<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 2000
REGISTRATION NO. 333-44118
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ORION POWER HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4911 52-2087649
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
7 EAST REDWOOD STREET
10TH FLOOR
BALTIMORE, MARYLAND 21202
(410) 230-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
W. THADDEUS MILLER
EXECUTIVE VICE PRESIDENT AND CHIEF LEGAL OFFICER
ORION POWER HOLDINGS, INC.
7 EAST REDWOOD STREET
10TH FLOOR
BALTIMORE, MARYLAND 21202
(410) 230-3500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MARTIN H. NEIDELL, ESQ. KIRK A. DAVENPORT, ESQ.
STROOCK & STROOCK & LAVAN LLP LATHAM & WATKINS
180 MAIDEN LANE 885 THIRD AVENUE
NEW YORK, NEW YORK 10038 NEW YORK, NEW YORK 10022
(212) 806-5400 (212) 906-1200
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED OCTOBER 27, 2000.
25,000,000 Shares
[ORION POWER HOLDERS, INC. LOGO]
Common Stock
-------------------------
This is an initial public offering of shares of common stock of Orion Power
Holdings, Inc.
Orion Power Holdings is offering 21,779,032 of the shares to be sold in the
offering. The selling stockholders identified in this prospectus are offering an
additional 3,220,968 shares. Orion Power Holdings will not receive any of the
proceeds from the sale of shares being sold by the selling stockholders. At the
request of Orion Power Holdings, the underwriters have reserved at the initial
public offering price up to 1,250,000 shares of common stock for sale to its
employees, affiliates and other business associates.
Prior to this offering, there has been no public market for the common
stock. Orion Power Holdings estimates that the initial public offering price per
share will be between $17.00 and $20.00. The common stock of Orion Power
Holdings has been approved for listing on the New York Stock Exchange under the
trading symbol "ORN," subject to official notice of issuance.
SEE "RISK FACTORS" ON PAGE 8 TO READ ABOUT FACTORS YOU SHOULD CONSIDER
BEFORE BUYING SHARES OF THE COMMON STOCK.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Orion Power Holdings.......... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
To the extent that the underwriters sell more than 25,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
3,750,000 shares from Orion Power Holdings at the initial public offering price
less the underwriting discount.
-------------------------
The underwriters expect to deliver the shares in New York, New York on
, 2000.
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
-------------------------
Prospectus dated , 2000.
<PAGE> 3
INSIDE FRONT COVER PAGE -- DESCRIPTION OF ARTWORK
Orion Power Holdings logo appears at the top center of the page.
Underneath the logo, a sentence reads "We are a fast growing non-nuclear
electric power generating company operating in the United States."
At the bottom center of the page is a map of the United States with the location
of our facilities and offices highlighted on the map and a brief description of
the primary fuel type.
At the bottom of the page is a bar chart showing "Announced Generation Capacity"
detailing our acquisitions and megawatts acquired in March 1998, November 1998,
July 1999, August 1999 and April 2000.
INSIDE COVER GATEFOLD -- DESCRIPTION OF ARTWORK
This page will have text with pictures or computer generated images that read
"We seek to acquire and develop assets that are: 'In Critical Locations' (with
pictures underneath of Astoria, Cheswick and Gowanus facilities), 'Low Cost
Producers of Energy' (with pictures underneath of an Erie Blvd. Hydropower
facility, Avon Lake Generating Station and a Sherman Island Hydroelectric
facility) and 'High Quality' (with a picture underneath of Carr Street
Generating Station, a computer generated image of Liberty Generating Station
(footnoted to read "Pending acquisition, scheduled for operation in 2002") and a
computer generated image of Ceredo Generating Station (footnoted to read
"Pending acquisition, scheduled for operation in 2001"))." Each picture will be
labeled with the name and location of the station.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes thereto appearing
elsewhere in this prospectus.
OUR COMPANY
We are a fast-growing electric power generating company operating in the
United States. We own and operate power plants and sell electricity and a broad
range of electricity-related products and services to utilities, municipalities,
cooperatives and retail aggregators in the newly deregulated wholesale market.
We intend to grow rapidly by acquiring and developing additional non-nuclear
power generating facilities in the United States and Canada and building on the
significant base of properties that we already own.
Our current facilities have a total generating capacity of 5,396 megawatts
and are diversified geographically. Set forth in the tables below are the assets
owned by our regional operating companies:
ORION POWER NEW YORK, L.P. -- FACILITIES SUMMARY
<TABLE>
<CAPTION>
CAPACITY PRIMARY
ASSET (MW) FUEL TYPE LOCATION SERVED
----- -------- --------- ------------------------
<S> <C> <C> <C>
Hydroelectric assets................... 650 Water Central and Northern New
York State
Assets Located in New York City:
Astoria Generating Station........... 1,265 Natural Gas/Oil New York City -- Queens
Gowanus Generating Station........... 494 Oil New York City -- Brooklyn
Narrows Generating Station........... 271 Natural Gas New York City -- Brooklyn
Carr Street Generating Station......... 102 Natural Gas East Syracuse, NY
-----
Total........................ 2,782
=====
</TABLE>
ORION POWER MIDWEST, L.P. -- FACILITIES SUMMARY
<TABLE>
<CAPTION>
CAPACITY PRIMARY
ASSET (MW) FUEL TYPE LOCATION SERVED
----- -------- --------- ------------------------
<S> <C> <C> <C>
Avon Lake Generating Station........... 739 Coal Cleveland, OH
Brunot Island Generating Station....... 234 Oil Pittsburgh, PA
Cheswick Generating Station............ 570 Coal Pittsburgh, PA
Elrama Generating Station.............. 487 Coal Pittsburgh, PA
New Castle Generating Station.......... 338 Coal West Pittsburg, PA
Niles Generating Station............... 246 Coal Youngstown, OH
-----
Total........................ 2,614
=====
</TABLE>
1
<PAGE> 5
Our existing facilities are also diversified by fuel type as set forth in
the table below:
FUEL TYPE SUMMARY
<TABLE>
<CAPTION>
PERCENTAGE OF
CAPACITY OUR TOTAL
PRIMARY FUEL (MW) CAPACITY (%)
------------ -------- -------------
<S> <C> <C>
Coal................................................ 2,380 44%
Natural Gas......................................... 1,638 30
Fuel Oil............................................ 728 14
Water............................................... 650 12
----- ---
Total..................................... 5,396 100%
===== ===
</TABLE>
We manage electric and fuel commodity price risk by attempting to sell a
majority of our output forward through long term and short term contracts and
purchase in advance the associated fuel to match the term of those sales. We
estimate that we have currently effectively sold approximately 60% of our
forecasted electric energy output for 2001, as measured by megawatt hours. We
are not involved in speculative trading of financial products.
RECENT DEVELOPMENTS
We are in the process of preparing our financial statements for the three
months ended September 30, 2000, and we expect to report revenues for the
quarter of approximately $300 million and net income of approximately $3
million. These results reflect the first full period of operation under our
ownership for all of our existing assets. We expect to report our final results
of operations for the quarter during the last two weeks of November 2000.
To supplement our own generating capacity and to reduce the risk that we
would not meet our forecasted obligation under the provider of last resort
contract with Duquesne Light Company, we purchased 698,400 net megawatt hours
under term contracts for the period May through October 2000. Our cost for the
purchases was $57 million and was paid upon the delivery of the energy. We have
resold into the market the excess energy that was not required to meet our
provider of last resort responsibility and realized the prevailing market price
at that time. We believe that this resulted in a one-time pre-tax loss to us of
approximately $30 million for the three months ended September 30, 2000, due to
the uncommonly cool summer weather and resultant lower than forecasted market
prices in Duquesne Light Company's service area.
In early October 2000, the second auction of capacity in New York City was
held by the New York independent system operator, known as the NY-ISO, relating
to the winter 2000-2001 capacity season, which runs from November 1, 2000 until
April 30, 2001. We bid 2,305 megawatts of capacity for our assets located in New
York City into the auction and were successful in selling 2,002 megawatts of
that capacity at an approximate average price of $105 per kilowatt year, for a
total of approximately $105.1 million, which we will recognize as revenue over
that period.
In September 2000, we executed a stock purchase agreement with Columbia
Energy Group to purchase all of the outstanding stock of Columbia Electric
Corporation, a power generation company with natural gas fired projects in
various stages of construction and development. We have agreed to pay
approximately $200 million in cash, subject to adjustment. In connection with
this acquisition, we agreed to assume a $334 million credit facility, of which
approximately $101 million was outstanding as of September 30, 2000, and assume
construction contract guarantee and equity investment obligations from Columbia
Energy Group. The closing of the sale is conditioned on the satisfaction of
customary closing conditions, including receipt of material third-party consents
and the expiration or early termination of the waiting period under
2
<PAGE> 6
the Hart-Scott-Rodino Antitrust Improvements Act of 1976. We hope, but are not
obligated, to complete this transaction before December 15, 2000, subject to
satisfaction of these conditions. However, we cannot assure you that this
acquisition will be consummated on the terms or timetable currently contemplated
or at all, and this offering is not conditioned upon the prior closing of this
acquisition.
Columbia Electric Corporation currently owns partial interests in several
generating projects in commercial operation, which will be excluded from the
sale. The facilities of Columbia Electric that we are acquiring an interest in,
all of which are under construction or in various stages of development, include
the following:
<TABLE>
<CAPTION>
PLANNED
CAPACITY PRIMARY
PROJECT (MW) FUEL TYPE LOCATION SERVED STATUS
------- -------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Ceredo Generating Station........ 500 Natural Gas West Virginia Construction
Liberty Generating Station....... 568 Natural Gas Philadelphia, PA Construction
Kelson Ridge Generating
Station........................ 1,650 Natural Gas Maryland/ Development
Washington, D.C.
Henderson Generating Station..... 500 Natural Gas Kentucky Development
-----
Total....................... 3,218
=====
</TABLE>
OUR INDUSTRY
Total electric generating capacity in the United States is approximately
783,000 megawatts, installed in approximately 3,000 individual facilities with
an estimated $223 billion in retail sales. The electric utility industry is
currently undergoing substantial change as a result of regulatory initiatives at
the federal and state level designed to produce customer choice and encourage
competition. One result of these initiatives has been the divestiture of
electric generating assets by regulated utilities. As of July 2000, 26 states,
including New York, Ohio and Pennsylvania, have enacted legislation or issued
comprehensive regulatory orders to restructure their electric utility industries
in order to promote competition in the wholesale and/or retail sale of electric
power. Similar restructuring is being considered or studied in virtually every
other state.
Since 1997, approximately 159,000 megawatts of power generating capacity in
the United States have been sold or transferred or are pending sale or transfer
by regulated electric utilities. According to published sources, up to 70,000
additional megawatts of power generating capacity in the United States will be
available for sale or transfer to wholesale power producers by the end of 2002.
The industry has also witnessed growing consumer demand and increasingly
frequent shortages of electricity over the past three years. The summers of
1998, 1999 and 2000 have all been characterized by shortages, brownouts and
blackouts in portions of major cities and very high peak prices for electricity
in the newly created wholesale electricity market. We believe that substantial
amounts of new electric generating capacity need to be built to relieve the
shortage of electricity and replace old and obsolete facilities.
As a result of these anticipated divestitures and the increasing demand for
electricity, we believe that the power generation industry offers significant
opportunities for investment.
3
<PAGE> 7
OUR STRATEGY
Our strategy is to acquire and develop a portfolio of premier non-nuclear
generating facilities in the United States and Canada that provide electricity
and related products for the regions in which they are located, while seeking to
maximize value for our stockholders. Based on the opportunities for investment
in our industry, we believe we will be able to rapidly grow our business, while
maintaining strict financial control. We attempt to have a significant market
share in each region in which we choose to compete, and believe we will become a
prominent power generator in each of those regions. Our strategy includes the
following key elements:
- Attract and retain talented entrepreneurial employees;
- Acquire additional high quality generating assets;
- Improve the operating performance and lower the operating costs of our
assets;
- Grow through expansion at our facilities and development of new
locations;
- Build strong relationships with local wholesale customers; and
- Maintain a portfolio of generating assets which is diversified by
geographic region, technology, fuel type and amount of annual energy
production.
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider all of the information set forth in this prospectus, and, in
particular, should evaluate the factors set forth in "Risk Factors." These risks
include the following, among others:
- We are subject to fluctuations in the prices for electric products and
services, which may impair our cash flow and profitability;
- We are subject to evolving regulatory structures and stringent government
regulation, including environmental compliance, which may affect our
performance;
- The wholesale power industry is rapidly changing and intensely
competitive, which may adversely affect our ability to operate
profitably;
- We may be unable to execute our strategy of acquiring or developing power
generating facilities, which would adversely affect our ability to grow
profitably;
- We will need significant additional financing to pursue our strategy;
- Because we have a limited period of operations, you have limited
information upon which you can evaluate our business; and
- Our securities have no prior trading market, and we cannot assure you
that any public market will develop or be sustained.
OUR HISTORY
We were incorporated in Delaware in March 1998 by GS Capital Partners II,
L.P. and other private investment partnerships affiliated with Goldman, Sachs &
Co. and by Constellation Power Source, Inc., an affiliate of Constellation
Enterprises, Inc. Our current stockholders are private investment partnerships
affiliated with Goldman, Sachs & Co., Constellation Enterprises and certain
affiliates, affiliates of Mitsubishi Corporation and The Tokyo Electric Power
Company and certain of our executive officers and directors. Our executive
offices are located at 7 East Redwood Street, 10th Floor, Baltimore, Maryland
21202, and our telephone number is (410) 230-3500.
4
<PAGE> 8
THE OFFERING
COMMON STOCK OFFERED:
By Orion Power Holdings....... 21,779,032 shares
By the selling stockholders... 3,220,968 shares
Total............... 25,000,000 shares
Common stock to be outstanding
immediately after the
offering.................... 90,595,926 shares
Use of proceeds............... We intend to use the net proceeds of this
offering:
- to acquire Columbia Electric Corporation,
- for other acquisitions and/or development
projects and
- for general corporate purposes.
Proposed NYSE symbol.......... "ORN"
This information and other information in this prospectus, unless otherwise
specifically stated, are based on the number of shares of common stock
outstanding on June 30, 2000. The number of shares:
- excludes any shares issuable upon the exercise of the underwriters'
over-allotment option;
- excludes 10,132,647 shares issuable upon the exercise of outstanding
options and warrants (of which 7,560,204 are exercisable) at a weighted
average exercise price of $11.33 per share;
- excludes shares available for issuance upon the exercise of options which
may be granted in the future under our 1998 stock incentive plan, as
amended; and
- has been adjusted to give effect to a 100-for-one split of our common
stock which was effected August 10, 2000.
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated historical financial data set forth below as of
December 31, 1998 and 1999, and for the period from March 10, 1998 (inception)
to December 31, 1998, and for the year ended December 31, 1999, have been
derived from our audited consolidated financial statements. The financial data
set forth below as of June 30, 1999 and 2000, and for the six-month periods then
ended, have been derived from our unaudited financial statements. The as
adjusted balance sheet data set forth below as of June 30, 2000 reflects the
receipt and application of the estimated net proceeds from the sale of common
stock in this offering, at an assumed initial public offering price of $18.50
per share. You should read the information set forth below together with the
information under "Selected Consolidated Financial and Operating Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements and the related notes
included elsewhere in this prospectus. We have supplied selected capacity and
other data set forth below under the caption "Operating Data."
We have grown rapidly since our inception and have not owned or operated
our facilities for a substantial period of time. Accordingly, our historical
financial information may not be useful either as a means of understanding our
current financial situation or as an indicator of our future results.
<TABLE>
<CAPTION>
MARCH 10,
1998 SIX MONTHS ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1998 1999 1999 2000
-------------- ------------ ---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue............................................. $ 314 $ 134,074 $ 2,023 $ 341,674
-------- ----------- ------- -----------
Operating expense:
Fuel.............................................. -- 20,463 -- 127,706
Operations and maintenance........................ 24 22,732 1,965 35,553
Taxes other than income tax....................... -- 20,785 280 27,016
General and administrative........................ 2,620 16,755 2,137 14,496
Depreciation and amortization..................... 94 18,938 409 42,296
Charge for buyout of operations and maintenance
contracts with related party.................... -- -- -- 19,000
-------- ----------- ------- -----------
Total operating expense............................. 2,738 99,673 4,791 266,067
-------- ----------- ------- -----------
Operating (loss) income............................. (2,424) 34,401 (2,768) 75,607
Interest expense, net............................... 124 23,943 37 52,303
-------- ----------- ------- -----------
(Loss) income before provision for income tax....... (2,548) 10,458 (2,805) 23,304
Income tax (benefit) expense........................ (1,006) 4,796 (1,126) 9,554
-------- ----------- ------- -----------
Net (loss) income................................. $ (1,542) $ 5,662 $(1,679) $ 13,750
======== =========== ======= ===========
(LOSS) EARNINGS PER AVERAGE COMMON SHARE:
Basic............................................. $ (12.94) $ 0.39 $ (0.89) $ 0.28
======== =========== ======= ===========
Diluted........................................... $ (12.94) $ 0.38 $ (0.89) $ 0.27
======== =========== ======= ===========
STATEMENT OF CASH FLOWS DATA:
Cash flows from operating activities................ $ (2,335) $ 10,456 $ (844) $ (12,763)
Cash flows from investing activities................ (16,407) (1,047,167) (2,123) (1,768,424)
Cash flows from financing activities................ 20,345 1,113,657 4,038 1,746,860
OPERATING DATA:
Consolidated EBITDA(a).............................. $ (2,330) $ 53,339 $(2,359) $ 117,903
======== =========== ======= ===========
Megawatt hours produced during period............... 7,283 2,793,689 90,357 5,494,382
Net capacity owned at end of period (megawatts)..... 102 2,613 102 5,227
</TABLE>
6
<PAGE> 10
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 2000
------------------ ------------------------
1998 1999 ACTUAL AS ADJUSTED
---- ---- ------ -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(b).................................. $ 2,079 $ 154,245 $ 311,108 $ 687,245
Total assets........................................ 20,450 1,252,007 3,218,817 3,594,954
Total debt, including current portion............... 2,593 787,680 2,259,756 2,259,756
Total stockholders' equity.......................... 17,068 395,416 767,713 1,163,021
</TABLE>
---------------
(a) Consolidated EBITDA represents earnings before interest, tax, depreciation
and amortization. EBITDA, as defined, is presented because it is a widely
accepted financial indicator used by some investors and analysts to analyze
and compare companies on the basis of operating performance. EBITDA, as
defined, is not intended to represent cash flows for the period, nor is it
presented as an alternative to operating income or as an indicator of
operating performance. It should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with
generally accepted accounting principles (GAAP) in the United States, is not
indicative of operating income or cash flow from operations as determined
under GAAP and does not give effect to our capital expenditures or debt
service payments. Our method of computation may or may not be comparable to
other similarly titled measures by other companies.
(b) Includes cash held in restricted accounts pursuant to our credit facilities
of $56.9 million as of December 31, 1999 and of $158.9 million as of June
30, 2000, actual and as adjusted.
7
<PAGE> 11
RISK FACTORS
You should carefully consider the risks described below before buying
shares in this offering. The risks described in this section are the ones we
consider to be material to your decision whether to invest in our common stock
at this time. If any of the following risks occur, our business, financial
condition or results of operations could be materially harmed. In that case, the
trading price of our common stock could decline, and you may lose all or part of
your investment.
RISKS RELATING TO THE WHOLESALE POWER MARKET INDUSTRY
WE ARE SUBJECT TO FLUCTUATIONS IN THE PRICES FOR ELECTRIC PRODUCTS AND
SERVICES, WHICH MAY IMPAIR OUR CASH FLOW AND PROFITABILITY.
In the absence of or upon expiration of any power sales agreements, we will
seek to sell our products, including energy, capacity and ancillary services,
into the competitive wholesale power markets. The factors that could negatively
impact the prices for these products in our markets include:
- prevailing market prices for fuel oil, coal, natural gas and other fuels
used in the generation of electricity, including any associated
transportation costs;
- demand for energy products;
- the extent of additional supplies of energy products that are available;
- the extent of transmission capacity or cost of transmission service into,
or out of, our markets;
- changes in the regulatory framework for wholesale power markets;
- liquidity in the general wholesale electricity market; and
- weather conditions impacting demand for electricity, and, particularly in
the case of our hydroelectric facilities, rainfall.
In addition, unlike most other commodities, energy products cannot be
easily stored and must be produced concurrently with their use. As a result of
these factors, the wholesale power markets are subject to significant price
fluctuations over relatively short periods of time and are unpredictable, which
may impair our financial position and results of operations.
THE RULES AND REGULATIONS IN THE VARIOUS REGIONAL MARKET STRUCTURES IN WHICH
WE COMPETE ARE SUBJECT TO CHANGE, WHICH MAY IMPACT OUR ABILITY TO COMPETE AND
OUR PROFITABILITY.
The markets in which we operate and intend to operate are subject to
significant regulatory oversight and control. In some markets, including the New
York area, our operating results are as dependent upon the continuance of the
regulatory regime as they are on fluctuations in the market price for
electricity. The rules governing these markets are in their infancy and remain
subject to change. We cannot assure you that we will be able to adapt our
business in a timely manner in response to any changes in the regulatory regimes
in which we operate, which could have a material adverse effect on our costs or
revenues.
Differences in the market and regulatory structures in the various regional
power markets in which we operate will affect our results of operations and
profit margin. An independent system operator administers the New York wholesale
power market, and other independent system operators either currently or are
expected to administer most of the other regional wholesale power markets in the
United States. For example, in June 2000, the NY-ISO imposed a price cap on bids
for energy and related services. In July 2000, the Federal Energy Regulatory
Commission, known as FERC, lowered that price cap to match the cap in other
eastern wholesale power markets. Other independent system operators have
suggested various forms of
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<PAGE> 12
cost-based bidding for energy and related services. Any further market rules or
regulations that could place a cap on market based pricing could adversely
impact our business and results of operations.
The independent system operator may also cause us to experience certain
problems, such as billing disputes, which may result in delayed or disputed
collection of revenues from sales of our products and may increase our earnings
volatility.
Additionally, any changes in the rules and regulations of state public
utility commissions or other regulatory bodies in the other markets in which we
compete or may compete in the future may adversely affect our operations and
financial condition.
THE WHOLESALE POWER INDUSTRY IS RAPIDLY CHANGING AND INTENSELY COMPETITIVE,
WHICH MAY ADVERSELY AFFECT OUR ABILITY TO OPERATE PROFITABLY.
The wholesale power industry is characterized by intense competition. A
number of our competitors, including domestic and international utilities and
other wholesale power generators have more extensive operating experience,
larger staffs and/or greater financial resources than we do. In addition, many
of the regions in which we operate have implemented or are considering
implementing regulatory initiatives designed to increase competition. For
example, regulations encouraging industry deregulation and privatization may
cause the disaggregation of vertically integrated utilities into separate
generation, transmission and distribution businesses. Moreover, FERC has
proposed regulatory changes designed to increase access to transmission grids by
utility and non-utility purchasers and sellers of electricity. As a result, a
significant number of additional competitors could become active in the
generation segment of our industry. This competition may negatively impact our
ability to sell energy and related products, which could adversely affect our
results of operations and our ability to grow our business.
WE ARE SUBJECT TO STRINGENT GOVERNMENTAL REGULATION, WHICH MAY BE BURDENSOME
OR LEAD TO SIGNIFICANT COSTS OR LIABILITIES.
Our operations are subject to complex and stringent federal, state and
local energy, environmental and other governmental laws and regulations. The
acquisition, development and operation of our facilities require numerous
permits, approvals and certifications. Further, particularly in relation to our
hydroelectric facilities, we periodically need to obtain from FERC new licenses
for our facilities. We are subject to regulation by FERC as wholesale energy
sellers and to heightened regulation in New York State as an electric
corporation. We are continually in the process of maintaining regulatory
compliance to operate our facilities. If there is a delay in obtaining required
regulatory approval or if we fail to comply with applicable regulations, our
business and operations could be adversely affected.
Before any acquisition of a power generation facility may be completed, we
must obtain a variety of federal, state and local permits, licenses and
approvals, including approval for our financing arrangements in some
jurisdictions. The need to obtain these permits, licenses and approvals can have
the effect of delaying or increasing the cost of an acquisition. If, for any
reason, we are not able to obtain all required permits, licenses and approvals,
we may not be able to complete a desirable acquisition.
The regulatory environment applicable to the power generation and
distribution industry has recently undergone substantial changes, both on a
federal and state level. We are not able to predict whether there will be any
further major changes in this regulatory environment, including potential
regulation of the capital structure of wholesale generating companies such as
ourselves, or what the ultimate effect this changing regulatory environment will
have on our business. In addition, existing market rules and regulations may be
revised or reinterpreted, new laws and regulations may be adopted or become
applicable to us or our facilities, and future changes in laws and regulation
may have a detrimental effect on our business.
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THE COSTS OF COMPLIANCE WITH EXISTING AND FUTURE ENVIRONMENTAL REGULATIONS
COULD ADVERSELY AFFECT OUR CASH FLOW AND PROFITABILITY.
Costs of compliance with environmental regulations, and in particular
emission regulations, could have a material impact on our business, particularly
if emission limits are tightened. Environmental laws may limit our ability to
operate our facilities at maximum capacity or at all. We expect our facilities
to be impacted by significant new restrictions on the emissions of sulfur
dioxide, nitrogen oxide and other particulates or pollutants, especially our
coal-fired facilities. For affected facilities, we plan to make capital
expenditures to install new emissions control equipment and may be required to
increase the efficiency of existing equipment and/or purchase emissions
allowances or cease operating. Environmental laws are subject to change, which
may materially increase the amount we must invest to bring our facilities into
compliance, or accelerate the time at which these capital expenditures must be
made. In addition, recent lawsuits by the Environmental Protection Agency and
various states highlight the environmental risks faced by generating facilities
in general and coal-fired generating facilities in particular. The current trend
towards more stringent environmental regulations could materially affect our
cash flow and profitability.
RISKS RELATING TO OUR BUSINESS AND OPERATIONS
WE MAY BE UNABLE TO EXECUTE OUR STRATEGY OF ACQUIRING OR DEVELOPING ADDITIONAL
POWER GENERATING FACILITIES, WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO GROW
PROFITABLY.
Our growth depends on our ability to acquire or develop additional
facilities. We have been pursuing this strategy for a very limited period of
time. Moreover, our growth strategy could place a significant strain on our
personnel, management systems and resources.
The successful achievement of our growth strategy will depend on, among
other things, (1) the continuation of the current regulatory environment
encouraging or requiring the divestiture of generating facilities and (2) our
ability to identify and complete appropriate acquisition and development
opportunities in a competitive environment on acceptable terms. In recent years,
the wholesale power industry has been characterized by increased competition for
asset purchases and development opportunities. Many facilities are currently
being sold through a competitive process, which puts significant emphasis on the
price received by the seller.
We incur substantial expenses investigating and evaluating potential
acquisition and development opportunities before we can determine whether they
are feasible or economically attractive, including participating in many
competitive bidding processes for power generation facilities without any
assurance that our bids will be accepted. If we are unable to complete the
acquisition or development of a facility on a timely basis, we would generally
not be able to recover our investment in the project. If we fail to acquire
additional facilities or we acquire additional facilities at prices that are too
high or under unfavorable terms or conditions, we would impair the achievement
of our business strategy and could negatively affect our ability to generate
sufficient cash flow to meet any future obligations.
THE DEVELOPMENT AND OPERATION OF OUR FACILITIES INVOLVE RISKS THAT MAY LEAD TO
POOR FINANCIAL PERFORMANCE AND IMPACT OUR STOCK PRICE.
The construction, expansion, refurbishment, maintenance and operation of
power generation facilities involve risks relating to the breakdown or failure
of equipment or processes, fuel interruption and performance below expected
levels of output or efficiency. A significant portion of our facilities were
constructed many years ago and may require significant capital expenditures to
maintain peak efficiency. In addition, weather related interference, work
stoppages and other unforeseen problems may disrupt the development and
operations of our facilities and adversely affect our results of operations.
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<PAGE> 14
In particular, the success of our facilities will depend on the following:
- our ability to integrate, operate, manage and properly maintain our
assets on an efficient, cost-effective basis;
- our ability to attract and retain qualified employees with construction
and development expertise;
- negotiation of satisfactory engineering, construction, fuel supply and
energy sales contracts;
- the receipt of all required regulatory and environmental approvals,
licenses and permits; and
- the availability of financing on satisfactory terms.
While we maintain spare parts in inventory for many critical pieces of
equipment and maintain insurance for property damage between $300 million and
$610 million per occurrence to protect against operating risks, these
protections may not be adequate to cover lost revenues or increased expenses and
penalties. As a result, we may not be able to operate our facilities at a level
necessary to comply with our supply agreements, which could result in
significant losses to us or could limit our ability to produce cash flows
sufficient to enable us to meet our obligations.
WE WILL LIKELY NEED SIGNIFICANT ADDITIONAL FINANCING IN ORDER TO PURSUE OUR
STRATEGY, WHICH MAY INCLUDE ADDITIONAL EQUITY ISSUANCES OR BORROWINGS. IF WE
HAVE DIFFICULTY OBTAINING FUTURE FINANCING, OUR ABILITY TO EXECUTE OUR STRATEGY
MAY BE IMPAIRED, AND OUR STOCK PRICE MAY DECLINE.
In order to execute our business strategy, we will need to incur additional
indebtedness at a corporate and/or subsidiary level and/or issue additional
equity. We may not be successful in our attempts to raise additional capital on
favorable terms, if at all.
We anticipate approximately $1.5 billion in capital expenditures for
repowering projects at our existing plants during the next five years. This
amount includes approximately $300 million for compliance with environmental
regulations and other regulatory requirements. The regulations are subject to
change, which may increase the aggregate amount we must spend on capital
projects or accelerate the timing of capital expenditures. This will also
increase our need for additional financing.
Upon completion of the Columbia Electric acquisition, we anticipate making
approximately $600 million in additional capital expenditures over the next
three years to complete the construction and development of the facilities to be
acquired.
It is possible that future indebtedness may include terms that are more
restrictive or burdensome than those in our current bank credit facilities. This
may negatively impact our ability to operate our business, or severely restrict
or prohibit cash distributions to us. Our ability to arrange debt financing and
the costs of such capital depends upon numerous factors, including:
- credit availability and maintenance of acceptable credit ratings;
- investor confidence in us and our market;
- the success of current projects; and
- the perceived quality of new projects.
To date, our existing stockholders have provided all of our equity capital.
We do not anticipate that our existing stockholders will provide us with any
additional equity capital. If we issue additional equity, it will result in
dilution to our stockholders.
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BECAUSE WE HAVE A LIMITED PERIOD OF OPERATIONS, YOU HAVE LIMITED INFORMATION
UPON WHICH YOU CAN EVALUATE OUR BUSINESS.
We completed our first acquisition in November 1998 and completed our
largest acquisition in April 2000. We have very limited experience operating our
facilities. Our historical financial statements, therefore, may not be helpful
in predicting our future performance.
Prior to our ownership, these facilities operated as integrated parts of,
or sold all of their electric output to, regulated utilities. The utilities, in
turn, sold the electric output of these facilities to consumers at prices based
on rates set by regulatory authorities. We cannot assure you that we will be
successful in operating any of these facilities or any other facilities acquired
in the future in a competitive environment where wholesale and retail
electricity prices will be determined by market forces.
As has been the case in our acquisitions to date, it is likely that, when
we acquire facilities from utilities, we will not have access to the type of
historical financial information that we will report regarding the prior
operation of the facilities. As a result, it may be difficult for investors in
our securities to evaluate the probable impact of major acquisitions on our
financial performance until we have operated the acquired facilities for a
substantial period of time.
THE CONCENTRATION OF OUR SUPPLIERS AND RELIANCE ON A SINGLE CUSTOMER AT OUR
FACILITIES EXPOSES US TO FINANCIAL RISKS IF ANY SUPPLIER OR CUSTOMER SHOULD FAIL
TO PERFORM THEIR OBLIGATIONS.
We periodically rely on a single supplier for the provision of fuel, water
and other services required for operation of a facility. At times we rely on a
single customer or a few customers to purchase all or a significant portion of a
facility's output, in some cases under long-term agreements that provide support
for any project debt used to finance the facility. The financial performance of
any facility depends upon the continued performance by customers and suppliers
of their contractual obligations and, in particular, on the credit quality of
our customers and suppliers.
The NY-ISO is the principal customer for our assets located in New York
City, which in turn, sells our products to load serving entities. The following
table sets forth the approximate percentage of our revenues attributed to each
of our major wholesale customers for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1999 JUNE 30, 2000
---------------------------------- ----------------------------------
CUSTOMER % CUSTOMER %
-------- ---- -------- ----
<S> <C> <C> <C>
Consolidated Edison 54% NY-ISO 41%
Niagara Mohawk 23% Duquesne Light Company 23%
NY-ISO 17% Consolidated Edison 19%
Niagara Mohawk 15%
</TABLE>
Failure by any one of these customers to meet their obligations under these
agreements could cause us to enter the wholesale markets or seek to enter into
new contracts for some products in these regions earlier than we currently
anticipate, which may materially adversely affect our operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR RISK MANAGEMENT PRACTICES,
WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We have been managing risks associated with our hedging of market price
volatility in the wholesale power markets for only a limited amount of time. In
addition, we do not attempt to hedge all of our future risks. There can be no
assurance that our hedging activities will effectively manage this price
volatility, and we may not be able to successfully manage the risks associated
with wholesale power markets, including the risk that counterparties may not
perform. Any failure in this regard could lead to significant losses.
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<PAGE> 16
WE HAVE ENTERED INTO TRANSITION AGREEMENTS IN CONNECTION WITH THE ACQUISITION
OF OUR FACILITIES, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
In connection with the acquisition of our facilities, we entered into three
contracts to sell some or all of our products to the seller of the assets for a
period of time following completion of the respective acquisitions. As a result
of these agreements, we currently sell a substantial amount of our products from
our hydroelectric assets to Niagara Mohawk Power Corporation and from our assets
located in Ohio and Pennsylvania to Duquesne Light Company, and, as a result, we
do not benefit fully from any increases in the wholesale price of energy,
capacity and ancillary services until these contracts expire. In 1999,
approximately 80% of our revenue resulted from sales under these agreements, and
for the six months ended June 30, 2000, approximately 56% of our revenue
resulted from these sales. We may also be exposed to other financial risks,
including rising fuel or other costs, under the contracts. As substantially all
of the obligations under these contracts are expected to expire in the third
quarter of 2001, we could become subject to the risks of fluctuating demand and
prices for energy, capacity and ancillary services in the markets served by
these facilities. We may seek to enter into further supply contracts with
respect to the output of our facilities following termination of these
contracts, but we may not be successful in doing so. In the case of future
acquisitions, we also cannot assure you that, if we seek to secure any
commitments to purchase any or all of our output for any specified period of
time, we will be able to do so.
WE HAVE AGREED TO PROVIDE ALL OF THE ENERGY REQUIRED BY DUQUESNE LIGHT COMPANY
TO SATISFY ITS PROVIDER OF LAST RESORT OBLIGATION, WHICH COULD RESULT IN
SIGNIFICANT LOSSES TO US.
Duquesne Light Company is obligated to supply electricity at predetermined
tariff rates to all retail customers in its existing service territory who do
not select another electricity supplier. We committed to provide 100% of the
energy that Duquesne Light Company needs to meet this requirement, under an
agreement that we refer to as the provider of last resort contract. We are
seeking to reach agreement with Duquesne Light Company to extend the period
during which we will supply energy to meet these requirements until December 31,
2004. If our obligation under this contract exceeds our own energy production
levels, we would be forced to buy additional energy from the market at
prevailing market prices and, in certain cases where we failed to deliver the
required amount, we could incur penalties during periods of peak demand of up to
$1,000 per megawatt hour. If this situation were to occur even for a brief
period of time during periods of peak energy prices, we could suffer substantial
losses that could materially adversely affect our results of operations for an
entire fiscal year. For example, if one of our larger facilities were shut down
completely during a period of peak demand, with market prices at $1,000 per
megawatt hour, the cost of procuring replacement power could exceed $14 million
per day. We incurred substantial costs in order to hedge a portion of this risk
for the past summer and may do so again in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Market Risks" and "Business -- Orion Power MidWest,
L.P. -- Provider of Last Resort Contract."
CHANGES IN THE MARKET PRICES AND AVAILABILITY OF FUEL SUPPLIES TO GENERATE
ELECTRICITY MAY INCREASE OUR COST OF PRODUCING POWER, WHICH COULD ADVERSELY
IMPACT OUR PROFITABILITY AND FINANCIAL PERFORMANCE.
The market prices and availability of natural gas, coal and oil fluctuate.
Any price increase, delivery disruption or reduction in the availability of
these commodities could affect our ability to operate our facilities and impair
our cash flow and profitability. The provider of last resort contract with
Duquesne Light Company may require us to operate the assets located in Ohio and
Pennsylvania even if a dramatic increase in the price of coal makes it
economically unattractive to do so. We may be subject to further exposure if any
of our future acquisitions are concentrated in natural gas, coal or oil-fired
facilities. We may not be successful in our efforts to mitigate our exposure to
supply and price swings.
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<PAGE> 17
Delivery of the natural gas to each of our natural gas-fired facilities
typically depends on a single gas distributor, usually the natural gas utility
for that location. As a result, we are subject to the risk that a natural gas
distributor suffers disruptions or curtailments in its ability to deliver the
natural gas to us or that the amounts of natural gas we are permitted to request
are curtailed. Any disruptions and/or curtailments could materially adversely
affect our ability to operate natural gas-fired generating facilities.
WE MAY INCUR SUBSTANTIAL COSTS IF OUR SUPPLY OF WATER IS IMPAIRED.
Hydroelectric plants require continuous water flow for their operation.
Accordingly, we are subject to the risk that a drought or other water flow
impairment may limit our ability to produce and market electricity from these
facilities. We have agreed with Niagara Mohawk to provide electricity totaling
at least 2.2 million megawatt hours each year (within quarterly targets) until
September 30, 2001. If we fail to provide the minimum amount we are required to
during any quarter, we will have to pay Niagara Mohawk its replacement costs. In
the third and fourth quarters of 1999, we failed to meet the minimum threshold
due to an extended drought in New York State. This resulted in additional costs
of $1.2 million for the year.
WE MAY BE LIABLE FOR SIGNIFICANT ENVIRONMENTAL COSTS RELATING TO OUR
ACQUISITIONS.
Some of the acquisition agreements that we have entered into have required
that we assume specified pre-closing liabilities, primarily related to
environmental and employee matters. We have recorded a liability of
approximately $9.2 million, on an undiscounted basis, for estimated costs of
environmental remediation in connection with our acquisition of the
hydroelectric assets and the assets located in New York City, and a liability of
approximately $4.8 million, on an undiscounted basis, in connection with our
acquisition of the assets located in Ohio and Pennsylvania. We recorded the
liabilities based on valuations performed by independent environmental liability
assessment experts. In conjunction with these valuations, we have developed
remediation plans for the known liabilities. There can be no assurance that the
actual costs of compliance and remediation will not be significantly higher than
our recorded liability. We are likely to be required to assume these types of
liabilities, as well as others, in connection with future acquisitions. As a
result, we may be liable for significant environmental remediation costs and
other liabilities arising from the operation of our facilities by prior owners,
which could materially adversely affect our cash flow and operations.
WE RELY ON TRANSMISSION LINES THAT WE DO NOT OWN OR CONTROL, WHICH MAY HINDER
OUR ABILITY TO DELIVER OUR PRODUCTS.
We depend on transmission and distribution facilities owned and operated by
utilities and other power companies to deliver the electric power products and
services we generate to our customers, who in turn deliver these products to the
ultimate consumers of the power. If transmission is disrupted, our ability to
sell and deliver our products may be hindered, which could materially affect our
cash flow and profitability.
OUR OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL AND QUARTERLY BASIS.
Electric power generation frequently is a seasonal business. Consequently,
our overall operating results in the future may fluctuate substantially on a
seasonal basis, and the pattern of this fluctuation may change depending on the
nature and location of any facilities we acquire and the terms of any contract
to sell electricity that we may enter into. Our second and third quarter results
of operations will be substantially dependent on weather conditions, and may
make period comparisons less relevant. Any substantial fluctuations in our
operating results for fiscal quarters or on a year to year basis may cause our
stock price to be volatile.
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<PAGE> 18
IF A CHANGE IN CONTROL OCCURS, IT MAY NEGATIVELY AFFECT OR ALLOW TERMINATION
OF SEVERAL OF OUR IMPORTANT AGREEMENTS.
Upon the occurrence of a change of control, several of our important
agreements may be negatively affected or terminated, including the employment
contracts of our key officers and directors. A change of control may constitute
an event of default under our credit facilities, which would permit the lenders
under those credit facilities to exercise remedies, including accelerating the
outstanding indebtedness and prohibiting any future distributions by our
subsidiaries to us. In addition, following a change of control, each holder of
our senior notes may require us to purchase all or a portion of that holder's
notes at 101% of the principal amount, plus accrued and unpaid interest. There
can be no assurance that we will have the financial resources necessary to repay
our indebtedness or repurchase the notes upon a change in control.
WE ARE CONTROLLED BY A LIMITED NUMBER OF STOCKHOLDERS, AND THERE MAY BE
CONFLICTS OF INTEREST BETWEEN THESE STOCKHOLDERS AND OUR PUBLIC STOCKHOLDERS.
Upon completion of this offering, GS Capital Partners II, L.P. and
affiliated investment partnerships collectively will beneficially own
approximately 38% of our outstanding common stock. In addition, Constellation
Enterprises, Inc., several affiliates of Mitsubishi Corporation and Tokyo
Electric Power Company International B.V. will beneficially own approximately
34% of our outstanding common stock. As a result of their stock ownership, each
of our significant stockholders, individually or in conjunction with one or more
other stockholders, may be deemed to be able to exercise control over at least
some of our activities, including election of directors, approval of significant
corporate transactions, our dividend policy and access to capital.
Each of our significant stockholders, together with its affiliates, has
other business activities and interests in addition to its ownership position in
us. It is possible that the stockholders may exercise their control in ways that
serve their individual interests but do not serve the best interests of the
public stockholders. It is also possible that conflicts or disagreements among
the stockholders regarding the proper course for us may make it difficult for us
to take action important to the achievement of our goals.
