10-Q 1 a2063419z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 333-91391 AES IRONWOOD, L.L.C. (Exact name of registrant as specified in its charter) DELAWARE 54-1457537 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 305 PRESCOTT ROAD, LEBANON, PA 17042 (717) 228-1328 (Registrant's address of principal executive offices,) (zip code and telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / (page 1 of 18) AES IRONWOOD, L.L.C. TABLE OF CONTENTS PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements (Unaudited)........................................................3 Condensed Statements of Operations, Three and Nine Month Periods Ended September 30, 2001 and 2000 and the Period From June 25, 1999 (Inception) Through September 30, 2001............3 Condensed Balance Sheets, September 30, 2001 and December 31, 2000................................4 Condensed Statement of Changes in Member's Deficit Period From June 25, 1999 (Inception) Through September 30, 2001........................................................................5 Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 and the Period From June 25, 1999 (Inception) Through September 30, 2001..........................6 Notes to Condensed Financial Statements Three and Nine Months Ended September 30, 2001 and 2000, and the Period From June 25, 1999 (Inception) Through September 30, 2001................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............12 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................17 SIGNATURES.......................................................................................................18

(page 2 of 18) PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED) AES IRONWOOD, L.L.C. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF OPERATIONS, THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 AND THE PERIOD FROM JUNE 25, 1999 (INCEPTION) THROUGH SEPTEMBER 30, 2001 (DOLLARS IN THOUSANDS)

See notes to condensed financial statements. (page 3 of 18) AES IRONWOOD, L.L.C. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED BALANCE SHEETS, SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)

See notes to condensed financial statements (page 4 of 18) AES IRONWOOD, L.L.C. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENT OF CHANGES IN MEMBER'S DEFICIT PERIOD FROM JUNE 25, 1999 (INCEPTION) THROUGH SEPTEMBER 30, 2001 (DOLLARS IN THOUSANDS)

See notes to condensed financial statements. (page 5 of 18) AES IRONWOOD, L.L.C. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 AND THE PERIOD FROM JUNE 25, 1999 (INCEPTION) THROUGH SEPTEMBER 30, 2001 (DOLLARS IN THOUSANDS)

See notes to condensed financial statements. (page 6 of 18) AES IRONWOOD, L.L.C. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS, THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000, AND THE PERIOD FROM JUNE 25, 1999 (INCEPTION) THROUGH SEPTEMBER 30, 2001 1. ORGANIZATION AES Ironwood, L.L.C. was formed on October 30, 1998, in the State of Delaware, to develop, construct, and operate a 705-megawatt (MW) gas-fired, combined cycle electric generating facility in South Lebanon Township, Pennsylvania. AES Ironwood, L.L.C. was considered dormant until June 25, 1999, at which time it consummated a project financing and certain related agreements. The facility, currently under construction, will consist of two Westinghouse 501 G combustion turbines, two heat recovery steam generators, and one steam turbine. The facility will produce and sell electricity, as well as provide fuel conversion and ancillary services, solely to Williams Energy under a power purchase agreement with a term of 20 years that will commence on the facility's anticipated commercial operation date. The Company currently expects to commence commercial operations on December 1, 2001. The guaranteed commercial operation date of the construction agreement was May 22, 2001. Late completion payments are payable to the Company by the general contractor beginning forty-five days from this date until commercial operation is achieved. Late payments are $110,000 per day, payable by the tenth day of the month following the month in which the charges were incurred. As of November 14, 2001, the Company had accrued and received $12.87 million in respect of these late payments. AES Ironwood, L.L.C. is in the development stage and is not expected to generate any operating revenues until the facility achieves commercial operations. As with any new business venture of this size and nature, operation of the facility could be affected by many factors. Management of AES Ironwood, L.L.C. believes that the assets of AES Ironwood, L.L.C. are realizable. AES Ironwood, L.L.C. is a wholly-owned subsidiary of AES Ironwood, Inc., which is a wholly-owned subsidiary of The AES Corporation. AES Ironwood, Inc. has no assets other than its ownership interests in AES Ironwood, L.L.C. and AES Prescott, L.L.C. AES Ironwood, Inc. has no operations and is not expected to have any operations. Its only income will be from distributions it receives from AES Ironwood, L.L.C. and AES Prescott, L.L.C., once AES Ironwood, L.L.C. achieves commercial operation. The equity that AES Ironwood, Inc. is to provide to AES Ironwood, L.L.C. will be provided to AES Ironwood, Inc. by The AES Corporation, which owns all of the stock of AES Ironwood, Inc. The AES Corporation files quarterly and annual audited reports with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, which are publicly available, but which do not constitute a part of, and are not incorporated into, this Form 10-Q. AES Ironwood Inc.'s equity contribution obligations are required to be (page 7 of 18) supported by either an insurance bond or letter of credit. Currently those obligations are supported by an insurance bond issued to the collateral agent. 