UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment No. 2)

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

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 1-7176

El Paso CGP Company

(Exact Name of Registrant as Specified in Its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		74-1734212 (I.R.S. Employer Identification No.)
El Paso Building 1001 Louisiana Street Houston, Texas (Address of Principal Executive Offices)		77002 (Zip Code)

Telephone Number: (713) 420-2600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) 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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant: None

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Stock, par value $1 per share. Shares outstanding on April 15, 2005: 1,000

EL PASO CGP COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION I(1)(a) AND (b) TO FORM 10-K AND IS, THEREFORE, FILING THIS REPORT WITH A REDUCED DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.

Documents Incorporated by Reference: None

EXPLANATORY NOTE

This amendment on Form 10-K/ A constitutes Amendment No. 2 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, which was originally filed with the SEC on April 15, 2005. Amendment No. 1 to the Annual Report was filed on June 21, 2005, to reflect adjustments in certain of our discontinued operations in 2003 and 2004, resulting from errors in the accounting and reporting for foreign currency translation adjustments and related tax adjustments. We are filing this Form 10-K/ A to amend the disclosure set forth in Item 15 of that report and to include the financial statements of certain of our unconsolidated subsidiaries including Saba Power Company (Private) Limited, Khulna Power Company Limited, Empresa de Generación Eléctrica Fortuna, S.A., and Habibullah Coastal Power Company (Private) Limited for the years ended December 31, 2004. We are including these financial statements in Item 15, Exhibits and Financial Statement Schedules as required by Rule 3-09 of Regulation S-X.

This amendment only amends Item 15 of the Annual Report as specified above. It does not affect the original financial statements or footnotes filed in the Annual Report and does not reflect events occurring after the original filing date of April 15, 2005.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following documents are filed as part of this report:

1. Financial statements.

Our consolidated financial statements are included in Part II, Item 8 of our Annual Report on Form 10-K, as amended:


			Page

Consolidated Statements of Income				45
Consolidated Balance Sheets				46
Consolidated Statements of Cash Flows				48
Consolidated Statements of Stockholder’s Equity				50
Consolidated Statements of Comprehensive Income				51
Notes to Consolidated Financial Statements				52
Report of Independent Registered Public Accounting Firm				94

2. Financial statement schedules and supplementary information required to be submitted.

Schedule II — Valuation and Qualifying Accounts				106
Midland Cogeneration Venture Limited Partnership
	As of and for the years ended December 31, 2004, 2003, and 2002
		Report of Independent Registered Public Accounting Firm		111
		Consolidated Balance Sheets		113
		Consolidated Statements of Operations		114
		Consolidated Statements of Partners’ Equity		115
		Consolidated Statements of Cash Flows		116
		Notes to Consolidated Financial Statements		117
Javelina Company
	As of and for the years ended December 31, 2004, 2003, and 2002
		Report of Independent Registered Public Accounting Firm		133
		Balance Sheets		134
		Statements of Operations		135
		Statements of Partners’ Capital		136
		Statements of Cash Flows		137
		Notes to Financial Statements		138
Great Lakes Gas Transmission Limited Partnership
	As of and for the years ended December 31, 2004, 2003, and 2002
		Report of Independent Registered Public Accounting Firm		143
		Consolidated Statements of Income and Partners’ Capital		144
		Consolidated Balance Sheets		145
		Consolidated Statements of Cash Flows		146
		Notes to Consolidated Financial Statements		147
Khulna Power Company Limited⁽¹⁾
	As of and for the years ended December 31, 2004 and 2003
		Auditors’ Report to the Shareholders of Khulna Power Company Limited		151
		Balance Sheet		152
		Income Statement		153
		Cash Flow Statement		154
		Statement of Changes in Equity		155
		Notes to the Financial Statements		156
	As of and for the year ended December 31, 2002 (Unaudited)
		Balance Sheet		165
		Income Statement		166
		Cash Flow Statement		167
		Statement of Stockholders’ Equity		168
		Notes to the Financial Statements		169

109


			Page

Habibullah Coastal Power (Private) Company Limited
	As of and for the years ended December 31, 2004 and 2003
		Report of Independent Auditors		177
		Balance Sheets		178
		Statements of Operations		179
		Statements of Cash Flows		180
		Statements of Changes in Stockholder’s Equity		181
		Notes to Financial Statements		182
	As of and for the year ended December 31, 2002 (Unaudited)
		Balance Sheet		188
		Statement of Operations		189
		Statement of Changes in Stockholder’s Equity		190
		Statement of Cash Flows		191
		Notes to Financial Statements		192
Empresa de Generación Eléctrica Fortuna, S.A.
	As of and for the years ended December 31, 2004 and 2003
		Report of Independent Auditors		198
		Balance Sheets		199
		Statements of Income		200
		Statements of Changes in Stockholder’s Equity		201
		Statements of Cash Flows		202
		Statements of Comprehensive Income and Accumulated Other Comprehensive Income		203
		Notes to Financial Statements		204
	As of and for the year ended December 31, 2002 (Unaudited)
		Balance Sheet		216
		Statement of Income		217
		Statement of Changes in Stockholder’s Equity		218
		Statement of Cash Flows		219
		Statement of Comprehensive Income and Accumulated Other Comprehensive Income		220
		Notes to Financial Statements		221
Saba Power Company (Private) Limited
	As of and for the years ended December 31, 2004 and 2003
		Report of Independent Auditors		232
		Balance Sheets		233
		Statements of Operations		234
		Statements of Changes in Stockholder’s Equity		235
		Statement of Cash Flows		236
		Notes to Financial Statements		237
	As of and for the year ended June 30, 2002 and as of and for the six months ended December 31, 2002⁽²⁾(Unaudited)
		Balance Sheets		246
		Statements of Operations		247
		Statements of Changes in Stockholder’s Equity		248
		Statements of Cash Flows		249
		Notes to Financial Statements		250
Certification of CEO pursuant to Sec. 302
Certification of CFO pursuant to Sec. 302
Certification of CEO pursuant to Sec. 906
Certification of CFO pursuant to Sec. 906


	Schedules other than those listed above are omitted because they are not applicable.



⁽¹⁾	The financial statements of Khulna Power Company Limited (Khulna) are prepared in accordance with International Financial Reporting Standards (IFRS). In 2002, Khulna incurred $641,418 of legal and other expenses associated with certain debt financing. These costs were expensed in accordance with IFRS; however, such costs would have been capitalized under generally accepted accounting principles in the United States. There are no other material reconciling differences to prepare these statements in accordance with generally accepted accounting principles in the United States.



⁽²⁾	During 2002, Saba Power Company (Private) Limited (Saba) changed its accounting year-end to December 31 from June 30.


3. Exhibit list			260

110

PRICEWATERHOUSECOOPERS LLP

Report of Independent Registered Public Accounting Firm

To the Partners and the Management Committee of

Midland Cogeneration Venture Limited Partnership:

We have completed an integrated audit of Midland Cogeneration Venture Limited Partnership 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its December 31, 2003 and December 31, 2002 financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, partners’ equity and cash flows present fairly, in all material respects, the financial position of the Midland Cogeneration Limited Partnership (a Michigan limited partnership) and its subsidiaries (MCV) at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the MCV’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As explained in Note 2 to the financial statements, effective April 1, 2002, Midland Cogeneration Venture Limited Partnership changed its method of accounting for derivative and hedging activities in accordance with Derivative Implementation Group (“DIG”) Issue C-16.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting (not presented herein), that the MCV maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the MCV maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The MCV’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the MCV’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

111

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Detroit, Michigan

February 25, 2005

112

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,

(In Thousands)


			2004			2003

ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	125,781		$	173,651
	Accounts and notes receivable — related parties			54,368			43,805
	Accounts receivable			42,984			38,333
	Gas inventory			17,509			20,298
	Unamortized property taxes			18,060			17,672
	Derivative assets			94,977			86,825
	Broker margin accounts, and prepaid gas costs and expenses			13,147			8,101

		Total current assets		366,826			388,685

PROPERTY, PLANT AND EQUIPMENT:
	Property, plant and equipment			2,466,944			2,463,931
	Pipeline			21,432			21,432

		Total property, plant and equipment		2,488,376			2,485,363
	Accumulated depreciation			(1,062,821	)		(991,556	)

		Net property, plant and equipment		1,425,555			1,493,807

OTHER ASSETS:
	Restricted investment securities held-to-maturity			139,410			139,755
	Derivative assets non-current			24,337			18,100
	Deferred financing costs, net of accumulated amortization of $18,498 and $17,285, respectively			6,467			7,680
	Prepaid gas costs, spare parts deposit, materials and supplies			17,782			21,623

		Total other assets		187,996			187,158

TOTAL ASSETS			$	1,980,377		$	2,069,650


LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable and accrued liabilities		$	82,693		$	57,368
	Gas supplier funds on deposit			19,613			4,517
	Interest payable			47,738			53,009
	Current portion of long-term debt			76,548			134,576

		Total current liabilities		226,592			249,470

NON-CURRENT LIABILITIES:
	Long-term debt			942,097			1,018,645
	Other			1,712			2,459

		Total non-current liabilities		943,809			1,021,104

COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
TOTAL LIABILITIES				1,170,401			1,270,574

PARTNERS’ EQUITY				809,976			799,076

TOTAL LIABILITIES AND PARTNERS’ EQUITY			$	1,980,377		$	2,069,650

The accompanying notes are an integral part of these statements.

113

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,

(In Thousands)


			2004			2003			2002

OPERATING REVENUES:
	Capacity		$	405,415		$	404,681		$	404,713
	Electric			225,154			162,093			177,569
	Steam			19,090			17,638			14,537

		Total operating revenues		649,659			584,412			596,819

OPERATING EXPENSES:
	Fuel costs			413,061			254,988			255,142
	Depreciation			88,712			89,437			88,963
	Operations			18,769			16,943			16,642
	Maintenance			13,508			15,107			12,666
	Property and single business taxes			28,834			30,040			27,087
	Administrative, selling and general			11,236			9,959			8,195

		Total operating expenses		574,120			416,474			408,695

OPERATING INCOME				75,539			167,938			188,124

OTHER INCOME (EXPENSE):
	Interest and other income			5,460			5,100			5,555
	Interest expense			(104,618	)		(113,247	)		(119,783	)

		Total other income (expense), net		(99,158	)		(108,147	)		(114,228	)

NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE				(23,619	)		59,791			73,896
Cumulative effect of change in method of accounting for derivative option contracts (to April 1, 2002) (Note 2)				—			—			58,131

NET INCOME (LOSS)			$	(23,619	)	$	59,791		$	132,027

The accompanying notes are an integral part of these statements.

114

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31,

(In Thousands)


			General			Limited
			Partners			Partners			Total

BALANCE, DECEMBER 31, 2001			$	468,972		$	82,740		$	551,712
Comprehensive Income
	Net Income			114,947			17,080			132,027
	Other Comprehensive Income
		Unrealized gain on hedging activities since beginning of period		33,311			4,950			38,261
		Reclassification adjustments recognized in net income above		10,717			1,593			12,310

		Total other comprehensive income		44,028			6,543			50,571

	Total Comprehensive Income			158,975			23,623			182,598

BALANCE, DECEMBER 31, 2002			$	627,947		$	106,363		$	734,310
Comprehensive Income
	Net Income			52,056			7,735			59,791
	Other Comprehensive Income
		Unrealized gain on hedging activities since beginning of period		34,484			5,125			39,609
		Reclassification adjustments recognized in net income above		(30,153	)		(4,481	)		(34,634	)

		Total other comprehensive income		4,331			644			4,975

	Total Comprehensive Income			56,387			8,379			64,766

BALANCE, DECEMBER 31, 2003			$	684,334		$	114,742		$	799,076
Comprehensive Income
	Net Loss			(20,563	)		(3,056	)		(23,619	)
	Other Comprehensive Income
		Unrealized gain on hedging activities since beginning of period		62,292			9,256			71,548
		Reclassification adjustments recognized in net income above		(32,239	)		(4,790	)		(37,029	)

		Total other comprehensive income		30,053			4,466			34,519

	Total Comprehensive Income			9,490			1,410			10,900

BALANCE, DECEMBER 31, 2004			$	693,824		$	116,152		$	809,976

The accompanying notes are an integral part of these statements.

115

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,

(In Thousands)


			2004			2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income (loss)		$	(23,619	)	$	59,791		$	132,027
	Adjustments to reconcile net income to net cash provided by operating activities
	Depreciation and amortization			89,925			90,792			90,430
	Cumulative effect of change in accounting principle			—			—			(58,131	)
	(Increase) decrease in accounts receivable			(15,214	)		(1,211	)		48,343
	(Increase) decrease in gas inventory			2,789			(732	)		133
	(Increase) decrease in unamortized property taxes			(388	)		683			(1,730	)
	(Increase) decrease in broker margin accounts and prepaid expenses			(5,046	)		(4,778	)		31,049
	(Increase) decrease in derivative assets			20,130			4,906			(20,444	)
	(Increase) decrease in prepaid gas costs, materials and supplies			3,841			(8,704	)		1,376
	Increase (decrease) in accounts payable and accrued liabilities			25,775			(712	)		8,774
	Increase in gas supplier funds on deposit			15,096			4,517			—
	Decrease in interest payable			(5,271	)		(3,377	)		(3,948	)
	Increase (decrease) in other non-current liabilities			(1,197	)		311			(24	)

		Net cash provided by operating activities		106,821			141,486			227,855

CASH FLOWS FROM INVESTING ACTIVITIES:
	Plant modifications and purchases of plant equipment			(20,460	)		(33,278	)		(29,529	)
	Maturity of restricted investment securities held-to-maturity			674,553			601,225			377,192
	Purchase of restricted investment securities held-to-maturity			(674,208	)		(602,279	)		(374,426	)

		Net cash used in investing activities		(20,115	)		(34,332	)		(26,763	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Repayment of financing obligation			(134,576	)		(93,928	)		(182,084	)

		Net cash used in financing activities		(134,576	)		(93,928	)		(182,084	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS				(47,870	)		13,226			19,008
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD				173,651			160,425			141,417

CASH AND EQUIVALENTS AT END OF PERIOD			$	125,781		$	173,651		$	160,425

The accompanying notes are an integral part of these statements.

116

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)	The Partnership and Associated Risks

MCV was organized to construct, own and operate a combined-cycle, gas-fired cogeneration facility (the “Facility”) located in Midland, Michigan. MCV was formed on January 27, 1987, and the Facility began commercial operation in 1990.

In 1992, MCV had acquired the outstanding common stock of PVCO Corp., a previously inactive company. MCV and PVCO Corp. then entered into a partnership agreement to form MCV Gas Acquisition General Partnership (“MCV GAGP”) for the purpose of buying and selling natural gas on the spot market and other transactions involving natural gas activities. PVCO Corp. and MCV GAGP were dissolved on January 30, 2004 and July 2, 2004, respectively, due to inactivity.

The Facility has a net electrical generating capacity of approximately 1500 MW and approximately 1.5 million pounds of process steam capacity per hour. MCV has entered into three principal energy sales agreements. MCV has contracted to (i) supply up to 1240 MW of electric capacity (“Contract Capacity”) to Consumers Energy Company (“Consumers”) under the Power Purchase Agreement (“PPA”), for resale to its customers through 2025, (ii) supply electricity and steam to The Dow Chemical Company (“Dow”) through 2008 and 2015, respectively, under the Steam and Electric Power Agreement (“SEPA”) and (iii) supply steam to Dow Corning Corporation (“DCC”) under the Steam Purchase Agreement (“SPA”) through 2011. From time to time, MCV enters into other sales agreements for the sale of excess capacity and/or energy available above MCV’s internal use and obligations under the PPA, SEPA and SPA. Results of operations are primarily dependent on successfully operating the Facility at or near contractual capacity levels and on Consumers’ ability to perform its obligations under the PPA. Sales pursuant to the PPA have historically accounted for over 90% of MCV’s revenues.

The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the Michigan Public Service Commission (“MPSC”) does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA (the “regulatory-out” provision). Until September 15, 2007, however, the capacity charge may not be reduced below an average capacity rate of 3.77 cents per kilowatt-hour for the available Contract Capacity notwithstanding the “regulatory-out” provision. Consumers and MCV are required to support and defend the terms of the PPA.

The Facility is a qualifying cogeneration facility (“QF”) originally certified by the Federal Energy Regulatory Commission (“FERC”) under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”). In order to maintain QF status, certain operating and efficiency standards must be maintained on a calendar-year basis and certain ownership limitations must be met. In the case of a topping-cycle generating plant such as the Facility, the applicable operating standard requires that the portion of total energy output that is put to some useful purpose other than facilitating the production of power (the “Thermal Percentage”) be at least 5%. In addition, the Facility must achieve a PURPA efficiency standard (the sum of the useful power output plus one-half of the useful thermal energy output, divided by the energy input (the “Efficiency Percentage”)) of at least 45%. If the Facility maintains a Thermal Percentage of 15% or higher, the required Efficiency Percentage is reduced to 42.5%. Since 1990, the Facility has achieved the applicable Thermal and Efficiency Percentages. For the twelve months ended December 31, 2004, the Facility achieved a Thermal Percentage of 15.6% and an Efficiency Percentage of 47.6%. The loss of QF status could, among other things, cause MCV to lose its rights under PURPA to sell power from the Facility to Consumers at Consumers’ “avoided cost” and subject MCV to additional federal and state regulatory requirements.

The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility’s operating expenses consist of the costs of natural gas. MCV recognizes that its existing gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of the existing gas contracts. In

117

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

addition, to the extent that the costs associated with production of electricity rise faster than the energy charge payments, MCV’s financial performance will be negatively affected. The extent of such impact will depend upon the amount of the average energy charge payable under the PPA, which is based upon costs incurred at Consumers’ coal-fired plants and upon the amount of energy scheduled by Consumers for delivery under the PPA. However, given the unpredictability of these factors, the overall economic impact upon MCV of changes in energy charges payable under the PPA and in future fuel costs under new or existing contracts cannot accurately be predicted.

At both the state and federal level, efforts continue to restructure the electric industry. A significant issue to MCV is the potential for future regulatory denial of recovery by Consumers from its customers of above market PPA costs Consumers pays MCV. At the state level, the MPSC entered a series of orders from June 1997 through February 1998 (collectively the “Restructuring Orders”), mandating that utilities “wheel” third-party power to the utilities’ customers, thus permitting customers to choose their power provider. MCV, as well as others, filed an appeal in the Michigan Court of Appeals to protect against denial of recovery by Consumers of PPA charges. The Michigan Court of Appeals found that the Restructuring Orders do not unequivocally disallow such recovery by Consumers and, therefore, MCV’s issues were not ripe for appellate review and no actual controversy regarding recovery of costs could occur until 2008, at the earliest. In June 2000, the State of Michigan enacted legislation which, among other things, states that the Restructuring Orders (being voluntarily implemented by Consumers) are in compliance with the legislation and enforceable by the MPSC. The legislation provides that the rights of parties to existing contracts between utilities (like Consumers) and QFs (like MCV), including the rights to have the PPA charges recovered from customers of the utilities, are not abrogated or diminished, and permits utilities to securitize certain stranded costs, including PPA charges.

In 1999, the U.S. District Court granted summary judgment to MCV declaring that the Restructuring Orders are preempted by federal law to the extent they prohibit Consumers from recovering from its customers any charge for avoided costs (or “stranded costs”) to be paid to MCV under PURPA pursuant to the PPA. In 2001, the United States Court of Appeals (“Appellate Court”) vacated the U.S. District Court’s 1999 summary judgment and ordered the case dismissed based upon a finding that no actual case or controversy existed for adjudication between the parties. The Appellate Court determined that the parties’ dispute is hypothetical at this time and the QFs’ (including MCV) claims are premised on speculation about how an order might be interpreted by the MPSC, in the future.

Two significant issues that could affect MCV’s future financial performance are the price of natural gas and Consumers’ ability/obligation to pay PPA charges. Natural gas prices have historically been volatile and presently there is no consensus among forecasters on the price or range of future prices of natural gas. Even with the approved Resource Conservation Agreement and Reduced Dispatch Agreement, if gas prices continue at present levels or increase, the economics of operating the Facility may be adversely affected. Consumers’ ability/obligation to pay PPA charges may be affected by an MPSC order denying Consumers recovery from ratepayers. This issue is likely to be addressed in the timeframe of 2007 or beyond. MCV continues to monitor and participate in these matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. MCV management cannot, at this time, predict the impact or outcome of these matters.


(2)	Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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. Following is a discussion of MCV’s significant accounting policies.

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	Principles of Consolidation

The consolidated financial statements included the accounts of MCV and its wholly-owned subsidiaries, PVCO Corp. and MCV GAGP. Previously, all material transactions and balances among entities, which comprise MCV, had been eliminated in the consolidated financial statements. The 2004 dissolution of these wholly-owned subsidiaries had no impact on the financial position and results of operations.


	Revenue Recognition

MCV recognizes revenue for the sale of variable energy and fixed energy when delivered. Capacity and other installment revenues are recognized based on plant availability or other contractual arrangements.


	Fuel Costs

MCV’s fuel costs are those costs associated with securing natural gas, transportation and storage services necessary to generate electricity and steam from the Facility. These costs are recognized in the income statement based upon actual volumes burned to produce the delivered energy. In addition, MCV engages in certain cost mitigation activities to offset the fixed charges MCV incurs for these activities. The gains or losses resulting from these activities have resulted in net gains of approximately $6.7 million, $7.7 million and $3.9 million for the years ended 2004, 2003 and 2002, respectively. These net gains are reflected as a component of fuel costs.