GS Capital Partners II, L.P. is controlled by an affiliate of the lead
underwriter for this offering, Goldman, Sachs & Co. Goldman Sachs is a global
investment banking and securities firm that engages in many activities that
could give rise to conflicts with our interests. For example:
- Goldman Sachs serves as a financial advisor to electric and gas utility
companies, power generation and energy trading companies and as such
assists these companies in raising capital or developing business and
financial strategies that may involve competition with us or give these
companies an advantage in competing with us.
- Goldman Sachs or its affiliates may compete directly with us and Goldman
Sachs has no agreement with us that would prevent it from doing so.
Goldman Sachs and its affiliates, including GS Capital Partners II, L.P.,
regard the investment in us as a financial investment.
- Goldman Sachs and its affiliates may, from time to time, own significant
investments in companies that compete with us, and directors, officers or
employees of Goldman Sachs or its affiliates may serve as directors or
advisors to these competitors.
- An affiliate of Goldman Sachs currently serves as advisor to
Constellation Power Source, an affiliate of Constellation Enterprises, for
power marketing and related risk management services and receives a
portion of the profits of that activity as compensation. Goldman Sachs has
been providing these advisory services exclusively to Constellation Power
Source. On October 22, 2000, Goldman Sachs entered into an agreement with
Constellation Enterprises that provides that upon closing, Goldman Sachs
will acquire up
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<PAGE> 19
to a 17.5% interest together with warrants in Constellation Enterprises'
merchant energy businesses in return for Goldman Sachs' investment of $250
million and contribution of certain assets that are related to the power
marketing and trading business. In addition, the existing advisory service
arrangements will terminate. Constellation Enterprises' merchant energy
businesses, which include Constellation Power Source, engage in power
generation, power marketing and trading activities. Constellation
Enterprises' merchant energy businesses will offer employment to the
current Goldman Sachs employees presently engaged in providing advisory
services to Constellation Power Source. In addition, two Goldman Sachs
employees are expected to be directors of the parent company of the
Constellation Enterprises merchant energy business, which is expected to
become a separate publicly traded company. Goldman Sachs' investment
represents an exclusive North American power business arrangement, with
certain exclusions that include our business as well as Goldman Sachs'
other merchant banking activities.
Constellation Enterprises and affiliates currently own approximately 30% of
our outstanding shares (approximately 19% following this offering). We
previously entered into a strategic alliance agreement with Constellation Power
Source under which they serve as the exclusive provider of power marketing and
risk management advisory services to us. We also entered into a non-compete
agreement under which Constellation Energy Group, Inc. (the parent of
Constellation Enterprises) and its affiliates agreed not to compete with us in
the purchase of existing, non-nuclear generating assets in the United States and
Canada. Both the strategic alliance agreement and the non-compete agreement will
terminate upon the closing of this offering. Constellation Enterprises regards
its investment in us as a financial investment, and we expect that, after this
offering, Constellation Enterprises and its affiliates will compete with us in
purchasing generating assets and by the execution of its own merchant generation
strategy.
Constellation Energy Group, Inc. develops, owns and operates generation,
transmission and other distribution assets, and markets and trades power
products and related fuels throughout North America. Given the national scope of
Constellation Energy Group's energy business, they will continue to compete with
us, and there are no restrictions on their ability to do so.
THE SUBSTANTIAL OWNERSHIP INTEREST IN US BY CERTAIN OF OUR STOCKHOLDERS COULD
HINDER OUR ABILITY TO OBTAIN GOVERNMENTAL APPROVAL FOR FUTURE ACQUISITIONS OR
ENTER ADDITIONAL MARKETS.
Because Constellation Enterprises and private investment partnerships
affiliated with Goldman Sachs have, and will continue to have, a substantial
ownership of our shares following this offering, antitrust regulations and
government agencies responsible for assuring competition in the markets in which
we participate, or may wish to participate in the future, may attribute
ownership of Constellation Enterprises' or Goldman Sachs' assets to us for
purposes of considering competitive effects of possible acquisitions or other
transactions. For example, when we acquire generating assets in the United
States, we may need to obtain approval from FERC, depending upon whether other
facilities, such as generator leads, step-up transformers or filed tariffs, are
transferred with the generating assets. FERC evaluates approvals for
acquisitions such as these by analyzing, among other things, the transaction's
effect on competition. If we were to seek to acquire assets in a market in which
our stockholders had business activities or other ownership interests and our
acquisition required FERC approval, FERC could attribute our stockholders'
interests to us when evaluating the effect on competition thus attributing to us
a larger share of the market. Some of our future acquisitions also may require
approval from state regulators, and some states, like FERC, will consider the
competitive effects of a transaction as part of the approval process. Finally,
our transactions are typically subject to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. The Department of Justice and/or the Federal Trade
Commission may attribute the ownership of our stockholders' assets to us in
preparing their competitive analysis of our transactions. This could limit or
delay our ability to make acquisitions
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<PAGE> 20
in markets in which Constellation Enterprises or Goldman Sachs has or obtains a
significant market presence.
In addition to affecting our ability to acquire assets in some markets, our
stockholders' business activities and other ownership interests could impair our
ability to sell electricity at market based rates. FERC authorization is
required to sell electricity and electricity-related products at market based
rates in wholesale markets. FERC allows generators, like us, to sell electricity
at market based rates if the seller and its affiliates do not have, or have
adequately mitigated, market power in generation and transmission and cannot
erect other barriers to entry. In order for an affiliate of a
transmission-owning public utility to demonstrate the absence or mitigation of
market power, the public utility must have on file with FERC an open access
transmission tariff for the provision of comparable services. FERC also
considers whether there is evidence of affiliate abuse and/or reciprocal
dealing. To the extent that Constellation Enterprises or Goldman Sachs owns or
obtains generation or transmission assets, or controls a key input to
generation, such as fuel, such that it is able to erect barriers to entry in a
particular geographic market, our ability to transact business in that market at
market based rates could be limited.
WE HAVE SUBSTANTIAL INDEBTEDNESS, WHICH RESTRICTS OUR ACTIVITIES AND COULD
AFFECT OUR ABILITY TO MEET OUR OBLIGATIONS.
We incurred substantial indebtedness to finance our acquisitions. As of
June 30, 2000, we had total indebtedness of approximately $2.3 billion, with
approximately $50.9 million available for future borrowings under our
subsidiaries' various working capital facilities. In July 2000, we established a
$75 million revolving credit facility.
Our substantial indebtedness has important consequences to you. For
example, it:
- requires us to dedicate a substantial portion of our operating
subsidiaries' cash flow to payments on our indebtedness, which reduces
the amount of cash flow available to fund working capital, capital
expenditures, future acquisitions and other corporate requirements;
- increases our vulnerability to general adverse economic and industry
conditions due to our reduced liquidity and increased need to generate
sufficient cash flow to meet our payment obligations;
- limits our ability to borrow additional funds, which may hinder our
ability to execute our growth strategy or to respond to adverse changes
in governmental regulation;
- places us at a disadvantage to our less leveraged competitors who may be
more able to capitalize on business opportunities and to react to
competitive pressures; and
- subjects us to financial and other restrictive covenants, which, if not
complied with, could result in an event of default and acceleration of
our debt.
Our ability to meet our payment obligations under our debt or to fund
capital expenditures depends on our performance. Our performance is subject to
regulatory, economic, financial, competitive, legislative and other factors that
are beyond our control. We cannot provide you with any assurance that our cash
flow from operations will enable us to meet all of our payment obligations under
our debt or to fund our other liquidity needs.
WE WILL NEED TO REFINANCE THE INDEBTEDNESS UNDER OUR BANK CREDIT FACILITIES
WHEN THIS INDEBTEDNESS BECOMES DUE.
As of June 30, 2000, we had $715 million outstanding under the credit
facility of our subsidiary Orion Power New York, L.P., which becomes due in
December 2002, and $1,144 million outstanding under the credit facility of our
subsidiary Orion Power MidWest, L.P., which becomes due in October 2002. We will
need to refinance these bank credit facilities when
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<PAGE> 21
they become due, which may require regulatory approvals. We cannot assure you
that we will be able to refinance these bank credit facilities on commercially
reasonable terms, or at all, which could have a material adverse affect on our
financial condition. The credit facilities are secured by substantially all of
the assets of our subsidiaries. If we are unable to refinance these credit
facilities, we may be forced to default on our debt obligations.
WE MAY NOT BE ABLE TO SERVICE OUR CORPORATE-LEVEL INDEBTEDNESS BECAUSE OF OUR
HOLDING COMPANY STRUCTURE, WHICH COULD CAUSE US TO DEFAULT ON OUR DEBT.
Our subsidiaries conduct substantially all of our operations. We depend
upon cash dividends and distributions or other transfers from our subsidiaries
to service our corporate-level debt and maintain our cash flow. The debt
agreements of each of our subsidiaries provide that the maximum amount of
dividends or distributions from the subsidiary to us may not exceed $100 million
over the life of the facility for the subsidiary holding our assets located in
New York and $175 million over the life of the facility for the subsidiary
holding our assets located in Ohio and Pennsylvania. Our subsidiaries are
separate and distinct legal entities that have no obligation, contingent or
otherwise, to pay any amounts due under our indebtedness or to make any funds
available to us, whether by dividends, loans or other payments, and they do not
guarantee the payment of our corporate-level indebtedness.
RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK
OUR SECURITIES HAVE NO PRIOR PUBLIC MARKET, AND WE CANNOT ASSURE YOU THAT ANY
PUBLIC MARKET WILL DEVELOP OR BE SUSTAINED AFTER THE OFFERING.
Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. If no public market develops, you may have
difficulty selling your stock. The market price for our common stock may
fluctuate significantly after this offering, and may decline below the initial
public offering price. Since the price you will pay for our common stock in this
offering was not established in a competitive market, you may not be able to
resell those shares at or above the initial public offering price.
Because Goldman, Sachs & Co. is an affiliate of ours, it will not be
permitted under the rules of the New York Stock Exchange to solicit, or make
recommendations regarding, the purchase or sale of our common stock. This could
affect the liquidity of, the trading markets for, or investor interest in, our
common stock, which could adversely affect the price at which our common stock
trades.
64.9 MILLION, OR APPROXIMATELY 72%, OF OUR TOTAL OUTSTANDING SHARES AFTER THIS
OFFERING, ARE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET
IN THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO
DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have outstanding 90,595,926 shares of common
stock. This includes the 25,000,000 shares sold in this offering, which may be
resold in the public market immediately. 64,918,226 shares, or approximately 72%
of our total outstanding shares after this offering, will become available for
resale in the public market 180 days after the date of this prospectus due to an
agreement these stockholders have with the underwriters, subject to applicable
volume and other limitations imposed under federal securities laws, including
Rule 144. However, the underwriters can waive this restriction and allow these
stockholders to sell their shares at any time. In addition, all of our existing
stockholders have the right to require us to register their shares under the
Securities Act. As restrictions on resale end or as these stockholders exercise
their registration rights, the market price of our stock could drop
18
<PAGE> 22
significantly if the holders of restricted shares sell them or are perceived by
the market as intending to sell them.
OUR CHARTER DOCUMENTS, RIGHTS AGREEMENT AND DELAWARE LAW MAY INHIBIT A
TAKEOVER AND LIMIT OUR GROWTH OPPORTUNITIES, WHICH COULD CAUSE THE MARKET PRICE
OF OUR SHARES TO DECLINE.
Our certificate of incorporation, bylaws and rights agreement, as well as
Delaware corporate law, contain provisions that could delay or prevent a change
of control or changes in our management that a stockholder might consider
favorable. These provisions apply even if the offer may be considered beneficial
by some stockholders. If a change of control or change in management is delayed
or prevented, the market price of our common stock could decline. In addition,
following this offering, our certificate of incorporation will prohibit us from
engaging in any activities that will subject us to regulation under the Public
Utility Holding Company Act without the consent of Goldman, Sachs & Co. until
Goldman, Sachs & Co. and its affiliates own less than 5% of our outstanding
voting securities. This provision may limit our growth strategy, which could
adversely affect our results of operations.
ALTHOUGH INVESTORS WILL PAY $18.50 PER SHARE IN THIS OFFERING, EACH SHARE ONLY
HAS A TANGIBLE BOOK VALUE OF $10.39 PER SHARE.
The initial public offering price per share will significantly exceed the
net tangible book value per share. Therefore, based upon the assumed initial
public offering price of $18.50 per share, if you purchase our common stock in
this offering, you will incur immediate and substantial dilution of
approximately $6.46 per share in the net tangible book value per share of common
stock from the initial public offering price.
FORWARD-LOOKING STATEMENTS REGARDING TRANSACTIONS MAY NOT BE CORRECT WHICH COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks and
relate to future events, our future financial performance or our projected
business results. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology.
Forward-looking statements are only predictions. Actual events or results
may differ materially from any forward-looking statement as a result of various
factors. These factors include:
- legislative and regulatory initiatives regarding deregulation and
restructuring of the electric utility industry;
- the extent and timing of the entry of additional competition in our
markets;
- our pursuit of potential business strategies, including acquisitions or
dispositions of assets;
- state, federal and other rate regulations in the United States;
- changes in or application of environmental and other laws and regulations
to which we are subject;
- political, legal and economic conditions and development in the United
States;
- financial market conditions and the results of our financing efforts,
changes in commodity prices and interest rates, weather and other natural
phenomena;
19
<PAGE> 23
- the performance of projects undertaken and the success of our efforts to
invest in and develop new opportunities; and
- other factors, including the risks outlined under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements.
20
<PAGE> 24
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 21,779,032 shares of
common stock in this offering will be approximately $375.7 million
(approximately $440.9 million if the underwriters' over-allotment option is
exercised in full), based on an assumed initial public offering price of $18.50
per share (the mid-point of our estimated range) and after deducting
underwriting discounts and commissions and our estimated offering expenses. We
will not receive any of the proceeds from the sale of shares by the selling
stockholders.
We expect to use approximately $205 million of the net proceeds of the
offering to purchase all of the outstanding capital stock of Columbia Electric
Corporation (including expenses of the transaction) and the balance for other
acquisitions and/or development of electric power generating facilities and for
general corporate purposes and working capital requirements. However, this
offering is not conditioned on the completion of the Columbia Electric
acquisition. We will retain broad discretion as to the use of the net proceeds
currently allocated to that acquisition if it is not completed.
Although we regularly review potential acquisitions, we currently have not
entered into any binding commitments or agreements with respect to any such
transactions other than the agreement relating to the acquisition of Columbia
Electric. Until we use the net proceeds as described above, we plan to invest
them in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. Therefore, we do not anticipate paying any cash
dividends on our common stock in the foreseeable future. Our senior notes and
credit facilities limit our ability to pay cash dividends.
21
<PAGE> 25
DILUTION
Our net tangible book value at June 30, 2000 was approximately $715
million, or $10.39 per share. After giving effect to our sale of 21,779,032
shares of common stock in this offering at an assumed initial public offering
price of $18.50 per share (the mid-point of our estimated range) and after
deducting an assumed underwriting discount and estimated offering expenses
payable by us, our as adjusted net tangible book value at June 30, 2000 would
have been approximately $1.1 billion, or $12.04 per share. This represents an
immediate increase in net tangible book value of $1.65 per share to our existing
stockholders and an immediate dilution in net tangible book value of $6.46 per
share to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $18.50
Net tangible book value per share as of June 30, 2000..... $10.39
Increase in book value per share attributable to new
investors.............................................. 1.65
------
As adjusted net tangible book value per share after this
offering............................................... 12.04
------
Dilution in net tangible book value per share to new
investors.............................................. $ 6.46
======
</TABLE>
The following table shows at June 30, 2000, on an as adjusted basis, the
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid by existing stockholders for their
common stock and by new investors purchasing common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(a)................. 68,816,894 76% $ 804,875,000 67% $11.70
New investors(b)......................... 21,779,032 24% 402,912,092 33% 18.50
---------- --- -------------- --- ------
Total........................... 90,595,926 100% $1,207,787,092 100% $13.33
========== === ============== === ======
</TABLE>
---------------
(a) Includes 1,219,355 shares of our common stock, valued at $18.9 million,
issued as partial consideration for the acquisition of four subsidiaries of
Constellation Operating Services.
(b) Represents the 21,779,032 shares of common stock offered by us in this
offering.
At June 30, 2000, there were outstanding options and warrants to purchase
10,132,647 shares of common stock at a weighted average exercise price of
approximately $11.33 per share. Additionally, there are 4,473,653 options
available for future grant under our 1998 stock incentive plan, as amended. To
the extent we issue additional shares or the holders exercise these outstanding
options or warrants or any options we grant in the future, there will be further
dilution to new investors.
22
<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. Our
capitalization is presented:
- on an actual basis; and
- on an as adjusted basis to reflect the receipt and application of the
estimated net proceeds from the sale of common stock in this offering, at
an assumed initial public offering price of $18.50 per share. See "Use of
Proceeds."
You should read the information in this table together with our
consolidated financial statements and the related notes and with "Selected
Consolidated Financial and Operating Data," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT OBLIGATIONS, INCLUDING CURRENT PORTION:
Orion Power New York, L.P. Credit Facility(a)........... $ 715,000 $ 715,000
Orion Power MidWest, L.P. Credit Facility(b)............ 1,144,137 1,144,137
12% senior notes due 2010............................... 400,000 400,000
Other notes payable..................................... 619 619
---------- ----------
Total long-term debt............................ 2,259,756 2,259,756
---------- ----------
COMMON STOCK SUBJECT TO PUT RIGHTS(C)..................... 19,171 --
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 200,000,000 shares
authorized, 67,597,539 shares issued and outstanding,
actual, and 90,595,926 shares issued and outstanding,
as adjusted.......................................... 676 906
Additional paid-in capital.............................. 759,478 1,154,285
Deferred compensation(d)................................ (4,368) (4,368)
Notes receivable........................................ (5,672) (5,672)
Retained earnings (deficit)............................. 17,599 17,870
---------- ----------
Total stockholders' equity...................... 767,713 1,163,021
---------- ----------
Total capitalization............................ $3,046,640 $3,422,777
========== ==========
</TABLE>
---------------
(a) This credit facility provides for a $700 million acquisition facility and a
$30 million working capital facility, of which $10 million is used to post a
letter of credit for an indirect wholly owned subsidiary.
(b) This credit facility provides for a $1.11 billion acquisition facility and a
$90 million working capital facility, of which $10 million is used to post a
letter of credit for a wholly owned subsidiary.
(c) We issued 1,219,355 shares of our common stock, valued at $18.9 million, as
partial consideration for the acquisition of four subsidiaries of
Constellation Operating Services. Constellation Operating Services has the
right to require us to repurchase these shares at dates and under
circumstances set forth in the acquisition agreements. This right will
terminate upon completion of this offering.
(d) As part of our employees' stock option agreements, certain employees
received options to acquire shares of our common stock at the time of each
acquisition. Certain employees received these options at exercise prices
that were determined when they commenced employment, which was less than the
fair value of the common stock at the date of issuance of the options. We
recognized deferred compensation for any difference between exercise price
and fair value.
23
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables present our selected consolidated financial data. The
information set forth below should be read together with the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical consolidated financial statements and the notes
to those statements included in this prospectus. Our consolidated statement of
income and cash flows data for the period March 10, 1998 (inception) to December
31, 1998 and the year ended December 31, 1999, and balance sheet data as of
December 31, 1998 and 1999, are derived from our audited consolidated financial
statements, which were audited by Arthur Andersen LLP, independent public
accountants. The balance sheet and statement of income and cash flows data as of
and for the six months ended June 30, 1999 and 2000 are derived from our
unaudited financial statements included elsewhere in this prospectus. In the
opinion of management, the unaudited financial statements have been prepared on
a basis consistent with the audited financial statements which appear elsewhere
in this prospectus and include all adjustments, which are normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for the unaudited periods. The historical results
presented are not necessarily indicative of future results. We have supplied
selected capacity and other data set forth below under the caption "Operating
Data."
<TABLE>
<CAPTION>
MARCH 10, 1998
(INCEPTION) TO YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1998 1999 1999 2000
-------------- ------------ ---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue............................................... $ 314 $ 134,074 $ 2,023 $ 341,674
-------- ----------- ------- -----------
Operating expenses:
Fuel................................................ -- 20,463 -- 127,706
Operations and maintenance.......................... 24 22,732 1,965 35,553
Taxes other than income tax......................... -- 20,785 280 27,016
General and administrative.......................... 2,620 16,755 2,137 14,496
Depreciation and amortization....................... 94 18,938 409 42,296
Charge for buyout of operations and maintenance
contracts with related party........................ -- -- -- 19,000
-------- ----------- ------- -----------
Total operating expenses.............................. 2,738 99,673 4,791 266,067
-------- ----------- ------- -----------
Operating (loss) income............................... (2,424) 34,401 (2,768) 75,607
Interest expense, net................................. 124 23,943 37 52,303
-------- ----------- ------- -----------
(Loss) income before provision for income tax......... (2,548) 10,458 (2,805) 23,304
Income tax (benefit) expense.......................... (1,006) 4,796 (1,126) 9,554
-------- ----------- ------- -----------
Net (loss) income..................................... $ (1,542) $ 5,662 $(1,679) $ 13,750
======== =========== ======= ===========
(LOSS) EARNINGS PER AVERAGE COMMON SHARE:
Basic............................................... $ (12.94) $ 0.39 $ (0.89) $ 0.28
======== =========== ======= ===========
Diluted............................................. $ (12.94) $ 0.38 $ (0.89) $ 0.27
======== =========== ======= ===========
STATEMENT OF CASH FLOWS DATA:
Cash flows from operating activities.................. $ (2,335) $ 10,456 $ (844) $ (12,763)
Cash flows from investing activities.................. (16,407) (1,047,167) (2,123) (1,768,424)
Cash flows from financing activities.................. 20,345 1,113,657 4,038 1,746,860
OPERATING DATA:
Consolidated EBITDA(a)................................ $ (2,330) $ 53,339 $(2,359) $ 117,903
======== =========== ======= ===========
Megawatt hours produced during period................. 7,283 2,793,689 90,357 5,494,382
Net capacity owned at end of period (megawatts)....... 102 2,613 102 5,227
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 2000
------------------ -------------------
1998 1999
---- ---- (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(b)...................................... $ 2,079 $ 154,245 $ 311,108
Total assets............................................ 20,450 1,252,007 3,218,817
Total debt, including current portion................... 2,593 787,680 2,259,756
Total stockholders' equity.............................. 17,068 395,416 767,713
</TABLE>
---------------
(a) Consolidated EBITDA represents earnings before interest, taxes, depreciation
and amortization. EBITDA, as defined, is presented because it is a widely
accepted financial indicator used by some investors and analysts to analyze
and compare companies on the basis of operating performance. EBITDA, as
defined, is not intended to represent cash flows for the period, nor is it
presented as an alternative to operating income or as an indicator of
operating performance. It should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with
generally accepted accounting principles (GAAP) in the United States, is not
indicative of operating income or cash flow from operations as determined
under GAAP and does not give effect to our capital expenditures or debt
service payments. Our method of computation may or may not be comparable to
other similarly titled measures by other companies.
(b) Includes cash held in restricted accounts pursuant to our credit facilities
of $56.9 million as of December 31, 1999 and of $158.9 million as of June
30, 2000.
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with "Risk
Factors," "Selected Consolidated Financial and Operating Data" and our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
OVERVIEW
We were incorporated in Delaware in March 1998 for the purpose of
acquiring, developing, owning, and operating non-nuclear electric power
generating facilities in the United States and Canada. Commencing in November
1998, in four separate acquisitions, we have acquired our existing facilities
with a total electric generating capacity of 5,396 megawatts. Our business
strategy includes the acquisition and development of additional generating
facilities to the extent that facilities meeting our investment criteria become
available to us on attractive terms.
Wholesale power generators like us typically sell three types of products:
energy, capacity, and ancillary services. Although these are separate products,
all three products are typically sold together, with the exception of capacity
in the New York City market. Accordingly, we do not allocate revenue among our
products other than in the New York City market.
Energy. Energy refers to the actual electricity generated by our
facilities and sold to intermediaries for ultimate transmission and distribution
to consumers of electricity. Energy is the only one of our products that is
subsequently distributed to consumers by power retailers.
Capacity. Capacity refers to the physical capability of a facility to
produce energy. In some regional power markets, like the market managed by the
NY-ISO, a market for capacity exists distinct from the market for the energy
produced by that capacity. In other power markets, like the East Central Area
Reliability Council region in Ohio and Pennsylvania, there is no market for
capacity as a separate product, and the value of the underlying capacity is
included in the price of the energy produced.
In the New York market administered by the NY-ISO, wholesale power
generators sell capacity into a regional market to assure power retailers in
that region that they will have access to energy adequate to meet their retail
demand. The sale of capacity in New York represents a commitment by a wholesale
generator to make the energy it produces available to the relevant day-ahead
market, but does not commit the wholesale generator to sell that energy to any
particular power retailer or at any particular price. Power retailers are not
committed to acquire energy from the wholesale generators from whom they
purchase capacity. A wholesale generator will recognize additional revenue when
it sells its energy, either into the ISO market or to any other third-party
purchaser. Utilities and other power retailers build the cost of acquiring
capacity into the retail price for electricity.
In markets like New York City, where there are constraints on the ability
to transmit power from outside the city into the city and reliability of the
power supply system is a high priority, capacity -- not the energy itself -- may
represent the principal product and significant source of revenue for local
wholesale generators.
Ancillary Services. Ancillary services generally are support products used
to ensure the safe and reliable operation of the electric power supply system.
Examples of ancillary services include:
- automatic generation control, which is used to balance energy supply with
energy demand, referred to in our industry as "load," on a real-time
basis;
- operating reserves, which are used on an hourly or daily basis to
generate additional energy if demand increases or if major generating
resources go off-line or if transmission facilities become unavailable;
26
<PAGE> 30
- reactive supply and voltage support, which maintain voltages on the
transmission and distribution system within acceptable limits; and
- black start capability, which is used to restart generating facilities
without reliance on external energy sources.
Markets. We typically sell our products to electric power retailers, which
are the entities that supply power to consumers. Power retailers include
regulated utilities, municipalities, energy supply companies, cooperatives, and
retail "load" aggregators.
We may sell energy and ancillary services in advance under bilateral supply
contracts with specific buyers. Alternatively, we may sell them into regionally
operated day-ahead and real-time markets. Capacity may be sold in monthly,
semi-annual, or annual blocks in a competitive bid market or in advance under
bilateral contracts.
FACILITIES
Our facilities are diversified by fuel type, technology and, consequently,
by cost of production. Facilities that have the lowest costs of production
relative to other power plants in the region are usually the facilities that are
first used to provide energy. These facilities are known as "baseload"
facilities and typically operate more than 60% of the time that they are
available. Our hydroelectric assets in New York, which have a marginal cost of
production of between $1 and $2 per megawatt hour, are examples of baseload
facilities. Our baseload facilities also include the coal-fired facilities in
Pennsylvania and Ohio, which have a marginal cost of production of between $15
and $20 per megawatt hour, depending on the delivered cost of coal.
As demand for electricity rises during the year or even during the course
of a day, power plants that have higher costs of production are dispatched to
supply additional energy. Facilities that regularly provide additional energy
during a day are known as "intermediate" facilities. Intermediate facilities are
used between 10% and 60% of the time that they are available. Our intermediate
facilities generally have a marginal cost of production of between $20 and $50
per megawatt hour, depending on the cost of fuel.
Power plants with the highest costs of production are called upon only in
times of exceptionally high demand and are known as "peaking units." Peaking
units are dispatched less than 10% of the time that they are available in the
course of a year and generally have a marginal cost of production of between $50
and $75 or more per megawatt hour, depending on the cost of fuel.
The table below separates our capacity into baseload, intermediate and
peaking categories:
<TABLE>
<CAPTION>
CAPACITY (MW) BY DISPATCH PERCENTAGE OF TOTAL CAPACITY
------------------------- ----------------------------
<S> <C>
Baseload........................................ 53%
Intermediate.................................... 27
Peaking......................................... 20
</TABLE>
RECENT DEVELOPMENTS
We are in the process of preparing our financial statements for the three
months ended September 30, 2000, and we expect to report revenues for the
quarter of approximately $300 million and net income of approximately $3
million. These results reflect the first full period of operation under our
ownership for all of our existing assets. We expect to report our final results
of operations for the quarter during the last two weeks of November 2000.
To supplement our own generating capacity and to reduce the risk that we
would not meet our forecasted obligation under the provider of last resort
contract with Duquesne Light
27
<PAGE> 31
Company, we purchased 698,400 net megawatt hours under term contracts for the
period May through October 2000. Our cost for the purchases was $57 million and
was paid upon the delivery of the energy. We have resold into the market the
excess energy that was not required to meet our provider of last resort
responsibility and realized the prevailing market price at that time. We believe
that this resulted in a one-time pre-tax loss to us of approximately $30 million
for the three months ended September 30, 2000, due to the uncommonly cool summer
weather and resultant lower than forecasted market prices in Duquesne Light
Company's service area.
In early October 2000, the second auction of capacity in New York City was
held by the New York independent system operator, known as the NY-ISO, relating
to the winter 2000-2001 capacity season, which runs from November 1, 2000 until
April 30, 2001. We bid 2,305 megawatts of capacity for our assets located in New
York City into the auction and were successful in selling 2,002 megawatts of
that capacity at an approximate average price of $105 per kilowatt year, for a
total of approximately $105.1 million, which we will recognize as revenue over
that period.
IMPACT OF COLUMBIA ELECTRIC ACQUISITION
In September 2000, we entered into an agreement to purchase all of the
stock of Columbia Electric Corporation for approximately $200 million in cash,
subject to adjustment. In connection with this acquisition, we agreed to assume
a $334 million credit facility associated with the Liberty Generating Station,
of which approximately $101 million was outstanding as of September 30, 2000,
and assume construction contract guarantee and equity investment obligations
from Columbia Energy Group. Among the assets being acquired are two projects
under construction and several other projects in various stages of development
in Maryland, Kentucky, Pennsylvania and West Virginia. Columbia Electric has
agreed to divest its interests in facilities already in operation prior to our
acquisition.
The two projects under construction, the 500 megawatt baseload plant at the
Ceredo Generating Station and the 568 megawatt peaking plant at the Liberty
Generating Station, will require the expenditure of an additional $100 million
in 2001 to complete construction of the Ceredo Generating Station and the
expenditure of an additional $41 million in 2002 to satisfy the guarantee
obligations of Columbia Energy Group that we assumed in connection with Liberty
Generating Station.
We intend to use the net proceeds from this offering and cash flow from
operations to finance these expenditures. In addition, we are assuming a credit
facility which funds the construction of the Liberty project.
The future development projects could require significant additional
capital, but we do not yet consider the projects advanced enough for us to
estimate the timing or amount of the total additional capital expenditures that
will be required. We would expect to finance these amounts through a combination
of debt and equity financing and cash flow from operations.
RESULTS OF OPERATIONS
Generally. The principal factor affecting recent changes in our results
has been the timing of the acquisitions of our facilities. We acquired our
existing facilities on the following dates:
- Carr Street Generating Station -- November 19, 1998;
- Hydroelectric assets -- July 30, 1999;
- Assets located in New York City -- August 20, 1999; and
- Assets located in Ohio and Pennsylvania -- April 28, 2000.
28
<PAGE> 32
As a result, our results for year ended December 31, 1998 reflect only
corporate administrative expenses incurred following our formation in March 1998
and the operation of the Carr Street Generating Station from November 1998. Our
results for other periods include the operations of our facilities from the date
of acquisition. From November 1998 until July 1999, we operated only the Carr
Street Generating Station.
The substantial expansion of our operations in July and August 1999 and
April 2000 with the acquisition of the hydroelectric assets, the assets located
in New York City and the assets located in Ohio and Pennsylvania makes our
historical financial statements less useful either as a means of understanding
our current financial situation or as an indicator of our future results than
might be the case with a more established company.
For periods prior to our acquisitions of the various facilities, separate
historical financial statements are not available with respect to the
hydroelectric assets, the assets located in New York City or the assets located
in Ohio and Pennsylvania because their prior owners did not treat these assets
as separate business units, but rather as parts of a fully integrated business.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenue. Our revenue was $341.7 million for the six months ended June 30,
2000, as compared to revenue of $2.0 million for the six months ended June 30,
1999. The increase is a result of the ownership and operation of the
hydroelectric assets, the assets located in New York City and the assets located
in Ohio and Pennsylvania in the more recent period, all of which were acquired
after June 30, 1999. The six months ended June 30, 1999 reflects Carr Street as
our only owned and operating asset. Carr Street revenues were $2.3 million for
the six months ended June 20, 2000, as compared to $2.0 million for the six
months ended June 30, 1999. The increase was due to increased generation during
the period ending June 30, 2000. The revenue from each facility was determined
at least in part in accordance with the various interim capacity and energy
agreements then in place, including the provider of last resort contract. Our
capacity sale agreement with Consolidated Edison, which includes energy, for the
assets located in New York City expired in April 2000, at which time we began
selling all of our products into the market through the NY-ISO. Capacity sales
generated from the assets located in New York City were $96.1 million for the
six months ended June 30, 2000, as compared to $0 for the six months ended June
30, 1999.
We anticipate that the provider of last resort contract will serve to
reduce the seasonality of our revenues due to the fact that the price we receive
under the contract is fixed throughout the year. From the period April 28, 2000
through June 30, 2000, during which the provider of last resort contract was in
effect, we believe that our revenues were lower than they would have been had we
received market prices. We are, however, unable to quantify this difference
since we did not attempt to sell this significant amount of electricity into the
market, and are unable to estimate what price we would have received and what
quantity we would have sold had we done so.
Operating Expenses. Our operating expenses consisted of fuel expense,
operations and maintenance expense, taxes other than income taxes (principally,
property taxes), general and administrative expenses, depreciation and
amortization expense and charge for buyout of operations and maintenance
contracts.
We had fuel expenses of $127.7 million for the six months ended June 30,
2000, compared with no fuel expenses for the six months ended June 30, 1999. The
Carr Street facility operates under a tolling agreement, which provides that the
party buying the power is responsible for supplying all necessary fuel.
Our operations and maintenance expenses were $35.6 million for the six
months ended June 30, 2000, as compared to $2.0 million for the six months ended
June 30, 1999. The increase is a result of the ownership and operation of the
hydroelectric assets and the assets
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located in New York City and in Ohio and Pennsylvania in the more recent period,
all of which were acquired after June 30, 1999.
Taxes other than income taxes amounted to $27.0 million for the six months
ended June 30, 2000 compared to $280,000 for the six months ended June 30, 1999.
The increase is a result of the ownership and operation of the hydroelectric
assets and the assets located in New York City and in Ohio and Pennsylvania in
the more recent period.
Our general and administrative expenses were $14.5 million for the six
months ended June 30, 2000, as compared to $2.1 million for the six months ended
June 30, 1999. The increase is the result of expanded corporate infrastructure
as well as the creation of two regional headquarters to support our growth.
Depreciation and amortization expense was $42.3 million for the six months
ended June 30, 2000, as compared to $409,000 for the six months ended June 30,
1999. Depreciation and amortization increased due to the acquisition of the
hydroelectric assets and the assets located in New York City and in Ohio and
Pennsylvania after June 1999.
The charge for buyout of operations and maintenance contracts resulted from
the purchase of all the outstanding capital stock of three subsidiaries of
Constellation Operating Services which, pursuant to our strategic alliance
agreement, operated our assets located in New York. In addition, we acquired
another subsidiary of Constellation Operating Services that was established to
operate the assets located in Ohio and Pennsylvania.
We decided to acquire these subsidiaries to allow us the opportunity to be
a full service operator of our facilities and allow us more operating
flexibility over our operating and maintenance functions. Also, the acquisition
of the subsidiaries of Constellation Operating Services will allow us to avoid
over $4.0 million per year of fees and bonuses over the next four to five years,
providing us with additional cash flow flexibility. We paid $19.0 million for
the four subsidiaries by issuing Constellation Operating Services 1,219,355
shares of our common stock and paying $0.1 million in cash. As a result of these
acquisitions, we incurred a one time operating loss of $19.0 million. There was
no such loss for the six months ended June 30, 1999.
Operating Income. As a result of these factors, our operating income was
$75.6 million for the six months ended June 30, 2000, as compared to an
operating loss of $2.8 million for the six months ended June 30, 1999. During
the six months ended June 30, 2000, a majority of our operating income was
contributed by the assets located in New York, due in part to the acquisition of
the assets located in Ohio and Pennsylvania during the period.
Interest Expense, Net. Our interest expense, net was $52.3 million for the
six months ended June 30, 2000, as compared to $37,000 for the six months ended
June 30, 1999. Interest income was $4.2 million for the six months ended June
30, 2000, as compared to $0 for the six months ended June 30, 1999. The increase
in interest expense is due to our bank credit agreements, senior notes and loans
from our stockholders to finance the acquisition and operation of the
hydroelectric assets and the assets located in New York City and in Ohio and
Pennsylvania. The interest income was generated from overnight investments
related to daily cash on hand as allowed under our credit facilities.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE PERIOD MARCH 10, 1998 (INCEPTION)
THROUGH DECEMBER 31, 1998
Revenue. Our revenue was $134.1 million for the year ended December 31,
1999, as compared to revenue of $0.3 million for the period from March 10, 1998
(inception) through December 31, 1998. The increase is a result of the ownership
and operation of the hydroelectric assets and the assets located in New York
City in the more recent period, which were acquired after December 31, 1998 and
the longer period of operation of the Carr Street facility in 1999. The revenue
from each facility was determined in accordance with the various interim
capacity
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and energy agreements then in place. Our transition energy sale agreement with
Consolidated Edison expired on November 18, 1999, allowing us to realize market
prices for energy sales after that date. Our capacity sale agreement for the
assets located in New York City expired in April 2000, and we then commenced
selling capacity in New York City through the NY-ISO market. Capacity sales
generated from the assets located in New York City were $71.3 million for the
year ended December 31, 1999.
Operating Expenses. Our operating expenses consisted of fuel expense,
operations and maintenance expense, taxes other than income taxes, general and
administrative expenses and depreciation and amortization expense.
We had fuel expenses of $20.5 million for the year ended December 31, 1999,
compared with $0 in the prior period. Both the Carr Street facility and, until
November 18, 1999, the assets located in New York City were operated under
tolling agreements, which provided that the party buying the power would supply
all necessary fuel. As a result of the expiration of the tolling agreement for
the assets located in New York City, as well as the impact of the acquisition of
the assets located in Ohio and Pennsylvania, fuel costs will be a significant
expense for us in future periods.
In the third and fourth quarters of 1999, we failed to meet the minimum
threshold under our energy contract with Niagara Mohawk due to a drought. This
resulted in additional net costs to meet our obligations of $1.2 million for the
year.
Our operations and maintenance expenses were $22.7 million for the year
ended December 31, 1999, as compared to $24,000 for the period from March 10,
1998 (inception) through December 31, 1998. The increase is a result of the
operation of the hydroelectric assets, the assets located in New York City, and
the Carr Street facility in the more recent period.
Taxes other than income taxes amounted to $20.8 million for the year ended
December 31, 1999 compared to $0 for the period from March 10, 1998 (inception)
through December 31, 1998. This was due to our ownership of the Carr Street
facility during all of 1999, as well as the hydroelectric assets and the assets
located in New York City for a portion of the period.
Our general and administrative expenses were $16.8 million for the year
ended December 31, 1999, as compared to $2.6 million for the period from March
10, 1998 (inception) through December 31, 1998. The increase is the result of
expanded corporate infrastructure to support our growth and approximately $6.7
million of transaction costs related to the acquisition of the hydroelectric
assets and the assets located in New York City.
Depreciation and amortization expense was $18.9 million for the year ended
December 31, 1999, as compared to $94,000 for the period from March 10, 1998
(inception) through December 31, 1998. Depreciation and amortization increased
due to the acquisition of the hydroelectric assets, the assets located in New
York City, and the ownership of Carr Street facility during all of 1999.
Operating Income. As a result of these factors, our operating income was
$34.4 million for the year ended December 31, 1999, as compared to an operating
loss of $2.4 million for the period from March 10, 1998 (inception) through
December 31, 1998.
Interest Expense, Net. Our interest expense, net was $23.9 million for the
year ended December 31, 1999, as compared to $124,000 for the period from March
10, 1998 (inception) through December 31, 1998. Interest income was $1.8 million
for the year ended December 31, 1999 and $13,000 for the period from March 10,
1998 (inception) through December 31, 1998. The increase was due to increased
average daily cash available for overnight investment in accordance with our
credit facilities. The increase in interest expense is due to our bank credit
agreement and loans from our stockholders to finance the acquisition and
operation of the hydroelectric assets and the assets located in New York City.
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LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, we obtained cash from our
operations and from borrowings under the credit facilities of our subsidiaries.
We utilized this cash to fund our operations, service debt obligations, fund the
acquisition of the assets located in Ohio and Pennsylvania and meet our other
cash and liquidity requirements.
Operating activities for the six months ended June 30, 2000 used $12.8
million. This resulted from a $172.0 million increase in operating assets,
including restricted cash balances. This was offset by a $76.6 million increase
in operating liabilities, $46.7 million of depreciation and amortization, $18.9
million cost of buyout of operations and maintenance contracts, $13.8 million of
net income, $2.8 million increase in deferred income taxes and $0.5 million of
deferred compensation.
Investing activities for the six months ended June 30, 2000 used
approximately $1.8 billion, primarily for the acquisition of the assets located
in Ohio and Pennsylvania.
Financing activities for the six months ended June 30, 2000 provided
approximately $1.8 billion of cash, consisting of $1.6 billion of borrowings
under the credit facilities of our subsidiaries and the senior notes, of which
$8.0 million was repaid in the period, and $304.3 million of net proceeds from
the issuance of common stock. This was offset by $55.0 million used to fund
restricted cash balances as required by the credit facility of Orion Power
Midwest, L.P., $28.5 million paid for financing costs under that credit facility
and the senior notes and $17.1 million of advisory fees paid to our stockholders
in accordance with our stockholders' agreement in connection with our
acquisition of the assets located in Ohio and Pennsylvania. All of the remaining
stockholder loans were converted into common equity.
As of June 30, 2000, cash and cash equivalents were $44.2 million and
working capital was $311.1 million. Of this working capital, we had restricted
cash of $158.9 million that can only be used in certain circumstances to fund
the business activities of our subsidiaries that hold our assets.
