Item 1. Business
General. NE LP, a Delaware limited partnership, was formed on November 21, 1997 for the purpose of acquiring ownership interests in two partnerships, NEA, a Massachusetts limited partnership, and NJEA, a New Jersey limited partnership, each of which owns an electric power generation station in the northeastern United States. NE LP is jointly owned by ESI GP and ESI LP (indirect wholly-owned subsidiaries of FPL Energy, which is an indirect wholly-owned subsidiary of FPL Group, a company listed on the New York Stock Exchange) and Tractebel GP and Tractebel LP (indirect wholly-owned subsidiaries, through Tractebel and Tractebel Power of Tractebel S.A., a Belgian energy, industrial services and energy services business, and a member of the Suez group). NE LP also formed a wholly-owned entity, NE LLC, to assist in such acquisitions. On January 14, 1998, NE LP and NE LLC acquired all of the interests in the Partnerships from IEC and from certain individuals for approximately $545 million, including approximately $10 million of acquisition costs. The acquisition of the Partnerships was accounted for using the purchase method of accounting and was subject to pushdown accounting, which gave rise to a new basis of accounting by the Partnerships.
The Partnerships were formed in 1986 to develop, construct, own, operate and manage the power generation stations. NEA's facility commenced commercial operation in September 1991 and is located in Bellingham, Massachusetts. NJEA's facility commenced commercial operation in August 1991 and is located in Sayreville, New Jersey.
In connection with the acquisition of the Partnerships' interests, the Funding Corp., a Delaware corporation, was acquired by a subsidiary of ESI Energy, Tractebel Power and Broad Street from IEC. This entity was established in 1994 solely for the purpose of issuing debt. This debt was privately issued under Rule 144A to acquire outstanding bank debt and to lend funds to the Partnerships and was subsequently exchanged for public debt under the Act.
On January 12, 1998, the Acquisition Corp., a Delaware corporation, was formed. The Acquisition Corp.'s common stock is jointly owned by a subsidiary of ESI Energy and a subsidiary of Tractebel Power. On February 12, 1998, the Acquisition Corp. issued $220 million of debt under Rule 144A which was also subsequently exchanged for public debt under the Act. The proceeds were loaned to NE LP and then distributed to direct subsidiaries of FPL Energy and Tractebel Power. Repayment of the debt is expected from distributions from the Partnerships.
None of the Registrants or the Partners have any employees.
Partnerships' Operations. The Partnerships operate in the independent power industry. In the United States, regulated electric utilities have been the dominant producers and suppliers of electric energy since the early 1900s. In 1978, PURPA removed regulatory constraints relating to the production and sale of electric energy by certain non-utility power producers and required electric utilities to buy electricity from certain types of non-utility power producers under certain conditions, thereby encouraging companies other than electric utilities to enter the electric power production market. The Partnerships were created as a result of the PURPA legislation.
Each of the Partnerships owns and derives substantially all of its revenues from a nominal 300 mw combined-cycle cogeneration facility. The facilities were constructed by Westinghouse Power and use natural gas to produce electrical energy and thermal energy in the form of steam. The Partnerships were developed and are operated as qualifying facilities under PURPA and the regulations promulgated thereunder by the FERC. The Partnerships must satisfy certain annual operating and efficiency standards and ownership requirements to maintain qualifying facility status, which exempts the Partnerships from certain federal and state regulations. The Partnerships are, however, not exempt from state regulatory commission general supervisory powers relating to environmental and safety matters.
NEA and NJEA sell substantially all of their output to regulated utilities under power purchase agreements as follows:
				 % of Power Purchase Power Purchaser MW Capacity Agreement Expiration NEA: Boston Edison 135 47% September 15, 2016 Boston Edison 84 29 September 15, 2011 Commonwealth 25 9 September 15, 2016 Commonwealth 21 7 September 15, 2016 Montaup 25 8 September 15, 2021 NEA Total 290 100%
NJEA: JCP&L 250 83% August 13, 2011
The remainder of the net electrical energy produced by the Partnerships is available for sale to the marketplace either directly to third parties or via FPL Energy's power marketing subsidiary. The power purchase agreements provide for substantially continuous delivery of base load power.
Certain of the power purchase agreements require the establishment of energy banks to record cumulative payments made by the utilities in excess of avoided cost rates scheduled or specified in such agreements. Some of the energy bank balances bear interest at various rates specified in the agreements. Upon termination of the agreements, some or all of the remaining amounts recorded in the energy banks will be required to be repaid. Energy bank balances are partially secured by letters of credit.
To meet the FERC regulations for a qualifying facility, both NEA and NJEA sell at least 5% of the thermal energy produced to unrelated third parties. NEA sells steam to a third party which leases a carbon dioxide facility owned by NEA and located on NEA's property.
Approximately 80% of the natural gas that fuels the Partnerships' facilities is supplied pursuant to long-term gas supply agreements with ProGas and, in the case of NJEA, also pursuant to a long-term gas supply agreement with PSE&G. Gas is transported to, or stored for later use by, the Partnerships pursuant to long-term gas transportation and storage agreements. The remainder of the daily fuel requirements is satisfied by open-market purchases. Price escalators under the long-term gas agreements are intended to correlate to the price escalators under the power purchase agreements, thereby reducing the risk associated with increases in the price of natural gas. ESI Northeast Fuel, an indirect wholly-owned subsidiary of FPL Energy, is the fuel manager for the Partnerships and provides fuel management and administrative services by contracting with FPL Energy's power marketing subsidiary. This subsidiary buys and sells wholesale energy commodities, such as natural gas, oil and electric power.
O&M of the Partnerships was provided by Westinghouse, a subsidiary of Westinghouse Power, through December 31, 1998. Effective December 31, 1998, the O&M contracts between Westinghouse Power and the Partnerships were terminated by mutual consent of both parties and a payment of $10 million was made to Westinghouse. The Partnerships recorded a net gain of $4.2 million, the effect of which is reflected in the statement of operations for the period ended December 31, 1998. Additionally, the Partnerships agreed to pay Westinghouse a total of $15.6 million, which approximates market value, for spare parts purchased in 1999. FPLE Operating Services, a wholly-owned indirect subsidiary of FPL Energy, became the new provider of O&M services for the Partnerships on January 1, 1999. See Management's Discussion - Results of Operations.
Seasonality. The performance of the Partnerships is dependent on ambient conditions (principally air temperature), which affect the efficiency and capacity of the combined-cycle facilities. Payments due to NJEA under the JCP&L power purchase agreement during the winter and summer seasons are substantially higher than those in spring and fall. Otherwise, the business of the Partnerships is not materially subject to seasonal factors.
Competition. Recent regulatory change has created additional competition in the form of wholesale power marketers that engage in purchase and resale transactions between power producers and power distributors. Although substantially all of the Partnerships' output is committed under the power purchase agreements described above, these factors may adversely affect energy prices under certain power purchase agreements that are tied to the wholesale electric market prices. NE LP and the Partnerships do not expect electric utility industry restructuring to result in any material adverse change to prices under the Partnerships' power purchase agreements. However, the impact of electric utility industry restructuring on the companies that purchase power from the Partnerships is uncertain. Both Massachusetts and New Jersey have enacted legislation designed to deregulate the production and sale of electricity. By allowing customers to choose their electricity supplier, deregulation is expected to result in a shift from cost-based rates to market- based rates for energy production. Similar initiatives are also being pursued on the federal level.
The Partnerships operate in two power pools. NEA operates in NEPOOL and NJEA operates in PJM, each of which has an independent system operator that manages the wholesale electricity market and the transmission of electricity. While legislators and state regulatory commissions will decide what impact, if any, competitive forces will have on retail transactions, the FERC has jurisdiction over potential changes which could affect competition in wholesale transactions. The FERC has approved various filings submitted by NEPOOL and PJM that further electric industry deregulation initiatives.
Item 2.