In July 2000, in response to rapidly escalating natural gas prices and since Consumers’ electric rates were frozen, MCV entered into a series of transactions with Consumers whereby Consumers agreed to reduce MCV’s dispatch level and MCV agreed to share with Consumers the savings realized by not having to generate electricity (“Dispatch Mitigation”). On January 1, 2004, Dispatch Mitigation ceased and Consumers began dispatching MCV pursuant to a 915 MW settlement and a 325 MW settlement “availability caps” provision (i.e., minimum dispatch of 1100 MW on- and off-peak (“Forced Dispatch”)). In 2004, MCV and Consumers entered into a Resource Conservation Agreement (“RCA”) and a Reduced Dispatch Agreement (“RDA”) which, among other things, provides that Consumers will economically dispatch MCV, if certain conditions are met. Such dispatch is expected to reduce electric production from what is occurring under the Forced Dispatch, as well as decrease gas consumption by MCV. The RCA provides that Consumers has a right of first refusal to purchase, at market prices, the gas conserved under the RCA. The RCA and RDA provide for the sharing of savings realized by not having to generate electricity. The RCA and RDA were approved by an order of the MPSC on January 25, 2005 and MCV and Consumers accepted the terms of the MPSC order making the RCA and RDA effective as of January 27, 2005. This MPSC order is subject to appeal by other parties. MCV management cannot predict the final outcome of any such appeal. While awaiting approval of this order, effective October 23, 2004, MCV and Consumers entered into an interim Dispatch Mitigation program for energy dispatch above 1100 MW up to 1240 MW of Contract Capacity under the PPA. This interim program, which was structured very similarly to the RCA and RDA, was terminated on January 27, 2005 with the effective date of the RCA/ RDA. For the twelve months ended December 31, 2004, 2003 and 2002, MCV estimates that these programs have resulted in net savings of approximately $1.6 million, $13.0 million and $2.5 million, a portion of which is realized in reduced maintenance expenditures in future years.


	Accounts Receivable

Accounts receivable and accounts receivable-related parties are recorded at the billed amount and do not bear interest. MCV evaluates the need for an allowance for doubtful accounts using MCV’s best estimate of the amount of probable credit losses. At December 31, 2004 and 2003, no allowance was provided since typically all receivables are collected within 30 days of each month end.

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	Inventory

MCV’s inventory of natural gas is stated at the lower of cost or market, and valued using the last-in, first-out (“LIFO”) method. Inventory includes the costs of purchased gas, variable transportation and storage. The amount of reserve to reduce inventories from first-in, first-out (“FIFO”) basis to the LIFO basis at December 31, 2004 and 2003, was $10.3 million and $8.4 million, respectively. Inventory cost, determined on a FIFO basis, approximates current replacement cost.


	Materials and Supplies

Materials and supplies are stated at the lower of cost or market using the weighted average cost method. The majority of MCV’s materials and supplies are considered replacement parts for MCV’s Facility.


	Depreciation

Original plant, equipment and pipeline were valued at cost for the constructed assets and at the asset transfer price for purchased and contributed assets, and are depreciated using the straight-line method over an estimated useful life of 35 years, which is the term of the PPA, except for the hot gas path components of the GTGs which are primarily being depreciated over a 25-year life. Plant construction and additions, since commercial operations in 1990, are depreciated using the straight-line method over the remaining life of the plant which currently is 22 years. Major renewals and replacements, which extend the useful life of plant and equipment are capitalized, while maintenance and repairs are expensed when incurred. Major equipment overhauls are capitalized and amortized to the next equipment overhaul. Personal property is depreciated using the straight-line method over an estimated useful life of 5 to 15 years. The cost of assets and related accumulated depreciation are removed from the accounts when sold or retired, and any resulting gain or loss reflected in operating income.


	Federal Income Tax

MCV is not subject to Federal or State income taxes. Partnership earnings are taxed directly to each individual partner.


	Statement of Cash Flows

All liquid investments purchased with a maturity of three months or less at time of purchase are considered to be current cash equivalents.


	Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents and short-term investments approximate fair value because of the short maturity of these instruments. MCV’s short-term investments, which are made up of investment securities held-to-maturity, as of December 31, 2004 and December 31, 2003 have original maturity dates of approximately one year or less. The unique nature of the negotiated financing obligation discussed in Note 6 makes it unnecessary to estimate the fair value of the Owner Participants’ underlying debt and equity instruments supporting such financing obligation, since SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” does not require fair value accounting for the lease obligation.


	Accounting for Derivative Instruments and Hedging Activities

Effective January 1, 2001, MCV adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” which was issued in June 1998 and then amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of SFAS No. 133,” SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities — An

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amendment of FASB Statement No. 133” and SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activity (collectively referred to as “SFAS No. 133”). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges in some cases allows a derivative’s gains and losses to offset related results on the hedged item in the income statement or permits recognition of the hedge results in other comprehensive income, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting.


	Electric Sales Agreements

MCV believes that its electric sales agreements currently do not qualify as derivatives under SFAS No. 133, due to the lack of an active energy market (as defined by SFAS No. 133) in the State of Michigan and the transportation cost to deliver the power under the contracts to the closest active energy market at the Cinergy hub in Ohio and as such does not record the fair value of these contracts on its balance sheet. If an active energy market emerges, MCV intends to apply the normal purchase, normal sales exception under SFAS No. 133 to its electric sales agreements, to the extent such exception is applicable.


	Natural Gas Supply Contracts

MCV management believes that its long-term natural gas contracts, which do not contain volume optionality, qualify under SFAS No. 133 for the normal purchases and normal sales exception. Therefore, these contracts are currently not recognized at fair value on the balance sheet.

The FASB issued DIG Issue C-16, which became effective April 1, 2002, regarding natural gas commodity contracts that combine an option component and a forward component. This guidance requires either that the entire contract be accounted for as a derivative or the components of the contract be separated into two discrete contracts. Under the first alternative, the entire contract considered together would not qualify for the normal purchases and sales exception under the revised guidance. Under the second alternative, the newly established forward contract could qualify for the normal purchases and sales exception, while the option contract would be treated as a derivative under SFAS No. 133 with changes in fair value recorded through earnings. At April 1, 2002, MCV had nine long-term gas contracts that contained both an option and forward component. As such, they were no longer accounted for under the normal purchases and sales exception and MCV began mark-to-market accounting of these nine contracts through earnings. As of January 31, 2005, only four contracts of the original nine contracts, which contained an option and forward component remain in effect. In addition, as a result of implementing the RCA/ RDA, effective January 27, 2005, MCV has determined that as of the effective date of the RCA/ RDA, an additional nine long term contracts (for a total of 13) will no longer be accounted for under the normal purchases and sales exception, per SFAS No. 133 and will result in additional mark-to-market activity in 2005 and beyond. MCV expects future earnings volatility on both the remaining long term gas contracts that contain volume optionality as well as the long term gas contracts under the RCA/ RDA that will require mark-to-market recognition on a quarterly basis.

Based on the natural gas prices, at the beginning of April 2002, MCV recorded a $58.1 million gain for the cumulative effect of this accounting change. From April 2002 to December 2004, MCV recorded an additional net mark-to-market loss of $2.3 million for these gas contracts. The cumulative mark-to-market gain through December 31, 2004 of $55.8 million is recorded as a current and non-current derivative asset on the balance sheet, as detailed below. These assets will reverse over the remaining life of these gas contracts, ranging from 2005 to 2007. For the twelve months ended December 31, 2004 and 2003, MCV recorded in “Fuel costs” losses of $19.2 million and $5.0 million, respectively, for net mark-to-market adjustments

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associated with these contracts. In addition, as of December 31, 2004 and 2003, MCV recorded “Derivative assets” in Current Assets in the amount of $31.4 million and $56.9 million, respectively, and for the same periods recorded “Derivative assets non-current” in Other Assets in the amount of $24.3 million and $18.1 million, respectively, representing the mark-to-market value on these long-term natural gas contracts.


	Natural Gas Supply Futures and Options

To manage market risks associated with the volatility of natural gas prices, MCV maintains a gas hedging program. MCV enters into natural gas futures contracts, option contracts, and over the counter swap transactions (“OTC swaps”) in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are being utilized principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize MCV’s existing gas supply, storage and transportation arrangements.

These financial instruments are derivatives under SFAS No. 133 and the contracts that are utilized to secure the anticipated natural gas requirements necessary for projected electric and steam sales qualify as cash flow hedges under SFAS No. 133, since they hedge the price risk associated with the cost of natural gas. MCV also engages in cost mitigation activities to offset the fixed charges MCV incurs in operating the Facility. These cost mitigation activities include the use of futures and options contracts to purchase and/or sell natural gas to maximize the use of the transportation and storage contracts when it is determined that they will not be needed for Facility operation. Although these cost mitigation activities do serve to offset the fixed monthly charges, these cost mitigation activities are not considered a normal course of business for MCV and do not qualify as hedges under SFAS No. 133. Therefore, the resulting mark-to-market gains and losses from cost mitigation activities are flowed through MCV’s earnings.

Cash is deposited with the broker in a margin account at the time futures or options contracts are initiated. The change in market value of these contracts requires adjustment of the margin account balances. The margin account balance as of December 31, 2004 and 2003 was recorded as a current asset in “Broker margin accounts and prepaid expenses,” in the amount of $1.4 million and $4.1 million, respectively.

For the twelve months ended December 31, 2004, MCV has recognized in other comprehensive income, an unrealized $34.5 million increase on the futures contracts and OTC swaps, which are hedges of forecasted purchases for plant use of market priced gas. This resulted in a net $65.8 million gain in other comprehensive income as of December 31, 2004. This balance represents natural gas futures, options and OTC swaps with maturities ranging from January 2005 to December 2009, of which $33.4 million of this gain is expected to be reclassified into earnings within the next twelve months. MCV also has recorded, as of December 31, 2004, a $63.6 million current derivative asset in “Derivative assets,” representing the mark-to-market gain on natural gas futures for anticipated projected electric and steam sales accounted for as hedges. In addition, for the twelve months ended December 31, 2004, MCV has recorded a net $36.5 million gain in earnings from hedging activities related to MCV natural gas requirements for Facility operations and a net $1.8 million gain in earnings from cost mitigation activities.

For the twelve months ended December 31, 2003, MCV recognized an unrealized $5.0 million increase in other comprehensive income on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas, which resulted in a $31.3 million gain balance in other comprehensive income as of December 31, 2003. As of December 31, 2003, MCV had recorded a $29.9 million current derivative asset in “Derivative assets.” For the twelve months ended December 31, 2003, MCV had recorded a net $35.0 million gain in earnings from hedging activities related to MCV natural gas requirements for Facility operations and a net $1.0 million gain in earnings from cost mitigation activities.

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	New Accounting Standard

In 2003, the Emerging Issues Task Force (“EITF”) issued EITF 03-1 “The Meaning of Other-Than-Temporary Impairment and It’s Application to Certain Investments”. EITF 03-1 addresses how to determine the meaning of other-than-temporary impairment of certain debt and equity securities, the measurement of an impairment loss and accounting and disclosure considerations subsequent to the recognition of an other-than-temporary impairment. The various sections of EITF 03-1 became effective at various times during 2004. MCV has adopted this guidance and does not expect the application to materially affect it financial position or results of operations, since MCV’s investments approximate fair value due to the short maturity of its permitted investments.


(3)	Restricted Investment Securities Held-to-Maturity

Non-current restricted investment securities held-to-maturity have carrying amounts that approximate fair value because of the short maturity of these instruments and consist of the following at December 31 (in thousands):


	2004		2003

Funds restricted for rental payments pursuant to the Overall Lease Transaction	$	138,150	$	137,296
Funds restricted for management non-qualified plans		1,260		2,459

Total	$	139,410	$	139,755


(4)	Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following at December 31 (in thousands):


		2004		2003

Accounts payable
	Related parties	$	12,772	$	7,386
	Trade creditors		53,476		34,786
Property and single business taxes			11,833		12,548
Other			4,612		2,648

Total		$	82,693	$	57,368


(5)	Gas Supplier Funds on Deposit

Pursuant to individual gas contract terms with counterparties, deposit amounts or letters of credit may be required by one party to the other based upon the net amount of exposure. The net amount of exposure will vary with changes in market prices, credit provisions and various other factors. Collateral paid or received will be posted by one party to the other based on the net amount of the exposure. Interest is earned on funds on deposit. As of December 31, 2004, MCV is supplying credit support to two gas suppliers; one in the form of a letter of credit in the amount of $2.4 million; and cash on deposit with the other in the amount of $7.3 million. As of December 31, 2004, MCV is holding $19.6 million of cash on deposit from two of MCV’s brokers. In addition as of December 31, 2004, MCV is also holding letters of credit totaling $208.6 million from two gas suppliers, of which $184.0 million is a letter of credit from El Paso Corporation (“El Paso”), a related party.

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(6)	Long-Term Debt

Long-term debt consists of the following at December 31 (in thousands):


	2004			2003

Financing obligation, maturing through 2015, payable in semi-annual installments of principal and interest, collateralized by property, plant and equipment	$	1,018,645		$	1,153,221
Less current portion		(76,548	)		(134,576	)

Total long-term debt	$	942,097		$	1,018,645


	Financing Obligation

In June 1990, MCV obtained permanent financing for the Facility by entering into sale and leaseback agreements (“Overall Lease Transaction”) with a lessor group, related to substantially all of MCV’s fixed assets. Proceeds of the financing were used to retire borrowings outstanding under existing loan commitments, make a capital distribution to the Partners and retire a portion of notes issued by MCV to MEC Development Corporation (“MDC”) in connection with the transfer of certain assets by MDC to MCV. In accordance with SFAS No. 98, “Accounting For Leases,” the sale and leaseback transaction has been accounted for as a financing arrangement.

The financing obligation utilizes the effective interest rate method, which is based on the minimum lease payments required through the end of the basic lease term of 2015 and management’s estimate of additional anticipated obligations after the end of the basic lease term. The effective interest rate during the remainder of the basic lease term is approximately 9.4%.

Under the terms of the Overall Lease Transaction, MCV sold undivided interests in all of the fixed assets of the Facility for approximately $2.3 billion, to five separate owner trusts (“Owner Trusts”) established for the benefit of certain institutional investors (“Owner Participants”). U.S. Bank National Association (formerly known as State Street Bank and Trust Company) serves as owner trustee (“Owner Trustee”) under each of the Owner Trusts, and leases undivided interests in the Facility on behalf of the Owner Trusts to MCV for an initial term of 25 years. CMS Midland Holdings Company (“CMS Holdings”), currently a wholly owned subsidiary of Consumers, acquired a 35% indirect equity interest in the Facility through its purchase of an interest in one of the Owner Trusts.

The Overall Lease Transaction requires MCV to achieve certain rent coverage ratios and other financial tests prior to a distribution to the Partners. Generally, these financial tests become more restrictive with the passage of time. Further, MCV is restricted to making permitted investments and incurring permitted indebtedness as specified in the Overall Lease Transaction. The Overall Lease Transaction also requires filing of certain periodic operating and financial reports, notification to the lessors of events constituting a material adverse change, significant litigation or governmental investigation, and change in status as a qualifying facility under FERC proceedings or court decisions, among others. Notification and approval is required for plant modification, new business activities, and other significant changes, as defined. In addition, MCV has agreed to indemnify various parties to the sale and leaseback transaction against any expenses or environmental claims asserted, or certain federal and state taxes imposed on the Facility, as defined in the Overall Lease Transaction.

Under the terms of the Overall Lease Transaction and refinancing of the tax-exempt bonds, approximately $25.0 million of transaction costs were a liability of MCV and have been recorded as a deferred cost. Financing costs incurred with the issuance of debt are deferred and amortized using the interest method over the remaining portion of the 25-year lease term. Deferred financing costs of approximately $1.2 million, $1.4 million and $1.5 million were amortized in the years 2004, 2003 and 2002, respectively.

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Interest and fees incurred related to long-term debt arrangements during 2004, 2003 and 2002 were $103.4 million, $111.9 million and $118.3 million, respectively.

Interest and fees paid during 2004, 2003 and 2002 were $108.6 million, $115.4 million and $122.1 million, respectively.

Minimum payments due under these long-term debt arrangements over the next five years are (in thousands):


	Principal		Interest		Total

2005	$	76,548	$	97,835	$	174,383
2006		63,459		92,515		155,974
2007		62,916		87,988		150,904
2008		67,753		83,163		150,916
2009		70,335		76,755		147,090

	$	341,011	$	438,256	$	779,267

Revolving Credit Agreement

MCV has also entered into a working capital line (“Working Capital Facility”), which expires August 27, 2005. Under the terms of the existing agreement, MCV can borrow up to the $50.0 million commitment, in the form of short-term borrowings or letters of credit collateralized by MCV’s natural gas inventory and earned receivables. At any given time, borrowings and letters of credit are limited by the amount of the borrowing base, defined as 90% of earned receivables and 50% of natural gas inventory, capped at $15 million. MCV did not utilize the Working Capital Facility during the year 2004, except for letters of credit associated with normal business practices. At December 31, 2004, MCV had $47.6 million available under its Working Capital Facility. As of December 31, 2004, MCV’s borrowing base was capped at the maximum amount available of $50.0 million and MCV had outstanding letters of credit in the amount of $2.4 million. MCV believes that amounts available to it under the Working Capital Facility along with available cash reserves will be sufficient to meet any working capital shortfalls that might occur in the near term.

Intercreditor Agreement

MCV has also entered into an Intercreditor Agreement with the Owner Trustee, Working Capital Lender, U.S. Bank National Association as Collateral Agent (“Collateral Agent”) and the Senior and Subordinated Indenture Trustees. Under the terms of this agreement, MCV is required to deposit all revenues derived from the operation of the Facility with the Collateral Agent for purposes of paying operating expenses and rent. In addition, these funds are required to pay construction modification costs and to secure future rent payments. As of December 31, 2004, MCV has deposited $138.2 million into the reserve account. The reserve account is to be maintained at not less than $40 million nor more than $137 million (or debt portion of next succeeding basic rent payment, whichever is greater). Excess funds in the reserve account are periodically transferred to MCV. This agreement also contains provisions governing the distribution of revenues and rents due under the Overall Lease Transaction, and establishes the priority of payment among the Owner Trusts, creditors of the Owner Trusts, creditors of MCV and the Partnership.

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(7)	Commitments and Other Agreements

MCV has entered into numerous commitments and other agreements related to the Facility. Principal agreements are summarized as follows:

Power Purchase Agreement

MCV and Consumers have executed the PPA for the sale to Consumers of a minimum amount of electricity, subject to the capacity requirements of Dow and any other permissible electricity purchasers. Consumers has the right to terminate and/or withhold payment under the PPA if the Facility fails to achieve certain operating levels or if MCV fails to provide adequate fuel assurances. In the event of early termination of the PPA, MCV would have a maximum liability of approximately $270 million if the PPA were terminated in the 12th through 24th years. The term of this agreement is 35 years from the commercial operation date and year-to-year thereafter.

Steam and Electric Power Agreement

MCV and Dow executed the SEPA for the sale to Dow of certain minimum amounts of steam and electricity for Dow’s facilities.

If the SEPA is terminated, and Consumers does not fulfill MCV’s commitments as provided in the Backup Steam and Electric Power Agreement, MCV will be required to pay Dow a termination fee, calculated at that time, ranging from a minimum of $60 million to a maximum of $85 million. This agreement provides for the sale to Dow of steam and electricity produced by the Facility for terms of 25 years and 15 years, respectively, commencing on the commercial operation date and year-to-year thereafter.

Steam Purchase Agreement

MCV and DCC executed the SPA for the sale to DCC of certain minimum amounts of steam for use at the DCC Midland site. Steam sales under the SPA commenced in July 1996. Termination of this agreement, prior to expiration, requires the terminating party to pay to the other party a percentage of future revenues, which would have been realized had the initial term of 15 years been fulfilled. The percentage of future revenues payable is 50% if termination occurs prior to the fifth anniversary of the commercial operation date and 33¹/3% if termination occurs after the fifth anniversary of this agreement. The term of this agreement is 15 years from the commercial operation date of steam deliveries under the contract and year-to-year thereafter.

Gas Supply Agreements

MCV has entered into gas purchase agreements with various producers for the supply of natural gas. The current contracted volume totals 238,531 MMBtu per day annual average for 2005. As of January 1, 2005, gas contracts with U.S. suppliers provide for the purchase of 173,336 MMBtu per day while gas contracts with Canadian suppliers provide for the purchase of 65,195 MMBtu per day. Some of these contracts require MCV to pay for a minimum amount of natural gas per year, whether or not taken. The estimated minimum commitments under these contracts based on current long term prices for gas for the years 2005 through 2009 are $384.6 million, $402.1 million, $436.7 million, $358.8 million and $324.0 million, respectively. A portion of these payments may be utilized in future years to offset the cost of quantities of natural gas taken above the minimum amounts.

Gas Transportation Agreements

MCV has entered into firm natural gas transportation agreements with various pipeline companies. These agreements require MCV to pay certain reservation charges in order to reserve the transportation capacity.

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MCV incurred reservation charges in 2004, 2003 and 2002, of $35.5 million, $34.8 million and $35.1 million, respectively. The estimated minimum reservation charges required under these agreements for each of the years 2005 through 2009 are $34.3 million, $30.0 million, $21.6 million, $21.6 million and $21.6 million, respectively. These projections are based on current commitments.

