation
Power Source relating to our operation of the Carr Street facility, which
continues until 2003. Under this
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agreement, the counterparty will have the exclusive right to receive all energy,
capacity and ancillary services produced by the plant. The counterparty will pay
for, and be responsible for, all fuel used by the plant. We are currently paid
approximately $3.6 million per annum as a fixed fee and $3.15 per megawatt hour
generated, both of which will escalate by approximately 2.5% per annum. We have
guaranteed portions of the plant's operating performance, and failure to meet
these guarantees could result in penalties. We believe that when we entered into
this agreement the terms were no less favorable to us than terms we could
negotiate in an arms-length transaction.
We have entered into two financial tolling agreements with Constellation
Power Source relating to a total of 300 megawatts of on-peak energy in New York
City. One transaction, representing 200 megawatts, is in effect from November
2000 through October 2001, and the other transaction, representing 100
megawatts, is in effect from March 2001 through February 2002. Under these
agreements, we will pay Constellation Power Source the NY-ISO determined market
price minus the lesser of a factor of the New York City delivered gas or oil
market price. Constellation Power Source will pay us a fixed monthly fee of $1.6
million for the first transaction and $0.9 million for the second transaction.
We believe that the terms of these agreements are no less favorable to us than
terms we could negotiate in an arms-length transaction.
CONSTELLATION OPERATING SERVICES ACQUISITION
In April 2000, we acquired all of the outstanding capital stock of four
subsidiaries of Constellation Operating Services for $18.9 million in stock and
$0.1 million in cash. Our board of directors approved the valuation of these
subsidiaries, which was determined after arms-length negotiations, in accordance
with our stockholders' agreement.
AGREEMENTS RELATING TO PUBLIC UTILITY HOLDING COMPANY ACT REGULATION
We have entered into an agreement with Goldman, Sachs & Co. and its
affiliates pursuant to which we have agreed that if Goldman, Sachs & Co. and its
affiliates are no longer a controlling shareholder in us but still own 5% or
more of our outstanding voting securities, and we wish to engage in any
activities that will subject us to regulation under the Public Utility Holding
Company Act of 1935, as amended, known as PUHCA, and which are prohibited under
our certificate of incorporation without the consent of Goldman, Sachs & Co.,
Goldman, Sachs & Co. and its affiliates will negotiate in good faith with us to
structure the transaction or its ownership interest in us so as to avoid
material regulatory or other restrictions on us or Goldman, Sachs & Co. and its
affiliates.
In addition, we have entered into a separate agreement with affiliates of
Mitsubishi Corporation and Tokyo Electric Power Company International B.V. in
the event we wish to engage in any transactions or activities that would subject
them to regulation under PUHCA, solely by virtue of their ownership interest in
us. We have agreed that for so long as affiliates of Mitsubishi Corporation or
Tokyo Electric Power Company International B.V. own more than 5% of our
outstanding voting securities, we will give them 60 days' notice before engaging
in any transactions or activities that would cause them to be deemed an
"affiliate," or a "subsidiary company," or a "holding company" (as each of these
terms is defined in PUHCA) or subject to regulation under PUHCA or the Federal
Power Act, and will convert into non-voting stock, on a one-to-one basis, the
number of shares of voting stock necessary to ensure that each will avoid
becoming an "affiliate," or a "subsidiary company," or a "holding company" under
PUHCA or subject to regulation under PUHCA. The affiliates of Mitsubishi
Corporation and Tokyo Electric Power Company International B.V. each has the
right to convert their shares of non-voting stock into an equal number of voting
common stock at any time and in their sole discretion. If either an affiliate of
Mitsubishi Corporation's or Tokyo Electric Power Company International B.V.'s
total share ownership in us, including voting and non-voting stock, falls below
5%, all of that
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stockholders' non-voting shares will convert automatically back to voting common
stock and the agreement will terminate with respect to that stockholder.
LOANS FROM STOCKHOLDERS
During 1999 and 1998, GS Capital Partners II, L.P. and affiliated
investment partnerships made loans to us of approximately $71.1 million and
Constellation Enterprises made loans to us of approximately $41.2 million to
allow us to pay our initial expenses. Each loan was for a five-year term,
required earlier repayment in the event of our public offering, sale,
liquidation or merger and accrued interest at 7%, payable semiannually. In
November 1999, we repaid the total balance due to Constellation Enterprises with
funds from the capital calls of our new investors. In April 2000, GS Capital
Partners II, L.P. and affiliated investments partnerships converted all of their
approximately $71.1 million in loans to 7,108,600 shares of common stock in
satisfaction of a portion of its capital commitments.
We paid interest of approximately $0.8 million in 1999 to affiliates of
Constellation Enterprises. We accrued interest of approximately $2.2 million in
1999 and $3.7 million in 2000 to GS Capital Partners II, L.P. and affiliated
investment partnerships.
LOANS TO DIRECTORS, OFFICERS AND EMPLOYEES
We have made the following loans to directors, officers and employees in
connection with their purchase of common stock at the indicated dates:
NAME LOAN AMOUNT($) DATE
---- -------------- ----
Frederic V. Salerno.............................. $5,000,300 April 2000
Jack A. Fusco.................................... 7,873 December 1998
125,460 July 1999
Scott B. Helm.................................... 15,746 December 1998
250,920 July 1999
W. Thaddeus Miller............................... 150,000 July 1999
E. Thomas Webb................................... 100,000 July 1999
The loans are limited recourse to the borrower, secured by all shares and
options held by the borrower on the date of the loan and all shares acquired by
the borrower in connection with the exercise of options held on the date of the
loan. Except in the case of Mr. Salerno, the loans each bear interest at 7% per
annum and are repayable on the date which is five years from the date of the
initial loan. Mr. Helm repaid his loan in May 2001.
Mr. Salerno's loan bears interest at the greater of the London Interbank
Offered Rate plus 1%, or the "applicable federal rate" as determined pursuant to
the Internal Revenue Code. Interest accrues annually commencing December 31,
2000. The principal and interest are repayable on the first to occur of the
fifth anniversary of the loan, one year after Mr. Salerno's service as one of
our directors terminates due to death, termination without cause, a fiduciary
resignation or the expiration of the two year term of his director agreement, or
the 90th day following the date Mr. Salerno's service as a director terminates
for any other reason. Mr. Salerno repaid approximately $1.7 million of the
principal amount plus accrued interest upon the closing of our public offering
of common stock in June 2001.
REGISTRATION RIGHTS
Each of GS Capital Partners II, L.P. and affiliated investment
partnerships, Constellation Enterprises, certain affiliates of Mitsubishi
Corporation and Tokyo Electric Power Company International has been granted
registration rights by us pursuant to which each stockholder may require us from
time to time to register their shares of common stock for sale to the public
under the Securities Act. In addition, each of these stockholders, our executive
officers and Mr. Salerno has piggyback registration rights that allow them to
include their shares of common stock in registration statements initiated by us.
These registration rights are subject to conditions and
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limitations, including the right of the underwriters of an offering to limit the
number of shares included in a registration statement.
TRADING ACTIVITY
From time to time we enter into interest rate and energy-related commodity
transactions, including transactions intended to hedge the interest rate and
commodity price risks in our business, with affiliates of Goldman, Sachs & Co.
and with Constellation Power Source, Inc. These transactions are entered into on
an arm's length basis.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
When we sold the outstanding notes in April and May 2000, we entered into a
registration rights agreement with the initial purchasers of those notes, which
requires us to:
- file with the SEC a registration statement related to the exchange notes;
- use our commercially reasonable efforts to cause the registration
statement to become effective under the Securities Act on or before July
15, 2001;
- offer to the holders of the existing notes the opportunity to exchange
their existing notes for a like principal amount of exchange notes upon
the effectiveness of the registration statement; and
- use commercially reasonable efforts to issue the exchange notes on the
earliest practicable date and, in any event, within 30 business days of
the effectiveness of the registration statement.
If we fail to satisfy our registration and exchange obligations under the
registration rights agreement, we will be required to pay special penalty
interest to the holders of the notes.
A copy of the registration rights agreement is filed as an exhibit to the
registration statement to which this prospectus is a part.
TERMS OF THE EXCHANGE OFFER
This prospectus and the accompanying letter of transmittal together
constitute the exchange offer. Upon the terms and subject to the conditions set
forth in this prospectus and in the letter of transmittal, we will accept for
exchange outstanding notes which are properly tendered on or before the
expiration date and are not withdrawn as permitted below. The expiration date
for this exchange offer is 5:00 p.m., New York City time, on July 23, 2001, or
such later date and time to which we, in our sole discretion, extend the
exchange offer.
The form and terms of the notes being issued in the exchange offer are the
same as the form and terms of the outstanding notes, except that:
- the notes being issued in the exchange offer will have been registered
under the Securities Act;
- the notes issued in the exchange offer will not bear the restrictive
legends restricting their transfer under the Securities Act; and
- the notes being issued in the exchange offer will not contain the
registration rights and penalty interest provisions contained in the
outstanding notes.
Notes tendered in the exchange offer must be in minimum denominations of
$1,000 and integral multiples of $1,000 in excess thereof.
We expressly reserve the right, in our sole discretion:
- to extend the expiration date;
- to delay accepting any outstanding notes;
- if any of the conditions set forth below under "-- Conditions to the
Exchange Offer" have not been satisfied, to terminate the exchange offer
and not accept any notes for exchange; or
- to amend the exchange offer in any manner.
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We will give oral or written notice of any extension, delay,
non-acceptance, termination or amendment as promptly as practicable by a public
announcement, and in the case of an extension, no later than 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
During an extension, all outstanding notes previously tendered will remain
subject to the exchange offer and may be accepted for exchange by us. Any
outstanding notes not accepted for exchange for any reason will be returned
without cost to the holder that tendered them as promptly as practicable after
the expiration or termination of the exchange offer.
HOW TO TENDER NOTES FOR EXCHANGE
When the holder of outstanding notes tenders, and we accept, notes for
exchange, a binding agreement between us and the tendering holder is created,
subject to the terms and conditions set forth in this prospectus and the
accompanying letter of transmittal. Except as set forth below, a holder of
outstanding notes who wishes to tender notes for exchange must, on or prior to
the expiration date:
- transmit a properly completed and duly executed letter of transmittal,
including all other documents required by such letter of transmittal, to
Wilmington Trust Company, which will act as the exchange agent, at the
address set forth below under the heading "-- The Exchange Agent"; or
- if notes are tendered pursuant to the book-entry procedures set forth
below, the tendering holder must transmit an agent's message to the
exchange agent at the address set forth below under the heading "-- The
Exchange Agent."
- In addition, either:
- the exchange agent must receive the certificates for the outstanding
notes and the letter of transmittal;
- the exchange agent must receive, prior to the expiration date, a timely
confirmation of the book-entry transfer of the notes being tendered into
the exchange agent's account at the Depository Trust Company, or DTC,
along with the letter of transmittal or an agent's message; or
- the holder must comply with the guaranteed delivery procedures described
below.
The term "agent's message" means a message, transmitted to the DTC and
received by the exchange agent and forming a part of a book-entry transfer, or
"book-entry confirmation," which states that the DTC has received an express
acknowledgment that the tendering holder agrees to be bound by the letter of
transmittal and that we may enforce the letter of transmittal against such
holder.
The method of delivery of the outstanding notes, the letters of transmittal
and all other required documents is at the election and risk of the holders. If
such delivery is by mail, we recommend registered mail, properly insured, with
return receipt requested. In all cases, you should allow sufficient time to
assure timely delivery. No letters of transmittal or notes should be sent
directly to us.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the notes surrendered for exchange are
tendered:
- by a registered holder of the notes; or
- for the account of an eligible institution.
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An "eligible institution" is a firm which is a member of a registered
national securities exchange or a member of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company having an office
or correspondent in the United States.
If signatures on a letter of transmittal or notice of withdrawal are
required to be guaranteed, the guarantor must be an eligible institution. If
notes are registered in the name of a person other than the signer of the letter
of transmittal, the notes surrendered for exchange must be endorsed by, or
accompanied by a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by us in our sole discretion, duly executed by
the registered holder with the holder's signature guaranteed by an eligible
institution.
We will determine all questions as to the validity, form, eligibility
(including time of receipt) and acceptance of notes tendered for exchange in our
sole discretion. Our determination will be final and binding. We reserve the
absolute right to:
- reject any and all tenders of any note improperly tendered;
- refuse to accept any note if, in our judgment or the judgment of our
counsel, acceptance of the note may be deemed unlawful; and
- waive any defects or irregularities or conditions of the exchange offer
as to any particular note either before or after the expiration date,
including the right to waive the ineligibility of any holder who seeks to
tender notes in the exchange offer.
Our interpretation of the terms and conditions of the exchange offer as to
any particular notes either before or after the expiration date, including the
letter of transmittal and the instructions to it, will be final and binding on
all parties. Holders must cure any defects and irregularities in connection with
tenders of notes for exchange within such reasonable period of time as we will
determine, unless we waive such defects or irregularities. Neither we, the
exchange agent nor any other person shall be under any duty to give notification
of any defect or irregularity with respect to any tender of notes for exchange,
nor shall any of us incur any liability for failure to give such notification.
If a person or persons other than the registered holder or holders of the
outstanding notes tendered for exchange signs the letter of transmittal, the
tendered notes must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name or names of the registered
holder or holders that appear on the outstanding notes.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity sign the letter of transmittal or any notes or any power of attorney,
such persons should so indicate when signing, and you must submit proper
evidence satisfactory to us of such person's authority to so act unless we waive
this requirement.
By tendering, each holder will represent to us that, among other things,
the person acquiring notes in the exchange offer is obtaining them in the
ordinary course of its business, whether or not such person is the holder, and
neither the holder nor such other person has any arrangement or understanding
with any person to participate in the distribution of the notes issued in the
exchange offer. If any holder or any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of us, or is engaged in or intends
to engage in or has an arrangement or understanding with any person to
participate in a distribution of such notes to be acquired in the exchange
offer, such holder or any such other person:
- may not rely on the applicable interpretations of the staff of the SEC;
and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction.
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Each broker-dealer who acquired its outstanding notes as a result of
market-making activities or other trading activities, and thereafter receives
notes issued for its own account in the exchange offer, must acknowledge that it
will deliver a prospectus in connection with any resale of such notes issued in
the exchange offer. The letter of transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution" for a discussion of the exchange and resale obligations of
broker-dealers in connection with the exchange offer.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF NOTES ISSUED IN THE
EXCHANGE OFFER
Upon satisfaction or waiver of all the conditions to the exchange offer, we
will accept, promptly after the expiration date, all outstanding notes properly
tendered and will issue notes registered under the Securities Act. For purposes
of the exchange offer, we shall be deemed to have accepted properly tendered
outstanding notes for exchange when, as and if we have given oral or written
notice to the exchange agent, with written confirmation of any oral notice to be
given promptly thereafter. See "-- Conditions to the Exchange Offer" for a
discussion of the conditions that must be satisfied before we accept any notes
for exchange.
For each outstanding note accepted for exchange, the holder will receive a
note registered under the Securities Act having a principal amount equal to that
of the surrendered outstanding note. Accordingly, registered holders of notes
issued in the exchange offer on the relevant record date for the first interest
payment date following the consummation of the exchange offer will receive
interest accruing from the most recent date to which interest has been paid.
Outstanding notes that we accept for exchange will cease to accrue interest from
and after the date of consummation of the exchange offer. Under the registration
rights agreement, we may be required to make additional payments in the form of
penalty interest to the holders of the outstanding notes under circumstances
relating to the timing of the exchange offer.
In all cases, we will issue notes in the exchange offer for outstanding
notes that are accepted for exchange only after the exchange agent timely
receives:
- certificates for such outstanding notes or a timely book-entry
confirmation of such outstanding notes into the exchange agent's account
at the DTC;
- a properly completed and duly executed letter of transmittal or an
agent's message; and
- all other required documents.
If for any reason set forth in the terms and conditions of the exchange
offer we do not accept any tendered outstanding notes, or if a holder submits
outstanding notes for a greater principal amount than the holder desires to
exchange, we will return such unaccepted or non-exchanged notes without cost to
the tendering holder. In the case of notes tendered by book-entry transfer into
the exchange agent's account at the DTC, such non-exchanged notes will be
credited to an account maintained with the DTC. We will return the notes or have
them credited to the DTC account as promptly as practicable after the expiration
or termination of the exchange offer.
BOOK ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the outstanding notes at the DTC for purposes of the exchange offer within
two business days after the date of this prospectus. Any financial institution
that is a participant in the DTC's system must make book-entry delivery of
outstanding notes by causing the DTC to transfer such outstanding notes into the
exchange agent's account at the DTC in accordance with the DTC's procedures for
transfer. Such participant should transmit its acceptance to the DTC on or prior
to
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the expiration date or comply with the guaranteed delivery procedures described
below. The DTC will verify such acceptance, execute a book-entry transfer of the
tendered outstanding notes into the exchange agent's account at the DTC and then
send to the exchange agent confirmation of such book-entry transfer. The
confirmation of such book-entry transfer will include an agent's message
confirming that the DTC has received an express acknowledgment from such
participant that such participant has received and agrees to be bound by the
letter of transmittal and that we may enforce the letter of transmittal against
such participant. Delivery of notes issued in the exchange offer may be effected
through book-entry transfer at the DTC. However, the letter of transmittal or
facsimile thereof or an agent's message, with any required signature guarantees
and any other required documents, must:
- be transmitted to and received by the exchange agent at the address set
forth below under "-- The Exchange Agent" on or prior to the expiration
date; or
- comply with the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a holder of outstanding notes desires to tender such notes and the
holder's notes are not immediately available, or time will not permit such
holder's notes or other required documents to reach the exchange agent before
the expiration date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if:
- the holder tenders the notes through an eligible institution;
- prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice of
guaranteed delivery, acceptable to us, by telegram, telex, facsimile
transmission, mail or hand delivery, setting forth the name and address
of the holder of the notes tendered and the amount of the notes being
tendered. The notice of guaranteed delivery shall state that the tender
is being made and guarantee that within three New York Stock Exchange
trading days after the date of execution of the notice of guaranteed
delivery, the certificates for all physically tendered notes, in proper
form for transfer, or a book-entry confirmation, as the case may be,
together with a properly completed and duly executed letter of
transmittal or agent's message with any required signature guarantees and
any other documents required by the letter of transmittal will be
deposited by the eligible institution with the exchange agent; and
- the exchange agent receives the certificates for all physically tendered
outstanding notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, together with a properly completed and
duly executed letter of transmittal or agent's message with any required
signature guarantees and any other documents required by the letter of
transmittal, within three New York Stock Exchange trading days after the
date of execution of the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
You may withdraw tenders of your outstanding notes at any time prior to
5:00 p.m., New York City time, on the expiration date.
For a withdrawal to be effective, you must send a written notice of
withdrawal to the exchange agent at one of the addresses set forth below under
"-- The Exchange Agent." Any such notice of withdrawal must:
- specify the name of the person that has tendered the outstanding notes to
be withdrawn;
- identify the outstanding notes to be withdrawn, including the principal
amount of such outstanding notes; and
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- where certificates for outstanding notes are transmitted, specify the
name in which outstanding notes are registered, if different from that of
the withdrawing holder.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and signed notice of withdrawal with
signatures guaranteed by an eligible institution unless such holder is an
eligible institution. If notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at the DTC to be credited with the withdrawn
notes and otherwise comply with the procedures of such facility. We will
determine all questions as to the validity, form and eligibility (including time
of receipt) of such notices and our determination will be final and binding on
all parties. Any tendered notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the exchange offer. Any notes
which have been tendered for exchange but which are not exchanged for any reason
will be returned to the holder thereof without cost to such holder. In the case
of notes tendered by book-entry transfer into the exchange agent's account at
the DTC, the notes withdrawn will be credited to an account maintained with the
DTC for the outstanding notes. The notes will be returned or credited to the DTC
account as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn notes may be re-tendered
by following one of the procedures described under "-- How to Tender Notes for
Exchange" above at any time on or prior to 5:00 p.m., New York City time, on the
expiration date.
CONDITIONS TO THE EXCHANGE OFFER
We are not required to accept for exchange, or to issue, notes in the
exchange offer for any outstanding notes. We may terminate or amend the exchange
offer if at any time before the acceptance of such outstanding notes for
exchange:
- any federal law, statute, rule or regulation shall have been adopted or
enacted which, in our judgment, would reasonably be expected to impair
our ability to proceed with the exchange offer;
- any stop order shall be threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act of 1939, as
amended; or
- there shall occur a change in the current interpretation by the staff of
the Securities and Exchange Commission which permits the notes issued in
the exchange offer in exchange for the outstanding notes to be offered
for resale, resold and otherwise transferred by such holders, other than
broker-dealers and any such holder which is an "affiliate" of us within
the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities
Act, provided that such notes acquired in the exchange offer are acquired
in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the
distribution of such notes issued in the exchange offer.
The preceding conditions are for our sole benefit, and we may assert them
regardless of the circumstances giving rise to any such condition. We may waive
the preceding conditions in whole or in part at any time and from time to time
in our sole discretion. Our failure at any time to exercise the foregoing rights
shall not be deemed a waiver of any such right, and each such right shall be
deemed an ongoing right which we may assert at any time and from time to time.
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THE EXCHANGE AGENT
Wilmington Trust Company has been appointed as our exchange agent for the
exchange offer. All executed letters of transmittal should be directed to our
exchange agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent addressed as follows:
Main Delivery To:
WILMINGTON TRUST COMPANY, AS EXCHANGE AGENT
BY MAIL: BY HAND OR OVERNIGHT COURIER TO: BY FACSIMILE
Wilmington Trust Company Wilmington Trust Company (for eligible institutions only):
P.O. Box 8861 1105 North Market Street, 1st Fl. (302) 651-1079
Wilmington, DE 19899-8861 Wilmington, DE 19890 Attn: Corporate Trust Reorg.
Attn: Corporate Trust Attn: Corporate Trust Reorg. Services
Reorg. Services Services
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF
TRANSMITTAL.
FEES AND EXPENSES
We will not make any payment to brokers, dealers or others soliciting
acceptance of the exchange offer except for reimbursement of mailing expenses.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us and are estimated in the aggregate to be approximately $250,000.
