-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VgfTo72eFlTz0QMATRo9ACN4HHGPhlIpBR9Q9mH/TH6N+NUJ4XD8B6x+ngXS8IBD hbeUWJeiSzkBYjSosivGNQ== /in/edgar/work/0000950131-00-006572/0000950131-00-006572.txt : 20001128 0000950131-00-006572.hdr.sgml : 20001128 ACCESSION NUMBER: 0000950131-00-006572 CONFORMED SUBMISSION TYPE: SC TO-T/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20001127 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: KENETECH CORP CENTRAL INDEX KEY: 0000807708 STANDARD INDUSTRIAL CLASSIFICATION: [4991 ] IRS NUMBER: 943009803 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3/A SEC ACT: SEC FILE NUMBER: 005-43755 FILM NUMBER: 777081 BUSINESS ADDRESS: STREET 1: 500 SANSOME STREET SUITE 410 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4153983825 MAIL ADDRESS: STREET 1: 500 SANSOME STREET SUITE 410 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: KENETECH CORP CENTRAL INDEX KEY: 0000807708 STANDARD INDUSTRIAL CLASSIFICATION: [4991 ] IRS NUMBER: 943009803 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-T/A SEC ACT: SEC FILE NUMBER: 005-43755 FILM NUMBER: 777082 BUSINESS ADDRESS: STREET 1: 500 SANSOME STREET SUITE 410 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4153983825 MAIL ADDRESS: STREET 1: 500 SANSOME STREET SUITE 410 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: KC HOLDING CORP CENTRAL INDEX KEY: 0001127379 STANDARD INDUSTRIAL CLASSIFICATION: [ ] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-T/A BUSINESS ADDRESS: STREET 1: C/O VALUEACT CAPITAL PARTNERS LP STREET 2: ONE MAITIME PLAZA SUITE 1400 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4157339756 MAIL ADDRESS: STREET 1: C/O VALUEACT CAPITAL PARTNERS LP STREET 2: ONE MARITIME PLAZA SUITE 1400 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: KC HOLDING CORP CENTRAL INDEX KEY: 0001127379 STANDARD INDUSTRIAL CLASSIFICATION: [ ] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-T/A BUSINESS ADDRESS: STREET 1: C/O VALUEACT CAPITAL PARTNERS LP STREET 2: ONE MAITIME PLAZA SUITE 1400 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4157339756 MAIL ADDRESS: STREET 1: C/O VALUEACT CAPITAL PARTNERS LP STREET 2: ONE MARITIME PLAZA SUITE 1400 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 SC TO-T/A 1 0001.txt AMENDMENT #2 TO SCHEDULE TO-T SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- SCHEDULE TO (Amendment No. 2) (Rule 14d-100) Tender Offer Statement Under Section 14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934 KENETECH CORPORATION (Name of Subject Company (Issuer)) KC MERGER CORP. KC HOLDING CORPORATION VALUEACT CAPITAL PARTNERS, L.P. VA PARTNERS, L.L.C. (Names of Filing Persons (Offerors)) Common Stock, Par Value $.0001 Per Share, Together With The Associated Rights Attached Thereto (Title of Class of Securities) 488878109 (CUSIP Number of Class of Securities) Jeffrey W. Ubben Secretary and Treasurer KC Merger Corp. KC Holding Corporation c/o ValueAct Capital Partners, L.P. One Maritime Plaza Suite 1400 San Francisco, CA 94111 (415) 362-3700 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Filing Persons) Copies to: Dennis M. Myers, Esq. Kirkland & Ellis 200 East Randolph Drive Chicago, IL 60601 (312) 861-2000 CALCULATION OF FILING FEE
Transaction Valuation* Amount of Filing Fee** $34,548,971 $6,910
* Estimated for purposes of calculating the amount of the filing fee only. Calculated by multiplying $1.04, the per share tender offer price, by 33,220,164, the sum of (i) 31,970,164 currently outstanding shares of Common Stock sought in the Offer, (ii) outstanding options with respect to 750,000 shares of Common Stock and (iii) outstanding warrants with respect to 500,000 shares of Common Stock, in each case as of October 20, 2000. ** Calculated as 1/50 of 1% of the transaction value. [X] Check the box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $6,910 Filing Party: KC Merger Corp. Form or Registration No.: Schedule TO Date Filed: November 7, 2000 [_] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. Check the appropriate boxes to designate any transactions to which the statement relates: [X] third-party tender offer subject to Rule 14d-1. [_] issuer tender offer subject to Rule 13e-4. [X] going-private transaction subject to Rule 13e-3. [X] amendment to Schedule 13D under Rule 13d-2. Check the following box if the filing is a final amendment reporting the results of the tender offer: [_] - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 KC Holding Corporation - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [_] (b) [X] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 OO - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(D) or 2(E) [_] 5 - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 Delaware - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF 11,365,458 SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 0 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING 0 PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 0 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 11,365,458 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [_] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 Approximately 36% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 CO - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON KC Merger Corp. - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [_] (b) [X] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 OO - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(D) or 2(E) [_] 5 - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 Delaware - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF 0 SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 11,365,458 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING 0 PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 0 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 11,365,458 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [_] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 Approximately 36% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 CO - ------------------------------------------------------------------------------ 2 - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON ValueAct Capital Partners, L.P. - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [_] (b) [X] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 OO - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [_] 5 - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 Delaware - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF 0 SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 11,365,458 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING 0 PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 0 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 11,365,458 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [_] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 Approximately 36% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 PN - ------------------------------------------------------------------------------ 3 - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON VA Partners, L.L.C. - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [_] (b) [X] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 OO - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(D) or 2(D) [_] 5 - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 Delaware - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF 0 SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 11,365,458 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING 0 PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 0 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 11,365,458 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [_] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 Approximately 36% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 OO - ------------------------------------------------------------------------------ 4 This Amendment No. 2 (the "Amendment") amends and supplements the Tender Offer Statement on Schedule TO filed by KC Merger Corp., a Delaware corporation ("Purchaser"), KC Holding Corporation, a Delaware corporation ("Parent"), and ValueAct Capital Partners, L.P., a Delaware limited partnership ("VAC") on November 7, 2000, as amended by Amendment No. 1 to Schedule TO filed on November 14, 2000 (the "Schedule TO") relating to the offer by Purchaser to purchase all outstanding shares of common stock, par value $.0001 per share, and the associated rights attached thereto (together, the "Shares"), of KENETECH Corporation, a Delaware corporation (the "Company"), at a purchase price of $1.04 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase dated November 6, 2000 (the "Offer to Purchase"), and in the related Letter of Transmittal, copies of which are attached as Exhibits (a)(1)(i) and (a)(1)(ii) to the Schedule TO (which, together with any amendments or supplements thereto, collectively constitute the "Offer"). VA Partners, L.L.C. has been added as a filing person to the Schedule TO. Capitalized terms used but not defined in this Amendment shall have the meaning assigned to them in the Offer to Purchase. Items 1 through 9, and 11. Items 1 through 9, and 11 of the Schedule TO, which incorporate by reference the information contained in the Offer to Purchase, are hereby amended and supplemented by incorporating by reference therein the information set forth in the Supplement to Offer to Purchase, dated November 26, 2000. Item 12. Exhibits. Item 12 of the Schedule TO is hereby amended and supplemented by adding thereto the following: Exhibit No. Description ----------- ----------- (a)(1)(vii) Supplement to Offer to Purchase, dated November 26, 2000. (a)(5)(vi) Pages 3 through 28 of the Quarterly Report on Form 10-Q filed by the Company for the quarterly period ended September 30, 2000 (incorporated by reference to the Form 10-Q filed by the Company on November 14, 2000). (c)(3) Schedule of the 823 U.S. acquisitions considered by Houlihan Lokey. (c)(4) Feasibility Assessment of the Proposed Astoria Energy Project. Item 13. Information Required by Schedule 13E-3. Item numbers below refer to such items as contained in Schedule 13E-3. Item 2. Subject Company Information, paragraphs (d) through (f): (d) The information set forth in "The Tender Offer - Price Range of Shares; Dividends" of the Offer to Purchase is incorporated herein by reference. (e) Not applicable. (f) The information set forth in "Schedule B" of the Offer to Purchase under the heading "Purchase of Shares" and in "The Tender Offer -- Certain Information Concerning Purchaser and Parent" is incorporated herein by reference. 5 Item 4. Terms of the Transaction, paragraphs (c) through (f): (c) Not applicable. (d) The information set forth in the "The Tender Offer - Appraisal Rights" and "Schedule C" of the Offer to Purchase is incorporated herein by reference. (e) The information set forth in "The Tender Offer - Provisions for Unaffiliated Security Holders" of the Offer to Purchase is incorporated herein by reference. (f) Not applicable. Item 5. Past Contacts, Transactions, Negotiations and Agreements, paragraphs (c) and (e): (c) The information set forth in the "Special Factors - Background of the Transaction; Past Contacts, Negotiations and Agreements" of the Offer to Purchase is incorporated herein by reference. (e) The information set forth in the "Introduction," "Special Factors - Interests of Certain Persons in the Offer and the Merger," and "The Tender Offer" of the Offer to Purchase is incorporated by reference. Item 6. Purposes of the Transaction and Plans or Proposals, paragraphs (b) and (c)(8): (b) The information set forth in the "Introduction," "Special Factors - Purposes, Alternatives, Reasons, Effects and Plans," and "The Tender Offer - The Transactions Agreements - The Merger Agreement" of the Offer to Purchase is incorporated herein by reference. (c)(8) The information set forth in the "Special Factors - Purposes, Alternatives, Reasons, Effects and Plans" of the Offer to Purchase is incorporated herein by reference. Item 7. Purposes, Alternatives, Reasons and Effects: (a)-(d) The information set forth in the "Introduction," "Special Factors - Background of the Transaction; Past Contacts, Negotiations and Agreements," "Special Factors -- Purposes, Alternatives, Reasons, Effects and Plans," "Special Factors - Recommendation of the Special Committee and the Board of Directors of KENETECH; Fairness of the Transaction," "Special Factors - Reports, Opinions, Appraisals and Negotiations," and "The Tender Offer" of the Offer to Purchase is incorporated herein by reference. Item 8. Fairness of the Transaction: (a)-(f) The information set forth in the "Introduction," "Special Factors," and "Annex A," of the Offer to Purchase is incorporated herein by reference. Item 9. Reports, Opinions, Appraisals, and Negotiations: (a)-(c) The information set forth in the "Introduction," "Special Factors - Background of the Transaction; Past Contacts, Negotiations and Agreements,"Special Factors - Recommendation of the Special Committee and the Board of Directors of 6 KENETECH; Fairness of the Transaction," "Special Factors - Position of Parent, Purchaser, VAC and Mr. Lerdal as to the Fairness of the Offer and the Merger," "Special Factors - Reports, Opinions, Appraisals and Negotiations," and "Annex A" of the Offer to Purchase and Exhibit (c)(2) of the Schedule TO is incorporated herein by reference. Item 10. Source and Amounts of Funds or Other Consideration, paragraph (c): (c) The information set forth in "Special Factors - Reports, Opinions, Appraisals and Negotiations" and "The Tender Offer - Fees and Expenses" of the Offer to Purchase is incorporated herein by reference. Item 12. The Solicitation or Recommendation, paragraphs (d) and (e): (d)-(e) The information set forth in the "Introduction," "Special Factors - Background of the Transaction; Past Contacts, Negotiations and Agreements," "Special Factors - Purposes, Alternatives, Reasons, Effects and Plans," "Special Factors -- Recommendation of the Special Committee and the Board of Directors of KENETECH; Fairness of the Transaction," "Special Factors - Interests of Certain Persons in the Offer and the Merger," and "The Tender Offer" of the Offer to Purchase is incorporated herein by reference. Item 14. Persons/Assets, Retained, Employed, Compensated or Used, paragraph (b): (b) No officer, class of employees or corporate assets of the Company will be utilized by Purchaser, Parent or VAC in the Offer. 7 After due inquiry and to the best of its knowledge and belief, each of the undersigned certifies that the information set forth in this statement is true, complete and correct. Dated: November 27, 2000 Schedule TO, Schedule 13E-3 and Schedule 13D KC MERGER CORP. By: /s/ Jeffrey W. Ubben Name: Jeffrey W. Ubben Title: Secretary/Treasurer KC HOLDING CORPORATION By: /s/ Jeffrey W. Ubben Name: Jeffrey W. Ubben Title: Secretary/Treasurer VALUEACT CAPITAL PARTNERS, L.P. By: VA Partners, L.L.C. Its: General Partner By: /s/ Jeffrey W. Ubben Name: Jeffrey W. Ubben Title: Managing Member VA PARTNERS, L.L.C. By: /s/ Jeffrey W. Ubben Name: Jeffrey W. Ubben Title: Managing Member 8 EX-99.(A)(1)(VII) 2 0002.txt SUPPLEMENT TO OFFER TO PURCHASE DATED 11/26/00 Exhibit (a)(1)(vii) Supplement to the Offer to Purchase for Cash Dated November 6, 2000 All Outstanding Shares of Common Stock, Together With The Associated Rights Attached Thereto of KENETECH Corporation at $1.04 Net Per Share by KC Merger Corp. a wholly owned subsidiary of KC Holding Corporation a wholly owned subsidiary of ValueAct Capital Partners, L.P. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, DECEMBER 7, 2000, UNLESS THE OFFER IS EXTENDED. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE TRANSACTION, PASSED UPON THE MERITS OR FAIRNESS OF THE TRANSACTION, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. A SUMMARY OF THE PRINCIPAL TERMS OF THE OFFER APPEARS ON PAGES 1 THROUGH 4 OF THIS SUPPLEMENT. YOU SHOULD READ THIS ENTIRE DOCUMENT AND THE OFFER TO PURCHASE PREVIOUSLY CIRCULATED CAREFULLY BEFORE DECIDING WHETHER TO TENDER YOUR SHARES AND THE RIGHTS ATTACHED THERETO. ---------------- The Information Agent For The Offer is: MacKenzie Partners, Inc. November 26, 2000 INTRODUCTION............................................................... 5 SPECIAL FACTORS............................................................ 5 1.Background of the Transaction; Past Contacts, Negotiations and Agreements.............................................................. 5 2.Purposes, Alternatives, Reasons, Effects and Plans..................... 7 3. Recommendation of the Special Committee and the Board of Directors of KENETECH; Fairness of the Transaction............... 10 4. Position of Parent, Purchaser, VAC and Mr. Lerdal as to the Fairness of the Offer and the Merger............................. 10 5. Interests of Certain Persons in the Offer and the Merger......... 11 6. Reports, Opinions, Appraisals and Negotiations................... 12 THE TENDER OFFER........................................................... 21 1. Terms of the Offer............................................... 21 8. Certain Information Concerning KENETECH.......................... 21 9. Certain Information Concerning Purchaser and Parent.............. 22 12 Certain Conditions of the Offer....................................... 22 13 Certain Legal Matters and Regulatory Approvals........................ 23 SCHEDULE A Certain Information Concerning Purchaser, Parent and VAC........ A-1
SUMMARY OF THE OFFER KC Merger Corp. is offering to buy all outstanding shares of KENETECH Corporation's common stock, together with the associated rights attached thereto. The tender price is $1.04 per share, net to you in cash. Set out below are some of the questions that you, as a stockholder of KENETECH, may have and answers to those questions. The information in this Summary of the Offer is not complete. This Supplement, together with the Offer to Purchase and the Letter of Transmittal that were previously distributed to you, contain additional important information. We urge you to carefully read all of the material about our offer that is sent to you before you decide whether to accept our offer. WHO IS OFFERING TO BUY MY SECURITIES? Our name is KC Merger Corp. We are a Delaware corporation formed for the purpose of making this offer. We are a wholly owned subsidiary of KC Holding Corporation, a Delaware corporation. KC Holding Corporation is a wholly owned subsidiary of ValueAct Capital Partners, L.P., a Delaware limited partnership. WHAT ARE THE CLASSES AND AMOUNTS OF SECURITIES SOUGHT IN THE OFFER? We are offering to buy all of the outstanding shares of common stock of KENETECH. HOW MUCH ARE YOU OFFERING TO PAY AND WHAT IS THE FORM OF PAYMENT? We are offering to pay $1.04 per share, net to you, in cash. WILL I HAVE TO PAY ANY FEES OR COMMISSIONS? No, tendering stockholders will not have to pay brokerage fees or commissions. DO YOU HAVE THE FINANCIAL RESOURCES TO MAKE PAYMENT? ValueAct Capital Partners, L.P. will provide KC Holding Corporation with sufficient funds from its own resources to acquire all tendered shares or shares to be acquired pursuant to the merger. KC Holding Corporation will contribute these funds to KC Merger Corp. ValueAct Capital Partners, L.P. has guaranteed the performance by each of KC Holding Corporation and KC Merger Corp. of its covenants, duties and obligations under the merger agreement. See pages 42 and 43 of the Offer to Purchase. IS YOUR FINANCIAL CONDITION RELEVANT TO MY DECISION OF WHETHER TO TENDER IN THE OFFER? We do not think that our financial condition is relevant to your decision of whether to tender shares and accept the offer because: . the offer is being made for all outstanding shares solely for cash, . the offer is not subject to any financing condition, and . if we consummate the offer, we will acquire all remaining shares for the same cash price pursuant to the merger. HOW LONG DO I HAVE TO DECIDE WHETHER TO TENDER IN THE OFFER? The offer will expire at 12:00 midnight, New York City time on December 7, 2000, unless we extend the offer. 1 CAN THE OFFER BE EXTENDED, AND UNDER WHAT CIRCUMSTANCES? Yes, we may extend the offer if, among other reasons, the number of shares of KENETECH stock that have been validly tendered and not withdrawn represents less than 85% of the then issued and outstanding shares of KENETECH stock on a fully diluted basis, not including shares held by Mr. Mark D. Lerdal, KENETECH's Chairman, President and Chief Executive Officer. See pages 25 through 27 of the Offer to Purchase. HOW WILL I BE NOTIFIED IF THE OFFER IS EXTENDED? If we are required to extend the offer, or if we otherwise decide to extend the offer, we will issue a press release giving the new expiration date no later than 9:00 a.m., New York City time, on the first business day after the previously scheduled expiration of the offer. WILL THERE BE A SUBSEQUENT OFFERING PERIOD? We do not currently intend to include a subsequent offering period for the offer, although we reserve our right to do so. A subsequent offering period, if one is included, will be an additional period of time beginning after we have purchased shares tendered during the offer, during which stockholders may tender their shares and receive the offer consideration. HOW WILL I BE NOTIFIED IF THERE IS A SUBSEQUENT OFFERING PERIOD? If we decide to provide a subsequent offering period, we will make a public announcement of our decision by 9:00 a.m., New York City time, on the next business day following the initial closing of the tender offer. See pages 26 and 27 of the Offer to Purchase. WHAT ARE THE MOST SIGNIFICANT CONDITIONS TO THE OFFER? We are not required to complete the tender offer unless: . the number of tendered and not withdrawn shares represents at least 85% of the shares of KENETECH stock outstanding on a fully diluted basis as defined in the merger agreement, excluding shares held by Mr. Lerdal, . there is no material adverse change in KENETECH or its business, and . there is no pending suit, action or proceeding before any court or governmental entity challenging the tender offer or proposed merger. The offer is also subject to a number of other conditions. See pages 43 through 44 of the Offer to Purchase. HOW IS KENETECH'S CHIEF EXECUTIVE OFFICER INVOLVED IN THE OFFER? On October 24, 2000, KC Holding Corporation and ValueAct Capital Partners, L.P. entered into a separate agreement with Mr. Mark D. Lerdal, the Chairman, President and Chief Executive Officer of KENETECH, pursuant to which Mr. Lerdal agreed to contribute all of his shares of KENETECH stock to KC Holding Corporation for shares of KC Holding Corporation stock. As a result, Mr. Lerdal will become a stockholder of KC Holding Corporation, owning approximately 35.3% of KC Holding Corporation, and will not receive any cash for the shares he contributes. He will, however, have the opportunity to share in any future growth of KENETECH, which following completion of the offer and the merger will be a wholly owned subsidiary of KC Holding Corporation. The shares to be contributed represent approximately 36% of the outstanding shares of KENETECH stock. See pages 35 and 36 of the Offer to Purchase. Simultaneously with entering into the merger agreement, we entered into a voting agreement with Mr. Lerdal in which Mr. Lerdal agreed not to tender his shares in the offer and to vote all of his shares in favor of the merger and the merger agreement and against any other takeover proposal. 2 WHAT DOES THE KENETECH BOARD OF DIRECTORS THINK OF THE OFFER? We are making the offer pursuant to a merger agreement among us and KENETECH. The Board of Directors of KENETECH, with Mr. Lerdal abstaining, after receiving the recommendation of a special committee of the Board of Directors comprised solely of independent directors, has determined that the merger agreement and the transactions contemplated therein, including the offer and the merger, are fair to and in the best interests of KENETECH and its stockholders, and recommends that you tender your KENETECH shares in the offer. See pages 12 through 16 of the Offer to Purchase. WILL KENETECH CONTINUE AS A PUBLIC COMPANY? No. If the merger takes place, KENETECH will no longer be publicly owned. Even if the merger does not take place, if we purchase all the tendered shares, there may be so few remaining stockholders and publicly held shares that the common stock will no longer be eligible to be traded on the OTC Bulletin Board or other securities market, there may not be a public trading market for the common stock and KENETECH may cease making filings with the Securities and Exchange Commission or otherwise cease being required to comply with SEC rules relating to publicly held companies. WILL THE TENDER OFFER BE FOLLOWED BY A MERGER IF ALL OF KENETECH'S SHARES ARE NOT TENDERED IN THE OFFER? If the offer is successful, we will acquire any remaining shares of KENETECH stock in a later merger for $1.04 per share in cash as provided in a merger agreement entered into on October 25, 2000 among KC Holding Corporation, KC Merger Corp. and KENETECH. KENETECH stockholders will not have appraisal rights in the tender offer but will have appraisal rights in the merger. If we receive at least 85% of the then issued and outstanding shares of KENETECH stock, excluding shares held by Mr. Lerdal, and Mr. Lerdal contributes his shares to us as described below, we will own at least 90% of the outstanding shares of KENETECH stock. Our ownership of 90% or more of the outstanding shares of KENETECH stock will allow us to complete a "short-form" merger under applicable state law. This type of merger will not require approval by any KENETECH stockholder. IF I DECIDE NOT TO TENDER, HOW WILL THE OFFER AFFECT MY SHARES? Stockholders not tendering in the offer will receive pursuant to the merger the same amount of cash per share which they would have received had they tendered their shares in the offer. Therefore, if the merger takes place, the only difference to you between tendering your shares and not tendering your shares (other than the availability of certain appraisal rights) is that you will be paid earlier if you tender your shares in the offer. WHAT IS THE MARKET VALUE OF MY SHARES AS OF A RECENT DATE? The closing bid price for a share of KENETECH stock was: . $0.71 on October 25, 2000, the last full trading day before we announced the execution of the merger agreement with KENETECH, and . $1.00 on November 24, 2000, the last trading day before the printing of this Supplement. Before deciding whether to tender your shares, you should obtain a current market quotation for the shares. See page 32 of the Offer to Purchase. HOW DO I TENDER MY SHARES? If you wish to accept the offer, this is what you must do: . If you are a record holder (and, therefore, a stock certificate has been issued to you) you must complete and sign the enclosed letter of transmittal and send it with your stock certificate to the depositary for 3 the offer or follow the procedures described in the offer for book-entry transfer. These materials must reach the depositary before the offer expires. Detailed instructions are contained in the letter of transmittal and on pages 28 through 30 of the Offer to Purchase. . If you are a record holder but your stock certificate is not available or you cannot deliver it to the depositary before the offer expires, you may be able to tender your shares using the enclosed notice of guaranteed delivery. Please call our information agent, MacKenzie Partners, Inc., at (212) 929-5500 for assistance. . If you hold your shares through a broker or bank, you should contact your broker or bank and give instructions that your shares be tendered. UNTIL WHAT TIME CAN I WITHDRAW PREVIOUSLY TENDERED SHARES? If, after tendering your shares in the offer, you decide that you do NOT want to accept the offer, you can withdraw your shares by instructing the depositary before the offer expires. If you tendered by giving instructions to a broker or bank, you must instruct the broker or bank to arrange for the withdrawal of your shares. See pages 30 and 31 of the Offer to Purchase. If we decide to provide a "subsequent offering period," we will accept shares tendered during that period immediately and thus you will not be able to withdraw shares tendered during any subsequent offering period. See pages 26, 27 and 31 of the Offer to Purchase. WHO CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE TENDER OFFER? MacKenzie Partners, Inc. is acting as the information agent for our tender offer. You can contact MacKenzie Partners, Inc. at (800) 322-2885 (toll free) or, if you live outside of the U.S. and Canada, at (212) 929-5500 (call collect). 4 To The Holders of Shares of Common Stock of KENETECH Corporation: INTRODUCTION The following information amends and supplements the Offer to Purchase dated November 6, 2000 (the "Offer to Purchase") of KC Merger Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of KC Holding Corporation, a Delaware corporation ("Parent"), pursuant to which Purchaser is offering to purchase all of the outstanding shares, together with the associated rights attached thereto issued pursuant to that certain Rights Agreement, dated May 4, 1999, as amended (the "Shares"), of common stock, par value $.000l per share (the "Common Stock"), of KENETECH Corporation, a Delaware corporation ("KENETECH"), at $1.04 per Share, net to the seller in cash (the "Per Share Amount"), without interest thereon upon the terms and subject to the conditions set forth in the Offer to Purchase, this Supplement and in the related Letter of Transmittal (which, together with any amendments or additional supplements thereto, collectively constitute the "Offer"). Parent is a wholly owned subsidiary of ValueAct Capital Partners, L.P., a Delaware limited partnership. VA Partners, L.L.C., a Delaware limited liability company, is the sole general partner of ValueAct Capital Partners, L.P. Unless the context requires otherwise, all references in the Offer to Purchase and this Supplement to "VAC" shall collectively refer to VA Partners, L.L.C. and ValueAct Capital Partners, L.P. This Supplement should be read in conjunction with the Offer to Purchase. This Supplement has been prepared to include additional information requested by the Commission in the course of its review of the Offer to Purchase and to disclose certain events that have occurred since the distribution of the Offer to Purchase. The terms and conditions previously set forth in the Offer to Purchase and the Letter of Transmittal previously mailed to stockholders remain applicable in all respects to the Offer. Terms used but not defined have the meaning set forth in the Offer to Purchase. KENETECH has filed with the Commission and previously mailed to its stockholders a Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9"). KENETECH is filing with the Commission an amendment to the Schedule 14D-9 that attaches this Supplement and incorporates by reference this Supplement to the extent applicable. Accordingly, the following information shall be deemed to amend and supplement the Schedule 14D-9 to the extent applicable. THIS SUPPLEMENT, THE OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION THAT YOU SHOULD READ CAREFULLY AND IN THEIR ENTIRETY BEFORE YOU MAKE ANY DECISION WITH RESPECT TO THE OFFER. SPECIAL FACTORS 1. Background of the Transaction; Past Contacts, Negotiations and Agreements The discussion set forth in "Special Factors--Background of the Transaction; Past Contacts, Negotiations and Agreements" is hereby amended and supplemented as follows: The second full paragraph on page 7 of the Offer to Purchase is hereby amended and supplemented to add the following to the end of such paragraph: Mr. Winn resigned from the Special Committee to avoid any appearance of impropriety arising from his affiliation with Terrasearch, Inc. Terrasearch had entered into a consulting agreement with KENETECH on January 1, 2000 that provided for cash payments and warrants to Terrasearch, and this agreement would be subject to renewal on December 31, 2000. For additional information regarding Mr. Winn and Terrasearch, see "Special Factors-- Interests of Certain Persons in the Offer and the Merger." 