Gas Turbine Service Agreements

Under a Service Agreement, as amended, with Alstom, which commenced on January 1, 1990 and was set to expire upon the earlier of the completion of the sixth series of major GTG inspections or December 31, 2009, Alstom sold MCV an initial inventory of spare parts for the GTGs and provided qualified service personnel and supporting staff to assist MCV, to perform scheduled inspections on the GTGs, and to repair the GTGs at MCV’s request. The Service Agreement was terminated for cause by MCV in February 2004. Alstom disputed MCV’s right to terminate for cause. The parties settled the dispute and the agreement terminated in February 2004.MCV has a maintenance service and parts agreement with General Electric International, Inc. (“GEII”), which commenced July 1, 2004 (“GEII Agreement”). GEII will provide maintenance services and hot gas path parts for MCV’s twelve GTGs, including providing an initial inventory of spare parts for the GTGs and providing qualified service personnel and supporting staff to assist MCV, to perform scheduled inspections on the GTGs, and to repair the GTGs at MCV’s request. Under terms and conditions similar to the MCV/ Alstom Service Agreement, as described above the GEII Agreement will cover four rounds of major GTG inspections, which are expected to be completed by the year 2015, at a savings to MCV as compared to the Service Agreement with Alstom. MCV is to make monthly payments over the life of the contract totaling approximately $207 million (subject to escalations based on defined indices. The GEII Agreement can be terminated by either party for cause or convenience. Should termination for convenience occur, a buy out amount will be paid by the terminating party with payments ranging from approximately $19.0 million to $.9 million, based upon the number of operating hours utilized since commencement of the GEII Agreement.

Steam Turbine Service Agreement

MCV entered into a nine year Steam Turbine Maintenance Agreement with General Electric Company effective January 1, 1995, which is designed to improve unit reliability, increase availability and minimize unanticipated maintenance costs. In addition, this contract includes performance incentives and penalties, which are based on the length of each scheduled outage and the number of forced outages during a calendar year. Effective February 1, 2004, MCV and GE amended this contract to extend its term through August 31, 2007. MCV will continue making monthly payments over the life of the contract, which will total $22.3 million (subject to escalation based on defined indices). The parties have certain termination rights without incurring penalties or damages for such termination. Upon termination, MCV is only liable for payment of services rendered or parts provided prior to termination.

Site Lease

In December 1987, MCV leased the land on which the Facility is located from Consumers (“Site Lease”). MCV and Consumers amended and restated the Site Lease to reflect the creation of five separate undivided interests in the Site Lease as of June 1, 1990. Pursuant to the Overall Lease Transaction, MCV assigned these undivided interests in the Site Lease to the Owner Trustees, which in turn subleased the undivided interests back to MCV under five separate site subleases.

The Site Lease is for a term which commenced on December 29, 1987, and ends on December 31, 2035, including two renewal options of five years each. The rental under the Site Lease is $.6 million per annum, including the two five-year renewal terms.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(8)	Contingencies


	Property Taxes

In 1997, MCV filed a property tax appeal against the City of Midland at the Michigan Tax Tribunal contesting MCV’s 1997 property taxes. Subsequently, MCV filed appeals contesting its property taxes for tax years 1998 through 2004 at the Michigan Tax Tribunal. A trial was held for tax years 1997-2000. The appeals for tax years 2001-2004 are being held in abeyance. On January 23, 2004, the Michigan Tax Tribunal issued its decision in MCV’s tax appeal against the City of Midland for tax years 1997 through 2000 and has issued several orders correcting errors in the initial decision (together the “MTT Decision”). MCV management has estimated that the MTT Decision will result in a refund to MCV for the tax years 1997 through 2000 of at least approximately $35.3 million in taxes plus $9.6 million of interest as of December 31, 2004. The MTT Decision has been appealed to the Michigan Appellate Court by the City of Midland. MCV has filed a cross-appeal at the Michigan Appellate Court. MCV management cannot predict the outcome of these legal proceedings. MCV has not recognized any of the above stated refunds (net of approximately $16.1 million of deferred expenses) in earnings at this time.


	NOx Allowances

The United States Environmental Protection Agency (“US EPA”) has approved the State of Michigan’s — State Implementation Plan (“SIP”), which includes an interstate NOx budget and allowance trading program administered by the US EPA beginning in 2004. Each NOx allowance permits a source to emit one ton of NOx during the seasonal control period, which for 2004 was from May 31 through September 30. NOx allowances may be bought or sold and unused allowances may be “banked” for future use, with certain limitations. MCV estimates that it will have excess NOx allowances to sell under this program. Consumers has given notice to MCV that it believes the ownership of the NOx allowances under this program belong, at least in part, to Consumers. MCV has initiated the dispute resolution process pursuant to the PPA to resolve this issue and the parties have entered into a standstill agreement deferring the resolution of this dispute. However, either party may terminate the standstill agreement at any time and reinstate the PPA’s dispute resolution provisions. MCV management cannot predict the outcome of this issue. As of December 31, 2004, MCV has sold 1,200 tons of 2004 allowances for $2.7 million, which is recorded in “Accounts payable and accrued liabilities”, pending resolution of ownership of these credits.


	Environmental Issues

On July 12, 2004 the Michigan Department of Environmental Quality (“DEQ”), Air Quality Division, issued MCV a “Letter of Violation” asserting that MCV violated its Air Use Permit to Install No. 209-02 (“PTI”) by exceeding the carbon monoxide emission limit on the Unit 14 GTG duct burner and failing to maintain certain records in the required format. On July 13, 2004 the DEQ, Water Division, issued MCV a “Notice Letter” asserting MCV violated its National Pollutant Discharge Elimination System Permit by discharging heated process waste water into the storm water system, failure to document inspections, and other minor infractions (“alleged NPDES violations”).

MCV has declared all duct burners as unavailable for operational use (which reduces the generation capability of the Facility by approximately 100 MW) and is assessing the duct burner issue and has begun other corrective action to address the DEQ’s assertions. MCV disagrees with certain of the DEQ’s assertions. MCV filed responses to these DEQ letters in July and August 2004. On December 13, 2004, the DEQ informed MCV that it was pursuing an escalated enforcement action against MCV regarding the alleged violations of MCV’s PTI. The DEQ also stated that the alleged violations are deemed federally significant and, as such, placed MCV on the United States Environmental Protection Agency’s High Priority Violators List (“HPVL”). The DEQ and MCV are pursuing voluntary settlement of this matter, which will satisfy state and federal requirements and remove MCV from the HPVL. Any such settlement is likely to involve a fine,

128

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

but the DEQ has not, at this time, stated what, if any, fine they will seek to impose. At this time, MCV management cannot predict the financial impact or outcome of these issues, however, MCV believes it has resolved all issues associated with the alleged NPDES violations and does not expect any further MDEQ actions on this NPDES matter.


(9)	Voluntary Severance Program

In July 2004, MCV announced a Voluntary Severance Program (“VSP”) for all employees (union and non-union employees), subject to certain eligibility requirements. The VSP entitled participating employees, upon termination, to a lump sum payment, based upon number of years of service up to a maximum of 52 weeks of wages. Nineteen employees elected to participate in the VSP and MCV has recorded $1.7 million of severance costs in “Operating Expenses” related to the nineteen employees.


(10)	Retirement Benefits


	Postretirement Health Care Plans

In 1992, MCV established defined cost postretirement health care plans (“Plans”) that cover all full-time employees, excluding key management. The Plans provide health care credits, which can be utilized to purchase medical plan coverage and pay qualified health care expenses. Participants become eligible for the benefits if they retire on or after the attainment of age 65 or upon a qualified disability retirement, or if they have 10 or more years of service and retire at age 55 or older. The Plans granted retroactive benefits for all employees hired prior to January 1, 1992. This prior service cost has been amortized to expense over a five-year period. MCV annually funds the current year service and interest cost as well as amortization of prior service cost to both qualified and non-qualified trusts. The MCV accounts for retiree medical benefits in accordance with SFAS 106, “Employers Accounting for Postretirement Benefits Other Than Pensions.” This standard required the full accrual of such costs during the years that the employee renders service to the MCV until the date of full eligibility. The accumulated benefit obligation of the Plans were $4.9 million at December 31, 2004 and $3.3 million at December 31, 2003. The measurement date of these Plans was December 31, 2004.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law in December 2003. The Act expanded Medicare to include, for the first time, coverage for prescription drugs. At December 31, 2003, based upon FASB staff position, SFAS No. 106-1, “Employers Accounting for Postretirement Benefits Other Than Pensions,” MCV had elected to defer financial recognition of this legislation until issuance of final accounting guidance. The final SFAS No. 106-2 was issued in second quarter 2004 and supersedes SFAS No. 106-1, which MCV adopted during this same period. The adoption of this standard had no impact to MCV’s financial position because MCV does not consider its Plans to be actuarially equivalent. The Plans benefits provided to eligible participants are not annual or on-going in nature, but are a readily exhaustible, lump-sum amount available for use at the discretion of the participant.

129

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table reconciles the change in the Plans’ benefit obligation and change in Plan assets as reflected on the balance sheet as of December 31 (in thousands):


	2004			2003

Change in benefit obligation:
Benefit obligation at beginning of year	$	3,276.0		$	2,741.9
Service cost		232.1			212.5
Interest cost		174.8			178.2
Actuarial gain (loss)		1,298.0			147.4
Benefits paid during year		(8.3	)		(4.0	)

Benefit obligation at end of year		4,972.6			3,276.0

Change in Plan assets:
Fair value of Plan assets at beginning of year		2,826.8			2,045.8
Actual return on Plan assets		292.7			527.5
Employer contribution		206.5			257.5
Benefits paid during year		(8.3	)		(4.0	)

Fair value of Plan assets at end of year		3,317.7			2,826.8

Unfunded (funded) status		1,654.9			449.2
Unrecognized prior service cost		(155.9	)		(170.3	)
Unrecognized net gain (loss)		(1,499.0	)		(278.9	)

Accrued benefit cost	$	—		$	—

Net periodic postretirement health care cost for years ending December 31, included the following components (in thousands):


	2004			2003			2002

Components of net periodic benefit cost:
Service cost	$	232.1		$	212.5		$	197.3
Interest cost		174.8			178.2			188.7
Expected return on Plan assets		(216.1	)		(163.7	)		(167.0	)
Amortization of unrecognized net (gain) or loss		15.7			30.5			14.3

Net periodic benefit cost	$	206.5		$	257.5		$	233.3

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):


	1-Percentage-		1-Percentage
	Point		Point
	Increase		Decrease

Effect on total of service and interest cost components	$	51.6	$	44.7
Effect on postretirement benefit obligation	$	514.8	$	447.1

130

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Assumptions used in accounting for the Post-Retirement Health Care Plan were as follows:


		2004		2003		2002

Discount rate			5.75%		6.00%		6.75%
Long-term rate of return on Plan assets			8.00%		8.00%		8.00%
Inflation benefit amount
	1998 through 2004		0.00%		0.00%		0.00%
	2005 and later years		5.00%		4.00%		4.00%

The long-term rate of return on Plan assets is established based on MCV’s expectations of asset returns for the investment mix in its Plan (with some reliance on historical asset returns for the Plans). The expected returns for various asset categories are blended to derive one long-term assumption.

Plan Assets. Citizens Bank has been appointed as trustee (“Trustee”) of the Plan. The Trustee serves as investment consultant, with the responsibility of providing financial information and general guidance to the MCV Benefits Committee. The Trustee shall invest the assets of the Plan in the separate investment options in accordance with instructions communicated to the Trustee from time to time by the MCV Benefit Committee. The MCV Benefits Committee has the fiduciary and investment selection responsibility for the Plan. The MCV Benefits Committee consists of MCV Officers (excluding the President and Chief Executive Officer).

The MCV has a target allocation of 80% equities and 20% debt instruments. These investments emphasis total growth return, with a moderate risk level. The MCV Benefits Committee reviews the performance of the Plan investments quarterly, based on a long-term investment horizon and applicable benchmarks, with rebalancing of the investment portfolio, at the discretion of the MCV Benefits Committee.

MCV’s Plan’s weighted-average asset allocations, by asset category are as follows as of December 31:


		2004			2003

Asset Category:
Cash and cash equivalents			1	%		11	%
Fixed income			19	%		17	%
Equity securities			80	%		72	%

	Total		100	%		100	%

Contributions. MCV expects to contribute approximately $.4 million to the Plan in 2005.

Retirement and Savings Plans

MCV sponsors a defined contribution retirement plan covering all employees. Under the terms of the plan, MCV makes contributions to the plan of either five or ten percent of an employee’s eligible annual compensation dependent upon the employee’s age. MCV also sponsors a 401(k) savings plan for employees. Contributions and costs for this plan are based on matching an employee’s savings up to a maximum level. In 2004, 2003 and 2002, MCV contributed $1.4 million, $1.3 million and $1.2 million, respectively under these plans.

Supplemental Retirement Benefits

MCV provides supplemental retirement, postretirement health care and excess benefit plans for key management. These plans are not qualified plans under the Internal Revenue Code; therefore, earnings of the trusts maintained by MCV to fund these plans are taxable to the Partners and trust assets are included in the assets of MCV.


(11)	Partners’ Equity and Related Party Transactions

The following table summarizes the nature and amount of each of MCV’s Partner’s equity interest, interest in profits and losses of MCV at December 31, 2004, and the nature and amount of related party

131

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

transactions or agreements that existed with the Partners or affiliates as of December 31, 2004, 2003 and 2002, and for each of the twelve month periods ended December 31 (in thousands).


Beneficial Owner, Equity Partner,			Equity
Type of Partner and Nature of Related Party			Interest			Interest			Related Party Transactions and Agreements	2004		2003		2002

CMS Energy Company
CMS Midland, Inc.			$	396,888			49.0	%	Power purchase agreements	$	601,535	$	513,774	$	557,149

	General Partner; wholly-owned								Purchases under gas transportation
	subsidiary of Consumers Energy								agreements		9,349		14,294		23,552
	Company								Purchases under spot gas agreements		—		663		3,631
									Purchases under gas supply agreements		—		2,330		11,306
									Gas storage agreement		2,563		2,563		2,563
									Land lease/easement agreements		600		600		600
									Accounts receivable		50,364		40,373		44,289
									Accounts payable		1,031		1,025		3,502
									Sales under spot gas agreements		—		3,260		1,084
El Paso Corporation			$	141,397			18.1	%
Source Midland Limited Partnership									Purchase under gas transportation
	(“SMLP”)								agreements		12,334		13,023		12,463
	General Partner; owned by								Purchases under spot gas agreement		—		610		15,655
	subsidiaries of El Paso Corporation								Purchases under gas supply agreement		70,000		54,308		47,136
									Gas agency agreement		264		238		365
									Deferred reservation charges under gas
									purchase agreement		3,152		4,728		—
									Accounts receivable		—		—		523
									Accounts payable		10,997		5,751		7,706
									Sales under spot gas agreements		—		3,474		14,007
El Paso Midland, Inc. (“El Paso Midland”)				84,838			10.9		See related party activity listed under
	General Partner; wholly-owned subsidiary of El Paso Corporation								SMLP.
MEI Limited Partnership (“MEI”)									See related party activity listed under
	A General and Limited Partner; 50% interest owned by El Paso Midland, Inc. and 50% interest owned by SMLP								SMLP.
		General Partnership Interest		70,701			9.1
		Limited Partnership Interest		7,068			.9
Micogen Limited Partnership (“MLP”)				35,348			4.5		See related party activity listed under
	Limited Partner, owned subsidiaries of El Paso Corporation								SMLP.

		Total El Paso Corporation	$	339,352			43.5	%

The Dow Chemical Company
The Dow Chemical Company			$	73,735			7.5	%	Steam and electric power agreement		39,055		36,207		29,385

	Limited Partner								Steam purchase agreement — Dow Corning
									Corp (affiliate)		4,289		4,017		3,746
									Purchases under demineralized water
									supply agreement		8,142		6,396		6,605
									Accounts receivable		4,003		3,431		3,635
									Accounts payable		744		610		1,016
									Standby and backup fees		766		731		734
									Sales of gas under tolling agreement		—		—		6,442
Alanna Corporation
Alanna Corporation			$	1	⁽¹⁾		.00001	%	Note receivable		1		1		1

	Limited Partner; wholly-owned subsidiary of Alanna Holdings Corporation

Footnotes to Partners’ Equity and Related Party Transactions


(1)	Alanna’s capital stock is pledged to secure MCV’s obligation under the lease and other overall lease transaction documents.

132

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of Javelina Company:

In our opinion, the accompanying balance sheets and the related statements of operations, partners’ capital and cash flows present fairly, in all material respects, the financial position of Javelina Company (the Partnership) at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

April 15, 2005

Houston, Texas

133

JAVELINA COMPANY

BALANCE SHEETS


				December 31,

				2004			2003

				(In Thousands of Dollars)
ASSETS
Current assets
	Cash and cash equivalents			$	20,435		$	8,038
	Accounts receivable, net
		Trade			30,778			10,613
		Affiliates			3,281			6,770
	Product inventory				941			—
	Materials and supplies inventory				1,959			1,885
	Prepaid expense				15			15

			Total current assets		57,409			27,321

Property, plant and equipment, at cost
	Land				4,203			4,203
	Liquids extraction plant				199,425			198,316
	Accumulated depreciation				(125,347	)		(116,655	)

			Total property, plant and equipment, net		78,281			85,864

			Total assets	$	135,690		$	113,185


LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities
	Accounts payable
		Trade		$	12,681		$	7,663
		Affiliates			12,563			9,470
	Ad valorem taxes payable				1,445			1,491
	Accrued expenses				1,257			1,182

			Total current liabilities		27,946			19,806
Commitments and contingencies
Partners’ capital					107,744			93,379

			Total liabilities and partners’ capital	$	135,690		$	113,185

The accompanying notes are an integral part of these financial statements.

134

JAVELINA COMPANY

STATEMENTS OF OPERATIONS


			Years Ended December 31,

			2004		2003			2002

			(In Thousands of Dollars)
Operating revenue
	Product revenue		$	284,049	$	181,318		$	135,720
Other revenue
	Interest income and other			142		105			331

				284,191		181,423			136,051
Operating Expenses
	Cost of product			171,913		137,726			86,675
	Plant operating expenses			66,792		47,239			38,039
	General and administrative			484		327			429
	Depreciation			8,692		8,268			8,360
	Ad valorem taxes			1,445		1,491			1,511
	Bad debt expense			—		—			197

				249,326		195,051			135,211

		Net income (loss)	$	34,865	$	(13,628	)	$	840

The accompanying notes are an integral part of these financial statements.

135

JAVELINA COMPANY

STATEMENTS OF PARTNERS’ CAPITAL

Years Ended December 31, 2004, 2003 and 2002


				El Paso
	El Paso			Field						Valero						Accumulated
	Javelina,			Operations			K-M			Javelina,						Other
	L.P.			Company			Javelina, L.P.			L.P.						Comprehensive
	(40%)			(40%)			(40%)			(20%)			Total			Income

	(In Thousands of Dollars)
Balances at January 1, 2002	$	44,747		$	—		$	44,747		$	22,375		$	111,869		$	702
Net income		336			—			336			168			840			—
Distributions		(2,000	)		—			(2,000	)		(1,000	)		(5,000	)		—
Other comprehensive income — realized gain on cash flow hedges		(281	)		—			(281	)		(140	)		(702	)		(702	)

Balances at December 31, 2002		42,802			—			42,802			21,403			107,007			—
Net loss		(9,876	)		4,425			(5,451	)		(2,726	)		(13,628	)		—
Sale of interests from El Paso Javelina, L.P. to El Paso Field Operations Company		(32,926	)		32,926			—			—			—			—

Balances at December 31, 2003		—			37,351			37,351			18,677			93,379			—
Net income		—			13,946			13,946			6,973			34,865			—
Distributions		—			(8,200	)		(8,200	)		(4,100	)		(20,500	)		—

Balances at December 31, 2004	$	—		$	43,097		$	43,097		$	21,550		$	107,744		$	—

The accompanying notes are an integral part of these financial statements.

136

JAVELINA COMPANY

STATEMENTS OF CASH FLOWS


				Years Ended December 31,

				2004			2003			2002

				(In Thousands of Dollars)
Cash flows from operating activities
Net income (loss)				$	34,865		$	(13,628	)	$	840
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
	Depreciation				8,692			8,268			8,360
	Gain from sales of property, plant and equipment				—			—			(2	)
	Market value adjustment for derivative instruments				—			—			(539	)
	Changes in operating assets and liabilities
		Accounts receivable			(16,676	)		(2,105	)		(3,148	)
		Product inventory			(941	)		—			3,112
		Materials and supplies inventory			(74	)		10			38
		Accounts payable			8,111			3,802			(2,466	)
		Ad valorem taxes payable			(46	)		(20	)		1,511
		Accrued expenses			75			(678	)		184

			Net cash provided by (used in) operating activities		34,006			(4,351	)		7,890

Cash flows from investing activities
Purchases of property, plant and equipment					(1,109	)		(1,911	)		(616	)
Proceeds from sale of property, plant and equipment					—			—			2

			Net cash used in investing activities		(1,109	)		(1,911	)		(614	)

Cash flows from financing activities
Distributions to partners					(20,500	)		—			(5,000	)

			Net cash used in financing activities		(20,500	)		—			(5,000	)

Change in cash and cash equivalents					12,397			(6,262	)		2,276
Cash and cash equivalents at beginning of year					8,038			14,300			12,024

Cash and cash equivalents at end of year				$	20,435		$	8,038		$	14,300

The accompanying notes are an integral part of these financial statements.

137

JAVELINA COMPANY

NOTES TO FINANCIAL STATEMENTS


1.	Organization and Nature of Business

Javelina Company (the Partnership) was organized on November 4, 1988 as a Texas general partnership under a Partnership Agreement with a minimum term of 25 years for the purposes of acquiring, planning, designing, engineering, constructing, owning and operating a refinery off-gas processing plant located in the Corpus Christi, Texas area. The Partnership is owned 40 percent by El Paso Field Operations Company (El Paso Field, a wholly owned indirect subsidiary of El Paso Corporation); 40 percent by K-M Javelina, L.P. (Kerr-McGee, a wholly owned subsidiary of Kerr-McGee Corporation); and 20 percent by Valero Javelina, L.P. (Valero, a wholly owned subsidiary of Valero Energy Corporation). El Paso Javelina, L.P. (a wholly owned indirect subsidiary of El Paso Corporation) sold its 40 percent interest in the Partnership to El Paso Field in August 2003.