TRANSFER TAXES
Holders who tender their outstanding notes for exchange will not be
obligated to pay any transfer taxes in connection with the exchange. If,
however, notes issued in the exchange offer are to be delivered to, or are to be
issued in the name of, any person other than the holder of the notes tendered,
or if a transfer tax is imposed for any reason other than the exchange of
outstanding notes in connection with the exchange offer, then the holder must
pay any such transfer taxes, whether imposed on the registered holder or on any
other person. If satisfactory evidence of payment of, or exemption from, such
taxes is not submitted with the letter of transmittal, the amount of such
transfer taxes will be billed directly to the tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE OUTSTANDING NOTES
Holders who desire to tender their outstanding notes in exchange for notes
registered under the Securities Act should allow sufficient time to ensure
timely delivery. Neither the exchange agent nor Orion Power is under any duty to
give notification of defects or irregularities with respect to the tenders of
notes for exchange.
Outstanding notes that are not tendered or are tendered but not accepted
will, following the consummation of the exchange offer, continue to accrue
interest and to be subject to the provisions in the indenture regarding the
transfer and exchange of the outstanding notes and the existing restrictions on
transfer set forth in the legend on the outstanding notes and in the offering
circular dated April 20, 2000, relating to the outstanding notes. Except in
limited circumstances with respect to specific types of holders of outstanding
notes, we will have no further obligation to provide for the registration under
the Securities Act of such outstanding
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notes. In general, outstanding notes, unless registered under the Securities
Act, may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. We do not currently anticipate that we will take any action to register
the outstanding notes under the Securities Act or under any state securities
laws.
Upon completion of the exchange offer, holders of the outstanding notes
will not be entitled to any further registration rights under the registration
rights agreement, except under limited circumstances.
CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES
Based on interpretations of the staff of the SEC, as set forth in no-action
letters to third parties, we believe that the notes issued in the exchange offer
may be offered for resale, resold or otherwise transferred by holders of such
notes, other than by any holder which is an "affiliate" of us within the meaning
of Rule 405 under the Securities Act. Such notes may be offered for resale,
resold or otherwise transferred without compliance with the registration and
prospectus delivery provisions of the Securities Act, if:
- such holder is not a broker-dealer tendering notes acquired directly from
us;
- such notes issued in the exchange offer are acquired in the ordinary
course of such holder's business; and
- such holder, other than broker-dealers, has no arrangement or
understanding with any person to participate in the distribution of such
notes issued in the exchange offer.
However, the SEC has not considered the exchange offer in the context of a
no-action letter, and we cannot guarantee that the staff of the SEC would make a
similar determination with respect to the exchange offer as in such other
circumstances.
Each holder, other than a broker-dealer, must furnish a written
representation, at our request, that:
- it is not an affiliate of us;
- it is not a broker-dealer tendering notes acquired directly from us;
- it is not engaged in, and does not intend to engage in, a distribution of
the notes issued in the exchange offer and has no arrangement or
understanding to participate in a distribution of notes issued in the
exchange offer; and
- it is acquiring the notes issued in the exchange offer in the ordinary
course of its business.
Each broker-dealer that receives notes issued in the exchange offer for its
own account in exchange for outstanding notes must acknowledge that such
outstanding notes were acquired by such broker-dealer as a result of
market-making or other trading activities and that it will deliver a prospectus
in connection with any resale of such notes issued in the exchange offer. See
"Plan of Distribution" for a discussion of the exchange and resale obligations
of broker-dealers in connection with the exchange offer.
In addition, to comply with state securities laws of certain jurisdictions,
the notes issued in the exchange offer may not be offered or sold in any state
unless they have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and complied with by
the holders selling the notes. We have not agreed to register or qualify the
exchange notes for offer or sale under state securities laws.
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DESCRIPTION OF THE NOTES
The terms of the notes to be issued in the exchange offer are identical in
all material respects to the terms of the outstanding notes, except that the
transfer restrictions, registration rights and penalty interest provisions
relating to the outstanding notes do not apply to the new registered notes. When
we refer to the term "note" or "notes", we are referring to both the outstanding
notes and the notes to be issued in the exchange offer. When we refer to
"holders" of the notes, we are referring to those persons who are the registered
holders of notes on the books of the registrar appointed under the indenture.
We are able to issue notes from time to time under a document called an
"indenture". The indenture is a contract between us and Wilmington Trust
Company, which acts as trustee. The trustee has two main roles. First, the
trustee can enforce your rights against us if we default. There are some
limitations on the extent to which the trustee acts on your behalf, as described
in the indenture. Second, the trustee performs administrative duties for us,
such as sending interest payments to DTC and sending you notices. The indenture
and its associated documents contain the full legal text of the matters
described in this section. The indenture and the notes are governed by New York
law. The indenture under which the notes were issued is available as set forth
below under "-- Additional Information."
The following description of the provisions of the indenture is a summary
only. More specific terms can be found in the indenture and the Trust Indenture
Act of 1939, which is applicable to the indenture. Because this section is a
summary, it does not describe every aspect of the notes. This summary is subject
to and qualified in its entirety by reference to all the provisions of the
indenture, including definitions of certain terms used in the indenture. A copy
of the indenture has been filed as an exhibit to the registration statement of
which this prospectus is a part.
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are our general unsecured obligations;
- are on a parity in right of payment with all existing and future
unsecured senior indebtedness of Orion Power, including our revolving
credit facility;
- are senior in right of payment to any of our future subordinated
indebtedness, if any; and
- will not be guaranteed by any of our subsidiaries.
As of the date of the indenture, all of our subsidiaries were considered
"restricted subsidiaries" under the indenture. However, under the circumstances
described below under the subheading "-- Certain Covenants -- Designation of
Restricted and Unrestricted Subsidiaries," we are permitted to designate certain
of our subsidiaries as "unrestricted subsidiaries." Our unrestricted
subsidiaries are not subject to many of the restrictive covenants in the
indenture.
We conduct our operations through our subsidiaries and, therefore, we
depend on the cash flow of our subsidiaries to meet our obligations, including
our obligations under the notes. The notes will be effectively subordinated in
right of payment to all indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of our subsidiaries. Any right
we have to receive assets of any of our subsidiaries upon the subsidiary's
liquidation or reorganization (and the consequent right of the holders of the
notes to participate in those assets) will be effectively subordinated to the
claims of that subsidiary's creditors, except to the extent that we are also
recognized as a creditor of the subsidiary, in which case our claims would still
be subordinate in right of payment to any security in the assets of the
subsidiary and any indebtedness of the subsidiary senior to that held by us. In
addition, our ability to access the cash flow of our subsidiaries is subject to
substantial restrictions. At March 31, 2001, we and our operating subsidiaries
had approximately $2.4 billion principal amount of long-term indebtedness,
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of which $2.0 billion was secured, and approximately $220 million of current
liabilities ranking senior to our equity interests in our operating
subsidiaries.
The indenture contains an acknowledgment and agreement by us and by the
trustee on behalf of the holders of the notes that:
- the notes are our obligations only, without recourse to any of our
officers or directors or shareholders, and that, in the event we undergo
a bankruptcy, liquidation, dissolution or consolidation, the holders will
have no rights to the assets of our subsidiaries or in any distribution
from our subsidiaries that was made in violation of the provisions of the
credit facilities of either Orion Power MidWest, L.P. or Orion Power New
York, L.P., until the indebtedness created by those facilities has been
repaid in full;
- the holders of indebtedness under the credit facility of Orion Power
MidWest, L.P. are relying on the above acknowledgment and agreement in
extending such indebtedness; and
- the holders of indebtedness under the credit facility of Orion Power New
York, L.P. are relying on the above acknowledgment and agreement in
consenting to our issuance of the notes as contemplated under the terms
of the credit facility.
PRINCIPAL, MATURITY AND INTEREST
We will issue the exchange notes in denominations of $1,000 and integral
multiples of $1,000. The notes will mature on May 1, 2010.
Interest on the notes will accrue at the rate of 12% per annum and will be
payable semi-annually in arrears on May 1 and November 1, commencing on November
1, 2000. We will make each interest payment to the holders of record on the
immediately preceding April 15th and October 15th.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
REVOLVING CREDIT FACILITY
Our $75 million revolving credit facility ranks equal in right of payment
with the notes. During the term of this facility, we will be able to draw on
this facility, subject to the conditions provided therein, in order to meet our
obligations under the notes.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder has given wire transfer instructions to us at least ten
business days prior to the applicable payment date, we will pay all principal,
interest and premium, if any, on that holder's notes in accordance with those
instructions. All other payments on the notes will be made at the office or
agency of the paying agent and registrar for the notes within the City and State
of New York unless we elect to make interest payments by check mailed to the
holders at their addresses set forth in the register of holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. We may change
the paying agent or registrar without prior notice to the holders, and we or any
of our subsidiaries may act as paying agent or registrar.
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OPTIONAL REDEMPTION
Before May 1, 2003, we may redeem up to 35% of the aggregate principal
amount of the notes at a redemption price of 112% of the principal amount of the
notes redeemed, plus all accrued and unpaid interest with the net cash proceeds
of an equity offering. However, at least 65% of the notes must remain
outstanding after the occurrence of the redemption (not including notes held by
us or our subsidiaries), and we must redeem the notes within 60 days of the date
of the closing of the equity offering. We may not otherwise redeem the notes
prior to maturity.
MANDATORY REDEMPTION
We are not required to make any mandatory redemption or sinking fund
payments with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If we liquidate, sell substantially all our assets, transfer more than 50%
of our voting stock, merge into another entity, or the majority of the seats on
our board change hands (any of which is considered a change of control under the
indenture), each holder of notes will have the right to require us to repurchase
all or any part of that holder's notes for 101% of the aggregate principal
amount of notes repurchased plus accrued and unpaid interest. Within 30 days
following any change of control, we will mail a notice to each holder describing
the transaction or transactions that constitute the change of control and
offering to repurchase notes. We will comply with all securities laws and
regulations thereunder to the extent those laws and regulations are applicable
in connection with this repurchase of notes.
On the repurchase date, which will be no earlier than 30 days and no later
than 60 days from the date the notice is mailed, we will:
- accept for payment all notes or portions of notes,
- deposit with the paying agent an amount equal to the applicable
repurchase price, and
- deliver the accepted notes to the trustee together with an officers'
certificate stating the aggregate principal amount of notes or portions
of notes being purchased by us.
The paying agent will promptly mail to each holder of notes properly
tendered the applicable repurchase payment for the notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered. Each new note will be in a principal amount of $1,000 or
an integral multiple of $1,000. We will publicly announce the results of this
offer to repurchase notes on or as soon as practicable after the repurchase
date.
The provisions described above that require us to make this offer to
repurchase notes following a change of control will apply regardless of whether
any other provisions of the indenture apply. The indenture does not contain any
other provisions that permit the holders of the notes to require that we
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction. We will not be obligated to repurchase notes upon a change
of control if we exercise our right under the indenture to redeem all of the
notes on or prior to the date on which this offer to repurchase notes must be
consummated.
We will not be required to make this repurchase offer upon a change of
control if a third party makes the repurchase offer in compliance with the
requirements stated in the indenture and purchases all notes properly tendered
and not withdrawn under the repurchase offer.
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ASSET SALES
The indenture prohibits us and our restricted subsidiaries from selling our
assets not in the ordinary course of business. However, the following
transactions are not considered asset sales under the indenture:
- a sale of assets having a value of less than $5 million,
- an issuance of equity interests by a restricted subsidiary to us or
another restricted subsidiary,
- a sale or lease of equipment that is no longer being used by us,
- transfers of cash or cash equivalents,
- investments that are otherwise permitted under the indenture, and
- the granting of a lien otherwise permitted under the indenture.
Asset sales in which we receive consideration at least equal to the fair
market value of the assets sold are also permitted under the indenture. However,
if the consideration received is more than $15 million, our board of directors
must determine the fair market value and deliver its determination to the
trustee in the form of a resolution contained in an officer's certificate. In
addition, at least 60% of the consideration received in such asset sale by us
must be in the form of cash or cash equivalents. Cash equivalents may include
securities if they are promptly sold. Cash equivalents also include assumption
of liabilities.
Within 365 days after a permitted sale of assets, we may apply the net
proceeds from an asset sale for any of the following purposes:
- to repay indebtedness under one of our credit facilities,
- to acquire a power generating facility or a business, or assets used in a
business, that develops, constructs, manages, or improves power
generating facilities,
- to make capital expenditures, or
- to acquire a minority interest in one of our restricted subsidiaries.
Any proceeds from an asset sale that are not applied or invested as
provided above in the preceding paragraph will constitute "excess proceeds."
When the aggregate amount of excess proceeds exceeds $25.0 million, we will make
an offer to all holders of notes and all holders of other indebtedness that is
equal to the notes to repurchase their notes and other indebtedness. The offer
price will be equal to 100% of the principal amount plus accrued and unpaid
interest to the date of purchase, and will be payable in cash. If any excess
proceeds remain after consummation of this offer, we may use those excess
proceeds for any purpose not otherwise prohibited by the indenture. We will
comply with all securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with this repurchase of notes
and other indebtedness.
The credit facilities of Orion Power MidWest, L.P. and Orion Power New
York, L.P. contain prohibitions against asset sales and events that would
constitute a change of control under the indenture. In addition, the exercise by
the holders of notes of their right to require us to repurchase the notes upon a
change of control or an asset sale could cause a default under these credit
facilities due to the financial effect of such repurchases on us, even if the
change of control or asset sale itself does not cause a default. These credit
facilities also severely restrict our ability to access the cash flow of our
subsidiaries for any purpose, including to finance an offer to repurchase notes
upon a change of control or an asset sale. Finally, our ability to pay cash to
the holders of notes upon a repurchase may be limited by our then existing
financial resources. See "Risk Factors -- Risks Relating to our Business and
Operations -- If a change in
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control occurs, it may negatively affect or allow termination of several of our
important agreements."
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange, on a
pro rata basis, by lot or by such method as the trustee shall deem fair
and appropriate.
No notes of $1,000 or less will be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the holder thereof
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of notes called for redemption.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
We will not, and will not permit any of our restricted subsidiaries to,
directly or indirectly:
- declare or pay any dividend or make any other payment or distribution on
account of our stock;
- purchase, redeem or otherwise acquire our stock (except employee stock up
to a certain amount) unless we use the proceeds of a concurrent sale of
stock to effect this purchase or redemption;
- make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any indebtedness that is
subordinated in right of payment to the notes, except a payment of
interest or principal at the stated maturity of the indebtedness or to
refinance the indebtedness within one year of its final maturity date or
if the payment is made out of proceeds of a concurrent sale of stock or
permitted debt; or
- make any investment unless the investment is specifically permitted under
the indenture.
However, we may make any of the restricted payments listed above if:
- no default has occurred and is continuing or would occur as a consequence
of the payment;
- we would be in compliance with our fixed charge coverage ratio test under
the indenture; and
- the restricted payment, together with the aggregate amount of the
restricted payments listed above made by us after the date of the
indenture is less than $10 million or the sum of:
- 50% of our consolidated net income for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing prior to the date of the
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indenture to the end of our most recently ended fiscal quarter for
which internal financial statements are available at the time of such
restricted payment, plus
- 100% of the aggregate net cash proceeds received by us since the date
of the indenture as a contribution to our common equity capital or
from the issue or sale of our equity interests, plus
- payments of interest or return of capital on investments restricted by
the indenture, plus
- the fair market value of our investment in any unrestricted subsidiary
designated as restricted after the date of the indenture, plus
- any guarantee made by us if the obligation arising under such
guarantee no longer exists.
INCURRENCE OF INDEBTEDNESS
We will not and will not permit any of our restricted subsidiaries to
become liable on any indebtedness unless we are in compliance with the financial
coverage ratios specified in the indenture. We may, however, incur the following
indebtedness:
- intercompany indebtedness and guarantees,
- letters of credit less than $10 million if any account balance on the
letter of credit is paid within 30 days,
- other indebtedness less than $25 million,
- indebtedness in the ordinary course of business if paid within 5 business
days,
- indebtedness involving hedging transactions,
- indebtedness equal to less than 7.5% of our consolidated tangible assets
incurred to finance capital expenditures or to finance acquisitions or
development of property or equipment or a subsidiary that owns or
develops power generating facilities,
- indebtedness under a credit facility if our indebtedness under our
existing credit facilities is less than an amount specified by the
indenture, and
- if we use the proceeds to refinance other indebtedness.
In addition, we will not incur any indebtedness that is subordinated in
right of payment to any other indebtedness of ours unless the indebtedness is
also contractually subordinated in right of payment to the notes.
LIENS
We will not and will not permit any of our restricted subsidiaries to incur
any lien upon any of our property or assets unless all payments due under the
indenture and the notes are secured on an equal basis with the obligations
secured by the lien.
We may, however incur the following liens:
- liens to secure indebtedness as long as the sum of the amount of
indebtedness secured by the liens plus acquisition or any liens replacing
those liens, and
- liens securing capital lease obligations or purchase money obligations.
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DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
We will not restrict ourselves and will not permit any of our restricted
subsidiaries to restrict itself from:
- paying dividends or distributions to us or any of our restricted
subsidiaries;
- making loans or advances to us or any of our restricted subsidiaries; or
- transferring any properties or assets to us or any of our restricted
subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
- any indebtedness existing on the date of the indenture;
- any instrument governing indebtedness of any business we acquire that is
limited to the assets of the acquired business;
- any capital lease or purchase money obligations;
- any liens incurred in connection with any financing for the purpose of
paying down existing indebtedness that are no more restrictive than the
lien under the existing indebtedness;
- restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business; or
- restrictions imposed pursuant to the terms of indebtedness permitted by
the indenture if the restrictions are commercially reasonable, are
required in order to obtain the financing giving rise to the
indebtedness, and will not impair our ability to make interest and
principal payments as required under the notes.
MERGER, CONSOLIDATION OR SALE OF ASSETS
We may not merge into another person or transfer substantially all our
assets unless:
- the surviving entity (which must be organized in the U.S.) assumes all
our obligations under the notes;
- no default will occur; and
- we comply with the financial coverage ratios required by the indenture
This provision will not prohibit an intercompany merger or consolidation or
a merger with an affiliate for the purpose of reorganizing in another
jurisdiction.
TRANSACTIONS WITH AFFILIATES
We will not, and will not permit any of our restricted subsidiaries to,
enter into a transaction with an affiliate unless:
(1) the terms of the transaction are no less favorable to us than those
that would be obtainable in a comparable transaction in arm's-length
dealings with an unrelated third party; and
(2) if the transaction involves assets or property having value in excess
of $10.0 million, the transaction has been approved by a majority of
our directors who do not have a financial interest in the transaction
or if our board receives a written opinion of a nationally recognized
investment banking, accounting or appraisal firm stating that the
transaction is fair to the noteholders from a financial point of view.
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This restriction does not prohibit the following transactions:
- transactions between or among us and/or our restricted subsidiaries;
- any sale or other issuance of stock to an affiliate;
- payments by us or any of our restricted subsidiaries to Goldman, Sachs &
Co. or any of its affiliates in connection with any financial or banking
services;
- transactions with Constellation Energy Group, Inc. or any of its
affiliates in the ordinary course of business;
- transactions with Mitsubishi Corporation, Tokyo Electric Power Company
International B.V. or any of their affiliates in the ordinary course of
business;
- transactions under any agreement in effect on the date of the indenture;
and
- transactions permitted by the Orion Power New York, L.P. credit facility.
SALE AND LEASEBACK TRANSACTIONS
We will not, and will not permit any of our restricted subsidiaries to,
enter into any sale/ leaseback transaction unless:
- we would be entitled to create a lien on the property in an amount equal
to our total obligations under the sale/leaseback transaction under our
lien covenant described above under the caption "-- Liens";
- the net proceeds of the sale are at least equal to the fair value of the
property sold, and we apply the proceeds to pay down indebtedness or we
purchase other property having a fair market value equal to the fair
value of the assets or property sold in the sale/leaseback transaction;
- the sale/leaseback transaction is between us and any of our restricted
subsidiaries or between any of our restricted subsidiaries; or
- our total obligations under any sale/leaseback transactions plus the
amount of indebtedness secured by liens restricted under the indenture
does not exceed 10% of our consolidated tangible assets as of the end of
our most recent fiscal quarter.
LIMITATION ON LINE OF BUSINESS
We will not engage in any business other than the business of owning and
developing power generating facilities. In addition, we will conduct our
businesses in a manner so as to maintain the exemption from treatment as a
public utility holding company under PUHCA. However, if PUHCA is amended in such
a manner that compliance would result in a material adverse effect on our
results of operations or financial condition, then we shall not be required to
comply with this paragraph.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
Our board of directors may designate any restricted subsidiary to be an
unrestricted subsidiary if that designation would not cause a default under the
notes. However, the business currently operated by Orion Power New York, L.P. or
the business operated by Orion Power MidWest, L.P. may not be held by an
unrestricted subsidiary. Furthermore, if a restricted subsidiary is designated
as an unrestricted subsidiary, the amount of our investment in that subsidiary
will reduce the amount of investment or payments permitted under the indenture.
Our board of directors may redesignate any unrestricted subsidiary to be a
restricted subsidiary if the redesignation would not cause a default.
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REPORTS
For so long as any notes are outstanding, we will furnish the holders of
the notes with copies of our annual, quarterly and current reports which we are
required to file with the SEC pursuant to the Exchange Act. In addition, whether
or not required by the SEC, we will file a copy of the annual, quarterly and
current reports with the SEC for public availability within the time periods
specified in the SEC's rules and regulations (unless the SEC will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. We have also agreed, for so long as any
notes remain outstanding, to furnish to the holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act, until such time
as we have either exchanged the notes for securities identical in all material
respects which have been registered under the Securities Act or until such time
as all holders of notes have disposed of their notes pursuant to an effective
registration statement under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is considered an event of default:
(1) default for 30 days in the payment when due of interest on the notes;
(2) default in payment when due of the principal of the notes;
(3) default in performance of any other covenants in the indenture or in
the notes for 60 days after written notice to us;
(4) the default by us or any of our restricted subsidiaries under any
indebtedness having an outstanding principal amount of $25.0 million;
(5) a final judgment is rendered against us for an amount in excess of
$25.0 million; and
(6) events of bankruptcy or insolvency.
If any default occurs and is continuing, the trustee or the holders of at
least 25% in principal amount of the then outstanding notes may declare all the
notes to be due and payable immediately. If an event of bankruptcy or insolvency
occurs, all outstanding notes will become due and payable immediately without
further action or notice.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
None of our directors, officers, employees or stockholders will be liable
for any of our obligations under the notes or the indenture.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may at any time elect to have all of our obligations discharged with
respect to the outstanding notes by depositing with the trustee, in trust, for
the benefit of the holders of the notes, cash or cash equivalents in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, investment bank, or appraisal firm to pay the
principal of, premium and all interest on the outstanding notes on the stated
maturity or on any applicable redemption date.
