News from CNW Group
Clean Power Income Fund Announces First Quarter 2005 Financial Results
Thursday, May 12, 2005
TORONTO, May 12 /CNW/ - Clean Power Income Fund (CLE.UN: TSX) today announced its financial results for the first quarter ended March 31, 2005. The Fund reported operating cash flow before changes in working capital of $5.7 million on revenues of $19.6 million.
Effective January 1, 2005, Canadian Accounting Guideline 15 ("AcG-15") requires consolidation of a Variable Interest Entities ("VIEs") in instances where the company will absorb a majority of the VIE's expected losses, receive a majority of its expected returns or both. As a result of adoption of AcG-15, the financial statements of Gas Recovery Systems, LLC ("GRS") are consolidated into the Fund's financial statements. Clean Power has adopted AcG-15 retroactively without restatement of the 2004 financial results as permitted under the guideline. A detailed explanation of the impact of this accounting change is contained in this news release.
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Financial and Operating Highlights
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For the quarter ended March 31
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2005 2004
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Revenue $ 19,646 $ 11,552
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Operating cash flow before changes in
working capital(x) 5,724 7,527
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Working capital changes (2,102) (169)
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Net income 806 6,700
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Cash available for distribution(xx) 4,429 8,091
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Distributions declared 6,190 8,400
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Per Trust Unit - basic:
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- Net income $ 0.023 $ 0.189
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- Cash available for distribution $ 0.125 $ 0.228
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- Distributions declared $ 0.175 $ 0.237
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(x) Operating cash flow before changes in working capital is a non-GAAP
measure which management uses to measure performance of the Fund.
(xx)"Cash available for distribution" is a non-GAAP measure defined as:
operating cash flow after changes in working capital, plus (minus)
increase (decrease) working capital, plus cash flow from investments
which consists of levelization payments and Biomass principal
repayments, less minority interest expense, less capitalized
maintenance costs.
During the first quarter, all facilities with the exception of some GRS
plants, performed well. Arbor Hills, the largest of GRS's 29 landfill gas
facilities, was extensively refurbished and overhauled as the new management
team at GRS addressed operating deficiencies.
Offsetting the GRS results, power production from Clean Power's
hydroelectric facilities in Ontario and British Columbia showed a growth of 5%
compared to the same quarter in 2004. Biomass production increased slightly
during the quarter, with availability at the Chapais plant in Québec exceeding
99%. All payments from the wind loans were received and production was within
expectations. For the quarter, cash available for distribution was
$4.4 million ($0.125 per Trust Unit) versus $8.1 million ($0.228 per Trust
Unit) reported in the same period last year.
"At the end of the first quarter, we have substantially completed our
overhaul of the Arbor Hills facility which is now running at near full
capacity. In addition, all necessary permits relating to the Arbor Hills plant
expansion are now in place and work is proceeding with expected completion in
the fourth quarter. As expected, cash flow in the first quarter was down due
to expenditures at the GRS facilities. However, we are well on the way to
improving performance at GRS, as we continue to optimize plant operations,"
stated Stephen Probyn, President and CEO of Clean Power Income Fund.
In the first quarter of 2005, the Fund reported revenue of $19.6 million
versus $11.6 million for the same period in 2004. The significant increase is
the adoption of the AcG-15 change requiring the consolidation of the results
of GRS. The Fund reported net income for the three-month period of
$0.8 million ($0.023 per Trust Unit), compared to $6.7 million ($0.189 per
Trust Unit) for the same period last year. Capital expenditures for the
three-month period ended March 31, 2005, were US$1.9 million and were
dedicated to expansions and maintenance programs at GRS.
New Projects
In March 2005, a contract to buy 66 GE 1.5 MW SLE wind turbines for the
Erie Shores Wind Project was signed with General Electric providing the
turbines along with erection services at a fixed price. Deliveries are
expected to commence on December 1, 2005, and the plant has a guaranteed in-
service date of March 31, 2006. Clean Power is currently finalizing the
financing of the Project.
RESULTS OF OPERATIONS
For the three months ended March 31, 2005, the Fund reported operating
cash flow before changes in working capital of $5.7 million on revenues of
$19.6 million(x). For the three-month period ended March 31, 2005, net income
was $0.8 million. For a more complete explanation of the Fund's investment
performance, please refer to the segmented business section of this report.
All of the Fund's investments, with the exception of GRS, performed well,
delivering cash flow in line with management's expectations. For the quarter,
operating cash flow available for distributions - including the impact of
$0.4 million through hydro levelization payments and $0.1 million received
from the Chapais biomass facility on account of loan principal repayments and
net of $1.8 million in capitalized maintenance costs - was $4.4 million,
compared to the $6.2 million in distributions declared.
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(x) Operating cash flow before changes in working capital is a non-GAAP
term which management uses to evaluate operating cash flow and should
not be considered an alternative to, or more meaningful than cash
flow as determined in accordance with GAAP as an indicator of the
Fund's performance or liquidity.
All Operations
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Three months ended March 31
(in thousands of Canadian dollars
except per Trust Unit amounts) 2005 2004
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Revenues $ 19,646 $ 11,552
Expenses (17,406) (5,052)
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Operating income 2,240 6,500
Interest expense (2,130) (1,160)
Foreign exchange gain (loss) 632 1,430
Future income tax recovery 73 16
Minority interest (9) (86)
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Net income (loss) 806 6,700
Per Trust Unit - basic and diluted $ 0.023 $ 0.189
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Operating cash flow after changes in
working capital 3,622 7,358
Changes in working capital 2,102 169
Cash flow from investments(1) 490 650
Capitalized maintenance costs (1,776) -
Minority interest expense (9) (86)
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Cash available for distribution(2) 4,429 8,091
Per Trust Unit - basic and diluted 0.125 0.228
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Cash Distributions declared 6,190 8,400
Per Trust Unit - basic and diluted 0.175 0.237
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Distributions supported by cash(3) 1,761 309
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Weighted average number of Trust Units
outstanding - basic and diluted 35,368,597 35,368,597
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(1) Consists of hydro levelization payments and biomass principal
repayments.
(2) "Cash available for distribution" is a measure of the Fund's ability
to make distributions to unitholders based on operating results;
however, it is not defined under GAAP and it should not be considered
an alternative to, or more meaningful than, net income or cash flow
as determined in accordance with GAAP as an indicator of the Fund's
performance or liquidity. Cash available for distribution is defined
as: operating cash flow after changes in working capital, plus
(minus) increase (decrease) in working capital, plus cash flow from
investments, less minority interest expense, less capitalized
maintenance costs.
(3) "Distributions supported by cash" is a measure of the Fund's ability
to make distributions to unitholders based on operating results;
however it is not defined under GAAP and should not be considered an
alternative to, or more meaningful than, net income or cash flow as
determined in accordance with GAAP as an indicator of the Fund's
performance or liquidity. Distributions supported by cash is defined
as: cash distributions declared less cash available for distribution.
This amount does not include cash to finance working capital changes.
HYDROELECTRIC OPERATING RESULTS
The hydro facilities operated at an average availability of 99% for the
three-month period ended March 31, 2005, which is consistent with the
availability achieved for the same period in 2004. Production was 34,952 MWh
for the first quarter of 2005, an increase of 5% compared to the corresponding
period in 2004 due to an increase in Dryden lake storage and production.
First quarter revenues for 2005 were $2.7 million, 4% higher than the
same period in 2004 due to improved production and increased pricing at
Sechelt. Operating expenses for the period were similar to 2004, maintenance
costs were as expected, and there were no material unscheduled outages.
First quarter 2005 hydro production and cash flow have met management's
expectations.
Hydroelectric Production (MWh)
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Three Three
months months
ended ended
March 31, March 31,
Facility 2005 2004
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Sechelt, BC 20,781 22,925
Wawatay, ON 5,363 6,768
Dryden, ON 6,754 1,418
Hluey Lakes, BC 2,054 2,137
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Total 34,952 33,248
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Hydroelectric Operations
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Three months ended March 31
(in thousands of Canadian dollars) 2005 2004
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Power sales $ 2,664 $ 2,558
Depreciation and amortization 729 813
Operating income 1,341 1,131
Interest on levelization amounts 408 336
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BIOMASS OPERATING RESULTS
The Whitecourt facility in Alberta operated at 99% availability for the
three-month period ended March 31, 2005, compared to 96% for the same period
in 2004. The Chapais plant in Québec operated at availability levels of 100%
for the three-month period ended March 31, 2005, similar to the three-month
period ended March 31, 2004.
Production (MWh)
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Three Three
months months
ended ended
March 31, March 31,
Facility 2005 2004
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Whitecourt 51,236 50,588
Chapais 60,724 59,913
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Total 111,960 110,501
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Whitecourt production was 51,236 MWh for the three-month period ended
March 31, 2005, compared to 50,588 MWh for the same period in 2004. First
quarter 2005 revenue from Whitecourt was $3.3 million and largely unchanged
compared to 2004. The average Alberta Power Pool price was $46 per MWh. Power
Pool pricing affected approximately 15% of Whitecourt production that is not
contracted under long-term power purchase agreements. The actual average Power
Pool price for the corresponding period in 2004 was $49 per MWh. For the
three-month period ended March 31, 2005, Whitecourt operations and maintenance
costs were approximately $0.4 million more than the same period in 2004 due to
increased fuel handling expenses.
Chapais production of 60,724 MWh for the first quarter 2005 was
marginally higher than the same period in 2004. Chapais' operations and
maintenance costs were as planned and principal repayments of $0.1 million
were received.
Whitecourt Biomass Facility, Alberta
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Three months ended March 31
(in thousands of Canadian dollars) 2005 2004
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Power sales $ 3,343 $ 3,325
Depreciation and amortization 704 697
Operating Income 907 1,335
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Chapais Biomass Facility, Quebec
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Three months ended March 31
(in thousands of Canadian dollars) 2005 2004
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Interest and other investment income $ 951 $ 922
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WIND OPERATING RESULTS
The Fund received in March 2005, the first of two scheduled semi-annual
interest payments on its subordinated loan investment.
In the first quarter, production at all facilities was lower than the
first quarter in 2004 due primarily to reduced wind speed at Peetz Table and
the Foote Creek facilities, as well as lower availability at Big Spring and
Foote Creek II facilities as a result of several mechanical issues.
Production (MWh)
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Three Three
months months
ended ended
March 31, March 31,
Facility 2005 2004
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Foote Creek II 1,400 1,853
Foote Creek III 22,013 24,349
Foote Creek IV 16,641 17,650
Peetz Table 19,232 22,085
Big Spring 19,487 22,431
Chandler 1,498 2,056
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Total 80,271 90,424
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Windpower Operations
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Three months ended March 31
(in thousands of Canadian dollars) 2005 2004
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Interest earned on wind investments $ 636 $ 677
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GRS OPERATING RESULTS
Starting in the first quarter of 2005, changes to Canadian Generally
Accepted Accounting Principles ("GAAP") require the consolidation of GRS and
its parent companies, PEET U.S. Holdings, Inc. ("PEET U.S.") and PEET Canadian
Holdings Inc. ("PEET Canadian"), with the Fund for reporting purposes.