2.	Significant Accounting Policies

Basis of Presentation

The Partnership’s financial statements are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures in these financial statements. Actual results can, and often do, differ from the estimates and assumptions used.

Cash and Cash Equivalents

Short-term investments with little risk of changes in value because of changes in interest rates and purchased with original maturity of less than three months are considered to be cash equivalents.

Accounts Receivable

Allowances for doubtful accounts are established using the specific identification method. Accounts receivable — trade are reported in the balance sheets net of allowance for doubtful accounts of $292,500 as of December 31, 2004 and 2003. Accounts receivable — trade includes $24,486,000 and $10,064,000 of unbilled receivables as of December 31, 2004 and 2003, all of which were billed after year end. Accounts receivable — affiliates includes $3,281,000 and $6,770,000 of unbilled receivables as of December 31, 2004 and 2003, all of which were billed after year end.

Gas Imbalances

Gas imbalances result from over or under delivery of gas under various processing and sales agreements. Gas imbalances are settled in the following month with delivery or receipt of makeup gas or by cash in accordance with contractual terms. Gas imbalances are valued at the Partnership’s current month average purchase cost of gas and may be impacted by changes in natural gas prices. As of December 31, 2003, accounts receivable — trade included $494,000 of gas imbalances receivable. As of December 31, 2004, accounts payable — trade included $33,000 of gas imbalances payable. As of December 31, 2004 and 2003, accounts payable — affiliates included $1,395,000 and $452,000, respectively, of gas imbalances payable.

138

Inventories

The Partnership accounts for product inventory on a first-in, first-out basis and materials and supplies inventories at average cost. Both inventories are valued at the lower of average cost or market.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost and includes management fees paid on capital acquisition costs under the operating agreement (see Note 3). Expenditures that increase the capacity or operating efficiency or extend the useful life of an asset are capitalized. Depreciation is provided on a straight-line basis over lives ranging from 10 to 23 years. Assets retired, sold, or disposed are recorded by eliminating the related cost and accumulated depreciation with any resulting gain or loss reflected in income.

Impairment and Disposal of Long-lived Assets

The Partnership evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the projected undiscounted future cash flows from the use and eventual disposition of the asset is less than the asset’s carrying amount, the asset is written down to its fair value and an impairment loss is recorded in the statement of operations.

Fair Value of Financial Instruments

The estimated fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their carrying amounts due to the short-term maturity of these instruments.

Revenue Recognition

The Partnership recognizes revenue for the sale of products, excluding hydrogen, in the period of delivery. Under terms of a hydrogen sales contract, as consideration for hydrogen supplied to the customer, the customer is required to deliver natural gas containing 130% of the British Thermal Units contained in the hydrogen supplied to the customer. Such exchanges of product have been treated as non-monetary exchanges in accordance with Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions, and accordingly, no sales or purchases of product are reflected in the statements of operations. The value of these exchanges were $27.2 million, $19.2 million and $12.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.

Repair and Maintenance Costs

The cost of most planned major repair and maintenance activity is accrued and charged to expense in a systematic and rational manner over the estimated period extending to the next planned major maintenance activity. Other repair and maintenance costs are charged to expense as incurred.

Federal Income Taxes

Javelina Company is organized as a partnership and is therefore, not subject to taxation for federal or state income tax purposes. The taxable income or loss resulting from the Partnership’s operations will ultimately be included in the federal and state tax returns of the individual partners. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements.

Income Allocation and Distributions

Under the terms of the Partnership Agreement, all income, gains, losses, deductions, credits and distributions of excess cash are allocated to the partners based on their ownership interest in the Partnership. Distributions are determined by the Management Committee. In 2004 and 2002, the Partnership declared and paid cash distributions of $20.5 million and $5 million, respectively. No distribution was declared for the year ended December 31, 2003. In January and February 2005, the Partnership declared and paid cash distributions totalling $11.3 million.

139

Derivative Instruments and Hedging Activities

In November 2000, as part of its risk management strategy to offset the variability of expected future cash flows as a result of changes in ethylene and natural gas commodity prices, the Partnership entered into derivative contracts expiring in December 2003 to sell ethylene and purchase natural gas. Effective January 2001, the Partnership accounted for these contracts under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, that requires all derivative instruments be recorded on the balance sheet at their fair values. Gains and losses related to changes in fair values of derivatives that qualify, are designated, and are effective as cash flow hedges are deferred and recorded as components of other comprehensive income. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period the hedged transaction affects earnings. Hedge accounting is discontinued prospectively when a derivative is terminated or no longer effective and related gains and losses are recognized immediately in current-period earnings. Amounts included in accumulated other comprehensive income at the time the derivative is terminated or no longer effective remain and are reclassified into earnings in the same period the hedged transaction affects earnings. In September 2001, the ethylene contract became ineffective as a result of credit risk with the counterparty. Under guidance provided by the Financial Accounting Standards Board’s Derivatives Implementation Group in Issue G-10, hedge accounting was discontinued prospectively. In addition, no fair value was assigned to the contract and a loss equal to the value of the asset immediately prior to its ineffectiveness was recognized in earnings. In 2002, both contracts were terminated. Of the $702,000 included in accumulated other comprehensive income as of December 31, 2001, $163,000, related to changes in fair value, was recognized as a reduction of accumulated other comprehensive income through the date the natural gas contract was terminated, and $539,000 was recognized in earnings in connection with the settlement of the contracts. The Partnership also recognized an additional $275,000 in earnings in connection with the settlement of the contracts. Of these amounts recognized in earnings, $736,000 was included in product revenue and $78,000 was included as an offset to cost of product. There were no material gains or losses associated with hedged transactions in 2003.


3.	Transactions With Affiliates

Transactions with partners are governed under the terms and conditions of the Partnership Agreement.

The Partnership has an operating agreement with El Paso Field. The agreement was transferred from El Paso Javelina, L.P. upon the sale of its 40 percent interest in the Partnership to El Paso Field. Under the agreement, El Paso Field, acting as project manager, generally pays costs and expenses incurred by the Partnership. El Paso Field is reimbursed 100 percent for all such costs and expenses and, in addition, receives a management fee equal to 15 percent of qualifying operating expenses and up to 10 percent of plant and equipment expenditures.

Under the terms of processing agreements with Valero Refining Company and Valero Refining and Marketing Company, wholly owned subsidiaries of Valero Energy Corporation, the Partnership pays processing fees equal to 25% of monthly profits derived from products extracted from refinery off gas received, if any, as defined. In addition, gas imbalance settlements are settled in the following month with delivery or receipt of makeup gas or by cash in accordance with contractual terms. Under the terms of a transportation agreement with Javelina Pipeline Company, a partnership owned by El Paso Field, Kerr McGee and Valero, Javelina Pipeline Company receives, transports and redelivers all or part of the Partnership’s gas for a contractual price.

During 1989, the Partnership entered into a 25-year surface rental agreement with El Paso Merchant Energy-Petroleum Company, a wholly owned indirect subsidiary of El Paso Corporation. The remaining aggregate minimum lease payments under the long-term operating lease are $77,880 per year for 2005 to 2008 and $81,000 per year thereafter until the agreement ends in December 2013.

140

The following table summarizes transactions with affiliates related to these agreements and other sales of product or purchases of gas from affiliates as of and for the years ended December 31, 2004, 2003 and 2002.


		(In Thousands of Dollars)

		2004		2003			2002

Product revenue:
El Paso Corporation
	Sales to El Paso NGL Marketing Company, L.P., a wholly owned indirect subsidiary of El Paso Corporation	$	42,494	$	41,726		$	29,046
	Sales to El Paso Merchant Energy — Petroleum Company		—		237			6,891
Valero Energy Corporation
	Sales to Valero Refining Company		35,002		25,304			20,492

		$	77,496	$	67,267		$	56,429

Cost of product:
El Paso Corporation
	Gas purchases from El Paso Industrial Energy, a wholly owned indirect subsidiary of El Paso Corporation	$	65,912	$	37,154		$	6,542
Valero Energy Corporation
	Gas imbalance settlements paid to Valero Refining Company		2,819		4,883			2,416
	Gas imbalance settlements paid to (received from) Valero Refining and Marketing Company		8,336		(2,161	)		(43	)

		$	77,067	$	39,876		$	8,915

Plant operating expenses:
El Paso Corporation
	Management fees paid to El Paso Field on qualifying expenses	$	1,347	$	1,333		$	1,302
	Transportation fees paid to Javelina Pipeline Company		1,852		1,672			1,656
	Surface rentals paid to El Paso Merchant Energy-Petroleum Company		78		75			84
Valero Energy Corporation
	Processing fees paid to Valero Refining Company		1,588		586			316
	Processing fees paid to Valero Refining and Marketing Company		3,900		185			164

		$	8,765	$	3,851		$	3,522

Accounts receivable — affiliates:
El Paso Corporation
	Accounts receivable due from El Paso NGL Marketing Company, L.P.	$	—	$	4,308
Valero Energy Corporation
	Accounts receivable due from Valero Refining Company		3,281		2,462

		$	3,281	$	6,770

Property, plant and equipment:
Capitalized management fees paid to El Paso Field on plant and equipment expenditures		$	59	$	74

141


		(In Thousands of Dollars)

		2004		2003		2002

Accounts payable — affiliates:
El Paso Corporation
	Accounts payable due to El Paso Industrial Energy for gas purchases	$	5,394	$	4,608
	Accounts payable due to El Paso Field for reimbursable items and management fees		4,574		4,155
	Accounts payable due to Javelina Pipeline Company for transportation fees		310		255
Valero Energy Corporation
	Accounts payable due to Valero Refining Company for gas imbalance settlements		331		361
	Accounts payable due to Valero Refining and Marketing Company for gas imbalance settlements		1,064		91
	Accounts payable due to Valero Refining and Marketing Company for processing fees		890		—

		$	12,563	$	9,470


4.	Sales and Processing Agreements

The Partnership has entered into various sales agreements with terms up to three years whereby the customer has agreed to purchase certain base quantities of the Partnership’s products at contractual prices based on market price indexes. In addition, one contract requires the Partnership to pay an access fee of $90,000 per year and transportation fees to pipeline companies for delivery of product to the customer. These costs are included in plant operating expenses in the statements of operations.

The Partnership entered into processing fee agreements with certain refinery off gas suppliers. Under these agreements, the Partnership pays a processing fee equal to 25% of monthly profits derived from products extracted from off gas received, if any, as defined. In May 2003, under terms of the agreements, the Partnership notified the suppliers that it would terminate the processing agreements in six months. Since their termination, the agreements have been extended on a month to month basis pending renegotiation.


5.	Commitments and Contingencies

In the normal course of business, the Partnership may become party to certain lawsuits and administrative proceedings before various courts and governmental agencies involving, for example, contractual matters and environmental issues. While the outcome of these items cannot be predicted with certainty, based on information known to date, management does not expect the ultimate resolution of any matters will have a material adverse effect on the Partnership’s financial statements.

Management is not aware of any contingency that could have a material adverse effect on the Partnership’s financial position, results of operations or cash flows as of December 31, 2004.

142

Report of Independent Registered Public Accounting Firm

The Partners

Great Lakes Gas Transmission Limited Partnership:

We have audited the accompanying consolidated balance sheets of Great Lakes Gas Transmission Limited Partnership and subsidiary (Partnership) as of December 31, 2004 and 2003, and the related consolidated statements of income and partners’ capital, and cash flows for each of the years in the three year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (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 Great Lakes Gas Transmission Limited Partnership and subsidiary as of December 31, 2004 and 2003, and the results of their operations and their cash flows each of the years in the three year period ended December 31, 2004 in conformity with U. S. generally accepted accounting principles.

/s/ KPMG LLP

Detroit, Michigan

January 11, 2005

143

GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF

INCOME AND PARTNERS’ CAPITAL


		Years Ended December 31

		2004			2003			2002

		(Thousands of Dollars)
Transportation Revenues		$	284,327		$	279,208		$	277,515
Operating Expenses
	Operation and Maintenance		34,723			43,052			37,075
	Depreciation		57,756			57,238			56,916
	Income Taxes Payable by Partners		47,058			40,530			45,400
	Property and Other Taxes		23,265			24,929			14,393

			162,802			165,749			153,784

Operating Income			121,525			113,459			123,731
Other Income (Expense)
	Interest on Long Term Debt		(37,718	)		(40,239	)		(44,539	)
	Other, Net		1,373			1,102			3,850

			(36,345	)		(39,137	)		(40,689	)

Net Income		$	85,180		$	74,322		$	83,042

Partners’ Capital
	Balance at Beginning of Year	$	452,007			445,512			443,640
	Contributions by General Partners		29,398			22,459			25,432
	Net Income		85,180			74,322			83,042
	Current Income Taxes Payable by Partners Charged to Earnings		31,536			24,238			27,801
	Distributions to Partners		(177,620	)		(114,524	)		(134,403	)

	Balance at End of Year	$	420,501		$	452,007		$	445,512

The accompanying notes are an integral part of these statements.

144

GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS


		As of December 31

		2004		2003

		(Thousands of Dollars)
ASSETS
Current Assets
	Cash and Cash Equivalents	$	59,034	$	40,156
	Accounts Receivable		44,137		34,747
	Materials and Supplies, at Average Cost		10,043		10,020
	Prepayments and Other		5,146		3,511

			118,360		88,434
Gas Utility Plant
	Property, Plant and Equipment		2,015,202		2,011,279
	Less Accumulated Depreciation		919,287		870,356

			1,095,915		1,140,923

		$	1,214,275	$	1,229,357

LIABILITIES & PARTNERS’ CAPITAL
Current Liabilities
	Current Maturities of Long Term Debt	$	10,000	$	10,000
	Accounts Payable		27,984		14,850
	Property and Other Taxes		24,107		25,077
	Accrued Interest and Other		13,580		14,025

			75,671		63,952
Long Term Debt			460,000		470,000
Other Liabilities
	Amounts Equivalent to Deferred Income Taxes		256,959		241,281
	Other		1,144		2,117

			258,103		243,398

Partners’ Capital			420,501		452,007

		$	1,214,275	$	1,229,357

The accompanying notes are an integral part of these statements.

145

GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS


				Years Ended December 31

				2004			2003			2002

				(Thousands of Dollars)
Cash Flow Increase (Decrease) from:
Operating Activities
	Net Income			$	85,180		$	74,322		$	83,042
	Adjustments to Reconcile Net Income to Operating Cash Flows:
		Depreciation			57,756			57,238			56,916
		Amounts Equivalent to Deferred Income Taxes			15,678			16,983			18,241
		Allowance for Funds Used During Construction			(157	)		(398	)		(500	)
		Changes in Current Assets and Liabilities:
			Accounts Receivable		(9,390	)		1,529			(6,250	)
			Accounts Payable		13,134			(1,642	)		2,148
			Property and Other Taxes		(970	)		(1,687	)		(1,131	)
			Other		(3,076	)		(337	)		678

					158,155			146,008			153,144
Investment in Utility Plant					(12,591	)		(27,277	)		(34,292	)
Financing Activities
	Repayment of Long Term Debt				(10,000	)		(41,500	)		(47,250	)
	Contributions by General Partners				29,398			22,459			25,432
	Current Income Taxes Payable by Partners Charged to Earnings				31,536			24,238			27,801
	Distribution to Partners				(177,620	)		(114,524	)		(134,403	)

					(126,686	)		(109,327	)		(128,420	)
Change in Cash and Cash Equivalents					18,878			9,404			(9,568	)
Cash and Cash Equivalents:
	Beginning of Year				40,156			30,752			40,320

	End of Year			$	59,034		$	40,156		$	30,752

Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for Interest
		(Net of Amounts Capitalized of $48, $150 and $214, Respectively)		$	37,903		$	40,576		$	45,004

The accompanying notes are an integral part of these statements.

146

GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1	Organization and Management

Great Lakes Gas Transmission Limited Partnership (Partnership) is a Delaware limited partnership that owns and operates an interstate natural gas pipeline system. The Partnership transports natural gas for delivery to customers in the midwestern and northeastern United States and eastern Canada. Partnership ownership percentages are recalculated each year to reflect distributions and contributions.

The partners, their parent companies, and partnership ownership percentages are as follows:


		Ownership %

Partner (Parent Company)		2004		2003

General Partners:
	El Paso Great Lakes, Inc. (El Paso Corporation)		46.61		46.33
	TransCanada GL, Inc. (TransCanada PipeLines Ltd.)		46.61		46.33
Limited Partner:
	Great Lakes Gas Transmission Company (TransCanada PipeLines Ltd. and El Paso Corporation)		6.78		7.34

The day-to-day operation of Partnership activities is the responsibility of Great Lakes Gas Transmission Company (Company), which is reimbursed for its employee salaries, benefits and other expenses, pursuant to the Partnership’s Operating Agreement with the Company.

2 Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Partnership and GLGT Aviation Company, a wholly owned subsidiary. GLGT Aviation Company owns a transport aircraft used principally for pipeline operations. Intercompany amounts have been eliminated.

For purposes of reporting cash flows, the Partnership considers all liquid investments with original maturities of three months or less to be cash equivalents.

The Partnership recognizes revenues from natural gas transportation in the period the service is provided.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported as assets, liabilities, revenues and expenses and the disclosures in these financial statements. Actual results can, and often do, differ from those estimates.

Regulation

The Partnership is subject to the rules, regulations and accounting procedures of the Federal Energy Regulatory Commission (FERC). The Partnership’s accounting policies follow regulatory accounting principles prescribed under Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation. Regulatory assets and liabilities have been established and represent probable future revenue or expense which will be recovered from or refunded to customers.

Accounts Receivable

Accounts receivable are reported net of an allowance for doubtful accounts of $1,200,000 and $2,304,000 for 2004 and 2003, respectively. Accounts receivable are recorded at the invoiced amount. Late fees are recognized as income when earned. The Partnership establishes an allowance for losses on accounts receivable if it is determined that all or a portion of the outstanding balance will not be collected. The Partnership also

147

considers historical industry data and customer credit trends. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Gas Utility Plant and Depreciation

Gas utility plant is stated at cost and includes certain administrative and general expenses, plus an allowance for funds used during construction. The cost of plant retired is charged to accumulated depreciation. Depreciation of gas utility plant is computed using the straight-line method. The Partnership’s principal operating assets are depreciated at an annual rate of 2.75%.

The allowance for funds used during construction represents the debt and equity costs of capital funds applicable to utility plant under construction, calculated in accordance with a uniform formula prescribed by the FERC. The rates used were 10.49%, 10.41% and 10.36% for years 2004, 2003, and 2002, respectively.

Asset Retirement Obligations

Effective January 1, 2003, the Partnership adopted SFAS No. 143 “Accounting for Asset Retirement Obligations” (Statement 143). Statement 143 requires recognition of the fair value of legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal operation of a long-lived asset. The Partnership has asset retirement obligations if it were to permanently retire all or part of the pipeline system; however, the fair value of the obligations cannot be determined because the end of the system life is indeterminable.

Income Taxes

The Partnership’s tariff includes an allowance for income taxes, which the FERC requires the Partnership to record as if it were a corporation. The provisions for current and deferred income tax expense are recorded without regard to whether each partner can utilize its share of the Partnership’s tax deductions. Income taxes are deducted in the Consolidated Statements of Income and the current portion of income taxes is returned to partners’ capital. Recorded current income taxes are distributed to partners based on their ownership percentages.

Amounts equivalent to deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases at currently enacted income tax rates.

3 Affiliated Company Transactions

Affiliated company amounts included in the Partnership’s consolidated financial statements, not otherwise disclosed, are as follows:


		(In Thousands)

		2004		2003		2002

Accounts receivable		$	12,827	$	16,062	$	15,989
Accounts payable			1,845		1,135		622
Transportation revenues:
	TransCanada PipeLines Ltd. and affiliates		164,810		166,578		163,442
	El Paso Corporation and affiliates		20,581		23,877		24,875

Affiliated transportation revenues are primarily provided under fixed priced contracts with remaining terms ranging from 1 to 8 years.

The Partnership reimburses the Company for salaries, benefits and other incurred expenses. Benefits include pension, savings plan, and other post-retirement benefits. Operating expenses charged by the Company in 2004, 2003 and 2002 were $17,388,000, $25,758,000 and $17,888,000, respectively.

148

The Company makes contributions for eligible employees of the Company to a voluntary defined contribution plan sponsored by one of the parent companies. The Company’s contributions, which are based on matching employee contributions, amounted to $475,000, $396,000, and $770,000 in 2004, 2003 and 2002, respectively.

The Company participates in the El Paso Corporation cash balance pension plan and post-retirement plan. The Company accounts for pension and post-retirement benefits on an accrual basis. The net expense (income) for each of the plans are as follows:


	(In Thousands)

	2004			2003			2002

Pension	$	(743,000	)	$	(2,600,000	)	$	(5,400,000	)
Post-Retirement		202,000			204,000			236,000


4	Debt


		(In Thousands)

		2004		2003

Senior Notes, unsecured, interest due semiannually, principal due as follows:
	8.74% series, due 2003 to 2011	$	70,000	$	80,000
	9.09% series, due 2012 to 2021		100,000		100,000
	6.73% series, due 2009 to 2018		90,000		90,000
	6.95% series, due 2019 to 2028		110,000		110,000
	8.08% series, due 2021 to 2030		100,000		100,000

			470,000		480,000
	Less current maturities		10,000		10,000

	Total long term debt less current maturities	$	460,000	$	470,000

The aggregate estimated fair value of long term debt was $559,800,000 and $571,400,000 for 2004 and 2003, respectively. The fair value is determined using discounted cash flows based on the Partnership’s estimated current interest rates for similar debt.