5 The last sentence of the last paragraph on page 7 of the Offer to Purchase is hereby amended and restated to read in its entirety as follows: The Special Committee also discussed with its legal counsel and representatives of Houlihan Lokey the possibility of enhancing the valuation of KENETECH by obtaining insurance for the deferred benefit for deconsolidated subsidiary losses liability reported on KENETECH's financial statements, which was established in connection with KENETECH's utilization of certain tax benefits generated by a subsidiary that was deconsolidated for financial statement purposes as a result of such subsidiary's bankruptcy. The first paragraph on page 9 of the Offer to Purchase is hereby amended and restated to read in its entirety as follows: Representatives of Houlihan Lokey met with representatives of VAC on September 15, 2000, to discuss the valuation approaches and underlying assumptions used in their respective valuations of KENETECH. During these discussions, VAC and Houlihan Lokey reviewed in general terms the methodology used by each to value certain of KENETECH's larger investments. The parties spent a significant amount of time discussing valuation approaches and underlying assumptions relating to KENETECH's investment in the Astoria energy project. Based upon these discussions, Houlihan Lokey revised one of its underlying assumptions relating to the cash flows to KENETECH as a result of the ability of the Astoria project to receive additional financing support from a third party. The meeting was concluded without the parties specifically addressing the value of KENETECH's investment in the Astoria project. Later that day, the Special Committee met with its legal counsel and Houlihan Lokey to receive Houlihan Lokey's report on those discussions. After discussing valuation issues with Houlihan Lokey, the Special Committee authorized Houlihan Lokey to make a counterproposal at $1.08 per Share. Counsel to the Special Committee contacted VAC's counsel to relay the proposal and to discuss other terms of the potential transaction. The last full paragraph on page 9 of the Offer to Purchase is hereby amended and supplemented to add the following to the end of such paragraph: In general, these discussions related to: (i) the terms upon which Mr. Lerdal would contribute his Shares to Parent, (ii) the composition of Parent's board of directors after the Merger and the need to have certain significant corporate transactions approved by all the members of the board, (iii) the appropriate procedure to resolve any disagreements between VAC and Mr. Lerdal on a going forward basis and (iv) the terms of Mr. Lerdal's employment agreement, including its duration, compensation arrangements and requirement that Mr. Lerdal permit VAC to participate in certain investment opportunities on a pro rata basis. The carryover paragraph at the top of page 10 of the Offer to Purchase is hereby amended and supplemented to add the following to the end of such paragraph: In addition, during this period Potter Anderson & Corroon LLP ("PAC") reviewed the following filings from the cause of action filed in the Delaware Court of Chancery styled Kohls v. Duthie, et. al.: (i) plaintiffs' first amended complaint; (ii) the briefs filed by all parties in support of and in opposition to defendants' motion to dismiss; (iii) the Court's opinion denying defendants' motion to dismiss; and (iv) defendants' application for certification of interlocutory appeal. In addition, PAC reviewed an affidavit from a representative of the seller of the shares at issue, in which the representative affirmed that he did not offer the shares to KENETECH and would not have recommended the sale of the shares to KENETECH for fear that such a transaction might be rescinded because of the possible legal impediments to KENETECH buying the shares, which rescission would have had adverse tax consequences to the seller. PAC also discussed the action with counsel for the defendants. PAC was not able to speak with plaintiffs' counsel due to the confidential nature of the negotiations between KENETECH and VAC. PAC considered whether the action was an asset of KENETECH, analyzed KENETECH's costs associated with the action and ultimately concluded that the plaintiffs in Kohls v. Duthie had a low probability of success. PAC discussed its assessment of Kohls v. Duthie with the Special Committee. PAC also shared its analysis and the basis for its analysis (as well as each of the documents referenced above) with Houlihan Lokey. Houlihan Lokey 6 concluded and advised the Special Committee that, given PAC's analysis and advice as to the plaintiffs' low probability of success, the derivative claim added not more than $.01 per share of value to KENETECH. The third paragraph on page 10 of the Offer to Purchase is hereby amended and restated in its entirety to read as follows: Also on October 24, 2000, the Special Committee met with its legal counsel to review a revised draft of the Merger Agreement. At the meeting, the Special Committee's counsel discussed the terms of the Merger Agreement and the history and status of the negotiations. The Special Committee's counsel also noted the Special Committee members' earlier analysis and ultimate conclusion, based on discussions with insurance brokers and the terms of the preliminary proposal that had been received, that the contingent liability for which insurance had been considered could not be insured on reasonable terms. Counsel also discussed with the Special Committee, among other things, the duties of the Special Committee in considering the Merger Agreement. The meeting was then recessed to be reconvened the next day. During such meeting it was noted that none of VAC, Parent or Purchaser, or any of its representatives, were being requested to agree to seek to dismiss Kohls v. Duthie following the successful completion of the Offer and the Merger. The Special Committee did not believe, however, that it was likely that VAC would prosecute the action in plaintiffs' place. The following information is hereby added to page 11 of the Offer to Purchase immediately following the first paragraph thereon: On November 9, 2000, Robert L. Kohls and Louise A. Kohls moved to file a second amended and supplemental complaint in an action pending in the Court of Chancery of the State of Delaware in and for New Castle County styled Kohls v. Duthie, et. al. The plaintiffs request, among other things, that the Chancery Court: (i) issue a preliminary injunction enjoining the consummation of the Merger Agreement; (ii) enter a permanent injunction prohibiting the consummation of the Merger Agreement; and (iii) award plaintiffs their attorneys' fees, costs, and other expenses. A hearing on plaintiffs' application for preliminary injunction is scheduled for December 5, 2000, at 3:00 p.m. E.S.T. KENETECH has been informed that the individual named defendants intend to defend this action vigorously, and, to the extent that it does not involve derivative claims, KENETECH intends to defend this action vigorously. For additional information regarding this litigation, see "The Tender Offer--Certain Legal Matters and Regulatory Approval" included in this Supplement. 2. Purposes, Alternatives, Reasons, Effects and Plans The discussion set forth in "Special Factors--Purposes, Alternatives, Reasons, Effects and Plans" is hereby amended and restated in its entirety to read as follows: Purposes. The purpose of the Offer and the Merger is for Parent to acquire control of, and the entire equity interest in, KENETECH. The Offer, as the first step in the acquisition of KENETECH, is intended to facilitate the acquisition of all outstanding Shares. The purpose of the Merger is to acquire all of the outstanding Common Stock not purchased pursuant to the Offer or otherwise acquired by Parent or Purchaser. If, after consummation of the Offer and the contribution by Mr. Lerdal of the Contribution Shares, we own at least 90% of the Shares then outstanding, we believe that we will be able to cause the Merger to occur without a vote of KENETECH's stockholders. If, however, after consummation of the Offer, we own less than 90% of the Shares then outstanding, a meeting of KENETECH's stockholders will be required under applicable state law to adopt the Merger Agreement. In such event, however, we would own, as a result of the Minimum Condition being satisfied, enough Shares to adopt the Merger Agreement in accordance with the applicable state law and the Restated Certificate without the affirmative vote of any other stockholder. VAC believes that KENETECH's future business prospects can be improved through VAC's active participation in the strategic direction and operations of KENETECH. The principals of VAC have significant experience in making investments in small-capitalization public companies and implementing 7 value-enhancing strategies such as recapitalizations, spin-offs, acquisition programs, management changes, business unit divestitures or closing and sale transactions. Although VAC has not reached any definitive conclusions as to its future plans for KENETECH, it believes that it will use such experience to enhance KENETECH's future value. In addition, VAC believes that its access to capital will provide KENETECH with development opportunities that it is not currently able to pursue. Alternatives. The following information has been provided to Parent, Purchaser, VAC and Mr. Lerdal by KENETECH: The Special Committee considered various alternatives to the Merger. These alternatives consisted of remaining independent and continuing the status quo, pursuing a sale to a strategic or financial buyer, making strategic acquisitions, and liquidating. These alternatives as analyzed by Houlihan Lokey for the purposes of issuing its fairness opinion are discussed in detail in "Special Factors--Background of the Transaction; Past Contacts, Negotiations and Agreements" and "--Reports, Opinions, Appraisals and Negotiations--Opinion of Houlihan Lokey." Before determining that the proposed Merger Agreement and the transactions contemplated thereby were fair to and in the best interests of KENETECH and its stockholders, and recommending that the Board approve and declare advisable the Merger Agreement and the transactions contemplated thereby, the Special Committee considered the following with respect to the alternatives: . With respect to the alternative of attempting to sell KENETECH to a strategic buyer or a financial buyer, the Special Committee considered the fact that no other bidder had come forward since KENETECH had announced it was considering strategic alternatives, and that the provisions of the Merger Agreement had been negotiated so as to not unreasonably deter other bidders from coming forward. . With respect to maintaining the status quo or attempting to make strategic acquisitions, the Special Committee believed that, among other things, KENETECH did not have the financial resources or access to capital to reach critical mass. . With respect to the alternative of liquidating KENETECH, the Special Committee noted that Houlihan Lokey, in rendering its fairness opinion, had qualitatively considered the liquidation of KENETECH's assets and determined that a possible range of resulting per Share values was $0.79 to $1.06. Based on the foregoing analysis and the uncertainties associated with liquidating KENETECH's assets, the Special Committee believed that the alternative of liquidation did not appear to be as favorable to KENETECH's stockholders as the Offer and the Merger. Reasons of Parent, Purchaser, VAC and Mr. Lerdal. Each of Parent, Purchaser, VAC and Mr. Lerdal believe that it is in KENETECH's best interest to operate as a privately held entity. From 1995 through the end of 1998, KENETECH experienced severe liquidity constraints. In an effort to relieve such constraints, KENETECH undertook to sell its assets. By the end of March 1999, KENETECH had disposed of substantially all its operating assets and, by the end of April 1999, had repaid substantially all of its indebtedness. As a result of its operating performance, KENETECH had been unable to access the public capital markets in recent years and each of Parent, Purchaser, VAC and Mr. Lerdal believe that it is unlikely that KENETECH could access such markets in the foreseeable future. Accordingly, the principal benefit of operating as a public company is not available to KENETECH. Similarly, due to the historical and recent market prices of the Common Stock and the low trading volume in the Common Stock, each of Parent, Purchaser, VAC and Mr. Lerdal believe that it is unlikely that KENETECH could use its Common Stock to fund acquisitions. Furthermore, many of the project development activities currently conducted by KENETECH are highly speculative, require significant capital expenditures and may take years to mature. As a privately held entity, KENETECH will be able to make decisions that may negatively affect quarterly earnings but that may increase the value of KENETECH's assets or earnings over the long-term. In a public company setting, it is difficult to make decisions that could negatively affect earnings when the result of those decisions could significantly reduce per share price. 8 In addition, after the Merger, KENETECH will no longer be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which will allow KENETECH to eliminate the time devoted by its management and certain other employees to matters which relate exclusively to KENETECH being a publicly held company. "Going- private" will also reduce certain other costs which relate to being a public company, including the costs of certain accounting, auditing and legal activities, the cost of preparing, printing and mailing corporate reports and proxy statements, and the expense of a transfer agent. These assessments are based upon publicly available information regarding KENETECH and VAC's due diligence investigation or knowledge of KENETECH and the experience of the principals of VAC in investing in or managing public companies generally. While VAC believes that there will be significant opportunities associated with its investment in KENETECH, it realizes that there are also substantial and significant risks that such opportunities may not be fully realized. Effects. As a result of the Offer and the Merger, the entire equity interest in KENETECH will be owned indirectly by VAC and Mr. Lerdal through their ownership of Parent. It is anticipated that following the Merger, VAC will own approximately 64.7% of Parent's outstanding common stock and Mr. Lerdal will own approximately 35.3% of Parent's outstanding common stock. The other stockholders of KENETECH (the "Public Stockholders") will no longer have any interest in, and will not be stockholders of, KENETECH, and therefore, will not participate in KENETECH's future earnings and potential growth. Instead, the Public Stockholders will have the right to receive $1.04 in cash, without interest, for each Share held (other than Shares for which appraisal rights have been perfected). To the extent that Mr. Lerdal receives shares of Parent common stock for the Contribution Shares, he will have the ability to participate in KENETECH's future earnings and potential growth. However, to the extent that Mr. Lerdal receives shares of Parent for the Contribution Shares, he will also bear the risk of any decreases in the value of KENETECH. The reduction of Mr. Lerdal's ownership percentage from 35.6% of the outstanding Shares prior to the consummation of the Offer and the Merger to 35.3% of Parent shares thereafter will reduce his interest in KENETECH's book value as of November 15, 2000 from $9,321,566 prior to the consummation of the Offer and the Merger to $9,266,501 thereafter (with no adjustment made for goodwill). Likewise, Mr. Lerdal's interest in KENETECH's net earnings for the period ending November 15, 2000 will decrease from $249,206 prior to the consummation of the Offer and the Merger to $247,733 thereafter. An equity investment in Parent following the Merger will involve substantial risk resulting from the limited liquidity of any such investment and the highly speculative nature of KENETECH's project development activities. Nonetheless, if KENETECH successfully executes its business strategy, the value of such an equity investment could be considerably greater than the original cost thereof. See "The Tender Offer--Possible Effects of the Offer on the Market for the Shares and Exchange Act Registration." In addition, the Common Stock will no longer be traded as an over-the- counter equity security on the OTC Bulletin Board and price quotations for sales of Shares in the public market will no longer be available. The registration of the Common Stock under the Exchange Act will terminate and KENETECH will no longer file periodic or annual reports. KENETECH's officers, directors and the owners of more than 10% of the Common Stock will no longer be subject to the short-swing profit provisions of Section 16(b) of the Exchange Act. Plans For KENETECH. Pursuant to the Merger Agreement, upon completion of the Offer, we intend to effect the Merger in accordance with the terms and conditions of the Merger Agreement. The Merger Agreement provides that, effective upon the consummation of the Offer, Purchaser will be entitled to designate a number of directors (rounded up to the nearest whole number) to the Board in proportion to the percentage of the total number of outstanding Shares owned by Parent and its affiliates. 9 Except as otherwise described in this Offer to Purchase and except for the transactions contemplated by the Merger Agreement, we have no current plans or proposals which relate to or would result in: (a) an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving KENETECH; (b) a sale or transfer of a material amount of assets of KENETECH; or (c) any other material change in KENETECH's corporate structure or business. Nevertheless, we may initiate a review of KENETECH and its assets, corporate structure, capitalization, operations, properties, policies, management and personnel to determine what changes, if any, would be desirable following the Merger in order best to organize and coordinate the activities of KENETECH and Parent. Furthermore, in connection with our ongoing review of KENETECH's long term strategy, we may, in the future, consider transactions such as the disposition or acquisition of material assets, alliances, joint ventures, other forms of co-operation with third parties or other extraordinary transactions affecting KENETECH or its operations. To minimize future tax liability, Parent expects to distribute to its stockholders the excess cash generated by KENETECH, if any. 3. Recommendation of the Special Committee and the Board of Directors of KENETECH; Fairness of the Transaction The discussion set forth in "Special Factors--Recommendation of the Special Committee and the Board of Directors of KENETECH; Fairness of the Transaction" is hereby amended and supplemented as follows: The following information is hereby added to page 14 of the Offer to Purchase immediately following the sixth bullet point therein: . The Per Share Amount exceeds the book value per Share of KENETECH of $0.80 as of June 30, 2000 and $0.79 as of December 31, 1999. . The Per Share Amount exceeds the price per Share of $0.66-$0.85 paid by KENETECH in connection with the stock repurchase program and other repurchases of Shares, as described in the Offer to Purchase under "Special Factors--Background of the Transaction; Past Contacts, Negotiations and Agreements" and in "Schedule B" to the Offer to Purchase under the heading "Purchase of Shares." . The Special Committee noted that Houlihan Lokey, in rendering its fairness opinion, had qualitatively considered the liquidation of KENETECH's assets and determined that a possible range of resulting per Share values was $0.79 to $1.06. Based on the foregoing analysis and the uncertainties associated with liquidating KENETECH's assets, the Special Committee believed that the alternative of liquidation did not appear to be as favorable to KENETECH's stockholders as the Offer and the Merger. The fourth bullet point on page 15 of the Offer to Purchase is hereby amended and restated in its entirety to read as follows: . Certain members of the Board and KENETECH's management may have interests in the Offer and the Merger that are in addition to those of KENETECH's other stockholders. For additional information regarding the interests of certain members of the Board and KENETECH's management in the Offer and the Merger, see "--Interests of Certain Persons in the Offer and the Merger." 4. Position of Parent, Purchaser, VAC and Mr. Lerdal as to the Fairness of the Offer and the Merger The first bullet point on page 17 of the Offer to Purchase is hereby amended and restated in its entirety to read as follows: . The historical and projected financial performance of KENETECH and its financial results, including its current liquidity situation, its recent operating losses and highly uncertain nature of its future projected performance due to the highly speculative nature of its development activities. 10 The following information is hereby added to page 17 of the Offer to Purchase immediately following the last bullet point thereon: . The Per Share Amount represents an amount in excess of the historical bid quotations for the Common Stock since at least the beginning of 1998. . The Per Share Amount represents an amount in excess of the prices paid by KENETECH in connection with its previous repurchases of the Common Stock since January 1, 1998. . The Per Share Amount represents an amount in excess of the net book value per share of $0.80 as of June 30, 2000 and $0.79 as of December 31, 1999. . During the last two years, KENETECH has not received any firm offers relating to a merger or consolidation, sale or other transfer of all or a substantial part of its assets or a purchase of its securities that would enable the holder to exercise control of KENETECH. In consideration of the fairness of the Offer and the Merger to the Public Stockholders, Parent, Purchaser, VAC and Mr. Lerdal did not consider the liquidation value of the Common Stock in light of the difficulty associated with assigning values to the Company's current investments. Although KENETECH's liquidation value was never quantified, Parent, Purchaser, VAC and Mr. Lerdal believe that the Per Share Amount is in excess of KENETECH's liquidation value since KENETECH's principal assets (other than cash and cash equivalents) would not result in any significant gains on liquidation and most would likely result in the realization of an amount that is less than their recorded value. 5. Interests of Certain Persons in the Offer and the Merger The discussion set forth in "Special Factors--Interests of Certain Persons in the Offer and the Merger" is hereby amended and supplemented as follows: The following information is hereby added to page 18 of the Offer to Purchase immediately following the second full paragraph thereon: Dr. Christenson is a defendant in Kohls v. Duthie. If the Merger is consummated, the plaintiffs may lose standing to pursue the action. The Board considered Dr. Christenson's status as a defendant in Kohls v. Duthie when he was appointed to the Special Committee. The Special Committee again considered this fact during its deliberations, considered the indemnity and exculpatory rights of Dr. Christenson, and, based upon the advice of PAC, determined that the plaintiffs were unlikely to succeed. Accordingly, the Board and the Special Committee concluded that Dr. Christenson's status as a defendant would not influence his objectivity or compromise his duties and obligations as a member of the Special Committee in any material respect. Dr. Christenson's status as a defendant in the action was a factor considered by the Special Committee in insisting as a condition to KENETECH's obligation to consummate the potential acquisition that at least a majority of the outstanding shares, other than the shares held by Mr. Lerdal, be tendered in the Offer. For additional information regarding this pending litigation, see "Certain Legal Matters and Regulatory Approvals" included in this Supplement. The sixth paragraph on page 18 of the Offer to Purchase is hereby amended and restated in its entirety to read as follows: It is anticipated that immediately following the Merger VAC will own 865,214 shares of Parent common stock, or approximately 64.7% of the outstanding common stock, and Mr. Lerdal will own 472,803 shares of Parent common stock, or approximately 35.3% of the outstanding common stock. Such ownership of shares will represent all of the outstanding shares of Parent common stock. 11 6. Reports, Opinions, Appraisals and Negotiations The discussion set forth in "Special Factors--Reports, Opinions, Appraisals and Negotiations" is hereby amended and restated in its entirety to read as follows: The following information (other than the information concerning Parent, Purchaser or VAC, including the information set forth under the heading "Astoria Viability Report") has been provided to Purchaser by KENETECH: Opinion of Houlihan Lokey The Special Committee retained Houlihan Lokey to assist it in evaluating the terms of the Offer and the Merger and to render an opinion as to whether the consideration to be received by KENETECH's stockholders, except Mr. Lerdal, in connection with the Offer and the Merger, is fair to such stockholders from a financial point of view. At the October 25, 2000 meeting of the Special Committee, Houlihan Lokey presented its analysis as hereinafter described and delivered its oral opinion (subsequently confirmed in writing) that, as of such date and based upon and subject to the assumptions made, procedures followed, matters considered, and limitations on the review set forth therein and described to the Special Committee, the consideration to be received by KENETECH's stockholders (except Mr. Lerdal) in connection with the Offer and the Merger is fair to such stockholders from a financial point of view. The preparation of a fairness opinion is a complex process and is not necessarily conducive to partial analysis or summary description. The following is a brief summary and general description of the valuation methodologies and approaches utilized by Houlihan Lokey in its evaluation of KENETECH in connection with the Offer and the Merger, but does not purport to be a complete statement of the analyses and procedures applied, the judgments made or the conclusions reached by Houlihan Lokey, nor does it purport to be a complete description of its presentation. Houlihan Lokey believes, and so advised the Special Committee and the Board, that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it (without considering all factors and analyses) could create an incomplete view of the process underlying Houlihan Lokey's analyses and opinions. The complete text of Houlihan Lokey's written opinion as presented to the Special Committee and the Board is attached as Annex A to the Offer to Purchase. The summary of the opinion set forth below is qualified in its entirety by reference to the full text of such opinion. Stockholders are urged to read such opinion carefully in its entirety for a description of the procedures followed, the factors considered, the assumptions made, and the limitations on the analysis undertaken by Houlihan Lokey. Houlihan Lokey's written opinion is for the information and assistance of the Special Committee and the Board, and does not constitute a recommendation as to whether any holder of Common Stock should accept the Offer or as to how any holder of Common Stock should vote with respect to the Merger. A copy of the presentation Houlihan Lokey gave to the Special Committee and the Board is attached as an exhibit to the Schedule TO. Houlihan Lokey has consented to the inclusion of its opinion as an attachment to the Offer to Purchase and the Schedule 14D-9 and to the references to its opinion contained therein and in this Supplement. Houlihan Lokey's opinion does not address the Special Committee's, the Board's or KENETECH's underlying business decision to proceed with the Offer and the Merger. Houlihan Lokey has not been requested to, and did not, participate in the process to explore strategic alternatives for KENETECH nor did it actively solicit third party indications of interest in acquiring all or any part of KENETECH. In connection with the preparation of its opinion, Houlihan Lokey made such reviews, analyses and inquiries as its representatives deemed necessary and appropriate under the circumstances. Among other things, Houlihan Lokey: . reviewed KENETECH's annual reports on Form 10-K for the fiscal years ended 1995 through 1999, the quarterly reports on Form 10-Q for the two quarters ended June 30, 2000 and KENETECH's 12 financial statements for the period ended September 30, 2000, which KENETECH's management has identified as being the most current financial statements available; . met with certain members of KENETECH's management, auditors and tax advisors, and management of Astoria Energy, LLC, an electric generating company in which KENETECH has invested funds on a minority interest basis, to discuss the operations, financial condition, future prospects and projected operations and performance of KENETECH and Astoria Energy, LLC, respectively; . discussed the operations, financial condition, future prospects and projected operations and performance of certain companies in which KENETECH has invested (the "Company Investments") with KENETECH's management and certain members of the senior management of various Company Investments; . reviewed the Merger Agreement and the letter from KENETECH, dated October 25, 2000 (the "Company Letter"); . reviewed financial statements and forecasts and projections for certain of the Company Investments; . reviewed the historical market prices and trading volume for KENETECH's Common Stock; . reviewed certain other publicly available financial data for certain companies that Houlihan Lokey deemed comparable to KENETECH and the Company Investments; . reviewed various documents relating to KENETECH and the Company Investments, including publicly-filed applications to state regulatory agencies relating to electric generating facilities, loan agreements, credit agreements, security agreements, limited guarantees, warrant purchase agreements, partnership agreements, business plans, insurance policies and related business correspondence; . reviewed various documents provided by counsel to the Special Committee relating to the cause of action filed in the Delaware Court of Chancery styled Kohls v. Duthie, et at., and relied on the views expressed by counsel to the Special Committee with respect to it; and . conducted such other studies, analyses and inquiries as Houlihan Lokey deemed appropriate. In assessing the fairness of the consideration to KENETECH's stockholders (other than Mr. Lerdal) in the Offer and the Merger, Houlihan Lokey independently valued KENETECH and the Company Investments using widely accepted valuation methodologies. The consideration to be paid by Purchaser in the Offer and the Merger was determined through negotiations between the Special Committee and Purchaser. Houlihan Lokey assisted the Special Committee in evaluating the terms of the Offer and the Merger. Assessment of KENETECH's Stock Price Houlihan Lokey analyzed the trading volume and the trading prices of the Common Stock over the past twelve months. Based on these analyses, Houlihan Lokey observed that: (i) KENETECH's market capitalization is small; (ii) the Common Stock is thinly traded; and (iii) KENETECH has no analyst coverage. Analysis of Control Premiums The analysis of control premiums involved the application of control premium evidence using a comparable transactions approach to KENETECH's unaffected stock price. The unaffected stock price for KENETECH is considered to be the closing trading price for the five days prior to the initial public announcement of the Merger Agreement. KENETECH's largest investments are in the power generation industry. Therefore, Houlihan Lokey examined the control premiums in the following broad categories: the electric, gas, water and sanitary services industry, the energy services industry, and all industries. Houlihan Lokey examined these broad industry classifications as opposed to reviewing any specific transaction. The control premium comparables for the latest twelve-month period included: . one transaction in the energy services industry (as further described in Exhibit A attached hereto); 13 . twenty-two transactions in the electrical, gas, water and sanitary industry (as further described in Exhibit A attached hereto); and . 