Item 2. Properties
As of December 31, 2000, the Partnerships had the following properties:
	Facility Type Location Principal Use
NEA cogeneration facility (1) Bellingham, MA Power production NEA carbon dioxide plant (2) Bellingham, MA Carbon dioxide production NEA residential properties (3) Bellingham, MA Private residences NJEA cogeneration facility (2) Sayreville, NJ Power production _______________
(1) Subject to the liens of a first and second mortgage. (2) Subject to the lien of a first mortgage. (3) NEA owns 12 properties, most with single-family dwellings, located on land immediately adjacent to the facility site. These properties are subject to the lien of a mortgage.
Item 3.
Item 3. Legal Proceedings
None of the Registrants are involved in any material legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
				 PART II
Item 5.
Item 5. Market for the Registrants' Common Equity and Related Stockholder Matters
This item is not applicable for the Registrants.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
NE LP for the years ended December 31, 2000 and 1999 - NE LP's results of operations declined in 2000 primarily due to increased fuel costs, partly offset by slightly higher revenues. Revenues in 2000 were comprised of $333.4 million of power sales to utilities and $4.2 million of steam sales. In 1999, revenues were comprised of $331.4 million of power sales to utilities and $4.9 million of steam sales. Power sales to utilities reflect changes in utility energy bank balances of $23.7 million and $22.2 million in 2000 and 1999, respectively. The changes in energy bank balances, which increased reported revenues, are determined in accordance with scheduled or specified rates under certain power purchase agreements.
Fuel expense increased primarily as a result of the increased price of natural gas required to fuel the facilities. These fuel costs were partly offset in 2000 and 1999 by $20.8 million of deferred credit amortization for fuel contracts.
NE LP for the years ended December 31, 1999 and 1998 - NE LP's operations for 1999 reflect a full year of operations versus operations for 1998, which primarily reflect the operation of NE LP subsequent to the acquisitions on January 14, 1998 and the related allocation of the purchase price.
NE LP's results of operations increased in 1999 primarily due to increased revenues, partly offset by higher fuel costs. Revenues increased due to higher power purchase rates paid by utilities, as well as increased generation resulting from less plant outages in 1999. Revenues increased due to higher power purchase rates paid by utilities, as well as increased generation resulting from less plant outages in 1999. Revenues in 1999 were comprised of $331.4 million of power sales to utilities and $4.9 million of steam sales. In 1998, revenues were comprised of $298.2 million of power sales to utilities and $4.5 million of steam sales. Power sales to utilities reflect changes in utility energy bank balances of $22.2 million and $15.6 million in 1999 and 1998, respectively. The changes in energy bank balances, which increased reported revenues, are determined in accordance with scheduled or specified rates under certain power purchase agreements.
Fuel expense increased primarily as a result of the increased price of natural gas required to fuel the facilities. These fuel costs were partly offset in 1999 and 1998 by $20.8 million and $20.1 million, respectively, of deferred credit amortization for fuel contracts.
The Partnerships for the years ended December 31, 2000 and 1999 - The Partnerships' results of operations declined in 2000 primarily due to increased fuel costs, partly offset by slightly higher revenues. Revenues in 2000 were comprised of $333.4 million of power sales to utilities and $4.2 million of steam sales. In 1999, revenues were comprised of $331.4 million of power sales to utilities and $4.9 million of steam sales. Power sales to utilities reflect changes in utility energy bank balances of $23.7 million and $22.2 million in 2000 and 1999, respectively. The changes in energy bank balances, which increased reported revenues, are determined in accordance with scheduled or specified rates under certain power purchase agreements.
Fuel expense increased primarily as a result of the increased price of natural gas required to fuel the facilities. These fuel costs were partly offset in 2000 and 1999 by $20.8 million of deferred credit amortization for fuel contracts.
Both Massachusetts and New Jersey have enacted legislation designed to deregulate the production and sale of electricity. By allowing customers to choose their electricity supplier, deregulation is expected to result in a shift from cost-based rates to market-based rates for energy production. Similar initiatives are also being pursued on the federal level. NE LP and the Partnerships do not expect electric utility industry restructuring to result in any material adverse change to prices under the Partnerships' power purchase agreements. However, the impact of electric utility industry restructuring on the companies that purchase power from the Partnerships is uncertain.
The Partnerships for the years ended December 31, 1999 and 1998 - The Partnerships' operations for 1999 reflect a full year of operations versus operations for 1998, which primarily reflect the operation of the Partnerships subsequent to the acquisitions on January 14, 1998 and the related allocation of the purchase price.
The Partnerships' results of operations increased in 1999 primarily due to increased revenues, partly offset by higher fuel costs. Revenues in 1999 were comprised of $331.4 million of power sales to utilities and $4.9 million of steam sales. In 1998, revenues were comprised of $298.2 million of power sales to utilities and $4.5 million of steam sales. Power sales to utilities reflect changes in utility energy bank balances of $22.2 million and $15.6 million in 1999 and 1998, respectively. The changes in energy bank balances, which increased reported revenues, are determined in accordance with scheduled or specified rates under certain power purchase agreements.
Fuel expense increased primarily as a result of the increased price of natural gas required to fuel the facilities. These fuel costs were partly offset in 1999 and 1998 by $20.8 million and $20.1 million, respectively, of deferred credit amortization for fuel contracts.
The Funding Corp. - During the three years ended December 31, 2000, the Funding Corp. used principal payments and interest income received from the notes receivable from the Partnerships to make scheduled principal and interest payments on its outstanding debt.
The Acquisition Corp. - During the three years ended December 31, 2000, the Acquisition Corp. used interest income received from the notes receivable from NE LP to make scheduled interest payments on its outstanding debt.
New Accounting Rule - Effective January 1, 2001, the Registrants adopted Financial Accounting Standards No. (FAS) 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." For information concerning the adoption of FAS 133/138, see Note 2 to the Consolidated and Combined Financial Statements - Accounting for Derivative Instruments and Hedging Activities.
Liquidity and Capital Resources
The Funding Corp. and the Partnerships - Cash flow generated by the Partnerships during 2000 was sufficient to fund operating expenses as well as fund the debt service requirements of the Funding Corp. During December 2000, $26.3 million principal amount of 8.43% Senior Secured Notes matured and were repaid. Debt maturities of the Funding Corp. will require cash outflows of approximately $315 million in principal and interest through 2005, including $59.5 million in 2001. It is anticipated that cash requirements for principal and interest payments in 2001 will be satisfied with operational cash flow.
The Acquisition Corp. and NE LP - Cash flow generated by NE LP during 2000 was sufficient to fund operating expenses as well as fund the debt service requirements of the Acquisition Corp. and the Funding Corp. Debt maturities of the Acquisition Corp. and the Funding Corp. will require cash outflows of approximately $433.5 million in principal and interest through 2005, including $77.1 million in 2001. It is anticipated that cash requirements for principal and interest payments in 2001 will be satisfied with operational cash flow.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
All financial instruments and positions held by NE LP and the Partnerships described below are held for purposes other than trading.
