SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended October 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-13572
THERMO ECOTEK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3072335
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
245 Winter Street
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of October 29, 1999, was approximately $15,823,000.
As of October 29, 1999, the Registrant had 35,967,902 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended October 2, 1999, are incorporated by reference into Parts I and II.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Thermo Ecotek Corporation (the Company or the Registrant) is an
environmental company that operates in two segments: Energy and Biopesticides.
The Energy segment operates independent electric power-generation facilities
through joint ventures, limited partnerships, or wholly owned subsidiaries (the
Operating Companies), as well as a natural gas business (Star Natural Gas).
Until May 1999, the Energy segment also operated a subbituminous
coal-beneficiation facility (the K-Fuel Facility). The Biopesticides segment
manufactures and sells naturally derived pesticides through the Company's
majority-owned subsidiary, Thermo Trilogy Corporation.
Initially, the Company designed, developed, and acted as general
contractor for the construction of cogeneration plants fueled by natural gas and
diesel. These turnkey facilities were generally sold to third-party operators
upon completion and had a total generating capacity of approximately 60
megawatts. In the mid-1980s, the Company began developing biomass-fueled power
plants to take advantage of a favorable regulatory environment and attractive
power-sales agreements. Biomass plants use environmentally responsible fuels,
including wood and agricultural wastes. The Company currently operates seven
biomass facilities in the U.S. with a total electric generating capacity of 140
megawatts.
While the Company's U.S. biomass energy business is expected to continue
to generate revenues for the foreseeable future, the Company expects the
aggregate revenues and profitability associated with this business to decline
significantly beginning in fiscal 2000 due to the expiration or termination of
power-sales agreements at the biomass facilities. In anticipation of this
decline, the Company has explored other options for its biomass facilities,
including disposal or repowering. Such efforts will continue in fiscal 2000. In
addition, within the next few years, the Company expects a substantial portion
of its revenues to be derived from other business ventures such as repowering,
natural gas gathering and storage, and/or biopesticides. A major portion of the
Company's efforts will be focused on developing and acquiring new power
projects, including repowering existing power plants and natural gas gathering
and storage projects.
In May 1999, the Company entered into an agreement to terminate the
power-sales agreement for its Delano I and Delano II facilities in California,
effective December 31, 1999. The Company recorded a charge of $51.0 million as a
result of entering this agreement. In September 1999, the Company entered into
an agreement to terminate the power-sales agreement for its Gorbell facility in
Maine. The Company recorded nonrecurring income of $13.5 million as a result of
entering this agreement.
In January 1998, the Company, through a wholly owned subsidiary's
participation in a joint venture, indirectly acquired a majority interest in the
assets of a 12-megawatt energy center near Tabor, Czech Republic, along with the
business of five auxiliary boilers in the town of Pribram, Czech Republic.
During fiscal 1999*, the Company completed an expansion of the facility to
50-megawatt capacity.
In September 1999, the Company, through a wholly owned subsidiary's
participation in a joint venture, acquired a 58-megawatt energy center in
Premnitz, Germany, for $4.5 million, including the assumption of debt. The
Company is exploring the possibility of expanding the capacity of the facility.
During fiscal 1998, the Company established its Star Natural Gas
subsidiary in Dallas, Texas, to pursue opportunities in the natural gas
gathering, processing, storage, and marketing business. In May 1999, Star
acquired one gas gathering and two gas processing plants (the gas facilities)
for $8.6 million in cash and future contingent payments based on the performance
of the gas facilities.
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* References to fiscal 1999, 1998, and 1997 herein are for the years ended
October 2, 1999, October 3, 1998, and September 27, 1997.
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In August 1995, the Company, through two wholly owned subsidiaries,
entered into a Limited Partnership Agreement with KFx Wyoming, Inc., a
subsidiary of KFx, Inc., (the K-Fuel Partnership) to develop, construct, and
operate a subbituminous coal-beneficiation plant to be constructed near
Gillette, Wyoming. The K-Fuel Partnership was granted, in exchange for certain
future contingent royalty payments, a nonexclusive right and license to use
certain patented clean coal technology to create a low-moisture, high-energy
fuel with reduced sulfur that will help coal-burning utilities meet the SO(2)
emission restrictions contained in the Clean Air Act through fuel switching or
blending. The K-Fuel Partnership procured a 24-acre site for construction of the
plant and began construction in August 1995 under a third-party, turnkey
construction contract. In return for a 95% equity interest in the K-Fuel
Partnership, the Company provided approximately $68 million for the design,
construction, and operation of the plant. In May 1999, following significant
investments of resources in attempts to correct operational problems that arose
during construction, the Company made a decision to cease further efforts and
hold the K-Fuel Facility for sale. As a result, the Company recorded
restructuring charges totaling $68.0 million. See Note 10 to Consolidated
Financial Statements in the Registrant's 1999 Annual Report to Shareholders,
which information is incorporated herein by reference.
Through its Thermo Trilogy subsidiary, the Company develops, manufactures,
and markets environmentally friendly products used for pest control. Derived
from naturally occurring microorganisms, biopesticides safely and effectively
control insects, diseases, and mites on numerous crops. In fiscal 1998, Thermo
Trilogy issued shares of its common stock in private placements for net proceeds
of $14.9 million.
The Company operated as a division of Thermo Electron Corporation's Energy
Systems Division from 1979 until its incorporation as Thermo Energy Systems
Corporation in November 1989. At October 2, 1999, Thermo Electron owned
approximately 94% of the Company's outstanding common stock, giving Thermo
Electron the power to elect all Directors of the Company. Thermo Electron is a
leading provider of analytical and monitoring instruments, used in everything
from life sciences research to food and beverage production, and a recognized
leader in heart-assist devices, respiratory-care equipment, neurodiagnostics,
and mammography systems. In addition, Thermo Electron develops and operates
power plants, offers a range of environmental consulting and resource management
services, is a major producer of paper-recycling equipment, provides
water-clarification and fiber-recovery products and services, and conducts a
broad range of advanced technology R&D.
During fiscal 1999, Thermo Electron expanded its proposed reorganization
plan involving certain of Thermo Electron's subsidiaries, including the Company.
Under this plan, the Company would be merged into Thermo Electron. As a result,
the Company would become a wholly owned subsidiary of Thermo Electron. The
public shareholders of the Company would receive common stock of Thermo Electron
in exchange for their shares. This proposal is subject to numerous conditions,
as outlined in Note 18 to Consolidated Financial Statements in the Registrant's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on Form
10-K. For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
"seeks," "estimates," and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the results of the Company to differ materially from those indicated by
such forward-looking statements, including those detailed under the heading
"Forward-looking Statements" in the Registrant's Fiscal 1999 Annual Report to
Shareholders, which statements are incorporated herein by reference.
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(b) Financial Information About Industry Segments
Financial Information concerning the Company's industry segments is
summarized in Note 14 to Consolidated Financial Statements in the Registrant's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference.
(c) Description of Business
(i) Principal Products and Services
Energy
Operating Projects
The following table summarizes certain information relating to the
Company's projects currently in operation. With the exception of the Mendota
plant, at the end of each leased facility's applicable lease term, the Company
has the option to renew the lease for a specified period or purchase the
facility at fair market value. The Mendota plant may be purchased for a fixed
amount on December 31, 1999, the end of its lease term. The Company has notified
the lessor of its intent to purchase the facility for $4.8 million.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Project Location Plant Size Ownership Inservice Date Lease/Own
(net mw) of Operating
Company
- ------------------- ----------------- ----------------- ----------------- -------------------- ------------
Hemphill New Hampshire 13.6 67% December 1987 Lease
Gorbell Maine 13.6 100% December 1987 Own
Whitefield New Hampshire 13.6 100% July 1988 Own
Mendota California 25 100% May 1990 Lease
Woodland California 25 100% May 1990 Lease
Delano I California 27 100% January 1991 Own
Delano II California 22 100% January 1994 Own
Tabor Czech Republic 50 87% January 1998* Own
Premnitz Germany 58 65% September 1999* Own
*Represents date facility was acquired by the Company.
Hemphill. The Hemphill facility is a 13.6-megawatt wood waste plant
located on a 50-acre site in Springfield, New Hampshire. The Operating Company
is a joint venture in which the Company has a 67% interest. The generating
equipment at the Hemphill facility is owned by BankBoston Leasing Services Inc.,
which leases the facility to the Operating Company through March 2003, with an
option to renew or purchase the facility at fair market value. Public Service of
New Hampshire (PSNH) purchases power produced by the plant at a fixed rate under
a rate order issued by the New Hampshire Public Utility Commission (NHPUC)
expiring in 2006. The Operating Company purchases wood waste pursuant to two
contracts with affiliates of the Company's joint venture partner, each of which
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expires in 2003. The contracts provide for the supply of wood waste to the
Operating Company at market prices. In 1990, a plan of reorganization (the Plan)
for PSNH was approved by the U.S. Bankruptcy Court for the District of New
Hampshire. Pursuant to the Plan, Northeast Utilities (NU) acquired the assets of
PSNH. An agreement between NU and the State of New Hampshire contains language
to the effect that PSNH will seek to renegotiate some of the terms of certain
rate orders with small power producers, including the Whitefield (discussed
below) and Hemphill Operating Companies, and that the state will support PSNH in
such efforts. PSNH reached agreements in principle with these two Operating
Companies to settle the renegotiation of their rate orders. The settlement
agreements were subject to the approval of the NHPUC on terms acceptable to both
PSNH and the Operating Companies. The principal terms of the agreement generally
called for the two Operating Companies to reduce the amount of power sold
annually to PSNH to 70% of the plants' capacities, and to reduce the price per
kilowatt paid by PSNH to $0.06 per kilowatt hour, escalating three percent per
year for the remainder of the term of the original, applicable rate order. In
consideration of these reductions, the Operating Companies would receive certain
cash settlement payments, paid over several years. In May 1998, the NHPUC issued
a written ruling rejecting these settlement agreements. Certain members of the
N.H. Legislature filed a motion requesting that the NHPUC reconsider its ruling
and instead provide that the settlement agreements be left open. The NHPUC
approved this request in July 1998. No further action has occurred on the
settlement agreements. Rejection of the Company's rate orders would result in a
claim for damages by the Company and could be the subject of lengthy litigation.
In January 1997, NU disclosed in a filing with the Securities and Exchange
Commission that if a proposed deregulation plan for the New Hampshire electric
utility industry were adopted, PSNH could default on certain financial
obligations and seek bankruptcy protection. In February 1997, the NHPUC voted to
adopt a deregulation plan, and in March 1997, PSNH filed suit to block the plan.
In March 1997, the federal district court issued a temporary restraining order
which prohibits the NHPUC from implementing the deregulation plan as it affects
PSNH, pending a determination by the court as to whether PSNH's claim could then
be heard by the court. In April 1997, the court ruled that it could hear the
case and ordered that the restraining order continue indefinitely pending the
outcome of the suit. In addition, in March 1997, the Company, along with a group
of other biomass power producers, filed a motion with the NHPUC seeking
clarification of the NHPUC's proposed deregulation plan regarding several
issues, including purchase requirements and payment of current rate order prices
with respect to the Company's energy output. In March 1998, the NHPUC addressed
the Operating Companies' motion and stated it was not the NHPUC's intent in the
February 1997 order to impair any of the Operating Companies' legal rights in
their rate orders. In August 1999, PSNH and the State reached a comprehensive
settlement agreement which was filed with the NHPUC. The NHPUC has stayed its
dockets concerning the deregulation plan pending review of this settlement
agreement. The federal district court lawsuit has also been stayed pending
settlement agreement review. If the NHPUC approves the settlement agreement as
filed, then the NHPUC deregulation plan docket, other related dockets, and the
federal district court lawsuits will be dismissed. The PSNH/State settlement
agreement purports not to make any changes in the Operating Companies' rate
orders. It does provide for PSNH to resell the power from the Operating
Companies to assist in mitigating the cost of that power. No assurances may be
made as to the outcome of this matter. An unfavorable resolution of this matter,
including the bankruptcy of PSNH, could have a material adverse effect on the
Company's results of operations and financial position.
Gorbell. The Gorbell facility is a 13.6-megawatt wood waste plant located
on a 56-acre site in Athens, Maine. The design of the facility is substantially
similar to the Hemphill plant. The Operating Company is a joint venture in which
the Company had a 60% interest until September 1999 and 100% thereafter. In
September 1999, the Company entered into an agreement to terminate the
facility's power-sales agreement. Under the terms of the agreement, the Company
received a payment in lieu of operating under the original agreement. The
Company obtained ownership of the Gorbell facility in this transaction and is
currently operating it under a short-term power-sales agreement, expiring
December 31, 1999, although it has not determined if it will be economically
beneficial to operate the plant after that time. See Note 10 to the Registrant's
Annual Report to Shareholders, which information is incorporated herein by
reference.
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Whitefield. The Whitefield facility is a 13.6-megawatt wood waste plant
located on a 46-acre site in Whitefield, New Hampshire. The power produced by
the plant is sold to PSNH at established rates under a power-sales agreement
that expires in 2005. This plant is also subject to a dispute with PSNH (See
"Hemphill" above). Fuel is purchased at a fixed price pursuant to an agreement
expiring in 2001. The Whitefield facility was originally owned by Chrysler
Capital Corp., and leased to the Operating Company. The Company purchased the
Whitefield facility in August 1992.
Mendota. The Mendota facility is a 25-megawatt agricultural and urban wood
waste plant located on an 80-acre site in Mendota, California. The Operating
Company is a limited partnership, 100% of which is owned by the Company. The
generating equipment is owned by Chrysler Capital Corp., which leases the
equipment to the Operating Company through December 1999, at which point the
Company intends to exercise its option to purchase the equipment for $4.8
million. In June 1995, the Operating Company amended the facility lease which
resulted in the agreement being treated as a capital lease. The power generated
by the plant is sold to Pacific Gas & Electric (PG&E) under a standard offer #4
(SO#4) contract expiring in 2014. Under the contract, PG&E was required to
purchase the plant's electricity at predetermined prices for a fixed period, and
at a price equal to PG&E's avoided cost for the remainder of the contract.
Payments for capacity are fixed throughout the life of the contract. PG&E
stopped paying for power purchased under this contract at fixed cost rates in
July 1999, although the Company believes that this change from fixed cost rates
occurred six months earlier than the power-sales agreement provided. The Company
is considering its alternatives concerning this dispute. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference into Item 7 herein. Approximately 9% of the fuel for
the plant is purchased pursuant to long-term contracts terminating between
calendar 1999 and 2002, under which prices increase in accordance with
prescribed schedules or market-based indices. The remainder of the plant's fuel
is purchased by the Operating Company on the spot market.
The power-sales agreements between the Mendota and Woodland (discussed
below) Operating Companies and PG&E allowed PG&E to curtail the quantity of
power purchased under these agreements by up to 2,000 hours of generating
capacity annually. PG&E normally exercised its curtailment rights during periods
when cheaper hydroelectric power was available, which generally occurred
following periods of heavy rain or snow. Curtailment reduces the power payment
received by the Operating Companies and, therefore, has an adverse effect on the
financial results of those Operating Companies. In November 1997, the Company
renegotiated PG&E's curtailment rights limiting PG&E to 1,000 hours per calendar
year effective January 1, 1998. The limitations on PG&E's curtailment rights
ended at the same time as the fixed-price portion of its power-sales agreements
with Mendota and Woodland. The Company experienced approximately 1,030, 1,560,
and 1,720 hours of aggregate utility-imposed curtailments at the two plants
during fiscal 1999, 1998, and 1997, respectively.
Woodland. The Woodland facility is a 25-megawatt agricultural and urban
wood waste plant located on a 38-acre site in Woodland, California. The design
of the plant is essentially the same as the Mendota plant. The Operating Company
is a limited partnership, 100% of which is owned by the Company. The generating
equipment is owned by BankBoston Leasing Services Inc., which leases the
equipment to the Operating Company through March 2010, with an option to renew
or purchase the equipment for fair value. The electricity generated by the plant
is sold to PG&E under an SO#4 contract expiring in 2014, at predetermined prices
for a fixed period. Payments for capacity are fixed throughout the life of the
contract. PG&E stopped paying for power purchased under this contract at fixed
cost rates in August 1999, although the Company believes that this change from
fixed cost rates occurred six months earlier than the power-sales agreement
provided (See "Mendota" above). Approximately 31% of the fuel for the plant is
purchased pursuant to long-term contracts terminating in 2000, under which
prices increase in accordance with prescribed schedules or market-based indices.
The remaining fuel is purchased by the Operating Company on the spot market.
The Operating Company has conditions in its nonrecourse lease agreement
that require the funding of a "power reserve" in years prior to 2000, based on
projections of operating cash flow shortfalls in 2000 and thereafter. The power
reserve represents funds available to make lease payments in the event that
revenues are not sufficient after the plant converts to avoided cost rates in
March 2000. This funding requirement will significantly limit future profit
distributions the Operating Company may make to the Company. Accordingly,
beginning in the first quarter of fiscal
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1997, the Company has expensed the funding of reserves required under Woodland's
nonrecourse lease agreement to cover projected shortfalls in lease payments
beginning in 2000. Consequently, the results of the Woodland plant were
approximately breakeven in fiscal 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" incorporated by
reference into Item 7 herein.
Delano I. The Delano I facility is a 27-megawatt agricultural and urban
wood waste plant located on a 124-acre site in Delano, California. Southern
California Edison (SCE) purchases power under an SO#4 contract which was to have
expired in 2020. Under the contract energy prices were predetermined until
September 2000, and then paid at avoided cost for the remainder of the contract.
Approximately 6% of the fuel supply is purchased pursuant to long-term contracts
with terms expiring at various dates through 2004 under which prices increase in
accordance with prescribed schedules or market-based indices. The remaining fuel
is purchased by the Operating Company on the spot market. The Delano I
generating equipment was originally owned by Westinghouse Credit Corporation and
leased to the Company. In December 1993, the Company purchased Delano I for
$21.5 million in cash and the assumption of $66.9 million original principal
amount of nonrecourse, long-term tax-exempt bonds issued by the California
Pollution Control Finance Authority (CPCFA). As of October 2, 1999, $27.2
million principal amount was outstanding on these bonds. These bonds effectively
bear interest at a rate of 8.3%, with principal and interest payable
semi-annually until maturity in 2000. The cash portion of the purchase price was
funded by borrowings from Thermo Electron.
Delano II. In January 1994, the Delano Operating Company commenced
operation of phase II of the Delano project, a 22-megawatt agricultural and
urban wood waste plant located on the same site as Delano I. The facility is
wholly owned by the Delano Operating Company. Power generated by the Delano II
facility is also purchased by SCE under the Delano I contract described above,
under which prices were to have been fixed until September 2000. Fuel is also
purchased pursuant to the same contracts as Delano I. The Delano II facility is
owned by the Company and is subject to $66 million principal amount of
nonrecourse, long-term tax-exempt bonds issued by CPCFA. As of October 2, 1999,
$6.5 million principal amount was outstanding on these bonds. These bonds
effectively bear interest at a rate of 6%, with principal and interest payable
semi-annually until maturity in 2000.
In May 1999, the Company entered into an agreement to terminate the Delano
facilities' power-sales agreement effective December 31, 1999. The terms of the
agreement call for the Company to receive payments in lieu of operating under
the current agreement. As a result of entering into the new agreement, the
Company recorded a charge of $51.0 million. See Note 10 to Consolidated
Financial Statements in the Registrant's Fiscal 1999 Annual Report to
Shareholders, which information is incorporated herein by reference. The Company
is considering its options for the Delano facilities, including continuing
operations at the plant or disposal.
Czech Republic. In January 1996, the Company, through a wholly owned
subsidiary, signed a joint development agreement with a Czech power-development
company, EMD Praha Spol s.r.o. The Company owns a 65% interest in this joint
venture. The initial focus is on expansion and environmental retrofit of
existing Czech energy centers. To support this effort, the Company has opened an
office in Prague. The development of projects through the joint venture will be
subject to a number of conditions including negotiation of definitive agreements
for power sale, fuel supply, construction, and other agreements with third
parties. In January 1998, the Company entered into a new joint venture
arrangement, superseding the original arrangement, and in connection therewith,
indirectly acquired a majority interest in two Czech energy centers near the
towns of Tabor and Pribram. At the time of acquisition, the Tabor facility
provided 12 megawatts of electrical output and 165 tons per hour of thermal
production. In fiscal 1999, the Company completed an expansion and modernization
of the energy center to provide approximately 50 megawatts of electrical output
to be sold to the local power distribution company and an adjacent industrial
customer. At the Pribram facility, the joint venture has purchased five
auxiliary boilers that provide thermal service during peak hours. In addition,
the Company is exploring other projects relating to expanding and retrofitting
existing Czech energy centers through the joint venture.
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Germany. In September 1999, the Company, through a wholly owned
subsidiary's participation in a joint venture, acquired a heating plant and
steam distribution system in Premnitz, Germany. The Company owns a 65% interest
in this joint venture. The Company is researching opportunities to modernize the
facility and expand it from its current 58-megawatt capacity.
Projects in Development
The State of California's Public Utility Commission (CPUC) mandated the
restructuring of California's electric utility industry beginning in March 1998.
Following that mandate, the electric power market in California became more
competitive, allowing the Company to acquire two power-generation facilities and
related sites in California for approximately $9.5 million in cash and the
assumption of certain liabilities. These natural gas-fired facilities, built in
the 1950s, had been designated "non must run" by the California Independent
System Operator, meaning they were not essential for assuring the reliable
operation of the California power grid. These acquisitions - the 126-megawatt
San Bernadino (Mountainview) facility and the 154-megawatt Highgrove (Riverside)
facility - pose an opportunity for repowering with new equipment and technology.
The Company operated these facilities from July to September 1999. The Company
has begun development efforts associated with the expansion of operating
capacity at the Mountainview facility. The Company intends to repower and expand
the facility to approximately 1,100-megawatt capacity and expects that this
project will cost approximately $570 million, which the Company expects to
finance principally through nonrecourse debt. Expected completion is in fiscal
2003. No assurance can be given that the Company will successfully complete such
projects on a timely basis or at all. In addition, to sell power from these
facilities, the Company must ensure that it will not be subject to regulation as
a holding company under PUHCA and that all necessary approvals from the Federal
Energy Regulatory Commission (FERC) and/or CPUC are obtained. In fiscal 1998,
the Company obtained Exempt Wholesale Generator status with respect to these
facilities.
In January 1999, the Company received an exclusive opportunity to develop,
construct, and operate a gas turbine, combined-cycle, 210-megawatt
electricity-generating facility from the city of Lake Worth, Florida. The
estimated cost of this project is expected to be $105 million. The city has also
allowed the Company to provide steam to its existing 26.5-megawatt steam
turbine. The facility will be built on the site of a Florida municipal electric
utility, allowing the Company to connect to the region's natural gas and
electricity networks and use the pre-existing steam turbine infrastructure.
The Company had been exploring opportunities in Italy but in fiscal 1999
reached an agreement with a joint venture partner to sell the Company's interest
in projects there to the partner.
During fiscal 1999, the Company, through Star's 90% participation in a
joint venture, began development efforts for a gas storage facility in Adams
County, Colorado. This facility would have an operating capacity of
approximately nine billion cubic feet and is expected to cost approximately $35
million. The Company expects to seek nonrecourse financing to fund this project.
Biopesticides
The Company's Thermo Trilogy subsidiary produces a broad range of
biopesticide products. Products produced by Thermo Trilogy include botanical
extracts from the seed of tropical neem trees, microbial-based pesticides
(fungal-based insecticides and fungicides, bacculovirus, beneficial nematodes,
and Bts), insect pheromone-based products such as traps and lures, and
disease-free sugarcane planting stock. As compared to conventional chemical
pesticides, most of Thermo Trilogy's products are derived from natural origins
with minimal or no toxicity, and are environmentally friendly as they have
minimal or no residue and do not harm beneficial insects. Thermo Trilogy's
products are used primarily by agricultural farmers, consumers, and pest-control
operators and are sold through various distribution channels worldwide.
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Market acceptance of the Company's biopesticide products depends in part
on educating customers on the benefits of the Company's products compared to
conventional chemical pesticides. Although response from customers to date has
been positive, there is no assurance that the Company will be able to obtain
satisfactory levels of market acceptance. Thermo Trilogy's business was
adversely affected in fiscal 1999 by a downturn in agriculture prices and a
related decrease in industry spending.
Regulatory Matters
The Company is subject to energy and environmental laws and regulations at
the federal, state, local, and international levels in connection with the
development, ownership, and operation of its plants. Federal laws and
regulations govern power purchase and sale transactions with regulated utility
companies, the types of fuel that may be used by a plant, the ownership of a
plant, the plant's efficiency, and the type and use of combustion and
pollution-control technology at a plant. State utility regulatory commissions
must establish the rates and, in some instances, other terms and conditions
under which public utilities purchase electric power from nonutility generators.
Under certain circumstances where specific exemptions are otherwise unavailable,
state utility regulatory commissions may have broad jurisdiction over nonutility
electric power plants. Energy-producing projects also are subject to federal,
state, local, and international laws, as well as administrative regulations
governing the emissions and other substances produced by a plant, and
geographical location, zoning, and land use. Further, the Company's natural gas
business activities are subject to regulation at the federal and state level. In
addition, the Company is subject to environmental and other laws and regulations
at the federal, state, and international level regarding the manufacture, use,
and sale of its biopesticide products.
Public Utility Regulatory Policies Act of 1978, as amended (PURPA). The
U.S. market for nonutility generators selling electricity at wholesale rates
developed after the passage of PURPA. Prior to the passage of PURPA, regulated
utilities were the primary producers of electric power. PURPA was passed in the
wake of the energy crises of the 1970s as a means to increase energy efficiency
and foster the development of alternative power-generation technologies. The
1978 enactment of PURPA and the adoption of regulations thereunder by FERC
provided incentives for the development of cogeneration and small
power-production facilities.
A domestic electricity-generating project must be a Qualifying Facility
(QF), in order to take advantage of certain rate and regulatory incentives
provided by PURPA. To qualify as a QF, a plant must be a cogeneration facility
or small power producer (less than 80 megawatts) that burns waste or alternative
fuels, must satisfy certain engineering standards, and an electric utility, an
electric utility holding company, or its subsidiary must not own more than 50%
of the economic interest in the plant. PURPA exempts QFs from the Public Utility
Holding Company Act of 1935 (PUHCA), most provisions of the Federal Power Act
(the FPA) and, except under certain limited circumstances, state laws concerning
rates or financial regulation of electric utilities. The Company believes that
each of the domestic operating plants that the Company currently owns and/or
operates meets the requirements under PURPA necessary for QF status.
PURPA provides two primary benefits to QFs. First, most QFs are relieved
of compliance with certain extensive federal, state, and local regulations that
control the development, financial structure, and operation of any
energy-producing plant and the prices and terms on which energy may be sold by
the plant. Second, FERC's regulations promulgated under PURPA require that
electric utilities purchase electricity generated by QFs at a price based on the
purchasing utility's full "avoided cost." This is defined as the incremental
cost to an electric utility of electric energy or capacity that the utility
would have to generate itself or purchase from another source if it did not have
power available from the QF. FERC regulations also permit QFs and utilities to
negotiate agreements for utility purchases of power at rates lower than the
utility's avoided costs. While all of the Company's existing domestic operating
projects initially had long-term power-sales agreements at rates equal to or
greater than the utilities' current avoided costs, the majority of these
contracts have recently either transitioned to avoided cost rates or have been
terminated. Further, the current practice is for most power-sales agreements to
be awarded at a rate below avoided cost, due to increasing
9
<PAGE>
competition for utility contracts. Moreover, whereas in the 1980s power-sales
agreements were often entered into as a result of negotiations between a
nonutility generator and a utility, increasingly, these agreements are the
subject of competitive bidding, which tends to lower the price that a nonutility
generator may receive for power. Currently, the demand for the construction of
cogeneration plants has significantly diminished in the U.S.; therefore, the
Company does not anticipate entering into any new construction projects of this
type in the near future.
The Company and its operating plants must continue to comply with certain
regulatory requirements in order to maintain QF status; therefore, the Company
endeavors to design its projects, monitor its compliance with applicable
regulations, and choose its customers in a manner that minimizes the risks of
losing QF status for its projects. If an Operating Company were unable to
qualify as a QF or lost its QF status, the facility could be subject to
regulation as a public utility under the FPA and state laws and the Company
could become a public utility holding company by owning or controlling 10% or
more of a facility that would no longer be exempt from PUHCA, unless the
Operating Company qualified as an EWG under the National Energy Policy Act of
1992 (see "National Energy Policy Act" below). A loss of QF status could result
in defaults under the Operating Company leases, power-sales agreements, and
other contracts, which could have a material adverse effect on the Company.
PUHCA. Under the PUHCA, any corporation, partnership, or other legal
entity that directly or indirectly owns, or controls the power to vote, 10% or
more of the outstanding voting securities of a "public utility company," or a
company that is a "holding company" of a public utility company, is subject to
registration with the Securities and Exchange Commission and regulation under
PUHCA, unless eligible for an exemption. PURPA provides that companies that only
own QFs are not public utility holding companies under PUHCA. A holding company
of a public utility company that is subject to registration is required by PUHCA
to limit its utility operations to a single integrated utility system and to
such other businesses as are reasonably incidental or economically necessary or
appropriate to the operation of such integrated public utility system. Approval
by the Securities and Exchange Commission is required for nearly all important
financial and business dealings of a registered holding company.
FPA. The FPA grants FERC exclusive rate-making jurisdiction over wholesale
sales of electricity in interstate commerce. FERC has jurisdiction to establish
rates, to amend, revoke, or modify previously approved rates, and has
jurisdiction over certain corporate-related transactions. These rates may be
based on a cost-of-service approach or may be determined through competitive
bidding or negotiation, or, lastly, may be based on other criteria as long as
FERC finds the rates are "just and reasonable" and in the public interest. While
QFs under PURPA are exempt from the rate-making and certain other provisions of
the FPA, projects not qualifying for QF status would be subject to the FPA and
to FERC rate-making jurisdiction which may limit their flexibility in
negotiations with power purchasers.
National Energy Policy Act. In 1992, Congress enacted comprehensive new
energy policy legislation in its passage of the National Energy Policy Act. This
law is primarily designed to foster competition in energy production and provide
competitive access to the transmission grid. To achieve these goals, the
National Energy Policy Act amended PUHCA to create EWGs, a new class of
generating facility that is exempt from public utility regulation under PUHCA.
An EWG is an entity determined by FERC to be exclusively engaged, directly or
indirectly, in the business of owning and/or operating certain eligible
facilities and selling energy wholesale. EWGs may own generating facilities of
any size, use any fuel source, and may be owned by utilities or nonutilities.
EWGs generally may not own transmission facilities. Domestic EWGs may not make
retail sales of electric energy. The National Energy Policy Act also provides
new authority to FERC to mandate that owners of electric transmission lines
provide wheeling access to nonutility generators at just and reasonable rates.
Previously limited, wheeling rights enhance the ability of nonutility generators
to negotiate transmission access and encourage development of facilities whose
most feasible siting lies outside the purchasing utility's service area. In
1996, FERC enhanced this transmission access by issuing its Order Nos. 888 and
889. Order No. 888 required utilities to provide third parties wholesale open
access to transmission facilities on terms comparable to those that apply when
utilities use their own systems. Order No. 889 required transmission-owning
utilities to adopt procedures for an open access, same time information system
regarding their services. The Company believes that the National Energy Policy
Act could benefit the Company by expanding its ability to own and operate
facilities that do not qualify for QF status. However, this legislation may also
result in increased competition by allowing utilities and others to develop such
facilities without being subject to the constraints of PUHCA.
10
<PAGE>
State Regulation. State public utility commissions (PUCs) have broad
authority to regulate the rates, expenses, financings, and power-sale
transactions of regulated electric utilities. Since a power-sales agreement will
become a part of a utility's expenses (and therefore will be reflected in its
rates), sale agreements with nonutility generators typically fall under the
regulatory purview of PUCs. Recognizing the competitive nature of the
acquisition process, most PUCs will permit utilities to "pass through" expenses
associated with an independent power contract to the utility's retail customers.
Nonutility generators (including EWGs) that are not QFs under PURPA are
considered to be public utilities in many states, and are subject to broad
regulation by PUCs, ranging from the requirement of certificates of public
convenience and necessity to regulation of organizational, accounting,
financial, and other corporate matters. Although FERC generally has exclusive
jurisdiction over the rates charged by such a producer to its wholesale
customers, PUCs have the ability, in practice, to influence the establishment of
such rates by asserting jurisdiction over the purchasing utility's ability to
pass through the resulting cost of the purchased power to its retail customers.
In addition, states may assert jurisdiction over the siting and construction of
facilities, and over the issuance of securities and the sale or other transfer
of assets by these facilities.
Certain states have adopted or are considering legislation that will
remove many of the restrictions that currently limit the ability of nonutility
generators to sell electrical power directly to industrial and commercial
customers. The Company believes that the removal of these restrictions will
result in greater competition and greater opportunities to negotiate power-sale
agreements with industrial and commercial customers and may result in state PUCs
attempting to reduce, or forcing the renegotiation of, fixed rates or contracts.
Although the Company believes that the trend in the power market is toward
deregulation, to date, only a few states have passed any such legislation, and
there can be no assurance that any further similar legislation will ultimately
be passed.
Other Regulatory Matters. Different aspects of the Company's natural gas
business activities are subject to regulation at the federal and state level.
FERC has jurisdiction over, among other things, the construction and operation
of pipeline and related facilities used in the transportation and sale of
natural gas in interstate commerce, including the construction, extension,
expansion, or abandonment of such facilities. FERC also has jurisdiction over
the rates and charges for the transportation of natural gas in interstate
commerce and the sale by a natural gas company of natural gas in interstate
commerce for resale. FERC thus would regulate any interstate transportation
business in which the Company engages. The Company does not anticipate engaging
in interstate pipeline transportation subject to FERC jurisdiction. Natural gas
marketers and brokers generally are not subject to federal or state regulation.
Natural gas storage activities that are in interstate commerce also fall within
FERC's transportation jurisdiction. FERC must grant prior approval for the
construction or abandonment of interstate storage facilities, and also regulates
the rates and charges of interstate storage services. If storage facilities are
not engaged in interstate commerce, FERC has no jurisdiction. Various states do,
however, regulate such intrastate storage activities. Furthermore, FERC
generally does not have jurisdiction over gas gathering activities, and the
Company will attempt to obtain, and maintain, FERC nonjurisdiction status for
any gas gathering activities. However, various states regulate the rates and
terms of service of gas gathering companies.
EPA and Related-state Regulation. No pesticide may be manufactured, used,
or sold without federal and state approvals. Such approvals, called
registrations, must be obtained for each individual product formulation for use
on specific pests for specific crops. Adding new uses, pests, crops, or
formulations requires submission of additional applications or data for
approval.
The U.S. Environmental Protection Agency (EPA) regulates pesticides under
the Federal Insecticide, Fungicide, and Rodenticide Act and implementing EPA
regulations. To obtain a pesticide registration from the EPA, the applicant must
submit extensive field test data evidencing product effectiveness, nontargeted
organism testing, environmental impact studies, residue chemistry, and toxicity
studies on plants and animals. Initial product registrations can take many years
to obtain, and an applicant may incur considerable additional delay and expense
if the EPA requests further testing and data. To promote the development and use
of biopesticides, the EPA has established special guidelines for their
registration which are set out in subdivision M of the EPA's Pesticide
Assessment Guidelines which generally require less time and expense than that
required for synthetic pesticides.
11
<PAGE>
As a part of the pesticide registration process, the applicant must submit
labeling data describing the chemical composition of the pesticide,
concentrations, manufacturer directions for application, pest and crop use, and
cautionary and warning statements to be put on all packaging of the pesticides.
All pesticide packages must contain the approved label and no changes can be
made to the label without EPA approval.
Pesticide registrations must also be obtained from each state where the
pesticide will be sold. Some states, such as California, which represents an
important market for the Company's products, have their own extensive testing
and pesticide registration procedures and may impose additional restrictions on
the use of the pesticide in such state beyond those imposed by the EPA
regulations. Other states simply follow the EPA registration and labeling
guidelines.
Foreign countries may also require extensive testing and data submission
before pesticides can be manufactured or sold in such foreign country. The
relevant regulations vary from country to country and may be stricter and more
difficult and costly to comply with than EPA's regulations. A number of the
Company's products are registered for sale in foreign countries.
The Company's activities may also be subject to regulation under other
state, federal, and foreign government laws and regulations governing employee
and public health and safety, environmental pollution, clean water, disposal of
hazardous wastes, manufacture of chemicals, product liability, food and
agriculture applications, and public disclosure of the use of chemicals.
(ii) New Products
Not applicable.
(iii)Raw Materials
Energy
Fuel and operating supplies purchased by the Company's independent power
projects are either available from a number of different suppliers or from
alternative sources that could be developed without a material adverse effect on
the Company. To date, the Company has experienced no difficulties in obtaining
these materials.
Biopesticides
Thermo Trilogy relies on overseas producers of the raw materials for its
neem-based products and on third parties to manufacture some of its products. In
particular, Thermo Trilogy's sole supplier of neem products is P.J. Margo Pvt.
Ltd., a joint venture in India in which Thermo Trilogy holds a 50% interest,
pursuant to an exclusive supply contract that expires in 2001. To date, Thermo
Trilogy has experienced no difficulties in obtaining these raw materials;
however, there is no assurance that Thermo Trilogy will have an uninterrupted
supply of raw materials or that third-party manufacturers will produce the
products at competitive prices.
(iv) Patents, Licenses, and Trademarks
Biopesticides
The Company has numerous U.S. patents and corresponding foreign patents in
various areas related to process development, fermentation, formulation, or
applications of current commercial products. Additionally, various patent
applications are pending in the U.S. and foreign countries. The Company also
relies on trade secrets and proprietary know-how which it seeks to protect
through confidentiality agreements with employees, collaborators, and
consultants.
12
<PAGE>
The Company's patent portfolio includes several patents related to Bt
technology. The Company has obtained licenses or sublicenses for a number of
patent families in areas related to Bt strain construction and formulation
development. The Company also relies on trade secret protection for its
extensive know-how in quality control.
The Company also has additional patents that have been granted for neem
oil and azadirachtin technologies. The Company also has patent positions
covering nematode and fungi technologies.
The Company has an exclusive license for the fungus PFR-97. Additionally,
the Company has a sublicense agreement for a unique strain of a bacculovirus
from Novartis.
(v) Seasonal Influences
Energy
The Energy segment earns a disproportionately high share of its income in
May through October due to rate structures under the power-sale agreements
relating to its California plants, which provide strong incentives to operate
during this period of high demand. Conversely, the Energy segment historically
has operated at a marginal profit during its second fiscal quarter due to the
rate structure under these agreements.
Biopesticides
The Biopesticide segment currently markets its products predominantly for
use in the northern hemisphere, where the growing season generally runs from
March to October. Therefore, the seasonal nature of agriculture will cause the
Biopesticide segment's product sales to be concentrated during such period and
will result in substantial variations in quarter-to-quarter results.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii)Dependency on a Single Customer
Energy
The Company derived 10% or more of its revenues during the past three
years from its three most significant electric utility customers: PSNH, SCE, and
PG&E. Revenues from these three customers as a percentage of total revenues were
approximately 16%, 30%, and 26%, respectively, in fiscal 1999.
(viii)Backlog
Biopesticides
The Company maintains minimal backlog. Most orders for its biopesticide
products are shipped out of inventory within a short period of time.
(ix) Government Contracts
Not applicable.
13
<PAGE>
(x) Competition
Energy
The worldwide independent power market now consists of numerous companies,
ranging from small startups to multinational industrial companies. In addition,
a number of regulated utilities have created subsidiaries that compete as
nonutility generators. Nonutility generators often specialize in market
"niches," such as a specific technology or fuel (i.e., gas-fired cogeneration,
refuse-to-energy, hydropower, geothermal, wind, solar, wood, or coal) or a
specific region of the country where they believe they have a market advantage.
However, many nonutility generators seek to develop projects powered by the best
fuel available. Many companies in this market have substantially greater
financial, technical, and operational resources than the Company. The Company
competes primarily on the basis of project experience, technical expertise,
capital resources, and power pricing.
Biopesticides
The Company currently has virtually no competition in the neem- and
azadirachtin-based product market in the U.S. In the microbial pesticides market
(Bts, viruses, fungi) the Company has a number of competitors, including major
chemical companies. The pheromone market is fragmented and is comprised of
dozens of small operating companies. The Company has a significant share of the
nematode market. The Company's products compete primarily based on performance,
quality, and price.
(xi) Research and Development
Research and development expenses for the Company were $2,671,000,
$2,398,000, and $1,638,000 in fiscal 1999, 1998, and 1997, respectively.
(xii)Environmental Protection Regulation
The construction and operation of power projects are subject to extensive
federal, state, and local laws and regulations adopted for the protection of
health, safety, and the environment, and to regulate land use. The laws and
regulations applicable to the Company primarily involve discharges and emissions
into the water and air, and the use of water, but can also include wetlands
preservation, endangered species, waste disposal, and noise regulation. These
laws and regulations in many cases require a lengthy and complex process of
obtaining licenses, permits, and approvals from federal, state, and local
agencies. If such laws and regulations are changed and the Company's facilities
are not grandfathered, extensive modifications to project technologies and
facilities could be required.
The Company does not believe that it will be required to make material
capital expenditures to comply with existing environmental regulations.
(xiii)Number of Employees
As of October 2, 1999, the Company employed, directly and through its
Operating Companies and subsidiary, a total of 533 employees. None of the
employees of the Company or the Operating Companies is represented by a labor
union, and the Company considers its relations with its employees to be good.
(d) Financial Information about Exports by Domestic Operations and about
Foreign Operations
Not applicable.
</TABLE>
14
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(e) Executive Officers of the Registrant
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Present Title (Fiscal Year First Became Executive Officer)
------------------ ------ -----------------------------------------------------
Brian D. Holt 50 Chief Executive Officer and President (1994)
Theo Melas-Kyriazi 40 Chief Financial Officer (1999)
Parimal S. Patel 56 Executive Vice President (1989)
Floyd M. Gent 50 Vice President; President, Clean Fuels Division (1994)
John T. Miller 53 Vice President; President, Clean Power Division (1998)
Randall W. Miselis 46 Vice President, Accounting and Administration (1996)
Paul F. Kelleher 57 Chief Accounting Officer (1989)
</TABLE>
All of the Company's executive officers are elected annually by the Board
of Directors and serve until their successors are elected and qualified. All
executive officers, except Messrs. Melas-Kyriazi, Miller, and Miselis have held
comparable positions for at least five years either with the Company or Thermo
Electron. Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company
and Thermo Electron on January 1, 1999. Mr. Melas-Kyriazi joined Thermo Electron
in 1986 as Assistant Treasurer, and became Treasurer in 1988. In 1994, he was
named President and Chief Executive Officer of ThermoSpectra Corporation, a
public subsidiary of Thermo Instrument Systems Inc. In 1998, he became Vice
President of Corporate Strategy for Thermo Electron. Mr. Miller has been a Vice
President of the Company since March 1998. Prior to joining the Company, he
served as President and Chief Executive Officer of Pacific Generation Company
from 1994 to 1998, overseeing its expansion into international generation
projects. From 1990 to 1994, he served as Vice President of Business Development
of Pacific Generation Company, and from 1987 to 1990, he served as its Vice
President of Operations. Mr. Miselis has been Vice President of Accounting and
Administration since January 1996 and has worked for the Company in various
accounting capacities since November 1988. Messrs. Melas-Kyriazi and Kelleher
are full-time employees of Thermo Electron, but devote such time to the affairs
of the Company as the Company's needs reasonably require.
Item 2. Properties
Energy
The Company's corporate headquarters are located in Waltham,
Massachusetts, and consist of approximately 15,000 square feet that are occupied
pursuant to a lease expiring in 2003. The Company also leases office space in
Prague, Czech Republic; Roseville, California; Houston, Texas; and Dallas,
Texas. The Company's other properties consist of the power plants described
under "Operating Projects" and "Projects in Development." The Company owns all
of the land on which the plants are built. The K-Fuel Facility is located on
approximately 80 acres of land inside the rail loop in Fort Union Mine, in
Campbell County, Wyoming, approximately five miles northeast of Gillette,
Wyoming. The K-Fuel Facility is comprised of three buildings totaling
approximately 7,100 square feet.
The Company's California plants are located in areas where there is a risk
of potentially significant earthquake activity. Projects that the Company
develops in the future may also be located in areas where there is earthquake
risk. The Company's earthquake insurance is not sufficient to cover all
potential losses and there can be no assurance that such insurance will continue
to be available on reasonable terms.
Biopesticides
Thermo Trilogy's corporate headquarters are located in Columbia, Maryland,
where it leases 25,000 square feet of space for office, laboratory, and
warehouse use. Thermo Trilogy also leases a 26,000 square foot building, in
which it has built a fermentation/formulation facility, in Decatur, Illinois.
Thermo Trilogy owns an 80,000 square foot fermentation/formulation facility in
Wasco, California. Thermo Trilogy's wholly owned subsidiary in the U.K. leases a
20,000 square foot pheromone trap and lure manufacturing facility.