However, the Fund's cash flow from GRS continues to be received in the form of
interest payments.
As has been previously discussed in the Fund's 2004 annual report, action
has been taken to improve the operating performance of the GRS investment. On
December 15, 2004, GRS and PEET U.S. reached an agreement that released them
from their long-term contract with Gas Recovery Systems Management, Inc.
("GRSM"), the independent contract manager. GRSM was immediately replaced by a
new senior management team, comprised of a President and a Vice-President -
Operations, charged to evaluate and improve production at the Arbor Hills
facility and to optimize operating cash flow from all 28 other facilities
owned and operated by GRS.
The new management's review of GRS operations has resulted in a more
extensive maintenance program than initially anticipated in order to deal with
unscheduled outages in January and February 2005 at the largest plants (Arbor
Hills, Pine Bend and Mallard Lake), and to ensure long-term reliability of
these facilities. For these reasons, first quarter production was 153,385 MWh
as compared to 179,866 MWh for the same period in 2004 with Arbor Hills
contributing to approximately 50% of the production shortfall. By the end of
the first quarter, all three of the Arbor Hills generation trains (each
consisting of a compressor, generator and boiler) were operational and have
operated at near full availability through the month of April. Excluding Arbor
Hills, Pine Bend and Mallard Lake, all 23 other power generation facilities
operated at or near expected availability with first quarter production up 17%
over the same period in 2004.
GRS Production for 2005 (all facilities) (in thousands of MWh)
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Three Three
months months
ended ended
March 31, March 31,
Facility 2005 2004
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Actual - Total 153,385 179,866
Arbor Hills, Pine Bend, Mallard Lake Facilities 59,071 99,080
Other Facilities 94,314 80,786
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Revenues earned in the first quarter of 2005 included US $0.5 million
from the sale of Renewable Energy Credits ("RECs") and were US $0.1 million
higher than the similar period in 2004 due to increased rates received for the
RECs in 2005. Operating costs increased US $0.3 million as a result of
increased maintenance activity.
GRS Operations
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Three months ended March 31
(in thousands of US dollars) 2005 2004
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Power sales(1) $ 10,543 $ 11,635
Operating costs (7,196) (6,880)
Other(2) (3,664) (3,481)
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Income before income tax provision (317) 1,274
Depreciation and accretion 2,982 2,501
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Operating cash flow before changes in
working capital(x) 2,665 3,775
Illinois Retail Rate Law liability funding(3) 146 264
Capital Expenditures
Maintenance costs capitalized(4) (1,468) (3,037)
Expansion expenditures(5) (354) (3,670)
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Net cash 989 (2,668)
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(x) Operating cash flow before changes in working capital is a non-GAAP
term which management uses to evaluate operating cash flow before
working capital timing differences.
(1) GRS power sales include $0.5 million in revenue from the sale of
Renewable Energy Credits ("RECs") in the first quarter of 2005.
(2) Other includes depreciation and amortization, administration expenses
and interest expense.
(3) Represents the difference between the increased obligation and cash
funding of the restricted investment balance.
(4) Amounts incurred to prolong the life of an existing asset.
(5) Expansion capital expenditure in the first quarter of 2005 for
Arbor Hills.
In the first quarter of 2005, GRS capital expenditures were
US $0.4 million for the Arbor Hills expansion and capitalized maintenance
costs were US $1.5 million.
The Fund expected to borrow approximately US $1.3 million in 2005 to fund
the cost reduction activities relating to business reorganization costs. These
costs (severance and building lease break fees) were primarily associated with
outsourcing maintenance activity currently undertaken at GRS's head office in
Livermore, California. In addition, 2005 GRS borrowings from the Fund are
anticipated to be US $5-6 million for required major equipment refurbishment.
BUSINESS DEVELOPMENT ACTIVITIES
In March 2005, the Erie Shores L.P. entered into a contract to purchase
66 GE 1.5 MW SLE wind turbines. General Electric is providing the turbines
along with erection services at a fixed price. Deliveries will commence on
December 1, 2005 and the plant has a guaranteed in-service date of March 31,
2006.
FUND MANAGEMENT AND ADMINISTRATIVE COSTS
Fund management and administrative costs excluding GRS for the three-
month period ended March 31, 2005 were $0.9 million, including the
reimbursement of the Fund Manager's costs. Reimbursement of the Fund Manager's
costs is approved by the Fund's Compensation Committee which is comprised of
the Independent Trustees.
INTEREST EXPENSE
Interest expense on long-term debt for the three-month period ended March
31, 2005 was $1.4 million, compared to $0.8 million for the same period in
2004. The increase was primarily due to interest expense incurred as a result
of a convertible debenture financing which closed on June 29, 2004. Interest
is accrued on the outstanding Illinois Retail Rate Law liability.
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Three months ended March 31
(in thousands of US dollars) 2005 2004
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Interest expense on long-term debt $ 1,401 $ 824
Accrued interest on levelization amounts and
Illinois Retail Rate Law 729 336
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LIQUIDITY AND CAPITAL RESOURCES
Cash Distributions
Total cash distributions for the period January 1, 2005 to March 31, 2005
were declared and paid as follows:
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Record date Distribution Per Trust
Month declared date paid Unit Total(x)
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January 2005 January 31, February 28,
2005 2005 $0.058334 $2,063,191.74
February 2005 February 28, March 31,
2005 2005 0.058334 2,063,191.74
March 2005 March 31, 2005 April 29, 2005 0.058334 2,063,191.74
Total declared
for three
months ended
March 31, 2005 $6,189,575.22
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(x) excludes distributions on 451,880 Class B exchangeable units.
RESERVE ACCOUNT AND LIQUIDITY
The Fund maintains a reserve account ("Reserve Account") to levelize
distributions against operating cash flow. At March 31, 2005, the balance in
the Reserve Account was $10.5 million an increase from the December 31, 2004
Reserve Account balance of $10.2 million.
In addition to the Reserve Account, the Fund had $5.6 million in cash and
cash equivalents at March 31, 2005.
The levelization amounts associated with the Dryden and Wawatay hydro
facilities increased $0.7 million from December 31, 2004.
FINANCIAL INSTRUMENTS
In respect of the U.S. dollar-denominated intercompany and Wind Power
Loan receivables, the Fund has entered into foreign exchange forward contracts
expiring in 2005, and a series of put and call options with exercise dates
between March 2005 and October 2006, to minimize fluctuations in the value of
U.S. dollar receipts of interest on the loan receivables caused by foreign
exchange movements. Approximately US $11.1 million of total expected 2005
U.S. dollar interest receipts are covered through to December 2005 at an
average exchange rate of C $1.31 to US $1.00. Approximately US $11.1 million
of total expected 2006 U.S. dollar interest receipts are covered through to
December 2006 at an average exchange rate of C $1.27 to US $1.00. A mark-to-
market loss of C $0.3 million was recorded in the first quarter of 2005
relating to the foreign exchange contracts and options as they are not
considered to be hedges for accounting purposes. This loss had no impact on
the operating cash flows for the period.
CAPITAL EXPENDITURES
GRS capital expenditures for the three-month period ended March 31, 2005
were US $1.8 million, US $1.5 million for capitalized maintenance costs and
US $0.4 million for the expansion of Arbor Hills. Operations consolidated into
the Fund's financial statements (Whitecourt and the hydroelectric facilities)
normally expense all maintenance costs due to the nature of their maintenance
activities.
FUND MANAGEMENT
The management structure of the Fund has not changed from that described
in the 2004 audited consolidated financial statements. The Fund and Clean
Power Operating Trust ("CPOT"), a subsidiary of the Fund, reimburse Clean
Power Inc. (the "Manager") on a cost-recovery basis. For the first quarter of
2005, the Manager was reimbursed for a total of $0.5 million in costs.
BUSINESS RISKS
The Fund's business risks are set out in the 2004 Annual Information
Form. These risks included production availability, the seasonal availability
of naturally occurring fuel sources, currency exchange rate risk, the near-
term unpredictability of Alberta Power Pool prices and risks associated with
construction activity including financing and credit risk, environmental
liability, regulatory risk, and permitting risk.
SELECTED QUARTERLY FINANCIAL DATA
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(in thousands of
Canadian dollars,
except per Trust
Unit amounts) Q1 Q2 Q3 Q4 Year
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2005
Total revenues $ 19,646 $ - $ - $ - $ 19,646
Operating income 2,240 - - - 2,240
Net income 806 - - - 806
Net income per Trust Unit
- basic - - - - -
- diluted - - - - -
Total assets 357,668 - - - 357,668
Long-term financial
liabilities 121,983 - - - 121,983
Distributions declared
per Trust Unit 0.1750 - - - 0.1750
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2004
Total revenues $ 11,552 $ 12,172 $ 10,199 $ 12,672 $ 46,595
Operating income 6,500 6,195 5,112 7,028 24,835
Net income 6,700 7,857 (5,220) (1,325) 8,012
Net income per Trust Unit
- basic 0.189 0.222 (0.148) (0.037) 0.227
- diluted 0.189 0.221 (0.148) (0.037) 0.227
Total assets 365,785 380,523 367,315 359,504 359,504
Long-term financial
liabilities 69,534 94,046 94,568 94,730 94,730
Distributions declared
per Trust Unit 0.2375 0.2375 0.2375 0.1958 0.9083
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2003
Total revenues $ 12,175 $ 11,559 $ 9,506 $ 11,396 $ 44,636
Operating income 6,888 5,705 4,433 5,358 22,384
Net income (6,638) (8,546) 3,448 (1,591) (13,327)
Net income per Trust Unit
- basic (0.206) (0.266) 0.100 (0.045) (0.397)
- diluted (0.206) (0.266) 0.100 (0.045) (0.397)
Total assets 389,487 374,071 366,380 358,294 358,294
Long-term financial
liabilities 95,414 96,218 69,001 68,590 68,590
Distributions declared
per Trust Unit 0.2375 0.2375 0.2449 0.2375 0.9569
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CRITICAL ACCOUNTING ESTIMATES
A discussion of the Fund's significant accounting policies is contained
in Note 2 to the consolidated financial statements. Preparing financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. The Fund's
operations and investments operate under long-term contracts with highly-rated
counterparties. The operations have generally demonstrated stable financial
performance. As a result, the Manager of the Fund believes that it is not
exposed to the same number of critical accounting estimates that may be
required of management of other operations of comparable size. The following
is a discussion of the accounting estimates that are critical in determining
the Fund's financial results. Actual results may differ from these estimates.
ASSET RETIREMENT OBLIGATIONS
The Fund's landfill gas operations involve activities that could have a
significant effect on the area surrounding such operations. The Fund has
estimated its reclamation and closure costs to be $4.1 million.
To calculate the fair value of these obligations, the Fund discounted the
projected decommissioning costs using a credit adjusted discount rate of 5.88%
and an inflation rate of 2.48%.
ILLINOIS RETAIL RATE LAW
GRS has four sites in the state of Illinois subject to the Illinois
Retail Rate Law (the "Illinois Law"). Under the Illinois Law, GRS receives a
retail rate that is in excess of the local municipality's SRAC for a ten or
twenty year period, depending on the agreement, and the excess is required to
be repaid to the state of Illinois ten or twenty years subsequent to the date
received. Repayment of the Illinois Law liability will commence in February
2006.
