MORGANTOWN ENERGY ASSOCIATES (A Partnership)

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MORGANTOWN ENERGY ASSOCIATES (A Partnership)
MORGANTOWN ENERGY ASSOCIATES
(A Partnership)
Financial Statements for the Years Ended
December 31, 2011 and 2010
and Independent Auditors’ Report
MORGANTOWN ENERGY ASSOCIATES
Table of Contents
Page No.
Independent Auditors’ Report ……………………………………………………………………………..
1
Statements of Income for the years ended December 31, 2011 and 2010 ……………………………..….
2
Balance Sheets at December 31, 2011 and 2010 …………………………………………………………..
3
Statements of Partners’ Capital for the years ended December 31, 2011 and 2010 …..………………….
4
Statements of Cash Flows for the years ended December 31, 2011 and 2010 …………………………….
5
Notes to Financial Statements ……………………………………………………………………………..
6
INDEPENDENT AUDITORS' REPORT
To the Partners of Morgantown Energy Associates
Morgantown, West Virginia
We have audited the accompanying balance sheets of Morgantown Energy Associates (the “Partnership”)
at December 31, 2011 and 2010, and the related statements of income, partners’ capital, and cash flows
for the years then ended. These financial statements are the responsibility of the Partnership’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Partnership's internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of
the Partnership at December 31, 2011 and 2010, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in the United States of
America.
March 30, 2012
MORGANTOWN ENERGY ASSOCIATES
STATEMENTS OF INCOME
Year Ended December 31,
2010
2011
(thousands)
Operating Revenues
Capacity
Energy
Steam
Total Operating Revenues
Operating Expenses
Solid fuel and limestone
Operations and maintenance
External
Affiliated
Depreciation
Other taxes
Other
Total operating expenses
Income from operations
$16,116
13,220
8,635
37,971
$15,309
12,252
8,332
35,893
11,988
10,685
11,408
3
2,794
1,188
2,213
29,594
9,625
4,180
2,785
1,248
1,203
29,726
8,377
6,167
27
42
4,990
3,683
$ 3,414
$ 2,526
Interest income
Interest expense and related charges
Net income
The accompanying notes are an integral part of the Financial Statements.
2
MORGANTOWN ENERGY ASSOCIATES
BALANCE SHEETS
December 31,
2011
(thousands)
December 31,
2010
ASSETS
Current Assets
Restricted cash and investments
Accounts receivable and interest receivable
Inventory – fuel
Spare parts
Prepaid and other current assets
Total current assets
$ 18,978
4,566
139
207
370
24,260
$ 25,618
3,119
144
330
313
29,524
Property, Plant and Equipment
Property, plant and equipment
Accumulated depreciation
Property, plant and equipment, net
173,413
(70,570)
102,843
173,384
(67,776)
105,608
436
4,699
5,135
1,425
1,425
$ 132,238
$ 136,557
$ 2,667
59,040
477
62,184
$ 2,275
1,025
14
66,555
48
69,917
70,054
66,640
$ 132,238
$ 136,557
Other Noncurrent Assets and Deferred Charges
Other noncurrent assets
Deferred charges, net
Other noncurrent assets and deferred charges
Total assets
LIABILITIES & PARTNERS' CAPITAL
Current Liabilities
Accounts payable
Payables to affiliated companies
Payables to affiliated companies - subordinated
Project financing debt
Other current liabilities
Total current liabilities
Partners' capital - unrestricted
Total liabilities and partners' capital
The accompanying notes are an integral part of the Financial Statements.
3
MORGANTOWN ENERGY ASSOCIATES
STATEMENTS OF PARTNERS’ CAPITAL
RCM
Morgantown
Power Ltd.
Dominion
Cogen WV,
Inc.
Hickory
Power
LLC
Total
(thousands)
Balance at January 1, 2010
Net income
Balance at December 31, 2010
Net income
Transfer of Partnership Interest
Balance at December 31, 2011
$33,648
$20,370
$10,096
$64,114
1,263
34,911
884
21,254
379
10,475
2,526
66,640
456
(35,367)
$
-
1,195
$ 22,449
1,763
35,367
$ 47,605
3,414
$ 70,054
The accompanying notes are an integral part of the Financial Statements.