AMENDMENT, SUPPLEMENT AND WAIVER
The indenture or the notes may be amended and any default may be waived
with the consent of the holders of at least a majority in principal amount of
the notes then outstanding.
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However, without the consent of each holder affected, an amendment or
waiver may not:
- reduce the principal of or change the fixed maturity of any note or alter
the provisions with respect to the redemption of the notes;
- reduce the rate of or change the time for payment of interest on any
note; or
- waive a default in the payment of principal of, or interest or premium,
if any, on, the notes.
Notwithstanding the preceding, without the consent of any holder of notes,
we and the trustee may amend or supplement the indenture or the notes to make
any administrative changes that do not affect the rights of any holders.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when either all notes have been delivered to the
trustee for cancellation or all notes that have not been delivered to the
trustee for cancellation have become due and payable or will become due and
payable within one year, and we have deposited with the trustee cash or cash
equivalents in an amount sufficient to pay and discharge the entire indebtedness
on the notes not delivered to the trustee for cancellation and have paid all
sums payable by us under the indenture. In addition, we must deliver an
officers' certificate and an opinion of counsel to the trustee stating that all
conditions precedent to satisfaction and discharge have been satisfied.
CONCERNING THE TRUSTEE
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee. The indenture
provides that in case any default occurs and is continuing, in taking any action
against us, the trustee will be required to use the degree of care of a prudent
man in the conduct of his own affairs. The trustee will otherwise not be
obligated to exercise any of its rights or powers under the indenture at the
request of any holder of notes, unless such holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights agreement without charge by writing to Orion Power Holdings,
Inc., 7 East Redwood Street, Baltimore, MD 21202, Attention: Chief Financial
Officer.
BOOK-ENTRY; DELIVERY
Except as set forth below, the exchange notes will initially be issued in
the form of one or more Global Notes (each, a "New Global Note"). Each New
Global Note will be deposited on the date of the closing of the exchange of the
outstanding notes for the exchange notes with, or on behalf of, DTC and will be
registered in the name of DTC or its nominee. Investors may hold their
beneficial interests in a New Global Note directly through DTC or indirectly
through organizations which are participants in the DTC system.
Unless and until they are exchanged in whole or in part for certificated
notes, the New Global Notes may not be transferred except as a whole by DTC or
its nominee.
DTC has advised us as follows:
- DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of
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the Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act.
- DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and other organizations.
Indirect access to the DTC system is available to others, including
banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly.
- Upon the issuance of the New Global Notes, DTC or its custodian will
credit, on its internal system, the respective principal amounts of the
exchange notes represented by the New Global Notes to the accounts of
persons who have accounts with DTC. Ownership of beneficial interests in
the New Global Notes will be limited to persons who have accounts with
DTC or persons who hold interests through the persons who have accounts
with DTC. Persons who have accounts with DTC are referred to as
"participants." Ownership of beneficial interests in the New Global Notes
will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee, with respect to
interests of participants, and the records of participants, with respect
to interests of persons other than participants.
As long as DTC or its nominee is the registered owner or holder of the New
Global Notes, DTC or the nominee, as the case may be, will be considered the
sole record owner or holder of the exchange notes represented by the New Global
Notes for all purposes under the indenture and the exchange notes. No beneficial
owners of an interest in the New Global Notes will be able to transfer that
interest except according to DTC's applicable procedures, in addition to those
provided for under the indenture. Owners of beneficial interests in the New
Global Notes will not:
- be entitled to have the exchange notes represented by the New Global
Notes registered in their names,
- receive or be entitled to receive physical delivery of certificated notes
in definitive form, and
- be considered to be the owners or holders of any exchange notes under the
New Global Notes.
Accordingly, each person owning a beneficial interest in the New Global
Notes must rely on the procedures of DTC and, if a person is not a participant,
on the procedures of the participant through which that person owns its
interests, to exercise any right of a holder of exchange notes under the New
Global Notes. We understand that under existing industry practice, if an owner
of a beneficial interest in the New Global Notes desires to take any action that
DTC, as the holder of the New Global Notes, is entitled to take, DTC would
authorize the participants to take that action, and that the participants would
authorize beneficial owners owning through the participants to take that action
or would otherwise act upon the instructions of beneficial owners owning through
them.
Payments of the principal of, premium, if any, and interest on the exchange
notes represented by the New Global Notes will be made by us to the trustee and
from the trustee to DTC or its nominee, as the case may be, as the registered
owner of the New Global Notes. Neither we, the trustee, nor any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the New
Global Notes or for maintaining, supervising or reviewing any records relating
to the beneficial ownership interests.
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We expect that DTC or its nominee, upon receipt of any payment of principal
of, premium, if any, or interest on the New Global Notes will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of the New
Global Notes, as shown on the records of DTC or its nominee. We also expect that
payments by participants to owners of beneficial interests in the New Global
Notes held through these participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers registered in the names of nominees for these customers.
These payments will be the responsibility of these participants.
Transfer between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a holder requires physical delivery of notes in
certificated form for any reason, including to sell notes to persons in states
which require the delivery of the notes or to pledge the notes, a holder must
transfer its interest in the New Global Notes in accordance with the normal
procedures of DTC and the procedures set forth in the indenture.
Unless and until they are exchanged in whole or in part for certificated
exchange notes in definitive form, the New Global Notes may not be transferred
except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or
another nominee of DTC.
Beneficial owners of exchange notes registered in the name of DTC or its
nominee will be entitled to be issued, upon request, exchange notes in
definitive certificated form.
DTC has advised us that DTC will take any action permitted to be taken by a
holder of notes, including the presentation of notes for exchange as described
below, only at the direction of one or more participants to whose account the
DTC interests in the New Global Notes are credited. Further, DTC will take any
action permitted to be taken by a holder of notes only in respect of that
portion of the aggregate principal amount of notes as to which the participant
or participants has or have given that direction.
Although DTC has agreed to these procedures in order to facilitate
transfers of interests in the New Global Notes among participants of DTC, it is
under no obligation to perform these procedures, and may discontinue them at any
time. Neither we nor the trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Subject to specified conditions, any person having a beneficial interest in
the New Global Notes may, upon request to the trustee, exchange the beneficial
interest for exchange notes in the form of certificated notes. Upon any issuance
of certificated notes, the trustee is required to register the certificated
notes in the name of, and cause the same to be delivered to, the person or
persons, or the nominee of these persons. In addition, if DTC is at any time
unwilling or unable to continue as a depositary for the New Global Notes, and a
successor depositary is not appointed by us within 90 days, we will issue
certificated notes in exchange for the New Global Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives notes for its own account in the exchange
offer must acknowledge that it will deliver a prospectus in connection with any
resale of those notes. This prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection with resales of
notes received in the exchange offer where the outstanding notes were acquired
as a result of market-making activities or other trading activities.
We will not receive any proceeds from any sale of notes by broker-dealers.
Notes received by broker-dealers for their own account in the exchange offer may
be sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the notes
or a combination of such methods of resale, at market prices
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prevailing at the time of resale, at prices related to such prevailing market
prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such notes. Any broker-dealer that resells notes that were
received by it for its own account in the exchange offer and any broker or
dealer that participates in a distribution of such notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and profit on any such
resale of notes issued in the exchange and any commission or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
We have agreed to pay all expenses incident to the exchange offer and will
indemnify the holders of the notes, including any broker-dealers, against
certain liabilities, including liabilities under the Securities Act. We note,
however, that, in the opinion of the SEC, indemnification against liabilities
arising under federal securities laws is against public policy and may be
unenforceable.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material United States federal income tax
consequences associated with the exchange of outstanding notes for exchange
notes pursuant to the exchange offer and the ownership and disposition of those
exchange notes. It deals only with notes held as capital assets and does not
purport to deal with persons in special tax situations, such as financial
institutions, banks, insurance companies, real estate investment trusts,
regulated investment companies, dealers in securities or currencies, tax-exempt
entities, persons holding notes in a tax-deferred or tax-advantaged account,
persons holding notes as a hedge or as a position in a "straddle" or as part of
a "conversion transaction" for tax purposes, persons who are required to
mark-to-market for tax purposes, persons receiving payments from the offices of
any broker not located in the United States, or persons whose functional
currency is not the United States dollar. This summary does not deal with
holders other than original purchasers (except where otherwise specifically
noted). In addition, this summary does not address any aspect of state, local or
foreign taxation. This summary is based upon current United States federal
income tax laws, regulations, rulings and judicial decisions, all of which are
subject to change, possibly with retroactive effect.
For purposes of this summary, the term "U.S. person" means a beneficial
owner of a note that is for United States federal income tax purposes (a) a
citizen or resident of the United States, (b) a corporation or partnership
(including an entity treated as a corporation or a partnership for U.S. federal
income tax purposes) created or organized in or under the laws of the United
States or any state thereof or the District of Columbia (except in the case of a
partnership as otherwise provided by Treasury Regulations), (c) an estate the
income of which is subject to United States federal income taxation regardless
of its source, (d) a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or more
United States persons have the authority to control all substantial decisions of
the trust or (e) any other person whose income or gain in respect of a note is
effectively connected with the conduct of a United States trade or business.
Notwithstanding the preceding sentence, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as United States
persons prior to such date that elect to continue to be so treated also shall be
considered U.S. persons. As used herein, the term "non-U.S. person" means a
beneficial owner of a note that is not a U.S. person.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION THAT APPEARS BELOW IS
INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. YOU ARE ADVISED TO CONSULT WITH
YOUR OWN TAX ADVISOR
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REGARDING THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE ACQUISITION, OWNERSHIP,
SALE OR OTHER DISPOSITION OF NOTES IN LIGHT OF YOUR PARTICULAR TAX AND
INVESTMENT SITUATION AND THE PARTICULAR FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS APPLICABLE TO YOU.
This discussion is divided into four sections. If you are a "U.S. person,"
you should read the section captioned "U.S. Holders." If you are a "non-U.S.
person," you should read the section captioned "Non-U.S. Holders." All of you
should read the section captioned "Exchange Offer" and the section captioned
"Backup Withholding."
EXCHANGE OFFER
The exchange of outstanding notes for the notes issued in the exchange
offer will not be treated as an "exchange" for United States federal income tax
purposes because the notes issued in the exchange offer will not differ
materially in kind or extent from the outstanding notes. Rather, the notes
received by a holder in the exchange offer will be treated as a continuation of
the outstanding notes in the hands of the exchanging holder. As a result, there
will be no United States federal income tax consequences to holders exchanging
their outstanding notes for notes issued in the exchange offer. In addition, any
exchanging holder of outstanding notes will have the same adjusted tax basis and
holding period in the notes issued in the exchange offer as such holder had in
the outstanding notes immediately prior to the exchange.
U.S. HOLDERS
Payments of Interest. Under general principles of current United States
federal income tax law, interest on a note generally is taxable to you as
ordinary interest income at the time you accrue or receive the interest in
accordance with your method of accounting for tax purposes.
Disposition of a Note. Under general principles of current United States
federal income tax law, upon the sale, exchange, retirement or other disposition
of a note, you will recognize gain or loss in an amount equal to the difference,
if any, between the amount you realize from the disposition (other than amounts
representing accrued and unpaid interest) and your adjusted tax basis in the
note. Your adjusted tax basis in a note generally equals your initial investment
in the note. Gain or loss realized by you on the sale, exchange, retirement or
other disposition of a note generally will be capital gain or loss and the
capital gain or loss will be long-term capital gain or loss if at the time of
the disposition you have held the note for more than one year. The maximum
long-term capital gain tax rate for individual taxpayers is 20% (and could be
lower for gains realized in the year 2001 and thereafter for certain individual
taxpayers who meet specified conditions).
NON-U.S. HOLDERS
Subject to the discussion of backup withholding below, payments of interest
on a note that you receive from us or our agent generally will not be subject to
United States federal income or withholding tax, provided that
(1) you
- do not actually or constructively own a 10% or greater interest in our
capital or profits, and
- are not a controlled foreign corporation that is related to us
(directly or indirectly) through stock ownership for United States
federal income tax purposes;
(2) such interest payments are not effectively connected with the conduct
of a trade or business carried on by you within the United States; and
(3) we or our paying agent receives
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- from you, a properly completed Form W-8BEN (or substitute Form W-8BEN)
signed under penalties of perjury which provides your name and address
and certifies that you are a non-U.S. person, or
- from a security clearing organization, bank or other financial
institution that holds the notes in the ordinary course of its trade
or business on behalf of you, certification under penalties of perjury
that the Form W-8BEN (or substitute Form W-8BEN) has been received by
it, or by another such financial institution, from you, and a copy of
the Form W-8BEN (or substitute Form W-8BEN) is furnished to us or our
paying agent.
If you do not qualify for an exemption from withholding under the preceding
paragraph, you generally will be subject to withholding of United States federal
income tax at the rate of 30% (or a lower rate if a treaty applies) when you
receive payments of interest on the notes.
If you are engaged in a trade or business in the United States and interest
on the notes is effectively connected with the conduct of the trade or business,
you will not be subject to a withholding tax (assuming proper certification is
provided), but you will be subject to United States federal income tax on the
interest on a net income basis in the same manner as if you were a U.S. person.
In addition, if you are a foreign corporation, you may be subject to a branch
profits tax at a 30% rate (or, if applicable, a lower rate specified by a
treaty).
New rules have been issued to consolidate and modify the current
certification requirements and means by which you may claim exemption from
withholding and backup withholding. These rules apply to payments made after
December 31, 2000 and provide certain presumptions regarding your tax status if
you do not provide appropriate documentation to make this determination. You
must provide certification that complies with these new rules by the first
payment date after these rules become effective. If you are claiming benefits
under an income tax treaty, you may be required to obtain a taxpayer
identification number and to certify your eligibility under the appropriate
treaty's limitations on benefits articles in order to comply with the new rules.
In addition, the new rules may change the certification procedures relating to
the receipt by intermediaries of payments on behalf of a beneficial owner of a
note. Because these rules may apply differently to different holders, you should
consult your own tax advisor regarding the application of these rules to you.
Subject to the discussion concerning backup withholding, any gain realized
by you on the sale, exchange, retirement or other disposition of a note
generally will not be subject to a United States federal income tax, unless (1)
such gain is effectively connected with the conduct of a trade or business
carried on by you within the United States, or (2) you are an individual who is
present in the United States for 183 days or more in the taxable year of the
disposition and certain other conditions are satisfied. Any such gain that is
effectively connected with the conduct of a United States trade or business by
you will be subject to United States federal income tax on a net income basis in
the same manner as if you were a U.S. person and, if you are a corporation, such
gain may also be subject to the 30% United States branch profits tax.
If you are an individual who at the time of death is not a citizen or
resident of the United States, the note held by you at the time of your death
will not be subject to United States federal estate tax, provided that (1) you
do not actually or constructively own a 10% or greater interest in our capital
or profits and (2) the interest accrued on the note was not effectively
connected with your conduct of a United States trade or business.
BACKUP WITHHOLDING
The payment of interest or principal on a note generally is subject to
information reporting and possibly to backup withholding. Information reporting
means that the payment is required to be reported to you and to the Internal
Revenue Service. Backup withholding means that the
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payor is required to collect and deposit 31% of your payment with the IRS as a
tax payment on your behalf.
If you are a U.S. person (other than a corporation or certain exempt
organizations), you may be subject to backup withholding if you do not supply an
accurate taxpayer identification number and certify that your taxpayer
identification number is correct. You may also be subject to backup withholding
if the United States Secretary of the Treasury determines that you have not
reported all interest and dividend income required to be shown on your federal
income tax return or if you do not certify that you have not underreported your
interest and dividend income. If you are a non-U.S. person, backup withholding
and information reporting generally will not apply to payments made to you if
you have certified that you are a non-U.S. person in the manner set forth above
in "Non-U.S. Holders" or you otherwise establish an exemption from backup
withholding (provided that the payor does not have actual knowledge that you are
a U.S. person or that the conditions of any exemption are not satisfied).
Upon the disposition of a note to (or through) the United States office of
a broker, the broker must report the disposition to the IRS and withhold 31% of
the entire proceeds of the disposition, unless either (a) the broker determines
that you are a corporation or other exempt recipient or (b) you provide, in the
required manner, certain identifying information and, in the case of a non-U.S.
person, certify under penalties of perjury that you are a non-U.S. person
(provided the payor does not have actual knowledge that you are a U.S. person).
Payments of the proceeds of a disposition of the notes by or through a foreign
office of a United States broker or foreign broker with certain relationships to
the United States generally will be subject to information reporting, but not
backup withholding, unless (a) the broker has documentation of your foreign
status and has no actual knowledge to the contrary or (b) you otherwise
establish an exemption from information reporting.
Any amount withheld from a payment to you under the backup withholding
rules is refundable or allowable as a credit against your United States federal
income tax liability, provided that the required information is furnished to the
IRS. Certain holders (including, among others, corporations and foreign
individuals who comply with certain certification requirements) are not subject
to backup withholding.
As indicated above in "-- Non-U.S. Holders," the Treasury Department has
issued new rules that consolidate and modify the current certification
requirements and means by which you may claim exemption from United States
federal income tax withholding and provide certain presumptions regarding your
status when payments to you cannot be reliably associated with appropriate
documentation provided to the payor. The regulation generally will be effective
with respect to distributions made after December 31, 2000. You should consult
your own tax advisor regarding the effect these regulations will have on your
reporting and certification requirements.
LEGAL MATTERS
The validity of the notes being offered will be passed upon for us by
Stroock & Stroock & Lavan LLP, New York, New York.
EXPERTS
Our consolidated financial statements included in this prospectus and
elsewhere in this registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements of Orion Power Holdings,
Inc.:
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000, and March 31, 2001 (Unaudited)................... F-3
Consolidated Statements of (Loss) Income for the period
from March 10, 1998 (Date of Inception) to December 31,
1998, and for the years ended December 31, 1999 and
2000, and the periods ended March 31, 2000 and 2001
(Unaudited)............................................ F-4
Consolidated Statements of Changes in Stockholders' Equity
for the period from March 10, 1998 (Date of Inception)
to December 31, 1998, and for the years ended December
31, 1999 and 2000, and the period ended March 31, 2001
(Unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the period from
March 10, 1998 (Date of Inception) to December 31,
1998, and for the years ended December 31, 1999 and
2000, and the periods ended March 31, 2000 and 2001
(Unaudited)............................................ F-6
Notes to Consolidated Financial Statements December 31,
1999 and 2000, and March 31, 2001 (Unaudited).......... F-8
Condensed Financial Statements of Orion Power Holdings, Inc.