15
<PAGE>
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information concerning the market and market price for the Registrant's
Common Stock, $.10 par value, and dividend policy is included under the sections
labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's Fiscal 1999 Annual Report to Shareholders and is incorporated
herein by reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's Fiscal 1999 Annual Report to Shareholders and is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1999 Annual Report to Shareholders and is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1999 Annual Report to Shareholders and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements and Supplementary Data
are included in the Registrant's Fiscal 1999 Annual Report to Shareholders and
are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
16
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth below are the names of the directors; their ages; their offices
in the Company, if any; their principal occupation or employment for the past
five years; the length of their tenure as directors; and the names of other
public companies in which such persons hold directorships. Information regarding
their beneficial ownership of the Company's Common Stock; the common stock of
Thermo Electron, a provider of products and services in measurement
instrumentation, biomedical devices, energy, resource recovery, and emerging
technologies; and the common stock of its majority-owned subsidiary, Thermo
Trilogy, is reported in Item 12 - Security Ownership of Certain Beneficial
Owners and Management.
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------------------------
Jerry P. Davis Mr. Davis, 66, has been a director of the Company since its inception in 1989.
He also served as the chairman of the board of the Company from February 1994 to
January 1997, and as the Company's president and chief executive officer from
1989 to February 1994. Mr. Davis was also a vice president of Thermo Electron
from January 1986 to December 1996.
- -----------------------------------------------------------------------------------------------------------
George N. Hatsopoulos Dr. Hatsopoulos, 72, has been a director
of the Company since its inception in 1989. He was the
chairman of the board and chief executive officer of
Thermo Electron from 1956 to June 1, 1999. He also
served as the president of Thermo Electron from 1956 to
January 1997. He currently serves as non-executive
chairman of the board of Thermo Electron. Dr.
Hatsopoulos is also a director of Photoelectron
Corporation, Thermedics Inc., Thermo Electron, Thermo
Fibertek Inc., Thermo Instrument Systems Inc., and
ThermoTrex Corporation.
- -----------------------------------------------------------------------------------------------------------
Brian D. Holt Mr. Holt, 50, has been a director of the Company since January 1995 and president
and chief executive officer of the Company since February 1994. He has been the
chief operating officer, energy and environment, of Thermo Electron since
September 1998. From March 1996 to September 1998, he was a vice president of
Thermo Electron. For more than five years prior to his appointment as an officer
of the Company, he was president and chief executive officer of Pacific
Generation Company, a financier, builder, owner, and operator of independent
power facilities. Mr. Holt is also a director of Thermo TerraTech Inc., The
Randers Killam Group Inc., and ThermoRetec Corporation.
- -----------------------------------------------------------------------------------------------------------
Frank Jungers Mr. Jungers, 73, has been a director of the Company since its inception in 1989
and its chairman of the board since January 1997. He has been a self-employed
consultant on business and energy matters since 1977. He was employed by the
Arabian American Oil Company from 1974 to 1977 as chairman and chief executive
officer. Mr. Jungers is also a director of The AES Corporation, Donaldson,
Lufkin & Jenrette, Thermo Electron, ThermoQuest Corporation, ONIX Systems Inc.,
and Statia Terminals Corp.
- -----------------------------------------------------------------------------------------------------------
William H. Keough Mr. Keough, 62, has been a director of the Company since November 1999. He was
the senior vice president, chief financial officer, and treasurer of the Pioneer
Group, Inc. from 1986 to November 1998. The Pioneer Group Inc. operates various
financial services businesses, including global asset management, mutual fund
distribution and servicing, venture capital investing, and the natural resources
industry.
- -----------------------------------------------------------------------------------------------------------
William A. Rainville Mr. Rainville, 57, has been a director of the Company since November 1995. He
has been president and chief executive officer of Thermo Fibertek, a
majority-owned subsidiary of Thermo Electron that develops and manufactures
equipment and products for the papermaking and paper-recycling industries, since
its inception in 1991. He has been chief operating officer, recycling and
resource recovery systems, of Thermo Electron since September 1998. Prior to
that time, Mr. Rainville had been a senior vice president of Thermo Electron from
March 1993 to September 1998 and a vice president of Thermo Electron from 1986 to
1993. From 1984 to January 1993, Mr. Rainville was the president and chief
executive officer of Thermo Electron Web Systems Inc., a subsidiary of Thermo
Fibertek. Mr. Rainville is also a director of Thermo Fibergen Inc., Thermo
Fibertek, Thermo TerraTech, and ThermoRetec.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Executive Officers
Reference is made to Item 1(e) of this report for information regarding
the Executive Officers of the Company.
Item 11. Executive Compensation
Compensation of Directors
Cash Compensation
Outside directors receive an annual retainer of $4,000 and a fee of $1,000
per day for attending regular meetings of the board of directors and $500 per
day for participating in meetings of the board of directors held by means of
conference telephone and for participating in certain meetings of committees of
the board of directors. Payment of directors' fees is made quarterly. Dr.
Hatsopoulos, Mr. Holt, and Mr. Rainville are all employees of Thermo Electron or
its subsidiaries and do not receive any cash compensation from the Company for
their services as directors. Directors are also reimbursed for out-of-pocket
expenses incurred in attending such meetings.
In November 1999, the board of directors established a special committee
(the Special Committee) for the purpose of evaluating the merits and negotiating
the terms of the proposed transaction with Thermo Electron pursuant to which the
Company would be taken private. Mr. Keough was appointed the sole member of the
Special Committee.
Mr. Keough, as a member of the Special Committee, receives a one-time
retainer of $20,000, a fee of $1,000 per day for attending regular meetings of
the Special Committee, and $500 per day for participating in meetings of the
Special Committee held by means of conference telephone.
Deferred Compensation Plan for Directors
Under the Company's deferred compensation plan for directors (the Deferred
Compensation Plan), a director has the right to defer receipt of his cash fees
until he ceases to serve as a director, dies, or retires from his principal
occupation. In the event of a change in control or proposed change in control of
the Company that is not approved by the board of directors, deferred amounts
become payable immediately. Any of the following is deemed to be a change of
control: (i) the acquisition by any person of 40% or more of the outstanding
common stock or voting securities of Thermo Electron; (ii) the failure of the
Thermo Electron board of directors to include a majority of directors who are
"continuing directors", which term is defined to include directors who were
members of Thermo Electron's board on July 1, 1999, or who subsequent to that
date were nominated or elected by a majority of directors who were "continuing
directors" at the time of such nomination or election; (iii) the consummation of
a merger, consolidation, reorganization, recapitalization, or statutory share
exchange involving Thermo Electron or the sale or other disposition of all or
substantially all of the assets of Thermo Electron unless immediately after such
transaction all holders of Thermo Electron common stock immediately prior to
such transaction own more than 60% of the outstanding voting securities of the
resulting or acquiring corporation in substantially the same proportions as
their ownership immediately prior to such transaction and no person after the
transaction owns 40% or more of the outstanding voting securities of the
resulting or acquiring corporation; or (iv) approval by stockholders of a
complete liquidation or dissolution of Thermo Electron. Amounts deferred
pursuant to the Deferred Compensation Plan are valued at the end of each quarter
as units of the Company's Common Stock. When payable, amounts deferred may be
disbursed solely in shares of Common Stock accumulated under the Deferred
Compensation Plan. A total of 37,500 shares of Common Stock have been reserved
for issuance under the Deferred Compensation Plan. As of October 2, 1999,
deferred units equal to approximately 5,847 full shares of Common Stock were
accumulated for current directors under the Deferred Compensation Plan.
18
<PAGE>
Directors Stock Option Plan
The Company's directors stock option plan (the Directors Plan) provides
for the grant of stock options to purchase shares of Common Stock of the Company
and its majority-owned subsidiaries to outside directors as additional
compensation for their service as directors. Under the Directors Plan, outside
directors are automatically granted options to purchase 1,000 shares of Common
Stock annually. The annual grant is made at the close of business on the date of
each Annual Meeting of the Stockholders of the Company to each outside director
then holding office. Options evidencing annual grants are immediately
exercisable at any time from and after the grant date of the option and prior to
the earliest to occur of (i) the expiration of the option on the third
anniversary of the grant date; (ii) two years after the director ceases to serve
as a director of the Company; or (iii) the date of dissolution or liquidation of
the Company. Shares acquired upon exercise of the options are subject to
repurchase by the Company at the exercise price if the recipient ceases to serve
as a director of the Company or another Thermo Electron company prior to the
first anniversary of the grant date.
The exercise price for options granted under the Directors Plan is the
average of the closing prices of the Common Stock as reported on the American
Stock Exchange (or other principal market on which the Common Stock is then
traded) for the five trading days immediately preceding and including the date
of grant, or, if the shares are not then traded, at the last price per share
paid by third parties in an arms-length transaction prior to the option grant.
As of October 2, 1999, options to purchase 90,200 shares of Common Stock had
been granted and were outstanding under the Directors Plan, 3,000 options had
lapsed, 73,000 options had been exercised, and options to purchase 137,800
shares of Common Stock were reserved and available for grant.
Compensation of the Chairman of the Board
Mr. Jungers was appointed the chairman of the board of the Company in
January 1997. Mr. Jungers is not an employee of the Company or of any other
company affiliated with Thermo Electron. For his service as chairman of the
board, Mr. Jungers receives an additional meeting fee equal to $1,000 per day
for attending regular meetings of the board of directors and $500 per day for
participating in meetings of the board of directors held by means of conference
telephone. He also receives an additional option to purchase 1,000 shares of the
Common Stock at an exercise price equal to the average closing price for the
five days preceding and including the date of grant, which is awarded at the
first regular meeting of the board of directors following the Annual Meeting of
the Stockholders in conjunction with his reappointment as chairman of the board.
Stock Ownership Policies for Directors
The human resources committee of the board of directors (the Committee)
has established a stock holding policy for directors. The stock holding policy
requires each director to hold a minimum of 1,000 shares of Common Stock.
Directors are requested to achieve this ownership level within a three-year
period. The chief executive officer of the Company is required to comply with a
separate stock holding policy established by the Committee, which is described
below.
In addition, the Committee has adopted a policy requiring directors to
hold shares of the Company's Common Stock equal to one-half of their net option
exercises over a period of five years. The net option exercise is determined by
calculating the number of shares acquired upon exercise of a stock option, after
deducting the number of shares that could have been traded to exercise the
option and the number of shares that could have been surrendered to satisfy tax
withholding obligations attributable to the exercise of the option. This policy
is also applicable to executive officers and is described below.
19
<PAGE>
Summary Compensation Table
The following table summarizes compensation during the last three fiscal
years for services to the Company in all capacities, except as otherwise
indicated below, awarded to, earned by, or paid to the Company's chief executive
officer and its four other most highly compensated executive officers who were
employed by the Company as of the end of the fiscal year. These executive
officers are together referred to as the "named executive officers."
The Company is required to appoint certain executive officers and
full-time employees of Thermo Electron as executive officers of the Company, in
accordance with the Thermo Electron Corporate Charter. The compensation for
these executive officers is determined and paid entirely by Thermo Electron. The
time and effort devoted by these individuals to the Company's affairs is
provided to the Company under the Corporate Services Agreement between the
Company and Thermo Electron. See Item 13 Certain Relationships and Related
Transactions. Accordingly, the compensation for these individuals is not
reported in the following table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Summary Compensation Table
- -----------------------------------------------------------------------------------------------------------
Annual Compensation Long-term Compensation All
Fiscal Other
Name and Principal Year Restricted Securities Compensation
Position (4)
Stock
Salary Bonus (1) Award (2) Underlying
Options (3)
- -----------------------------------------------------------------------------------------------------------
Brian D. Holt (5) 1999 $159,115 n/a $58,800 (TCK) -- $ 7,200
Chief Executive Officer 1998 $198,000 $108,000 -- $ 6,429
and President 1997 $182,250 $189,000 60,000(TCK) $ 6,107
40,000(TRIL)
- -----------------------------------------------------------------------------------------------------------
Parimal S. Patel 1999 $173,400 $ 78,000 $21,470 (TMO) 8,000 (TCK) $ 7,200
Executive Vice
President 2,500 (TMO)
1998 $170,000 $ 68,400 2,700 (TCK) $ 6,850
5,300 (TMO)
1997 $167,000 $ 51,500 15,800(TCK) $ 6,993
2,400 (TMO)
2,500 (TRIL)
- -----------------------------------------------------------------------------------------------------------
John T. Miller (6) 1999 $165,000 $ 65,000 $14,313 (TMO) 10,000(TCK) $34,401 (7)
Vice President;
President, Clean Power
Division 1998 $ 76,154 $ 65,000 38,000(TCK) $19,500 (7)
16,300(TMO)
5,000 (TRIL)
- -----------------------------------------------------------------------------------------------------------
Floyd M. Gent 1999 $150,000 $ 56,300 $ 8,588 (TMO)2,700 (TCK) $ 7,550
Vice President;
President, Clean Fuels
Division 1998 $138,700 $ 55,800 600 (TCK) $ 5,847
3,000 (TMO)
1997 $133,000 $ 10,500 100 (TMO) $ 7,359
2,500 (TRIL)
- -----------------------------------------------------------------------------------------------------------
Randall W. Miselis 1999 $110,700 $ 33,200 $ 4,294 (TMO) 400 (TCK) $ 6,710
Vice President, 1998 $100,600 $ 38,400 400 (TCK) $ 7,200
Accounting &
Administration 1997 $ 93,000 $ 29,100 100 (TCK) $ 5,643
2,500 (TRIL)
(1) Beginning with fiscal 1997, the Company changed its compensation practices
to determine bonuses for the named executive officers, other than the chief
executive officer, based on fiscal year performance rather than calendar
year performance. Accordingly, for all named executive officers other than
Mr. Holt, the bonuses for fiscal 1997 represent the prorated bonus paid for
performance during the nine-month period from January 1, 1997, through
September 27, 1997. Due to Mr. Holt's position as chief operating officer,
environmental and energy, of Thermo Electron, his bonus will continue to be
determined and paid based on performance for the calendar year. Mr. Holt's
bonus for 1999 has not been determined as of the date hereof.
20
<PAGE>
(2) In fiscal 1999, Mr. Holt was awarded 5,600 shares of restricted stock of the
Company with a value of $58,800 on the grant date, and Messrs. Patel,
Miller, Gent, and Miselis were granted 1,500, 1,000, 600, and 300 shares,
respectively, of restricted stock of Thermo Electron with a value of
$21,470, $14,313, $8,588, and $4,294, respectively, on the grant date. Mr.
Holt's restricted stock awards vest in their entirety on January 27, 2002.
The restricted stock awarded to Messrs. Patel, Miller, Gent, and Miselis
vest in their entirety on September 22, 2002. Holders of restricted stock
are eligible for dividend payments. At the end of fiscal 1999, Mr. Holt held
5,600 shares of restricted stock with an aggregate value of $51,800 and
Messrs. Patel, Miller, Gent, and Miselis held 1,500, 1,000, 600, and 300
shares, respectively, of restricted stock with an aggregate value of
$20,344, $13,563, $8,138, and $4,069, respectively.
(3) Options granted by the Company are designated in the table as "TCK." In
addition, the named executive officers have also been granted options to
purchase common stock of the Thermo Electron and its majority-owned
subsidiaries from time to time as part of Thermo Electron's stock option
program. Options have been granted during the last three fiscal years in the
following Thermo Electron companies: Thermo Electron (designated in the
table as TMO) and Thermo Trilogy Corporation (designated in the table as
TRIL). Mr. Holt was appointed an officer of Thermo Electron in March 1996
and has been granted options to purchase common stock of Thermo Electron
since that date. These options are not reported in the table as they were
granted as compensation for service in a capacity other than in his capacity
as the chief executive officer of the Company.
(4) Except as indicated in footnote (7) below, represents the amount of matching
contributions made by the individual's employer on behalf of executive
officers participating in the Thermo Electron 401(k) plan.
(5) Mr. Holt was appointed chief executive officer of the Company in February
1994, vice president of Thermo Electron in March 1996, and chief operating
officer, energy and environmental, of Thermo Electron in September 1998. Mr.
Holt has also been responsible for certain operations of Thermo Electron
since the commencement of his employment in February 1994, and a portion of
his annual cash compensation (salary and bonus) has been allocated to and
paid by Thermo Electron in each of the fiscal years reported for the time he
devoted to these responsibilities. The annual cash compensation (salary and
bonus) reported in the table for Mr. Holt represents the amount paid by the
Company for Mr. Holt's services as its chief executive officer. For calendar
1999, 1998, and 1997, approximately 60%, 90%, and 90%, respectively, of Mr.
Holt's salary earned in all capacities throughout the Thermo Electron
organization was paid by the Company for his services as its chief executive
officer. For calendar 1999, 1998, and 1997, approximately 60%, 90%, and 82%,
respectively, of Mr. Holt's total bonus earned in all capacities throughout
the Thermo Electron organization was or will be paid by the Company for his
performance as the Company's chief executive officer. Mr. Holt's bonus is
determined and paid based upon performance for the calendar year.
(6) Mr. Miller was appointed vice president; president, clean power division of
the Company, effective as of March 23, 1998.
(7) In addition to the matching contributions set forth in footnote (4) above,
this amount includes $4,500 of temporary living expenses and $15,000 of
travel and relocation expenses for fiscal 1998 and $13,500 of temporary
living expenses and $20,901 of relocation expenses for fiscal 1999.
21
<PAGE>
Stock Options Granted During Fiscal 1999
The following table sets forth information concerning individual grants of
stock options made during fiscal 1999 to the Company's named executive officers.
It has not been the Company's policy in the past to grant stock appreciation
rights, and no such rights were granted during fiscal 1999.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Option Grants in Fiscal 1999
- ----------------------------------------------------------------------------------------------------------
Potential Realizable
Number of Percent of Value at Assumed
Securities Annual Rates of
Underlying Total Options Exercise Stock Price
Options Granted to Price per Expiration Price Appreciation
Name Granted and Employees in Date for Option Term (2)
Company (1) Fiscal Year Share 5% 10%
- ----------------------------------------------------------------------------------------------------------
Brian D. Holt -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Parimal S. Patel 3,000 (TCK) 3.6% $10.54 12/03/01 $ 4,980 $10,466
5,000 (TCK) 6.0% $10.54 12/03/03 $14,560 $32,174
2,500 (TMO) 0.05% (3) $14.81 09/22/04 $10,230 $22,604
- ----------------------------------------------------------------------------------------------------------
John T. Miller 10,000 (TCK) 12.0% $10.54 12/03/03 $29,120 $64,348
- ----------------------------------------------------------------------------------------------------------
Floyd M. Gent 700 (TCK) 0.8% $10.54 12/03/01 $ 1,160 $ 2,442
2,000 (TCK) 2.4% $10.54 12/03/03 $ 5,820 $12,870
- ----------------------------------------------------------------------------------------------------------
Randall W. Miselis 400 (TCK) 0.5% $10.54 12/03/01 $ 660 $ 1,395
- ----------------------------------------------------------------------------------------------------------
(1) As part of Thermo Electron's stock option program, options have been granted
during fiscal 1999 to the named executive officers to purchase the common
stock of the Company and Thermo Electron. All of the options granted during
the fiscal year are immediately exercisable at the date of grant. In all
cases, the shares acquired upon exercise are subject to repurchase by the
granting company at the exercise price if the optionee ceases to be employed
by such company or any other Thermo Electron company. The granting company
may exercise its repurchase rights within six months after the termination
of the optionee's employment. The repurchase rights generally lapse ratably
over a three- to seven-year period, depending on the option term, which may
vary from three to seven years, provided the optionee continues to be
employed by the granting company or any other Thermo Electron company. The
granting company may permit the holder of options to exercise options and to
satisfy tax withholding obligations by surrendering shares equal in fair
market value to the exercise price or withholding obligation. Please see
footnote (3) under Summary Compensation Table above for the company
abbreviations used in this table.
(2) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5% and
10% compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise price,
but do not include deductions for taxes or other expenses associated with
the exercise. Actual gains, if any, on stock option exercises will depend on
the future performance of the common stock of the applicable corporation,
the optionee's continued employment through the option period, and the date
on which the options are exercised.
(3) These options were granted under stock option plans maintained by Thermo
Electron or its subsidiaries other than the Company as part of Thermo
Electron's compensation program and accordingly are reported as a percentage
of total options granted to employees of Thermo Electron and its
subsidiaries.
22
<PAGE>
Stock Options Exercised During Fiscal 1999 and Fiscal Year-End Option Values
The following table reports certain information regarding stock option
exercises during fiscal 1999 and outstanding stock options held at the end of
fiscal 1999 by the Company's named executive officers. No stock appreciation
rights were exercised or were outstanding during fiscal 1999.
Aggregated Option Exercises In Fiscal 1999 And Fiscal 1999 Year-End Option Values
- ----------------------------------------------------------------------------------------------------------
Number of Value of
Unexercised Unexercised
Shares Options at Fiscal In-the-Money
Acquired on Year-End Options at
Exercise Value (Exercisable/ Fiscal Year-End
Name Company (1) Realized (2) Unexercisable) (1) (Exercisable/
Unexercisable)
- ----------------------------------------------------------------------------------------------------------
Brian D. Holt (3) TCK -- -- 210,000 /0 $513,000 /--
TMO -- -- 138,750 /0 (4) $ /--
0
TBA -- -- 2,000 /0 $ 15,750 /--
TFG -- -- 2,000 /0 $ /--
2,500
TLZ -- -- 5,000 /0 $ /--
0
TLT -- -- 0 /2,000 -- /$0
(5)
TOC -- -- 6,000 /0 $ /--
0
TMQ -- -- 6,000 /0 $ /--
0
TSR -- -- 2,000 /0 $ /--
0
TRIL -- -- 0 /40,000 -- /$0
(5)
TXM -- -- 4,000 /0 $ /--
0
- ----------------------------------------------------------------------------------------------------------
Parimal S. Patel TCK -- -- 49,000 /0 $ 84,375 /--
TMO -- -- 29,362 /0 (4) $ 1,248 /--
TFT 2,700 $12,320 -- /-- -- /--
TRIL -- -- 0 /2,500 -- /$0
(5)
- ----------------------------------------------------------------------------------------------------------
John T. Miller TCK -- -- 48,000 /0 /--
$
0
TMO -- -- 16,300 /0 $ /--
0
TRIL -- -- 0 /5,000 -- /$0
(5)
- ----------------------------------------------------------------------------------------------------------
Floyd M. Gent TCK -- -- 55,800 /0 $170,625 /--
TMO -- -- 33,100 /0 $ 0 /--
TRIL -- -- 0 /2,500 -- /$0
(5)
- ----------------------------------------------------------------------------------------------------------
Randall W. Miselis TCK -- -- 45,900 /0 $ 52,500 /--
TMO -- -- 15,100 /0 $ 0 /--
TRIL -- -- 0 /2,500 -- /$0
(5)
- ----------------------------------------------------------------------------------------------------------
(1) All of the options reported outstanding at the end of the fiscal year are
immediately exercisable as of fiscal year-end, except options to purchase
the common stock of ThermoLyte Corporation and Thermo Trilogy Corporation,
which are not exercisable until the earlier of (i) 90 days after the
effective date of the registration of that company's common stock under
Section 12 of the Exchange Act or (ii) nine years from the grant date. In
all cases, the shares acquired upon exercise of the options reported in the
table are subject to repurchase by the granting company at the exercise
price if the optionee ceases to be employed by such company or any other
Thermo Electron company. The granting company may exercise its repurchase
rights within six months after the termination of the optionee's employment.
For publicly-traded companies, the repurchase rights generally lapse ratably
over a one- to ten-year period, depending on the option term, which may vary
from five to twelve years, provided that the optionee continues to be
employed by the granting company or another Thermo Electron company. For
companies that are
23
<PAGE>
not publicly-traded, the repurchase rights lapse in their entirety on the
ninth anniversary of the grant date. The granting company may permit the
holder of options to exercise options and to satisfy tax withholding
obligations by surrendering shares equal in fair market value to the
exercise price or withholding obligation. Please see footnote (3) under
Summary Compensation Table above for the company abbreviations used in this
table. In addition, company abbreviations used in this table and not defined
in footnote (3) are defined as follows: Thermo BioAnalysis Corporation
(designated in the table as TBA), Thermo Fibertek Inc. (designated in the
table as TFT), Thermo Fibergen Inc. (designated in the table as TFG),
ThermoLase Corporation (designated in the table as TLZ), ThermoLyte
(designated in the table as TLT), Thermo Optek Corporation (designated in
the table as TOC), ThermoQuest Corporation (designated in the table as TMQ),
Thermo Sentron Inc. (designated in the table as TSR), and Trex Medical
Corporation (designated in the table as TXM).
(2) Amounts shown in this column do not necessarily represent actual value
realized from the sale of the shares acquired upon exercise of the option
because in many cases the shares are not sold on exercise but continue to be
held by the named executive officer exercising the option. The amounts shown
represent the difference between the option exercise price and the market
price on the date of exercise, which is the amount that would have been
realized if the shares had been sold immediately upon exercise.
(3) As an officer of Thermo Electron, Mr. Holt also holds unexercised options to
purchase common stock of Thermo Electron and its subsidiaries other than the
Company. These options are not reported in the table as they were granted as
compensation for service to other Thermo Electron companies in capacities
other than his capacity as the chief executive officer of the Company.
(4) Options to purchase 67,500 and 15,000 shares of the common stock of Thermo
Electron granted to Mr. Holt and Mr. Patel, respectively, are subject to the
same terms described in footnote (1), except that the repurchase rights of
the granting corporation generally do not lapse until the tenth anniversary
of the grant date. In the event of the employee's death or involuntary
termination prior to the tenth anniversary of the grant date, the repurchase
rights of the granting corporation shall be deemed to have lapsed ratably
over a five-year period commencing with the fifth anniversary of the grant
date
(5) No public market existed for the shares underlying these options as of
October 2, 1999. Accordingly, no value in excess of exercise price has been
attributed to these options.
Executive Retention Agreements
Thermo Electron has entered into agreements with certain executive
officers and key employees of Thermo Electron and its subsidiaries that provide
severance benefits if there is a change in control of Thermo Electron and their
employment is terminated by Thermo Electron "without cause" or by the individual
for "good reason," as those terms are defined therein, within 18 months
thereafter. For purposes of these agreements, a change in control exists upon
(i) the acquisition by any person of 40% or more of the outstanding common stock
or voting securities of Thermo Electron; (ii) the failure of the Thermo Electron
board of directors to include a majority of directors who are "continuing
directors," which term is defined to include directors who were members of
Thermo Electron's board on the date of the agreement or who subsequent to the
date of the agreement were nominated or elected by a majority of directors who
were "continuing directors" at the time of such nomination or election; (iii)
the consummation of a merger, consolidation, reorganization, recapitalization,
or statutory share exchange involving Thermo Electron or the sale or other
disposition of all or substantially all of the assets of Thermo Electron unless
immediately after such transaction (a) all holders of Thermo Electron common
stock immediately prior to such transaction own more than 60% of the outstanding
voting securities of the resulting or acquiring corporation in substantially the
same proportions as their ownership immediately prior to such transaction and
(b) no person after the transaction owns 40% or more of the outstanding voting
securities of the resulting or acquiring corporation; or (iv) approval by
stockholders of a complete liquidation or dissolution of Thermo Electron.
24
<PAGE>
In 1998, Thermo Electron authorized an executive retention agreement with
each of Brian D. Holt, Floyd M. Gent, and John T. Miller. This agreement
provides that in the event the individual's employment is terminated under the
circumstances described above, the individual would be entitled to a lump sum
payment equal to the sum of (a) in the case of Mr. Holt, two times, and in the
case of Messrs. Gent and Miller, one times his highest annual base salary in any
12 month period during the prior five-year period, plus (b) in the case of Mr.
Holt, two times and in the case of Messrs. Gent and Miller, one times his
highest annual bonus in any 12-month period during the prior five-year period.
In addition, the individual would be provided benefits for a period of, in the
case of Mr. Holt, two years, and in the case of Messrs. Gent and Miller, one
year after such termination substantially equivalent to the benefits package the
individual would have been otherwise entitled to receive if he was not
terminated. Further, all repurchase rights of Thermo Electron and its
subsidiaries shall lapse in their entirety with respect to all options and
restricted stock that the individual holds in Thermo Electron and its
subsidiaries, including the Company, as of the date of the change in control.
Finally, the individual would be entitled to a cash payment equal to, in the
case of Mr. Holt, $20,000, and in the case of Messrs. Gent and Miller, $15,000,
to be used toward outplacement services.
Assuming that the severance benefits would have been payable as of October
2, 1999, the lump sum salary and bonus payment under such agreement to Messrs.
Holt, Gent and Miller would have been approximately $1,040,000, $234,500, and
$230,000, respectively. In the event that payments under these agreements are
deemed to be so called "excess parachute payments" under the applicable
provisions of the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code), the individuals would be entitled to receive a gross-up payment
equal to the amount of any excise tax payable by such individual with respect to
such payment, plus the amount of all other additional taxes imposed on such
individual attributable to the receipt of such gross-up payment.
Stock Ownership Policies
The Committee established a stock holding policy for executive officers of
the Company that required executive officers to own a multiple of their
compensation in shares of Common Stock. For the chief executive officer, the
multiple is one times his base salary and reference incentive compensation for
the fiscal year. For all other officers, the multiple was one times the
officer's base salary. The Committee deemed it appropriate to permit officers to
achieve these ownership levels over a three-year period. The policy has been
amended to apply only to the chief executive officer.
In order to assist executive officers in complying with the policy, the
Committee also adopted a stock holding assistance plan under which the Company
is authorized to make interest-free loans to executive officers to enable them
to purchase shares of Common Stock in the open market. This plan was also
amended to apply only to the chief executive officer. The loans are required to
be repaid upon the earlier of demand or the tenth anniversary of the date of the
loan, unless otherwise determined by the Committee.
The Committee also has a policy requiring its executive officers to hold
shares of Common Stock equal to one-half of their net option exercises over a
period of five years. The net option exercise is determined by calculating the
number of shares acquired upon exercise of a stock option, after deducting the
number of shares that could have been traded to exercise the option and the
number of shares that could have been surrendered to satisfy tax withholding
obligations attributable to the exercise of the option.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of Common Stock,
as well as the common stock of Thermo Electron and each majority-owned
subsidiary of the Company, as of October 2, 1999, with respect to (i) each
director, (ii) each executive officer named in the summary compensation table
set forth in Item 11 - Executive Compensation (the named executive officers) and
(iii) all directors and current executive officers as a group. In addition, the
following table sets forth the beneficial ownership of Common Stock, as of
October 2, 1999, with respect to each person who was known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock.
25
<PAGE>
While certain directors or executive officers of the Company are also
directors and executive officers of Thermo Electron or its subsidiaries other
than the Company, all such persons disclaim beneficial ownership of the shares
of Common Stock beneficially owned by Thermo Electron.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name (1) Thermo Ecotek Thermo Electron Thermo Trilogy
Corporation (2) Corporation (3) Corporation (4)
- -------------------------------------------------------------------------------------------------------------
Thermo Electron Corporation (5) 33,865,203 N/A N/A
Jerry P. Davis 101,426 32,670 0
Floyd M. Gent 60,380 33,100 0
George N. Hatsopoulos 25,579 3,889,697 0
Brian D. Holt 215,600 287,941 0
Frank Jungers 49,706 176,302 3,000
William H. Keough 0 0 0
John T. Miller 48,000 16,500 0
Randall W. Miselis 47,706 15,855 0
Parimal S. Patel 88,868 58,874 0
William A. Rainville 4,467 360,752 0
All directors and current executive officers 649,232 5,386,885 3,000
as a group (12 persons)
</TABLE>
(1) Except as reflected in the footnotes to this table, shares of Common Stock
of the Company and of the common stock of Thermo Electron and Thermo Trilogy
beneficially owned consist of shares owned by the indicated person or by
that person for the benefit of minor children, and all share ownership
includes sole voting and investment power.
(2) Shares of the Common Stock beneficially owned by Mr. Davis, Mr. Gent, Dr.
Hatsopoulos, Mr. Holt, Mr. Jungers, Mr. Miller, Mr. Miselis, Mr. Patel, and
all directors and executive officers as a group include 10,000, 55,800,
15,000, 210,000, 6,000, 48,000, 45,900, 49,000, and 447,200 shares,
respectively, that such person or group has the right to acquire within 60
days of October 2, 1999, through the exercise of stock options. Shares of
the Common Stock beneficially owned by Mr. Jungers and all directors and
executive officers as a group include 3,156 shares allocated through October
2, 1999, to his account maintained pursuant to the Company's Deferred
Compensation Plan for Directors. Shares beneficially owned by Mr. Davis
include 91,426 shares held by Mr. Davis' spouse. Shares beneficially owned
by Mr. Jungers include 500 shares held by Mr. Jungers' spouse. No director
or named executive officer beneficially owned more than 1% of the Common
Stock as of October 2, 1999; all directors and current executive officers as
a group beneficially owned 1.80% of the Common Stock outstanding as of such
date.
(3) Shares of the common stock of Thermo Electron beneficially owned by Mr.
Davis, Mr. Gent, Dr. Hatsopoulos, Mr. Holt, Mr. Jungers, Mr. Miller, Mr.
Miselis, Mr. Patel, Mr. Rainville, and all directors and executive officers
as a group include 5,377, 33,100, 2,206,486, 284,948, 9,693, 16,300, 15,100,
29,362, 294,630, and 3,338,081 shares, respectively, that such person or
group has the right to acquire within 60 days of October 2, 1999, through
the exercise of stock options. Shares of the common stock of Thermo Electron
beneficially owned by Mr. Davis, Dr. Hatsopoulos, and all directors and
executive officers as a group include 1,716, 2,266 and 6,479 full shares,
respectively, allocated to accounts maintained pursuant to Thermo Electron's
employee stock ownership plan, of which the trustees, who have investment
power over its assets, were, as of October 2, 1999, executive officers of
Thermo Electron. Shares of the common stock of Thermo Electron beneficially
owned by Mr. Jungers and all directors and executive officers as a group
include 80,427 full shares allocated through October 2, 1999, to Mr.
Junger's account maintained pursuant to Thermo Electron's deferred
compensation plan for Directors. Shares beneficially owned by Mr. Davis
include 25,577 shares held by Mr. Davis' spouse. Shares beneficially owned
by Dr. Hatsopoulos include 144,437 shares held by his spouse, 330,747 shares
held by a family trust of which his spouse is the trustee and 566,262 shares
held by a family limited partnership indirectly controlled by Dr.
Hatsopoulos. Shares beneficially owned by Dr. Hatsopoulos also include
50,000 shares that a family trust, of
26
<PAGE>
which Dr. Hatsopoulos' spouse is the trustee, has the right to acquire
within 60 days of October 2, 1999, and 2,149,500 shares that a family
limited partnership indirectly controlled by Dr. Hatsopoulos has the right
to acquire within 60 days of October 2, 1999, through the exercise of stock
options. Dr. Hatsopoulos disclaims beneficial interest in the shares owned
by the family limited partnership except to the extent of his pecuniary
interest therein. Shares beneficially owned by Mr. Jungers include 4,500
shares held by Mr. Jungers' spouse. No director or named executive officer
beneficially owned more than 1% of the common stock of Thermo Electron as of
October 2, 1999, except for Dr. Hatsopoulos, who beneficially owned 2.42% of
such common stock; all directors and current executive officers as a group
beneficially owned 3.37% of the common stock of Thermo Electron outstanding
as of such date.
(4) The beneficial ownership of shares of the common stock of Thermo Trilogy is
presented as of October 2, 1999. As of October 2, 1999, no director or
executive officer beneficially owned more than 1% of the outstanding common
stock of Thermo Trilogy; all directors and current executive officers as a
group beneficially owned less than 1% of Thermo Trilogy common stock
outstanding as of such date.
(5) Thermo Electron beneficially owned 93.68% of the Common Stock as of October
2, 1999. Shares beneficially owned by Thermo Electron include 171,272 shares
issuable upon conversion of $2,826,000 in principal amount of the Company's
4 7/8% Subordinated Convertible Debentures due 2004. Thermo Electron's
address is 81 Wyman Street, Waltham, Massachusetts 02454-9046. As of October
2, 1999, Thermo Electron had the power to elect all of the members of the
Company's board of directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
Exchange Act) requires the Company's directors and executive officers, and
beneficial owners of more than 10% of the Common Stock, such as Thermo Electron,
to file with the Securities and Exchange Commission initial reports of ownership
and periodic reports of changes in ownership of the Company's securities. Based
upon a review of such filings, all Section 16(a) filing requirements applicable
to such persons were complied with during fiscal 1999, except in the following
instances: Mr. Jungers, a director of the Company, filed one transaction late,
reporting the exempt grant of stock options. Thermo Electron filed one Form 4
late, reporting a total of six transactions associated with the cancellation and
grant of options to purchase Common Stock granted to employees under its stock
option program.
Item 13. Certain Relationships and Related Transactions
Thermo Electron has, from time to time, caused its subsidiaries to sell
minority interests to investors, resulting in several majority-owned, private
and publicly-held subsidiaries. Thermo Electron has created the Company as a
majority-owned, publicly-held subsidiary. The Company and such other
majority-owned Thermo Electron subsidiaries are hereinafter referred to as the
"Thermo Subsidiaries."
Thermo Electron and each of the Thermo Subsidiaries recognize that the
benefits and support that derive from their affiliation are essential elements
of their individual performance. Accordingly, Thermo Electron and each of the
Thermo Subsidiaries, including the Company, have adopted the Thermo Electron
Corporate Charter (the Charter) to define the relationships and delineate the
nature of such cooperation among themselves. The purpose of the Charter is to
ensure that (1) all of the companies and their stockholders are treated
consistently and fairly, (2) the scope and nature of the cooperation among the
companies, and each company's responsibilities, are adequately defined, (3) each
company has access to the combined resources and financial, managerial and
technological strengths of the others, and (4) Thermo Electron and the Thermo
Subsidiaries, in the aggregate, are able to obtain the most favorable terms from
outside parties.
To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies and provides for centralized administrative, banking and credit
services to be performed by Thermo Electron. The services provided by Thermo
Electron include collecting and managing cash generated by members, coordinating
the access of Thermo Electron and the Thermo Subsidiaries (the Thermo Group) to
external financing sources, ensuring compliance with external financial
covenants and internal financial policies, assisting in the
27
<PAGE>
formulation of long-range planning and providing other banking and credit
services. Pursuant to the Charter, Thermo Electron may also provide guarantees
of debt or other obligations of the Thermo Subsidiaries or may obtain external
financing at the parent level for the benefit of the Thermo Subsidiaries. In
certain instances, the Thermo Subsidiaries may provide credit support to, or on
behalf of, the consolidated entity or may obtain financing directly from
external financing sources. Under the Charter, Thermo Electron is responsible
for determining that the Thermo Group remains in compliance with all covenants
imposed by external financing sources, including covenants related to borrowings
of Thermo Electron or other members of the Thermo Group, and for apportioning
such constraints within the Thermo Group. In addition, Thermo Electron
establishes certain internal policies and procedures applicable to members of
the Thermo Group. The cost of the services provided by Thermo Electron to the
Thermo Subsidiaries is covered under existing corporate services agreements
between Thermo Electron and the Thermo Subsidiaries.
The Charter currently provides that it shall continue in effect so long as
Thermo Electron and at least one Thermo Subsidiary participate. The Charter may
be amended at any time by agreement of the participants. Any Thermo Subsidiary,
including the Company, can withdraw from participation in the Charter upon 30
days' prior notice. In addition, Thermo Electron may terminate a subsidiary's
participation in the Charter in the event the subsidiary ceases to be controlled
by Thermo Electron or ceases to comply with the Charter or the policies and
procedures applicable to the Thermo Group. A withdrawal from the Charter
automatically terminates the corporate services agreement and tax allocation
agreement (if any) in effect between the withdrawing company and Thermo
Electron. The withdrawal from participation does not terminate outstanding
commitments to third parties made by the withdrawing company, or by Thermo
Electron or other members of the Thermo Group, prior to the withdrawal. In
addition, a withdrawing company is required to continue to comply with all
policies and procedures applicable to the Thermo Group and to provide certain
administrative functions mandated by Thermo Electron so long as the withdrawing
company is controlled by or affiliated with Thermo Electron.
As provided in the Charter, the Company and Thermo Electron have entered
into a Corporate Services Agreement (the Services Agreement) under which Thermo
Electron's corporate staff provides certain administrative services, including
certain legal advice and services, risk management, employee benefit
administration, tax advice and preparation of tax returns, centralized cash
management, and financial and other services to the Company. The Company was
assessed an annual fee equal to 0.8% of the Company's revenues for these
services in fiscal 1999. The annual fee will remain at 0.8% of the Company's
revenues for fiscal 2000. The fee is reviewed annually and may be changed by
mutual agreement of the Company and Thermo Electron. During fiscal 1999, Thermo
Electron assessed the Company $1.6 million in fees under the Services Agreement.
Management believes that the charges under the Services Agreement are reasonable
and that the terms of the Services Agreement are fair to the Company. In fiscal
1999, the Company was billed an additional $18,100 by Thermo Electron for
certain administrative services required by the Company that were not covered by
the Services Agreement. The Services Agreement automatically renews for
successive one-year terms, unless canceled by the Company upon 30 days' prior
notice. In addition, the Services Agreement terminates automatically in the
event the Company ceases to be a member of the Thermo Group or ceases to be a
participant in the Charter. In the event of a termination of the Services
Agreement, the Company will be required to pay a termination fee equal to the
fee that was paid by the Company for services under the Services Agreement for
the nine-month period prior to termination. Following termination, Thermo
Electron may provide certain administrative services on an as-requested basis by
the Company or as required in order to meet the Company's obligations under
Thermo Electron's policies and procedures. Thermo Electron will charge the
Company a fee equal to the market rate for comparable services if such services
are provided to the Company following termination.
The Company and Thermo Electron have a Tax Allocation Agreement (Tax
Allocation Agreement) under which the Company is included in the consolidated
federal and certain state income tax returns filed by Thermo Electron. The Tax
Allocation Agreement provides that Thermo Electron charges or pays the Company
amounts based on the Company's relative contribution to Thermo Electron's tax
liability. If in any year the Company incurs a loss or generates a tax credit,
Thermo Electron shall pay the Company the amount of such benefit realized by
Thermo Electron attributable to such loss or tax credit on the earlier of (i)
the year in which the Company would have obtained a tax benefit from such loss
or tax credit of the Company had filed separate federal income tax returns or
(ii) the year
28
<PAGE>
in which the applicable carry-forward period with respect to such loss or tax
credit expires. As of October 2, 1999, the aggregate net amount due to the
Company from Thermo Electron pursuant to the Tax Allocation Agreement is
approximately $5.6 million.
At October 2, 1999, the Company owed Thermo Electron and its other
subsidiaries an aggregate of approximately $0.7 million for amounts due under
the Services Agreement and related administrative charges and for miscellaneous
items, net of amounts owed to the Company for miscellaneous items. The largest
amount of net indebtedness owed by the Company to Thermo Electron and its other
subsidiaries since October 3, 1998, was approximately $2.8 million. These
amounts do not bear interest and are expected to be paid in the normal course of
business.
As of October 2, 1999, $17.8 million of the Company's cash equivalents
were invested in a cash management arrangement with Thermo Electron, which was
effective June 1999. Under the cash management arrangement, the Company lends
its excess cash to Thermo Electron and has the contractual right to withdraw its
invested funds upon 30 days' prior notice. Thermo Electron is contractually
required to maintain cash, cash equivalents and/or immediately available bank
lines of credit equal to at least 50% of all the funds invested under the
arrangement by all Thermo Electron subsidiaries other than wholly-owned
subsidiaries. The Company's funds invested in the cash management arrangement
earn a rate equal to the 30-day Dealer Commercial Paper Rate as reported in The
Wall Street Journal plus 50 basis points, set at the beginning of each month.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company would be merged into Thermo Electron. As a result, the Company would
become a wholly owned subsidiary of Thermo Electron. The public shareholders of
the Company would receive common stock in Thermo Electron in exchange for their
shares. The completion of this transaction is subject to numerous conditions,
including the establishment of a price and exchange ratio; confirmation of
anticipated tax consequences; the negotiation and execution of a definitive
merger agreement; the receipt of a fairness opinion from an investment banking
firm that the transaction is fair to the Company's shareholders (other than
Thermo Electron) from a financial point of view; the approval of the Company's
Board of Directors, including its independent directors; and completion of
review by the Securities and Exchange Commission of any necessary documents
regarding the proposed transactions.
Stock Holding Assistance Plan
The Committee established a stock holding policy that requires the chief
executive officer to acquire and hold a minimum number of shares of Common
Stock. In order to assist the chief executive officer in complying with the
policy, the Committee also adopted a stock holding assistance plan under which
the Company may make interest-free loans to the chief executive officer, to
enable him to purchase the Common Stock in the open market. No such loans are
currently outstanding under the plan.
29
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a, d) Financial Statements and Schedule
(1)The consolidated financial statements set forth in the list below
are filed as part of this Report.
(2)The consolidated financial statement schedule set forth in the list
below is filed as part of this Report.
(3)Exhibits filed herewith or incorporated herein by reference are set
forth in Item 14(c) below.
List of Financial Statements and Schedule Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders'
Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule I: Condensed Financial Information of the Registrant
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Date: December 15, 1999 THERMO ECOTEK CORPORATION
By: /s/ Brian D. Holt
Brian D. Holt
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of December 15, 1999.