GRS records the SRAC portion as revenue, for the portion in excess of
SRAC, its net present value (using an implied interest rate estimate of 5.0%)
is recorded as a liability and the remaining amount as Illinois support
revenue. Liability amounts are placed in an escrow account and invested to
meet future repayment obligations.
COMMITMENTS
As of March 31, 2005, CPOT has guaranteed two standby letters of credit
for GRS in the amount of US $3.5 million which were issued in favour of two
utilities under power sales agreements. There have been no draws on these
letters of credit to date. In addition, CPOT has guaranteed two standby
letters of credit associated with the Erie Shores wind project; a $3.1 million
letter of credit issued in favour of Ontario Electricity Financial Corporation
for the Erie Shores Wind project, and a $2.0 million letter of credit issued
in favour of General Electric with respect to the wind turbines supply
agreement.
OUTLOOK
For 2005, we expect that our biomass, hydro and wind investments will
continue to perform well and that GRS production will improve over recent
historical performance as an extensive maintenance program continues to be
executed through the year.
Development of the 99 MW Erie Shores wind project will soon enter the
financing and construction phase with completion expected in April 2006.
Clean Power Income Fund
Consolidated Balance Sheets (unaudited)
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March 31, December 31,
As at (in thousands of Canadian dollars) 2005 2004
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 5,645 $ 4,313
Accounts receivable 9,327 2,778
Accrued interest on loans receivable 134 775
Chapais loan receivable 477 464
Material and supplies inventories 6,677 750
Prepaid expenses 1,015 371
Deposits 255 -
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23,530 9,451
GRS Loans receivable - 112,147
Restricted investments (Note 6) 23,659 -
Wind Power Loan receivable 22,294 22,168
Chapais loans receivable 14,841 14,965
Western Wind Note receivable 400 400
Preferred share investment - 12,020
Other long-term investment 2,157 1,513
Reserve Account 10,536 10,196
Capital assets (Note 4) 245,553 152,597
Goodwill 8,885 8,885
Other assets (Note 5) 5,813 15,162
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$ 357,668 $ 359,504
-------------------------------------------------------------------------
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LIABILITIES AND UNITHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 7,265 $ 1,891
Distributions payable 2,090 2,089
Interest payable 915 -
Bank debt 4,090 2,790
Current portion of capital lease obligations 68 68
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14,428 6,838
Convertible debentures 55,000 55,000
Long-term debt 25,000 25,000
Illinois Retail Rate Law liability (Note 6) 26,557 -
Levelization amounts 15,321 14,611
Asset retirement obligations (Note 7) 4,227 -
Future income tax liability 10,330 7,362
Capital lease obligations 105 119
Minority interest 2,608 3,161
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153,576 112,091
-------------------------------------------------------------------------
Trust Units issued 332,849 332,849
Deficit (128,570) (85,436)
Cumulative translation adjustment (187) -
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Total unitholders' equity 204,092 247,413
-------------------------------------------------------------------------
$ 357,668 $ 359,504
-------------------------------------------------------------------------
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The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Clean Power Income Fund
Consolidated Statements of Income and Deficit (unaudited)
-------------------------------------------------------------------------
Three months ended March 31 2005 2004
(in thousands of Canadian dollars (Restated -
except per Trust Unit amounts) Note 2(k))
-------------------------------------------------------------------------
REVENUES
Power sales $ 15,700 $ 5,883
Interest earned on GRS and Wind Power Loan
receivable 630 4,647
Illinois support revenue (Note 2(g)) 648 -
Gas sales and other 1,287 -
Other investment income 1,325 989
Other income 56 33
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19,646 11,552
-------------------------------------------------------------------------
COSTS AND OPERATING EXPENSES
Operating and maintenance 9,885 2,004
Management and administration 1,856 573
Depreciation and amortization 5,665 2,475
-------------------------------------------------------------------------
17,406 5,052
-------------------------------------------------------------------------
Operating income 2,240 6,500
Interest expense on long-term debt 1,401 824
Interest on levelization amounts and Illinois
Retail Rate Law liability 729 336
Foreign exchange gain (632) (1,430)
-------------------------------------------------------------------------
Income for the period before future income tax
recovery and minority interest $ 742 $ 6,770
Future income tax recovery (73) (16)
Minority interest 9 86
-------------------------------------------------------------------------
Net income for the period $ 806 $ 6,700
-------------------------------------------------------------------------
Deficit, beginning of period, prior to change
in accounting policy (85,436) -
Adjustment to deficit resulting from change
in accounting policy (Note 1) (37,750) -
-------------------------------------------------------------------------
Deficit, beginning of period, as restated (123,186) (61,321)
Distributions declared to unitholders (6,190) (8,400)
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Deficit, end of period $ (128,570) $ (63,021)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per Trust Unit - basic and diluted $ 0.023 $ 0.189
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of Trust Units
outstanding - basic and diluted 35,368,597 35,368,597
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Clean Power Income Fund
Consolidated Statements of Cash Flows (unaudited)
-------------------------------------------------------------------------
Three months ended March 31 2005 2004
(in thousands of Canadian dollars (Restated -
except per Trust Unit amounts) Note 2(k))
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 806 $ 6,700
Add (deduct) items not affecting cash
Minority interest 9 86
Future income tax recovery (73) (16)
Depreciation and amortization 5,665 2,475
Accretion on asset retirement obligation 60 -
Unpaid interest on levelization amounts and
Illinois Retail Rate Law liability 647 331
Unrealized foreign exchange gain and other (406) (1,424)
Equity income in excess of distributions received (644) (547)
Investment income on Reserve Account (340) (78)
-------------------------------------------------------------------------
5,724 7,527
Increase in operating working capital (2,102) (169)
-------------------------------------------------------------------------
3,622 7,358
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Advance to PEET U.S. Holdings Inc. - (7,868)
Increase in restricted cash (645) -
Repayment of other long-term investments 111 210
Investment in windpower projects (170) -
Purchases and construction of property
and equipment (2,876) (53)
-------------------------------------------------------------------------
(3,580) (7,711)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Distributions to unitholders (6,189) (8,400)
Distributions to minority interest holders (79) (108)
Proceeds from credit facility 1,300 9,014
Proceeds from Illinois Retail Rate Law liability
and levelization amounts 886 440
Repayment of capital lease obligations (14) (25)
Advances on Net Profits Interest (25) (25)
-------------------------------------------------------------------------
(4,121) 896
-------------------------------------------------------------------------
Increase in cash resulting from change in
accounting policy 5,411 -
-------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,332 543
Cash and cash equivalents, beginning of period 4,313 4,434
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,645 $ 4,977
Cash and cash equivalents are comprised of:
Cash 3,256 4,412
Short-term investments 2,389 565
-------------------------------------------------------------------------
$ 5,645 $ 4,977
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest paid during the period $ 491 $ 810
-------------------------------------------------------------------------
Income taxes paid during the period $ - $ -
-------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Notes to Consolidated Financial Statements (unaudited)
(In thousands of Canadian dollars unless otherwise stated)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Clean
Power Income Fund (the "Fund") have been prepared by Clean Power Inc.
(the "Manager") using Canadian generally accepted accounting principles
("GAAP") applicable for interim reporting periods. These unaudited notes
to the consolidated financial statements do not include all disclosures
required in the annual financial statements and should be read in
conjunction with the audited consolidated financial statements and notes
included in the Fund's annual report for the year ended December 31,
2004.
The consolidated financial statements of the Fund include the accounts of
its wholly-owned trust, Clean Power Operating Trust ("CPOT"), and the
accounts of CPOT's subsidiary entities. All inter-entity transactions and
balances have been eliminated on consolidation.
Effective January 1, 2005, the Fund has adopted the provisions of
Accounting Guideline 15 ("AcG-15"), "Consolidation of Variable Interest
Entities", of the Canadian Institute of Chartered Accountants ("CICA").
The Fund has determined that it is the primary beneficiary of PEET
Canadian Holdings Inc. ("PEET Canadian") and its wholly owned subsidiary,
PEET U.S. Holdings, Inc. ("PEET U.S."), which are both variable interest
entities. Accordingly, as required by AcG-15, the Fund has consolidated
the results of PEET Canadian, PEET U.S. and PEET U.S.'s wholly owned
subsidiary, Gas Recovery Systems, LLC ("GRS"). The Fund has adopted AcG-
15 on a retroactive basis with no restatement of prior period results.
As the Fund has not restated its results, the decrease in closing deficit
at December 31, 2004 of $37,750 has been recorded as an adjustment to the
2005 opening deficit. The following is a reconciliation of the Fund's
consolidated balance sheet reflecting the impact of the adoption of AcG-
15.
-------------------------------------------------------------------------
As Effect of
As at December 31, 2004 previously adoption
(in thousands of Canadian dollars) reported of AcG-15 As revised
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 4,313 $ 5,411 $ 9,724
Accounts receivable 2,778 7,289 10,067
Accrued interest on loans receivable 775 4 779
Chapais loan receivable 464 - 464
Material and supplies inventories 750 5,269 6,019
Prepaid expenses 371 793 1,164
Deposits - 253 253
-------------------------------------------------------------------------
9,451 19,019 28,470
GRS Loans receivable 112,147 (112,147) -
Restricted investments - 22,878 22,878
Wind Power Loan receivable 22,168 - 22,168
Chapais loans receivable 14,965 - 14,965
Western Wind Note receivable 400 - 400
Preferred share investment 12,020 (12,020) -
Other long-term investment 1,513 - 1,513
Reserve Account 10,196 - 10,196
Capital assets 152,597 95,616 248,213
Goodwill 8,885 - 8,885
Other assets 15,162 (9,088) 6,074
-------------------------------------------------------------------------
$ 359,504 $ 4,258 $ 363,762
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current
Accounts payable and accrued
liabilities $ 1,891 $ 9,835 $ 11,726
Distributions payable 2,089 - 2,089
Bank debt 2,790 - 2,790
Current portion of capital lease
obligations 68 - 68
-------------------------------------------------------------------------
6,838 9,835 16,673
Convertible debentures 55,000 - 55,000
Long-term debt 25,000 - 25,000
Illinois Retail Rate Law liability - 25,583 25,583
Levelization amounts 14,611 - 14,611
Asset retirement obligation - 4,142 4,142
Future income tax liability 7,362 3,022 10,384
Capital lease obligations 119 - 119
Minority interest 3,161 (483) 2,678
-------------------------------------------------------------------------
$ 112,091 $ 42,099 $ 154,190
-------------------------------------------------------------------------
Trust Units issued 332,849 - 332,849
Cumulative translation adjustment - (91) (91)
Deficit (85,436) (37,750) (123,186)
-------------------------------------------------------------------------
Total unitholders' equity 247,413 (37,841) 209,572
-------------------------------------------------------------------------
$ 359,504 $ 4,258 $ 363,762
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at March 31, 2005, the Fund holds substantially all of the economic
interest in GRS. Due to cumulative operating losses incurred by PEET U.S.
and PEET Canadian, the value of the minority interest with respect to GRS
at March 31, 2005 was nil.