Report of Independent Public Accountants.................. F-34
Condensed Balance Sheets as of December 31, 1999 and
2000................................................... F-35
Condensed Statements of (Loss) Income for the period from
March 10, 1998 (Date of Inception) to December 31,
1998, and for the years ended December 31, 1999 and
2000................................................... F-36
Condensed Statements of Cash Flows for the period from
March 10, 1998 (Date of Inception) to December 31,
1998, and for the years ended December 31, 1999 and
2000................................................... F-37
Notes to Condensed Financial Statements
December 31, 1999 and 2000............................. F-38
F-1
109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orion Power Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Orion Power
Holdings, Inc. (a Delaware corporation) and subsidiaries (Orion Power) as of
December 31, 1999 and 2000, and the related consolidated statements of (loss)
income, changes in stockholders' equity and cash flows for the period from March
10, 1998 (date of inception), to December 31, 1998, and for each of the two
years in the period ended December 31, 2000. These financial statements are the
responsibility of Orion Power's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orion Power
Holdings, Inc. and its subsidiaries as of December 31, 1999 and 2000, and the
results of their operations and their cash flows for the period from March 10,
1998 (date of inception) to December 31, 1998 and for each of the two years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
March 2, 2001
(except with respect to the matters discussed in Note 14, as to which the date
is March 15, 2001)
F-2
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------------- MARCH 31,
1999 2000 2001
----------- ----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 78,549 $ 135,834 $ 179,259
Restricted cash......................................... 56,866 283,426 189,441
Accounts receivable, net of allowances for bad debts of
$0, $1,458 and $1,458, as of December 31, 1999,
December 31, 2000 and March 31, 2001, respectively... 37,271 154,777 146,538
Inventories and supplies................................ 10,427 44,881 44,553
Deferred income tax assets.............................. 1,083 14,920 52,693
Prepaid expenses and other current assets............... 13,765 28,307 25,991
----------- ----------- -----------
Total current assets...................................... 197,961 662,145 638,475
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET............................... 975,835 3,083,546 3,169,440
----------- ----------- -----------
OTHER NONCURRENT ASSETS:
Prepaid expenses and other noncurrent assets.............. 3,164 12,134 25,977
Identifiable purchased intangibles, net of accumulated
amortization of $857, $4,998 and $6,280, as of December
31, 1999, December 31, 2000 and March 31, 2001,
respectively............................................ 59,284 70,786 69,504
Deferred financing costs, net of accumulated amortization
of $2,178, $13,587 and $17,333 as of December 31, 1999,
December 31, 2000 and March 31, 2001, respectively...... 15,763 41,579 38,083
----------- ----------- -----------
Total other noncurrent assets............................. 78,211 124,499 133,564
----------- ----------- -----------
Total assets.............................................. $ 1,252,007 $ 3,870,190 $ 3,941,479
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 23,643 $ 117,000 $ 65,378
Accrued expenses........................................ 14,420 50,711 41,065
Accrued interest........................................ 3,573 18,641 31,230
Deferred revenue........................................ 1,794 1,836 917
Note payable -- current portion......................... 286 261 261
Other current liabilities............................... -- -- 80,988
----------- ----------- -----------
Total current liabilities................................. 43,716 188,449 219,839
NOTE PAYABLE, LONG-TERM................................... 308 -- --
NOTES PAYABLE TO STOCKHOLDERS............................. 71,086 -- --
LONG-TERM DEBT............................................ 716,000 2,367,637 2,431,094
DEFERRED INCOME TAX LIABILITIES........................... 3,094 8,931 16,785
OTHER LONG-TERM LIABILITIES............................... 22,387 50,391 51,173
----------- ----------- -----------
Total liabilities......................................... 856,591 2,615,408 2,718,891
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 200 million shares
authorized; 36,162,629, 93,095,926 and 93,095,926
shares issued and outstanding as of December 31,
1999, December 31, 2000 and March 31, 2001,
respectively......................................... 362 931 931
Additional paid-in capital.............................. 393,416 1,230,467 1,230,467
Deferred compensation................................... (1,811) (3,359) (2,960)
Notes receivable from officers.......................... (671) (5,916) (6,007)
Accumulated other comprehensive income.................. -- -- (47,619)
Retained earnings....................................... 4,120 32,659 47,776
----------- ----------- -----------
Total stockholders' equity................................ 395,416 1,254,782 1,222,588
----------- ----------- -----------
Total liabilities and stockholders' equity................ $ 1,252,007 $ 3,870,190 $ 3,941,479
=========== =========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE
PERIOD FROM
MARCH 10, FOR THE THREE MONTHS
1998 (DATE OF FOR THE YEARS ENDED ENDED
INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------- -----------------------
1998 1999 2000 2000 2001
-------------- -------- -------- ---------- ----------
(UNAUDITED)
OPERATING REVENUES (NOTE 6).............. $ 314 $134,074 $957,569 $ 105,506 $ 274,251
------- -------- -------- ---------- ----------
OPERATING EXPENSES
Fuel................................... -- 20,463 437,763 30,666 111,728
Gain on derivative financial
instruments.......................... -- -- -- -- (1,521)
Operations and maintenance (Note 6).... 24 22,732 97,607 13,964 27,906
General and administrative............. 2,620 16,755 37,082 5,389 12,778
Taxes, other than income taxes......... -- 20,785 60,751 13,519 17,786
Depreciation and amortization.......... 94 18,938 103,196 13,050 32,195
Charge for buyout of operations and
maintenance contracts with related
party (Notes 3 and 6)................ -- -- 19,000 -- --
------- -------- -------- ---------- ----------
Total operating expenses........ 2,738 99,673 755,399 76,588 200,872
------- -------- -------- ---------- ----------
OPERATING (LOSS) INCOME.................. (2,424) 34,401 202,170 28,918 73,379
INTEREST INCOME.......................... 13 1,824 15,281 388 5,791
INTEREST EXPENSE......................... (137) (25,767) (168,670) (14,731) (52,891)
------- -------- -------- ---------- ----------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAX......................... (2,548) 10,458 48,781 14,575 26,279
INCOME TAX (BENEFIT) PROVISION........... (1,006) 4,796 20,242 6,281 11,162
------- -------- -------- ---------- ----------
NET (LOSS) INCOME........................ $(1,542) $ 5,662 $ 28,539 $ 8,294 $ 15,117
======= ======== ======== ========== ==========
(LOSS) EARNINGS PER AVERAGE COMMON SHARE:
Basic.................................. $(12.94) $ 0.39 $ 0.46 $ 0.23 $ 0.16
======= ======== ======== ========== ==========
Diluted................................ $(12.94) $ 0.38 $ 0.44 $ 0.22 $ 0.15
======= ======== ======== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
112
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK ADDITIONAL NOTES OTHER RETAINED
------------------- PAID-IN DEFERRED RECEIVABLE COMPREHENSIVE EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION FROM OFFICERS INCOME (DEFICIT)
------ ------ ---------- ------------ ------------- ------------- ---------
BEGINNING BALANCE, MARCH
10, 1998................. -- $ -- $ -- $ -- $ -- $ -- $ --
Sale of common stock..... 1,864,542 19 18,626 -- (35) -- --
Net loss................. -- -- -- -- -- -- (1,542)
Comprehensive loss....... -- -- -- -- -- -- --
---------- ---- ---------- ------- ------- -------- --------
BALANCE, DECEMBER 31,
1998..................... 1,864,542 19 18,626 -- (35) -- (1,542)
Sale of common stock, net
of fees................ 34,298,087 343 382,623 -- (636) -- --
Distribution to
stockholders (Note
6)..................... -- -- (9,750) -- -- -- --
Deferred compensation
pursuant to issuance of
stock options.......... -- -- 1,917 (1,917) -- -- --
Amortization of deferred
compensation........... -- -- -- 106 -- -- --
Net income............... -- -- -- -- -- -- 5,662
Comprehensive income..... -- -- -- -- -- -- --
---------- ---- ---------- ------- ------- -------- --------
BALANCE, DECEMBER 31,
1999..................... 36,162,629 362 393,416 (1,811) (671) -- 4,120
Sale of common stock, net
of fees................ 56,933,297 569 851,250 -- (5,001) -- --
Distribution to
stockholders (Note
6)..................... -- -- (17,050) -- -- -- --
Deferred compensation
pursuant to issuance of
stock options.......... -- -- 2,851 (2,851) -- -- --
Amortization of deferred
compensation........... -- -- -- 1,303 -- -- --
Change in notes
receivable............. -- -- -- -- (244) -- --
Net income............... -- -- -- -- -- -- 28,539
Comprehensive income..... -- -- -- -- -- -- --
---------- ---- ---------- ------- ------- -------- --------
BALANCE, DECEMBER 31,
2000..................... 93,095,926 931 1,230,467 (3,359) (5,916) -- 32,659
Change in valuation of
cash flow hedges
(unaudited)............ -- -- -- -- -- (14,289) --
Derivative transition
adjustment
(unaudited)............ -- -- -- -- -- (33,330) --
Amortization of deferred
compensation
(unaudited)............ -- -- -- 399 -- -- --
Change in notes
receivable
(unaudited)............ -- -- -- -- (91) -- --
Net income (unaudited)... -- -- -- -- -- -- 15,117
Comprehensive loss
(unaudited)............ -- -- -- -- -- -- --
---------- ---- ---------- ------- ------- -------- --------
BALANCE, MARCH 31, 2001
(unaudited).............. 93,095,926 $931 $1,230,467 $(2,960) $(6,007) $(47,619) $ 47,776
========== ==== ========== ======= ======= ======== ========
COMPREHENSIVE
TOTAL INCOME (LOSS)
----- -------------
BEGINNING BALANCE, MARCH
10, 1998................. $ --
Sale of common stock..... 18,610
Net loss................. (1,542) $ (1,542)
--------
Comprehensive loss....... -- $ (1,542)
---------- ========
BALANCE, DECEMBER 31,
1998..................... 17,068
Sale of common stock, net
of fees................ 382,330
Distribution to
stockholders (Note
6)..................... (9,750)
Deferred compensation
pursuant to issuance of
stock options.......... --
Amortization of deferred
compensation........... 106
Net income............... 5,662 $ 5,662
--------
Comprehensive income..... -- $ 5,662
---------- ========
BALANCE, DECEMBER 31,
1999..................... 395,416
Sale of common stock, net
of fees................ 846,818
Distribution to
stockholders (Note
6)..................... (17,050)
Deferred compensation
pursuant to issuance of
stock options.......... --
Amortization of deferred
compensation........... 1,303
Change in notes
receivable............. (244)
Net income............... 28,539 $ 28,539
--------
Comprehensive income..... -- $ 28,539
---------- ========
BALANCE, DECEMBER 31,
2000..................... 1,254,782
Change in valuation of
cash flow hedges
(unaudited)............ (14,289) $(14,289)
Derivative transition
adjustment
(unaudited)............ (33,330) (33,330)
Amortization of deferred
compensation
(unaudited)............ 399
Change in notes
receivable
(unaudited)............ (91)
Net income (unaudited)... 15,117 15,117
--------
Comprehensive loss
(unaudited)............ -- $(32,502)
---------- ========
BALANCE, MARCH 31, 2001
(unaudited).............. $1,222,588
==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
113
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE PERIOD FROM FOR THE YEARS ENDED FOR THE THREE MONTHS
MARCH 10, 1998 DECEMBER 31, ENDED MARCH 31,
(DATE OF INCEPTION) TO ------------------- --------------------
DECEMBER 31, 1998 1999 2000 2000 2001
---------------------- ---- ---- ---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................... $ (1,542) $ 5,662 $ 28,539 $ 8,294 $ 15,117
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation and amortization............ 94 21,116 114,496 13,050 35,941
Charge for buyout of operations
and maintenance contracts
(Notes 3 and 6)........................ -- -- 18,900 -- --
Deferred income taxes.................... (1,006) 3,017 (8,000) 2,181 4,203
Deferred compensation.................... -- 106 1,303 -- 399
Notes receivable from officers........... -- (21) (244) -- (91)
Gain on derivative financial
instruments............................ -- -- -- -- (1,521)
Change in assets and liabilities:
Restricted cash........................ (623) (30,243) (169,268) 14,976 93,985
Accounts receivable.................... (22) (37,249) (117,506) (2,701) 8,239
Inventories and supplies............... -- (4,182) 7,930 (461) 328
Prepaid expenses and other current
assets............................... (2) 6,004 (13,928) (11,598) 3,084
Prepaid expenses and other noncurrent
assets............................... -- 3,164 (2,147) -- (13,843)
Accounts payable....................... 477 23,166 83,286 (12,175) (51,622)
Accrued expenses....................... 235 14,185 36,260 (2,105) (9,646)
Accrued interest....................... 54 3,540 13,952 1,181 12,589
Other long-term liabilities............ -- 397 3,629 662 782
Deferred revenue....................... -- 1,794 42 (897) (919)
-------- ---------- ---------- ---------- ----------
Net cash (used in) provided by operating
activities................................. (2,335) 10,456 (2,756) 10,407 97,025
-------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and related
assets in acquisitions (see Notes 2 and
3)....................................... (16,407) (1,024,332) (1,975,252) -- --
Purchase of property and equipment in
operations............................... -- (22,835) (137,881) (2,923) (116,807)
-------- ---------- ---------- ---------- ----------
Net cash used in investing activities........ (16,407) (1,047,167) (2,113,133) (2,923) (116,807)
-------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net.............. 18,610 382,330 756,832 -- --
Distribution to stockholders............... -- (9,750) (17,050) -- --
Proceeds from long-term debt............... -- 720,000 1,629,537 -- 66,900
Payments on long-term debt................. -- (4,000) (109,000) (8,000) (3,443)
Proceeds from notes payable to
stockholders............................. 1,735 110,539 -- 10 --
Payments on notes payable to stockholders.. -- (41,188) -- -- --
Funding of reserve accounts established
with the Credit Agreement (restricted
cash).................................... -- (26,000) (55,000) -- --
Payment on note payable.................... -- (333) (333) -- --
Payment of deferred financing costs........ -- (17,941) (31,812) -- (250)
-------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities................................. 20,345 1,113,657 2,173,174 (7,990) 63,207
-------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 1,603 76,946 57,285 (506) 43,425
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD..................................... -- 1,603 78,549 78,549 135,834
-------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD..... $ 1,603 $ 78,549 $ 135,834 $ 78,043 $ 179,259
======== ========== ========== ========== ==========
F-6
114
FOR THE PERIOD FROM FOR THE YEARS ENDED FOR THE THREE MONTHS
MARCH 10, 1998 DECEMBER 31, ENDED MARCH 31,
(DATE OF INCEPTION) TO ------------------- --------------------
DECEMBER 31, 1998 1999 2000 2000 2001
---------------------- ---- ---- ---- ----
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................................. $ 83 $ 20,070 $ 144,436 $ 13,208 $ 38,806
======== ========== ========== ========== ==========
Income taxes............................. -- $ 640 $ 25,111 $ 2,056 $ 7,522
======== ========== ========== ========== ==========
Noncash disclosure --
Note payable for inventory............... $ 859 $ -- $ -- $ -- $ --
======== ========== ========== ========== ==========
Notes receivable from officers........... $ 35 $ 615 $ 5,001 $ -- $ --
======== ========== ========== ========== ==========
Other long-term liabilities assumed in
acquisitions........................... $ -- $ 21,990 $ 24,375 $ -- $ --
======== ========== ========== ========== ==========
Debt assumed in acquisitions............. $ -- $ -- $ 131,100 $ -- $ --
======== ========== ========== ========== ==========
Conversion of notes payable to equity.... $ -- $ -- $ 71,086 $ -- $ --
======== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
115
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 2000 AND MARCH 31, 2001 (UNAUDITED)
1. ORGANIZATION
Orion Power Holdings, Inc. (Orion Power) and subsidiaries, a Delaware
corporation, is engaged in the business of acquiring, developing, owning and
managing electric power generating facilities in North America. Orion Power was
incorporated on March 10, 1998, by Constellation Power Source Inc. (CPS), a
Delaware corporation and an affiliate of Baltimore Gas and Electric Company
(BG&E), and GS Capital Partners II, L.P. along with certain other affiliated
private investment funds managed by Goldman, Sachs & Co. (collectively GSCP). On
November 5, 1999, certain affiliates of Mitsubishi Corporation (Mitsubishi) and
Tokyo Electric Power Company International B.V. (TEPCO) became stockholders of
Orion Power. In December 1999, CPS transferred its interest in Orion Power to an
affiliate -- Constellation Enterprises, Inc. (Constellation).
There are significant risks associated with our business, including
possible changes in federal and state government regulations, possible increased
environmental regulations and changing market structures. As the impact of the
deregulation of the energy industry evolves in areas in which Orion Power
operates, certain changes may adversely impact our operations. However, since
Orion Power operates in several markets (see Note 3) and has certain long-term
contracts in place, management does not believe that such changes would have an
immediate adverse impact on operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Orion Power and its wholly owned subsidiaries. All material intercompany
transactions have been eliminated in the accompanying consolidated financial
statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The purchase prices of the acquisitions (see Note 3) were allocated to the
acquired assets, including identifiable intangible assets and assumed
liabilities. Property and equipment and intangible assets were recorded based on
the advice of independent valuation experts. Certain assets and liabilities have
been recorded based on estimates and are subject to adjustment based upon
receipt of final information or resolution of uncertainties. As of December 31,
2000, Orion Power has reallocated certain identifiable intangible assets to
generation assets based on the advice of independent valuation experts.
CASH AND CASH EQUIVALENTS
Orion Power considers all investments with an original maturity of three
months or less to be cash equivalents.
F-8
116
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED CASH
Restricted cash includes cash which is restricted under the terms of
certain wholly owned subsidiaries' credit and operating agreements. Restricted
cash includes amounts restricted for major maintenance, debt service, and
operations and maintenance costs (see Note 5).
INVENTORIES AND SUPPLIES
Inventories and supplies are valued at the lower of cost or market using
the FIFO method. Inventories and supplies are comprised of the following as of
December 31, 1999 and 2000 (in thousands):
1999 2000
---- ----
Fuel........................................................ $ 3,333 $17,439
Supplies.................................................... 7,094 27,442
------- -------
$10,427 $44,881
======= =======
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost or is recorded based on a
valuation performed by an independent expert at the time of acquisition and is
depreciated on a straight-line basis over the useful life of the asset. The
valuations considered the current replacement cost for similar capacity, market
value and discounted cash flows. Other equipment is carried at cost or at the
fair value determined at acquisition.
As of December 31, 1999 and 2000, the components of property and equipment,
net are as follows (in thousands):
1999 2000 USEFUL LIVES
---- ---- ------------
Structures and improvements................... $196,664 $ 637,650 15-40
Production assets............................. 584,903 1,640,693 10-30
Accessories and other equipment............... 141,718 340,619 3-15
Other assets.................................. 17,311 117,533 3-30
-------- ----------
940,596 2,736,495
Less: accumulated depreciation................ (18,075) (116,861)
-------- ----------
922,521 2,619,634
Land.......................................... 53,314 66,610
Construction in progress...................... -- 397,302
-------- ----------
Property and equipment, net................... $975,835 $3,083,546
======== ==========
Depreciation expense for the period from March 10, 1998 (Date of Inception)
to December 31, 1998, and the years ended December 31, 1999 and 2000, was (in
thousands) $94, $18,081 and $99,026, respectively.
Repairs and maintenance costs are expensed as incurred.
Construction in progress is attributable to projects under construction
during 2000. Orion Power capitalizes interest on projects during the development
and construction period. There
F-9
117
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was (in thousands) $0 and $3,885 of capitalized interest as of December 31, 1999
and 2000, respectively.
PROJECT DEVELOPMENT COSTS
Project development costs represent amounts incurred for professional
services, direct salaries, permits, options on real property and other direct
incremental costs related to the development of new property and equipment,
principally electric generating facilities. These costs are expensed as incurred
until development reaches a stage when it is probable that the project will be
completed. A project is considered probable of completion upon meeting one or
more milestones which may include a power sales contract or securing
construction or operating permits, among others. Project development costs that
are incurred after a project is considered probable of completion but prior to
starting physical construction are capitalized. Project development costs are
included in construction in progress when physical construction begins. Orion
Power periodically assesses project development costs for impairment. Project
development costs are included in prepaid expenses and other noncurrent assets
in the accompanying consolidated balance sheets.
IDENTIFIABLE PURCHASED INTANGIBLES
Identifiable purchased intangibles include certain Federal Energy
Regulatory Commission (FERC) licenses for its hydroelectric plants. These items
are recorded based on an estimated fair value determined from an independent
expert valuation and amortized on a straight-line basis over the life of the
related license, ranging from 8 to 40 years.
The balance in identifiable purchased intangibles as of December 31, 1999
and 2000, included the following (in thousands):
1999 2000
---- ----
FERC licenses.......................................... $60,141 $60,348
POLR contract (Note 3)................................. -- 14,288
Other.................................................. -- 1,148
Accumulated amortization............................... (857) (4,998)
------- -------
Total.................................................. $59,284 $70,786
======= =======
Amortization expense related to identifiable purchased intangibles for the
period from March 10, 1998 (Date of Inception) to December 31, 1998, and the
years ended December 31, 1999 and 2000, was (in thousands) $0, $857 and $4,170,
respectively.
DEFERRED FINANCING COSTS
Financing costs, consisting primarily of the costs incurred to obtain debt
financing, are deferred and amortized using the effective interest method, over
the term of the related permanent financing. Amortization expense is included in
interest expense on the accompanying statements of (loss) income.
DERIVATIVES
Derivative financial instruments (Derivatives) are contracts which
typically derive value from changes in interest rates, foreign exchange rates,
credit spreads, prices of securities or financial or commodity indices. The
timing of cash receipts and payments for derivatives is generally determined by
contractual agreement. Derivatives can be either standardized contracts that are
F-10
118
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
traded on an organized exchange or privately negotiated contracts. Futures
contracts are examples of standard exchange-traded derivatives. Privately
negotiated derivative contracts include forwards, interest rate swaps and
certain option contracts. Orion Power enters into interest rate swap agreements
and commodity forward contracts for other than trading purposes. Derivatives
used for other than trading purposes are related to hedging variable cash flows
on floating rate debt and hedging the purchase and sale price of various
commodities.
Interest rate swaps are contractual agreements to exchange periodic
interest payments at specified intervals. The notional amounts of interest rate
swaps are not exchanged; they are used in conjunction with the agreed-upon fixed
and/or floating interest rates to calculate the periodic interest payments.
Commodity swaps are contractual commitments to exchange the fixed price of
a commodity for floating price. Commodity forwards are privately negotiated
agreements to purchase or sell a specific amount of a commodity at an
agreed-upon price and settlement date.
Orion Power accounts for its derivative instruments as either cash flow
hedges or no hedging designation. To qualify for cash flow hedge accounting, the
hedge relationship must be formally documented at inception and be anticipated
to be highly effective. If the requirements for hedge accounting are not met,
Orion Power accounts for derivatives as no hedging designation.
Orion Power reports interest rate swaps at fair value with changes in the
swap fair value reported in either Other Comprehensive Income (OCI) or earnings
as determined by the accounting method applied. For swaps qualifying for hedge
accounting, the gains/losses on the swaps that are deemed effective are deferred
in OCI. Deferred gains and losses from effective hedge relationships will be
reclassified into earnings as adjustments to interest expense over the life of
the hedged debt. If the swap does not qualify for hedge accounting, any change
in fair value is reported currently in earnings.
Orion Power accounts for the commodity forwards for electricity at fair
value, with the change in fair value reported in OCI. The effective portion of
the derivative fair value change for those swaps that qualify as cash flow
hedges of the forecasted sale of electricity is deferred as part of OCI. The
deferred gains/losses on the electricity forward contracts are reclassified from
OCI to earnings in the same period as the hedged sale of electricity impacts
earnings. If hedge accounting is not applied, any fair value changes in the
electricity forwards are reported currently in earnings.
Orion Power classifies its fuel swap contracts and financial tolling
arrangements as no hedging designation under Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activity". These contracts are reported at fair value with any changes in fair
value reported currently in earnings.
COMPREHENSIVE INCOME
Orion Power's comprehensive income consists of net income and other items
recorded directly to the equity accounts. The objective is to report a measure
of all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners. Orion
Power accumulated other comprehensive income consists principally of gains and
losses on derivative instruments that qualify for cash flow hedge treatment.
INCOME TAXES
Orion Power accounts for income taxes under the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes," and, accordingly,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences
F-11
119
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using existing
enacted tax rates. The effect on deferred tax assets and liabilities of a change
in tax rates would be recognized in income in the period that includes the
enactment date.
ASSET IMPAIRMENT
Orion Power periodically reviews its long-lived assets, including property
and equipment, and identifiable purchased intangibles for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the expected future undiscounted cash flows
are less than the carrying amount of an asset, an impairment loss would be
recognized.
REVENUE RECOGNITION
Revenues from the sale of electricity are recorded based on output
delivered and capacity provided at rates specified under contract terms or
received in the wholesale marketplace.
START-UP AND ORGANIZATION COSTS
Costs related to start-up activities and the organization of Orion Power
were expensed as incurred.
CUSTOMER CONCENTRATION
All revenues for the period from March 10, 1998 (Date of Inception) to
December 31, 1998, were from CPS.
For the year ended December 31, 1999, revenues recognized on contracts with
Niagara Mohawk Power Corporation (Niagara Mohawk), Consolidated Edison Company
of New York Inc. (Consolidated Edison) and the New York Independent System
Operator (NY-ISO) (see Note 3) were approximately $30,961,000, $72,481,000, and
$22,237,000, representing approximately 23, 54 and 17 percent of total operating
revenue, respectively.
Accounts receivable from Niagara Mohawk, Consolidated Edison and the NY-ISO
as of December 31, 1999, were approximately $6,544,000, $15,973,000, and
$14,665,000, representing approximately 17, 43 and 39 percent of the total
accounts receivable balance, respectively.
For the year ended December 31, 2000, revenues recognized on contracts with
Niagara Mohawk, Consolidated Edison, the NY-ISO and Duquesne Light Company
(Duquesne) were approximately $92,376,000, $84,236,000, $413,157,000, and
$283,389,000, representing approximately 10, 9, 43 and 30 percent of total
operating revenue, respectively.
Accounts receivable from Niagara Mohawk, Consolidated Edison, the NY-ISO
and Duquesne as of December 31, 2000, were approximately $6,123,000, $2,723,000,
$64,236,000, and $65,434,000, representing approximately 4, 2, 42 and 42 percent
of the total accounts receivable balance, respectively.