2. BASIS OF PRESENTATION In AES Ironwood, L.L.C.'s opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the interim periods presented herein, are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the three month, nine month and other periods presented herein are not necessarily indicative of the results of operations to be expected for the full year or future periods. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Because the accompanying condensed financial statements do not include all of the information and footnotes required by generally accepted accounting principles, they should be read in conjunction with the audited financial statements for the period ended December 31, 2000 and notes thereto included in AES Ironwood, L.L.C.'s Annual Report on Form 10-K for the year ended December 31, 2000. 3. DEBT On June 25, 1999, AES Ironwood, L.L.C. issued $308.5 million in senior secured bonds for the purpose of providing financing for the construction of the facility and to fund, through the construction period, interest payments to the bondholders. On May 12, 2000, (page 8 of 18) the Company consummated an exchange offer whereby the holders of the senior secured bonds exchanged their privately placed senior secured bonds for registered senior secured bonds. Repayment of the bonds commences in the year 2002. The amount payable in the year 2002 is approximately $2.0 million. Principle repayments on the bonds varies each year, with amounts detailed in the financing documents. Repayment dates are February 28, May 31, August 31 and November 30 of each year, with the final being November 30, 2025. Interest at the annual rate of 8.857% is payable quarterly on the above dates. Pursuant to an equity subscription agreement (see Note 3), AES Ironwood, Inc. has agreed to contribute in the form of either equity or subordinated debt up to approximately $50.1 million to AES Ironwood, L.L.C. to fund construction after the bond proceeds have been fully utilized. On March 27, June 5, and August 30, 2001, AES Ironwood, Inc. issued $10 million, $5 million, and $10 million respectively, in subordinated debt to the Company under this agreement (Note 3). The subordinated debt is repayable using available cash pursuant to Section 3.10 of the Collateral Agency and Intercreditor Agreement. Interest will begin accruing at an annual rate of 5.79% once commercial operations commence. 4. EQUITY SUBSCRIPTION AGREEMENT AES Ironwood, L.L.C., along with AES Ironwood, Inc., has entered into an equity subscription agreement, pursuant to which AES Ironwood, Inc. has agreed to contribute up to approximately $50.1 million to AES Ironwood, L.L.C. to fund project costs. This amount is secured by an acceptable bond issued by AES Ironwood, Inc. AES Ironwood, Inc. will fund these amounts as they come due upon the earlier of (a) expenditure of all funds that have been established for construction or (b) the occurrence, and during the continuation of, an event of default, as defined under the indenture governing its senior secured bonds. A portion of this equity requirement may be made in the form of affiliate debt, between AES Ironwood, Inc. and AES Ironwood, L.L.C., which would be subordinate to the senior secured bonds. At September 30, 2001, AES Ironwood, Inc. had issued $25.0 million in subordinated debt to AES Ironwood, L.L.C. under the equity subscription agreement. The subordinated debt is repayable using available cash pursuant to Section 3.10 of the Collateral Agency and Intercreditor Agreement. 5. POWER PURCHASE AGREEMENT AES Ironwood, L.L.C. and Williams Energy have entered into a power purchase agreement for the sale of all electric energy and capacity produced by the facility, as well as ancillary and fuel conversion services. The term of the power purchase agreement is 20 years, commencing when the construction of the facility is complete and the facility is commercially viable to produce electricity and related capacity, as well as to provide ancillary and fuel conversion services. Payment obligations to AES Ironwood, L.L.C. are guaranteed by The Williams Companies, Inc. Such payment obligations under the guarantee are capped at an amount equal to 125% of the sum of the principal amount of the senior secured bonds plus the maximum debt service reserve account required balance. AES Ironwood, L.L.C. has provided Williams Energy