Interest rate risk - The fair value of NE LP's and the Partnerships' long- term debt is affected by changes in interest rates. The following presents the sensitivity of the fair value of debt to a hypothetical 10% decrease in interest rates:
Commodity price risk - The prices received by the Partnerships for power sales under their long-term contracts do not move precisely in tandem with the prices paid by the Partnerships for natural gas. To mitigate the price risk associated with purchases of natural gas, the Partnerships may, from time to time, enter into certain transactions either through public exchanges or by means of over-the-counter transactions with specific counterparties. The Partnerships mitigate their risk associated with purchases of natural gas through the use of natural gas swap agreements that require the Partnerships to pay a fixed price (absolutely or within a specified range) in return for a variable price on specified notional quantities of natural gas. The following presents the sensitivity of the fair value of gas swap agreements to a hypothetical 40% decrease in natural gas prices:
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
NORTHEAST ENERGY, LP NORTHEAST ENERGY ASSOCIATES, A LIMITED PARTNERSHIP NORTH JERSEY ENERGY ASSOCIATES, A LIMITED PARTNERSHIP:
We have audited the accompanying consolidated financial statements of Northeast Energy, LP (a partnership) and subsidiaries, as of December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, and the combined financial statements of Northeast Energy Associates, A Limited Partnership and North Jersey Energy Associates, A Limited Partnership, two of the subsidiaries of Northeast Energy, LP, as of December 31, 2000 and 1999, and for the years ended December 31, 2000 and 1999, and for the periods from January 1, 1998 to January 13, 1998 and from January 14, 1998 to December 31, 1998, listed in the accompanying index at Item 14(a)1 of this Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended December 31, 2000. These financial statements are the responsibility of the respective Partnerships' managements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and 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 consolidated financial position of Northeast Energy, LP and its subsidiaries, and the combined financial position of Northeast Energy Associates, A Limited Partnership and North Jersey Energy Associates, A Limited Partnership as of December 31, 2000 and 1999 and the results of their operations and their cash flows for the above-stated periods in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP Certified Public Accountants
West Palm Beach, Florida March 29, 2001
	 NORTHEAST ENERGY, LP (A PARTNERSHIP) AND SUBSIDIARIES 			 CONSOLIDATED BALANCE SHEETS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
	 NORTHEAST ENERGY, LP (A PARTNERSHIP) AND SUBSIDIARIES 		 CONSOLIDATED STATEMENTS OF OPERATIONS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
	 NORTHEAST ENERGY, LP (A PARTNERSHIP) AND SUBSIDIARIES 		 CONSOLIDATED STATEMENTS OF CASH FLOWS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
	 NORTHEAST ENERGY, LP (A PARTNERSHIP) AND SUBSIDIARIES 		 CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY 			 (Thousands of Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
	 NORTHEAST ENERGY ASSOCIATES, A LIMITED PARTNERSHIP AND 	 NORTH JERSEY ENERGY ASSOCIATES, A LIMITED PARTNERSHIP 			 COMBINED BALANCE SHEETS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these combined financial statements.
	 NORTHEAST ENERGY ASSOCIATES, A LIMITED PARTNERSHIP AND 	 NORTH JERSEY ENERGY ASSOCIATES, A LIMITED PARTNERSHIP 		 COMBINED STATEMENTS OF OPERATIONS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these combined financial statements.
	 NORTHEAST ENERGY ASSOCIATES, A LIMITED PARTNERSHIP AND 	 NORTH JERSEY ENERGY ASSOCIATES, A LIMITED PARTNERSHIP 		 COMBINED STATEMENTS OF CASH FLOWS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these combined financial statements.
	 NORTHEAST ENERGY ASSOCIATES, A LIMITED PARTNERSHIP AND 	 NORTH JERSEY ENERGY ASSOCIATES, A LIMITED PARTNERSHIP 	 COMBINED STATEMENTS OF PARTNERS' EQUITY(DEFICIENCY) 			 (Thousands of Dollars)
The accompanying notes are an integral part of these combined financial statements.
	 NORTHEAST ENERGY, LP (A PARTNERSHIP) AND SUBSIDIARIES 	 NORTHEAST ENERGY ASSOCIATES, A LIMITED PARTNERSHIP AND 	 NORTH JERSEY ENERGY ASSOCIATES, A LIMITED PARTNERSHIP 	 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 			 Year Ended December 31, 2000 			 Year Ended December 31, 1999 	 Period From January 14, 1998 to December 31, 1998 	 Period From January 1, 1998 to January 13, 1998
1. Nature of Business
Northeast Energy, LP (NE LP), a Delaware limited partnership, was formed on November 21, 1997 for the purpose of acquiring ownership interests in two partnerships, each of which owns an electric power generation station in the northeastern United States (Northeast Energy Associates, A Limited Partnership (NEA) and North Jersey Energy Associates, A Limited Partnership (NJEA), collectively the Partnerships). NE LP is jointly owned by subsidiaries of ESI Energy, LLC (ESI Energy) and Tractebel Power, Inc. (Tractebel Power). ESI Energy is wholly-owned by FPL Energy, LLC (FPL Energy), which is an indirect wholly-owned subsidiary of FPL Group, Inc., a company listed on the New York Stock Exchange. Tractebel Power is a direct wholly-owned subsidiary of Tractebel, Inc., which is a direct wholly-owned subsidiary of Tractebel S.A., a Belgian energy, industrial services and energy services business, and a member of the Suez group. NE LP also formed a wholly-owned subsidiary, Northeast Energy, LLC (NE LLC) to assist in such acquisitions. NE LP had no financial activity prior to January 1, 1998.
On January 14, 1998, NE LP and NE LLC acquired all of the interests in the Partnerships from Intercontinental Energy Corporation (IEC), a Massachusetts corporation. NE LP holds a one percent (1%) general partner and ninety-eight percent (98%) limited partner interest in the Partnerships; NE LLC holds the remaining one percent (1%) limited partner interest. See Note 2 - Acquisitions.
The Partnerships were formed in 1986 to develop, construct, own, operate and manage two separate 300 megawatt (mw) combined-cycle cogeneration facilities. NEA's facility is located in Bellingham, Massachusetts and NJEA's facility is located in Sayreville, New Jersey. NEA commenced commercial operation in September 1991 and NJEA commenced commercial operation in August 1991. The Partnerships operate in the independent power industry and have been granted permission by the Federal Energy Regulatory Commission to operate as qualifying facilities defined in the Public Utility Regulatory Policies Act of 1978, as amended and as defined in federal regulations.
In connection with the acquisitions of the Partnerships' interests, an existing special purpose funding corporation was acquired by an entity related to FPL Energy and Tractebel Power. The funding corporation's name was changed from IEC Funding Corp. to ESI Tractebel Funding Corp (Funding Corp.). Additionally, as a means of funding portions of the purchase price of the acquisitions of the Partnerships, ESI Tractebel Acquisition Corp. (Acquisition Corp.), also an affiliate of FPL Energy and Tractebel Power, was formed. On February 12, 1998, the Acquisition Corp. issued new debt securities which were registered with the Securities and Exchange Commission in an exchange offer. The proceeds were loaned to NE LP and then distributed to direct subsidiaries of FPL Energy and Tractebel Power. Repayment of the new debt is expected from distributions from the Partnerships and is guaranteed by all interests in the Partnerships. See Note 4 for additional information.
The partners share profits and losses and have interests in assets and liabilities and cash flows in proportion to their tax basis capital accounts. Distributions to the partners may be made only after all funding requirements of the Partnerships have been met, as described in the trust indenture relating to the debt issued by the Acquisition Corp.
2. Summary of Significant Accounting Policies
Basis of Presentation - The accompanying consolidated financial statements include the accounts of NE LP and subsidiaries (including the Partnerships subsequent to the acquisitions, as they are indirectly wholly-owned by NE LP). All material intercompany balances and transactions have been eliminated in consolidation. The accompanying combined financial statements include the accounts of NEA and NJEA for all periods and are combined based on common ownership. All material intercompany transactions have been eliminated in the combination. Certain amounts included in prior years' consolidated and combined financial statements have been reclassified to conform to the current year's presentation.
Acquisitions - On January 14, 1998, NE LP and NE LLC acquired all of the interests in the Partnerships for approximately $545 million, including approximately $10 million of acquisition costs (the Acquisitions). The Acquisitions were accounted for using the purchase method of accounting and were subject to pushdown accounting, which gave rise to a new basis of accounting by the Partnerships. The purchase price was allocated to the assets and liabilities acquired based on their relative fair values.