Signature Title
By: /s/ Brian D. Holt President, Chief Executive Officer, and
Brian D. Holt Director
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ Frank Jungers Chairman of the Board and Director
Frank Jungers
By: /s/ Jerry P. Davis Director
Jerry P. Davis
By: /s/ Dr. George N. Hatsopoulos Director
Dr. George N. Hatsopoulos
By: /s/ William H. Keough Director
William H. Keough
By: /s/ William A. Rainville Director
William A. Rainville
31
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Ecotek Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Thermo Ecotek Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated November 8, 1999. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14 on page 30 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the consolidated financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
November 8, 1999
32
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
Condensed Financial Information of Registrant
Unconsolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Assets
Current Assets:
Cash and cash equivalents $ - $ 22,732
Advance to affiliate 17,766 -
Accounts and notes receivable from subsidiaries 613 1,910
Prepaid income taxes and prepaid expenses 41,288 11,548
Current portion of note receivable and other current assets 2,732 330
-------- ---------
62,399 36,520
-------- ---------
Investment in Subsidiaries (on the equity method) 228,129 319,279
-------- ---------
Office Equipment, at Cost 448 322
Less: Accumulated Depreciation (149) (96)
-------- ---------
299 226
-------- ---------
Long-term Available-for-sale Investment, at Quoted Market Value 6,111 8,502
(amortized cost of $6,379 and $8,504)
-------- ---------
Deferred Debt Expense 891 1,090
-------- ---------
$297,829 $ 365,617
======== =========
33
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
Condensed Financial Information of Registrant
Unconsolidated Balance Sheet (continued)
(In thousands) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 276 $ -
Accrued expenses 3,761 9,366
Due to parent company 507 2,251
-------- ---------
4,544 11,617
-------- ---------
Long-term Obligations:
Noninterest-bearing subordinated convertible debentures 1,820 2,450
4.875% Subordinated convertible debentures 44,950 44,950
-------- ---------
46,770 47,400
-------- ---------
Deferred Income Taxes 55,951 56,968
-------- ---------
Shareholders' Investment:
Common stock 3,787 3,782
Capital in excess of par value 175,895 175,673
Retained earnings 39,382 98,802
Treasury stock (28,084) (28,735)
Deferred compensation (46) -
Accumulated other comprehensive items (370) 110
-------- ---------
190,564 249,632
-------- ---------
$297,829 $ 365,617
======== =========
</TABLE>
34
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
Condensed Financial Information of Registrant
Statement of Unconsolidated Operations
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Revenues $ - $ 1,962 $ 8,200
Equity in Earnings (Loss) of Subsidiaries (83,019) 50,401 39,817
-------- -------- --------
(83,019) 52,363 48,017
-------- -------- --------
General and Administrative Expenses 10,196 10,379 10,219
-------- -------- --------
Operating Income (Loss) (93,215) 41,984 37,798
Interest Expense, Net (1,021) (1,342) (838)
Gain on Issuance of Stock by Subsidiary - 6,269 -
-------- -------- --------
Income (Loss) Before Income Taxes (94,236) 46,911 36,960
Income Tax (Provision) Benefit 34,816 (15,702) (14,415)
-------- -------- --------
Net Income (Loss) $(59,420) $ 31,209 $ 22,545
======== ======== ========
35
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
Condensed Financial Information of Registrant
Statement of Unconsolidated Cash Flows
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Operating Activities:
Net income (loss) $(59,420) $ 31,209 $ 22,545
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 265 258 513
Deferred revenue - - (8,200)
Deferred income tax expense (benefit) (30,183) 7,315 10,715
Equity in (earnings) loss of subsidiaries 83,019 (50,401) (39,817)
Gain on issuance of stock by subsidiary - (6,269) -
Changes in current accounts, excluding the
effect of acquisitions:
Accounts and notes receivable from 1,204 2,139 (906)
subsidiaries
Other assets (768) 94 55
Accounts payable 637 (551) 48
Accrued expenses (5,576) 101 99
Due (to) from parent company (1,744) (98) 3,471
-------- -------- --------
Net cash used in operating activities (12,566) (16,203) (11,477)
-------- -------- --------
Investing Activities:
Acquisitions, net of cash acquired (12,615) (19,100) (10,865)
Purchase of available-for-sale investments - - (2,500)
Advances to affiliate, net (17,766) - -
Purchases of property, plant, and equipment (126) (219) (15)
Distribution from (investment in) subsidiaries 20,115 (16,361) 13,315
-------- -------- --------
Net cash used in investing activities (10,392) (35,680) (65)
-------- -------- --------
Financing Activities:
Net proceeds from issuance of subordinated - - 48,470
convertible debentures
Purchases of Company common stock - (10,248) (19,743)
Net proceeds from issuance of Company and 189 15,458 (417)
subsidiary common stock
-------- -------- --------
Net cash provided by financing activities 189 5,210 28,310
-------- -------- --------
Exchange Rate Effect on Cash 37 (60) (31)
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents (22,732) (46,733) 16,737
Cash and Cash Equivalents at Beginning of Year 22,732 69,465 52,728
-------- -------- --------
Cash and Cash Equivalents at End of Year $ - $ 22,732 $ 69,465
======== ======== ========
</TABLE>
36
<PAGE>
SCHEDULE II
THERMO ECOTEK CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Description Balance at Provision Accounts Balance
Beginning Charged to Written at End
of Year Expense Off of Year
- ----------------------------------- ------------- -------------- ------------- ------------- -------------
Allowance for Doubtful Accounts
Year Ended October 2, 1999 $ 50 $ 87 $ (20) $ 117
Year Ended October 3, 1998 $ - $ 50 $ - $ 50
Description Balance at Provision Activity Balance
Beginning Costs Charged to at End
of Year Charged to Reserve of Year
Expense (b)
- ------------------------------------------------- -------------- ------------- ------------- -------------
Accrued Restructuring Costs (a)
Year Ended October 2, 1999 $ - $ 7,914 $ (157) $ 7,757
(a) The nature of activity in this account is described in Note 10 to
Consolidated Financial Statements in the Registrant's Fiscal 1999 Annual
Report to Shareholders.
(b) Excludes noncash charges of $118.4 million, primarily for the write-off of
property, plant, and equipment.
37
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Asset Purchase Agreement among Thermo Trilogy Corporation, Thermo
Ecotek International Holdings, Inc., and W.R. Grace & Co. - Conn.
dated March 5, 1996 (filed as Exhibit 2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 30,
1996 [File No. 1-13572] and incorporated herein by reference).
2.2 Asset Purchase Agreement among Thermo Trilogy Corporation, biosys,
inc., Crop Genetics International Corporation, and AgriDyne
Technologies, Inc. dated December 24, 1996 (filed as Exhibit 2 to
the Registrant's Current Report on Form 8-K filed January 31,
1997 [File No.1-3572] and incorporated herein by reference).
3.1 Certificate of Incorporation, as amended, of the Registrant
(filed as Exhibit 3.1 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3.2 to the
Registrant's Transition Report on Form 10-K for the nine months
ended September 30, 1995 [File No. 1-13572] and incorporated
herein by reference).
4.1 Fiscal Agency Agreement dated as of March 14, 1996, among the
Registrant, Thermo Electron Corporation, and Chemical Bank as
fiscal agent, relating to $37 million principal amount of
noninterest-bearing subordinated convertible debentures due 2001
(filed as Exhibit 4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 30, 1996 [File No. 1-13572] and
incorporated herein by reference).
4.2 Fiscal Agency Agreement dated as of April 15, 1997, among the
Registrant, Thermo Electron Corporation, and Bankers Trust
Company as fiscal agent, relating to $50 million principal amount
of 4 7/8% Convertible Subordinated Debentures due 2004 (filed as
Exhibit 4 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 29, 1997 [File No. 1-13572] and
incorporated herein by reference).
10.1 Asset Transfer Agreement between Thermo Electron Corporation and
the Registrant dated January 2, 1990 (filed as Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.2 Corporate Services Agreement dated January 3, 1993, between Thermo Electron Corporation
and the Registrant (filed as Exhibit 10.2 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by reference).
10.3 Thermo Electron Corporate Charter as amended and restated effective January 3, 1993
(filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.4 Amended and Restated Tax Allocation Agreement dated as of December 4, 1996, between
Thermo Electron and the Registrant (filed as Exhibit 10.4 to the Registrant's Report on
Form 10-K for the fiscal year ended September 28, 1996 [File No. 1-13572] and
incorporated herein by reference).
10.5 Purchase and sale of $38,500,000 principal amount 4% subordinated convertible note due
2001 (filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
38
<PAGE>
Exhibit
Number Description of Exhibit
10.6 Purchase and sale of $30,000,000 principal amount 4% subordinated convertible note due
2001 (filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.7 Power Purchase Agreement between Mendota Biomass Power, Ltd. and
Pacific Gas and Electric Company dated May 7, 1984 (filed as
Exhibit 10.10 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 33-86682] and incorporated herein by reference).
10.8 Project Lease between Chrysler Capital Corporation and Mendota
Biomass Power, Ltd. dated October 30, 1989 (filed as Exhibit
10.11 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.9 First Amendment to Project Lease between Chrysler Capital
Corporation and Mendota Biomass Power, Ltd., dated June 30, 1995
(filed as Exhibit 1 to the Registrant's Current Report on Form
8-K dated June 30, 1995 and incorporated herein by reference).
10.10 Mendota Biomass Power, Ltd. Limited Partnership Agreement dated December 10, 1986 (filed
as Exhibit 10.12 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.11 Rate Order and Interconnection Agreement between Whitefield Power
and Light Company and Public Service Company of New Hampshire
dated September 4, 1986 (filed as Exhibit 10.13 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).
10.12 Wood Supply Contract between North County Procurement, Inc. and
Whitefield Power and Light Company dated June 4, 1993 (filed as
Exhibit 10.14 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 33-86682] and incorporated herein by reference).
10.13 Joint Venture Agreement establishing Gorbell Thermo Electron Power Company dated
September 13, 1985 (filed as Exhibit 10.19 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by reference).
10.14 Leasing Agreement between BankBoston Leasing Services, Inc. and
Hemphill Power and Light Company dated December 23, 1987 (filed
as Exhibit 10.20 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
10.15 Rate Order Support Agreement between Hemphill Power and Light Company and Thermo Electron
dated December 23, 1987 (filed as Exhibit 10.21 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated herein by reference).
10.16 Wood Supply Contract between Durgin & Crowell Lumber Company,
Inc. and Hemphill Power and Light Company dated June 4, 1985
(filed as Exhibit 10.22 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.17 Fuel Supply Contract between Springfield Management Company and Hemphill Power and Light
Company dated June 4, 1985, as amended (filed as Exhibit 10.23 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
39
<PAGE>
Exhibit
Number Description of Exhibit
10.18 Rate Order and Interconnection Agreement between Hemphill Power
and Light Company and Public Service Company of New Hampshire
dated June 26, 1986 (filed as Exhibit 10.24 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.19 Joint Venture Agreement establishing Hemphill Power and Light Company dated June 4, 1985
(filed as Exhibit 10.25 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.20 Letter Agreement dated July 15, 1988, among the partners of
Hemphill Power and Light Company amending various agreements
(filed as Exhibit 10.26 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.21 Letter Agreement dated January 1, 1990, between the partners of Hemphill Power and Light
Company (filed as Exhibit 10.27 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.22 Assignment and Assumption Agreement of Delano II plant by Delano
Energy Company, Inc. dated December 1, 1993 (filed as Exhibit
10.28 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.23 Loan Agreement between California Pollution Control Financing
Authority ("CPCFA") and Delano Energy Company, Inc. dated August
1, 1989, as supplemented on May 1, 1990 (Delano I; filed as
Exhibit 10.29 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 33-86682] and incorporated herein by reference).
10.24 Indenture of Trust between CPCFA and Bankers Trust Company dated August 1, 1990, as
supplemented on May 1, 1990 (Delano I; filed as Exhibit 10.30 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
10.25 Indenture of Trust between CPCFA and Bankers Trust Company dated October, 1991 (Delano
II; filed as Exhibit 10.31 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.26 Loan Agreement between CPCFA and Delano Energy Company, Inc. dated October 1, 1991 (filed
as Exhibit 10.32 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.27 Power Purchase Contract between Southern California Edison Co. and Signal Delano Energy
Company, Inc. dated July 31, 1987 (filed as Exhibit 10.33 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
10.28 Amended Restated Reimbursement Agreement among Chemical Trust Company of California
("CTCC"), Delano Energy Company, Inc. and ABN AMRO Bank N.V. and other banks dated
December 31, 1993 (filed as Exhibit 10.34 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by reference).
40
<PAGE>
Exhibit
Number Description of Exhibit
10.29 Amended and Restated Lease Agreement between CTCC and Delano
Energy Company, Inc. dated December 31, 1993 (filed as Exhibit
10.35 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.30 Biomass Fuel Supply Contract between the Registrant and Delano
Energy Company, Inc. dated December 31, 1993 (filed as Exhibit
10.36 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.31 Power Purchase Agreement between Woodland Biomass Power, Ltd. and
Pacific Gas & Electric Company dated May 7, 1987 (filed as
Exhibit 10.38 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 33-86682] and incorporated herein by reference).
10.32 Stock Purchase Agreement dated as of August 18, 1995, between the
Registrant and KFx, Inc. (filed as Exhibit 10.40 to the
Registrant's Transition Report on Form 10-K for the nine months
ended September 30, 1995 [File No. 1-13572] and incorporated
herein by reference). Pursuant to Item 601(b)(2) of Regulation
S-K, schedules to this Agreement have been omitted. The Company
hereby undertakes to furnish supplementally a copy of such
schedules to the commission upon request.
10.33 Stock Purchase Warrant issued by KFx, Inc. to the Company dated August 18, 1995 (filed as
Exhibit 10.41 to the Registrant's Transition Report on Form 10-K for the nine months
ended September 30, 1995 [File No. 1-13572] and incorporated herein by reference).
10.34 Stock Purchase Warrant issued by KFx, Inc. to the Company dated August 18, 1995 (filed as
Exhibit 10.42 to the Registrant's Transition Report on Form 10-K for the nine months
ended September 30, 1995 [File No. 1-13572] and incorporated herein by reference).
10.35 Limited Partnership Agreement of KFx Fuel Partners, L.P. dated as
of August 18, 1995 (filed as Exhibit 10.43 to the Registrant's
Transition Report on Form 10-K for the nine months ended
September 30, 1995 [File No. 1-13572] and incorporated herein by
reference). (Certain portions of this Exhibit have been omitted
subject to an application for confidential treatment filed with
the Commission pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934.)
10.36 Turnkey Design and Construction Agreement dated as of August 18,
1995, between KFx Fuel Partners, L.P. and Walsh Construction
Company, a Division of Guy F. Atkinson Company (filed as Exhibit
10.44 to the Registrant's Transition Report on Form 10-K for the
nine months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference). (Certain portions of this
Exhibit have been omitted subject to an application for
confidential treatment filed with the Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934.)
10.37 Lease Agreement between Manufacturers Hanover Trust Company of
California and Woodland Biomass Power, Ltd. dated December 29,
1989 (filed as Exhibit 10.39 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.38 First Amendment to Power Purchase Agreement dated November 6,
1997, between Woodland Biomass Power, Ltd. and Pacific Gas and
Electric Company (filed as Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 3,
1998 [File No. 1-13572] and incorporated herein by reference).
(Certain portions of this Exhibit have been omitted subject to an
application for confidential treatment filed with the Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.)
41
<PAGE>
Exhibit
Number Description of Exhibit
10.39 Second Amendment to Power Purchase Agreement dated November 6,
1997, between Mendota Biomass Power, Ltd. and Pacific Gas and
Electric Company (filed as Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 3,
1998 [File No. 1-13572] and incorporated herein by reference).
(Certain portions of this Exhibit have been omitted subject to an
application for confidential treatment filed with the Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.)
10.40* Purchase Agreement dated October 25, 1999, between Mountainview
Power Company and General Electric Company for four PG 7241 FA
Combustion Turbine Generators for the Mountainview Generation
Project.
10.41* Contract Termination Agreement between Southern California Edison
Company and Delano Energy Co., Inc.
10.42 Incentive Stock Option Plan of the Registrant (filed as Exhibit
10.44 to the Registrant's Registration Statement on Form S-1
[Reg. No 33-86682] and incorporated herein by reference).
(Maximum number of shares issuable in the aggregate under this
plan and the Registrant's Nonqualified Stock Option Plan is
1,350,000 shares, after adjustment to reflect share increase
approved in December 1993 and 3-for-2 stock split effected in
October 1996.)
10.43 Amended and Restated Directors Stock Option Plan of the Registrant (filed as Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-13572] and incorporated herein by reference).
10.44 Amended and Restated Deferred Compensation Plan for Directors of the Registrant (filed as
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July
3, 1999 [File No. 1-13572] and incorporated herein by reference).
10.45 Amended and Restated Equity Incentive Plan of the Registrant (filed as Exhibit 10.5 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-13572] and incorporated herein by reference).
10.46 Amended and Restated Nonqualified Stock Option Plan of the
Registrant (filed as Exhibit 10.6 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 3, 1999 [File No.
1-13572] and incorporated herein by reference). (Maximum number
of shares issuable in the aggregate under this plan and the
Registrant's Incentive Stock Option Plan is 1,350,000 shares,
after giving effect to share increase approved in December 1993
and 3-for-2 stock split effected in October 1996.)
10.47 Amended and Restated Thermo Ecotek Corporation - Thermo Trilogy
Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.7
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended July 3, 1999 [File No. 1-13572] and incorporated herein by
reference).
10.48 Thermo Trilogy Corporation Equity Incentive Plan (filed as
Exhibit 10.52 to the Registrant's Report on Form 10-K for the
fiscal year ended September 28, 1996 [File No.
1-13572] and incorporated herein by reference).
In addition to the stock-based compensation plans of the
Registrant, the executive officers of the Registrant may be
granted awards under stock-based compensation plans of Thermo
Electron Corporation, for services rendered to the Registrant.
The terms of such plans are substantially the same as those of
the Registrant's Equity Incentive Plan.
42
<PAGE>
Exhibit
Number Description of Exhibit
10.49 Form of Indemnification Agreement between the Registrant and its officers and directors
(filed as Exhibit 10.43 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.50 Restated Stock Holding Assistance Plan and Form of Promissory Note (filed as Exhibit
10.54 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September
27, 1997 [File No. 1-13572] and incorporated herein by reference).
10.51 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, between the Registrant and
Thermo Electron Corporation (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 3, 1999 [File No. 1-13572] and incorporated herein by
reference).
10.52 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, between Thermo Trilogy
Corporation and Thermo Electron Corporation (filed as Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999 [File No. 1-13572] and incorporated
herein by reference).
13 Annual Report to Shareholders for the fiscal year ended October 2, 1999 (only those
portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
* Confidential treatment requested as to certain portions of the document,
which portions have been omitted and filed separately with the Securities and
Exchange Commission.
</TABLE>
Exhibit 13
Thermo Ecotek Corporation
Consolidated Financial Statements
Fiscal Year 1999
<PAGE>
<TABLE>
<CAPTION>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Operations
Year Ended
-----------------------------------------
<S> <C> <C> <C>
(In thousands except per share amounts) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Revenues (Notes 12 and 14) $205,493 $208,971 $180,191
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues (includes $4,302, $4,668, 153,203 135,506 114,610
and $4,545 to related parties; Notes 8 and
9)
Selling, general, and administrative 25,696 21,950 16,845
expenses (includes $1,649, $1,767, and
$1,802 to related parties; Notes 8 and
9)
Research and development expenses 2,671 2,398 1,638
Restructuring and nonrecurring costs, net (Note 10) 112,801 - -
-------- -------- --------
294,371 159,854 133,093
-------- -------- -------
Operating Income (Loss) (88,878) 49,117 47,098
Interest Income 2,733 4,096 5,089
Interest Expense (includes $379, $1,644, (7,252) (11,040) (13,926)
and $2,740 to parent company)
Gain on Issuance of Stock by Subsidiary (Note 5) - 6,269 -
Other Expense (Note 10) (2,125) - -
Equity in Earnings of Joint Venture 279 150 33
-------- -------- --------
Income (Loss) Before Income Taxes and Minority (95,243) 48,592 38,294
Interest
Income Tax (Provision) Benefit (Note 7) 34,816 (15,702) (14,415)
Minority Interest (Expense) Income (Note 10) 1,007 (1,681) (1,334)
-------- -------- --------
Net Income (Loss) $(59,420) $ 31,209 $ 22,545
======== ======== ========
Earnings (Loss) per Share (Note 17)
Basic $ (1.65) $ 1.07 $ .92
======== ======== ========
Diluted $ (1.65) $ .86 $ .64
======== ======== ========
Weighted Average Shares (Note 17)
Basic 35,944 29,299 24,613
======== ======== ========
Diluted 35,944 39,152 38,740
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Balance Sheet
(In thousands) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Assets
Current Assets:
Cash and cash equivalents (includes $21,207 under repurchase $ 21,919 $ 41,371
agreement with parent company in fiscal 1998)
Advance to affiliate 17,766 -
Restricted funds 28,024 24,536
Accounts receivable and unbilled revenues, less allowances 66,954 45,792
of $117 and $50
Inventories (Note 10) 20,023 23,640
Prepaid income taxes (Note 7) 41,288 11,724
Other current assets 3,194 2,335
-------- ---------
199,168 149,398
-------- ---------
Property, Plant, and Equipment, Net (Note 10) 203,606 301,930
-------- ---------
Long-term Available-for-sale Investment, at Quoted Market Value 6,111 8,502
(amortized cost of $6,379 and $8,504; Notes 2 and 10)
-------- ---------
Restricted Funds 30,315 26,177
-------- ---------
Other Assets 17,463 19,104
-------- ---------
$456,663 $ 505,111
======== =========
3
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term obligations and current portion of long-term $ 37,752 $ 28,032
obligations (includes advance from affiliate of $4,972 in
fiscal 1999; Note 13)
Accounts payable 32,159 10,775
Accrued restructuring costs (Note 10) 7,757 -
Accrued income taxes (Note 7) 617 7,824
Other accrued expenses 16,815 19,178
Due to parent company 728 -
-------- ---------
95,828 65,809
-------- ---------
Long-term Obligations (Note 13):
Nonrecourse tax-exempt obligations 14,500 33,700
Subordinated convertible debentures (includes $2,826 due to 46,770 47,400
parent company in fiscal 1999)
Capital lease obligations - 12,346
-------- ---------
61,270 93,446
-------- ---------
Deferred Income Taxes (Note 7) 55,951 56,571
-------- ---------
Other Deferred Items 40,419 25,216
-------- ---------
Minority Interest 12,631 14,437
-------- ---------
Commitments and Contingencies (Notes 8, 9, and 11)
Shareholders' Investment (Notes 4, 6, and 13):
Common stock, $.10 par value, 50,000,000 shares authorized; 3,787 3,782
37,869,248 and 37,822,789 shares issued
Capital in excess of par value 175,895 175,673
Retained earnings 39,382 98,802
Treasury stock at cost, 1,901,346 and 1,944,179 shares (28,084) (28,735)
Deferred compensation (Note 6) (46) -
Accumulated other comprehensive items (Note 16) (370) 110
-------- ---------
190,564 249,632
-------- ---------
$456,663 $ 505,111
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
-----------------------------------------
<S> <C> <C> <C>
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Operating Activities
Net income (loss) $(59,420) $ 31,209 $ 22,545
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Noncash restructuring charges (Note 10) 118,351 - -
Gain on termination of power-sales agreement (13,462) - -
(Note 10)
Depreciation and amortization 26,859 23,903 21,618
Deferred income tax expense (benefit) (Note 7) (30,183) 6,919 10,715
Minority interest (income) expense (Note 10) (1,007) 1,681 1,334
Other noncash items (Note 10) 3,521 - -
Provision for losses on accounts receivable 87 50 -
Gain on issuance of stock by subsidiary (Note 5) - (6,269) -
Deferred revenue (Note 12) - - (8,200)
Changes in current accounts, excluding the
effect of acquisitions:
Restricted funds (3,488) (3,763) (1,837)
Accounts receivable and unbilled revenues (17,905) (12,543) (3,740)
Inventories (175) (799) (1,371)
Other current assets 1,311 (7,854) 1,229
Accounts payable 19,857 6,355 2,457
Due from parent company (1,718) 12,631 3,170
Other current liabilities 2,681 (1,445) (401)
-------- -------- --------
Net cash provided by operating activities 45,309 50,075 47,519
-------- -------- --------
Investing Activities
Proceeds from termination of power-sales 40,000 - -
agreement (Note 10)
Payment for termination of lease agreement (Note 10) (17,425) - -
Payment for termination of fuel contract (Note 10) (6,800) - -
Acquisitions, net of cash acquired (Note 3) (12,615) (19,100) (10,865)
Purchases of property, plant, and equipment (25,833) (48,423) (17,710)
Advances to affiliate, net (17,766) - -
Funding of long-term restricted funds (4,138) (5,272) (6,793)
Increase in other deferred items 10,863 12,209 8,476
Increase in other assets (7,344) (2,610) (2,452)
-------- -------- --------
Net cash used in investing activities $(41,058) $(63,196) $(29,344)
-------- -------- --------
5
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Financing Activities
Net proceeds from issuance of subordinated $ - $ - $48,470
convertible debentures
Repayment of long-term obligations (18,317) (26,100) (16,800)
Payments under capital lease obligations (10,097) (8,912) (8,006)
Increase in short-term borrowings 5,284 - -
Net proceeds from issuance of Company and 232 15,777 698
subsidiary common stock (Note 5)
Payment of withholding taxes related to stock (43) (319) (1,115)
option exercises
Purchases of Company common stock - (10,248) (19,743)
Distribution to minority partner (1,547) (1,147) (1,346)
Capital contribution by minority partner 748 1,961 -
-------- -------- -------
Net cash provided by (used in) financing (23,740) (28,988) 2,158
activities
-------- -------- -------
Exchange Rate Effect on Cash 37 (60) (31)
-------- -------- -------
Increase (Decrease) in Cash and Cash Equivalents (19,452) (42,169) 20,302
Cash and Cash Equivalents at Beginning of Year 41,371 83,540 63,238
-------- -------- -------
Cash and Cash Equivalents at End of Year $ 21,919 $ 41,371 $83,540
======== ======== =======
Cash Paid For
Interest $ 7,698 $ 12,727 $13,100
Income taxes $ 1,555 $ 38 $ 7
Noncash Activities
Fair value of assets of acquired companies $ 18,078 $ 20,025 $15,183
Cash paid for acquired companies (12,778) (19,100) (11,223)
-------- -------- -------
Liabilities assumed of acquired companies $ 5,300 $ 925 $ 3,960
======== ======== =======
Conversions of subordinated convertible $ 630 $ 83,248 $19,579
debentures (includes $68,500 converted by ======== ======== =======
parent company in fiscal 1998; Note 13)
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Comprehensive Income
Net Income (Loss) $(59,420) $ 31,209 $22,545
-------- -------- -------
Other Comprehensive Items (Note 16):
Foreign currency translation adjustment (318) 164 (52)
Unrealized losses on available for sale investments (162) (2,438) (6,327)
-------- -------- -------
(59,900) 28,935 16,166
Minority Interest 97 (21) -
-------- -------- -------
$(59,803) $ 28,914 $16,166
======== ======== =======
Shareholders' Investment
Common Stock, $.10 Par Value:
Balance at beginning of year $ 3,782 $ 2,598 $ 1,617
Conversions of subordinated convertible 5 1,183 145
debentures (Note 13)
Issuance of Company common stock under employees' - 1 27
and directors' stock plans
Effect of three-for-two stock split - - 809
-------- -------- -------
Balance at end of year 3,787 3,782 2,598
-------- -------- -------
Capital in Excess of Par Value:
Balance at beginning of year 175,673 95,573 74,740
Conversions of subordinated convertible 625 81,701 18,991
debentures (Note 13)
Issuance of Company common stock under employees' (403) (1,601) 204
and directors' stock plans
Tax benefit related to employees' and directors' - - 2,447
stock plans
Effect of three-for-two stock split - - (809)
-------- -------- -------
Balance at end of year 175,895 175,673 95,573
-------- -------- -------
Retained Earnings:
Balance at beginning of year 98,802 67,593 45,048
Net income (loss) (59,420) 31,209 22,545
-------- -------- -------
Balance at end of year $ 39,382 $ 98,802 $67,593
-------- -------- -------
7
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Treasury Stock:
Balance at beginning of year $(28,735) $(20,872) $ (481)
Activity under employees' and directors' stock 651 2,385 (648)
plans
Purchases of Company common stock - (10,248) (19,743)
-------- -------- --------
Balance at end of year (28,084) (28,735) (20,872)
-------- -------- --------
Deferred Compensation:
Balance at beginning of year - - -
Issuance of restricted stock under employees' (59) - -
stock plans (Note 6)
Amortization of deferred compensation 13 - -
-------- -------- --------
Balance at end of year (46) - -
-------- -------- --------
Accumulated Other Comprehensive Items (Note 16):
Balance at beginning of year 110 2,384 8,763
Other comprehensive items (480) (2,274) (6,379)
-------- -------- --------
Balance at end of year (370) 110 2,384
-------- -------- --------
$190,564 $249,632 $147,276
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Ecotek Corporation (the Company) is an environmental company
providing a range of environmentally responsible technologies and products,
including nonutility electric power generation using clean combustion processes;
environmentally friendly pest control products through its biopesticides
subsidiary, Thermo Trilogy Corporation; as well as natural gas gathering,
processing, storage, and marketing, through its Star Natural Gas subsidiary
(Note 3).
The Company primarily develops and operates alternative-energy
electricity-generating facilities through joint ventures or limited partnerships
in which the Company has a majority interest, or through wholly owned
subsidiaries (the Operating Companies). The Company's interests in the Operating
Companies ranged from 65% to 100% at October 2, 1999, and in each case, are held
by wholly owned subsidiaries of the Company. Of the principal facilities
operated by the Company at October 2, 1999, six were owned by the Operating
Companies and the remainder were owned by unaffiliated parties who leased them
to the Operating Companies under long-term leases (Notes 8 and 10).
Relationship with Thermo Electron Corporation
The Company was incorporated on November 30, 1989, as a wholly owned
subsidiary of Thermo Electron Corporation. At October 2, 1999, Thermo Electron
owned 33,693,931 shares of the Company's common stock, representing 94% of such
stock outstanding.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company would be merged into Thermo Electron. As a result, the Company would
become a wholly owned subsidiary of Thermo Electron (Note 18).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
its majority-owned and wholly owned Operating Companies, and its majority-owned
subsidiary. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company accounts for investments in businesses
in which it owns between 20% and 50% using the equity method.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
September 30. References to fiscal 1999, 1998, and 1997 are for the years ended
October 2, 1999, October 3, 1998, and September 27, 1997, respectively. Fiscal
1999 and 1997 each included 52 weeks; fiscal 1998 included 53 weeks.
Revenue Recognition
The Company earns revenues primarily from the operation of
alternative-energy facilities. Revenues from plant operations are recorded as
electricity is delivered. The Operating Companies, with the exception of those
that terminated their agreements during fiscal 1999, have long-term power-supply
arrangements with local utilities, expiring between 2005 and 2014, to sell all
the output of the plants currently in operation at established or formula-based
defined rates (Notes 10 and 11). Under certain of these arrangements, in the
event of service termination by the Operating Companies prior to the end of the
obligation period, the Operating Companies may be required to reimburse the
utilities to the extent that cumulative revenue calculated at established rates
exceeds the amounts calculated at the utilities' "avoided cost" rates.
Management does not expect to incur any obligation under these provisions in the
foreseeable future. The Company recognizes revenue from its biopesticide
products upon shipment.
The Company's Woodland, California, plant has conditions in its
nonrecourse lease agreement that require the funding of a "power reserve" in
years prior to 2000, based on projections of operating cash flow shortfalls in
2000 and thereafter. The power reserve represents funds available to make lease
payments in the event that revenues are not sufficient following the transition
to avoided cost rates in August 1999 (Note 10). This funding requirement
significantly limits profit distributions that Woodland may make to the Company.
Accordingly, beginning during the first quarter of fiscal 1997, the Company
began recording as an expense the funding of reserves required under
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Woodland's nonrecourse lease agreement to cover projected shortfalls in lease
payments beginning in fiscal 2000. Consequently, the results of the Woodland
plant were reduced to approximately breakeven in fiscal 1999 and 1998. During
fiscal 1997, the Woodland plant contributed $1.0 million of operating income.
Repairs and Maintenance
The Company charges routine repairs and maintenance to expense in the
period the costs are incurred. The Company accrues for major maintenance and
overhauls in anticipation of scheduled outages at facilities that operate under
long-term power-sales agreements. Other accrued expenses in the accompanying
balance sheet includes approximately $0.3 million and $1.9 million at fiscal
year-end 1999 and 1998, respectively, in anticipation of scheduled maintenance
and overhauls.
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements in connection
with debt on certain alternative-energy facilities (Notes 13 and 15). The
interest rate swap agreements convert floating debt obligations to fixed rate
obligations. Interest rate swap agreements are accounted for under the accrual
method. Amounts to be received from or paid to the counter-parties of the
agreements are accrued during the period to which the amounts relate and are
reflected as interest expense. The related amounts payable to the
counter-parties are included in other accrued expenses in the accompanying
balance sheet. The fair value of the swap agreements is not recognized in the
accompanying financial statements since the agreements are accounted for as
hedges. The Company does not enter into speculative interest rate swap
agreements.
Gain on Issuance of Stock by Subsidiary
At the time a subsidiary sells its stock to unrelated parties at a price
in excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity and not engaged
principally in research and development, the Company records the increase as a
gain. See Note 5 for a description of gains recorded.
If gains have been recognized on issuances of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased by the subsidiary, the
Company, or Thermo Electron, gain recognition does not occur on issuances
subsequent to the date of a repurchase until such time as shares have been
issued in an amount equivalent to the number of repurchased shares.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 6). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes
The Company and Thermo Electron have a tax allocation agreement under
which the Company is included in the consolidated federal and certain state
income tax returns filed by Thermo Electron. The agreement provides that Thermo
Electron charges or pays the Company amounts based on the Company's relative
contribution to Thermo Electron's tax liability. If Thermo Electron's equity
ownership of the Company were to drop below 80%, the Company would be required
to file its own tax returns.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Earnings (Loss) per Share
Basic earnings (loss) per share have been computed by dividing net income
(loss) by the weighted average number of shares outstanding during the period.
Except where the result would be antidilutive, diluted earnings (loss) per share
have been computed assuming the conversion of convertible debentures and the
elimination of the related interest expense, and the exercise of stock options,
as well as their related income tax effects (Note 17).
Cash and Cash Equivalents and Restricted Funds
At fiscal year-end 1998, $21.2 million of the Company's cash equivalents
were invested in a repurchase agreement with Thermo Electron. Under this
agreement, the Company in effect lent excess cash to Thermo Electron, which
Thermo Electron collateralized with investments principally consisting of
corporate notes, U.S. government agency securities, commercial paper, money
market funds, and other marketable securities, in the amount of at least 103% of
such obligation. The repurchase agreement earned a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter. Effective June 1999, the Company adopted a new cash management
arrangement with Thermo Electron, described below, that replaces the repurchase
agreement. Cash equivalents also include investments in money market accounts.
The use of cash and cash equivalents totaling $12.5 million and $12.0 million at
fiscal year-end 1999 and 1998, respectively, was restricted by the terms of
certain Operating Companies' lease and financing agreements.
Restricted funds in the accompanying balance sheet represents amounts held
in trust for lease and debt payments and working capital requirements, as
required by certain of the Operating Companies' lease and financing agreements,
and are invested in money market accounts. Restricted funds that are not
expected to be used within the next fiscal year are classified as long-term in
the accompanying balance sheet.
All cash equivalents and restricted funds are carried at cost, which
approximates market value.
Advance to Affiliate
Effective June 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate (DCP Rate) plus 50
basis points, set at the beginning of each month. Thermo Electron is
contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Amounts invested in this arrangement are included in "advance to affiliate" in
the accompanying balance sheet.
In addition, under this arrangement, amounts may be borrowed from Thermo
Electron by the Company or its majority-owned subsidiary for domestic cash
management purposes, bearing interest at the 30-day DCP Rate plus 150 basis
points, set at the beginning of each month; provided such rate shall be reduced
to the DCP Rate plus 50 points to the extent of any funds invested by the
Company's majority-owned subsidiary in the cash management arrangement. Amounts
borrowed under this arrangement are included in short-term obligations and
current portion of long-term obligations in the accompanying balance sheet.
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Inventories
Inventories consist of raw materials, fuel, operating supplies, spare
parts, materials, and overhead and are stated at the lower of cost (on a
first-in, first-out or average basis) or market value. The components of
inventories are as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Raw Materials and Supplies $11,088 $13,843
Work in Process 4,267 2,802
Finished Goods 4,668 6,995
------- -------
$20,023 $23,640
======= =======
The Company periodically reviews its quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of revenues any amounts required
to reduce the carrying value of inventories to net realizable value (Note 10).
Property, Plant, and Equipment
The costs of additions and improvements are capitalized. The Company
provides for depreciation and amortization primarily using the straight-line
method over the estimated useful lives of the property as follows: buildings and
electricity-generating facilities, 10 to 25 years; property under capital lease,
the life of the asset; leasehold improvements, the shorter of the term of the
lease or the life of the asset; and machinery and equipment, 3 to 7 years. The
Company's subbituminous coal-beneficiation facility was depreciated based on a
rate per ton of product produced that was computed by estimating total
production over the life of the facility (Note 10). Property, plant, and
equipment consists of the following:
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Land $ 5,412 $ 6,747
Buildings and Electricity-generating Facilities (Notes 9, 10, and 13) 183,787 282,315
Property Under Capital Lease 47,020 47,020
Machinery and Equipment 19,762 19,261
Leasehold Improvements 10,898 16,915
Construction in Process 4,486 17,295
--------- ---------
271,365 389,553
Less: Accumulated Depreciation and Amortization 67,759 87,623
--------- ---------
$ 203,606 $ 301,930
========= =========
In March 1998, the Company purchased two power-generation facilities and
related sites in California for approximately $9.5 million and the assumption of
certain liabilities.
12
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Other Assets
Other assets in the accompanying balance sheet includes patents, licenses,
and other intangible assets arising from acquisitions by Thermo Trilogy and Star
Natural Gas (Note 3), prepaid rent relating to an Operating Company's lease
agreement, certain costs associated with the development of the Company's
alternative-energy facilities, and deferred debt expense relating to the
Company's issuances of subordinated convertible debentures. These assets are
being amortized using the straight-line method over their estimated useful
lives, which range from 5 to 30 years. These assets were $16.2 million and $17.5
million, net of accumulated amortization of $10.2 million and $8.9 million at
fiscal year-end 1999 and 1998, respectively.
In addition, other assets includes an investment in a joint venture of
$1.3 million and $1.6 million at fiscal year-end 1999 and 1998, respectively.
Other Deferred Items
Other deferred items in the accompanying balance sheet includes
obligations under an Operating Company lease to cover projected short-falls in
lease payments beginning in fiscal 2000, as described above under the caption
"Revenue Recognition." Other deferred items also includes rent that has been
recognized ratably for financial reporting purposes in connection with an
Operating Company's lease agreement (Note 8).
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment.
Foreign currency transaction gains and losses are included in the accompanying
statement of operations and are not material for the three years presented.
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.
Presentation
Certain amounts in fiscal 1998 and 1997 have been reclassified to conform
to the presentation in the fiscal 1999 financial statements.
2. Available-for-sale Investment
The Company's marketable equity securities are considered
available-for-sale investments in the accompanying balance sheet and are carried
at market value, with the difference between cost and market value, net of
related tax effects, recorded in the "Accumulated other comprehensive items"
component of shareholders' investment. At fiscal year-end 1999 and 1998, the
Company held one long-term available-for-sale investment, an investment in the
common stock of KFx, Inc., described below.
In fiscal 1995, the Company purchased 1,500,000 shares of KFx common stock
for $3.0 million, representing an approximate 7% equity interest in KFx. In
fiscal 1996, the Company purchased an additional 1,500,000 shares of KFx common
stock for $3.0 million, representing an additional 7% equity interest in KFx. In
fiscal 1997, the Company purchased an additional 1,250,000 shares of KFx common
stock for $2.5 million pursuant to the purchase agreement, bringing its total
equity interest in KFx to approximately 17%. Simultaneously with the execution
of the purchase agreement, KFx granted to the Company a warrant to purchase an
additional 7,750,000 shares at $3.65 per share, as
13
<PAGE>
2. Available-for-sale Investment (continued)
well as a warrant to purchase further shares of the common stock of KFx at then
market value, defined so that the number, when added to all other shares of such
common stock owned by the Company, would result in the Company owning 51% of the
common stock of KFx on a diluted basis. These warrants are exercisable from
January 1, 2000, through July 1, 2001.
The fair market value of this investment at October 2, 1999, was $6.1
million. The Company has written down the value of its investment in KFx in
fiscal 1999, as discussed in Note 10.
3. Acquisitions and Projects Under Development
Acquisitions
In May 1999, the Company's Star Natural Gas subsidiary acquired one gas
gathering system and two gas processing plants (the gas facilities) for $8.6
million in cash and future contingent payments based on the performance of the
gas facilities of up to $5.6 million, of which $1.1 million was accrued at
October 2, 1999. In September 1999, the Company acquired, through a joint
venture, a 58-megawatt electricity-generating facility in Germany for
approximately $4.5 million, including the assumption of debt.
In November 1997, Thermo Trilogy acquired the sprayable bacillus
thuringiensis (Bt) - biopesticide business of Novartis AG and its affiliates
(the Bt business of Novartis) for $19.1 million in cash and the assumption of
certain liabilities. In January 1997, Thermo Trilogy acquired substantially all
of the assets of biosys, inc., a biopesticide company, for $11.2 million in cash
and the assumption of certain liabilities.
These acquisitions have been accounted for using the purchase method of
accounting and their results have been included in the accompanying financial
statements from their respective dates of acquisition. The aggregate cost of
these acquisitions approximated the fair value of the net assets acquired.
Allocation of the purchase price was based on an estimate of the fair value of
the net assets acquired.
Based upon unaudited data, the following table presents selected financial
information for the Company, the Bt business of Novartis, and the biosys
business on a pro forma basis, assuming these businesses had been combined since
the beginning of fiscal 1997. The effect of the acquisition of the gas
facilities is not included in the pro forma data as this acquisition was not
material to the Company's results of operations.
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------- ---------- ---------- --------
Revenues $ 212,204 $205,199
Net Income 31,380 17,272
Earnings per Share:
Basic 1.07 .70
Diluted .86 .51
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of the Bt
business of Novartis and the biosys business been made at the beginning of
fiscal 1997.
Projects Under Development
During fiscal 1999, the Company completed a $32 million expansion of its
power operations in the Czech Republic. The Company is planning to expand and
repower an electricity-generating facility in Southern California bringing its
capacity to approximately 1,100 megawatts. In addition, the Company is in the
process of developing a 210-megawatt electricity-generating facility in Florida
and, together with a 10% joint venture partner, is developing a gas storage
facility in Colorado. The Company expects to expend approximately $700 million
dollars through fiscal 2003 to complete these projects, a large portion of which
it will seek to finance through external means.
14
<PAGE>
4. Shareholders' Investment
The net assets of certain Operating Companies are generally restricted as
to the amounts that can be transferred to the parent company in the form of
dividends, loans or advances, pursuant to certain lease or debt agreements. As
of October 2, 1999, net assets of certain subsidiaries of approximately $111.9
million were not restricted from distribution.
At October 2, 1999, the Company had reserved 4,349,365 unissued shares of
its common stock for possible issuance under stock-based compensation plans and
for issuance upon possible conversion of the Company's convertible obligations.
5. Transactions in Stock of Subsidiary
In fiscal 1998, Thermo Trilogy sold 1,942,821 shares of its common stock
in private placements at $8.25 per share for net proceeds of $14.9 million,
resulting in a gain of $6.3 million. Following the private placements, the
Company owned 80% of Thermo Trilogy's outstanding common stock.
6. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans permit the grant of nonqualified and
incentive stock options. A third plan permits the grant of a variety of stock
and stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under these plans are determined by
the Board Committee. Generally, options granted to date are exercisable
immediately, but are subject to certain transfer restrictions and the right of
the Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a one- to ten-year period, after the first
anniversary of the grant date, depending on the term of the option, which
generally ranges from five to twelve years. Nonqualified stock options may be
granted at any price determined by the Board Committee, although incentive stock
options must be granted at not less than the fair market value of the Company's
stock on the date of grant. To date, all options have been granted at fair
market value. The Company also has a directors' stock option plan that provides
for the grant of stock options to outside directors pursuant to a formula
approved by the Company's shareholders. Options awarded under this plan are
exercisable six months after the date of grant and expire three to ten years
after the date of grant. In addition to the Company's stock-based compensation
plans, certain officers and key employees may also participate in the
stock-based compensation plans of Thermo Electron.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 71,200 shares at a weighted average exercise price of $14.93 per share
elected to participate in this exchange and, as a result, received options to
purchase 35,600 shares of Company common stock at $10.58 per share, which are
included in the fiscal 1999 grants in the table below. The other terms of the
new options are the same as the exchanged options except that the holders may
not sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
In June 1999, the Company awarded 5,600 shares of restricted Company
common stock to certain key employees. The shares had an aggregate value of
$59,000 and vest three years from the date of award, assuming continued
employment, with certain exceptions. The Company has recorded the fair value of
the restricted stock as deferred compensation in the accompanying balance sheet
and is amortizing such amount over the vesting period.