The aggregate annual required repayments of Senior Notes is $10,000,000 for each year 2005 through 2008 and $19,000,000 in 2009.

Under the most restrictive covenants in the Senior Note Agreements, approximately $253,000,000 of partners’ capital is restricted as to distributions as of December 31, 2004.

149


5	Income Taxes Payable by Partners

Income taxes payable by partners for the years ended December 31, 2004, 2003 and 2002 consists of:


		(In Thousands)

		2004		2003		2002

Current
	Federal	$	30,187	$	23,201	$	26,612
	State		1,349		1,037		1,189

			31,536		24,238		27,801

Deferred
	Federal		14,833		15,556		16,808
	State		689		736		791

			15,522		16,292		17,599

		$	47,058	$	40,530	$	45,400

Income taxes payable by partners differs from the statutory rate of 35% due to the amortization of excess deferred taxes along with the effects of state and local taxes. The Partnership is required to amortize excess deferred taxes which had previously been accumulated at tax rates in excess of current statutory rates. Such amortization reduced income taxes payable by partners by $575,000 for 2004 and $900,000 for 2003 and 2002. The excess deferred taxes were fully amortized at December 31, 2004.

Amounts equivalent to deferred income taxes are principally comprised of temporary differences associated with excess tax depreciation on utility plant. As of December 31, 2004 and 2003, no valuation allowance is required. The deferred tax assets and deferred tax liabilities as of December 31, 2004 and 2003 are as follows:


	(In Thousands)

	2004			2003

Deferred tax assets — other	$	4,889		$	5,168
Deferred tax liabilities — utility plant		(245,786	)		(230,614	)
Deferred tax liabilities — other		(16,062	)		(15,835	)

Net deferred tax liability	$	(256,959	)	$	(241,281	)


6	Severance Costs

In 2003, the Partnership implemented a reorganization plan to reduce the work force, and recorded severance costs of approximately $6 million. All amounts were substantially paid by December 31, 2003. Severance costs have been included in Operation and Maintenance expense.


7	Use Tax Refunds

In the first quarter of 2002, Great Lakes received a favorable decision from the Minnesota Supreme Court on use tax litigation and has collected refunds and related interest on litigated claims and pending claims for 1994 to 2001. The total amount received was $13.7 million. The refunds are reflected in Property and Other Taxes ($10.9 million) and the interest included in Other, Net ($2.8 million).

150

Auditors’ Report

to the Shareholders of

Khulna Power Company Limited

We have audited the accompanying balance sheet of Khulna Power Company Limited as of 31 December 2004 and the related income statement, statement of changes in equity and cash flows for the year then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to express an independent opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above, which have been properly prepared on the basis explained in note 2 to the financial statements, read in conjunction with the notes attached, present fairly the financial position of Khulna Power Company Limited as at 31 December 2004 and the results of its operations, cash flows and changes in equity for the year then ended.

/s/ Rahman Rahman Huq

Dhaka, 27 April 2005

151

KHULNA POWER COMPANY LTD.

BALANCE SHEET


					As at 31 December 2004

					2004		2003
			Notes		US$		US$

ASSETS
Non-current assets:
	Property, plant and equipment:			3
		Power plant				82,658,421		82,657,977
		Furniture and fixtures				24,799		18,648
		Building and construction				181,354		180,561
		Vehicles				46,114		46,114
		Office equipment				108,523		100,688
		Office renovation				27,256		27,256

						83,046,467		83,031,244
		Less: Accumulated depreciation				17,320,521		14,529,660

						65,725,946		68,501,584
	Project development expenditure			4		12,597,244		12,597,244
	Less: Accumulated amortisation					5,012,606		4,106,414

						7,584,638		8,490,830

						73,310,584		76,992,414
Current assets:
		Inventory		5		5,416,579		7,928,428
		Trade and other receivables		6		9,986,401		10,266,590
		Advances, deposits and prepayments		7		934,876		1,011,224
		Cash and cash equivalents		8		1,080,291		285,263

						17,418,147		19,491,505

Total assets						90,728,731		96,483,919

EQUITY AND LIABILITIES
Capital and reserves:
	Share capital			9		44,100,000		44,100,000
	Retained earnings					6,981,546		5,361,298

						51,081,546		49,461,298
Non-current liabilities:				10
	Loan from shareholders					2,444,711		2,889,204
	IFC loan					24,463,389		28,596,047
	Deferred liability for gratuity					53,040		27,836

						26,961,140		31,513,087
Current liabilities:
	Accounts payable			11		5,541,268		5,396,187
	Working capital loan payable			12		1,840,236		4,930,424
	Accrued expenses and others			13		299,318		190,253
	Payable for other financial charges			14		90,182		18,575
	Payable for project implementation expenses			15		223,130		223,130
	Current portion of shareholders’ loan			10		444,493		444,493
	Current portion of IFC loans			10		4,132,658		4,132,658
	Interest payable					114,760		173,814

						12,686,045		15,509,534

Total equity and liabilities						90,728,731		96,483,919

The annexed notes 1 to 20 form an integral part of these financial statements.

152

KHULNA POWER COMPANY LTD.

INCOME STATEMENT


				For the Year Ended
				31 December

				2004			2003
		Notes		US$			US$

Turnover			16		45,743,612			37,666,666
Cost of sales:
	Fuel		17		27,738,419			20,921,316
	Plant operations and maintenance		18		5,090,754			4,973,328
	Depreciation and amortization				3,663,061			3,663,598

					36,492,234			29,558,242

Gross profit					9,251,378			8,108,424
Other operating expenses:
	General and administrative				(1,358,407	)		(2,070,378	)

Profit from operations					7,892,971			6,038,046
Net financing cost					(3,026,408	)		(3,463,457	)
Gain/(Loss) on currency translation					(204,250	)		3,016

Net profit for the year					4,662,313			2,577,605

The annexed notes 1 to 20 form an integral part of these financial statements.

153

KHULNA POWER COMPANY LTD.

CASH FLOW STATEMENT


		For0the Year Ended
		US31 DecemberS$


A)	Cash flows from operating activities
	Net income		4,662,313		2,577,605
	Adjustments to reconcile net income to net cash provided by operating activities:
	Interest expenses		2,865,661		3,298,810
	Depreciation and amortization		3,697,886		3,716,205

			11,225,860		9,592,620
	Change in operating assets and liabilities:
	Inventory		2,511,849		(1,772,428	)
	Trade and other receivables		280,189		(223,017	)
	Advances, deposits and prepayments		76,348		199,802
	Interest paid		(2,924,715	)	(3,358,148	)
	Accounts payable and accrued expenses		(2,739,231	)	41,777
	Accumulated depreciation of disposed assets		(833	)	(2,792	)

			(2,796,393	)	(5,114,806	)

	Net cash provided by operating activities		8,429,467		4,477,814

B)	Cash flows from investing activities:
	Expenditures for property, plant and equipment		(18,095	)	(6,894	)
	Disposal of assets		2,872		3,002

	Net cash used in investing activities		(15,223	)	(3,892	)

C)	Cash flows from financing activities:
	Net proceeds from borrowings		(4,577,151	)	(4,599,377	)
	Dividend paid for 2003		(2,772,260	)	—
	Dividend distribution tax paid for 2003		(269,805	)	—

	Net cash out flow by financing activities		(7,619,216	)	(4,599,377	)

D)	Net increase/(decrease) in cash and cash equivalents (A+B+C)		795,028		(125,455	)
E)	Cash and cash equivalents at beginning of year		285,263		410,718

F)	Cash and cash equivalents at end of year (D+E)		1,080,291		285,263

154

KHULNA POWER COMPANY LTD.

STATEMENT OF CHANGES IN EQUITY

As at 31 December 2004


				Ordinary Shares

												Total
	Retained			Class A				Class B
Particulars	Earnings			Shares		Value		Shares		Value		Shares		Value

	US$			No.		US$		No.		US$		No.		US$
Balance at 1 January 1999		(17,636	)		2,085,924		44,099,873		6		127		2,085,930		44,100,000
Net income for 1999		6,938,422			—		—		—		—		—		—

Balance at 31 December 1999		6,920,786			2,085,924		44,099,873		6		127		2,085,930		44,100,000
Dividend for 1999		(6,131,541	)		—		—		—		—		—		—

		789,245			2,085,924		44,099,873		6		127		2,085,930		44,100,000
Net income for 2000		2,889,622			—		—		—		—		—		—

Balance at 31 December 2000		3,678,867			2,085,924		44,099,873		6		127		2,085,930		44,100,000
Dividend for 2000		(3,678,867	)		—		—		—		—		—		—

		—			2,085,924		44,099,873		6		127		2,085,930		44,100,000
Net income for 2001		1,150,847			—		—		—		—		—		—

Balance at 31 December 2001		1,150,847			2,085,924		44,099,873		6		127		2,085,930		44,100,000
Net income for 2002		1,632,846			—		—		—		—		—		—

Balance at 31 December 2002		2,783,693			2,085,924		44,099,873		6		127		2,085,930		44,100,000
Net income for 2003		2,577,605			—		—		—		—		—		—

Balance at 31 December 2003		5,361,298			2,085,924		44,099,873		6		127		2,085,930		44,100,000
Net income for 2004		4,662,313			—		—		—		—		—		—
Dividend paid for 2003		(2,772,260	)		—		—		—		—		—		—
Dividend distribution tax paid for 2003		(269,805	)		—		—		—		—		—		—

Balance at 31 December 2004		6,981,546			2,085,924		44,099,873		6		127		2,085,930		44,100,000

155

KHULNA POWER COMPANY LTD.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2004


1.	Organisation and background


1.1	Organisation

Khulna Power Company Limited, (the “Company”), was incorporated on 15 October 1997, as a limited liability company under the Bangladesh Companies Act of 1994. The Company was organized for the purpose of developing, constructing, owning and operating a nominal 110 Megawatt (“MW”) output, heavy fuel oil fired, barge mounted electric generating plant in Khulna, Bangladesh (the “Facility”). The Facility is required to change to natural gas as the primary fuel when it becomes available in the Khulna area.

The Company is owned 73.9% by El Paso Khulna Power ApS, (“EKPA”) an indirect wholly owned subsidiary of The El Paso Corporation, (“El Paso”), 10% by Summit Industrial and Mercantile Corporation (Pvt.) Ltd., (“Summit”), 10% by United Enterprises and Co. Ltd., (“United”), and 6.1% by Wartsila Development & Financial Services (Asia) Ltd., (“Wartsila”). Collectively, the Members.

Summit and United each contributed equity equivalent to a 5.5% ownership interest. EKPA and Wartsila contributed equity equivalent to the remaining 4.5% of each of their ownership interests in a 70:30 ratio and the shares were donated to Summit and United.


1.2	Significant contracts

The Company has entered into an Implementation Agreement (“IA”) with the Government of Bangladesh (“GOB”). Through the IA, the GOB guarantees, among other items, the payment of all sums due to the Company, full contractual performance, convertibility of funds into US dollars and certain tax and fiscal incentives. Among the tax and fiscal incentives are a fifteen-year corporate income tax exemption, stamp duty exemption and the ability to repatriate equity dividends and profits.

The Company has entered into a fifteen-year Power Purchase Agreement (“PPA”) with the Bangladesh Power Development Board (“BPDB”), whereby the BPDB agrees to purchase all of the net electrical output of the Facility generated in accordance with BPDB’s instructions. The PPA can be extended during the final twelve months of its term upon the mutual agreement of the Company and the BPDB.

The Company has entered in a fifteen-year Fuel Supply Agreement (“FSA”) with United Summit Coastal Oil Ltd., (“USCOL”) to provide heavy fuel oil to the Facility. USCOL is owned 50% by an indirect, wholly owned subsidiary of El Paso and 25% each by affiliates of Summit and United.

The Company has entered into an Engineering, Procurement and Construction Contract (“EPC” contract) with Wartsila NSD Finland OY (“Contractor”), an affiliate of Wartsila. The lump sum EPC contract calls for the Contractor to design, engineer, procure, install and commission the Facility in accordance with certain performance criteria.

The Company has entered into an Operations & Maintenance Agreement (“O&M agreement”) with Wartsila NSD Finland OY, an affiliate of Wartsila, to operate and maintain the Facility. This agreement has been assigned to and is being performed by Wartsila Bangladesh Ltd., also an affiliate of Wartsila.

The Company has entered into a Gas Conversion Contract with the Contractor for the modification of the Facility so that it can utilise natural gas as the primary fuel when it becomes available in the Khulna area.

The Company has entered into a Land Lease Agreement with the BPDB for the purpose of securing the rights to occupy the Facility site.

The Company has entered into an Investment Agreement with the IFC for the purpose of securing non-recourse financing for approximately 55% of the total cost of the Facility.

156

The company has entered into an agreement with Citibank, N.A. to minimize the risk of fluctuation of interest rate for payment of IFC B loan interest. This allows the company to pay interest at a capped LIBOR rate of 7.5% instead of floating LIBOR rate when the latter is higher than 7.5%.


2.	Summary of significant accounting policies

The summary of significant accounting policies of the Company is presented to assist in understanding the company’s financial statements.


2.1	Basis of presentation

The accompanying financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). All costs incurred relating to the construction of the Facility, obtaining financing and the development of the Company are considered recoverable and, accordingly, have been capitalized as project development expenditure.

The Company considers its functional currency to be the US dollar as the majority of the Company’s activities and contractual agreements are denominated in, or indexed to US dollars, and the GOB has committed in the IA to guarantee the Company’s conversion of Bangladesh taka into US dollars.

The Company maintains its financial records in Bangladesh taka and prepares statutorily required financial statements in accordance with Bangladesh Accounting Standards. Except for the depreciation provision on fixed assets and treatment of start-up costs, the statutory statements have been restated into US dollars to reflect the financial position and results of operations of the Company as if the accounting records had been maintained in US dollars, on the following basis. All monetary assets and liabilities denominated in Bangladesh taka have been remeasured into US dollars utilising the rate of each month end in 2004. All non-monetary assets and liabilities and related expenses denominated in Bangladesh taka were remeasured into US dollars utilising historical exchange rates. Ordinary share capital was converted utilizing the rate in effect on the date of issue. Income statement items denominated in BDT were converted into US dollars utilizing the month-average rate and items denominated in USD have been shown using historical rate during the year 2004.

As a result of the existence of a large number of foreign currency transactions during the year and foreign currency monetary assets and liabilities at the year end, the results of the statutorily prepared Bangladesh Taka Accounts will not be the same as these accounts.

In view of the intended use of these accounts, in the opinion of management, disclosure in these accounts is sufficient.


2.2	Property, plant and equipment

Property, plant and equipment are recorded at cost less depreciation. Depreciation is accounted for on the straight-line method from the month of acquisition. The generating plant is depreciated over thirty years, with other equipment and building being depreciated over a period of 4-10 years. Betterments and large renewals that extend the life of the asset are capitalised whereas maintenance, repairs and small renewals are expensed as incurred.


2.3	Capitalised interest

The company has capitalised, as components of fixed assets and capitalised development cost, interest cost incurred during the development and construction phases of the facility. Such interest costs totaled US$ 282,876 and US$ 3,876,235 respectively.


2.4	Income taxes

The Company has a fifteen-year exemption from income tax in Bangladesh through the provisions of the IA. Accordingly, no current or deferred income taxes have been provided.

157


2.5	Use of estimates

The preparation of the Company’s financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of development costs and fixed assets. Actual results could differ from those estimates.


3.	Property, plant and equipment


	Cost									Depreciation

					Disposal/									Disposal/					Written Down
	Balance at		Additions		Adjustment			Balance at		Balance at				Adjustment			Balance at		Value at
	1 January		During		During the			31 December		1 January		Charged for		During the			31 December		31 December
Particulars	2004		the Year		Year			2004		2004		the Year		Year			2004		2004

	US$		US$		US$			US$		US$		US$		US$			US$		US$
Power plant		82,657,977		444		—			82,658,421		14,314,785		2,756,869		—			17,071,654		65,586,767
Furniture and fixtures		18,648		6,151		—			24,799		15,648		308		—			15,956		8,843
Building and construction		180,561		793		—			181,354		69,752		18,081		—			87,833		93,521
Vehicles		46,114		—		—			46,114		19,962		11,532		—			31,494		14,620
Office equipment		100,688		10,707		(2,872	)		108,523		84,481		4,119		(833	)		87,767		20,756
Office renovation		27,256		—		—			27,256		25,032		785		—			25,817		1,439

Total 2004		83,031,244		18,095		(2,872	)		83,046,467		14,529,660		2,791,694		(833	)		17,320,521		65,725,946

Total 2003		83,027,352		6,894		(3,002	)		83,031,244		11,722,977		2,809,475		(2,792	)		14,529,660		68,501,584


4.	Project development expenditure


		2004			2003

		US$			US$
Development cost:
	Foreign expenses		1,306,722			1,306,722
	Fees and leasehold rent		57,661			57,661
	Start-up expenses		91,475			91,475
	Other development expenses		1,174,820			1,174,820
	Development fee with interest		3,143,013			3,143,013
	Legal fees		4,397,750			4,397,750
	Environmental consulting		595,394			595,394
	Pre-full commercial operation date (FCOD) surplus		(629,610	)		(629,610	)

			10,137,225			10,137,225
Fuel reservation fee			1,500,000			1,500,000
Social goodwill			182,086			182,086
Financing cost:
	IFC appraisal fees		250,000			250,000
	Independent engineers for lenders		448,645			448,645
	Additional financing fees		79,288			79,288

			777,933			777,933

			12,597,244			12,597,244
Less: Accumulated amortisation			5,012,606			4,106,414

			7,584,638			8,490,830

158


5.	Inventory


Spare parts for plant maintenance (Note 5.1)	2,000,000	2,000,000
Fuel (Note 5.2)	3,416,579	5,928,428

	5,416,579	7,928,428

5.1 Spare parts inventory was acquired under a provision of the EPC contract. The provision called for the contractor to provide safety spare parts with a cost basis of US$ 2,000,000. In addition to above safety spares, the operator maintains usual maintenance spares at their cost against variable fees paid to them.

5.2 Fuel oil inventories are valued at cost, utilising the first-in, first-out (FIFO) method.


6.	Trade and other receivables


Operation and maintenance tariff, due from BPDB	4,703,690	4,629,405
Fuel tariff, due from BPDB	5,179,104	5,523,360
Coastal Fuji Oil	5,609	16,840
Bangladesh Power Development Board — Licence fees of BIWTA	97,998	96,985

	9,986,401	10,266,590


7.	Advances, deposits and prepayments

This includes US$ 377,250 paid as premium to Citibank, N.A., New York to arrange an interest rate cap over IFC B loan. This arrangement caps LIBOR to 7.5%. The payment made is not considered to be materially different from the fair value of the instrument.


8.	Cash and cash equivalents

Cash and cash equivalents is comprised of bank deposits and offshore overnight investment of US dollars amounting to US$ 11,003 and US$ 928,065 respectively and Bangladesh taka equivalent to US$ 141,223. The GOB, through the provisions of the IA, has agreed to make the Company whole for any losses resulting from changes in the exchange rate from the time that Bangladesh Taka are received until the time that any of the taka are converted to US dollars.

159


9.	Share capital

The shareholding position as at the balance sheet date was as follows:


	2004

	Class A		Class B		Total				2003
	ordinary		ordinary		ordinary
Name of shareholder	share		share		share		Total value		Total value

	No.		No.		No.		US$		US$
El Paso Khulna Power ApS (formerly Coastal Khulna Power ApS) (incorporated in Denmark)		1,541,498		2		1,541,500		32,589,900		32,589,900
Wartsila Development & Financial Services (Asia) Ltd. (incorporated in Cayman Islands)		127,242		2		127,244		2,690,100		2,690,100
Summit Industrial & Mercantile Corporation (Pvt) Ltd. (incorporated in Bangladesh)		208,592		1		208,593		4,410,000		4,410,000
United Enterprises & Company Ltd. (incorporated in Bangladesh)		208,592		1		208,593		4,410,000		4,410,000

		2,085,924		6		2,085,930		44,100,000		44,100,000

The Members of the Company have an agreement stipulating, among other things, the terms under which the Company’s stock can be sold or transferred. Any stockholder intending to dispose of an interest in the Company must first offer their stock to the other Members, indicating the number of shares and the price. If the other Members do not purchase the shares, they may be sold to other parties at not less than the price offered to the Members.


10.	Non-current liabilities


						Total
		Current				outstanding
		maturity		Long term		at 31 Dec.
		portion		portion		2004

		US$		US$		US$
Term loans:
	El Paso Power Khulna Holding Ltd.		377,819		2,078,004		2,455,823
	Wartsila Development & Financial Services (Asia) Ltd.		66,674		366,707		433,381

			444,493		2,444,711		2,889,204

IFC loans:
	‘A’ loan		1,733,769		11,269,500		13,003,269
	‘B’ loan		2,398,889		13,193,889		15,592,778

			4,132,658		24,463,389		28,596,047

The above term loans are being repaid in semi-annual installments for a term of 9 years effective from 15 December 2002. Interest rate applicable is 10% per annum. Collateral includes a promissory note of the company.