Since inception, our principal need for capital has been in connection with
the financing of our acquisition of generating facilities. We have financed our
four acquisitions to date through stockholder capital contributions and loans,
the sale of senior notes and borrowings under the credit facilities of our
subsidiaries.
The credit facility of Orion Power New York, L.P. is a credit agreement
between our subsidiary that holds our assets located in New York and a group of
lending institutions. Under this credit facility, we incurred $700 million of
indebtedness to finance the acquisition of the assets located in New York.
Amounts outstanding under the facility bear interest at a floating rate at our
option at either (1) the greater of the base rate of interest announced by Bank
of America or the federal funds effective rate, plus an applicable margin for
the first two years of 0.375 percent and 0.75 percent thereafter, or (2) LIBOR
for deposits in dollars plus an applicable margin for the first two years of
1.375 percent and 1.75 percent thereafter. In addition, our New York subsidiary
has a $30 million working capital revolving credit facility under this credit
facility, of which $15 million was outstanding as of June 30, 2000, and $10
million was used to provide a letter of credit in favor of Consolidated Edison
of New York. This facility is available only to that subsidiary and not for our
operations. It provides, among other things, that the cumulative amount of
dividends and distributions that our New York subsidiary may pay to us cannot
exceed $100 million over the life of the facility. As of June 30, 2000, no
dividends or distributions had been paid. The credit facility of Orion Power New
York, L.P. has a maturity date of December 2002.
The credit facility of Orion Power MidWest, L.P. is a credit agreement
between our subsidiary that holds our assets located in Ohio and Pennsylvania
and a group of lending institutions. Under this credit facility, we incurred
$1.11 billion of indebtedness to finance the acquisition of the
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assets located in Ohio and Pennsylvania. Amounts outstanding under the credit
facility bear interest at our option at either (1) the greater of (a) the prime
rate of interest publicly announced by Bank of America, N.A. or (b) the federal
funds effective rate, plus an applicable margin of 0.375 percent for the first
year, 0.5 percent for the second year and 1.0 percent thereafter or (2) LIBOR
for deposits in dollars for a term comparable to the period elected by Orion
Power MidWest, L.P., plus an applicable margin of 1.375 percent for the first
year, 1.5 percent for the second year and 2.0 percent thereafter. In addition,
this subsidiary has a $90 million revolving working capital facility, of which
$34.1 million was outstanding as of June 30, 2000, and $10 million was used to
provide a letter of credit in favor of Duquesne Light Company. This facility is
available only to that subsidiary and not for our operations. It provides, among
other things, that the cumulative amount of dividends and distributions that our
Orion Power MidWest, L.P. subsidiary may pay to us cannot exceed $175 million
over the life of the facility. As of June 30, 2000, no dividends or
distributions had been paid. The credit facility of Orion Power MidWest, L.P.
has a maturity date of October 2002.
In April and May 2000, we sold $400 million aggregate principal amount of
12% senior notes due May 1, 2010.
We will require cash to meet our debt service obligations under the notes
and our credit facilities. Our debt service obligations will fluctuate depending
on variations in the interest rate and the balance on the working capital
portion of the facilities. The following table summarizes our outstanding
indebtedness, effective interest rate and annual interest payments as of June
30, 2000:
<TABLE>
<CAPTION>
INTEREST ANNUAL INTEREST
SOURCE AMOUNT RATE PAYMENTS
------ ------ -------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Orion Power New York, L.P. Credit Facility....... $ 715 8.18% $ 58
Orion Power MidWest, L.P. Credit Facility........ 1,144 8.44 97
12% Senior Notes due 2010........................ 400 12.00 48
------ ------ ----
Total.................................. $2,259 8.99%(a) $203
====== ====== ====
</TABLE>
---------------
(a) Weighted average interest rate.
In April 2000, we paid $19.0 million for four subsidiaries of Constellation
Operating Services by issuing 1,219,355 shares of our common stock and paying
$0.1 million in cash. Because the form of consideration paid to Constellation
Operating Services was largely shares of our common stock rather than cash, it
did not meaningfully affect our short-term liquidity requirements. Under the
terms of the agreement with Constellation Operating Services, if the shares of
common stock we issued to Constellation Operating Services are not offered to be
included in an initial public offering within one year of issuance,
Constellation Operating Services can require us to repurchase those shares for
$19 million in cash, plus interest at a rate of 8% per annum from the date of
the acquisition of the subsidiaries. In July 2000, we offered Constellation
Operating Services the right to sell shares in this offering. As a result of
this transaction, we will reduce a portion of our operations and maintenance
costs to Constellation Operating Services related to the base fee and at-risk
fee under the contracts which totalled approximately $1.6 million for the year
ended December 31, 1999.
On July 27, 2000, we entered into a $75 million revolving senior credit
facility with a group of lending institutions which includes a $40 million
sublimit for letters of credit. The credit facility matures in December 2002.
Amounts outstanding under the facility bear interest at our option at either (1)
the greater of the lender's base rate and the federal funds effective rate, plus
0.5 percent and an additional margin of between 0.0 and 3.0 percent, or (2)
LIBOR for deposits in dollars, plus an additional margin of between 1.5 percent
and 4.5 percent. Letters of credit used to satisfy financial obligations will
have the same applicable margin as Eurodollar rate loans while
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letters of credit to satisfy other obligations will bear an applicable margin
between 1.0 and 3.0 percent. The facility is unsecured and ranks on a parity
with all of our senior debt. The credit facility contains financial and
operating covenants and other restrictions with which we must comply. As of
September 30, 2000, no amount was outstanding under this facility.
We review potential acquisition and development opportunities on an
on-going basis. In the near future, we will seek to acquire and/or develop
additional facilities, which, depending on the size and structure of these
acquisitions or development projects, may require significant cash resources. We
currently have not made any commitments or entered into any binding agreements
with respect to any such transaction other than the Columbia Electric
acquisition. We may incur substantial additional indebtedness to finance future
acquisitions and development opportunities. This indebtedness may be incurred by
us or by one or more of our subsidiaries.
We are restricted in our ability to incur additional indebtedness and make
acquisitions and capital expenditures by the terms and conditions of our senior
notes, our revolving credit facility and the credit facilities of our
subsidiaries. We may incur additional indebtedness under:
- the senior notes if the ratio of consolidated cash flow to fixed charges
is at least 2.0 times, taking into account the additional indebtedness;
- the revolving credit facility if we are in compliance with the financial
covenants in the credit agreement, taking into account the additional
indebtedness;
- the Orion Power New York, L.P. credit facility with the consent of
two-thirds of our lenders; and
- the Orion Power MidWest, L.P. credit facility as long as the debt has a
maturity date of 36 months or longer and the provisions of the
indebtedness are no more limiting or restrictive than the senior notes.
We believe we are currently in compliance with all of the covenants under
our credit facilities and senior notes.
We seek to improve the operational efficiency of our generating facilities
and, in some cases, to expand our facilities on-site. This on-site expansion may
come either through the construction of additional generating plants at existing
sites, referred to in our industry as "brownfield" development, or through the
repowering of existing plants. Our ability to expand the capacity of our
facilities is subject to restrictions imposed by environmental regulations. See
"Business -- Regulation." We anticipate in 2000 approximately $30 million in
total capital expenditures for the assets located in New York and $10 million
for the assets located in Ohio and Pennsylvania. We anticipate maintenance
capital expenditures of between $25 million and $30 million annually for the
next several years in connection with our assets. Our budgeted capital
expenditures for the next five years beyond 2000 are approximately $1.5 billion,
which include three major repowering initiatives (Astoria, Brunot Island and
Avon Lake) and the 10 turbines that we entered into a letter of intent to
purchase for approximately $345 million. This amount includes approximately $300
million for compliance with environmental regulations and other regulatory
requirements. This budget would increase by approximately $600 million, which
amount includes the credit facility and guarantee obligations that we assumed,
over the next three years to complete the development and construction of the
projects that we will acquire in the Columbia Electric acquisition.
Additionally, we expect that capital expenditures on environmental projects
alone will total approximately $300 million over the next seven years, the
majority of which we expect to expend between 2002 and 2006. We believe that a
substantial portion of this will be funded out of operating cash flow. This
amount may change, however, and the timing of any necessary capital expenditures
could be accelerated in the event of a change in environmental regulations or
any enforcement proceeding being commenced against us.
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In order to execute our business strategy and finance our anticipated
capital expenditures, we will need to incur additional debt and/or issue
additional equity. If we incur additional debt, we will refinance our existing
indebtedness and/or incur new debt in compliance with the restrictions of our
existing indebtedness or with the consent of our existing lenders. Any increase
in our level of indebtedness will increase the amount of interest we must pay.
We may also raise additional equity from the public markets to assist in the
financing of these acquisitions and/or development projects. The sale of equity
securities by us could cause you to incur dilution in the net tangible book
value of your shares of common stock.
Our ability to meet our payment obligations under our indebtedness or to
fund capital expenditures will depend on our future performance, which is
subject to regulatory, economic, financial, competitive, legislative and other
factors that are beyond our control. We believe that our current financial
resources, in combination with additional cash generated from operations, will
most likely be adequate to meet our cash needs for at least the next 12 months,
excluding cash that may be needed for acquisitions or new development projects.
In the event of an acquisition or new development project, we are likely to need
additional capital resources and may need to borrow additional funds or sell
additional equity. See "Risk Factors."
SEASONALITY
Our operations vary depending upon the season and regional weather
conditions, although the impact of seasonality can vary depending upon the
geographic location of our facilities. In many areas, the demand for electric
power peaks during the hot summer months, with energy and capacity prices
correspondingly being the highest at that time. We earn a substantial amount of
our net income from a few days during the peak demand for electric power on the
hottest days of summer. In some areas, demand also increases during the coldest
winter months. Additionally, hydroelectric plants show seasonality depending
upon the availability of water flows, which generally will be high during rainy
months or as a result of snowmelt in the late winter and spring. Prices will
generally fluctuate with demand, being highest at times of greatest demand. This
fluctuation is currently somewhat mitigated by the existence of the hydro
transition power sales agreement and the provider of last resort contract, all
of which have constant prices for the entire year. Our overall future operating
results may reflect different seasonal aspects, depending upon the location and
characteristics of any additional facilities we acquire.
FINANCIAL MARKET RISKS
We attempt to hedge some aspects of our operations against the effects of
fluctuations in inflation, interest rates, and commodity prices. Because of the
complexity and potential cost of hedging strategies and the diverse nature of
our operations, our results, although hedged, will likely be somewhat materially
affected by fluctuations in these variables and these fluctuations may result in
material improvement or deterioration of operating results. Results would
generally improve with lower interest rates and fuel costs, and with higher
prices for energy, capacity, and ancillary services, except where we are subject
to fixed price agreements such as the provider of last resort contract. We
incurred significant costs in connection with our hedging activities related to
the provider of last resort contract for the summer 2000 due to the risks
described in "Risk Factors -- Risks Relating to our Business and
Operations -- We have agreed to provide all of the energy required by Duquesne
Light Company to satisfy its provider of last resort obligation, which could
result in significant losses to us." Under the provider of last resort contract,
these risks should be substantially less in subsequent years, and we do not
anticipate similar hedging costs related to that contract after 2000. Our
operating results are also sensitive to the difference between inflation and
interest rates, and would generally improve when increases in inflation are
higher than increases in interest rates. We do not use derivative financial
instruments for speculative or trading purposes.
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As of June 30, 2000, we were party to four interest rate swap agreements
designed to fix the variable rate of interest on $350 million of the credit
facility of our subsidiary that holds our assets located in New York. The
weighted average fixed rate of interest for the related swap agreement is
approximately 6.95%. In addition, we entered into $500 million of interest rate
swap agreements to fix the variable rate of interest for the credit facility of
our subsidiary that holds our assets located in Ohio and Pennsylvania. The
weighted average fixed rate of interest for the related swap agreement is
approximately 7.52%. As of June 30, 2000, if we sustained a 100 basis point
change in interest rates for all variable rate debt, the change would have
affected net income by $6.5 million.
As of June 30, 2000, we were party to a total of 25 forward sale agreements
to sell power forward for a fixed price. These are financial transactions, and
we will not actually deliver energy to the buyers. Instead, the agreements will
be settled by us paying the buyers the daily index price for the New York City
region, and the buyers paying us the fixed price under the agreements. At the
end of the term of each of the agreements, the fluctuating rate paid by us and
the fixed price received by us will be netted out for each hour of energy
delivery. Accordingly, we will either pay or receive any price differences. We
have purchased sufficient fuel to produce the energy over these periods at a
fixed price for delivery during the period of the hedge agreements. We have sold
a total of 580,000 megawatt hours for 2000 and locked in a net margin (after
fuel costs) of $38.7 million and 35,200 megawatt hours for 2001 for a locked in
net margin of $2.6 million. We may seek to enter into additional similar
agreements, however, the market for energy in New York is in its early stages,
and we may not be able to find suitable counterparties. At such times as we
purchase the prices of energy, we intend to purchase the associated fuel.
As of June 30, 2000, a 10% change in electricity forward prices in Ohio and
Pennsylvania would have resulted in a net change in the value of our outstanding
forward purchase contracts of approximately $5.3 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards, requiring every derivative instrument be recorded on the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and require
that a company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
The effective date of SFAS No. 133 was delayed by the FASB, and therefore
will not be effective for us until January 1, 2001. We have entered into
interest rate swaps with financial institutions and other contracts that may
meet the definition of derivatives instruments under SFAS 133. We have not yet
analyzed the impact of adopting SFAS No. 133 on the financial statements and
have not determined the timing of or method of the adoption of SFAS No. 133. The
statement, however, could increase the volatility of our earnings.
On December 3, 1999, the SEC staff released Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition," to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101 is
effective December 31, 2000. We do not believe there will be a material impact
on our current revenue recognition policies.
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BUSINESS
GENERAL
We are a fast-growing electric power generating company operating in the
United States committed to delivering competitively priced wholesale electricity
and related products and services. We have opportunistically grown our business
through the acquisition of non-nuclear electric generating facilities located in
states that are deregulating the electric power industry. Since inception, we
have acquired 68 operating hydroelectric facilities across central and northern
New York, the assets located in New York City, consisting of three generating
facilities, the Carr Street Generating Station near Syracuse, New York, and the
assets located in Ohio and Pennsylvania, consisting of six operating power
generating facilities. We intend to aggressively pursue attractive opportunities
to acquire and develop electric generating facilities in order to take advantage
of the continuing deregulation of the electric power industry.
INDUSTRY OVERVIEW
DEREGULATION AND OPPORTUNITY
The United States electric power industry, including companies generating,
transmitting, distributing and retailing power, has recently undergone
significant change driven largely by the shift towards deregulation. This
industry historically has been characterized by vertically integrated electric
utility monopolies with the ability to sell electricity to a captive customer
base. Deregulation, however, has created the opportunity for consumer choice and
a substantial increase in competition. This competition may be found both on the
wholesale level in the sale of electricity by generators, marketers and others
to utilities and other electric distributors, as well as on the retail level in
the sale of electricity to consumers.
The passage of the Energy Policy Act in 1992 significantly expanded the
opportunities available to exempt wholesale power generators like us. Under this
law, FERC has required owners and operators of electric transmission facilities
to give wholesale generators and other wholesale market participants access to
transmission lines on a non-discriminatory basis. This right enables us, as well
as other wholesale generators, to sell the energy that we produce into
competitive markets for wholesale energy. The Energy Policy Act also created a
new class of generators -- exempt wholesale power generators -- that are not
subject to portions of the regulatory structure otherwise generally applicable
to electric utilities and their holding companies. In April 1996, FERC adopted
Order Nos. 888 and 889, providing for nondiscriminatory open-access electric
transmission services by public utilities, separate from wholesale sales of
electricity. This development has opened wholesale power sales to more
competition. The U.S. Court of Appeals for the District of Columbia Circuit
recently upheld Order Nos. 888 and 889 in nearly all respects. In December 1999,
FERC issued Order No. 2000 which encourages and provides the principles for the
establishment of a system of regional transmission organizations, which would
control the transmission facilities within its region. As of early 2000, new
regulatory initiatives to increase competition in the domestic power generation
industry had been adopted or were being considered at the federal level and by
many states. The impact of Order Nos. 888, 889 and 2000 on our business and
operations depends on the effect of these orders on transmission operations in
particular markets.
More recently, certain states have started to support complete deregulation
of the electric generating industry. As of July 2000, 26 states, including New
York, Ohio and Pennsylvania, have enacted legislation or issued comprehensive
regulatory orders to restructure their electric power industries in order to
promote competition in the wholesale and/or retail sale of electric power.
Similar restructuring is being considered or studied in virtually every other
state.
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Since 1997, approximately 159,000 megawatts of power generating capacity in
the United States have been sold or transferred or are pending sale or transfer
by regulated electric utilities. According to published sources, up to 70,000
additional megawatts of power generating capacity in the United States will be
available for sale or transfer to wholesale power producers by the end of 2002.
Consumer demand for reliable power in the United States has also been
increasing. The growing population in urban and developing areas of the country
requires additional power, as evidenced by electricity shortages, brownouts and
blackouts in portions of major cities and very high peak prices for electricity
in the newly created wholesale electric market. Additionally, many old power
plants will also need to be replaced by environmentally cleaner, cheaper and
more efficient sources of power.
As a result of these anticipated divestitures and the need to replace
inefficient generating facilities, we believe there exists a significant
opportunity for investment in the power generation industry. We are one of many
companies actively pursuing the opportunities created by this evolving industry.
In our case, we are doing so by seeking to acquire and develop a portfolio of
generating facilities in order to operate as a competitive electric generating
and wholesale supply company in a deregulated marketplace.
MARKET FUNDAMENTALS
Generally, generating facilities can be categorized into three categories:
baseload, intermediate and peaking, based on their operating characteristics in
the production of energy for the region they serve. The various tiers of
baseload, intermediate and peaking facilities serving a particular area or
region are often referred to as the "generation stack" for that area or region.
Our current facilities are weighted towards baseload and intermediate units,
although our assets located in New York City include several peaking units near
the top of the New York City generation dispatch stack. The assets located in
Ohio and Pennsylvania are predominately baseload facilities.
The United States and Canada are divided for administrative and energy
distribution purposes into a number of areas, generally referred to as "power
pools" or "reliability regions." As part of the deregulation of the industry and
the efforts to increase competition, in some areas the role of these power pools
or reliability regions in managing the generation and distribution of energy is
being taken over by new organizations known as "independent system operators,"
or "ISOs," and "regional transmission organizations" that will supervise a
market-based system for generation and/or transmission of electric power. FERC
oversees the operations of these organizations in the United States.
In many geographic areas, especially in large cities, the demand for
electricity is greater than the ability of electric transmission lines to supply
electricity. This creates a need for a power plant to be located within the
geographic area, known as a load pocket, so that the necessary electricity is
available. Load pockets that cover large regions may themselves include smaller
load pockets. The existence of a load pocket may require selected generating
units inside the load pocket to produce electricity, even though less costly
sources of electricity may exist outside of the load pocket. Our assets
currently serve load pockets in New York City, Pittsburgh and Cleveland.
Since generating units inside of load pockets need to operate to prevent
blackouts or brownouts due to limited electric transmission capability, they are
usually designated as facilities that must run when local utilities require them
to operate for reliability reasons. A must-run facility is usually reimbursed
for its cost of operations, even if the market price of electricity is below its
cost of production. In some markets, such as New York City, generating units in
load
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pockets may have an ability to influence market prices. In these cases, rules
limiting the exercise of market power may be imposed by regulatory authorities.
For example, in New York, the NY-ISO regulates the price we may charge for
capacity, energy and ancillary services under certain circumstances. The
construction of additional electric transmission facilities can reduce or
eliminate load pockets by increasing transmission capability. Additionally, the
construction of additional generating units within a load pocket may increase
competition and may reduce market prices.
We look to acquire generating facilities that are located in load pockets
since we believe these facilities will have a more stable revenue stream, which
reduces the seasonality of our business. The elimination of a load pocket in
which we own a generating facility through either the construction of additional
transmission or generating capacity could negatively impact our business. In
addition, a significant change in the rules governing market prices within a
load pocket could negatively impact our business.
BUSINESS STRATEGY
Our strategy is to acquire and develop a portfolio of premier non-nuclear
generating facilities in the United States and Canada that provide electricity
and related products for the regions in which they are located, while seeking to
maximize value for our stockholders. We believe that by operating a carefully
assembled portfolio of generating assets in a cost-efficient manner, we will be
able to compete effectively in the newly deregulated market for wholesale
electric power. We approach our business with financial discipline, applying a
rigorous and multi-faceted approach to valuing acquisitions and development
opportunities, including the strict application of rate of return targets on
invested capital. We also place a high priority on integrating acquired assets
and related employees into our operations.
Based on the opportunities for investment in our industry, we believe we
will be able to rapidly grow our business and become one of the ten largest
power generators in the U.S. while maintaining strict financial control. We
attempt to have a significant market share in each region in which we choose to
compete, and believe we will become a prominent power generator in each of those
regions. Our strategy to build and operate this business includes the following
key elements:
Attract and Retain Talented, Entrepreneurial Employees. We believe that
the quality of our employees will be the most critical factor in our success. We
hire high quality employees from a variety of different backgrounds, including
in the wholesale and unregulated power industry, utility operations, financial
services and commodity trading, and offer them superior tools and training,
which we couple with substantial authority and responsibility. We are committed
to a flat, non-hierarchical organization that offers our employees internal
growth opportunities. To achieve our growth targets, our employees must be
motivated to work together and focused on expanding our business. Meaningful
amounts of their expected compensation are tied to increasing stockholder value,
including incentive cash compensation and stock option plans. After completion
of this offering, a substantial number of our employees will participate in our
stock option program, and our executive officers and employees will own, either
directly or indirectly through stock options, approximately 5% of the company on
a fully diluted basis.
Acquire a Competitive Portfolio of U.S. and Canadian Generating
Facilities. To date we have been very disciplined in our approach to acquiring
assets. As we grow our asset base to meet the market opportunity, we will
continue to focus on the following:
- High Quality Facilities. In determining which available generating
facilities to pursue, we focus on those properties or portfolios that
have a proven and successful operating history, have been
well-maintained, and have a long remaining anticipated useful life.
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- Critical Locations. We target power generating facilities that are
critical to the functioning of the electric grid for the region that they
serve, such as our facilities serving capacity constrained areas in New
York City, Pittsburgh and certain parts of Ohio. These types of
generating facilities typically are located in or near large metropolitan
areas or in very rural areas.
- Low Cost Producers. We are interested in facilities that have relatively
low marginal costs of producing energy and related products and services.
These facilities are more likely to produce energy for economic reasons,
whether they operate in a bid-based market or a cost-based dispatch pool,
and provide some protection against fluctuating wholesale prices of
energy. Low marginal production costs can result from a variety of
factors, including low cost fuel, efficiency in converting fuel into
energy, and low per unit operation and maintenance costs. Our
hydroelectric assets and our assets located in Ohio and Pennsylvania are
examples of this latter type of generating facility.
- Fuel Diversity. We intend to continue developing a portfolio of
facilities using a variety of fuel types in order to create a natural
hedge against some of the risks of fluctuating fuel prices. Our current
facilities illustrate this diversity, as they use fuel oil, natural gas,
coal and water to generate power. We do not expect to acquire
nuclear-powered generating facilities.
- Geographic Diversity. We intend to continue to acquire facilities
serving a variety of markets throughout North America. We evaluate
acquisition opportunities in a number of states. We compete in two
different large markets and serve multiple submarkets like New York City,
eastern New York, western New York, Pittsburgh and northern Ohio. Our
goal is to continue to diversify into additional markets in the future.
Disciplined Approach to Acquisition Opportunities. We employ a rigorous,
multifaceted approach to our acquisition opportunities. We believe that access
to the complementary skill sets of our key management members provides us with a
significant competitive advantage in successfully completing acquisition
opportunities.
Optimize Performance of Facilities. We are committed to optimizing the
performance of our facilities to meet the demands of a competitive market. We
will do so by improving the operating efficiency of our facilities, which
historically have been operated in a regulated environment that often did not
encourage cost efficiency. We increase our employees' authority and
responsibility by eliminating layers of management. We believe that this allows
us to increase productivity and operating efficiency to maximize profitability.
We also have opportunities to improve fuel procurement practices to lower
overall fuel costs and increase fuel quality.
Internal Growth Through Redevelopment of Existing Facilities and the
Development of New Facilities. We are focused on growing our business through
the development and construction of new power generating facilities. We believe
that there is significant need for additional generating capacity throughout
North America to replace aging and inefficient facilities, as well as to satisfy
increasing demand. These new facilities may be created through the redevelopment
of existing assets or through "greenfield" development at new sites that are not
currently used for power generation.
We are capitalizing on the existing infrastructure at our current plants by
expanding and modernizing certain generating units, including the Astoria power
plant in New York City, the Brunot Island generating station in Pittsburgh and
the Avon Lake generating station in Cleveland. The existing assets at these
sites allow us to build additional generating capacity at critical sites and for
anticipated capital costs which other developers are unlikely to be able to
reproduce. We expect to commence the construction, siting and permitting of new
power plants to meet the
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need to provide efficient, low-cost energy and related products to areas of
North America where demand is projected to exceed the current power supply.
In pursuing this strategy, we intend to use our management and technical
knowledge, and expertise in finance, fuel, operations and power marketing, which
we believe provide us with a competitive advantage. We believe that we can
maximize the return on our investments in these new and existing facilities by
utilizing and building upon our current infrastructure and organization.
Build Strong Relationships with Local Customers. We seek to sell a
majority of our power under contracts of varying lengths. Therefore, we strive
to build strong relationships with the electric utilities, municipalities,
cooperatives and retail aggregators in the regions in which we generate energy,
including the companies that sell us our facilities. We believe that these
entities will continue to be the primary providers of electricity to retail
consumers in a deregulated environment, and that they will need products in
addition to energy, such as capacity, operating reserves, voltage support, and
automatic generation control, in order to reliably serve their customers' needs.
By providing these services to meet our customers' energy needs, we believe that
we can earn a better return than would be available by primarily selling
commodity energy into the spot markets as they develop.
As an initial step in building these relationships, we have entered into
transition contracts to sell energy and other products to Niagara Mohawk Power
Corporation and Duquesne Light Company, from whom we purchased assets. As
substantially all of the obligations under these contracts are expected to
expire in the third quarter of 2001, we will seek to continue these
relationships beyond the expiration date of these contracts and enter into new
relationships with other entities that provide retail electric service. In
particular, we are seeking to reach agreement with Duquesne Light Company to
extend the period during which we will supply energy to Duquesne Light Company
until December 31, 2004 and with Niagara Mohawk Power Corporation to extend the
period, but we have not reached any definitive agreements. See "-- Orion Power
Midwest, L.P. -- Provider of Last Resort Contract." In order to facilitate the
development of these relationships, we will operate our facilities on a
decentralized basis, using local management with expertise in the local power
markets.
Develop our power marketing capabilities. We are focused on maximizing the
net margin of energy and related products while minimizing risk. Our electric
markets and fuels group actively markets output from and manages fuel
procurement for the facilities on a monthly, daily and real-time basis. We
operate a 24-hour, seven-day-per-week service desk to dispatch facilities,
manage output and fuels and respond to operational issues on a real-time basis.
We do not engage in any speculative trading of electricity or fuel. Our
goal is to sell a majority of our output forward through long-term and
short-term contracts and purchase in advance the associated fuel to match the
term of those sales. We believe that this approach allows us to successfully
manage electric and fuel commodity risk while maximizing our profit margins.
ACQUISITIONS OF OPERATING FACILITIES
1998 ACQUISITION
On November 19, 1998, we purchased Carr Street Generating Station, a 102
megawatt natural gas-fired facility from U.S. Generating Company, LLC, located
in East Syracuse, New York. The net purchase price for these assets was
approximately $17 million in cash.
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1999 ACQUISITIONS
On July 30, 1999, we purchased 70 hydroelectric generating plants located
in New York State with a capacity of 650 megawatts from Niagara Mohawk. The net
purchase price for these assets was approximately $425 million in cash. In
connection with this acquisition, we assumed approximately $14 million of
liabilities relating to employee benefits and environmental remediation.
Also, in connection with this acquisition, we entered into a Transition
Power Purchase Agreement with Niagara Mohawk. Under the terms of this agreement,
we will produce and deliver electric energy to Niagara Mohawk until September
30, 2001. As consideration, we will receive payments based on the amount of
electric energy produced and sold to Niagara Mohawk. If we fail to produce
specified minimum levels of electric energy, we will be required to pay a
penalty based on formulas set forth in the agreement.
On August 20, 1999, we purchased three gas- or oil-fired generating plants
located in New York City with a capacity of 2,030 megawatts from Consolidated
Edison. The net purchase price for these assets was approximately $550 million
in cash. In connection with this acquisition, we assumed approximately $17
million of liabilities relating to employee benefits and environmental
remediation. Also, in connection with this acquisition, we entered into certain
transition agreements with Consolidated Edison, the last of which expired in
June 2000 upon the formation of the NY-ISO.
2000 ACQUISITIONS
On April 28, 2000, we purchased seven generating plants located in Ohio and
Pennsylvania with a capacity of 2,614 megawatts from Duquesne Light Company. The
net purchase price for the assets was approximately $1.7 billion in cash. In
connection with this acquisition, we assumed approximately $22 million of
liabilities relating to employee benefits and environmental remediation and
assumed Duquesne Light Company's responsibility as provider of last resort.
OPERATIONS
We operate our business on a decentralized basis. The majority of
day-to-day operating decisions are made by employees either at the facilities or
in our regional offices. This allows employees in our headquarters to focus on
those activities that benefit from economies of scale, that require
inter-regional coordination and that continue to grow our business.
We own 5,396 megawatts of generating capacity, with historic generation of
energy totaling over 20 million megawatt hours per year. Some of our capacity
rating is based on information supplied by the sellers of the facilities.
Capacity refers to the tested, operational capability of a generating facility
to produce energy. The capacity of a particular facility will vary seasonally,
typically as a result of differences in ambient air temperature. As a result,
capacity is typically measured twice -- once for the summer and once for the
winter. Total capacity can fluctuate based on periodic capacity testing. Our
portfolio utilizes four primary fuels: coal, natural gas, oil, and water. All of
our natural gas facilities can also use fuel oil, however, none of our
facilities can use natural gas or kerosene. No one fuel type currently accounts
for as much as 50% of our capacity.
CORPORATE OPERATIONS
Our corporate headquarters are located in Baltimore, Maryland. The
corporate office is focused on selected activities, including corporate
administration, accounting, financing, power sales, fuel procurement, asset
management, risk management and business development. As of June 30, 2000, there
were 42 employees located in the corporate office, including all of the
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executive officers. Our day-to-day operations are conducted by subsidiaries
which are wholly-owned either by us or by another one of our subsidiaries.
We have centralized some aspects of asset management, risk management,
power sales, and fuel procurement. The combined power sales and fuel procurement
group, which currently totals 18 employees, is focused on optimizing the net
margin earned on sales of energy, capacity, and ancillary services after taking
out the cost of fuel and limiting the amount of risk in our activities. This
group focuses solely on power sales and fuel procurement for our assets and is
not authorized by senior management to engage in speculative trading or
activities for unaffiliated third parties.
Business development is focused on maximizing value and growing our
business, both through new acquisitions and new project development. We expect
to expand our business development team in the future. Currently, most of our
corporate employees, including all of our executive officers, are directly
involved in our business development efforts.
We have instituted a risk management committee to help monitor our business
activities. The committee meets at least once per month and has a broad mandate
to review all areas of our business, set policies for managing risk positions,
and direct management on appropriate actions to reduce our significant risks.
ORION POWER NEW YORK, L.P.
Facilities. Our assets located in New York are managed by our regional
operating company, Orion Power New York, L.P., which is headquartered outside
Syracuse, New York. Orion Power New York manages a total of 74 power generation
facilities of which 72 are currently operational. Total aggregate capacity of
these facilities is approximately 2,607 megawatts. The facilities consist of 70
hydroelectric facilities, of which 68 are active, three facilities located in
New York City and the Carr Street Generating Station in East Syracuse. In April
2000, we acquired three subsidiaries of Constellation Operating Services that,
pursuant to strategic alliance agreements, operated the assets located in New
York. As of June 30, 2000, Orion Power New York employed 348 people as direct
employees.
We have not owned these facilities for a substantial period of time, and
therefore, our historical financial and operating results do not provide a
longer term perspective on the operation of the assets located in New York.
Market Framework. The New York market has recently been reorganized, with
the NY-ISO taking over responsibility for daily operation of the transmission
system and the administration of bid-based markets for energy, capacity, and
ancillary services. The day-ahead and real-time energy and ancillary services
markets started on November 18, 1999. The capacity market began with an auction
in early April 2000 for the summer 2000 six-month capacity period.
The NY-ISO is a not-for-profit corporation governed by a board of directors
comprised of representatives of electric market participants, including buyers
and sellers of power, transmission owners, and consumer groups, and is overseen
by FERC and is subject to regulation by the New York Public Service Commission.
The New York State Reliability Council works with the NY-ISO by setting the
reliability standards used by the NY-ISO in its operation of the transmission
system and market.
Under the NY-ISO, generators like us are able to sell energy to any
wholesale customer in the state. These sales may be done under bilateral
contracts, in which pricing and other provisions are determined through private
negotiation, or by bidding into the day-ahead and real-time energy and ancillary
services markets. If we sell our capacity into the NY-ISO, we are required to
bid the related energy output into the day-ahead energy market. The NY-ISO
market
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is responsible for determining, based on the bids submitted by generators, the
lowest marginal price for each location at which the supply of energy and
ancillary services would meet the demand. The day-ahead market is used primarily
to meet forecast demand and the real-time market ensures that actual supply
equals actual demand. The NY-ISO itself procures the necessary ancillary
services and capacity to ensure reliable operation of the New York electric
system.
The NY-ISO has only recently been formed, and the markets it operates are
new. The NY-ISO has experienced problems in administering New York's competitive
wholesale energy markets since its inception. As a result, the NY-ISO is in the
process of reviewing and revising market rules and their implementation in the
NY-ISO's software. These problems have created some uncertainty for future
market conditions in New York. There can be no assurance that changes to New
York's competitive wholesale energy markets will not adversely affect our
operations. The NY-ISO has the ability to revise prices, which could lead to
delayed or disputed collection of amounts due to us for sales of energy and
ancillary services. The NY-ISO also has the ability, in some cases subject to
FERC approval, to impose cost-based pricing and/or price caps. The NY-ISO
applied to FERC to impose a cost-based price with respect to the ten minute
spinning reserve and ten minute non-spinning reserve markets. FERC granted the
NY-ISO's request with respect to the ten-minute non-spinning reserve market. In
July 2000, FERC imposed a bid cap of $1,000 per megawatt hour to be consistent
with the independent system operators in the Mid-Atlantic and New England. This
cap is in place through April 2001, and parties have requested extensions of the
cap. Other independent system operators have suggested various forms of
cost-based bidding for energy and related services.
The NY-ISO may also require a generator to operate for reliability reasons,
rather than economic reasons. In this case, the generator is eligible for a
supplemental payment to recover variable operating costs in excess of the market
clearing price. We expect the New York City facilities to receive these
supplemental payments on a regular basis, since they have been and we believe
will continue to be asked to produce energy for reliability reasons at times
when market prices are below the applicable cost of production.
The NY-ISO has established a capacity market, beginning with the summer
2000 capacity season, to ensure that there is enough generation capacity to meet
retail energy demand and ancillary services requirements. All power retailers
are required to demonstrate commitments for capacity sufficient to meet their
peak forecasted load plus a reserve requirement, currently set at 18%. As an
extra reliability measure, power retailers located in New York City are required
to procure the majority of this capacity (currently 80% of their peak forecasted
load) from generating units located in New York City. Since New York City is
currently short of capacity and the existing capacity is owned by only a few
entities, a price cap of $105 per kilowatt year has been instituted for in-city
generators. This price cap and other rules relating to the capacity market may
be reviewed by regulatory agencies from time to time and may change.
A generator selling capacity into the NY-ISO market is required to meet
certain availability requirements for the production of energy and to either
produce energy for the New York market or bid into the market. Failure to do so
results in penalties being imposed.
Pursuant to the New York Public Service Commission's authority over certain
aspects of the New York electric industry, it recently ordered the NY-ISO to
provide its staff with access to confidential market data, including information
about our assets located in New York and other participants in the New York
markets. According to the New York Public Service Commission, it is requesting
the data in order to assess the interrelationships among the NY-ISO's software,
market design, rules and tariff provisions, and to assess the efficiency of the
system's operation.
Assets Located in New York City. We currently bid the energy produced by
the assets located in New York City into the energy and ancillary services
markets operated by the NY-ISO.
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Because our assets located in New York City serve a transmission-constrained
area, bids for energy produced by these facilities are subject to market power
mitigation measures as implemented by the NY-ISO, in addition to the New York
City capacity regulations. The market power mitigation measures provide that if
the energy bid price for our assets located in New York City exceeds the market
price at a specified location reference point outside New York City by 5% or
more, our bid price is replaced with an energy reference price that approximates
our cost of production.
In early April 2000, the first auction of capacity in New York City was
held by the NY-ISO relating to the summer 2000 capacity season, which runs from
May 1, 2000 until October 31, 2000. We bid 1,835 megawatts of capacity of our
assets located in New York City into the auction and were successful in selling
all of that capacity at a price of $105,000 per megawatt year, which is equal to
the price cap imposed by regulatory agencies, for a total of approximately $96.3
million. The NY-ISO is in the process of reviewing certain market rules relating
to capacity, and may require generators to alter the method used to calculate
the amount of capacity available for the auction for the summer of 2001 at the
earliest. These changes could adversely affect the amount of capacity we can
sell from our assets located in New York City.
Hydroelectric Assets. We have sold all of the output of the hydroelectric
assets, including energy, capacity, and ancillary services, to Niagara Mohawk
Power Corporation on a bilateral basis through September 30, 2001. Under this
contract, we receive an annual fixed payment, totaling $71.8 million for the
period October 1999 through September 2000 and $73.6 million for the period
October 2000 through September 2001, and a variable payment of $20 per megawatt
hour for all generation above approximately 2.2 million megawatt hours. The
actual targets are set on a quarterly basis to reflect the seasonal fluctuations
in energy production from our hydroelectric assets, and payments are made
monthly. If we fail to meet the minimum generation threshold, we are obliged to
pay penalties to Niagara Mohawk. The 2.2 million megawatt hour target is
approximately 78% of the average generation for the units over the last ten
years. Generation at hydroelectric facilities, however, varies based on
precipitation. Due to the drought conditions experienced in the Northeast during
the summer of 1999, we were short of the minimum threshold for the third and
fourth quarters of 1999 by approximately 11%. This resulted in additional net
costs of $1.2 million for the year to meet our obligations (under 2% of our
annual fixed payment from our hydroelectric assets under the Niagara Mohawk
agreement).
Carr Street. We have entered into a Gas Tolling Agreement with
Constellation Power Source covering the Carr Street Generating Station, which
continues until 2003. Under this agreement, Constellation Power Source will have
the exclusive right to all energy, capacity and ancillary services produced by
the plant. Constellation Power Source will pay for, and be responsible for, all
fuel used by the plant. We are currently paid approximately $3.6 million per
annum as a fixed fee and $3.07 per megawatt hour generated, both of which will
escalate by approximately 2.5% per annum. We have guaranteed certain aspects of
the plant's operating performance and failure to meet these guarantees could
result in penalties.
ORION POWER MIDWEST, L.P.
Facilities. In April 2000, we acquired our assets located in Ohio and
Pennsylvania from Duquesne Light Company and a subsidiary of Constellation
Operating Services that was established to perform operations and maintenance
services for these assets. Our assets located in Ohio and Pennsylvania are
managed by our regional operating company, Orion Power MidWest, L.P., which is
headquartered near Pittsburgh, Pennsylvania. The assets consist of seven power
generating facilities, six of which are active, located in western Pennsylvania
and Ohio. Three of the facilities were recently acquired by Duquesne Light
Company in an asset swap with FirstEnergy Corp. The other four facilities
(including the retired facility) have historically been owned and operated by
Duquesne Light Company. The six active facilities have
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a total aggregate capacity of approximately 2,614 megawatts. Five of the
facilities use coal as their fuel source and one facility uses oil. The majority
of the coal units operate as baseload units since their marginal operating costs
are currently approximately $14-$20 per megawatt hour. In addition, in
connection with this acquisition we entered into the provider of last resort
contract, which gives us the right and obligation for a specific period to
supply Duquesne Light Company with the energy to meet its obligations as the
provider of last resort to its retail customers in the Duquesne Light Company
service area, which basically covers the greater Pittsburgh area, and we are
seeking to reach agreement to extend the period covered by this agreement until
December 31, 2004. As of June 30, 2000, we employed 436 people in the direct
operation of our assets located in Ohio and Pennsylvania.
The acquisition of our assets located in Ohio and Pennsylvania was an asset
acquisition. No historic financial statements for these assets exist, nor do we
believe that if they were created, they would be meaningful because of the
integrated nature of the previous owners' businesses combined with the lack of
an historical energy market from which to determine prevailing prices. We have
not owned these facilities for a substantial period of time, and therefore, our
historical financial and operating results do not provide a longer term
perspective on the operation of our assets located in Ohio and Pennsylvania.
Market Framework. The assets are located in an operating region known as
the East Central Area Reliability Council, more commonly referred to as ECAR.
The ECAR region is the second largest region in the United States ranked by
energy consumption, with total demand in 1998, the latest year available, of
nearly 542 million megawatt hours. The ECAR region covers part or all of the
following states: Indiana, Kentucky, Maryland, Michigan, Ohio, Pennsylvania,
Virginia and West Virginia. Deregulation in these states is at various stages
ranging from well-advanced toward full market-based competition, such as in
Pennsylvania, to conducting early stage studies. We believe that this
contributes to the fact that the ECAR region market is considerably more
fragmented than other regions such as California, New England, and New York,
which started deregulating earlier. There is no ISO or similar entity in place
for the entire ECAR region, although the utilities in the region are proposing
at least two plans for an independent system operator and/or a regional
transmission operator. Given the competing proposals currently under
consideration and the many divergent interests which exist in the ECAR region,
we expect that any adoption of ISOs or similar entities will be gradual.