15
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
6. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is as follows:
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- -------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 1,124 $ 9.70 1,281 $ 8.64 1,439 $ 6.55
Granted 132 10.50 83 17.72 264 14.13
Exercised (41) 5.60 (205) 6.37 (369) 4.46
Forfeited (90) 11.33 (35) 9.33 (53) 8.21
Canceled due to exchange (71) 14.93 - -
----- ----- -----
Options Outstanding, End of Year 1,054 $ 9.47 1,124 $ 9.70 1,281 $ 8.64
===== ====== ===== ====== ===== ======
Options Exercisable 1,054 $ 9.47 1,124 $ 9.70 1,281 $ 8.64
===== ====== ===== ====== ===== ======
Options Available for Grant 333 305 353
===== ===== =====
A summary of the status of the Company's stock options at October 2, 1999,
is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options Outstanding and Exercisable
-----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------- ------------------- -------------------- ------------------
$ 5.50 - $ 8.96 485 5.4 years $ 5.71
8.97 - 12.42 379 6.0 years 11.46
12.43 - 15.87 143 6.8 years 13.79
15.88 - 19.33 47 4.6 years 19.10
-----
$ 5.50 - $19.33 1,054 5.8 years $ 9.47
=====
Employee Stock Purchase Program
Substantially all of the Company's employees are eligible to participate
in an employee stock purchase program sponsored by the Company and Thermo
Electron. Under this program, shares of Company and Thermo Electron common stock
may be purchased at 85% of the lower of the fair market value at the beginning
or end of the plan year, and shares purchased are subject to a one-year resale
restriction. Prior to November 1, 1998, the applicable shares of common stock
could be purchased at the end of a 12-month period at 95% of the fair market
value at the beginning of the period and shares purchased were subject to a
six-month resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages.
16
<PAGE>
6. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after fiscal 1995 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income (loss) and
earnings (loss) per share would have been as follows:
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Net Income (Loss):
As reported $(59,420) $31,209 $22,545
Pro forma (60,222) 30,614 22,159
Basic Earnings (Loss) per Share:
As reported (1.65) 1.07 .92
Pro forma (1.68) 1.04 .90
Diluted Earnings (Loss) per Share:
As reported (1.65) .86 .64
Pro forma (1.68) .84 .63
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $3.32,
$5.79, and $5.72 in fiscal 1999, 1998, and 1997, respectively. The fair value of
each option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1999 1998 1997
- -------------------------------------------------------------------------- --------- ----------- ---------
Volatility 30% 28% 26%
Risk-free Interest Rate 4.8% 5.5% 6.1%
Expected Life of Options 4.0 years 4.2 years 6.4 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
17
<PAGE>
6. Employee Benefit Plans (continued)
401(k) Savings Plans
Substantially all of the Company's corporate, full-time employees are
eligible to participate in Thermo Electron's 401(k) savings plan. Contributions
to the Thermo Electron 401(k) savings plan are made by both the employee and the
Company. Company contributions are based upon the level of employee
contributions. Employees of the Operating Companies who meet eligibility
requirements may participate in a separate defined contribution plan.
Contributions to the plan are made by both the employee and the Operating
Companies. The Operating Companies' contributions are based on the level of
employee contributions. The Company contributed and charged to expense for these
plans $595,000, $536,000, and $401,000 in fiscal 1999, 1998, and 1997,
respectively.
7. Income Taxes
The components of income (loss) before income taxes and minority interest
are as follows:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Domestic $(94,441) $ 46,992 $ 37,712
Foreign (802) 1,600 582
-------- -------- --------
$(95,243) $ 48,592 $ 38,294
======== ======== ========
The components of the income tax (provision) benefit are as follows:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Currently (Payable) Refundable:
Federal $ 5,041 $ (7,202) $ (3,214)
State (679) (1,438) (486)
Foreign 271 (143) -
-------- -------- --------
4,633 (8,783) (3,700)
-------- -------- --------
(Deferred) Prepaid:
Federal 27,439 (6,545) (9,250)
State 2,744 (374) (1,465)
-------- -------- --------
30,183 (6,919) (10,715)
-------- -------- --------
$ 34,816 $(15,702) $(14,415)
======== ======== ========
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the Company's common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $1,012,000
of such benefits that have been allocated to capital in excess of par value in
fiscal 1998.
18
<PAGE>
7. Income Taxes (continued)
The income tax (provision) benefit in the accompanying statement of
operations differs from the provision calculated by applying the statutory
federal income tax rate of 35% to income (loss) before income taxes and minority
interest due to the following:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Income Tax (Provision) Benefit at Statutory Rate $ 33,335 $(17,007) $(13,403)
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 1,342 (1,178) (1,268)
Minority interest expense 449 491 466
Nondeductible expenses (53) (44) (210)
Nontaxable gain on issuance of stock by subsidiary - 2,194 -
Other (257) (158) -
-------- -------- --------
$ 34,816 $(15,702) $(14,415)
======== ======== ========
</TABLE>
Prepaid and deferred income taxes in the accompanying balance sheet
consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Deferred (Prepaid) Income Taxes:
Depreciation $ 54,947 $ 55,062
Restructuring costs (24,779) -
State tax net operating loss carryforwards (3,904) (2,811)
Capitalized costs and other (2,125) (2,097)
Other reserves and accruals (14,483) (9,959)
Available-for-sale investments (109) (2)
Intangible assets 959 1,502
Stock options not benefited 253 341
-------- --------
10,759 42,036
Valuation allowance 3,904 2,811
-------- --------
$ 14,663 $ 44,847
======== ========
The valuation allowance relates principally to uncertainty surrounding the
realization of certain state tax loss carryforwards. State tax loss
carryforwards of approximately $41 million began expiring in 1998.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of its investment in the common stock of
its subsidiary (such difference relates primarily to unremitted earnings of
foreign subsidiaries and gain on issuance of stock by subsidiary) because the
Company does not expect this basis difference to become subject to tax at the
parent level. The Company believes it can implement certain tax strategies to
recover its investment in its domestic subsidiaries tax free.
19
<PAGE>
8. Commitments
Leases
Certain Operating Companies have operating lease agreements for their
facilities expiring in various years through 2010. The lease agreements provide
for renewal of each of the leases for additional periods ranging from one to
five years at the Operating Companies' option. In general, renewal options are
at the lower of a predetermined percentage of the average annual lease rental
during the lease terms or the fair market rental as determined by an independent
appraisal. In general, at the end of the lease terms or renewal terms, the
Operating Companies have a right of first refusal or an option to purchase the
facilities, at their fair market value, as determined by an independent
appraisal.
Lease payments under the operating leases are made to the owner of the
facility only to the extent that power revenues exceed essential operating
expenses, as defined, up to certain specified maximum levels (Note 9). Subject
to the foregoing, as of October 2, 1999, the contractual amounts payable
pursuant to the lease agreements total approximately $104.5 million over the
remaining initial lease terms, averaging approximately $12.3 million per year.
The Company recognizes rent expense ratably over the respective lease terms. The
accompanying statement of operations includes expenses from operating leases for
the Operating Companies' facilities of $14.7 million, $15.2 million, and $15.5
million in fiscal 1999, 1998, and 1997, respectively.
In addition, the Company and a subsidiary lease office and production
facilities under operating lease arrangements expiring from fiscal 2002 through
fiscal 2005. The accompanying statement of operations includes expenses from
operating leases excluding the related-party lease discussed below of
$1,216,000, $804,000, and $688,000 in fiscal 1999, 1998, and 1997, respectively.
Future minimum lease payments due under noncancellable operating leases as of
October 2, 1999, net of annual sublease income of $187,000, are $1,072,000 in
fiscal 2000; $1,017,000 in fiscal 2001; $822,000 in fiscal 2002; $676,000 in
fiscal 2003; and $363,000 in fiscal 2004; and $260,000 in fiscal 2005 and
thereafter. Total future minimum lease payments are $4,210,000.
During part of fiscal 1997, the Company leased part of its office
facilities from Thermo Electron. The agreement called for the Company to pay
rent based on Thermo Electron's occupancy costs per square foot. The
accompanying statement of operations included expense of $27,000 in fiscal 1997,
under the agreement with Thermo Electron.
Fuel Supply
The Operating Companies have entered into fuel supply agreements with
various suppliers guaranteeing the purchase of certain minimum quantities of
acceptable fuel at negotiated prices and terms. The Operating Companies
purchased $20.9 million, $17.6 million, and $20.4 million of fuel under such
contracts in fiscal 1999, 1998, and 1997, respectively. The agreements call for
price adjustments based on certain published indices or stated rates over their
terms expiring between calendar 1999 and 2005. See Note 9 for fuel supply
agreements with related parties.
9. Related-party Transactions
Corporate Service Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar years 1997 and 1996, the Company paid an
amount equal to 1.0% of the Company's revenues. For these services, the Company
was charged $1.6 million, $1.8 million, and $1.8 million in fiscal 1999, 1998,
and 1997, respectively. The fee is reviewed and adjusted annually by mutual
agreement of the parties. Management believes that the service fee charged by
Thermo Electron is reasonable and that such fees are representative of the
expenses the Company would have incurred on a stand-alone basis. The corporate
services agreement is renewed annually but can be terminated upon 30 days' prior
notice by the Company or upon the
20
<PAGE>
9. Related-party Transactions (continued)
Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo
Electron Corporate Charter defines the relationships among Thermo Electron and
its majority-owned subsidiaries). For additional items such as employee benefit
plans, insurance coverage, and other identifiable costs, Thermo Electron charges
the Company based upon costs attributable to the Company.
Fuel Supply
A portion of the fuel used by the Operating Companies' facilities is
obtained under agreements with related parties of the Operating Companies or
their joint venture partners (Note 8). During fiscal 1999, 1998, and 1997, the
Company paid $3.9 million, $4.2 million, and $4.2 million, respectively, under
these agreements.
Management Fees
One of the Operating Companies has entered into management agreements with
a related party of its joint venture partner for the day-to-day operation of its
facility and the procurement and management of fuel. During fiscal 1999, 1998,
and 1997, the Company paid $405,000, $386,000, and $368,000, respectively, under
these agreements.
Thermo Electron Guarantees
Thermo Electron has issued an operating standards support agreement for
each of the facilities leased or financed by the Operating Companies. These
agreements provide that Thermo Electron will loan the Operating Companies, on a
subordinated basis, enough funds to meet their lease or debt payments in the
event the power plants are unable to generate power at a designated level and
such inability is related to the design, construction, operation, or maintenance
of the plants and not caused by certain uncontrollable circumstances.
Thermo Electron has also guaranteed the lease payments of one of the
Operating Companies under certain events. Under the terms of this guarantee,
Thermo Electron will loan funds to the Operating Company to cover any shortfall
in its lease payment in the event and to the extent the terms of the Operating
Company's power purchase agreements are changed by Public Service Company of New
Hampshire (PSNH; Note 11). No such payments have been required under this
guarantee.
The Company and Thermo Electron have entered into a Master Cash
Management, Guarantee Reimbursement, and Loan Agreement through which the
Company will reimburse Thermo Electron in the event that Thermo Electron is
required to make any payments pursuant to guarantees, including those guarantees
described above.
Operating Lease
See Note 8 for a description of the Company's operating lease with Thermo
Electron.
Long-term Obligations
See Note 13 for a description of the Company's long-term obligations held
by Thermo Electron.
Cash Management
The Company invests excess cash in arrangements with Thermo Electron as
discussed in Note 1.
21
<PAGE>
10. Restructuring and Nonrecurring Costs, Net
During fiscal 1999, the Company recorded restructuring costs of $126.3
million, nonrecurring income of $13.5 million, inventory provisions of $3.0
million, and other expense of $2.1 million, as a result of the actions detailed
below. The inventory provision and $0.6 million of restructuring costs were
recorded by the Company's Biopesticides segment. The balance of the charges were
recorded by the Company's Energy segment.
Following significant investments of resources in attempts to correct
operational problems, in May 1999, the Company made a decision to cease further
efforts and hold for sale or disposal its subbituminous coal-beneficiation
facility near Gillette, Wyoming (the K-Fuel Facility). As a result, the Company
recorded a charge of $68.0 million, including $63.3 million to write down the
plant and related equipment to a nominal salvage value, $4.4 million for
estimated land reclamation costs, and $0.3 million of other exit costs,
primarily abandoned-facility payments. The Company recorded $1.5 million of
minority interest income, representing a minority partner's share of these
charges. The Company is seeking damages against the facility contractor and its
bonding company. The amount of future recovery, if any, is dependent on the
successful resolution of this claim.
The Company's Delano, California, biomass facilities will reach the end of
the fixed price contract period of their power-sales agreement in September
2000. While the Company forecasts positive cash flows for periods after that
time, the facilities would operate at a loss due to depreciation expense that
extends beyond fiscal 2000. In response, in May 1999, the Company entered into
an agreement to terminate the power-sales agreement for its Delano facilities,
effective December 31, 1999. The terms of the agreement call for the Company to
receive payments over seven years in lieu of operating under its current
agreement. The Company recorded a charge of $51.0 million as a result of
entering into the new agreement, including $47.5 million to write down the
plants and related assets to their estimated recoverable value, $2.4 million
related to a charge for the cancellation of the facilities' primary fuel
contract, and $1.1 million to write off cost in excess of net assets acquired
that arose in connection with the acquisition of the facilities.
Pacific Gas & Electric (PG&E), the customer under a long-term power-sales
agreement at the Company's Woodland, California, plant, has interpreted the
terms of such agreement to permit PG&E to cease payment of fixed contract rates
effective August 1999, and to thereafter purchase power at avoided cost rates.
The Company believes that PG&E stopped paying fixed cost rates six months
earlier than called for under the Company's power-sales agreement with PG&E.
Although the Company is considering its alternatives concerning this dispute,
during fiscal 1999 the Company recorded a charge of $3.8 million, representing
impairment of the Company's remaining net investment in the Woodland facility as
a result of PG&E's decision to cease making payments of the fixed contract rates
six months earlier than anticipated.
During fiscal 1999, the Company recorded a charge of $1.5 million to write
off a power plant that is held for sale. The Company believes that the salvage
value, if any, is nominal. In addition, the Company wrote off $0.4 million of
unrecovered development costs for a project in Italy. The Company agreed to sell
its interest in the Italy project to its joint venture partner for $2.5 million
and wrote off the balance of its development costs. The Company also recorded
other restructuring costs of $1.0 million, primarily representing the write-off
of abandoned fixed assets.
In connection with certain of these restructuring actions, the Company
provided $0.6 million for severance for 17 employees, 14 of whom have been
terminated as of October 2, 1999.
In September 1999, the Company entered into an agreement to terminate the
power-sales agreement for its Gorbell facility in Athens, Maine. Under the terms
of the agreement, the Company received a payment in lieu of operating under its
current agreement, which was scheduled to expire in fiscal 2007. The Company has
recorded nonrecurring income of $13.5 million as a result of entering into this
agreement. This amount represents the excess of the proceeds from the
termination of the agreement over lease and fuel agreement termination costs,
aggregating $17.4 million and $6.8 million, respectively, and $2.3 million of
assets that were written off. The assets principally consist of leasehold
improvements and related plant assets. The Company obtained ownership of the
Gorbell facility in this transaction, although the Company has not determined if
it will be economically beneficial to operate the plant in the future. In fiscal
1999, the Gorbell facility had revenues and operating income prior to the
nonrecurring gain of $9.2 million and $1.3 million, respectively.
22
<PAGE>
10. Restructuring and Nonrecurring Costs, Net (continued)
In addition, during fiscal 1999, following a period of weak performance in
the biopesticides industry, Thermo Trilogy established inventory provisions of
$3.0 million for inventories deemed unsaleable or excess based on current
demand. The provision is included in cost of revenues in the accompanying fiscal
1999 statement of operations.
In fiscal 1999, the Company also recorded a charge of $2.1 million
representing the write-down of available-for-sale equity securities of KFx, its
minority partner in the K-Fuel Facility. The Company deemed the impairment to be
permanent based on stock prices prior to recording the charge. This charge is
included in other expense in the accompanying fiscal 1999 statement of
operations.
Except for activity recorded in accrued restructuring costs, the fiscal
1999 restructuring and related charges represent noncash charges. The Company
expects to pay amounts accrued in fiscal 2000.
A summary of the changes in accrued restructuring costs is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Land Fuel Contract Severance Other
Reclamation Cancellation
(In thousands) Costs Total
- --------------------------------- -------------- -------------- -------------- ------------- -------------
Balance at October 3, 1998 $ - $ - $ - $ - $ -
Provision charged to expense 4,394 2,444 630 446 7,914
Usage - - (157) - (157)
------ ------ ----- ------ ------
Balance at October 2, 1999 $4,394 $2,444 $ 473 $ 446 $7,757
====== ====== ===== ====== ======
11. Contingencies
Two of the Operating Companies have rate orders from the New Hampshire
Public Utilities Commission (NHPUC) to sell all of their power to PSNH. In 1990,
a plan of reorganization (the Plan) for PSNH was approved by the U.S. Bankruptcy
Court for the District of New Hampshire. Pursuant to the Plan, Northeast
Utilities (NU) acquired the assets of PSNH. An agreement between NU and the
State of New Hampshire contains language to the effect that PSNH will seek to
renegotiate some of the terms of certain rate orders with small power producers,
including the Whitefield and Hemphill Operating Companies, and that the state
will support PSNH in such efforts. PSNH reached agreements in principle with
these two Operating Companies to settle the renegotiation of their rate orders.
The settlement agreements were subject to the approval of the NHPUC on terms
acceptable to both PSNH and the Operating Companies. The principal terms of the
agreement generally called for the two Operating Companies to reduce the amount
of power sold annually to PSNH to 70% of the plants' capacities, and to reduce
the price per kilowatt paid by PSNH to $0.06 per kilowatt hour, escalating three
percent per year for the remainder of the term of the original, applicable rate
order. In consideration of these reductions, the Operating Companies would
receive certain cash settlement payments, paid over several years. In May 1998,
the NHPUC issued a written ruling rejecting these settlement agreements. Certain
members of the N.H. Legislature filed a motion requesting that the NHPUC
reconsider its ruling and instead provide that the settlement agreements be left
open. The NHPUC approved this request in July 1998. No further action has
occurred on the settlement agreements. Rejection of the Company's rate orders
would result in a claim for damages by the Company and could be the subject of
lengthy litigation.
In January 1997, NU disclosed in a filing with the Securities and Exchange
Commission that if a proposed deregulation plan for the New Hampshire electric
utility industry were adopted, PSNH could default on certain financial
obligations and seek bankruptcy protection. In February 1997, the NHPUC voted to
adopt a deregulation plan, and in March 1997, PSNH filed suit to block the plan.
In March 1997, the federal district court issued a temporary restraining order
which prohibits the NHPUC from implementing the deregulation plan as it affects
PSNH, pending a determination by the court as to whether PSNH's claim could then
be heard by the court. In April 1997, the
23
<PAGE>
11. Contingencies (continued)
court ruled that it could hear the case and ordered that the restraining order
continue indefinitely pending the outcome of the suit. In addition, in March
1997, the Company, along with a group of other biomass power producers, filed a
motion with the NHPUC seeking clarification of the NHPUC's proposed deregulation
plan regarding several issues, including purchase requirements and payment of
current rate order prices with respect to the Company's energy output. In March
1998, the NHPUC addressed the Operating Companies' motion and stated it was not
the NHPUC's intent in the February 1997 order to impair any of the Operating
Companies' legal rights in their rate orders. In August 1999, PSNH and the State
reached a comprehensive settlement agreement which was filed with the NHPUC. The
NHPUC has stayed its dockets concerning the deregulation plan pending review of
this settlement agreement. The federal district court lawsuit has also been
stayed pending settlement agreement review. If the NHPUC approves the settlement
agreement as filed, then the NHPUC deregulation plan docket, other related
dockets, and the federal district court lawsuits will be dismissed. The
PSNH/State settlement agreement purports not to make any changes in the
Operating Companies' rate orders. It does provide for PSNH to resell the power
from the Operating Companies to assist in mitigating the cost of that power. No
assurances may be made as to the outcome of this matter. An unfavorable
resolution of this matter, including the bankruptcy of PSNH, could have a
material adverse effect on the Company's results of operations and financial
position.
The Company is contingently liable with respect to lawsuits and matters
that arose in the normal course of business. In the opinion of management, these
contingencies will not have a material adverse effect on the financial position
or results of operations of the Company.
12. Termination of Power-sales Agreement
In August 1993, in exchange for a cash payment, the Company agreed to
terminate a power-sales agreement with a utility, which required the utility to
purchase the power that was to be generated by the Company's 55-megawatt natural
gas cogeneration facility under development in Staten Island, New York. Under
the agreement, the Company received $18.0 million in a series of payments
through May 1997, plus interest at 5.8%. The Company would have been obligated
to return $8.2 million of this amount if the Company had elected to proceed with
the Staten Island facility and the plant were to commence commercial operation
before January 1, 2000. Accordingly, the Company deferred recognition of $8.2
million through fiscal 1996, pending final determination of the project's
status.
During fiscal 1997, the Company determined that due to continuing economic
conditions in the domestic energy market it would not be feasible to design,
construct, and commence commercial operation of the Staten Island facility prior
to January 1, 2000. As a result, the refund obligation terminated and the
previously deferred revenue was recognized during fiscal 1997.
24
<PAGE>
13. Long-term Obligations
</TABLE>
<TABLE>
<CAPTION>
Long-term obligations consist of the following:
<S> <C> <C>
(In thousands except per share amounts) 1999 1998
- -------------------------------------------------------------------------- ---------- ---------- ---------
8.3% Nonrecourse Tax-exempt Revenue Bonds, Series 1989 $13,400 $17,400
(payable in semi-annual installments, with a final payment in
December 2000)
8.3% Nonrecourse Tax-exempt Revenue Bonds, Series 1990 13,800 18,200
(payable in semi-annual installments, with a final payment in
December 2000)
6.0% Nonrecourse Tax-exempt Revenue Bonds, Series 1991 6,500 16,200
(payable in semi-annual installments, with a final payment in
June 2000)
Noninterest-bearing Subordinated Convertible Debentures, due 1,820 2,450
March 2001 (convertible at $13.56 per share)
4.875% Subordinated Convertible Debentures, due April 2004 44,950 44,950
(convertible at $16.50 per share)
------- -------
80,470 99,200
Less: Current Portion of Long-term Obligations 19,200 18,100
------- -------
$61,270 $81,100
======= =======
</TABLE>
<TABLE>
<CAPTION>
The annual requirements for long-term obligations are as follows:
<S> <C>
(In thousands)
- ------------------------------------------------------------------------------------- ---------- ---------
2000 $19,200
2001 16,320
2002 -
2003 -
2004 44,950
-------
$80,470
=======
The Company's noninterest-bearing and 4.875% subordinated convertible
debentures are guaranteed on a subordinated basis by Thermo Electron.
In May 1998, Thermo Electron converted $68.5 million principal amount of
the Company's 4.0% subordinated convertible debentures, convertible at $6.33 per
share and due January 2001, into 10,815,846 shares of the Company's common
stock. In fiscal 1999 and 1998, $0.6 million and $14.7 million principal amount,
respectively, of the noninterest-bearing and 4.875% subordinated convertible
debentures were converted into 46,459 shares and 1,021,244 shares, respectively,
of the Company's common stock.
Thermo Electron purchased $2.8 million principal amount of the Company's
4.875% subordinated convertible debentures in the open market in fiscal 1999.
The tax-exempt revenue bonds were issued by the California Pollution
Control Financing Authority to finance the construction of the Delano I and
Delano II facilities. The obligations are credit-enhanced by a letter of credit
issued by a bank group. Repayment of the debt is an obligation of Delano and the
obligations are nonrecourse to the Company. As of October 2, 1999, Delano I and
Delano II plant and equipment totaling approximately $93.8 million were
collateral for this debt.
25
<PAGE>
14. Significant Customers, Concentrations of Credit Risk, and Business
Segments
Significant Customers
Revenues from three electric utility customers as a percentage of total
revenues were approximately 16%, 30%, and 26% in fiscal 1999; 16%, 30%, and 30%
in fiscal 1998; and 18%, 31%, and 32% in fiscal 1997.
Concentrations of Credit Risk
At fiscal year-end 1999 and 1998, a significant amount of accounts
receivable due to the Company was from its four principal electric utility
customers. The Company does not normally require collateral or other security to
support its accounts receivable. Management does not believe that this
concentration of credit risk has or will have a significant negative impact on
the Company.
Business Segments
The Company's business is divided into two segments. The Energy segment
operates independent electric power-generation facilities and a natural gas
business. The Biopesticides segment manufactures and sells biopesticides through
the Company's majority-owned Thermo Trilogy subsidiary.
Information with respect to the Company's business segments, is shown in
the following table.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- ---------- --------
Revenues:
Energy $ 178,338 $ 175,943 $164,261
Biopesticides 27,155 33,028 15,930
--------- --------- --------
$ 205,493 $ 208,971 $180,191
========= ========= ========
Income (Loss) Before Income Taxes and Minority Interest:
Energy (a) $ (76,089) $ 55,257 $ 55,662
Biopesticides (b) (5,584) 2,749 (146)
Corporate (c) (7,205) (8,889) (8,418)
--------- --------- --------
Total operating income (loss) (88,878) 49,117 47,098
Interest and other expense, net (d) (6,365) (525) (8,804)
--------- --------- --------
$ (95,243) $ 48,592 $ 38,294
========= ========= ========
Identifiable Assets:
Energy $ 385,850 $ 418,571 $384,002
Biopesticides 49,225 50,620 29,338
Corporate (e) 21,588 35,920 71,965
--------- --------- --------
$ 456,663 $ 505,111 $485,305
========= ========= ========
Depreciation and Amortization:
Energy $ 24,417 $ 21,260 $ 20,106
Biopesticides 2,356 2,385 1,000
Corporate 86 258 512
--------- --------- --------
$ 26,859 $ 23,903 $ 21,618
========= ========= ========
26
<PAGE>
14. Significant Customers, Concentrations of Credit Risk, and Business Segments (continued)
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- ---------- --------
Capital Expenditures:
Energy $23,801 $46,261 $16,528
Biopesticides 1,864 1,943 1,167
Corporate 168 219 15
------- ------- -------
$25,833 $48,423 $17,710
======= ======= =======
(a) Reflects restructuring and related costs, net of $112.2 million in fiscal
1999.
(b) Reflects inventory provisions of $3.0 million and restructuring costs of
$0.6 million in fiscal 1999. (c) Primarily general and administrative
expenses.
(d) Reflects a write-down of available-for-sale investment of $2.1 million in
fiscal 1999.
(e) Primarily cash and cash equivalents and, in fiscal 1999, advance to
affiliate.
15. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, advance to affiliate, restricted funds, accounts receivable,
long-term available-for-sale investment, short-term and current portion of
long-term obligations, accounts payable, due to parent company, long-term
obligations, and interest rate swaps. The carrying amounts of these financial
instruments, with the exception of long-term available-for-sale investments,
long-term obligations, and interest rate swaps, approximate fair value due to
their short-term nature.
The Company's long-term available-for-sale investments are carried at fair
value in the accompanying balance sheet. The fair value was determined based on
a quoted market price. See Note 2 for the fair value information pertaining to
this financial instrument.
The carrying amount and fair value of the Company's long-term obligations
and interest rate swaps are as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 1998
------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
Long-term Obligations:
Convertible obligations $46,770 $39,846 $47,400 $ 47,617
Other long-term obligations 14,500 15,329 46,046 48,098
------- ------- ------- --------
$61,270 $55,175 $93,446 $ 95,715
======= ======= ======= ========
Interest Rate Swaps Receivable $ 853 $ 2,052
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year ends. The fair value of convertible obligations at fiscal year-end 1999 is
below the carrying amount primarily due to the conversion price of the
convertible obligations exceeding the market price of the Company's common
stock.
Interest rate swap agreements are in place on the borrowings associated
with the Delano facilities and are with a different counter-party than the
holders of the underlying debt. These swaps have terms expiring in December 2000
commensurate with the final maturity of the debt. The swaps have effectively
converted floating rate debt to fixed rate
27
<PAGE>
15. Fair Value of Financial Instruments (continued)
borrowings. Management believes any credit risk associated with the swaps is
remote. The notional amount of the swap agreements was $33.6 million and $53.6
million at fiscal year-end 1999 and 1998, respectively. The fair value of such
agreements is the estimated amount that the Company would pay upon termination
of the contract, taking into account the change in market interest rates and
creditworthiness of the counterparties. During fiscal 1999 and 1998, the average
variable rate received under the swap agreement was 3.0% and 3.6%, respectively.
16. Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income (loss)
and "other comprehensive items, net," which represents certain amounts that are
reported as components of shareholders' investment in the accompanying balance
sheet, including foreign currency translation adjustments and unrealized net of
tax losses on available-for-sale investments.
Accumulated other comprehensive items in the accompanying balance sheet
consist of the following:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------- ------- ------
Cumulative Translation Adjustment $(206) $ 112
Net Unrealized Loss on Available-for-sale Investments (164) (2)
----- -----
$(370) $ 110
===== =====
28
<PAGE>
17. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ----------
Basic
Net Income (Loss) $(59,420) $ 31,209 $22,545
-------- -------- -------
Weighted Average Shares 35,944 29,299 24,613
-------- -------- -------
Basic Earnings (Loss) per Share $ (1.65) $ 1.07 $ .92
======== ======== =======
Diluted
Net Income (Loss) $(59,420) $ 31,209 $22,545
Effect of:
Convertible debentures - 2,387 2,374
Majority-owned subsidiary's dilutive securities - (13) -
-------- -------- -------
Income (Loss) Available to Common Shareholders, as Adjusted $(59,420) $ 33,583 $24,919
-------- -------- -------
Weighted Average Shares 35,944 29,299 24,613
Effect of:
Convertible debentures - 9,541 13,746
Stock options - 312 381
-------- -------- -------
Weighted Average Shares, as Adjusted 35,944 39,152 38,740
-------- -------- -------
Diluted Earnings (Loss) per Share $ (1.65) $ .86 $ .64
======= ======== =======
Options to purchase 633,000, 73,000, and 76,000 shares of common stock
were not included in the computation of diluted earnings (loss) per share for
fiscal 1999, 1998, and 1997, respectively, because their effect would have been
antidilutive due to the options' exercise prices exceeding the average market
price for the common stock and, in fiscal 1999, due to the Company's net loss
position. In addition, the computation of diluted earnings (loss) per share for
fiscal 1999 excludes the effect of assuming the conversion of the Company's
$45.0 million principal amount of 4.875% convertible debentures, convertible at
$16.50 per share, and $1.8 million principal amount of noninterest-bearing
subordinated convertible debentures, convertible at $13.56 per share because the
effect would be antidilutive due to the Company's net loss position.
18. Proposed Reorganization
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company would be merged into Thermo Electron. As a result, the Company would
become a wholly owned subsidiary of Thermo Electron. The public shareholders of
the Company would receive common stock in Thermo Electron in exchange for their
shares. This proposal is subject to numerous conditions, including establishment
of a price and exchange ratio, confirmation of anticipated tax consequences,
receipt of a fairness opinion from an investment banking firm, approval by the
board of directors of the Company (including its independent directors),
negotiation and execution of a definitive merger agreement, and completion of
review by the Securities and Exchange Commission of certain required filings
regarding the proposed transaction.
29
<PAGE>
19. Unaudited Quarterly Information
(In thousands except per share amounts)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 First Second Third (a) Fourth (b)
- --------------------------------------------------------- ----------- ------------ ----------- -----------
Revenues $45,061 $ 47,330 $ 52,267 $ 60,835
Gross Profit 11,514 10,569 15,688 14,519
Net Income (Loss) 2,510 1,754 (74,558) 10,874
Earnings (Loss) per Share:
Basic .07 .05 (2.07) .30
Diluted .07 .05 (2.07) .29
1998 First (c) Second Third Fourth (d)
- --------------------------------------------------------- ----------- ------------ ----------- -----------
Revenues $47,809 $ 47,207 $50,748 $ 63,207
Gross Profit 16,414 13,562 16,328 27,161
Net Income 9,258 4,198 4,824 12,929
Earnings per Share:
Basic .38 .17 .15 .36
Diluted .25 .13 .14 .34
(a) Reflects restructuring and related costs of $126.4 million.
(b) Reflects $1.1 million of fees associated with the sale of a power-sales
agreement, nonrecurring income of $13.5 million, inventory provisions of
$3.0 million, and restructuring and related costs of $1.9 million.
(c) Reflects the November 1997 acquisition of the Bt business of Novartis and a
nontaxable gain of $6.3 million from the issuance of stock by subsidiary.
(d) Reflects the inclusion of $1.9 million of fees received from the release by
the Company of certain rights relating to power-generating equipment.
30
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Ecotek Corporation:
We have audited the accompanying consolidated balance sheet of Thermo
Ecotek Corporation (a Delaware corporation and 94%-owned subsidiary of Thermo
Electron Corporation) and subsidiaries as of October 2, 1999, and October 3,
1998, the related consolidated statements of operations, cash flows, and
comprehensive income and shareholders' investment for each of the three years in
the period ended October 2, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo
Ecotek Corporation and subsidiaries as of October 2, 1999, and October 3, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended October 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 8, 1999
31
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company reports its results in two business segments. The Energy
segment operates independent electric power-generation facilities through joint
ventures, limited partnerships, or wholly owned subsidiaries (the Operating
Companies), as well as a natural gas business (Star Natural Gas). The
Biopesticides segment manufactures and sells naturally derived pesticides
through the Company's majority-owned subsidiary, Thermo Trilogy Corporation.
In the Energy segment, each Operating Company in the United States
typically sells power under a long-term power-sales agreement. The profitability
of operating the Company's facilities depends on the price received for power
under the power-sales agreements with power purchasers, on plant performance or
availability, and on the fuel, operating, and maintenance costs for the
facilities. The Energy segment earns a disproportionately high share of its
income in May to October due to the rate structures under the power-sales
agreements for its California plants, which provide strong incentives to operate
during this period of high demand. Conversely, the Energy segment has
historically operated at marginal profitability during the second fiscal quarter
due to the rate structure under these agreements. The Energy segment's
profitability is also dependent on the amount of development expenses that it
incurs.
Through May 1999, the Energy segment also operated in the field of
engineered clean fuels through a limited partnership agreement with KFx, Inc.
The Company is a 95% partner in a partnership that was established to develop,
construct, and operate a subbituminous coal-beneficiation facility near
Gillette, Wyoming (the K-Fuel Facility). In May 1999, the Company made a
decision to hold the K-Fuel Facility for sale or disposal (Note 10).
The Company has expanded its energy operations into international markets
and has begun business- development efforts in the Czech Republic and Germany.
In January 1998, the Company, through a wholly owned subsidiary's participation
in a joint venture, indirectly acquired a majority interest in the assets of a
12-megawatt energy center near Tabor, Czech Republic, along with the business of
five auxiliary boilers in the town of Pribram, Czech Republic (the Czech
Republic operations). The Company completed an expansion of the facility to
50-megawatt capacity in March 1999. In September 1999, the Company purchased,
through a joint venture, a 58-megawatt electricity generating facility in
Premnitz, Germany (Premnitz) for $4.5 million, including the assumption of debt
(Note 3). The cost of business-development efforts may increase as the Company
expands into these markets due to increased complexity inherent in foreign
development. In addition, the amount of cash required to fund the equity
component of these investments is expected to increase, due to the financing
requirements of lenders in foreign markets.
During fiscal 1998, the Company established its Star Natural Gas
subsidiary in Dallas, Texas, to pursue opportunities in the natural gas
gathering, processing, storage, and marketing business. In May 1999, Star
purchased one gas gathering system and two gas processing plants (the gas
facilities) for $8.6 million in cash and future contingent payments based on the
performance of the gas facilities of up to $5.6 million (Note 3).
Thermo Trilogy's biopesticide products include botanical extracts from the
seed of the tropical neem tree, microbial-based pesticides (fungal-based
insecticides and fungicides, bacterial-based insecticides, bacculovirus, and
beneficial nematodes), insect pheromone-based products such as traps and lures,
and disease-free sugar cane planting stock. These biopesticide products are used
as alternatives or complements to conventional chemical-based pest-
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Overview (continued)
control technologies. In November 1997, Thermo Trilogy acquired the sprayable
bacillus thuringiensis (Bt) biopesticide business of Novartis AG and its
affiliates (the Bt business). Because Thermo Trilogy currently markets its
products predominantly for use in the northern hemisphere, where the growing
season generally runs from March to October, it generally earns a
disproportionately high share of its revenues in its third and fourth fiscal
quarters.
Since its inception, the Company has derived a substantial majority of its
revenue from the development, construction, and operation of biomass-fueled
electric-generation facilities. While the Company's U.S. biomass energy business
is expected to continue to generate revenues for the foreseeable future, the
Company expects the aggregate revenues and profitability associated with this
business to decline significantly beginning in fiscal 2000 due to the expiration
or termination of power-sales agreements at the biomass facilities. In
anticipation of this decline, the Company has explored other options for its
biomass facilities, including disposal or repowering (Note 10). Such efforts
will continue in fiscal 2000. In addition, within the next few years, the
Company expects a substantial portion of its revenues to be derived from other
business ventures such as repowering, natural gas gathering and storage, and/or
biopesticides. A major portion of the Company's efforts will be focused on
developing and acquiring new power projects, including repowering existing power
plants and natural gas gathering and storage projects. The Company has had
limited prior experience in the repowering of power plants and in the natural
gas gathering and storage business, and there can be no assurance that the
Company will be able to successfully develop, market, or sell its services in
these areas. The Company's future success will depend significantly on its
ability to develop, introduce, and integrate new products and services in these
areas. No assurance can be given that the Company will be successful in this
regard. Any failure or inability of the Company to implement these strategies
would have a material adverse effect on the Company's business, financial
condition, and results of operations.
Results of Operations
Fiscal 1999 Compared With Fiscal 1998
Total revenues were $205.5 million in fiscal 1999, compared with $209.0
million in fiscal 1998. Revenues from the Energy segment were $178.3 million in
fiscal 1999, compared with $176.0 million in fiscal 1998. Revenues increased by
$5.7 million from the operation of newly acquired electricity-generating
facilities and by $3.5 million at Star Natural Gas, primarily due to the
inclusion of revenues from the gas facilities, acquired in May 1999. Revenues
also increased $4.7 million at the Company's Czech Republic operations due to a
plant expansion and, to a lesser extent, the inclusion of its revenues for a
full twelve months in fiscal 1999, compared with nine months in fiscal 1998.
These increases were offset in part by decreases in revenues aggregating $9.1
million at the Company's Mendota and Woodland facilities. The utility that
purchases power from the Mendota and Woodland facilities commenced paying for
power at avoided cost rates during the fourth quarter of fiscal 1999, as
discussed below. During fiscal 1999 and 1998, the Energy segment recorded as
revenues fees of $1.1 million and $1.9 million, respectively, associated with
the sale of a power-sales agreement and the release of rights to certain
generating equipment, respectively.
During fiscal 1999, Southern California Edison (SCE), the utility that
purchases the output of the Company's Delano I and Delano II facilities,
interpreted the power-sales agreement for the Delano facilities to permit SCE to
pay reduced rates for energy produced during off-peak periods. Although the
Company contests this interpretation, SCE has reduced its payments to reflect
the lower rate and accordingly, during the fourth quarter of fiscal 1999, the
Company recorded a reduction in revenues of $2.8 million related to this
dispute. The Company is considering its alternatives concerning its claim.
Revenues at Thermo Trilogy decreased to $27.2 million in fiscal 1999 from
$33.0 million in fiscal 1998, primarily due to decreased demand. The Company
believes the lower demand has resulted from depressed agriculture prices and a
corresponding decrease in expenditures by this industry. There can be no
assurance that this trend will not continue.
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Fiscal 1999 Compared With Fiscal 1998 (continued)
The gross profit margin decreased to 25% in fiscal 1999 from 35% in fiscal
1998. The gross profit margin for the Energy segment decreased to 25% in fiscal
1999 from 34% in fiscal 1998, primarily due to a $5.8 million increase in
operating losses before restructuring charges at the Company's K-Fuel Facility,
which was placed in service in April 1998 and closed in May 1999. In addition,
the transition to avoided cost rates at the Mendota plant contributed to the
decrease in the gross profit margin. The gross profit margin for Thermo Trilogy
decreased to 26% in fiscal 1999 from 42% in fiscal 1998, primarily due to $3.0
million of provisions for inventories deemed unsaleable and excess based on
recent demand (Note 10) and, to a lesser extent, decreased revenues.
The power-sales agreements for the Company's Mendota, Woodland, and Delano
plants in California are so-called standard offer #4 (SO#4) contracts, which
require Pacific Gas & Electric (PG&E), in the case of Mendota and Woodland, and
SCE, in the case of the Delano facilities, to purchase the power output of the
projects at fixed rates through specified periods. Thereafter, the utility will
pay a rate based upon the costs that would have otherwise been incurred by the
purchasing utilities in generating their own electricity or in purchasing it
from other sources (avoided cost). Avoided cost rates are currently
substantially lower than the rates the Company has received under the fixed-rate
portions of its contracts and are expected to remain so for the foreseeable
future. PG&E stopped paying for power purchased from the Mendota and Woodland
facilities at fixed cost rates effective in July and August 1999, respectively,
although the Company believes that this change from fixed cost rates occurred
six months earlier than the power-sales agreements provided. The Company is
considering its alternatives concerning this dispute. Based on current avoided
cost rates, the Company expects that the Woodland plant will operate at
breakeven or nominal operating losses, primarily as a result of nonrecourse
lease obligations that have been partially funded from the Woodland plant's past
cash flows. Absent sufficient reductions in fuel prices and other operating
costs, the Company will draw down power reserve funds to cover operating cash
shortfalls and then, if such funds are depleted, either renegotiate its
nonrecourse lease for the Woodland plant or forfeit its interest in the plant.
Revenues from the Woodland plant were $28.9 million in fiscal 1999. The results
of the Woodland facility were approximately breakeven, as a result of recording
as an expense the funding of reserves required under Woodland's nonrecourse
lease agreement to cover expected shortfalls in lease payments.
As a result of the transition from fixed contract rates to avoided costs
rates, the Mendota plant operated at a loss in the fourth quarter of fiscal 1999
and expects to do so in the first quarter of fiscal 2000. However, based on
current avoided cost rates, the Mendota plant is expected to operate at a profit
subsequent to the first quarter of fiscal 2000. The Mendota plant's revenues and
operating income were $24.4 million and $3.8 million, respectively, in fiscal
1999. In May 1999, the Company reached an agreement to terminate its power-sales
agreement, effective December 31, 1999, for the Delano facilities. As a result
of reaching this agreement, the Company expects that the results of the Delano
facilities will be reduced to breakeven or a nominal loss subsequent to December
1999. The Delano plants' aggregate revenues and operating income before
restructuring charges were approximately $63.6 million and $33.4 million,
respectively, in fiscal 1999. In anticipation of these expected declines in
revenues and operating income, the Company may continue to explore other options
for its biomass facilities, including disposal or repowering.
Selling, general, and administrative expenses as a percentage of revenues
increased to 13% in fiscal 1999 from 11% in fiscal 1998, primarily due to the
inclusion of higher selling, general, and administrative expenses as a
percentage of revenues at Star Natural Gas and an increase of $2.0 million in
business development costs over fiscal 1998.
Research and development expenses were $2.7 million in fiscal 1999 and
$2.4 million in fiscal 1998, and represent Thermo Trilogy's ongoing new-product
development.
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Fiscal 1999 Compared With Fiscal 1998 (continued)
During fiscal 1999, the Company recorded restructuring and nonrecurring
costs, net, of $112.8 million (Note 10). Restructuring costs of $126.3 million
include $68.0 million recorded due to the Company's decision to hold the K-Fuel
Facility for sale or disposal, $51.0 million recorded as a result of entering
into an agreement to terminate the power-sales agreement at its Delano
facilities, $3.8 million representing impairment of the Company's net investment
in the Woodland facility, $1.5 million to write off a power plant that is held
for sale, $1.4 million of other asset write-offs, and $0.6 million for
severance. The Company also recorded $13.5 million of nonrecurring income as a
result of entering into an agreement to terminate the power-sales agreement at
its Gorbell facility in Athens, Maine. The Gorbell plant's revenues and
operating income before nonrecurring items were $9.2 million and $1.3 million,
respectively, in fiscal 1999. The Company expects to complete the sale or
disposal of the K-Fuel Facility in fiscal 2000.
Interest income decreased to $2.7 million in fiscal 1999 from $4.1 million
in fiscal 1998. The decrease was primarily due to lower average invested
balances due to cash expended for the acquisition and expansion of the Czech
Republic operations, the repurchase of Company common stock in fiscal 1998,
construction of the K-Fuel Facility, the purchase of power-generation facilities
and related sites in California, and the purchase of the gas facilities.
Interest expense decreased to $7.3 million in fiscal 1999 from $11.0
million in fiscal 1998, primarily due to lower outstanding debt related to the
Company's Delano and Mendota plants and, to a lesser extent, the conversion by
Thermo Electron Corporation of $68.5 million principal amount of the Company's
4% subordinated convertible debentures in May 1998.
The Company and Thermo Electron adopted a strategy of spinning out certain
of its businesses into separate subsidiaries and having these subsidiaries sell
a minority interest to outside investors. As a result of the sale of common
stock by Thermo Trilogy, the Company recorded a gain of $6.3 million in fiscal
1998 (Note 5). This gain represents an increase in the Company's proportionate
share of the subsidiary's equity and is classified as gain on issuance of stock
by subsidiary in the accompanying statement of operations.