a letter of credit to (page 9 of 18) support the project's payment obligations should the facility not achieve commercial operation by June 30, 2001. The amount available to be drawn under the letter of credit is capped at $30 million. To date, no amounts have been drawn under this letter of credit. The repayment obligations with respect to drawings under the letter of credit are a senior debt obligation of AES Ironwood, L.L.C. If the commercial operation date has not occurred by June 30, 2001 for any reason, including the continued existence of or delay caused by a force majeure event affecting AES Ironwood, L.L.C., other than any delay caused by any act or failure to act by Williams Energy or any of its affiliates where the action is required under the power purchase agreement, Williams Energy will have the right to terminate the power purchase agreement. AES Ironwood, L.L.C., however, can extend the commercial operation date to December 31, 2001 (1) by providing an opinion from a third-party engineer that the commercial operation date will occur no later than December 31, 2001 (the "Free Extension Option"), or (2) by giving Williams Energy written notice of such extension no later than April 30, 2001, and paying to Williams Energy a specified amount by no later than June 30, 2001 (the "First Paid Extension Option"). The facility's anticipated commercial operation date is currently expected to be December 1, 2001. In accordance with the power purchase agreement, on April 30, 2001, an opinion from a third-party engineer was provided to Williams Energy stating that the commercial operation date will occur no later than December 31, 2001. As a result, the commercial operation date under the power purchase agreement has been extended to December 31, 2001. The Company may elect to extend the Commercial Operation Date up to and including December 31, 2002 by paying Williams Energy an amount equal to the lessor of any actual damages Williams suffers or incurs after December 31, 2001 as a result of Williams reliance upon the delivery by such date or three million dollars ($3,000,000). The Company shall also pay specified amounts ranging from $11,000 per day to $50,000 per day of the extension. During this time the Company continues to collect liquidated damages from the Contractor in the amount of $110,000 per day in an amount not to exceed twenty percent (20%) of the Contract Price. The Contractor is also responsible for fuel consumed until Commercial Operation is achieved. The Company is entitled to ninety percent of electric revenues generated during testing. During the current test phase, the plant has consistently been operating at base load. 6. COMMITMENTS AND CONTINGENCIES CONSTRUCTION - AES Ironwood, L.L.C. has entered into a fixed-price turnkey construction agreement with Siemens Westinghouse for the design, engineering, procurement and construction of the facility. Siemens Westinghouse will provide AES Ironwood, L.L.C., with specific combustion turbine maintenance services and spare parts for an initial term (page 10 of 18) of between eight and ten years under a maintenance service agreement. The fees assessed by Siemens Westinghouse will be based on the number of Equivalent Base Load Hours accumulated by the applicable Combustion Turbine as adjusted for inflation. As of September 30, 2001 and December 31, 2000, AES Ironwood, L.L.C. was liable to Siemens Westinghouse for a retention payment as part of the total contract price due at the completion of the contract for approximately $11.7 million and $11.1 million, respectively. These amounts are recorded within construction in progress in the accompanying balance sheets. WATER SUPPLY - AES Ironwood, L.L.C. has entered into a contract with the City of Lebanon Authority for the purchase of 50 percent of the water use of the facility. The contract has a term of 25 years. Costs associated with the use of water by the facility under this contract are based on gallons used per day at prices specified under the contract terms. AES Ironwood, L.L.C. has also entered into an agreement with Pennsy Supply, Inc. which will provide the remaining 50 percent of the water use of the facility. INTERCONNECTION AGREEMENT - AES Ironwood, L.L.C. has entered into an interconnection agreement with GPU Energy to transmit the electricity generated by the facility to the transmission grid so that it may be sold as prescribed under AES Ironwood, L.L.C.'s power purchase agreement. The agreement is in effect for the life of the facility, however it may be terminated by mutual consent of both GPU Energy and AES Ironwood, L.L.C. under certain circumstances as detailed in the agreement. Costs associated with the agreement are based on electricity transmitted via GPU Energy at a variable price, and the tariff imposed by the Pennsylvania/New Jersey/Maryland power pool market, as charged by GPU Energy to AES Ironwood, L.L.C., which is comprised of both service cost and asset recovery cost, as determined by GPU Energy and approved by the Federal Energy Regulatory Commission. SURETY BOND AGREEMENT - AES Ironwood, Inc. has