The following is a summary of the Partnerships' assets acquired and liabilities assumed in the Acquisitions (thousands of dollars):
ASSETS: Current assets ........................................ $114,286 Restricted cash ....................................... $ 69,156 Cogeneration facilities and carbon dioxide facility.... $513,523 Power purchase agreements ............................. $888,756 Other assets .......................................... $ 36
LIABILITIES: Current liabilities ................................... $ 48,404 Operations and maintenance (O&M) contracts ............ $ 18,749 Fuel contracts ........................................ $333,544 Energy bank balances .................................. $171,530 Notes payable ......................................... $468,724
Carrying values of current assets, restricted cash and current liabilities were considered to closely approximate fair value and were not adjusted. Power purchase agreements were assigned a value based on the estimated amount to be received over the contract period in excess of an independent appraiser's assessment of market rates for power, discounted to the date of acquisition. The cogeneration facilities and carbon dioxide facility were initially assigned value based on an assessment of current replacement cost for similar capacity, without the acquired power purchase agreements. In accordance with Accounting Principles Board Opinion No. 16, the values assigned to these long-lived assets were reduced by the net excess of the fair values of all assets acquired over the purchase price. O&M and fuel contract obligations were determined based on expected cash flows during contract periods compared to estimated cash flows for similar services if contracted for currently, discounted to the date of acquisition. Notes payable include the previously existing debt of the Partnerships that was considered to approximate market value. Energy bank balances were assigned a value representing the estimated present value of future payments to utilities in connection with certain existing power purchase agreements.
Impairment of Long-Lived Assets - NE LP and the Partnerships evaluate on an ongoing basis the recoverability of its assets and related intangible assets for impairment, based on estimated future cash flows, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable as described in FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Cash and Cash Equivalents - Investments purchased with an original maturity of three months or less are considered cash equivalents. Excess cash is invested in high-grade money market accounts and commercial paper and is subject to minimal credit and market risk. At December 31, 2000 and 1999, the recorded amount of cash approximates its fair value.
Accounts Receivable and Revenue - Accounts receivable primarily consist of receivables from three Massachusetts utilities and one New Jersey utility for electricity delivered and sold under six power purchase agreements. Prices are based on initial floor prices per kilowatt-hour (kwh), subject to adjustment based on actual volumes of electricity purchased, escalation factors and other conditions. Revenue is recognized based on power delivered at rates stipulated in the power purchase agreements, except that revenue is deferred to the extent that stipulated rates are in excess of amounts, either scheduled or specified, in the agreements to the extent the Partnerships have an obligation to repay such excess. The amount deferred is reflected as amounts due utilities for energy bank balances on the balance sheets. Revenue from steam sales is recognized upon delivery.
Cogeneration Facilities, Carbon Dioxide Facility and Other Assets - Effective January 14, 1998, all facilities were revalued as a result of applying the purchase method of accounting mentioned above. The facilities are depreciated using the straight-line method over their estimated useful life which was increased from 20 years to 34 years effective January 14, 1998.
Major Maintenance - Effective January 14, 1998, maintenance expenses are accrued for certain identified major maintenance and repair items related to the Partnerships' facilities. The expenses are accrued ratably over each major maintenance cycle. The amounts accrued relate to maintenance costs required for the equipment to operate over its depreciable life. For the periods ended December 31, 2000, 1999 and 1998, the Partnerships recorded major maintenance expense of $4.8 million, $5.1 million and $2.8 million, respectively. At December 31, 2000 and 1999, the Partnerships had $6.5 million and $3.3 million of accrued major maintenance expense, respectively.
Inventories - Fuel inventories consist of natural gas and fuel oil and are stated at the lower of cost, determined on an average cost basis, or market. Prior to January 14, 1998, inventories were determined on a first-in, first- out (FIFO) basis. The change did not have a significant impact on the financial statements. Spare parts inventories consist primarily of spare parts purchased from the previous O&M provider. Spare parts inventories are stated at lower of cost or market and are determined by specific identification.
Power Purchase Agreements - Effective January 14, 1998, power purchase agreements which were determined to be in excess of prevailing rates for similar agreements were adjusted as a result of applying the purchase method of accounting mentioned above. These amounts are being amortized over the respective agreement periods, ranging from 14 to 24 years, on a straight- line basis or matched to scheduled fixed-price increases under the power purchase agreements, as applicable.
Fuel Contracts - Effective January 14, 1998, fuel contracts which were determined to be in excess of prevailing rates for similar contracts were adjusted as a result of applying the purchase method of accounting mentioned above. The fuel contracts are being amortized on a straight-line basis over the remaining terms of the contracts from that date, 16 years.
O&M Contracts - Effective January 14, 1998, O&M contracts which were determined to be in excess of prevailing rates for similar contracts were adjusted as a result of applying the purchase method of accounting mentioned above. The O&M contracts were initially assigned a value of $18.7 million. For the period ended December 31, 1998, the Partnerships recorded $4.5 million of amortization expense for the O&M contracts. Effective December 31, 1998, the O&M contracts between the previous O&M provider and the Partnerships were terminated by mutual consent of both parties and a payment of $10 million was made to the previous O&M provider. See Note 7 O&M of the Cogeneration Facilities.
Interest Rate Swaps - Interest rate swaps that do not qualify for hedge accounting are recorded at fair value, with changes in the fair value recognized currently in income as adjustments to interest expense. See Note 6.
Natural Gas Hedging Instruments - Periodic settlements on natural gas swap agreements are recognized as adjustments to fuel costs at monthly settlement dates. Purchases of natural gas under forward purchase agreements are accounted for as fuel costs at their contract price at delivery. See Note 6.
Deferred Debt Issuance Costs - Deferred debt issuance costs of NE LP are being amortized over the approximate 14-year term of the Acquisition Corp.'s note payable using the interest method.
Income Taxes - Partnerships are not taxable entities for federal and state income tax purposes. As such, no provision has been made for income taxes since such taxes, if any, are the responsibilities of the individual partners.
Accounting for Derivative Instruments and Hedging Activities - Effective January 1, 2001, the Registrants adopted Statement of Financial Accounting Standards No. (FAS) 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Upon settlement, any gains or losses will be passed through fuel expense.
In January 2001, NE LP and the Partnerships recorded an initial adjustment to record the fair values of instruments not previously reported on the balance sheet resulting in derivative assets of $22.6 million. Hedge accounting has been applied to some of these contracts, resulting in a credit of $4.3 million to other comprehensive income (in partners' equity) for NE LP and the Partnerships. An adjustment to record the cumulative effect on NE LP and the Partnerships' earnings of a change in accounting principle in the amount of a $18.3 million gain was recorded, representing the effect of those derivative instruments for which hedge accounting was not applied.
In December 2000, the Financial Accounting Standards Board's (FASB) Derivatives Implementation Group (DIG) discussed several issues related to the power generation industry, but did not reach conclusions on those issues. In March 2001, the FASB discussed some of these issues, but the conclusions were not final or effective. The ultimate resolution of these issues could result in a requirement to mark certain of NE LP and the Partnerships' power purchase agreements to their fair market values each reporting period. If these agreements are required to be treated as derivative instruments, the new accounting would first be applied in the quarter following final resolution of the issues.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. Cogeneration Facilities, Power Purchase Agreements and Carbon Dioxide Facility
Power Purchase Agreements - In 1986, NEA entered into three power purchase agreements with three Massachusetts utilities, and in 1988, NEA entered into two power purchase agreements with two Massachusetts utilities. Under the five power purchase agreements, NEA agreed to sell approximately 290 mw at initial floor prices per kwh subject to adjustment based on actual volumes purchased, escalation factors and other conditions. Performance under certain of these agreements is secured by a second mortgage on the NEA facility. In 1987, NJEA entered into an agreement with a New Jersey utility to sell 250 mw at an initial fixed price per kwh subject to adjustments, as defined in the agreement. These power purchase agreements have initial terms with expiration dates ranging from 2011 to 2021. The majority of the Partnerships' power sales to utilities are generated through these agreements. As such, the Partnerships are directly affected by changes in the power generation industry. Substantially all of the Partnerships' accounts receivable are with these utilities. The Partnerships do not require collateral or other security to support their receivables. However, management does not believe significant credit risk exists at December 31, 2000.
For the years ended December 31, 2000, 1999 and 1998, power sale revenues from two different utilities accounted for approximately 42% and 42%, 45% and 41%, and 47% and 40%, respectively, of total revenues.