823 U.S. acquisitions overall (a detailed schedule of which has been filed as an exhibit to the Schedule TO), and such control premiums were 23.0%, 33.3% and 40.5%, respectively. Applying this range of control premiums to the unaffected stock price of KENETECH yielded an implied value range for the Common Stock of $0.87 to $1.00 per Share. Based on the unaffected stock price of KENETECH and the Per Share Amount of $1.04, the implied control premium is 46.5%. Adjusted Net Asset Value Approach As part of its analysis, Houlihan Lokey completed an independent valuation of KENETECH using the adjusted net asset value approach. This was the primary methodology used by Houlihan Lokey to value KENETECH. The adjusted net asset value approach focuses on individual asset and liability values, as reported on KENETECH's balance sheet, and as adjusted to fair market value. This going- concern approach is appropriate in instances where the subject company invests heavily in tangible assets, identifiable assets and investments, or where operating earnings are insignificant relative to the value of the underlying assets. KENETECH's assets consisted primarily of cash, traded debt securities, advances and various investments (which are principally minority interest investments in privately-held companies and investments in venture funds). Cash and traded debt securities were adjusted to reflect cash outflows subsequent to the September 30, 2000 balance sheet date and were otherwise valued at book value. Advances and the Company Investments were valued using the prior transactions and discounted cash flow approaches (which approaches are described in more detail below). KENETECH's liabilities consisted primarily of accounts payable, accrued liabilities and other long-term liabilities. The accounts payable and accrued liabilities were adjusted to reflect post-balance sheet transactions and were otherwise valued at book value. The Deferred Benefit for Deconsolidated Subsidiary Losses liability (reported in the long-term liabilities section) was adjusted to market value based on discussions with KENETECH's advisors and by using the discounted cash flow approach. Houlihan Lokey examined the assets and liabilities on the most current balance sheet available and adjusted the reported value, where appropriate, to reflect a range of the fair market values of such assets or liabilities. The aggregate market value of the liabilities was subtracted from the aggregate fair market value of the assets to arrive at the adjusted net asset value. Further adjustments were made to net asset value to deduct the present value of the costs of managing the assets and to deduct the associated taxes on appreciated assets, as determined in Houlihan Lokey's valuation. One or both of the following two approaches (the prior transactions approach and the discounted cash flow approach) were used to arrive at indications of fair market value for each of the Company Investments. From these two approaches, a range of indicated fair market values was determined for each of the Company Investments. The reported book value for such Company Investments was then adjusted to reflect the concluded range of fair market values for each of the Company Investments. In this manner, Houlihan Lokey adjusted the reported book value of the Company Investments and other assets to fair market value and then aggregated the overall adjusted market value of KENETECH's assets (as discussed above). A discussion of these valuation approaches follows. Prior Transactions Approach The prior transactions approach examines prior stock transactions for the companies or securities being valued. This approach was highly relevant to most of the Company Investments for which no public market 14 existed and because most of KENETECH's investments were made in the nine months prior to the date of Houlihan Lokey's opinion. The prior transactions approach demonstrates what a third party might be willing to pay for the securities of a company in an arms-length transaction. Based on discussions with KENETECH's management and the management of several of the Company Investments, Houlihan Lokey calculated implied equity values for select Company Investments based on prior rounds of financing or capital raised, and third party indications of interest in such Company Investments. In valuing each of the Company Investments, the prior transactions approach was considered. Discounted Cash Flow Approach The discounted cash flow approach utilizes projections prepared by the respective managements of certain of the Company's Investments, and discounts such projections of future earnings to the present. Specifically, Houlihan Lokey received the following: . SCS Energy, LLC provided Houlihan Lokey with cash flow projections with regard to certain aspects of Astoria Energy LLC's future business operations. . OSB Chateaugay LLC's management provided Houlihan Lokey with cash flow projections with regard to certain aspects of its future business operations. . Sage Systems, Inc.'s management also provided Houlihan Lokey cash flow projections with regard to certain aspects of its future business operations. The projected cash flows were analyzed on a "leveraged" basis (after cash payments to interest-bearing debt investors) in order to develop a valuation for such investments. A provision for the value of these Company Investments at the end of the forecast period, or terminal value, based on after-tax earnings was also made. The present value of the interim cash flows and the terminal value were determined using a risk-adjusted rate of return or "discount rate." This discount rate, in turn, was developed through an analysis of rates of return on alternative investment opportunities in companies with similar risk characteristics as the Company Investments being valued. In determining the value of certain Company Investments using the discounted cash flow approach, Houlihan Lokey utilized the exit multiple method by capitalizing the earnings for the final projection period at an appropriate price-to-earnings multiple to determine the terminal value. Houlihan Lokey used the discounted cash flow approach for certain of the Company Investments for which forecasts were obtained from management. Summary The indicated ranges of values for KENETECH's investments analyzed by Houlihan Lokey, pursuant to the approaches described above, is attached hereto as Exhibit B. Also, based on the approaches described above, the per Share equity value of KENETECH was in the range of $0.96 to $1.13. Fairness Analysis To determine the fairness of the consideration to KENETECH's stockholders (other than Mr. Lerdal) from a financial point of view, Houlihan Lokey reviewed the Per Share Amount to be paid in the Offer and the Merger. Houlihan Lokey concluded that the Per Share Amount of $1.04 per share was within the concluded per Share equity value range of $0.96 to $1.13. Assessment of KENETECH's Strategic Alternatives to the Offer and the Merger In evaluating the fairness of the consideration to KENETECH's stockholders (other than Mr. Lerdal), from a financial point of view, Houlihan Lokey qualitatively considered the expected value to the stockholders of completing the Offer and the Merger and certain alternatives to the Offer and the Merger. In the course of working for the Special Committee, Houlihan Lokey held discussions with KENETECH's representatives and reviewed the materials and information provided by KENETECH with respect to 15 KENETECH's strategic alternatives and, for purposes of issuing an opinion, considered the following strategic alternatives: . maintaining the status quo; . sale of KENETECH to a strategic buyer; . strategic acquisitions by KENETECH; . sale of KENETECH to a financial buyer; and . liquidation. The assessment of strategic alternatives included a qualitative assessment of the valuation impact of the Offer and the Merger relative to the alternatives considered by Houlihan Lokey. The analysis did not quantify the valuation impact because, in the opinion of Houlihan Lokey, it was not feasible to so quantify this impact (due to the significant number of non- quantifiable variables). Houlihan Lokey's qualitative analysis of KENETECH maintaining status quo in its operations considered the following factors: that its stockholders would retain the upside and the risk of KENETECH's operations; that KENETECH would continue to operate and invest in power related development projects, and perhaps non-power related investments for which KENETECH has little historical experience; that KENETECH's investment in the Astoria Energy, LLC project is subject to significant milestone risks; that the usefulness of KENETECH's existing NOL carryforwards is limited by its limited profitability and would be useful largely in the context of asset sales; that KENETECH has a significant contingent long term liability on its balance sheet that KENETECH and its advisors reviewed and considered to be appropriately provided for under GAAP; that Houlihan Lokey relied on KENETECH advisors in determining the value of this liability; that the impact of Kohls v. Duthie is not entirely clear; and, finally, that KENETECH's shares are thinly traded. Houlihan Lokey's qualitative analysis of the sale of KENETECH to VAC considered, among the other issues discussed in this filing, the following factors: that VAC's Offer provides liquidity to KENETECH's stockholders at a substantial premium to the current trading price of KENETECH's stock; that VAC would assume the risk of all liabilities and upside return of KENETECH's investments; and that the Offer is all cash, significantly reducing financing risk. Houlihan Lokey's qualitative analysis of the sale of KENETECH to another strategic buyer considered the following factors: that there are relatively few strategic buyers for a group of assets as diverse in nature as KENETECH's; that KENETECH's most significant strategic asset is the Astoria Energy, LLC project and discussions with likely strategic acquirors with respect to this asset have been preliminary, with no indication of value or ownership; that the time required to find an alternative buyer and to secure a better offer for KENETECH is uncertain; that KENETECH has not recently received other indications of interest, either orally or in written form, prior to the VAC Offer; that KENETECH has publicly disclosed that it is evaluating all strategic alternatives available to it; that KENETECH has a substantial contingent liability on its balance sheet that may make it unattractive to certain potential buyers; and that all of KENETECH's investments are minority interest investments in privately held entities, which may also make it unattractive to certain potential buyers. Houlihan Lokey's qualitative analysis of KENETECH with respect to possible strategic acquisitions considered that, as size is becoming an increasingly more important factor in the ability to compete in the independent power industry, KENETECH does not have the resources to be able to effect sufficient strategic acquisitions to reach critical mass. Houlihan Lokey's qualitative analysis of the sale of KENETECH to a financial buyer considered the following factors: that KENETECH has diverse minority investments in privately held entities, which may make it unattractive to certain potential buyers; that financial buyers may be interested in the speculative nature of the Astoria Energy, LLC investment; that KENETECH has a substantial contingent liability on its balance sheet that 16 may make it unattractive to certain potential buyers; that KENETECH publicly disclosed that it is evaluating its strategic alternatives; that KENETECH has not recently received other indications of interest, either orally or in written form, prior to the VAC Offer; and that the time required to find an alternative buyer and to secure a better offer for KENETECH is uncertain. The final alternative Houlihan Lokey qualitatively considered, the liquidation of KENETECH's assets, resulted in a likely per share value lower than the consideration offered by VAC, and did not therefore appear to maximize stockholder value. In connection with the preparation and delivery of its opinion to the Special Committee and the Board, Houlihan Lokey performed a variety of financial and comparative analyses, as described above. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial and comparative analysis, and the application of those methods to the particular circumstances. Furthermore, in arriving at its opinion, Houlihan Lokey did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Houlihan Lokey believes that its analyses must be considered as a whole and that considering any portion of such analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, Houlihan Lokey made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of KENETECH. In arriving at its opinion, Houlihan Lokey relied upon and assumed, without independent verification, that the financial forecasts and projections provided to it were reasonably prepared and reflected the best currently available estimates of the future financial results and condition of KENETECH and the Company Investments, where applicable. Houlihan Lokey also assumed that, except to the extent provided for in the Company Letter, there had been no material change in the assets, financial condition, business or prospects of KENETECH and the Company Investments, where applicable, since the date of the most recent financial statements made available to Houlihan Lokey. Houlihan Lokey did not independently verify the accuracy and completeness of the information supplied to it with respect to KENETECH and the Company Investments, and did not assume any responsibility with respect to such information. Houlihan Lokey did not make any physical inspection or independent appraisal of any of the properties, assets or liabilities of KENETECH and the Company Investments. Houlihan Lokey's opinion was necessarily based on business, economic, market and other conditions as they existed and could be evaluated by it at the date of its opinion letter. Accordingly, although subsequent developments may affect its opinion, Houlihan Lokey has not assumed the obligation to update, revise or reaffirm its written opinion dated as of October 25, 2000. Houlihan Lokey's opinion and presentation are directed to the Special Committee and the Board, address only the fairness of the consideration to be received by KENETECH's stockholders (other than Mr. Lerdal) in the Offer and the Merger and do not address the relative merits of the Offer and the Merger, any other matter provided for or contemplated by the Merger Agreement or any other transaction that may have been available as an alternative to the Offer and the Merger, whether or not any such alternative could be or could have been achieved, or the terms upon which any such alternative transaction could be or could have been achieved. Further, Houlihan Lokey's opinion addresses only issues related to the fairness, from a financial point of view to KENETECH's stockholders (except Mr. Lerdal), of the consideration to be received, and Houlihan Lokey does not express any views on any other terms of the Merger Agreement, or any other agreement. In addition, Houlihan Lokey has assumed that in the course of obtaining the necessary regulatory and third party consents for the Offer and the Merger, no delay or restrictions will be imposed that will have a material adverse effect on the contemplated benefits of the Offer and the Merger. The opinion of Houlihan Lokey and its presentation to KENETECH's Special Committee and the Board constituted only one of a number of factors taken into consideration by the Special Committee and the Board in making their respective recommendations and determinations to approve the Merger Agreement and the 17 transactions contemplated thereby, including the Offer and the Merger. Houlihan Lokey's opinion and presentation do not constitute a recommendation to the Special Committee, the Board or any stockholder of KENETECH as to whether the stockholders should tender their shares in the Offer or how the Special Committee, the Board or the stockholders should vote with respect to any matter relating to the Offer and the Merger, and do not address the underlying business decisions of the Special Committee and the Board to enter into the Merger Agreement and to consummate the transactions contemplated thereby, including the Offer and the Merger. Houlihan Lokey is a nationally recognized investment banking firm with special expertise in, among other things, valuing businesses and securities and rendering fairness opinions. Houlihan Lokey is continually engaged in the valuation of businesses and securities in connection with mergers and acquisitions, leveraged buyouts, private placements of debt and equity, corporate reorganizations, employee stock ownership plans, corporate and other purposes. The Special Committee selected Houlihan Lokey because of its industry experience and expertise in performing valuation and fairness analyses. Houlihan Lokey does not beneficially own, nor has it ever beneficially owned, any interest in KENETECH. Materials summarizing Houlihan Lokey's analyses were presented to the Special Committee and the Board on October 25, 2000. Parent has filed these materials with the Commission as an exhibit to the Schedule TO. Copies of these materials are available for inspection and copying at KENETECH's principal executive offices, during regular business hours, by any interested KENETECH stockholder or representative who has been so designated in writing. You may also obtain these materials from the SEC in the same manner as set forth for KENETECH's SEC filings in "The Tender Offer--Certain Information Concerning KENETECH." Fees and Expenses The Special Committee retained Houlihan Lokey pursuant to a letter agreement, dated August 24, 2000. The Special Committee retained Houlihan Lokey to assist it in evaluating the terms of the Offer and the Merger and to render an opinion as to the fairness of the consideration to be received by KENETECH's stockholders (except for Mr. Lerdal) in connection with the proposed transaction and, additionally, to assist the Special Committee in reviewing and negotiating the financial structure and terms of the Offer and the Merger, and to provide assistance in connection with defining, from a financial point of view, strategic and financial objectives. Pursuant to the engagement letter, KENETECH agreed to pay Houlihan Lokey $350,000 for its services. KENETECH made a partial payment of $150,000 when it signed the engagement letter, and the remaining $200,000 was paid shortly after Houlihan Lokey issued its opinion on October 25, 2000. KENETECH also paid Houlihan Lokey's travel and out-of-pocket expenses (including reasonable fees and expenses of legal counsel) through October 30, 2000. KENETECH also agreed in the letter agreement to indemnify Houlihan Lokey and its employees, agents, officers, shareholders and persons who control Houlihan Lokey against certain liabilities, including liabilities under the federal securities laws, relating to or arising out of Houlihan Lokey's engagement. In June 1996, Houlihan Lokey was retained by an unofficial committee of KENETECH's 12 3/4% senior secured noteholders (which notes were satisfied and discharged in 1998) to provide financial advisory services for the benefit of such committee and Houlihan Lokey received compensation for such services. Although KENETECH was a party to the agreement between the unofficial committee and Houlihan Lokey, this past engagement is unrelated to the Offer and the Merger. Astoria Viability Report In connection with VAC's due diligence investigations of KENETECH, VAC retained Navigant Consulting, Inc. ("Navigant") to generate a report assessing the feasibility of developing the proposed Astoria Energy Project, a 1,000 MW natural gas-fired combined cycle facility to be located near New York City (the "Astoria Project"). KENETECH currently is a party to funding and participation agreements with Astoria Energy, LLC with respect to the Astoria Project. The Astoria Project would be located adjacent to the existing Astoria Generation Station, now owned by Orion Power Holdings, in Queens, New York. The Astoria Project is projected 18 to enter commercial operation in 2003 with the output being sold into the regional power market, either through bilateral contract arrangements or spot sales. In general, the report provided an overview of the New York bulk power market; an assessment of the Astoria Project, based on information contained in its application to the New York Public Service Commission ("PSC") for the necessary permits to begin the construction of the facility; and a market price forecast and related financial assessment for the project for several likely outcomes. In addition, Navigant provided an assessment of the proposed fuel supply plan for the project and a benchmark of the capital cost for the construction of the project. The report concluded that the New York power market has undergone significant change as historically integrated utility functions have been unbundled, and the generation and power supply components have been deregulated and opened to competitive forces, which has fundamentally changed the dynamics governing the revenue streams that will be earned by merchant power generation resources such as the Astoria Project. The focus of Navigant's analysis was to assess the feasibility of several aspects of the project and to provide a projection of revenues that the Astoria Project will likely earn for sales into the New York City area of the New York power market. This projection was prepared based on market fundamentals in the context of the market transformation that has taken place and will continue to evolve within New England. The report documented the methodology/approach, underlying assumptions, and results of Navigant's analysis. Navigant's analysis was based on regional demand and energy forecasts, actual utility hourly load profiles, fuel price forecasts, generating plant ratings and other pertinent generating unit operating parameters. Navigant's due diligence assessment of the Astoria Project was broad, covering many areas associated with the project's development. No significant limitations were placed on Navigant's scope of investigation or analysis. As a result of its analysis, Navigant reached the following conclusions as they relate to the New York energy market and the Astoria Project: . Based on the implementation of restructuring in the New York Power market, the state has been subdivided by the PSC into 11 transmission zones, reflecting significant transmission limitations across the system. The Astoria Project is located in a zone that includes New York City. . The New York power market has been restructured to include a spot energy market that is determined based on locational-based marginal pricing. As such, the spot market transactions are settled at the market-clearing price for numerous points on the transmission system, reflecting the different marginal costs of supplying energy at various locations when the transmission system is constrained. Based on the significant transmission constraints that exist between Astoria's zone and other zones, the energy prices in the New York City area are somewhat higher than most other areas in the state, reflecting older, more expensive, and less efficient generation setting the clearing price. . Reliability requirements established by the New York State Reliability Council ("NYSRC") have established locational-based capacity requirements for the New York City and Long Island regions. These reliability requirements create an immediate need for new capacity within the zones covering New York City, and provide a significant penalty for not meeting this requirement. . The proposed Astoria Project was projected by Navigant to earn an after- tax return of between 13% and 19%. However, this estimate was a function of future market pricing, fuel prices, locational-based installed capacity requirements, and the amount and timing of new entrants within Astoria's zone. . There is adequate up-stream gas supply available to support the project. However, pipeline capacity is currently constrained, and would require a commitment for up-stream construction to alleviate these constraints. Local pipeline construction to the facility would also be required. There are several options available to the project. Unfortunately, each will be expensive based on the urban location of the project. . The Astoria Project would be one of the most expensive projects of its size in the region. However, the project is believed to be reflective of costs for land and construction in the New York City area. The capital cost estimate seems to be consistent with another project on Long Island; however, more research would need to be done in this area to confirm this higher price. 19 . Navigant's initial review identified several areas of concern related to environmental modeling, construction of the facility, and construction financing. The report noted that the application for construction permits filed by Astoria Energy with respect to the Astoria Project was found to be incomplete by the PSC, which cited several areas of concern. Navigant predicted that the project could correct the deficiencies in its application within 6-12 months time. Navigant is a global provider of management consulting and professional services to clients in a wide variety of industries. Navigant is recognized as having developed significant expertise in the areas of energy, healthcare, insurance, pharmaceuticals and utilities. VAC selected Navigant for this assignment based principally on Navigant's reputation in the energy industry and Mr. Ubben's prior experience with such firm. VAC agreed to pay Navigant a fee of $10,000 plus 1% of the net proceeds, if any, received by VAC from the Astoria Project, assuming VAC completed the acquisition of KENETECH. The Navigant report was not prepared with a view to public disclosure and is included herein only because such report was prepared for VAC in connection with a "going-private" transaction. The conclusions reached by Navigant are based on numerous assumptions and projections, many of which may turn out to be incorrect. Navigant's report was prepared for the information and assistance of VAC only and does not constitute a recommendation as to whether any holder of Common Stock should accept the Offer or as to how a holder of Common Stock should vote with respect to the Merger. The above summary is qualified in its entirety by references to the complete text of the report, a copy of which is incorporated herein by reference and a copy of which had been filed with the Commission as an exhibit to the Schedule TO to which this Supplement is an exhibit. This report may be examined and copies may be obtained in the manner set forth in Section 8 of the Offer to Purchase. In addition, this report will be made available for inspection and copying at KENETECH's principal executive office during its regular business hours by any interested Public Stockholder or representative who has been so designated in writing. 20 THE TENDER OFFER 1. Terms of the Offer The following discussion set forth in "The Tender Offer--Terms of the Offer" is hereby amended and supplemented as follows: The second paragraph on page 25 of the Offer to Purchase is hereby amended and restated in its entirety to read as follows: THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, SATISFACTION OF THE MINIMUM CONDITION, AND CERTAIN OTHER CONDITIONS AS SET OUT IN SECTION 12 BELOW. THE MERGER AGREEMENT AND THE OFFER MAY BE TERMINATED BY PURCHASER AND PARENT SHOULD ANY OF THE EVENTS SET FORTH IN SECTION 12 OCCUR. SEE SECTION 12. The third paragraph on page 25 of the Offer to Purchase is hereby amended and supplemented by adding the following information at the end thereof: If presented with a request to waive the Minimum Condition, KENETECH will consider the facts and circumstances at the time of the request. However, KENETECH will not approve, and Parent agrees that it will not request that KENETECH approve, a reduction in the triggering percentage for the Minimum Condition to below 50% in order to ensure that, as a condition to KENETECH's obligation to consummate the Offer and the Merger, at least a majority of the outstanding shares, other than the shares held by Mr. Lerdal, be tendered in the Offer. 8. Certain Information Concerning KENETECH The section referred to as "The Tender Offer--Certain Information Concerning KENETECH" is hereby amended and supplemented as follows: The following information is added before the first paragraph on page 35 of the Offer to Purchase: Preliminary Estimate of Net Cash Flows. In the course of discussions giving rise to the Merger Agreement, Mr. Lerdal furnished to VAC certain financial information that was not publicly available. The non-public information provided by Mr. Lerdal included his preliminary estimate of the net cash he asserted KENETECH's eight largest investments could generate over the next four years. KENETECH does not as a matter of course publicly disclose estimates as to future results. These estimates were not prepared for publication or with a view to complying with the published guidelines of the Commission regarding projections or with the American Institute of Certified Public Accountants guide for Prospective Financial Statements. Such information is being included in this Supplement solely because it was furnished to us in connection with the discussions giving rise to the Merger Agreement. We believe that the information was presented in a manner designed to persuade us that we should raise our offer price. As a result, we did not consider the information reliable and did not rely on such information in ultimately deciding to increase our price offered for the Common Stock. Furthermore, we believe that the information was incomplete since it did not address in any comprehensive manner KENETECH's existing contingent liabilities. The independent accountants of KENETECH have neither examined nor compiled the financial information set forth below and, accordingly, do not express an opinion or any other form of assurance with respect thereto. The reports of such independent accountants incorporated by reference in the Offer to Purchase relate to the historical financial information of KENETECH and do not extend to the following financial information and should not be read to do so. THE INFORMATION SET FORTH BELOW NECESSARILY REFLECTS NUMEROUS ASSUMPTIONS WITH RESPECT TO GENERAL BUSINESS AND ECONOMIC CONDITIONS AND OTHER MATTERS, MANY OF WHICH ARE INHERENTLY UNCERTAIN OR BEYOND KENETECH'S OR OUR CONTROL, MAY NOT BE APPARENT ON THE FACE OF THE 21 ASSUMPTIONS AND DO NOT TAKE INTO ACCOUNT ANY CHANGES IN KENETECH'S OPERATIONS OR CAPITAL STRUCTURE WHICH MAY RESULT FROM THE OFFER AND THE MERGER. IN ADDITION, FACTORS SUCH AS INDUSTRY PERFORMANCE AND REGULATORY AND FINANCIAL CONDITIONS, WHICH ARE DIFFICULT TO PROJECT, MAY CAUSE THIS INFORMATION OR THE UNDERLYING ASSUMPTIONS TO BE INACCURATE. IT IS NOT POSSIBLE TO PREDICT WHETHER THE ASSUMPTIONS MADE IN PREPARING SUCH FINANCIAL INFORMATION WILL BE VALID. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THESE ESTIMATES WILL BE REALIZED, AND ACTUAL RESULTS MAY PROVE TO BE MATERIALLY HIGHER OR LOWER THAN THOSE CONTAINED IN THE ESTIMATES. THE INCLUSION OF THIS INFORMATION SHOULD NOT BE REGARDED AS AN INDICATION THAT WE, KENETECH OR ANYONE ELSE WHO RECEIVED THIS INFORMATION CONSIDERED IT A RELIABLE PREDICTOR OF FUTURE EVENTS, AND THIS INFORMATION SHOULD NOT BE RELIED ON AS SUCH. NONE OF PARENT, PURCHASER, VAC OR ANY OF THEIR RESPECTIVE REPRESENTATIVES ASSUMES ANY RESPONSIBILITY FOR THE VALIDITY, REASONABLENESS, OR COMPLETENESS OF SUCH FINANCIAL INFORMATION, AND KENETECH HAS MADE NO REPRESENTATION TO SUCH PARTIES REGARDING SUCH INFORMATION.