The aggregate total of all generating facilities in the ECAR region had a
net demonstrated capacity of just under 104,000 megawatts in 1999, and the
operating reserve margin was 8%, below the ECAR region's planned reserve target
of 15%.
The ECAR market is characterized by substantial costs for transmitting
power from one location to another, because each independent utility charges a
tariff to use its transmission facilities. Therefore, moving power across
multiple control areas becomes expensive and may become difficult or impossible
at times of maximum demand.
The current market in the ECAR region is relatively illiquid and is
dominated by private bilateral contracts between parties. Notwithstanding the
general lack of liquidity, markets do exist for several areas within the ECAR
region. The ECAR region also lacks a specific capacity market and well-developed
markets for ancillary services. The value of these products would appear to be
bundled together with the value of energy with all being acquired through
purchases of energy.
We believe that all of these factors have contributed to the relatively
high volatility of energy prices in the ECAR region over the last several years.
In the summers of 1998 and 1999, power prices peaked in excess of $5,000 per
megawatt hour for several high demand days and transmission curtailments were
instituted in some control areas. This combination has been
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blamed for the trading and power marketing losses experienced by some utilities
operating in the ECAR region in 1998 and 1999.
Provider of Last Resort Contract. As part of the acquisition of our assets
located in Ohio and Pennsylvania, we entered into the provider of last resort
contract with Duquesne Light Company. Under the contract, we are obligated for a
specific period to provide power to Duquesne Light Company to meet its
obligations to satisfy the demands of any customer in the Duquesne Light Company
service area that does not elect to buy power from a competitive supplier as
allowed by the Pennsylvania state deregulatory initiatives or that elects to
return to Duquesne Light Company as the designated provider of last resort.
Under this contract, we must provide all of the energy necessary to meet the
contractual requirements with no minimum and no maximum quantity and Duquesne
Light Company must buy all of the energy needed to satisfy its provider of last
resort obligation from us.
The provider of last resort contract is a wholesale contract between us and
Duquesne Light Company, and we have no responsibility for selling energy
directly to the related retail customers. Therefore, we have no involvement in
billing retail customers or collecting amounts owed by retail customers.
The Duquesne Light Company service area covers approximately 580,000 retail
customers. According to information provided by Duquesne Light Company, for the
six months ended June 30, 2000, the peak demand for the Duquesne Light Company
control area was approximately 2,673 megawatts, and the total amount of
electricity consumed was approximately 6,954,420 megawatt hours. As of June 30,
2000, approximately 91% of the customers in the Duquesne Light Company control
area as measured by energy consumption received energy from Duquesne Light
Company as the provider of last resort. The peak provider of last resort load
was approximately 2,335 megawatts for the six months ended June 30, 2000. The
total amount of electricity consumed by provider of last resort customers was
approximately 5,203,150 megawatt hours for the six months ended June 30, 2000.
Under the provider of last resort contract, the prices we receive are a
specified portion of Duquesne Light Company's current retail rates, which have
been approved by the Pennsylvania Public Utility Commission. Based on historic
patterns of usage for each of Duquesne Light Company's rate classes, we expect
our average gross selling price will approximate $42 per megawatt hour for 2000.
From this amount, Duquesne Light Company deducts both the Pennsylvania gross
receipts tax of 4.4% and $1 per megawatt hour for ancillary services that
Duquesne Light Company procures from another party.
The provider of last resort contract continues in effect for each rate
class until the amount of Duquesne Light Company's stranded costs allocated to
that rate class has been recovered through the surcharge being added to each
customer's monthly bill. For two rate classes, all stranded costs have already
been recovered, and therefore the provider of last resort obligation is
satisfied for these rate classes. The remaining rate classes are projected to
complete stranded cost recovery between 2000 and 2003, with most rate classes
expected to have completed stranded cost recovery before the summer of 2002.
Accordingly, we expect the majority of the original provider of last resort
contract obligations to end during early 2002.
We are seeking to reach agreement with Duquesne Light Company to extend the
provider of last resort contract until December 31, 2004 and to amend the price
and certain other terms. The new agreement would become effective for each
Duquesne Light Company retail customer class as that class comes off the retail
tariff that relates to the existing contract. An extension of the provider of
last resort contract is tied to Duquesne Light Company's application for a
retail tariff which has been submitted to the Pennsylvania Public Utility
Commission for approval. The application is now in a "collaborative proceeding"
in which the various affected parties confer, leading to a commission order on
the tariff. This proposed tariff and contract between us and
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Duquesne Light Company must be filed with FERC. The extension will differ from
the existing tariff and contract in certain respects, including:
- The penalty for failure to deliver energy will be reduced from $1,000 to
$100 per megawatt hour under most circumstances where Duquesne Light
Company will be required to reduce power provided to consumers;
- We will be paid rates that are higher per megawatt hour, although the
actual increase will depend on actual demand in each rate class;
- We will be responsible for only a pro rata share of transmission line
losses in the Duquesne Light Company control area, together with the
other electric generation suppliers operating in the area, instead of
being responsible for all transmission line losses as the existing
contract provides; and
- A customer service switching rule will be added that we expect will
reduce our risks associated with customer switching. This provision would
also come into effect for the balance of the term of the current
contract.
The terms of the proposed agreement could be amended from the terms
described in this prospectus during the regulatory approval process, and we
cannot assure you that this agreement will be entered into on the terms
described herein, or at all if we cannot obtain terms we deem appropriate.
Given the expected demand for energy from provider of last resort customers
and the historic energy generation from the assets located in Ohio and
Pennsylvania, we generally expect to produce more energy than needed to meet our
provider of last resort obligations. We will attempt to sell this excess energy
into the market and will receive the prevailing market price at the time. The
provider of last resort demand, however, will fluctuate on a continuous,
real-time basis, and will peak during summer and winter, weekdays, and some
hours of the day. This could cause the provider of last resort demand to be
greater than the amount of energy we are able to generate at any given moment.
As a result, we may need to purchase energy from the market to cover our
contractual obligations. This is likely to occur at times of higher market
prices, although the price we receive will be determined as described above and
will not fluctuate with the market. This situation could also arise or worsen if
we have operational problems at one or more of our generating facilities that
reduce their ability to produce energy. Failure to provide sufficient energy
could give rise to penalties under the contracts. A severe under-delivery of
energy that forces Duquesne Light Company to deny some customers energy could
give rise to penalties of $1,000 per megawatt hour under the initial provider of
last resort contract or $100 per megawatt hour under the extension. This risk
should diminish as the number of rate classes eligible for provider of last
resort service is reduced. We currently utilize the skills of Constellation
Power Source to help manage this risk and to sell our excess power under an
agreement that expires March 31, 2001.
PENDING ACQUISITION OF COLUMBIA ELECTRIC CORPORATION
In September 2000, we executed a stock purchase agreement with Columbia
Energy Group to purchase all the outstanding stock of Columbia Electric
Corporation, a power generation company with natural gas fired projects in
various stages of development. Columbia Electric has agreed to divest its
partial ownership interest in facilities already in operation prior to our
acquisition. We have agreed to pay approximately $200 million in cash, subject
to adjustment. In connection with this acquisition, we agreed to assume a $334
million credit facility, of which approximately $101 million was outstanding as
of September 30, 2000, and to assume construction contract and equity investment
guarantee obligations from Columbia Energy Group. Borrowings under the credit
facility have been and are expected to continue to be used to finance the
construction of one power plant.
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Generating facilities under construction include the 500 megawatt Ceredo
Electric Generating Station located in Wayne County, West Virginia, which is
scheduled to be in operation by June 1, 2001 and the 568 megawatt Liberty
Electric Generating Station located near Philadelphia, Pennsylvania, which is
scheduled to be in operation by early 2002. Projects in advanced development
include the planned 1,650 megawatt Kelson Ridge Generating Station located in
Charles County, Maryland, and the planned 500 megawatt Henderson Generating
Station located in Henderson County, Kentucky. Phase I of Kelson Ridge will
include the construction of 550 megawatts and Phase I of Henderson will include
the construction of 250 megawatts, each of which is planned to be operational in
2004. We also acquired additional projects in earlier stages of development. The
Liberty Station will be operated by Connectiv Operating Services Company under
an operations and maintenance agreement with a seven-year term. An operator has
not been selected for the Ceredo Station. The actual commercial operation dates
of these facilities will be dependent on various factors, including timely
delivery of and performance of the turbines, transformers and other major
equipment, timely construction of the gas and electric interconnection lines,
any unusual conditions at the sites or otherwise which may impact construction,
and we cannot assure you that these facilities will operate as scheduled.
We will also assume a tolling agreement for the Liberty Electric Generating
Station which has a term of approximately 14 years. Under this agreement, the
counterparty will have the exclusive right to receive all energy, capacity and
ancillary services produced by the plant. The counterparty will pay for, and be
responsible for, all fuel used by the plant under the tolling agreement.
The closing of the Columbia acquisition is conditioned on the satisfaction
of customary closing conditions, including receipt of material third party
consents and expiration or early termination of the waiting period under the
Hart Scott Rodino Antitrust Improvements Act of 1976. However, we are not
obligated to close before December 15, 2000. Subject to satisfaction of these
conditions, we hope for the closing to occur not later than December 2000. We
cannot assure you, however, that this acquisition will be consummated on the
terms or timetable described herein or at all. This offering is not conditioned
upon the prior closing of the acquisition. Columbia Electric Corporation also
owns interests in several generating projects which are in commercial operation
and are excluded from the sale.
DEVELOPMENT
In addition to acquisitions, we intend to continue to grow by developing
additional capacity at our facilities through repowering or adding units at
existing facilities and by building new facilities throughout the U.S. and
Canada.
We are pursuing a number of development opportunities. In New York, we have
restored a unit at Astoria in New York City that was shut down by the prior
owner in 1993. We have been granted the right to restore and operate this unit
for up to three years in order to increase capacity and electric reliability in
New York City. The restored unit is capable of producing approximately 175
megawatts of energy.
We are in the design and permitting phase modifying two of the three large
units at Astoria. As currently envisioned, we intend to install new natural gas
fired combustion turbines to repower the units and to retire the third unit,
resulting in an increase in total capacity of approximately 800 megawatts. In
addition to increasing Astoria's total capacity to approximately 1,900
megawatts, this project would significantly lower air emissions from the plant's
current levels and lower our cost of producing energy, making the Astoria plant
even more competitive in the New York City and New York State energy markets. We
believe that the permit, design and development process in New York could take
up to two more years to complete before we can begin construction. We currently
believe that the first phase of this project represents
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approximately 500 megawatts of additional capacity. We expect it to be in
service by the summer of 2004, with the balance in service in 2006.
In the region where our Ohio and Pennsylvania assets are located, we have
announced the planned conversion of the existing Brunot Island simple cycle,
oil-fired units on site back to their original combined cycle operation and the
upgrade of the on-site natural gas pipeline to allow for natural gas to become
the primary fuel. We also propose to upgrade environmental control equipment to
reduce our emissions. Our objective is to increase capacity at Brunot Island by
140 megawatts and significantly reduce production costs. We envision that this
project will be complete by the summer of 2002.
We have plans over the long-term to develop additional gas-fired, combined
cycle power plants at both the Avon Lake location and the Niles location.
Preliminary plans project from 550 to 1,100 megawatts of additional capacity at
Avon Lake depending on forecast market conditions and up to 550 megawatts of
additional capacity at Niles, which may include the shutdown of some existing
older, coal-fired capacity. Given the early stage of these projects, we may
elect not to pursue these activities or we may otherwise not be able to do so.
In September 2000, we entered into a letter of intent for the delivery over
the next four years of 10 combustion turbine generators from Siemens
Westinghouse Power Corporation as part of our repowering and new development
efforts. The total purchase price is approximately $345 million, substantially
all of which is payable at various times in 2003 and 2004. We paid a $5 million
deposit in the third quarter of 2000 and will pay an additional $5 million
deposit in the first quarter of 2001. Furthermore, as part of our acquisition of
Columbia Electric Corporation, we will acquire the rights to eight additional
turbine generators to be delivered by GE Power Systems, which will be installed
in the projects under construction.
We also expect to significantly upgrade the environmental controls at most
of the existing plants over the next seven years to comply with regulatory
requirements, particularly in the area of air emissions. We expect that capital
expenditures for environmental projects will total approximately $300 million
during this period. We have commenced engineering and design work and started
procuring equipment for this program.
REGULATION
We are subject to complex and stringent energy, environmental, and other
governmental laws and regulations at the federal, state, and local levels in
connection with the development, ownership, and operation of our electric
generation facilities.
The federal and state energy laws and regulations create burdens and risks
for our operations, as well as opportunities for further acquisitions of
facilities at attractive prices. As part of electric industry restructuring,
numerous electric utilities are continuing to divest their electric generating
facilities, creating future opportunities for us.
FEDERAL ENERGY REGULATION
The Federal Energy Regulatory Commission, or FERC, is an independent agency
within the Department of Energy that regulates the transmission and wholesale
sale of electricity in interstate commerce under the authority of the Federal
Power Act. FERC is also responsible for licensing and inspecting private,
municipal and state-owned hydroelectric projects. FERC determines whether a
public utility qualifies for exempt wholesale generator status under the Public
Utility Holding Company Act, which was amended by the Energy Policy Act of 1992.
Federal Power Act. The Federal Power Act gives FERC exclusive rate-making
jurisdiction over wholesale sales of electricity and transmission of electricity
in interstate commerce. FERC
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regulates the owners of facilities used for the wholesale sale of electricity
and its transmission in interstate commerce as "public utilities" under the
Federal Power Act. The Federal Power Act also gives FERC jurisdiction to review
certain transactions and numerous other activities of public utilities.
Under the Federal Power Act, an entity that sells electricity at wholesale
is a public utility, subject to FERC's jurisdiction. Public utilities are
required to obtain FERC's acceptance of their rate schedules for wholesale sales
of electricity. Because we are selling electricity in the wholesale market, we
are deemed to be a public utility for purposes of the Federal Power Act. In most
cases, FERC does not actively regulate the rates for facilities operated by
wholesale generating companies like ours. Accordingly, FERC has granted
market-based rate authority for the Carr Street facility, our hydroelectric
assets, our assets located in Ohio and Pennsylvania and, subject to various
market power mitigation measures, our assets located in New York City.
Market-based rate authority enables us to price based upon market conditions
rather than upon our costs.
Usually, FERC's orders, which grant us market-based rate authority, reserve
the right to revoke our market-based rate authority on a prospective basis if
FERC subsequently determines that we possess excessive market power. If we lost
our market-based rate authority, we would be required to obtain FERC's
acceptance of a cost-of-service rate schedule and would become subject to the
accounting, record-keeping and reporting requirements that are imposed only on
utilities with cost-based rate schedules. In addition, when FERC considers our
request for market-based rate authority in connection with a new acquisition or
development project, it may include generation owned or controlled by our
stockholders in determining whether we possess market power. See "Risk
Factors -- Risks Relating to our Business and Operations."
FERC also regulates the rates, terms, and conditions for electricity
transmission in interstate commerce. Tariffs established under FERC regulation
give us access to transmission lines, which enable us to sell the energy we
produce into competitive markets for wholesale energy.
In April 1996, FERC issued an order requiring all public utilities to file
"open access" transmission tariffs that give wholesale generators, as well as
other wholesale sellers and buyers of electricity, access to transmission
facilities on a non-discriminatory basis. Almost all utilities filed open access
tariffs. Some utilities are seeking permission from FERC to recover costs
associated with stranded investments through add-ons to their transmission
rates. To the extent that FERC permits these charges, the cost of transmission
may be too high on some systems to be of practical use to wholesale sellers like
us.
FERC is also encouraging the voluntary restructuring of transmission
operations through the use of independent system operators and regional
transmission groups. The result of establishing these entities typically is to
eliminate or reduce transmission charges imposed by successive transmission
systems. The full effect of these changes on us is uncertain at this time.
The Federal Power Act also gives FERC exclusive authority to license
non-federal hydroelectric projects on navigable waterways and federal lands.
FERC hydroelectric licenses are issued for 30 to 50 years. The hydroelectric
assets are licensed by FERC from 2004 through 2036. Individual hydroelectric
facilities, representing approximately 90 megawatts of capacity, have licenses
that expire over the next ten years. Facilities representing approximately 160
megawatts of capacity have new or initial license applications pending before
FERC. Upon expiration of a FERC license, the federal government can take over
the project and compensate the licensee, or FERC can issue a new license to
either the existing licensee or a new licensee. In addition, upon license
expiration, FERC can decommission an operating project and even order that it be
removed from the river at the owner's expense. In deciding whether to issue a
license, FERC gives equal consideration to a full range of licensing purposes
related to the potential value of a stream or river. It is not uncommon for the
relicensing process to take
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between four and ten years to complete. Generally, the relicensing process
begins at least five years before the license expiration date and FERC issues
annual licenses to permit a hydroelectric facility to continue operations
pending conclusion of the relicensing process. We expect that FERC will issue us
new or initial hydroelectric licenses for all the facilities with pending
applications. Presently, there are no applications for competing licenses and
there is no indication that FERC will decommission or order any of the projects
be removed.
Nonetheless, there remains the possibility that FERC will not issue new or
initial licenses for our projects, which could have a material adverse affect on
our operations and revenue. In addition, several interested parties have
intervened or are likely to intervene in our licensing proceedings. These
interested parties may be able to impose conditions and affirmative obligations
on our hydropower operations, which could add significant costs to our
operations or reduce revenues. In the past, FERC has issued licenses with
conditions that have rendered operation of projects to be uneconomic. Therefore,
there is no guarantee that the hydroelectric licenses issued by FERC will permit
us to operate the projects profitably. Finally, the relicensing process itself
is costly, time consuming, and could affect adversely our hydroelectric
revenues.
The remainder of our hydroelectric assets have licenses that expire over an
approximate 30 year period, are exempt from licensing because they are small
facilities with five megawatts or less or are not within FERC's jurisdiction
because they are not located on navigable waterways or federal land. Many of the
existing licenses contain conditions which have one or more operational
constraints, including restricting energy production, impacting the time of year
or day in which generation occurs, raising operating costs, and requiring
certain minimum river flow releases, which directly affects our ability to
generate energy.
Public Utility Holding Company Act. The Public Utility Holding Company
Act, known as PUHCA, provides that any entity that owns, controls or has the
power to vote 10% or more of the outstanding voting securities of an "electric
utility company", or a holding company for an electric utility company, is
subject to regulation under the Holding Company Act.
Registered holding companies under the Holding Company Act are required to
limit their utility operations to a single, integrated utility system and divest
any other operations that are not functionally related to the operation of the
utility system. In addition, a company that is a subsidiary of a holding company
registered under the Holding Company Act is subject to financial and
organizational regulation, including approval by the SEC of certain financings
and transactions. Under the Energy Policy Act of 1992, however, FERC can
determine that a company engaged exclusively in the business of owning or
operating an eligible facility used for the generation of electric energy for
sale at wholesale is an "exempt wholesale generator". Accordingly, it is exempt
from the Holding Company Act requirements. In the case of facilities previously
operated by regulated utilities, FERC can make an exempt wholesale generator
determination only after the state utility commission finds that allowing the
facility or facilities to be eligible for exempt wholesale generator status will
benefit consumers, is in the public interest, and does not violate state law.
Each of our operating subsidiaries has been designated by FERC as an exempt
wholesale generator.
We do not expect to engage in, and following this offering our certificate
of incorporation will prohibit us from engaging in, until Goldman, Sachs & Co.
and its affiliates own less than 5% of our outstanding common stock, any
activities that will subject us to regulation under the PUHCA without the
consent of Goldman, Sachs & Co. If we were to lose our exempt wholesale
generator status, we would become subject to regulation under the Holding
Company Act. It would be difficult for us to comply with the Holding Company Act
absent a substantial restructuring.
Proposed Restructuring Legislation. Congress is considering legislation
that would require states to permit retail competition. In addition, state
utility commissions or state legislatures are considering, or have considered,
whether to open the retail electric power markets to
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competition. At present, many states have adopted some version of a "customer
choice" plan. Customer choice plans typically allow customers to choose their
electricity suppliers by a date that is specified in the initiative.
Retail competition is possible when a customer's local utility agrees, or
is required, to "unbundle" its distribution service. This refers to the
separation of the utility's delivery of electric power to retail customers
through its local distribution lines, from its transmission and generating
services. Retail access programs provide us with opportunities to provide power
from our facilities to power marketers.
Wholesale access programs are likely to continue to provide us with
additional opportunities to purchase additional generation facilities as
utilities are required or choose to divest their assets.
STATE ENERGY REGULATION
On the state level, public utility regulatory commissions are responsible
for approving rates and other terms and conditions under which public utilities
purchase electric power from independent producers and sell retail electric
power to consumers. In addition, most state laws require approval from the state
commission before an electric utility operating in the state may divest or
transfer electric generation facilities. These laws also give the commissions
authority to regulate the financial activities of electric utilities selling
electricity to consumers in their states.
State public utility commissions have authority to promulgate regulations
for implementing some federal laws. Power sales agreements, which we enter into,
are also potentially subject to review by state public utility commissions. In
particular, the state public utility commissions review the process by which the
utility has entered into the power sales agreements. States may also assert
jurisdiction over the siting, construction, and operation of our facilities, as
well as the issuance of securities and the sale or other transfer of assets.
New York. In 1996, the New York Public Service Commission began
proceedings to introduce retail competition in New York State. These
initiatives, in conjunction with FERC's "open access" rules, led to the
formation of an ISO responsible for centralized control and operation of the
state-wide electric transmission grid. They also led to a spot market
responsible for a competitive electric energy auction. This auction is open on a
non-discriminatory basis to all electric service providers. Other aspects of New
York's restructuring plan include market power mitigation through utility
divestiture of fossil fuel generation plants, the unbundling and establishment
of separate rates for historic utility functions, and market mitigation measures
at the wholesale level. See "-- Orion Power New York, L.P. -- Market Framework"
for a discussion of the NY-ISO market.
Under the New York Public Service Law, the New York Public Service
Commission has jurisdiction over corporations engaged in the production of
electricity and transfers of electric generation facilities located in the
State. The New York Public Service Commission reviewed and approved each of our
transactions to acquire our assets located in New York, and made the necessary
findings to permit us to seek exempt wholesale generator status from FERC.
Moreover, while the NY-ISO is an independent entity, it is considered an
"electric corporation" subject to the New York Public Service Law.
In addition, the New York Public Service Commission has determined that
certain requirements of the Public Service Law apply to new forms of electric
service providers, which differ from traditional electric utilities. As a
result, even though we do not engage in the sale of electricity at retail in New
York State, our assets located in New York are subject to "lightened regulation"
by the New York Public Service Commission. Under the lightened regulation
regime, our assets located in New York are subject to provisions of the Public
Service Law that relate to
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enforcement, investigation, safety, reliability, system improvements,
construction, excavation, and the issuance of securities. The provisions
relating to the issuance of securities apply to our subsidiaries that operate
our assets located in New York, but not to a holding company such as Orion Power
Holdings.
Pennsylvania. In December 1996, Pennsylvania adopted the Electricity
Generation Customer Choice and Competition Act, which is now part of the Public
Utility Code. The Act is a comprehensive restructuring plan that allows direct
access to be phased in over a three-year period beginning January 1, 1999 and
culminating in full retail choice by January 1, 2001. Under this plan, one-third
of each customer class will be eligible for direct access each year.
Pennsylvania opened its retail electric market to competition on January 1,
1999. The Act required each utility to submit its restructuring plan to the
Pennsylvania Public Utility Commission for approval. The Pennsylvania Public
Utility Commission is authorized to permit, but may not require, utilities to
divest their generation assets.
In addition, the Pennsylvania restructuring plan authorizes utilities to
implement a non-bypassable Competitive Transition Charge to collect stranded
costs, subject to approval by the Pennsylvania Public Utility Commission, and
permits securitization of stranded costs.
The Pennsylvania Public Utility Code also requires that the Pennsylvania
Public Utility Commission approve any transfers or acquisitions of property
"used or useful in public service." The Pennsylvania Public Utility Commission
approved the transaction between Duquesne Light Company and Orion Power MidWest
and has made the necessary findings to enable us to seek exempt wholesale
generator status from FERC. Unlike New York, however, Pennsylvania does not have
a regulatory regime for wholesale generators in the state. Therefore, we do not
expect to be subject to regulation by the Pennsylvania Public Utility
Commission. However, if we do become subject to regulation by the Pennsylvania
Public Utility Commission, additional costs may be imposed on the operations of
our assets located in Ohio and Pennsylvania.
Ohio. The Ohio legislature passed a statute in 1999 providing for
implementation of retail competition beginning in 2001. The statute delegated to
the Ohio Public Utilities Commission the responsibility for developing certain
restructuring rules, including rules relating to market monitoring, stranded
cost recovery, and consumer protection. The Ohio Public Utilities Commission
proceedings are in a very early stage, and we cannot predict what effect they
will have on us. The Ohio Public Utilities Commission has made the necessary
findings to enable us to seek exempt wholesale generator status from FERC.
Similar to the case with Pennsylvania, we do not expect to be subject to
regulation by the commission. If we do become subject to regulation by the Ohio
Public Utilities Commission, however, additional costs may be imposed on the
operations of our assets located in Ohio and Pennsylvania.
ENVIRONMENTAL REGULATIONS
The construction and operation of electric generating facilities are
subject to extensive environmental and land use regulation in the United States.
Those regulations applicable to us primarily involve the discharge of emissions
into the water and air as well as the use of water, but can also include
wetlands preservation, endangered species, waste disposal, and noise regulation.
These laws and regulations often require a lengthy and complex process of
obtaining and renewing licenses, permits, and approvals from federal, state, and
local agencies. If these laws and regulations are changed, modifications to our
facilities may be required.
Clean Air Act. In late 1990, Congress passed the Clean Air Act Amendments
of 1990, which affect existing facilities as well as new project development.
The act and many state laws require significant reductions in SO(2) (sulfur
dioxide) and NO(x) (nitrogen oxide) emissions that result from burning fossil
fuels.
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The 1990 Amendments create a marketable commodity called an SO(2)
"allowance". All non-exempt facilities over 25 megawatts that emit SO(2) must
obtain allowances in order to operate after 1999. Each allowance gives the owner
the right to emit one ton of SO(2). All non-exempt facilities that existed in
1990 have an assigned number of allowances. If additional allowances are needed,
they can be purchased from facilities having excess allowances. Our assets
located in New York currently have more allowances than needed, while our assets
located in Ohio and Pennsylvania require additional allowances or the
installation of SO(2) controls. We will be able to use the excess New York Asset
allowances at our assets located in Ohio and Pennsylvania, decreasing the number
that will need to be purchased or the amount of emission reduction needed via
SO(2) control. We believe that the additional costs of obtaining the number of
allowances needed for future projects should not materially affect our ability
to purchase and operate such facilities.
The 1990 Amendments also require states to impose annual operating permit
fees. While such permit fees may be substantial and will be greater for
coal-fired projects like our assets located in Ohio and Pennsylvania than for
those burning gas or other fuels, such fees are not expected to significantly
increase our costs.
The 1990 Amendments also contain other provisions that could materially
affect our projects. Various provisions may require permits, inspections, or
installation of additional pollution control technology.
The 1990 Amendments expand the enforcement authority of the federal
government by increasing the range of civil and criminal penalties for
violations of the Clean Air Act. They enhance administrative civil penalties and
add a citizen suit provision. These enforcement provisions also include enhanced
monitoring, record-keeping, and reporting requirements for existing and new
facilities.
The Ozone Transport Assessment Group, composed of state and local air
regulatory officials from the 37 eastern states, has recommended additional
NO(x) emission reductions that go beyond current federal standards. These
recommendations include reductions from utility and industrial boilers during
the summer ozone season.
As a result of the Ozone Transport Assessment Group's recommendations, on
October 27, 1998, the EPA issued a rule requiring 22 Eastern states and the
District of Columbia to reduce emissions of NO(x) (a precursor of ozone) in
those states. Among other things, the EPA's rule establishes an ozone season,
which runs from May through September, and a NO(x) emission budget for each
identified state, including New York, Ohio, and Pennsylvania. The EPA rule
requires states to implement controls sufficient to meet their NO(x) budget by
May 1, 2003. Coal-fired power plants are a principal target of NO(x) reductions
under this initiative. Our assets will be subject to NO(x) reduction
requirements under the EPA rule. Due to relatively low NO(x) emissions from its
facilities, however, the assets located in New York are unlikely to be impacted
by this rulemaking. In contrast, the assets located in Ohio and Pennsylvania
will be affected significantly. Beginning in 2003, it is anticipated that the
EPA rule will result in a requirement for substantial NO(x) reductions at the
assets located in Ohio and Pennsylvania, which will likely result in significant
capital expenditures by us.
The EPA recently granted several state petitions under Section 126 of the
Clean Air Act. Section 126 allows the EPA to set limits for specific sources of
emissions originating in other states. As a result, the EPA will require
reductions in NO(x) emissions at the majority of our fossil energy facilities at
levels consistent with those required under the EPA rule. Consistent with the
EPA's rule, reductions have been proposed which would need to be achieved by May
1, 2003 through the implementation of controls or the purchase of emission
allowances. We believe that our assets located in New York City are already in
compliance with these limits. We anticipate capital expenditures of
approximately $300 million at the assets located in Ohio and Pennsylvania
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through 2006 to address these anticipated air emissions issues. We expect that
the majority of these expenditures under the EPA rule and the EPA's Section 126
initiative will occur between 2002 and 2006. However, particularly given the
trend towards more stringent environmental regulation, it is possible that the
amount we must spend to bring the facilities into compliance may change
materially. In addition, the time at which these capital expenditures must be
made could be accelerated, and operations could be halted at these stations
until any necessary improvements are made.
In October and November 1999, the EPA and several states filed suits or
announced their intention to file suits against a number of coal-fired power
plants in Midwestern and Eastern states. These suits relate to alleged
violations of the Clean Air Act. More specifically, they derive from the
deterioration prevention and non-attainment provisions of the Clean Air Act's
new source review requirements. In 1999, the EPA requested information relating
to the Avon Lake Generating Station and Niles Generating Station from the
previous owner of these facilities. This was part of the EPA's broader industry
information request, and forms the basis for the agency's new source review
actions against coal-fired power plants. Although there have not been any new
source review-related suits filed against the Avon Lake Generating Station or
the Niles Generating Station, there can be no assurance that either of them will
not be the target of any such action in the future. Based on the levels of
emissions control that the EPA and/or states are seeking in these new source
review enforcement actions, we believe that significant additional costs and
penalties could be incurred, planned capital expenditures could be accelerated,
or operations could be halted at these stations if they ever became targets of a
new source review enforcement action.
Individual states can also regulate air emissions, the costs of compliance
with which could be significant. For example, in 1999, New York Governor George
Pataki introduced new emission requirements for generation facilities in the
State, which must be achieved by 2003. The New York State requirements, among
other things, require year-round reductions in nitrogen oxide emissions, which
were previously limited to summertime reductions. Additionally, under these
requirements, we have to reduce our sulfur dioxide emissions from our New York
power plants. These emission reductions would be phased in between January 1,
2003 and January 1, 2007. Compliance with these emission reductions
requirements, if they become effective, could have a material adverse impact on
the operation of our assets located in New York. While we anticipate that we
should be able to satisfy these constraints, additional constraints may be added
in various jurisdictions that may affect our facilities and increase our costs
of compliance.
The 1990 Amendments required the EPA to evaluate the public health impacts
of emissions of mercury, a hazardous air pollutant, from power plants. The EPA
has not proposed emissions controls because commercially viable control
technologies have not been developed for utility boilers. We expect that the EPA
will decide by the end of 2000 whether to control mercury emissions from
coal-fired plants. If the EPA decides to control mercury emissions, compliance
could be required by approximately 2007. If emissions controls are mandated, all
coal-fired utility boilers would be affected and the cost of compliance could be
substantial.
The Kyoto Protocol regarding greenhouse gas emissions and global warming
was signed by the United States, thereby committing the United States to
significant reductions in greenhouse gas emissions between 2008-2012. The U.S.
Senate must ratify the agreement for the protocol to take effect. The Clinton
Administration has proposed a package of administrative policies to curb
greenhouse gases, none of which require Senate ratification. Future initiatives
on this issue and the ultimate effects of the Kyoto Protocol effects on us are
unknown at this time. Fossil fuel-fired power plants, however, are believed to
be significant sources of carbon dioxide emissions, which constitute a principal
greenhouse gas. Therefore, the power industry's compliance costs with mandated
federal greenhouse gas reductions could be significant.
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<PAGE> 60
Clean Water Act. Our facilities are subject to a variety of state and
federal regulations governing existing and potential water/wastewater and
stormwater discharges from the facilities. Generally, federal regulations
promulgated through the Clean Water Act govern overall water/wastewater and
stormwater discharges through permits. Under current provisions of the Clean
Water Act, existing permits must be renewed at least every five years, at which
time permit limits come under extensive review and can be modified to account
for more stringent regulations. In addition, the permits can be modified at any
time. Many of our facilities, including the assets located in Ohio and
Pennsylvania, need to renew their Clean Water Act permits over the next two
years. Major issues to be addressed when permits are renewed include the impact
of intake screens and cooling systems on fish, as well as the adverse impact of
discharging large quantities of warm water to public rivers and lakes. The cost
of addressing any of these environmental issues could be substantial.
In addition, changes to the environmental permits of our coal or other fuel
suppliers may increase the cost of fuel, which in turn could have a significant
impact on our operations.
Emergency Planning and Community Right-to-Know Act. In April 1997, the EPA
expanded the list of industry groups required to report the Toxic Release
Inventory under Section 313 of the Emergency Planning and Community
Right-to-Know Act to include electric utilities. Our operating facilities will
be required to complete a toxic chemical inventory release form for each listed
toxic chemical manufactured, processed, or otherwise used in excess of threshold
levels for the applicable reporting year. The purpose of this requirement is to
inform the EPA, states, localities, and the public about releases of toxic
chemicals to the air, water, and land that can pose a threat to the community.
Changes in the laws governing disposal of coal ash generated by our
coal-fired plants to classify coal ash as a hazardous waste or otherwise
restrict the disposal of coal ash could increase our costs and expose us to
greater potential liabilities for environmental remediation. The ash disposal
sites used by our coal-fired facilities are permitted under state regulations.
Those sites under our operational control have approved closure plans in place,
and funds have been budgeted to accomplish the closures.
Comprehensive Environmental Response, Compensation and Liability Act. The
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
among other things, imposes cleanup requirements for threatened or actual
releases of hazardous substances that may endanger public health or welfare of
the environment. Under CERCLA, joint and several liability may be imposed on
waste generators, site owners, and operators and others regardless of fault or
the legality of the original disposal activity. Although all waste substances
generated by the facilities are generally not regarded as hazardous substances,
some products used in the operations and the disposal of such products are
governed by CERCLA and similar state statutes. As a result of CERCLA's no-fault,
retroactive liability scheme, we cannot assure you that we would be free from
substantial liabilities in the future.
Consent Orders. The assets located in New York City are subject to a
consent order issued by the New York State Department of Environmental
Conservation. The consent order requires active investigation and remediation of
past releases of petroleum and other substances at the facilities by the prior
owner. The consent order also contains obligations related to compliance with
air emission and opacity regulations, corrective action requirements for solid
waste management units, and investigation and implementation of measures to
reduce water contamination and the killing of fish. The total liability assumed
and recorded by Orion Power New York associated with these obligations was
$9.15 million in the aggregate. We intend to fund this liability with cash flow
from operations.
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<PAGE> 61
COMPETITION
We have many strong and well capitalized competitors in the wholesale power
generation industry. These are both domestic and international organizations,
many of whom have extensive and diversified operating expertise and financial
resources that are greater than those we possess. We face competition in the
markets for energy, capacity, and ancillary services, as well as intense
competition for the acquisition and development of additional facilities.
We anticipate increasing competition from international companies for
acquisitions as the market continues to deregulate. As a result, it may be more
difficult for us to compete effectively in future competitive bidding
situations. In recent years, the industry has been characterized by increasingly
strong competition with respect to the acquisition of existing electric
generating facilities. This includes a trend away from negotiated transactions
and towards competitive bidding.
Following the expiration of our various transition power and capacity
agreements, we will be subject to competition in the market for energy,
capacity, and ancillary services. We will principally compete on the basis of
the price of our products, although we will also compete to a lesser extent on
the basis of reliability and availability. The continuing deregulation of the
industry is likely to increase competition and may place downward pressure on
energy prices.
EMPLOYEES
As of June 30, 2000, we employed approximately 830 people. Of these
employees, approximately 540 are covered by collective bargaining agreements.
The collective bargaining agreements expire at various dates between June 2001
and June 2004. We have never experienced a work stoppage, strike, or labor
dispute. We consider relations with our employees to be good.
FACILITIES/PROPERTIES
Our corporate offices currently occupy approximately 15,340 square feet of
leased office space in Baltimore, Maryland, which lease expires in 2005, subject
to renewal options.
In addition to our corporate office space, we lease or own various real
property and facilities relating to our assets and development activities. Our
principal facilities are generally described under the descriptions of our two
operating subsidiaries contained elsewhere in this prospectus. We believe that
we have title to our facilities in accordance with standards generally accepted
in the energy industry, subject to exceptions which, in our opinion, would not
have a material adverse effect on the use or value of the facilities.
Substantially all of our assets are pledged to our bank lenders under our credit
facilities.
We believe that all of our existing office and generating facilities,
including the facilities under construction, are adequate for our needs through
calendar year 2000. If we require additional space, we believe that we will be
able to secure space on commercially reasonable terms without undue disruption
to our operations.
Our total lease expense for all of our properties described above is
approximately $900,000 for the year ending December 31, 2000.
LEGAL PROCEEDINGS
We are involved in various litigation matters in the ordinary course of our
business. We are not currently involved in any litigation that we expect, either
individually or in the aggregate, will have a material adverse effect on our
financial condition or results of operations.
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<PAGE> 62
MANAGEMENT
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Frederic V. Salerno..... 57 Chairman of the Board of Directors
Jack A. Fusco........... 38 Chief Executive Officer, President and Director
Scott B. Helm........... 35 Executive Vice President and Chief Financial
Officer
W. Thaddeus Miller...... 49 Executive Vice President and Chief Legal Officer
E. Thomas Webb.......... 46 Senior Vice President
Edward A. Crooke........ 62 Director
Richard A. Friedman..... 42 Director
Tsutomu Kajita.......... 46 Director
Douglas F. Londal....... 34 Director
Terence M. O'Toole...... 42 Director
</TABLE>
Each of our directors will hold office until the next annual meeting of our
stockholders, or until his or her successor has been duly elected and qualified.
Our officers are elected by our Board of Directors and serve at the discretion
of the Board. Within three months of the completion of this offering, we intend
to expand our board of directors to nine and appoint two additional independent
directors.
FREDERIC V. SALERNO joined us in April 2000 as Chairman of our Board of
Directors. He is currently the Vice Chairman and Chief Financial Officer of
Verizon Communications, effective with the closing of the merger of Bell
Atlantic Corporation and GTE in June 2000. Since 1997, he has been the Senior
Executive Vice President and Chief Financial Officer of Strategy and Business
Development at Bell Atlantic. Prior to his position at Bell Atlantic, he served
as Vice Chairman of Finance and Business Development at NYNEX Corporation from
1994 to 1997, and served as President of Worldwide Services Group from 1991 to
1994, and as a director of NYNEX from 1991 to 1997. Mr. Salerno joined New York
Telephone in 1965. He currently serves as a director of Viacom, Inc. and The
Bear Stearns Companies Inc. Mr. Salerno holds a B.S. from Manhattan College and
an M.B.A. from Adelphi University.
JACK A. FUSCO has been our Chief Operating Officer since our inception in
March 1998. He was appointed President and Chief Executive Officer in November
1999. Mr. Fusco has over 16 years of experience in various areas of the power
generation industry. Prior to joining us, Mr. Fusco was a Vice President at
Goldman Sachs Power, an affiliate of Goldman, Sachs & Co., beginning in 1997.
Prior to joining Goldman, Sachs & Co., Mr. Fusco was Executive Director of
International Development and Operations for Pacific Gas & Electric's
non-regulated subsidiary PG&E Enterprises. In that role, he was responsible for
the development and implementation of PG&E's International Business Strategy and
the launching of International Generating Company, an international wholesale
power producer. Mr. Fusco holds a B.S. in Mechanical Engineering from California
State University, and is a Registered Professional Mechanical Engineer in the
State of California.
SCOTT B. HELM joined us in September 1998 as Chief Financial Officer and
was appointed Executive Vice President in November 1999. He is responsible for
managing our accounting and finance functions. Prior to joining us, he was a
Vice President in the Investment Banking Division of Goldman, Sachs & Co.,
commencing in 1994, where he generally focused on commodity, cyclical and
industrial clients. Mr. Helm holds a B.S.B.A. from Washington University.
W. THADDEUS MILLER joined us in June 1999 as Chief Legal Officer, and was
appointed Executive Vice President in November 1999. Mr. Miller has been
advising us on legal matters since our inception. Prior to joining us, Mr.
Miller was a Vice President and Associate General Counsel for Goldman, Sachs &
Co., commencing in 1994 specializing in commodities, with
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<PAGE> 63
particular emphasis on energy matters, where he advised our stockholder, GS
Capital Partners II, L.P., on certain legal matters in connection with its
investment in us. Prior to joining Goldman, Sachs & Co., Mr. Miller was a
partner with Watson, Farley & Williams, an international law firm. He has been
practicing law for over 20 years. Mr. Miller holds a B.S. from the United States
Merchant Marine Academy (Kings Point) and a J.D. from St. John's University
School of Law.
E. THOMAS WEBB joined us in September 1998 as Vice President of Asset
Management. In November 1999, he was appointed as Senior Vice President. Prior
to joining us Mr. Webb was employed by Pacific Gas & Electric from 1977 to
August 1998 in a variety of posts, including power plant management, and
transmission and distribution operations. Mr. Webb has over 23 years of
experience in the power generation industry. Mr. Webb holds a B.S. in Mechanical
Engineering from California Polytechnic State University and an M.B.A. from St.
Mary's College of California. Mr. Webb is a Registered Professional Mechanical
Engineer in the State of California.