Both Massachusetts and New Jersey have enacted legislation designed to deregulate the production and sale of electricity. While NE LP and the Partnerships do not expect electric utility industry restructuring to result in any material adverse change to the Partnerships' power purchase agreements, the impact of electric utility industry restructuring on the companies that purchase power from the Partnerships is uncertain.
Energy Bank Balances - Certain of the power purchase agreements require the establishment of energy banks to record cumulative payments made by the utilities in excess of avoided cost rates scheduled or specified in such agreements. Some of the energy bank balances bear interest at various rates specified in the agreements. Upon termination of the agreements, some or all of the remaining amounts recorded in the energy banks will be required to be repaid. Energy bank balances are partially secured by letters of credit (see Note 7 - Energy Bank and Loan Collateral).
Steam Sales Agreements and Carbon Dioxide Facility - In order for the Partnerships' facilities to maintain qualifying facility status, the facilities are required to generate five percent of the thermal energy produced for sale to unrelated third parties. In 1990, NEA entered into an amended and restated steam sales agreement with a processor and seller of carbon dioxide. The amended and restated NEA steam sales agreement extends for the same terms as the carbon dioxide facility's lease, with automatic extension for any renewal period under that lease. Pursuant to the steam sales agreement, NEA sells a portion of the steam generated by the NEA facility at a price that fluctuates based on changes in the price of a specified grade of fuel oil. In conjunction with this contract, NEA constructed the carbon dioxide facility and, in 1989, entered into a 16-year agreement to lease the facility to the steam user. Base rent under the lease is $100,000 per month, adjusted by the operating results of the facility as outlined in the lease agreement. Additionally, NEA pays the steam user $100,000 annually for administrative services rendered related to the operation of the carbon dioxide facility.
In 1989, NJEA entered into a 20-year steam sales agreement with a steam user adjacent to the NJEA facility. Under this agreement, NJEA sells a quantity of steam at a floor price that can increase based on changes in prices of coal. This agreement automatically renews for two consecutive five-year terms unless either party gives notice not to renew two years before the expiration of each of the prior terms.
Fuel Supply, Transportation and Storage Agreements - Natural gas is provided to the NEA and NJEA facilities primarily under long-term contracts for supply, transportation and storage. The remaining fuel requirements are provided under short-term spot arrangements. The long-term natural gas supply is provided under contracts with ProGas Limited (ProGas) and Public Service Electric and Gas Company (PSE&G). Various pipeline companies provide transportation of the natural gas. Gas storage agreements provide contractual arrangements for the storage of limited volumes of natural gas with third parties for future delivery to the Partnerships.
The ProGas contracts commenced in 1991, and the initial 15-year terms were subsequently extended an additional seven years. The maximum total volumes of gas to be delivered under the ProGas contracts are approximately 48,800 and 22,000 million of British thermal units (MMBtu) per day for NEA and NJEA, respectively. The contract price, including transportation, of the ProGas supply delivered to the import point is determined with reference to a base price in 1990, re-determined annually thereafter based on specified inflation indices. The PSE&G contract commenced in 1991 and provides for the sale and delivery to NJEA of up to 25,000 MMBtu per day of gas for a term of 20 years. The contract price of the PSE&G gas is established monthly using a contractually specified mechanism.
With the exception of the PSE&G arrangement, all of the Partnerships' long- term contractual arrangements call for monthly demand charge payments. These demand charge payments reserve certain pipeline transportation capacity and are made regardless of the Partnerships' specified fuel requirements in any month and regardless of whether the Partnerships utilize the capacity reserved. These demand charges totaled approximately $45 million, $43 million and $46 million for the years ended December 31, 2000, 1999 and 1998, respectively. Total payments under such contracts were approximately $133.7 million, $126.9 million and $125.4 million in 2000, 1999 and 1998, respectively, inclusive of demand charges. Total charges under the contract with PSE&G, including transportation costs, during 2000, 1999 and 1998, were approximately $33.8 million, $27.0 million and $24.6 million, respectively. NEA's facility also has the capability to burn No. 2 fuel oil which is stored on site for contingency supply.
4. Loans Payable
Funding Corp. - The proceeds from the Funding Corp.'s secured notes (Funding Corp. Securities) were used to make loans to the Partnerships and notes of the Partnerships were issued to the Funding Corp. in an aggregate principal amount equal to the Funding Corp. Securities. The Funding Corp., and, thus, the Partnerships, has borrowings outstanding as follows:
Interest on the Funding Corp. Securities is payable semiannually on each June 30 and December 30. Principal repayments are made semiannually in amounts stipulated in the trust indenture. Future principal payments are as follows:
Year ending December 31: 2001 .................................................. $ 20,160,000 2002 .................................................. $ 22,688,000 2003 .................................................. $ 23,818,000 2004 .................................................. $ 28,564,000 2005 .................................................. $ 45,349,000 Thereafter ............................................ $278,301,000 Total ................................................. $418,880,000
The Funding Corp. Securities are not subject to optional redemption but are subject to mandatory redemption in certain limited circumstances involving the occurrence of an event of loss, as defined in the trust indenture, for which the Partnerships fail to or are unable to restore a facility.
The Funding Corp. Securities are unconditionally guaranteed, jointly and severally, by the Partnerships and are secured by a lien on, and a security interest in, substantially all of the assets of the Partnerships. The Partnerships are jointly and severally required to make scheduled payments on the notes on dates and in amounts identical to the scheduled payments of principal and interest on the Funding Corp. Securities. The Funding Corp. Securities, the guarantees thereon provided by the Partnerships and the notes are nonrecourse to the partners and are payable solely from the collateral pledged as security.
The trust indenture governing the Funding Corp. Securities contains certain restrictions on certain activities of the Partnerships, including incurring additional indebtedness or liens, distributions to the partners, the cancellation of power sale and fuel supply agreements, the use of proceeds from the issuance of the Funding Corp. Securities and the execution of mergers, consolidations and sales of assets.
Under the terms of a previous loan and credit agreement, the Partnerships were required to enter into interest rate swap agreements providing for the payments on a notional principal amount to be made by the Partnerships at fixed interest rates, in exchange for payments to be made by such financial institutions at floating interest rates. As a result of the repayment of such loans with the proceeds of the Funding Corp. Securities, the original interest swap agreements no longer qualified for hedge accounting and were recorded at fair value at December 31, 1998. The swaps expired during 1999. Changes in fair value are recognized in the statements of operations for the periods ended December 31, 1999 and 1998.
Acquisition Corp. - During 1998, the Acquisition Corp. issued $220 million of 7.99% Secured Bonds Due 2011 (Acquisition Corp. Securities) for the purpose of reimbursing certain partners of NE LP for a portion of $545 million in equity contributions used to acquire the Partnerships. The proceeds from the Acquisition Corp. Securities were loaned to NE LP, evidenced by a promissory note. Interest on the Acquisition Corp. Securities is payable semiannually on each June 30 and December 30. Principal repayments are made annually commencing on June 30, 2002 and are in amounts stipulated in the trust indenture. Future principal payments are as follows:
Year ending December 31: 2002 .................................................. $ 8,800,000 2003 .................................................. $ 8,800,000 2004 .................................................. $ 8,800,000 2005 .................................................. $ 8,800,000 Thereafter ............................................ $184,800,000 Total ................................................. $220,000,000
The Acquisition Corp. Securities are subject to optional redemption after June 30, 2008 at the redemption prices set forth in the trust indenture and are subject to extraordinary mandatory redemption at a redemption price of 100% of the principal amount thereof in certain limited circumstances as defined in the trust indenture.