STOCK-BASED COMPENSATION
As described in Note 9, Orion Power accounts for stock-based employee
compensation arrangements using the intrinsic value method in accordance with
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and
F-12
120
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB Opinion No. 25, compensation cost is
recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock.
EARNINGS PER SHARE
Basic net income (loss) per share is computed by dividing income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. The diluted net income (loss) per share data
is computed using the weighted-average number of common shares outstanding plus
the dilutive effect of common stock equivalents, unless the common stock
equivalents are antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the SEC staff released Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition," to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101 is
effective December 31, 2000. Adoption of SAB No. 101 will not have a material
impact on Orion Power's current revenue recognition policies.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which replaces SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This standard revises the methods for accounting for securitizations and other
transfers of financial assets and collateral as outlined in SFAS No. 125, and
requires certain additional disclosures. The Company does not expect the
adoption of this standard to have a material effect on its financial position or
results of operations.
See Note 12 for discussion of adoption of SFAS No. 133.
BASIS OF INTERIM PRESENTATION
The financial information as of March 31, 2001, and for the three months
ended March 31, 2000 and 2001, is unaudited, but includes all adjustments,
consisting only of normal recurring adjustments, that Orion Power's management
considers necessary for a fair presentation of Orion Power's operating results
and cash flows for such periods. Results for the three month period ended March
31, 2001, are not necessarily indicative of results to be expected for the full
fiscal year of 2001 or for any future period.
3. ACQUISITIONS
1999 ACQUISITIONS
NIAGARA MOHAWK. On July 30, 1999, Orion Power, through its wholly owned
subsidiary Erie Boulevard Hydropower, L.P. (Erie Blvd.), purchased certain
hydroelectric generating assets and assumed certain liabilities (see Notes 7 and
8) from Niagara Mohawk, for approximately $425,000,000 in cash including
acquisition costs of approximately $1,700,000. These facilities consist of 70
hydro power plants with a capacity of 650 MW (the Hydro Assets).
In connection with this acquisition, Erie Blvd. entered into a Transition
Power Purchase Agreement (the Erie Sales Agreement) with Niagara Mohawk from the
closing date through September 30, 2001. Under the terms of the Erie Sales
Agreement, Erie Blvd. will produce and deliver tiered amounts of electric energy
to Niagara Mohawk. As consideration, Erie Blvd. will
F-13
121
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receive capacity payments and energy revenue based on the amount of electric
energy produced and sold to Niagara Mohawk. If Erie Blvd. fails to produce
contractual minimum levels of electric energy, it will be required to pay a
penalty based on formulas set forth in the Erie Sales Agreement. In the third
quarter of 1999, Erie Blvd. failed to meet the minimum threshold under this
contract due to a drought. This resulted in additional costs to meet the
obligation of approximately $1,700,000 for the year, which are recorded in fuel
expense in 1999 in the accompanying financial statements. As part of the
independent valuation performed of the acquisition of the Hydro Assets, the
third party considered these agreements with Niagara Mohawk and determined that
such agreements were at market value. Therefore, no asset or liability related
to the Erie Sales Agreements has been recognized by Orion Power.
Orion Power is currently negotiating with Niagara Mohawk to extend the term
of the Erie Sales Agreement, with certain modifications. If an agreement is not
reached, Orion Power would sell power from the Erie Blvd. plants into the
market.
CONSOLIDATED EDISON. On August 20, 1999, Orion Power, through its wholly
owned subsidiary Astoria Generating Company, L.P. (Astoria), purchased certain
generating assets located in New York City and assumed certain liabilities (see
Notes 7 and 8) from Consolidated Edison, for approximately $550,000,000 in cash
including acquisition costs of approximately $2,100,000. The Astoria facilities
consist of three gas- or oil-fired plants with a capacity of 2,030 MW (the New
York City Assets).
In connection with this acquisition, Astoria entered into a Transition
Capacity Agreement and a Transition Energy Sales Agreement (collectively, the
Astoria Sales Agreements) with Consolidated Edison. As consideration, Astoria
received capacity payments and energy revenue based on the amounts of electric
energy produced and sold to Consolidated Edison. The Transition Energy Sales
Agreement had a term from the closing date through the commencement of the
energy market administered by the NY-ISO. The Transition Energy Sales Agreement
was terminated on the commencement of the NY-ISO, which occurred on November 18,
1999. The Transition Capacity Agreement had a term from the closing date through
the later of (a) the earlier of (i) December 31, 2002 or (ii) the date on which
Astoria receives written notice from the NY-ISO that none of the electric
capacity of the Astoria assets is required for meeting the installed capacity
requirements in New York City as determined by the NY-ISO, or (b) the date the
NY-ISO capacity market commences. The NY-ISO capacity market began operations on
May 1, 2000. Under the terms of the Astoria Sales Agreements, during the period
of the Transition Energy Sales Agreement, Consolidated Edison provided all of
the fuel to the Astoria facilities and received from the facilities all of the
capacity and electric energy. As part of the independent valuation performed of
the acquisition of the New York City Assets, the third party valued these
agreements with Consolidated Edison and determined that such agreements were at
market value. Therefore, no asset or liability related to these agreements has
been recognized by Orion Power.
2000 ACQUISITIONS
CONSTELLATION OPERATING SERVICES, INC. On April 26, 2000, Orion Power
purchased all of the outstanding stock of the three subsidiaries of
Constellation Operating Services, Inc. (COSI), which pursuant to certain
operation and maintenance service agreements operated all of Orion Power's
assets. Orion Power also acquired another subsidiary that was established to
perform operations and maintenance services for the Midwest Assets following the
completion of the acquisition. COSI is a wholly owned subsidiary of
Constellation Energy, Inc. The purchase price was approximately $19,000,000
payable at the time of the acquisition by issuing COSI 1,219,355
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of Orion Power common stock valued at $15.50 per share plus $100,000
cash. Orion Power has accounted for this transaction as the settlement of the
operation and maintenance contracts with COSI. The entire cost of the
transaction was charged to expense.
COSI agreed to assist in the transition process of operating the Orion
Power assets by cooperating with Orion Power for six months following the
closing. Additionally, COSI agreed to make its software available to Orion
Power. Furthermore, COSI agreed to provide technical support in the form of
professional, supervisory, managerial, administrative, and technical operating
assistance, until the earlier of December 31, 2002, or the date of repayment in
full of the New York Credit Facility (Note 5).
DUQUESNE LIGHT COMPANY. On April 28, 2000, Orion Power, through its wholly
owned subsidiary Orion Power MidWest, L.P. (Orion Power MidWest) purchased seven
power plants located in Ohio and Pennsylvania (the Midwest Assets) with a
generating capacity of 2,614 MW from Duquesne. The net purchase price for the
assets was approximately $1,764,000,000 in cash including approximately
$17,000,000 in acquisition costs. In association with this acquisition, Orion
Power MidWest assumed certain liabilities related to employee benefits and
environmental remediation (See Notes 7 and 8).
The acquisition of the Midwest Assets requires Orion Power MidWest to
assume Duquesne's responsibility as "provider of last resort" (Provider of Last
Resort). As Provider of Last Resort, Orion Power MidWest will be obligated to
supply electricity at predetermined tariff rates to all customers in Duquesne's
service area who do not select another electricity supplier through December 31,
2004. While Orion Power MidWest should have the capacity to meet these
obligations under the contract (POLR Contract) most of the time, there may be
times when the energy required to meet the obligation may exceed the amounts
that can be produced from the Midwest Assets. If the obligation exceeds Orion
Power MidWest's energy production levels, Orion Power MidWest will be required
to purchase additional energy from outside sources at market rates, and in
certain circumstances, pay a penalty of currently $1,000 per megawatt hour. The
value of this contract, at acquisition, was reviewed by independent experts and
determined to be favorable. As such, an intangible asset of approximately
$14,300,000 was recorded at the time of the purchase. The intangible asset is
being amortized over the life of the contract.
To supplement the generating capacity to meet Orion Power's
responsibilities under the POLL Contract with Duquesne, Orion Power purchased
698,400 net megawatt hours for the period of May through October 2000. The cost
for the purchases was approximately $57,000,000 and was paid upon delivery of
the energy. Orion Power resold all excess energy not required to meet the
Provider of Last Resort responsibility into the market and realized the
prevailing price at that time.
COLUMBIA ELECTRIC CORPORATION. On December 11, 2000, Orion Power, through
its wholly owned subsidiary Orion Power Development, L.P. (Orion Power
Development) acquired all the outstanding stock of Columbia Electric Corporation
for approximately $209,000,000 in cash, including approximately $1,300,000 in
acquisition costs. In connection with this acquisition, Orion Power agreed to
assume a $334,000,000 credit facility, of which approximately $131,100,000 was
outstanding at the date of the acquisition. Orion Power Development also assumed
from Columbia Energy Group, former parent of Columbia Electric Corporation,
construction contract and tolling agreement guarantees of approximately
$5,000,000 as well as equity investment obligations of approximately
$41,000,000. The facilities acquired are under various stages of development,
will have total capacity of approximately 3,220 MW, and will begin operations at
various times from mid-2001 through 2004.
F-15
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition was recorded under the purchase method of accounting. The
purchase price has been allocated to assets acquired and liabilities assumed
based on the estimated fair market value at the date of acquisition. The
purchase price allocation for this acquisition is preliminary and further
refinements will be made based on final valuations. The pro forma operating
results of this acquisition for the years presented was not materially different
from actual results.
The initial allocation of the purchase price is as follows (in thousands):
Current assets.......................................... $ 2,906
Property and equipment.................................. 336,286
Noncurrent assets....................................... 12,127
Debt and other liabilities assumed...................... (142,319)
---------
$ 209,000
=========
4. FUEL CONTRACTS
Orion Power has entered into various fuel contracts for gas, oil and coal
to operate its generating assets. These contracts expire at various dates
through December 31, 2003. The contracts generally require the supplier to have
certain quantities of fuel available, do not require a minimum purchase by Orion
Power, and set prices at current market indices based on the type of fuel, time
of year and advance notice from Orion Power to the supplier.
5. DEBT
CREDIT AGREEMENTS
NEW YORK CREDIT AGREEMENT. On July 30, 1999, Orion Power New York, LP
(Orion NY), a wholly owned subsidiary of Orion Power, entered into a
$730,000,000 secured credit agreement. The banks agreed to provide an
acquisition facility in an amount of up to $700,000,000 (the Acquisition Loans),
and a revolving working capital facility in an amount of up to $30,000,000 (the
Working Capital Facility) (collectively, the New York Credit Agreement). The New
York Credit Agreement has a maturity of December 31, 2002, for all indebtedness.
The net proceeds under the New York Credit Agreement were used to finance the
Hydro Assets and New York City Assets acquisitions.
The borrowings under each facility bear interest at a floating rate. At
Orion Power New York's option, the interest rate will be determined as either
the Base Rate as defined or LIBOR plus an applicable margin. The rate as of
December 31, 1999 and 2000, and March 31, 2001, was 7.32, 8.10 and 7.46 percent,
respectively. The Acquisition Loans and Working Capital Facility are secured by
substantially all of the assets of Orion NY.
As of December 31, 1999 and 2000, and March 31, 2001, Orion NY had
$700,000,000, $650,000,000 and $646,557,000 of the Acquisition Loans
outstanding, respectively. As of December 31, 1999 and 2000, and March 31, 2001
Orion NY had $16,000,000, $0, and $0, respectively, of the Working Capital Loans
outstanding. Under the Working Capital Facility, an additional $10,000,000 is
used to provide a letter of credit in favor of Consolidated Edison in
conjunction with the New York City Assets acquisition.
In accordance with the New York Credit Agreement, Orion NY entered into a
Deposit Account Agreement with Bank of America, N.A. Accordingly, Orion NY
established 12 restricted use accounts for the disbursement of its revenues. As
of December 31, 1999 and 2000, and
F-16
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 2001, the total balance in these restricted use accounts totaled
$56,214,000, $116,478,000 and $132,008,000, respectively.
MIDWEST CREDIT AGREEMENT. On April 28, 2000, Orion Power MidWest entered
into a $1,200,000,000 secured credit agreement. The banks agreed to provide
acquisition loans of $1,110,000,000 (the Acquisition Loans) and a revolving
working capital facility of $90,000,000 (the Working Capital Facility)
(collectively, the "MidWest Credit Agreement"). The MidWest Credit Agreement has
a maturity date of October 28, 2002, for all indebtedness. The net proceeds
under the MidWest Credit Agreement were used to finance the acquisition of the
Midwest Assets.
As of December 31, 2000 and March 31, 2001, Orion Power MidWest had
$1,110,000,000 of Acquisition Loans along with $60,137,000 and $76,137,000 of
Working Capital Facility outstanding, respectively. Under the working capital
facility, Orion Power MidWest is required to provide a $10,000,000 letter of
credit in favor of Duquesne as part of the POLR contract.
The borrowings under the MidWest Credit Agreement bear interest at a
floating rate. At Orion Power MidWest's option, the interest rate will be
determined as either the Base Rate as defined or LIBOR plus an applicable
margin. The rate as of December 31, 2000 and March 31, 2001, was 8.49 and 7.65
percent, respectively. The credit agreement is secured by substantially all the
assets of Orion Power MidWest.
In accordance with the MidWest Credit Agreement, Orion Power MidWest
entered into a Deposit Account Agreement with Bank of America, N.A. Accordingly,
Orion Power MidWest established 12 restricted use accounts for the disbursement
of its revenues. As of December 31, 2000 and March 31, 2001, the total balances
in these restricted accounts were approximately $62,884,000 and $57,433,000,
respectively.
Under the New York Credit Agreement and the MidWest Credit Agreement
(collectively, the "Credit Agreements"), Orion Power New York and Orion Power
MidWest are restricted from distributing cash to Orion Power. These credit
agreements provide for various accounts to be created, into which all operating
revenues and other cash receipts are deposited, and from which operating
expenses, repayments of the loan facilities and distributions to Orion Power may
be made. The lenders under each credit agreement have a security interest in all
amounts on deposit in the accounts and if there is an event of default under the
appropriate credit agreement, the lenders will be able to immediately exercise
their security interest on any funds contained in that credit facility's
accounts.
Distributions to Orion Power may only be made after satisfaction of the
following -- (1) all operating expenses of the applicable subsidiary; (2) all
debt service payments under the appropriate credit agreement; (3) 50 percent of
the Excess Cash Flow, as defined, has been used to prepay each credit agreement;
and (4) any other required prepayments. After satisfaction of the aforementioned
items, the Credit Agreements allow Orion NY and Orion Power MidWest to pay
dividends and make other distributions to Orion Power up to the limit of
$100,000,000 over the life of the New York Credit Agreement and $175,000,000
over the life of the MidWest Credit Agreement. As of December 31, 2000, no
dividends or distributions had been made to Orion Power. On February 21, 2001,
Orion NY made a distribution of approximately $37,190,000 to Orion Power.
Among other restrictions, the Credit Agreements also contain customary
affirmative covenants and significant negative covenants including a requirement
that expenditures be within 105 percent of their budgeted amounts and that a
debt service coverage ratio of at least 1.5 to 1.0 be maintained. In addition,
the following events are also events of default under the New York
F-17
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Agreement -- reduction in the rule requiring New York City power
retailers to procure capacity equal to at least 80 percent of forecasted peak
demand from in-city generation sources to less than 75 percent and a reduction
in the price cap for capacity from in-city generators from $105 per kilowatt
year to less than $90 per kilowatt year.
LIBERTY CREDIT AGREEMENT. In December 2000, in connection with our
acquisition of Columbia Electric Corporation, Orion Power assumed a credit
facility entered into by Liberty Electric Power, LLC (Liberty), a wholly-owned
subsidiary of Columbia Electric Corporation. This credit facility, entered into
by Liberty in July 2000, provides for the following:
(1) a construction/term loan in an amount of up to $105,000,000;
(2) an institutional term loan in an amount of up to $165,000,000;
(3) an equity bridge loan in an amount of up to $41,000,000;
(4) a revolving working capital facility for an amount of up to
$5,000,000; and
(5) a debt service reserve letter of credit of $17,500,000.
Amounts outstanding under the facility bear interest at a floating rate for
a portion of the facility, which may be either the Base Rate as defined or LIBOR
plus an applicable margin, and a fixed rate for the remainder. At December 31,
2000 and March 31, 2001, the interest rate was 7.81 and 7.74 percent,
respectively on the floating rate component and 9.15 and 9.16 percent on the
fixed rate portion, respectively. As of December 31, 2000 and March 31, 2001,
Orion Power Development had $73,200,000 and $92,600,000 of the floating rate and
$74,300,000 and $105,800,000 of the fixed rate portions of the facility
outstanding, respectively. The lenders have a security interest in substantially
all of the assets of Orion Power Development and have negative pledges on other
fixed assets. Orion Power Development also pays facility fees on the working
capital facility and the debt service reserve letter of credit.
The construction/term loan, the institutional term loan and the equity
bridge loan mature on the earlier of October 1, 2002, or a date on which the
conditions precedent to conversion to a term loan are met. The debt service
reserve letter of credit becomes available for use when the conditions precedent
to conversion to a term loan are met and matures five years thereafter. The
working capital facility becomes available for use six months prior to the
scheduled conversion date and matures five years thereafter. The
construction/term loan converts to an amortizing term loan when the conditions
precedent to conversion to a term loan are met and matures 10 years thereafter.
The institutional term loan has a final maturity date of April 15, 2026.
Each credit agreement is an independent recourse project financing secured
by the assets of the applicable borrower without recourse to any other Orion
Power financing facility.
NOTES PAYABLE
During 1999, Orion Power entered into several promissory notes payable with
CPS and GSCP in order to provide funding for acquisitions and operations. The
total borrowings under these notes amounted to approximately $41,200,000 and
$71,100,000 to CPS and GSCP, respectively. Each promissory note was due five
years from the date of the note. Earlier repayment of the debt was required in
the event of a public offering, sale, liquidation or merger of Orion Power.
Interest on the unpaid principal balance accrued at 7 percent and was payable
semiannually from the respective anniversary dates.
F-18
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 8, 1999, Orion Power repaid the total balance due to CPS with
the funds from the capital call of Mitsubishi and TEPCO. On April 28, 2000,
Orion Power converted $71,100,000 of notes payable to GSCP into 7,108,600 shares
of common stock.
In conjunction with Orion Power's acquisition of the Carr Street facility
(Carr Street) (see Note 6), Orion Power entered into a non-interest bearing note
payable with US Generating Company, LLC in the amount of $1,000,000. Payment is
due annually starting November 19, 1999 through November 19, 2001. Orion Power
recognized a discount (8 percent) on this note at acquisition of $141,000.
SENIOR NOTES
In April and May 2000, Orion Power issued a total of $400,000,000 of 12
percent senior notes, due 2010 (the Senior Notes). The proceeds were used to
assist in the financing of the acquisition of the Midwest Assets. Interest is
paid semiannually in May and November of each year. The Senior Notes are senior
unsecured obligations and rank pari passu with all of Orion Power's existing and
future unsecured indebtedness.
Before May 1, 2003, Orion Power may redeem up to 35 percent of the notes
issued under the indenture at a redemption price of 112 percent of the principal
amount of the notes redeemed, plus accrued and unpaid interest and special
interest, with the net cash proceeds of an equity offering provided that certain
provisions under the indenture are met. Orion Power is not required to make any
mandatory redemption or sinking fund payments with respect to the Senior Notes.
Each holder of the Senior Notes will have the right to require Orion Power
to repurchase the notes pursuant to a change of control offer as set forth in
the indenture. The Senior Notes are not guaranteed by any of Orion Power's
subsidiaries.
REVOLVING SENIOR CREDIT FACILITY
On July 27, 2000, Orion Power entered into a $75,000,000 revolving senior
credit facility. The credit facility matures in December 2002. Amounts
outstanding under the facility bear interest at a floating rate. The facility is
unsecured and ranks pari passu with all of Orion Power's senior debt. As of
December 31, 2000 and March 31, 2001, there were no outstanding amounts under
this facility and $46,000,000 had been used to post letters of credit to support
various payout obligations.
F-19
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPAL PAYMENTS ON DEBT OBLIGATIONS
The following is a schedule of principal payments due under the credit
facilities, senior notes and the notes payable as of December 31, 2000 (in
thousands):
DECEMBER 31,
2000
------------
2001........................................................ $ 261
2002........................................................ 1,850,937
2003........................................................ 8,151
2004........................................................ 8,646
2005........................................................ 9,146
Thereafter.................................................. 490,757
----------
Total....................................................... $2,367,898
==========
Total interest expense under the debt obligations, including amortization
of deferred financing costs, for the period from March 10, 1998 (Date of
Inception) to December 31, 1998, and the years ended December 31, 1999 and 2000,
was (in thousands) $137, $25,767 and $168,670, respectively.
INTEREST RATE SWAP AGREEMENTS
Orion Power has entered into a number of interest rate swaps designed to
fix the rate of interest on its New York and MidWest Credit Facilities.
Surrounding the interest rate swap is a total notional amount of interest rate
swaps are $350,000,000 on the New York Credit Facility with an average maturity
of 7 years and an average fixed rate of approximately 7.0 percent and
$600,000,000 on the MidWest Credit Facility with an average maturity of 5 years
and an average fixed rate of 7.4 percent.
Counterparties to the interest rate swap agreements are major financial
institutions. While Orion Power may be exposed to credit losses in the event of
non-performance by these counterparties, Orion Power does not anticipate losses.
6. RELATED-PARTY TRANSACTIONS
CAPACITY SALE AND TOLLING AGREEMENT
On November 18, 1998, Carr Street, a 102 megawatt natural gas-fired
facility acquired from US Generating Company, LLC, entered into a Capacity Sale
and Tolling Agreement (the Sales Agreement) with CPS for a period of five years.
Under the terms of the Sales Agreement, CPS provides all fuel to the Carr Street
facility and receives from the facility all of the capacity, electric energy and
other products generated by the facility. As consideration, Carr Street will
receive capacity payments, electric revenue based on the amount of electric
energy produced and sold to CPS, certain start-up fees and market steam
reimbursable costs. The minimum required payment to be received by Carr Street
is $3,677,000 in 2001, $3,769,000 in 2002 and $3,863,000 in 2003.
OPERATION AND MAINTENANCE SERVICES AGREEMENT
Each operating subsidiary of Orion NY entered into Operation and
Maintenance Services Agreements (the O&M Agreements) with COSI for a term of
five years, whereby COSI provided ongoing operating and maintenance services.