Other investments in which the Fund has significant influence, but does
not control or jointly control, are accounted for using the equity
method. The Fund records its share in the income or loss of its investees
in other investment income in the consolidated statements of income and
deficit. All other investments are carried at cost.
The preparation of the unaudited consolidated financial statements in
conformity with GAAP requires the Manager to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and these accompanying notes. In the opinion of the
Manager, these unaudited consolidated financial statements have been
properly prepared within reasonable limits of materiality and within the
framework of the accounting policies. Actual results could differ from
those estimates, and the operating results for the interim period
presented are not necessarily indicative of the results expected for the
full year.
These unaudited consolidated financial statements have been prepared on a
basis consistent with the accounting policies disclosed in the audited
financial statements for the year ended December 31, 2004. The Fund
adopted accounting policies dealing with the following new developments:
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation
These consolidated financial statements include the accounts of the Fund
and its wholly-owned subsidiaries and entities in which it has a
controlling financial interest after the elimination of intercompany
accounts and transactions. The Fund has a controlling financial interest
if it owns a majority of the outstanding voting common stock or has
significant control over an entity through contractual or economic
interests in which the Fund is the primary beneficiary.
(b) Restricted Investments
Restricted investments represents escrow accounts that will be used to
repay the liability under the Illinois Retail Rate Law beginning in 2006
and funds as required by two power sales agreements.
(c) Capital Assets
Plant and equipment are recorded at cost, except for the portion related
to asset retirement obligations, which is recorded at estimated fair
value. Direct costs incurred related to the construction of assets and
renewals and betterments that materially extend the life of the assets
are capitalized. Minor equipment overhauls and maintenance and repairs,
which are generally performed annually, are expensed when incurred. Major
equipment overhauls, which are generally performed every three years, are
capitalized and amortized prospectively. Depreciation is computed using
the straight-line method over estimated useful lives of the assets as
follows:
Property, plant and equipment 25 to 40 years
Mobile equipment and vehicles 5 years
Equipment and furniture 3 to 8 years
When plant and equipment are retired or otherwise disposed of, the
related cost and accumulated depreciation or amortization is removed and
a gain or loss is recognized in income.
(d) Asset Retirement Obligations
GRS recognizes the fair value of an asset retirement obligation ("ARO")
in the period in which it is incurred when a reasonable estimate of fair
value can be made. The fair value of the estimated ARO is recorded as a
long-term liability, with a corresponding increase in the carrying amount
of the related asset. The capitalized amount is depreciated over the
shorter of the life of the power purchase agreement or the site lease
agreement. The liability amount is increased each reporting period due to
the passage of time and the amount of this accretion is charged to
earnings in the period. Revisions, if any, to the estimated timing of
cash flows or to the original estimated undiscounted cost, if any, also
result in an increase or decrease to the ARO and the related asset.
Actual costs incurred upon settlement of the ARO are charged against the
ARO to the extent of the liability recorded. Any difference between the
actual costs incurred upon settlement of the ARO and the recorded
liability is recognized as a gain or loss in GRS's earnings in the period
in which the settlement occurs.
(e) Power Purchase Agreements
The costs attributable to acquiring power purchase agreements ("PPA") are
being amortized on a straight-line basis over the remaining term to
maturity of the agreements, which range from 4 to 27 years.
(f) Gas Recovery Systems, LLC and Wind Power Loan Receivable
Interest-bearing financial assets, including the Wind Power Loan,
intended to be held to maturity, are carried at cost. Interest on the
Wind Power Loan is recognized on an effective yield basis. Transaction
costs arising from the acquisition of the Wind Power Loan are deferred
and amortized on a straight-line basis over the term of the Wind Power
Loan.
Previously, the GRS loans were also carried at cost, with interest being
recognized on an effective yield basis. However, with the adoption of AcG-
15, the GRS loans are now eliminated on consolidation and no
corresponding interest revenue is recognized.
(g) Revenue Recognition
Revenue is derived mainly from power sales. Revenue derived from power
sales pursuant to the PPA is recorded at the time electrical energy is
delivered at the rates set out in the PPA. Revenue derived from power
sales to the Power Pool of Alberta is recorded at the average Power Pool
rate for the month in which the electrical power is delivered.
Capacity payments fluctuate based on peak time of the year and revenues
from capacity payments are recognized when earned. Revenue from
management services and from maintenance and operating agreements are
recognized when services are performed. GRS records the difference
between the gross repayment obligation to the State of Illinois and the
net present value of the obligation as Illinois support revenue.
(h) Foreign Currency Translation
The operations of GRS are self-sustaining and as a result, all assets and
liabilities are translated using the period end rate, while revenues and
expenses are recorded at the average rate for the period. All resulting
exchange gains and losses are recorded in unitholders' equity in the
cumulative translation adjustment account.
(i) Income Taxes
Under the terms of the Income Tax Act (Canada), each of the Fund and
CPOT, as a trust, will not be subject to income taxes to the extent that
its taxable income and taxable capital gains are paid or payable to its
unitholders. Accordingly, no provision for current income taxes for the
Fund or CPOT is made. In addition, as each of the Fund and CPOT is
contractually committed to distribute to its unitholders all, or
virtually all of its taxable income and taxable capital gains that would
otherwise be taxable to it, and each of the Fund and CPOT intends to
continue not to be subject to income taxes, each of the Fund and CPOT is
not subject to the recommendations of the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 3465.
The incorporated entities, Whitecourt Power Corp., CPIF (Alberta) Inc.,
PEET Canadian, PEET U.S., and CPOT Holdings Corp., are subject to
corporate income taxes as computed under the Income Tax Act and the CICA
Handbook Section 3465.
(j) Financial Instruments
For the quarter ended March 31, 2005, none of the Fund's derivative
contracts were designated as hedges and as a result are recorded on the
consolidated balance sheet at their fair value. Any changes in fair value
during the period are reported in the consolidated statements of income
(loss) and deficit.
The Fund does not consider the credit risks associated with its financial
instruments to be significant. Foreign exchange forward contracts and
option contracts are maintained with high-quality counterparties, and the
Fund does not anticipate that any counterparty will fail to meet its
obligations.
(k) Exchangeable Class B Limited Partnership Units
As part of the formation of the Fund, 451,880 Exchangeable Class B
Limited Partnership Units (the "Exchangeable Units") were issued from a
subsidiary of the Fund as consideration for the acquisition of the
biomass facility in Alberta. In 2004, the Fund adopted, retroactively
with restatement, the recommendations of Emerging Issues Committee
Abstract 151, "Exchangeable Securities Issued by Subsidiaries of Income
Trusts." As a result, these exchangeable units are now classified as
minority interest in the consolidated financial statements.
(l) Reclassifications
Certain amounts in the 2004 financial statements have been reclassified
in order to conform with the 2005 presentation. Such reclassifications do
not have a material impact on the Fund's financial position, results of
operations or cash flows.
NOTE 3 - SEASONALITY
A significant portion of electricity production generated by the Fund's
hydroelectric generating facilities fluctuates with the natural water
flows of the respective watersheds. During the spring and autumn periods,
water flows are generally greater than during the winter and summer
periods.
The two PPAs with Ontario Electricity Financial Corporation ("OEFC") have
different pricing provisions for electricity produced, depending on the
time of year. Higher rates are paid by OEFC for electricity sold during
the months of October to March than those for electricity sold during the
months of April to September.
The PPA with Hydro Québec relating to the Chapais Energie, Société en
Commandite ("Chapais"), facility also has different pricing provisions
for electricity produced, depending on the time of year. During the
months of December to March, an additional capacity premium is paid. This
results in fluctuations in other investment income, but does not affect
cash flows of the Fund.
The seasonality of water flows and pricing provisions within the two PPAs
with OEFC and the PPA with Hydro Québec may result in fluctuations in
revenues and net income during the year.
Wind production will vary according to wind flow and season. Typically,
wind production is greater in cooler seasons when wind flow is greater
and more dense.
The generation of power from landfill gas may vary with air temperature
changes as ambient temperatures can impact gas turbine efficiency. In
addition, extreme cold may inhibit the process by which methane gas is
created in the landfill. To adjust for seasonality, the Fund follows a
practice of levelizing distributions over the year through the use of
cash reserves and the Reserve Account.
NOTE 4 - CAPITAL ASSETS
-------------------------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------
2005
Land $ 235 $ - $ 235
Property, plant & equipment 248,924 66,184 182,740
Power Purchase Agreement 61,737 10,163 51,574
Mobile equipment and vehicles 5,266 4,131 1,135
Furniture and equipment 587 446 141
Construction in progress 9,728 - 9,728
-------------------------------------------------------------------------
$ 326,477 $ 80,924 $ 245,553
-------------------------------------------------------------------------
NOTE 5 - OTHER ASSETS
-------------------------------------------------------------------------
March 31, December 31,
(in thousands of Canadian dollars) 2005 2004
-------------------------------------------------------------------------
Other long-term receivable (a) $ - $ 6,356
Deferred charges, net 3,760 6,444
Fair value of option contracts 1,678 2,012
Advances on net profits interest 375 350
-------------------------------------------------------------------------
$ 5,813 $ 15,162
-------------------------------------------------------------------------
(a) At December 31, 2004, the other long-term receivable consisted of
accrued interest receivable on the GRS loans. PEET U.S. is required
to pay interest on the accrued interest receivable at 11.5%. This
balance now eliminates on consolidation.
NOTE 6 - ILLINOIS RETAIL RATE LAW
GRS has four sites in the State of Illinois subject to the Illinois
Retail Rate Law (the "Illinois Law"). Under the Illinois Law, GRS
receives a retail rate that is in excess of the local municipality's
short-run avoided cost ("SRAC") for a ten or twenty year period,
depending on the agreement, and the excess is required to be repaid to
the State of Illinois ten or twenty years subsequent to the date
received. Repayment of the Illinois Law liability will commence in
February 2006.
GRS records the SRAC portion as revenue. For the portion in excess of
SRAC, its net present value (using an implied interest rate of 5.0%) is
recorded as a liability, and the remaining amount as Illinois support
revenue. During the first quarter of 2005, GRS received $1.2 million of
proceeds in excess of SRAC, of which $0.6 million was recognized as
Illinois support revenue. During the quarter, GRS recorded imputed
interest expense of $0.3 million related to the accretion of the
liability under the Illinois Law. At March 31, 2005, the gross principal
amount of the Illinois Law liability totalled $52.9 million. At March 31,
2005, the present value of the liability under the Illinois Law totalled
$26.6 million.
GRS committed to the State of Illinois to place sufficient funds in
escrow to meet the future repayment liability. At March 31, 2005, GRS has
invested $23.7 million in long-term government securities and short-term
high-quality commercial paper. These investments have been presented as
restricted investments on the balance sheet.
NOTE 7 - ASSET RETIREMENT OBLIGATIONS
The CICA issued Section 3110 that requires the recognition of the fair
value of the retirement obligation for related long-term assets as a
liability effective January 1, 2004. Retirement costs equal to the
retirement obligation are capitalized as part of the cost of the
associated plant and equipment and amortized to expense over the life of
the asset. In subsequent periods, the liability is adjusted for the
passage of time and for any changes in the amount or timing of the
underlying future cash flows.