The Acquisition Corp. Securities are unconditionally guaranteed by NE LP and are payable solely from payments to be made by NE LP under the promissory note and bond guaranty. NE LP's obligations to make payments under the promissory note are nonrecourse to the direct and indirect owners of NE LP. Payments with respect to the promissory note and, therefore, in respect of the Acquisition Corp. Securities will be effectively subordinated to payment of all indebtedness and other liabilities and commitments of the Partnerships, including the guarantee by the Partnerships of their indebtedness. Repayment of the Acquisition Corp. Securities is guaranteed by all interests in the Partnerships. The Acquisition Corp. Securities will rank senior to all subordinated indebtedness and rank evenly with all senior indebtedness that the Acquisition Corp. incurs in the future.
5. Related Party Information
Administrative Services Agreement - NE LP and an entity related to FPL Energy have entered into an administrative services agreement that provides for management and administrative services to the Partnerships. The agreement which expires in 2018 provides for fees of a minimum of $600 thousand per year, subject to certain adjustments, and reimburses costs and expenses of performing services. For the periods ended December 31, 2000, 1999 and 1998, the Partnerships incurred $798 thousand, $782 thousand and $765 thousand, respectively, in fees under the agreement.
O&M Agreements - NE LP and an entity related to FPL Energy have entered into operations and maintenance agreements that provide for the O&M of the Partnerships. The agreements expire in 2016, subject to extension by mutual agreement of the parties before six months preceding expiration. The agreements provide for fees of a minimum of $750 thousand per year, subject to certain adjustments, for each Partnership and reimburse costs and expenses of performing services. For each of the periods ended December 31, 2000, 1999 and 1998, the Partnerships incurred $1.5 million in fees under the agreements. See Note 7 - O&M of the Cogeneration Facilities.
Fuel Management Agreements - Each of NEA and NJEA has entered into fuel management agreements with an entity related to FPL Energy that provide for the management of all natural gas and fuel oil, transportation and storage agreements, and the location and purchase of any additional required natural gas or fuel oil for the Partnerships. The agreements which expire in 2023 provide for fees of a minimum of $450 thousand per year, subject to certain adjustments, for each Partnership and reimburse costs and expenses of performing services. For the periods ended December 31, 2000, 1999 and 1998, the Partnerships incurred $909 thousand, $896 thousand and $881 thousand, respectively, in fees under the agreements.
The Partnerships pay a management fee to NE LP in an amount equal to the fees under the administrative services, operations and maintenance and fuel management agreements mentioned above.
Accrued expenses under the administrative services, O&M and fuel management agreements were $796 thousand and $473 thousand at December 31, 2000 and 1999, respectively. Additionally, power sales to an entity related to FPL Energy were $3.5 million, $2.5 million and $1.1 million for the years ended December 31, 2000, 1999 and 1998, respectively.
6. Financial Instruments
The Partnerships have made use of derivative financial instruments to hedge their exposure to fluctuations in both interest rates and the price of natural gas.
Under the terms of a previous loan and credit agreement, the Partnerships were required to enter into fixed interest rate swap agreements as a means of managing exposure to the variable rate of interest of those borrowings. In conjunction with the refinancing of those borrowings, the Partnerships entered into counter-swap agreements so that the Partnerships would no longer be exposed to changes in interest rates. The interest rate swaps expired during 1999. The notional amount of these interest rate swap agreements was $5.5 million at December 31, 1998. The notional amount indicates the size of the transaction entered into, not the Partnerships' exposure to loss. Changes in fair value from the interest rate swap agreements which are recognized in the statements of operations were $191 thousand and $697 thousand for the years ended December 31, 1999 and 1998, respectively.
The prices received by the Partnerships for power sales under their long- term contracts do not move precisely in tandem with the prices paid by the Partnerships for natural gas. To mitigate the price risk associated with purchases of natural gas, the Partnerships may, from time to time, enter into certain transactions either through public exchanges or by means of over-the-counter transactions with specific counterparties. The Partnerships mitigate their risk associated with purchases of natural gas through the use of natural gas swap agreements that require the Partnerships to pay a fixed price (absolutely or within a specified range) in return for a variable price on specified notional quantities of natural gas. The contract amount of these agreements was 4.2 million MMBtu, 4.3 million MMBtu and 13.4 million MMBtu at December 31, 2000, 1999 and 1998, respectively. The net gain reflected as a reduction in fuel costs resulting from the gas swap agreements was $9.5 million, $2.4 million and $2.5 million for the years ended December 31, 2000, 1999 and 1998, respectively.
The following estimates of the fair value of financial instruments have been made using available market information and other valuation methodologies. However, the use of different market assumptions or methods of valuation could result in different estimated fair values.
7. Commitments and Contingencies
Energy Bank and Loan Collateral - Subsequent to the Acquisitions on January 14, 1998, certain credit arrangements were terminated and replaced with new letters of credit and a guaranty to satisfy requirements in certain power purchase agreements. On July 1 and December 19, 2000, energy bank letters of credit were renewed in face amounts of $13.9 million and $54 million. The $13.9 million letter of credit expires on December 31, 2001 and can be drawn upon on one occasion in the event that a certain power purchase agreement has terminated at a time when there is a positive energy bank balance existing in favor of the power purchaser. The $54 million letter of credit expires on December 31, 2001 and can be drawn upon in multiple drawings in the event that a certain power purchase agreement has terminated at the time when there is a positive energy bank balance existing in favor of the power purchaser. The NEA power purchase agreements are also secured by a second mortgage on the NEA cogeneration facilities. In addition, on July 1, 2000, a letter of credit was renewed in the face amount of $23.4 million. The $23.4 million letter of credit expires on December 31, 2001 and can be drawn upon in multiple drawings in the event that insufficient funds are available in the Partnership trust accounts to pay bond interest and principal.
Once the new credit arrangements mentioned above were put in place in 1998, cash of approximately $69.2 million (plus approximately $2.5 million in accrued interest) was released and distributed to the partners. Additionally, in 1998 new letters of credit were issued in substitution for cash on deposit in Partnership trust accounts and approximately $33.2 million in cash was released and distributed to the partners.
A guaranty was made by a subsidiary of FPL Group in favor of the trustee under the indenture relating to the Acquisition Corp. Securities. The guarantor unconditionally and irrevocably guarantees the payment of an amount equal to 50% of the debt service reserve requirement with respect to the Acquisition Corp. Securities. The guaranty expires on December 31, 2001 and is automatically extended for successive one-year periods unless the guarantor gives notice that it will not renew. Pursuant to a reimbursement agreement, NE LP has agreed to repay any amounts paid under such guaranty.
O&M of the Cogeneration Facilities - In 1989, the Partnerships entered into two separate ten-year O&M agreements with an O&M provider (the previous O&M provider) for an aggregate annual consideration of approximately $11.1 million, subject to changes in specified indices. Under these agreements, the Partnerships were required to pay the previous O&M provider a bonus payable annually over the term of the agreements based on operating performance. The Partnerships incurred $16.7 million for O&M and bonus expenses for the year ended December 31, 1998. Effective December 31, 1998, the O&M contracts between the previous O&M provider and the Partnerships were terminated by mutual consent of both parties. The Partnerships paid the previous O&M provider $10 million in cash to terminate the agreements and recorded a net gain of $4.2 million, the effect of which is reflected in the statement of operations for the period ended December 31, 1998. Additionally, the Partnerships agreed to pay the previous O&M provider a total of $15.6 million, which approximates market value, for spare parts purchased in 1999. An entity related to FPL Energy became the new provider of O&M services for the Partnerships on January 1, 1999. The Partnerships incurred $13.9 million and $14.2 million for O&M expense for the year ended December 31, 2000 and 1999, respectively, of which $3.4 million and $3.8 million represented salaries paid to the new O&M provider.
Operating Lease - NEA entered into a 26-year operating lease in 1986 for a parcel of land. The lease may be extended for another 25 years at the option of NEA. Lease payments under the operating lease are as follows:
Year ending December 31: 2001 .................................................. $ 225,000 2002 .................................................. $ 237,000 2003 .................................................. $ 249,000 2004 .................................................. $ 261,000 2005 .................................................. $ 273,000 Thereafter ............................................ $1,977,000
Lease expense under this agreement is recognized on a straight-line levelized basis of approximately $198,000 annually over the lease term.