4
MORGANTOWN ENERGY ASSOCIATES
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2010
2011
(thousands)
Operating Activities
Net income
Adjustments to reconcile net income to cash
from operating activities:
Depreciation
Amortization of deferred financing costs
Changes in:
Accounts receivable and interest receivable
Inventory and spare parts
Prepaid and other assets
Accounts payable
Accrued interest
Other liabilities
Net cash provided by operating activities
$ 3,414
$ 2,526
2,794
1,663
2,785
1,542
(1,447)
128
(493)
(685)
450
(21)
5,803
1,224
(39)
(188)
(670)
(2)
(449)
6,729
(30)
6,640
6,610
(36)
2,208
2,172
(7,515)
(59,040)
59,040
(4,898)
(12,413)
(6,975)
(1,926)
(8,901)
-
-
Investing Activities
Property additions
Restricted cash and investments, net
Net cash provided by investing activities
Financing Activities
Sinking fund redemption 1989 Series A bonds
Refunding of 1989 Series A WVPEA bonds
Issuance of 2011 Series WVEDA bonds
Deferred financing costs
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
$
Supplemental Cash Flow Information
Cash paid during the year for interest and related charges
Significant noncash financing activity:
Accounts payable related to deferred financing costs
The accompanying notes are an integral part of the Financial Statements.
5
$
$ 2,900
$ 2,559
$
$
38
-
MORGANTOWN ENERGY ASSOCIATES
Notes to the Financial Statements
Note 1. Nature of Operations
Morgantown Energy Associates (MEA), a West Virginia general partnership among Dominion Cogen WV, Inc.
(Dominion), RCM Morgantown Power, Ltd. (RCM), and Hickory Power LLC (Hickory), was formed October 3,
1988. As of January 1, 2011, Dominion, RCM and Hickory had ownership interests in MEA of 50%, 35%, and
15%, respectively. On January 31, 2011, Dominion sold its 50% ownership interest in MEA to Hickory resulting in
Hickory having a post transaction ownership interest of 65% and RCM having an ownership interest of 35%. All
profits and losses are shared among the partners in accordance with their respective ownership interests. MEA is
managed by a Management Committee. Each partner, through their representative, is entitled to vote in proportion
to their ownership interest in MEA. All decisions require at least a majority vote of the Management Committee.
MEA owns and operates a cogeneration facility (the Facility), located in Morgantown, West Virginia. The Facility
is a certified qualifying cogeneration facility under Federal Energy Regulatory Commission (FERC) regulations. A
cogeneration facility is a generating facility that sequentially produces electricity and another form of useful thermal
energy that is more efficient than the separate production of both forms of energy. The Facility has a gross capacity
of approximately 69 megawatts (MW) and is designed to generate sufficient energy to accommodate the
simultaneous contracted electrical requirements of Monongahela Power Company (Monongahela) and steam
requirements of West Virginia University (WVU) and West Virginia University Hospitals, Inc. (Hospital).
The 35-year Electric Energy Purchase Agreement (the Electric Contract) between Monongahela and MEA expires
April 17, 2027 and provides that MEA supply Monongahela with up to 50 MW of firm capacity. Payment from
Monongahela is comprised of a fixed capacity component for energy delivered up to 50 MW and an energy
component for all energy delivered based on the avoided cost of the buyer on a monthly basis at four of the buyer's
generating stations.
The Steam Purchase Agreement (the Steam Contract) between MEA and the WVU Board of Regents expires April
16, 2027 and requires that the Facility will meet WVU's and the Hospital's combined average steam demand of
approximately 94,000 pounds per hour, and a peak steam requirement of 225,000 pounds per hour. The 35-year
steam contract has a fixed base rate which is adjusted quarterly, based on a weighted set of indices, and once every
fifth year, based upon a review of certain costs. WVU has entered into a separate agreement with the Hospital under
which WVU sells to the Hospital a portion of the steam provided pursuant to the Steam Contract.
The Facility's primary fuel is a blend of at least 65% bituminous coal waste and not more than 35% bituminous coal.
Limestone is used to reduce sulfur dioxide emissions.
Coal is obtained from Hunter Ridge Coal Company (Hunter Ridge) pursuant to the Coal Sales Agreement (the Coal
Agreement). The expiration of the initial 15-year term of the Coal Agreement occurred in 2007. An amendment to
the Coal Agreement, dated April 17, 2007, extended the expiration an additional five years until April 17, 2012.