EDWARD A. CROOKE assumed the position of Vice Chairman of Constellation
Energy Group in October 2000, a position he previously held before retiring in
January 2000. Upon completion of the separation of Constellation Energy Group
and BGE Corp., Mr. Crooke will become Chairman, President and Chief Executive
Officer of BGE Corp., a holding company focused on retail energy and related
services. Prior to becoming Vice Chairman of Constellation Energy Group in 1999,
he was Chairman, President and Chief Executive Officer of Constellation
Enterprises from 1998 through 1999 and President and Chief Operating Officer of
Baltimore Gas and Electric Company from 1992 through 1998. Mr. Crooke has worked
for Constellation Energy Group and its affiliates for 32 years. He serves on the
Board of Directors of Baltimore Equitable Insurance, Allfirst Financial, Inc.,
Allfirst Bank, Corporate Office Properties Trust and Associated Electric & Gas
Insurance Services Limited. Mr. Crooke received a B.A. from the University of
Maryland and an M.B.A. from Loyola College.
RICHARD A. FRIEDMAN is Co-Head of Goldman, Sachs & Co.'s Merchant Banking
Division, and Head of the Firm's Principal Investment Area. He joined Goldman,
Sachs & Co. in 1981, became a Partner in 1990, and was made a Managing Director
in 1996. He is Chairman of the Board of AMF Bowling Inc., and on the Board of
Directors of Carmike Cinemas, Inc., and Polo Ralph Lauren Corporation. Mr.
Friedman received a B.A. from Brown University and an M.B.A. from the University
of Chicago Graduate School of Business.
TSUTOMU KAJITA is Executive Vice President and Treasurer of Diamond
Generating Corporation (one of our stockholders). Since 1993 he has been
responsible for investment in and development of international wholesale power
projects. Prior to that he was a Vice President of Diamond Energy, Inc., a
company engaged in the wholesale power business. He has worked for Mitsubishi
Corporation and its affiliates, including Diamond Energy, for 20 years. Mr.
Kajita holds a B.A. in Law from Keio University in Tokyo and an M.B.A. from
Babson College.
DOUGLAS F. LONDAL is a Managing Director of Goldman, Sachs & Co. in the
Merchant Banking Division. He joined Goldman, Sachs & Co. in 1991 and was made a
Managing Director in 1999. He serves on the Board of Directors of 21st Century
Newspapers, Inc., Ruth's Chris Steak House, Inc. and Village Voice Media. Mr.
Londal received a B.A. from the University of Michigan and an M.B.A. from the
University of Chicago Graduate School of Business.
TERENCE M. O'TOOLE is a Managing Director of Goldman, Sachs & Co. in the
Merchant Banking Division. He joined Goldman, Sachs & Co. in 1983, became a
Partner in 1992, and was made a Managing Director in 1996. He is Chairman of the
Board of Amscan Holdings, Inc., and serves on the Board of Directors of 21st
Century Newspapers, Inc., AMF Bowling, Inc., TBG Information Investors, L.L.C.,
VoiceStream Wireless Corporation, and Western Wireless Corporation. Mr. O'Toole
received a B.S. from Villanova University and an M.B.A. from the Stanford
University Graduate School of Business.
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<PAGE> 64
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the previous two fiscal years, we did not have a compensation
committee or other Board committee performing similar functions. During that
period, the entire board of directors had authority to consider executive
compensation matters. Mr. Fusco, an executive officer, participated in
deliberations of our board of directors concerning executive compensation.
BOARD COMPENSATION
We intend to establish fees for all non-employee directors within six
months after the date of this prospectus. We will also reimburse our
non-employee directors for reasonable expenses they incur in attending board or
committee meetings.
BOARD COMMITTEES
Our board will have two standing committees: an audit committee and a
compensation committee. The audit committee will select the independent public
accountants to audit our annual financial statements and will establish the
scope and oversee the annual audit. The audit committee will also be responsible
for risk management and control and credit policies. The compensation committee
will approve and administer compensation and employee benefit plans. Our board
may establish other committees from time to time to facilitate the management of
our business and affairs.
EXECUTIVE COMPENSATION
The following table sets forth information for the calendar years ended
December 31, 1999 and 1998 concerning the annual compensation paid or accrued by
us to our executive officers ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION NUMBER OF
------------------- SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION(A) YEAR ($) ($) OPTIONS(#) ($)(B)
------------------------------ ---- ------ ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Jack A. Fusco(c)................... 1999 $203,167 $200,000 434,759 $ 884
President and Chief Executive 1998 108,333 133,333 21,261 1,967
Officer
Scott B. Helm(d)................... 1999 $186,250 $200,000 404,604 $ 802
Executive Vice President and
Chief Financial Officer
W. Thaddeus Miller(e).............. 1999 $149,000 $232,333 316,379 $ 205
Executive Vice President and
Chief Legal Officer
E. Thomas Webb(f).................. 1999 $153,163 $200,000 213,475 $1,741
Senior Vice President
</TABLE>
---------------
(a) We do not have any executive officers other than those named in the table.
(b) We paid insurance premiums for term life insurance for 1999 in the amount of
$884 for Mr. Fusco, $802 for Mr. Helm, $205 for Mr. Miller and $1,741 for
Mr. Webb.
(c) Mr. Fusco has been our Chief Operating Officer since June 1998 and he also
became our President and Chief Executive Officer in 1999. His bonus
compensation includes a one-time discretionary bonus in addition to the
bonus under his employment agreement.
(d) Mr. Helm has been our Chief Financial Officer since September 1998 and he
also became an Executive Vice President in 1999. His bonus compensation
includes a one-time discretionary bonus in addition to the bonus under his
employment agreement.
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<PAGE> 65
(e) Mr. Miller commenced his employment in June 1999 as Chief Legal
Officer/General Counsel and also became an Executive Vice President in 1999.
His bonus compensation includes a one-time discretionary bonus and a
one-time sign on bonus of $32,333 in addition to the regular bonus under
this employment agreement.
(f) Mr. Webb commenced employment in September 1998 as Vice President of Asset
Management and became a Senior Vice President in 1999. His bonus
compensation includes a one-time discretionary bonus in addition to the
bonus under his letter agreement.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND 1999
YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON VALUE 1999 YEAR END (#) 1999 YEAR END ($)(B)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#)(A) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack A. Fusco................ -- -- 55,466 400,554 $305,066 $1,989,868
Scott B. Helm................ -- -- 49,920 354,684 274,560 1,790,881
W. Thaddeus Miller(c)........ -- -- -- 316,379 -- 1,663,498
E. Thomas Webb............... -- -- 19,201 194,274 76,267 497,467
</TABLE>
---------------
(a) The Named Executive Officers did not exercise any options in 1999.
(b) In-the-money options are defined as those for which the fair market value of
the underlying security exceeds the exercise price of the option. The fair
market value is assumed to be $15.50 per share as of December 31, 1999,
reflecting the price of the most recent sales of common stock before that
date.
(c) Mr. Miller entered into an employment agreement effective June 1, 1999. Per
the agreement, Mr. Miller's options vest ratably on a daily basis, but did
not become exercisable before June 1, 2000.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------
PERCENT
NUMBER OF OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS MARKET ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE PRICE ON STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES OR BASE DATE OF OPTION TERM(A)
GRANTED IN FISCAL PRICE GRANT -------------------------------
NAME (#)(B) YEAR(C) ($/SH) ($)(D) EXPIRATION DATE 0% ($) 5% ($) 10% ($)
---- ---------- ---------- -------- -------- --------------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jack A. Fusco........ 2,883(e) 0.18% 10.00 10.00 December 2008 -- 15,896 39,154
292,531(f) 17.98% 10.00 10.00 December 2008 -- 1,612,810 3,972,427
11,555(g) 0.71% 10.00 10.00 December 2008 -- 63,711 156,924
89,028(h) 5.47% 10.00 15.50 December 2008 489,658 1,250,460 2,363,551
38,759(i) 2.38% 15.50 15.50 December 2008 -- 331,224 815,822
Scott B. Helm........ 2,595(e) 0.16% 10.00 10.00 December 2008 -- 14,307 35,238
263,278(f) 16.18% 10.00 10.00 December 2008 -- 1,451,529 3,575,185
10,400(g) 0.64% 10.00 10.00 December 2008 -- 57,340 141,232
80,125(h) 4.92% 10.00 15.50 December 2008 440,692 1,125,414 2,127,196
29,069(i) 1.79% 15.50 15.50 December 2008 -- 248,419 611,867
W. Thaddeus Miller... 2,162(e) 0.13% 10.00 10.00 December 2008 -- 11,922 29,365
219,398(f) 13.48% 10.00 10.00 December 2008 -- 1,209,607 2,979,321
8,666(g) 0.53% 10.00 10.00 December 2008 -- 47,783 117,693
66,771(h) 4.10% 10.00 15.50 December 2008 367,243 937,845 1,772,663
19,379(i) 1.19% 15.50 15.50 December 2008 -- 165,612 407,910
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------
PERCENT
NUMBER OF OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS MARKET ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE PRICE ON STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES OR BASE DATE OF OPTION TERM(A)
GRANTED IN FISCAL PRICE GRANT -------------------------------
NAME (#)(B) YEAR(C) ($/SH) ($)(D) EXPIRATION DATE 0% ($) 5% ($) 10% ($)
---- ---------- ---------- -------- -------- --------------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E. Thomas Webb....... 720(e) 0.04% 10.00 10.00 December 2008 -- 3,974 9,788
73,132(f) 4.49% 10.00 10.00 December 2008 -- 403,202 993,107
2,889(g) 0.18% 10.00 10.00 December 2008 -- 15,928 39,231
22,257(h) 1.37% 10.00 15.50 December 2008 122,415 312,615 590,888
104,315(h) 6.41% 15.50 15.50 December 2008 -- 891,435 2,195,646
4,845(i) 0.30% 15.50 15.50 December 2008 -- 41,403 101,978
</TABLE>
---------------
(a) Amount calculated as the difference between the per-share market price at
the date of the grant adjusted for the assumed appreciation rate through
the expiration date and the per-share exercise price of the option,
multiplied by the number of shares underlying the grant at year-end. The
per-share market price is assumed to be the price of the most recent sale
of common stock.
(b) In the event of a change of control of Orion Power Holdings, all of these
options become immediately and fully exercisable.
(c) In 1999, 1,627,246 options were granted to our employees.
(d) The market price on the date of each grant is assumed to be the price of
the most recent sales of common stock before that date.
(e) These options were granted on June 11, 1999 and vest ratably on a daily
basis over three years.
(f) These options were granted on July 27, 1999 and vest ratably on a daily
basis over three years.
(g) These options were granted on September 29, 1999 and vest ratably on a
daily basis over three years.
(h) These options were granted on November 5, 1999 and vest ratably on a daily
basis over three years.
(i) These options were granted on December 31, 1999 and vest ratably on a daily
basis over three years.
1998 STOCK INCENTIVE PLAN
In February 1999, our board of directors adopted and our stockholders
approved our 1998 stock incentive plan. Prior to the closing of this offering,
our board of directors intends to approve an amendment to the plan, which will
be approved by our stockholders, to increase the maximum number of shares that
may be awarded under the plan to 7,500,000 shares and to modify the definition
of change of control. The plan, as amended, will provide for the granting of
stock options, stock appreciation rights, share awards, performance awards and
restricted stock to our or our subsidiaries' employees, officers, and directors.
The 1998 stock incentive plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code and stock
options that do not so qualify. The maximum number of shares that may be awarded
to an employee during any three year period is 1,500,000, and the maximum amount
of dollar denominated performance units that may be awarded to any employee is
$1,000,000. The 1998 stock incentive plan is designed to comply with the
requirements for "performance-based compensation" under Section 162(m) of the
Internal Revenue Code, and the conditions for exemption from the short-swing
profit recovery rules under Rule 16b-3 under the Exchange Act.
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<PAGE> 67
The purpose of the 1998 stock incentive plan is to provide an incentive to
our directors, officers, employees and consultants and to encourage them to
devote their abilities to the success of our business. The 1998 stock incentive
plan is administered by, and awards may be granted by, the compensation
committee of our board. Generally, the compensation committee has the right to
grant options and other awards to eligible participants and to determine the
terms and conditions of option and other award agreements, including the vesting
schedule of options and other awards and the exercise price of options.
The 1998 stock incentive plan provides that the term of any option may not
exceed ten years. In the event of a change in control (as defined below) of our
company, all outstanding stock options, stock appreciation rights, and
performance units become immediately and fully vested and any restrictions on
restricted stock lapse.
Change in control generally means:
- the acquisition of 30% or more of our combined voting power of our voting
securities, unless the acquisition is by one of our subsidiaries or any
of our employee benefit plans;
- a merger, consolidation, reorganization or other transaction, unless our
shareholders continue to control at least 50% of our voting power or the
original members of our board of directors continue to hold a majority of
the board seats after the transaction;
- our complete dissolution or liquidation; or
- the sale of all of our assets or substantially all of our assets.
In the event of a change in capitalization, the compensation committee will
adjust the maximum number and class of shares which may be granted under the
1998 stock incentive plan or to any individual in any three calendar year
period, the number and class of shares which are subject to any outstanding
options and the purchase price of the option.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Effective November 2000, we entered into amended and restated employment
agreements with Jack A. Fusco, our President and Chief Executive Officer, Scott
B. Helm, our Chief Financial Officer and Executive Vice President, and W.
Thaddeus Miller, our Chief Legal Officer and Executive Vice President, and
entered into an employment agreement with E. Thomas Webb, our Senior Vice
President of Operations.
The following table provides information about the employment agreements of
each of our executive officers:
<TABLE>
<CAPTION>
OPTION GRANTS
(SHARES OF COMMON STOCK)
-----------------------------------------
FIVE-YEAR THREE-YEAR
BONUS EXPIRATION STOCK VESTING VESTING ADDITIONAL
NAME SALARY($)(A) RANGE(B)(C) DATE(D) PURCHASES(E) OPTIONS(F) OPTIONS(G) OPTIONS(H)
---- ------------ ----------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Jack A. Fusco........ $450,000 75-150% May 2003 20,000 shares 150,000 100,000 At least 50,000
Scott B. Helm........ 400,000 75-150% August 2003 40,000 shares 120,000 80,000 At least 40,000
W. Thaddeus
Miller............. 375,000 75-150% May 2004 22,500 shares 120,000 80,000 At least 40,000
E. Thomas Webb....... 325,000 50-100% November 2005 15,000 shares 100,000 60,000 At least 30,000
</TABLE>
---------------
(a) Subject to annual inflationary increases.
(b) Discretionary annual cash bonus equal to the specified range, based upon
performance criteria to be established in the future.
(c) In 2000, the bonus is guaranteed and shall be not less than the annual base
salary for 2000.
(d) Unless earlier terminated in accordance with the agreement.
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<PAGE> 68
(e) Each of the executive officers entered into a stock purchase agreement to
purchase the specified number of shares at a purchase price of $10.00 per
share and issued to us a non-recourse promissory note in a principal amount
equal to two-thirds of the purchase price of such stock.
(f) Each of the executive officers is entitled to stock option grants upon the
effective date of this registration statement to purchase the specified
number of shares at the initial public offering price, with the options
vesting ratably over a five-year period.
(g) Each of the executive officers is entitled to stock option grants upon the
effective date of this registration statement to purchase the specified
number of shares at the initial public offering price, with the options
vesting ratably over a three-year period.
(h) Each of the executive officers is entitled to stock option grants on January
1, 2002 and each January 1 thereafter during the employment term to purchase
not less than the specified number of shares at the fair market value of the
common stock at the date of grant, with the options vesting ratably over a
three-year period.
Each agreement provides that in the event of termination by us without
cause or by the employee for good reason, the employee will be entitled to
receive from us within 15 days following his termination:
- Any earned and unpaid base salary;
- A cash payment of two times the employee's annual base salary;
- A cash payment equal to two times the amount of the most recent bonus
paid to or earned by the employee in the last fiscal year; and
- Benefits accrued under any other benefit plan, program or arrangement in
which the employee was a participant on the date of termination.
If the employee owes us monies under the note to the stock purchase
agreement on the date of his termination, then cash payment amounts for salary
and bonus in excess of the employee's 2000 salary shall first be applied to
satisfy the monies owed to us under the note.
Good reason means:
- Our breach of the employment agreement or any related agreement;
- A reduction in the employee's title, duties or responsibilities;
- The relocation of the employee or our headquarters to any location
outside of Baltimore, Maryland (and, in the case of Mr. Miller, New
York); and
- A change in control as defined in the 1998 Stock Incentive Plan.
In addition, termination for good reason due to our breach, relocation or a
change in control automatically triggers the vesting of all stock options held
by each employee. The employment agreement also provides that each employee will
not compete with us for a period of one year after the termination of the
employee's employment.
With the exception of the director agreement with Frederic V. Salerno
described below, we do not provide our directors with any annual fees or meeting
fees, and our directors are not compensated for any services they provide to us
or for committee participation.
On April 5, 2000, we entered into a director agreement with Frederic V.
Salerno, who is the Chairman of our Board of Directors. Mr. Salerno will use
reasonable best efforts to attend all board meetings, serve on subcommittees and
perform such other duties and services appropriate for his position as Chairman.
In addition, we agreed to indemnify Mr. Salerno for his activities as a director
and reimburse Mr. Salerno for all reasonable business expenses.
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<PAGE> 69
The director agreement is for a two-year term, subject to earlier
termination due to death, mutual agreement, cause, a fiduciary resignation or
good reason as set forth in the director agreement.
Under the director agreement, Mr. Salerno is subject to a non-disclosure
covenant and a covenant prohibiting the solicitation of our employees and
customers. He is also subject to a non-competition covenant which prohibits him
from becoming employed by any entity that is principally engaged in our line of
business (other than his current employer).
In connection with the director agreement, we also entered into an option
agreement with Mr. Salerno under our 1998 stock incentive plan. Under his option
agreement, he has the option to purchase 322,600 shares at an exercise price of
$15.50 per share. The option has a five-year term. The option will vest and
become exercisable with respect to 50% of the shares on the first anniversary of
the grant date. The remaining 50% will vest and become exercisable the day
before the second anniversary of the grant date. The option will become
immediately vested and exercisable if Mr. Salerno is terminated without cause,
resigns as a result of a fiduciary conflict, or resigns for good reason. The
option will also immediately vest and become exercisable upon a change in
control, as defined in our 1998 stock incentive plan.
In addition, we entered into a stock purchase agreement with Mr. Salerno.
Under his stock purchase agreement, Mr. Salerno may purchase 645,200 shares of
our common stock at $15.50 per share paying for one-half of this stock with a
non-recourse promissory note.
We also entered into an investor rights agreement with Mr. Salerno, which
set forth certain rights, obligations and restrictions with respect to his
shares. The provisions of this agreement will terminate automatically upon the
closing of this offering.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information about the beneficial ownership
of our common stock as of June 30, 2000 by (1) each person who is the beneficial
owner of more than five percent of the outstanding shares of our common stock,
(2) each of our directors, (3) each of our executive officers, (4) all of our
executive officers and directors as a group and (5) each of our selling
stockholders. Except as otherwise indicated, the persons or entities listed
below have sole voting and investment power with respect to all shares of common
stock beneficially owned by them. For the purposes of this table, "beneficial
ownership" is determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, pursuant to which a person or group of persons is deemed
to have "beneficial ownership" of any shares of common stock that such person
has the right to acquire within 60 days after the date of this prospectus.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES NUMBER OF SHARES OUTSTANDING
BENEFICIALLY OFFERED IN --------------------------------
NAME OWNED THIS OFFERING BEFORE OFFERING AFTER OFFERING
---- ---------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
5% AND SELLING STOCKHOLDERS:
Entities affiliated with The Goldman
Sachs Group, Inc.(a).............. 40,850,400 -- 54.3% 42.1%
Constellation Enterprises,
Inc. and affiliates(b)............ 21,426,867 3,220,968 30.8% 19.9%
Constellation Operating Services,
Inc.(c)........................... 1,219,355 1,219,355 1.8% 0
Mitsubishi Corporation and
affiliates(d)..................... 7,741,936 -- 11.3% 8.5%
Tokyo Electric Power Company
International B.V.(e)............. 5,161,290 -- 7.5% 5.7%
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Jack A. Fusco(f)..................... 258,099(g) -- * *
Scott B. Helm(f)..................... 252,373(h) -- * *
W. Thaddeus Miller(f)................ 190,660(i) -- * *
E. Thomas Webb(f).................... 120,726(j) -- * *
Frederic V. Salerno(k)............... 645,200 -- * *
Edward A. Crooke(l).................. 21,426,867 3,220,968 30.8% 19.9%
Richard A. Friedman(m)............... 40,850,400 -- 54.3% 42.1%
Tsutomu Kajita(n).................... 7,741,936 -- 11.3% 8.5%
Douglas F. Londal(o)................. 40,850,400 -- 54.3% 42.1%
Terence M. O'Toole(p)................ 40,850,400 -- 54.3% 42.1%
All directors and executive officers
as a group (10
people)(l)(m)(n)(o)(p)(q)......... 71,486,261 3,220,968 93.3% 69.3%
</TABLE>
---------------
* Less than one percent.
(a) Consists of 14,984,097 shares and 2,966,742 warrants held by GS Capital
Partners II, L.P., 5,956,795 shares and 1,179,401 warrants held by GS
Capital Partners II Offshore, L.P., 552,685 shares and 109,427 warrants
held by GS Capital Partners II Germany C.L.P., 773,101 shares and 152,234
warrants held by Stone Street Fund 1998, L.P., 233,322 shares and 45,945
warrants held by Bridge Street Fund 1998, L.P., 8,796,383 shares and
1,445,976 warrants held by GS Capital Partners III, L.P., 2,418,232 shares
and 397,515 warrants held by GS Capital Partners III Offshore, L.P.,
406,086 shares and 66,753 warrants held by GS Capital Partners III Germany
C.L.P., 197,579 shares and 21,844 warrants held by Stone Street Fund 2000,
L.P., and 131,720 shares and 14,563 warrants held by Bridge Special
Opportunities Fund 2000, L.P. An affiliate of The Goldman Sachs
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<PAGE> 71
Group, Inc., of which Goldman, Sachs & Co. (an underwriter in this
offering) is an indirect wholly-owned subsidiary, is either the general
partner, managing general partner or investment manager of each of these
entities. The Goldman Sachs Group, Inc. and Goldman, Sachs & Co. each
disclaims beneficial ownership of the shares owned by such investment
partnerships to the extent attributable to partnership interests therein
held by persons other than The Goldman Sachs Group, Inc. and its
affiliates. The address of each of these funds is 85 Broad Street, New
York, New York 10004.
(b) 111 Market Place, Baltimore, Maryland 21201. Includes 705,900 warrants
owned by Constellation Enterprises and 1,219,355 shares beneficially owned
by its affiliate, Constellation Operating Services, all of which shares are
being sold in this offering.
(c) 111 Market Place, Baltimore, Maryland 21201.
(d) Includes shares beneficially owned by the following wholly-owned
subsidiaries of Mitsubishi Corporation: 3,677,419 shares owned by Diamond
Generating Corporation, 3,677,419 shares owned by Diamond Cayman, Inc., and
387,098 shares owned by Mitsubishi International Corporation. The address
of Diamond Generating Corporation is 333 South Grand Avenue, Suite 3000,
Los Angeles, California 90071, of Diamond Cayman, Inc. is c/o Mitsubishi
Corporation, 6-3 Marunouchi 2-chome, Chiyoda-ku Tokyo 100-8086 Japan, and
of Mitsubishi International Corporation is 520 Madison Avenue, New York,
New York 10022.
(e) Officia 1, De Boelelaan 7, 1083HJ, Amsterdam, The Netherlands.
(f) 7 East Redwood Street, Baltimore, Maryland 21202.
(g) Includes 238,099 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(h) Includes 212,373 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(i) Includes 168,160 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(j) Includes 105,726 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
(k) 1095 Avenue of the Americas, New York, New York 10036.
(l) 111 Market Place, Baltimore, Maryland 21201. Mr. Crooke, who is Vice
Chairman of Constellation Energy Group, an affiliate of Constellation
Enterprises, disclaims beneficial ownership of the securities owned by
Constellation Enterprises and its affiliates, except to the extent of his
pecuniary interest in those securities.
(m) 85 Broad Street, New York, New York 10004. Mr. Friedman, who is a Managing
Director of Goldman, Sachs & Co., disclaims beneficial ownership of the
securities owned by affiliates of Goldman, Sachs & Co., except to the extent
of his pecuniary interest in those securities.
(n) 333 South Grand Avenue, Suite 3000, Los Angeles, California 90071. Mr.
Kajita, who is Executive Vice President and Treasurer of Diamond Generating
Corporation, a wholly-owned subsidiary of Mitsubishi Corporation, disclaims
beneficial ownership of the securities owned by Mitsubishi and its
affiliates, except to the extent of his pecuniary interest in those
securities.
(o) 85 Broad Street, New York, New York 10004. Mr. Londal, who is a Managing
Director of Goldman, Sachs & Co., disclaims beneficial ownership of the
securities owned by affiliates of Goldman, Sachs & Co., except to the extent
of his pecuniary interest in those securities.
(p) 85 Broad Street, New York, New York 10004. Mr. O'Toole, who is a Managing
Director of Goldman, Sachs & Co., disclaims beneficial ownership of the
securities owned by affiliates of Goldman, Sachs & Co., except to the extent
of his pecuniary interest in those securities.
(q) Includes 7,830,678 shares subject to stock options that are exercisable
within 60 days of the date of this prospectus.
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<PAGE> 72
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
STOCKHOLDERS' AGREEMENT
GENERAL
GS Capital Partners II, L.P. and other private investment partnerships
affiliated with Goldman, Sachs & Co., Constellation Enterprises, affiliates of
Mitsubishi Corporation, Tokyo Electric Power Company International B.V. and we
are parties to a stockholders' agreement, most provisions of which will
terminate automatically upon the closing of this offering.
ADVISORY FEES
Pursuant to the stockholders' agreement, in addition to any other fees
payable with respect to any of our financings or paid under our strategic
alliance agreements, we paid 1% of the aggregate consideration paid in each
acquisition transaction as an advisory fee to our stockholders in proportion to
the percentage holding of each stockholder. For the six months ended June 30,
2000, we paid a total of $9.4 million to GS Capital Partners II, L.P. and
affiliated investment partnerships, $4.7 million to Constellation Enterprises,
$1.8 million to affiliates of Mitsubishi Corporation and $1.2 million to Tokyo
Electric Power Company International B.V. In 1999, we paid a total of $6.8
million to GS Capital Partners II, L.P. and affiliated investment partnerships
and $2.9 million to Constellation Power Source (which was then our stockholder).
In addition, prior to this offering, Goldman, Sachs & Co. had the right to
provide all investment banking services to us on arms-length terms, conditions
and pricing. Both of these provisions terminate automatically upon the closing
of this offering.
EQUITY INVESTMENTS
Pursuant to the stockholders' agreement, at the time of our formation in
March 1998, GS Capital Partners II, L.P. and affiliated investment partnerships
and Constellation Power Source irrevocably committed to provide us with
additional equity capital subject to an aggregate maximum investment for each
stockholder. Our other stockholders made similar commitments when they first
purchased our stock in November 1999. The price at which each stockholder
purchased stock upon the capital calls was set forth in the stockholders'
agreement at $10.00 per share for GS Capital Partners II, L.P. and affiliated
investment partnerships and Constellation Enterprises and at $15.50 per share
for our other stockholders, and was determined through arms-length negotiations
and reflected our status and prospects at the time of the commitment. All
commitments to provide equity under the stockholders' agreement have been
satisfied.
The following table sets forth the equity investments to date for each of
our principal stockholders:
<TABLE>
<CAPTION>
INVESTOR AMOUNT ($)
-------- ----------
<S> <C>
Entities affiliated with The Goldman Sachs Group, Inc. ... $368,975,000
Constellation Power Source, Inc. and affiliates........... 206,025,000
Mitsubishi Corporation and affiliates..................... 120,000,000
Tokyo Electric Power Company International B.V. .......... 80,000,000
</TABLE>
In March 1998, November 1998, December 1998, June 1999, July 1999,
September 1999 and April 2000, GS Capital Partners II, L.P. and affiliated
investment partnerships and Constellation Enterprises made equity investments
pursuant to capital calls based upon their respective commitments described
above. These funds were primarily used to finance acquisitions. GS Capital
Partners II, L.P. and affiliated investment partnerships purchased 30,000,000
shares and Constellation Enterprises and affiliates purchased 17,500,000 shares
pursuant to those capital calls.
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<PAGE> 73
Pursuant to the stockholders' agreement, in connection with several capital
calls, we issued warrants to GS Capital Partners II, L.P. and affiliated
investment partnerships to purchase a total of 5,034,257 shares of our common
stock at an exercise price of $10.00 per share and 1,366,143 shares at an
exercise price of $15.50 per share, and to Constellation Enterprises to purchase
a total of 705,900 shares at an exercise price of $10.00 per share. All of these
warrants expire ten years from the date of issuance.
Under the stockholders' agreement, Goldman, Sachs & Co. was entitled to a
fee of 5% of the proceeds received by us in a private placement of equity (other
than capital calls under the stockholders' agreement) for acting as our agent in
the transaction. The placement of equity with affiliates of Mitsubishi
Corporation and Tokyo Electric Power Company International B.V. in November 1999
qualified as such a private placement and, under the stockholders' agreement,
Goldman, Sachs & Co. would have been entitled to a fee of $10 million. In
connection with the negotiation of an amendment to the stockholders' agreement,
however, Goldman, Sachs & Co. agreed to reduce this fee to a total of $4 million
in cash for all private placements. Of this amount, $2.4 million was earned in
November 1999 and $1.6 million was earned in April 2000 at the time of capital
calls against the prior commitments. We have satisfied all our obligations set
forth in the stockholders' agreement to pay fees in connection with any future
placements of equity with new stockholders.
The stockholders' agreement provides that our certificate of incorporation
and bylaws shall provide for indemnification, advancement of expenses and
limitation of the personal liability of our directors to the fullest extent
permitted by law, and that such provisions may not be amended, repealed or
otherwise modified in any manner adverse to any director until at least six
years from the closing of this offering. In addition, pursuant to the
stockholders' agreement, all transactions between us and any of our stockholders
or their affiliates shall occur only after arms-length negotiations which result
in market-based price, terms and conditions, which provision shall survive the
closing of this offering.
In April 2000, our existing stockholders made equity investments to help
finance the acquisition of the assets located in Ohio and Pennsylvania. First,
all our existing stockholders satisfied their remaining commitments under the
stockholders' agreement at $10.00 per share for GS Capital Partners II, L.P. and
affiliated investment partnerships and Constellation Enterprises and at $15.50
per share for affiliates of Mitsubishi Corporation and Tokyo Electric Power
Company International B.V. Second, GS Capital Partners II, L.P. and affiliated
investment partnerships invested approximately $69 million and Constellation
Enterprises invested approximately $31 million over and above the amount that
they had previously committed to invest pursuant to the stockholders' agreement
at $15.50 per share.
SENIOR NOTES
In April and May 2000, Goldman, Sachs & Co. acted as one of several initial
purchasers of $400 million of our senior notes, purchasing $250 million of notes
at customary arms-length discounts. As of June 30, 2000, Goldman, Sachs & Co.
did not hold any of our senior notes. For a discussion of the senior notes, see
"Description of Indebtedness -- Senior Notes."
ORION POWER MIDWEST, L.P. CREDIT FACILITY
In connection with the credit facility of Orion Power MidWest, L.P. entered
into in April 2000, Goldman Sachs Credit Partners L.P. acted as an arranger,
syndication agent, joint book runner and lender. We entered into the credit
facility after arms-length negotiations and at market terms and conditions. As
of June 30, 2000, Goldman Sachs Credit Partners L.P., as a lender, has received
interest payments and fees under this credit facility totaling approximately
$2.4 million.
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CONSTELLATION POWER SOURCE STRATEGIC ALLIANCE AGREEMENT
We entered into a strategic alliance agreement with Constellation Power
Source, pursuant to which Constellation Power Source was the exclusive provider
of, and had the right of first refusal for, power marketing and risk management
services for our facilities. We will terminate this agreement upon closing of
this offering. We did not pay any money to Constellation Power Source under this
agreement other than payments made to Constellation Power Source under the other
agreements described below.
We paid approximately $200,000 in 1999 to Constellation Power Source for
rent, telephone and information technology support.
In a related agreement, affiliates of Constellation Power Source agreed not
to compete with us for the acquisition of existing non-nuclear generation assets
for the period that the strategic alliance agreement is in effect. Our
termination of the strategic alliance agreement will also have the effect of
terminating the non-compete.
CONSTELLATION OPERATING SERVICES STRATEGIC ALLIANCE AGREEMENT
We entered into a strategic alliance agreement with Constellation Operating
Services pursuant to which it was the exclusive provider of day-to-day operating
and maintenance services for each of the generation facilities we acquired a
controlling interest in (including our existing facilities). This agreement
terminated in April 2000 upon the completion of our acquisition of Constellation
Operating Services' subsidiaries.
We also entered into separate, site-specific, market-based, arms-length
contracts with subsidiaries of Constellation Operating Services, essentially on
a cost plus basis, to perform day-to-day operations and maintenance services at
certain facilities. These agreements terminated in April 2000 upon the
completion of our acquisition of Constellation Operating Services' subsidiaries.
AGENCY AGREEMENT
In April 2000, in connection with Orion Power MidWest, L.P.'s obligations
under the Provider of Last Resort Contract, we entered into an agency and sale
agreement with Constellation Power Source which expires March 31, 2001. The
agreement provides that Constellation Power Source will act as Orion Power
MidWest, L.P.'s agent to sell its excess energy to third-party purchasers and
purchase energy on behalf of Orion Power MidWest, L.P. to enable Orion Power
MidWest, L.P. to meet its obligations as the provider of last resort. In return,
Constellation Power Source is entitled to receive a monthly fee ranging from
$60,000, to $150,000 depending on the season and between 23% and 38% of net
revenue generated from its agency sales (over certain revenue benchmarks). For
the six months ended June 30, 2000, we paid approximately $210,000 to
Constellation Power Source as a fee under this agreement.
TOLLING AGREEMENTS
We have entered into a five year gas tolling agreement with Constellation
Power Source relating to our operation of the Carr Street facility, which
continues until 2003. Under this agreement, the counterparty will have the
exclusive right to receive all energy, capacity and ancillary services produced
by the plant. The counterparty will pay for, and be responsible for, all fuel
used by the plant. We are currently paid approximately $3.6 million per annum as
a fixed fee and $3.07 per megawatt hour generated, both of which will escalate
by approximately 2.5% per annum. We have guaranteed portions of the plant's
operating performance, and failure to meet these guarantees could result in
penalties. We believe that when we entered into this agreement the terms were no
less favorable to us than terms we could negotiate in an arms-length
transaction.
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We have entered into a one year financial tolling agreement with
Constellation Power Source relating to 200 megawatts of on-peak energy in New
York City, which is in effect from November 2000 through October 2001. Under
this agreement, we will pay Constellation Power Source the NY-ISO determined
market price minus the lesser of a factor of the New York City delivered gas or
oil market price. Constellation Power Source will pay us a fixed monthly fee of
$1.6 million. We believe that the terms of this agreement are no less favorable
to us than terms we could negotiate in an arms-length transaction.
MITSUBISHI AND TOKYO ELECTRIC POWER COMPANY NON-COMPETE AGREEMENTS
Affiliates of Mitsubishi Corporation and Tokyo Electric Power Company
International B.V. entered into agreements not to compete with us for the
acquisition of existing generation assets. These agreements will terminate upon
closing of this offering.
CONSTELLATION OPERATING SERVICES ACQUISITION
In April 2000, we acquired all of the outstanding capital stock of four
subsidiaries of Constellation Operating Services for $18.9 million in stock and
$0.1 million in cash. Our board of directors approved the valuation of these
subsidiaries, which was determined after arms-length negotiations, in accordance
with our stockholders' agreement.
AGREEMENT RELATING TO PUBLIC UTILITY HOLDING COMPANY ACT REGULATION
Prior to the completion of this offering, we intend to enter into an
agreement with Goldman, Sachs & Co. and its affiliates pursuant to which we have
agreed that if Goldman, Sachs & Co. is no longer a controlling shareholder in
us but still owns 5% or more of our outstanding voting securities, and
we wish to engage in any activities that will subject us to regulation under
PUHCA and which are prohibited under our certificate of incorporation without
the consent of Goldman, Sachs & Co., Goldman, Sachs & Co. will negotiate in good
faith with us to structure the transaction or its ownership interest in us so as
to avoid material regulatory or other restrictions on us or Goldman, Sachs & Co.
LOANS FROM STOCKHOLDERS
During 1999 and 1998, GS Capital Partners II, L.P. and affiliated
investment partnerships made loans to us of approximately $71.1 million and
Constellation Enterprises made loans to us of approximately $41.2 million to
allow us to pay our initial expenses. Each loan was for a five-year term,
required earlier repayment in the event of our public offering, sale,
liquidation or merger and accrued interest at 7%, payable semiannually. In
November 1999, we repaid the total balance due to Constellation Enterprises with
funds from the capital calls of our new investors. In April 2000, GS Capital
Partners II, L.P. and affiliated investments partnerships converted all of their
approximately $71.1 million in loans to 7,108,600 shares of common stock in
satisfaction of a portion of its capital commitments.
We paid interest of approximately $0.8 million in 1999 to affiliates of
Constellation Enterprises. We accrued interest of approximately $2.2 million in
1999 and approximately $1.5 million for the six months ended June 30, 2000 to GS
Capital Partners II, L.P. and affiliated investment partnerships.
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LOANS TO DIRECTORS, OFFICERS AND EMPLOYEES
We have made the following loans to directors, officers and employees in
connection with their purchase of common stock at the indicated dates:
<TABLE>
<CAPTION>
NAME LOAN AMOUNT($) DATE
---- -------------- ----
<S> <C> <C>
Frederic V. Salerno...................... $5,000,300 April 2000
Jack A. Fusco............................ 7,873 December 1998
125,460 July 1999
Scott B. Helm............................ 15,746 December 1998
250,920 July 1999
W. Thaddeus Miller....................... 150,000 July 1999
E. Thomas Webb........................... 100,000 July 1998
</TABLE>
The loans are limited recourse to the borrower, secured by all shares and
options held by the borrower on the date of the loan and all shares acquired by
the borrower in connection with the exercise of options held on the date of the
loan. Except in the case of Mr. Salerno, the loans each bear interest at 7% per
annum and are repayable on the date which is five years from the date of the
initial loan.
Mr. Salerno's loan bears interest at the greater of the London Interbank
Offered Rate plus 1%, or the "applicable federal rate" as determined pursuant to
the Internal Revenue Code. Interest will accrue annually commencing December 31,
2000. The principal and interest are repayable on the first to occur of the
fifth anniversary of the loan, one year after Mr. Salerno's service as one of
our directors terminates due to death, termination without cause, a fiduciary
resignation or the expiration of the two year term of his director agreement, or
the 90th day following the date Mr. Salerno's service as a director terminates
for any other reason.
REGISTRATION RIGHTS
Each of GS Capital Partners II, L.P. and affiliated investment
partnerships, Constellation Enterprises, Constellation Operating Services,
certain affiliates of Mitsubishi Corporation and Tokyo Electric Power Company
International has been granted registration rights by us pursuant to which each
stockholder may require us from time to time after the expiration of six months
from this offering, to register their shares of common stock for sale to the
public under the Securities Act. In addition, each of these stockholders and our
executive officers has piggyback registration rights that allow them to include
their shares of common stock in registration statements initiated by us. These
registration rights are subject to conditions and limitations, including the
right of the underwriters of an offering to limit the number of shares included
in a registration statement.
Constellation Operating Services has the right to include its 1,219,355
shares of common stock in this offering and has elected to do so.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
After this offering, our authorized capital stock will consist of
210,000,000 shares, of which 200,000,000 shares are common stock, par value
$0.01 per share, and 10,000,000 shares are preferred stock, par value $0.01 per
share. Immediately following the offering, 90,595,926 shares of common stock, or
94,345,926 shares if the underwriters exercise their over-allotment option in
full, will be outstanding and no shares of preferred stock will be outstanding.
The following descriptions are summaries of material terms of our
certificate of incorporation and bylaws. This summary is qualified by our
certificate of incorporation and bylaws, copies of which have been filed as
exhibits to the registration statement of which this prospectus is a part, and
by the provisions of applicable law.
COMMON STOCK
As of June 30, 2000, there were 68,816,894 shares of common stock
outstanding held of record by 19 stockholders.
Each share of common stock entitles the holder to one vote on all matters
on which holders are permitted to vote. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to dividends when, as and if declared by the board of directors out of
funds legally available for that purpose. Upon liquidation, subject to
preferences that may be applicable to any outstanding preferred stock, the
holders of common stock are entitled to a pro rata share in any distribution to
stockholders. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable.
PREFERRED STOCK
Our board of directors is authorized, without approval of our stockholders,
to cause shares of preferred stock to be issued from time to time in one or more
series, and our board of directors may fix the designations, powers, privileges,
preferences and rights and the qualifications, limitations and restrictions of
the shares of each series.
The specific matters that our board of directors may determine include the
following:
- the designation of each series,
- the number of shares of each series,
- the rate of any dividends,
- whether any dividends shall be cumulative or non-cumulative,
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of our company,
- the terms of any redemption,
- rights and terms of any conversion or exchange, and
- any voting rights.
Although no shares of preferred stock are currently outstanding, and we
have no current plans to issue preferred stock, the issuance of shares of
preferred stock, or the issuance of rights to purchase shares of preferred
stock, could be used to discourage an unsolicited acquisition proposal. For
example, a business combination could be impeded by issuing a series
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of preferred stock containing class voting rights that would enable the holder
or holders of this series to block that transaction. Alternatively, a business
combination could be facilitated by issuing a series of preferred stock having
sufficient voting rights to provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power and other rights of the
holders of the common stock. Although our board is required to make any
determination to issue any preferred stock based on its judgment as to the best
interests of our stockholders, it could act in a manner that would discourage an
acquisition attempt or other transaction that some, or a majority, of our
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over prevailing market
prices of the stock. Our board does not presently intend to seek stockholder
approval prior to any issuance of currently authorized stock unless otherwise
required by law or applicable stock exchange requirements.
RIGHTS PLAN
Our rights plan may have the effect of delaying or preventing a change in
control of our company. This plan attaches to each share of common stock one
right that, when exercisable, entitles the holder to purchase one one-hundredth
of a share of series A junior participating preferred stock at a purchase price
of five times the initial public offering price, subject to adjustment.