Realization Period -------------------------- 2001 2002 2003 2004 ------- ------ ------ ---- (in thousands) Net cash flow(1)..................................... $10,350 $9,950 $1,500 $500
- -------- (1) Represents preliminary estimates of the aggregate net cash return from KENETECH's eight largest investments. Assumes operating expenses of $1.0 million in each of 2001, 2002 and 2003. The estimated net cash flows do not give effect to many of KENETECH's existing contingent liabilities. 9. Certain Information Concerning Purchaser and Parent The section referred to as "The Tender Offer--Certain Information Concerning Purchaser and Parent" is hereby amended and supplemented as follows: The fourth paragraph on page 35 of the Offer of Purchase is hereby amended and restated in its entirety to read as follow: ValueAct Capital Partners, L.P., a limited partnership organized under the laws of Delaware, owns the voting equity securities of Parent. Parent's equity securities will be owned after the Merger by VAC and Mr. Lerdal, who has agreed to contribute the Contribution Shares to Parent. The principal executive offices of ValueAct Capital Partners, L.P. are located at One Maritime Plaza, Suite 1400, San Francisco, California 94111, and its telephone number is (415) 362-3706. The following information is added to page 35 of the Offer to Purchase immediately following the fourth paragraph thereon: VA Partners, L.L.C., a limited liability company organized under the laws of Delaware, is the sole general partner of ValueAct Capital Partners, L.P. The principal executive offices of VA Partners, L.L.C. are located at One Maritime Plaza, Suite 1400, San Francisco, California 94111 and its telephone number is (415) 362-3706. 12. Certain Conditions of the Offer The section referred to as "The Tender Offer--Certain Conditions of the Offer" is hereby amended and supplemented as follows: The third paragraph on page 43 of the Offer to Purchase is hereby amended and restated in its entirety as follows: Furthermore, notwithstanding any other term of the Offer or the Merger Agreement, Purchaser will not be required to accept for payment or, subject as aforesaid, to pay for any Shares not theretofore accepted 22 for payment or paid for, and may terminate the Offer if, at any time on or after the date of the Merger Agreement and before the Expiration Date, any of the following conditions exists (other than as a result of any action or inaction of Parent or any of its subsidiaries that constitutes a breach of the Merger Agreement): The first full paragraph on page 44 of the Offer to Purchase is hereby amended and restated in its entirety to read as follows: The foregoing conditions are for the sole benefit of Parent and Purchaser and may, subject to the terms of the Merger Agreement, and other than with respect to the Minimum Condition (the waiver of which also requires the consent of KENETECH), be waived by Parent and Purchaser in whole or in part at any time and from time to time in their sole discretion prior to the Expiration Date. The failure by Parent or Purchaser at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right. The waiver of any such right with respect to particular facts and circumstances will not be deemed a waiver with respect to any other facts and circumstances. Each such right will be deemed an ongoing right that may be asserted at any time and from time to time. 13. Certain Legal Matters and Regulatory Approvals The section referred to as "The Tender Offer--Certain Legal Matters and Regulatory Approvals" is hereby amended and supplemented as follows: The following information is added as the final paragraphs of such section: Litigation. On November 9, 2000, Robert L. Kohls and Louise A. Kohls (the "Plaintiffs") moved to file a second amended and supplemental complaint (the "Second Amended Complaint") in an action pending in the Court of Chancery of the State of Delaware in and for New Castle County (the "Chancery Court") styled Kohls v. Duthie, et al. (the "Action"). The Second Amended Complaint names Gerald R. Morgan, Jr., Michael D. Winn, and KENETECH as additional defendants. KENETECH previously was a nominal defendant. The first cause of action of the Second Amended Complaint sets forth all of the allegations and seeks all of the relief set forth in the Plaintiffs' first amended complaint. The first cause of action of the Second Amended Complaint is purportedly brought as a derivative action on behalf of KENETECH. The second cause of action of the Second Amended Complaint seeks to enjoin preliminary and permanently the consummation of the Merger Agreement. As it pertains to the Merger Agreement, the Second Amended Complaint alleges in substance the following: . that the Offer and the Merger are the result of an unfair process, and will constitute an unfair transaction to the KENETECH stockholders; . that Charles Christenson, one of the members of the Special Committee, has, as a defendant in the Action, a personal interest in approving the Merger Agreement because the closing of the Merger would eliminate the standing of the Plaintiffs to bring the Action, and therefore the transactions contemplated by the Merger Agreement were not the product of arms-length negotiations, but instead constituted self-dealing; . that because Gerald R. Morgan, Jr., one of the members of the Special Committee, has, as the Chief Operating Officer of an entity in which KENETECH invests, an interest in pleasing Mr. Lerdal, and because the Offer and the Merger provide a unique benefit to Mr. Lerdal in the form of a "roll over" of his investment in KENETECH, the process whereby the Offer and the Merger were agreed to by KENETECH was unfair; . that the Per Share Amount of $1.04 was the product of an analysis of Houlihan Lokey that assumed the Action had no value to KENETECH, failed to investigate the Action by contacting the Plaintiffs, failed to consider that the Action is scheduled to go to trial in April 2001, and failed to evaluate independently the deferred benefit for deconsolidated losses, as a result of which the process whereby the Offer and the Merger were agreed to by KENETECH was unfair; 23 . that the Per Share Amount of $1.04 fails to properly account for issues relating to the deferred benefit for deconsolidated losses and overhead costs, as a result of which the Per Share Amount is unfair; . that the Per Share Amount of $1.04 is based on Mr. Lerdal owning the Shares that are the subject of the Action, title to which is contested by the Action, as a result of which both the process whereby the Offer and the Merger were agreed to by KENETECH and the Per Share Amount are unfair; and . that the disclosures surrounding the Offer and the Merger contain material misstatements and fail to include information necessary to make the statements not misleading. The Plaintiffs allege that the second cause of action of the Second Amended Complaint, including the above allegations, is maintainable as a class action, and that there are questions of law and fact which are common to the KENETECH stockholders who comprise the class, including: (i) whether the transactions contemplated by the Merger Agreement are the product of a fair process and provide a fair price to the stockholders of KENETECH; and (ii) whether the materials that describe the Offer and the Merger contain any misrepresentations or fail to disclose material facts which are necessary for the disclosures that have been made to not be misleading. The Plaintiffs request that the Chancery Court: (i) issue a preliminary injunction enjoining the consummation of the Merger Agreement; (ii) enter a permanent injunction prohibiting the consummation of the Merger Agreement; and (iii) award Plaintiffs their attorneys' fees, costs, and other expenses. Also on November 9, 2000, the Plaintiffs asked the Chancery Court to hold a scheduling conference to determine whether to schedule an expedited hearing on the Plaintiffs' application for a preliminary injunction enjoining the consummation of the Merger Agreement. On November 13, 2000, the Chancery Court held a conference and scheduled a hearing on the Plaintiffs' application for a preliminary injunction for December 5, 2000, at 3:00 p.m. E.S.T. KENETECH has been informed that the individual defendants intend to defend this action vigorously, and, to the extent that it does not involve derivative claims, KENETECH intends to defend this action vigorously. The above summary is qualified in its entirety by reference to the complete terms of the Notice of Motion and Motion for Leave to File Second Amended and Supplemental Complaint, copies of which are attached as Exhibit (a)(5)(v) to Amendment No. 1 to Schedule TO and incorporated by this reference. Miscellaneous. Parent, Purchaser and VAC have filed with the Commission a Tender Offer Statement on Schedule TO, as amended, together with all exhibits thereto, pursuant to Regulation M-A under the Exchange Act (the "Exchange Act Rules"), furnishing certain additional information with respect to the Offer which includes the information required by Schedule 13E-3. In addition, KENETECH has filed a Solicitation/Recommendation Statement on Schedule 14D-9, as amended, together with all exhibits thereto, pursuant to Rule 14d-9 of the Exchange Act Rules setting forth its recommendation with respect to the Offer and the reasons for such recommendations and furnishing certain additional related information. Such Schedules and any amendments thereto, including exhibits, may be inspected and copies may be obtained from the offices of the Commission in the manner set forth in "THE TENDER OFFER--Section 8. Certain Information Concerning KENETECH" of the Offer to Purchase (except that they will not be available at the regional offices of the Commission). KC MERGER CORP. November 26, 2000 24 SCHEDULE A Certain Information Concerning Purchaser, Parent and VAC The following information is added to page A-1 of the Offer to Purchaser immediately following the fourth paragraph thereon: VA Partners, L.L.C. The General Partner was formed in 2000 for the purpose of serving as the sole general partner of ValueAct Capital Partners, L.P. The founding members of the General Partner are listed above. A-1 Exhibit A Announced Transactions Between 10/19/99 and 10/18/00 Mergerstat Custom Report (dated as of October 18, 2000)
Target 5 Day Seller Buyer Industry(1) Premium - ------ ----- ----------- ------- R&B Falcon Corp Transocean Sedco Forex Inc ES 23.04% ThermoRetec Corp Thermo Electron Corp EGW&SS 33.33% E'town Corp Thames Water PLC EGW&SS 30.77% Providence Energy Corp Southern Union Co EGW&SS 35.74% Valley Resources Inc Southern Union Co EGW&SS 32.00% Hyder PLC Southern Co/PPL Corp EGW&SS 29.83% Virginia Gas Co Private Group EGW&SS 25.39% Scherer Healthcare Inc Private Group EGW&SS 42.86% LG&E Energy Corp PowerGen PLC EGW&SS 58.38% Virginia Gas Co NUI Corp EGW&SS 33.33% Bangor Hydro Electric Co NS Power Holdings Inc EGW&SS 73.77% Niagara Mohawk Power Holdings Inc National Grid Group PLC EGW&SS 49.02% Eastern Enterprises KeySpan Corp EGW&SS 27.03% GZA GeoEnvironmental Technologies Inc Futureco Environmental Inc EGW&SS 16.36% Entergy Corp FPL Group Inc EGW&SS 2.35% GPU Inc FirstEnergy Corp EGW&SS 36.76% Berkshire Energy Resources Energy East Corp EGW&SS 49.02% Coastal Corp (The) El Paso Energy Corp EGW&SS 33.78% MidAmerican Energy Holdings Co Berkshire Hathaway Inc EGW&SS 26.85% Union Pacific Resources Group Inc Anadarko Petroleum Corp EGW&SS 77.03% SJW Corp American Water Works Co Inc EGW&SS 28.64% CA La Electricidad de Caracas AES Corp EGW&SS 111.11% IPALCO Enterprises Inc AES Corp EGW&SS 16.93%
Median, Energy Services..... 23.04% Median, Electrical, Gas, Water & Sanitary Services..... 33.33%
- -------- (1) The term "ES" refers to Energy Services and the term "EGW&SS" refers to Electrical, Gas, Water & Sanitary Services Exhibit B Indicated Ranges of Value to KENETECH
Indicated Value Range ---------------------- Low High ---------- ----------- ADVANCES: Astoria Energy LLC.................................... $8,500,000 $ 9,000,000 OSB Chateaugay LLC.................................... $1,300,000 $ 2,000,000 Whinash............................................... $ 99,000 $ 123,000 DEBT SECURITIES: Indosuez Capital Funding VI, Ltd...................... $2,500,000 $ 2,500,000 ServiSense.com, Inc................................... $ 900,000 $ 900,000 INVESTMENTS: Astoria Energy LLC.................................... $6,500,000 $10,000,000 Francisco Partners L.P................................ $ 840,000 $ 840,000 Draper Atlantic Venture Fund II, L.P.................. $ 250,000 $ 250,000 Sage Systems, Inc..................................... $ 500,000 $ 800,000 Odin Millennium Partnership, Ltd...................... $1,050,000 $ 1,200,000 GenPhar, Inc.......................................... $ 250,000 $ 250,000 Interactive International Commerce, Ltd............... $ 150,000 $ 250,000 BreightBurn Energy Company, LLC....................... $ 42,500 $ 42,500
Facsimile copies of the Letter of Transmittal will be accepted. The Letter of Transmittal, certificates for the Shares and any other required documents should be sent by each stockholder of KENETECH or such stockholder's broker- dealer, commercial bank, trust company or other nominee to the Depositary as follows: The Depositary for the Offer Is: ChaseMellon Shareholder Services, L.L.C. By Facsimile Transmission (For Eligible Institutions Only) (201) 296-4293 Attention: Reorganization Department Confirm by Telephone: (201) 296-4860 By Overnight Courier: By Mail: By Hand: Reorganization Department Reorganization Department Reorganization Department P.O. Box 3301 120 Broadway 85 Challenger Road South Hackensack, NJ 07606 13th Floor Mail Stop--Reorg. New York, NY 10271 Ridgefield Park, NJ 07660 Other Information: Questions or requests for assistance or additional copies of this Supplement, the Offer to Purchase and the Letter of Transmittal may be directed to the Information Agent at its telephone number and location listed below. You may also contact your broker, dealer, commercial bank or trust company or other nominee for assistance concerning the Offer. The Information Agent for the Offer is: MacKenzie Partners, Inc. 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (Call Collect) E-Mail: Proxy@mackenziepartners.com or Call Toll Free (800) 322-2885 EX-99.(C)(3) 3 0003.txt SCHEDULE OF ACQUISITIONS Exhibit (c)(3)
- -------------------------------------------------------------------------------------------------------------------------------- Target 5 Day Seller Buyer Industry Premium - -------------------------------------------------------------------------------------------------------------------------------- Foremost Corp of America Zurich Allied AG Insurance 22.18% Nogatech Inc Zoran Corp Electronics 77.89% Premisys Communications Inc Zhone Technologies Inc Electrical Equipment 23.00% Piercing Pagoda Inc Zale Corp Retail 47.66% Eskimo Pie Corp Yogen Fruz World-Wide Inc Food Processing 15.43% Bolle Inc Worldwide Sports & Recreation Inc Drugs, Medical Supplies & Equipment 16.67% Serengeti Eyewear Inc Worldwide Sports & Recreation Inc Drugs, Medical Supplies & Equipment 110.11% Intermedia Communciations Inc WorldCom Inc Communications 97.47% Brandmakers Inc World Sales & Merchandising Inc Computer Software, Supplies & Services 180.00% TelDaFax AG World Access Inc Electrical Equipment 4.64% ERC Industries Inc Wood (John) Group PLC Construction Mining & Oil Equip & Mach. 6.67% Integrated Systems Inc Wind River Systems Inc Computer Software, Supplies & Services 245.21% Barnett Inc Wilmar Industries Inc Wholesale & Distribution 35.29% TJ International Inc Weyerhaeuser Co Timber & Forest Products 36.01% Old Guard Group Inc Westfield Cos Insurance 26.32% Teltrend Corp Westell Technologies Inc Electrical Equipment 462.39% National Bancorp of Alaska Wells Fargo & Co Banking & Finance 24.79% First Commerce Bancshares Inc Wells Fargo & Co Banking & Finance 13.47% First Security Corp Wells Fargo & Co Banking & Finance 17.00% Protocol Systems Inc Welch Allyn Inc Drugs, Medical Supplies & Equipment 25.49% Active Software Inc WebMethods Inc Computer Software, Supplies & Services 77.40% Alpine Oil Services Corp Weatherford International Inc Construction Mining & Oil Equip & Mach. 48.78% Schein Pharmaceuticals Inc Watson Pharmaceuticals Inc Drugs, Medical Supplies & Equipment 4.00% Quest Education Corp Washington Post Co (The) Miscellaneous Services 89.37% Bank United Corp Washington Mutual Inc Banking & Finance 7.65% Centennial HealthCare Corp Warburg, Pincus (E.M.) & Co LLC Health Services 87.07% Moser-Baer India Ltd Warburg, Pincus (E.M.) & Co LLC Electrical Equipment 5.75% Powertel Inc VoiceStream Wireless Corp Communications 1.35% Phillips (R.H.) Inc Vincor International Inc Beverages 51.19% OnDisplay Inc Vignette Corp Computer Software, Supplies & Services 50.67% Infinity Broadcasting Corp Viacom Inc Broadcasting 6.94% Chic by H.I.S. Inc VF Corp Apparel 30.27% H.I.S. Sportswear AG VF Corp Apparel 30.27% Data Transmission Network Corp Veronis Suhler & Associates Inc Computer Software, Supplies & Services 16.56% Tech-Sym Corp Veritas Capital Fund LP Instruments & Photographic Equipment 23.71% Acsys Inc Vedior NV Miscellaneous Services 40.45% Lilly Industries Inc Valspar Corp Chemicals, Paints & Coatings 126.79% Merchants New York Bancorp Inc Valley National Bancorp Banking & Finance 18.30% Precision Response Corp USA Networks Inc Miscellaneous Services 1.82% Repap Enterprises Inc UPM-Kymmene Oyj Paper 85.71% Pathways Group Inc (The) Upgrade International Corp Computer Software, Supplies & Services 56.82% Northrock Resources Ltd Unocal Corp Oil & Gas 67.80% Cade Industries Inc United Technologies Corp Aerospace, Aircraft & Defense 26.25% Specialty Equipment Cos Inc United Technologies Corp Industrial & Farm Equipment & Machinery 25.10% Questa Oil & Gas Co Unit Corp Oil & Gas 76.25% Jefferson Savings Bancorp Inc Union Planters Corp Banking & Finance 32.47% Mid-Coast Bancorp Inc Union Bankshares Corp Banking & Finance 164.67% Ben & Jerry's Homemade Inc Unilever NV/Unilever PLC Food Processing 35.70% Bestfoods Unilever NV/Unilever PLC Food Processing 35.66% Engineering Animation Inc Unigraphics Solutions Inc Computer Software, Supplies & Services 20.83% Pioneer Group Inc (The) UniCredito Italiano SpA Brokerage, Investment & Mgmt. Consulting 61.11% VRB Bancorp Umpqua Holdings Corp Banking & Finance 30.80% Pendaries Petroleum Ltd Ultra Petroleum Corp Oil & Gas 29.07% Paine Webber Group Inc UBS AG Brokerage, Investment & Mgmt. Consulting 64.03% US Airways Group Inc UAL Corp Transportation 119.14% Scripps Financial Corp U.S. Bancorp Banking & Finance 79.11% Praegitzer Industries Inc Tyco International Ltd Electronics 27.61% Mallinckrodt Inc Tyco International Ltd Drugs, Medical Supplies & Equipment 74.01% InnerDyne Inc Tyco International Ltd Drugs, Medical Supplies & Equipment 27.55% BeautiControl Cosmetics Inc Tupperware Corp Toiletries & Cosmetics 115.38% Worldtalk Communications Corp Tumbleweed Communications Corp Computer Software, Supplies & Services 117.67% Interface Systems Inc Tumbleweed Communications Corp Computer Software, Supplies & Services 85.52% Varco International Inc Tuboscope Inc Construction Mining & Oil Equip & Mach. 15.16% Landmark Financial Corp TrustCo Bank Corp NY Banking & Finance 35.48% Catskill Financial Corp Troy Financial Corp Banking & Finance 34.27% IMS Health Inc TriZetto Group (The) Computer Software, Supplies & Services 21.48% Vertex Communications Corp TriPoint Global Communications Inc Electrical Equipment 37.50% CareerBuilder Inc Tribune Co / Knight Ridder Inc Miscellaneous Services 106.19% Times Mirror Co Tribune Co Printing & Publishing 81.89% LaSalle Re Holdings Ltd Trenwick Group Inc Insurance 48.98% R&B Falcon Corp Transocean Sedco Forex Inc Energy Services 23.04% Romtec PLC Total Research Corp Miscellaneous Services 0.00% HW Group PLC TMP Worldwide Inc Miscellaneous Services 23.39% Advanced Communication Systems Inc Titan Corp Electrical Equipment 47.10% Garden Ridge Corp Three Cities Research Inc Retail 65.71% Business Resource Group Three Cities Research Inc Wholesale & Distribution 44.98% Thermo Electron Corp Thoratec Laboratories Corp Drugs, Medical Supplies & Equipment 88.06%
Coachmen Industries Inc Thor Industries Inc Autos & Trucks 43.31% Wave Technologies International Inc Thomson Corp (The) Miscellaneous Services 14.71% Primark Corp Thomson Corp (The) Computer Software, Supplies & Services 45.82% Thermo TerraTech Inc Thermo Electron Corp Fabricated Metal Products 84.62% ThermoRetec Corp Thermo Electron Corp Electric, Gas Water & Sanitary Services 33.33% ThermoTrex Corp Thermo Electron Corp Drugs, Medical Supplies & Equipment 37.06% ThermoLase Corp Thermo Electron Corp Toiletries & Cosmetics 28.17% Thermo Sentron Inc Thermo Electron Corp Industrial & Farm Equipment & Machinery 6.90% Onix Systems Inc Thermo Electron Corp Instruments & Photographic Equipment 16.13% Thermo BioAnalysis Corp Thermo Electron Corp Instruments & Photographic Equipment 55.56% Thermedics Detection Inc Thermo Electron Corp Instruments & Photographic Equipment 0.76% Metrika Systems Corp Thermo Electron Corp Instruments & Photographic Equipment 0.00% Trex Medical Corp Thermo Electron Corp Drugs, Medical Supplies & Equipment 102.83% EFTC Corp Thayer-BLUM Funding LLC Miscellaneous Services 68.07% E'town Corp Thames Water PLC Electric, Gas Water & Sanitary Services 30.77% Burr-Brown Corp Texas Instruments Inc Electronics 45.98% Telident Inc Teltronics Inc Electrical Equipment 2.47% Pointe Communications Corp Telscape International Inc Communications 30.86% Newgen Results Corp TeleTech Holdings Inc Miscellaneous Services 34.53% Lycos Inc Telefonica SA Computer Software, Supplies & Services 94.13% Tritel Inc TeleCorp PCS Inc Communications 73.68% Alba-Waldensian Inc Tefron Ltd Textiles 64.44% Engle Homes Inc Technical Olympic SA Construction Contractors & Eng. Svcs. 51.23% Greg Manning Auctions Inc Take to Auction.com Inc Retail 55.56% Docucon Inc TAB Products Co Computer Software, Supplies & Services 76.00% Carolina Southern Bank Synovus Financial Corp Banking & Finance 23.50% Telxon Corp Symbol Technologies Inc Office Equipment & Computer Hardware 40.03% AXENT Technologies Inc Symantec Corp Computer Software, Supplies & Services 41.51% General Cigar Holdings Inc Swedish Match AB Agricultural Production 80.69% Cobalt Networks Inc Sun Microsystems Inc Electrical Equipment 19.59% Image Guided Technologies Inc Stryker Corp Instruments & Photographic Equipment 260.32% Consolidated Papers Inc Stora Enso Oyj Paper 68.84% Kinnard Investments Inc Stockwalk.com Group Inc Brokerage, Investment & Mgmt. Consulting 67.64% Hanover Bancorp Inc Sterling Financial Corp Banking & Finance 5.80% Independent Bankshares Inc State National Bancshares Inc Banking & Finance 57.76% Ciga SpA Starwood Hotels & Resorts Worldwide Inc Leisure & Entertainment 11.39% ObjectShare Inc StarBase Corp Computer Software, Supplies & Services 14.00% Writer Corp Standard Pacific Corp Construction Contractors & Eng. Svcs. 89.53% MMI Cos Inc St. Paul Cos Inc (The) Insurance 142.13% Providence Energy Corp Southern Union Co Electric, Gas Water & Sanitary Services 35.74% Valley Resources Inc Southern Union Co Electric, Gas Water & Sanitary Services 32.00% Hyder PLC Southern Co / PPL Corp Electric, Gas Water & Sanitary Services 29.83% Heritage Bancorp Inc SouthBanc Shares Inc Banking & Finance 26.07% Peekskill Financial Corp Sound Federal Bancorp Banking & Finance 77.71% St. Laurent Paperboard Inc Smurfit-Stone Container Corp Packaging & Containers 61.41% Block Drug Co Inc SmithKline Beecham PLC Toiletries & Cosmetics 20.78% MotherNature.com Inc Sitestar Corp Retail 161.36% Moore Products Co Siemens AG Instruments & Photographic Equipment 45.89% Shared Medical Systems Corp Siemens AG Computer Software, Supplies & Services 61.75% Acuson Corp Siemens AG Drugs, Medical Supplies & Equipment 56.57% Janna Systems Inc Siebel Systems Inc Computer Software, Supplies & Services 46.13% Talbot Bancshares Inc Shore Bancshares Inc Banking & Finance 0.72% Interstate Hotels Corp Shaner Hotel Group Leisure & Entertainment 105.48% EIS International Inc SER Systeme AG Electrical Equipment 34.99% Homestead Village Inc Security Capital Group Inc Leisure & Entertainment 55.89% Security Capital US Realty Security Capital Group Inc Real Estate 13.11% Health Power Inc Security Capital Corp Insurance 40.57% Burns International Services Corp Securitas AB Miscellaneous Services 69.42% Dolphin Packaging PLC Sealed Air Corp Packaging & Containers 34.69% Home Port Bancorp Inc Seacoast Financial Services Corp Brokerage, Investment & Mgmt. Consulting 49.49% U.S. Trust Corp Schwab (Charles) Corp Brokerage, Investment & Mgmt. Consulting 85.87% Convergent Group Corp Schlumberger Ltd Computer Software, Supplies & Services 55.95% Caere Corp ScanSoft Inc Computer Software, Supplies & Services 59.21% Sterling Commerce Inc SBC Communications Inc Computer Software, Supplies & Services 36.87% Radiologix Inc Saunders Karp & Megrue Brokerage, Investment & Mgmt. Consulting 153.93% Shared Technologies Cellular Inc SATX Inc Communications 166.67% Courtaulds Textiles PLC Sara Lee Corp Apparel 138.71% Hadco Corp Sanmina Corp Electronics 77.88% Calahoo Petroleum Ltd Samson Investment Co Oil & Gas 69.62% Best Software Inc Sage Group PLC Computer Software, Supplies & Services 30.21% GetThere.com Inc Sabre Holdings Corp Computer Software, Supplies & Services 77.50% Prism Financial Corp Royal Bank of Canada Banking & Finance 55.93% Dain Rauscher Corp Royal Bank of Canada Brokerage, Investment & Mgmt. Consulting 23.97% US Foodservice Royal Ahold NV Wholesale & Distribution 46.48% Urban Shopping Centers Inc Rodamco North America NV Brokerage, Investment & Mgmt. Consulting 42.73% South Jersey Financial Corp Inc Richmond County Financial Corp Banking & Finance 19.83% Marketing Specialists Corp Richmond Capital Partners I, LP Miscellaneous Services 184.09% ChiRex Inc Rhodia SA Drugs, Medical Supplies & Equipment 55.24% Nabisco Group Holdings Corp Reynolds (R.J.) Tobacco Holdings Inc Food Processing 17.65% American National Can Group Inc Rexam PLC Packaging & Containers 41.84% Allgon AB REMEC Inc Electrical Equipment 22.20%