The coal waste is obtained pursuant to the Waste Services Agreement with Hunter Ridge. Ash is removed pursuant
to the Solid Waste Disposal Agreement with Hunter Ridge. Both the Waste Services Agreement and the Solid
Waste Disposal Agreement commenced in 1992 and have 25-year terms. The fuel contracts do not contain any
minimum purchase requirements.
Limestone is obtained pursuant to the Limestone Sales Agreement with Greer Steel. The Limestone Sales
Agreement that commenced in 1992 has a 25-year term. Purchases under the Limestone Sales Agreement were $1.9
million and $1.6 million for the years ended December 31, 2011 and 2010, respectively.
Dominion Energy Services Company, Inc. (DESCO), an affiliate of Dominion, operated and maintained the Facility
pursuant to the Operation and Maintenance Agreement (the O&M Agreement) through September 5, 2010. On
September 6, 2010 the operating and maintenance of the facility was assumed by NAES Corporation under the
Contract for Operation and Maintenance Services (O&M Services Agreement). The expiration of the NAES O&M
Services Agreement is 5 years. The management responsibilities for the facility were also assumed by Power Plant
Management Services, LLC (PPMS) effective September 6, 2010 under the Contract for Project Management and
Administrative Services. The initial term of the PPMS agreement is also 5 years.
MEA conducts annual planned maintenance outages. Major outages are also performed periodically based on
equipment manufacturers’ recommendations and operating history. The year 2010 was a major outage year in
which extensive inspection, evaluation, and maintenance of the boilers and the generating equipment were planned
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MORGANTOWN ENERGY ASSOCIATES
Notes to the Financial Statements
and executed. Although subject to change, the next major outage is currently planned for 2017 with subsequent
major outages every seven years.
Note 2. Summary of Significant Accounting Policies
General
Management makes certain estimates and assumptions in preparing MEA’s Financial Statements in accordance with
accounting principles generally accepted in the United States of America. These estimates and assumptions affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses for the periods presented. Actual results could differ
from those estimates. Subsequent events have been evaluated through March 30, 2012, the date the financial
statements were issued.
Revenue Recognition
Steam sales revenue is recognized based upon steam delivered pursuant to the Steam Contract. Electric sales
revenue is recognized in accordance with accounting guidance for revenue recognition of long-term power sales
contracts, and is based on monthly invoices provided to MEA by Monongahela that calculate electrical revenues
based upon electricity delivered. The electric sales revenue includes a capacity and an energy component. The
capacity component is determined at a rate of 4.0 cents per kilowatt hour. The energy component is determined by
Monongahela’s avoided costs for the billing period. These avoided costs are estimated based upon information
available on the billing date and may be corrected or adjusted in subsequent months.
Income Taxes
Income or loss of MEA is includable in the tax returns of the partners. Accordingly, no provision for income taxes
has been made in the accompanying financial statements.
Restricted Cash and Investments
MEA does not report any cash or cash equivalents on its Statements of Cash Flows. All of MEA’s funds are
considered restricted cash and investments by the terms of MEA’s debt agreements and include highly liquid shortterm instruments, predominately commercial paper and money market funds, purchased with a maturity of three
months or less.
Inventory and Spare Parts
Spare parts are valued at the weighted-average cost method. Fuel inventory is valued using the lower of the first-in,
first-out method or market.
Property, Plant and Equipment
Property, plant and equipment, including additions and replacements, are recorded at original cost, consisting of
labor, materials, other direct costs and capitalized interest. The cost of repairs and maintenance, including minor
additions and replacements are charged to expense in the period incurred. Substantially all of the MEA’s assets are
pledged as collateral for the debt.
Depreciation on the Facility, as originally placed in service, is computed using the straight-line method over a 55year estimated useful life. Depreciation on new equipment and betterments is computed using the straight-line
method over estimated useful lives ranging from 5 years to the remaining estimated useful life of the Facility.
MEA performs an evaluation for impairment whenever events or changes in circumstances indicate that the carrying
amount of long-lived assets may not be recoverable. A long-lived asset is written down to fair value if the sum of its
expected future undiscounted cash flows is less than its carrying account. There were no impairment charges for the
years ended December 31, 2011 and 2010.
There were no capitalized interest costs in 2011 or 2010.