Other expense of $2.1 million in fiscal 1999 represents the write-down of
available-for-sale equity securities held by the Company due to an impairment
that the Company deems permanent (Note 10).
Equity in earnings of joint venture represents the Company's proportionate
share of earnings from a joint venture.
The effective tax rate was a benefit of 37% in fiscal 1999 and a provision
of 32% in fiscal 1998. The effective tax rate in fiscal 1999 differed from the
statutory federal income tax rate, primarily due to tax credits earned from the
production of fuel prior to the closure of the K-Fuel Facility and the exclusion
of income taxed directly to a minority partner, offset in part by the effect of
certain nondeductible restructuring costs. The effective tax rate in fiscal 1998
was below the statutory federal tax rate due to the nontaxable gain on issuance
of stock by subsidiary and the exclusion of income taxed directly to a minority
partner, offset in part by state income taxes.
The Company recorded minority interest income in fiscal 1999, primarily
due to the allocation of $1.5 million in restructuring costs to the Company's
minority partner in the K-Fuel Facility (Note 10) and, to a lesser extent,
losses incurred at Thermo Trilogy, offset in part by the allocation of income
from plant operations to a minority partner in an Operating Company. Minority
interest expense in fiscal 1998 represents the allocation of income from plant
operations to a minority partner in an Operating Company and the minority
shareholders' proportionate share of Thermo Trilogy's results.
35
<PAGE>
Fiscal 1998 Compared With Fiscal 1997
Total revenues increased 16% to $209.0 million in fiscal 1998 from $180.2
million in fiscal 1997. Revenues from the Energy segment increased to $176.0
million in fiscal 1998 from $164.3 million in fiscal 1997. The increase was
primarily due to higher contractual energy rates at the Company's Delano,
Gorbell, and Whitefield facilities and, to a lesser extent, the inclusion of
$6.0 million of revenues from the Czech Republic operations, acquired in January
1998. Revenues in fiscal 1998 included $1.9 million of fees received from the
release by the Company of certain rights relating to power-generating equipment.
Revenues in fiscal 1997 included $8.2 million of previously deferred revenue
related to an August 1993 agreement with a utility (Note 12).
Revenues at Thermo Trilogy increased to $33.0 million in fiscal 1998 from
$15.9 million in fiscal 1997. The increase was primarily due to the inclusion of
$14.6 million of revenues from the Bt business of Novartis, acquired in November
1997.
The gross profit margin decreased to 35% in fiscal 1998 from 36% in fiscal
1997. The gross profit margin for the Energy segment decreased to 34% in fiscal
1998 from 36% in fiscal 1997. The decrease was primarily due to the effect on
gross profit in fiscal 1997 of recording $8.2 million of previously deferred
revenue and, to a lesser extent, $4.2 million of losses in fiscal 1998 at the
Company's K-Fuel Facility.
The gross profit margin for Thermo Trilogy decreased to 42% in fiscal 1998
from 43% in fiscal 1997, primarily due to the inclusion of lower-margin revenues
from the Bt business of Novartis.
Selling, general, and administrative expenses as a percentage of revenues
increased to 11% in fiscal 1998 from 9% in fiscal 1997. The increase resulted
primarily from the inclusion of higher selling, general, and administrative
expenses as a percentage of revenues at Thermo Trilogy due to the acquisition of
the Bt business of Novartis.
Research and development expenses represent Thermo Trilogy's ongoing new
product development and increased to $2.4 million in fiscal 1998 from $1.6
million in fiscal 1997 due to the inclusion of expenses from the Bt business of
Novartis.
Interest income decreased to $4.1 million in fiscal 1998 from $5.1 million
in fiscal 1997. The decrease was primarily due to lower average invested
balances due to cash expended for the acquisition of the Bt business of
Novartis, the acquisition and expansion of the Czech Republic operations, the
repurchase of Company common stock, construction of the K-Fuel Facility, and the
purchase of power-generation facilities and related sites in California.
Interest expense decreased to $11.0 million in fiscal 1998 from $13.9
million in fiscal 1997. The decrease was primarily due to lower outstanding debt
related to the Company's Delano and Mendota plants and, to a lesser extent, the
conversion by Thermo Electron of $68.5 million principal amount of the Company's
4% subordinated convertible debentures in May 1998.
During fiscal 1998, the Company recorded a gain of $6.3 million as a
result of the sale of common stock by Thermo Trilogy.
Equity in earnings of joint venture represents the Company's proportionate
share of earnings from a joint venture.
The effective tax rates were 32% and 38% in fiscal 1998 and fiscal 1997,
respectively. The effective tax rate in fiscal 1998 was below the statutory
federal income tax rate due to the nontaxable gain on issuance of stock by
subsidiary and the exclusion of income taxed directly to a minority partner,
offset in part by state income taxes. The effective tax rate in fiscal 1997
exceeded the statutory federal income tax rate, primarily due to the impact of
state income taxes, offset in part by the exclusion of income taxed directly to
a minority partner.
Minority interest expense represents the allocation of income from plant
operations to a minority partner in an Operating Company and, in fiscal 1998,
the minority shareholders' proportionate share of Thermo Trilogy's results.
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Liquidity and Capital Resources
Working capital was $103.3 million at October 2, 1999, compared with $83.6
million at October 3, 1998. The Company had cash, cash equivalents, and current
restricted funds of $49.9 million at October 2, 1999, compared with $65.9
million at October 3, 1998. In addition, at October 2, 1999, the Company had
$17.8 million invested in an advance to affiliate. Prior to the use of a new
domestic cash management arrangement between the Company and Thermo Electron,
which became effective June 1999, amounts invested with Thermo Electron were
included in cash and cash equivalents. Current restricted funds, which consists
of funds held in trust pursuant to certain lease and debt agreements, totaled
$28.0 million and $24.5 million at October 2, 1999, and October 3, 1998,
respectively. In addition, cash and cash equivalents in the accompanying balance
sheet includes $12.5 million and $12.0 million of cash at October 2, 1999, and
October 3, 1998, respectively, which is restricted by the terms of certain lease
and financing agreements. These restrictions limit the ability of the Operating
Companies to transfer funds to the Company in the form of dividends, loans,
advances, or other distributions. Further, until such time, if ever, as
projections of avoided costs change, all cash flows from the Woodland Operating
Company, other than cash required for tax distributions, will be restricted from
distribution to the Company.
During fiscal 1999, the Company's operating activities provided cash and
restricted funds of $48.8 million. Cash provided by the Company's operations and
an increase in accounts payable of $19.9 million was offset in part by $17.9
million of cash used to fund an increase in accounts receivable. The increase in
accounts payable and accounts receivable are primarily due to increased business
activity at Star Natural Gas, which did not have substantial operations until
fiscal 1999. The Company expects to pay accrued restructuring costs of $7.8
million primarily over the next 12 months.
The Company's investing activities, excluding advance to affiliate
activity, used $23.3 million of cash during fiscal 1999. The Company expended
$25.8 million on capital expenditures during fiscal 1999, including $11.0
million to complete construction on an expansion to 50-megawatt capacity at the
Czech Republic operations. In addition, the Company, through its Limited
Partnership Agreement with KFx Wyoming, Inc., expended $4.7 million for
additions to the K-Fuel Facility. The Company expects to make capital
expenditures for existing operations of approximately $47.0 million during
fiscal 2000, primarily related to the projects discussed below. The Company also
expended $12.6 million, net of cash acquired, for the purchase of one gas
gathering system and two gas processing facilities and a power-generation
facility in Germany (Note 3). Proceeds from the termination of a power-sales
agreement provided $15.8 million of cash in fiscal 1999 (Note 10).
During fiscal 1999, the Company's financing activities used cash of $23.7
million, primarily for the repayment of long-term obligations and payments under
capital lease obligations related to three of its California plants.
The Company has completed the expansion project of its Czech Republic
operations. The cost of the acquisition and expansion of this facility was
approximately $32 million. The Company has begun repowering and expansion
efforts at an existing project in Southern California and development efforts
for an electricity-generating facility in Florida. The Company estimates the
total cost of the Southern California and Florida projects to be $570 million
and $105 million, respectively. The Company has committed to spend approximately
$140 million for the purchase of certain equipment for the Southern California
facility, of which it has expended $5 million as a nonrefundable deposit. The
Company expects to obtain project financing to fund this purchase although it
does not currently have any firm available credit facilities. In addition,
together with a 10% joint venture partner, the Company is developing a gas
storage facility in Colorado at an expected cost of $35 million. The Company
expects it will require significant financing for these development and
expansion projects, although the Company does not currently have any firm
available credit facilities. Although the Company's projects are designed to
produce positive cash flow over the long term, the Company will have to obtain
significant additional funds from time to time to meet project development
requirements, including the funding of equity investments, and to complete
acquisitions. As the Company acquires, invests in, or develops future plants,
the Company expects to finance them with nonrecourse debt, internal funds, or
through borrowings from third parties or Thermo Electron. Although Thermo
Electron has expressed its willingness to
37
<PAGE>
Liquidity and Capital Resources (continued)
provide funds to the Company on a short-term basis to partially finance
acquisitions and equity investments in future projects, the Company has no
agreements with Thermo Electron or third parties that assure funds will be
available on acceptable terms, or at all.
Market Risk
The Company is exposed to market risk from changes in equity prices,
foreign currency exchange rates, and interest rates, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
Equity Prices
The Company's long-term available-for-sale investment includes an equity
security that is sensitive to fluctuations in price. In addition, the Company's
convertible debentures are sensitive to fluctuations in the price of Company
common stock into which the debentures are convertible. Changes in equity prices
would result in changes in the fair value of the Company's long-term
available-for-sale investment and convertible debentures due to the difference
between the current market price and the market price at the date of purchase or
issuance of the financial instrument. A 10% increase in the fiscal year-end 1999
and 1998 market equity prices would result in a negative impact of $1.1 million
and $6.2 million, respectively, on the net fair value of the Company's
price-sensitive equity financial instruments. The change in the net fair value
from fiscal 1998 to 1999 is primarily due to a decrease in the market price of
the Company's common stock relative to the conversion price of the debentures.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in Czech koruna and British
pounds sterling. The effect of a change in foreign exchange rates on the
Company's net investment in foreign subsidiaries is recorded as a separate
component of shareholders' investment. A 10% depreciation in fiscal year-end
1999 and 1998 functional currencies, relative to the U.S. dollar, would result
in a reduction of shareholders' investment of $4.3 million and $0.8 million,
respectively.
Interest Rates
The Company's long-term obligations and interest rate swap agreements are
sensitive to changes in interest rates. Interest rate changes would result in a
change in the fair value of these financial instruments due to the difference
between the market interest rate and the rate at the date of purchase or
issuance of the financial instrument. A 10% decrease in fiscal year-end 1999 and
1998 market interest rates would result in a negative impact of $0.6 million and
$0.4 million, respectively, on the net fair value of the Company's
interest-sensitive financial instruments.
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<PAGE>
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems and operations. The Company's year
2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) assessing the year 2000 readiness of its
key suppliers, customers, and vendors to determine their year 2000 compliance
status; and (iii) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year 2000 compliance, has been completed.
During phase one, the Company tested and evaluated its significant computer
systems, software applications, and related equipment for year 2000 compliance.
The Company also evaluated the potential year 2000 impact on its critical
non-information technology systems, which efforts included testing the year 2000
readiness of its manufacturing, utility, and telecommunications systems at its
critical facilities. In phase two of its program, any material noncompliant
information technology systems or non-information technology systems that were
identified during phase one were prioritized and remediated. The Company
substantially completed the process of upgrading or replacing such noncompliant
information technology systems as of October 31, 1999. The Company has also
completed upgrading its hardware and software relating to plant control
operations at all eight of its U.S. facilities. In many cases, such upgrades or
replacements were made in the ordinary course of business, without accelerating
previously scheduled upgrades or replacements. For phase three of the program,
the Company will continue monitoring its critical internal business systems and
non-information technology systems in an effort to ensure that no operating
disruptions due to year 2000 issues occur.
The Company is continuing its process of identifying and assessing the
year 2000 readiness of key suppliers, vendors, and customers that are believed
to be significant to the Company's business operations, including its most
significant electric utility customers. As part of this ongoing effort, the
Company has developed and distributed questionnaires requesting year 2000
compliance information from its significant suppliers, vendors, and customers.
To date, no significant supplier, vendor, or customer has indicated that it
believes its business operations will be materially disrupted by the year 2000
issue. The Company has been contacting and working with its significant
suppliers, vendors, and customers to verify the information that has been
provided. The Company has placed increased focus on any significant supplier,
vendor, or customer that either does not respond to the Company's questionnaire
or, from information provided, is considered to be lacking in its year 2000
compliance effort. The Company has completed its assessment of significant
vendors, suppliers, customers, and all other third-party risks. The Company has
developed and implemented internal systems and procedures to monitor the
response of its significant suppliers, vendors, and customers regarding the
state of their year 2000 compliance readiness.
Contingency Plan
The Company has developed a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan includes identifying and securing other suppliers and modifying
production facilities and schedules. As the Company continues to monitor the
year 2000 readiness of its business systems and facilities, significant
suppliers, vendors, and customers, it will modify and adjust its contingency
plan as may be required.
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<PAGE>
Year 2000 (continued)
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. Year 2000 costs relating to facilities were funded from working
capital. All internal costs and related external costs other than capital
additions related to year 2000 remediation have been expensed as incurred. The
Company does not track the internal costs incurred for its year 2000 compliance
project. Such costs are principally the related payroll costs for its
information systems group.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers, vendors, or customers experience business disruptions due to the year
2000 issue and, with respect to suppliers and vendors, are unable to provide
materials and services to the Company on time and, with respect to customers,
may result in their inability to accept power produced. The Company's operations
could be delayed or temporarily shut down, and it could be unable to meet its
obligations to customers in a timely fashion. The Company's business,
operations, and financial condition could be adversely affected in amounts that
cannot be reasonably estimated at this time. If the Company believes that any of
its key suppliers or vendors may not be year 2000 ready, it will seek to
identify and secure other suppliers or vendors as part of its contingency plan.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. Further, while the Company has completed
work on its material business systems and supporting operations, there can be no
assurance that the Company will not encounter unexpected costs or delays beyond
its control. If any of the Company's material suppliers, vendors, or customers
experience business disruptions due to year 2000 issues, the Company might also
be materially adversely affected. If any of the countries in which the Company
operates experience significant year 2000 disruption, the Company could also be
materially adversely affected. There is expected to be a significant amount of
litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. In
addition, if any year 2000 issues are identified, there can be no assurance that
the Company will be able to retain qualified personnel to remedy such issues.
Any unexpected costs or delays arising from the year 2000 issue could have a
significant adverse impact on the Company's business, operations, and financial
condition in amounts that cannot be reasonably estimated at this time.
40
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important risk factors, among others, in some cases have affected, and
in the future could affect, the Company's actual results and could cause its
actual results in fiscal 2000 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
General
Transition of Business Focus. Since its inception, the Company has derived
a substantial majority of its revenue from the development, construction, and
operation of biomass-fueled electric-generation facilities. While the Company's
U.S. biomass energy business is expected to continue to generate revenues for
the foreseeable future, the Company expects the aggregate revenues and
profitability associated with this business to decline significantly beginning
in fiscal 2000 due to the expiration or termination of power-sales agreements at
the biomass facilities. In anticipation of this decline, the Company has
explored other options for its biomass facilities, including disposal or
repowering. Such efforts will continue in fiscal 2000. In addition, within the
next few years, the Company expects a substantial portion of its revenues to be
derived from other business ventures such as repowering, natural gas gathering
and storage, and/or biopesticides. A major portion of the Company's efforts will
be focused on developing and acquiring new power projects, including repowering
existing power plants, and natural gas gathering and storage projects. The
Company has had limited prior experience in the repowering of power plants and
in the natural gas gathering and storage business, and there can be no assurance
that the Company will be able to successfully develop, market, or sell its
products and services in these areas. The Company's future success will depend
significantly on its ability to develop, introduce, and integrate new products
and services in these areas. No assurance can be given that the Company will be
successful in this regard. Any failure or inability of the Company to implement
these strategies would have a material adverse effect on the Company's business,
financial condition, and results of operations.
Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of businesses that complement or augment the Company's
business strategy or existing product lines. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory approvals,
including antitrust approvals. Any acquisitions completed by the Company may be
made at substantial premiums over the fair value of the net assets of the
acquired companies that would result in substantial expenses for the
amortization of goodwill. There can be no assurance that the Company will be
able to complete future acquisitions or that the Company will be able to
successfully integrate any acquired businesses. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financing, if available
at all, may be on terms that are not favorable to the Company.
Risks Associated with Energy Business
Development Risks
Uncertainty of Project Development. The process of locating, developing,
permitting, financing, and constructing power plants is complex, lengthy, and
expensive. Only a small percentage of the projects that the Company evaluates
and pursues ultimately results in operating projects. As a result, the Company
may not recover any expenses that it incurs in the evaluation and development of
many projects.
The Company currently operates seven U.S. facilities that utilize biomass
as fuel. The Company is not currently considering the development of further
biomass-fueled projects in the U.S. due to high biomass fuel costs and the
relatively high costs of constructing and operating biomass-fueled plants. The
Company is actively exploring opportunities for repowering or developing power
facilities in the U.S. The Company is considering the development of
biomass-fueled projects internationally in countries where market conditions may
support profitable biomass operations. The Company has also expanded its
development focus to include international clean power opportunities and other
environmentally sound technologies such as developing or repowering natural gas
or coal-fueled power
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facilities. In this regard, the Company has established operations in the Czech
Republic and Germany. The completion or success of these projects and new
ventures is subject to a number of significant conditions, including obtaining
financing, negotiating key contracts with partners and other third parties, and
other material development activities such as obtaining required permits. No
assurance can be given that these projects or new ventures will be completed on
a timely basis, or at all. Any failure by the Company to successfully develop
new projects would have a material adverse effect on the future growth of the
Company.
Uncertainty of Access to Capital. The Company has sought to finance the
debt portion of each of its power projects in a manner that is substantially
nonrecourse to the Company. To minimize its equity commitment, the Company must
borrow substantial amounts from third-party lenders. The borrowings are
typically secured only by the applicable project assets and the capital stock of
the appropriate entity, typically a joint venture or limited partnership in
which the Company has a majority interest or wholly owned subsidiary through
which the Company develops its projects and operates its facilities (an
Operating Company). The Company anticipates that it will require substantial
financing to fund both the equity and debt components of future projects. No
assurance can be given that financing for future projects will be available on a
nonrecourse basis or on acceptable terms, or at all. Any failure by the Company
to obtain adequate amounts of financing on acceptable terms would have a
material adverse effect on the future growth of the Company.
Dependence on Terms of Power-sales Agreement. The profitability of any of
the Company's power facilities is heavily dependent upon the power-sales
agreement that it has entered into with the electric utility or other customer.
Under certain of these agreements, in the event of service termination by the
Operating Company prior to the end of the applicable obligation period, the
Operating Company may be required to reimburse the utilities to the extent that
cumulative revenue calculated at established rates exceeds the amounts
calculated at the utilities avoided cost rates. Most of the Company's existing
power-sales agreements were obtained as a direct negotiation with the purchasing
utility. However, in recent years, in the U.S. such agreements have increasingly
been awarded as a result of competitive bidding. Consequently, obtaining a
power-sales agreement in the U.S. has become progressively more competitive and
expensive and, in many cases, less profitable. In the future, foreign
power-sales agreements also may increasingly be subject to competitive bidding.
In addition, the passage of the National Energy Policy Act of 1992 has removed
certain barriers to entry into the independent power market by utilities and
others, and is expected to increase competition in that market. There can be no
assurance that power-sales agreements, if any, entered into by the Company in
the future will be as profitable as the Operating Companies' power-sales
agreements prior to fiscal 1999.
Risks Associated with Doing Business Outside the United States. The
Company believes that significant growth opportunities in the power market exist
outside of the U.S. In that regard, the Company is currently pursuing projects
in the Czech Republic and Germany, and intends to identify other countries in
which to develop power projects. Doing business in many foreign countries
exposes the Company to many risks that are not present in the U.S., including
political, military, privatization, currency exchange and repatriation risks,
and higher credit risks related to the utility purchaser. In addition, it is
possible that legal obligations may be more difficult for the Company to enforce
in foreign countries and that the Company may be at a disadvantage in any legal
proceeding with the local entity. Local laws may also limit the ability of the
Company to hold a majority interest in some of the projects that it develops or
acquires. The Company's costs associated with business development efforts
outside the U.S. are expected to increase due to increased complexity inherent
in foreign development. In addition, the amount of cash required to fund equity
investments is expected to increase due to the financing requirements of lenders
in foreign markets.
Intense Competition for Projects. The Company believes that there are
approximately 200 companies that are actively engaged in the worldwide
nonutility power market. Many of the companies in the power market have
substantially greater financial and technical resources than those of the
Company. Domestic competition in this market is expected to intensify as a
result of deregulation at the federal and state levels, and due to the trend
toward awarding contracts based upon competitive bidding. Such competition may
reduce the ability of the Company to secure future projects and may have a
material adverse effect on the profitability of future projects.
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Uncertainty of Regulatory or Community Support. Development, construction,
and operation of a power project requires numerous environmental, siting, and
other permits. The process of obtaining these permits can be lengthy and
expensive. In addition, local opposition to a particular project can
substantially increase the cost and time associated with developing a project,
and can potentially render a project unfeasible or uneconomic. The Company may
incur substantial costs or delays or may be unsuccessful in developing power
projects as a result of such opposition.
Operating Risks
Expected Price Reductions Under California SO#4 Contracts. The power-sales
agreements for the Company's Woodland, Mendota, and Delano plants in California
are so-called standard offer #4 (SO#4) contracts, which require Pacific Gas &
Electric (PG&E), in the case of Woodland and Mendota, and Southern California
Edison (SCE), in the case of Delano and Delano II, to purchase the power output
of the projects at fixed rates through specified periods. Thereafter, the
utility will pay a rate based upon the costs that would have otherwise been
incurred by the purchasing utilities in generating their own electricity or in
purchasing it from other sources (avoided cost) (as determined from time to time
by the California Public Utility Commission (CPUC)). Avoided cost is determined
pursuant to a formula that is intended to estimate the price that the utility
would, but for its contract with the power producer, be paying for the same
amount of energy. The rate fluctuates with the price of fuels and certain other
factors. Avoided cost rates are currently substantially lower than the rates the
Company has received under the fixed-rate portions of its contracts and are
expected to remain so for the foreseeable future. PG&E stopped paying for power
purchased from the Mendota and Woodland facilities at fixed cost rates effective
in July and August 1999, respectively, although the Company believes that this
change from fixed cost rates occurred six months earlier than the power-sales
agreements provided. The Company is considering its alternatives concerning this
dispute. Based on current avoided cost rates, the Company expects that the
Woodland plant will operate at breakeven or nominal operating losses through
2010, primarily as a result of nonrecourse lease obligations that have been
partially funded from the Woodland plant's past cash flows. Absent sufficient
reductions in fuel prices and other operating costs, the Company will draw down
power reserve funds to cover operating cash shortfalls and then, if such funds
are depleted, either renegotiate its nonrecourse lease for the Woodland plant or
forfeit its interest in the plant. Revenues from the Woodland plant were $28.9
million in fiscal 1999. The results of the Woodland facility were approximately
breakeven, as a result of recording as an expense the funding of reserves
required under Woodland's nonrecourse lease agreement to cover expected
shortfalls in lease payments.
As a result of the transition from fixed costs rates to avoided costs
rates, the Mendota plant operated at a loss in the fourth quarter of fiscal 1999
and expects to do so in the first quarter of fiscal 2000. Based on current
avoided cost rates, the Mendota plant is expected to operate at a profit
subsequent to the first quarter of fiscal 2000. The Mendota plant's revenues and
operating income were $24.4 million and $3.8 million, respectively, in fiscal
1999. In May 1999, the Company reached an agreement to terminate its power-sales
agreements, effective December 31, 1999, for the Delano facilities. As a result
of reaching this agreement, the Company expects that the results of the Delano
facilities will be reduced to breakeven or a nominal loss subsequent to December
1999. The Delano plants' aggregate revenues and operating income before
restructuring charges were approximately $63.6 million and $33.4 million,
respectively, in fiscal 1999. In anticipation of these expected declines in
revenues and operating income, the Company may continue to explore other options
for its biomass facilities, including disposal or repowering.
Potential Decreased Power Sales Due to Power Curtailments. The power-sales
agreements between the Woodland and Mendota Operating Companies and PG&E allowed
PG&E to curtail the quantity of power purchased under each of these agreements
by up to 2,000 hours of generating capacity annually. PG&E normally exercised
its curtailment rights during periods when cheaper hydroelectric power was
available, which generally occurred following periods of heavy rain or snow.
Curtailment reduces the power payment received by the Operating Companies and,
therefore, has an adverse effect on the financial results of those Operating
Companies. In November 29, 1997, the Company renegotiated PG&E's curtailment
rights, limiting PG&E to 1,000 hours per calendar year effective January 1,
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1998. The limitations on PG&E's curtailment rights ended at the same time as the
fixed-price portion of PG&E's power-sales agreement with Woodland and Mendota
(discussed above). During fiscal 1999, the Company experienced approximately
1,030 hours of aggregate utility imposed curtailments at these plants.
Potential Increased Fuel Prices and Reduced Availability of Fuel. The
profitability of the Company's plants is dependent in part upon the difference
between the price the Company receives from its utility customers for power and
the price the Company pays for the fuel. The Company has typically entered into
long-term fuel supply agreements for a significant portion of its fuel
requirements. These agreements generally provide for prices based upon
predetermined formulas or indexes. If fuel prices rise significantly, the
Company will be required to pay higher prices on the spot market for the portion
of its fuel not covered by agreements. The Company's existing power sales
agreements do not adjust to account for changes in the Company's fuel prices.
Therefore, the profitability of these agreements, and any future power-sales
agreements that do not provide for such an adjustment, could be materially
adversely affected by increases in the Company's fuel prices. In addition,
future fuel shortages could adversely affect the Company's ability to deliver
power, and therefore receive payments, pursuant to its power-sales agreements.
Operating Difficulties. The financial performance of each of the Company's
plants depends to a significant extent upon the ability of each plant to be
capable of performing at or near capacity. If a plant is unable to perform at
these levels, payments under the power-sales agreement will be reduced, possibly
significantly. The Company has in the past experienced mechanical problems with
the boilers at its Mendota and Woodland plants and suffered major equipment
damage at its Whitefield plant. Although the Company believes that these
problems have been corrected, no assurance can be given that these or other
plants will not experience operating problems in the future. No assurance can be
given that business interruption insurance will be adequate to cover all
potential losses, or that such insurance will continue to be available on
reasonable terms.
Dependence on Utility Customers. Each of the current U.S. projects relies
upon one power sales agreement with a single electric utility customer for the
majority, if not all, of its revenues over the life of the power sales
agreement. During fiscal 1999, Public Service of New Hampshire (PSNH), SCE, and
PG&E accounted for 16%, 30%, and 26%, respectively, of the Company's revenues.
The failure of any one utility customer to fulfill its contractual obligations
could have a substantial negative impact on the Company. No assurance can be
given that a particular utility will not be unwilling or unable, at some time,
to make required payments under its power sales agreements. Further, in a
deregulated market, the Company may do business with customers of various sizes
and levels of credit-worthiness.
Potential Earthquake Damage. The Company's California plants are located
in areas where there is a risk of potentially significant earthquake activity.
Projects that the Company develops in the future may also be located in areas
where there is earthquake risk. The Company's earthquake insurance is not
sufficient to cover all potential losses and there can be no assurance that such
insurance will continue to be available on reasonable terms.
Regulatory Risks
Potential Rate Reduction by PSNH. In 1990, a plan of reorganization (the
Plan) for PSNH was approved by the U.S. Bankruptcy Court for the District of New
Hampshire. Pursuant to the Plan, Northeast Utilities (NU) acquired the assets of
PSNH. An agreement between NU and the State of New Hampshire contains language
to the effect that PSNH will seek to renegotiate some of the terms of certain
rate orders with small power producers, including the Whitefield and Hemphill
Operating Companies, and that the state will support PSNH in such efforts. PSNH
reached agreements in principle with these two Operating Companies to settle the
renegotiation of their rate orders. The settlement agreements were subject to
the approval of the New Hampshire Public Utility Commission (NHPUC) on terms
acceptable to both PSNH and the Operating Companies. The principal terms of the
agreement generally called for the two Operating Companies to reduce the amount
of power sold annually to PSNH to 70% of the plants'
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capacities, and to reduce the price per kilowatt paid by PSNH to $0.06 per
kilowatt hour, escalating three percent per year for the remainder of the term
of the original, applicable rate order. In consideration of these reductions,
the Operating Companies would receive certain cash settlement payments, paid
over several years. In May 1998, the NHPUC issued a written ruling rejecting
these settlement agreements. Certain members of the N.H. Legislature filed a
motion requesting that the NHPUC reconsider its ruling and instead provide that
the settlement agreements be left open. The NHPUC approved this request in July
1998. No further action has occurred on the settlement agreements. Rejection of
the Company's rate orders would result in a claim for damages by the Company and
could be the subject of lengthy litigation.
In January 1997, NU disclosed in a filing with the Securities and Exchange
Commission that if a proposed deregulation plan for the New Hampshire electric
utility industry were adopted, PSNH could default on certain financial
obligations and seek bankruptcy protection. In February 1997, NHPUC voted to
adopt a deregulation plan, and in March 1997, PSNH filed suit to block the plan.
In March 1997, the federal district court issued a temporary restraining order
which prohibits the NHPUC from implementing the deregulation plan as it affects
PSNH, pending a determination by the court as to whether PSNH's claim could then
be heard by the court. In April 1997, the court ruled that it could hear the
case and ordered that the restraining order continue indefinitely pending the
outcome of the suit. In addition, in March 1997, the Company, along with a group
of other biomass power producers, filed a motion with the NHPUC seeking
clarification of the NHPUC's proposed deregulation plan regarding several
issues, including purchase requirements and payment of current rate order prices
with respect to the Company's energy output. In March 1998, the NHPUC addressed
the Operating Companies' motion and stated it was not the NHPUC's intent in the
February 1997 order to impair any of the Operating Companies' legal rights in
their rate orders. In August 1999, PSNH and the State reached a comprehensive
settlement agreement which was filed with the NHPUC. The NHPUC has stayed its
dockets concerning the deregulation plan pending review of this settlement
agreement. The federal district court lawsuit has also been stayed pending
settlement agreement review. If the NHPUC approves the settlement agreement as
filed, then the NHPUC deregulation plan docket, other related dockets, and the
federal district court lawsuits will be dismissed. The PSNH/State settlement
agreement purports not to make any changes in the Operating Companies' rate
orders. It does provide for PSNH to resell the power from the Operating
Companies to assist in mitigating the cost of that power. An unfavorable
resolution of this matter, including the bankruptcy of PSNH, could have a
material adverse effect on the Company's results of operations and financial
position.
Potential Effects of Loss of QF Status or Changes to PURPA. The Company's
existing facilities are subject to the provisions of various laws and
regulations, including the Public Utility Regulatory Policies Act of 1978, as
amended (PURPA). PURPA provides to Qualifying Facilities (QFs) certain
exemptions from substantial federal and state legislation, including regulation
as public utilities. PURPA also requires electric utilities to purchase
electricity generated by QFs at prices not exceeding their avoided cost. Any
future changes to PURPA could have a material adverse effect on the Company.
Public Utility Holding Company Act. The Public Utility Holding Company Act
of 1935 (PUHCA) regulates public utility holding companies and their
subsidiaries. The Company is not and will not be subject to regulation as a
holding company under PUHCA as long as the domestic power plants it owns and/or
operates are QFs under PURPA or otherwise are exempt from regulation as public
utility holding companies under PUHCA. If a power plant were to lose such
status, the Operating Company owning or leasing that plant could become a public
utility company, which could result in the Company becoming a public utility
holding company. In addition, loss of QF status, regardless of the Company's
ability to avoid public utility holding company status, could be a default under
many of the Company's facility lease and power sales agreements. In the event of
any such default, the other parties to such agreements could seek various
remedies against the Company or could seek to renegotiate such agreements on
terms more favorable to such parties. In addition, to ensure that the Company
will not be subject to regulation as a holding company under PUHCA, the foreign
power plants it owns and/or operates also must be exempt from regulation as
public utility companies under PUHCA.
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Potential Increased Competition Due to Regulatory Changes. The Company
believes that certain regulatory changes are likely to have a significant impact
on the domestic power market over the next several years. The National Energy
Policy Act of 1992 exempts a new class of facilities, electric wholesale
generators (EWG), from certain federal utility regulation and liberalizes access
for nonutility generators to the utility power transmission grid. In addition,
many states are considering the elimination of many of the regulations that
currently limit the ability of power generators to negotiate power sales
agreements directly with industrial and commercial customers. The Company
believes that the effect of these regulatory changes will be to increase
competition for the sale of power.
The Evolving California Electric Utility Market. The electric utility
market in California has undergone a complex restructuring which is not yet
complete. The CPUC and the California legislature have required the creation of
an Independent System Operator (ISO), which operates transmission facilities
owned by investor-owned utilities in the state, and a Power Exchange (PX), which
conducts hourly and daily auctions of electric energy that are designed to set
prices at market levels. The ISO and PX were created in May 1997 and commenced
operations on March 31, 1998. The activities of the ISO and PX are subject to
comprehensive Federal Energy Regulatory Commission (FERC) regulation. FERC has
approved tariffs and rates for the ISO and PX, but these approvals are not
final; they are subject to further FERC and judicial review. In addition, the
restructuring of the California electric utility market may have an effect on
avoided cost. Investor-owned utilities in California are required to buy power
through the PX. The avoided cost for such utilities thus potentially will be
determined based on market prices set through the PX. These market prices may be
lower than energy rates set in current QF contracts which may adversely affect
Operating Companies after the end of the fixed price period in their contracts
with utilities.
Limitations Imposed by Environmental Regulation. Federal, state, and local
environmental laws govern air emissions and discharges into water and the
generation, transportation, storage, and treatment and disposal of solid and
hazardous waste. These laws establish standards governing most aspects of the
construction and operation of the Company's facilities, and often require
multiple governmental permits before these facilities can be constructed,
modified, or operated. There can be no assurance that all required permits will
be issued for the Company's projects under development or for future projects,
or that the requirements for continued environmental regulatory laws and
policies governing their enforcement may change, requiring new technology or
stricter standards for the control of discharges of air or water pollutants, or
for solid or hazardous waste or ash handling and disposal. Such future
developments could affect the manner in which the Company operates its plants
and could require significant additional expenditures to achieve compliance with
such requirements. It is possible that compliance may not be technically or
economically feasible.
Natural Gas Business Operating Risks. The Company's proposed natural gas
business is subject to all of the operating risks normally associated with the
processing, transporting, and storage of natural gas, including blowouts,
pollution, and fires, each of which could result in damage to or destruction of
processing and storage facilities or properties, or in personal injury. The
Company intends to obtain insurance coverage limiting financial loss resulting
from certain of these operating hazards. Losses and liabilities arising from
uninsured or underinsured events could reduce revenues and increase costs to the
Company and could materially adversely affect the Company's financial condition
and results of operations.
Volatility of Natural Gas Prices. Historically, the market for natural gas
has been volatile and is likely to continue to be volatile in the future. Prices
for natural gas are subject to wide fluctuation in response to relatively minor
changes in the supply of and demand for natural gas and oil, market uncertainty
and other factors over which the Company has no control. These factors include
the extent of domestic production and importation of foreign natural gas and/or
oil, political instability in oil and gas producing countries and regions, the
ability of members of the Organization of Petroleum Exporting Countries to agree
upon price and production levels for oil, the effect of federal regulation on
the sale of natural gas and/or oil in interstate commerce, and other
governmental regulation of the
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production and transportation of natural gas and/or oil. Certain other factors
outside the Company's control, such as operational and transportation
difficulties of pipeline or oil purchasing companies, may also limit sales. In
addition, the price level of natural gas obtainable by the Company depends upon
the needs of the purchasers to which the producer has access. Depending on the
purchasers' needs and the price obtainable for natural gas which the Company is
able to sell, the revenues of the Company from its proposed natural gas business
could be materially adversely affected.
Risks Associated with the Biopesticides Business
Need for Regulatory Approval for Future Products. The Company's Thermo
Trilogy subsidiary's biopesticide products cannot be sold unless the U.S.
Environmental Protection Agency (the EPA) grants Thermo Trilogy a registration
for each pesticide product it intends to manufacture or sell. Thermo Trilogy
must submit extensive toxicological studies and results of field testing as well
as other studies to the EPA to apply for a product registration. Pesticide
registrations under state laws and regulations must also be obtained. In
addition, pesticide registrations must be obtained from foreign governments
before Thermo Trilogy's products can be sold in a particular country, and these
countries may also require costly and extensive studies to support the
registration applications some of which may be more stringent then current U.S.
regulations. Registration of Thermo Trilogy's new products likely will be
lengthy and expensive. There is no assurance that the EPA, states, or foreign
governments will timely grant pesticide registrations to Thermo Trilogy, or at
all. Pesticide registrations may also be revoked if new regulations are adopted
or if Thermo Trilogy violates regulations regarding the manufacturing, sale, or
labeling of Thermo Trilogy's products. Such regulation applies to all stages of
field testing and to the manufacture, sale, and use of most of Thermo Trilogy's
products. There can be no assurance that Thermo Trilogy will continue to be able
to comply with EPA regulations or any changes thereto. The regulatory process or
private litigation contesting products of Thermo Trilogy may be costly and
time-consuming and may delay research, development, production, and/or marketing
of such products and require costly and time-consuming procedures, all of which
may furnish an advantage to competitors. There can be no assurance that
requisite regulatory approvals and/or registrations of any or all of Thermo
Trilogy's products will be granted on a timely basis, if at all. In addition,
new or more stringent regulations may be adopted or imposed, which could have a
material adverse effect on Thermo Trilogy's business, financial condition, and
results of operations.
Uncertainty of Market Acceptance and Penetration. Thermo Trilogy's sales
growth is dependent on the penetration of its products into new markets. The
primary competition to Thermo Trilogy's products are chemical pesticides, and
Thermo Trilogy must educate customers on the cost effectiveness and efficacy and
minimal environmental effects of Thermo Trilogy's products compared to chemical
pesticides in order to gain acceptance for application on new crop types in
different parts of the world. In addition, the rate of acceptance of Thermo
Trilogy's products in the U.S. will be substantially affected by ongoing EPA
review and registration of the use of currently available chemical insecticides
and biopesticides and the extent to which the EPA restricts or bans chemical
pesticides for which Thermo Trilogy has biopesticide alternatives. No assurance
can be given that Thermo Trilogy's products will gain increased acceptance in
new market segments.
Highly Competitive Markets and Technological Change. Most of the markets
in which Thermo Trilogy operates are highly competitive and are subject to rapid
technological change. Several of Thermo Trilogy's products are in testing or
early marketing stages. Many of Thermo Trilogy's competitors are large chemical
and pharmaceutical companies with greater financial, marketing, and
technological resources than Thermo Trilogy. There is no assurance that
competitors will not develop new products that will render Thermo Trilogy's
products noncompetitive. The development of transgenic plants and seeds, which
are genetically engineered seeds or plants designed to improve resistance to
insects or disease or to improve product quality, may pose a competitive threat
to Thermo Trilogy's products in the future.
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Reliance on Third-party Manufacturers and Producers. Thermo Trilogy relies
on overseas producers of the raw materials for its neem-based products and on
third parties to manufacture some of its products. In particular, Thermo
Trilogy's sole supplier of neem products is P.J. Margo Pvt. Ltd., a joint
venture in India in which Thermo Trilogy holds a 50% interest, pursuant to an
exclusive supply contract that expires in 2001. There is no assurance that
Thermo Trilogy will have an uninterrupted supply of raw materials or that
third-party manufacturers will produce the products at competitive prices.
Uncertainty of Product Development and Commercialization. Thermo Trilogy's
products are at various stages of development and commercialization. The ability
of Thermo Trilogy to sell its products in large commercial markets will be
dependent upon continued product development to allow increased efficiency and
reduced costs in production. There can be no assurance that increased efficiency
and reduced costs of production can be achieved. Thermo Trilogy cannot
accurately predict whether any of its products under development can be produced
and marketed profitably.
Seasonality of Product Sales. Thermo Trilogy currently markets its
products predominantly for use in the northern hemisphere, where the growing
season generally runs from March to October; therefore, the seasonal nature of
agriculture will cause Thermo Trilogy's product sales to be concentrated during
such period and will result in substantial variations in quarter-to-quarter
financial results.
Perishability of Products. Certain of Thermo Trilogy's microbial products
are living organisms and thus have a limited shelf-life, may biodegrade quickly
when exposed to light and heat and are perishable. In addition, such products
may be perishable when exposed to hostile environments including severe or
changing weather patterns particularly during shipping and storage. Failure of
these products as a result of perishability could have a material adverse effect
on the business of the Company.
Testing. Commercial introduction of additional products and the expansion
of label claims for current products to include additional insects are both
contingent upon, among other factors, completion of field testing. Unusual
weather conditions during field tests prior to the growing season or other tests
in subsequent growing seasons could result in delays in product development and
commercialization. Such delays could result in additional losses due to
increased operating expenses in the intervening period without significant
offsetting revenues.
Product and Warranty Liability. Thermo Trilogy faces an inherent business
risk of exposure to product liability and warranty claims in the event that the
use of its current products or prospective products lack efficacy or result in
adverse effects. Further, product liability claims could result in Company
exposure for crop damage or personal injury. Run-off excess concentrations of
pesticide products could also expose Thermo Trilogy to claims and liabilities
for water pollution, including governmental fines and penalties. There can be no
assurance that the scope of Thermo Trilogy's insurance coverage is sufficient,
that it can obtain additional coverage, or that Thermo Trilogy will have
sufficient resources to satisfy any product liability and warranty claims.
Other Risks
Significant Quarterly Fluctuations in Operating Results. The Company's
operating results fluctuate significantly from quarter to quarter based on a
number of factors, primarily seasonal energy demand in California, which results
in higher payments under the Company's California power-sales agreements in the
months of May through October, and lower payments during the remainder of the
year, and seasonal demand for its biopesticide products. The Company
historically has operated at marginal profitability during its second fiscal
quarter due to the rate structure under these agreements. In addition, the
Company's operating results can be affected by utility imposed curtailments or
by any operating problems that cause a plant to operate at less than normal
capacity, and with respect to its biopesticides business, by agricultural
conditions such as pest infestation, amount of rain, and other adverse weather
conditions, the occurrence of natural resistance factors, and the increase or
decrease in agricultural plantings and produce prices.
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Limitation on Access to Operating Company Assets and Cash Flow. The
Company's energy segment's operations are conducted through the Operating
Companies, and the Company's cash flow is contingent on the ability of the
Operating Companies to make dividends or other distributions to the Company. The
terms of certain leases and financial agreements to which the Operating
Companies are parties require that certain funds be held in trust and restricted
from distribution to the Company. As of October 2, 1999, the Company and its
subsidiaries had cash and cash equivalents totaling $21.9 million, of which
approximately $12.5 million was restricted from distribution by the terms of
certain Operating Companies' lease and financing agreements. In addition, until
such time, if ever, as projections of avoided cost change, all cash flows from
the Woodland operations, other than cash required for tax distributions, will be
restricted from distribution to the Company. The inability of the Company to
receive distributions from the Operating Companies could have a material adverse
effect on the future growth of the Company. Furthermore, Thermo Trilogy is a
majority-owned subsidiary of the Company, therefore all Thermo Trilogy cash
dividends, if any, must be distributed on a pro rata basis to all shareholders
of Thermo Trilogy, including the minority shareholders.
Dependence on Proprietary Technology. Proprietary rights relating to the
Company's products will be protected from unauthorized use by third parties only
to the extent that they are covered by valid and enforceable patents or are
maintained in confidence as trade secrets. The Company has a number of U.S.
patents and also owns corresponding foreign patents in a number of jurisdictions
throughout the world. There can be no assurance that any patents now or
hereafter owned by the Company will afford protection against competitors.
Proceedings initiated by the Company to protect its proprietary rights could
result in substantial costs to the Company. There can be no assurance that
competitors of the Company, some of whom have substantially greater resources
than those of the Company, will not initiate litigation to challenge the
validity of the Company's patents, or that they will not use their resources to
design comparable products that do not infringe the Company's patents. The
Company could incur substantial costs and diversion of management resources with
respect to the defense of any such claims, which could have a material adverse
effect on the Company's business, financial condition, and results of operation.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief, which
could effectively block the Company's ability to make, use, sell, distribute, or
market its products and services in the U.S. and abroad. There may also be
pending or issued patents held by parties not affiliated with the Company that
relate to the Company's products or technologies. In the event that a claim
relating to proprietary technology or information is asserted against the
Company, the Company may need to acquire licenses to, or contest the validity
of, any such competitor's proprietary technology. It is likely that significant
funds would be required to contest the validity of any such competitor's
proprietary technology. There can be no assurance that any license required
under any such competitor's proprietary technology would be made available on
acceptable terms or that the Company would prevail in any such contest. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology. In
addition, the laws of some jurisdictions do not protect the Company's
proprietary rights to the same extent as the laws of the U.S. There can be no
assurance that these protections will be adequate.