160

It was the intent of the Company to obtain limited recourse financing for approximately 55% of the Facility’s cost amounting to US$ 51,968,000. To this end, the Company obtained financing from two sources:



	a)	An IFC A loan in the amount of US$ 22,539,000 was secured on 4 August 1999 with an interest rate of LIBOR plus 0.5% and a term of thirteen years. El Paso and Wartsila initially guaranteed the loan. On 28 February 2001 the Company met the required terms and conditions and the guarantees were released. At that time, the interest rate changed to LIBOR plus approximately 4% to be computed pursuant to section 1.1 [“A Loan interest rate” (ii)] of Article 1 of the Investment Agreement. As of 31 December 2004, US$ 13,003,269, of which US$ 54,776 in unpaid interest, was outstanding.



	b)	An IFC B loan in the amount of US$ 21,590,000 was secured on 25 October 2002 with an interest rate of LIBOR plus 3.5% and a term of nine years. As of 31 December 2004, US$ 15,592,778, of which US$ 42,898 in unpaid interest, was outstanding.



	c)	A Bridge Loan in the amount of US$ 25,014,650 and US$ 4,414,350 was secured from El Paso Power Khulna Holding Ltd. and Wartsila respectively. The interest rate is 10% and payable in semi-annual installment. Unpaid interest is added to the outstanding principal and accrues interest at the stated rate. IFC B loan has been fully used for repaying the Bridge loan. As of 31 December 2004, US$ 2,889,204 of which US$ 12,841 in unpaid interest, was outstanding.


11.	Accounts payable


	2004		2003

	US$		US$
CFO — Handling commission		786,863		1,710,810
CFO — Fuel cost		4,134,579		3,092,555
USCOL — Fuel carrying and storage		448,862		473,581
Wartsila — Operating and maintenance expenses		170,964		119,241

		5,541,268		5,396,187


12.	Working capital loan payable


Taka Overdraft	940,236	2,831,607
US Dollar Revolving	900,000	2,098,817

	1,840,236	4,930,424

The above facilities are secured by a corporate guarantee amounting to USD 7 million provided by El Paso Corporation and Wartsila NSD Corporation in the proportion of 85% and 15% respectively.

161


13.	Accrued expenses and others


Electricity, gas and water	243	338
Legal and audit fees — HVC, RRH and others	14,878	19,066
Telephone, fax and email	2,024	1,860
Provision for withholding tax/ VAT for legal, professional & other fee	5	46,869
Wartsila Bangladesh Ltd. (WBL)	—	526
El Paso International	99,364	40,661
Chadbourne and Parke LLP — Legal fees	—	5,168
R W Becker — Independent Engineer for lenders	5,819	3,491
Late payment interest — Fuel (CFO)	62,172	36,733
SBLC charges — Fuel	104,629	35,000
Others	10,184	541

	299,318	190,253


14.	Payable for other financial charges


Bank charge on performance bond (USD 1.5 million)	13,281	—
Bank charge on performance bond (USD 4.498 million)	76,901	18,575

	90,182	18,575


15.	Payable for project implementation expenses


VAT on plant	223,130	223,130

	223,130	223,130


16.	Turnover


	2004		2003

	US$		US$
Operation and maintenance tariff		20,892,671		18,862,499
Fuel tariff		24,850,941		18,804,167

		45,743,612		37,666,666


17.	Fuel expenses


Heavy fuel oil	27,525,186	20,700,415
Light fuel oil	19,365	21,368
Fuel storage charges	193,868	199,533

	27,738,419	20,921,316

162


18.	Plant operations and maintenance


O & M fixed fees:
	Fixed fees	1,798,000	2,180,220
	Variable expenses	3,009,075	2,532,816
Land lease fee — BPDB		51,463	81,313
Plant security		37,529	38,360
Performance bond and guarantee charges		175,051	123,594
Environmental compliance		19,335	16,769
Miscellaneous operating expenses		301	256

		5,090,754	4,973,328


19.	Commitments and contingencies


19.1	Agreements


19.1.1	Implementation agreement

The IA states certain actions that if taken by the Company and not remedied within the prescribed period will cause the Company to be in default of the IA. These events are the abandonment of the Facility for 30 consecutive days or the passing of a resolution of winding up or voluntary bankruptcy. If the incidence of default is not remedied, the IA can be cancelled and the Company’s performance bonds required by the PPA can be drawn. The GOB would also have the right to acquire the Company’s interest in the plant upon the payment of compensation as defined in the PPA.

The IA also places certain restrictions on the sale and transfer of Company common stock for a period of five years unless approved by the GOB.


19.1.2	Power purchase agreement

The Company will deliver electricity only as requested by BPDB. The price paid by BPDB for electricity consists of a fuel cost recovery tariff and an operations and maintenance tariff.

The operations and maintenance tariff is structured to cover the operating, administrative and general expenses of the Company, as well as to provide a return on and of equity to the stockholders. It is indexed for changes in the Bangladesh taka to US dollar exchange rates. The operations and maintenance tariff is based on the number of kilowatt-hours of electricity delivered. The PPA establishes a minimum guaranteed operations and maintenance tariff equivalent to 50% of the Facility’s generating capacity.

The PPA also imposes liquidated damages for each hour that the Facility is unable to deliver a minimum of 90 megawatts, after stated maintenance allowances. No damages have been assessed under this provision.

The PPA requires that the Company post initially two Performance Bonds one for US$ 1,500,000 and other for US$ 8,500,000 to ensure the Company’s obligations under the PPA. The Performance Bond of US$ 1,500,000 remains intact while the Performance Bond of US$ 8,500,000 is reduced by US$ 667,000 annually to a minimum of US$ 1,500,000.


19.1.3	Operations and maintenance agreement

The Company has entered into a fifteen-year O&M Agreement with WBL to operate and maintain the Facility. WBL receives a fixed monthly fee plus a variable fee per megawatt produced as per agreement. A capacity bonus is paid when monthly net electrical output exceeds 85%. An availability penalty is assessed when monthly Facility availability falls below 85%.

163


19.1.4	Fuel supply agreement

The company has entered into a FSA with USCOL, to provide Heavy Fuel Oil to the Facility. The FSA has a fifteen-year term, but subject to termination within thirty days following the conversion to natural gas. If the BPDB terminates the PPA during the first five years of the FSA, the Company is obligated to make a Compensation Payment to USCOL of US$ 5,000,000, prorated for the number of days remaining in the five-year period. There is no minimum purchase commitment under this agreement.


19.1.5	Gas conversion agreement

The Company has entered into a Gas Conversion Contract with the Contractor for the modification of the Facility to utilise natural gas as the primary fuel when it becomes available in the Khulna area. This agreement is for fifteen years beginning on Commercial Operations Date. It is a US$ 10,000,000, lump sum agreement with a two-percent annual escalation beginning on the ninth anniversary of the agreement. Liquidated damages are provided for construction delays, and failure to meet stated heat rate and net power output parameters.


19.2	Guarantees by the sponsors in favour of the Company


19.2.1	Performance bond to Bangladesh Power Development Board (BPDB)

As required under section 16.6 of PPA, the Company has submitted two performance bonds to BPDB, one for US$ 4.498 million and other for US$ 1.5 million. Both the performance bonds have been issued by the schedule bank on the strength of the guarantee provided by the El Paso Corporation on behalf of the Company.


19.2.2	Catastrophic Maintenance Letter of Credit and Debt Service Letter of Credit submitted to the Trustee

As required under section 2.2(b)(ii) of the Investment Agreement, the Company has submitted two Letters of Credit to Trustee such as Catastrophic Maintenance Letter of Credit of US$ 1 million and Debt Service Letter of Credit of US$ 3.245 million. Both the Letters of Credit have been issued on the strength of the guarantee provided by El Paso Corporation on behalf of the Company.


19.2.3	Working capital facility

The Company has taken US$ 7 million working capital facility from Citibank, N.A. For obtaining such facility, El Paso and Wartsila have provided guarantee of US$ 5.95 million and US$ 1.05 million respectively to the Citibank, N.A.


20.	General



20.1	Previous year’s figures have been rearranged, wherever considered necessary, to conform to current year’s presentation.



20.2	Figures have been rounded off to the nearest US dollar.

164

KHULNA POWER COMPANY LTD.

BALANCE SHEET

(Unaudited)


				As at
				December 31,
		Notes		2002

				US$
				(Restated)
ASSETS
Non-Current Assets:			3
	Power plant				82,657,977
	Furniture and fixtures				19,558
	Building and construction				178,690
	Vehicles				46,114
	Office equipment				97,757
	Office renovation				27,256

					83,027,352
	Less: Accumulated depreciation				11,722,977

					71,304,375
	Project development expenditure		4		12,597,244
	Less: Accumulated amortisation				3,199,684
					9,397,560

					80,701,935
Current Assets:
	Inventory		5		6,156,000
	Trade and other receivables		6		10,043,573
	Advances, deposits and prepayments		7		1,211,026
	Cash and cash equivalents		8		410,718

					17,821,317

Total Assets					98,523,252


EQUITY AND LIABILITIES
Capital and Reserves:
	Share capital		9		44,100,000
	Retained profit				2,783,693

					46,883,693
Non-Current Liabilities (Net of Current Maturity):			10
	Deferred liability for gratuity				18,340
	Loan from shareholders				3,400,371
	IFC loan				32,728,706

					36,147,417
Current Liabilities:
	Accounts payable		11		4,432,885
	Working capital loan payable		12		5,857,442
	Accrued expenses and others		13		183,746
	Payable for other financial charges		14		29,085
	Payable for project implementation expenses		15		223,130
	Current portion of non-current liabilities				4,532,702
	Interest payable				233,152

					15,492,142

Total Equity and Liabilities					98,523,252

The annexed notes 1 to 17 form an integral part of these financial statements.

165

KHULNA POWER COMPANY LTD.

INCOME STATEMENT

(Unaudited)


		For the year ended 31
		December
		2002

		US$
		(Restated)
Turnover			40,245,823
Cost of sales:
	Fuel		21,418,440
	Plan operations and maintenance		5,301,242
	Depreciation and amortization		3,662,966

			30,382,648

Gross profit			9,863,175
Other operating expenses:
	General and administrative		(3,382,467	)

Profit from operations			6,480,708
Net financing cost			(4,792,183	)
Loss on currency translation			(55,679	)

Net profit for the year			1,632,846
Retained profit brought forward			1,150,847

Retained profit carried forward			2,783,693

The annexed notes 1 to 17 form an integral part of these financial statements.

166

KHULNA POWER COMPANY LTD.

CASH FLOW STATEMENT

(Unaudited)


			For the year ended
			31 December
			2002

			US$
			(Restated)
A) Operating activities
	Net income			1,632,846
	Adjustments to reconcile net income to net cash provided by operating activities:
		Interest expenses		4,758,065
		Depreciation and amortization		3,717,823

				10,108,734
	Change in operating assets and liabilities:
		Trade and other receivables		(926,870	)
		Prepaid expenses and advances		(928,019	)
		Inventory		(1,557,569	)
		Interest paid		(5,074,096	)
		Accounts payable and accrued expenses		875,224
		Accumulated depreciation of disposed assets		(45,561	)

				(7,656,891	)

	Net cash provided by operating activities			2,451,843

B) Investing activities:
	Expenditures for property, plant and equipment			(54,774	)
	Disposal of assets			47,539

	Net cash used in investing activities			(7,235	)

C) Financing activities:
	Net proceeds from borrowings			(4,412,757	)

	Net cash provided by financing activities			(4,412,757	)

D) Net increase in cash and cash equivalents (A+B+C)				(1,968,149	)
E) Cash and cash equivalents at beginning of year				2,378,867

F) Cash and cash equivalents at end of year (D+E)				410,718

167

KHULNA POWER COMPANY LTD.

STATEMENT OF STOCKHOLDERS’ EQUITY

AS AT 31 DECEMBER 2002

(Unaudited)


			Common Stock

											Total
	Retained		Class A				Class B
Particulars	Earnings		Shares		Value		Shares		Value		Shares		Value

	US$		No.		US$		No.		US$		No.		US$
	(Restated)
Balance at 31 December 2001		1,150,847		2,085,924		44,099,873		6		127		2,085,930		44,100,000
Net income for 2002		1,632,846		—		—		—		—		—		—

Balance at December 2002		2,783,693		2,085,924		44,099,873		6		127		2,085,930		44,100,000

The management have proposed a total cash distribution of US$5.26 million as final dividend for 2002 to holders of all ordinary shares. This amount has been arrived at by reference to the company’s statutory financial statements for 2002.

168

KHULNA POWER COMPANY LTD.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2002

(Unaudited)

1. Organisation and background

1.1 Organisation

The Company is owned 73.9% by El Paso Khulna Power ApS, (“EKPA”) an indirect wholly owned subsidiary of The El Paso Corporation, (“El Paso”), 10% by Summit Industrial and Mercantile Corp. (Pvt.) Ltd., (“Summit”), 10% by United Enterprises and Co. Ltd., (“United”), and 6.1% by Wartsila Development & Financial Services (Asia) Ltd., (“Wartsila”). Collectively, the Members.

1.2 Significant contracts

The Company has entered into a Land Lease Agreement with the BPDB for the purpose of securing the rights to occupy the Facility site.

The Company has entered into an Investment Agreement with the IFC for the purpose of securing limited-recourse financing for approximately 55% of the total cost of the Facility.

169


2.	Summary of significant accounting policies

The summary of significant accounting policies of the Company is presented to assist in understanding the company’s financial statements.


2.1	Basis of presentation

The Company maintains its financial records in Bangladesh taka and prepares statutorily required financial statements in accordance with Bangladesh Accounting Standards. Except for the depreciation provision on fixed assets and treatment of start-up costs, the statutory statements have been restated into US dollars to reflect the financial position and results of operations of the Company as if the accounting records had been maintained in US dollars, on the following basis. All monetary assets and liabilities denominated in Bangladesh taka have been remeasured into US dollars utilising the rate of each month end in 2002. All non-monetary assets and liabilities and related expenses denominated in Bangladesh taka were remeasured into US dollars utilising historical exchange rates. Common stock was converted utilizing the rate in effect on the date of issue. Income statement items denominated in BDT were converted into US dollars utilizing the month-average rate and items denominated in USD have been shown using historical rate during the year 2002.

In view of the intended use of these accounts, in the opinion of management disclosure in these accounts is sufficient.

2.1.1 Restatement

We have restated these financial statements to reflect legal and other fees associated with obtaining our debt financing in our income statement which were previously capitalized as project development costs. The effects of this restatement are shown below:


		For the Year Ended
		December 31, 2002

		As Reported		As Restated

Income statement:
	Depreciation and amortization		3,687,343		3,662,966
	General and administrative		2,741,049		3,382,467
	Net profit		2,249,887		1,632,846
Balance sheet:
	Project development expenditure, net		10,014,601		9,397,560
	Retained profit		3,400,734		2,783,693
	Capital and reserves		47,500,734		46,883,693

170

2.2 Property, plant and equipment

Property, plant and equipment are recorded at cost less depreciation. Depreciation is accounted for on the straight-line method from the date of acquisition. The generating plant is depreciated over thirty years, with other equipment and building being depreciated over a period of 4-10 years. Betterments and large renewals that extend the life of the asset are capitalised whereas maintenance, repairs and small renewals are expensed as incurred.

2.3 Capitalised interest

2.4 Income taxes

The Company has a fifteen-year exemption from income tax in Bangladesh through the provisions of the IA. Accordingly, no current or deferred income taxes have been provided.

2.5 Use of estimates


3.	Non-current assets


	Cost									Depreciation

					Disposal/									Disposal/					Written Down
	Balance at		Additions		Adjustment			Balance at		Balance at				Adjustment			Balance at		Value at
	1 January		During		During the			31 December		1 January		Charged for		During the			31 December		31 December
Particulars	2002		the Year		Year			2002		2002		the Year		Year			2002		2002

	US$		US$		US$			US$		US$		US$		US$			US$		US$
Power plant		82,657,977		—		—			82,657,977		8,801,954		2,755,963		—			11,557,917		71,100,060
Furniture and fixtures		18,892		666		—			19,558		10,608		3,880		—			14,488		5,070
Building and construction		175,403		3,287		—			178,690		34,160		17,630		—			51,790		126,900
Vehicles		42,782		46,114		(42,782	)		46,114		41,044		9,065		(41,993	)		8,116		37,998
Office equipment		93,050		4,707		—			97,757		48,450		18,909		—			67,359		30,398
Office renovation		32,013		—		(4,757	)		27,256		21,503		5,372		(3,568	)		23,307		3,949

At 31 December 2002		83,020,117		54,774		(47,539	)		83,027,352		8,957,719		2,810,819		(45,561	)		11,722,977		71,304,375

171


4.	Project development expenses


		2002

		US$
Development cost:
	Foreign expenses		1,306,722
	Fees and leasehold rent		57,661
	Start-up expenses		91,475
	Other development expenses		1,174,820
	Development fee with interest		3,143,013
	Legal fees		4,397,750
	Environmental consulting		595,394
	Pre-full commercial operation date (FCOD) surplus		(629,610	)

			10,137,225
Fuel reservation fee			1,500,000
Social goodwill			182,086
Financing cost:
	IFC appraisal fees		250,000
	Independent engineers for lenders		448,645
	Additional financing fees		79,288

			777,933

			12,597,244
Less: Accumulated amortisation			3,199,684

			9,397,560


5.	Inventory


Spare parts for plant maintenance (Note 5.1)			2,000,000
Fuel (Note 5.2)			4,156,000

			6,156,000

5.1 Spare parts inventory was acquired under a provision of the EPC contract. The provision called for the contractor to provide spare parts with a cost basis of US$2,000,000. It is the responsibility of the operator to maintain, at its expense, the spare parts inventory at the original cost level.

5.2 Fuel oil inventories are valued at cost, utilising the first-in, first-out (FIFO) method.


6.	Trade and other receivables


Operation and maintenance tariff, due from BPDB			4,594,092
Fuel tariff, due from BPDB			5,197,524
Coastal Fuji Oil			87,285
United Enterprises & Company Ltd.			2,550
Bangladesh Inland Water Transport Authority — Licence fees			162,122

			10,043,573

172


7.	Advances, deposits and prepayments

This includes US$ 503,000 paid as fees to Citibank, N.A., Bangladesh to arrange an interest rate cap over IFC B loan. This arrangement caps LIBOR to 7.5%. The payment made is not considered to be materially different from the fair value of the instrument.


8.	Cash and cash equivalents

Cash and cash equivalents is comprised of bank deposits and offshore overnight investment of US dollars amounting to US$ 19,259 and US$ 158,031 respectively and Bangladesh taka equivalent to US$ 233,428. The GOB, through the provisions of the IA, has agreed to make the Company whole for any losses resulting from changes in the exchange rate from the time that Bangladesh Taka are received until the time that any of the taka are converted to US dollars.


9.	Share capital

The shareholding position as at the balance sheet date was as follows:


	2002

					Total
Name of shareholder	Class A		Class B		shares		Total value

	No.		No.		No.		US$
El Paso Khulna Power ApS (formerly Coastal Khulna Power ApS) (incorporated in Denmark)		1,541,498		2		1,541,500		32,581,209
Wartsila Development & Financial Services (Asia) Ltd. (incorporated in Cayman Islands)		127,242		2		127,244		2,698,263
Summit Industrial & Mercantile Corporation (Pvt) Ltd. (incorporated in Bangladesh)		208,592		1		208,593		4,410,264
United Enterprises & Company Ltd. (incorporated in Bangladesh)		208,592		1		208,593		4,410,264

		2,085,924		6		2,085,930		44,100,000


10.	Non-current liabilities

It was the intent of the Company to obtain limited-resource financing for approximately 55% of the Facility’s cost amounting to US$ 51,968,000. To this end, the Company obtained financing from two sources:



	a)	An IFC A loan in the amount of US$ 22,539,000 was secured on 4 August 1999 with an interest rate of LIBOR plus 0.5% and a term of thirteen years. El Paso and Wartsila initially guaranteed the loan. On 28 February 2001 the Company met the required terms and conditions and the guarantees were released. At that time, the interest rate changed to LIBOR plus approximately 4% to be computed pursuant to section 1.1 [“A Loan interest rate” (ii)] of Article 1 of the Investment Agreement. As of 31 December 2002, US$ 16,470,808, of which US$ 64,758 in unpaid interest, was outstanding.



	b)	An IFC B loan in the amount of US$ 21,590,000 was secured on 25 October 2002 with an interest rate of LIBOR plus 3.5% and a term of nine years. As of 31 December 2002, US$ 20,390,556, of which US$ 39,046 in unpaid interest, was outstanding.

173


	c)	A Bridge Loan in the amount of US$ 25,014,650 and US$ 4,414,350 was secured from El Paso Power Khulna Holding Ltd. and Wartsila respectively. The interest rate if 10% and payable in semi-annual instalment. Unpaid interest is added to the outstanding principal and accrues interest at the stated rate. IFC B loan has been fully used for repaying the Bridge loan. As of 31 December 2002, US$ 3,800,414 of which US $30,397 in unpaid interest, was outstanding.


11.	Accounts payable


	2002

	US$
CFO — Handling commission		1,016,165
CFO — Fuel cost		2,979,464
USCOL — Fuel carrying and storage		437,256

		4,432,885


12.	Working capital loan payable


Taka Overdraft			1,860,660
US Dollar Revolving			3,996,782

			5,857,442

The above facilities are secured by a corporate guarantee amounting to USD 7 million provided by El Paso Corporation and Wartsila NSD Corporation in the proportion of 85% and 15% respectively.


13.	Accrued expenses and others


	2002

	US$
Electricity, gas and water		847
El Paso Khulna Power ApS		38
Legal and audit fees — HVC, RRH and others		23,802
Wartsila Development & Financial Services (Asia) Ltd.		5,042
Telephone, fax and email		2,794
Provision for withholding tax/VAT for legal, professional & other fee		6,346
Wartsila Bangladesh Ltd. (WBL)		4,229
El Paso International		9,043
Fulbright and Jaworski LLP — Legal fees		83,870
R W Beck — Independent Engineer for lenders		4,750
Chadbourne and Parke LLP — Legal fees		37,784
Others		5,201

		183,746


14.	Payable for other financial expenses


Bank charge on performance bond (1.5 million US dollar)			783
Bank charge on performance bond (5.832 million US dollar)			28,302

			29,085

174


15.	Payable for project implementation expenses


VAT on plant			223,130

			223,130


16.	Commitments and contingencies


16.1	Agreements


16.1.1	Implementation agreement

The IA also places certain restrictions on the sale and transfer of Company common stock for a period of five years unless approved by the GOB.