The Fund estimated the fair value of its total asset retirement
obligations to be $4.1 million as of December 31, 2004, based on a total
future liability of $13.9 million. These payments are expected to be made
over the next 26 years with the majority of costs incurred between 2020
and 2030. The Fund's credit adjusted discount rate of 5.88% and an
inflation rate of 2.48% were used to calculate the fair value of the
asset retirement obligations. These asset retirement obligations relate
solely to GRS as the Fund's other installed assets are expected to be
used for an indefinite period and hence no removal date can be determined
and consequently a reasonable estimate of the fair value of any related
asset retirement obligations cannot be made at this time.
The following table reconciles the Fund's total asset retirement
obligations activity for the quarter ended March 31:
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Balance at January 1 $ 4,141
Accretion expense 60
-------------------------------------------------------------------------
Balance at March 31 $ 4,227
-------------------------------------------------------------------------
NOTE 8 - COMMITMENTS & CONTINGENCIES
(a) Renewable Energy Credits
A State of Massachusetts Law (the "Massachusetts Law") requires that a
portion of retail electricity sales must be generated by a renewable
energy source. GRS markets and sells, through a broker, renewable energy
credits ("RECs") associated with the renewable energy it produces for
five plants operating in Massachusetts. During the quarter, GRS sold
20,003 MW hours of RECs for power generated and recognized revenue of
$0.6 million. Under the Massachusetts Law, RECs generated are eligible
for sale for up to six months subsequent to the generation of the
renewable energy. Under two power sales agreements, GRS is required to
pay the municipality 50% of any RECs sold related to power generated at
the associated plant. During the quarter, GRS paid this municipality
$0.3 million and accrued $0.4 million at March 31, 2005.
(b) Gas Recovery Sites' Purchase Options
Under power sales agreements with a municipality for two sites, the
municipality has the option to purchase the sites commencing in 2006
through 2008, with the purchase price based on a declining scale through
2018. As of March 31, 2005, the option purchase price for the two sites
(when eligible) totalled $17.9 million. If the municipality does not
exercise its option to purchase the site, the municipality can exercise
its option to change the pricing under the contract from a fixed price to
a variable price based on the municipality's SRAC, as defined in the
agreements.
(c) Gas Purchase Agreements
GRS has landfill gas purchase agreements which expire from 2007 to 2031,
with renewal options for up to six years, and can generally be continued
if recoverable gas is available and neither party has terminated the
agreement. The gas purchase agreements' start dates and expiration dates
coincide, closely, with the power sales agreements to which they relate.
During the quarter, gas purchases under these agreements totalled
$0.6 million. The range of landfill gas purchase prices for gas to be
used to produce electricity is US $0.78 to US $0.86 per million British
thermal units (MMBtu). The estimated annual delivery of landfill gas is
approximately 6,100,000 MMBtu.
GRS also has agreements for 17 sites, whereby it pays royalties ranging
from 5% to 25% of revenues generated from electricity and gas sales.
During the quarter, royalty expenses totalled $1.0 million.
(d) Landfill Gas Collection Systems Purchase Options
One gas purchase agreement provides the landfill owner the first right of
refusal to purchase the facility if the agreement is terminated. Under
certain other gas purchase and royalty agreements, GRS has options to
purchase the landfill gas rights and related landfill gas collection
systems for a period of 30 days following the expiration of the
agreements, at the then adjusted book value, as defined in the
agreements, which totalled $0.4 million at March 31, 2005, plus the
adjusted book value of certain capital expenditures made by the landfill
owners subsequent to April 2000. If GRS does not exercise its options,
the counterparties have the right to purchase GRS's power plants for a
period of 30 days at the then adjusted book value, as defined in the
agreements, which totalled $9.1 million at March 31, 2005.
(e) Operating and Maintenance Agreements
GRS has operating and maintenance (O&M) agreements, which expire in 2007,
with renewal options for up to six years, and expire in 2030. Under the
O&M agreements, GRS operates and maintains the collection systems at each
site for the landfill owners, and receives an annual operation fee per
site, which ranges from US $1,200 to US $19,200, plus a variable fee per
MMBtu, ranging from US $0.72 to US $0.81 per MMBtu. During the quarter,
operating and maintenance income, under the O&M agreements totalled
$1.3 million.
(f) Letters of Credit and Bonds
As of March 31, 2005, GRS was required to maintain two standby letters of
credit totalling $4.2 million that were issued in favour of two utilities
under power sales agreements.
As of March 31, 2005, GRS is required to maintain five bonds totalling
$2.5 million in favour of two pollution control agencies under pollution
control agreements, one utility and one municipality under power sales
agreements and the state of California for licensed contractors. As of
March 31, 2005, GRS did not have one of the bonds in place. Management
believes that GRS will not incur any penalties as a result of this.
In connection with its Erie Shores Project, the Fund has entered into a
wind turbines supply agreement with General Electric. As security for
this commitment, the Fund has issued a letter of credit to General
Electric in the amount of $2.0 million.
There have been no draws on these letters of credit or bonds to date.
(g) GRS Creditors
GRS creditors do not have any claim on the assets of the Fund.
NOTE 9 - SEGMENTED INFORMATION
By generation source:
-------------------------------------------------------------------------
Hydro- Corporate/
Landfill Biomass electric Windpower other Total
-------------------------------------------------------------------------
For the three
months ended
March 31, 2005
Power sales $ 9,693 $ 3,343 $ 2,664 $ - $ - $ 15,700
Illinois
support
revenue,
gas sales
and other 1,935 - - - - 1,935
Interest and
other
investment
income - 988 - 636 387 2,011
Depreciation
and
amortization 4,223 704 729 9 - 5,665
Operating
income (loss) (1,586) 1,858 1,341 627 - 2,240
Interest
expense 321 - 408 - 1,401 2,130
-------------------------------------------------------------------------
As at March 31,
2005
GRS loans
receivable $ - $ - $ - $ - $ - $ -
Capital assets 94,332 50,718 100,503 - - 245,553
Wind Power loan
receivable - - - 22,294 - 22,294
Chapais loans
receivable - 15,318 - - - 15,318
Other long-term
investment - 2,157 - - - 2,157
Goodwill - 8,885 - - - 8,885
-------------------------------------------------------------------------
For 3 months
ended March
31, 2004
Power sales $ - $ 3,325 $ 2,558 $ - $ - $ 5,883
Interest and
other
investment
income 3,970 958 - 677 64 5,669
Depreciation
and
amortization 956 697 813 9 - 2,475
Operating
income (loss) 3,014 2,257 1,131 668 (570) 6,500
Interest
expense - - 336 - 824 1,160
-------------------------------------------------------------------------
As at December
31, 2004
GRS loans
receivable $112,147 $ - $ - $ - $ - $112,147
Capital assets - 52,387 100,210 - - 152,597
Wind Power loan
receivable - - - 22,168 - 22,168
Chapais loans
receivable - 15,429 - - - 15,429
Goodwill - 8,885 - - - 8,885
-------------------------------------------------------------------------
NOTE 10 - BENEFIT PLAN
GRS maintains a qualified 401(k) benefit plan to cover substantially all
of its employees who meet the eligibility requirements. During the three
months ended March 31, 2005, GRS's contribution expense was $0.1 million.
APPENDIX I
Gas Recovery Systems, LLC
Consolidated Balance Sheet (unaudited)
-------------------------------------------------------------------------
As at December 31, 2004 (in United States dollars) 2004
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 137,404
Accounts receivable, less allowance for accounts of nil
for 2004 and $31,120 for 2003 6,324,139
Receivable from related party -
Due from parent 4,000,000
Materials and supplies 2,048,225
Other current assets 855,122
-------------------------------------------------------------------------
Total current assets 13,364,890
Restricted cash 19,033,011
Spare parts inventories 2,335,114
Receivable from related party -
Plant and equipment, net 42,186,338
Deferred income taxes 9,935,868
-------------------------------------------------------------------------
Total assets $ 86,855,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable $ 2,081,533
Accrued expenses 6,025,075
Advances from parent 7,693,000
-------------------------------------------------------------------------
Total current liabilities 15,799,608
Asset retirement obligation 3,445,449
Illinois Retail Rate Law liability 21,283,574
Other liabilities -
-------------------------------------------------------------------------
Total liabilities 40,528,631
-------------------------------------------------------------------------
Commitments and contingencies (Notes 4, 7 and 9)
Member's Equity
Member's capital 35,167,823
Retained earnings 11,158,767
-------------------------------------------------------------------------
Total member's equity 46,326,590
-------------------------------------------------------------------------
Total liabilities and member's equity $ 86,855,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
APPENDIX I
Gas Recovery Systems, LLC
Consolidated Statement of Income (unaudited)
-------------------------------------------------------------------------
Year ended December 31, 2004 (in United States dollars) 2004
-------------------------------------------------------------------------
REVENUES
Electricity sales $ 33,525,580
Illinois support revenue (Note 2(h)) 2,025,225
Gas sales and other 4,880,515
-------------------------------------------------------------------------
40,431,320
Cost of sales 22,734,887
-------------------------------------------------------------------------
Gross profit 17,696,433
Depreciation 10,691,206
Long-lived assets impairment (Note 2(f)) 439,398
General and administrative expenses 2,954,898
-------------------------------------------------------------------------
Operating income 3,610,931
-------------------------------------------------------------------------
Other income (expense)
Interest expense (1,136,353)
Management agreement termination gain 439,600
Interest income and other, net 127,722
-------------------------------------------------------------------------
(569,031)
-------------------------------------------------------------------------
Income before income tax benefit 3,041,900
Income tax benefit (80,795)
-------------------------------------------------------------------------
Net income $ 3,122,695
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
APPENDIX I
Gas Recovery Systems, LLC
Consolidated Statement of Shareholder's/Member's Equity (unaudited)
-------------------------------------------------------------------------
Common Stock Additional
Year ended December 31, 2004 --------------------------- paid in
(in United States dollars) Shares Amount capital
-------------------------------------------------------------------------
Balances, beginning of year $ 100,000 $ 2,600,000 $32,567,823
Conversion from a C-corporation
to a limited liability company (100,000) (2,600,000) (32,567,823)
Net income - - -
Cash dividends paid - - -
-------------------------------------------------------------------------
Balances, end of year $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year ended December 31, 2004 Member's Retained
(in United States dollars) capital earnings Total
-------------------------------------------------------------------------
Balances, beginning of year $ - $17,516,072 $52,683,895
Conversion from a C-corporation
to a limited liability company 35,167,823 - -
Net income - 3,122,695 3,122,695
Cash dividends paid - (9,480,000) (9,480,000)
-------------------------------------------------------------------------
Balances, end of year $35,167,823 $11,158,767 $46,326,590
-------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
APPENDIX I
Gas Recovery Systems, LLC
Consolidated Statement of Cash Flows (unaudited)
-------------------------------------------------------------------------
Year ended December 31, 2004 (in United States dollars) 2004
-------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 3,122,695
Adjustments to reconcile net income to cash provided
by operating activities
Depreciation 10,691,206
Long-lived assets impairment 439,398
Accretion of Illinois Retail Rate Law liability 1,309,383
Deferred income taxes (87,933)
Changes in operating assets and liabilities
Accounts receivable (489,933)
Receivables from related party 3,102,446
Due from parent (4,000,000)
Other current assets 149,514
Inventories 164,121
Accounts payable 25,698
Accrued expenses 1,925,001
Other liabilities (50,999)
-------------------------------------------------------------------------
Net cash provided by operating activities 16,300,597
-------------------------------------------------------------------------
Cash flows from investing activities
Increase in restricted cash (3,168,142)
Purchases and construction of plant and equipment (13,122,184)
-------------------------------------------------------------------------
Net cash used in investing activities (16,290,326)
-------------------------------------------------------------------------
Cash flows from financing activities
Advances from parent 6,943,000
Proceeds from Illinois Retail Rate Law 1,641,253
Cash dividends paid (9,480,000)
-------------------------------------------------------------------------
Net cash used in financing activities (895,747)
-------------------------------------------------------------------------
Net decrease in cash and cash equivalents (885,476)
Cash and cash equivalents, beginning of year 1,022,880
-------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 137,404
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for
Income taxes $ 169,140
Interest 24,671
-------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
APPENDIX I
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 1 - ORGANIZATION
Background
Gas Recovery Systems, LLC (the "Company") is in the business of
extracting and collecting gas from landfills, using such gas primarily as
a fuel to drive generators producing a combined annual total net
deliverable capacity of 110 megawatts (MW) of electricity and selling the
electricity to power utilities under power sales agreements. The Company
operates 29 gas recovery sites in the United States of America. The
Company also receives management fees for operations and maintenance
services under agreements with landfill owners.