Under the terms of the O&M Agreements, Carr Street, Astoria, and Erie Blvd. paid
COSI for direct materials and expenses, plus a base fee and
F-20
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain bonuses, as set forth in the O&M Agreements. The base fee and the
bonuses were subject to annual adjustments. Expenses incurred under the O&M
Agreements for the period from March 10, 1998 (Date of Inception) to December
31, 1998, and for the years ended December 31, 1999 and 2000, were approximately
$24,000, $19,846,000 and $13,247,000, respectively. There were no amounts owed
to COSI at December 31, 1998 or 2000. Amounts owed to COSI at December 31,1999,
were approximately $1,674,000, and are included in accounts payable on the
accompanying consolidated balance sheets. See Note 3 for discussion of Orion
Power's acquisition of the COSI subsidiaries that eliminated the O&M Agreements.
STOCKHOLDER FEES
As part of the original stockholders agreement between CPS and GSCP and the
Second Amended and Restated Stockholders Agreement, Orion Power was required to
pay a total of 1 percent of the aggregate consideration paid in an acquisition
to its stockholders -- GSCP, CPS, Mitsubishi, and TEPCO. Orion Power paid a
total of $9,750,000 in August and September 1999 to GSCP and CPS, and paid a
total of $17,050,000 in June 2000, to the four primary stockholders. These
payments are recognized as a distribution to stockholders in the accompanying
statement of changes in stockholders' equity.
Additionally, Goldman Sachs had the right to provide all investment banking
services to Orion Power on an arms' length basis with regard to terms,
conditions and pricing. In association with the investment by Mitsubishi and
TEPCO on November 5, 1999 and April 28, 2000, Orion Power was required to pay a
2 percent fee to Goldman Sachs, in accordance with the Second Amended and
Restated Stockholder's Agreement. The amounts of these payments are
approximately $2,400,000 and $1,600,000, respectively. Orion Power charged the
fee against additional paid-in capital.
Both of the obligations related to payments of shareholders fees ended
during 2000.
NOTES RECEIVABLE FROM OFFICERS
Certain officers were required to purchase shares of Orion Power's common
stock under their employment agreements. As of December 31, 1999, these officers
owed Orion Power $671,000 related to the purchase of approximately 97,500 shares
of common stock and related interest. As of December 31, 2000, these officers
owed Orion Power $5,916,000 related to the purchase of 742,700 shares of common
stock, and related interest.
7. RETIREMENT PLANS
As part of the acquisitions of the Hydro Assets, New York City Assets and
Midwest Assets, Orion Power was required to assume the defined benefit pension
plans and other postretirement benefit plans (OPEB) for employees that remained
at the facilities subsequent to each acquisition. These former Consolidated
Edison, Niagara Mohawk, Duquesne and First Energy employees were hired by COSI
in the same capacity as with their former employers. The plans were being
maintained by COSI, through the date of the COSI acquisition (see Note 3),
although it was the subsidiary's responsibility to fund these obligations. As of
April 26, 2000, the plans were transferred to Orion Power's control.
F-21
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles the plans' funded status to the accrued cost
recorded as other long-term liabilities in the consolidated balance sheets as of
December 31, 1999 and 2000 (in thousands):
DEFINED BENEFIT PLANS OPEB
---------------------- ------------------
1999 2000 1999 2000
---- ---- ---- ----
Change in benefit obligation --
Benefit obligation at January 1........ $ -- $ 17,398 $ -- $ 4,318
Benefit obligation assumed in
acquisition......................... 17,984 10,071 4,226 9,504
Service cost........................... 629 2,215 238 886
Interest cost.......................... 517 1,868 121 826
Benefits paid.......................... -- (1,085) -- --
Actuarial (gain) loss.................. (1,732) 460 (267) 1,871
------- -------- ------- --------
Benefit obligation at December 31...... $17,398 $ 30,927 $ 4,318 $ 17,405
======= ======== ======= ========
Change in plan assets --
Fair value of plan assets at January
1................................... $ -- $ 11,967 $ -- $ --
Fair value of plan assets assumed in
acquisition......................... 11,668 -- -- --
Actual return on plan assets........... 299 785 -- --
Employer contributions................. -- 597 -- --
Benefits paid.......................... -- (1,085) -- --
------- -------- ------- --------
Fair value of plan assets at December
31.................................. $11,967 $ 12,264 $ -- $ --
======= ======== ======= ========
Funded status --
Funded status of the plans at December
31.................................. $(5,431) $(18,663) $(4,318) $(17,405)
Unrecognized actuarial net gains/
(losses)............................ (1,618) (887) (267) 1,603
------- -------- ------- --------
Accrued benefit cost..................... $(7,049) $(19,550) $(4,585) $(15,802)
======= ======== ======= ========
Assumptions as of December 31:
Discount rate.......................... 7.75% 7.75% 7.75% 7.75%
Expected return on plan assets......... 8.50% 8.50% N/A N/A
Rate of compensation increase.......... 4.50% 4.00% 4.00% 5.00%
As of December 31, 1999 and 2000, the defined benefit pension plan for
employees covered by the Erie Boulevard Plan, included in the table above, had
plan assets in excess of benefit obligations of (in thousands) $1,246 and $242,
respectively.
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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of Orion Power's net periodic benefit cost for the years
ended December 31, 1999 and 2000, were as follows (in thousands):
DEFINED BENEFIT
PLANS OPEB
--------------- -------------
1999 2000 1999 2000
---- ---- ---- ----
Components of net periodic benefit cost:
Service cost................................... $ 629 $ 2,215 $238 $ 886
Interest cost.................................. 517 1,868 121 826
Expected return on plan assets................. (413) (1,017) -- --
Amortization of actuarial (gain) or loss....... -- (38) -- --
----- ------- ---- ------
Net periodic benefit cost........................ $ 733 $ 3,028 $359 $1,712
===== ======= ==== ======
The assumed healthcare cost trend rates for fiscal year 2001 for Medicare
eligible and non-Medicare eligible retirees is 8.5 percent; this rate is
expected to decrease gradually to 5.0 percent in 2008 and remain at that level
thereafter. The assumed healthcare trend rate has a significant effect on the
amounts reported for the healthcare plans. A one-percentage-point change in the
assumed healthcare trend rate would have the following effects:
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- ----------------
1999 2000 1999 2000
---- ---- ---- ----
Increase (decrease) total service and interest
cost components............................. $ 80 $ 464 $ (62) $ (361)
Increase (decrease) OPEB obligation........... $908 $3,758 $(712) $(2,949)
Effective January 1, 1999, Orion Power established a 401(k) retirement plan
for the benefit of all eligible employees. The plan is for all employees of
Orion Power with no minimum age or minimum service requirements. Participants
may contribute up to 15 percent of their annual compensation, subject to
statutory limits. Employee contributions are fully vested. Orion Power's
matching contribution is discretionary and therefore will be determined on an
annual basis. Employees will fully vest in any discretionary contributions
ratably over five years. Orion Power made no contributions to the plan in 1999
and approximately $614,000 in contributions in 2000.
8. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL LIABILITIES
Orion Power has recorded a liability for the estimated cost of
environmental remediation associated with the acquisition of the Hydro Assets
and New York City Assets based on valuation reports provided by independent
environmental liability assessment experts. In conjunction with these
valuations, Orion Power has developed remediation plans for each item
specifically identified. For environmental items at Astoria, the New York State
Department of Environmental Conservation has issued consent orders requiring
active investigation and remediation of past releases of petroleum and other
substances by the prior owners. The consent order also contains obligations
related to continuing compliance with environmental regulations. The total
liability assumed and recorded by Orion NY totaled approximately $9,150,000, on
an undiscounted basis. Through December 31, 2000, Orion NY had spent
approximately $50,000 toward completion of its remediation plans and anticipates
that the remaining portion will be paid out through 2009.
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131
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In association with the Midwest Acquisition, Orion Power MidWest has
recorded a liability for the estimated cost of environmental remediation, based
on valuations performed by independent environmental liability assessment
experts. In conjunction with these valuations, Orion Power MidWest has developed
remediation plans for the known liabilities. The total liability assumed by
Orion Power MidWest totaled approximately $4,800,000 on an undiscounted basis
and is recorded in other long-term liabilities.
On an ongoing basis, Orion Power monitors its compliance with environmental
laws. Due to the uncertainties associated with environmental compliance and
remediation activities, future costs of compliance or remediation could be
higher or lower than the amount currently accrued.
TAX SAVINGS SHARING AGREEMENT WITH NIAGARA MOHAWK
As part of the acquisition of the Hydro Assets, Orion NY has entered into a
tax savings sharing agreement with Niagara Mohawk. Funds received from
settlement of prior Niagara Mohawk filed property tax litigation or future
property tax reduction agreements are shared 25 percent to Niagara Mohawk. The
total amount paid to Niagara Mohawk cannot exceed $20,000,000. Since this amount
due to Niagara Mohawk is contingent on future events, amounts due to Niagara
Mohawk will only be recognized when a settlement has been reached with a local
jurisdiction and related payment received. As of December 31, 1999 and 2000, no
such payments had been received from local tax jurisdictions that would require
Orion NY to make payment to Niagara Mohawk.
TURBINE PURCHASES
In September 2000, Orion Power entered into a letter of intent for the
delivery over the next four years of 10 combustion turbine generators from
Siemens Westinghouse Power Corporation as part of the repowering and new
development efforts. The total purchase price made is approximately
$345,000,000, substantially all of which is payable at various times in 2003 and
2004. Orion Power made a $5,000,000 deposit during 2000 and paid an additional
$5,000,000 in the first quarter of 2001. Furthermore, as part of Orion Power's
acquisition of Columbia Electric Corporation, Orion Power acquired the rights to
purchase eight additional turbine generators which will be installed in the
projects under construction. As of December 31, 2000, approximately $33,900,000
remained to be paid for these eight turbines, of which $32,000,000 was due at
December 31, 2000, and recorded in accounts payable on the accompanying balance
sheets.
In February and March 2001, Orion Power entered into two letters of intent
for delivery of turbine generators for Orion Power's development projects for
approximately $281,210,000. Orion Power made an $8,000,000 deposit on these
turbines in March 2001.
POWER SUPPLY AGREEMENT WITH NIAGARA MOHAWK
On March 20, 2001, Orion Power completed a new power sale agreement with
Niagara Mohawk. The power supply contract is a three-year agreement that
supplies Niagara Mohawk with all of the electric output from Erie Boulevard's
650 megawatts of hydroelectric generation at fixed rates. This agreement will
commence in October 2001, upon expiration of the existing power supply
agreement.
F-24
132
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LABOR SUBJECT TO COLLECTIVE BARGAINING AGREEMENTS
Orion Power has 62 percent of its employees subject to one of five
collective bargaining agreements. Such agreements expire at various times
between June 2001 through June 2006.
LEASES
Orion Power and its subsidiaries have entered into various noncancelable
operating lease arrangements for office space, storage space, office furniture
and vehicles. These leases terminate at various dates through December 2021.
On November 10, 1999, Erie Blvd. entered into a capital lease arrangement
for the land at the Watertown hydroplant located in Potsdam, New York. This land
will house a maintenance facility and a regional headquarters for the Hydro
Assets. The lease term begins at the completion of the facility, which was
completed in October 2000, and expires in 2014. Under the terms of the lease,
the monthly payments are $10,500. Erie Blvd. has the option to purchase the land
for $450,000 at the end of the lease term.
Future minimum payments due under these leases are as follows (in
thousands):
YEAR ENDING
DECEMBER 31, CAPITAL OPERATING
------------ ------- ---------
2001.................................................... $ 126 $ 1,266
2002.................................................... 126 1,280
2003.................................................... 126 1,298
2004.................................................... 126 1,309
2005.................................................... 126 1,054
Thereafter.............................................. 1,145 3,830
------ -------
1,775 $10,037
=======
Interest portion........................................ (594)
------
Total................................................... $1,181
======
Total rental expense for the period from March 10, 1998 (Date of Inception)
to December 31, 1998, and the years ended December 31, 1999 and 2000, was (in
thousands) $0, $373 and $1,831, respectively.
LITIGATION AND CLAIMS
Orion Power is directly or indirectly involved in various pending lawsuits
and claims. Litigation reserves are recorded when a loss is determined to be
probable and the amount can be reasonably estimated. In the opinion of
management, the ultimate outcome of the claims will not have a material impact
on Orion Power's financial position or the results of its operations.
During 2000, Orion Power, through Orion NY, provided certain services to
Consolidated Edison under the local electric system reliability rules.
Consolidated Edison has questioned its obligation to make separate payment to
Orion Power related to these services. As of December 31, 2000, the amount
requested by Orion Power for these services was approximately $24,000,000. Since
Orion Power management and its counsel cannot reasonably estimate the amount
Orion Power will ultimately collect, no amount has been recognized in these
consolidated financial statements. The parties are discussing resolution to this
item. At such time as this issue is resolved and payments are either receivable
or payable, Orion Power will recognize the revenue or expense as appropriate.
F-25
133
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTION PLAN
On May 21, 1998, Orion Power adopted the 1998 Stock Incentive Plan (the
"Plan") to provide for granting of stock options and other equity based awards
to directors, officers, employees, and consultants. The Plan, as amended,
provides that up to 7,500,000 shares of common stock may be issued pursuant to
such options and other awards. Stock options may be granted at an exercise price
as determined by the Board of Directors or a committee designated by the Board
of Directors. Options generally are granted at fair market value at the date of
grant, are exercisable in installments beginning one year from the date of
grant, and expire 10 years after the date of grant. The plan permits the
issuance of either incentive stock options or non-qualified stock options.
Orion Power utilizes the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation," which defines a "fair value based
method" of accounting for stock-based compensation and applies APB Opinion No.
25 and related interpretations in accounting for its stock option and stock
purchase plans.
Orion Power has granted options to acquire shares of its common stock at an
exercise price less than the fair value of Orion Power's common stock. As of
December 31, 2000, Orion Power has recognized deferred compensation of
$4,768,000 to be amortized over the three-year vesting period. Orion Power
recognized $0, $106,000 and $1,303,000 of compensation expense related to these
options for the period from March 10, 1998 (Date of Inception) to December 31,
1998, and the years ended December 31, 1999 and 2000, respectively.
The following summarizes options granted to directors, officers and
employees:
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
Outstanding at March 10, 1998 (Date of
Inception)................................... -- $ --
Granted...................................... 49,964 10.00
---------
Outstanding at December 31, 1998............... 49,964 10.00
Granted...................................... 1,627,246 11.91
---------
Outstanding at December 31, 1999............... 1,677,210 11.86
Granted...................................... 3,544,813 17.37
Forfeited.................................... (32,176) (14.91)
---------
Outstanding at December 31, 2000............... 5,189,847 $ 15.28
========= =======
Options exercisable at December 31, 1998....... -- $ --
========= =======
Options exercisable at December 31, 1999....... 118,163 $ 10.00
========= =======
Options exercisable at December 31, 2000....... 678,352 $ 10.66
========= =======
F-26
134
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices for options outstanding as of December 31, 2000, ranged
from $10 to $20. The following table provides certain information with respect
to stock options outstanding at December 31, 2000:
WEIGHTED-AVERAGE
REMAINING
STOCK OPTIONS WEIGHTED-AVERAGE CONTRACTUAL LIFE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE (IN YRS.)
------------------------ ------------- ---------------- ----------------
$10.00 - $15.50 2,996,379 $11.95 8.96
$15.51 - $20.00 2,193,468 19.83 9.86
--------- ------ ----
5,189,847 $15.28 9.34
--------- ------ ----
The following table provides certain information with respect to stock
options exercisable at December 31, 2000:
STOCK OPTIONS WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
------------------------ ------------- ----------------
$10.00 - $15.50 678,352 $10.66
$15.51 - $20.00 -- --
------- ------
678,352 $10.66
======= ======
The weighted-average fair values at date of grant for options granted
during 1998, 1999 and 2000 were $0, $8.96, and $15.60, respectively, and were
estimated using the Black-Scholes option valuation model with the following
weighted-average assumptions:
1998 1999 2000
---- ---- ----
Expected life in years.............................. 10 10 10
Risk-free interest rate............................. N/A 5.12% 5.11%
Volatility.......................................... N/A 16.40% 35.00%
Dividend yield...................................... -- -- --
Orion Power's pro forma information for the years ended December 31, 1999
and 2000, prepared in accordance with the provisions of SFAS No. 123, is
provided below. The pro forma impact for the period from March 10, 1998 (Date of
Inception) to December 31, 1998 was not material. For purposes of pro forma
disclosures, stock-based compensation is amortized to expense on a straight-line
basis over the vesting period.
1999 2000
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Pro forma net income................................ $4,711 $17,853
Pro-forma net income per common share -- basic...... $ 0.33 $ 0.29
Pro forma net income per common share -- assuming
dilution.......................................... $ 0.32 $ 0.28
F-27
135
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The sources of and differences between the financial accounting and tax
basis of Orion Power's assets and liabilities which give rise to the net
deferred tax assets and net deferred tax liabilities as of December 31, 1999 and
2000, respectively, are as follows (in thousands):
1999 2000
------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
Accumulated deferred income taxes:
Deferred tax assets --
Accruals and Prepaids........................ $ -- $ -- $15,352 $ 1,090
Net operating loss carryforward.............. -- -- -- 5,853
Amortization differences on intangibles...... -- -- 517 6,720
Long-term liabilities assumed in
acquisition................................ 938 8,007 -- 17,964
Deferred compensation........................ -- 44 -- 532
Acquisition costs............................ 145 3,109 122 3,172
------ -------- ------- --------
Total deferred tax assets......................... 1,083 11,160 15,991 35,331
------ -------- ------- --------
Deferred tax liabilities --
Depreciation differences on property and
equipment.................................. -- (5,308) -- (25,582)
Difference in asset basis of property and
equipment.................................. -- (8,946) -- (18,680)
Other........................................ -- -- (1,071) --
------ -------- ------- --------
Total deferred liabilities........................ -- (14,254) (1,071) (44,262)
------ -------- ------- --------
Net accumulated deferred income tax assets
(liabilities)................................... $1,083 $ (3,094) $14,920 $ (8,931)
====== ======== ======= ========
The components of the income tax (benefit) provision during the period from
March 10, 1998 (Date of Inception) to December 31, 1998, and for the years ended
December 31, 1999 and 2000, are as follows:
1998 1999 2000
---- ---- ----
Current:
Federal............................................ $ -- $1,378 $14,417
State.............................................. -- 401 13,825
------- ------ -------
-- 1,779 28,242
------- ------ -------
Deferred:
Federal............................................ (880) 2,418 1,079
State.............................................. (126) 599 (9,079)
------- ------ -------
(1,006) 3,017 (8,000)
------- ------ -------
Total income tax (benefit) provision................. $(1,006) $4,796 $20,242
======= ====== =======
F-28
136
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax (benefit) provision differs from the amounts obtained by applying
the statutory U.S. Federal income tax rate to pre-tax income from operations.
The differences are reconciled as follows (in thousands):
1998 1999 2000
---- ---- ----
Income tax (benefit) provision computed at Federal
statutory rates.................................... $ (892) $3,660 $17,073
Permanent differences................................ -- 484 84
State income taxes, net of Federal income tax
benefit............................................ (83) 650 3,085
Other................................................ (31) 2 --
------- ------ -------
Total................................................ $(1,006) $4,796 $20,242
======= ====== =======
As of December 31, 2000, Orion Power had state net operating loss
carryforwards of (in thousands) $9,004, which are due to expire in tax years
2010 through 2020.
11. EARNINGS PER SHARE
The impact of 2,500 stock options from the second quarter of 2000 and
2,077,000 stock options from the fourth quarter of 2000 have been excluded from
diluted EPS due to their antidilutive effect. The following table shows the
computation of Orion Power's basic and diluted EPS for 1998, 1999 and 2000 and
for the three month period March 31, 2001 (in thousands, except per share data).
PER SHARE
NET INCOME SHARES AMOUNT
---------- ------ ---------
For the period from March 10, 1998 (Date of
Inception) to December 31, 1998:
Basic EPS --............................... $(1,542) 119,200 $ (12.94)
Effect of dilutive securities........... -- --
------- ----------
Diluted EPS --............................. $(1,542) 119,200 $ (12.94)
======= ========== ==========
For the year ended December 31, 1999:
Basic EPS --............................... $ 5,662 14,344,400 $ 0.39
Effect of dilutive securities
Stock options......................... -- 83,700
Warrants.............................. -- 518,800
------- ----------
Diluted EPS --............................. $ 5,662 14,946,900 $ 0.38
======= ========== ==========
For the year ended December 31, 2000:
Basic EPS --............................... $28,539 61,755,269 $ 0.46
Effect of dilutive securities:
Stock options......................... -- 480,364
Warrants.............................. -- 2,202,685
------- ----------
Diluted EPS --............................. $28,539 64,438,318 $ 0.44
======= ========== ==========
For the three month period ended March 31,
2001:
Basic EPS -- .............................. $15,117 93,095,900 $ 0.16
Effect of dilutive securities:
Stock Options......................... -- 1,154,860
Warrants.............................. -- 3,905,640
------- ----------
Diluted EPS -- ............................ $15,117 98,156,400 $ 0.15
======= ========== ==========
F-29
137
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. DERIVATIVE INSTRUMENTS, FAIR VALUE OF FINANCIAL INSTRUMENTS, RISK FACTORS
DERIVATIVE INSTRUMENTS
Effective January 1, 2001, Orion Power adopted SFAS No. 133 (the
"Statement") as amended by SFAS Nos. 137 and 138. This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a cash flow hedge, the effective portions of the changes in fair
value of the derivative are recorded as OCI and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in fair value of cash flow hedges are recognized into earnings.
Orion Power uses derivative instruments to manage exposures to interest
rate and commodity price risks. Orion Power's objective for holding derivatives
is to minimize the variability in Orion Power's cash flow using the most
effective methods to eliminate or reduce the impacts of these risks. Orion Power
does not use derivative financial instruments for speculative or trading
purposes.
The adoption of the Statement resulted in a pre-tax reduction to OCI of
approximately $56,975,000 (approximately $33,331,000 after taxes). This
transition adjustment represented the fair value of the Company's derivative
instruments related to interest rate swaps and commodity price contracts
recognized as cash flow hedges. The reduction in OCI for the three months ended
March 31, 2001, is attributable to valuation losses of approximately $11,737,000
on Orion Power's interest rate swaps, offset by the reclassifications out of OCI
of approximately $2,552,000 in gains from Orion Power's commodity contracts. The
net derivative losses included in OCI will be reclassified into earnings during
the next twelve months.