The Company relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
Risks Associated with Cash Management Arrangement with Thermo Electron.
The Company participates in a cash management arrangement with its parent
company, Thermo Electron. Under this cash management arrangement, the Company
lends its excess cash to Thermo Electron on an unsecured basis. The Company has
the contractual right to withdraw its funds invested in the cash management
arrangement upon 30 days' prior notice. Thermo Electron is contractually
required to maintain cash, cash equivalents and/or immediately available bank
lines of credit equal to at least 50% of all funds invested under the cash
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The funds are held on an unsecured basis and therefore are
subject to the credit risk of Thermo Electron. The Company's ability to receive
its cash upon notice of withdrawal could be adversely affected if
49
<PAGE>
participants in the cash management arrangement demand withdrawal of their funds
in an aggregate amount in excess of the 50% reserve required to be maintained by
Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company
would be treated as an unsecured creditor and its right to receive funds from
the bankruptcy estate would be subordinated to secured creditors and would be
treated on a pari passu basis with all other unsecured creditors. Further, all
cash withdrawn by the Company from the cash management arrangement within one
year before the bankruptcy would be subject to rescission. The inability of
Thermo Electron to return the Company's cash on a timely basis or at all could
have a material adverse effect on the Company's results of operations and
financial position.
Potential Impact of Year 2000 on Processing Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. Further, while the Company has completed work on its
internal business systems and supporting operations there can be no assurance
that the Company will not encounter unexpected costs or delays beyond its
control. If any of the Company's material suppliers, vendors, or customers
experience business disruptions due to year 2000 issues, the Company might also
be materially adversely affected. The Company's research and development,
production, distribution, financial, administrative, and communications
operations might be disrupted. There is expected to be a significant amount of
litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. Any
unexpected costs or delays arising from the year 2000 issue could have a
significant adverse impact on the Company's business, operations, and financial
condition.
Risks Associated With International Operations. International sales
accounted for 6% of the Company's total revenues in fiscal 1999. Over the next
several years, the Company intends to continue to significantly expand its
presence in international markets. International revenues are subject to a
number of risks, including the following: agreements may be difficult to enforce
and receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles; foreign countries may impose
additional withholding taxes or otherwise tax the Company's foreign income,
impose tariffs, or adopt other restrictions on foreign trade; fluctuations in
exchange rates may affect product demand and adversely affect the profitability
in U.S. dollars of products and services provided by the Company in foreign
markets where payment for the Company's products and services is made in the
local currency; U.S. export licenses may be difficult to obtain; and the
protection of intellectual property in foreign countries may be more difficult
to enforce. There can be no assurance that any of these factors will not have a
material adverse impact on the Company's business and results of operations.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Thermo Ecotek Corporation 1999 Financial Statements
Selected Financial Information
<S> <C> <C> <C> <C> <C> <C>
Nine
Months
Year Ended Ended (e)
(In thousands except per share Oct. 2, Oct. 3, Sept. 27,Sept. 28, Sept. 30, Sept. 30,
amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995 1995
- ------------------------------------------ ---------- ---------- --------- ---------- ---------- ---------
(Unaudited)
Statement of Operations Data
Revenues $ 205,493 $ 208,971 $180,191 $ 150,076 $ 139,319 $ 107,139
Net Income (Loss) (59,420) 31,209 22,545 17,780 12,540 10,264
Earnings (Loss) per Share:
Basic (1.65) 1.07 .92 .76 .58 .46
Diluted (1.65) .86 .64 .54 .43 .34
Weighted Average Shares:
Basic 35,944 29,299 24,613 23,528 21,796 22,477
Diluted 35,944 39,152 38,740 36,292 33,014 33,815
Balance Sheet Data
Working Capital $ 103,340 $ 83,589 $ 90,714 $ 76,217 $ 58,361
Total Assets 456,663 505,111 485,305 449,145 390,476
Long-term Obligations 61,270 93,446 204,690 209,281 202,360
Shareholders' Investment 190,564 249,632 147,276 129,687 92,985
(a) Reflects a $131.9 million pretax charge for restructuring and related costs,
consisting of restructuring costs of $126.3 million, inventory provisions of
$3.0 million, and other expense of $2.1 million. Also reflects $13.5 million
of nonrecurring income.
(b) Reflects the November 1997 acquisition of the Bt business of Novartis, a
nontaxable gain of $6.3 million from the issuance of stock by a subsidiary,
and the conversion by Thermo Electron of $68.5 million principal amount of
4% subordinated convertible debentures.
(c) Reflects the January 1997 acquisition of the business of biosys, inc. and
the April 1997 issuance of $50.0 million principal amount of 4.875%
subordinated convertible debentures.
(d) Reflects the March 1996 issuance of $37.0 million principal amount of
noninterest-bearing subordinated convertible debentures and the May 1996
acquisition of the biopesticides division of W.R. Grace & Co.
(e) In June 1995, the Company changed its fiscal year end from the Saturday
nearest December 31 to the Saturday nearest September 30. Accordingly, the
Company's 39-week transition period ended September 30, 1995, is presented.
51
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TCK. The following table sets forth the high and low sale prices of
the Company's common stock for fiscal 1999 and 1998, as reported in the
consolidated transaction reporting system.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal 1999 Fiscal 1998
----------------- ------------------
Quarter High Low High Low
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
First $15 1/4 $10 1/16 $18 1/2 $13
Second 11 1/8 7 3/4 19 3/4 16 3/4
Third 10 7/8 6 1/4 19 3/4 15 5/8
Fourth 9 1/4 7 3/8 16 7/8 14 1/8
As of October 29, 1999, the Company had 577 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for the Company's common
stock on October 29, 1999, was $7 5/8 per share.
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Dividend Policy
The Company has never paid cash dividends because its policy has been to
use earnings to finance expansion and growth. Payment of dividends will rest
within the discretion of the Board of Directors and will depend upon, among
other factors, the Company's earnings, capital requirements, and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of certain restrictions applicable to
the use of certain funds.
</TABLE>
Exhibit 10.40
PURCHASE AGREEMENT
BETWEEN
MOUNTAINVIEW POWER COMPANY
AND
GENERAL ELECTRIC COMPANY
FOR
FOUR PG7241 FA COMBUSTION TURBINE GENERATORS
FOR THE
MOUNTAINVIEW GENERATION PROJECT
October 25, 1999
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
<PAGE>
APPENDICES
A. SCOPE OF WORK (GE Proposal # 90044AG dated September 1999)
B. PERSONNEL TRAINING PROGRAM
C. QUALITY ASSURANCE PROGRAM
D. PAYMENT/TERMINATION SCHEDULE
E. SAMPLE GE MONTHLY REPORT Schedule 1: Final Lien Waiver Form
F. INTENTIONALLY OMITTED
G. APPROVED TEST PROCEDURES
H. INTENTIONALLY OMITTED
I. CONFIDENTIALITY AGREEMENT
J. FORM OF RETAINAGE BOND.
K. TECHNICAL ADVISORY SERVICES
L. FUELS SPECIFICATION
M. PRICING SUMMARY/OPTIONS
2
<PAGE>
TABLE OF CONTENTS
SECTION 1: DEFINITIONS......................................................5
SECTION 2: GENERAL TERMS OF SALE...........................................9
SECTION 3: OBLIGATION TO PROCEED..........................................10
SECTION 4: PERSONNEL TRAINING; OPERATING MANUAL...........................10
SECTION 5: QUALITY ASSURANCE..............................................10
SECTION 6: RESERVED..........................................................
SECTION 7: PAYMENT........................................................10
SECTION 8: TAXES..........................................................12
SECTION 9: PRICE ADJUSTMENTS..............................................13
SECTION 10: INSPECTION AND FACTORY TESTS..................................13
SECTION 11: TITLE TRANSFER, RISK OF LOSS, SHIPMENT TO STORAGE.............14
SECTION 12: COMPLIANCE WITH APPLICABLE LAWS AND PERMITS...................14
SECTION 13: EXPORT PROHIBITIONS............................................15
SECTION 14: CHANGES.......................................................16
SECTION 15: NON-RECOURSE OBLIGATIONS......................................16
SECTION 16: MECHANICAL COMPLETION..........................................16
SECTION 17: GUARANTEED SHIPMENT DATE; LIQUIDATED DAMAGES FOR LATE SHIPMENT.18
SECTION 18: PERFORMANCE TESTS.............................................19
SECTION 19: PERFORMANCE GUARANTEES........................................20
SECTION 20. ACHIEVMENT OF PERFORMANCE GUARANTEES..........................22
SECTION 21. ACCEPTANCE.....................................................23
3
<PAGE>
TABLE OF CONTENTS
SECTION 22: INTENTIONALLY LEFT BLANK..........................................
SECTION 23: PERFORMANCE GUARANTEE PAYMENTS AND REMEDIES.....................24
SECTION 24: WARRANTIES......................................................25
SECTION 25: FORCE MAJEURE EVENT..........................................26
SECTION 26: INDEMNITIES...................................................28
SECTION 27: LIMITATIONS OF LIABILITIES....................................29
SECTION 28: CONSEQUENTIAL DAMAGES...........................................30
SECTION 29: SELLER-PROVIDED INSURANCE......................................30
SECTION 30: BUYER-PROVIDED INSURANCE........................................32
SECTION 31: DEFAULT AND REMEDIES............................................33
SECTION 32: ASSIGNMENTS.....................................................34
SECTION 33: PERFORMANCE IN FAVOR OF FINANCING PARTIES.......................35
SECTION 34: BUYER REVIEW OF DOCUMENTS.......................................35
SECTION 35: WAIVERS.........................................................36
SECTION 36: GOVERNING LAW...................................................36
SECTION 37: SEVERABILITY....................................................37
SECTION 38: NOTICES........................................................37
SECTION 39: HEADINGS AND INTERPRETATION RULES..............................38
SECTION 40: ENTIRE AGREEMENT................................................38
SECTION 41: SELLER'S PROPRIETARY INFORMATION................................38
SECTION 42: PUBLICITY RELEASES; INFORMATION................................38
SECTION 43: NON NUCLEAR USE................................................38
4
<PAGE>
THIS PURCHASE AGREEMENT ("AGREEMENT") IS ENTERED INTO OCTOBER 25, 1999, BY AND
AMONG GENERAL ELECTRIC COMPANY, A NEW YORK CORPORATION, HAVING A PRINCIPAL PLACE
OF BUSINESS AT 1 RIVER ROAD, SCHENECTADY, NEW YORK 12345 USA ("GE" OR "SELLER")
AND MOUNTAINVIEW POWER COMPANY, A DELAWARE CORPORATION, HAVING A PRINCIPAL PLACE
OF BUSINESS AT 245 WINTER ST, SUITE 300, WALTHAM, MA 02451 ("BUYER") (GE AND
BUYER BEING REFERRED TO HEREIN INDIVIDUALLY AS A "PARTY" AND COLLECTIVELY THE
"PARTIES").
RECITALS
WHEREAS, GE is, among other things, a manufacturer of combustion and steam
turbine generator equipment; and
WHEREAS, Buyer is, among other things, in the business of independent power
generation facility development and operation.
WHEREAS, Seller has the desire to sell four (4) new PG7241 (FA) gas
turbine-generators (the "Turbine Generator Units") to the Buyer and ship
two Turbine Generator Units prior to August 31, 2002 and two Turbine
Generator Units prior to September 30, 2002 which is expected to be used by
Buyer in its development and construction of the Mountainview Generation
Project (the "Project"); and
WHEREAS, Buyer desires to purchase, and Seller desires to sell four (4)
PG7241FA Gas Turbine Generators for the Project, subject to the terms and
conditions of this purchase agreement ("AGREEMENT");.
NOW, THEREFORE, in consideration of the premises and mutual covenants set forth
herein the Parties agree as follows:
SECTION 1: DEFINITIONS
"Acceptance" Acceptance shall have the meaning in Section 21 hereof.
"Applicable Laws and Permits" means all laws, ordinances, rules & regulations,
permits and, judgments, decrees, injunctions, orders of any court, arbitrator or
governmental agency or authority, having jurisdiction over the location where
the Work is to be performed.
"Applicable Codes and Standards" means those codes and standards applicable to
the design, engineering, manufacture, workmanship and equipment applicable to
the Scope of Work, as more fully described in the Scope of Work.
"Approved Test Procedures" means the test procedures set forth in Appendix G
hereto as amended and supplemented in accordance with this Agreement.
"Base Labor Index" shall be as defined in Section 9.
"Base Materials Index" shall be as defined in Section 9.
"Business Days" means all calendar days, except Saturday, Sunday and such other
days on which banks in the State of California are required or authorized to
close.
"Buyer Taxes" shall have the meaning in Section 8.2
"Contract Price" shall have the meaning in Section 7.2
5
<PAGE>
"Damages" shall mean suits, judgements, expenses, losses, costs, damages,
injuries, obligations, liabilities, claims, demands, royalties, penalties,
interest and causes of action, including without limitation reasonable
attorney's fees (collectively the "Damages") as they may apply to third party
claims pursuant to Section 26.
"Defects or Deficiencies" means, any materials, equipment, tools, supplies which
(i) do not conform to the Agreement, (ii) would materially and adversely affect
the performance of the Turbine Generator Units under the Performance Guarantees
or would materially and adversely affect the capability of the Turbine Generator
Units to be operated on a continuous basis; or (iii) affect the ability of the
Turbine Generator Units to be operated in accordance with Applicable Laws and
Permits or Applicable Codes and Standards.
"Delay Payments" shall include Late Guaranteed Shipment Delay Payments and Late
Substantial Completion Delay Payments.
"Delivery Point" means the Project Site for shipments made via common carrier,
and to the nearest rail siding for shipments made via rail.
"Emission Guarantee" shall be as defined in Section 19.4
"EPC Contractor" shall be as defined in Section 23.5.
"Financing Parties" means any and all lenders providing the construction,
interim or long-term financing (including any refinancing thereof) for the
Project.
"Force Majeure" shall be as defined in Section 25.
"General Warranty" shall be as described in Section 24
"Good Electric Power Producing Practices" means those construction, operation
and maintenance practices, methods and procedures, as modified by published
guidelines from time to time, that are generally accepted by the electric power
producing industry in North America, as of the date of this Agreement. Those
practices which are commonly used in prudent electric power producing
engineering and operations to construct, operate and maintain equipment
lawfully, safely, dependably and economically, as applied by the Seller to units
of the size and type used for the Project.
"Guarantee Conditions" shall have the meaning in Section 19.1
"Guaranteed Heat Rate" shall have the meaning in Section 19.1
"Guaranteed Shipment Dates" shall be as described in Section 17.1
"Late Guaranteed Shipment Delay Payments" shall be as described in Section 17.2
"Late Substantial Completion Delay Payments" shall be as described in Section
16.1.5
"Liens" shall have the meaning in Section 7.11.
"Hazardous Material" means any toxic or hazardous waste, pollutants or
substances, including, without limitations, asbestos, PCBs, petroleum products
and by-products, substances defined or listed as "hazardous substance", "toxic
substance", "toxic pollutant", or similarly identified substances or mixtures,
in or pursuant to any environmental law, including, but not limited to, the
Comprehensive Environmental Response, Compensation
6
<PAGE>
and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1802, et seq. , the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the
Toxic Substance Control Act of 1976, as amended, 15 U.S.C. Section 2601, et
seq., and the Clean Water Act, 33 U.S.C. Section 446 et seq., as amended, and
any substance regulated as hazardous under Florida state law.
"Mechanical Completion" shall have the meaning provided in Section 16.
"Minimum Performance" shall mean achieving (i) less than or equal to 105% of the
Heat Rate Guarantee while achieving 100% of the Emission Guarantee, (ii) greater
than or equal to 95% of the Turbine Generator Unit Electrical Output Guarantee
while achieving 100% of the Emission Guarantees.
"Natural Gas" shall mean the fuel delivered by pipeline to the Turbine Generator
Units and in accordance with the fuel specification attached as Appendix L,
Fuels Specification.
" Heat Rate Guarantee" shall have the meaning in section 19.2
"Notice of Acceptance" shall have the meaning in Section 21.2
"Notice of Default" shall have the meaning in Section 31
"Notice of Mechanical Completion" means when Buyer delivers to Seller a notice
of Mechanical Completion.
"Notice of Performance Test Success" shall have the meaning of Section 20.1
"Notice of Substantial Completion" means when Buyer delivers to Seller a notice
of Substantial Completion.
"Operating Criteria" means the mode of operation of the Turbine Generator Units
combusting Natural Gas fuel
"Operating Manual" means the complete equipment and system instructions and
procedures for the start-up, operation and maintenance of the Turbine Generator
Units.
"Options" shall have the meaning in Section 7.2 hereof.
"Parties" shall mean Seller or Buyer.
"Payment/Termination Schedule" shall be in accordance with Appendix D
"Performance Tests" means the operation of the Turbine Generator Unit in
accordance with the provisions of Section 18 hereof and the Approved Test
Procedures for the purposes of determining each Turbine Generator Unit's level
of achievement of one or more of the Performance Guarantees, as defined in
Section 19 hereof.
"Performance Guarantees" shall have the meaning in Section 19 hereof.
"Performance Guarantee Payments" shall have the meaning in Section 23.
"Permit" means any waiver, exemption, variance, franchise, permit,
authorization, license or similar order of or from any federal, state, county,
municipal, regional, environmental or
7
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
other governmental body, instrumentality, agency, authority, court or other body
having jurisdiction over the matter in question.
"Project" shall mean the Mountainview Generation Project, an electrical
generating facility being developed in San Bernardino, California.
"Project Site" means certain parcels of land in San Bernardino, California, and
any other real estate rights of Buyer upon which the Project will be located or
from which the Project will otherwise benefit.
"Punch List" means the list prepared (and periodically revised) by Buyer, of
minor items of work which may remain to be performed by Seller after Acceptance,
but which items do not affect Buyer's ability to operate the Turbine Generator
Units in accordance with Applicable Laws and Permits and the Agreement.
"Quality Assurance Program" is Seller's written quality assurance program for
the work, including the written procedures to implement such program, as
described in Appendix C.
"Reliability Guarantee" shall have the meaning in Section 19.5
******************************************************************
"Rewarranty Period" shall have the meaning in Section 24.4
"Revised Guaranteed Shipment Date" shall have the meaning in Section 7.2.
"Seller Taxes" Shall have the meaning in Section 8.1.
"Scope Changes" means a material addition to, deletion from, or other
modification to, the quality, function or scope of the Turbine Generator Units
as delineated in the Scope of Work, or a material change to the requirements of
this Agreement, but shall not include Seller's correction of the Work from time
to time pursuant to the Scope of Work or Seller's warranties.
"Scope of Work" shall be as described in Appendix A.
"Steam Turbines" shall have the meaning in Section 2
"Subcontract" means a contract between Seller and a Subcontractor for the
performance or supply of a portion of the Work by such Subcontractor.
"Subcontractor" shall mean any subcontractor of Seller.
"Substantial Completion" shall have the meaning provided in Section 16.1.4
"Substantial Completion Cure Period" shall have the meaning provided in Section
16.1.5.
"Technical Advisory Services" shall be as described in Appendix K.
"Termination for Cause" shall have the meaning in Section 31.
8
<PAGE>
"Termination for Convenience" shall have the meaning in Section 31.
"Training Services" shall be as described in Appendix B.
"Turbine Generator Unit(s)" shall be as described in Section 2.
"Turbine Generator Units Electrical Output Guarantee" shall be as described in
Section 19.3.
"Warranty Period" shall have the meaning of Section 24.1
"Work" shall mean all work, manufacture and technical direction of the
installation of the Turbine Generator Units on the Project Site as more fully
described in the Scope of Work.
SECTION 2: GENERAL TERMS OF SALE
A. The Turbine Generator Units shall meet all the requirements of this
Agreement including, but not limited to, the Scope of Work, and shall meet
all the requirements of (i) Seller's design criteria, manufacturing
processes and procedures and Quality Assurance Program, (ii) those portions
of industry specifications, codes and standards in effect as of the date of
this Agreement, which are deemed applicable by Seller to the Work, (iii)
the United States Federal, State and local laws and rules applicable to the
locations where the Work is performed in effect as of the date of this
Agreement. Buyer agrees to buy, and Seller agrees to sell, subject to the
terms and conditions of this Agreement.
Four (4) PG 7241 FA gas turbine generators for combined cycle
use, using a dry low NOx combustion system, combusting Natural
Gas Fuel, and associated auxiliary equipment as more completely
defined in Appendix A, Scope of Work, (collectively, the "Turbine
Generator Units" or individually the "Turbine Generator Unit").
Two Turbine Generator Units to be shipped no later than August
31, 2002 and two Turbine Generator Units to be shipped no later
than September 30, 2002. Seller shall also provide personnel
qualified to give technical advice relative to the installation
and startup of the Turbine Generator Units (as described herein
and as further defined in Appendix K, the "Technical Advisory
Services"). Seller shall also provide training services (the
"Training Services") for Buyer's personnel as described in
Appendix B Personnel Training Program. The Technical Advisory
Services and Training Services and any optional services provided
are referred to herein as the "Services."
It is expressly understood that the Seller will have the right to utilize
all resources within its global manufacturing and vendor network to supply
the requirements of this Agreement for the supply of the Turbine Generator
Units.
9
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
**********************************************************
SECTION 3: OBLIGATION TO PROCEED
********************************************************************************
SECTION 4: PERSONNEL TRAINING; OPERATING MANUAL
Commencing as soon as practicable prior to start-up operations, Seller shall
provide on-site classroom training for the operation and maintenance personnel.
Such Training Services, as more fully described in Appendix B, shall be designed
to offer basic instruction and training to the operation and maintenance
personnel, and shall be of such quality as to provide the operation and
maintenance personnel with a reasonable understanding of the major, critical
operational and maintenance aspects of the Turbine Generator Units. Seller shall
provide a minimum of eighteen (18) copies of the appropriate manuals and other
written materials as part of the training program (hereinafter the "Operating
Manual"). Buyer shall provide a suitable classroom for the Seller's training of
the operation and maintenance personnel.
SECTION 5: QUALITY ASSURANCE
Seller shall fully observe and implement its Quality Assurance Program as more
fully described in Appendix C until Acceptance. All tests, inspections and
quality assurance procedures required by this Agreement shall be in addition to,
and not in lieu of, applicable Quality Assurance Program activity. Seller shall
inspect and test the Work, including all design, installation, engineering,
materials and services performed or provided. Seller shall correct all Defects
or Deficiencies within a reasonable time. Seller's compliance with Seller's
Quality Assurance Program in accordance with the procedures contained therein is
a requirement of this Agreement.
SECTION 6: RESERVED
SECTION 7: PAYMENT
7.1 ***************************************************************
7.2
Buyer agrees to pay Seller a base price of
********************************************************("Contract Price") for
shipment and Acceptance of the Turbine Generator Units and completion of the
Scope of Work set forth in Appendix A, as may be adjusted by such amounts
associated with options that Buyer elects to include or exclude in the Scope of
Work as described in Appendix M (the "Options") or as adjusted by any change
orders pursuant to Section 14. Buyer shall notify Seller of all Options Buyer
wishes to include 15 months prior to the Guaranteed Shipment Dates. The Contract
Price may be subsequently modified through changes to the Scope of Work pursuant
to Section 14 hereof. The Contract Price set forth above includes freight and
delivery to the Delivery Point.
10
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
7.3 Seller retains the right to determine transportation mode.
7.4 Paymentsof the Contract Price shall be made in accordance with the
Payment/Termination Schedule as set forth in Appendix D, provided that
Seller has complied with all the material terms and conditions of this
Agreement. The progress payments in Appendix D listed as payable in
March and April of 2001 may be delayed by Buyer until May 2001. Such
delayed payments will be then payable in May 2001 (together with the
scheduled May 2001 payment), and will be paid to Seller with interest.
The interest shall be calculated utilizing an annual rate equal to the
U.S. prime lending rate published, on the day the payment was due, by
Citibank N.A., plus two percent (2%) from the date the payment was
originally scheduled to be made until the actual payment is made.
7.5 ****************************************************************
7.6 Thirty (30) days prior to each scheduled payment, Seller shall submit
to Buyer a written request or invoice for the applicable payment set
forth on the Payment/Termination Schedule. No payment to Seller or any
use of the Turbine Generator Units by Buyer shall alone constitute an
acceptance of any of the Work or relieve Seller of any of its
obligations or liabilities with respect thereto.
7.7 Seller shall submit to Buyer all information required to be submitted
with each payment request pursuant to Appendix E. Seller shall furnish
to Buyer with each payment request the information listed in Appendix E
hereto relating to such payment request and which are necessary to
satisfy the requirements of all state and local tax authorities.
7.8 Subjectto the terms of this Agreement, and provided that Buyer has
received Seller's request for payment and the information required
pursuant to Appendix E hereof, Buyer shall make, or cause to be made,
the scheduled payment pursuant to the Payment/Termination Schedule, to
Seller, provided that Buyer may withhold all or part of any Payment for
the month in which the event occurs, to the extent of the occurrence of
any of the following events:
a. Seller's request for payment does not meet the requirements of
Appendix E hereof or the Monthly Progress Report for the month for
which the request for payment is made has not been submitted to
Buyer.
b. Seller has failed to pay any amounts due and payable to Buyer
under the Agreement.
7.9 Seller shall indemnify Buyer against any mechanics liens filed against
the Project Site by suppliers or subcontractors to Seller in the
performance of the Work hereunder and which allege non-payment by
Seller for such supplier or subcontractor work.
7.10 ******************************************************************
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7.11 Final Payment Subject to a Release of Liens: At the time of final
payment hereunder, Seller shall certify to Buyer that the Project to
the extent of the most recent payment received by Seller, are free
from, and that there are no known, or pending claims of, liens,
security interests (including without limitation mortgages, pledges) or
encumbrances of whatsoever nature referred to collectively as "Liens")
arising out of or in connection with performance by Seller, or any
Subcontractor, of the Work, or to the extent that any such Liens exist,
that a bond or corporate guaranty in an amount sufficient to discharge
any or all Liens against Seller in form, substance and amount
reasonably satisfactory to Buyer has been delivered by Seller.
7.12 Any provision hereof to the contrary notwithstanding, upon the
occurrence and continuance of a default by Seller as provided in
Section 31 and the cure period applicable hereto if any, shall have
expired, Buyer may withhold or retain such portion (including all) of
any payments due to Seller under this Agreement as reasonably necessary
to insure the performance of the Work or to protect fully Buyers rights
hereunder.
SECTION 8: TAXES
8.1 Seller Taxes:
The Contract Price shall not include and, Seller shall be responsible
for, and shall pay directly, any and all corporate and individual taxes
that are measured by net income or profit imposed by any governmental
authority of any country on Seller, its employees or Subcontractors due
to the execution of any agreement or the performance of or payment for
Work hereunder (the "Seller Taxes"). It is expressly understood by the
Parties that all export and import duties that may be applied to the
Turbine Generator Units and any Buyer taxes related to the manufacture
of the Turbine Generator Units outside of the United States of America
are the responsibility of the Seller.
8.2 Buyer Taxes:
Buyer shall be responsible for, and shall pay directly when due and
payable, any and all Buyer Taxes (defined below), and all payments due
and payable by Buyer to Seller hereunder shall be made, free and clear
of all deductions and withholding, for Buyer Taxes. If Seller is
required to pay Buyer Taxes, Buyer shall, promptly upon presentation of
Seller's invoice for such Buyer Taxes, pay to Seller an amount equal to
the Buyer Taxes or alternatively, Buyer shall provide Seller with a tax
exemption certificate acceptable to the taxing authorities.
"Buyer Taxes" means all taxes, fees, or other charges of any nature
(including, but not limited to, ad valorem, consumption, excise,
franchise, gross receipts, license, property, sales, stamp, storage,
transfer, turnover, use, or value-added taxes, and any and all items of
withholding, deficiency, penalty, addition to tax, interest, or
assessment related thereto), other than Seller Taxes, imposed by any
governmental authority of any country on the Project. Products exported
from the United States are presumed to be exempt from Buyer Taxes
levied within the United States. When requested by Seller, Buyer agrees
to furnish without charge evidence of tax or duty exemption acceptable
to the taxing or customs authorities.
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SECTION 9: PRICE ADJUSTMENTS
For shipments beyond the Guaranteed Shipment Dates due to delays caused by
events of Force Majeure, the Contract Price is subject to adjustment upward or
downward by adjustment of payments made after such date to reflect changes in
Bureau of Labor Statistics Indexes as follows: (a) 50% of the price shall be
adjusted by an amount equal to the percentage by which the "Labor Index" for the
month in which payment is made is greater or less than the "Base Labor Index";
(b) 50% of the price shall be adjusted by an amount equal to the percentage by
which the "Materials Index" for the month in which payment is made is greater or
less than the "Base Materials Index";
For the purpose of this provision, the following definitions apply: (a) The
Labor Index shall be that index identified as SIC 3511 (Turbine and Turbine
Generator Sets) determined and reported monthly by the Bureau of Labor
Statistics of the U.S. Department of Labor; (b) the Materials Index shall be
that index identified as PPI 10-17 (Steel Mill Products) determined and reported
monthly by the Bureau of Labor Statistics of the U.S. Department of Labor; and
(c) the Base Labor Index and Base Materials Index shall be determined by
averaging the applicable indices for the month of the firm price date with those
of the preceding and following month.
All such payments shall be adjusted on a day to day basis based upon the month
of revised shipment. For billing purposes each payment shall include a tentative
adjustment calculated in the manner prescribed above but based upon the
preliminary indices in the most recent U.S. Department of Labor Index and the
Materials Index at the time such payment is invoiced. Any further adjustment
which may be required shall be made at the time the final indices are first
published for the month of shipment. Should the bases for calculation of the
indices be modified, the index series in effect at the date of shipment shall be
used for final price adjustment. Should the indices be discontinued, substitute
indices shall be substituted by mutual agreement of the parties. The Base Labor
Index shall be determined to the nearest second decimal place. The Base
Materials Index shall be determined to the nearest first decimal place. In
either case, if the next succeeding place is five or more, the preceding decimal
place shall be raised to the next higher figure. Both labor and material
adjustment shall be calculated to the nearest one-tenth of one percent.
SECTION 10: INSPECTION AND FACTORY TESTS
Buyer's inspectors will be provided reasonable access to Seller's facilities for
purposes of obtaining information on production progress, determining status and
observing tests and inspections of the Turbine Generator Units. Such access will
be limited to areas concerned with the Turbine Generator Units and shall not
include restricted areas where work of a proprietary nature is being conducted.
Buyer will be advised as to the schedule for testing which the Parties have
mutually agreed upon. Buyer 's inspectors will be given an opportunity to
observe these tests during regular working hours. Neither completion of
production work nor shipment of any part of the Turbine Generator Units,
however, will be delayed to accommodate the inspectors. The inspectors will be
informed of Seller's methods of reporting production progress. Appropriate
office facilities will be provided where Buyer's inspectors may conduct their
work in connection with the above. Subject to the conditions set forth in this
Section 10, Seller shall obtain, where reasonably available, for Buyer access to
Subcontractors' plants for the purposes described above. Buyer's inspection of
the work or his failure to inspect in no way relieves Seller of its obligation
to fulfill the requirements of this Agreement nor is it to be construed as
acceptance by Buyer.
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SECTION 11: TITLE TRANSFER, RISK OF LOSS, SHIPMENT TO STORAGE
11.1 Passage of Title
Title to major components or materials of each Turbine Generator Unit
to be shipped from within the United States shall pass to Buyer when
made available for shipment from the Seller's or Seller's
Subcontractor's factory. Title to major components or materials to be
shipped from a country other than the United States shall pass to Buyer
at the port of export immediately after such components or materials
have been cleared for export. Title to installation services and other
work in progress conducted at the Project Site shall pass to Buyer as
such work is performed.
11.2 Risk of Loss
Notwithstanding passage of title, Seller shall remain responsible for
risk of loss or damage to the Turbine Generator Units and materials
incorporated therein until delivered to the Delivery Point.
11.3 Shipment to Storage
If any part of the Turbine Generator Units cannot be shipped to Buyer
by the Guaranteed Shipment Date due to any cause not attributable to
Seller, Seller may ship such parts to storage. If such parts are placed
in storage, including storage at the facility where manufactured, the
following conditions shall apply: (a) title shall thereupon pass to
Buyer if it had not already passed; (b) any amounts otherwise payable
to Seller upon shipment shall be payable upon presentation of Seller's
invoices and certification of cause for storage; (c) all direct
expenses incurred by Seller, such as for preparation for and placement
into storage, handling, inspection, preservation, insurance, storage,
removal charges and any taxes shall be payable by Buyer upon submission
of Seller's invoices; and (d) when conditions permit and upon payment
of all amounts due hereunder, Seller shall resume shipment of the
Turbine Generator Units to the Delivery Point.
SECTION 12: COMPLIANCE WITH APPLICABLE LAWS AND PERMITS
The Contract Price is based on Seller's design, manufacture and shipment of the
Turbine Generator Units and performance of the Work pursuant to Applicable Laws
and Permits in effect as of the date of this Agreement. The Contract Price will
be equitably adjusted to reflect additional costs incurred by Seller resulting
from a change in Applicable Laws and Permits after the execution date of this
Agreement which have a material effect on the Turbine Generator Units or the
Scope of Work. If Seller determines that a change is not possible, Seller will
so notify Buyer and Buyer may terminate this Agreement pursuant to Section 31.4,
"Termination for Convenience by Buyer" hereof or direct completion without
change and assume responsibility for obtaining any necessary waivers.
Notwithstanding the foregoing paragraphs, no modification in the Contract Price
will be made as a result of any general change in the manufacturing facilities
of Seller resulting from the imposition of any requirements by any Federal,
State or local governmental entity.
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In addition to the Codes listed in Appendix A, Seller supplied Equipment will be
designed and furnished in compliance with the following State of California Code
requirements:
* CBC - 98 or UBC - 97
* Earthquake Zone 4
* Soil Profile Type Sd
* Special Occupancy Structure
* Near Source Factor Na = 1.0
* Near Source Factor Nv = 1.0
* Wind Speed: 70 MPH
* Exposure Category C
Seller will submit Seller drawings, as reasonably required by the above stated
California Code, for review by the appropriate reviewing authority as part of
Seller's price. Should changes be required to bring Seller's Equipment into
compliance with codes or requirements other than those State of California Code
requirements stated above, such changes will be performed by Seller as a
Contract extra to Buyer's account, and will be effected via a mutually agreed to
change order in accordance with this Section and Section 14.
SECTION 13: EXPORT PROHIBITIONS
Buyer agrees not to re-export US origin goods supplied by Seller, other than in
and to the ultimate country of destination specified in Buyer's order and/or
declared as the country of ultimate destination on Seller's invoice, except as
may be permitted by the US export laws and regulations, as may be amended. Buyer
agrees that it will not re-export to the countries designated in Export
Administration Regulations Section 779.4(f), any technical data or software (nor
the direct product thereof) provided to Buyer by Seller in connection with this
Agreement, unless prior written authorization is obtained from the US Export
Administration.
Unless otherwise provided in Seller's proposal the Turbine Generator Units and
the Work sold hereunder are not intended for application (and shall not be used)
in connection with any nuclear installation or activity and Buyer warrants that
it shall not use the Turbine Generator Units and Services for such purposes, or
permit others to use or permit others to use the Turbine Generator Units for any
such purposes. If, in breach of the foregoing, any such use occurs, Seller shall
have no liability for any nuclear or other damage, injury or contamination, and
Buyer shall indemnify Seller, its affiliates and suppliers of every type and
tier against any such liability, whether arising as a result of breach of
Agreement, warranty, indemnity, tort (including negligence), strict liability or
otherwise. Notwithstanding, any other provisions herein, and to the extent
applicable, Seller shall be responsible for timely obtaining any required
authorization, such as an export license, import license, foreign exchange
permit, work permit or any other governmental authorization. Buyer and Seller
provide each other reasonable assistance in obtaining required authorizations.
Seller shall comply with all applicable state and federal laws, including but
not limited to, the Fair Labor Standards Act of 1938, as amended, the
Occupational Safety and Health Act of 1970 (OSHA), laws related to nonsegregated
facilities and equal employment opportunity (including the seven paragraphs
appearing in Sec. 202 of Executive Order 11246, as amended), and all standards,
rules, regulations, and orders issued pursuant to such state and federal laws.
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SECTION 14: CHANGES
Buyer may, by written change order, make mutually agreed to changes in the
Turbine Generator Units and the Work. If any such change results in an increase
or decrease in the cost or time required for the performance of the Work under
this Agreement, there shall be an equitable adjustment in the Contract Price and
the Guaranteed Shipment Date. Seller shall not be obligated to proceed with the
changed or extra work until the price of such change and its effect on the
Guaranteed Shipment Date has been agreed upon in a written change order.
SECTION 15: NON-RECOURSE OBLIGATIONS
Except as may be otherwise agreed pursuant to Section 7.5 (particularly the
second sentence thereof), none of the affiliates, or members of Buyer, or their
respective officers, employees or agents shall be personally liable for payments
due under this Agreement or for the performance of any obligation hereunder, and
the sole recourse of Seller for the payment of amounts due from Buyer or for the
satisfaction of any other obligations of Buyer hereunder shall be against the
Buyer.
SECTION 16: MECHANICAL COMPLETION AND SUBSTANTIAL COMPLETION
16.1 Mechanical Completion
16.1.1 Mechanical Completion shall mean that all the following has
occurred: (i) each Turbine Generator Unit has been substantially
manufactured in accordance with the terms of the Agreement (with
the exception of curing the Punch List, completing the
Performance Tests and delivery of Final Drawings and
Documentation); (ii) Seller has provided to Buyer the Operating
Manual in accordance with Section 4 hereof, Seller has completed
the operator training and Buyer has provided and Seller has
accepted the Punch List, (iii) all pollution and emission control
systems for each Turbine Generator Unit are functional and
operating as provided for in this Agreement; (iv) each Turbine
Generator Unit is mechanically and electrically functional and
operating as intended per this Agreement; (v) all instrumentation
and control systems have been calibrated and are functional and
operating as intended per this Agreement; (vi) all applicable
Turbine Generator Unit systems shall have undergone functional
testing at full load, without leaks or equipment failures; and
(vii) Mechanical Completion has been acknowledged by Buyer. Buyer
shall give Seller at least 5 days notice before Buyer begins
mechanical completion tests.
16.1.2 Notice of Mechanical Completion
When Buyer believes that it has achieved Mechanical Completion
for any Turbine Generator Unit, it shall deliver to Seller notice
thereof (the "Notice of Mechanical Completion").
16.1.3 Achievement of Mechanical Completion
Within ten (10) Business Days following receipt of the Notice of
Mechanical Completion, (a) Seller shall acknowledge that
Mechanical Completion for any applicable Turbine Generator Unit
has been achieved if the requirements of Section 16.1 hereof have
been satisfied, or (b) notify Buyer in writing that Mechanical
Completion has not been achieved,
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
stating the reasons therefor. In the event that Seller determines
that Mechanical Completion has not been achieved, Buyer shall
promptly take such reasonable actions, including the performance
of additional work as will achieve Mechanical Completion and
shall issue to Seller another Notice of Mechanical Completion
pursuant to Section 16.1 hereof. Such procedure shall be repeated
as necessary until Mechanical Completion has been achieved. For
all purposes of this Agreement, the date of achievement of
Mechanical Completion shall be the date on which Seller receives
a Notice of Mechanical Completion relating thereto, with respect
to which Seller ultimately acknowledges that Mechanical
Completion has been achieved.
16.1.4 Substantial Completion
Substantial Completion shall mean that each of the Turbine
Generator Units has achieved Minimum Performance and has
successfully achieved the Reliability Guarantee (with the
exception of curing the Punch List and delivery of Final Drawings
and Documentation).
16.1.5 Delay in Achievement of Substantial Completion:
If, as a result of Seller's sole fault or negligence, Substantial
Completion for any Turbine generator Unit has not been achieved
within ninety (90) days of achievement of Mechanical Completion,
and Buyer has provided to Seller 60 days, during which the
balance of plant and auxiliaries are functional and operating for
the purpose of Seller's correction and or adjustment of the
deficientTurbine Generator Unit to meet Minimum Performance
("Substantial Completion Cure Period"), Seller hereby agrees to
pay to Buyer **********per day for each Turbine Generator Unit
which fails to achieve Substantial Completion as liquidated
damages, and not as a penalty ("Late Substantial Completion Delay
Payments") for each day beyond the Substantial Completion Cure
Period to the date Substantial Completion occurs. Buyer and
Seller hereby acknowledge and agree that the terms, conditions
and amounts fixed pursuant to the payment of liquidated damages
provided herein are reasonable and will not constitute a penalty,
considering the delay and the actual costs that Buyer will incur
due to any Turbine Generator Unit failing to achieve Substantial
Completion within the Substantial Completion Cure Period due to
the sole fault or negligence of Seller. The amount of liquidated
damages is agreed upon and fixed hereunder because of the
difficulty of ascertaining the exact amount of damages that would
actually be incurred by Buyer if Substantial Completion is not
achieved during the Substantial Completion Cure Period, and Buyer
and Seller agree that the liquidated damages specified herein
shall be applicable regardless of the amount of such damages
actually incurred by Buyer. Late Substantial Completion Delay
Payments shall be Seller's sole and exclusive liability for
delays in not achieving Substantial Completion within the time
period stated in this Section 16.1.5.
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Sellers total liquidated damages for delays under this paragraph
16.1.5 and the following paragraph 17.2, in aggregate, shall not
exceed 15 % of the Contract Price.
16.1.6 Notice of Substantial Completion
When Seller believes that any Turbine Generator Unit has achieved
Substantial Completion, it shall deliver to Buyer a notice
thereof (the "Notice of Substantial Completion").
16.1.7 Achievement of Substantial Completion
Within ten (10) Business Days following receipt of the Notice of
Substantial Completion (including all the results of testing),
(a) Buyer shall acknowledge that Substantial Completion has been
achieved, if the requirements of Section 16.1.4 hereof have been
satisfied, or (b) if Buyer determines that Substantial completion
has not been achieved, Buyer shall notify Seller in writing that
Substantial Completion has not been achieved, stating the reasons
therefor. In such event, Seller shall promptly take such
reasonable actions, including the performance of additional Work
as will achieve Substantial Completion. Such procedure shall be
repeated as necessary until Substantial Completion has been
achieved. For all purposes of this Agreement, the date of
achievement of Substantial Completion shall be the date on which
Buyer receives a Notice of Substantial Completion relating
thereto, with respect to which Buyer ultimately acknowledges that
Substantial Completion has been achieved. In the event Buyer
fails to acknowledge, within twenty (20) Business Days after
Buyer's receipt of a Notice of Substantial Completion, that
Substantial Completion has been achieved, or has not been
achieved, as the case may be, Substantial Completion will be
deemed to have been achieved on the date upon which Seller's
Notice of Substantial Completion was received by Buyer.
SECTION 17: GUARANTEED SHIPMENT DATE; LIQUIDATED DAMAGES FOR LATE SHIPMENT
17.1 Seller shall ship the Turbine Generator Units and all major components
of the Turbine Generator Units (gas turbine, generator, and accessory
base module) no later than August 31, 2002, for the first two Turbine
Generator Units and September 30, 2002 for the second two Turbine
Generator Units (the "Guaranteed Shipment Dates"). In the event the
Turbine Generator Units are manufactured outside the United States of
America the Guaranteed Shipment dates shall be the dates the Turbine
Generator Unit are transported to the United States of America, cleared
for import into the United States of America by customs and ready for
inland transportation.
17.2 If the actual shipment dates are delayed beyond the Guaranteed Shipment
Dates due to causes other than delays caused by the Buyer or due to
events of Force Majeure, Seller shall pay Buyer as liquidated damages
per Turbine Generator Unit and not as a penalty, a sum in accordance
with the following schedule:
Days after the Guaranteed Shipment date:
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
Days 1 through 14 *********day for each delayed Turbine Generator Unit
Days 15 through 21 ********day for each delayed Turbine Generator Unit
Days 22 through 28 ********day for each delayed Turbine Generator Unit
Days 29 through 35 ********day for each delayed Turbine Generator Unit
Each day after day 36 ********day for each delayed Turbine Generator Unit
Hereafter, "Late Guaranteed Shipment Delay Payments".
Late Guaranteed Shipment Delay Payments shall apply until
shipment of the delayed Turbine Generator Unit is made. Late
Guaranteed Shipment Delay Payments shall be Seller's sole and
exclusive liability for delays in not shipping the Turbine
Generator Units by the Guaranteed Shipment Dates. Buyer and
Seller hereby acknowledge and agree that the terms, conditions
and amounts fixed pursuant to the payment of liquidated damages
provided herein are reasonable and will not constitute a penalty,
considering the delay and the actual costs that Buyer will incur
due to Seller's failure to ship the Turbine Generator Units by
the Guaranteed Shipment Dates. The amount of liquidated damages
is agreed upon and fixed hereunder because of the difficulty of
ascertaining the exact amount of damages that would actually be
incurred by Buyer due to Seller's failure to ship the Turbine
Generator Units by the Guaranteed Shipment Dates, and Buyer and
Seller agree that the liquidated damages specified herein shall
be applicable regardless of the amount of such damages actually
incurred by Buyer. Sellers total liquidated damages for delays
under this paragraph 17.2 and the preceding paragraph 16.1.5, in
aggregate, shall not exceed ****of the Contract Price.