Deferred Charges
Deferred charges include costs associated with obtaining two letter of credit (LC) extensions, a replacement LC, and
a refunding of the debt to extend the maturity. On August 1, 2008, the expiration of an irrevocable LC provided for
under the Reimbursement and Loan Agreement (the RLA) was extended from September 28, 2008 to September 28,
2010. See Note 8 for additional information on the RLA. The costs of obtaining the extension were deferred and
7
MORGANTOWN ENERGY ASSOCIATES
Notes to the Financial Statements
amortized over the 2-year extension period. On August 18, 2010, the expiration of an irrevocable LC was again
extended from September 28, 2010 to September 28, 2011. The costs of obtaining the extension were deferred and
amortized over the 1-year extension period. On September 29, 2011, the West Virginia Public Energy Authority
Bonds (WVPEA) bonds were refunded and reissued as West Virginia Economic Development Bonds (WVEDA)
Series 2011, extending the maturity on the bonds from 2017 to 2027. In addition, a new LC was obtained under the
Amended and Restated Reimbursement Agreement (RA), dated September 15, 2011. The new LC term is 5 years
with an expiration of September 29, 2016. The cost of refunding the bonds is being deferred and amortized over the
15.5-year term of the bonds and the cost of obtaining the new LC is being deferred and amortized over the 5-year
term of the LC.
The balance of deferred charges at December 31, 2011 and 2010, included $4.9 million and $1.9 million of charges
and $0.2 million and $0.5 million of accumulated amortization, respectively. Amortization costs are recorded in
interest expense and related charges.
Note 3. Newly Adopted and Recently Issued Accounting Standards
Fair Value Measurements
In January 2010, the FASB issued new guidance which requires additional disclosures for recurring and
nonrecurring fair value measurement and clarifies certain existing disclosure requirements. These additional
disclosures include: amounts and reasons for significant transfers between Level 1 and Level 2 of the fair value
hierarchy; reasons for significant transfers in and out of Level 3 of the fair value hierarchy; and information about
purchases, sales, issuances and settlements on a gross basis in the reconciliation of recurring Level 3 measurements.
The clarification of existing fair value disclosure requirements includes the requirement for entities to disclose
information about both the inputs and valuation techniques used in estimated Level 2 and Level 3 fair value
measurements and to provide disclosures for fair value measurements for each class of assets and liabilities. The
requirements of this guidance were effective for periods beginning after December 15, 2010. The new guidance did
not have a material impact on the financial statements.
Note 4. Restricted Cash and Investments
Restricted cash and investments represent $19.0 million and $25.6 million at December 31, 2011 and 2010,
respectively, restricted by Union Bank (UB), Bank of New York and Monongahela. The use of restricted cash and
cash equivalents is subject to the requirements and restrictions of UB per the RLA and RA. Restricted funds may
only be disbursed with the approval of UB.
Restricted cash and investments, includes a "Reserve Fund" established by MEA with UB upon completion of the
Facility as required by the Electric Contract between MEA and Monongahela. The initial deposit was $4.0 million
and the minimum reserve fund requirement is adjusted annually as required by the Electric Contract. The balance in
the Reserve Fund was $7.0 million at both December 31, 2011 and 2010, respectively.
Restricted cash and investments at December 31, 2011, also includes a "WVU Litigation Reserve Fund" account
established during 2011 by MEA with UB as required under the RA. The initial WVU Litigation Reserve Fund
requirement of $10.2 million was satisfied with cash of $6.5 million and irrevocable letters of credit of $3.7 million
provided by Hickory. The balance in the WVU Litigation Reserve Fund account was $6.5 million at December 31,
2011.
Restricted cash and investments at December 31, 2010, also included a $2.0 million debt service reserve account
with UB. The debt service reserve fund was established upon completion of the Facility for the benefit of the banks.
The initial reserve requirement of $2.0 million was satisfied with irrevocable letters of credit established by each
individual partner in proportion to their ownership interest (see Note 8). Thereafter, MEA funded the remaining $2.0
million reserve requirement from operating revenues in accordance with the RLA until the reserve requirement was
fully funded at $4.0 million. The debt service reserve fund was no longer required when the RA replaced the RLA
in September 2011.
The remaining $5.5 million and $16.6 million of restricted cash and investments at December 31, 2011 and 2010,
respectively, is restricted by the funds flow requirements of the RA and RLA and restrictions on partner cash
distributions. See Note 8 for discussion on partner distribution restrictions.