Lexington Global Asset Managers Inc ReliaStar Financial Corp Brokerage, Investment & Mgmt. Consulting 79.84% First Community Bank of The Desert Rancho Santa Fe National Bank Banking & Finance 3.81% Agribrands International Inc Ralcorp Holdings Inc Food Processing 7.93% Haven Bancorp Inc Queens County Bancorp Inc Banking & Finance 6.53% NetZero Inc QUALCOMM Inc Communications 132.34% Ancor Communications Inc QLogic Corp Electrical Equipment 21.63% UTILX Corp Puget Sound Energy Inc Construction Contractors & Eng. Svcs. 32.40% Metamor Worldwide Inc PSINet Inc Miscellaneous Services 66.83% Percon Inc PSC Inc Office Equipment & Computer Hardware 12.11% Highland Bancorp Inc Prudential PLC Banking & Finance 55.37% WMF Group Ltd (The) Prudential Insurance Co of America Banking & Finance 60.94% Harbor Federal Bancorp Inc Provident Bankshares Corp Banking & Finance 37.69% Watkins-Johnson Co Private Group Industrial & Farm Equipment & Machinery 29.02% Cleveland Indians Baseball Co Inc Private Group Leisure & Entertainment 26.31% Avado Brands Inc Private Group Leisure & Entertainment 38.10% RISCORP Inc Private Group Insurance 71.11% Virginia Gas Co Private Group Electric, Gas Water & Sanitary Services 25.39% Gleason Corp Private Group Industrial & Farm Equipment & Machinery 26.86% Transportation Technologies Industries Inc Private Group Automotive Products & Accessories 57.05% Micro Warehouse Inc Private Group Retail 51.27% Wilmar Industries Inc Private Group Retail 26.91% BNC Mortgage Inc Private Group Banking & Finance 42.86% Healthplex Inc Private Group Insurance 31.58% Arizona Instrument Corp Private Group Instruments & Photographic Equipment 40.45% Sheldahl Inc Private Group Electronics 20.40% Spanlink Communications Inc Private Group Computer Software, Supplies & Services 6.28% Seagate Technology Inc Private Group Office Equipment & Computer Hardware 13.45% Pulaski Furniture Corp Private Group Furniture 30.43% Solomon-Page Group Ltd Private Group Miscellaneous Services 47.57% Jason Inc Private Group Industrial & Farm Equipment & Machinery 48.81% Cherry Corp Private Group Electrical Equipment 109.03% Roadhouse Grill Inc Private Group Leisure & Entertainment 33.33% Stratosphere Corp Private Group Leisure & Entertainment 30.44% PETCO Animal Supplies Inc Private Group Retail 70.02% Lindberg Corp Private Group Primary Metal Processing 35.75% Simon Transportation Services Inc Private Group Transportation 27.27% U.S. Can Corp Private Group Packaging & Containers 50.94% Johns Manville Corp Private Group Stone, Clay & Glass 26.25% Neff Corp Private Group Miscellaneous Services 34.53% General Bearing Corp Private Group Industrial & Farm Equipment & Machinery 23.81% MascoTech Inc Private Group Automotive Products & Accessories 46.19% BI Inc Private Group Electrical Equipment 106.25% U.S. Franchise Systems Inc Private Group Leisure & Entertainment 14.16% Sunburst Hospitality Corp Private Group Leisure & Entertainment 35.66% Simpson Industries Inc Private Group Automotive Products & Accessories 26.83% Omega Worldwide Inc Private Group Brokerage, Investment & Mgmt. Consulting 55.00% Sunrise Medical Inc Private Group Drugs, Medical Supplies & Equipment 65.02% Dynamic Homes Inc Private Group Construction Contractors & Eng. Svcs. 60.38% Scherer Healthcare Inc Private Group Electric, Gas Water & Sanitary Services 42.86% Timberline Bancshares Inc PremierWest Bancorp Banking & Finance 68.75% LG&E Energy Corp PowerGen PLC Electric, Gas Water & Sanitary Services 58.38% Quantum Effect Devices Inc PMC-Sierra Inc Electronics 23.48% Georgia-Pacific Corp Plum Creek Timber Co Timber & Forest Products 55.41% Image Processing Systems Inc Photon Dynamics Inc Instruments & Photographic Equipment 45.53% Moto Photo Inc PhotoChannel Networks Inc Miscellaneous Services 297.73% Software.com Inc Phone.com Inc Computer Software, Supplies & Services 27.75% Phoenix Investment Partners Ltd Phoenix Home Life Mutual Insurance Co Brokerage, Investment & Mgmt. Consulting 40.00% Medquist Inc Philips Electronics NV Brokerage, Investment & Mgmt. Consulting 32.47% Balance Bar Co Philip Morris Cos Inc Wholesale & Distribution 60.86% Nabisco Group Holdings Corp Philip Morris Cos Inc Food Processing 4.50% Warner-Lambert Co Pfizer Inc Drugs, Medical Supplies & Equipment 71.21% Kyzen Corp Petroferm Inc Household Goods 42.86% Telco Research Corp Peregrine Systems Inc Computer Software, Supplies & Services 58.79% Market Financial Corp Peoples Community Bancorp Banking & Finance 36.84% JPS Packaging Co Pechiney SA Paper 46.10% National Computer Systems Inc Pearson PLC Computer Software, Supplies & Services 29.34% PDK Labs Inc PDK Acquisition Corp Drugs, Medical Supplies & Equipment 12.61% Northfield Bancorp Inc Patapsco Bancorp Inc Banking & Finance 26.93% Commercial Intertech Corp Parker-Hannifin Corp Valves, Pumps & Hydraulics 34.41% Wynn's International Inc Parker-Hannifin Corp Wholesale & Distribution 71.13% Western Properties Trust Pan Pacific Retail Properties Inc Brokerage, Investment & Mgmt. Consulting 51.06% Los Robles Bancorp Pacific Capital Bancorp Banking & Finance 23.31% Hagler Bailly Inc PA Consulting Group Brokerage, Investment & Mgmt. Consulting 89.32% Cia Manufacturera de Vidrio Owens-Illinois Inc Packaging & Containers 207.14% Langer Biomechanics Group Inc OrthoStrategies Inc Drugs, Medical Supplies & Equipment 26.81% Carleton Corp Oracle Corp Computer Software, Supplies & Services 11.87% East/West Communications Inc Omnipoint Corp Communications 100.98% Permanent Bancorp Inc Old National Bancorp Banking & Finance 69.25% United Asset Management Corp Old Mutual PLC Brokerage, Investment & Mgmt. Consulting 22.67% Home Bancorp Old Kent Financial Corp Banking & Finance 2.50% Plasma-Therm Inc Oerlikon-Buhrle Holding AG Industrial & Farm Equipment & Machinery 38.89%
Dayton Superior Corp Odyssey Investment Partners Primary Metal Processing 54.29% Virginia Gas Co NUI Corp Electric, Gas Water & Sanitary Services 33.33% Bangor Hydro Electric Co NS Power Holdings Inc Electric, Gas Water & Sanitary Services 73.77% Wesley Jessen VisionCare Inc Novartis AG Drugs, Medical Supplies & Equipment 17.09% Comptek Research Inc Northrop Grumman Corp Instruments & Photographic Equipment 21.94% Security of Pennsylvania Financial Corp Northeast Pennsylvania Financial Corp Banking & Finance 62.79% Dime Bancorp Inc North Fork Bancorp Inc Banking & Finance 29.47% Saratoga Beverage Group Inc North Castle Partners LLC Beverages 23.97% Verio Inc Nippon Telegraph & Telephone Corp Computer Software, Supplies & Services 70.79% CNY Financial Corp Niagara Bancorp Inc Banking & Finance 5.28% Iroquois Bancorp Inc Niagara Bancorp Inc Banking & Finance 139.55% Concentric Network Corp NEXTLINK Communications Inc Communications 52.04% Chadmoore Wireless Group Inc NEXTEL Communications Inc Communications 80.77% Chris-Craft Industries Inc News Corp Ltd (The) Broadcasting 19.71% BHC Communications Inc News Corp Ltd (The) Broadcasting 12.92% United Television Inc News Corp Ltd (The) Broadcasting 7.85% Battle Mountain Gold Co Newmont Mining Corp Mining & Minerals 10.50% Nutmeg Federal Savings & Loan Association NewMil Bancorp Inc Banking & Finance 0.98% PremiumWear Inc New England Business Service Inc Apparel 45.95% Wall Data Inc NetManage Inc Computer Software, Supplies & Services 54.91% Summit Technology Inc Nestle SA Drugs, Medical Supplies & Equipment 56.64% Diehl Graphsoft Inc Nemetschek AG Computer Software, Supplies & Services 52.00% 4Front Technologies Inc NCR Corp Computer Software, Supplies & Services 28.65% World of Science Inc Natural Wonders Inc Retail 11.65% IRI International Corp National-Oilwell Inc Construction Mining & Oil Equip & Mach. 78.11% Community Independent Bank Inc National Penn Bancshares Brokerage, Investment & Mgmt. Consulting 96.90% Renex Corp National Nephrology Associates Inc Health Services 50.83% Niagara Mohawk Power Holdings Inc National Grid Group PLC Electric, Gas Water & Sanitary Services 49.02% Tri Link Resources Ltd National Fuel Gas Co Oil & Gas 27.39% CCB Financial Corp National Commerce Bancorp Banking & Finance 16.65% PennCorp Financial Group Inc National Bancshares Corp of Texas Insurance 78.57% First Northern Capital Corp Mutual Savings Bank Banking & Finance 56.25% Beau Canada Exploration Ltd Murphy Oil Corp Oil & Gas 22.22% TEAM America Corp MuchoCode.com Brokerage, Investment & Mgmt. Consulting 5.80% Printrak International Inc Motorola Inc Miscellaneous Manufacturing 10.97% Advest Group Inc Mony Group Inc Brokerage, Investment & Mgmt. Consulting 7.83% Pharmacia & Upjohn Inc Monsanto Co Drugs, Medical Supplies & Equipment 12.50% LJL BioSystems Inc Molecular Devices Corp Miscellaneous Services 114.23% Pacific Gateway Properties Inc Mission Orchard Statutory Trust Real Estate 19.47% Minolta QMS Inc Minolta Co Ltd Office Equipment & Computer Hardware 100.00% Quante AG Minnesota Mining & Manufacturing Co Electrical Equipment 45.42% Robinson Nugent Inc Minnesota Mining & Manufacturing Co Electrical Equipment 21.10% CSB Financial Group Inc Midland States Bancorp Inc Banking & Finance 42.98% Mirage Resorts Inc MGM Grand Inc Leisure & Entertainment 81.66% Conning Corp Metropolitan Life Insurance Co Brokerage, Investment & Mgmt. Consulting 33.26% Met-Coil Systems Corp Mestek Inc Industrial & Farm Equipment & Machinery 18.33% BridgeStreet Accommodations Inc MeriStar Hotels & Resorts Inc Leisure & Entertainment 38.03% ShopKo Stores Inc Merck & Co Inc Health Services 55.46% Union National Bancorp Mercantile Bankshares Corp Banking & Finance 36.22% Professionals Group Inc Medical Assurance Inc Insurance 96.23% Digital Origin Inc Media 100 Inc Computer Software, Supplies & Services 34.34% Ameritrans Capital Corp Medallion Financial Corp Banking & Finance 51.10% Splitrock Services Inc McLeodUSA Inc Communications 146.74% David's Bridal Inc May Department Stores Co (The) Retail 58.35% Quantum Corp Maxtor Corp Office Equipment & Computer Hardware 60.76% Prudential Steel Ltd Maverick Tube Corp Primary Metal Processing 23.98% CFM Technologies Inc Mattson Technology Inc Electronics 95.36% Alltrista Corp Marlin Capital LP Packaging & Containers 39.53% In Home Health Inc Manor Care Inc Health Services 28.47% NetMoves Corp Mail.com Inc Computer Software, Supplies & Services 95.06% American Business Products Inc Mail-Well Inc Printing & Publishing 73.01% CML Industries Ltd Mail-Well Inc Paper 83.77% Harding Lawson Associates Group Inc MACTEC Inc Construction Contractors & Eng. Svcs. 41.45% Keystone Financial Inc M&T Bank Corp Banking & Finance 59.32% Ortel Corp Lucent Technologies Inc Electrical Equipment 40.24% Professional Transportation Group Ltd Inc Logistics Management LLC Transportation 48.15% Charter PLC Lincoln Electric Holdings Inc Industrial & Farm Equipment & Machinery 101.27% Citizens Bancorp Lincoln Bancorp Banking & Finance 96.44% Template Software Inc Level 8 Systems Inc Computer Software, Supplies & Services 197.71% Veterinary Centers of America Inc Leonard Green & Partners LP Agricultural Production 9.57% Service Experts Inc Lennox International Inc Construction Contractors & Eng. Svcs. 3.69% U.S. Home Corp Lennar Corp Construction Contractors & Eng. Svcs. 40.91% Rainforest Cafe Inc Landry's Seafood Restaurants Inc Leisure & Entertainment 57.77% Carson Inc L'Oreal SA Toiletries & Cosmetics 40.92% 800-JR Cigar Inc L&LR Inc Wholesale & Distribution 18.83% Cerprobe Corp Kulicke & Soffa Industries Inc Instruments & Photographic Equipment 44.82% Rexall Sundown Inc Koninklijke Numico NV Drugs, Medical Supplies & Equipment 40.68% Euroweb International Corp Koninklijke KPN NV Communications 84.57% HMT Technology Corp Komag Inc Office Equipment & Computer Hardware 59.65% Wassall PLC Kohlberg Kravis Roberts & Co Chemicals, Paints & Coatings 11.99% Medco Research Inc King Pharmaceuticals Inc Drugs, Medical Supplies & Equipment 29.35%
Safeskin Corp Kimberly-Clark Corp Plastics & Rubber 32.60% Eastern Enterprises KeySpan Corp Electric, Gas Water & Sanitary Services 27.03% Advanced Machine Vision Corp Key Technology Inc Instruments & Photographic Equipment 22.70% Acme Electric Corp Key Components LLC Electrical Equipment 20.97% Canisco Resources Inc Kenny Industrial Services LLC Construction Contractors & Eng. Svcs. 66.67% JLK Direct Distribution Inc Kennametal Inc Wholesale & Distribution 94.44% EndoSonics Corp JOMED NV Drugs, Medical Supplies & Equipment 58.50% Gylling Optima Batteries AB Johnson Controls Inc Electrical Equipment 71.77% Mikasa Inc JG Durand Industries SA Household Goods 68.20% Optical Coating Laboratory Inc JDS Uniphase Corp Instruments & Photographic Equipment 289.34% E-Tek Dynamics Inc JDS Uniphase Corp Electronics 93.48% SDL Inc JDS Uniphase Corp Electronics 50.20% Pentech International Inc JAKKS Pacific Inc Miscellaneous Manufacturing 60.00% Cucos Inc Jacksonville Restaurant Acquisition Corp Leisure & Entertainment 0.00% dELiA*s Inc iTurf Inc Retail 119.11% Pierce Leahy Corp Iron Mountain Inc Miscellaneous Services 46.18% Protocol Systems Inc Invivo Corp Drugs, Medical Supplies & Equipment 45.35% Dexter Corp (The) Invitrogen Corp Textiles 29.19% Life Technologies Inc Invitrogen Corp Drugs, Medical Supplies & Equipment 17.65% Synthetic Industries Inc Investcorp Textiles 16.81% Jostens Inc Investcorp Miscellaneous Manufacturing 45.62% Integ Inc Inverness Medical Technology Inc Drugs, Medical Supplies & Equipment 50.85% Brands Hatch Leisure PLC Interpublic Group of Cos Inc Leisure & Entertainment 33.29% NFO Worldwide Inc Interpublic Group of Cos Inc Miscellaneous Services 71.16% Hercules Inc International Specialty Products Inc Chemicals, Paints & Coatings 18.16% Shorewood Packaging Corp International Paper Co Packaging & Containers 12.36% Champion International Corp International Paper Co Paper 45.61% International Paper Co International Flavors & Fragrances Inc Food Processing 11.80% LGS Group Inc International Business Machines Corp Computer Software, Supplies & Services 38.60% Petroglyph Energy Inc Intermountain Industries Inc Oil & Gas 106.52% CSI Computer Specialists Inc Interactive Systems Inc Miscellaneous Services 38.89% bamboo.com Inc Interactive Pictures Corp Computer Software, Supplies & Services 110.03% PS Group Holdings Inc Integrated Capital Associates Inc Wholesale & Distribution 2.65% Republic Group Inc Integrated Capital Associates Inc Paper 53.47% Hussmann International Inc Ingersoll-Rand Co Industrial & Farm Equipment & Machinery 120.87% ReliaStar Financial Corp ING Groep NV Insurance 88.61% Ardent Software Inc Informix Corp Computer Software, Supplies & Services 154.64% Medical Dynamics Inc InfoCure Corp Drugs, Medical Supplies & Equipment 148.00% Proxima ASA In Focus Systems Inc Office Equipment & Computer Hardware 78.58% Siddons Ramset Ltd Illinois Tool Works Inc Fabricated Metal Products 38.73% Laser Power Corp II-VI Inc Instruments & Photographic Equipment 115.53% Empire Banc Corp Huntington Bancshares Inc Banking & Finance 7.79% Ulster Petroleums Ltd Hunt Oil Co Oil & Gas 41.23% Newport Petroleum Corp Hunt Oil Co Oil & Gas 17.92% Tehama Bancorp Humboldt Bancorp Banking & Finance 11.69% Washington Homes Inc Hovnanian Enterprises Inc Construction Contractors & Eng. Svcs. 37.24% BFX Hospitality Group Inc Hospitality Concepts LLC Leisure & Entertainment 28.57% Pittway Corp Honeywell International Inc Electrical Equipment 52.94% United Biscuits Holdings PLC Hicks, Muse, Tate & Furst / Nabisco Holdings Corp Food Processing 7.28% Bradley Real Estate Inc Heritage Property Investment Trust Inc Brokerage, Investment & Mgmt. Consulting 18.92% Robertson-Ceco Corp Heico Holdings Inc Building Products 43.75% HALIS Inc HealthWatch Inc Computer Software, Supplies & Services 14.29% SMED International Inc Haworth Inc Furniture 17.39% Snyder Communications Inc Havas Advertising SA Miscellaneous Services 11.78% Hartford Life Inc Hartford Financial Services Group Inc Insurance 18.66% SGB Group PLC Harsco Corp Building Products 54.92% C-Cube Microsystems Inc Harmonic Inc Electrical Equipment 5.95% CFI ProServices Inc Harland (John H.) Co Computer Software, Supplies & Services 77.66% Concentrex Inc Harland (John H.) Co Computer Software, Supplies & Services 77.66% OEC Compression Corp Hanover Compressor Co Miscellaneous Services 33.33% Celestial Seasonings Inc Hain Food Group Inc (The) Food Processing 50.23% Vallen Corp Hagemeyer NV Wholesale & Distribution 47.06% Everest Medical Corp Gyrus Group PLC Drugs, Medical Supplies & Equipment 23.10% Cameron Ashley Building Products Inc Guardian Industries Corp Wholesale & Distribution 27.61% Coinmach Laundry Corp GTCR Golder Rauner LLC Miscellaneous Services 60.47% CompUSA Inc Grupo Sanborns SA de CV Retail 83.64% Coast Bancorp Greater Bay Bancorp Banking & Finance 31.30% Bank of Santa Clara Greater Bay Bancorp Banking & Finance 20.51% MYR Group Inc GPU Inc Construction Contractors & Eng. Svcs. 45.90% Hello Direct Inc GN Great Nordic Group Electrical Equipment 64.49% IPC Communications Inc Global Crossing Ltd Construction Contractors & Eng. Svcs. 19.47% WesterFed Financial Corp Glacier Bancorp Inc Banking & Finance 46.81% ZapMe! Corp Gilat Satellite Networks Ltd Computer Software, Supplies & Services 32.57% Ridgeview Inc Gibor Sport Holdings Ltd Textiles 13.64% Fort James Corp Georgia-Pacific Corp Paper 58.17% GelTex Pharmaceuticals Inc Genzyme General Corp Drugs, Medical Supplies & Equipment 18.37% Biomatrix Inc Genzyme Corp Drugs, Medical Supplies & Equipment 30.97% Vialog Corp Genesys SA Communications 73.73% MEPC PLC General Electric Co/British Telecommunications PLC Real Estate 20.41% MECON Inc General Electric Co Computer Software, Supplies & Services 59.03% Showpower Inc General Electric Co Miscellaneous Services 24.33%
Harmon Industries Inc General Electric Co Electrical Equipment 107.66% Smallworldwide PLC General Electric Co Computer Software, Supplies & Services 140.67% News Communications & Media PLC Gannett Co Inc Printing & Publishing 152.84% Central Newspapers Inc Gannett Co Inc Printing & Publishing 8.36% Real Goods Trading Corp Gaiam Inc Wholesale & Distribution 11.11% American Educational Products Inc G.C. Associates Holdings Corp Miscellaneous Manufacturing 9.53% GZA GeoEnvironmental Technologies Inc Futureco Environmental Inc Electric, Gas Water & Sanitary Services 16.36% Skylands Financial Corp Fulton Financial Corp Banking & Finance 76.10% Bissett & Associates Investment Management Ltd Franklin Resources Inc Brokerage, Investment & Mgmt. Consulting 14.60% Entergy Corp FPL Group Inc Electric, Gas Water & Sanitary Services 2.35% Texas Pacific Group Foster's Brewing Group Ltd Beverages 38.06% Farr Co Forvaltnings AB Ratos Industrial & Farm Equipment & Machinery 39.60% Brookdale Living Communities Inc Fortress Investment Group LLC / Capital Z Partners Miscellaneous Services 1.67% Forcenergy Inc Forest Oil Corp Oil & Gas 26.05% Carey International Inc Ford Motor Co / Chartwell Investments II LLC Transportation 21.18% Hertz Corp Ford Motor Co Miscellaneous Services 20.58% Videonics Inc FOCUS Enhancements Inc Instruments & Photographic Equipment 56.00% SWVA Bancshares Inc FNB Corp Brokerage, Investment & Mgmt. Consulting 134.65% Innovative Valve Technologies Inc Flowserve Corp Wholesale & Distribution 100.00% DII Group Inc Flextronics International Ltd Electronics 103.91% Castle & Cook Inc Flexi-Van Leasing Inc Real Estate 54.74% Summit Bancorp FleetBoston Financial Corp Banking & Finance 43.35% GPU Inc FirstEnergy Corp Electric, Gas Water & Sanitary Services 36.76% U.S. Bancorp Firstar Corp Banking & Finance 28.66% FFY Financial Corp First Place Financial Corp Banking & Finance 4.80% Somerset Group Inc (The) First Indiana Corp Banking & Finance 77.95% Professional Bancorp Inc First Community Bancorp Banking & Finance 128.57% Dynex Capital Inc First Commercial Corp Brokerage, Investment & Mgmt. Consulting 78.26% Carolina First BancShares Inc First Charter Corp Banking & Finance 10.10% Millennium Bank First Banks Inc Banking & Finance 15.71% First Savings Bancorp Inc First Bancorp Banking & Finance 14.59% United Financial Mortgage Corp Finantra Capital Inc Banking & Finance 226.09% Duff & Phelps Credit Rating Co FIMALAC SA Brokerage, Investment & Mgmt. Consulting 25.19% Ottawa Financial Corp Fifth Third Bancorp Banking & Finance 22.87% Pennwood Bancorp Inc Fidelity Bancorp Inc Banking & Finance 69.03% Ferrofluidics Corp Ferrotec Corp Industrial & Farm Equipment & Machinery 79.06% Atlantic Financial Corp F&M National Corp Brokerage, Investment & Mgmt. Consulting 29.62% CNS Bancorp Inc Exchange National Bancshares Inc Banking & Finance 50.22% Echelon International Corp Inc ETA Holding LLC Real Estate 41.67% Microwave Power Devices Inc Ericsson AB Electrical Equipment 51.30% Globe Business Resources Inc Equity Residential Properties Trust Miscellaneous Services 12.50% Grove Property Trust Equity Residential Properties Trust Brokerage, Investment & Mgmt. Consulting 7.94% Cornerstone Properties Inc Equity Office Properties Trust Brokerage, Investment & Mgmt. Consulting 28.43% MG PLC Enron Corp Wholesale & Distribution 33.13% Northstar Computer Forms Inc Ennis Business Forms Inc Printing & Publishing 64.71% Berkshire Energy Resources Energy East Corp Electric, Gas Water & Sanitary Services 49.02% SOFTWORKS Inc EMC Corp Computer Software, Supplies & Services 15.87% Splash Technology Holdings Inc Electronics For Imaging Inc Office Equipment & Computer Hardware 33.33% Liposome Co Inc (The) Elan Corp PLC Drugs, Medical Supplies & Equipment 41.49% Dura Pharmaceuticals Inc Elan Corp PLC Drugs, Medical Supplies & Equipment 24.42% Coastal Corp (The) El Paso Energy Corp Electric, Gas Water & Sanitary Services 33.78% Triple S Plastics Inc Eimo Oyj Plastics & Rubber 46.48% Circle International Group Inc EGL Inc Miscellaneous Services 43.32% Lodgian Inc Edgecliff Holdings LLC Leisure & Entertainment 73.61% Telesciences Inc EDB Gruppen AS Computer Software, Supplies & Services 219.64% McWhorter Technologies Inc Eastman Chemical Co Chemicals, Paints & Coatings 38.83% OneMain.com Inc EarthLink Inc Communications 28.81% VERSUS Technology Inc E*TRADE Group Inc Computer Software, Supplies & Services 60.26% Spiros Development Corp II Inc Dura Pharmaceuticals Inc Drugs, Medical Supplies & Equipment 56.86% Catalytica Inc DSM NV Miscellaneous Services 11.85% @plan Inc DoubleClick Inc Computer Software, Supplies & Services 44.98% Safety 1st Inc Dorel Industries Inc Plastics & Rubber 28.40% nFront Inc Digital Insight Corp Computer Software, Supplies & Services 97.16% Financial Security Assurance Holdings Ltd Dexia SA Insurance 69.11% Santa Fe Snyder Corp Devon Energy Corp Oil & Gas 21.30% VoiceStream Wireless Corp Deutsche Telekom AG Communications 32.89% Air Express International Corp Deutsche Post AG Miscellaneous Services 6.25% National Discount Brokers Group Inc Deutsche Bank AG Brokerage, Investment & Mgmt. Consulting 73.08% Delhaize America Inc Delhaize Le Lion SA Retail 23.60% American Precision Industries Inc Danaher Corp Electrical Equipment 64.67% Kollmorgen Corp Danaher Corp Electrical Equipment 75.17% Detroit Diesel Corp DaimlerChrysler AG Industrial & Farm Equipment & Machinery 35.29% Apex Inc Cybex Computer Products Corp Office Equipment & Computer Hardware 19.25% Altoro Gold Corp Crown Resources Corp Mining & Minerals 80.00% ISOCOR Critical Path Inc Computer Software, Supplies & Services 141.44% Computer Research Inc CRI Acquisition Corp Computer Software, Supplies & Services 24.74% Aureal Inc Creative Technology Ltd Electronics 55.56% Comps.com Inc CoStar Group Inc Computer Software, Supplies & Services 7.14% Home-Stake Oil & Gas Co Cortez Oil & Gas Inc Oil & Gas 2.33% Oak Industries Inc Corning Inc Electronics 171.11% NetOptix Corp Corning Inc Instruments & Photographic Equipment 34.75%
Coulter Pharmaceutical Inc Corixa Corp Drugs, Medical Supplies & Equipment 46.80% Healthworld Corp Cordiant Communications Group PLC Miscellaneous Services 37.89% Metal Manufactures Ltd Consolidated Electrical Distributors Inc Primary Metal Processing 88.00% Maker Communications Inc Conexant Systems Inc Electronics 82.31% International Home Foods Inc ConAgra Inc Food Processing 33.48% Loronix Information Systems Inc Comverse Technology Inc Electrical Equipment 47.79% Policy Management Systems Corp Computer Sciences Corp Computer Software, Supplies & Services 57.02% Sterling Software Inc Computer Associates International Inc Computer Software, Supplies & Services 13.89% Pinnacle Entertainment Inc Colony Capital Inc Leisure & Entertainment 44.32% Money Controls PLC Coin Acceptors Inc Industrial & Farm Equipment & Machinery 30.37% Mod-U-Kraf Inc Coachmen Industries Inc Building Products 135.00% Miller Building Systems Inc Coachmen Industries Inc Building Products 11.11% Yesmail.com Inc CMGI Inc Miscellaneous Services 45.36% SFX Entertainment Inc Clear Channel Communications Inc Leisure & Entertainment 34.20% ACT Networks Inc Clarent Corp Electrical Equipment 32.64% Student Loan Corp (The) Citigroup Inc Banking & Finance 11.63% Travelers Property Casualty Corp Citigroup Inc Insurance 39.55% Associates First Capital Corp Citigroup Inc Banking & Finance 56.72% Twin City Bancorp, Inc Citco Community Bancshares Inc Brokerage, Investment & Mgmt. Consulting 10.65% Aironet Wireless Communications Inc Cisco Systems Inc Electrical Equipment 83.62% Arrowpoint Communications Inc Cisco Systems Inc Electrical Equipment 35.59% Brunswick Technologies Inc Cie de Saint-Gobain SA Textiles 54.55% Chemfab Corp Cie de Saint-Gobain SA Textiles 71.68% DBT Online Inc ChoicePoint Inc Computer Software, Supplies & Services 30.37% First Entertainment Holding Corp Choice Sports Network Inc Broadcasting 376.19% PathoGenesis Corp Chiron Corp Drugs, Medical Supplies & Equipment 21.26% Texaco Inc Chevron Corp Oil & Gas 22.53% Boxmore International PLC Chesapeake Corp Packaging & Containers 76.61% Shoreline Financial Corp Chemical Financial Corp Banking & Finance 19.08% Morgan (J.P.) & Co Inc Chase Manhattan Corp Banking & Finance 16.32% PlayCore Inc Chartwell Investments Inc Toys & Recreational Products 44.29% Catherines Stores Corp Charming Shoppes Inc Retail 71.43% Johnston Industries Inc CGW Southeast Partners IV Textiles 54.64% CITATION Computer Systems Inc Cerner Corp Computer Software, Supplies & Services 113.54% GrandBanc Inc Century Bancshares Inc Banking & Finance 58.33% Sparta Foods Inc Cenex Harvest States Cooperatives Food Processing 12.80% Cambridge NeuroScience Inc CeNeS Pharmaceuticals PLC Drugs, Medical Supplies & Equipment 44.23% Avis Group Holdings Inc Cendant Corp Miscellaneous Services 25.05% Southdown Inc Cemex SA Stone, Clay & Glass 38.39% Giant Cement Holding Inc Cementos Portland SA Stone, Clay & Glass 70.99% Cistron Biotechnology Inc Celltech Group PLC Drugs, Medical Supplies & Equipment 93.55% TREEV Inc CE Computer Equipment AG Computer Software, Supplies & Services 71.00% Buffets Inc Caxton-Iseman Capital Inc Leisure & Entertainment 27.30% Ring PLC Catalina Lighting Inc Electrical Equipment 41.51% Wyant Corp Cascades Inc Drugs, Medical Supplies & Equipment 48.70% Taco Cabana Inc Carrols Corp Leisure & Entertainment 109.74% Anchor Financial Corp Carolina First Corp Banking & Finance 4.46% Trimin Enterprises Inc Carlyle Group Inc Primary Metal Processing 52.87% Tritech Precision Inc Carlyle Group Inc Primary Metal Processing 44.59% TCBY Enterprises Inc Capricorn Investors III LP Retail 60.00% TriGas Exploration Inc Calpine Corp Oil & Gas 28.48% First Washington Realty Trust Inc CalPERS / National Retail Partners LLC Brokerage, Investment & Mgmt. Consulting 24.52% ConnectInc.com Co Calico Commerce Inc Computer Software, Supplies & Services 13.89% Nvest LP Caisse des Depots et Consignations Brokerage, Investment & Mgmt. Consulting 96.27% Critchley Group PLC Brady Corp Electrical Equipment 42.88% Imtec Inc Brady Corp Industrial & Farm Equipment & Machinery 7.82% Able Telcom Holding Corp Bracknell Corp Construction Contractors & Eng. Svcs. 0.80% Vastar Resources Inc BP Amoco PLC Oil & Gas 37.05% CNBT Bancshares Inc BOK Financial Corp Banking & Finance 7.18% Boise Cascade Office Products Corp Boise Cascade Corp Wholesale & Distribution 55.22% Ridgewood Financial Inc Boiling Springs Bancorp Banking & Finance 24.65% OptiSystems Solutions Inc BMC Software Inc Computer Software, Supplies & Services 25.00% CDNow Inc Bertelsmann AG Computer Software, Supplies & Services 20.00% MidAmerican Energy Holdings Co Berkshire Hathaway Inc Electric, Gas Water & Sanitary Services 26.85% CORT Business Services Corp Berkshire Hathaway Inc Miscellaneous Services 64.71% Justin Industries Inc Berkshire Hathaway Inc Stone, Clay & Glass 34.31% Shaw Industries Inc Berkshire Hathaway Inc Textiles 59.13% GSB Financial Corp Berkshire Bancorp Inc Banking & Finance 33.74% Northstar Health Services Inc Benchmark Medical Inc Miscellaneous Services 59.57% Sacramento Commercial Bank Belvedere Capital Partners Inc Banking & Finance 91.24% United Payors & United Providers Inc BCE Inc Health Services 48.92% Mark IV Industries Inc BC Partners Ltd Fabricated Metal Products 5.46% First Banking Co of Southeast Georgia BB&T Corp Banking & Finance 9.71% One Valley Bancorp Inc BB&T Corp Banking & Finance 39.41% FCNB Corp BB&T Corp Brokerage, Investment & Mgmt. Consulting 3.60% BankFirst Corp BB&T Corp Banking & Finance 23.58% FirstSpartan Financial Corp BB&T Corp Banking & Finance 32.74% Sybron Chemicals Inc Bayer AG Chemicals, Paints & Coatings 25.00% North American Vaccine Inc Baxter International Inc Drugs, Medical Supplies & Equipment 28.95% Althin Medical AB Baxter International Inc Drugs, Medical Supplies & Equipment 53.94% Bristol Hotels & Resorts Inc Bass PLC Leisure & Entertainment 94.67%