Initially, the rights will be represented by the presently outstanding common
stock, and no separate rights certificates will be distributed. The rights will
separate from the common stock on a distribution date, which will occur upon the
earlier of:
- 10 business days following public announcement of the fact that a person
or group, other than exempt persons, has acquired beneficial ownership of
10% or more of our outstanding common stock; or
- 10 business days following the commencement or announcement by any person
or group of an intention to commence a tender offer or exchange offer for
10% or more of our outstanding common stock.
The rights plan will not be triggered upon (1) a sale of all the shares owned by
Constellation Enterprises and its affiliates in a single transaction to a single
purchaser or (2) a sale of up to 18,205,899 shares owned by Goldman Sachs and
their affiliates in a single transaction to a single purchaser, provided that
the shares sold by Constellation Enterprises and Goldman Sachs may not be sold
to the same purchaser or affiliates of such purchaser. Upon the occurrence of
the events described above, each holder of a right (other than the acquiring
person or group) would be entitled to receive shares of our common stock or
common stock of a surviving corporation, or cash, property or other securities,
with a market value equal to twice the purchase price. Accordingly, exercise of
the rights may cause substantial dilution to a person who attempts to acquire
our company.
The rights, which expire in September 2010, may be redeemed, at the option
of our board of directors, at a price of $.01 per right at any time prior to a
group or person acquiring ownership of 10% or more of the outstanding shares of
common stock. The rights agreement may have certain antitakeover effects,
although it is not intended to preclude any acquisition or business combination
that is at a fair price and otherwise in the best interests of our company and
our stockholders as determined by our board of directors. However, a stockholder
could potentially disagree with the board's determination of what constitutes a
fair price or the best interests of our company and our stockholders.
The description and terms of the rights are set forth in a rights agreement
between us and LaSalle Bank National Association, as rights agent. A copy of the
rights agreement is filed as an exhibit to the registration statement of which
this prospectus forms a part. The above summary of the material terms of the
rights does not purport to be complete and is qualified in its entirety by
reference to the rights agreement.
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WARRANTS
Pursuant to the stockholders' agreement, in connection with several capital
calls through which these parties were obligated to purchase shares of our
common stock, during the period starting in November 1998 and ending in April
2000, we issued warrants to GS Capital Partners II, L.P. and affiliated
investment partnerships to purchase a total of 5,034,257 shares of our common
stock at an exercise price of $10.00 per share and 1,366,143 shares at an
exercise price of $15.50 per share, and to Constellation Enterprises to purchase
a total of 705,900 shares at an exercise price of $10.00 per share. All of these
warrants expire ten years from the date of issuance.
DELAWARE ANTI-TAKEOVER LAWS AND CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS
ANTI-TAKEOVER PROVISIONS. Some provisions of Delaware law and our
certificate of incorporation and bylaws could make the following more difficult:
- acquisition of us by means of a tender offer,
- acquisition of us by means of a proxy contest or otherwise, or
- removal of our incumbent officers and directors.
These provisions, as well as our ability to issue preferred stock, are
designed to discourage coercive takeover practices and inadequate takeover bids.
These provisions are also designed to encourage persons seeking to acquire
control of us to first negotiate with our board of directors. We believe that
the benefits of increased protection give us the potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us, and that the benefits of this increased protection outweigh the
disadvantages of discouraging those proposals, because negotiation of those
proposals could result in an improvement of their terms.
PUBLIC UTILITY HOLDING COMPANY ACT LIMITATION. Our certificate of
incorporation provides that we will not acquire, directly or indirectly, any of
the voting securities of, and will not become, (1) a "public-utility company"
(as such term is defined in PUHCA), or (2) an "affiliate" (as such term is
defined in Section 2(a) 11(A) of PUHCA) or a "subsidiary company" (as such term
is defined in PUHCA) or a "holding company" (as such term is defined in PUHCA)
with respect to any such public-utility company, and that we will not become a
"public utility" (as such term is defined in the Federal Power Act, known as the
FPA), in each case so long as PUHCA and/or the FPA are in effect and so long as
acquiring any such securities or becoming any of the entities identified above
imposes material regulatory or other restrictions on us or Goldman, Sachs & Co.,
without the consent of Goldman, Sachs & Co., so long as Goldman, Sachs & Co.
owns 5% or more of our outstanding voting securities. Notwithstanding the
preceding sentence, filings with FERC (a) to qualify as an "exempt wholesale
generator" (as such term is defined in PUHCA) or a "qualifying facility" (as
such term is defined in the Public Utility Regulatory Policies Act of 1978), (b)
to obtain authority from FERC to sell electricity and electricity-related
products at market based rates or to own certain electric transmission
facilities relating to our generation assets which are subject to the FPA or (c)
that are otherwise necessary filings by us or any of our stockholders to
effectuate the acquisition of certain assets shall be permitted.
LIMITATION ON LIABILITY OF DIRECTORS. Our certificate of incorporation
provides that no director shall be personally liable to us or our stockholders
for monetary damages for breach of fiduciary duty as a director, except as
required by law, as in effect from time to time. Currently, Delaware law
requires that liability be imposed for the following:
- any breach of the director's duty of loyalty to our company or our
stockholders,
- any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law,
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- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporate
Law, and
- any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that, to the fullest extent permitted by law, we will
indemnify any person made or threatened to be made a party to any action by
reason of the fact that the person is or was our director or officer, or served
at our request for any other enterprise as a director or officer. We will
reimburse the expenses, including attorneys' fees, incurred by a person
indemnified by this provision when we receive an undertaking to repay such
amounts if it is ultimately determined that the person is not entitled to be
indemnified by us. Amending this provision will not reduce our indemnification
obligations relating to actions taken before an amendment.
DELAWARE BUSINESS COMBINATION STATUTE
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an
anti-takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders. Because certain of our stockholders will own more than 15% of our
voting stock before we become a public company and upon completion of the
offering, Section 203 by its terms is currently not applicable to business
combinations with these stockholders even though these stockholders each own
more than 15% of our outstanding stock. If any other person acquires 15% or more
of our outstanding stock, that person will be subject to the provisions of
Section 203.
LISTING OF COMMON STOCK
Our common stock has been approved for listing on the New York Stock
Exchange under the symbol "ORN," subject to official notice of issuance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of our common stock is LaSalle Bank
National Association.
DESCRIPTION OF INDEBTEDNESS
ORION POWER NEW YORK, L.P. CREDIT FACILITY
In July 1999, Orion Power New York, L.P., entered into a credit facility
providing for (1) an acquisition facility in an amount of up to $700 million and
(2) a revolving working capital facility in an amount of up to $30 million, of
which $10 million has been utilized in the form of a letter of credit for the
benefit of Consolidated Edison of New York. This facility is due to mature in
December 2002. Amounts outstanding under the facility bear interest at our
option at either (1) the greater of one of the lender's base rate and the
federal funds effective rate, plus, in either case, 0.375% for the first two
years and 0.750% thereafter, or (2) LIBOR plus 1.375% for
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the first two years and 1.750% thereafter. The lenders have a security interest
in substantially all of the assets of Orion Power New York, L.P., and have
negative pledges on other fixed assets. Orion Power New York, L.P. also pays
facility fees on the working capital facility and the Consolidated Edison letter
of credit.
Each loan under the working capital facility will be subject to customary
conditions precedent, including satisfaction of all covenants. The acquisition
facility provides for mandatory prepayments upon the occurrence of certain
events. The credit facility restricts the ability of Orion Power New York, L.P.
and its various operating subsidiaries from distributing cash flow to us and
places an aggregate limit of $100 million on such distributions over the term of
the loan.
The acquisition facility and the working capital facility contain financial
and operational covenants and other restrictions with which Orion Power New
York, L.P. must comply, including, among other things, a requirement to maintain
debt service coverage ratios, and restrict the ability of Orion Power New York,
L.P. to:
- dispose of assets;
- incur additional indebtedness;
- create or permit any liens on assets;
- engage in activities other than those related to the Carr Street
facility, the hydroelectric assets or the assets located in New York
City;
- make investments or acquisitions;
- make capital expenditures;
- incur guarantee obligations; and
- enter into transactions with affiliates.
The credit facility contains events of default, including payment defaults
and default in the performance of other covenants, breach of representations or
warranties, cross-default to other significant indebtedness, insolvency events,
failure to obtain any required governmental approval and certain regulatory
changes, including the NY-ISO failing to become operational before June 30,
2001, a reduction in the rule requiring New York City power retailers to procure
capacity of at least 80% of forecasted peak demand from in-city generation
sources to less than 75%, or a reduction in the price cap for capacity from
in-city generators to less than $90 per kilowatt year. The credit facility also
provides that an event of default will occur upon a change of control.
As of June 30, 2000, we have funded a debt service reserve account for the
benefit of the lenders in the amount of approximately $52 million. We are
required to fund one year's interest expense on the facility, and the amount
that we are obligated to deposit into this reserve account fluctuates based upon
the interest rate fluctuations under the facility. We will fund any of these
obligations from cash flow from operations.
ORION POWER MIDWEST, L.P. CREDIT FACILITY
In April 2000, Orion Power MidWest, L.P. entered into a credit facility
providing for (1) an acquisition facility in an amount of up to $1.11 billion
and (2) a revolving credit facility in an amount of up to $90 million, of which
$10 million has been utilized in the form of a letter of credit for the benefit
of Duquesne Light Company. This facility is due to mature in October 2002.
Amounts outstanding under the facility bear interest at our option at either (1)
the greater of one of the lender's base rate and the federal funds effective
rate, plus, in either case, 0.375% for the first year, 0.500% for the second
year and 1.000% thereafter, or (2) LIBOR plus 1.375% for the first year, 1.500%
for the second year and 2.000% thereafter. The lenders have a security interest
in substantially all of the assets of Orion Power MidWest, L.P. and have
negative pledges on
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other fixed assets. Orion Power MidWest, L.P. also pays facility fees on the
revolving credit facility and the Duquesne Light Company letter of credit.
Each loan under the working capital facility will be subject to customary
conditions precedent, including satisfaction of all covenants. The acquisition
facility provides for mandatory prepayments upon the occurrence of certain
events. The credit facility restricts the ability of Orion Power MidWest, L.P.
and its various operating subsidiaries from distributing cash flow to us and
places an aggregate limit of $175 million on such distributions over the term of
the loan.
The acquisition facility and the working capital facility contain financial
and operational covenants and other restrictions with which Orion Power MidWest,
L.P. must comply, including, among other things, requirements to maintain debt
coverage ratios, and restrict the ability of Orion Power MidWest, L.P. to:
- dispose of assets;
- incur additional indebtedness;
- create or permit any liens on assets;
- engage in activities other than those related to our existing assets
located in Ohio and Pennsylvania;
- make investments, mergers, acquisitions or consolidations;
- engage in joint ventures or partnerships;
- make capital expenditures;
- incur guarantee obligations;
- enter into transactions with affiliates; and
- declare or pay any distributions to stockholders.
The credit facility contains events of default, including payment defaults
and default in the performance of other covenants, breach of representations or
warranties, cross-default to other significant indebtedness, insolvency events,
entry of judgments against us and substantial loss or destruction of our
existing assets located in Ohio and Pennsylvania. The credit facility also
provides that an event of default will occur upon a change of control.
We established for the benefit of the lenders (1) a debt service reserve
account, in the amount of $45 million, and (2) a capital expenditure reserve
account, initially in the amount of $10 million, into which Orion Power MidWest,
L.P. will deposit funds on a quarterly basis for the payment of specified
capital expenditures at some of our existing assets located in Ohio and
Pennsylvania.
REVOLVING CREDIT FACILITY
In July 2000, we entered into a revolving senior credit facility providing
us with up to $75 million of revolving credit borrowings for general corporate
purposes, with a $40 million sub-limit for letters of credit. This credit
facility matures in December 2002. Amounts outstanding under the facility bear
interest at our option at either (1) the greater of the lender's base rate and
the federal funds effective rate, plus 0.50% and an additional margin of between
0.0% and 3.00%, or (2) LIBOR for deposits in dollars, plus an additional margin
of between 1.50% and 4.50%. Letters of credit used to satisfy our financial
obligations will bear a letter of credit commission rate equal to the applicable
margin on Eurodollar Rate loans. Letters of credit used to satisfy our
obligations to perform other activities will have a letter of credit commission
rate of between 1.00% and 3.00%. Under certain circumstances, the highest
applicable margin or an additional margin will be payable. The facility is
unsecured and ranks on parity with all of our senior debt,
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including the senior notes. In connection with this facility, we paid an annual
agency fee and a commitment fee in July 2000.
Drawings under the credit facility will be subject to customary conditions
precedent, including satisfaction of all covenants, maintenance of shareholders'
equity and no cross-defaults. The facility provides for mandatory prepayments
upon the occurrence of certain events.
The credit facility contains financial and operating covenants and other
restrictions with which we must comply, including requirements to maintain
certain leverage ratios, minimum debt service coverage ratios and net worth, and
limitations on our and our subsidiaries' ability to:
- dispose of assets;
- incur additional indebtedness;
- incur any liens on assets;
- make investments or acquisitions;
- create subsidiary indebtedness;
- pay dividends or distributions;
- make capital expenditures; and
- incur guarantee obligations.
The credit facility contains events of default, including payment defaults
and default in the performance of other covenants, breach of representations or
warranties, cross-default to other significant indebtedness, cross-acceleration
to our subsidiaries' indebtedness, insolvency or ERISA defaults and entry of
judgments against us or our subsidiaries. The credit facility also provides that
an event of default will occur upon a change of control. In addition, we will be
required to reduce all borrowings, other than letters of credit, under the
facility to zero each year for a period of at least 15 consecutive days.
SENIOR NOTES
In April and May 2000, we sold a total of $400 million aggregate principal
amount at maturity of 12% senior notes due May 1, 2010. Cash interest on the
notes will be payable semi-annually on May 1 and November 1 of each year,
beginning on November 1, 2000. In connection with the sale of these notes, we
received net proceeds of approximately $390 million.
The notes are senior unsecured obligations of us and rank equally in right
of payment with all our existing and future unsecured indebtedness and senior in
right of payment to all our future subordinated indebtedness. Prior to May 1,
2003, we may redeem up to 35% of the outstanding notes with the net cash
proceeds of an equity offering, at 112% of the principal amount thereof, plus
accrued and unpaid interest and special interest, if any, as long as at least
65% of the notes issued remain outstanding immediately after the redemption and
the redemption occurs within 60 days of the closing of the equity offering. We
must offer to repurchase the notes for cash upon a change of control at 101% or
upon certain asset sales at 100% of the principal amount thereof, plus accrued
and unpaid interest (and special interest with respect to a change of control).
The senior notes, among other things, restrict our and our subsidiaries'
ability to:
- borrow money;
- pay dividends on stock or repurchase stock;
- make investments;
- use assets as security in other transactions;
- sell certain assets or merge with or into other companies; and
- engage in certain transaction with affiliates.
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We granted the holders of the senior notes certain registration rights and
agreed to consummate an exchange offer with respect of the senior notes by July
15, 2001. If we do not comply with these obligations, we will be required to pay
special interest to the holders of the senior notes.
LIBERTY ELECTRIC POWER, LLC CREDIT FACILITY TO BE ASSUMED IN CONNECTION WITH
COLUMBIA ELECTRIC ACQUISITION
In September 2000, in connection with our agreement to acquire Columbia
Electric Corporation, we agreed to assume a credit facility entered into by
Liberty Electric Power, LLC, a wholly-owned subsidiary of Columbia Electric
Corporation. This credit facility, entered into by Liberty Electric Power in
July 2000, provides for the following:
(1)a construction/term loan in an amount of up to $105 million;
(2)an institutional term loan in an amount of up to $165 million;
(3)an equity bridge loan in an amount of up to $41 million;
(4)a revolving working capital facility for an amount of up to $5 million;
and
(5)a debt service reserve letter of credit of $17.5 million.
Amounts outstanding under the facility bear interest at either (1) the
greater of one of the lender's base rate and the federal funds effective rate,
plus, in either case, an applicable margin ranging from 0.000% to 0.625%
depending on the type and length of the loan, (2) LIBOR plus an applicable
margin ranging from 0.750% to 1.625% depending on the type and length of the
loan, or (3) the treasury rate plus 3.250% solely in the case of the
institutional term loan. The lenders have a security interest in substantially
all of the assets of Liberty Electric Power, LLC and have negative pledges on
other fixed assets. Liberty Electric Power, LLC also pays facility fees on the
working capital facility and the debt service reserve letter of credit.
Each loan under the working capital facility will be subject to customary
conditions precedent, including satisfaction of all covenants. The credit
facility provides for mandatory prepayments upon the occurrence of certain
events. The credit facility restricts the ability of Liberty Electric Power, LLC
from distributing cash flow to its parent, Columbia Electric Corporation.
The credit facility contains financial and operational covenants and other
restrictions with which Liberty Electric Power, LLC must comply and restricts
the ability of Liberty Electric Power, LLC to:
- dispose of assets;
- incur additional indebtedness;
- create or permit any liens on assets;
- engage in activities other than those related to the Liberty Generating
Station;
- make investments or acquisitions;
- make capital expenditures;
- incur guarantee obligations; and
- enter into transactions with affiliates.
The credit facility contains events of default, including payment defaults
and default in the performance of other covenants, breach of representations or
warranties, cross-default to other significant indebtedness, insolvency events,
failure to obtain any required governmental approval, the commencement of
liquidation, reorganization or similar activities for major contract
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counterparties and certain regulatory changes. The credit facility also provides
that an event of default will occur upon a change of control. Liberty Electric
Power, LLC is in the process of obtaining a waiver of the change of control
default in connection with our acquisition of Columbia Electric.
The construction/term loan, the institutional term loan and the equity
bridge loan mature on the earlier of October 1, 2002 or a date on which the
conditions precedent to conversion to a term loan are met. The debt service
reserve letter of credit becomes available for use when the conditions precedent
to conversion to a term loan are met and matures five years thereafter. The
working capital facility becomes available for use six months prior to the
scheduled conversion date and matures five years thereafter. The
construction/term loan converts to an amortizing term loan when the conditions
precedent to conversion to a term loan are met and matures 10 years thereafter.
The institutional term loan has a final maturity date of April 15, 2026.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock. We cannot predict the effect, if any, that sales of shares or the
availability of shares for sale will have on the market price of our common
stock. Nevertheless, sales of substantial amounts of our common stock in the
public market, or the perception that such sales might occur, could adversely
affect the market price of our common stock and could impair our future ability
to raise capital through the sale of our equity securities.
Upon the closing of this offering, we will have an aggregate of 90,595,926
shares of our common stock outstanding, assuming no exercise of outstanding
options. All of the 25,000,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares purchased by our "affiliates," as that term is defined in
Rule 144 under the Securities Act, may only be sold in compliance with the
limitations described below. Shares of common stock purchased by our affiliates
will be "restricted securities" under Rule 144. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144 or 701 promulgated under the Securities Act.
Our existing stockholders, other than our officers, have registration rights
that allow them to initiate a registration statement and all of our existing
stockholders have registration rights to include their shares of common stock in
a registration statement filed by us. The number of shares to be sold in the
public market could increase if such rights are exercised. See "Certain
Relationships and Related Party Transactions -- Registration Rights."
LOCK-UP AGREEMENTS
Prior to the closing of this offering, all of our executive officers,
directors and existing stockholders will have signed agreements under which they
may not, for a period of 180 days after the date of this prospectus, directly or
indirectly transfer or dispose of any shares of common stock or any securities
convertible into or exchangeable or exercisable for shares of common stock. The
shares could be available for resale immediately upon the expiration of the
180-day period if they are available for resale under Rule 144. Transfers or
dispositions can be made sooner with the prior written consent of Goldman, Sachs
& Co.
RULE 144
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated), including an affiliate, who has beneficially owned shares for
at least one year is entitled to sell, within any three-month period commencing
90 days after the date of this prospectus, a number of shares that does not
exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 905,959 shares after the closing of this offering; or
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- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a notice on Form 144 with respect
to such sale.
Sales under Rule 144 also are subject to manner-of-sale provisions and notice
requirements and to the availability of current public information about us.
RULE 144(k)
Under paragraph (k) of Rule 144, persons who are not our affiliate at any
time during the 90 days preceding a sale and who have beneficially owned the
shares proposed to be sold for at least two years are entitled to sell such
shares without complying with the manner-of-sale, public information, volume
limitation or notice provisions of Rule 144. The two-year holding period
includes the holding period of any prior owner who is not our affiliate.
Therefore, unless otherwise restricted, shares covered by Rule 144(k) may be
sold immediately upon the closing of this offering.
RULE 701
In general, under Rule 701, any of our employees, consultants or advisors
who purchase shares from us in connection with a compensatory stock or option
plan or other written agreement is eligible to resell such shares 90 days after
the date of this prospectus in reliance on Rule 144, but without compliance with
other restrictions, including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
After this offering, the holders of all of our outstanding common stock
prior to this offering will be entitled to rights with respect to the
registration of those shares under the Securities Act, as described in more
detail under "Certain Relationships and Related Party Transactions --
Registration Rights." After registration and resale under a registration
statement, these shares of our common stock become freely tradeable without
restriction under the Securities Act. These sales could have a material adverse
effect on the trading price of our common stock.
STOCK OPTIONS
Upon the closing of this offering, we intend to file a registration
statement to register for resale the 7,500,000 shares of common stock reserved
for issuance under our stock incentive plan. That registration statement will
automatically become effective upon filing. Upon the expiration of the lock-up
agreements described above, all of the shares subject to vested options will be
eligible for resale in the public market from time to time, subject to Rule 144
volume limitations applicable to our affiliates.
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UNDERWRITING
Orion Power Holdings, the selling stockholders and the underwriters for the
offering named below have entered into an underwriting agreement with respect to
the shares being offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., Credit Suisse First Boston Corporation, Deutsche
Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc. ..............................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Morgan Stanley & Co. Incorporated...........................
----------
Total............................................. 25,000,000
==========
</TABLE>
If the underwriters sell more than the total number of shares set forth in
the table above, the underwriters have an option to buy up to an additional
3,750,000 shares from Orion Power Holdings to cover such sales. They may
exercise the option for 30 days. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Orion Power Holdings and the
selling stockholders. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Orion Power Holdings
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.................................................. $ $
Total...................................................... $ $
<CAPTION>
Paid by selling stockholders
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.................................................. $ $
Total...................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be sold at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers and dealers at a discount of up to $ per share from
the initial public offering price. If all of the shares are not sold at the
initial public offering price, the representatives may change the offering price
and the other selling terms.
Orion Power Holdings, its executive officers, directors and all of the
existing stockholders, including the selling stockholders, have agreed with the
underwriters not to dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent of Goldman, Sachs
& Co. This agreement does not apply to any existing employee benefit plans. See
"Shares Available for Future Sale" for a discussion of certain transfer
restrictions.
84
<PAGE> 88
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Orion Power Holdings and
the representatives. Among the factors to be considered in determining the
initial public offering price of the shares, in addition to prevailing market
conditions, will be the historical performance of Orion Power Holdings, an
assessment of the management of Orion Power Holdings and the consideration of
the above factors in relation to the market valuation of companies in related
businesses.
The common stock of Orion Power Holdings has been approved for listing on
the New York Stock Exchange under the symbol "ORN," subject to official notice
of issuance.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from the issuer or the selling stockholders
in the offering. The underwriters may close out any covered short position by
either exercising their option to purchase additional shares or purchasing
shares in the open market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among other things, the
price of shares available for purchase in the open market as compared to the
price at which they may purchase shares through the overallotment option.
"Naked" short sales are any sales in excess of such option. The underwriters
must close out any naked short position by purchasing shares in the open market.
A naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the common stock
in the open market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of various bids for
or purchases of common stock made by the underwriters in the open market prior
to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of Orion
Power Holdings' stock and, together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common stock. As
a result, the price of the common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
NYSE, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, certain underwriters and
selling group members that are passive market makers in the common stock may
make bids for or purchases of the common stock on the NYSE until a stabilizing
bid has been made. Rule 103 generally provides that
- a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months, or any 60 consecutive days ending
within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part,
- a passive market maker may not effect transactions or display bids for
the common stock at a price that exceeds the highest independent bid for
the common stock by persons who are not passive market makers, and
- bids made by passive market makers must be identified as such.
85
<PAGE> 89
Because Goldman, Sachs & Co. is an affiliate of Orion Power Holdings, it
will not be permitted under the rules of the NYSE to solicit, or make
recommendations regarding, the purchase or sale of the common stock. This could
affect the liquidity of, the trading markets for, or investor interest in, the
common stock, which could adversely affect the price at which the common stock
trades.
Also because of the relationship between Goldman, Sachs & Co. and Orion
Power Holdings, the offering is being conducted in accordance with Rule 2720 of
the National Association of Securities Dealers. That rule requires that the
initial public offering price can be no higher than that recommended by a
"qualified independent underwriter," as defined by the NASD. Morgan Stanley &
Co. Incorporated has served in that capacity and performed due diligence
investigations and reviewed and participated in the preparation of the
registration statement of which this prospectus forms a part.
At the request of Orion Power Holdings, the underwriters have reserved, at
the initial public offering price, up to 1,250,000 shares out of the total
number of shares of common stock to be sold in this offering for sale to
employees, directors, customers, suppliers, consultants, friends and family and
other business associates of Orion Power Holdings. The purchasers of these
shares will not be subject to lock-up agreements. The number of shares available
for sale to the general public will be reduced by the number of reserved shares
sold. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same basis as other shares offered hereby.
After this offering, certain affiliates of The Goldman Sachs Group, Inc.
will own approximately 38.0% of Orion Power Holdings' outstanding common stock
and warrants to purchase an additional 6,400,400 shares of common stock.
Additionally, certain affiliates of Goldman, Sachs & Co. may in the future
make investments in other companies in our industry, some of which may be our
competitors. See "Risk Factors -- Risks Relating to our Business and
Operations -- We are controlled by a limited number of stockholders, and there
may be conflicts of interest between these stockholders and our public
stockholders."
In addition, under Orion Power Holdings' stockholders' agreement,
affiliates of The Goldman Sachs Group, Inc. received the right to designate
members to Orion Power Holdings' board of directors, which right will terminate
automatically upon the closing of this offering, and received both advisory
fees, in connection with acquisition transactions, and warrants to purchase
shares of our common stock, in connection with the purchase of common stock by
our other stockholders. See "Certain Relationships and Related Party
Transactions -- Stockholders' Agreement."
In connection with Orion Power Holdings' $730 million New York Credit
Facility, an affiliate of Deutsche Bank Securities Inc. acted as senior managing
agent, and in connection with Orion Power's $1.2 billion Midwest Credit
Facility, affiliates of Goldman, Sachs & Co. and Deutsche Bank Securities Inc.
acted as arrangers and lenders for which they received customary fees and
expense reimbursements. In connection with Orion Power Holdings' $400 million
senior notes offerings, Goldman, Sachs & Co., and Deutsche Bank Securities Inc.
acted as two of several initial purchasers of Orion Power Holdings' senior
notes, which they purchased after customary arms-length discounts and expense
reimbursements.
Richard A. Friedman, Douglas F. Londal and Terence M. O'Toole, directors of
Orion Power Holdings, are Managing Directors of Goldman, Sachs & Co.
In addition to the foregoing, from time to time the underwriters or their
affiliates may in the future engage in investment banking services with Orion
Power Holdings, for which they will receive customary compensation.
86
<PAGE> 90
The underwriters have informed Orion Power Holdings that they do not expect
sales to discretionary accounts to exceed five percent of the total number of
shares offered. In addition, in accordance with the rules of the NASD, the
underwriters will not execute sales to any accounts over which they exercise
discretionary authority without prior written approval of the transaction by the
customer.
Orion Power Holdings estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $2.6 million.
Orion Power Holdings and the selling stockholders have agreed to indemnify
the several underwriters against certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed on for us by
Stroock & Stroock & Lavan LLP, New York, New York and for the underwriters by
Latham & Watkins, New York, New York.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, Washington, D.C. 20549, a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto.
Certain items are omitted in accordance with the rules and regulations of the
SEC. For further information about us and our common stock, refer to the
registration statement and the exhibits and any schedules filed therewith. A
copy of the registration statement, including the exhibits and schedules
thereto, may be read and copied at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov, from which
interested persons can electronically access the registration statement,
including the exhibits and any schedules thereto, as well as reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC.
As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.
87
<PAGE> 91
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Orion Power Holdings,
Inc.
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999 and June 30, 2000 (unaudited)..................... F-3
Consolidated Statements of (Loss) Income for the period
from March 10, 1998 to December 31, 1998 and the year
ended December 31, 1999 and the periods ended June 30,
1999 and 2000 (unaudited).............................. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the period from March 10, 1998 to December 31,
1998, and the year ended December 31, 1999 and the
period ended June 30, 2000 (unaudited)................. F-5
Consolidated Statements of Cash Flows for the period from
March 10, 1998 to December 31, 1998 and the year ended
December 31, 1999 and the periods ended June 30, 1999
and 2000 (unaudited)................................... F-6
Notes to Consolidated Financial Statements as of December
31, 1998 and 1999 and June 30, 2000 (unaudited)........ F-8
Condensed Financial Statements of Orion Power Holdings, Inc.
Report of Independent Public Accountants.................. F-30
Condensed Balance Sheets as of December 31, 1998 and
1999................................................... F-31
Condensed Statements of (Loss) Income for the period from
March 10, 1998 to December 31, 1998 and the year ended
December 31, 1999...................................... F-32
Condensed Statements of Cash Flows for the period from
March 10, 1998 to December 31, 1998 and the year ended
December 31, 1999...................................... F-33
Notes to Condensed Financial Statements as of December 31,
1998 and 1999.......................................... F-34
</TABLE>
F-1
<PAGE> 92
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orion Power Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Orion Power
Holdings, Inc. (a Delaware corporation) and its subsidiaries ("Orion") as of
December 31, 1998 and 1999, and the related consolidated statements of (loss)
income, changes in stockholders' equity and cash flows for the period from March
10, 1998 (date of inception), to December 31, 1998, and the year ended December
31, 1999. These financial statements are the responsibility of Orion's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orion Power
Holdings, Inc. and its subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for the period from March 10,
1998 (date of inception), to December 31, 1998, and the year ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
July 27, 2000
(except with respect to the matters discussed in Note 14, as to which the date
is September 29, 2000)
F-2
<PAGE> 93
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------ JUNE 30,
1998 1999 2000
---- ---- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 1,603 $ 78,549 $ 44,222
Restricted cash......................................... 623 56,866 158,935
Accounts receivable..................................... 22 37,271 147,968
Inventories and supplies................................ 859 10,427 54,783
Deferred income tax assets.............................. 1,029 1,083 1,200
Prepaid expenses and other current assets............... 2 13,765 25,240
------- ----------- -----------
Total current assets...................................... 4,138 197,961 432,348
------- ----------- -----------
PROPERTY AND EQUIPMENT:
Land.................................................... -- 53,314 64,603
Generation assets....................................... 16,375 931,389 2,639,769
Other equipment......................................... 31 9,207 23,379
Accumulated depreciation................................ (94) (18,075) (57,534)
------- ----------- -----------
NET PROPERTY AND EQUIPMENT................................ 16,312 975,835 2,670,217
------- ----------- -----------
OTHER NONCURRENT ASSETS:
Prepaid expenses and other noncurrent assets.............. -- 3,164 3,972
Identifiable purchased intangibles, net of accumulated
amortization of $857 and $2,421, as of December 31,
1999, and June 30, 2000, respectively................... -- 59,284 72,114
Deferred financing costs, net of accumulated amortization
of $2,178 and $6,622, as of December 31, 1999 and June
30, 2000, respectively.................................. -- 15,763 40,166
------- ----------- -----------
Total other noncurrent assets............................. -- 78,211 116,252
------- ----------- -----------
Total assets.............................................. $20,450 $ 1,252,007 $ 3,218,817
======= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 477 $ 23,643 $ 70,653
Accrued expenses........................................ 235 14,420 21,468
Note payable -- current portion......................... 264 286 286
Interest payable........................................ 54 3,573 27,039
Deferred revenue........................................ -- 1,794 1,794
------- ----------- -----------
Total current liabilities................................. 1,030 43,716 121,240
NOTE PAYABLE, LONG-TERM................................... 594 308 333
NOTES PAYABLE TO STOCKHOLDERS............................. 1,735 71,086 --
LONG-TERM DEBT............................................ -- 716,000 2,259,137
DEFERRED INCOME TAX LIABILITIES........................... 23 3,094 5,970
OTHER LONG-TERM LIABILITIES............................... -- 22,387 45,253
------- ----------- -----------
Total liabilities................................ 3,382 856,591 2,431,933
------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
COMMON STOCK SUBJECT TO RELATED PARTY PUT RIGHTS, $.01 PAR
VALUE; 1,219,355 SHARES ISSUED AND OUTSTANDING (NOTE
3)...................................................... -- -- 19,171
------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 200 million shares
authorized; 1,864,542 and 36,162,629 and 67,597,539
shares issued and outstanding as of December 31,1998,
December 31, 1999, and June 30, 2000, respectively.... 19 362 676
Additional paid-in capital.............................. 18,626 393,416 759,478
Deferred compensation................................... -- (1,811) (4,368)
Notes receivable from officers.......................... (35) (671) (5,672)
Retained (deficit) earnings............................. (1,542) 4,120 17,599
------- ----------- -----------
Total stockholders' equity................................ 17,068 395,416 767,713
------- ----------- -----------
Total liabilities and stockholders' equity................ $20,450 $ 1,252,007 $ 3,218,817
======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 94
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MARCH 10,
1998 (DATE OF FOR THE YEAR FOR THE SIX MONTHS
INCEPTION) TO ENDED ENDED JUNE 30
DECEMBER 31, DECEMBER 31, --------------------------
1998 1999 1999 2000
------------- ------------ ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES (NOTE 7).......... $ 314 $134,074 $ 2,023 $341,674
------- -------- ------- --------
OPERATING EXPENSES:
Fuel............................... -- 20,463 -- 127,706
Operations and maintenance
(Note 7)........................ 24 22,732 1,965 35,553
General and administrative......... 2,620 16,755 2,137 14,496
Taxes, other than income taxes..... -- 20,785 280 27,016
Depreciation and amortization...... 94 18,938 409 42,296
Charge for buyout of operations and
maintenance contracts with
related party (Notes 3 and 7)... -- -- -- 19,000
------- -------- ------- --------
Total operating expenses... 2,738 99,673 4,791 266,067
------- -------- ------- --------
OPERATING (LOSS) INCOME.............. (2,424) 34,401 (2,768) 75,607
INTEREST INCOME...................... 13 1,824 -- 4,203
INTEREST EXPENSE..................... (137) (25,767) (37) (56,506)
------- -------- ------- --------
(LOSS) INCOME BEFORE PROVISION FOR
INCOME TAX......................... (2,548) 10,458 (2,805) 23,304
INCOME TAX (BENEFIT) EXPENSE......... (1,006) 4,796 (1,126) 9,554
------- -------- ------- --------
NET (LOSS) INCOME.................... $(1,542) $ 5,662 $(1,679) $ 13,750
======= ======== ======= ========
(LOSS) EARNINGS PER AVERAGE COMMON
SHARE:
Basic.............................. $(12.94) $ 0.39 $ (0.89) $ 0.28
======= ======== ======= ========
Diluted............................ $(12.94) $ 0.38 $ (0.89) $ 0.27
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 95
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE RETAINED
------------------- PAID-IN DEFERRED FROM EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION OFFICERS (DEFICIT) TOTAL
------ ------ ---------- ------------ ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE, MARCH 10,
1998....................... -- $ -- $ -- $ -- $ -- $ -- $ --
Sale of common stock....... 1,864,542 19 18,626 -- (35) -- 18,610
Net loss................... -- -- -- -- -- (1,542) (1,542)
---------- ---- -------- ------- ------- -------- --------
BALANCE, DECEMBER 31, 1998... 1,864,542 19 18,626 -- (35) (1,542) 17,068
Sale of common stock, net
of fees.................. 34,298,087 343 382,623 -- (636) -- 382,330
Distribution to
stockholders............. -- -- (9,750) -- -- -- (9,750)
Deferred compensation
pursuant to issuance of
stock options............ -- -- 1,917 (1,917) -- -- --
Amortization of deferred
compensation............. -- -- -- 106 -- -- 106
Net income................. -- -- -- -- -- 5,662 5,662
---------- ---- -------- ------- ------- -------- --------
BALANCE, DECEMBER 31, 1999... 36,162,629 362 393,416 (1,811) (671) 4,120 395,416
Sale of common stock, net
of fees (unaudited)...... 31,434,910 314 380,051 (5,001) 375,364
Distribution to
stockholders
(unaudited).............. -- -- (17,050) -- -- -- (17,050)
Deferred compensation
pursuant to issuance of
stock options
(unaudited).............. -- -- 3,061 (3,061) -- -- --
Amortization of deferred
compensation
(unaudited).............. -- -- -- 504 -- -- 504
Accretion of common stock
subject to put rights
(unaudited).............. -- -- -- -- -- (271) (271)
Net income (unaudited)..... -- -- -- -- -- 13,750 13,750
---------- ---- -------- ------- ------- -------- --------
BALANCE, JUNE 30, 2000
(UNAUDITED)................ 67,597,539 $676 $759,478 $(4,368) $(5,672) $ 17,599 $767,713
========== ==== ======== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 96
ORION POWER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE SIX MONTHS
MARCH 10, 1998 ENDED JUNE 30,
(DATE OF INCEPTION) TO FOR THE YEAR ENDED -------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 1999 2000
---------------------- ------------------ ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................... $(1,542) $ 5,662 $(1,679) $ 13,750
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities --
Deferred income taxes.............. (1,006) 3,017 (1,126) 2,759
Depreciation and amortization...... 94 21,116 409 46,740
Deferred compensation.............. -- 106 -- 504
Charge for buyout of operations
and maintenance contracts
(Notes 3 & 7).................... -- -- -- 18,900
Change in assets and liabilities:
Restricted cash.................. (623) (30,243) (15) (47,069)
Accounts receivable.............. (22) (37,249) (99) (110,697)
Notes receivable................. -- -- 12 --
Inventories and supplies......... -- (4,182) -- (1,972)
Prepaid expenses and other
current assets................ (2) 9,168 (367) (11,475)
Prepaid expenses and other
noncurrent assets............. -- -- -- (808)
Accounts payable................. 477 23,166 409 47,010
Accrued expenses................. 235 14,185 (127) 7,048
Other long-term liabilities...... -- 397 -- (919)
Interest payable................. 54 3,519 (11) 23,466
Deferred revenue................. -- 1,794 1,750 --
------- ----------- ------- -----------
Net cash (used in) provided by
operating activities................. (2,335) 10,456 (844) (12,763)
------- ----------- ------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and
related assets in acquisitions (see
Notes 2 and 3)..................... (16,407) (1,024,332) -- (1,728,846)
Purchase of property and equipment in
operations......................... -- (22,835) (2,123) (39,578)
------- ----------- ------- -----------
Net cash used in investing
activities........................... (16,407) (1,047,167) (2,123) (1,768,424)
------- ----------- ------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net........ 18,610 382,330 2,500 304,278
Distribution to stockholders......... -- (9,750) -- (17,050)
Proceeds from long-term debt......... -- 720,000 -- 1,551,137
Payments on long-term debt........... -- (4,000) -- (8,000)
Proceeds from notes payable to
stockholders....................... 1,735 110,539 1,538 --
Payments on notes payable to
stockholders....................... -- (41,188) -- --
Funding of reserve accounts
established with the Credit
Agreements (restricted cash)....... -- (26,000) -- (55,000)
Payment on note payable.............. -- (333) -- --
Payment of deferred financing
costs.............................. -- (17,941) -- (28,505)
</TABLE>
F-6
<PAGE> 97
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE SIX MONTHS
MARCH 10, 1998 ENDED JUNE 30,
(DATE OF INCEPTION) TO FOR THE YEAR ENDED -------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 1999 2000
---------------------- ------------------ ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
------- ----------- ------- -----------
Net cash provided by financing
activities........................... 20,345 1,113,657 4,038 1,746,860
------- ----------- ------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.......................... 1,603 76,946 1,071 (34,327)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD............................... -- 1,603 1,603 78,549
------- ----------- ------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................... $ 1,603 $ 78,549 $ 2,674 $ 44,222
======= =========== ======= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................... $ 83 $ 20,070 $ 93 $ 33,040
======= =========== ======= ===========
Income taxes....................... $ -- $ 640 $ -- $ 9,110
======= =========== ======= ===========
Noncash disclosure --
Note payable for inventory......... $ 859 $ -- $ -- $ --
======= =========== ======= ===========
Notes receivable from officers..... $ 35 $ 615 $ -- $ 5,000
======= =========== ======= ===========
Other long-term liabilities assumed
in acquisitions.................. $ -- $ 21,990 $ -- $ 23,785
======= =========== ======= ===========
Conversion of note
payable to equity................ $ -- $ -- $ -- $ 71,086
======= =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 98
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)
1. ORGANIZATION:
Orion Power Holdings, Inc. ("Orion Power Holdings"), a Delaware
corporation, is engaged in the business of acquiring, developing, owning and
managing electric power generating facilities in North America. Orion was
incorporated on March 10, 1998, by Constellation Power Source, Inc. ("CPS"), a
Delaware corporation and an affiliate of Baltimore Gas and Electric Company
("BG&E"), and GS Capital Partners II, L.P. along with certain other private
investment partnerships affiliated with Goldman, Sachs & Co. (collectively
"GSCP"). On November 5, 1999, certain affiliates of Mitsubishi Corporation
("Mitsubishi") and Tokyo Electric Power Company International B.V. ("TEPCO")
became stockholders of Orion Power Holdings. In December 1999, CPS transferred
its interest in Orion Power Holdings to an affiliate -- Constellation
Enterprises, Inc. ("Constellation").
In accordance with the Second Amended and Restated Stockholder's Agreement
(the "Agreement") dated November 5, 1999, the stockholders were required to
purchase common stock when capital was needed for the acquisition and management
of portfolio assets, as defined in the Agreement and subject to an aggregate
maximum investment from each stockholder. As of June 30, 2000, the stockholders
had fulfilled their commitments under the Agreement.