The Company is wholly owned by PEET U.S. Holdings, Inc. (PEET). PEET is a
100% owned subsidiary of PEET Canadian Holdings, Inc.
Restructuring
The Company restructured in March 2004, whereby a new entity, Gas
Recovery Systems, LLC, was created as a separate company. All of the
operating assets of Gas Recovery Systems, Inc. were transferred to the
Company in connection with this restructuring and, as a result, there was
no change in the primary operations of the reporting entity. In
connection with the restructuring, all of the net assets of Gas Recovery
Systems, Inc. were transferred to the Company at historical cost and the
transaction was treated as a transfer of assets under common control.
There was no change in controlling ownership interest of this collective
reporting entity during 2004.
The Company's Operating Agreement (the "Operating Agreement") addresses,
among other terms, the governance of the Company and the required
methodology for cash distributions. The Company will continue until
December 31, 2103, unless sooner terminated in accordance with specific
provisions of the Operating Agreement.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Consolidation
The Company's consolidated financial statements include the assets and
liabilities of Landfill Gas Management, LLC (LGM). While the Company's
ownership interest in LGM of 49% is less than 50% during the period, the
Company exercised effective control over LGM through operations and
management of LGM. PEET has the option to purchase the remaining
ownership interest in LGM at any time for a nominal amount. Under the LGM
operating agreement, 100% of the operations are allocated to the Company.
Upon sale or dissolution of LGM, the proceeds will be allocated to the
members based on their capital accounts, and the remaining gain or loss,
if any, on the net assets will be allocated to the owners according to
their ownership percentage. Intercompany accounts and transactions have
been eliminated in consolidation.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original or
remaining maturity of three months or less at the date of purchase to be
cash equivalents.
(c) Restricted Cash
Restricted cash represents escrow accounts that will be used to repay the
liability under the Illinois Retail Rate Law beginning in 2006 and funds
as required by two power sales agreements.
(d) Materials and Supplies and Spare Parts Inventories
Inventories consist primarily of replacement parts for the internal
combustion, gas turbine engines, and materials and supplies, and are
stated at the lower of cost (determined by the first-in, first-out
method) or net realizable value.
(e) Plant and Equipment
Plant and equipment are recorded at cost, except for the portion related
to asset retirement obligations, which are recorded at estimated fair
value. Direct costs incurred related to the construction of assets and
renewals and betterments that materially extend the life of the assets
are capitalized. Minor equipment overhauls and maintenance and repairs,
which are generally performed annually, are expensed when incurred. Major
equipment overhauls, which are generally performed every three years, are
capitalized and amortized prospectively. Depreciation is computed using
the straight-line method over useful lives ranging from ten to thirty
years for buildings and three to seven years for operating and other
equipment. When plant and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation or amortization is removed
and a gain or loss is recognized in income.
(f) Long-Lived Assets Impairment
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
fully recoverable. Recoverability of long-lived assets to be held and
used is measured by a comparison of the carrying amount of the assets to
their fair value, which is normally determined through analysis of the
assets' future undiscounted net cash flows expected to be generated. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount that the carrying amounts of the
assets exceed the fair value of the assets. At December 31, 2004, the
Company recognized an impairment loss of $439,398 for one site because
the carrying value of the assets exceeded the expected future cash flow.
(g) Asset Retirement Obligations
The Company recognizes the fair value of an asset retirement obligation
("ARO") in the period in which it is incurred when a reasonable estimate
of fair value can be made. The fair value of the estimated ARO is
recorded as a long-term liability, with a corresponding increase in the
carrying amount of the related asset. The capitalized amount is
depreciated over the shorter of the life of the power purchase agreement
or the site lease agreement. The liability amount is increased each
reporting period due to the passage of time and the amount of this
accretion is charged to earnings in the period. Revisions, if any, to the
estimated timing of cash flows or to the original estimated undiscounted
cost, if any, also result in an increase or decrease to the ARO and the
related asset. Actual costs incurred upon settlement of the ARO are
charged against the ARO to the extent of the liability recorded. Any
difference between the actual costs incurred upon settlement of the ARO
and the recorded liability is recognized as a gain or loss in the
Company's earnings in the period in which the settlement occurs.
(h) Revenue Recognition
Revenues from sales of electricity and gas are recognized when delivered.
Capacity payments fluctuate based on peak time of the year and revenues
from capacity payments are recognized when earned. Revenue from
management services and from maintenance and operating agreements are
recognized when services are performed. The Company records the
difference between the gross repayment obligation to the State of
Illinois and the net present value of the obligation as Illinois support
revenue.
(i) Income Taxes
Effective March 2004, income and losses of the Company and tax credits
are distributed to the sole member in accordance with the applicable
sections of the Internal Revenue Code and state legislation for those
states in which the Company sells its products. Accordingly, tax
liabilities are the responsibility of the sole member except for the
minimum state tax requirements.
The Company is not a separate taxable entity for federal income tax
purposes and for certain states, and the results of its operations are
included with the consolidated federal and applicable state tax returns
of PEET. At December 31, 2004, the Company has determined its income
taxes as if it were a separate taxable entity and the Company has no tax-
related balances due to or from PEET.
The Company records income taxes in accordance with the liability method,
wherein future tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that will be in
effect when the differences are expected to reverse. A valuation
allowance is established to reduce future taxes when management estimates
it is more likely than not that all or some of such future tax assets
will not be realized. Income tax expense or benefit is the tax payable or
refundable, respectively, for the period plus or minus the change during
the period in future tax assets and liabilities.
(j) Significant Customers
During 2004, six customers accounted for 73% of revenues. As of
December 31, 2004, two customers accounted for 28% of accounts
receivable.
(k) Credit Concentration Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade
receivables. The Company places its cash with high credit quality
financial institutions located in the United States of America. The
Company performs ongoing credit evaluations of its customers. The Company
does not require collateral from its customers and maintains an allowance
for credit losses, which historically have not been material.
(l) Financial Instruments Fair Value
The fair value of financial instruments is defined as the amount at which
the instruments could be exchanged in a current transaction between
willing parties. The carrying amount of cash and cash equivalents
approximates fair value due to their short-term maturities.
(m) Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in Canada requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
NOTE 3 - NEW AND RECENT ACCOUNTING PRONOUNCEMENTS
The Canadian Institute of Chartered Accountants (CICA) issued Section
3110 that requires the recognition of the fair value of the retirement
obligation for related long-term assets as a liability. Retirement costs
equal to the retirement obligation are capitalized as part of the cost of
the associated plant and equipment and amortized to expense over the life
of the asset. In subsequent periods, the liability is adjusted for the
passage of time and for any changes in the amount or timing of the
underlying future cash flows. This standard was adopted effective
January 1, 2004 and applied retroactively. The cumulative effect of the
change in accounting principle at January 1, 2003 was $767,178.
Implementation of the new accounting principle had the following effects
on the Company's consolidated financial statements as of December 31:
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Balance Sheet
Increase to property, plant and equipment,
Net of accumulated depreciation of $616,102 $ 1,615,325
Increase to deferred income taxes 725,461
Increase to asset retirement obligation (3,445,449)
Decrease to retained earnings 1,104,663
Income Statement
Increase in cost of sales 196,311
Increase in depreciation 88,830
Decrease in income taxes (113,030)
Decrease in net income (172,111)
-------------------------------------------------------------------------
There was no impact on the Company's cash flows as a result of adopting
this new policy.
The Company estimated the fair value of its asset retirement obligation
to be $3,445,449 as of December 31, 2004, based on a total future
liability of $11,551,238. These payments are expected to be made over the
next 26 years with the majority of costs incurred between 2020 and 2030.
The Company's credit adjusted discount rate of 5.88% and an inflation
rate of 2.48% were used to calculate the fair value of the asset
retirement obligation.
The following table reconciles the Company's asset retirement obligation
activity for the year ended December 31:
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Balance at January 1 $ 3,249,138
Accretion expense 196,311
-------------------------------------------------------------------------
Balance at December 31 $ 3,445,449
-------------------------------------------------------------------------
Recent Accounting Pronouncements
In September 2004, the CICA issued in final, Accounting Guideline (AcG)
15, Consolidation of Variable Interest Entities (VIEs), which requires
the consolidation of VIEs by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb or receive the majority of
the VIE expected losses, expected residual returns, or both. A VIE is an
entity where (a) its equity investment at risk is insufficient to permit
the entity to finance its activities without additional subordinated
support from others and/or where certain essential characteristics of a
controlling financial interest are not met, and (b) it does not meet
specified exemption criteria. This Guideline is effective for fiscal
years and interim periods beginning on or after November 1, 2004. The
adoption of AcG-15 had no impact on the accounts of the Company.
NOTE 4 - COMPANY OPERATIONS
(a) Power Sales Agreements
The Company has power sales agreements with utilities to sell up to
110 MW of electricity and receive capacity payments. The power sales
agreements expire from 2005 to 2031, with renewal options of the Company
for up to six years. The price per kilowatt hour (Kwh) varies for each
contract, ranging from $0.03 per Kwh to $0.11 per Kwh. For certain power
sales agreements, the pricing is determined by the respective utilities'
short-run avoided cost (SRAC) formula, the cost they avoid by not
purchasing or producing the electricity themselves. During 2004, power
sales under long-term agreements totaled $24,000,112. Under certain
agreements, the Company is also entitled to capacity payments for
delivering contracted Kwh capacity, which totaled $9,115,929 in 2004.