8
MORGANTOWN ENERGY ASSOCIATES
Notes to the Financial Statements
Note 5. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an
orderly transaction between market participants at the measurement date in the principal or most advantageous
market. MEA utilizes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure the
fair value based upon observability. Fair value measurements are categorized based upon the lowest level of input
that is significant to the fair value measurement. Level 1 inputs include quoted market prices in an active market for
identical assets or liabilities. Level 2 inputs are market data, other than Level 1, that are observable either directly or
indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an
inactive market, and other information that can be corroborated by market data. Level 3 inputs are unobservable and
corroborated by little or no market data.
MEA applies fair value measurements to certain assets and liabilities including restricted cash and investments.
MEA maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair
value. Fair value is based on actively-quoted market prices, if available. In the absence of actively-quoted market
prices, MEA seeks price information from external sources, including broker quotes and industry publications.
The following table provides information on those assets and liabilities measured at fair value on a recurring basis
for each hierarchy level:
Level 1
Level 2
Level 3
Total
(thousands)
At December 31, 2011
Assets:
Commercial paper
$18,853
$18,853
Cash equivalents and other
51
51
Interest Rate Cap
436
436
Total assets (1)
$19,340
$19,340
At December 31, 2010
Assets:
Commercial paper
Cash equivalents and other
Interest Rate Cap
Total assets (1)
-
$25,048
239
$25,287
-
$25,048
239
$25,287
(1) Restricted cash and investments at December 31, 2011 and 2010, includes cash of $0.1 million and $0.3 million, respectively.
MEA used price quotes from the counterparty for the interest rate caps and quoted interest rates as a basis for
measuring the estimated fair value of the interest rate cap obligations. See Note 6 for additional information on the
interest rate cap agreements.
Fair Value of Financial Instruments
At December 31, 2011 and 2010, the carrying amounts of accounts receivable and interest receivable, and accounts
payable are representative of fair value because of the short-term nature of these instruments. At December 31,
2011 and 2010, the carrying amount of the project financing debt is also considered representative of fair value due
to its ongoing remarketing in a variable rate mode (weekly following the RA or for terms not to exceed 180 days
prior to the RA). See Note 8 for additional information on the debt.
Note 6. Derivatives
MEA has entered into various interest rate cap agreements over time to limit its variable rate exposure related to the
underlying debt. These cap agreements include the following:
Date
(thousands)
05/27/09
06/10/10
06/30/11
07/28/11
08/25/11
Notional
Period
Cost
$73,500
$66,600
$59,040
$59,040
$59,040
07/01/09 - 07/01/10
07/01/10 - 07/01/11
07/01/11 - 08/01/11
08/01/11 - 09/01/11
09/01/11 - 11/01/11
9
$28
$31
$6
$8
$12
MORGANTOWN ENERGY ASSOCIATES
Notes to the Financial Statements
10/06/11
10/06/11
$22,140
$22,140
11/01/11 - 10/01/24
11/01/11 - 10/01/24
$255
$256
Under accounting guidance for derivatives, the interest rate cap does not qualify for hedge accounting, and as a
result, is marked to fair value through earnings. Changes in the fair value of the interest rate cap agreement are
recorded as a gain or loss in interest expense and related charges in the Statements of Income in the period in which
the change occurs and cash flows from derivative instruments are presented in net cash flow from operating
activities on the Statements of Cash Flows. The fair value of the interest rate cap agreements was $0.4 million and
zero at December 31, 2011 and 2010, respectively.
Note 7. Property, Plant and Equipment
The components of property, plant and equipment at December 31, 2011 and 2010 were as follows:
At December 31,
(thousands)
Spare parts, long term
Land
Plant and equipment
Total property, plant and equipment
2011
2010
$ 1,380
1,890
170,143
$173,413
$ 1,351
1,890
170,143
$173,384
Note 8. Project Financing Debt
MEA issued various series of Energy Revenue Bonds pursuant to various agreements with the WVPEA, UB, and the
Bank of New York in order to fund construction and secure permanent project financing. On September 29, 2011,
the outstanding WVPEA bonds were refunded and reissued as West Virginia Economic Development Bonds
(WVEDA) Series 2011 Energy Revenue Bonds, extending the maturity on the bonds from 2017 to 2027. The cost
of refunding the bonds of $1.3 million is being deferred and amortized over the 15.5-year remaining term of the
bonds. MEA is liable for repayment of principal and interest under these loans, to the limited extent of the assets of
MEA. These financing agreements contain customary covenants and default provisions. As of December 31, 2011,
there were no events of default under these covenants.