At March 31, 2001, Orion Power had derivative assets of approximately
$768,000 and liabilities of approximately $80,988,000 related to the fair values
of Orion Power's derivative contracts. The derivative assets and liabilities are
recorded in prepaid expenses and other current assets, and other current
liabilities, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Orion Power's financial instruments consist of cash and cash equivalents,
restricted cash, accounts receivable, interest, taxes and other accounts
payable, accrued expenses, notes payable and long-term debt. The fair value of
these financial instruments, except for notes payable, senior notes and the
fixed rate component of the Liberty Credit Facility, approximates their carrying
value as of December 31, 2000, due to their short-term nature or due to the fact
that the interest rate paid on the debt is variable.
The carrying amount of the notes payable as of December 31, 1999, was
approximately $71,100,000 with a fair value of approximately $65,800,000. The
carrying amount of the senior notes and the fixed component of the Liberty
Credit facility as of December 31, 2000 was approximately $474,300,000, with a
fair value of approximately $529,289,000. The fair value was estimated using
discounted cash flow analysis, based on Orion Power's current incremental
borrowing rate and the approximate carrying value based on quoted market prices
for similar types of borrowing arrangements.
F-30
138
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of interest rate swap agreements, which are not carried on
the balance sheet, is estimated by determining the difference between the fixed
payments on the agreements and what the fixed payments would be based on current
market fixed rates for the appropriate maturity, then calculating the present
value of that difference for the remaining terms of the agreements at current
fixed market rates. The estimated value of interest rate swap agreements was an
asset of approximately $2,400,000 and a liability of approximately $56,500,000
at December 31, 1999 and 2000, respectively.
INTEREST RATE RISK
Orion Power's variable rate credit facilities expose Orion Power to
uncertain future cash flows due to variability in future interest payments or
floating rate debt. To mitigate this variability in cash flows, Orion Power
executes pay fixed interest rate swaps. The swaps allow Orion Power to
effectively fix its cost of funding on the hedged floating rate notes.
COMMODITY PRICE RISK
Orion Power is exposed to earnings volatility due to changes in the future
market prices of commodities bought and sold in the normal course of business.
To hedge against this exposure, Orion Power executes commodity swaps and
commodity futures agreements for the forward sale of electricity, the forward
purchases of natural gas and oil as well as financial tolling contracts. The
forward sales of electricity are designated as cash flow hedges. The remaining
contracts have not been designated as hedges and therefore the gains and losses
on those derivative contracts are recorded directly as income. The net gain
attributable to the change in these derivative contract's fair value for the
three months ended March 31, 2001, was approximately $1,521,000 and is included
in operating expenses on the accompanying consolidated statements of operations.
MARKET RISK
Market risk is the potential loss Orion Power may incur as a result of
changes in the market or fair value of a particular instrument or commodity. All
financial and commodities-related instruments, including derivatives, are
subject to market risk. Orion Power's exposure to market risk is determined by a
number of factors, including the size, duration, composition, and
diversification of positions held, the absolute and relative levels of interest
rates, as well as market volatility and illiquidity. Orion Power's risk
management policies limit the amount of total net exposure and rolling net
exposure during stated periods. These policies, including related risk limits,
are regularly assessed to ensure their appropriateness given Orion Power's
objectives.
CREDIT RISK
Orion Power is exposed to losses in the event of nonperformance by
counterparties to its derivative financial instruments. Credit risk is measured
by the loss Orion Power would record if its counterparties failed to perform
pursuant to terms of their contractual obligations and the value of collateral
held, if any, was not adequate to cover such losses. Orion Power has established
controls to determine and monitor the creditworthiness of counterparties, as
well as the quality of pledged collateral, and uses master netting agreements
whenever possible to mitigate Orion Power's exposure to counterparty credit
risk. Additionally, Orion Power may require counterparties to pledge additional
collateral when deemed necessary.
Concentrations of credit risk from financial instruments, including
contractual commitments, exist when groups of counterparties have similar
business characteristics or are engaged in like
F-31
139
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
activities that would cause their ability to meet their contractual commitments
to be adversely affected, in a similar manner, by changes in the economy or
other market conditions. Orion Power monitors credit risk on both an individual
and group counterparty basis.
13. STOCKHOLDERS' EQUITY
In accordance with the Second Amended and Restated Stockholder's Agreement
(the Agreement) dated November 5, 1999, the stockholders were required to
purchase common stock when capital was needed for the acquisition and management
of portfolio assets, as defined in the Agreement. As of April 28, 2000, the
stockholders had fulfilled their commitments under the Agreement.
The Agreement also states that at the time of a capital call, Orion Power
shall issue warrants to GSCP and CPS for shares of Orion Power common stock in
accordance with certain formulas, as defined in the Agreement. Under the terms
of the original stockholders agreement between CPS and GSCP, only GSCP was
entitled to receive warrants. The warrants will have an exercise price equal to
the subscription price of the common stock ($10.00 or $15.50) and expire on the
tenth anniversary of their Issuance. The warrant holder may exercise the
warrants for an equivalent number of shares of Orion Power common stock when
accompanied by payment of the full exercise price. The warrant holder may also
exercise the warrant without payment and would be entitled to a number of shares
of Orion Power common stock equivalent to (x) the difference between the
aggregate Current Market Price, as defined, less the aggregate exercise price,
divided by (y) the Current Market Price of one share of common stock. As of
December 31, 1999 and 2000, 4,172,609 and 6,400,400 warrants, respectively, had
been issued by Orion Power to GSCP and 705,900 warrants have been issued to CPS
as of December 31, 2000. No warrants have been exercised as of December 31,
2000, and accordingly, all warrants are outstanding. No more capital is subject
to call under this agreement and no more warrants are issuable.
In April 2000, Orion Power issued 24,326,310 shares of common stock at an
average per share price of $12.51 for new proceeds of approximately
$304,300,000. Orion Power also issued 7,108,600 shares of common stock in
exchange for repayment of notes held by CPS in the amount of $71,100,000.
On August 10, 2000, Orion Power's Board of Directors approved a stock split
of 100 to 1 to be effective August 10, 2000. These financial statements reflect
the stock split retroactive for all periods presented.
On November 17, 2000, Orion Power completed an initial public offering of
27,500,000 shares of common stock (3,220,968 shares from a selling stockholder)
at $20.00 per share for net proceeds of approximately $452,500,000.
14. SUBSEQUENT EVENTS
On March 15, 2001, Orion Power made an initial filing on Form S-4 to
register its Senior Notes in April and May 2000 (See Note 5).
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Orion Power's quarterly operating results have fluctuated in the past and
may continue to do so in the future as a result of a number of factors,
including, but not limited to, the timing and size of acquisitions, the
completion of development projects, and variations in levels of production. The
following quarterly information is in thousands, except for per share amounts.
F-32
140
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
2000
Operating Revenues...................... $105,506 $236,168 $343,010 $272,885
Operating Income........................ $ 28,918 $ 65,689 $ 59,586 $ 47,977
Net Income.............................. $ 8,294 $ 5,456 $ 3,921 $ 10,868
Net Income per share -- basic........... $ 0.23 $ 0.09 $ 0.05 $ 0.13
Net Income per share -- diluted......... $ 0.22 $ 0.09 $ 0.05 $ 0.13
1999
Operating Revenues...................... $ 933 $ 1,090 $ 35,612 $ 96,439
Operating (Loss) Income................. $ (752) $ (2,016) $ 12,019 $ 25,150
Net (Loss) Income....................... $ (504) $ (1,175) $ 2,683 $ 4,658
Net (Loss) Income per share -- basic.... $ (0.27) $ (0.61) $ 0.13 $ 0.14
Net (Loss) Income per
share -- diluted...................... $ (0.27) $ (0.61) $ 0.13 $ 0.13
F-33
141
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orion Power Holdings, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Orion Power
Holdings, Inc. and subsidiaries, incorporated by reference in this Form S-1, and
have issued our report thereon dated March 2, 2001. Our audit was made for the
purpose of forming an opinion on those statements as a whole. The schedule
listed in the index of financial statements is the responsibility of the
company's management and is presented for the purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
March 2, 2001
(except with respect to the matters discussed in Note M,
as to which the date is March 15, 2001)
F-34
142
ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 2000
(IN THOUSANDS)
1999 2000
-------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 78,081 $ 133,653
Restricted cash........................................... 651 --
Due from affiliates....................................... 17,112 149,910
Prepaid expenses and other current assets................. 132 1,294
-------- ----------
TOTAL CURRENT ASSETS........................................ 95,976 284,857
-------- ----------
PROPERTY AND EQUIPMENT:
Property and equipment.................................... 2,936 3,333
Less accumulated depreciation............................. (218) (564)
-------- ----------
PROPERTY AND EQUIPMENT, NET................................. 2,718 2,769
DEFERRED TAX ASSET.......................................... 3,911 28,212
DEFERRED FINANCING FEES, NET OF ACCUMULATED AMORTIZATION OF
$1,082 AT DECEMBER 31, 2000............................... -- 12,118
PREPAID EXPENSES AND OTHER NONCURRENT ASSETS................ -- 2,200
INVESTMENT IN SUBSIDIARIES.................................. 370,787 1,350,831
-------- ----------
TOTAL ASSETS................................................ $473,392 $1,680,987
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ -- $ 742
Accrued expenses.......................................... 4,729 17,226
Accrued income taxes...................................... -- --
Accrued interest.......................................... 2,161 8,237
-------- ----------
TOTAL CURRENT LIABILITIES................................... 6,890 26,205
NOTES PAYABLE TO STOCKHOLDERS............................... 71,086 --
LONG-TERM DEBT.............................................. -- 400,000
-------- ----------
TOTAL LIABILITIES........................................... 77,976 426,205
-------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 200,000,000 shares
authorized; 36,162,629 and 93,095,926 shares issued and
outstanding, respectively.............................. 362 931
Additional paid-in capital................................ 393,416 1,230,467
Deferred compensation..................................... (1,811) (3,359)
Notes receivable from officers............................ (671) (5,916)
Retained earnings......................................... 4,120 32,659
-------- ----------
TOTAL STOCKHOLDERS' EQUITY.................................. 395,416 1,254,782
-------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $473,392 $1,680,987
======== ==========
The accompanying notes are an integral part of these condensed balance sheets.
F-35
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ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF (LOSS) INCOME
FOR THE PERIOD FROM MARCH 10, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
(IN THOUSANDS)
FOR THE PERIOD FROM FOR THE YEAR ENDED
MARCH 10, 1998 ----------------------------
(DATE OF INCEPTION) DECEMBER 31, DECEMBER 31,
TO DECEMBER 31, 1998 1999 2000
-------------------- ------------ ------------
REVENUE..................................... $ -- $ -- $ --
EXPENSES:
General and administrative................ 2,150 4,441 12,513
Depreciation and amortization............. -- 218 346
Charge for buyout of operations and
maintenance contracts with a related
party.................................. -- -- 19,000
------- ------- --------
2,150 4,659 31,859
------- ------- --------
OPERATING LOSS.............................. (2,150) (4,659) (31,859)
INTEREST INCOME............................. 12 265 6,019
INTEREST EXPENSE............................ (136) (2,933) (35,633)
------- ------- --------
LOSS BEFORE BENEFIT FOR INCOME TAXES........ (2,274) (7,327) (61,473)
TAX BENEFIT................................. (1,006) (2,905) (24,301)
EQUITY IN EARNINGS FROM SUBSIDIARIES........ (274) 10,084 65,711
------- ------- --------
NET (LOSS) INCOME........................... $(1,542) $ 5,662 $ 28,539
======= ======= ========
The accompanying notes are an integral part of these condensed financial
statements.
F-36
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ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM MARCH 10, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
(IN THOUSANDS)
FOR THE PERIOD FROM FOR THE YEAR ENDED
MARCH 10, 1998 ---------------------------
(DATE OF INCEPTION) DECEMBER 31, DECEMBER 31,
TO DECEMBER 31, 1998 1999 2000
-------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................ $ (1,542) $ 5,662 $ 28,539
Adjustments to reconcile net loss to net cash
used in operating activities --
Equity in earnings from subsidiaries........... 275 (10,084) (65,711)
Deferred income taxes.......................... (1,006) (2,905) (24,301)
Depreciation and amortization.................. -- 218 1,428
Deferred compensation.......................... -- 106 1,303
Change in notes receivable from officers....... -- -- (244)
Change in assets and liabilities:
Restricted cash............................. -- (651) 651
Due from affiliates......................... -- (17,112) (132,798)
Prepaid expenses and other current assets... (2) (130) (3,362)
Accounts payable............................ -- -- 742
Accrued expenses............................ 605 4,123 12,497
Accrued interest............................ 54 2,107 6,076
-------- --------- ----------
Net cash used in operating activities.............. (1,616) (18,666) (175,180)
-------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... -- (2,936) (397)
Investment made in subsidiaries.................. (18,600) (342,377) (914,333)
-------- --------- ----------
Net cash used in investing activities.............. (18,600) (345,313) (914,730)
-------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from stockholders........... 18,610 382,330 758,682
Payments of deferred financing costs............. -- -- (13,200)
Distribution to stockholders..................... -- (9,750) --
Proceeds from senior notes and credit facility... -- -- 420,000
Payments on credit facility...................... -- -- (20,000)
Proceeds from notes payable to stockholders...... 1,735 110,539 --
Payments on notes payable to stockholders........ -- (41,188) --
-------- --------- ----------
Net cash provided by financing activities.......... 20,345 441,931 1,145,482
-------- --------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS................ 129 77,952 55,572
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... -- 129 78,081
-------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 129 $ 78,081 $ 133,653
======== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest....................................... $ 83 $ 826 $ 28,475
======== ========= ==========
Income taxes................................... $ -- $ -- $ --
======== ========= ==========
Noncash disclosures --
Notes receivable from officers................. $ -- $ -- $ 5,001
======== ========= ==========
Conversion of notes payable to equity.......... $ -- $ -- $ 71,086
======== ========= ==========
The accompanying notes are an integral part of these condensed financial
statements.
F-37
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ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 2000
A) The accompanying condensed financial information of Orion Power
Holdings, Inc. ("Orion Power") presents the financial position, results of
operations and cash flows of the Parent Company with the investment in, and
operations of, consolidated subsidiaries with restricted net assets on the
equity method of accounting.
B) DEFERRED FINANCING COSTS
Financing costs, consisting primarily of the costs incurred to obtain debt
financing, are deferred and amortized using the effective interest method, over
the term of the related permanent financing. Amortization expense is included in
interest expense on the accompanying statements of (loss) income.
C) CREDIT AGREEMENTS
NEW YORK CREDIT AGREEMENT. On July 30, 1999, Orion Power New York, LP
(Orion NY), a wholly owned subsidiary of Orion Power, entered into a
$730,000,000 secured credit agreement. The banks agreed to provide an
acquisition facility in an amount of up to $700,000,000 (the Acquisition Loans),
and a revolving working capital facility in an amount of up to $30,000,0000 (the
Working Capital Facility) (collectively, the New York Credit Agreement). The New
York Credit Agreement has a maturity of December 31, 2002, for all indebtedness.
The net proceeds under the New York Credit Agreement were used to finance the
Hydro Assets and New York City Assets acquisitions.
The borrowings under each facility bear interest at a floating rate. At
Orion NY's option, the interest rate will be determined as either the Base Rate
as defined or LIBOR plus an applicable margin. The rate as of December 31, 1999
and 2000, was 7.315 percent and 8.097 percent, respectively. The Acquisition
Loans and Working Capital Facility are secured by substantially all of the
assets of Orion NY.
As of December 31, 1999 and 2000, Orion NY had $700,000,000 and
$650,000,000 of the Acquisition Loans outstanding, respectively. As of December
31, 1999, and December 31, 2000, Orion NY had $16,000,000 and $0, respectively,
of the Working Capital Loans outstanding. Under the Working Capital Facility, an
additional $10,000,000 is used to provide a letter of credit in favor of
Consolidated Edison in conjunction with the New York City Assets acquisition.
In accordance with the New York Credit Agreement, Orion NY entered into a
Deposit Account Agreement with Bank of America, N.A. Accordingly, Orion NY
established 12 restricted use accounts for the disbursement of its revenues. As
of December 31, 1999 and 2000, the total balance in these restricted use
accounts totaled $56,214,000 and $116,478,000, respectively.
MIDWEST CREDIT AGREEMENT. On April 28, 2000, Orion Power MidWest entered
into a $1,200,000,000 secured credit agreement. The banks agreed to provide
acquisition loans of $1,110,000,000 (the Acquisition Loans) and a revolving
working capital facility of $90,000,000 (the Working Capital Facility)
(collectively, the "MidWest Credit Agreement"). The MidWest Credit Agreement has
a maturity date of October 28, 2002, for all indebtedness. The net proceeds
under the MidWest Credit Agreement were used to finance the acquisition of the
Midwest Assets.
As of December 31, 2000, Orion Power MidWest had $1,110,000,000 and
$60,137,000 of Acquisition Loans and Working Capital Facility outstanding,
respectively. Under the working capital facility, Orion Power MidWest is
required to provide a $10,000,000 letter of credit in favor of Duquesne as part
of the POLR contract.
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ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The borrowings under the MidWest Credit Agreement bear interest at a
floating rate. At Orion Power MidWest's option, the interest rate will be
determined as either the Base Rate as defined or LIBOR plus an applicable
margin. The rate as of December 31, 2000 was 8.489 percent. The credit agreement
is secured by substantially all the assets of Orion Power MidWest.
In accordance with the MidWest Credit Agreement, Orion Power MidWest
entered into a Deposit Account Agreement with Bank of America, N.A. Accordingly,
Orion Power MidWest established 12 restricted use accounts for the disbursement
of its revenues. As of December 31, 2000, the total balances in these restricted
accounts were approximately $62,884,000.
Under the New York Credit Agreement and the MidWest Credit Agreement
(collectively, the "Credit Agreements"), Orion NY and Orion Power MidWest are
restricted from distributing cash to Orion Power. These credit agreements
provide for various accounts to be created, into which all operating revenues
and other cash receipts are deposited, and from which operating expenses,
repayments of the loan facilities and distributions to Orion Power may be made.
The lenders under each credit agreement have a security interest in all amounts
on deposit in the accounts and if there is an event of default under the
appropriate credit agreement, the lenders will be able to immediately exercise
their security interest on any funds contained in that credit facility's
accounts.
Distributions to Orion Power may only be made after satisfaction of the
following -- (1) all operating expenses of the applicable subsidiary; (2) all
debt service payments under the appropriate credit agreement; (3) 50 percent of
the Excess Cash Flow, as defined, has been used to prepay each credit agreement;
and (4) any other required prepayments. After satisfaction of the aforementioned
items, the Credit Agreements allow Orion NY and Orion Power MidWest to pay
dividends and make other distributions to Orion Power up to the limit of
$100,000,000 over the life of the New York Credit Agreement and $175,000,000
over the life of the MidWest Credit Agreement. As of December 31, 2000, no
dividends or distributions had been made to Orion Power. On February 21, 2001,
Orion NY made a distribution of approximately $37,190,000 to Orion Power.
Among other restrictions, the Credit Agreements also contain customary
affirmative covenants and significant negative covenants including a requirement
that expenditures be within 105 percent of their budgeted amounts and that a
debt service coverage ratio of at least 1.5 to 1.0 be maintained. In addition,
the following events are also events of default under the New York Credit
Agreement -- reduction in the rule requiring New York City power retailers to
procure capacity equal to at least 80 percent of forecasted peak demand from
in-city generation sources to less than 75 percent and a reduction in the price
cap for capacity from in-city generators from $105 per kilowatt year to less
than $90 per kilowatt year.
LIBERTY CREDIT AGREEMENT. In December 2000, in connection with our
acquisition of Columbia Electric Corporation, Orion Power assumed a credit
facility entered into by Liberty Electric Power, LLC (Liberty), a wholly-owned
subsidiary of Columbia Electric Corporation. This credit facility, entered into
by Liberty in July 2000, provides for the following:
(1) a construction/term loan in an amount of up to $105,000,000;
(2) an institutional term loan in an amount of up to $165,000,000;
(3) an equity bridge loan in an amount of up to $41,000,000;
F-39
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ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(4) a revolving working capital facility for an amount of up to
$5,000,000; and
(5) a debt service reserve letter of credit of $17,500,000.
Amounts outstanding under the facility bear interest at a floating rate for
a portion of the facility, which may be either the Base Rate as defined or LIBOR
plus an applicable margin, and a fixed rate for the remainder. At December 31,
2000, the interest rate was 7.81 percent on the floating rate component and 9.15
percent on the fixed rate portion. As of December 31, 2000, Orion Power
Development had $73,200,000 and $74,300,000 of the floating rate and fixed rate
portions of the facility outstanding, respectively. The lenders have a security
interest in substantially all of the assets of Orion Power Development and have
negative pledges on other fixed assets, Orion Power Development also pays
facility fees on the working capital facility and the debt service reserve
letter of credit.
The construction/term loan, the institutional term loan and the equity
bridge loan mature on the earlier of October 1, 2002, or a date on which the
conditions precedent to conversion to a term loan are met. The debt service
reserve letter of credit becomes available for use when the conditions precedent
to conversion to a term loan are met and matures five years thereafter. The
working capital facility becomes available for use six months prior to the
scheduled conversion date and matures five years thereafter. The
construction/term loan converts to an amortizing term loan when the conditions
precedent to conversion to a term loan are met and matures 10 years thereafter.
The institutional term loan has a final maturity date of April 15, 2026.
Each credit agreement is an independent recourse project financing secured
by the assets of the applicable borrower without recourse to any other Orion
Power financing facility.
D) NOTES PAYABLE
During 1999, Orion Power entered into several promissory notes payable with
CPS and GSCP in order to provide funding for acquisitions and operations. The
total borrowings under these notes amounted to approximately $41,200,000 and
$71,100,000 to CPS and GSCP, respectively. Each promissory note was due five
years from the date of the note. Earlier repayment of the debt was required in
the event of a public offering, sale, liquidation or merger of Orion Power.
Interest on the unpaid principal balance accrued at 7 percent and was payable
semi-annually from the respective anniversary dates.
On November 8, 1999, Orion Power repaid the total balance due to CPS with
the funds from the capital call of Mitsubishi and TEPCO. On April 28, 2000,
Orion Power converted $71,100,000 of notes payable to GSCP into 7,108,600 shares
of common stock.
E) SENIOR NOTES
In April and May 2000, Orion Power issued a total of $400,000,000 of 12
percent senior notes, due 2010 (the Senior Notes). The proceeds were used to
assist in the financing of the acquisition of the Midwest Assets. Interest is
paid semiannually in May and November of each year. The Senior Notes are senior
unsecured obligations and rank pari passu with all of Orion Power's existing and
future unsecured indebtedness.