a surety bond agreement in relation to its equity subscription agreement. The initial amount of the bond under this agreement was $50.1 million. This amount was reduced by $10 million on March 27, 2001 following the issuance by AES Ironwood, Inc. of $10 million in subordinated debt under the equity subscription agreement. Annual commitment fees will be assessed based on the amount outstanding during the year. The surety bond was also reduced $5 million in July 2001 in respect of the $5 million and $10 million of subordinated debt issued in June 2001 and reduced by $10 million in August 2001 in respect of the $10 million of subordinated debt issued in August 2001. At September 30, 2001, no amount has been drawn and no amount is outstanding under the surety bond agreement. 7. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting For Derivative Instruments And Hedging Activities", which, as amended, establishes new accounting and reporting standards for derivative instruments and hedging activities. (page 11 of 18) The Company will produce and sell electricity, as well as provide fuel conversion and ancillary services, solely to Williams under the power purchase agreement. The Company does not believe that the power purchase agreement meets the definition of a derivative under SFAS 133 and, as such should not be accounted for as a derivative. The Company has no other contracts that meet the definition of a derivative or an embedded derivative under SFAS No. 133, as amended. Therefore, the impact of the adoption of provisions of SFAS 133, as amended, on the Company's financial statements as of January 1, 2001 or for the three and nine month periods ended September 30, 2001 is not expected to be material. In July 2001, the FASB issued SFAS No. 143, entitled "Accounting for Asset Retirement Operations". This standard is effective for fiscal years beginning after June 15, 2002, and provides accounting requirements for asset retirement obligations associated with long-lived assets. The Company has not determined the effects of this standard on its financial reporting. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and generally are to be applied prospectively. This statement addresses financial accounting and reporting for the impairment or disposal of long - lived assets. SFAS No. 144 provides guidance for developing estimates of future flows used to test assets for recoverability, requires that assets to be disposed of be classified as held for sale when certain criteria are met. The statement also extends the reporting of discontinued operations to all components of an entity and provides guidance for recognition of a liability for obligations associated with a disposal activity. The Company believes that the initial adoption of the provisions of SFAS No. 144 will not have any material impact on its financial position or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in this Form 10-Q, as well as statements made by the Company in periodic press releases and other public communications, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "believes," "estimates," "plans," "projects," "expects," "may," "will," "should," "approximately," or "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussion of strategies, each of which involves risks and uncertainties. The Company has based these forward-looking statements on its current expectations and projections about future events based upon its knowledge of facts as of the date of this Form 10-Q and its assumptions about future events. (page 12 of 18) All statements other than of historical facts included herein, including those regarding market trends, the Company's financial position, business strategy, projected plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors outside of the Company's control that may cause the actual results or performance of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, among others, the following: o unexpected construction delays, o unexpected problems relating to the start-up, commissioning and performance of the facility, o the financial condition of third parties on which we depend, o an adequate merchant market after the expiration of the power purchase agreement, o capital shortfalls and access to additional capital on reasonable terms, o inadequate insurance coverage, o unexpected expenses or lower than expected revenues once commercial operations have begun, o environmental and regulatory compliance, o terrorist acts and adverse reactions to United States anti-terrorism activities, and o the additional factors that are unknown to the Company or beyond its control. The Company has no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. GENERAL AES Ironwood, L.L.C. (the "Company") was formed on October 30, 1998 to develop, construct, own, operate and maintain its facility. The Company was dormant until June 25, 1999, the date of the sale of its senior secured bonds. The Company obtained $308.5 million of project financing from the sale of its senior secured bonds. The total cost of the construction of the Company's facility is