Fatbrain.com Inc Barnesandnoble.com Inc Retail 17.08% Funco Inc Barnes & Noble Inc Retail 87.64% First United Bancshares Inc BancorpSouth Inc Banking & Finance 40.72% Texarkana First Financial Corp BancorpSouth Inc Banking & Finance 33.43% Milton Federal Financial Corp BancFirst Ohio Corp Banking & Finance 15.75% AXA Financial Inc Axa SA Insurance 18.71% IBP Inc Axa SA Food Processing 27.14% travelbyus.com Ltd Aviation Group Inc Computer Software, Supplies & Services 32.16% Analogy Inc Avant! Corp Computer Software, Supplies & Services 24.00% Scientific Games Holdings Corp Autotote Corp Printing & Publishing 44.44% Cunningham Graphics International Inc Automatic Data Processing Inc Printing & Publishing 1.15% OEA Inc Autoliv Inc Instruments & Photographic Equipment 44.09% Autocam Corp Aurora Capital Group Industrial & Farm Equipment & Machinery 70.45% Four Media Co AT&T Corp Leisure & Entertainment 151.88% GRC International Inc AT&T Corp Brokerage, Investment & Mgmt. Consulting 16.46% Ascent Entertainment Group Inc AT&T Corp Leisure & Entertainment 32.61% IDT Corp AT&T Corp Communications 51.12% Video Services Corp AT&T Corp Leisure & Entertainment 103.58% Applied Digital Solutions Inc AT&T Canada Inc Communications 59.21% Arcadia Financial Ltd Associates First Capital Corp Banking & Finance 28.61% Transition Analysis Component Tech Inc Aspect Development Inc Computer Software, Supplies & Services 67.00% Silicon Valley Group Inc ASM Lithography Holding NV Industrial & Farm Equipment & Machinery 81.60% Hickson International PLC Arch Chemicals Inc Chemicals, Paints & Coatings 41.38% MMC Networks Inc Applied Micro Circuits Corp Electronics 47.50% Etec Systems Inc Applied Materials Inc Electronics 188.87% Optical Security Group Inc Applied Holographics PLC Fabricated Metal Products 23.02% Destron Fearing Corp Applied Digital Solutions Inc Miscellaneous Manufacturing 45.90% GBT Bancorp Inc Andover Bancorp Inc Banking & Finance 68.96% BCO Technologies PLC Analog Devices Inc Electrical Equipment 10.89% Union Pacific Resources Group Inc Anadarko Petroleum Corp Electric, Gas Water & Sanitary Services 77.03% SJW Corp American Water Works Co Inc Electric, Gas Water & Sanitary Services 28.64% Meridian Insurance Group Inc American Union Insurance Co Insurance 94.10% North Coast Bank NA American River Holdings Banking & Finance 17.66% Stratosphere Corp American Real Estate Partners LP Leisure & Entertainment 31.00% HSB Group Inc American International Group Inc Insurance 3.14% Gibson Greetings Inc American Greetings Corp Printing & Publishing 110.04% Time Warner Inc America Online Inc Leisure & Entertainment 55.82% TriStar Aerospace Co AlliedSignal Inc Aerospace, Aircraft & Defense 66.96% Pimco Advisors Holdings LP Allianz AG Holding Brokerage, Investment & Mgmt. Consulting 14.61% Molecular Biosystems Inc Alliance Pharmaceutical Corp Drugs, Medical Supplies & Equipment 34.15% Viasoft Inc Allen Systems Group Inc Computer Software, Supplies & Services 63.74% Equality Bancorp Inc Allegiant Bancorp Inc Banking & Finance 15.66% View Tech Inc All Communications Corp Wholesale & Distribution 27.20% Cordant Technologies Inc Alcoa Inc Aerospace, Aircraft & Defense 91.60% Cordant Technologies Inc Alcoa Inc Aerospace, Aircraft & Defense 2.14% Travel Services International Inc Airtours PLC Miscellaneous Services 62.50% Data Critical Corp Aether Systems Inc Electrical Equipment 27.43% CA La Electricidad de Caracas AES Corp Electric, Gas Water & Sanitary Services 111.11% IPALCO Enterprises Inc AES Corp Electric, Gas Water & Sanitary Services 16.93% PairGain Technologies Inc ADC Telecommunications Inc Electrical Equipment 117.90% Centigram Communications Corp ADC Telecommunications Inc Computer Software, Supplies & Services 16.24% Gatefield Corp Actel Corp Instruments & Photographic Equipment 16.67% GSS Array Technology PCL ACT Manufacturing Inc Electronics 135.12%
Copyright (C) 2000, Mergerstat EX-99.(C)(4) 4 0004.txt FEASIBILITY ASSESSMENT Exhibit (c)(4) Feasibility Assessment of the Proposed Astoria Energy Project September 2000 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY 1.1 Background 1.2 Key Findings 1.3 Organization of Report 2. OVERVIEW OF THE NEW YORK WHOLESALE ELECTRIC POWER MARKET 2.1 Overview 2.2 New York Power Pool Demand and Consumption 2.3 New York Generation Capacity and Production 2.4 New York Industry Restructuring 2.5 Overview of Proposed Product Markets 2.5.1 Installed Capacity 2.5.2 Energy Markets 2.5.3 Ancillary Services Markets 2.6 Open Access Transmission Tariff 2.7 Proposed Market Monitoring Plan 2.8 Transmission Infrastructure 2.9 NYPP Market-clearing Prices to Date 3. ASTORIA ENERGY PROJECT ASSESSMENT-- KEY ELEMENTS 3.1 Article X Application 3.1.1 Project Details 3.1.2 Practicality of the Project 3.1.3 Article X Requirements 3.1.4 Status of the SCS Application 3.2 Fuel Supply Assessment 3.3 Conclusions and Recommendations on Article X Application 4. ASTORIA ENERGY CAPITAL COST ANALYSIS 4.1 Summary 4.1.1 Study of the Cost of Proposed Generation in the US 4.1.2 Astoria Energy 4.2 Comparable Asset Values found in Utility Asset Divestitures 5. DESCRIPTION OF THE PRICE FORECASTING APPROACH AND METHODOLOGY 5.1 Background 5.2 Description of Market Price Forecast Methodolog 5.2.1 Approach to Projecting Energy-Clearing Prices 5.2.2 Approach to Projecting Supplemental Revenues 6. SUMMARY OF MODELING ASSUMPTIONS 6.1 New York Demand/Energy Forecasts and Hourly Loan Profiles 6.2 Existing Resource Capabilities 6.3 Existing Generating Unit Outage Parameters 6.4 Existing Unit Heat Rates - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page i 6.5 Fuel Price Forecast 6.5.1 Natural Gas 6.5.2 Residual and Distillate Oil 6.5.3 Coal 6.6 Fixed and Variable O&M Costs 6.7 Inflation Assumption 6.8 New Entrant Cost and Operating Assumptions 6.9 New Entry Timing/Amount Assumptions 6.10 Heat Rates for New Entrants 6.11 NYPP Transmission Region Assumptions and Modeling Methodology 7. PRICE PROJECTION RESULTS 7.1 Overview of Price Forecast Results 7.2 Pricing Applicable to the Astoria Energy Projec 7.3 Economic Feasibility of the Astoria Energy Project APPENDICES A. Detailed Market Price Forecast Results and Pro Forma Analysis for the Astoria Energy Project - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page ii 1. EXECUTIVE SUMMARY 1.1 Background Navigant Consulting, Inc. (Navigant) was retained by ValueAct Capital, Inc. to assess the feasibility of developing the proposed Astoria Energy Project, a 1,000 MW natural gas-fired combined cycle facility to be located near New York City. The Project, referred to hereafter as the Astoria Project, would be located adjacent to the existing Astoria Generation Station, now owned by Orion Power Holdings, in Queens, New York. The Astoria Project would enter commercial operation in 2003 with the output being sold into the regional power market, either through bilateral contract arrangements or spot sales. This report provides an overview of the New York bulk power market; an assessment of the Astoria Project, based on information contained in its Application X to the New York Public Service Commission (PSC) for the construction of the facility; and a market price forecast and related financial assessment for the project for several likely outcomes. In addition, Navigant provides an assessment of the proposed fuel supply plan for the project and a benchmark analysis of the capital cost for the construction of the project. The New York power market has undergone significant change as historically integrated utility functions have been unbundled, and the generation and power supply components have been deregulated and opened to competitive forces. Moreover, the former New York Power Pool (NYPP), an institution which was created to coordinate generation/transmission planning and to facilitate the region-wide pooling of power supply resources to achieve production cost savings, has been replaced by the implementation of an Independent System Operator (ISO). The ISO serves to oversee operations of and access to the regional transmission grid, and implement and manage the bid-based spot markets and installed capacity (ICAP) market. These various facets of transformation have fundamentally changed the dynamics governing the revenue streams that will be earned by merchant power generation resources such as the Astoria Energy Project. The focus of Navigant's analysis is to assess the feasibility of several aspects of the project and to provide a projection of revenues that the Project will likely earn for sales into the New York City area of the New York Power market. This projection was prepared based on market fundamentals in the context of the market transformation that has taken place and will continue to evolve within New England. This report documents the methodology/approach, underlying assumptions, and results of Navigant's analysis. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 1-1 1.2 Key Findings Navigant's due diligence assessment of the Astoria Project was broad, covering many areas associated with the project's development. As a result of our analysis in these areas, the following conclusions can be made as they relate to the New York market and the Astoria Project. . Based on the implementation of restructuring in the New York Power market, the state has been subdivided into 11 transmission zones, reflecting significant transmission limitations across the system. The Astoria Project is located in Zone J, an area that includes New York City. . The New York Power market has been restructured to include a spot energy market that is determined based on locational-based marginal pricing (LBMP). As such, the spot market transactions are settled at the market- clearing price of numerous points on the transmission system, reflecting the different marginal costs of supplying energy at various locations when the transmission system is constrained. Based on the significant transmission constraints that exist between Zone J and other zones, the energy prices in the New York City areas are somewhat higher than most other areas in the state, reflecting older, more expensive, and less efficient generation setting the clearing price. . Reliability requirements established by the New York State Reliability Council (NYSRC) have established locational-based capacity requirements for the New York City (Zone J) and Long Island (Zone K) regions. These reliability requirements create an immediate need for new capacity within Zone J. and provide a significant penalty ($75/kW-year) for not meeting this requirement. . The proposed Astoria project is projected to earn an after-tax return of between 13% and 19%. However, this estimate is a function of future market pricing, fuel prices, locational-based ICAP requirements, and the amount and timing of new entrants within Zone J. There are currently. . There is adequate up-stream gas supply available to support the project. However, pipeline capacity is currently constrained, and would require a - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 1-2 commitment for up-stream construction to alleviate these constraints. Local pipeline construction to the facility is also required. There are several options available to the plant. Unfortunately, each will be expensive based on the urban location of the plant. . The Astoria project would be one of the most expensive projects of its size in the region. However, the project is believed to be reflective of costs for land and construction in the New York City area. The capital cost estimate seems to be consistent with another project on Long Island; however, more research should be done in this area to confirm this higher price. . Navigant's initial review identified several areas of concern related to environmental modeling, construction of the facility, and construction financing. Subsequently, the PSC has deemed the Article X application incomplete, siting several areas of concern. Fortunately, no area found incomplete is deemed critical. Navigant believes that the project could correct the deficiencies within 6-12 months time. 1.3 Organization of Report Following the Executive Summary in this chapter, this report is organized to provide the necessary market background and underlying assumptions associated with out analysis, followed by Navigant's market price and revenue projection results. Specifically, Chapter 2 provides a detailed overview of the market structures and institutions that have recently been implemented in New York. Chapter 3 discusses various topics of key importance to the development of the Astoria Energy Project. Specifically, it establishes the New York City area as the appropriate area for consideration of revenue projections, discusses the PSC Article X application process and progress, assesses the fuel supply options available to the Astoria Project, compares the capital costs of the project to that of other new plants, and compares the sale prices achieved in utility generation divestitures to the installed cost of the Astoria Energy Project. Chapter 4 describes the approach and methodology that Navigant employed to prepare the price projections provided herein. Included in this chapter is a description of the production simulation model, PROPHET, which Navigant - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 1-3 utilized to emulate the economic dispatch of power supply resources within New York subject to various system and plant level operating constraints. Chapter 5 summarizes the assumptions underlying Navigant's analysis. Finally, Chapter 6 presents the price projection and pro forma results of Navigant's analysis. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 1-4 2. OVERVIEW OF THE NEW YORK WHOLESALE ELECTRIC POWER MARKET 2.1 Overview Historically the New York Power Pool (NYPP), an association of the major investor-owned utilities, the New York Power Authority and LIPA, was responsible for coordinating the development and operation of its members electric production and transmission facilities in order to obtain optimal reliability of service and efficiency of operation from the interconnected systems of its members. NYPP dispatched power throughout New York on a single-system basis, optimizing economic dispatch, while meeting prescribed reliability criteria. As part of the dynamic restructuring in the state, the NYISO recently became the fourth ISO approved by the Federal Energy Regulatory Commission (FERC). Under the new structure, NYPP was dissolved and many of its functions were assumed by the NYISO. Within the New York Control Area (NYCA), the NYSRC sets the installed capacity requirements in accordance with NERC reliability criteria. The NYISO then administers an installed capacity market where Load Serving Entities (LSEs)/1/ can procure installed capacity to meet their requirements either through bilateral contracts or auctions conducted by the NYISO. The New York market has many characteristics that distinguish it from neighboring markets, such as New England. A list of the major characteristics of the New York market is provided below and discussed in subsequent sections of the analysis. . There are a smaller number of large utilities. . New York has a balanced generation mix. . The dominant source of generation is oil/gas steam capacity. __________ /1/ Initially, LSEs will be the existing vertically integrated Transmission Providers as well as existing wholesale customers such as municipal electric systems. Under retail access, ESCOs may be the load- serving entities for retail customers. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-1 . Slight surplus of capacity in the near term given existing generation resources. . Merchant plant activity has been slow but is now beginning to pick up. . The market is being restructured at the wholesale and retail levels. . intra-regional transmission bottlenecks exist, creating disparities in locational energy prices. . A major constraint point is the Central-East interface, . Market prices vary across these interfaces. . NYPA/LIPA influence is significant. . Divestiture of generation assets has occurred for most utilities. . Retail access is being phased-in. . Significant gas pipeline additions from the west are proposed, but the status remains uncertain. . The market is not liquid at this point. 2.2 New York Power Pool Demand and Consumption The New York market has approximately seven million retail customers with annual electricity requirements of 156,029 GWH. The region's actual historical peak load for the year 1999 was 30,311 MW. The projected NYCA average annual peak demand growth rate between 2003 and 2015 is 0.75%. Electrical energy growth is projected to be 0.9% over the same period./2/ lt is interesting to note, however, that the pool has recently under- forecast actual demand, with the 1999 actual demand more than 1000 MW greater than expected. In its 2000 Load and Capacity Report, NYISO indicated that the capacity resources identified in the report would satisfy NYSRC criteria for adequate reliability for ________ /2/ NYISO 2000 Load and Capacity Data. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-2 the year 2000. Beyond 2000, the NYCA is showing a deficiency in the capacity needed to meet the 18% reserve margin requirement. Approximately 4,900 MW of new capacity with approved Article X applications was included in NYISO's reserve calculation. In addition, there is approximately 4,270 MW of capacity in the preapproval stages that were not included in the reserve margin calculation. According to market design filing recently approved by FERC, distributed generation and interruptible load that is not visible to the NYISO's Market Information System will be allowed to participate in the installed capacity market, providing another source of capacity to LSEs. An assessment of New York's projected resources and requirements is presented below. Exhibit 2-1 Need for New Capacity Resources in NYCA - -------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 2005 ================================================================================ Demand (W) Net Internal 30,200 30,460 30,790 31,070 31,300 31,510 Demand Reserve 5,436 5,483 5,542 5,593 5,634 5,672 Requirements Total Requirements 35,636 35,943 36,332 36,663 36,934 37,182 Supply (MW) Total Capability* 36,118 35,793 37,973 40,692 40,298 40,298 Surplus 482 (150) 1,641 4,029 3,364 3,116 (Deficiency) - -------------------------------------------------------------------------------- * Including 4,940 MW of new capacity with approved Article X applications. As indicated in Exhibit 2-1 New York will have a need for additional resources beginning in 2002 assuming the slight deficit in 2001 can be met through additional purchases from - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-3 neighboring markets. NYISO forecasts an additional 2,180 MW of merchant plants to come online in 2002 and another 2,760 MW in 2003. These projects have received approval of their Article X applications and are expected to alleviate what would otherwise be a severe capacity deficit. These numbers reflect NYSRC's 18% required reserve margin. However, the situation within New York City (Zone J) and Long Island (Zone K) is somewhat different. Locational capacity requirements have been established for these two subregions. Of the total installed capacity required for in-City load, a minimum of 80% must be located in-City. Of the total installed capacity required for Long Island load, a minimum of 89.7% must be located on Long Island. Other locational requirements may be adopted in the future. Within Zone J, where the Astoria Energy Project is located, the peak load is 10,340 MW and total generating capability within the zone is only 7,874 MW. Furthermore, while there is import capability into Zone J of 5,200 MW there is also an 80% locational capacity requirement. This means that LSEs within the zone must procure at least 80% of their installed capacity requirement from generation located within the zone (i.e. 8,272 MW) or pay a penalty of $75/kW. This leaves an in-city deficit of 398 MW, but an overall surplus (including the import capability) of 2,734 MW. 2.3 New York Generation Capacity and Production The region's currently available summer electric generating capacity and purchases total approximately 36,000 MW. NYCA's mix of generating resources and the production of electricity by fuel type are illustrated in Exhibit 2-2. Exhibit 2-2 2000 NYPP Generation Capacity by Fuel Type and Production [Image Removed] While, NYCA has a diverse generation mix including coal, hydro, nuclear, oil and gas-fired units, the chart also reveals that the generation mix is dominated by oil and gas-fired units, which account for almost 35% of the capacity in the region. However, over the last 15 years the share of oil in the generation mix has declined as utilities have added gas and nuclear generation and NUG additions have been predominantly gas-fired units. In fact, natural gas is now the dominant source of power generation in New York. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-4 The New York ISO has identified over 15,000 MW of proposed generation in New York but many of the projects are in the early stages of development. Several of these have been specifically included in Navigant's market pricing analysis, while others that are deemed less likely to materialize or fell outside a reasonable window of time were not specifically included. A list of the proposed merchant projects that were specifically included in the pricing analysis is presented in Exhibit 6-6. At this point, all of these projects can be classified as in the development or planning stages. One of the major factors that could influence the level of merchant activity in New York is the age of existing utility generating units. As illustrated on Exhibit 2-3, the vast majority of the capacity in New York is older than 25 years. Several types of projects, such as small coal units and old oil-fired steam facilities could be quite vulnerable in a competitive market or significant changes to environmental regulations, and could be forced into retirement. Exhibit 2-3 Age Distribution of NY Generating Units [Image Removed] The mix of generating plants In-City, however, is quite different from that of the rest of the state. As can be seen in Exhibit 2-4, gas and oil plants make up nearly 40% of the generating capability with another 40% coming from imports. Exhibit 2-4 Generating Capability for In-City Area [Image Removed] 2.4 New York Industry Restructuring - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-5 The electric industry in New York has undergone a significant amount of restructuring activity resulting in the unbundling of the vertically integrated utility structure and the introduction of fully competitive wholesale and retail markets. The fundamental driver of New York's electric industry restructuring initiatives is the desire to reduce costs to end-use customers. Historically, New York has had among the highest average electric rates in the country, ranking in the top ten for the highest average electric rates (excluding Alaska and Hawaii). New York's 10.71 (cent)/kWh rate is more than 50% above the national average of 6.85 (cent)/kwh. All of New York's major investor-owned utilities have filed and received approval of their restructuring settlement agreements. Each utility's agreement provided for retail choice, with some customers receiving retail access as early as 1998 or as late as 2002. Therefore, a competitive retail New York electricity market is expected to grow rapidly over the next three years. New York's approach to electric restructuring has largely been regulatory, as opposed to legislative. Although some restructuring bills have been introduced in the New York Assembly, the New York PSC's Competitive Opportunities proceeding has provided the major deregulation impetus. On August 9, 1994 the NYPSC began its investigation of issues surrounding electric industry restructuring and issued final principles to guide electric industry restructuring in June 1995. Since the PSC's final order, all of New York State's utilities have received approval of their restructuring settlement agreements. Each New York utility has a unique and different settlement agreement. In January 1997, the member systems of the NYPP began the power pool restructuring process by filing with the FERC their comprehensive restructuring proposal to implement the necessary structures and institutions to foster a competitive wholesale electricity market. The proposal called for the replacement of the NYPP with an ISO and other institutions designed to meet the primary objectives of the member systems: (i) to continue to satisfy the FERC standards for open, non-discriminatory access to the transmission system; (ii) to preserve reliability in a competitive environment; (iii) to facilitate an - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-6 economically efficient wholesale electricity market. While the original filing was modified numerous times, the primary objectives of the filing have remained unchanged. The market structure developed in New York can be classified as a "flexible pool" structure involving the establishment of an ISO incorporating certain power exchange functions. The ISO's primary mission is the reliable and efficient operation of the New York bulk power system. The ISO also provides centralized markets for energy, capacity, and ancillary services. The restructuring of the wholesale market involves the replacement of existing power supply markets with day-ahead and real-time bid-based spot markets for energy and reserves. The two-settlement system is the cornerstone and foundation of the new deregulated wholesale electric market in New York. The restructuring also includes the establishment of a statewide transmission tariff. As part of the restructuring process, a NYSRC was also established to primarily address reliability concerns that are unique to New York (e.g., many localized load pockets). The NYSRC was responsible for establishing reliability rules that will be carried out through procedures developed by the ISO. In January 1999, the FERC unanimously approved, with modification, the New York ISO Tariff and market rules for operating bid-based energy markets. Also approved were the member system's request for market-based rate authority for energy and ancillary services. In February of this year, the member systems filed an application to transfer operational control of their designated transmission facilities to the ISO. The competitive energy market in New York became operational in November 1999. The FERC approved the ISO proposal to operate a multi-settlement system entailing day- ahead and realtime bid-based spot markets for energy and reserves. All transactions are scheduled through the ISO and the ISO schedules all transmission within and on the ISO- controlled grid. The ISO has primary control over system security and reliability, including authority to take any action to preserve control area operation, such as load curtailment and/or shedding, consistent with set standards. 