8. Quarterly Data (Unaudited)
Condensed consolidated quarterly financial information for 2000 and 1999 is as follows:
INDEPENDENT AUDITORS' REPORT
ESI TRACTEBEL FUNDING CORP.:
We have audited the accompanying financial statements of ESI Tractebel Funding Corp. (the "Company") as of December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, listed in the accompanying index at Item 14(a)1 of this Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and 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 ESI Tractebel Funding Corp. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP Certified Public Accountants
West Palm Beach, Florida March 29, 2001
			ESI TRACTEBEL FUNDING CORP. 			 BALANCE SHEETS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
			ESI TRACTEBEL FUNDING CORP. 			 STATEMENTS OF OPERATIONS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
			ESI TRACTEBEL FUNDING CORP. 			 STATEMENTS OF CASH FLOWS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
			ESI TRACTEBEL FUNDING CORP. 		 NOTES TO FINANCIAL STATEMENTS 	 Years Ended December 31, 2000, 1999 and 1998
1. Nature of Business
ESI Tractebel Funding Corp. (Funding Corp.) is a Delaware corporation established in 1994 as a special purpose funding corporation for the purpose of issuing the securities described in Note 3. On January 14, 1998, the Funding Corp. was acquired by a subsidiary of ESI Energy, LLC (ESI Energy), Tractebel Power, Inc. (Tractebel Power) and Broad Street Contract Services, Inc. (Broad Street) from Intercontinental Energy Corporation (IEC), a Massachusetts corporation. Broad Street participates for the purpose of providing an independent director and has no economic interests. The Funding Corp. changed its name from IEC Funding Corp. to its current name concurrent with and related to its acquisition. The Funding Corp. acts as agent of Northeast Energy Associates, A Limited Partnership and North Jersey Energy Associates, A Limited Partnership (combined, the Partnerships) with respect to the securities and holds itself out as agent of the Partnerships in all dealings with third parties relating to the securities. The Partnerships, owners of electric power generation stations in the northeastern United States, are owned indirectly by subsidiaries of ESI Energy and Tractebel Power.
2. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. The Securities
The Funding Corp. previously issued secured notes (Securities). The proceeds from the Securities were used to make loans to the Partnerships. In connection with this transaction, the notes outstanding under a previous loan and credit agreement of the Partnerships were surrendered and new notes of the Partnerships were issued to the Funding Corp. in the aggregate principal amount of the Securities. Borrowings outstanding are as follows:
Interest on the Securities is payable semiannually on each June 30 and December 30. Principal repayments are made semiannually in amounts stipulated in the trust indenture. Future principal payments are as follows:
Year ending December 31: 2001 .................................................. $ 20,160,000 2002 .................................................. $ 22,688,000 2003 .................................................. $ 23,818,000 2004 .................................................. $ 28,564,000 2005 .................................................. $ 45,349,000 Thereafter ............................................ $278,301,000 Total ................................................. $418,880,000
The Securities are not subject to optional redemption but are subject to mandatory redemption in certain limited circumstances involving the occurrence of an event of loss, as defined in the trust indenture, for which the Partnerships fail to or are unable to restore a facility.
The Securities are unconditionally guaranteed, jointly and severally, by the Partnerships and are secured by a lien on, and a security interest in, substantially all of the assets of the Partnerships. The Partnerships are jointly and severally required to make scheduled payments on the notes on dates and in amounts identical to the scheduled payments of principal and interest on the Securities. The Securities, the guarantees thereon provided by the Partnerships and the notes are nonrecourse to the partners and are payable solely from the collateral pledged as security.
The trust indenture governing the Securities contains certain restrictions on certain activities of the Partnerships, including the incurrence of additional indebtedness or liens, distributions to the partners, the cancellation of power sale and fuel supply agreements, the use of proceeds from the issuance of the Securities and the execution of mergers, consolidations and sales of assets.
4. Financial Instruments
The estimated fair value of the Securities and the notes receivable from the Partnerships at December 31, 2000 and 1999 was $450 million and $454 million, respectively. The estimate of the fair value has been made using available market information and other valuation methodologies. However, the use of different market assumptions or methods of valuation could result in different estimated fair values.
5. Quarterly Data (Unaudited)
Condensed consolidated quarterly financial information for 2000 and 1999 is as follows:
INDEPENDENT AUDITORS' REPORT
ESI TRACTEBEL ACQUISITION CORP.:
We have audited the accompanying financial statements of ESI Tractebel Acquisition Corp. (the "Company") as of December 31, 2000 and 1999, and for the years ended December 31, 2000 and 1999 and the period from January 12, 1998 (Date of Formation) to December 31, 1998, listed in the accompanying index at Item 14(a)1 of this Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and 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 ESI Tractebel Acquisition Corp. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years ended December 31, 2000 and 1999 and the period from January 12, 1998 (Date of Formation) to December 31, 1998 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP Certified Public Accountants
West Palm Beach, Florida March 29, 2001
		 ESI TRACTEBEL ACQUISITION CORP. 			 BALANCE SHEETS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
		 ESI TRACTEBEL ACQUISITION CORP. 			 STATEMENTS OF OPERATIONS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
		 ESI TRACTEBEL ACQUISITION CORP. 			 STATEMENTS OF CASH FLOWS 			 (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
		 ESI TRACTEBEL ACQUISITION CORP. 		 STATEMENTS OF STOCKHOLDERS' EQUITY 			 (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
		 ESI TRACTEBEL ACQUISITION CORP. 			NOTES TO FINANCIAL STATEMENTS 	 Years Ended December 31, 2000, 1999 and 1998
1. Nature of Business
ESI Tractebel Acquisition Corp. (Acquisition Corp.) is a Delaware corporation established on January 12, 1998 as a special purpose funding corporation for the purpose of issuing the securities described in Note 3. The Acquisition Corp.'s common stock is jointly owned by a subsidiary of ESI Energy, LLC (ESI Energy) and by a subsidiary of Tractebel Power, Inc. (Tractebel Power). The Acquisition Corp. acts as agent of Northeast Energy, LP (NE LP) with respect to the securities and holds itself out as agent of NE LP in all dealings with third parties relating to the securities. NE LP is a Delaware limited partnership that was established on November 21, 1997 for the purpose of acquiring ownership interests in two electric power generation stations in the northeastern United States (the Partnerships). NE LP is also owned by subsidiaries of ESI Energy and Tractebel Power.
2. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. The Securities
On February 12, 1998, the Acquisition Corp. issued $220 million of 7.99% Secured Bonds Due 2011 (Securities). The proceeds from the Securities were loaned to NE LP, evidenced by a promissory note, for the purpose of reimbursing certain partners of NE LP for a portion of $545 million in equity contributions used to acquire the Partnerships. The Securities are unconditionally guaranteed by NE LP. Borrowings outstanding at December 31, 2000 were $220 million.
Interest on the Securities is payable semiannually on each June 30 and December 30. Principal repayments are made annually commencing on June 30, 2002 and are in amounts stipulated in the trust indenture. Future principal payments are as follows:
Year ending December 31: 2002 ............................................... $ 8,800,000 2003 ............................................... $ 8,800,000 2004 ............................................... $ 8,800,000 2005 ............................................... $ 8,800,000 Thereafter ......................................... $184,800,000 Total .............................................. $220,000,000
The Securities are subject to optional redemption after June 30, 2008 at the redemption prices set forth in the trust indenture and are subject to extraordinary mandatory redemption at a redemption price of 100% of the principal amount thereof in certain limited circumstances as defined in the trust indenture.
The Securities are unconditionally guaranteed by NE LP and are payable solely from payments to be made by NE LP under the promissory note and bond guaranty. NE LP's obligations to make payments under the promissory note are nonrecourse to the direct and indirect owners of NE LP. Payments with respect to the promissory note and, therefore, in respect of the Securities will be effectively subordinated to payment of all indebtedness and other liabilities and commitments of the Partnerships, including the guaranty by the Partnerships of its indebtedness. Repayment of the Securities is guaranteed by all interests in the Partnerships. The Securities will rank senior to all subordinated indebtedness and rank evenly with all senior indebtedness that the Acquisition Corp. incurs in the future.