SECTION 18: PERFORMANCE TESTS
18.1 When the Turbine Generator Units have achieved Mechanical Completion
and are capable of safe operation in accordance with Applicable Laws
and Permits, the Operating Manual and Applicable Codes and Standards,
Buyer shall perform the Performance Tests on each individual Turbine
Generator Unit, as specified in the Approved Test Procedures in
Appendix G. Buyer shall provide to Seller at least ten (10) days prior
written notice of the date on which Buyer intends to commence each of
the Performance Tests.
18.2 Buyer shall have the right to suspend or delay any Performance Test if
performance of such test would not be in compliance with Applicable
Laws and Permits, the Operating Manual, Applicable Codes and Standards.
18.3 All Performance Tests on each individual Turbine Generator Unit shall
be conducted and results calculated in accordance with Approved Test
Procedures for the Performance Tests, including any adjustments to
reflect deviations from Guarantee Conditions, to be calculated as set
forth in the Approved Test Procedures and verified by Parties. The
Performance Tests shall be based on the American Society of Mechanical
Engineer's Power Test Code 22, 1997, as amended by mutual consent of
the Parties. Seller's degradation curve attached hereto and made
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a part hereof within Appendix A shall apply if the Performance Tests
are conducted or completed after 100 hours of fired operation of any
individual Turbine Generator Unit. Notwithstanding GEK-28106A VI.
Evaluation, located in Appendix A, Tab17, the performance tolerances of
a single unit station instrumentation test for measurement of the
Performance Guarantees shall be in general accordance with the American
Society of Mechanical Engineer's Power Test Code 22, 1997, as amended
by mutual consent of the Parties.
18.4 Seller may designate and make available qualified and authorized
representatives to observe the Performance Tests to monitor the taking
of measurements to determine the level of achievement of the
Performance Guarantees. Buyer shall keep Seller's representatives
continuously apprised of the specific schedule, and any changes
thereto, for the commencement, and any re-performances, of the
Performance Tests. Buyer shall provide to Seller a written report of
the results of each Performance Test that is conducted.
18.5 If testing demonstrates that any individual Turbine Generator Unit's
corrected performance levels (adjusted for actual operating conditions
in accordance with 19.1 and calculated measurement uncertainties in
accordance with 18.3) do not achieve the Performance Guarantees, Seller
shall submit to Buyer a written plan to achieve the Performance
Guarantees pursuant to Section 23.
SECTION 19: PERFORMANCE GUARANTEES
Subject to the provisions of this Agreement, Seller guarantees that the Turbine
Generator Units will achieve all of the Performance Guarantees in this Section
(the "Performance Guarantees") during one or more Performance Tests.
Performance Guarantees
- --------------------------- ---------------------------------------------------
Guaranteed Heat Rate 9420 BTU/kWh (LHV)
at Guarantee Conditions****
- --------------------------- ---------------------------------------------------
- --------------------------- ---------------------------------------------------
Turbine Generator Units 162,300 kW at Guarantee Conditions****
Electrical Output
Guarantee*
- --------------------------- ---------------------------------------------------
- --------------------------- ---------------------------------------------------
Emissions NOx 9 ppmvd @ 15% O2
Guarantee
CO 9 ppmvd
UHC 7 ppmvw
PM- dry filterable (Front Half) 9 lb./hr**
Condensables (Back Half) 0.0 lb./hr***
VOC 1.4 lb./hr
- --------------------------- ---------------------------------------------------
*As measured at the generator terminals
** Front Half particulates as measured by US EPA Method 5
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*** Condensable (Back Half) particulates as measured by US EPA Method 8
(Sulfur Acid Mist) excluded ammonia salts.
****"Guarantee Conditions" means evaporative coolers off, ambient
temperature corrected to 59 degrees Fahrenheit, 14.19 psig barometric
pressure, relative humidity of 60%, elevation at 1105 feet, inlet
losses equal to 4 inches water and exhaust losses equal to 17 inches
water, generator power factor at .8 lagging, generator cold gas
temperature of 40 degrees C and generator H2 pressure of 30 psig with
fuel characteristics as follows:
Natural Gas Fuel: 21,490 Btu/lb. LHV @ 365 degrees F
NOx emissions are corrected to 15% O2 without heat rate correction and
are not corrected to ISO reference condition per 40CFR 60.335(c)(1).
NOx levels shown will be controlled by algorithms within the
SPEEDTRONIC control system.
19.2 Heat Rate Guarantee
Seller guarantees to Buyer, that during a continuous four (4) hour
Performance Test for the Operating Criteria, conducted in accordance
with the Approved Test Procedure, each individual Turbine Generator
Unit's heat rate will not exceed the Guaranteed Heat Rates specified in
Section 19.1, plus the allowance for test uncertainty in accordance
with Section 18.3 herein. Each thirty (30) minute interval within each
four (4) hour test period will be treated as an individual test point.
The Turbine Generator Unit's heat rate will be the average corrected
results from the eight (8) test points.
19.3 Turbine Generator Units Electrical Output Guarantee
Seller guarantees to Buyer that during a continuous four (4) hour
Performance Test for each the Operating Criteria, conducted in
accordance with the Approved Test Procedure, each individual Turbine
Generator Unit's electrical output will not be less than the Turbine
Generator Unit's Electrical Output Guarantee specified in Section 19.1,
less the allowance for test uncertainty in accordance with Section 18.3
herein. Each thirty (30) minute interval within each four (4) hour test
period will be treated as an individual test point. The Turbine
Generator Unit's electrical output will be the average corrected
results from the eight (8) test points.
19.4 Emissions Guarantee
19.4.1 Subject to the provisions of this Agreement, Seller guarantees to
Buyer that, for the Operating Criteria, during each of the six,
one hour Emission Tests, during an eight hour period throughout
which each individual Turbine Generator Unit is operating at a
net power output level within the range of fifty percent and one
hundred percent of the Turbine Generator Unit's Electrical Output
Guarantee, and in accordance with the Approved Test Procedures
and Section 19.4.2 below, each Turbine Generator Unit will meet
the Emissions Guarantee during each test period as specified in
Section 19.1 for the Operating Criterion.
19.4.2 Methods of Testing
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Methods for emission testing will follow the test procedures
defined in "US Standard Field Testing Procedure for Emission
Compliance", GEK-28172F, located in Appendix A, Tab 17, subject
to the acceptance of the California Energy Commission and the
California Air Resources Board-South Coast Air Quality Management
District or their successors and assigns.
a. NOx: utilizing plant certified continuous emission
monitoring system, EPA Method 7E and 20
b. CO: EPA Method 10
c. PM: Front Half EPA Method 5, Back Half EPA Method 8
d. VOC: EPA Method 18, 25 and/or 25A
19.5 Reliability Guarantee
Seller guarantees to Buyer that each individual Turbine Generator Unit
will, during a single continuous 5-day Reliability Test in accordance
with the Approved Test Procedures:
a. each individual Turbine Generator Unit while combusting
Natural Gas Fuel operating at various loads, will ramp up and
ramp down and will continue to operate and will not trip;
b. Should the Reliability Test be interrupted for reasons not
solely attributable to the Turbine Generator Unit, the
Reliability Test will re-commence at the hour of the
interruption.
SECTION 20: ACHIEVEMENT OF PERFORMANCE GUARANTEES
20.1 When Buyer believes that any individual Turbine Generator Unit has
achieved successful completion of a Performance Test providing the
basis for achieving the Heat Rate Guarantee, Turbine Generator Unit
Electrical Output Guarantee, Emission Guarantee or Reliability
Guarantee, it shall deliver to Seller a notice thereof (the "Notice of
Performance Test Success").
In the event that Buyer determines that for any individual Turbine
Generator Unit the Heat Rate Guarantee, Electrical Output Guarantee,
Emission Guarantee or Reliability Guarantee have not been achieved,
Buyer shall give Seller written notice of such determination and Seller
shall promptly take such reasonable actions, including the performance
of additional work and the completion of additional Performance Tests
(all fuel and operational personnel needed for any and all retesting to
be supplied by Buyer), as may be necessary to achieve the Heat Rate
Guarantee, Turbine Generator Unit Electrical Output Guarantee, Emission
Guarantee or Reliability Guarantee for such deficient Turbine Generator
Unit, as the case may be. Such procedure shall be repeated as necessary
until the Heat Rate Guarantee, Turbine Generator Unit Electrical Output
Guarantee, Emission Guarantee and Reliability Guarantee for such
deficient Turbine generator Unit has been achieved. If Buyer determines
that the Performance Guarantees have been satisfied it shall give
written notice to Seller. In the event Buyer fails either to notify
Seller within thirty (30) Business Days that the Heat Rate Guarantee,
Turbine
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Generator Unit Electrical Output Guarantee, Emission Guarantee or
Reliability Guarantee, as the case may be, or to notify Seller that
such Performance Guarantee has not been achieved, the Heat Rate
Guarantee, Turbine Generator Unit Electrical Output Guarantee, Emission
Guarantee or Reliability Guarantee, as the case may be, will be deemed
to have been achieved as of the date of completion of the Performance
Test.
20.2 The Heat Rate Guarantee, Turbine Generator Unit Electrical Output
Guarantee and Emission Guarantee, shall be considered to have been
achieved if Seller meets the requirements of Sections 19.2, 19.3 and
19.4 respectively, or Seller has achieved Minimum Performance and has
paid Liquidated Damages in accordance with Section 23 hereof.
SECTION 21: ACCEPTANCE
21.1 Acceptance shall have occurred if the following conditions have been
met:
(a) Seller has performed all of the Work required by this
Agreement in accordance with the Scope of Work, including any
items listed on the Punch List; and
(b) All portions of all of the Turbine Generator Units are capable
of being used in accordance with all Applicable Laws and
Permits, Good Electric Power Producing Practices, the
Operating Manual, Applicable Codes and Standards and, the
Agreement, and are free from Defects and Deficiencies and that
all systems are functioning as designed without contacts or
software inhibited or with jumpers in place; and
(c) All quality assurance documentation has been provided to Buyer
in accordance with the Seller's Quality Assurance Program and
Seller has otherwise complied with its Quality Assurance
Program; and
(d) Seller has conducted and completed the Personnel Training
Program and has delivered the Operating Manual; and
(e) Substantial Completion with respect to all four Turbine
generator Units has occurred; and
(f) Seller has delivered to Buyer its written certification that
the conditions for Acceptance set forth in clauses (a) through
(e) of this Section have been satisfied.
21.2 When Seller believes it has achieved Acceptance, it shall deliver to
Buyer a notice thereof (the "Notice of Acceptance"). Buyer shall,
within ten (10) Business Days following receipt of the Notice of
Acceptance, (a) inspect the Turbine Generator Units and all Work
hereunder and acknowledge that Acceptance has been achieved or (b)
notify Seller in writing that Acceptance has not been achieved, stating
the reasons therefor. In the event Buyer determines that Acceptance has
not been achieved, Seller shall promptly take such reasonable actions,
including the performance of additional Work as required herein and the
completion of additional Performance Tests, as will achieve Acceptance,
and shall issue to Buyer another Notice of Acceptance. Such procedure
shall be repeated as necessary until Acceptance has been achieved. In
the event Buyer fails to acknowledge, within
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EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
twenty (20) Business Days after Buyer's receipt of a Notice of
Acceptance, that Acceptance has been achieved, or has not been
achieved, as the case may be, Acceptance will be deemed to have been
achieved on the date upon which Seller's Notice of Acceptance was
received by Buyer.
SECTION 22: (INTENTIONALLY LEFT BLANK)
SECTION 23: PERFORMANCE GUARANTEE PAYMENTS AND REMEDIES
23.1 In the event that Substantial Completion has been achieved but the
Turbine Generator Unit Heat Rate Guarantee has not been achieved,
Seller shall be afforded a 180 days cure period, commencing at
Substantial Completion, during which time Seller shall use reasonable
efforts to cure such shortfall. In the event that Seller is unable to
cure such shortfall in performance within said cure period, Seller
agrees to pay to Buyer as liquidated damages and not as a penalty for
the amount that the aggregate heat rates of all the Seller's supplied
Turbine Generator Units for the Project (sum of heat rates/number of
Units delivered to the Project) fails to meet the Turbine Generator
Unit Heat Rate Guarantee, an amount equal to ********for every Btu/kWh
(lower heating value) by which average heat rate exceeds the Heat Rate
Guarantee based on the average heat rates recorded during the heat rate
performance test, up to a maximum liquidated damages amount equal to
*******of the Contract Price.
23.2 In the event that Substantial Completion has been achieved but the
Turbine Generator Electrical Output Guarantee has not been achieved,
Seller shall be afforded a 180 days cure period, commencing at
Substantial Completion, during which time Seller shall use reasonable
efforts to cure such shortfall. In the event that Seller is unable to
cure such shortfall in performance within said cure period, Seller
agrees to pay to Buyer, as liquidated damages and not as a penalty for
the amount that the aggregate electrical output of all the Seller's
supplied Turbine Generator Units for the Project (sum of electrical
outputs/number of Units delivered to the Project) fails to meet the
Turbine Generator Unit Electrical Output Guarantee, an amount equal to
$600 for every kW of electrical energy by which the aggregate net
electrical output of the Turbine Generator Units (in kW) falls below
the Turbine Generator Unit Electrical Output Guarantee based on the
average kW output of the Turbine Generator Units recorded during the
Electrical Output Performance Test, up to a maximum liquidated damages
amount equal to twenty percent (20%) of the Contract Price..
23.3 If due to the sole fault of Seller Substantial Completion is not
achieved within 180 days after Mechanical Completion (or such longer
period as may be mutually agreed between the Parties), Seller shall be
in default of this Agreement and Buyer may avail itself of all remedies
pursuant to Section 31 hereof.
23.4 The Performance Guarantee Payments specified in Sections 23.1 and 23.2
above, shall be calculated individually for each Turbine Generator Unit
for failure to achieve any Performance Guarantee and, shall be Seller's
sole and exclusive
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liability for failure to achieve any Performance Guarantee, except as
provided in 16.1.5.
23.5 Notwithstanding anything else to the contrary in this Agreement, Seller
shall not be subject to Performance Guarantee damages under this
Agreement to the extent that the engineering, procurement and
construction contractor for the Project, (the "EPC Contractor") is not
liable to the Buyer for performance guarantee payments under the EPC
Contractor's agreement with Buyer.
23.6 Buyer and Seller hereby acknowledge and agree that the terms,
conditions and amounts fixed pursuant to the payment of the Performance
Guarantee Payments liquidated damages provided herein are reasonable
and will not constitute a penalty, considering the delay and the actual
costs that Buyer will incur due to the Turbine Generator Units failure
to achieve the Performance Guarantees. The amount of liquidated damages
is agreed upon and fixed hereunder because of the difficulty of
ascertaining the exact amount of damages that would actually be
incurred by Buyer if the Turbine Generator Units fail to achieve the
Performance Guarantees, and Buyer and Seller agree that the liquidated
damages specified herein shall be applicable regardless of the amount
of such damages actually incurred by Buyer. Payment of Performance
Guarantee Payments shall be Seller's sole and exclusive liability if
the Turbine Generator Units fail to achieve the Performance Guarantees.
SECTION 24: WARRANTIES
24.1 Seller warrants to Buyer that (i) the equipment to be delivered
hereunder shall be designed and fit for the purpose of generating
electric power when operated in accordance with Seller's operation
instructions and, in the absence thereof, in accordance with generally
accepted operation practices of the electric power producing industry
and shall be free from defects in material, workmanship and title; and
(ii) Technical Advisory Services (as specified in Appendix K) shall be
performed in a competent, diligent manner in accordance with any
mutually agreed specifications. The warranties and related remedies for
Personal Training Program as specified in Appendix B, if provided, are
exclusively set forth elsewhere in this Agreement. Seller shall warrant
the foregoing for the earlier of: (i) one year following achievement of
Minimum Performance, or (ii) two years following the completion of
shipment of the Turbine Generator Units (hereafter, the "Warranty
Period").
24.2 The foregoing warranties (except as to title) for each Unit shall apply
to defects which appear during the Warranty Period.
24.3 If the equipment delivered or Technical Advisory Services performed
hereunder do not meet the above warranties during the Warranty Period,
Buyer shall promptly notify Seller in writing and make the equipment
available promptly for correction. Seller shall thereupon correct any
defect by, at its option, (i) reperforming the defective Technical
Advisory Services, (ii) repairing or replacing the defective part or
equipment, as may be applicable (freight and insurance paid by Seller).
Seller shall provide all reasonably necessary labor, tools and services
for any such repair of the equipment, but Seller shall not be
responsible for removal or replacement of structures or other parts of
the facility. If a defect in the equipment or part thereof cannot be
corrected by Seller's reasonable efforts, the Parties will negotiate a
mutually agreeable equitable adjustment in Contract Price with respect
to such
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equipment or part thereof. The condition of any tests shall be mutually
agreed upon and Seller shall be notified of and may be represented at,
all tests that may be made.
24.4 Any reperformed service or repaired or replacement part furnished under
this warranty shall carry warranties on the same terms as set forth
above, except that the warranty period shall be for a period of one
year from the date of such reperformance, repair or replacement. In any
event the warranty period and Seller's responsibilities set forth
herein for such repaired or replacement part shall terminate one year
after the end of the Warranty Period ("the Rewarranty Period")
applicable to the item of equipment in which such repaired or
replacement part was installed or in which such Service was
reperformed.
24.5 Seller does not warrant the Turbine Generator Units or any repaired or
replacement parts against normal wear and tear, including operation
beyond design capability, frequent starting, detrimental air inlet
conditions or erosion, corrosion or material deposit from fluids (all
as indicated in Seller's technical publication GEK 3620F, Heavy Duty
Gas Operating and Maintenance Considerations) and fuel not in
accordance with the fuel specification (attached as Appendix L). The
warranties and remedies set forth herein are further conditioned upon
(i) the proper storage, installation, operation, and maintenance of the
Turbine Generator Units and conformance with the Operation Manual
(including revisions thereto) provided by Seller and/or its
subcontractors, as applicable and (ii) repair of modification pursuant
to Seller's instructions or approval. Buyer shall keep proper records
of operation and maintenance during the Warranty Period. These records
shall be kept in the form of log sheets and copies shall be submitted
to Seller upon its request. Seller does not warrant any equipment or
services of others designated by Buyer where such equipment or services
are not supplied by Seller.
24.6 Except as otherwise specifically provided for in this Agreement the
preceding paragraphs of this Article 24 set forth the exclusive
remedies for all breach of Warranty, however instituted, whether based
on contract, indemnity, warranty, tort (including negligence), strict
liability or otherwise. The foregoing warranties are exclusive and are
in lieu of all other warranties and guarantees whether written, oral,
implied or statutory. NO IMPLIED STATUTORY WARRANTY OF MERCHANTABILITY
OR IMPLIED STATUTORY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE SHALL
APPLY.
SECTION 25: FORCE MAJEURE EVENT
25.1 A "Force Majeure Event" means any act, condition, or event that
prevents either Party to this Agreement from performing its obligations
under this Agreement, and such act, condition, or event could not have
been prevented by the exercise of due diligence of the Party asserting
the claim, was beyond the reasonable control of the Party or was not
reasonably foreseeable and occurred without the fault or negligence of
the Party asserting the claim. Seller or Buyer shall not have any
liability or be considered to be in breach or default of its
obligations under this Contract (other than Buyer for payment) to the
extent that performance of such obligations is delayed or prevented,
directly or indirectly, due to: (i) causes beyond its reasonable
control; or (ii) acts of God, act (or failures to act) of governmental
authorities, fires, severe weather conditions, earthquakes, strikes or
other labor disturbances, floods, war (declared or undeclared),
epidemics, civil unrest, riot, delays in transportation, or car
shortages; or (iii) acts (or omissions) of Buyer including failure to
promptly: (a) provide Seller with information and approvals necessary
to permit Seller to proceed with work immediately and without
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interruption, (b) comply with the terms of payment, or (c) provide
Seller with such evidence as Seller may request that any export or
import license or permit has been issued (if such is the responsibility
of Buyer), or (iv) shipment to storage or (v) inability on account of
causes beyond the reasonable control of Seller to obtain necessary
materials, necessary components or services. Seller shall notify Buyer
of any such delay. The date of delivery or of performance shall be
extended for a period equal to the time lost by reason of delay, plus
such additional time as may be reasonably necessary to overcome the
effect of such excusable delay. Seller shall notify Buyer, as soon as
practicable, of the revised Shipment Date and Service resumption date.
If Seller is delayed by acts or omissions of Buyer, or by the
prerequisite work of Buyer's other contractors or suppliers, Seller
shall also be entitled to an equitable price adjustment.
If a delay excused by Force Majeure under this Article extends for more
than three hundred sixty-five (365) days and the parties have not
agreed upon a revised basis for continuing the Work at the end of the
delay, including adjustment of the price, then either party (except
where delay is caused by Buyer, in which event only Seller), upon
thirty (30) days written notice, may terminate this Agreement with
respect to the undelivered Turbine Generator Units to which title has
not yet passed and any uncompleted services, whereupon Buyer shall
promptly pay Seller its termination charges determined in accordance
Appendix D upon submission of Seller's invoices therefor.
25.2 In the event of a Force Majeure occurrence:
(a) the affected Party shall promptly give the other Party notice
describing the particulars of the occurrence, including an
estimation of its expected duration and probable impact on the
performance of such party's obligations hereunder, and continues
to furnish timely regular reports with respect thereto during the
continuation of the Force Majeure Event;
(b) the notice described in clause (a) above is given no later than
five (5) Business Days after the affected party becomes aware or
should, with due diligence, have become aware of the commencement
of any such delay due to the claimed Force Majeure Event;
(c) the extension of time of performance shall be of no greater scope
and of no longer duration than is reasonably required by the Force
Majeure Event.
(d) no liability of either Party which arose before the occurrence of
the Force Majeure Event causing the suspension of performance
shall be excused as a result of the occurrence;
(e) the affected Party exercises all reasonable efforts to mitigate or
limit damages to the other party and to resume its performance as
quickly as possible;
(f) the affected Party shall use all reasonable efforts to continue to
perform its obligations hereunder and to correct or cure the event
or condition excusing performance; and
(g) when the affected Party is able to resume performance of the
affected obligations under the Agreement, that Party shall give
the other party written notice to that effect, a Change Order
shall be executed by Buyer and Seller to adjust the Guaranteed
Shipment Date to account for the actual effect on the
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affected party's performance of its obligations by the Force
Majeure Event, and the affected Party shall promptly resume
performance under the Agreement Documents
25.3 If Seller is delayed by acts or omissions of Buyer, or by the
prerequisite work of Buyer's other subcontractors or suppliers, Seller
shall be entitled to seek an equitable price adjustment in accordance
with Section 9 herein.
SECTION 26: INDEMNITIES
26.1 Seller Indemnities:
Seller shall indemnify, protect, save, hold harmless and defend Buyer,
the Financing Parties, each of their respective subsidiaries and
affiliates, and their directors, officers, agents, partners, employees,
and Buyer's subcontractors, successors and assigns of each of them (the
"Buyer Indemnified Parties") from and against any and all Damages
arising out of third-party claims for any damage to or destruction of
third-party property or death of or bodily injury to, any person, to
the extent caused by Seller's or Seller's Subcontractors' wrongful or
negligent acts or omissions, in the performance of Seller's obligations
hereunder. Seller's aforesaid indemnity is for the exclusive benefit of
the Buyer Indemnified Parties and in no event shall inure to the
benefit of any other party except for permitted assignees. "Third party
property" shall not include property of the foregoing Buyer Indemnified
Parties for purposes of this Section 26.1.
26.2 Buyer Indemnities:
Buyer shall indemnify, save harmless and defend Seller and its
Subcontractors and their affiliates and each of their directors,
officers, agents, employees, successors and assigns of each of them,
(the "Seller Indemnified Parties"), from and against any and all
Damages arising out of third-party claims associated with the
performance by Buyer or Buyer Indemnified Parties of its or their
obligations hereunder, including without limitation any damage to or
destruction of property of, or death of or bodily injury to, any
person, to the extent caused by Buyer's or Buyer Indemnified Party's
wrongful or negligent acts or omissions, in the performance of Buyer's
or Buyer Indemnified Party's obligations hereunder. Buyer's aforesaid
indemnity is for the exclusive benefit of the Seller Indemnified
Parties and in no event shall inure to the benefit of any other party
except for permitted assignees.
26.3 Tax Indemnification:
Seller shall indemnify, save harmless and defend the Buyer Indemnified
Parties from and against any and all Seller Taxes. Buyer shall
indemnify, save harmless and defend the Seller Indemnified Parties from
and against any and all Buyer Taxes.
26.4 Patent Indemnification:
Seller agrees to indemnify and hold harmless and defend the Buyer from
any claims, suits or proceedings of any third party that any Equipment
furnished hereunder infringes any patent of the United States
("Claim"). If Buyer notifies Seller promptly of the receipt of any
Claim, does not take any position adverse to Seller regarding such
Claim and gives Seller information, assistance and exclusive authority
to settle and defend the Claim, Seller shall, at its own expense and
option,
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
either (i) settle or defend the Claim and pay all damages and costs
awarded in it against Buyer, or (ii) procure for Buyer the right to
continue using the Equipment, or (iii) modify the Equipment so that it
becomes non-infringing, or (iv) replace the Equipment with
non-infringing Equipment. If, in any suit arising from such a Claim,
the continued use of the Equipment for the purpose intended is
forbidden by any court of competent jurisdiction, Seller shall at its
option take one or more of the actions under (ii), (iii) or (iv) above.
The foregoing states the entire liability of Seller for patent
infringement of any Equipment.
The foregoing shall not apply to any Equipment which is manufactured to
Buyer's design. As to any Equipment or use described in the preceding
sentence, Seller assumes no liability whatsoever for patent
infringement.
26.5 Notice and Legal Defenses:
Promptly after receipt by Buyer Indemnified Party or Seller Indemnified
Party of any claim or notice of the commencement of any action,
administrative or legal proceeding, or investigation as to which the
indemnity in favor of the Buyer Indemnified Parties or Seller
Indemnified Parties applies, the Buyer Indemnified Parties or Seller
Indemnified Parties, as the case may be, shall notify the indemnitor
thereof in writing. The indemnitor shall assume the defense thereof on
behalf of the Buyer Indemnified Parties or Seller Indemnified Parties,
as the case may be, and conduct such defense with due diligence and in
good faith with counsel reasonably satisfactory to the Buyer
Indemnified Parties or Seller Indemnified Parties, as applicable;
provided, however, that (a) the Buyer Indemnified Parties or Seller
Indemnified Parties, as the case may be, shall have the right to be
represented therein by advisory counsel of its own selection and at its
own expense.
26.6 Failure to Defend Action:
If any claim, action, proceeding or investigation arises as to which
the indemnity in favor of the Buyer Indemnified Parties or Seller
Indemnified Parties applies, and the indemnitor fails to assume the
defense of such claim, action, proceeding or investigation, then the
Buyer Indemnified Parties or Seller Indemnified Parties, as the case
may be, may at Seller's or Buyer's expense, as applicable, contest (or,
with the prior written consent of Seller or Buyer, as applicable,
settle) such claim.
26.7 Survival:
The provisions of this Section 26 shall survive Acceptance and the
termination of this Agreement.
SECTION 27: LIMITATIONS OF LIABILITIES
In no event shall the sum of Seller's liability to Buyer under this Agreement
for all Delay Payments and all Performance Guarantee Payments (excluding failure
to achieve the Emission Guarantee) exceed an amount equal to ***********of the
Contract Price. In no event shall the sum of Seller's liability to Buyer for any
claim arising from this Agreement whether based upon warranty, tort (including
negligence), strict liability, for defaults pursuant to Section 31, or otherwise
arising from Seller's performance or breach of this
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
Agreement exceed *********of the Contract Price. All liability under this
Contract shall terminate four years after the Shipment Date of the Turbine
Generator Unit giving rise to the claim, except for any liabilities or claims of
which Buyer has notified Seller within such four year period.
SECTION 28: CONSEQUENTIAL DAMAGES
28.1 It is understood and agreed by the Parties that liquidated damages
which may be payable by Seller, if applicable, under the specific
liquidated damages provisions elsewhere in this Agreement shall not be
considered consequential damages for purposes of this Section; and it
is further understood and agreed that, in no event, whether as a result
of breach of contract, warranty, indemnity, tort (including
negligence), strict liability, or otherwise, shall Seller or its
subcontractors or suppliers be liable for loss of profit or revenues,
loss of use of the equipment or any associated equipment, cost of
capital, cost of substitute equipment, (which does not include Seller's
liability, if any, pursuant to Section 31.2(c) hereof for equipment
which must be purchased by Buyer following Seller's default)
facilities, services or replacement power, downtime costs, claims of
Buyer's customers for such damages, or for any special, consequential,
incidental, indirect or exemplary damages and Buyer shall indemnify
Seller against such claims of Buyer's customers.
28.2 If Buyer cannot obtain for Seller from the subsequent purchasers the
protections specified in this Article 28, Buyer shall indemnify, defend
and hold Seller harmless from and against any and all claims made by
any subsequent purchasers of the Turbine Generator Units or services
against Seller for loss or damage arising out of the performance or
non-performance of the Equipment or Services provided under this
Contract.
28.3 If Seller furnishes Buyer with advice or assistance concerning any
products, systems or work which is not required pursuant to the Scope
of Work the furnishing of such advice or assistance will not subject
Seller to any liability, whether in contract, warranty, indemnity, tort
(including negligence), strict liability or otherwise.
28.4 For the purposes of this Article 28, the term "Seller" shall mean
Seller, its affiliates, subcontractors and suppliers of any tier, and
their respective agents and employees, whether individually or
collectively.
28.5 The provisions of this Article 28 shall prevail over any conflicting or
inconsistent provisions contained in any of the documents comprising
this Contract, except to the extent that such provisions further
restrict Seller's liability.
SECTION 29: SELLER PROVIDED INSURANCE
29.1 From a period commencing 15 months prior to the Guaranteed Shipment
Date, Seller shall provide and maintain the following insurance with
the indicated limits, with insurance carriers rated not less than "A"
by Best, or equivalent (with the
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exception of Worker's Compensation insurance), and in a form reasonably
satisfactory to Buyer and, unless indicated to the contrary below,
shall maintain such insurance in full force and effect until
Acceptance; provided, however, that Seller shall provide the liability
insurance coverage required under this Section 29 and workers'
compensation coverage for all periods during which Seller or any of its
agents or employees enters onto the Project Site; and provided,
further, that such liability insurance coverage and workers'
compensation coverage shall continue in full force and effect during
the Warranty Period. Such liability insurance shall include the
contractual liability assumed under the Section 26 (Indemnity Clause)
of this Agreement, covering claims for bodily injury (including death)
or third party property damage that may arise from operations performed
under this Agreement, whether such operations be by Seller or by any
Subcontractor of any tier or their respective agents or employees:
(i) Workers' compensation insurance in compliance with any
applicable federal law; with statutory limits in compliance
with the workers' compensation laws applicable in the state in
which the Work is being performed. Coverage will include a
Broad Form All States Endorsement.
(ii) Employers' liability insurance with a limit of $5,000,000 per
accident and $5,000,000 annual aggregate, $5,000,000 disease
per employee and $5,000,000 disease policy limit.
(iii) Automobile liability insurance including, but not limited to,
coverage for owned, non-owned and hired, leased or rented
motor vehicles, licensed or unlicensed with a $5,000,000
combined single limit per accident.
(iv) Comprehensive or commercial general liability insurance
written on an occurrence basis with a combined single limit of
liability for bodily injury, including death, personal injury
and property damage of $5,000,000 per occurrence and
$10,000,000 in the aggregate. Such coverage shall include
premises/operations, broad form property damage, blanket
contractual liability, independent Sellers, products/completed
operations liability, and personal injury.
(v) Excess liability insurance in connection with the employers'
liability coverage, the automobile liability coverage, the
comprehensive or commercial general liability coverage, and
with a combined single limit of $10,000,000 per occurrence and
$10,000,000 annual aggregate. Such insurance shall drop down
to provide primary coverage in the event the underlying policy
aggregate is exhausted by payment of claims. Any combination
of primary and excess limits is acceptable to the extent it
complies with the total limits.
29.2 Certificates: Seller shall furnish to Buyer certificates of insurance
required hereunder in the applicable forms set forth hereto. All such
certificates shall state that ninety (90) days' prior written notice
shall be given to each such party in the event of cancellation or
non-renewal of or material change in the relevant policy.
29.3 Waivers of Subrogation: All insurance policies supplied by Seller
(except those relating to workers' compensation insurance) shall
include a waiver of any right of subrogation of the insurers thereunder
against Buyer, the Financing Parties, and the Independent Engineer.
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29.4 Failure to Procure Insurance: If Seller fails to procure and maintain
the required insurance, or any portion thereof, the Buyer shall have
the right, but not the obligation, to procure and maintain the required
insurance for and in the name of Seller, and Seller shall promptly pay
the cost thereof and shall furnish all information necessary to acquire
and maintain such insurance. Neither party shall violate or knowingly
permit any violation of any condition or term of the policies of
insurance carried hereunder.
29.5 Additional Insureds, etc.: All liability insurance policies furnished
by Seller shall name Buyer as additional insureds.
29.6 No Limitation of Liability: The required coverage's referred to and set
forth in this Section 29 shall in no way affect, nor are they intended
as a limitation of, Seller's liability with respect to its performance
of the Work.
29.7 Insurance Primary: All policies of insurance provided by Seller
pursuant to this Section 29 shall be written as primary policies, not
contributing with, and not in excess of, the coverage that Buyer, and
the Financing Parties, and their respective permitted assigns,
successors, parent companies, subsidiaries and affiliates may carry
against the same hazards.
SECTION 30: BUYER-PROVIDED INSURANCE
Buyer shall provide and maintain the following insurance with the indicated
limits and, unless indicated to the contrary below, shall maintain such
insurance in full force and effect from six months prior to the Guaranteed
Shipment Date until Acceptance:
(i) Workers' Compensation insurance written in compliance with any
applicable federal law; with statutory limits in compliance
with workers' compensation laws applicable in the state in
which the Work is being performed. Coverage will include broad
form All States endorsement.
(ii) Employers' liability insurance with a limit of $1,000,000 per
accident and $1,000,000 annual aggregate, $1,000,000 disease
per employee and $1,000,000 disease policy limit.
(iii)Comprehensive or commercial general liability insurance
written on an occurrence basis with a combined single limit of
liability for bodily injury, including death, personal injury
and property damage of $1,000,000 per occurrence. Such
coverage shall include premises/operations, explosion,
blasting (if any), excavation, collapse and underground
hazards, broad form property damage, blanket contractual
liability, independent Sellers, products/completed operations
liability, and personal injury. If the policy is written on a
commercial general liability form, the general aggregate and
products/completed operations aggregate shall be no less than
$1,000,000, respectively.
(iv) Automobile liability insurance, including, but not limited to,
coverage for all owned, non-owned, hired, leased or rented
motor vehicles, licensed or unlicensed. Such insurance shall
provide coverage having a combined single limit per accident
of $1,000,000.
(v) Excess liability coverage in connection with the employers'
liability coverage, the automobile liability coverage and the
commercial general
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liability coverage, with a combined single limit of $4,000,000
per occurrence and in the aggregate.
(vi) Builders risk insurance policy covering the full value of the
Work.
Seller shall be added as an additional insured, with waiver of
subrogation, as Seller's interests may appear, under all of
the above policies except workers compensation.
SECTION 31: TERMINATION
31.1 Default by Seller
Seller shall be in default of this Agreement if: (i) Seller fails to
perform any of its material obligations under this Agreement or fails
to comply with the material terms of this Agreement, unless the remedy
for the breach of any such obligation is payment of Delay Payments or
Performance Guarantee Payments, and Seller does not diligently commence
to cure such default within thirty (30) days after written Notice of
Default from Buyer, and the default is not cured within 90 days, except
for the cure periods in Section 23 or such longer period as may be
determined by the Buyer, and; (ii) Seller intentionally or negligently
disregards Applicable Laws and Permits which are applicable to the
performance of Seller's Work and such failure continues for thirty (30)
days after written Notice of Default from Buyer; (iii) Seller abandons
the Work or suspends its efforts to complete the Work (except when
permitted pursuant to this Agreement); (iv) Seller makes a general
assignment for the benefit of its creditors, is generally unable to pay
its debts as they become due, or becomes the subject of any voluntary
or involuntary bankruptcy, insolvency, arrangement, reorganization or
other debtor relief proceeding, and, in the case of any such
involuntary proceeding, such proceeding is not dismissed or stayed
within forty-five (45) days after it is commenced.
31.2 If Seller is in default under the foregoing Section 31.1 and does not
cure within the applicable cure periods pursuant to Section 31.1 Buyer
shall have any or all of the following rights and remedies:
(a) Buyer, without prejudice to any of its other rights and
remedies under this Agreement, and at Buyer's option,
may terminate this Agreement immediately by shipment to
Seller of a notice of termination (a "Termination for
Cause"), in which event Seller shall be relieved from
any obligation to complete any unfinished portion of the
Work, but shall not be relieved from its liabilities,
warranties or obligations otherwise provided for
hereunder in respect of any portion of the Work for
which the Seller has been paid hereunder. If Buyer
elects not to terminate, Buyer shall retain all rights
under applicable law for the purpose of enforcing its
rights specified under this Agreement;
(b) Any amounts owed by Buyer to Seller as of the date of
the Termination for Cause shall be retained by Buyer
until after completion of the Work and applied by Buyer
to pay any amounts owed by Seller pursuant to this
Section;
(c) Seller shall be liable to Buyer for any additional cost
in addition to the Contract Price hereunder incurred by
Buyer in the purchase of
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<PAGE>
equipment or services corresponding to the Work
terminated pursuant to a Termination for Cause
hereunder.
31.3 Default by Buyer:
Buyer shall be in default of this Agreement if (a) Buyer fails to pay
to Seller any required payment which is not in dispute and such failure
continues for thirty (30) days after written Notice of Default has been
given by Seller to Buyer or (b) as a result of the occurrence of a
Force Majeure Event, Work has been suspended for three hundred sixty
five (365) days or longer, then Seller may terminate this Agreement
upon written notice to Buyer. Seller will not be obligated to ship the
Turbine Generator Units or pass title to Buyer unless all payments from
Buyer to Seller are current.
31.4 Termination For Convenience by Buyer
Buyer may terminate this Agreement by five (5) days written notice to
Seller if Buyer determines in its sole discretion to be necessary or
convenient ("Termination For Convenience"). In the event Buyer
terminates this Agreement for convenience, Buyer shall pay Seller the
termination amount determined using the Payment/Termination Schedule
(Appendix D) through the date of termination; however, Buyer shall not
be obligated to make any other payments due after the date of
termination. Payments made against the Contract Price shall be credited
against the termination payment. For termination prior to title
transfer, title to the Turbine Generator Units shall remain with
Seller. Upon payment of the termination amount, neither Buyer nor
Seller shall have any further obligations to the other.
31.5 Surviving Obligations
Termination of this Agreement for Cause (a) shall not relieve Seller or
Buyer of any obligation hereunder that expressly survives termination
hereof; (b) except as otherwise provided in any provision of this
Agreement expressly limiting the liability of either Party, termination
shall not relieve either Buyer or Seller of any contractual obligations
or liabilities hereunder for loss or damage to the other Party arising
out of or caused by acts or omissions of such Party prior to the
effectiveness of such termination or arising out of such
termination;(c) shall not relieve Seller of its warranty or other
contractual obligations as to portions of the Work hereunder already
performed or relieve either party of continuing obligations of Seller
or Buyer, as the case may be arising prior to the date of termination,
and (d) Seller shall be liable for Delay Payments or Performance
Guarantee Payments for which liability has arisen prior to such
Termination for Cause.
SECTION 32: ASSIGNMENTS
32.1 Buyer subject to Sellers approval, which will not be unreasonably
withheld, may assign its rights interests and obligations, in whole or
in part, under this agreement and this Agreement to an affiliated
company, in which Buyer owns an equity interest of 50% or more,
provided it gives written notice to Seller. Seller may assign its
rights and obligations regarding the Work, in part or in whole, to one
or more of its wholly owned subsidiaries provided that it gives written
notice to Buyer setting forth the effective date of such assignment.
Upon the effective date of said assignment all of the rights and
obligations of Seller under this Agreement shall vest solely in
Seller's respective subsidiaries. Buyer agrees to execute such
documents as may be necessary to effect the assignment. SELLER REMAINS
LIABLE AS A
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<PAGE>
GUARANTOR UNDER THIS AGREEMENT AND HEREBY GUARANTEES THE PERFORMANCE OF
ITS SUBSIDIARIES AFTER THE ASSIGNMENT TAKES EFFECT. Buyer may assign
this Agreement to the EPC Contractor who will provide engineering
procurement and construction services to Buyer with respect to the
Project, subject to Buyer demonstrating to Seller pursuant to Section
7.5 that the EPC Contractor has the financial ability to pay Seller
hereunder.
32.2 Except as provided in the preceding paragraph, it is expressly
understood and agreed that this Agreement is personal to Seller and
Buyer, and that Seller and Buyer shall have no right, power or
authority to assign or delegate this Agreement or any portion hereof,
either voluntarily or involuntarily, or by operation of law. Any
assignment by Buyer shall not release Buyer from any of its obligations
hereunder. Notwithstanding the foregoing, Seller hereby consents to the
collateral assignment of the Buyers rights under this Agreement by
Buyer to the Financing Parties and agrees to provide such
acknowledgments and consents in respect of such collateral assignment
as the Financing Parties or their counsel may from time to time
reasonably require. In the event of such collateral assignment, Seller
hereby consents to the exercise of the Financing Parties' rights under
such collateral assignment. Upon request of Buyer or any permitted
assignee, Seller will further evidence its consent by execution of an
assignment or other instrument reasonably acceptable to Seller and the
permitted assignee.
32.3 Successors and Assigns
All of the rights, benefits, duties, liabilities and obligations of the
Parties hereto shall inure to the benefit of and be binding upon their
respective successors and permitted assigns.
SECTION 33: PERFORMANCE IN FAVOR OF FINANCING PARTIES
Seller agrees that in the event of a default by Buyer under the terms and
conditions of any agreement between Buyer and any Financing Party, the Financing
Parties shall be entitled to use and enforce this Agreement, as the same may be
amended or supplemented before or after such default, all without additional
cost to the Financing Parties. In the event any Financing Party notifies Seller
in writing that Buyer has defaulted under any agreement between Buyer and the
Financing Parties and requests Seller to continue performance under this
Agreement, Seller shall thereafter perform hereunder in accordance with the
terms and provisions hereof, so long as Seller shall be paid in accordance with
this Agreement for the Work performed hereunder, including payment of any sums
due to Seller for Work performed to and including the date of Buyer's default,
and so long as such Financing Parties agree in writing to continue to pay Seller
for Work performed in accordance with this Agreement.
Seller agrees to amend this Agreement as may be reasonably requested by the
Financing Parties to the extent that Seller's rights and or obligations
thereunder are not materially adversely affected.
SECTION 34: BUYER REVIEW OF DOCUMENTS
34.1 Buyer Review
Neither (a) the review by Buyer of any information or calculations
supplied by
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<PAGE>
Seller nor (b) Buyer's certification of the Heat Rate Guarantee,
Turbine Generator Unit Electrical Output Guarantee, Emission Guarantee,
Reliability Guarantee or Acceptance nor (c) Buyer's payments of the
Contract Price constitute a waiver of, or release Seller from, any
liability hereunder from any breach or default by Seller under this
Agreement. Notwithstanding anything to the contrary herein contained,
Buyer shall not be liable for and makes no representation with respect
to any designs and specifications for the Turbine Generator Units or
the Scope of Work, including any designs and specifications prepared by
Seller and reviewed or accepted by Buyer, and including any designs and
specifications set forth in the Agreement. Buyer's Acceptance of the
Turbine Generator Units shall not relieve Seller of its obligation for
such compliance.
34.2 Final Drawings and Documentation
One hundred-twenty (120) days after Mechanical Completion, Seller shall
furnish to Buyer CAD disks where reasonably available and reproducible
mylars of the Final Drawings and Documentation. Without limiting the
requirements otherwise applicable to the Final Drawings and
Documentation hereunder, the Final Drawings and Documentation shall
completely and accurately, in all material respects, show and describe
all piping and instrumentation, electrical interconnections, electrical
elementarys and control loop logic diagrams within the Turbine
Generator Units. Seller shall incorporate into the Final Drawings and
Documentation all material changes or corrections to the Turbine
generator Unit made at the Project Site prior to Acceptance so as to
represent the completed as-built Turbine Generator Units completely and
accurately in all material respects. Seller shall establish such
systems and retain such personnel as are necessary to maintain full
quality control and quality assurance with respect to the Final
Drawings and Documentation.
34.3 Ownership
Seller agrees that all documents prepared by Seller and provided to
Buyer pursuant to this Agreement shall be the property of Buyer.
SECTION 35: WAIVERS
No failure to exercise, and no delay in exercising, any right, power or remedy
under the Agreement shall impair any right, power or remedy that any Party
hereto may have, nor shall such failure or delay be construed to be a waiver of
any such rights, powers or remedies or an acquiescence in any breach or default
under the Agreement, nor shall any waiver of any breach or default be deemed a
waiver of any default or breach subsequently occurring under the Agreement. This
Agreement may not be changed or amended orally and any waiver hereof must be in
writing and executed by both Parties. Either Party's waiver of any breach or
failure to enforce any of the terms, covenants, conditions, or other provisions
of this Agreement at any time shall in no way affect, limit, modify, or waive
that Party's right thereafter to enforce or compel strict compliance with every
term, covenant, condition or other provision, notwithstanding any course of
dealing, course of performance, or custom of the trade.