The Agreement also states that at the time of a capital call, Orion Power
Holdings shall issue warrants to GSCP and CPS for shares of Orion Power Holdings
common stock in accordance with certain formulas, as defined in the Agreement.
Under the terms of the original stockholders agreement between CPS and GSCP,
only GSCP was entitled to receive warrants. The warrants will have an exercise
price equal to the subscription price of the common stock ($10) and expire on
the tenth anniversary of their issuance. The warrant holder may exercise the
warrants for an equivalent number of shares of Orion Power Holdings common stock
when accompanied by payment of the full exercise price. The warrant holder may
also exercise the warrant without payment and would be entitled to a number of
shares of Orion Power Holdings common stock equivalent to (x) the difference
between the aggregate Current Market Price, as defined, less the aggregate
exercise price, divided by (y) the Current Market Price of one share of common
stock. As of December 31, 1998 and 1999, 212,600 and 4,172,600 warrants,
respectively, had been issued by Orion Power Holdings to GSCP. Cumulatively,
6,400,400 warrants had been issued to GSCP and 705,900 warrants have been issued
to CPS through June 30, 2000. No warrants have been exercised as of June 30,
2000, and accordingly, all warrants are outstanding.
There are significant risks associated with an investment in Orion Power
Holdings, including a short operating history, significant debt, possible
changes in federal and state government regulations, possible increased
environmental regulations, changing market structures, reliance on fuel
suppliers and transmission lines, and the dependence on key members of
management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Orion Power Holdings and its wholly owned subsidiaries. All material
intercompany transactions have been eliminated in the accompanying consolidated
financial statements.
F-8
<PAGE> 99
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The purchase prices of the acquisitions (see Note 3) were allocated to the
acquired assets, including identifiable intangible assets and assumed
liabilities. Property and equipment and intangible assets were recorded based on
the advice of independent valuation experts. Certain assets and liabilities have
been recorded based on estimates and are subject to adjustment based upon
receipt of final information or resolution of uncertainties. As of June 30,
2000, Orion Power Holdings has reallocated certain identifiable intangible
assets to generation assets based on advice of independent valuation experts.
CASH AND CASH EQUIVALENTS
Orion Power Holdings considers all investments with an original maturity of
three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash includes cash, which is restricted under the terms of
certain wholly owned subsidiaries' credit and operating agreements. Restricted
cash includes amounts restricted for major maintenance, debt service, and
operations and maintenance costs (see Note 6).
INVENTORIES AND SUPPLIES
Inventories and supplies are valued at the lower of cost or market using
the FIFO method. Inventories and supplies are comprised of the following as of
December 31, 1998 and 1999 and June 30, 2000:
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Fuel................................................ $ -- $ 3,333 $27,647
Supplies............................................ 859 7,094 27,136
---- ------- -------
$859 $10,427 $54,783
==== ======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of the electric generation
assets. These assets were recorded based on a valuation performed by an
independent expert. This valuation considered the current replacement cost for
similar capacity, market value and discounted cash flows. Other equipment is
carried at cost or at the fair value determined at acquisition. The
F-9
<PAGE> 100
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
electric generation assets and other equipment are being depreciated on a
straight-line basis over the following useful lives:
<TABLE>
<CAPTION>
JUNE 30,
2000 YEARS
----------- -----
(UNAUDITED)
<S> <C> <C>
Structures and Improvements $ 872,867 15-40
Production Assets 1,573,035 10-30
Accessories and Other Equipment 217,246 3-15
----------
$2,663,148
==========
</TABLE>
Repair and maintenance costs are expensed as incurred.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," Orion Power Holdings reviews its recorded long-lived
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the
expected future cash flows is less than the carrying amount of an asset, an
impairment loss would be recognized.
IDENTIFIABLE PURCHASED INTANGIBLES
In conjunction with the acquisitions, Orion also acquired certain Federal
Energy Regulatory Commission ("FERC") licenses for its hydroelectric plants and
emission credits for its fossil-fuel-fired plants. These items are recorded
based on an estimated fair value determined from an independent expert valuation
and amortized on a straight-line basis over the life of the related license or
credit, ranging from 8 to 40 years.
The balance in identifiable purchased intangibles as of December 31, 1999
and June 30, 2000, included the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
(UNAUDITED)
<S> <C> <C>
FERC licenses.................................... $60,141 $60,247
POLR contract.................................... -- 14,288
Accumulated amortization......................... (857) (2,421)
------- -------
Total............................................ $59,284 $72,114
======= =======
</TABLE>
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," Orion reviews its identifiable purchased intangibles
for possible impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the expected
future cash flows is less than the carrying amount of an asset, an impairment
loss would be recognized.
DEFERRED FINANCING COSTS
Financing costs, consisting primarily of the costs incurred to obtain debt
financing, are deferred and amortized using the effective interest method, over
the term of the related permanent financing.
F-10
<PAGE> 101
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Orion accounts for income taxes under the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes," and, accordingly,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using existing enacted tax rates. The
effect on deferred tax assets and liabilities of a change in tax rates would be
recognized in income in the period that includes the enactment date.
REVENUE RECOGNITION
Revenues from the sale of electricity are recorded based on output
delivered and capacity provided at rates specified under contract terms or
received in the wholesale marketplace.
START-UP AND ORGANIZATION COSTS
Costs related to start-up activities and the organization of Orion were
expensed as incurred.
CUSTOMER CONCENTRATION
All accounts receivable and revenues as of December 31, 1998, and for the
period from March 10, 1998 to December 31, 1998, are from CPS.
For the year ended December 31, 1999, revenues recognized on contracts with
Niagara Mohawk Power Corporation ("Niagara Mohawk"), Consolidated Edison Company
of New York Inc. ("Consolidated Edison"), and the New York Independent System
Operator ("NY-ISO," see Note 4) were approximately $30,961,000, $72,481,000, and
$22,237,000, representing approximately 23, 54, and 17 percent of total
operating revenue, respectively.
Accounts receivable from Niagara Mohawk, Consolidated Edison, and the
NY-ISO as of December 31, 1999, were approximately $6,544,000, $15,973,000, and
$14,665,000, representing approximately 17, 43, and 39 percent of the total
accounts receivable balance, respectively.
For the six months ended June 30, 2000, revenues recognized on contracts
with Niagara Mohawk, Consolidated Edison, NY-ISO and Duquesne Light Company (see
Note 3) were approximately $50,105,000, $64,000,000, $140,173,000 and
$77,350,000, representing approximately 15, 19, 41 and 23 percent of total
operating revenue, respectively.
Accounts receivable from Niagara Mohawk, NY-ISO and Duquesne Light Company
as of June 30, 2000, were approximately $15,169,000, $61,229,000 and
$69,096,000, representing approximately 10, 41 and 47 percent of the total
accounts receivable balance, respectively.
STOCK-BASED COMPENSATION
Orion Power Holdings accounts for stock-based employee compensation
arrangements using the intrinsic value method in accordance with provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock. Through June 30, 2000, no options have been
issued to consultants, non-employee
F-11
<PAGE> 102
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
directors or third parties that would be required to be recognized for in
accordance with SFAS No. 123.
EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires the presentation of basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding for the period. The diluted net
income (loss) per share data is computed using the weighted-average number of
common shares outstanding plus the dilutive effect of common stock equivalents,
unless the common stock equivalents are antidilutive.
DERIVATIVE FINANCIAL INSTRUMENTS
Orion uses derivative financial instruments to manage risks associated with
changes in interest rates and commodity prices. Gains and losses on qualifying
hedges are recognized when the hedge transaction occurs. Premiums paid and costs
incurred to execute the instruments are deferred and amortized over the term of
the agreements. Any gains or losses realized upon the early termination of the
agreements will be amortized over the respective lives of the item being hedged
or recognized immediately if the debt is terminated earlier than initially
anticipated.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards, requiring every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and require that a company formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
The effective date of SFAS No. 133 was delayed by the FASB, and therefore
will not be effective for Orion Power Holdings until January 1, 2001. Orion
Power Holdings has entered into interest rate swaps with financial institutions
and certain other contracts that may meet the definition of derivative
instruments under SFAS 133. Orion is currently evaluating the impact of adopting
SFAS No. 133 on the financial statements.
On December 3, 1999, the SEC staff released Staff Accounting Bulletin (SAB)
No.101, "Revenue Recognition", to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No.101 is
effective December 31, 2000. Orion Power Holdings does not believe there will be
a material impact on its current revenue recognition policies.
RECLASSIFICATIONS
Certain 1998 balances have been reclassified to conform with the current
year financial statement presentation.
INTERIM RESULTS (UNAUDITED)
The financial information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000, is unaudited, but includes all adjustments, consisting
only of normal recurring adjustments, that Orion Power Holdings' management
considers necessary for a fair presentation
F-12
<PAGE> 103
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Orion's operating results and cash flows for such periods. Results for the
six month period ended June 30, 2000, are not necessarily indicative of results
to be expected for the full fiscal year of 2000 or for any future period.
3. ACQUISITIONS:
1998 ACQUISITION
On November 19, 1998, Orion Power Holdings, through its wholly owned
subsidiary Carr Street Generating Station, L.P. ("Carr Street"), purchased
certain generating assets from U.S. Generating Company, LLC ("US Gen LLC"),
located in East Syracuse, New York, for approximately $17,375,000. Part of this
cost included the purchase of spare parts for $1,000,000 to be paid in three
equal installments due on November 19 of each succeeding year. The Carr Street
facility is a 102 MW (net), natural gas-fired, dual combustion turbine, combined
cycle plant. The facility began commercial operations in December 1993 and began
operations under Orion Power Holdings on December 10, 1998.
1999 ACQUISITIONS
On July 30, 1999, Orion Power Holdings, through its wholly owned subsidiary
Erie Boulevard Hydropower, L.P. ("Erie Blvd."), purchased certain hydroelectric
generating assets and assumed certain liabilities (see Notes 8 and 9) from
Niagara Mohawk, for approximately $425 million in cash including $1,659,304
million in acquisition costs. These facilities, which form part of the New York
Assets, consist of 70 hydro power plants with a capacity of 650 MW (the "Hydro
Assets").
In connection with this acquisition, Erie Blvd. entered into a Transition
Power Purchase Agreement (the "Erie Sales Agreement") with Niagara Mohawk from
the closing date through September 30, 2001. Under the terms of the Erie Sales
Agreement, Erie Blvd. will produce and deliver tiered amounts of electric energy
to Niagara Mohawk. As consideration, Erie Blvd. will receive capacity payments
and energy revenue based on the amount of electric energy produced and sold to
Niagara Mohawk. If Erie Blvd. fails to produce contractual minimum levels of
electric energy, it will be required to pay a penalty based on formulas set
forth in the Erie Sales Agreement. In the third quarter of 1999, Erie Blvd.
failed to meet the minimum threshold under this contract due to a drought. This
resulted in additional costs to meet the obligation of approximately $1,725,000
for the year, which are recorded in fuel expense in 1999 in the accompanying
financial statements. As part of the independent valuation performed of the
acquisition of the Hydro Assets, the third party considered these agreements
with Niagara Mohawk and determined that such agreements were at market value.
Therefore, no asset or liability related to the Erie Sales Agreements has been
recognized by Orion Power Holdings.
On August 20, 1999, Orion Power Holdings, through its wholly owned
subsidiary Astoria Generating Company, L.P. ("Astoria"), purchased certain
generating assets located in New York City and assumed certain liabilities (see
Notes 8 and 9) from Consolidated Edison, for approximately $550 million in cash
including $2,147,336 million in acquisition costs. The Astoria facilities
consist of three gas- or oil-fired plants with a capacity of 1,855 MW (the "New
York City Assets").
In connection with this acquisition, Astoria entered into a Transition
Capacity Agreement and a Transition Energy Sales Agreement (collectively, the
"Astoria Sales Agreements") with Consolidated Edison. As consideration, Astoria
received capacity payments and energy revenue based on the amounts of electric
energy produced and sold to Consolidated Edison. The Transition Energy Sales
Agreement had a term from the closing date through the commencement of the
energy market administered by the NY-ISO. The Transition Energy Sales Agreement
was terminated on the commencement of the NY-ISO, which occurred on November 18,
1999 (see
F-13
<PAGE> 104
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note 4). The Transition Capacity Agreement has a term from the closing date
through the later of (a) the earlier of (i) December 31, 2002 or (ii) the date
on which Astoria receives written notice from the NY-ISO that none of the
electric capacity of the Astoria assets is required for meeting the installed
capacity requirements in New York City as determined by the NY-ISO, or (b) the
date the NY-ISO capacity market commences. The NY-ISO capacity market began
operations on June 1, 2000. Under the terms of the Astoria Sales Agreements,
during the period of the Transition Energy Sales Agreement, Consolidated Edison
provided all of the fuel to the Astoria facilities and received from the
facilities all of the capacity and electric energy. As part of the independent
valuation performed of the acquisition of the New York City Assets, the third
party valued these agreements with Consolidated Edison and determined that such
agreements were at market value. Therefore, no asset or liability related to
these agreements has been recognized by Orion Power Holdings.
2000 ACQUISITIONS
On April 28, 2000, Orion Power Holdings, through its wholly owned
subsidiary Orion Power MidWest, L.P. ("Orion Power MidWest") purchased seven
power plants located in Ohio and Pennsylvania (the "Midwest Assets") with a
generating capacity of approximately 2,614 MW from Duquesne Light Company
("Duquesne"). The net purchase price for the assets was approximately $1.7
billion in cash including $5.7 million in acquisition costs. In association with
this acquisition, Orion Power MidWest assumed certain liabilities related to
employee benefits and environmental remediation.
In order to fund this acquisition, Orion Power MidWest entered into a
credit facility for $1.2 billion (see Note 6) and received equity from Orion
Power Holdings of approximately $705 million. Orion funded this equity through
the issuance of $400 million in Senior Notes, due 2010 (see Note 6) and raising
additional equity from its stockholders.
The acquisition of the Midwest Assets requires Orion Power MidWest to
assume Duquesne's responsibility as "provider of last resort." As provider of
last resort, Orion Power MidWest will be obligated to supply electricity at
predetermined tariff rates to all customers in Duquesne's service area who do
not select another electricity supplier. While Orion Power MidWest should have
the capacity to meet these obligations under the Provider of Last Resort
contract most of the time, there may be times when the energy required to meet
the obligation may exceed the amounts that can be produced from the Midwest
Assets. If the obligation exceeds Orion Power MidWest's energy production
levels, Orion Power MidWest will be required to purchase additional energy from
outside sources at market rates, and in certain circumstances, pay a penalty of
$1,000 per megawatt hour. The value of this contract has been determined to be
favorable. As such, an intangible asset of approximately $14.3 million was
recorded at the time of the purchase. The intangible asset is being amortized
over the life of the contract.
On April 26, 2000, Orion Power Holdings purchased all of the outstanding
stock of the three subsidiaries of Constellation Operating Services, Inc.
("COSI"), which pursuant to certain operation and maintenance service agreements
operated the New York Assets. COSI is a wholly owned subsidiary of Constellation
Enterprises. Orion Power Holdings also acquired another subsidiary that was
established to perform operations and maintenance services for the Midwest
Assets following the completion of the acquisition. The following is a summary
of the terms and conditions of the acquisition:
- PURCHASE PRICE -- approximately $19 million payable at the time of the
acquisition by issuing COSI 1,219,355 shares of Orion Power Holdings'
common stock valued at $15.50 per share plus $100,000 cash.
F-14
<PAGE> 105
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- SPECIAL SALE RIGHTS -- COSI will be entitled to sell these shares at the
time of an initial public offering, to the extent permitted by Orion
Power Holdings' investment bankers. COSI's shares would be eligible for
sale at or after the IPO in preference to the shares of all of the other
stockholders. In the event that COSI is not permitted to sell its shares
at the time of an IPO, then COSI has the right -- but not the
obligation -- to require Orion Power Holdings to repurchase these shares
at the earlier of:
- 30 days after an IPO; or
- one year after the closing of this acquisition.
The repurchase price Orion Power Holdings would be required to pay for this
stock is $19 million in cash, plus interest at a rate of 8 percent per year from
the date of the acquisition. As of June 30, 2000, the repurchase price would
have been approximately $19.2 million.
COSI has agreed to assist in the transition process of operating the Orion
Power Holdings' Assets by cooperating with Orion Power Holdings for six months
following the closing by making its software available to Orion Power Holdings;
and providing technical support in the form of professional, supervisory,
managerial, administrative, and technical operating assistance, until the
earlier of December 31, 2002, or the date of repayment in full of the New York
Credit Facility.
4. OPERATION OF THE NEW YORK INDEPENDENT SERVICE OPERATOR:
On November 18, 1999, the NY-ISO day-ahead and real time energy and
ancillary services markets began operations. The beginning of operations of the
NY-ISO energy and ancillary services markets (the "NY-ISO Markets") cancelled
the Transition Energy Sales Agreement ("TESA") at Astoria. The NY-ISO Markets
operate on a bid process. The power producers (such as Orion Power Holdings)
submit daily bids to supply the output required by the NY-ISO. The NY-ISO then
accepts or rejects the bids based on simple economics and the proximity of
certain producers to the higher load areas of New York. Orion Power Holdings'
bids in New York City may be mitigated by the NY-ISO to reflect the approximate
cost of energy production due to the presence of market power. The NY-ISO
assigns production to plants as the bids dictate. In the event that the NY-ISO
does not use the number of megawatts it required the plant to have available,
the plant will be paid at the day-ahead market price and is required to buy back
the production from the NY-ISO at the hourly prices, which should be lower. In
the event that the NY-ISO requests additional energy beyond their expected
amount, Orion Power Holdings may sell at the real time price.
5. FUEL CONTRACTS:
As a result of the cancellation of the TESA with Consolidated Edison,
Astoria must now purchase its fuel. Astoria has entered into the Firm Natural
Gas Supply Agreement with Sempra Energy Trading Co. ("Sempra") for a term which
expired May 31, 2000. This agreement called for the monthly purchase of a
Baseload quantity of 50,000 million British Thermal Units ("MMBtu") at a set
price equal to the Gas Daily Average ("GDA") Index plus one cent/MMBtu.
Additional gas could be purchased as needed at incrementally higher prices as
the day progresses ranging from the GDA index plus three cents/MMBtu to the spot
price plus five cents/MMBtu. Additionally, Astoria could request that Sempra
hold a quantity of gas in the event that it is not needed for an initial fee of
four cents per MMBtu plus one cent per MMBtu per day that the gas is held. Costs
incurred under this agreement for the year ended December 31, 1999, with Sempra
were approximately $12,128,000 and the amount due to Sempra at December 31,
1999, was approximately $8,078,000.
F-15
<PAGE> 106
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective May 1, 2000, Astoria entered into a second Firm Natural Gas
Supply Agreement with Sempra for a term expiring on December 31, 2003. This
agreement calls for the availability of a maximum baseload quantity of 375,000
MMBtu per day during the summer and 150,000 MMBtu per day during the winter. The
cost of this gas is determined based on various gas daily average indices,
depending on the advance notice. Costs incurred under the two Sempra contracts
for the six months ended June 30, 2000, were approximately $57,194,000 and the
amount due to Sempra at June 30, 2000, was approximately $19,343,000.
Astoria has entered into two separate contracts for the purchase of fuel
oil ("fuel oil contracts"). The fuel oil contracts began on November 18, 1999,
and extend through November 17, 2000. The fuel oil contracts are requirements
contracts that do not require a minimum purchase by Astoria. The prices per
gallon are indexed to various market prices and vary based on the type of fuel
oil purchased. Costs incurred under the fuel oil contracts for the year ended
December 31, 1999, were approximately $3,499,000, and the amount due at December
31, 1999, was approximately $1,268,000.
Costs incurred under the fuel oil contracts for the six months ended June
30, 2000, were approximately $20,195,000 and the amount due at June 30, 2000,
was approximately $7,090,000.
To supplement the generating capacity to meet Orion Power Holdings'
responsibility under the Provider of Last Resort Contract with Duquesne Light
Company, Orion Power Holdings has purchased 698,400 net megawatt hours for the
period of May through October 2000. The cost for the purchases was approximately
$57 million and will be paid upon delivery of the energy. Orion Power Holdings
intends to resell any excess energy that is not required to meet the Provider of
Last Resort responsibility into the market and realize the prevailing price at
that time.
6. DEBT:
CREDIT AGREEMENTS
On July 30, 1999, Orion Power New York, LP ("Orion Power New York"), a
wholly owned subsidiary of Orion, entered into a $730,000,000 secured credit
agreement with Banc of America Securities LLC and Paribas as the Lead Arrangers.
The banks agreed to provide an acquisition facility in an amount of up to
$700,000,000 (the "Acquisition Loans"), and a revolving working capital facility
in an amount of up to $30,000,000 (the "Working Capital Facility")
(collectively, the "New York Credit Agreement"). The New York Credit Agreement
has a maturity of December 31, 2002 for all indebtedness. The net proceeds under
the New York Credit Agreement were used to finance the Hydro Assets and New York
City Assets acquisitions.
The borrowings under each facility bear interest at a floating rate. At
Orion Power New York's option, the interest will be determined in accordance
with either the Base Rate or LIBOR. The Base Rate is defined as the greater of
the base rate of interest announced by Bank of America or the federal funds
effective rate, plus an applicable margin. The applicable margin for the first
two years is 0.375 percent and 0.75 percent thereafter. The LIBOR Rate is
defined as the LIBOR for deposits in dollars plus an applicable margin. The
applicable margin for the first two years is 1.375 percent and 1.75 percent
thereafter. The Acquisition Loans and Working Capital Facility are secured by
substantially all of the assets of Orion Power New York.
At December 31, 1999, and June 30, 2000, Orion Power New York had
$700,000,000 of the Acquisition Loans outstanding. At December 31, 1999, and
June 30, 2000, Orion Power New York had $16,000,000 and $15,000,000,
respectively, of the Working Capital loans outstanding. Under the Working
Capital Facility, an additional $10,000,000 is used to provide a letter of
credit in favor of Consolidated Edison in conjunction with the New York City
Assets acquisition.
F-16
<PAGE> 107
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with the New York Credit Agreement, Orion Power New York
entered into a Deposit Account Agreement with Bank of America, N.A. Accordingly,
Orion Power New York established 12 restricted use accounts for the disbursement
of its revenues. As required in the New York Credit Agreement, Orion Power New
York initially funded these restricted use accounts with $26,000,000. As of
December 31, 1999, and June 30, 2000, the balance in these restricted use
accounts totaled $56,214,000 and $89,722,000, respectively.
Under the New York Credit Agreement, Orion Power New York and its various
operating subsidiaries are restricted from distributing cash to Orion Power
Holdings. The New York Credit Agreement provides for various accounts to be
created, into which all operating revenues and other cash receipts are
deposited, and from which operating expenses, repayments of the loan facilities
and distributions to Orion Power Holdings may be made. The lenders under the New
York Credit Agreement have a security interest in all amounts on deposit in the
accounts and if there is an event of default under the New York Credit
Agreement, the lenders will be able to immediately exercise their security
interest on any funds contained in the accounts.
Distributions by Orion Power New York to Orion Power Holdings may only be
made after satisfaction of the following -- (1) all operating expenses of Orion
Power New York and its subsidiaries; (2) all debt service payments under the New
York Credit Agreement; (3) 50 percent of the Excess Cash Flow, as defined, has
been used to prepay the New York Credit Agreement; and (4) any other required
prepayments, such as with New York Credit Agreement. After satisfaction of the
aforementioned items, the Credit Agreement allows Orion Power New York to pay
dividends and make other distributions to Orion Power Holdings, up to the limit
of $100,000,000 over the life of the New York Credit Agreement. As of June 30,
2000, no dividends or distributions have been made by Orion Power New York to
Orion Power Holdings.
Among other restrictions, the New York Credit Agreement also contains
customary affirmative covenants and significant negative covenants including a
requirement that expenditures be within 105 percent of their budgeted amounts.
In addition, the following events are also events of default -- reduction in the
rule requiring New York City power retailers to procure capacity equal to at
least 80 percent of forecasted peak demand from in-city generation sources to
less than 75 percent and a reduction in the price cap for capacity from in-city
generators from $105 per kilowatt year to less than $90 per kilowatt year, and
Orion Power New York failing to maintain a debt service coverage ratio of at
least 1.5 to 1.0.
On April 28, 2000, Orion Power MidWest entered into a $1.2 billion secured
credit agreement with Banc of America Securities, LLC and Goldman Sachs Partners
L.P. as Lead Arrangers. The banks have agreed to provide acquisition loans of
$1,110,000,000 and a revolving working capital facility of $90,000,000
(collectively, the "Midwest Credit Agreement"). The Midwest Credit Agreement has
a maturity date of October 28, 2002, for all indebtedness. The net proceeds
under the Midwest Credit Agreement were used to finance the acquisition of the
Midwest Assets. Under the working capital facility, Orion Power MidWest is
required to provide a letter of credit in favor of Duquesne as part of the
Provider of Last Resort contract.
The borrowings under the Midwest Credit Agreement bear interest at a
floating rate. At Orion Power MidWest's option, interest will be determined in
accordance with either the Base Rate or the LIBOR. The Base Rate is defined as
the greater of (1) the prime rate of interest publicly announced by Bank of
America, N.A. or (2) the federal funds effective rate, plus an applicable
margin. The applicable margin is 0.375 percent for the first year, 0.5 percent
for the second year and 1.0 percent thereafter. The LIBOR is defined as the
LIBOR for deposits in dollars for a term comparable to the period elected by
Orion Power MidWest, plus an applicable margin. The
F-17
<PAGE> 108
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
applicable margin is 1.375 percent for the first year, 1.5 percent for the
second year and 2.0 percent thereafter.
At June 30, 2000, Orion Power MidWest had $1,144,137,000 of the Midwest
Credit Agreement loans outstanding.
In accordance with the Midwest Credit Agreement, Orion Power MidWest
entered into a Deposit Account Agreement with Bank of America, N.A. Accordingly,
Orion Power MidWest established 12 restricted use accounts for the disbursement
of its revenues. Orion Power MidWest originally funded these accounts with
$55,000,000 in April 2000. As of June 30, 2000, the balances in these restricted
use accounts totaled $69,213,000.
Under the Midwest Credit Agreement, Orion Power MidWest is restricted from
distributing cash to Orion Power Holdings. The Midwest Credit Agreement provides
for various accounts to be created, into which all operating revenues and other
cash receipts are deposited, and from which operating expenses, repayments of
the loan facilities and distributions to Orion Power Holdings may be made. The
lenders under the Midwest Credit Agreement have a security interest in all
amounts on deposit in the accounts and if there is an event of default under the
Midwest Credit Agreement, the lenders will be able to immediately exercise their
security interest on any funds contained in the accounts.
Distributions by Orion Power MidWest to Orion Power Holdings may only be
made after satisfaction of the following -- (1) all operating expenses of Orion
Power MidWest; (2) all debt service payments under the Midwest Credit Agreement;
(3) 50 percent of the Excess Cash Flow, as defined, has been used to prepay the
Midwest Credit Agreement; and (4) any other required prepayments, such as with
insurance or equity proceeds, have been made under the Midwest Credit Agreement.
After satisfaction of the aforementioned items, the Midwest Credit Agreement
allows Orion Power MidWest to pay dividends and make other distributions to
Orion Power Holdings up to the limit of $175,000,000 over the life of the
Midwest Credit Agreement. As of June 30, 2000, no dividends or distributions
have been made by Orion Power MidWest to Orion Power Holdings.
Among other restrictions, the Midwest Credit Agreement contains customary
affirmative covenants and significant negative covenants, including a required
debt service coverage ratio of 1.5 to 1.0 and a requirement that expenditures be
within 105 percent of their budgeted amounts.
SENIOR NOTES
On April 27, 2000, Orion Power Holdings issued $375,000,000 of 12 percent
senior notes, due 2010. On May 23, 2000, Orion Power Holdings issued an
additional $25,000,000 of 12 percent senior notes, due 2010, for a total of
$400,000,000 in 12 percent senior notes, due 2010 (the "Senior Notes"). The
proceeds were used to finance the acquisition of the Midwest Assets. Interest is
paid semiannually in May and November of each year.
The Senior Notes are senior unsecured obligations and rank pari passu with
all of Orion Power Holdings' existing and future unsecured indebtedness. The net
proceeds from the notes along with an additional amount of approximately $35
million in cash were held in escrow until the time of the acquisition of the
Midwest Assets.
Before May 1, 2003, Orion Power Holdings may redeem up to 35 percent of the
notes issued under the indenture at a redemption price of 112 percent of the
principal amount of the notes redeemed, plus accrued and unpaid interest and
special interest, with the net cash proceeds of an equity offering provided that
certain provisions under the indenture are met. Orion Power
F-18
<PAGE> 109
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holdings is not required to make any mandatory redemption or sinking fund
payments with respect to the Senior Notes.
Each holder of the Senior Notes will have the right to require Orion Power
Holdings to repurchase the notes pursuant to the change of control offer as set
forth in the indenture. The Senior Notes are not guaranteed by any of Orion
Power Holdings' subsidiaries.
NOTES PAYABLE
During 1998 and 1999, Orion Power Holdings entered into several promissory
notes payable with CPS and GSCP in order to provide funding for acquisitions and
operations. The total borrowings under these notes amounted to $41,187,981 and
$71,085,561 to CPS and GSCP, respectively. Each promissory note is due five
years from the date of the note. Earlier repayment of the debt is required in
the event of a public offering, sale, liquidation or merger of Orion Power
Holdings. Interest on the unpaid principal balance will accrue at 7 percent and
is payable semiannually from the respective anniversary dates.
On November 8, 1999, Orion Power Holdings repaid the total balance due to
CPS with the funds from the capital call of the new investors. On April 28,
2000, Orion converted approximately $71.1 million of notes payable to GSCP into
approximately 7,108,600 shares of common stock.
In conjunction with Orion Power Holdings' acquisition of the Carr Street
facility, it entered into a non-interest bearing note payable with US Gen LLC in
the amount of $1,000,000. Payment is due annually starting November 19, 1999
through November 19, 2001. Orion Power Holdings recognized a discount (8
percent) on this note at acquisition of $141,000.
REVOLVING CREDIT FACILITY
On July 27, 2000, Orion Power Holdings entered into a $75 million revolving
senior credit facility which includes a $40 million sublimit for letters of
credit. The credit facility matures in December 2002. Amounts outstanding under
the facility bear interest at Orion Power Holdings' option at either (1) the
greater of the lender's base rate and the federal funds effective rate, plus
0.50 percent and an additional margin of between 0.0 and 3.0 percent, or (2)
LIBOR for deposits in dollars, plus an additional margin of between 1.50 percent
and 4.5 percent. Letters of credit used to satisfy financial obligations will
have the same applicable margin as Eurodollar rate loans while letters of credit
to satisfy other obligations will bear an applicable margin between 1.00 and 3.0
percent. The facility is unsecured and ranks pari passu with all of Orion Power
Holdings' senior debt. The credit facility contains financial and operating
covenants and other restrictions with which Orion Power Holdings must comply.
F-19
<PAGE> 110
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of principal payments due under the long-term
credit facilities, senior notes and the notes payable as of December 31, 1999
and June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
(UNAUDITED)
<S> <C> <C>
2000........................................... $ 286 $ 286
2001........................................... 308 333
2002........................................... 716,000 1,859,137
2003........................................... 1,285 --
2004........................................... 69,801 --
Thereafter..................................... -- 400,000
-------- ----------
Total.......................................... $787,680 $2,259,756
======== ==========
</TABLE>
INTEREST RATE SWAP AGREEMENTS
In November 1999, Orion Power New York entered into three interest rate
swap agreements designed to fix the rate of interest on $200 million of its New
York Credit Facility. One agreement covered $100 million of interest rate swaps
with a commencement date of March 22, 2000, and a final maturity date of
December 31, 2002, with a fixed interest rate of 6.51 percent. The other two
agreements covered $40 million and $60 million of interest rate swaps with a
commencement date of March 22, 2000, and a final maturity date of March 22,
2010, with a fixed interest rate of 6.885 and 6.880 percent, respectively.
On January 18, 2000, Orion Power New York entered into a fourth interest
rate swap agreement with a notional amount of $150 million. This agreement was
entered into as a hedge of the credit facility debt. This agreement will be in
effect as of March 22, 2000, and expire on June 30, 2006, with a fixed interest
rate of 7.30 percent.
In June 2000, Orion Power MidWest entered into three interest rate swap
agreements designed to fix the rate of interest on $500 million under its
Midwest Credit Agreement. These agreements covered $100 million, $200 million,
and $200 million with a commencement date of June 5, 2000 and a final maturity
date of June 5, 2007, June 5, 2007, and June 5, 2003, respectively, with fixed
interest rates of 7.645, 7.673, and 7.306 percent, respectively.
Counterparties to the interest rate swap agreements are major financial
institutions. While Orion Power Holdings' subsidiaries may be exposed to credit
losses in the event of non-performance by these counterparties, Orion Power
Holdings' subsidiaries does not anticipate losses.
7. RELATED-PARTY TRANSACTIONS:
CAPACITY SALE AND TOLLING AGREEMENT
On November 18, 1998, Carr Street entered into a Capacity Sale and Tolling
Agreement (the "Sales Agreement") with CPS for a period of five years. Under the
terms of the Sales Agreement, CPS provides all fuel to the Carr Street facility
and receives from the facility all of the capacity, electric energy and other
products generated by the facility. As consideration, Carr Street will receive
capacity payments, electric revenue based on the amount of electric energy
produced and sold to CPS, certain start-up fees and market steam reimbursable
costs. Revenues generated for the year ended December 31, 1999 and the period
from March 10, 1998 (inception) through December 31, 1998 were $4,185,000 and
$314,000, respectively. The
F-20
<PAGE> 111
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum required payment to be received by Carr Street is $3,587,500 in 2000,
$3,677,000 in 2001, $3,769,000 in 2002, and $3,863,000 in 2003.
OPERATION AND MAINTENANCE SERVICES AGREEMENT
Each operating subsidiary entered into Operation and Maintenance Services
Agreements (the "O&M Agreements") with Constellation Operating Services, Inc.
("COSI"), for a term of five years, whereby COSI provided ongoing operating and
maintenance services. Under the terms of the O&M Agreements, Carr Street,
Astoria, and Erie Blvd. paid COSI for direct materials and expenses, plus a base
fee and certain bonuses, as set forth in the O&M Agreements. The base fee and
the bonuses were subject to annual adjustments. Expenses incurred under the O&M
Agreements for the period from March 10, 1998 to December 31, 1998, and the year
ended December 31, 1999, were approximately $24,000 and $19,846,000,
respectively. There were no amounts owed to COSI at December 31, 1998. Amounts
owed to COSI at December 31,1999, were approximately $1,674,000, and are
included in accounts payable on the accompanying consolidated balance sheets.
See Note 3 for discussion of Orion Power Holdings' acquisition of the COSI
subsidiaries that eliminated the O&M agreements.
STRATEGIC ALLIANCE AGREEMENTS
Orion Power Holdings has entered into a strategic alliance agreement with
COSI which calls for COSI to be the exclusive provider of operating and
maintenance services for each of the generation facilities that Orion Power
Holdings acquires.
Orion Power Holdings has also entered into a strategic alliance agreement
with CPS which calls for CPS to be the exclusive provider of power marketing and
risk management services for the Orion Power Holdings facilities. Additional
terms call for CPS to not provide assistance to any entity in connection with
the bidding, negotiation or acquisition of any facility that Orion Power
Holdings notifies CPS it intends to bid on or acquire.
STOCKHOLDER FEES
As part of the original stockholders agreement between CPS and GSCP and the
Second Amended and Restated Stockholders Agreement, Orion Power Holdings is
required to pay a total of 1 percent of the aggregate consideration paid in an
acquisition to its stockholders -- GSCP, CPS, Mitsubishi, and TEPCO. Orion Power
Holdings paid a total of $9,750,000 in August and September 1999 to GSCP and
CPS, and paid a total of $17,050,000 in June 2000, to all four primary
stockholders. These payments are recognized as a distribution to stockholders in
the accompanying statement of changes in stockholders' equity.
In association with the investment by Mitsubishi and TEPCO on November 5,
1999 and April 28, 2000, Orion Power Holdings was required to pay a 2 percent
fee to Goldman Sachs, in accordance with the Second Amended and Restated
Stockholder's Agreement. The amount of these payments is approximately $2.4
million and $1.6 million, respectively. Orion Power Holdings charged the fee
against additional paid-in capital. Additionally, prior to an initial public
offering of Orion Power Holdings' common stock, Goldman Sachs has the right to
provide all investment banking services to Orion on an arms' length basis with
regard to terms, conditions and pricing.
NOTES RECEIVABLE FROM OFFICERS
In conjunction with certain stock purchase agreements, certain officers are
required to purchase shares of Orion Power Holdings' common stock at each
acquisition. As of December 31, 1999, these officers owed Orion Power Holdings
$671,000 related to the purchase
F-21
<PAGE> 112
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of approximately 97,500 shares of common stock and related interest. As of June
30, 2000, these officers owed Orion Power Holdings $5,650,300 related to the
purchase of approximately 742,700 shares of common stock, and related interest.
8. RETIREMENT PLANS:
As part of the acquisitions of the Hydro Assets and New York City Assets,
Orion NY was required to assume the defined benefit pension plans and other
postretirement benefit plans ("OPEB") for employees that remained at the
facilities subsequent to each acquisition. These former Consolidated Edison and
Niagara Mohawk employees were hired by COSI in the same capacity as with their
former employers. The plans were being maintained by COSI, through the date of
the COSI acquisition (see Note 3), although it was Orion Power New York
responsibility to fund these obligations. As of April 26, 2000, the plans were
transferred to Orion Power Holdings' control.
As part of the acquisitions, the net liability of the pension plans for
Astoria's former Consolidated Edison employees and Erie Blvd.'s former Niagara
Mohawk employees were valued based on actuarial valuations to be $7,232,619 and
$10,750,972, respectively. Plan assets were only received related to the Niagara
Mohawk defined benefit plan. The fair value of these assets at acquisition was
$11,668,384. The OPEB liabilities related to expenses for benefits and
insurance, which were included in the former Niagara Mohawk and Consolidated
Edison employees' benefit plans, were valued based on actuarial valuations to be
$2,525,315 and $1,700,976, respectively.
The information on the following page is certain information about
retirement benefits as of and for the year ended December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
DEFINED
BENEFIT PLANS OPEB
------------- ----
<S> <C> <C>
Year Ended December 31, 1999:
Change in benefit obligation --
Benefit obligation assumed at acquisition...... $17,984 $ 4,226
Service cost................................... 629 238
Interest cost.................................. 517 121
Actuarial (gain) loss.......................... (1,732) (267)
------- -------
Benefit obligation at December 31, 1999........ 17,398 4,318
------- -------
Change in plan assets --
Fair value of plan assets assumed at
acquisition.................................. 11,668 --
Actual return on plan assets................... 299 --
------- -------
Fair value of plan assets at December 31,
1999......................................... 11,967 --
------- -------
Funded status --
Funded status of the plan...................... (5,431) (4,318)
Unrecognized actuarial net gains............... (1,618) (267)
------- -------
Accrued benefit cost................................ $(7,049) $(4,585)
======= =======
Assumptions as of December 31, 1999:
Discount rate..................................... 7.75% 7.75%
Expected return on plan assets.................... 8.50% N/A
Rate of compensation increase..................... 4.50% 4.00%
</TABLE>
F-22
<PAGE> 113
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumed healthcare cost trend rates for fiscal year 2000 for Medicare
eligible and non-Medicare eligible retirees is 7 percent; this rate is expected
to decrease gradually to 4 percent in 2005 and remain at that level thereafter.
<TABLE>
<CAPTION>
DEFINED
BENEFIT PLANS OPEB
------------- ----
<S> <C> <C>
Components of net periodic benefit cost:
Service cost...................................... $ 629 $ 238
Interest cost..................................... 517 121
Expected return on plan assets.................... (413) --
------- -------
Net periodic benefit cost........................... $ 733 $ 359
======= =======
</TABLE>
The assumed healthcare trend rate has a significant effect on the amounts
reported for the healthcare plans. A one-percentage-point change in the assumed
healthcare trend rate would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT INCREASE
-------------- --------------
<S> <C> <C>
Increase (decrease) total service and interest
cost components............................... $ 80 $ (62)
Increase (decrease) OPEB obligation............. 908 (712)
</TABLE>
As part of the acquisition of the Midwest Assets, Orion Power MidWest was
required to assume the defined benefit plans and OPEB for employees that were
hired by Orion Power Operating Services. This obligation amounted to $16,925,000
at April 28, 2000, the date of acquisition.
Effective January 1, 1999, Orion Power Holdings established a 401(k)
retirement plan for the benefit of all eligible employees. The plan is for all
employees of Orion Power Holdings with no minimum age or minimum service
requirements. Participants may contribute up to 15 percent of their annual
compensation, subject to statutory limits. Employee contributions are fully
vested. Orion Power Holdings' matching contribution is discretionary and
therefore will be determined on an annual basis. Employees will fully vest in
any discretionary contributions ratably over five years. Orion Power Holdings
made no contributions to the plan in 1999.
9. COMMITMENTS AND CONTINGENCIES:
ENVIRONMENTAL LIABILITIES
Orion Power Holdings has recorded a liability for the estimated cost of
environmental remediation associated with the acquisition of the Hydro Assets
and New York City Assets based on valuation reports provided by independent
environmental liability assessment experts. In conjunction with these
valuations, Orion Power Holdings has developed remediation plans for each item
specifically identified. For environmental items at Astoria, the New York State
Department of Environmental Conservation has issued consent orders requiring
active investigation and remediation of past releases of petroleum and other
substances by the prior owners. The consent order also contains obligations
related to continuing compliance with environmental regulations. The total
liability assumed and recorded by Orion Power New York totaled $9.15 million, on
an undiscounted basis. Through December 31, 1999, and June 30, 2000, Orion Power
New York had spent approximately $50,000 and $880,000, respectively, toward
completion of its remediation plans and anticipates that the remaining portion
will be paid out through 2009.
F-23
<PAGE> 114
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In association with the Midwest Acquisition, Orion Power MidWest has
recorded a liability for the estimated cost of environmental remediation, based
on valuations performed by independent environmental liability assessment
experts. In conjunction with these valuations, Orion Power MidWest has developed
remediation plans for the known liabilities. The total liability assumed and
recorded by Orion Power MidWest totaled $4.8 million, on an undiscounted basis.