The power sales agreements generally allow for bonuses or penalties for
delivering more or less Kwh than contracted. Certain agreements contain
significant cash penalties, termination options and purchase options
clauses on the sites, if the Company causes defaults that are not
remedied or if agreements are terminated prior to expiration, as defined
in the agreements. The economic viability of the Company's plants is
dependent upon sufficient recoverable landfill gas and on favourable
electricity prices with the utilities.
In December 2003, the Company ceased production under one power sales
agreement and is negotiating an early termination. Through December 2008,
the expiration date of the agreement, the Company is potentially liable
for damages if the utility is unable to purchase power at a rate
comparable to the rate stated in the agreement. Management does not
believe that any potential damages will have a material effect on the
Company's financial position, results of operations or cash flows.
An entity has guaranteed performance under two power sales agreements of
the Company. A subsidiary of the guarantor has provided debt financing to
PEET U.S. Also, three power sales agreements are collateralized by the
facilities to which they relate.
(b) California Energy Commission Program
The Company has eight sites in California that qualify under a State
program administered by the California Energy Commission (CEC), whereby
if the SRAC falls below $0.03 per Kwh, the CEC will pay the Company the
difference between the SRAC, as defined in the agreements, and $0.03 per
Kwh, limited to the amount funded by the State. The agreement's
expiration coincides with the expiration of the power sales agreement at
the corresponding sites. During 2004 and 2003, the Company did not
receive any funding under this CEC program.
(c) Renewable Energy Credits
A State of Massachusetts Law (the "Massachusetts Law") requires that a
portion of retail electricity sales must be generated by a renewable
energy source. The Company markets and sells, through a broker, renewable
energy credits (Credits) associated with the renewable energy it produces
for five plants operating in Massachusetts. During 2004, the Company sold
86,412 MW hours of Credits for power generated and recognized revenue of
$2,182,713. Under the Massachusetts Law, Credits generated are eligible
for sale for up to six months subsequent to generation of the renewable
energy. Under two power sales agreements, the Company is required to pay
the municipality 50% of any credits sold related to power generated at
the associated plant. During 2004, the Company paid this municipality
$589,049 and accrued $246,840 at December 31, 2004.
(d) Gas Recovery Sites' Purchase Options
Under power sales agreements with a municipality for two sites, the
municipality has the option to purchase the sites commencing in 2006
through 2008, with the purchase price based on a declining scale through
2018. As of December 31, 2004, the option purchase price for the two
sites (when eligible) total $14,792,766. If the municipality does not
exercise its option to purchase the site, the municipality can exercise
its option to change the pricing under the contract from a fixed price to
a variable price based on the municipality's SRAC, as defined in the
agreements.
(e) Gas Purchase Agreements
The Company has landfill gas purchase agreements that expire from 2007 to
2031, with renewal options for up to six years, and can generally be
continued if recoverable gas is available and neither party has
terminated the agreement. The gas purchase agreements' start dates and
expiration dates coincide, closely, with the power sales agreements to
which they relate. During 2004, gas purchases under these agreements
totaled $5,310,990. The range of landfill gas purchase prices for gas to
be used to produce electricity is $0.78 to $0.82 per million British
thermal units (MMBtu). The estimated annual delivery of landfill gas is
approximately 6,100,000 MMBtu.
The Company also has agreements for 17 sites, whereby it pays royalties
ranging from 5% to 25% of revenues generated from electricity and gas
sales. During 2004, royalty expenses totaled $2,471,340.
(f) Landfill Gas Collection Systems Purchase Options
One gas purchase agreement provides the landfill owner the first right of
refusal to purchase the facility if the agreement is terminated. Under
certain other gas purchase and royalty agreements, the Company has
options to purchase the landfill gas rights and related landfill gas
collection systems for a period of 30 days following the expiration of
the agreements, at the then adjusted book value, as defined in the
agreements, which totaled $327,038 at December 31, 2004, plus the
adjusted book value of certain capital expenditures made by the landfill
owners subsequent to April 2000. If the Company does not exercise its
options, the counterparties have the right to purchase the Company's
power plants for a period of 30 days at the then adjusted book value, as
defined in the agreements, which totaled $7,547,033 at December 31, 2004.
(g) Operating and Maintenance Agreements
The Company has operating and maintenance (O&M) agreements, which expire
in 2007, with renewal options for up to six years, and expire in 2030.
Under the O&M agreements, the Company operates and maintains the
collection systems at each site for the landfill owners, and receives an
annual operation fee per site, which ranges from $1,200 to $19,200, plus
a variable fee per MMBtu, ranging from $0.72 to $0.76 per MMBtu. During
2004, operating and maintenance income, under the O&M agreements totaled
$5,104,770.
(h) Illinois Retail Rate Law
The Company has four sites in the State of Illinois subject to the
Illinois Retail Rate Law (the "Illinois Law"). Under the Illinois Law,
the Company receives a retail rate that is in excess of the local
municipality's SRAC for a ten or twenty year period, depending on the
agreement, and the excess is required to be repaid to the State of
Illinois ten or twenty years subsequent to the date received. Repayment
of the Illinois Law liability will commence in February 2006.
The Company records the SRAC portion as revenue. For the portion in
excess of SRAC, its net present value (using an implied interest rate of
5.0%) is recorded as a liability, and the remaining portion as Illinois
support revenue. During 2004, the Company received $4,155,739 of proceeds
in excess of SRAC, of which $2,025,225 was recognized as Illinois support
revenue. During 2004, the Company recorded imputed interest expense of
$1,113,072 related to the accretion of the liability under the Illinois
Law. At December 31, 2004, the gross principal amount of the Illinois Law
liability totaled $42,817,432. At December 31, 2004, the present value of
the liability under the Illinois Law totaled $21,283,574.
The Company committed to the State of Illinois to place sufficient funds,
with interest earnings, in escrow to meet the future repayment liability.
At December 31, 2004, the Company has funded $18,814,212 in a restricted
escrow account.
(i) Development Sites
The Company had the first right to participate in any new projects
developed by Comcor Environmental Limited, an environmental consulting
company owned by six of the former shareholders of the Company. In
December 2004, these rights were canceled in connection with the
termination of a management agreement with six of the former shareholders
(see Note 8).
NOTE 5 - PLANT AND EQUIPMENT
Plant and equipment consist of the following at December 31:
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Operating equipment $ 56,373,924
Buildings 16,220,051
Other 2,954,301
-------------------------------------------------------------------------
75,548,276
-------------------------------------------------------------------------
Accumulated Depreciation
Operating equipment (35,213,531)
Buildings (2,731,303)
Other (2,577,670)
-------------------------------------------------------------------------
(40,522,504)
-------------------------------------------------------------------------
Construction in progress 7,160,566
Plant and equipment, net $ 42,186,338
-------------------------------------------------------------------------
As at December 31, 2004 operating equipment includes $2,231,427, and
accumulated depreciation of $616,102 relating to asset retirement
obligations.
NOTE 6 - INCOME TAXES
The income tax (benefit) provision consists of the following:
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Current
Federal $ -
State 7,138
-------------------------------------------------------------------------
7,138
-------------------------------------------------------------------------
Deferred
Federal (319,124)
State 231,191
-------------------------------------------------------------------------
(87,933)
-------------------------------------------------------------------------
$ 80,795
-------------------------------------------------------------------------
The income tax (benefit) provision differs from the amount computed by
multiplying the statutory federal income tax by the income before income
tax (benefit) provision due to the following:
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Federal income tax provision at statutory rate $ 1,064,665
State income tax provision, net of federal benefit 202,608
Termination of management agreement (1,628,459)
Valuation allowance against state net operating loss
carryforwards 231,906
Permanent differences and other, net 48,485
-------------------------------------------------------------------------
$ (80,795)
-------------------------------------------------------------------------
The types of temporary differences between the tax bases of assets
(liabilities) and their financial reporting amounts that give rise to a
significant portion of the net deferred tax assets and their approximate
tax effect consist of the following as of December 31, 2004:
-------------------------------------------------------------------------
Depreciation and amortization $ (674,863)
Net operating loss carryforward 14,311,858
Capital recovery revenue (4,848,832)
Asset retirement obligation 1,365,816
Other, net 13,795
-------------------------------------------------------------------------
10,167,774
Valuation allowance (231,906)
-------------------------------------------------------------------------
$ 9,935,868
-------------------------------------------------------------------------
As of December 31, 2004, the Company has pre-tax federal and state net
operating loss carryforwards of approximately $36,600,000 and $32,300,000
available to reduce future taxable income. The federal and state net
operating loss carryforwards begin to expire in 2024 and 2005,
respectively. Utilization of net operating loss carryforwards may be
subject to annual limitations due to certain ownership change limitations
as required by Internal Revenue Code Section 382. Management evaluates on
a periodic basis the recoverability of deferred tax assets and the need
for a valuation allowance. As of December 31, 2004, a valuation allowance
has not been provided for any deferred tax assets because management
believes it is more likely than not that the future federal benefits will
be full realized. At December 31, 2004, management recorded a valuation
allowance of $231,906 to provide for certain state net operating loss
carryforwards, which management believes will not be realized.
Deduction for Qualified Domestic Production Activities
In October 2004, the President signed the American Jobs Creation Act of
2004 (the "Act"). The Act provides a deduction for income from qualified
domestic production activities, which will be phased in from 2005 through
2010. The Company will treat the deduction as a "special deduction". As
such, the special deduction has no effect on deferred tax assets and
liabilities existing at the enactment date. Rather, the impact of this
deduction will be reported in the period in which the deduction is
claimed on the Company's tax return.
NOTE 7 - MANAGEMENT AGREEMENT
The Company had a management agreement, which was terminated in December
2004, with GRS Management Services LLC ("Management Services"), whereby
Management Services provided administration, operations and capital
expansion services to the Company. The owner-members of Management
Services were former shareholders of the Company. Under this agreement,
Management Services received $1,350,000 annually, plus or minus
incentives or reductions for achieving, or not achieving, certain cash
performance goals (as defined in the agreement) and was entitled to the
first $250,000 of credits sold annually. Under the agreement, Management
Services' incentive was equal to 50% of the amount in excess of the
annual performance goal and Management Services' reduction was equal to
50% of the amount under the annual performance goal. At December 31,
2003, the Company had a related receivable for $1,623,100. In April 2004,
the Company was paid $533,000 related to the management reduction under
the management agreement.
Host Community Fees
Three townships have filed a claim against the Company seeking equitable
relief for host community fees under gas purchase agreements. As a result
of these claims, the Company has recorded an estimated liability of
$2,578,386 as of December 31, 2004. Under the terminated management
agreement with Management Services, the Company was only responsible for
the first $400,000 on an annual basis of expenses associated with these
claims. Any expenses exceeding this amount were the responsibility of
Management Services. If the host community fees for these particular
townships were greater than $400,000 in any year, Management Services was
required to pay the Company the amount that exceeds $400,000. If the host
community fees were less than $400,000, the Company was required to pay
Management Services the difference between the actual amount of the
host's community fees and $400,000. At December 31, 2003, the Company had
a $1,479,400 receivable, which also included legal fees paid through
December 31, 2003 in excess of $400,000, from Management Services related
to these claims.