estimated to be approximately $359 million, which will be financed by the proceeds from the sale of the senior secured bonds and the equity contribution described below. On May 12, 2000, the Company consummated an exchange offer whereby the holders of the senior secured bonds exchanged their privately placed senior secured bonds for registered senior secured bonds. The Company is in the development stage and has no operating revenues. The Company's facility is still under construction and is expected to be completed and operational by approximately December 1, 2001. The Company cannot assure that these expectations will be met. See "Cautionary Note Regarding Forward-Looking Statements." The guaranteed commercial operation date of the construction agreement was May 22, 2001. Late completion payments are payable to the Company by the general contractor beginning forty-five days from this date until commercial operation is achieved. Late payments are $110,000 per day, payable by the tenth day of the month following the month in which the charges were incurred. As of October 31, 2001, the Company had accrued $12.87 million in respect of these late payments and has received $9.46 million in respect of these accruals, with a payment of $3.41 million paid November 13, 2001. (page 13 of 18) The Company may elect to extend the Commercial Operation Date up to and including December 31, 2002 by paying Williams Energy an amount equal to the lessor of any actual damages Williams suffers or incurs after December 31, 2001 as a result of Williams reliance upon the delivery by such date or $3 million. The Company shall also pay specified amounts ranging from $11,000 per day to $50,000 per day of the extension. EQUITY CONTRIBUTIONS / SUBORDINATED DEBT Under the equity subscription agreement, AES Ironwood, Inc. is obligated to contribute up to approximately $50.1 million to the Company to fund project costs, in the form of equity contributions or subordinated loans. AES Ironwood, Inc.'s obligation to make the contributions is, and will be, supported by an acceptable letter of credit or an acceptable bond. On March 27, June 5, and August 30, 2001, AES Ironwood, Inc. issued $10 million, $5 million and $10 million respectively in subordinated debt to the Company under this agreement. The subordinated debt is repayable using available cash pursuant to Section 3.10 of the Collateral Agency and Intercreditor Agreement. Interest will begin accruing at an annual rate of 5.79% once commercial operations commence. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 General and administrative costs for the three months ended September 30, 2001, were $111,000 compared to $137,000 for the comparable period of the prior calendar year. These costs did not directly relate to construction and are included as expenses in the Statement of Operations. A portion of the proceeds from the sale of senior secured bonds had not yet been expended on the construction by September 30, 2000, and were invested by the trustee. For the three months ended September 30, 2001 interest income earned on these invested funds was $-0-, compared to $581,000 for the comparable period of the prior calendar year. The interest earned on these invested funds is included in the Statements of Operations. (page 14 of 18) As noted above, at September 30, 2001 and December 31, 2000, interest capitalized was approximately $53.5 million, and $33.1 million respectively. As of September 30, 2001 all proceeds from the sale of the senior secured bonds were expended on construction. For the three months ended September 30, 2001, interest costs incurred on the bond proceeds not spent on construction of the Company's facility was $0, compared to $455,000 for the comparable period of the prior year. For the three months ended September 30, 2001, non-capitalizable costs plus interest cost and less interest income resulted in a loss of $61,000, compared to a loss of $11,000 for the comparable period of the prior year. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 General and administrative costs for the nine months ended September 30, 2001 were $255,000, compared to $138,000 for the comparable period of the prior calendar year. The increase in general and administrative costs is due to the Company's partial operation in 2000. These costs did not directly relate to construction and are included as expenses in the Statement of Operations. A portion of the proceeds from the sale of senior secured bonds had not yet been expended on the construction by September 30, 2000 and were invested by the trustee. As of September 30, 2001 all proceeds from the sale of the senior secured bonds were expended on construction. For the nine months ended September 30, 2001 interest income earned on these invested funds was approximately $400,000, compared to $2.3 million for the comparable period of the prior calendar year. The interest earned on these invested funds is included in the Statement of Operations. For the nine months ended September 30, 2001 interest costs incurred on the bond proceeds not spent on construction