Under the terms of the RLA and RA between UB and MEA, the Energy Revenue Bonds are secured by bank-issued
Irrevocable LCs. At December 31, 2011 and 2010, these LCs totaled $64.6 million and $70.4 million, respectively.
LC fees are charged to interest expense as incurred. On August 1, 2008, the expiration of the existing LC was
extended from September 28, 2008 to September 28, 2010. The costs of obtaining the extension of $2.8 million
were deferred and amortized over the 2-year extension period. On August 10, 2010, the expiration of the existing
LC was extended from September 28, 2010 to September 28, 2011. The costs of obtaining the extension of $1.9
million were deferred and amortized over the 1-year extension period. On September 15, 2011, a new LC was
obtained under the RA with a 5 year term and expiration of September 29, 2016. The costs of obtaining the new LC
of $3.6 million are being amortized over the 5-year new LC term.
The RA requires a Debt Service Reserve (DSR) account be established at closing for the benefit of the lenders and a
total DSR LC commitment be provided by the lender in the amount of $3.9 million. The amount of the DSR LC is
considered a deposit in the DSR account for purposes of the RA. Amounts from the DSR are available to be drawn
upon by the Agent Bank in the event other available funds are insufficient to meet debt service requirements.
The RLA required a debt service reserve fund of the Facility for the benefit of the banks, until all loans under the
RLA are repaid. The initial reserve requirement of $2.0 million was satisfied with irrevocable letters of credit
established by each individual partner in proportion to their ownership interest. Thereafter, MEA funded the
remaining $2.0 million reserve requirement from operating revenues in accordance with the RLA until the reserve
requirement was fully funded at $4.0 million. The debt service reserve fund was no longer required when the RA
replaced the RLA in September 2011.
Amortization expense was $1.7 million and $1.5 million for the years ended December 31, 2011 and 2010,
respectively. The remaining expected amortization is $4.7 million over years 2012 to 2027.
Under the RA, MEA is prohibited from making cash distributions to partners unless certain conditions are met
including but not limited to: 1) achieving of a Debt Service Coverage Ratio (DSCR) of 1.20, 2) all Major Project
10
MORGANTOWN ENERGY ASSOCIATES
Notes to the Financial Statements
Document expirations must be beyond certain specified time frames, 3) the Coal Sales Agreement expiration must
be on or after April 17, 2017, 4) the WVU Litigation Reserve Fund must be fully funded, and 5) the Environmental
Reserve Requirement must be funded as well. The RA Environmental Reserve Requirement requires additional
deposits be made to the Reserve Fund required by the Electric Contract if the Utility Maximum Achievable Control
Technology (MACT) and Boiler MACT rules have been finalized and compliance is required within 24 months and
estimates of achieving compliance exceeds the amount then on deposit in the Reserve Fund prior to any partner
distributions. The Energy Revenue Bonds are subject to mandatory redemption on the fifth business day preceding
the date of termination of the LC securing the bonds, unless a substitute letter of credit or an alternate credit facility
has been provided.
On July 1, 1994, the 1989 Series A bonds were subject to mandatory tender for remarketing purposes and
conversion to a fixed or flexible interest rate mode. At that time, the 1989 Series A bonds were issued in a variable
rate mode and subsequently were remarketed in minimum denominations of not less than $100,000 for periods not
to exceed 180 days. Effective with the September 29, 2011 refunding, the WVEDA 2011 Series bonds were placed
in a weekly interest rate mode. The actual weighted average interest rates incurred for 2011 and 2010 were 2.13%
and 0.47%, respectively. In the event of a remarketing failure the Irrevocable LCs are drawn upon to pay existing
bond holders and an LC Loan Borrowing (the LC Loan) is issued in accordance with the RLA and/or RA to repay
the LC draw. The LC Loan must be repaid upon the earlier of a successful remarketing or 90 days.
The bonds are classified as a current liability on the Balance Sheets due to the uncertainty of MEA’s ability to
refinance the obligation on a long-term basis should a remarketing failure occur. In the event of an issuance of an
LC Loan, management would endeavor to arrange replacement financing within the 90-day period, but cannot
assure that such replacement financing would be obtained, or that the terms and conditions of replacement financing
would be comparable to the terms and conditions of the existing debt.