On an ongoing basis, Orion Power Holdings monitors its compliance with
environmental laws. Due to of the uncertainties associated with environmental
compliance and remediation activities, future costs of compliance or remediation
could be higher or lower than the amount currently accrued.
TERMINATION PLAN
As part of the acquisition of the New York City Assets, Orion Power
Holdings formulated a plan to reduce the staffing levels at the related
facilities. The total estimated costs of $2,298,000 were recorded as a cost of
the acquisition. As of December 31, 1999, and June 30, 2000, $550,000 and
$662,000, respectively, had been paid out in accordance with this plan. The
remaining portion will be paid out prior to December 31, 2000 and is included in
accrued liabilities (current portion) and other long-term liabilities in the
accompanying consolidated balance sheet.
TAX SAVINGS SHARING AGREEMENT WITH NIAGARA MOHAWK
As part of the acquisition of the Hydro Assets, Orion Power New York has
entered into a tax savings sharing agreement with Niagara Mohawk. Funds received
from settlement of prior Niagara Mohawk filed property tax litigation or future
property tax reduction agreements are shared 25 percent to Niagara Mohawk. The
total amount paid to Niagara Mohawk cannot exceed $20,000,000. Since this amount
due to Niagara Mohawk is contingent on future events, amounts due to Niagara
Mohawk will only be recognized when a settlement has been reached with a local
jurisdiction. As of December 31, 1999, and June 30, 2000, there were no
agreements with local tax jurisdictions that would require Orion Power Holdings
to make payment to Niagara Mohawk.
LEASES
Orion Power Holdings and its subsidiaries have entered into various
noncancelable operating lease arrangements for office space, storage space,
office furniture and vehicles at its locations in Syracuse, New York, Baltimore,
Maryland and Pittsburgh, Pennsylvania. These leases terminate at various dates
through December 2021.
On November 10, 1999, Erie Blvd. entered into a lease arrangement at the
Watertown hydroplant located in Potsdam, New York. This space will be used as a
maintenance facility and a regional headquarters for the Hydro Assets. The lease
term begins at the completion of the facility, which is expected to be the end
of February 2000 and expires in 2014. Under the terms of the lease, the monthly
payments are $10,500. Erie Blvd. has the option to purchase the facility for
$450,000 at the end of the lease term. The leased asset is a capital lease
obligation that will be recorded as other equipment of $1.1 million upon
completion.
F-24
<PAGE> 115
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments due under these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 CAPITAL OPERATING
----------- ------- ---------
<S> <C> <C>
2000.................................................. $ 116 $ 751
2001.................................................. 126 831
2002.................................................. 126 845
2003.................................................. 126 863
2004.................................................. 126 874
Thereafter.............................................. 1,270 4,404
------ ------
1,890 $8,568
======
Interest portion........................................ (790)
------
Total................................................... $1,100
======
</TABLE>
LITIGATION AND CLAIMS
Orion Power Holdings is directly or indirectly involved in various pending
lawsuits and claims. Litigation reserves are recorded when a loss is determined
to be probable and the amount can be reasonably estimated. In the opinion of
management, the ultimate outcome of the claims will not have a material impact
on Orion Power Holdings' financial position or the results of its operations.
During 2000, Orion Power Holdings, through Orion Power New York, has
provided certain services to the operator of the New York City transmission
system (the "transmission operator") under the local electric system reliability
rules. The transmission operator has questioned its obligation to make separate
payment to Orion Power Holdings related to these services. As of May 31, 2000,
the amount requested by Orion Power Holdings for these services was
approximately $20.1 million. Since Orion Power Holdings management and its
counsel cannot reasonably estimate the amount Orion Power Holdings will
ultimately collect, no amount has been recognized in these financial statements.
Related to this dispute, the same transmission operator has asserted that Orion
Power Holdings owes it for providing electricity to Orion Power Holdings for
station service at retail tariff rates. Orion Power Holdings has disputed this
charge, which amounted to approximately $5 million at June 30, 2000. Since Orion
Power Holdings management does not believe that it is required to make such
payment and cannot reasonably estimate the amount it will ultimately be required
to pay, if any, no amount has been accrued in these financial statements. The
parties are discussing resolution to these items under a common process. At such
time as these issues are resolved and payments are either receivable or payable,
Orion Power Holdings will recognize the revenue or expense as appropriate.
10. STOCK OPTION PLAN:
On May 21, 1998, Orion Power Holdings adopted the 1998 Stock Incentive Plan
(the "Plan") to provide for granting of stock options and other equity based
awards to directors, officers, employers, and consultants. The Plan grants key
employees and officers the opportunity to purchase shares of voting common
stock. The Plan provides that up to 2,500,000 shares of common stock may be
issued pursuant to such options and other awards. As of March 6, 2000, Orion
Power Holdings has only granted stock options pursuant to the Plan. Stock
options may be granted at an exercise price as determined by the Board of
Directors or a committee designated
F-25
<PAGE> 116
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by the Board of Directors. Stock options granted pursuant to the Plan expire not
more than ten years after the date of grant, with vesting determined by the
Board of Directors.
Orion Power Holdings utilizes the disclosure-only provisions of SFAS No.
123, "Accounting for Stock Based Compensation," which defines a "fair value
based method" of accounting for stock-based compensation and applies APB Opinion
No. 25 and related interpretations in accounting for its stock option and stock
purchase plans. During 1998 and 1999, Orion Power Holdings granted options to
acquire shares of its common stock at an exercise price of either $10 or $15.50.
Certain options were granted when the fair value of Orion Power Holdings' common
stock was in excess of the exercise price. As a result, through June 30, 2000
Orion Power Holdings has recognized deferred compensation of $4,978,000 to be
amortized on a straight-line basis over a three-year vesting period. Orion Power
Holdings recognized $106,000 and $504,000 of compensation expense related to
these options for the year ended December 31, 1999, and the six month period
ended June 30, 2000, respectively.
The weighted-average fair value of the options granted by Orion Power
Holdings through December 31, 1999, is estimated to be $8.96. Had compensation
expense for Orion Power Holdings' stock option plan been determined based on the
fair value at the grant date for awards for the year ended December 31, 1999,
consistent with the provisions of SFAS No. 123, Orion Power Holdings' net income
and basic and diluted EPS would have been approximately $4,711,000, $0.33 and
$0.32, respectively, as compared to $5,662,000, $0.39 and $0.38, respectively.
The fair value of each option was estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1999: no dividend yield, a risk-free interest rate of 5.12 percent, an
expected term of the options of ten years and an expected volatility rate of
16.4 percent.
The following summarizes options granted to employees:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Outstanding at March 10, 1998...................... -- $ --
Granted.......................................... 49,963.9 10.00
-----------
Outstanding at December 31, 1998................... 49,963.9 10.00
Granted.......................................... 1,627,246.4 11.91
-----------
Outstanding at December 31, 1999................... 1,677,210.3 11.86
Granted.......................................... 1,353,812.7 13.39
Forfeited........................................ (4,676.2) 11.47
-----------
Outstanding at June 30, 2000....................... 3,026,346.8 $11.98
=========== ======
Options exercisable at December 31, 1999........... 118,163.0 $10.00
=========== ======
Options exercisable at June 30, 2000............... 453,903.6 $10.18
=========== ======
Weighted-average remaining contractual life in
years 9.5
===========
</TABLE>
11. INCOME TAXES:
The sources of and differences between the financial accounting and tax
basis of Orion Power Holdings' assets and liabilities which give rise to the net
deferred tax assets and net
F-26
<PAGE> 117
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred tax liabilities as of December 31, 1998 and 1999, respectively, are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
----------------- -------------------
LONG- LONG-
CURRENT TERM CURRENT TERM
------- ----- ------- -----
<S> <C> <C> <C> <C>
Accumulated deferred income taxes:
Deferred tax assets --
Net operating loss carryforward............... $1,029 $ -- $ -- $ --
Long-term liabilities assumed in
acquisition................................. -- -- 938 8,007
Deferred compensation......................... -- -- -- 44
Acquisition costs............................. -- -- 145 3,109
------ ------ ------ --------
Total deferred tax assets.......................... 1,029 -- 1,083 11,160
------ ------ ------ --------
Deferred tax liabilities --
Depreciation differences on property and
equipment................................... -- (23) -- (5,308)
Difference in asset basis of property and
equipment................................... -- -- -- (8,946)
------ ------ ------ --------
Total deferred tax liabilities..................... -- (23) -- (14,254)
------ ------ ------ --------
Net accumulated deferred income tax assets
(liabilities).................................... $1,029 $ (23) $1,083 $ (3,094)
====== ====== ====== ========
</TABLE>
The components of the income tax (benefit) expense during the periods ended
December 31, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Current:
Federal............................................... $ -- $1,378
State................................................. -- 401
------- ------
-- 1,779
------- ------
Deferred:
Federal............................................... (880) 2,418
State................................................. (126) 599
------- ------
(1,006) 3,017
------- ------
Total income tax (benefit) expense...................... $(1,006) $4,796
======= ======
</TABLE>
F-27
<PAGE> 118
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax provision differs from the amounts obtained by applying the
statutory U.S. Federal income tax rate to the income from operations. The
differences are reconciled as follows, (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Income tax (benefit) expense computed at federal
statutory rates....................................... $ (892) $3,660
Permanent differences................................... -- 484
State income taxes, net of federal income tax benefit... (83) 650
Other................................................... (31) 2
------- ------
Total................................................... $(1,006) $4,796
======= ======
</TABLE>
As of December 31, 1998, the Company had approximately $2,096,000 of net
operating loss carryforwards that were used in 1999.
As of June 30, 2000, Orion utilized an effective tax rate of 41.0 percent.
12. EARNINGS PER SHARE:
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. The
dilutive effect of the potential exercise of outstanding options to purchase
shares of common stock is calculated using the treasury stock method.
Diluted EPS assumes the issuance of common stock pursuant to stock options
and warrants at the beginning of the year. The impact of 2,500 stock options
have been excluded from diluted EPS due to their antidilutive effect. The
following table shows the computation of Orion Power Holdings' basic and diluted
EPS for 1998 and 1999 (in thousands, except share and per share data):
<TABLE>
<CAPTION>
NET INCOME PER SHARE
(LOSS) SHARES AMOUNT
---------- ------ ---------
<S> <C> <C> <C>
For the year ended December 31, 1998:
Basic EPS --
Net income (loss)......................... $(1,542) 119,200 $(12.94)
Effect of dilutive securities............. -- --
------- ----------
Diluted EPS --
Net income................................ $(1,542) 119,200 $(12.94)
======= ========== =======
For the year ended December 31, 1999:
Basic EPS --
Net income................................ $ 5,662 14,344,400 $ 0.39
Effect of dilutive securities:
Stock options........................... -- 83,700
Warrants................................ -- 518,800
------- ----------
Diluted EPS --
Net income................................ $ 5,662 14,946,900 $ 0.38
======= ========== =======
</TABLE>
F-28
<PAGE> 119
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NET INCOME PER SHARE
(LOSS) SHARES AMOUNT
---------- ------ ---------
<S> <C> <C> <C>
For the six months ended June 30, 2000:
Basic EPS --
Net income................................ $13,750 48,039,139
Less: accretion of common stock subject to
put rights.............................. (271)
Net income attributable to common
stockholders............................ 13,479 $ 0.28
Effect of dilutive securities:
Stock options........................... -- 425,306
Warrants................................ -- 2,371,085
------- ----------
Diluted EPS --
Net income attributable to common
stockholders............................ $13,479 50,835,530 $ 0.27
======= ========== =======
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Orion Power Holdings' financial instruments consist of cash and cash
equivalents, restricted cash, accounts receivable, interest, taxes and other
accounts payable, accrued expenses, notes payable and long-term debt. The fair
value of these financial instruments, with the exception of the notes payable to
CPS and GSCP approximates their carrying value as of December 31, 1999, due to
their short-term nature or due to the fact that the interest rate paid on the
debt is variable.
The carrying amount of the notes payable to CPS and GSCP as of December 31,
1999, was approximately $71.0 million with a fair value of approximately $65.8
million. The carrying amount of the notes payable to CPS and GSCP as of December
31, 1998 was approximately $1.7 million with a fair value of approximately $1.6
million. The fair value was estimated using discounted cash flow analysis, based
on Orion Power Holdings' current incremental borrowing rate and the approximate
carrying value based on currently quoted market prices for similar types of
borrowing arrangements.
The fair value of interest rate swap agreements, which are not carried on
the balance sheet, is estimated by determining the difference between the fixed
payments on the agreements and what the fixed payments would be based on current
market fixed rates for the appropriate maturity, then calculating the present
value of that difference for the remaining terms of the agreements at current
fixed market rates. The estimated value of interest rate swap agreements was an
asset of $2.36 million at December 31, 1999.
MARKET RISK
Market risk is the potential loss Orion Power Holdings may incur as a
result of changes in the market or fair value of a particular instrument or
commodity. All financial and commodities-related instruments, including
derivatives, are subject to market risk. Orion Power Holdings' exposure to
market risk is determined by a number of factors, including the size, duration,
composition, and diversification of positions held, the absolute and relative
levels of interest rates, as well as market volatility and illiquidity. The most
significant factor influencing the overall level of market risk to which Orion
Power Holdings is exposed is its use of hedging techniques to mitigate such
risk. Orion Power Holdings manages market risk by actively monitoring compliance
with stated risk management policies as well as monitoring the effectiveness of
its hedging
F-29
<PAGE> 120
ORION POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
policies and strategies. Orion Power Holdings' risk management policies limit
the amount of total net exposure and rolling net exposure during stated periods.
These policies, including related risk limits, are regularly assessed to ensure
their appropriateness given Orion Power Holdings' objectives.
14. SUBSEQUENT EVENT:
On August 10, 2000, Orion Power's Board of Directors approved plans to
register with the Securities and Exchange Commission shares of Orion Power
common stock. In addition, the Board approved a stock split of 100 to 1 to be
effective August 10, 2000. These financial statements reflect the stock split
retroactively for all periods presented.
On September 15, 2000, Orion Power Holdings signed a letter of intent to
purchase ten combustion turbine generators for approximately $345,000,000. These
generators will be delivered at various times between 2003 and 2004.
On September 29, 2000, Orion Power Holdings signed a stock purchase
agreement to acquire all of the outstanding common stock of Columbia Electric
Corporation, for approximately $200,000,000 in cash, plus the assumption of
debt. Columbia Electric Corporation is a power generation company consisting of
natural gas fired generating facilities under construction and in various stages
of development. Orion Power Holdings expects to finance the acquisition through
proceeds from this offering. The acquisition is expected to be completed in
December 2000, and will be accounted for as a purchase.
F-30
<PAGE> 121
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orion Power Holdings, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Orion Power
Holdings, Inc. and its subsidiaries, incorporated by reference in this
Registration Statement, and have issued our report thereon dated March 6, 2000.
Our audit was made for the purpose of forming an opinion on those statements as
a whole. The schedules listed in the index above are the responsibility of the
company's management and are presented for purposes of complying with the
Securities and Exchange Commission rules and are not part of the audited basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
March 6, 2000
(except with respect to the matters discussed in Note E,
as to which the date is August 10, 2000)
F-31
<PAGE> 122
ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 129 $ 78,081
Restricted cash........................................... -- 651
Due from affiliates....................................... -- 17,112
Prepaid expenses and other current assets................. 2 132
------- --------
TOTAL CURRENT ASSETS........................................ 131 95,976
------- --------
PROPERTY AND EQUIPMENT
Property and equipment.................................... -- 2,936
Less -- accumulated depreciation.......................... -- (218)
------- --------
NET PROPERTY AND EQUIPMENT.................................. -- 2,718
DEFERRED TAX ASSET.......................................... 1,006 3,911
INVESTMENT IN SUBSIDIARIES.................................. 18,326 370,787
------- --------
TOTAL ASSETS................................................ $19,463 $473,392
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses.......................................... $ 606 $ 4,729
Interest payable.......................................... 54 2,161
------- --------
TOTAL CURRENT LIABILITIES................................... 660 6,890
NOTES PAYABLE TO STOCKHOLDERS............................... 1,735 71,086
------- --------
TOTAL LIABILITIES........................................... 2,395 77,976
------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 200,000,000 shares
authorized; 1,864,542 and 36,162,629 shares issued and
outstanding respectively............................... 19 362
Additional paid-in capital................................ 18,626 393,416
Deferred compensation..................................... -- (1,811)
Notes receivable from officers............................ (35) (671)
Retained earnings......................................... (1,542) 4,120
------- --------
TOTAL STOCKHOLDERS' EQUITY.................................. 17,068 395,416
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $19,463 $473,392
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets.
F-32
<PAGE> 123
ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF (LOSS) INCOME
FOR THE PERIOD FROM MARCH 10, 1998 (DATE OF INCEPTION) TO DECEMBER 31,
1998 AND FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE YEAR
MARCH 10, 1998 ENDED
(DATE OF INCEPTION) DECEMBER 31,
TO DECEMBER 31, 1998 1999
-------------------- ------------
<S> <C> <C>
OPERATING REVENUE......................................... $ -- $ --
EXPENSES:
General and administrative.............................. 2,150 4,441
Depreciation............................................ -- 218
------- -------
2,150 4,659
------- -------
OPERATING LOSS............................................ (2,150) (4,659)
INTEREST INCOME........................................... 12 265
INTEREST EXPENSE.......................................... 136 2,933
------- -------
LOSS BEFORE PROVISION FOR INCOME TAXES.................... (2,274) (7,327)
TAX BENEFIT............................................... (1,006) (2,905)
EQUITY IN EARNINGS FROM SUBSIDIARIES...................... (274) 10,084
------- -------
NET (LOSS) INCOME......................................... $(1,542) $ 5,662
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-33
<PAGE> 124
ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM MARCH 10, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE YEAR
MARCH 10, 1998 ENDED
(DATE OF INCEPTION) DECEMBER 31,
TO DECEMBER 31, 1998 1999
-------------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................... $ (1,542) $ 5,662
Adjustments to reconcile net loss to net cash used in
operating activities --
Equity in earnings from subsidiaries................. 275 (10,084)
Deferred income taxes................................ (1,006) (2,905)
Depreciation......................................... -- 218
Deferred compensation................................ -- 106
Change in assets and liabilities:
Restricted cash.................................... -- (651)
Due from affiliates................................ -- (17,112)
Prepaid expenses and other current assets.......... (2) (130)
Accrued expenses................................... 605 4,123
Interest payable................................... 54 2,107
-------- ---------
Net cash used in operating activities..................... (1,616) (18,666)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... -- (2,936)
Investment made in subsidiaries......................... (18,600) (342,377)
-------- ---------
Net cash used in investing activities..................... (18,600) (345,313)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from stockholders.................. 18,610 382,330
Distribution to stockholders............................ -- (9,750)
Proceeds from notes payable to stockholders............. 1,735 110,539
Payment on notes payable to stockholders................ -- (41,188)
-------- ---------
Net cash provided by financing activities................. 20,345 441,931
-------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS....................... 129 77,952
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ -- 129
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 129 $ 78,081
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest............................................. $ 83 $ 826
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-34
<PAGE> 125
ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1999
A) The accompanying condensed financial information of Orion Power
Holdings, Inc. ("Orion") presents the financial position, results of operations
and cash flows of the Parent Company with the investment in, and operations of,
consolidated subsidiaries with restricted net assets on the equity method of
accounting.
B) Long-Term Credit Facility
On July 28, 1999, Orion Power New York, LP ("Orion Power New York"), an
indirect wholly owned subsidiary of Orion, entered into a $730,000,000 secured
credit agreement with Banc of America Securities LLC and Paribas as the Lead
Arrangers. The banks agreed to provide an acquisition facility in an amount of
up to $700,000,000 (the "Acquisition Loans"), and a revolving working capital
facility in an amount of up to $30,000,000 (the "Working Capital Facility")
(collectively, the "Credit Agreement"). The Credit Agreement has a maturity of
December 31, 2002 for all indebtedness. The net proceeds under the Credit
Agreement were used to finance the Erie Blvd. and Astoria acquisitions.
The borrowings under each facility bear interest at a floating rate. At
Orion Power New York's option, the interest will be determined in accordance
with either the Base Rate or LIBOR. The Base Rate is defined as the greater of
the base rate of interest announced by Bank of America or the federal funds
effective rate, plus an applicable margin. The applicable margin for the first
two years is 0.375 percent and 0.75 percent thereafter. The LIBOR Rate is
defined as the LIBOR for deposits in dollars plus an applicable margin. The
applicable margin for the first two years is 1.375 percent and 1.75 percent
thereafter. The elected rate as of December 31, 1999 was 7.135 percent. The
Acquisition Loans and Working Capital Facility are secured by substantially all
of the assets of Orion Power New York.
At December 31, 1999, Orion Power New York had $700,000,000 of the
Acquisition Loans and $16,000,000 of the Working Capital Loans outstanding.
Under the Working Capital Facility, $10,000,000 is to be used to provide a
letter of credit in favor of Consolidated Edison in conjunction with the New
York City Assets acquisition.
Under the Credit Agreement, Orion Power New York and its various operating
subsidiaries (the New York Assets are held by separate operating subsidiaries)
are restricted from distributing cash to Orion Power Holdings. The Credit
Agreement provides for various accounts to be created, into which all operating
revenues and other cash receipts are deposited, and from which operating
expenses, repayments of the loan facilities and distributions to Orion Power
Holdings may be made. The lenders under the Credit Agreement have a security
interest in all amounts on deposit in the accounts and if there is an event of
default under the Credit Agreement, the lenders will be able to immediately
exercise their security interest on any funds contained in the accounts.
Distributions by Orion Power New York to Orion Power Holdings may only be
made after satisfaction of the following -- (1) all operating expenses of Orion
Power New York and its subsidiaries; (2) all debt service payments under the
Credit Agreement; (3) 50% of the Excess Cash Flow, as defined, has been used to
prepay the Credit Agreement; and (4) any other required prepayments, such as
with insurance or equity proceeds, have been made under the Credit Agreement.
After satisfaction of the aforementioned items, the Credit Agreement allows
Orion Power New York to pay dividends and make other distributions to Orion
Power Holdings, up to the limit of $100,000,000 over the life of the Credit
Agreement. As of December 31, 1999,
F-35
<PAGE> 126
ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
no dividends or distributions have been made by Orion Power New York to Orion
Power Holdings, and approximately $375 million of Orion Power Holdings' $395
million of consolidated equity is restricted at the subsidiary level.
Among other restrictions, the Credit Agreement also contains customary
affirmative covenants and significant negative covenants including a requirement
that expenditures be within 105 percent of their budgeted amounts. In addition,
the following events are also events of default -- reduction in the rule
requiring New York City power retailers to procure capacity equal to at least 80
percent of forecasted peak demand from in-city generation sources to less than
75 percent and a reduction in the price cap for capacity from in-city generators
from $105 per kilowatt year to less than $90 per kilowatt year, and Orion Power
New York failing to maintain a debt service coverage ratio of at least 1.5 to
1.0.
Orion Power New York is owned directly by Orion Power Holdings, GP Inc. and
Orion Power Holdings, LP Inc. Based on the dividend and distribution
restrictions discussed above, Orion Power Holdings indirect interest in Orion
Power New York makes it a restricted subsidiary of Orion Power Holdings. As
such, the investment is accounted for under the equity method of accounting in
the accompanying condensed financial information of Orion Power Holdings.
During 1998 and 1999, Orion Power Holdings entered into several promissory
notes payable with Constellation Power Source, Inc. ("CPS") and GS Capital
Partners II, L.P. along with certain other affiliated private investment funds
managed by Goldman, Sachs & Co. (collectively "GSCP") in order to provide
funding for acquisitions and operations. The total borrowings under these notes
amounted to $41,187,981 and $71,085,561 to CPS and GSCP, respectively. Each
promissory note is due five years from the date of the note. Earlier repayment
of the debt is required in the event of a public offering, sale, liquidation or
merger of Orion Power Holdings. Interest on the unpaid principal balance will
accrue at 7 percent and is payable semiannually from the respective anniversary
dates.
On November 8, 1999, Orion Power Holdings repaid the total balance due to
CPS with the funds from the capital call of the new investors (see Note 1).
Additionally, Orion Power Holdings intends to convert the total balance due to
GSCP into equity at the time of the closing of the sale of Senior Notes.
The following is a schedule of principal payments due under the notes
payable as of December 31, 1999 (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ --
2001........................................................ --
2002........................................................ --
2003........................................................ 1,285
2004........................................................ 69,801
-------
$71,086
=======
</TABLE>
C) In conjunction with certain stock purchase agreements, certain officers
are required to purchase shares of Orion Power Holdings' common stock at each
acquisition. As of December 31, 1999, these officers owed the Company $650,000
related to the purchase of approximately 975,000 shares of common stock and
$21,000 in accrued and unpaid interest. As of December 31, 1998, these officers
owed the Company $35,000 related to the purchase of approximately 3,500 shares
of common stock.
F-36
<PAGE> 127
ORION POWER HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
D) Orion has entered into a noncancellable operating lease arrangement for
office space at its location in Baltimore, Maryland. Future minimum payments due
under these leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 PAYMENTS
----------- --------
<S> <C>
2000...................................................... $ 196
2001...................................................... 203
2002...................................................... 211
2003...................................................... 219
2004...................................................... 226
Thereafter.................................................. 115
------
$1,170
======
</TABLE>
E) On August 10, 2000, Orion Power Holdings' Board of Directors approved
plans to register with the Securities and Exchange Commission shares of Orion
Power Holdings' common stock. In addition, the Board approved a stock split of
100 to 1 to be effective August 10, 2000. These financial statements reflect the
stock split retroactively for all period presented.
F-37
<PAGE> 128
------------------------------------------------------
------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 8
Use of Proceeds....................... 21
Dividend Policy....................... 21
Dilution.............................. 22
Capitalization........................ 23
Selected Consolidated Financial and
Operating Data...................... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 37
Management............................ 59
Principal and Selling Stockholders.... 67
Certain Relationships and Related
Party Transactions.................. 69
Description of Capital Stock.......... 74
Description of Indebtedness........... 77
Shares Eligible for Future Sale....... 82
Underwriting.......................... 84
Legal Matters......................... 87
Experts............................... 87
Where You Can Find More Information... 87
Index To Financial Statements......... F-1
</TABLE>
-------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
25,000,000 Shares
ORION POWER
HOLDINGS, INC.
Common Stock
-------------------------
[ORION POWER HOLDINGS, INC. LOGO]
-------------------------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
REPRESENTATIVES OF THE UNDERWRITERS
------------------------------------------------------
------------------------------------------------------
<PAGE> 129
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions, are as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee........................................ $ 151,800
NASD filing fee............................................. 30,500
NYSE filing fee............................................. 500,000
Printing and engraving costs................................ 800,000
Accounting fees and expenses................................ 400,000
Legal fees and expenses..................................... 600,000
Blue sky fees and expenses.................................. 10,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 497,700
----------
Total............................................. $3,000,000
==========
</TABLE>
---------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Orion Power Holdings, Inc. is incorporated under the laws of the State of
Delaware. Section 145 ("Section 145") of Title 8 of the Delaware Code gives a
corporation power to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct was
unlawful. Section 145 also gives a corporation power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other
II-1
<PAGE> 130
court shall deem proper. Also, Section 145 states that, to the extent that a
present or former director or officer of a corporation has been successful on
the merits or otherwise in defense of any such action, suit or proceeding, or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Orion Power's Bylaws provide for the indemnification of officers and
directors to the fullest extent permitted by the General Corporation Law.
All of Orion Power's directors and officers will be covered by insurance
policies against certain liabilities for actions taken in their capacities as
such, including liabilities under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In April and May 2000, we sold a total of $400,000,000 12% senior notes due
2010. The purchase price of these notes was paid in cash by the certain
institutional investors. All of these notes were offered and sold to the initial
purchasers in reliance on the exemption from registration under Section 4(2) of
the Securities Act of 1933.
The following is a summary of the sales since inception by the Registrant
of equity securities that were not registered under the Securities Act.
<TABLE>
<CAPTION>
SHARES OF
INVESTOR DATE AMOUNT ($) COMMON STOCK WARRANTS
-------- ---- ---------- ------------ --------
<S> <C> <C> <C> <C>
Entities affiliated with The Goldman
Sachs Group, Inc...................... 3/98 6,350 635 --
11/98 3,809,524 380,952 68,454(a)
12/98 8,000,000 800,000 144,158(a)
6/99 1,578,510 157,851 28,833(a)
7/99 159,429,451 15,942,945 2,925,317(a)
9/99 6,298,271 629,827 115,559(a)
11/99 -- -- 890,287(b)
4/00 120,877,895 12,087,790 1,751,936(a)
4/00 68,975,000 4,450,000 475,856(b)
Constellation Power Source, Inc. and
affiliates............................ 3/98 3,650 365 --
11/98 2,190,476 219,048 --
12/98 4,600,000 460,000 --
6/99 921,490 92,149 --
7/99 93,070,549 9,307,055 --
9/99 3,701,730 370,173 --
4/00 70,512,105 7,051,210 705,900(a)
4/00 31,025,000 2,001,613 --
4/00 18,900,000 1,219,355 --
Mitsubishi Corporation and affiliates... 11/99 71,648,400 4,622,478 --
4/00 48,351,600 3,119,458 --
Tokyo Electric Power Company
International B.V..................... 11/99 47,765,600 3,081,652 --
4/00 32,234,400 2,079,638 --
Frederic V. Salerno..................... 6/00 10,000,600 645,200 --
</TABLE>
II-2
<PAGE> 131
<TABLE>
<CAPTION>
SHARES OF
INVESTOR DATE AMOUNT ($) COMMON STOCK WARRANTS
-------- ---- ---------- ------------ --------
<S> <C> <C> <C> <C>
Jack A. Fusco........................... 12/98 11,810 1,181 --
7/99 188,190 18,819 --
Scott B. Helm........................... 12/98 23,619 2,362 --
7/99 376,381 37,638 --
W. Thaddeus Miller...................... 7/99 225,000 22,500 --
E. Thomas Webb.......................... 7/99 150,000 15,000 --
</TABLE>
---------------
(a) Exercise price of $10.00 per share.
(b) Exercise price of $15.50 per share.
In addition, the Registrant from time to time has issued an aggregate of
3,026,347 stock options to various people pursuant to its stock option plan.
All the foregoing equity securities were issued in reliance on the
exemption from registration under Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation, as amended.
3.2** Bylaws, as amended.
4.1** Indenture, dated as of April 27, 2000 between Orion Power
Holdings, Inc. and Wilmington Trust Company.
4.2** Amended and Restated Registration Rights Agreement, dated
April 26, 2000, by and among Orion Power Holdings, Inc., GS
Capital Partners II, L.P. (and certain affiliates),
Constellation Enterprises, Inc., Constellation Operating
Services, Inc., certain affiliates of Mitsubishi Corporation
and Tokyo Electric Power Company International B.V.
4.3** Form of Rights Agreement between Orion Power Holdings, Inc.
and LaSalle Bank National Association, as Rights Agent.
4.4** Exchange and Registration Rights Agreement dated as of April
27, 2000 by and among Orion Power Holdings, Inc. and the
purchasers of the 12% senior notes due 2010.
5.1** Opinion of Stroock & Stroock & Lavan LLP.
10.1** Credit Agreement, dated as of July 28, 1999, by and among
Orion Power New York, L.P., Bank of America Securities LLC,
Paribas, and the other financial institutions who are
signatories to the agreement.
10.2** Credit Agreement, dated as of April 28, 2000, by and among
Orion Power MidWest, L.P., Bank of America, N.A., Goldman
Sachs Credit Partners L.P., Paribas, Deutsche Bank
Securities Inc. and the other financial institutions who are
signatories to the agreement.
10.3** Credit Agreement, dated as of July 27, 2000, by and among
Orion Power Holdings, Inc., Fleet National Bank, Union Bank
of California, N.A. and the other financial institutions who
are signatories to the agreement.
10.4** Asset Purchase Agreement, dated as of March 2, 1999, between
Astoria Generating Company, L.P. and Consolidated Edison
Company of New York, Inc., relating to the acquisition of
the assets located in New York City.
</TABLE>
II-3
<PAGE> 132
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.5** Asset Purchase Agreement, dated December 2, 1998, between
Erie Boulevard Hydropower, L.P. and Niagara Mohawk Power
Generating Company, L.P., relating to the acquisition of the
hydroelectric assets.
10.6** Asset Purchase Agreement, dated as of September 24, 1999
between the Company, Duquesne Light Company, First Energy
Corporation and the other parties named therein.
10.7** Asset Purchase Agreement, dated as of June 23, 1998, between
Carr Street Generating, L.P. and East Syracuse Generating
Company, relating to the acquisition of the Carr Street
Generating Station.
10.8** Transition Capacity Agreement, dated as of July 1, 1999,
between Astoria Generating Company, L.P. and Consolidated
Edison Company of New York, Inc.
10.9** Provider of Last Resort Agreement, dated as of September 24,
1999, between Duquesne Light Company and Orion Power
Holdings, Inc.
10.10** Transition Power Purchase Agreement, dated as of February 4,
1999, between Niagara Mohawk Power Corporation and Erie
Boulevard Hydropower, L.P.
10.11** Capacity Sale and Tolling Agreement, dated as of November
19, 1998, between Carr Street Generating Station, L.P. and
Constellation Power Source, Inc.
10.12** Strategic Alliance Agreement, dated as of March 10, 1998,
between Orion Power Holdings, Inc. and Constellation Power
Source, Inc.
10.13** Non-Competition Agreement, dated as of March 10,1998,
between Orion Power Holdings, Inc., Baltimore Gas and
Electric Company and Constellation Power, Inc.
10.14** Non-Competition Agreement, dated as of November 5, 1999,
between Orion Power Holdings, Inc. and Mitsubishi
Corporation.
10.15** Non-Competition Agreement, dated as of November 5, 1999,
between Orion Power Holdings, Inc. and Tokyo Electric Power
Company International B.V.
10.16 Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and Jack A. Fusco.
10.17 Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and Scott B. Helm.
10.18 Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and W. Thaddeus Miller.
10.19 Form of Employment Agreement between Orion Power Holdings,
Inc. and E. Thomas Webb.
10.20** Third Amended and Restated Stockholders' Agreement, dated as
of April 26, 2000, by and among Orion Power Holdings, Inc.,
GS Capital Partners II, L.P. (and certain affiliates),
Constellation Enterprises, Inc. (and certain affiliates),
certain affiliates of Mitsubishi Corporation and Tokyo
Electric Power Company International B.V.
10.21** Agency Agreement, dated as of April 28, 2000, by and between
Orion Power Midwest, L.P., Orion Power Holdings, Inc. and
Constellation Power Source, Inc.
10.22** Investor Rights Agreement dated as of April 5, 2000 between
Orion Power Holdings, Inc., Frederic V. Salerno and the
existing stockholders named therein.
10.23** Agreement dated as of April 5, 2000 between Orion Powers
Holdings, Inc. and Frederic V. Salerno.
10.24** Stock Purchase Agreement dated as of April 26, 2000 between
Orion Power Holdings, Inc. and Constellation Operating
Services, Inc.
10.25** Stock Purchase Agreement dated as of September 29, 2000
between Columbia Energy Group and Orion Power Holdings, Inc.
</TABLE>
II-4
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.26** Gas Tolling Agreement dated as of September 21, 2000 between
Orion Power Holdings, Inc. and Constellation Power Source,
Inc.
21.1** Subsidiaries Schedule.
23.1** Consent of Stroock & Stroock & Lavan LLP (included in
Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1** Power of Attorney (included in signature page).
27.1** Financial Data Schedule as of December 31, 1999.
27.2 Financial Data Schedule as of June 30, 2000.
</TABLE>
---------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules.
None.
All other financial statement schedules have been omitted because they are
not required, not applicable or the information to be included in the financial
statement schedules is included in the Consolidated Financial Statements or the
notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Baltimore, State of Maryland, on October 27, 2000.
ORION POWER HOLDINGS, INC.
By: /s/ JACK A. FUSCO
------------------------------------
Jack A. Fusco
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the registration statement has been signed by the following
persons in the capacities indicated below and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JACK A. FUSCO Chief Executive Officer, President October 27, 2000
---------------------------------- and Director (Principal
Jack A. Fusco Executive Officer)
/s/ SCOTT B. HELM Executive Vice President and Chief October 27, 2000
---------------------------------- Financial Officer (Principal
Scott B. Helm Financial and Accounting
Officer)
* Chairman of the Board of Directors
----------------------------------
Frederic V. Salerno
* Director
----------------------------------
Richard A. Friedman
* Director
----------------------------------
Tsutomu Kajita
* Director
----------------------------------
Douglas F. Londal
* Director
----------------------------------
Terence M. O'Toole
*By: /s/ W. THADDEUS MILLER
-----------------------------
W. Thaddeus Miller
As Attorney-In-Fact
Date: October 27, 2000
Director
----------------------------------
Edward A. Crooke
</TABLE>
II-6
<PAGE> 135
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation, as amended.
3.2** Bylaws, as amended.
4.1** Indenture, dated as of April 27, 2000 between Orion Power
Holdings, Inc. and Wilmington Trust Company.
4.2** Amended and Restated Registration Rights Agreement, dated
April 26, 2000, by and among Orion Power Holdings, Inc., GS
Capital Partners II, L.P. (and certain affiliates),
Constellation Enterprises, Inc., Constellation Operating
Services, Inc., certain affiliates of Mitsubishi Corporation
and Tokyo Electric Power Company International B.V.
4.3** Form of Rights Agreement between Orion Power Holdings, Inc.
and LaSalle Bank National Association, as Rights Agent.
4.4** Exchange and Registration Rights Agreement dated as of April
27, 2000 by and among Orion Power Holdings, Inc. and the
purchasers of the 12% senior notes due 2010.
5.1** Opinion of Stroock & Stroock & Lavan LLP.
10.1** Credit Agreement, dated as of July 28, 1999, by and among
Orion Power New York, L.P., Bank of America Securities LLC,
Paribas, and the other financial institutions who are
signatories to the agreement.
10.2** Credit Agreement, dated as of April 28, 2000, by and among
Orion Power Midwest, L.P., Bank of America, N.A., Goldman
Sachs Credit Partners L.P., Paribas, Deutsche Bank
Securities Inc. and the other financial institutions who are
signatories to the agreement.
10.3** Credit Agreement, dated as of July 27, 2000, by and among
Orion Power Holdings, Inc., Fleet National Bank, Union Bank
of California, N.A. and the other financial institutions who
are signatories to the agreement.
10.4** Asset Purchase Agreement, dated as of March 2, 1999, between
Astoria Generating Company, L.P. and Consolidated Edison
Company of New York, Inc., relating to the acquisition of
the assets located in New York City.
10.5** Asset Purchase Agreement, dated December 2, 1998, between
Erie Boulevard Hydropower, L.P. and Niagara Mohawk Power
Generating Company, L.P., relating to the acquisition of the
Hydro Assets.
10.6** Asset Purchase Agreement, dated as of September 24, 1999
between the Company, Duquesne Light Company, First Energy
Corporation and the other parties named therein.
10.7** Asset Purchase Agreement, dated as of June 23, 1998, between
Carr Street Generating, L.P. and East Syracuse Generating
Company, relating to the acquisition of the Carr Street
Generating Station.
10.8** Transition Capacity Agreement, dated as of July 1, 1999,
between Astoria Generating Company, L.P. and Consolidated
Edison Company of New York, Inc.
10.9** Provider of Last Resort Agreement, dated as of September 24,
1999, between Duquesne Light Company and Orion Power
Holdings, Inc.
10.10** Transition Power Purchase Agreement, dated as of February 4,
1999, between Niagara Mohawk Power Corporation and Erie
Boulevard Hydropower, L.P.
10.11** Capacity Sale and Tolling Agreement, dated as of November
19, 1998, between Carr Street Generating Station, L.P. and
Constellation Power Source, Inc.
10.12** Strategic Alliance Agreement, dated as of March 10, 1998,
between Orion Power Holdings, Inc. and Constellation Power
Source, Inc.
10.13** Non-Competition Agreement, dated as of March 10,1998,
between Orion Power Holdings, Inc., Baltimore Gas and
Electric Company and Constellation Power, Inc.
</TABLE>
<PAGE> 136
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.14** Non-Competition Agreement, dated as of November 5, 1999,
between Orion Power Holdings, Inc. and Mitsubishi
Corporation.
10.15** Non-Competition Agreement, dated as of November 5, 1999,
between Orion Power Holdings, Inc. and Tokyo Electric Power
Company International B.V.
10.16 Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and Jack A. Fusco.
10.17 Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and Scott B. Helm.
10.18 Form of Amended and Restated Employment Agreement between
Orion Power Holdings, Inc. and W. Thaddeus Miller.
10.19 Form of Employment Agreement between Orion Power Holdings,
Inc. and E. Thomas Webb.
10.20** Third Amended and Restated Stockholders' Agreement, dated as
of April 26, 2000, by and among Orion Power Holdings, Inc.,
GS Capital Partners II, L.P. (and certain affiliates),
Constellation Enterprises, Inc. (and certain affiliates),
certain affiliates of Mitsubishi Corporation and Tokyo
Electric Power Company International B.V.
10.21** Agency Agreement, dated as of April 28, 2000, by and between
Orion Power Midwest, L.P., Orion Power Holdings, Inc. and
Constellation Power Source, Inc.
10.22** Investor Rights Agreement dated as of April 5, 2000 between
Orion Power Holdings, Inc., Frederic V. Salerno and the
existing stockholders named therein.
10.23** Agreement dated as of April 5, 2000 between Orion Powers
Holdings, Inc. and Frederic V. Salerno.
10.24** Stock Purchase Agreement dated as of April 26, 2000 between
Orion Power Holdings, Inc. and Constellation Operating
Services, Inc.
10.25** Stock Purchase Agreement dated as of September 29, 2000
between Columbia Energy Group and Orion Power Holdings, Inc.
10.26** Gas Tolling Agreement dated as of September 21, 2000 between
Orion Power Holdings, Inc. and Constellation Power Source,
Inc.
21.1** Subsidiaries Schedule.
23.1** Consent of Stroock & Stroock & Lavan LLP (included in
Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1** Power of Attorney (included in signature page).
27.1** Financial Data Schedule as of December 31, 1999.
27.2 Financial Data Schedule as of June 30, 2000.
</TABLE>
---------------
* To be filed by amendment.
** Previously filed.