Before May 1, 2003, Orion Power may redeem up to 35 percent of the notes
issued under the indenture at a redemption price of 112 percent of the principal
amount of the notes redeemed, plus accrued and unpaid interest and special
interest, with the net cash proceeds of an equity offering provided that certain
provisions under the indenture are met. Orion Power is
F-40
148
ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
not required to make any mandatory redemption or sinking fund payments with
respect to the Senior Notes.
Each holder of the Senior Notes will have the right to require Orion Power
to repurchase the notes pursuant to a change of control offer as set forth in
the indenture. The Senior Notes are not guaranteed by any of Orion Power's
subsidiaries.
F) REVOLVING SENIOR CREDIT FACILITY
On July 27, 2000, Orion Power entered into a $75,000,000 revolving senior
credit facility. The credit facility matures in December 2002. Amounts
outstanding under the facility bear interest at a floating rate. The facility is
unsecured and ranks pari passu with all of Orion Power's senior debt. As of
December 31, 2000, there were no outstanding amounts under this facility and
$46,000,000 had been used to post letters of credit to support various payout
obligations.
G) INTEREST EXPENSE
Total interest expense under the debt obligations, including amortization
of deferred financing costs, for the period from March 10, 1998 (Date of
Inception) to December 31, 1998 and the years ended December 31, 1999, and 2000,
was (in thousands) $136, $2933 and $35,633, respectively.
H) STOCKHOLDER FEES
As part of the original stockholders agreement between CPS and GSCP and the
Second Amended and Restated Stockholders Agreement, Orion Power was required to
pay a total of 1 percent of the aggregate consideration paid in an acquisition
to its stockholders -- GSCP, CPS, Mitsubishi, and TEPCO. Orion Power paid a
total of $9,750,000 in August and September 1999 to GSCP and CPS, and paid a
total of $17,050,000 in June 2000, to the four primary stockholders. These
payments are recognized as a distribution to stockholders in the accompanying
statement of changes in stockholders' equity.
Additionally, Goldman Sachs had the right to provide all investment banking
services to Orion Power on an arms' length basis with regard to terms,
conditions and pricing. In association with the investment by Mitsubishi and
TEPCO on November 5, 1999 and April 28, 2000, Orion Power was required to pay a
2 percent fee to Goldman Sachs, in accordance with the Second Amended and
Restated Stockholder's Agreement. The amounts of these payments are
approximately $2,400,000 and $1,600,000, respectively. Orion Power charged the
fee against additional paid-in capital.
Both of the obligations related to payments of shareholders fees ended
during 2000.
I) NOTES RECEIVABLE FROM OFFICERS
Certain officers were required to purchase shares of Orion Power's common
stock under their employment agreements. As of December 31,1999, these officers
owed Orion Power $671,000 related to the purchase of approximately 97,500 shares
of common stock and related interest. As of December 31, 2000, these officers
owed Orion Power $5,916,000 related to the purchase of 742,700 shares of common
stock, and related interest.
J) TURBINE PURCHASES
In September 2000, Orion Power entered into a letter of intent for the
delivery over the next four years of 10 combustion turbine generators from
Siemens Westinghouse Power Corporation
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149
ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
as part of the repowering and new development efforts. The total purchase price
made is approximately $345,000,000, substantially all of which is payable at
various times in 2003 and 2004. Orion Power made a $5,000,000 deposit on behalf
of Orion Power Development during 2000 and will pay an additional $5,000,000 on
their behalf by the end of the first quarter of 2001. Furthermore, as part of
Orion Power's acquisition of Columbia Electric Corporation, Orion Power acquired
the rights to purchase eight additional turbine generators which will be
installed in the projects under construction. As of December 31, 2000,
approximately $33,900,000 remained to be paid for these eight turbines, of which
$32,000,000 was due at December 31, 2000.
K) LEASES
Orion Power has entered in various noncancelable operating lease
arrangements for office space, storage space, and office furniture. These leases
terminate at various dates through December 2005.
Future minimum payments due under these leases are as follows (in
thousands):
YEAR ENDING
DECEMBER 31, OPERATING
------------ ---------
2001...................................................... $204
2002...................................................... 212
2003...................................................... 220
2004...................................................... 227
2005...................................................... 116
Thereafter.................................................. --
----
Total.................................................. $979
====
Interest portion............................................
Total.......................................................
Total rental expense for the period from March 10, 1998 (Date of Inception)
to December 31, 1998 and the years ended December 31, 1999 and 2000, was (in
thousands) $0, $268 and $205, respectively.
L) FAIR VALUE OF FINANCIAL INSTRUMENTS.
Orion Power's financial instruments consist of cash and cash equivalents,
restricted cash, due from affiliates, interest, taxes and other accounts
payable, accrued expenses, notes payable and long-term debt. The fair value of
these financial instruments, except for notes payable and senior notes,
approximates their carrying value as of December 31, 2000, due to their
short-term nature or due to the fact that the interest rate paid on the debt is
variable.
The carrying amount of the notes payable as of December 31, 1999, was
approximately $71,100,000 with a fair value of approximately $65,800,000. The
carrying amount of the senior notes as of December 31, 2000, was approximately
$400,000,000 with a fair value of approximately $435,250,000. The fair value was
estimated using discounted cash flow analysis, based on Orion Power's current
incremental borrowing rate and the approximate carrying value based on quoted
market prices for similar types of borrowing arrangements.
M) SUBSEQUENT EVENT.
On March 15, 2001, Orion Power made an initial filing on Form S-4 to
register its Senior Notes issued in April and May 2000 (See Note E).
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150
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------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this Prospectus. You must
not rely on any unauthorized information or representations. This Prospectus
does not offer to sell or ask for offers to buy any securities other than those
to which this Prospectus relates and it does not constitute an offer to sell or
ask for offers to buy any of the securities in any jurisdiction where it is
unlawful, where the person making the offer is not qualified to do so, or to any
person who cannot legally be offered the securities. The information contained
in this Prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
Page
----
Where You Can Find More
Information........................ 2
Prospectus Summary................... 3
Risk Factors......................... 15
Use of Proceeds...................... 29
Capitalization....................... 30
Selected Consolidated Financial and
Operating Data..................... 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 33
Business............................. 45
Management........................... 67
Principal Stockholders............... 75
Certain Relationships and Related
Party Transactions................. 77
The Exchange Offer................... 83
Description of the Notes............. 91
Book-Entry; Delivery................. 100
Plan of Distribution................. 102
Material United States Federal Income
Tax Considerations................. 103
Legal Matters........................ 106
Experts.............................. 106
Index to Financial Statements........ F-1
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
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$400,000,000
ORION POWER
HOLDINGS, INC.
OFFER FOR ALL OUTSTANDING
12% NOTES DUE 2010
IN EXCHANGE FOR
12% NOTES DUE 2010
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
------------------------
PROSPECTUS
------------------------
June 21, 2001
------------------------------------------------------
------------------------------------------------------
151
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Orion Power Holdings, Inc. is incorporated under the laws of the State of
Delaware. Section 145 ("Section 145") of Title 8 of the Delaware Code gives a
corporation power to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct was
unlawful. Section 145 also gives a corporation power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper. Also, Section
145 states that, to the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
such action, suit or proceeding, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Orion Power's Bylaws provide for the indemnification of officers and
directors to the fullest extent permitted by the General Corporation Law.
All of Orion Power's directors and officers will be covered by insurance
policies against certain liabilities for actions taken in their capacities as
such, including liabilities under the Securities Act of 1933, as amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
II-1
152
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1* Certificate of Incorporation, as amended.
3.2* Bylaws, as amended.
4.1* Indenture, dated as of April 27, 2000 between Orion Power
Holdings, Inc. and Wilmington Trust Company.
4.2* Amended and Restated Registration Rights Agreement, dated
April 26, 2000, by and among Orion Power Holdings, Inc., GS
Capital Partners II, L.P. (and certain affiliates),
Constellation Enterprises, Inc., Constellation Operating
Services, Inc., certain affiliates of Mitsubishi Corporation
and Tokyo Electric Power Company International B.V.
4.3* Rights Agreement dated as of November 1, 2000 between Orion
Power Holdings, Inc. and LaSalle Bank National Association,
as Rights Agent.
4.4* Exchange and Registration Rights Agreement dated as of April
27, 2000 by and among Orion Power Holdings, Inc. and the
purchasers of the 12% senior notes due 2010.
4.5** Indenture dated as of June 6, 2001 between Orion Power
Holdings, Inc. and Wilmington Trust Company.
5.1 Opinion of Stroock & Stroock & Lavan LLP.
10.1* Credit Agreement, dated as of July 28, 1999, by and among
Orion Power New York, L.P., Bank of America Securities LLC,
Paribas, and the other financial institutions who are
signatories to the agreement.
10.2** Amended and Restated Credit Agreement dated as of December
15, 2000, between Orion Power MidWest, L.P., Banc of America
Securities LLC, Goldman Sachs Credit Partners L.P., Paribas,
Deutsche Bank Securities Inc., Bank of America, N.A.,
Deutsche Bank AG New York Branch, and the Lenders named
therein.
10.3* Credit Agreement, dated as of July 27, 2000, by and among
Orion Power Holdings, Inc., Fleet National Bank, Union Bank
of California, N.A. and the other financial institutions who
are signatories to the agreement.
10.4* Asset Purchase Agreement, dated as of March 2, 1999, between
Astoria Generating Company, L.P. and Consolidated Edison
Company of New York, Inc., relating to the acquisition of
the assets located in New York City.
10.5* Asset Purchase Agreement, dated December 2, 1998, between
Erie Boulevard Hydropower, L.P. and Niagara Mohawk Power
Generating Company, L.P., relating to the acquisition of the
Hydro Assets.
10.6* Asset Purchase Agreement, dated as of September 24, 1999
between the Company, Duquesne Light Company, First Energy
Corporation and the other parties named therein.
10.7* Asset Purchase Agreement, dated as of June 23, 1998, between
Carr Street Generating, L.P. and East Syracuse Generating
Company, relating to the acquisition of the Carr Street
Generating Station.
10.8* Transition Capacity Agreement, dated as of July 1, 1999,
between Astoria Generating Company, L.P. and Consolidated
Edison Company of New York, Inc.
10.9* Provider of Last Resort Agreement, dated as of September 24,
1999, between Duquesne Light Company and Orion Power
Holdings, Inc.
10.10* Transition Power Purchase Agreement, dated as of February 4,
1999, between Niagara Mohawk Power Corporation and Erie
Boulevard Hydropower, L.P.
10.11* Capacity Sale and Tolling Agreement, dated as of November
19, 1998, between Carr Street Generating Station, L.P. and
Constellation Power Source, Inc.
10.12* Strategic Alliance Agreement, dated as of March 10, 1998,
between Orion Power Holdings, Inc. and Constellation Power
Source, Inc.
II-2
153
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.13* Non-Competition Agreement, dated as of March 10, 1998,
between Orion Power Holdings, Inc., Baltimore Gas and
Electric Company and Constellation Power, Inc.
10.14* Non-Competition Agreement, dated as of November 5, 1999,
between Orion Power Holdings, Inc. and Mitsubishi
Corporation.
10.15* Non-Competition Agreement, dated as of November 5, 1999,
between Orion Power Holdings, Inc. and Tokyo Electric Power
Company International B.V.
10.16* Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and Jack A. Fusco.
10.17* Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and Scott B. Helm.
10.18* Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and W. Thaddeus Miller.
10.19* Form of Employment Agreement between Orion Power Holdings,
Inc. and E. Thomas Webb.
10.20* Third Amended and Restated Stockholders' Agreement, dated as
of April 26, 2000, by and among Orion Power Holdings, Inc.,
GS Capital Partners II, L.P. (and certain affiliates),
Constellation Enterprises, Inc. (and certain affiliates),
certain affiliates of Mitsubishi Corporation and Tokyo
Electric Power Company International B.V.
10.21* Agency Agreement, dated as of April 28, 2000, by and between
Orion Power MidWest, L.P., Orion Power Holdings, Inc. and
Constellation Power Source, Inc.
10.22* Investor Rights Agreement dated as of April 5, 2000 between
Orion Power Holdings, Inc., Frederic V. Salerno and the
existing stockholders named therein.
10.23* Agreement dated as of April 5, 2000 between Orion Powers
Holdings, Inc. and Frederic V. Salerno.
10.24* Stock Purchase Agreement dated as of April 26, 2000 between
Orion Powers Holdings, Inc. and Constellation Operating
Services, Inc.
10.25* Stock Purchase Agreement dated as of September 29, 2000
between Columbia Energy Group and Orion Power Holdings, Inc.
10.26* Gas Tolling Agreement dated as of September 21, 2000 between
Orion Powers Holdings, Inc. and Constellation Power Source,
Inc.
10.27* Form of Agreement among Orion Powers Holdings, Inc. and the
Goldman Shareholders named therein.
10.28* Form of Agreement among Orion Powers Holdings, Inc. and the
Shareholders named therein.
10.29*** Employment Agreement dated as of December 12, 2000, between
Orion Power Holdings, Inc. and Dr. Michael Gluckman.
10.30** Master Agreement dated as of July 31, 2000 between Liberty
Electric Power, LLC, Liberty Electric PA, LLC, the
Institutional Lenders named therein, and The Chase Manhattan
Bank as Administrative Agent.
10.31** Credit Agreement dated as of July 31, 2000 between Liberty
Electric PA, LLC, the Bank Lenders named therein, and the
Chase Manhattan Bank as Administrative Agent.
10.32** Note Purchase Agreement dated as of July 31, 2000 between
Liberty Electric PA, LLC and the Institutional Lenders named
therein.
10.33*** Amendment No. 4 to Amended and Restated Credit Agreement
dated as of December 15, 2000, between Orion Power, L.P.,
Banc of America Securities LLC, Goldman Sachs Credit
Partners L.P., Paribas, Deutsche Bank Securities Inc., Bank
of America, N.A., Deutsche Bank AG New York Branch, and the
Lenders named therein.
II-3
154
EXHIBIT
NUMBER DESCRIPTION
------- -----------
12.1** Statement regarding computation of ratios of earnings to
fixed charges.
21.1 Subsidiaries Schedule.
23.1 Consent of Stroock & Stroock & Lavan LLP (included in
Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1*** Power of Attorney (included in signature page).
---------------
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-44118).
**Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-60796).
***Previously filed.
(b) Financial Statement Schedules.
All other financial statement schedules have been omitted because they are
not required, not applicable or the information to be included in the financial
statement schedules is included in the Consolidated Financial Statements or the
notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
155
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Baltimore, State of Maryland, on June 21, 2001.
ORION POWER HOLDINGS, INC.
By: /s/ JACK A. FUSCO
------------------------------------
Jack A. Fusco
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the registration statement has been signed by the following
persons in the capacities indicated below and as of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JACK A. FUSCO Chief Executive Officer, President and June 21, 2001
------------------------------------------ Director (Principal Executive
Jack A. Fusco Officer)
/s/ SCOTT B. HELM Executive Vice President and Chief June 21, 2001
------------------------------------------ Financial Officer (Principal
Scott B. Helm Financial and Accounting Officer)
* Chairman of the Board of Directors June 21, 2001
------------------------------------------
Frederic V. Salerno
* Director June 21, 2001
------------------------------------------
Edward A. Crooke
* Director June 21, 2001
------------------------------------------
Richard A. Friedman
* Director June 21, 2001
------------------------------------------
Tsutomu Kajita
* Director June 21, 2001
------------------------------------------
Douglas F. Londal
* Director June 21, 2001
------------------------------------------
Cheryl Mills
* Director June 21, 2001
------------------------------------------
Vincent Tese
II-5
156
SIGNATURE TITLE DATE
--------- ----- ----
* Director June 19, 2001
------------------------------------------
Terence M. O'Toole
*By: /s/ W. THADDEUS MILLER
-------------------------------------
W. Thaddeus Miller
As Attorney-In-Fact
II-6
157
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1* Certificate of Incorporation, as amended.
3.2* Bylaws, as amended.
4.1* Indenture, dated as of April 27, 2000 between Orion Power
Holdings, Inc. and Wilmington Trust Company.
4.2* Amended and Restated Registration Rights Agreement, dated
April 26, 2000, by and among Orion Power Holdings, Inc., GS
Capital Partners II, L.P. (and certain affiliates),
Constellation Enterprises, Inc., Constellation Operating
Services, Inc., certain affiliates of Mitsubishi Corporation
and Tokyo Electric Power Company International B.V.
4.3* Rights Agreement dated as of November 1, 2000 between Orion
Power Holdings, Inc. and LaSalle Bank National Association,
as Rights Agent.
4.4* Exchange and Registration Rights Agreement dated as of April
27, 2000 by and among Orion Power Holdings, Inc. and the
purchasers of the 12% senior notes due 2010.
4.5** Indenture dated as of June 6, 2001 between Orion Power
Holdings, Inc. and Wilmington Trust Company.
5.1 Opinion of Stroock & Stroock & Lavan LLP.
10.1* Credit Agreement, dated as of July 28, 1999, by and among
Orion Power New York, L.P., Bank of America Securities LLC,
Paribas, and the other financial institutions who are
signatories to the agreement.
10.2** Amended and Restated Credit Agreement dated as of December
15, 2000, between Orion Power MidWest, L.P., Banc of America
Securities LLC, Goldman Sachs Credit Partners L.P., Paribas,
Deutsche Bank Securities Inc., Bank of America, N.A.,
Deutsche Bank AG New York Branch, and the Lenders named
therein.
10.3* Credit Agreement, dated as of July 27, 2000, by and among
Orion Power Holdings, Inc., Fleet National Bank, Union Bank
of California, N.A. and the other financial institutions who
are signatories to the agreement.
10.4* Asset Purchase Agreement, dated as of March 2, 1999, between
Astoria Generating Company, L.P. and Consolidated Edison
Company of New York, Inc., relating to the acquisition of
the assets located in New York City.
10.5* Asset Purchase Agreement, dated December 2, 1998, between
Erie Boulevard Hydropower, L.P. and Niagara Mohawk Power
Generating Company, L.P., relating to the acquisition of the
Hydro Assets.
10.6* Asset Purchase Agreement, dated as of September 24, 1999
between the Company, Duquesne Light Company, First Energy
Corporation and the other parties named therein.
10.7* Asset Purchase Agreement, dated as of June 23, 1998, between
Carr Street Generating, L.P. and East Syracuse Generating
Company, relating to the acquisition of the Carr Street
Generating Station.
10.8* Transition Capacity Agreement, dated as of July 1, 1999,
between Astoria Generating Company, L.P. and Consolidated
Edison Company of New York, Inc.
10.9* Provider of Last Resort Agreement, dated as of September 24,
1999, between Duquesne Light Company and Orion Power
Holdings, Inc.
10.10* Transition Power Purchase Agreement, dated as of February 4,
1999, between Niagara Mohawk Power Corporation and Erie
Boulevard Hydropower, L.P.
10.11* Capacity Sale and Tolling Agreement, dated as of November
19, 1998, between Carr Street Generating Station, L.P. and
Constellation Power Source, Inc.
158
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.12* Strategic Alliance Agreement, dated as of March 10, 1998,
between Orion Power Holdings, Inc. and Constellation Power
Source, Inc.
10.13* Non-Competition Agreement, dated as of March 10, 1998,
between Orion Power Holdings, Inc., Baltimore Gas and
Electric Company and Constellation Power, Inc.
10.14* Non-Competition Agreement, dated as of November 5, 1999,
between Orion Power Holdings, Inc. and Mitsubishi
Corporation.
10.15* Non-Competition Agreement, dated as of November 5, 1999,
between Orion Power Holdings, Inc. and Tokyo Electric Power
Company International B.V.
10.16* Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and Jack A. Fusco.
10.17* Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and Scott B. Helm.
10.18* Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and W. Thaddeus Miller.
10.19* Form of Employment Agreement between Orion Power Holdings,
Inc. and E. Thomas Webb.
10.20* Third Amended and Restated Stockholders' Agreement, dated as
of April 26, 2000, by and among Orion Power Holdings, Inc.,
GS Capital Partners II, L.P. (and certain affiliates),
Constellation Enterprises, Inc. (and certain affiliates),
certain affiliates of Mitsubishi Corporation and Tokyo
Electric Power Company International B.V.
10.21* Agency Agreement, dated as of April 28, 2000, by and between
Orion Power MidWest, L.P., Orion Power Holdings, Inc. and
Constellation Power Source, Inc.
10.22* Investor Rights Agreement dated as of April 5, 2000 between
Orion Power Holdings, Inc., Frederic V. Salerno and the
existing stockholders named therein.
10.23* Agreement dated as of April 5, 2000 between Orion Powers
Holdings, Inc. and Frederic V. Salerno.
10.24* Stock Purchase Agreement dated as of April 26, 2000 between
Orion Powers Holdings, Inc. and Constellation Operating
Services, Inc.
10.25* Stock Purchase Agreement dated as of September 29, 2000
between Columbia Energy Group and Orion Power Holdings, Inc.
10.26* Gas Tolling Agreement dated as of September 21, 2000 between
Orion Powers Holdings, Inc. and Constellation Power Source,
Inc.
10.27* Form of Agreement among Orion Powers Holdings, Inc. and the
Goldman Shareholders named therein.
10.28* Form of Agreement among Orion Powers Holdings, Inc. and the
Shareholders named therein.
10.29*** Employment Agreement dated as of December 12, 2000, between
Orion Power Holdings, Inc. and Dr. Michael Gluckman.
10.30** Master Agreement dated as of July 31, 2000 between Liberty
Electric Power, LLC, Liberty Electric PA, LLC, the
Institutional Lenders named therein, and The Chase Manhattan
Bank as Administrative Agent.
10.31** Credit Agreement dated as of July 31, 2000 between Liberty
Electric PA, LLC, the Bank Lenders named therein, and the
Chase Manhattan Bank as Administrative Agent.
10.32** Note Purchase Agreement dated as of July 31, 2000 between
Liberty Electric PA, LLC and the Institutional Lenders named
therein.
159
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.33*** Amendment No. 4 to Amended and Restated Credit Agreement
dated as of December 15, 2000, between Orion Power MidWest,
L.P., Banc of America Securities LLC, Goldman Sachs Credit
Partners L.P., Paribas, Deutsche Bank Securities Inc., Bank
of America, N.A., Deutsche Bank AG New York Branch, and the
Lenders named therein.
12.1** Statement regarding computation of ratios of earnings to
fixed charges.
21.1 Subsidiaries Schedule.
23.1 Consent of Stroock & Stroock & Lavan LLP (included in
Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1*** Power of Attorney (included in signature page).
---------------
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-44118).
**Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-60796).
***Previously filed.