Mandatory sinking fund redemptions associated with the 1989 Series A Bonds, totaling $80.0 million, were required
annually on July 1, for the years 2009 through 2017. Through July 1, 2011 mandatory sinking fund redemptions of
$21.0 million had been made. Following the September 29, 2011 refunding, mandatory sinking fund redemptions
associated with the 2011 Series Bonds, totaling $59.0 million, are required semi-annually on April 1 and October 1,
for the years April 2012 through April 2027. Sinking fund redemptions of $.1 million, $3.7 million, $2.9 million,
$3.4 million, and $3.6 million are due for the years 2012 through 2016, respectively, with the remaining balance due
thereafter.
Project financing debt is comprised of the following:
At December 31,
(thousands)
Energy Revenue Bonds, 1989 Series A, variable interest rate, due 2009-2017
Energy Revenue Bonds, 2011 Series, variable interest rate, due 2012-2027
Less: Amounts due within one year
Less: Amounts subject to short term LC loans, if unable to remarket
Long-term project financing debt
2011
2010
-
$66,555
$59,040
-
(50)
(7,515)
(58,990)
$
-
(59,040)
$ -
Note 9. Commitments and Contingencies
Environmental Matters
MEA is subject to costs resulting from a number of federal, state and local laws and regulations designed to protect
human health and the environment. These laws and regulations affect future planning and existing operations. They
can result in increased capital, operating and other costs as a result of compliance, remediation, containment and
monitoring obligations.
The final Mercury and Air Toxics (MATS) regulation, originally proposed as the Utility Maximum Achievable
Control Technology (MACT) regulation, was published in February 2012 and will regulate mercury,
metals/particulate, and hydrogen chloride (HCl)/SO2 emissions from the waste coal boilers. MEA will likely be
required to install additional controls by 2015 to meet the HCl/SO2 standards and has budgeted accordingly for this
requirement.
11
MORGANTOWN ENERGY ASSOCIATES
Notes to the Financial Statements
Implementation of the Cross-State Air Pollution Rule, a replacement to the Clean Air Interstate Rule (CAIR), has
been delayed due to legal proceedings. While CSAPR was anticipated to result in higher market allowance pricing
for NOx and SO2, the result of the court rulings could alter the rule and, therefore, MEA is unable to predict the
impact on the Partnership’s operations, cash flows or financial position.
The EPA proposed regulations on March 28, 2011 that govern existing utilities that employ a cooling water intake
structure and that have flows exceeding a minimum threshold. As proposed, the rule would require a velocity limit
at the water intake screen of 0.5 feet per second. MEA has already demonstrated compliance with this limit through
a site-specific flow study. MEA will evaluate the final rule upon its release to ensure that the limits are adopted as
proposed.
The EPA has proposed regulations for management of coal combustion byproducts at power plants under the
Resource Conservation and Recovery Act. The regulations address ash impoundments, ash landfills, and ash
handling practices, providing options for regulation of ash as hazardous or non-hazardous. Depending on the final
rules adopted, significant expenditures could be required at facilities that generate coal combustion byproducts. Due
to the uncertain nature of the final content and timing of these regulations, MEA is unable to estimate a reasonable
range of impact on the Partnership’s operations, cash flows or financial position.
While federal legislative greenhouse gas (GHG) cap-and-trade programs are not currently under consideration, the
EPA has begun regulating GHGs under the New Source Review and Title V programs and is developing a New
Source Performance Standards for the electricity industry that could potentially apply to existing facilities. Given
the highly uncertain outcome and timing of future action by the U.S. federal government and states, MEA is unable
to estimate a reasonable range of impact of future GHG emission reduction programs on the Partnership’s
operations, cash flow or financial position.
Purchase Commitments
The Limestone Sales Agreement has an annual minimum purchase requirement of 60,000 tons per year. The
minimum limestone purchases required, based on the base price effective as of December 31, 2011, are $1.2 million
annually for the years 2012 to 2018. The base price is adjusted annually based upon changes in four reference
indices specified in the Limestone Sales Agreement. Limestone tons purchased for the years ended December 31,
2011 and 2010 were 94,295 and 84,473, respectively.