2.5 Overview of Proposed Product Markets - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-7 2.5.1 Installed Capacity As previously mentioned, the ISO has established locational capacity requirements for all Load Serving Entities, consistent with the statewide installed capacity requirement and the NYSRC Reliability Rules. Of the total installed capacity required for In-City load, a minimum of 80% must be located in-City. Of the total installed capacity required for Long Island load, a minimum of 89.7% must be located on Long Island. An additional requirement for total NYCA capacity is that no more than 10% of load can be met from resources outside the state. The current requirement for installed capacity reserves is 18% of peak demand. Total pool installed capacity requirement is based on 1 day in 10 year LOLP planning criterion. Installed capacity requirements are established annually and are applied to all LSEs in the state, such that they can cover their annual forecasted peak load. Provisions will be made to allow seasonal variations in the level of installed reserves. Current plans are for LSEs to know their ICAP requirements in advance. A deficiency penalty equal to $75/kW-yr. is currently being imposed. The maximum ICAP that can be purchased external to the New York control area is 3,800 MW. The maximum ICAP that can be purchased from each of the neighboring central areas is 2,100 MW from Hydro-Quebec, 1,600 MW from Ontario Hydro, 1,450 MW from ISO-New England, and 3,150 MW from PJM. 2.5.2 Energy Markets The NYCA features two energy-related markets. The breakdown of these markets appears below and are based on locational marginal prices: . Day-ahead energy market . Real-time balancing market The Day-ahead energy market and the Real-time balancing market constitute the two energy related markets and form the two-settlement process. The New York market is based on the Location-Based Marginal Price at each generator's bus. Differences in energy clearing prices at different locations are equal to the cost of congestion and marginal losses between locations. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-8 The Day-Ahead market provides for "financially firm" energy contracts between buyers and sellers through the pool. In setting forth the roles and responsibilities of participants in the New York market, a new term, "Direct Customer," has been adopted to designate an entity that can interact directly with the ISO. Any market participant, a supplier, LSE, other transmission customer or power exchange, meeting the ISO Tariffs technical and financial requirements for "Direct Customer" can submit schedules for bids or bilateral transactions directly to the ISO and participate in the ISO's settlement process. However, market participants submitting schedules or bids through a Direct Customer settle financially with the Direct Customer, not directly with ISO. The operation of this market relies on hourly forecasts of LSEs' expected loads, the generators' hourly price/quantity bids, and scheduled bilateral transactions. By 5:00 AM of the day prior to the dispatch day, the LSEs provide the ISO with day-ahead and 7-day forecasts. LSEs, transmission customers and suppliers provide the ISO with bids to supply and purchase energy, capacity and ancillary services, as well as requests for bilateral transaction schedules. Bids to supply energy, capacity and ancillary services identify resources as dispatchable or non-dispatchable, indicate which ancillary services are available from the resource and specify variable energy prices. Bids may also specify minimum generation and start-up costs; however, these are not reflected in the LBMP. To the extent a generator does not cover its minimum generation and start-up costs, the ISO will provide them with a supplemental payment funded through the New York ISO transmission tariff. Bids to purchase energy in the day-ahead market specify quantities at the point of withdrawal and the prices at which the purchaser will voluntarily curtail the transaction. Bi-lateral transaction schedules identify hourly quantities by point of injection and point of withdrawal. By 11:00 AM on the day prior to Dispatch Day, the ISO closes the day-ahead scheduling process and posts the day-ahead schedules for each hour of dispatch in that day. The balancing market provides for reconciliation of the difference between energy reserved in the day-ahead market and actual energy required in the real-time dispatch. The ISO operates the real-time balancing market on a centralized five-minute security-constrained dispatch (SCD) process, which the ISO uses to determine the energy requirement. Positive or negative balances in this market are cleared based on the real-time LBMP. Buyers and sellers can participate in the balancing market with flexible bids or they can submit bilateral schedules for energy up to 90 minutes ahead of the settlement period. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-9 Loads purchase energy at the LBMP at the point of withdrawal. Initially, the LBMP for a zone is the load-weighted average of the Generator Bus LBMPs in the zone. Until the ISO software to compute Load Bus LBMPs, the zonal LBMPs are based on a weighted-average of generator bus LBMPs in the zone. 2.5.3 Ancillary Services Markets Both the ISO Tariff filed on January 31, 1997 and the revised ISO Tariff specify in detail how the ISO procures and pays for ancillary services and how customers are charged for such services. The ISO obtains ancillary services on an unbundled basis, using market-based procurement where possible. Self-provision of ancillary services is typically implemented through sales to the ISO. The treatment puts procurement of ancillary services on a competitive basis to the extent possible, yet ensures that the ISO controls these critical reliability-related services. On a statewide basis, operating reserves are 1,800 MW, which is 150% of the single largest contingency (i.e., 1,200 MW based on the loss of Bowline or the link with Hydro-Quebec at Chateauguay. The following is a list of the ancillary services markets: 2.5.3.1 Scheduling, System Control, and Dispatch This service is cost-based dependent on ISO startup/formation and operating costs and provided by the ISO. In the revised tariff, the excess payments received for marginal losses, in any, will be used as a credit to offset the cost of Scheduling, System Control and Dispatch. Thus any excess collections for losses will be returned to customers in proportion to their energy usage. Generating units bidding into the LMBP market submit multi-part bids which identify separately their startup and minimum generation costs, as well as an incremental energy bid curve for output above minimum levels. Although the ISO takes start-up and minimum generation bids into account in determining which units to commit, these bids are not factored into LBMP calculations. Therefore, it is possible that market revenues may not cover the generator's total bid cost to produce energy, including its start-up and minimum - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-10 generation bids. Under these circumstances, a supplemental payment is made to compensate the generator for these costs. Supplemental payments are recovered from all loads through the Scheduling, System Control and Dispatch Ancillary Service. Stormwatch is a reliability procedure for downstate New York, whereby transfer capability to downstate New York is reduced in the event of a thunderstorm. As a result, higher cost generation facilities in Southeastern New York and Long Island are substituted for lower cost imports from the north. Under the ISO tariff, the procedure is treated like any other system failure that leads to a temporary reduction in transfer capability, thus resulting in redispatch costs that affect LBMPs in the real-time market. If redispatch costs result in a revenue shortfall in the real-time market, the shortfall is funded through the Scheduling, System Control and Dispatch ancillary service. The tariff does not permit this service to be self-provided, so all load shares in these costs. 2.5.3.2 Reactive Supply and Voltage Support Service This service is also cost-based and provided by the ISO. Payments for this service are generator-specific and the payment is based on the embedded cost of the generating resource associated with its tested reactive power production capability. The embedded cost payment is determined by a formula, which utilizes capital investment and operating expense information filed in FERC Form is. All in-state generators receiving installed capacity credit receive the payment; in-state generators not receiving installed capacity credit also receive the payment for hours they are on-line. 2.5.3.3 Regulation and Frequency Response Service Regulation Service is the adjustment made in the output of generators in response to a control signal sent out from the control center every six seconds to balance the system and follow load fluctuations. This is also known as automatic generation control (AGC) service. Generating units providing regulation service are asked to set aside a predetermined amount of capacity so that the unit will be able to move up or down from its initial output, as measured in MWs, the ISO must be able to change in one minute. The price for this ancillary service is market-based rather than cost-based. Winners for regulation and frequency control bids receive the market clearing availability price, which reflects market dynamics as well as the wear and tear on generating units that provide such service. In - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-11 addition to being compensated this availability payment, generators increasing output will be paid the LBMP for resulting energy. 2.5.3.4 Energy Imbalance Under the new market structure, there is no separate balancing service for transactions. Balancing is provided through the operation of the real-time L8MP market. Market participants electing to schedule transactions in the day-ahead market balance at the real-time LBMP. If an LSE consumes more energy than scheduled, it makes a balancing payment; if it consumes less energy, it sells it back to the market at the real-time LBMP. There are no penalties associated with either circumstance. If a generator injects less than it was scheduled to provide day-ahead, it will be charged the real-time LBMP at its bus for the difference. No payments are made for injections above the schedules. Generators that are off-schedule are also subject to a regulation charge. 2.5.3.5 Operating Reserve Service Operating Reserve Service covers three types of reserve services: Class A/Class B Spinning Reserves, 10-Minute Non-Synchronous Reserves and 30-Minute Reserves. These ancillary services refer to generator capacity that is available to supply energy in the event of contingency conditions. Units that dispatch in the balancing market, responding to the ISO's 5-minute Security Constrained Dispatch Signal are called Class A units. An owner that chooses to bid Class A units in the balancing market must allow the ISO to use its option to provide spinning reserves from that unit. This implies that the ISO would ramp down the unit's capacity factor such that the unit can increase its output when faced with a system emergency. Generators providing operating reserve service receive an opportunity cost payment, equal to the difference between the LBMP and the bid price of the lost opportunity MW, to cover revenue forgone in the energy market when the unit operates at reduced output. When output is increased in response to an SCD signal, the generator receives the LBMP. Units that provide spinning reserves, but that are not controlled by the ISO SCD mechanism are called class B units. These units are not paid for lost opportunity cost, but they receive the market-clearing availability price based on bids from all generators. This bid reflects the supply demand balance in the spinning reserve market, as well as the premium placed on spinning reserves versus the energy market. Owners of generating units may also bid to provide 10-minute non-synchronous - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-12 reserves and 30-minute reserves. The ISO calculates separate market-clearing availability prices for these two categories of operating reserves. 2.6 Open Access Transmission Tariff The Open Access Transmission tariff incorporates regional transmission service designed to eliminate rate pancaking. Transmission users pay a fixed charge, referred to as a Transmission Service Charge (TSC). The TSCs involve a "license plate" rate structure in which loads within defined zones pay a rate that is reflective of the embedded revenue requirements of the transmission provider in the zone in which the load is located. Wheel through or out customers' TSCs will be based on the revenue requirements of the providers from whose territory the energy leaves New York. TSC is not applicable for the Transmission Provider's use of its own system to provide service to native load customers, as well as for services pursuant to an existing agreement that is grandfathered. Under the open access tariff, transmission customers pay congestion and marginal loss charges for spot transactions through the ISO. These charges are built into the LBMP. For bilateral transactions, these charges are referred to as Transmission Usage Charges (TUC), added as a surcharge to the TSC, the fixed cost of transmission. Under the revised ISO tariff, market participants may elect to receive non-firm transmission service for a bilateral transaction. Under non-firm transmission service, the customer submitting the bilateral schedule agrees that its transmission service will not be scheduled if there is congestion. If a non-firm transaction is scheduled and congestion appears later, the transmission service may be reduced or terminated. In that case, the generator's decremental bid would be automatically considered as a bid in the real-time market unless the generator indicates otherwise. In contrast, customers that elect to purchase firm transmission service commit to pay the transmission usage charge (TUC), the cost of transmission congestion and marginal losses. 2.7 Proposed Market Monitoring Plan The Transmission Providers market monitoring program is to be administered by the ISO. The program is intended to assist the ISO in developing information to identify needed - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-13 improvements to market rules and protocols and assess the possible exercise of market power. The program will monitor trends and anomalies in the energy; ancillary services and installed capacity markets. Trends will be examined for indicators such as: peak and off- peak prices, trading volumes in the central markets versus bilateral transactions, the amounts and types of dispatchable supply and demand. The analysis of anomalous behavior will focus on the volatility of indicators such as prices, bids, and unit availability, forced transmission and generation outages. Markets will be reviewed more carefully during times when system conditions are more susceptible to gaming or other possible exercises of market power. Such circumstances might include periods of high demand, severe transmission constraints, as well as sustained generation and transmission outages. The monitoring program will identify generating units that must run in order to maintain reliability and identify reliability constraints that may limit competition. The program will also review Power Exchanges' submission of bids and schedules to monitor their participation in the central market. A major element of the program is to ensure that market-clearing prices are transparent and publicly available. To achieve this end, working with the adviser, the ISO compliance staff publishes daily market clearing prices by location. These prices are an important way for the ISO to maintain the integrity of its dispatch and market coordination functions. The ISO provides information to the public on transmission system conditions, including historical supply and demand. This information, along with locational prices is assembled in a database. The ISO also retains confidential data for monitoring purposes. These include market bids of participants, identification of units providing marginal bids, data on unit availability and forced outages, proposed and accepted bilateral schedules, as well as actual/forecasted hourly load at each location. 2.8 Transmission Infrastructure The New York Transmission System connects bulk power generators and loads throughout the state of New York. The transmission system primarily consists of 115 kV, 138 kV, 230kV, and 345kV facilities. The backbone of the system operates at 345kV. The transmission facilities in the northern part of the state are generally longer in length and - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-14 fewer in number than downstate, reflecting the substantially larger concentration of load in and around New York City and the prevalence of low-cost generation in upstate New York. The map presented below identifies a number of "load pockets", or zones in NYCA that have been identified as potentially transmission constrained areas. Exhibit 2-5 New York Load Pockets [Image Removed] The NYCA is divided into the Eastern and Western regions. Frontier, Genesse, Syracuse, Adirondack and Utica fall under the Western region and Milwood, SPR Dunwoodie, New York City and Long Island belong to the Eastern region. The Western region generates roughly 40% of NYCA's energy and consumes only 34% of the total peak demand. Thus generators in the Western region serve a significant portion of the eastern region's load via the bulk transmission system. Internal constraints have been a big issue within New York. The Total-East interface, which divides central and western New York from eastern and southeastern New York, represents the primary constraint for energy transfer from the western region to the eastern region. This interface has a capacity of approximately 5,200 MW and congestion occurs over 75% of the time. Exhibit 2-6 illustrates the transfer limits between regions within New York. The most notable constraint is the Central-East interface which bisects the market between Utica and Albany. The constraints into New York City is also an issue and is more related to contingency operating requirements than physical transmission limitations. Constraints could lead to pricing differentials between western and eastern New York of $4-$5/MWH or more on average. Prices in western New York have recently been propped up by nuclear outages in Ontario, causing export of power from New York to Ontario. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-15 Exhibit 2-6 New York Transmission Transfer Limits (MW) [Image Removed] The NYCA is directly connected to Ontario Hydro (OH), Hydro Quebec (HQ), in Canada and to the New England Power Pool (NEPOOL), and the Pennsylvania, New Jersey and Maryland Interconnection (PJM) in the Eastern United States. The following table illustrates the total current transfer capabilities between New York and other regions. Exhibit 2-7 Inter Regional Transfer Capability/3/ ================================================================================ FCTTC (MW) OH HQ PJM NEPOOL Total - -------------------------------------------------------------------------------- NYPP Exports 1600 1000 725 1675 5000 NYPP Imports 1825 2470 2000 1575 7870 - -------------------------------------------------------------------------------- Although the above table suggests that a large amount of inter-regional transfer capability exists between New York and its neighboring regions, the actual capabilities between regions can vary significantly. A number of factors determine the actual capability between regions such as weather, generating unit loadings and outages and customer load levels. The interregional transmission transfer limits are illustrated in Exhibit 2-8. Exhibit 2-8 Regional Market Profile and Infrastructure [Image Removed] __________ /3/ 1998 New York Power Pool Load and Capacity Data. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-16 2.9 NYPP Market-clearing Prices to Date The electric market operated by NYISO opened in November 1999. Seasonal price patterns have shown low average prices and volatility during the spring and much higher price volatility and averages during the high demand periods of the winter and summer. This can be seen in Exhibit 2-9 below. Exhibit 2-9 Historic Energy In-City Pricing (11/99-7/00) [Image Removed] When plotted in descending order as in the following exhibit (Exhibit 2-10) it is apparent that the energy price over the first nine months of market operation was above $20/MWh, or above the variable costs of a new unit roughly 85% of the time. This means that a plant with a short run variable cost of $20/MWh could earn a contribution towards its invested capital for nearly all of its operating hours depending on its availability and other operational considerations. This naturally follows from the resource mix of the in-city (Zone J) plants. Being older oil and gas units, they are constantly on the margin cylcing to meet loads not covered by the import capability. Exhibit 2-10 Hourly Day Ahead In-City Prices (11/15/99-7/31-00) [Image Removed] Exhibit 2-11 extends the analysis of the historic pricing for Zone J by showing that a plant with a marginal generation cost of $25/MWh could earn roughly 60% of its gross margin in only about 12.5% of the hours of the year. Exhibit 2-11 Revenue Concentration in Peak Hours (11/15/99-7/31/00) [Image Removed] - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 2-17 3. ASTORIA ENERGY PROJECT ASSESSMENT KEY ELEMENTS 3.1 Article X Application As part of our assessment of the proposed project, Navigant reviewed Volume I of the PSC Article X application submitted in June of 2000 by SCS Energy LLC for the Astoria Energy Facility. Navigant assessed the probability of its being found complete, thereby allowing the project to proceed into public hearings, and to assess the practicality of the project itself. On August 18, the New York State Board on Electric Generation Siting and the Environment (Siting Board) notified SCS Energy that its application was incomplete, citing several of the areas flagged by Navigant, but also citing additional concerns. Based upon its review of Volume I of the application, Navigant believes that some major impediments exist to it being approved as proposed. Navigant believes a major drawback of the project is its very size. While all of the project's components may be able to be arranged to fit on the project site, almost all of the available space on the 23-acre site would be filled with permanent structures. This has caused concern over how the project could actually be built given the lack of construction laydown space on the site as well as over the impacts at offsite laydown areas and transportation routes. Further concerns relate to whether air emissions from the project would indeed be below significant impact levels (SIL), as suggested in the summary of the air emissions studies in the first volume of the application. While Navigant Consulting has no detail of the studies performed, other projects of similar magnitude have been found to have emissions of at least one criteria pollutant at or above SIL. Such a finding has been the basis of a finding of incompleteness for at least two applications, which forced the applicants to perform multi-source emissions modeling. The requirement for such modeling would represent a delay of six months to a year in a finding of completeness for an application. At this point, Navigant is skeptical of the practicality of a 1000-MW project at the proposed site and believes that a 500-MW project may more expeditiously alleviate concerns raised in the review of the application. Granting that it would be practical to construct the project as proposed on the available site, correction of the deficiencies found by the Siting Board in the application is likely to delay a finding of completeness by six months to one year. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-1 3.1.1 Project Details The Astoria Energy Project is proposed as a 1000-MW combined-cycle project that will be principally fueled with natural gas, but that is proposed to have the capability to use distillate oil as a backup fuel. The project developers propose to limit the use of distillate oil to 720 hours per year. The project would be comprised of two power blocks, with each block consisting of two General Electric 7FA combustion turbines, two heat-recovery steam generators, and one steam turbine. The combustion turbines would be equipped with low-NO\\x\\ burners capable of achieving emissions of nitrogen oxides (NO\\x\\) at levels less than 9 ppmvd, the lowest NO\\x\\ emissions level among any heavy-duty frame combustion turbines currently available. In addition the power blocks would be equipped with selective catalytic reduction systems (SCR), which would further reduce emissions of nitrogen oxides to levels below 2 ppmvd, again among the lowest levels currently achievable for combined-cycle units. In addition to SCR for reduction in NOx emissions, the project would utilize CO catalysts for reduction of the level of carbon-monoxide emissions from the project. The project would also utilize air-cooled condensers to both minimize vapor plumes and water requirements for the project. In the one major power project approved in New York State since passage of Article X of the Public Service Law in 1992, the Department of Environmental Conservation (DEC) mandated the use of air-cooled condensers to minimize the intake of raw water and the resulting mortality of entrainable aquatic organisms. On August 18 the Siting Board informed SCS Energy that it found the application to be incomplete. The Siting Board will allow SCS Energy to submit additional material when available in an effort to complete the application. However the Board will not allow hearings to go forward or the 12-month statutory time frame for consideration of Article X applications to begin until SCS has submitted additional information and the Board has determined that the application is complete. The Board is likely to take an additional 60 days once SCS has submitted supplemental information to again review the application for completeness. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-2 3.1.2 Practicality of the Project Navigant Consulting's most immediate and major concern is over the ability to actually construct the project as proposed. The entire project site consists of only 23 acres. As shown on the Project Layout, Figure 3-5 of the application, while all facilities can apparently fit on the site, there is no room for laydown of construction materials. A project of this size should have at least 5 acres of space available for construction laydown. The application calls for "just-in-time" deliveries and staging of construction materials at offsite laydown areas to compensate for this lack of space. However, it does not provide sufficient detail to give any significant level of assurance of the practicality of these measures. Detailed construction plans are commonly not developed during the application phase of a project. But in the present case, development of additional detail would be appropriate to assure that there are practical methods to actually construct the project. While Navigant Consulting has not developed any construction plan of its own, it believes that a 500-MW project would alleviate many of the concerns raised by the siting board. Even if a 1000-MW project could be built on the site, there appears to be scant room for movement of major components onto or off of the site after construction is complete. The scale of the project layout is of too small to allow any reasonable assessment. But it would be appropriate to review larger-scale plans and equipment arrangements to make a more definitive assessment of the adequacy of maintenance space and clearances. 