of the Company's facility was approximately $14,000, compared to $2.8 million for the comparable period of the prior year. For the nine months ended September 30, 2001, non-capitalizable costs plus interest cost and less interest income resulted in a net income of $131,000, compared to a loss of $621,000 for the comparable period of the prior year. FOR THE PERIOD FROM JUNE 25, 1999 (INCEPTION) THROUGH SEPTEMBER 30, 2001 As of September 30, 2001 and December 31, 2000, Construction in Progress, which includes capitalized facility construction costs, was $327.0 million and $298.0 million, respectively. For the three and nine month periods ended September 30, 2001, capitalized facility construction costs were $1 million and $29.0 million respectively. As discussed in greater detail below, Construction in Progress also includes the capitalization of construction related interest cost incurred on the portion of the bond proceeds expended during the construction period. These capitalized costs are included as assets on the balance sheet. Additionally, the cost of purchasing land for construction of the Company's facility has been separately identified on the balance sheets. (page 15 of 18) General and administrative costs for the period from June 25, 1999 (inception) through September 30, 2001, were $681,000. These costs did not directly relate to construction and are included as expenses in the Statements of Operations. A portion of the proceeds from the sale of senior secured bonds have not yet been expended on the construction and were invested by the trustee. Interest earned on these invested funds for the period from June 25, 1999 (inception) through September 30, 2001, were $6.3 million. The interest earned on these invested funds is included the Statements of Operations. As noted above, at September 30, 2001 and December 31, 2000, interest capitalized was approximately $53.5 million, and $33.1 million respectively. Interest costs incurred on the bond proceeds not spent on construction of the Company's facility for the period from June 25, 1999 (inception) through September 30, 2001, was approximately $8.7 million. Non-capitalizable costs plus interest cost and less interest income for the period from June 25, 1999 (inception) through September 30, 2001, resulted in a net loss of ($3.0 million). The results of operations may not be comparable with the results of operations during future periods, especially when the Company's facility commences commercial operations. LIQUIDITY AND CAPITAL RESOURCES The Company believes that the net proceeds from the sale of the senior secured bonds, together with the equity contribution, will be sufficient to (1) fund the engineering, procurement, construction, testing and commissioning of the Company's facility until it is placed in commercial operation, (2) pay certain fees and expenses in connection with the financing and development of the Company's project and (3) pay project costs, including interest on the senior secured bonds. After the Company's facility is placed in commercial operation, it will depend on revenues under the power purchase agreement, and after the power purchase agreement expires, it will depend on market sales of electricity. In order to provide liquidity in the event of cash flow shortfalls, the Company has entered into a Debt Service Reserve Letter of Credit and Reimbursement Agreement. Under this agreement, a Debt Service Reserve Letter of Credit will be issued on the commercial operation date, currently expected to be December 1, 2001. The amount of the Debt Service Reserve Letter of Credit will equal six months of scheduled payments of principal and interest on the bonds. As of September 30, 2001, the Company had original commitments to the general contractor totaling $241 million arising from the construction of its facility of which $234 million had been paid. BUSINESS STRATEGY AND OUTLOOK The Company's overall business strategy is to market and sell all of its net capacity, fuel conversion and ancillary services to Williams Energy during the 20-year term of the power purchase agreement. After expiration of the power purchase agreement, the Company anticipates selling its facility's capacity, ancillary services and energy under a power purchase agreement or (page 16 of 18) into the Pennsylvania/New Jersey/Maryland power pool market. The Company intends to cause its facility to be managed, operated and maintained in compliance with the project contracts and all applicable legal requirements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risks are not materially different from those market risks described in it's annual report on Form 10-K for the fiscal year ended December 31, 2000. (page 17 of 18) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AES IRONWOOD, L.L.C. Date: November 14, 2001 By: /S/ PETE NORGEOT -------------------------------------- PETE NORGEOT President Date: November 14, 2001 By: /S/ MICHAEL CARLSON -------------------------------------- MICHAEL CARLSON Vice President (and principal accounting officer) (page 18 of 18)

AES IRONWOOD LLC 10-Q