Contingent Liabilities
WVU has disputed the manner in which certain price adjustments were calculated and implemented under the Steam
Purchase Agreement between MEA and WVU. MEA disagrees with WVU’s contentions and has so advised WVU.
On May 28, 2010 WVU filed a complaint in the Circuit Court of Monongalia County, West Virginia naming MEA
as the defendant. Although the complaint does not specify a specific amount, it alleges that MEA improperly
charged inflated steam prices and seeks recovery of the alleged overcharges. MEA believes WVU’s claims are
without merit and intends to vigorously defend its position. Since the complaint was filed, various legal proceedings
have occurred as well as discovery requests and responses, depositions, and court ordered mediation. These
proceedings are expected to continue through 2012 until the matter is heard at trial which is currently scheduled for
June 2012. MEA does not believe it is probable that a loss has been incurred and has not recorded any liability as of
December 31, 2011. MEA estimates a possible range of loss including potential interest at December 31, 2011 of $0
to $16.8 million.
As discussed in Note 4, a "WVU Litigation Reserve Fund" has been established to minimize lender risk associated
with the WVU Litigation. The initial reserve requirement was $10.2 million and increases by cash from Operations
until a total Reserve Requirement of $17.7 is met. The Reserve Requirement is reduced if all or a portion of the
litigation is definitively resolved.
Note 10. Credit Risk
Credit risk is the risk of financial loss if counterparties fail to perform their contractual obligations. MEA sells all of
its electric generating capacity to one customer, Monongahela, and all of its steam production to one customer,
WVU. If either customer does not fulfill its obligations, terminates its agreements with MEA, or experiences severe
credit deterioration and if MEA cannot make adequate alternate arrangements, its revenues could decrease
12
MORGANTOWN ENERGY ASSOCIATES
Notes to the Financial Statements
materially. At March 30, 2012, the ratings for Monongahela and WVU by Standard & Poor’s Rating Services and
Moody’s Investor Service are considered investment grade.
Note 11. Related Party Transactions
Prior to Dominion’s January 2011 sale of its partnership interest, MEA incurred certain costs with companies
affiliated with Dominion. There were no significant amounts incurred during 2011 nor any amounts included in
accounts payable as of December 31, 2011. The 2010 amounts incurred and payable as of December 31, 2010 are
listed below.
Included in A/P
Affiliated Party
Agreement / Description
Incurred in 2010
at 12/31/10
(thousands)
DESCO
O&M Agreement
$3,300
$1,000
Dominion Energy
Emissions Allowances Master Purchase and
$100
$0
Marketing Inc.
Sales Agreement
Hope Gas, Inc.
Limited Term Transportation Agreement
$700
$0
Dominion
Insurance Allocations
$400
$100
Effective September 6, 2010, PPMS assumed management responsibilities for the facility (see Note 1). PPMS has
an exclusive contractual arrangement with Energy Investors Funds, an affiliate of Hickory. During 2011 and 2010,
MEA incurred other operating costs related to PPMS of $0.6 million and $0.3 million, respectively, under the
Contract for Project Management and Administrative Services. At December 31, 2011 and 2010, $0.1 million and
$0.0 million, respectively, are included in accounts payable related to these costs.
Prior to the September 2011 refinancing, the initial debt service reserve requirement under the RLA of $2.0 million
was satisfied with irrevocable LCs established by each individual partner in proportion to their ownership interest.
Under the Accommodation Agreement between MEA and UB, an interest risk LC was represented by irrevocable
LCs totaling $2.0 million by Dominion (76.9%) and Hickory (23.1%). Under the Rate Hedging Agreement, dated
July 1, 1994 between MEA and UB, and in conjunction with the remarketing of the 1989 Series A Bonds, a basis
risk LC was required for the benefit of the banks. The basis risk represents the risk associated with an imperfect
hedging relationship provided for under the Rate Hedging Agreement. The basis risk LC amount as of December
31, 2010 was $6.5 million. The partners bear the economic risks and costs of the basis risk LC in proportion to their
ownership interests.
Following the refinancing in September 2011, a portion of the WVU Litigation Reserve Requirement under the RA
was satisfied with irrevocable letters of credit of $3.7 million provided by Hickory.
Note 12. Subsequent Event
Under a Letter Agreement dated March 7, 2012, the parties to the Coal Agreement agreed to extend the expiration to
July 31, 2012.
13

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