4. Financial Instruments
In January 1998, the Acquisition Corp. entered into a fixed interest rate financial instrument to hedge its exposure to fluctuations in the interest rate associated with the placement of originally issued securities. The financial instrument was settled on February 17, 1998 and qualified for hedge accounting. The gain resulting from the hedge was $152 thousand and is being amortized into income using the effective interest method. The balances of the deferred gain were $112 thousand and $126 thousand as of December 31, 2000 and 1999, respectively.
The estimated fair value of the Securities and the note receivable from NE LP at December 31, 2000 and 1999 was $220 million and $204 million, respectively. The estimate of the fair value has been made using available market information and other valuation methodologies. However, the use of different market assumptions or methods of valuation could result in different estimated fair values.
5. Stockholders' Equity
On January 12, 1998 (Date of Formation), the Acquisition Corp. received stock subscriptions and subsequently issued 20 shares of common stock, par value $.10.
6. Income Taxes
The Acquisition Corp. acts as agent of NE LP with respect to the Securities and holds itself out as agent of NE LP in all dealings with third parties relating to the Securities. Accordingly, as a result of the agency relationship, all tax activity of the Acquisition Corp. for federal and state income tax purposes represents amounts due to NE LP.
7. Quarterly Data (Unaudited)
Condensed consolidated quarterly financial information for 2000 and 1999 is as follows:
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
				 PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrants
	 Management Committee of NE LP and the Partnerships
Nathan E. Hanson. Mr. Hanson, 36, is director of business management of FPL Energy. He was appointed to the NE LP Management Committee by ESI GP in March 2000. He was formerly operations manager for Intercontinental Energy Corporation from 1995 to 1998.
Eric M. Heggeseth. Mr. Heggeseth, 48, is vice president of Tractebel Power. He was appointed to the NE LP Management Committee by Tractebel GP in March 1998.
Michael L. Leighton. Mr. Leighton, 55, is vice president of business management of FPL Energy. He was formerly vice president of project development of FPL Energy from April 1994 to April 2000. He was appointed to the NE LP Management Committee by ESI GP in May 2000.
Werner E. Schattner. Mr. Schattner, 55, is executive vice president of Tractebel Power. He was appointed to the NE LP Management Committee by Tractebel GP in January 1998.
	 Directors of the Funding Corp. and the Acquisition Corp.
Lewis Hay III. Mr. Hay, 45, is president of FPL Energy. He was formerly vice president, finance and chief financial officer of FPL Group and senior vice president, finance and chief financial officer of FPL, from August 1999 to March 2000. Prior to that, Mr. Hay was senior vice president and chief financial officer of U.S. Foodservice, a foodservice distributor, from 1991 to 1997, and executive vice president and chief financial officer from 1997 to 1999. He has been a director of the Funding Corp. and the Acquisition Corp. since March 2000.
Eric M. Heggeseth. Mr. Heggeseth, 48, is vice president of Tractebel Power. He has been a director of the Funding Corp. and the Acquisition Corp. since 1998.
Werner E. Schattner. Mr. Schattner, 55, is executive vice president of Tractebel Power. He has been a director of the Funding Corp. and the Acquisition Corp. since 1998.
Glenn E. Smith. Mr. Smith, 43, is senior vice president of project development of FPL Energy. He was formerly director of project development for Nations Energy Corporation from May 1995 to June 1997. He has been a director of the Funding Corp. and the Acquisition Corp. since 1998.
Directors of the Funding Corp. and the Acquisition Corp. are elected annually and serve until their resignation, removal or until their respective successors are elected. The members of the Management Committee of NE LP and the Partnerships serve until their resignation, removal or until their respective successors are elected. Except as noted, each director or management committee member has held his position for five years or more and his employment history is continuous.
Item 11.
Item 11. Executive Compensation
None.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Partnerships and NE LP. The following table sets forth the direct and indirect interests of ownership:
The Funding Corp. The following table sets forth the number of shares and percentage owned of the Funding Corp.'s voting securities beneficially owned by each person known to be the beneficial owner of more than five percent (5%) of the voting securities:
The Acquisition Corp. The following table sets forth the number of shares and percentage owned of the Acquisition Corp.'s voting securities beneficially owned by each person known to be the beneficial owner of more than five percent (5%) of the voting securities:
Item 13.
Item 13. Certain Relationships and Related Transactions
Administrative Services Agreement. NE LP and an entity related to FPL Energy have entered into an administrative services agreement that provides for management and administrative services to the Partnerships. The agreement which expires in 2018 provides for fees of a minimum of $600 thousand per year, subject to certain adjustments, and reimburses costs and expenses of performing services. For the periods ended December 31, 2000, 1999 and 1998, the Partnerships incurred $798 thousand, $782 thousand and $765 thousand, respectively, in fees under the agreement.
O&M Agreements. NE LP and an entity related to FPL Energy have entered into O&M agreements that provide for the operations and maintenance of the Partnerships. The agreements expire in 2016, subject to extension by mutual agreement of the parties before six months preceding expiration. The agreements provide for fees of a minimum of $750 thousand per year, subject to certain adjustments, for each Partnership and reimburse costs and expenses of performing services. For each of the periods ended December 31, 2000, 1999 and 1998, the Partnerships incurred $1.5 million in fees under the agreements.
Fuel Management Agreements. Each of NEA and NJEA has entered into fuel management agreements with an entity related to FPL Energy that provide for the management of all natural gas and fuel oil, transportation and storage agreements, and the location and purchase of any additional required natural gas or fuel oil for the Partnerships. The agreements which expire in 2023 provide for fees of a minimum of $450 thousand per year, subject to certain adjustments, for each Partnership and reimburse costs and expenses of performing services. For the periods ended December 31, 2000, 1999 and 1998, the Partnerships incurred $909 thousand, $896 thousand and $881 thousand, respectively, in fees under the agreements.
Power Sales. From time to time, FPL Energy's power marketing subsidiary will purchase excess power produced by the Partnerships and resell the power to the marketplace. These purchases totaled $3.5 million, $2.5 million and $1.1 million in 2000, 1999 and 1998, respectively.
				 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
			 ESI TRACTEBEL FUNDING CORP. 		 ESI TRACTEBEL ACQUISITION CORP.
				LEWIS HAY III 				Lewis Hay III 				 President 		 (Principal Executive Officer and Director)
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the date indicated.
Signature and Title as of March 30, 2001:
ROBERT L. MCGRATH Robert L. McGrath Treasurer (Principal Financial and Principal Accounting Officer)
Directors:
ERIC M. HEGGESETH Eric M. Heggeseth
WERNER E. SCHATTNER Werner E. Schattner
GLENN E. SMITH Glenn E. Smith
				 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
	 NORTHEAST ENERGY ASSOCIATES, A LIMITED PARTNERSHIP (ESI Northeast Energy GP, Inc. as Administrative General Partner) 	 NORTH JERSEY ENERGY ASSOCIATES, A LIMITED PARTNERSHIP (ESI Northeast Energy GP, Inc. as Administrative General Partner) 			 NORTHEAST ENERGY, LP (ESI Northeast Energy GP, Inc. as Administrative General Partner)
				LEWIS HAY III 				Lewis Hay III 				 President 		 (Principal Executive Officer and Director)
			 ROBERT L. MCGRATH 			 Robert L. McGrath Vice President and Treasurer of ESI Northeast Energy GP, Inc. (Principal Financial and Principal Accounting Officer and Director 		 of ESI Northeast Energy GP, Inc.)
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the date indicated.
Signature and Title as of March 30, 2001:
Director of ESI Northeast Energy GP, Inc.:
GLENN E. SMITH Glenn E. Smith
EXHIBIT 21
			 SUBSIDIARIES OF NE LP