16.1.2	Power purchase agreement

The Company will deliver electricity only as requested by BPDB. The price paid by BPDB for electricity consists of a fuel cost recovery tariff and an operations and maintenance tariff.


16.1.3	Operations and maintenance agreement

The Company has entered into a fifteen-year O&M Agreement with WBL to operate and maintain the Facility. WBL receives a fixed monthly fee of US$ 179,000 plus a variable fee at the rate of US$ 5.99 per megawatt produced. A capacity bonus is paid when monthly net electrical output exceeds 85%. An availability penalty is assessed when monthly Facility availability falls below 85%.


16.1.4	Fuel supply agreement

175


16.1.5	Gas conversion agreement


16.2	Guarantees by the sponsors in favour of the Company


16.2.1	Performance bond to Bangladesh Power Development Board (BPDB)

As required under section 16.6 of PPA, the Company has submitted two performance bonds to BPDB, one for US$ 5.832 million and other for US$ 1.5 million. Both the performance bonds have been issued by the schedule bank on the strength of the guarantee provided by the El Paso Corporation on behalf of the Company.


16.2.2	Catastrophic Maintenance Letter of Credit and Debt Service Letter of Credit submitted to the Trustee

As required under section 2.2(b)(ii) of the Investment Agreement, the Company has submitted two Letters of Credit to Trustee such as Catastrophic Maintenance Letter of Credit of US$ 1 million and Debt Service Letter of Credit of US$ 3.472 million. Both the Letters of Credit have been issued on the strength of the guarantee provided by El Paso Corporation on behalf of the Company


16.2.3	Working capital facility


17.	General


17.1	Previous year’s figures have been rearranged, wherever considered necessary, to conform to current year’s presentation.


17.2	Figures have been rounded off to the nearest US dollar.

176

REPORT OF INDEPENDENT AUDITORS

To the Stockholders of Habibullah Coastal Power

Company (Private) Limited:

In our opinion, the accompanying balance sheets and the related statements of operations, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Habibullah Coastal Power Company (Private) Limited (the “Company”) at December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Houston, Texas

May 27, 2005

177

HABIBULLAH COASTAL POWER COMPANY (PRIVATE) LIMITED

BALANCE SHEETS


			December 31,

			2004			2003

ASSETS
Current assets:
	Cash and cash equivalents		$	20,322,632		$	17,907,942
	Accounts receivable — trade			5,724,080			5,381,720
	Accounts receivable — other			825,695			1,026,876
	Fuel inventory			2,338,792			2,351,832
	Supplies inventory			2,758,294			2,758,294
	Prepaid and other current assets			250,796			840,503

		Total current assets		32,220,289			30,267,167

Property, plant, and equipment:
	Land			2,700,000			2,700,000
	Plant facility			139,628,710			139,558,410
	Equipment			541,003			590,550

		Subtotal		142,869,713			142,848,960
	Less: accumulated depreciation			(24,597,099	)		(19,927,499	)

		Total property, plant, and equipment, net		118,272,614			122,921,461

Other non-current assets:
	Tax deposits			2,120,716			1,444,539
	Long term receivable			5,546,238			5,758,781

		Total other non-current assets		7,666,954			7,203,320

	Total Assets		$	158,159,857		$	160,391,948


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Interest payable		$	1,948,478		$	2,179,741
	Accounts payable — trade			5,811,681			5,232,858
	Accounts payable — affiliates			133,906			39,221
	Current portion of contract payable			2,579,284			13,228,072
	Current portion of note payable			10,868,650			9,972,154

		Total current liabilities		21,341,999			30,652,046

Long-term debt
	Deferred contract payable			8,069,505			—
	Notes payable			68,782,112			79,650,762

		Total long-term debt		76,851,617			79,650,762

Stockholders’ equity:
	Authorized share capital, 10 rupee par value: 174,000,000 shares
	Common stock, 10 rupees par value; 135,731,653 Class A shares issued			31,600,032			31,600,032
	Common stock, 10 rupees par value; 36,080,641 Class B shares issued			8,400,032			8,400,032
	Retained earnings			19,966,177			10,089,076

		Total stockholders’ equity		59,966,241			50,089,140

		Total Liabilities and Stockholders’ Equity	$	158,159,857		$	160,391,948

See the accompanying notes to these financial statements.

178

HABIBULLAH COASTAL POWER COMPANY (PRIVATE) LIMITED

STATEMENTS OF OPERATIONS


			For the Year Ended December 31,

			2004			2003

Revenue
	Electric capacity		$	28,710,968		$	29,219,104
	Electric energy			27,145,085			25,135,328

Total revenue				55,856,053			54,354,432

Operating expenses
	Fuel			24,526,389			23,010,876
	Administrative and general			2,057,511			2,572,673
	Operations and maintenance			5,655,520			6,655,212
	Depreciation			4,669,600			4,668,795

		Total operating expenses		36,909,020			36,907,556

Operating income				18,947,033			17,446,876

Other (income) expense
	Interest income			(520,307	)		(1,219,267	)
	Interest expense — affiliate			7,616,150			8,485,833
	Interest expense			589,613			1,941,521
	Foreign exchange loss			1,384,476			206,376

Total other expense, net				9,069,932			9,414,463

Net income			$	9,877,101		$	8,032,413

See the accompanying notes to these financial statements.

179

HABIBULLAH COASTAL POWER COMPANY (PRIVATE) LIMITED

STATEMENTS OF CASH FLOWS


			For the Year Ended December 31,

			2004			2003

Cash flows from operating activities
	Net income		$	9,877,101		$	8,032,413
	Adjustments to reconcile net income to net cash provided by operating activities
		Depreciation		4,669,600			4,668,795
	Working capital changes
		Accounts receivable		(141,179	)		5,893,316
		Fuel inventory		13,040			136,357
		Supplies inventory		—			(16,647	)
		Prepaid and other current assets		589,707			261,882
		Interest payable		(231,263	)		(1,342,565	)
		Accounts payable		673,508			(121,779	)
	Non-working capital changes
		Tax deposits		(676,177	)		(559,264	)
		Long-term receivable		212,543			(2,002,725	)

		Net cash provided by operating activities		14,986,880			14,949,783

Cash flows from investing activities:
	Capital expenditures			(20,753	)		(438,161	)

		Net cash used in investing activities		(20,753	)		(438,161	)

Cash flows from financing activities:
	Payments on deferred contract payable			(2,579,283	)		(3,719,676	)
	Principal payments on note payable			(9,972,154	)		(9,149,604	)
	Dividends paid			—			(7,409,322	)

		Net cash used in financing activities		(12,551,437	)		(20,278,602	)

Increase (decrease) in cash and cash equivalents				2,414,690			(5,766,980	)
Cash and cash equivalents at beginning of period				17,907,942			23,674,922

Cash and cash equivalents at end of period			$	20,322,632		$	17,907,942

Supplemental cash flow data
	Interest paid		$	8,323,052		$	10,649,827

See the accompanying notes to these financial statements.

180

HABIBULLAH COASTAL POWER COMPANY (PRIVATE) LIMITED

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


	Common Stock

	Class A				Class B				Retained
	Shares		Amount		Shares		Amount		Earnings			Total

Balance, January 1, 2003		135,731,653	$	31,600,032		36,080,641	$	8,400,032	$	9,465,985		$	49,466,049
Dividends paid		—		—		—		—		(7,409,322	)		(7,409,322	)
Net income		—		—		—		—		8,032,413			8,032,413

Balance, December 31, 2003		135,731,653		31,600,032		36,080,641		8,400,032		10,089,076			50,089,140
Net income		—		—		—		—		9,877,101			9,877,101

Balance, December 31, 2004		135,731,653	$	31,600,032		36,080,641	$	8,400,032	$	19,966,177		$	59,966,241

See the accompanying notes to these financial statements.

181

HABIBULLAH COASTAL POWER COMPANY (PRIVATE) LIMITED

NOTES TO FINANCIAL STATEMENTS


1.	Organization and Background

We were organized on December 17, 1995, as a Pakistani private unlimited company under the Pakistani Companies Ordinance, 1984, and converted to a private limited company on September 15, 2003. Our primary purpose is the ownership and operation of a 126 megawatt, natural gas-fired, combined cycle power plant near Quetta, Pakistan (the “Facility”). We began full-time commercial operations in September 1999.

We are owned 99% by Quetta Power Holding Company I Ltd. (“Quetta I”) and 1% by Quetta Power Holding Company II Ltd. (“Quetta II”). Quetta I is owned 50% by Coastal Power International II Ltd. (“CPI 2”), an indirect wholly owned subsidiary of El Paso Corporation (“El Paso”), 25% by Habibullah Energy Limited (“HEL”), a Pakistani company, and 25% by H.E.I. Ltd., an affiliate of HEL. Quetta II is owned 98% by Quetta I, 1% by CPI 2 and 1% by HEL. Quetta I and Quetta II made periodic capital contributions to us in proportion to their ownership interest. In addition, Quetta I and Quetta II are allocated/receive 99% and 1%, respectively, of our net profits and distributions.


2.	Summary of Significant Accounting Policies

Basis of Presentation

Our financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

Use of Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosures of contingent assets and liabilities that exist at the date of the financial statements. Actual results could differ from those estimates.

Functional Currency

Our functional currency is the U.S. dollar since the majority of our activities and significant contractual agreements are denominated in U.S. dollars and based on the Government of Pakistan’s (“GOP”) commitment to guarantee our conversion of Pakistan rupees into U.S. dollars under the terms of the Implementation Agreement (“IA”) (See Note 6). All monetary assets and liabilities denominated in the Pakistan rupee have been remeasured into the U.S. dollar using the current exchange rates as of December 31, 2004, and December 31, 2003. All nonmonetary balance sheet items, income and related expenses denominated in the Pakistan rupee are remeasured into the U.S. dollar using historic exchange rates. Foreign exchange gains and losses resulting from remeasurement are recorded during the period and are recognized in the accompanying statement of operations.

Revenue Recognition

We recognize revenue when we deliver electric energy and provide electric capacity. Revenue is based on the quantity of electric energy delivered and electric capacity provided at rates specified in our Power Purchase Agreement (“PPA”).

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents.

182

Accounts Receivable

Accounts receivable include all trade accounts receivable owed to us for capacity revenue and sales of energy. Periodically, we review the collectibility of our accounts receivable using the specific identification method and establish an allowance for amounts that are not expected to be collected. As of December 31, 2004 and 2003, there was no allowance for doubtful accounts recorded.

Inventory

Inventory, which consists of fuel, spare parts, materials, and supplies, is recorded at the lower of cost or market. Cost is determined on a first-in, first-out (“FIFO”) basis for fuel and a weighted average basis for spare parts, materials, and supplies.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Betterments of major units of property are capitalized, while repairs, maintenance and replacements and additions of minor units of property are expensed. Depreciation is calculated using the straight-line method. The estimated useful lives of our assets are 30 years for the plant, 10 years for office equipment, furniture and fixtures, and telecommunications, and 5 years for vehicles.

We evaluate the impairment of our long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When such events or changes in circumstances occur, an impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. We did not record any asset impairments in 2004 or 2003.

Income Taxes

We are not subject to income tax in Pakistan due to the exemption granted under the IA (See Note 6). Accordingly, no current or deferred income taxes have been provided in the accompanying financial statements.


3.	Stockholders’ Agreements

Our stockholders have an agreement stipulating, among other things, the terms under which our stock can be sold or transferred. Any stockholder intending to dispose of an interest in our stock must first offer their stock to us and then to the other stockholders. The price of such stock transfer shall be determined in accordance with the agreement, after receiving the unanimous consent of the non-transferring stockholders. On January 3, 2005, a dividend of $7,094,595 was declared and was paid to our stockholders on February 9, 2005.


4.	Long-Term Debt

Effective February 26, 1996, we entered into a $115,521,000 loan agreement, with a group of banks, with Australia and New Zealand Banking Group acting as agent. Our obligations under the loan agreement were guaranteed by El Paso CGP Company (then Coastal Corporation), a wholly owned subsidiary of El Paso Corporation, through a Note Purchase Agreement. The banks called the loan under the Note Purchase Agreement on December 15, 2002, and El Paso CGP Company assumed the entire loan outstanding as of that date and became the lender as defined in the Loan Agreement. The interest on the term loan is 9% with

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principal and interest payments made semi-annually through September 30, 2019. The following are the aggregate amounts of maturities of long-term debt for the next five years and in total thereafter:


Year	Principal Amount

2005	$	10,868,650
2006		11,845,742
2007		12,910,674
2008		14,071,344
2009		10,630,053
Thereafter		19,324,299

Total	$	79,650,762

Pursuant to the loan agreement, we are subject to certain restrictive covenants, which include maintaining certain financial ratios, including a ratio of debt to equity that is at all times less than 80 percent. At December 31, 2004 and 2003, the ratios of debt to equity were 69 percent and 72 percent.


5.	Related Party Transactions

Long-Term Debt

Our long-term debt is held by El Paso CGP Company. As of December 31, 2004, and 2003, principal in the amount of $79,650,762 and $89,622,916, was payable under this agreement. See Note 4.

Administrative Services Agreement

We entered into an administrative services agreement with El Paso Technology Pakistan (“EPTP”), an indirect wholly-owned subsidiary of El Paso CGP Company. The agreement provides for EPTP to have general responsibility for managing our affairs. As consideration for services rendered, EPTP is reimbursed on a monthly basis for its actual costs incurred plus an annual fee of $37,500, indexed for inflation. The agreement was executed in January 1997 and terminated on September 11, 2004. On January 3, 2005, this agreement was renewed for one year and will terminate on September 11, 2005. Costs were accrued from September 12, 2004 through January 3, 2005, and were paid when the contract was renewed on January 3, 2005. We may renew this agreement for three successive five year terms. For the years ended December 31, 2004 and 2003, we incurred $414,056 and $413,821, of administrative services costs. As of December 31, 2004 and 2003, $133,906 and $39,221, is payable under this agreement.

Local Advisory Services Agreement

We entered into a local advisory services agreement with Habibullah Mines (Private) Limited (“HML”), an associated company of HEL. The agreement provides for certain local advisory services, as requested from time to time by us. As consideration for services rendered, HML is reimbursed on a monthly basis for its actual costs incurred plus an annual fee of $337,500, indexed for inflation. The agreement was executed in January 1997 and terminated on September 11, 2004. On January 3, 2005, this agreement was renewed for one year and will terminate on September 11, 2005. Costs were accrued from September 12, 2004 through January 3, 2005, and were paid when the contract was renewed on January 3, 2005. We may renew this agreement for three successive five year terms. For the years ended December 31, 2004 and 2003, we incurred $444,378 and $538,972, of local advisory services costs. There was no amount outstanding under this agreement at December 31, 2004 and 2003.


6.	Commitments and Contingencies

EP Contract and Construction Contract

We entered into an Engineering and Procurement Contract (“EP Contract”), dated February 29, 1996, with Maire Engineering S.p.A. (“Maire”) (formerly Fiat Avio S.p.A.) to perform the design, engineering,

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and procurement services necessary to complete the Facility. The EP Contract provided for bonuses and liquidated damages, as appropriate, depending on completion dates and certain output performance levels.

We also entered into a Construction Contract with Maire Pakistan Branch to perform the construction necessary to complete the Facility. The Construction Contract provided for liquidated damages depending on completion dates and certain output performance levels.

The project completion was substantially delayed by Maire and as a result, in September 1999, we delivered demand for payment of net liquidated damages of $52,110,000. Maire did not agree to our claim and both parties sought arbitration. In April 2003, the Arbitration Panel issued an award in the net amount of $8,762,520 (the “Award Amount”) in our favor, but instructed the Award Amount be setoff against the then outstanding principal plus accrued interest of the Deferred Amount as discussed below. We recorded the award amount as an adjustment to the cost basis of our property, plant, and equipment in 2002.

Pursuant to our EP Contract, Maire agreed with us to defer payment of 37% of the amounts we owed them under this contract, up to an aggregate amount of $30 million (the “Deferred Amount”). Such deferred contract payments and construction interest thereon were available to be converted to long-term notes (“Deferred Note”) under the EP Contract. While the form and number of notes had not been agreed between the parties, principal and interest payments have been made since February 2001 based on semiannual payments and a twelve-year term provided in the EP Contract. Interest on the notes is paid at LIBOR plus 2.55%.

In February 2004, the Arbitration Panel delivered its final decision specifically addressing the terms and conditions for which Maire becomes a lender, along with El Paso CGP Company under our Loan Agreement and establishes the form of notes and repayment schedules for both lenders under the Loan Agreement. Accordingly, El Paso CGP Company and Maire entered into the Tenth Amendment to the Loan Agreement subject to approval of the Pakistan Private Power Infrastructure Board and the State Bank of Pakistan. Upon approval by the Pakistan Private Power Infrastructure Board, the net amount outstanding to Maire ($13,228,072 at February 17, 2004) converted to a term loan as evidenced by a Series B Note, with interest accrued thereon from and including September 16, 2003, with semi-annual principal and interest payments and a final maturity date of March 15, 2009. The Tenth Amendment also requires us to maintain a cash balance equivalent of $6,000,000 in our cash accounts in Pakistan at all times. Payments to Maire pursuant to the Series B Note under the agreement began on March 15, 2004. As of December 31, 2004 and 2003, principal in the amount of $10,648,789 and $13,228,072, was payable under this agreement.

As previously discussed, the Arbitration Panel required us to setoff liquidated damages awarded to us with the Deferred Amount owed to Maire. We continue to seek the approval of the State Bank of Pakistan. If we do not receive approval, the State Bank of Pakistan will have to approve all future payments.

The February 2004 final decision of the Arbitration Panel also changed the actual project acceptance date from August 2000 to March 2000. This shortened the period during which we were required to accrue interest on the Deferred Amount. Accordingly, we recorded a reduction of approximately $895,000 of interest expense in 2003 and reduced our liability.

The Pakistan Income Tax Appellate Tribunal (“ITAT”) assessed additional withholding taxes on our payments under the EP and Construction Contract made to Maire. Maire has acknowledged that they are responsible for these taxes under a 1996 Indemnification Agreement; however we and Maire are disputing that such taxes are owed. Our payment of such withholding taxes were subject to a Standstill Agreement, dated July 10, 2002 and acknowledged by Maire on September 3, 2002, however, we withdrew from the Standstill Agreement in 2004. The withholding taxes have been classified as a non-current asset in the accompanying balance sheet.

Implementation Agreement

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transfer all funds to banks or other parties outside of Pakistan without foreign exchange restrictions with appropriate consents and/or approvals from the State Bank of Pakistan.

The IA imposes certain deadlines and other requirements, the violation of which will be considered an event of default, and may require us to sell and transfer the Facility to the GOP. If the Facility is transferred to the GOP in the event of such a default, we will be reimbursed for our outstanding debt by the GOP. Upon default, the IA will terminate and the GOP will have no further interest in or obligations under the IA. Some of the more significant possible events of default include: any material breach of the PPA or the Gas Supply Agreement (“GSA”) by us not remedied within 30 days after notice of the breach. We believe we are in compliance with all of the terms of the IA.

Power Purchase Agreement

We have entered into a 20-year PPA with the Pakistan Water and Power Development Authority (“WAPDA”), whereby WAPDA agrees to purchase up to 105% of the Facility’s dependable capacity of 123 net megawatts. The effective date of the PPA is September 11, 1999. The PPA has been extended for an additional 10 years as agreed upon by us and WAPDA and will expire on September 10, 2029.

We deliver electricity only as ordered by WAPDA. If, through a change in law or a political force majeure event (as defined in the PPA), we are required to repair or make changes to the Facility, we will be allowed to pass those charges through to WAPDA via a supplemental tariff.

The PPA imposes liquidated damages on us if certain contractual conditions are not met, which include reduction of the capacity payment for outages above a certain allowable limit in any operating year. During 2004 and 2003, we incurred liquidated damages of $19,485 and $123,061, respectively, related to excess outages. This amount has been recorded as a component of operations and maintenance expense in the accompanying statement of operations.

We will be considered to be in default and WAPDA may initiate termination of the PPA if, among other things, either of the following events occur: (a) cumulative operating losses (as determined under the IA) of at least 50% of the combined equity contributions and subordinated loans; or, (b) any material breach of the PPA or the GSA by us not remedied within 30 days after notice of the breach. We believe we are in compliance with all of the terms of the PPA.

The PPA imposes liquidated damages on WAPDA if certain contractual conditions are not met, including WAPDA’s failure to make payments for electricity to us within 30 days of notice. WAPDA shall pay to us the monthly demand charge, as stipulated in the GSA, paid by us to Sui Southern Gas Company Limited (“Sui”). Such payments shall continue until the date that the delay caused by WAPDA ceases.

We will receive a bonus of 0.08 rupees for each Kilowatt hour (“kWh”) of net electrical output above certain minimums during the months of January through June of each year. The amount of the bonus shall be indexed over the initial term of the PPA on the basis of changes in inflation and Pakistan rupee exchange rates. During 2004 and 2003, $109,984 and $94,894, respectively, was recorded as a component of electric energy revenue in the accompanying statement of operations.

Gas Supply Agreement and Backup Fuel Supply Agreement

We entered into a 20-year GSA with Sui, whereby Sui is our exclusive supplier of natural gas. The effective date of the GSA is September 11, 1999. The price of all natural gas delivered under the GSA is based on the price of natural gas as notified by the GOP from time to time. The GSA may be extended subject to the approval of GOP. A 20-year Backup Fuel Supply Agreement (“BFSA”), which became effective June 12, 1998, has been executed between us and Shell Pakistan Limited, a local Pakistani company, for the periodic delivery of high speed diesel (“HSD”) fuel oil for backup emergency purposes. The price of HSD has been deregulated by GOP and marketing companies determine the prices on a fortnightly basis.