Management Agreement Termination
In December 2004, PEET, the Company's parent, executed a termination
agreement with Management Services, whereby Management Services agreed to
settle all past and future claims by the Company and both the Company and
Management Services released each other from future claims, including
Management Services' host community fees and construction commitments
described above and the Company's first rights to participate in landfill
projects developed by Comcor Environmental Limited.
Other
At December 31, 2004, the Company had $7,693,000 outstanding under
working capital advances for PEET primarily to fund capital expenditures.
The advances are due on demand.
During 2004, the Company paid letter of credit fees totaling $48,209 to
PEET. Effective October 2004, the Company incurred management fees and
out-of-pocket expenses totaling $228,360 from Probyn & Company, Inc.
(Probyn). At December 31, 2004, the Company has a liability of $173,323
to Probyn included in accrued liabilities.
NOTE 8 - BENEFIT PLAN
The Company maintains a qualified 401(k) benefit plan (the "Plan") to
cover substantially all of its employees who meet the eligibility
requirements. All employees of the Company working more than 1,000 hours
per year and with more than one year of service are eligible to
participate in the Plan. Eligible employees may contribute up to 25% of
their compensation on a pre-tax basis to the Plan, up to statutory
limits. The Company matches 50% on the first 6% of eligible employees'
contributions. The Company may also make discretionary contributions to
the Plan. The Company's contributions vest 20%, 50% and 100% after the
first, second and third years of service, respectively. During 2004, the
Company's contribution expense was $201,969.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has operating leases for its office and maintenance
locations, which expire from 2005 through 2008. Future minimum rental
payments required under all noncancelable operating leases as follows:
-------------------------------------------------------------------------
Year ended December 31,
2005 $ 264,357
2006 236,936
2007 246,413
2008 42,289
-------------------------------------------------------------------------
$ 789,995
-------------------------------------------------------------------------
Rent expense under operating leases totaled $275,969 during 2004.
The Company has operating leases for its landfill sites, however, the
Company may terminate these agreements, without liability, if the sites
are not commercially viable.
Letters of Credit and Bonds
As of December 31, 2004, the Company was required to maintain two standby
letters of credit totaling $3,500,843 which were issued in favour of two
utilities under power sales agreements.
As of December 31, 2004, the Company is required to maintain five bonds
totaling $2,043,641 in favour of two pollution control agencies under
pollution control agreements, one utility and one municipality under
power sales agreements and the state of California for licensed
contractors. As of December 31, 2004, the Company did not have one of the
bonds in place. Management believes that the Company will not incur any
penalties as a result of this.
There have been no draws on these letters of credit or bonds to date.
General
The Company is involved in various claims arising in the normal course of
business. Management believes that the outcome of these claims will not
have a material adverse affect on the Company's financial position,
results of operations or cash flows.
APPENDIX II
Gas Recovery Systems, LLC
Consolidated Balance Sheets (unaudited)
-------------------------------------------------------------------------
March 31, December 31,
As at (in United States dollars) 2005 2004
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 137,113 $ 137,404
Accounts receivable 5,557,220 6,324,139
Due from parent - 4,000,000
Materials and supplies 2,092,634 2,048,225
Other current assets 808,176 855,122
-------------------------------------------------------------------------
Total current assets 8,595,143 13,364,890
Restricted cash 19,559,043 19,033,011
Spare parts inventories 2,776,592 2,335,114
Plant and equipment, net 41,333,517 42,186,338
Future income taxes 10,061,577 9,935,868
-------------------------------------------------------------------------
Total assets $ 82,325,872 $ 86,855,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable $ 1,513,397 $ 2,081,533
Accrued expenses 3,104,425 6,025,075
Advances from parent 8,493,000 7,693,000
-------------------------------------------------------------------------
Total current liabilities 13,110,822 15,799,608
Asset retirement obligation 3,494,527 3,445,449
Illinois Retail Rate Law liability 21,955,349 21,283,574
-------------------------------------------------------------------------
Total liabilities 38,560,698 40,528,631
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Member's Equity
Member's capital 35,167,823 35,167,823
Retained earnings 8,597,351 11,158,767
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Total member's equity 43,765,174 46,326,590
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Total liabilities and member's equity $ 82,325,872 $ 86,855,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
APPENDIX II
Gas Recovery Systems, LLC
Consolidated Statements of Income (unaudited)
-------------------------------------------------------------------------
Three months ended March 31
(in United States dollars) 2005 2004
-------------------------------------------------------------------------
REVENUES
Electricity sales $ 7,908,369 $ 8,230,363
Illinois support revenue 528,445 918,284
Gas sales and other 1,049,925 1,124,831
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9,486,739 10,273,478
Cost of sales 6,139,149 5,518,214
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Gross profit 3,347,590 4,755,264
Depreciation 2,675,070 2,500,596
Long-lived assets impairment - -
General and administrative expenses 741,455 735,146
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Operating income (68,935) 1,519,522
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-------------------------------------------------------------------------
Other income (expense)
Interest expense 262,254 295,001
Management agreement termination gain - -
Interest income and other, net (14,064) (50,405)
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248,190 244,596
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before income tax (benefit) provision (317,125) 1,274,926
Income tax (benefit) provision (125,709) 76
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Net income (loss) for the period $ (191,416) $ 1,274,850
Retained earnings, opening 11,158,767 17,516,072
Dividends paid (2,370,000) (2,370,000)
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Retained earnings, closing $ 8,597,351 $ 16,420,924
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-------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
APPENDIX II
Gas Recovery Systems, LLC
Consolidated Statements of Cash Flows (unaudited)
-------------------------------------------------------------------------
Three months ended March 31
(in United States dollars) 2005 2004
-------------------------------------------------------------------------
Cash flows from operating activities
Net income $ (191,416) $ 1,274,852
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation 2,675,070 2,500,596
Accretion on asset retirement obligation 49,078 49,078
Accretion of imputed interest expense -
Illinois 257,676 291,241
Deferred income taxes (125,709) 612,431
Changes in operating assets and liabilities
Accounts receivable 766,919 468,351
Receivables from related party 4,000,000 -
Other current assets 46,946 87,216
Inventories (485,887) (82,663)
Accounts payable (568,136) 2,418,642
Accrued expenses (2,920,650) -
Other liabilities - (50,999)
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Net cash provided by operating activities 3,503,891 7,568,743
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Cash flows from investing activities
Increase in restricted cash (526,032) (705,292)
Purchases and construction of plant
and equipment (1,822,249) (7,319,461)
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Net cash used in investing activities (2,348,281) (8,024,753)
-------------------------------------------------------------------------
Cash flows from financing activities
Advances from parent 800,000 2,000,000
Proceeds from Illinois Retail Rate Law 414,099 678,202
Cash dividends paid (2,370,000) (2,370,000)
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Net cash used in financing activities (1,155,901) 308,202
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Net decrease in cash and cash equivalents (291) (147,808)
Cash and cash equivalents,
beginning of period 137,404 1,022,880
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Cash and cash equivalents, end of period $ 137,113 $ 875,072
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental disclosure of cash flow
information
Cash paid during the year for
Income taxes - 103,700
Interest 4,578 3,760
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
APPENDIX II
Notes to Consolidated Financial Statements
March 31, 2005
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Gas
Recovery Systems, LLC (the "Company") have been prepared by management
using Canadian generally accepted accounting principles ("GAAP")
applicable for interim reporting periods. These unaudited notes to the
consolidated financial statements do not include all disclosures required
in the annual financial statements and should be read in conjunction with
the audited consolidated financial statements and notes included in the
Company's unaudited financial statements for the year ended December 31,
2004. (See Appendix I.)
The consolidated financial statements of the Company include the accounts
of its wholly-owned subsidiaries, Landfill Gas Management, LLC and Gas
Recovery Systems of Illinois, Inc. All intercompany transactions and
balances have been eliminated on consolidation.
NOTE 2 - ILLINOIS RETAIL RATE LAW
The Company has four sites in the State of Illinois subject to the
Illinois Retail Rate Law (the "Illinois Law"). Under the Illinois Law,
the Company receives a retail rate that is in excess of the local
municipality's short-run avoided cost ("SRAC") for a ten or twenty year
period, depending on the agreement, and the excess is required to be
repaid to the State of Illinois ten or twenty years subsequent to the
date received. Repayment of the Illinois Law liability will commence in
February 2006.
The Company records the SRAC portion as revenue. For the portion in
excess of SRAC, its net present value (using an implied interest rate of
5.0%) is recorded as a liability, and the remaining amount as capital
recovery revenue. During the first quarter of 2005, the Company received
$0.9 million of proceeds in excess of SRAC, of which $0.5 million was
recognized as capital recovery revenue. During the quarter, the Company
recorded imputed interest expense of $0.3 million related to the
accretion of the liability under the Illinois Law. At March 31, 2005, the
gross principal amount of the Illinois Law liability totaled
$43.7 million. At March 31, 2005, the present value of the liability
under the Illinois Law totaled $21.9 million.
The Company committed to the State of Illinois to place sufficient funds,
with interest earnings, in escrow to meet the future repayment liability.
At March 31, 2005, the Company has funded $19.6 million which has been
presented as restricted investments.
NOTE 3 - ASSET RETIREMENT OBLIGATIONS
The Canadian Institute of Chartered Accountants (CICA) issued Section
3110 that requires the recognition of the fair value of the retirement
obligation for related long-term assets as a liability. Retirement costs
equal to the retirement obligation are capitalized as part of the cost of
the associated plant and equipment and amortized to expense over the life
of the asset. In subsequent periods, the liability is adjusted for the
passage of time and for any changes in the amount or timing of the
underlying future cash flows.
The Company estimated the fair value of its asset retirement obligation
to be $3.5 million as of December 31, 2004, based on a total future
liability of $11.5 million. These payments are expected to be made over
the next 26 years with the majority of costs incurred between 2020 and
2030. The Company's credit adjusted discount rate of 5.88% and an
inflation rate of 2.48% were used to calculate the fair value of the
asset retirement obligations.
The following table reconciles the Company's asset retirement obligation
activity for the quarter ended March 31:
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Balance at January 1 $ 3,445
Accretion expense 50
-------------------------------------------------------------------------
Balance at March 31 $ 3,495
-------------------------------------------------------------------------
Clean Power Income Fund's units are listed and posted for trading on the
Toronto Stock Exchange under the symbol "CLE.UN".
Investors should take note that certain statements in this press release
are forward-looking and may not give full weight to all potential risks and
uncertainties. Forward-looking statements are subject by their nature to risks
and uncertainties, and actual results, actions or events could differ
materially from those set forth in the forward-looking statements. Any
forward-looking statements speak only as of the date made. The Fund is not
undertaking to update any forward-looking statement.
/For further information: Peter Korth, Vice President and Chief Financial Officer, Clean Power Inc., Administrator of the Fund, (416) 777-2800 ext. 259, info(at)cleanpowerincomefund.com, Website: www.cleanpowerincomefund.com/
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