SECTION 36: GOVERNING LAW
This agreement and the rights and duties of the parties hereunder and/or arising
from or relating in any way to the transactions evidenced by the agreement shall
be governed by and
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<PAGE>
construed in accordance with the laws of the state of New York, including all
matters of interpretation, validity and performance.
SECTION 37: SEVERABILITY
In the event that any of the provisions, or portions or applications thereof, or
of any of the Agreement are held to be unenforceable or invalid by any
arbitrator, arbitration panel, court, or regulatory agency of competent
jurisdiction, the validity and enforceability of the remaining provisions, or
portions or applications hereof, shall not be affected thereby.
SECTION 38: NOTICES
38.1 Unless otherwise expressly required or permitted by the Agreement, any
notice required or permitted to be given by Seller to Buyer hereunder
shall be in writing and shall be addressed to Buyer at:
Mountainview Power Company
25770 San Bernardino Avenue
San Bernardino, CA 92408
Attention: Scott Noll, General Manager
Telephone: (909) 478-7943 Facsimile: (909) 478-7910
With a copy to:
Mountainview Power Company
245 Winter Street
Suite 300
Waltham, MA 02541
Attention: Arnold Wallenstein, Corporate Counsel
Telephone: (781) 370-1515 Facsimile: (781) 370-1594
and any notice required or permitted to be given by Buyer to Seller hereunder
shall be in writing and shall be addressed to Seller at:
GENERAL ELECTRIC COMPANY
1 River Road
Schenectady, New York 12345
Attention: Joseph Such
Telephone: (518) 385-4613 Facsimile: (518) 385-5128
38.2 Delivery
Unless otherwise expressly required or permitted by the Agreement, all
notices shall be by writing and delivered (a) in person to the party
above mentioned, (b) via certified mail with a return receipt requested
in a securely sealed envelope and postage prepaid, (c) by expedited
delivery service with signed proof of delivery by company recipient, or
(d) by prepaid telegram or facsimile. A notice shall be deemed
delivered either at the time of personal delivery or, in the case of
delivery service or mail, as the date of delivery at the address
provided herein, or in the case of telegram, or facsimile, upon
receipt. Each Party, by notice to the other Party,
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<PAGE>
may designate, from time to time, another address or office to which
notices may be given pursuant to this Agreement.
SECTION 39: HEADINGS AND INTERPRETATION RULES
The Section and Section headings herein have been inserted for convenience of
reference only and shall not in any manner affect the construction; meaning or
effect of the provisions herein contained nor govern the rights and liabilities
of the parties hereto. Where the context requires, words importing the singular
include the plural and vice versa. Words importing natural persons or Parties
shall include firms and corporations and any other organizations having legal
capacity.
SECTION 40: ENTIRE AGREEMENT
This Agreement together with attachments (Appendices A - M) constitutes the
entire agreement of the Parties with respect to the subject matter hereof. All
prior, correspondence, negotiations and agreements, oral or written, among the
Parties with respect to the subject matter hereof are superseded by this
Agreement. The following Sections shall survive the termination of this
Agreement:
* Section 8 (Taxes)
* Section 24 (Warranties)
* Section 26 ( Indemnities)
* Section 27 (Limitation of Liabilities)
* Section 40 (Entire Agreement)
* Section 41 ( Seller's Proprietary Information)
* Appendix I (Confidentiality Agreement)
SECTION 41: SELLER'S PROPRIETARY INFORMATION
At the time of furnishing confidential or proprietary information, Seller will
expressly designate by label, stamp, or other written communication that the
information or documentation furnished is confidential. Buyer agrees (i) to
treat such information as confidential, (ii) to restrict the use of such
information to matters relating to Seller's performance of the Agreement, and
(iii) to restrict access to such information to employees of Buyer and its
agents whose access is necessary in the implementation of the Agreement.
Confidential information will not be reproduced without Seller's prior written
consent, and all copies of written information will be returned to Seller upon
request except to the extent that such information is to be retained by Buyer
pursuant to the Agreement. The foregoing restrictions do not apply to
information which: (i) is contained in a printed publication which was released
to the public by Seller prior to the date of the Agreement; or (ii) is, or
becomes, publicly known otherwise than through a wrongful act of Buyer, its
employees, or agents; or (iii) is in possession of Buyer, its employees, or
agents prior to receipt from Seller, provided that the person or persons
providing the same have not had access to the information from Seller; (iv) or
is furnished to others by Seller without restrictions similar to those herein on
the right of the receiving party to use or disclose; or (v) is approved in
writing by Seller for disclosure by Buyer, its agents or employees to a third
party.
SECTION 42: PUBLICITY RELEASES; INFORMATION
Seller shall not, and shall not permit any Subcontractor to, issue any press or
publicity release or any advertisement, or publish, release or disclose any
photograph concerning this Agreement or the Turbine Generator Units except in
accordance with the Confidentiality Agreement attached as Appendix I or with the
consent of the Buyer, such consent not to be
38
<PAGE>
unreasonably withheld. Seller may list Buyer's name, project name, and a brief
project description in Seller's experience lists, which are periodically
developed and published. Seller shall give prior notice to Buyer of any
information contained in documents filed with public authorities or any other
public disclosure that could result in the dissemination of confidential
information; provided, however, that disclosures made pursuant to any federal or
state securities laws of the United States of America or regulations or pursuant
to the rules of any securities exchange may be made without the consent of
Buyer.
SECTION 43:NON-NUCLEAR USE.
The equipment furnished hereunder this Agreement shall not be used in
conjunction with the use or handling of nuclear material or the construction or
operation of a nuclear installation. Buyer warrants that it shall not use the
equipment for such purpose or permit others to use the equipment for such
purposes. If any such use does occur, Seller disclaims all liability for any
nuclear or other damage, injury or contamination or destruction of the equipment
and Buyer shall indemnify Seller against any such liability howsoever arising.
IN WITNESS WHEREOF, the Parties have caused this AGREEMENT to be executed by
this respective authorized representatives as of the date first set forth above.
GENERAL ELECTRIC COMPANY MOUNTAINVIEW POWER COMPANY
By: _________________________ By: ___________________________
Name: _______________________ Name: _________________________
Title: ________________________ Title: ________________________
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<PAGE>
APPENDIX A
SCOPE OF WORK
GE Proposal # 90044AG dated September 1999 definesSellers scope of supply.
It is expressly understood that the steam turbine generator equipment and
accessories listed in the GE Proposal are not included in the contract price or
scope of supply and are provided as an option that the Buyer and Seller may
mutually agree to execute.
Tab 2, Tab 4, Tab 11, Tab 12, Tab 13, Tab 14, Tab 15, and Tab 18: References to
the Steam Turbine Generator equipment, services and accessories shall be
disregarded for the purposes of this Agreement
Tab 5, Tab 6 and Tab 8 shall be disregarded for the purposes of this Agreement
Tab 1 Revision 0
Tab 2 Revision 2
Tab 3 Revision 2
Tab 4 Revision 1
Tab 5 Revision 0
Tab 6 Revision 0
Tab 7 Revision 2
Tab 8 Revision 0
Tab 9 Revision 0
Tab 10 Revision 0
Tab 11 Revision 0
Tab 12 Revision 0
Tab 13 Revision 0
Tab 14 Revision 0
Tab 15 Revision 0
Tab 16 Revision 0
Tab 17 Revision 0
Tab 18 Revision 0
40
<PAGE>
APPENDIX B
PERSONNEL TRAINING PROGRAM
Please refer to Appendix A, Tab 13
41
<PAGE>
APPENDIX C
QUALITY ASSURANCE PROGRAM
Please refer to Appendix A Tab 16
42
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
Appendix D
Payment/Termination Schedule
4 x PG7241(FA) GTG Sets
Payment - Termination Schedule
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Payment Termination
Payment Monthly Cumulative Cumulative
Month Event % of Contract % of Contract % of Contract
----- ----- ------------- ------------- -------------
Oct-99 Signed Agreement * * *
Nov-99
Dec-99
Jan-00
Feb-00
Mar-00
Apr-00
May-00
Jun-00 Progress Payment * * *
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
Jan-01
Feb-01
Mar-01 Progress Payment * * *
Apr-01 Progress Payment * * *
May-01 Progress Payment * * *
Jun-01 Progress Payment * * *
Jul-01 Progress Payment * * *
Aug-01 Progress Payment * * *
Sep-01 Progress Payment * * *
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<PAGE>
Oct-01 Progress Payment * * *
Nov-01 Progress Payment * * *
Dec-01 Progress Payment * * *
Jan-02 Progress Payment * * *
Feb-02 Progress Payment * * *
Mar-02 Progress Payment * * *
Apr-02 Progress Payment * * *
May-02 Progress Payment * * *
Jun-02 Progress Payment * * *
Jul-02 Progress Payment * * *
Aug-02 Ship 2 x GTG * * *
Sep-02 Ship 2 x GTG * * *
Oct-02 30 Days After Shipment of All Major Components * * *
</TABLE>
Notes: The notes below are more precisely set forth in the Agreement
The initial payment is due within 5 business days of signed
Agreement and is non-refundable. Progress Payments are due on the
15th of the indicated month and will be billed 30 days in advance.
Payments tied to shipment are due Net 30 days after certification
that equipment has shipped.
The Buyer may terminate this contract at any time upon written
notice and payment of termination charges in accordance with the
schedule set forth above.
Upon termination prior to title transfer, title to terminated gas
turbine-generator equipment and accessories remains with the Seller.
The termination charge for any equipment for which title has
transferred is 100%.
44
<PAGE>
APPENDIX E
SAMPLE GE MONTHLY PROGRESS REPORT
45
<PAGE>
APPENDIX E
Schedule 1
FINAL LIEN WAIVER FORM
State of _ _____________
County of __ _________________________
KNOW ALL MEN BY THESE PRESENTS THAT General Electric Company, a corporation of
the State of New York, acting through its Power System business, whose address
is One River Road, Schenectady, New York 12345, hereinafter called SUPPLIER, and
with regard to the (unit type) at (Project/site name), for and in consideration
of payment in the amount of______________ for invoice number ____ __________ to
be made by (Customer Name). (CONTRACTOR) upon execution of this Final Release,
hereby represents that all bills for labor, subcontractors, materials, lands,
licenses, and other expenses relating to this invoice have been paid by
SUPPLIER. Upon receipt by the undersigned of a check from the CONTRACTOR in the
above amount, payable to the undersigned, and when the check has been paid, this
document shall become effective to release and forever discharge the CONTRACTOR
and the OWNER from any and all claims, liens, and claims of lien arising out of
the materials and services for which payment is being made. Before any recipient
of this document relies upon it, he should verify evidence of payment to the
SUPPLIER. Supplier hereby covenants and agrees, for itself, its successors and
assigns, that it and they, and each of them, shall and will defend and save
harmless the Owner from and against any and all suits, actions, claims, liens or
demands of laborers, mechanics, materialmen or others, with regard to the
invoice to be paid in exchange for this Release of Lien.
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, I have hereunder set my hand in behalf of the Supplier
______ ______________ day of _ ______, 19______ at _________ ________
______________ ______________________ (City)__________ (State) (Zip Code)
(Supplier)
By ________________________________
Title _ _
--------------------------------------------------------------
ACKNOWLEDGMENT
State of ____ ________________________
County of __ ___________________________ ss:
On this __________________________ day of _____ __________________,
19
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before me appeared ____ _______________________________________, to me
personally known, who, being by me duly sworn, did depose and say that (he)
(she) (they) executed the above release for the Supplier and that (he) (she)
(they) was duly authorized to do so.
IN WITNESS WHEREOF, I have set hereunto my signature and seal this __________day
of _____ __________________, 19____.
---------------------------
(Notary Public)
My commission expires
--------------------------
47
<PAGE>
APPENDIX F
INTENTIONALLY OMITTED
48
<PAGE>
APPENDIX G
I. APPROVED TEST PROCEDURES
Please refer to Appendix A Tab 3 and Tab 17.
49
<PAGE>
APPENDIX I
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITYAGREEMENT IS MADE AND EFFECTIVE THIS 13TH DAY OF AUGUST
1999") , BY AND AMONG GENERAL ELECTRIC COMPANY, ACTING THROUGH ITS GE POWER
SYSTEMS BUSINESS, A NEW YORK CORPORATION, HAVING A PRINCIPAL PLACE OF BUSINESS
AT 1 RIVER ROAD, SCHENECTADY, NEW YORK 12345 USA ("GE" OR "SELLER")
ANDMOUNTAINVIEW POWER COMPANY, A DELAWARE CORPORATION, HAVING A PRINCIPAL PLACE
OF BUSINESS AT 245 WINTER ST, SUITE 300, WALTHAM, MA 02451 ("BUYER") (SELLER AND
BUYER BEING REFERRED TO HEREIN INDIVIDUALLY AS A "PARTY" AND COLLECTIVELY AS THE
"PARTIES").
WHEREAS, each Party may provide to the other Party confidential information (the
"Confidential Information"), as defined below; and
WHEREAS, each Party receiving such Confidential Information agrees to keep such
information confidential pursuant to the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises and for other good and
sufficient consideration the Parties hereby agree as follows:
1. Neither party will disclose any of the Confidential Information to any
third party; provided, however, the Confidential Information may be
disclosed to each Party's employees and representatives who need to know
such information for the purpose of prosecuting the Work and who agree to
keep such information confidential to the same extent as if they were
parties hereto. The Parties shall label all Confidential Information as
"Confidential", "Proprietary" or similar designation. Oral information
which is confidential or proprietary so stated at the time of disclosure
shall be reduced to writing by the disclosing party within ten (10) working
days after disclosure, which writing shall specifically reference the date
of disclosure. A party (the "parent party") may disclose Confidential
Information of the other party (the "other party") for the purposes
contemplated herein; provided that such subsidiary or affiliate agrees in
writing to be bound by the terms of this Agreement prior to receipt of the
Confidential Information of the other party. In such event, the parent
party shall notify the other party of the disclosure of the Confidential
Information and provide the other party with a copy of such written
agreement executed by the subsidiary or affiliate of the parent party.
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<PAGE>
2. Confidential Information shall not include any information which (i) is or
becomes generally available to the public other than as a result of a
breach of this Agreement by either Party, (ii) becomes available to either
Party on a non-confidential basis from a source other than the other Party,
its representatives or agents, provided that such source is not in breach
of any secrecy or confidentiality obligation to either Party, (iii) is
known to either Party prior to receiving the Confidential Information, or
(iv) is independently developed by either Party.
3. In the event that either Party becomes legally compelled by a court or
administrative agency order or by subpoena to disclose any of the
Confidential Information, such Party will provide the other Party with
prompt notice of the order or subpoena before such Confidential Information
is disclosed. In the event that such Party is required to disclose the
Confidential Information, the disclosing Party will furnish only that
portion of the Confidential Information which it is legally required to
disclose and will reasonably assist the other Party in obtaining a
protective order or other assurance that confidential treatment will be
accorded to the Confidential Information that is so disclosed.
4. Neither Party makes any representation or warranty as to the completeness
or accuracy of the information to be provided hereunder.
5. Except as expressly provided herein with respect to the confidentiality and
non-disclosure of the Confidential Information, nothing in this Agreement
shall obligate any Party in any manner whatsoever with respect to
consummate or agree to any other transaction between the Parties.
6. This Agreement shall not be construed to grant to either Party any patent,
license, know-how, license, trade secret or any other rights, or to use any
related licenses or patent, trade secret or know how, which are owned by
either Party or its affiliates.
7. Without prejudice to the rights and remedies otherwise available, either
Party shall be entitled to seek equitable relief by way of injunction or
otherwise if the receiving Party or any of its representative's breach this
Agreement.
8. Neither Party will use or disclose any Confidential Information provided by
the other Party for any purpose other than with working with such party on
the prosecution of the Work and, provided further, neither Party shall use
or provide to any third party any Confidential Information provided by the
other Party in connection with any competing project.
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<PAGE>
9. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
10. This Agreement contains the full and complete understanding of the Parties
with respect to the subject matter hereof and supersedes all prior
representations and understandings whether oral or written. This Agreement
may not be modified in any manner except by written amendment executed by
both Parties.
11. This Agreement shall expire three years from the date hereof.
IN WITNESS WHEREOF, the Parties have executed this Agreement by their duly
authorized officers in duplicate counterparts, each of which shall be considered
an original.
Mountainview Power Company
By: _________________________
Name:_______________________
Title:_________________________
General Electric Company
By: _________________________
Name:_______________________
Title:_________________________
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<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
APPENDIX J
- --------------------- ----------------------
*****************************************************
53
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APPENDIX K
TECHNICAL ADVISORY SERVICES
Please refer to Appendix A Tab 12
54
<PAGE>
APPENDIX L
FUELS SPECIFICATION
Please refer to Appendix A Tab 3, Tab 9 and Tab 17.
55
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
APPENDIX M
**************************************************
Buyer shall notify Seller of all Options Buyer wishes to include or delete 24
months prior to the Guaranteed Shipment Date. The Contract Price may be
subsequently modified through changes to the Scope of Work pursuant to Section
14 hereof. The Contract Price set forth above includes freight and delivery to
the Delivery Point.
Note 1
Packaged Electronic and Electrical Control
Compartment
(PEECC)
The PEECC is a completely enclosed compartment
suitable for outdoor installation. Heating, air
conditioning, compartment lighting, power
outlets, temperature alarms, and smoke detectors
are provided for convenience and protection of
the equipment in the PEECC.
Electrical monitoring and control of the unit are
accomplished by the turbine control panel and the
generator control panel, which are mounted on a
common skid and located in the PEECC. The
customer control local interface (I) is also
located in the PEECC. In addition to the control
systems, the PEECC also houses the gas turbine
motor control centers and batteries, rack and
charger (s). The arrangement of the equipment is
shown in the typical compartment layout below.
[chart depicting a Packaged Electronic and
Electrical Control Compartment]
56
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
Exhibit 10.41
CONTRACT TERMINATION AGREEMENT
BETWEEN
DELANO ENERGY COMPANY INC.
AND
SOUTHERN CALIFORNIA EDISON COMPANY
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
TABLE OF CONTENTS
SECTION TITLE PAGE
RECITALS 1
AGREEMENT
4
1 TERMINATION OF CONTRACT OBLIGATIONS 4
2 TERMINATION PAYMENTS 8
3 RELEASES 12
4 CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE
AGREEMENT 15
5 CPUC APPROVAL CONDITION PRECEDENT 17
6 ITCC REFUND 20
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
SECTION TITLE PAGE
7 REPRESENTATIONS AND WARRANTIES 21
8 EDISON'S OFFSET RIGHTS 22
9 NO PREVIOUS ASSIGNMENT 22
10 INDEMNITY 23
11 PREVIOUS COMMUNICATIONS 25
12 COSTS AND FEES 25
13 NONWAIVER 26
14 WAIVER OF PURPA RIGHTS 26
15 SUBJECT HEADINGS 27
16 GOVERNING LAW 27
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
SECTION TITLE PAGE
17 JUDGE TRIAL; JURISDICTION AND VENUE 27
18 AMENDMENT 28
19 FURTHER ASSURANCES 28
20 REVIEW AND CONSTRUCTION OF AGREEMENT 28
21 CONFIDENTIALITY 29
22 NOTICES 29
23 MULTIPLE ORIGINALS 30
24 ASSIGNMENT 30
25 SUCCESSORS AND ASSIGNS 31
26 THIRD PARTY BENEFICIARIES 31
27 DAMAGES LIMITATIONS 31
28 SIGNATURE CLAUSE 33
EXHIBITS:
A. TERMINATION PAYMENT SCHEDULE
***
C. LIST OF FINANCING PARTIES REQUIRING CONSENTS
***
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
CONTRACT TERMINATION AGREEMENT
BETWEEN
DELANO ENERGY COMPANY INC.
AND
SOUTHERN CALIFORNIA EDISON COMPANY
This Contract Termination Agreement ("Agreement") is entered into by and
between Southern California Edison Company, a California corporation ("Edison"),
and Delano Energy Company Inc., a Delaware corporation ("Delano"). Edison and
Delano shall be individually referred to herein as "Party" and jointly as
"Parties".
RECITALS
WHEREAS, this Agreement is made with reference to the following facts,
among others:
A. Delano and Edison are parties to a certain negotiated Amended and
Restated Power Purchase Contract (the "PPC") dated July 31, 1987,
including its associated Interconnection Facilities Agreement (the "IFA")
dated September 12, 1988. The Delano project is identified by Edison as
QFID No. 1023. The PPC and IFA are hereafter jointly referred to as the
"Contract".
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
B. The PPC provides for Delano to sell energy and capacity to Edison at
specified fixed prices that are higher than Edison's expected future costs
for energy and capacity.
C. Edison believes that compensating Delano to terminate the Contract is in
the best interests of Edison's ratepayers.
D. ***
E. To accomplish the early termination of the Contract, the Parties have
entered into this Agreement, which, among other things, is subject to the
final approval of the California Public Utilities Commission ("CPUC").
F. ***
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
AGREEMENT
THEREFORE, in consideration of the mutual promises and obligations stated
herein, the Parties agree as follows:
1. TERMINATION OF CONTRACT OBLIGATIONS
1.1 Subject to the satisfaction of the conditions precedent set forth in
Articles 4 and 5, effective as of 11:59 p.m. on December 31, 1999 the
following shall occur: (i) the Contract shall terminate ("Contract
Termination") and the obligation of Delano to sell, and the obligation
of Edison to purchase, energy and capacity, as well as all other
rights and obligations of Delano and Edison under the Contract, shall
prospectively be of no further force or effect; (ii) the payment
obligations set forth in Article 2 shall become effective; (iii) the
mutual releases in Article 3 shall become effective; and (v) Delano's
waiver of PURPA rights under Article 14 shall become effective. Prior
to the Contract Termination, this Agreement shall have no effect
whatsoever on the Contract or the Parties' rights and obligations
thereunder.
1.2 ***
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
1.3 The Parties understand and acknowledge that this Agreement does not
relieve Delano of its obligation to comply with all laws, statutes and
regulations ***
1.4 ***
1.5 This Agreement shall terminate and be of no further force or effect,
and neither Party shall have any liability to the other hereunder by
reason of such termination, under the following circumstances and on
the following dates:
A. On the date that a CPUC decision or resolution in response to the
Application which does not grant CPUC Approval becomes a Final
Decision (as such capitalized terms are defined in Article 5),
and/or
B. As of December 31, 1999, if the CPUC has not as of that date
issued a Final Decision granting CPUC Approval and Edison has not
given Notice in accordance with Article 22, below, of its
election to waive the condition of CPUC Approval under Section
5.3, and/or
C. If the condition precedent of *** (as defined in Section 4.1(a))
has not been satisfied, then on the date such condition fails;
and/or
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
D. If the condition precedent of *** (as defined in Section 4.1(b))
has not been satisfied, then on the date such condition fails;
and/or
E. On the date that Delano provides Notice to Edison in accordance
with Article 22, below, of the failure of the condition precedent
set forth in Section 4.1 ***, which Notice may not be given later
than 50 days after the Execution Date (as defined in Article 28).
1.6 Upon the termination of this Agreement pursuant to Section 1.5, the
Contract shall continue in full force and effect, including all
obligations and liabilities thereunder.
2. TERMINATION PAYMENTS
2.1 Upon Contract Termination, Edison shall become obligated to pay Delano
a total nominal sum of *** ("Termination Payments") in accordance with
the payment schedule attached hereto as Exhibit A ("Termination
Payment Schedule"), and in accordance with the procedures set forth in
this Article 2. During the period prior to Contract Termination, the
Parties' respective payment obligations will be in accordance with the
Contract.
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
2.1.1Termination Payments shall be due and payable on the dates set
forth in the Termination Payment Schedule unless the payment due
date falls on a weekend or Edison company holiday, in which case
such payment will be due and payable on the first Edison business
day following the payment due date. In addition, if the first
Termination Payment following Contract Termination would
otherwise be due less than 10 business days after Contract
Termination, such payment will be due and payable on the tenth
business day following Contract Termination.
2.1.2Edison shall pay each monthly Termination Payment on or before
the payment due date set forth in the Termination Payment
Schedule ***
2.1.3 ***
2.2 ***
3. RELEASES
3.1 ***
3.2 ***
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
3.3 The Parties, and each of them, acknowledge that they are fully
familiar with the facts and assumptions giving rise to this
Agreement, but agree that the releases in this Article 3 shall
remain fully effective and binding as to each of them even if the
facts or assumptions turn out to be different from what they now
believe them to be. In addition, as to the matters being released
in this Article 3, the Parties, and each of them, expressly waive
the application of California Civil Code Section 1542, which
reads as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor
at the time of executing the release, which if known by
him must have materially affected his settlement with
the debtor."
3.4 ***
4. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE AGREEMENT
4.1 The effectiveness of Sections 1.1 through 1.4, and Articles 2, 3 and
14 of this Agreement are subject to the following conditions precedent
(the failure of which shall also result in the termination of this
Agreement pursuant to Section 1.5):
(a) Within 30 days after the Execution Date (as defined in Article
28), Delano's receipt of an ***. This condition precedent shall
fail unless Delano, no later than 35 days after the Execution
Date, ***.
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
(b) Within 45 days after the Execution Date (as defined in Article
28), Delano's receipt of ***. This condition precedent shall fail
unless Delano, no later than 50 days after the Execution Date,
provides to Edison each of the *** required under this Section
4.1(b).
(c) ***
(d) By the Approval Deadline (as defined in Article 5), the receipt
of CPUC approval of this Agreement as specified in Article 5,
below.
4.2 Neither Party shall have any liability to the other Party under this
Agreement if the conditions precedent stated in Section 4.1 are not
satisfied to the Parties' satisfaction. Further, any of the deadlines
specified in Section 4.1, above, may be extended by the mutual,
written consent of the Parties.
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
5. CPUC APPROVAL CONDITION PRECEDENT
The Contract Termination and related provisions set forth in Sections
1.1 through 1.4, the Termination Payment provisions of Article 2, the
mutual releases pursuant to Article 3 and the waiver by Delano of its
PURPA rights pursuant to Article 14 are all subject to the condition
precedent that this Agreement has received CPUC Approval (as defined
in Section 5.2), by a decision or resolution that becomes final and
non-appealable ("Final Decision") before December 31, 1999 (the
"Approval Deadline"). The date that the Agreement receives CPUC
Approval by a Final Decision shall be referred to as the "Approval
Date." If the Agreement terminates pursuant to Section 1.5, then there
shall be no Approval Date and no Contract Termination. The procedure
by which CPUC Approval shall be obtained, and the nature of that
approval, are as follows:
5.1. Edison shall seek CPUC Approval by submitting either (i) a formal
application for a CPUC decision approving the Agreement, or (ii) a
restructuring advice letter filing to the CPUC's Energy Division for a
resolution by the CPUC approving the Agreement (either, the
"Application"). Edison shall determine in its sole discretion the type
of Application to submit. If deemed appropriate by Edison or required
by the CPUC, including its Energy Division, Edison may convert a
restructuring advice letter filing into a formal application without
Delano's concurrence. Subject to Article 4, Edison shall file the
Application with the CPUC or the Energy Division, as applicable, as
promptly as practicable following execution of this Agreement by the
Parties, except that Edison shall not be obligated to submit any
advice letter filing to the Energy Division until all of the
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
conditions precedent set forth in Sections 4.1(a), (b) and (c) have
been satisfied (i.e., it is established that none of the conditions
precedent will fail). If requested by Edison in its sole judgment,
Delano shall reasonably support the Application and preparation
thereof by promptly providing data and/or preparing written testimony
and providing witnesses to support such testimony. Delano shall
provide such data and testimony in sufficient detail, as requested by
Edison in its reasonable judgment, in order to facilitate preparation
of the Application and CPUC Approval. If such data or testimony
contains Confidential Information as defined in the Confidentiality
Agreement between Edison and Delano referred to in Article 11, it
shall be submitted to the CPUC pursuant to California Public Utilities
Code Section 583 or General Order 66-C. Edison shall have the right to
review and approve the testimony sponsored by Delano, if any, prior to
its being filed with the CPUC. If Delano wishes to file testimony or
data of which Edison does not approve, such testimony or data shall be
filed solely on Delano's behalf and not as part of the Application.
The Parties shall support the Application before the CPUC and each use
good faith efforts to obtain CPUC Approval as promptly as practicable.
5.2 "CPUC Approval" shall mean either issuance of a formal decision or a
resolution of the CPUC, either of which is final and no longer subject
to appeal, and which approves this Agreement in full and in the form
presented and which expressly finds this Agreement to be reasonable
and prudent, and without conditions or changes to the
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this document
are subject to a Confidentiality
Agreement and shall not be disclosed.
Agreement, and expressly finds that all payments to be made by Edison
under this Agreement will be deemed reasonable and recoverable in full
by Edison through its Annual Transition Cost Proceeding or any other
mechanism authorized by the CPUC, subject only to Edison's reasonable
administration of this Agreement.
5.3 Edison may, in its sole discretion, waive the condition precedent of
CPUC Approval under this Agreement by giving Delano Notice thereof, in
accordance with Article 22, below, in which case the Approval Date
shall be deemed to have occurred on the effective date of Edison's
Notice. If Edison waives the CPUC Approval condition precedent but the
Application is not withdrawn and the CPUC either issues a decision or
makes a resolution that does not contain CPUC Approval, then such
decision or resolution shall not be grounds to avoid or terminate
Edison's obligation to make Termination Payments.
6. ITCC REFUND
Notwithstanding anything in this Agreement to the contrary, the Parties
acknowledge that the following
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this document
are subject to a Confidentiality
Agreement and shall not be disclosed.
documents are in full force and effect and will remain in full force and
effect if the Contract terminates pursuant to this Agreement: (i) ITCC
Refund and Release Agreement executed by Delano on August 5, 1996; (ii)
ITCC Refund and Consent Agreement executed by Thermo Electron Corporation
on August 5, 1996; and (iii) Indemnity Agreement dated August 7, 1996
between Delano and Edison (all, the "ITCC Agreements"). The Parties also
acknowledge that, pursuant to the ITCC Agreements, regardless of whether
the Contract terminates pursuant to this Agreement, Delano is still subject
to its duties and obligations under the ITCC Agreements, including, but not
limited to, the obligation to pay Edison the amount of, or make Edison
whole for, any taxes and interest Edison may incur in the future that is
attributable to a taxable event as defined in the Indemnity Agreement.
7. REPRESENTATIONS AND WARRANTIES
Each Party represents and warrants to the other Party that, (i) except for
CPUC Approval and the consents and approvals to be obtained pursuant to
Article 4, above, no consents, approvals, authorization or order of any
party which has not already been obtained or will be obtained pursuant to
Article 4, above, are required to
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
be obtained for the valid execution, delivery and performance by such Party
of this Agreement and the transactions contemplated hereby, and (ii)
subject to the conditions precedent set forth in this Agreement, this
Agreement constitutes a binding obligation of such Party, enforceable
against such Party in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy insolvency, reorganization,
moratorium, or similar laws affecting the rights of creditors generally and
by general principles of equity (regardless of whether enforcement thereof
is sought in a proceeding at law or in equity).
8. EDISON'S OFFSET RIGHTS
Edison may recover by offset, setoff or recoupment ***, any sums due it
from Delano under the Agreement or the Contract, including but not limited
to, amounts owed to Edison by reason of any breach by Delano or
overpayments under this Agreement or the Contract.
9. NO PREVIOUS ASSIGNMENT
Except for the collateral assignments Delano has given to its financing
parties, which have been consented to in writing by Edison, each Party
represents and warrants that it has not assigned or otherwise transferred,
or purported to assign or otherwise
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this document
are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
transfer to any party which is not a party to this Agreement, directly or
indirectly, voluntarily, involuntarily, or by operation of law, the
Contract or any rights, liabilities, or claims arising thereunder or
related thereto, or any rights, claims, or causes of action, which it may
have against the other Party, or any obligation being released by this
Agreement.
10. INDEMNITY
10.1 Delano shall indemnify and hold Edison harmless from and against any
and all claims, demands, damages, losses, expenses, debts, accounts,
obligations, costs, expenses, liens, actions, or causes of action and
other liabilities (including without limitation reasonable legal and
accounting fees and costs) of any nature suffered or incurred by
Edison which arise out of or relate to (i) any breach of Delano's
representations and warranties in this Agreement; (ii) any breach or
violation by Delano of any provision of this Agreement; or (iii) any
claim asserted or action taken by any third party having privity of
contract with Delano or any affiliate of Delano, which claim or action
relates to this Agreement or the Contract. *** The Parties also agree
that in no event shall
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
Delano be required to indemnify Edison for any loss or liability under
this Article caused by Edison's willful misconduct (but in no event
shall Edison's entry into the Agreement be deemed "misconduct" for
purposes of this Section 10.1).
10.2 Edison shall indemnify and hold Delano harmless from and against any
and all claims, demands, damages, losses, expenses, debts, accounts,
obligations, costs, expenses, liens, actions, or causes of action and
other liabilities (including without limitation reasonable legal and
accounting fees and costs) of any nature suffered or incurred by
Delano which arise out of or relate to (i) any breach of Edison's
representations and warranties in this Agreement; (ii) any breach or
violation by Edison of any provision of this Agreement; or (iii) any
claim asserted or action taken by any third party having privity of
contract with Edison which claims or actions relate to this Agreement
or the Contract. *** The Parties also agree that in no event shall
Edison be required to indemnify Delano for any loss or liability under
this Article caused by Delano's willful misconduct (but in no event
shall Delano's entry into the Agreement be deemed "midconduct" for
purposes of this Section 10.2)
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
11. PREVIOUS COMMUNICATIONS
Except for the confidentiality agreement between Delano and Edison dated
January 18, 1999 ("Confidentiality Agreement") and the ITCC Agreements,
this Agreement contains the entire agreement and understanding between the
Parties as to the subject matter of this Agreement and supersedes all prior
agreements, except the Confidentiality Agreement and the ITCC Agreements,
and representations, and discussions between the Parties concerning the
subject matter of this Agreement. Each Party further represents that, in
entering into this Agreement, it has not relied on any promise, inducement,
representation, warranty, agreement, or other statement not set forth in
this Agreement.
12. COSTS AND FEES
Each Party shall pay its own costs and attorneys' fees in connection with
the preparation and execution of this Agreement and any related documents,
and any performance hereunder.***
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
13. NONWAIVER
None of the provisions of this Agreement shall be considered waived by a
Party unless such waiver is given in writing. The failure of a Party to
insist in any one or more instances upon strict performance of any of the
provisions of this Agreement or to take advantage of any of its rights
hereunder shall not be construed as a waiver of any such provisions or the
relinquishment of any such rights for the future, but the same shall
continue and remain in full force and effect.
14. WAIVER OF PURPA RIGHTS
Upon Contract Termination, Delano shall forever relinquish and waive any
rights it has under the Public Utility Regulatory Policies Act of 1978 (16
U.S.C. Section 824a-3 et seq.) or any federal or state regulation or order
implementing PURPA in effect as of the date of this Agreement to require
Edison to purchase power from the Delano project (the "Project"). ***
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
15. SUBJECT HEADINGS
Subject headings in this Agreement are inserted for convenience only, and
shall not be construed as interpretations of text.
16. GOVERNING LAW
This Agreement shall be interpreted, governed, and construed under the laws
of the State of California (without giving effect to its conflict of laws
provision that could apply the law of another jurisdiction) as if executed
in and to be performed wholly within the State of California.
17. JUDGE TRIAL; JURISDICTION AND VENUE
All disputes of any nature arising out of or relating to this Agreement,
including without limitation, disputes sounding in contract, tort or based
on statute or regulation, that the Parties are unable to settle between
themselves shall be submitted to a trial by judge. The Parties hereby waive
any right to a trial by jury. All proceedings shall be held in Los Angeles,
California. Additionally, the Parties agree, notwithstanding any right that
they may otherwise have under law to venue in other counties or locations,
that the venue of any such dispute shall exclusively be Los Angeles County,
California, and the Parties hereby consent to jurisdiction and venue in Los
Angeles County for purposes of litigating any such dispute.
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
18. AMENDMENT
This Agreement may not be altered or modified by any of the Parties except
by an instrument in writing executed by both of them.
19. FURTHER ASSURANCES
The Parties agree to cooperate promptly and fully in providing and/or
executing such additional documents and taking such other actions as may
later be determined to be reasonably necessary to effectuate the provisions
of this Agreement.
20. REVIEW AND CONSTRUCTION OF AGREEMENT
The Parties acknowledge that they have read and understood this Agreement
and further acknowledge that in entering into this Agreement, they have
been advised by attorneys of their choice. Further, both Parties have
participated in the drafting and preparation of this Agreement.
Accordingly, neither Parties to this Agreement shall be deemed to be the
drafter of any part of this Agreement, and any ambiguity in the provision
of this Agreement shall not be construed against any Party for that reason.
21. CONFIDENTIALITY
The terms of this Agreement are confidential within the meaning of the
Confidentiality Agreement.
21. NOTICES
Any notices or communications given pursuant to this Agreement ("Notice")
shall be in writing and (i) delivered personally (personally delivered
Notice shall
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this document
are subject to a Confidentiality
Agreement and shall not be disclosed.
be deemed given upon written acknowledgment of receipt after delivery to
the address specified or upon refusal of receipt at the address specified);
(ii) mailed by U.S. mail, postage prepaid (Notice by U.S. mail shall be
deemed made on the fifth business day after deposit in U.S. mail); (iii)
mailed by registered or certified mail, postage prepaid (Notices mailed by
registered or certified mail shall be deemed made on the actual date of
delivery, as set forth in the return receipt or upon refusal of receipt);
(iv) or delivered by facsimile transmission (Notice by facsimile
transmission shall be deemed made upon actual receipt of the entire
document sent). In each of these cases, the Notice shall be delivered,
mailed or sent as follows or to such other addresses or facsimile numbers
as may hereafter be designated by either Party to the other in writing:
If to Edison, as follows:
Director, QF Contracts
Southern California Edison
P. O. Box 800
2244 Walnut Grove Avenue
Rosemead, CA 91770
Facsimile: 626-302-1102
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
If to Delano, as follows:
Business Manager
Delano Energy Company, Inc.
c/o Thermo Ecotek Corporation
735 Sunrise Avenue, Suite 160
Roseville, CA 95661
Facsimile: 916-773-1154
With a copy to:
President,
Power Resources Division
Thermo Ecotek Corporation
245 Winter Street
Waltham, MA 02451
Facsimilie: 781-370-1594
23. MULTIPLE ORIGINALS
This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original and all of which taken together shall
constitute a single document.
24. ASSIGNMENT
24.1 Except as provided in 24.2, neither Party shall voluntarily assign its
rights nor delegate its duties under this Agreement, or any part of
such rights and duties, without the written consent of the other
Party, which consent shall not be unreasonably withheld. Any such
assignment or delegation made without such written consent shall be
null and void.
24.2 ****
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
25. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of the
respective heirs, administrators, representatives, executors, successors
and assigns of the Parties hereto.
26. THIRD PARTY BENEFICIARIES
The Parties do not intend to create rights in, or grant remedies to, any
third party as a beneficiary of this Agreement or of any duty, covenant,
obligation or understanding established under this Agreement.
27. DAMAGES LIMITATION
***
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
28. SIGNATURE CLAUSE
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized representatives. Subject to the
conditions precedent in this Agreement, it is effective as of the
date it has been executed by both of the Parties ("Execution Date").
<PAGE>
CONFIDENTIAL INFORMATION
The existence of and contents of this
document are subject to a Confidentiality
Agreement and shall not be disclosed.
Confidential material omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
SOUTHERN CALIFORNIA EDISON DELANO ENERGY COMPANY, INC.,
COMPANY, a California a Delaware corporation
corporation
By:/s/ Stephen E. Frank By:/s/ Parimal Patel
Name: STEPHEN E. FRANK Name: PARIMAL PATEL
Title: President and Chief Title: Vice President
Operating Officer
Date: May 21,1999
Date: May 21,1999
***
<TABLE>
<CAPTION>
Exhibit 21
THERMO ECOTEK CORPORATION
Subsidiaries of the Registrant
At November 17, 1999, the Registrant owned the following companies:
<S> <C>
NAME STATE OR PERCENT OF
JURISDICTION OWNERSHIP
OF
INCORPORATION
- ------------------------------------------------------------------------------------------------------------
Central Valley Fuels Management Inc. Delaware 100
Delano Energy Company Inc. Delaware 100
Eco Fuels Inc. Wyoming 100
Independent Power Services Corporation Nevada 100
KFP Operating Company, Inc. Delaware 100
Lake Worth Generation Corporation Delaware 100
Lake Worth Generation LLC Delaware 100
Mountainview Power Company Delaware 100
Mountainview Power Company LLC Delaware 100
Riverside Canal Power Company California 100
SFS Corporation New Hampshire 100
TCK Fuels Inc. Delaware 100
KFx Fuel Partners, L.P. Delaware 95*
(2% of which is owned
directly by Eco Fuels Inc.)
TES Securities Corporation Delaware 100
Thermendota, Inc. California 100
Mendota Biomass Power, Ltd. California 100
(additionally 0.1% of the shares are owned
directly by Thermo Ecotek Corporation)
MBPL Agriwaste Corporation California 100
Thermo Ecotek International Holdings Inc. Cayman Islands 100
Thermo Ecotek Europe Holdings B.V. Netherlands 100
Gouripore Power Company Pvt. Ltd. India 83
EMD Ventures B.V. Netherlands 65*
Kraftwerk, Premnitz GmbH & Co KG Germany 100
EMD Pribram sro Czech Republic 50*
Magnicon B.V. Netherlands 50
(additionally 50% of the shares are owned
directly by Thermo Ecotek Europe Holdings B.V.)
ECS sro Czech Republic 50*
EuroEnergy Group B.V. Netherlands 50*
Thermo EuroVentures sro Czech Republic 100
Thermo Ecotek International Inc. Cayman Islands 100
TCK Cogeneration Dominicana Inc. Cayman Islands 100
(1% of which shares are owned directly by Thermo Ecotek International
Holdings Inc.)
TCK Dominicana Holdings Inc. Cayman Islands 100
(1% of which shares are owned directly by
Thermo Ecotek International Holdings Inc.)
<PAGE>
2
NAME STATE OR PERCENT OF
JURISDICTION OWNERSHIP
OF
INCORPORATION
- ------------------------------------------------------------------------------------------------------------
Thermo Electron of Maine, Inc. Maine 100
Gorbell/Thermo Electron Power Company Maine 100
Thermo Electron of New Hampshire, Inc. New Hampshire 100
Hemphill Power and Light Company New Hampshire 66*
Thermo Electron of Whitefield, Inc. New Hampshire 100
Whitefield Power and Light Company New Hampshire 100*
(39% of which is owned
directly by SFS Corporation)
Star Natural Gas Company Delaware 95
Star/RESC LLC Texas 75
Starfield Services Company Delaware 100
Totem Gas Storage Company LLC Colorado 90
Thermo Fuels Company, Inc. California 100
Thermo Trilogy Corporation Delaware 80.03
Thermo Trilogy International Holdings, Inc. Cayman Islands 100
AgriSense-BCS, Ltd. England 100
P J Margo Pvt. Ltd. India 50*
AgriDyne Technologies S.A. de C.V. Mexico 100
Ulna Incorporated California 100
Woodland Biomass Power, Inc. California 100
Woodland Biomass Power, Ltd. California 100*
(.1% of which is owned directly
by Thermo Ecotek Corporation)
* Joint Venture/Partnership
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated November 8, 1999, included in or incorporated
by reference into Thermo Ecotek Corporation's Form 10-K for the fiscal year
ended October 2, 1999, into the Company's previously filed Registration
Statement on Form S-8 (No. 33-91538), Registration Statement on Form S-8 (No.
33-91542),Registration Statement on Form S-8 (No. 33-91546), Registration
Statement on Form S-8 (No. 33-91544), Registration Statement on Form S-8 (No.
33-91548), Registration Statement on Form S-8 (No. 33-80753), and Registration
Statement on Form S-8 (No. 333-70541).
Arthur Andersen LLP
Boston, Massachusetts
December 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
ECOTEK CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED OCTOBER 2,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> OCT-02-1999
<CASH> 21,919
<SECURITIES> 0
<RECEIVABLES> 67,071
<ALLOWANCES> 117
<INVENTORY> 20,023
<CURRENT-ASSETS> 199,168
<PP&E> 271,365
<DEPRECIATION> 67,759
<TOTAL-ASSETS> 456,663
<CURRENT-LIABILITIES> 95,828
<BONDS> 58,444
0
0
<COMMON> 3,787
<OTHER-SE> 186,777
<TOTAL-LIABILITY-AND-EQUITY> 456,663
<SALES> 205,493
<TOTAL-REVENUES> 205,493
<CGS> 153,203
<TOTAL-COSTS> 153,203
<OTHER-EXPENSES> 115,472
<LOSS-PROVISION> 87
<INTEREST-EXPENSE> 7,252
<INCOME-PRETAX> (95,243)
<INCOME-TAX> (34,816)
<INCOME-CONTINUING> (59,420)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,420)
<EPS-BASIC> (1.65)
<EPS-DILUTED> (1.65)
</TABLE>