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O&M Agreement

We entered into a seven-year operations and maintenance agreement (the “O&M Agreement”) with General Electric International, Inc. (“GE”) executed in June 1998, to operate and maintain the Facility.

The O&M Agreement provided for reimbursement of services provided by GE during the mobilization stage. Once the Facility became operational in September 1999, GE began receiving a fixed monthly operations and maintenance fee of $208,333 commencing the month after the combined cycle take over date. GE also receives a variable fee of $46.59 per hour for the number of hours during which any of the covered units were actually synchronized to the WAPDA grid and generating energy from the Facility. The fixed and variable payment components are subject to a periodic price escalation based on the Materials Index and the US Labor Index. The agreement may be renewed for an additional seven-year term based on mutual agreement between us and GE. For the years ended December 31, 2004 and 2003, $3,052,355 and $3,577,612, was reported as a component of operations and maintenance expense in the accompanying statement of operations.

Due to the events of terrorist attacks in the United States on September 11, 2001, GE declared a force majeure event and informed us they planned to stop operations by October 31, 2001. We did not agree to the force majeure and temporarily amended the O&M Agreement whereby GE was indemnified from most of its liabilities in return for continuing to operate the plant while a more permanent amendment was negotiated. An Amended and Restated O&M Agreement was successfully negotiated and executed with GE, effective as of July 1, 2002. The amended and restated agreement addressed GE’s main concerns of allowing for subcontracting and limiting GE’s liability to $1 million per year except for certain liabilities arising due to intentional torts, fraud, or bad faith and certain claims related to presence of hazardous materials resulting from the operator’s action or inaction.

LTS Agreement

We entered into a long-term service agreement (“LTS Agreement”), effective September 11, 1999, with GE to provide certain long-term parts and services for the Facility. The LTS Agreement also provides for a fixed monthly payment of $20,167 per month commencing the month after the commercial operations date of September 11, 1999. The LTS Agreement also provides for a variable fee based on a rate of $87.38 per hour for the number of fired hours run by each unit in the immediately preceding month. The fixed and variable payment components are subject to a periodic price escalation based on the Materials Index and the US Labor Index. The agreement will expire the later of 14 years following the effective date or after the completion of the planned maintenance. For the years ended December 31, 2004 and 2003, $2,395,623 and $2,423,363, was reported as a component of operations and maintenance expense in the accompanying statement of operations.

Tax Deposits

We have been assessed income tax on interest income against which we have filed an appeal with the ITAT and deposited the amount of tax assessed. This amount will be refunded to us if the ITAT decides in our favor. We believe we will receive a favorable decision in this matter. The balance of these deposits at December 31, 2004 and 2003 was $2,120,716 and $1,444,539.


7.	Concentration of Credit Risk

Financial instruments, which potentially subject us to credit risk, consist of cash and accounts receivable. Our cash accounts are held by major financial institutions. Our receivables are concentrated with WAPDA, as they are the sole purchaser of our electrical output under the terms of PPA.


8.	Fair Value of Financial Instruments

As of December 31, 2004 and 2003, the carrying value of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, approximates fair value because of their short-term nature or the market-based nature of the instrument’s interest rate. While there is no liquid market for our long-term debt, we believe that the carrying value of our long-term debt approximates its fair value at December 31, 2004 and 2003.

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HABIBULLAH COASTAL POWER (PRIVATE) COMPANY

BALANCE SHEET

(Unaudited)


			December 31,
			2002

ASSETS
Current Assets:
	Cash and cash equivalents		$	23,674,922
	Accounts receivable			12,301,912
	Fuel inventory			2,488,189
	Supplies inventory			2,741,647
	Prepaid and other current assets			1,102,385

		Total current assets		42,309,055

Property, plant, and equipment:
	Land			2,700,000
	Plant facility			139,169,796
	Equipment			541,003

		Subtotal		142,410,799
	Less: accumulated depreciation			(15,258,704	)

		Total property, plant, and equipment		127,152,095

Other non-current assets:
	Tax deposits			885,275
	Long term receivable			3,756,056

		Total other non-current assets		4,641,331

	Total Assets		$	174,102,481


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Interest payable		$	2,693,488
	Accounts payable, trade			5,291,199
	Accounts payable, affiliates			102,659
	Current portion of deferred contract — Fiat			17,776,566
	Current portion of long term debt			9,149,604

		Total current liabilities		35,013,516

Long-term debt and other obligations:
	Note payable			89,622,916

		Total long-term liabilities		89,622,916

Commitments and contingencies
Stockholders’ equity:
	Authorized share capital, 10 rupee par value: 174,000,000
	Common stock, 10 rupees par value; 135,731,653 Class A shares issued			31,600,032
	Common stock, 10 rupees par value; 36,080,641 Class B shares issued			8,400,032
	Retained earnings			9,465,985

		Total stockholders’ equity		49,466,049

		Total Liabilities and Stockholders’ Equity	$	174,102,481

See the accompanying notes to these financial statements.

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HABIBULLAH COASTAL POWER (PRIVATE) COMPANY

STATEMENT OF OPERATIONS

(Unaudited)


			For the Year
			Ended
			December 31,
			2002

Revenue
	Electricity capacity		$	28,774,138
	Electricity energy			24,250,410

Total revenue				53,024,548

Operating expenses
	Fuel			22,209,672
	Administrative & general			6,412,434
	Operating			9,893,625
	Depreciation			5,199,203

		Total operating expenses		43,714,934

Operating income				9,309,614

Other (income) expense
	Interest income			(1,241,831	)
	Interest expense			10,562,916
	Foreign exchange gain			(628,322	)

Total other expense				8,692,763

Net income			$	616,851

See the accompanying notes to these financial statements.

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HABIBULLAH COASTAL POWER (PRIVATE) COMPANY

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock

	Class A				Class B				Retained
	Shares		Amount		Shares		Amount		Earnings		Total

Balance, January 1, 2002		135,731,653	$	31,600,032		36,080,641	$	8,400,032	$	8,849,134	$	48,849,198
Net Income		—		—		—		—		616,851		616,851

Balance, December 31, 2002		135,731,653	$	31,600,032		36,080,641	$	8,400,032	$	9,465,985	$	49,466,049

See the accompanying notes to these financial statements.

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HABIBULLAH COASTAL POWER (PRIVATE) COMPANY

STATEMENT OF CASH FLOWS

(Unaudited)


			For the
			Year Ended
			December 31,
			2002

Cash flows from operating activities
	Net income		$	616,851
	Adjustments to reconcile net income to net cash provided by operating activities
		Depreciation and amortization		5,199,203
		Accounts receivable		1,843,555
		Fuel inventory		379,807
		Supplies inventory		66,779
		Prepaid and other current assets		198,069
		Interest payable		(510,566	)
		Accounts payable — affiliates and other		1,286,485

		Net cash provided by operating activities		9,080,183

Cash flows from investing activities:
	Plant facility			(2,184,497	)
	Proceeds from sale of equipment			46,673

		Net cash used in investing activities		(2,137,824	)

Cash flows from financing activities:
	Deferred contract payment			(2,653,908	)
	Payment of note payable			(8,394,903	)
	Dividends paid			(8,457,923	)

		Net cash used in financing activities		(19,506,734	)

Net decrease in cash and cash equivalents				(12,564,375	)
Cash and cash equivalents at beginning of period				36,239,297

Cash and cash equivalents at end of period			$	23,674,922

See the accompanying notes to these financial statements.

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HABIBULLAH COASTAL POWER COMPANY (PRIVATE) LIMITED

NOTES TO FINANCIAL STATEMENTS

(Unaudited)


1.	Organization and Background

We were organized on December 17, 1995, as a Pakistani private unlimited company under the Pakistani Companies Ordinance, 1984, and converted to a private limited company on September 15, 2003. Our primary purpose is the ownership and operation of a 126 megawatt, natural gas-fired, combined cycle power plant near Quetta, Pakistan (the “Facility”). Construction was completed and we began full-time commercial operations in September 1999.

We are owned 99% by Quetta Power Holding Company I Ltd. (“Quetta I”) and 1% by Quetta Power Holding Company II Ltd. (“Quetta II”). Quetta I is owned 50% by Coastal Power International II Ltd. (“CPI 2”), an indirect wholly owned subsidiary of El Paso Corporation (“El Paso”), 25% by Habibullah Energy Limited (“HEL”), a Pakistani company, and 25% by H.E.I. Ltd., an affiliate of HEL. Quetta II is owned 98% by Quetta I, 1% by CPI 2 and 1% by HEL. Quetta I and Quetta II made periodic capital contributions to us in proportion to their ownership interest. In addition, Quetta I and Quetta II receive 99% and 1%, respectively, of our net profits and distributions.


2.	Summary of Significant Accounting Policies

Basis of Presentation

Our financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

Use of Estimates

Functional Currency

Our functional currency is the U.S. dollar since the majority of our activities and significant contractual agreements are denominated in U.S. dollars and based on the Government of Pakistan’s (“GOP”) commitment to guarantee our conversion of Pakistan rupees into U.S. dollars under the terms of the Implementation Agreement (“IA”) (See Note 6). All monetary assets and liabilities denominated in the Pakistan rupee have been remeasured into the U.S. dollar using the current exchange rates as of December 31, 2002. All nonmonetary balance sheet items, income and related expenses denominated in the Pakistan rupee are remeasured into the U.S. dollar using historic exchange rates. Foreign exchange gains and losses resulting from remeasurement are recorded during the period and are recognized in the accompanying statement of operations.

Revenue Recognition

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents.

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Accounts Receivable

Accounts receivable include all trade accounts receivable owed to us for capacity revenue and sales of energy. Periodically, we review the collectibility of our accounts receivable using the specific identification method and establish an allowance for amounts which are not expected to be collected. As of December 31, 2002, there was no allowance for doubtful accounts recorded.

Inventory

Inventory, which consists of fuel, spare parts, materials, and supplies, is recorded at the lower of cost or market. Cost is determined on a first-in, first-out (“FIFO”) basis for fuel and weighted average for spare parts, materials, and supplies.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Betterments of major units of property are capitalized, while repairs, maintenance and replacements and additions of minor units of property are expensed. Depreciation is calculated using the straight-line method based on an estimated useful life and an estimated salvage value. The estimated useful lives of our assets are 30 years for the plant, 10 years for office equipment, furniture and fixtures, and telecommunications, and 5 years for vehicles.

Income Taxes

We are not subject to income tax in Pakistan due to the exemption granted by the IA (See Note 6). Accordingly, no current or deferred income taxes have been provided in the accompanying financial statements.

Recent Accounting Pronouncements

Accounting for Asset Retirement Obligations

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement requires companies to record a liability relating to the retirement and removal of assets used in their businesses. The liability is discounted to its present value, and the related asset value is increased by the amount of the resulting liability. Over the life of the asset, the liability will be accreted to its future value and eventually extinguished when the asset is taken out of service. The provisions of this statement are effective for fiscal years beginning after June 15, 2002.


3.	Stockholders’ Agreements


4.	Long-Term Debt

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Corporation, through a Note Purchase Agreement. The banks called the loan under the Note Purchase Agreement on December 15, 2002, and El Paso CGP Company assumed the entire loan outstanding as of that date and became the lender as defined in the Loan Agreement. The interest on the term loan is 9% with principal and interest payments made semi-annually through September 30, 2019. The following are the aggregate amounts of maturities of long-term debt for the next five years and in total thereafter:


Year	Principal Amount

2003	$	9,149,604
2004		9,972,154
2005		10,868,650
2006		11,842,742
2007		12,910,674
Thereafter		44,028,696

Total	$	98,772,520

Pursuant to the loan agreement, we are subject to certain restrictive covenants, which include maintaining certain financial ratios.


5.	Related Party Transactions

Long-Term Debt

Our long-term debt is held by El Paso CGP Company. As of December 31, 2002, principal in the amount of $98,772,520 is payable under this agreement. See Note 4.

Administrative Services Agreement

Local Advisory Services Agreement

We entered into a local advisory services agreement with Habibullah Mines (Private) Limited (“HML”), an associated company of HEL. The agreement provides for certain local advisory services, as requested from time to time by us. As consideration for services rendered, HML is reimbursed on a monthly basis for its actual costs incurred plus an annual fee of $337,500, indexed for inflation. The agreement was executed in January 1997 and will terminate on September 11, 2004. We may renew this agreement for three successive five year terms. For the year ended December 31, 2002, $382,740 of local advisory services costs were incurred. There was no amount outstanding under this agreement at December 31, 2002.


6.	Commitments and Contingencies

EP Contract and Construction Contract

We entered into an Engineering and Procurement Contract (“EP Contract”), dated February 29, 1996, with Fiat Avio S.p.A. (“Fiat Avio”) to perform the design, engineering, and procurement services necessary to complete the Facility. The EP Contract provided for bonuses and liquidated damages, as appropriate, depending on completion dates and certain output performance levels.

194

We also entered into a Construction Contract with Fiat Avio Pakistan Branch to perform the construction necessary to complete the Facility. The Construction Contract provided for liquidated damages depending on completion dates and certain output performance levels.

The project completion was substantially delayed by Fiat Avio and as a result, in September 1999, we delivered demand for payment of net liquidated damages of $52,110,000. Fiat Avio did not agree to our claim and both parties sought arbitration. In April 2003, the Arbitration Panel issued an award in the net amount of $8,762,520 (the “Award Amount”) in our favor, but instructed the Award Amount be setoff against the then outstanding principal plus accrued interest of the Deferred Amount as discussed below. We recorded the award amount as an adjustment to the cost basis of our property, plant, and equipment in 2002.

Pursuant to our EP Contract, Fiat Avio agreed with us to defer payment of 37% of the amounts we owed them under this contract, up to an aggregate amount of $30 million (the “Deferred Amount”). Such deferred contract payments and construction interest thereon were available to be converted to long-term notes (“Deferred Note”) under the EP Contract. While the form and number of notes had not been agreed between the parties, principal and interest payments have been made since February 2001 based on semiannual payments and a twelve-year term provided in the EP Contract. Interest on the notes is paid at LIBOR plus 2.55%.

The Pakistan Income Tax Appellate Tribunal (“ITAT”) assessed additional withholding taxes on our payments under the EP and Construction Contract made to Fiat Avio. Fiat Avio has acknowledged that they are responsible for these taxes under a 1996 Indemnification Agreement; however we and Fiat Avio are disputing that such taxes are owed. Our payment of such withholding taxes are currently subject to a Standstill Agreement, dated July 10, 2002 and acknowledged by Fiat Avio on September 3, 2002 and have been classified as a non-current asset in the accompanying balance sheet.

Implementation Agreement

We have entered into an IA under which the GOP agrees to use its best efforts to support our exclusive right to design, finance, insure, construct, complete, own, operate and maintain the Facility through the initial term of our PPA. The IA may be extended by mutual agreement. The IA grants us the ability to freely transfer all funds to banks or other parties outside of Pakistan without foreign exchange restrictions with appropriate consents and/or approvals from the State Bank of Pakistan.

Power Purchase Agreement

The PPA imposes liquidated damages on us if certain contractual conditions are not met, which include reduction of the capacity payment for outages above a certain allowable limit in any operating year. During 2002, we incurred liquidated damages of $153,688 related to excess outages. This amount has been recorded as a component of operations and maintenance expense in the accompanying statement of operations.

195

We will receive a bonus of 0.08 rupees for each Kilowatt hour (“kWh”) of net electrical output above certain minimums during the months of January through June of each year. The amount of the bonus payable shall be indexed over the initial term of the PPA on the basis of changes in inflation and Pakistan rupee exchange rates. During 2002, we did not record any bonus revenue.

Gas Supply Agreement and Backup Fuel Supply Agreement

O&M Agreement

The O&M Agreement provided for reimbursement of services provided by GE during the mobilization stage. Once the Facility became operational in September 1999, GE began receiving a fixed monthly operations and maintenance fee of $208,333 commencing the month after the combined cycle take over date. GE also receives a variable fee of $46.59 multiplied by the number of hours during which any of the covered units were actually synchronized to the WAPDA grid and generating energy from the Facility. The fixed and variable payment components are subject to a periodic price escalation based on the Materials Index and the US Labor Index. The agreement may be renewed for an additional seven-year term based on mutual agreement between us and GE. For the year ended December 31, 2002, $2,891,157 was reported as a component of operations and maintenance expense in the accompanying statement of operations.

LTS Agreement

196

number of fired hours run by each unit in the immediately preceding month. The fixed and variable payment components are subject to a periodic price escalation based on the Materials Index and the US Labor Index. The agreement will expire the later of 14 years following the effective date or after the completion of the planned maintenance. For the year ended December 31, 2002, $2,416,178 was reported as a component of operations and maintenance expense in the accompanying statement of operations.

Tax Deposits

We have been assessed income tax on interest income against which we have filed an appeal with the ITAT and deposited the amount of tax assessed. This amount will be refunded to us if the ITAT decides in our favor. Our tax consultants are confident to have a favorable decision. The balance of these deposits at December 31, 2002 was $885,275.


7.	Concentration of Credit Risk


8.	Fair Value of Financial Instruments

As of December 31, 2002, the carrying value of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, approximates fair value because of their short-term nature or the market-based nature of the instrument’s interest rate. While there is no liquid market for our long-term debt, we believe that the carrying value of our long-term debt approximates its fair value at December 31, 2002.

197

Report of Independent Auditors

To the Board of Directors and Stockholders of

Empresa de Generación Eléctrica Fortuna, S.A.

We have audited the accompanying balance sheets of Empresa de Generación Eléctrica Fortuna, S.A. as of December 31, 2004 and 2003 and the related statements of income, comprehensive income and accumulated other comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’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 of America. 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 the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Empresa de Generación Eléctrica Fortuna, S.A. as of December 31, 2004 and 2003, and the results of its operations, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As fully disclosed in Notes 1 and 8, Empresa de Generación Eléctrica Fortuna, S.A. emerged as the result of the restructuring process of the Instituto de Recursos Hidráulicos y Electrificación (IRHE) and is part of a regulated group of companies engaged in the generation, transmission and distribution of electric energy in the Republic of Panama. As fully disclosed in the financial statements, the Company reports significant balances and transactions with related parties, the nature of which may not be the same if performed among non-related parties.

/s/ PricewaterhouseCoopers LLP

Panama, Republic of Panama

February 3, 2005

198

Empresa de Generación Eléctrica Fortuna, S.A.

Balance Sheets

As of December 31,


			2004			2003

ASSETS
Current assets
	Cash and cash equivalents		$	10,205,923		$	1,222,755
	Non restricted investments			7,544,700			847,371
	Accounts receivable — affiliates			14,830,126			12,501,293
	Accounts receivable — other			924,666			548,303
	Materials and supplies			5,270,727			5,070,495
	Deferred tax asset			354,214			287,620
	Other prepaid expenses and deposits			4,231,684			1,892,438

		Total current assets		43,362,040			22,370,275

Note receivable — affiliate				12,000,000			12,000,000
Property, plant and equipment				687,899,413			683,401,151
Less — accumulated depreciation and amortization				(244,370,129	)		(229,696,178	)

	Property plant and equipment, net			443,529,284			453,704,973
Other assets
	Restricted investments			13,965,312			13,828,718
	Restricted cash			15,564			35,312
	Deferred financing costs, net			3,571,354			3,999,836
	Other			242,208			194,177
	Assets from risk management activities			602,981			1,447,093

		Total other assets		18,397,419			19,505,136

		Total assets	$	517,288,743		$	507,580,384


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
	Accounts payable — affiliates		$	9,418,081		$	6,035,719
	Accounts payable — other			1,093,374			1,419,210
	Accrued liabilities			563,358			445,922
	Current income taxes payable			7,137,769			30,753
	Accrued interest			673,003			717,187
	Current maturities of long-term debt			11,560,578			10,473,309

		Total current liabilities		30,446,163			19,122,100

Long-term debt				145,683,596			157,228,692
Deferred income tax liability				2,023,885			2,113,692
Liabilities from risk management activities				2,354,039			2,675,717
Employee future benefit liability				808,444			617,716
Commitments and contingencies
Stockholders’ equity
	Common stock, no par value; authorized, issued and outstanding 100,000,000 shares			309,457,729			309,457,729
	Retained earnings			28,133,546			18,270,580
	Accounts receivable — employees			(1,817,806	)		(1,910,722	)
	Accumulated other comprehensive income			199,147			4,880

		Total stockholders’ equity		335,972,616			325,822,467

		Total liabilities and stockholders’ equity	$	517,288,743		$	507,580,384

See accompanying notes.

199

Empresa de Generación Eléctrica Fortuna, S.A.

Statements of Income

For the years ended December 31,


				2004		2003

Revenue
	Energy revenue — contracted			$	38,208,575	$	34,979,628
	Energy revenue — spot				47,588,726		34,707,293
	Capacity revenue				13,638,720		10,680,681
	Auxiliary services and other				1,534,902		3,077,923

			Total revenue		100,970,923		83,445,525

Operating Expenses
	Transmission fees				15,793,052		16,142,106
	Depreciation and amortization				15,264,798		14,907,432
	Energy purchases and associated costs				3,363,800		8,425,239
	General and administrative				6,411,614		6,262,710
	Operations and maintenance				2,526,856		2,735,131
	Operating fees				2,186,283		1,995,334

		Total operating expenses			45,546,403		50,467,952

		Operating income			55,424,520		32,977,573

Other Income (Expense)
	Interest income				2,009,196		1,794,596

EL PASO CGP CO 10-K/A