3.1.3 Article X Requirements All new power plants of 80 MW or greater in capacity in New York State must be permitted in accordance with the requirements of Article X of the New York Public Service Law. Article X was originally intended to be a process under which all of the permitting requirements of New York State and its political subdivisions, including federal EPA requirements for which permitting authority had been delegated to the State, would be dealt with in a single unified proceeding. Under Article X, developers of new power plants must apply for what is called a certificate of environmental compatibility and public need, with the application being made to a regulatory body called the New York State Board of Electric Generation Siting and the Environment, commonly called the Siting Board. The Siting Board is made up of five statutory members: the Chairman of the New York State Public Service Commission; the Commissioner of the NYS Department of - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-3 Environmental Conservation; the Commissioner of NYS Department of Health; the Commissioner of the NYS Department of Economic Development; and the Chairman of the NYS Energy Research and Development Authority. In addition, for each specific application the Governor appoints two members from the general public, one of whom must be a resident of the county in which the proposed project is located, and one of whom must be a resident of the judicial district in which the proposed project is located. The Chairman of the Public Service Commission serves as the Chairman of the Siting Board, while the staff of the Department of Public Service acts as staff to the Siting Board. The Article X regulations delineate some requirements for the contents of an application, but the staffs of the state agencies involved in the review of an application exercise significant discretion in requiring applicants to carry out the specific investigations and studies required for an application. Typically, the requirements for studies for any particular application have resulted from negotiations between the applicant and the staffs of the state agencies. The agencies have tended to require increasingly extensive studies with succeeding applications as the staffs have sought to address problems that arose in earlier applications. The agencies are bound by specific requirements of federal and state law, particularly in the areas of air and water pollution. In fact, the original vision that the Article X process would be a unified proceeding in which all state and local permitting issues, and all federal permitting issues for which the State had been delegated authority, would be considered was voided by the federal Environmental Protection Agency in late 1998. At that time the EPA ruled that the Article X process was inconsistent with EPA's delegation of federal wastewater-discharge-permit and air-permit authority to the NYS Department of Environmental Conservation. EPA informed the State that its original delegation of authority was to the NYS Department of Environmental Conservation alone, and that no other state agencies or outside individuals could possess any authority over the granting of wastewater-discharge and air-emissions permits. This forced New York to amend Article X of the Public Service Law in order to vest air and wastewater permit authority solely with the Department of Environmental Conservation. However, the amendments to the law allow evidentiary hearings on air and wastewater issues to be conducted before the Siting Board, with the DEC using those evidentiary hearings as part of the record for its determinations on water and air issues. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-4 However, all other state and local issues remain within the province of the Siting Board. This means that, while applicants are expected to try to comply with all local regulations and ordinances, the Siting Board can overrule those regulations and ordinances if it finds them overly burdensome or impractical. The Article X process is generally initiated by informal discussions and consultations between the applicant and the staffs of State regulatory agencies to determine the issues that need to be dealt with in the application. There is also an expectation that the applicant will be conducting a public- involvement program contemporaneously with his development of concepts and designs for the project, giving the public meaningful opportunities to voice concerns and to participate in the development of the project. An applicant is, in turn, expected to give due consideration in its design to concerns raised by the public, and to mitigate adverse affects to the degree practical. Once a reasonable concept has been developed for a project, an applicant must submit a preliminary scoping statement to the Siting Board. This statement is in the form of a report that lays out information and details about the project as they are then known. This information is expected to be in sufficient detail to allow the parties to an Article X proceeding to enter into meaningful discussions leading to agreement on stipulations for studies to be completed by the applicant and included in the Article X application. The stipulations for any particular project have generally been the yardstick against which the completeness of the submitted application is judged. Once an application is submitted, the Siting Board has 60 days to review it for completeness. If the Siting Board finds deficiencies it will notify the applicant and ordinarily give the applicant the opportunity to submit additional information to complete the application. However, the Siting Board will delay the commencement of hearings and the 12-month time frame for a decision on an application until the application is ultimately deemed complete. Once the Siting Board has determined an application to be complete, it appoints a presiding hearing examiner, who is an administrative law judge from the Department of Public Service, and an associate hearing examiner, who is an administrative law judge from the Department of Environmental Conservation. Ordinarily, all evidentiary hearings are to be completed and a decision rendered by the Siting Board on a completed application within 12 months. In some - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-5 situations, however, the hearing schedule can be extended by an additional 6 months. At the end of this period, the Siting Board must either issue a certificate of environmental compatibility and public need, or deny the certificate with specific reasons for denial. Despite an applicant's being granted a certificate by the Siting Board, the applicant must also be separately granted wastewater discharge permits and air-emissions permits by the Department of Environmental Conservation. The DEC is under no statutory requirement to act in a time frame consistent with that of the Siting Board. However, in the one case in New York that has successfully proceeded through the Article X process, the applicant was granted wastewater and air-emissions permits soon after being granted a certificate by the Siting Board. Article X certificates remain valid for commencement of construction for 12 months after they are issued. A certificate may also be transferred, with the approval of the Siting Board, to another party that agrees to comply with the specific requirements of the certificate. 3.1.4 Status of the SCS Application On August 18, 2000 the New York State Board on Electric Generation Siting and the Environment notified SCS Energy that its Article X application for the proposed Astoria Energy LLC power plant was incomplete. The Board cited the specific areas in which it found the application incomplete, and allowed the applicant to submit additional information to complete the application. The Board also included a letter from the Department of Environmental Conservation that cited DEC's separate findings of incomplete items in the application. The deficiencies found by the Siting Board and the DEC are listed below. . Failure to assess the electric-system impacts of the Astoria Project in conjunction with nine other proposed projects currently involved in Article X review. . Failure to provide a pre-application waiver from the US EPA Region II office from pre-construction ambient-air monitoring requirements. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-6 . Failure to meet the requirements for an Environmental Justice (EJ) Analysis. . Failure to discuss any potential impacts of the project on air traffic at LaGuardia Airport. Also, failure to fully evaluate FAA regulations and NYC local laws, and to demonstrate acceptability of stack height to the FAA and compliance with local zoning laws. . Failure to demonstrate financial resources sufficient for site restoration and decommissioning. . Failure to consider zoning, land use, local permits, transportation, noise, visual, dust, recreational and other issues for off-site properties proposed as construction support areas. . Failure to consult with DPS Staff regarding local laws, ordinances, regulations and rules applicable to the project. . Failure to provide a technological basis, or to provide a review of reasonably related precedents, as bases for waiver requests from local laws, ordinances, regulations and rules. . Failure to provide adequate support for waiver requests from zoning noise requirements. . Failure to provide specific noise design goals in terms of dB at receptors or property lines. Also, failure to specify specific dB levels needed to achieve the modified CNR ranking reported in the application. . Failure to provide noise abatement measures for the construction phases of the project. . Failure to provide a description of post-construction noise evaluation studies. . Failure to provide a discussion of construction noise, including impulse noises such as those from pile driving. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-7 . Failure to discuss the appropriateness in the decommissioning plan of leaving two oil tanks, the boiler and electric building, and the office building upon site decommissioning. . Failure to include the proposed Poletti Generation Station expansion and the proposed extension of the MTA "N" Line extension on the land use map included as part of the application. . Failure to consider the compatibility of the project with the proposed "Greenway" and proposed bicycle paths within the vicinity of the project. Also, failure to consider the compatibility of the project with the Bower Bay Boat Club and permanent easements of the City of New York along the eastern edge of the site. Finally, failure to provide sufficient detail analysis of the proposed stack height on land uses at LaGuardia Airport. . Failure to assess visual and noise impacts on the Bowery Bay Boat Club. . Failure to specify the colors of major facility components. . Failure to provide details of project lighting. . Failure to indicate topography or areas of screening on the viewshed map included in the application. . Failure to provide a typical viewshed for the urban area under study, or to provide source information for the Landscape Similarity Zone Map, Figure 4.5-1, or for the Viewshed Map, Figure 4.5-2. . Failure to provide sufficient documentation regarding procedures to be employed to refurbish two existing oil tanks on the project site for distillate-oil storage use, and failure to provide testing protocols and requirements, nature and quantities of waste material, cleanup and disposal standards, and disposal sites. . Failure to provide electromagnetic field data in tabular form. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-8 Some of the deficiencies are of a nature that should be able to be rectified in a fairly straightforward manner, but some are of a more serious nature that will probably require significant additional work. The most serious deficiencies as perceived by Navigant Consulting are discussed below. 3.1.4.1 Electric Transmission Studies Upon review of the deficiencies cited by the Board, Navigant Consulting believes that none of the deficiencies represent fatal flaws to the project. If the applicant were to revise all of the studies in accordance with the Siting Board's comments, Navigant Consulting estimates that an additional three months of time would be required. The following deficiencies with the SCS electric transmission studies cited by the Board, and Navigant Consulting's assessment of them, are provided below. 1. Need for "a discussion of the benefits and detriments of the proposed facility on ancillary services and the electric transmission system, including impacts associated with reinforcements and new construction." 2. Need to include a design study. 3. Need for a system reliability impact study, thermal analysis, voltage analysis, stability analysis, and relay-coordination analysis incorporating all of the following proposed projects: Sunset Energy Fleet, Millennium Power Generating Company, East Coast Power - Linden Venture, ABB Development Corp, KeySpan Energy Ravenswood, NYPA Poletti, NYC Energy/SEFCO, Orion Power, and Consolidated Edison's East River Repowering. 4. Need for a submittal of a scope of work produced by Consolidated Edison or the New York Independent System Operator. 5. Need for an evaluation of the loss of the entire Astoria Energy Project as one of two contingencies in a double-circuit outage. 6. Need for an identification of how generators, feeders, and series reactors are treated under the "classical" method. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-9 7. Need for a description of where Astoria Units 1, 2, 4, 5, and 6 and the Astoria gas turbines will be connected when Astoria Unit 3 is switched from Astoria East to Astoria West. 8. Need for a transient stability analysis demonstrating that the voltage oscillations and generator rotor angle will dampen out, and the time it will take. Items 1, 4, 6, and 7 will require the submittal of existing documentation (e.g., #4), further explanation (e.g., #1, #6, #7), and a clearly labeled drawing (e.g., #7). The time required to produce this information should be minimal, and should not significantly delay the progress of the Article X procedure. Item #2 requires the Siting Board staff and the applicant to come to a mutual understanding on the meaning of a "design study." In most circumstances, a detailed design study (also called a facilities study) would be done as part of an interconnection agreement with the connecting transmission owner. Further, a design study is normally performed by the transmission owner at some point after receipt of approval for the project through the Article X process. Item #3 conflicts with the study scope for the System Reliability Impact Study (SRIS), approved by the NYISO on April 4, 2000. The Public Service Commission staff has supported the SRIS procedure and has been present at meetings of the Transmission Planning Advisory Subcommittee of the NYISO, where the scopes of studies are discussed and approved before their submittal to the NYISO Operating Committee. In addition, the Phase 1 and Phase 2 SRIS reports had been reviewed and approved by the NYISO. SCS Astoria Energy had revised the study scope for its Phase 2 study to clearly identify the development projects that were to be included in the analyses, and resubmitted the scope to TPAS for approval. The revised scope was just recently approved by TPAS on August 30, 2000. However, as of August 30, Consolidated Edison had not yet approved the Phase 2 system studies. If SCS Astoria Energy determines that it needs to revise the Phase 2 system impact studies to satisfy the Siting Board's concerns, it is estimated that these studies will require approximately 2 to 3 months to perform and to receive approval by NYISO and Consolidated Edison. Items #5 and #8 could be performed within 1 week, provided it is determined that item #3 need not be performed. If it is determined that system studies need to be redone with the inclusion of all of - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-10 the units specified in Item #3, items #5 and #8 may be performed simultaneously with the new system studies. 3.1.4.2 Air-Emissions Studies SCS Energy sought a waiver from an EPA requirement for the gathering of one year of normally required meteorological data in the vicinity of the project. Such a request to EPA has to be based on a demonstration that there is already representative meteorological data available from previous studies or from ongoing monitoring in the vicinity of the project. SCS sought to rely upon data gathered on a continuing basis by the National Weather Service at LaGuardia Airport in lieu of gathering its own meteorological data. Without having reviewed the request for an exemption, Navigant Consulting believes that SCS has a reasonable basis for its request, and that EPA is likely to grant an exemption. However, as of the time of the submittal of its Article X application, SCS had not yet received a waiver of the meteorological data-gathering requirements from EPA. Consequently, the Department of Environmental Conservation deemed the application premature. Moreover, DEC did not rule on the adequacy of the air-emissions studies submitted in the application because of the lack of the waiver from EPA. SCS's application for a waiver was apparently only submitted to EPA on June 8, 2000. If EPA grants the SCS request for a waiver, DEC will then apparently commence its review of the SCS air-emissions studies. If EPA refuses to grant a waiver, the SCS application would be delayed by more than one year while SCS establishes an air-monitoring station and collects 12 months of data. Air-emissions studies are among the most critical environmental studies for a project such as the Astoria Energy Project. Among the positive aspects of the project is the fact that its developers are proposing to use the lowest NOx emitting gas turbines commercially available on the market today, in conjunction with an 80% efficient selective-catalytic reduction system. This will result in NO\\x\\ emission of less than 2 ppmvd on natural gas. Emissions at this level would be among the lowest of any recent gas-fired combined-cycle project. In addition, Astoria Energy proposes to use CO catalysts to reduce emissions of carbon monoxide. CO emissions can be a problem with combustion-turbine based units, which require special consideration in CO non-attainment areas such as the New York City area. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-11 Volume I of the application contains a summary of the results of the air-emissions studies performed by SCS. However, this summary does not provide sufficient information with which to judge the adequacy of the studies. The conclusion of the studies is that emissions of all criteria pollutants from the Astoria Energy Facility will be below significant impact levels (SIL) specified by EPA. If true, this means that SCS does not have to perform multi-source emissions modeling, in which the emissions from all sources in a wide area surrounding the proposed project would have to be modeled. While Navigant Consulting has no specific data upon which to base an independent conclusion, it believes that a more in-depth assessment of the air-emissions analysis is warranted. If the project were to be required to perform multi-source emissions modeling because deposition of one criteria pollutant at a receptor site were to exceed a significant impact limit, completion of the application would be likely to be delayed by a minimum of six months, and more likely one year. One pollutant of special concern is particulate matter. In the past, only the fraction of particulate matter that would be captured on a filter had to be considered in air- emissions analyses. However, most recently EPA has been concentrating on condensable particulate matter, such as sulfates, from stack emissions. The summary information in Volume I is not clear as to whether or not condensable particulate matter was included in the total particulate emissions determination. If not, particulate levels could be higher than those stated in the application, which might force the applicant into multi-source emissions modeling. 3.1.4.3 Impacts on Air Traffic at LaGuardia Airport The application indicates that SCS has had contact with the Federal Aviation Administration regarding the appropriateness of the project's stack height, given the project's proximity to LaGuardia Airport. However, there is no indication that the FAA has firmly agreed to the stack height proposed. Moreover, there is no discussion about the effects of stack plumes on air traffic at LaGuardia. while the project may ultimately be in compliance with all FAA regulations and may not present a hindrance to air traffic, the application does not confirm the FAA's agreement that the project is compatible with operations at the nearby airport. 3.1.4.4 Environmental Justice The application does not satisfy the guidelines of the DEC regarding environmental justice investigations. The Department is beginning to require such investigations to assure that minority or low-income communities are not disproportionately subjected to impacts of environmental hazards. The application disposed of this issue in only two or three pages, which the DEC found to be superficial. While a brief reconnaissance of the area surrounding the project site by Navigant - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-12 suggests a predominance of Caucasian middle-class residents, SCS will have to provide a more intensive analysis in accordance with guidelines that were apparently given to SCS by the DEC in April. Navigant Consulting also anticipates that SCS will have to consider in its Environmental Justice review the effects on neighborhoods near off-site construction laydown areas and along routes from those areas to the project site. 3.1.4.5 Demonstration of Financial Resources The Siting Board found the applicant's demonstration of financial resources to cover decommissioning and site restoration inadequate. The Siting Board is unlikely to approve any project for which it has concerns over the financial capability of the applicant to undertake the project and to ultimately decommission the project. SCS will have to be more forthcoming and specific in this area, and will have to confirm the credit-worthiness of the project developers and identify financial resources available to them. 3.1.4.6 Consideration of Off-Site Properties Involved in Construction The application identified certain properties that might be used for off-site construction laydown space and for offsite parking for construction workers. However, the project developers apparently have no firm agreements for use of any of the off-site areas mentioned. The application contains sparse information on the impacts during construction on areas in the vicinity of these sites, or on areas along routes from these sites to the project site. Moreover, aside from saying that workers will be transported from off-site areas by shuttle bus, there is no indication of the traffic that would be generated by such trips, or of the routes that the shuttle buses would take. Navigant Consulting believes that the applicant will have to develop much more information about impacts during construction on all areas that will be affected, not only on the area in the immediate vicinity of the project site. This could be a substantial effort, particularly in light of environmental justice concerns referred to earlier. Navigant Consulting believes that three to six months of additional time will be required to develop appropriate additional information. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-13 3.1.4.7 Waiver Requests from Local Laws and Ordinances The applicant has requested the Siting Board to allow the project to avoid compliance with some of the requirements of local ordinances. However, SCS has not demonstrated that it would be either impossible or impractical to comply with those ordinances, which is the standard required by Article X of the Public Service Law before the Siting Board can grant such requests. Moreover, SCS did not consult with the Department of Public Service (DPS) Staff regarding potential waivers of local ordinances, as required by one of the stipulations. Navigant Consulting views this as a potentially serious oversight. The Siting Board will probably require substantive meetings between SCS and local government agencies to explore the practicality of the project's meeting local requirements. The Board will not allow the applicant to merely point to other situations in which local requirements may not have been enforced as justification for a waiver. SCS could at this point either agree to comply with all local ordinances, or initiate meetings with the DPS Staff and the various agencies of local government to confirm the impracticality of compliance. 3.2 Conclusions and Recommendations on Article X Application Upon its review of Volume I of the Article X application submitted by SCS Energy for the Astoria Energy Facility, Navigant Consulting has the following conclusions and recommendations. 1. The Astoria Energy project incorporates a number of environmentally positive features that should eliminate some potentially contentious permitting issues. The project proposes to use air-cooled condensers to minimize water requirements and to eliminate cooling-tower vapor plumes. The project proposes to use 9 ppmvd low-NO\\x\\ burners in conjunction with a selective catalytic reduction system to reduce NO\\x\\ emissions below 2 ppmvd. And the project proposes to use a CO catalyst for minimization of carbon monoxide emissions. 2. A significant effort will be required to complete the Article X application and secure air and wastewater permits from the DEC. Navigant believes that many of the concerns raised by the Siting Board, however, could be mitigated or eliminated by scaling back the project size to fit more comfortably on the 23 acre site. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-14 3. It is not possible to independently confirm the stated conclusions of the air-modeling analyses with only the information contained in Volume I of the application. However, Navigant is somewhat apprehensive with the conclusion that deposition of all criteria pollutants from the project were found to be below significant impact limits (SIL), thereby eliminating the need for multi-source air-emissions modeling. At least two other projects of similar magnitude in an area outside of New York City were required to perform multi-source emissions modeling. If the project were to be required to perform multi-source emissions modeling, a completed application would be likely to be delayed by about one year. 4. SCS has not received a waiver from EPA of the requirement for collection of one-year of meteorological data at the project site. While Navigant believes that EPA will grant the waiver, failure of EPA to do so would delay completion of the application for more than one year while the applicant establishes a meteorological station and collects data. 5. SCS apparently does not have any firm confirmation from the FAA that its project as proposed will not be a hindrance to air traffic at LaGuardia Airport. The stack height and vapor plumes from the stack are obvious items of concern. 6. SCS has submitted only a superficial Environmental Justice review of the project. A rigorous EJ review is likely to take several months, and should consider potentially negative environmental effects on predominantly minority and low-income communities near proposed off-site construction laydown areas and along routes from the laydown areas to the project site. 7. SCS must demonstrate sufficient credit worthiness to support site restoration in the event the project cannot be completed, and to support decommissioning of the project. In Navigant Consulting's opinion, it is unlikely that the Siting Board will grant an Article X certificate to a poorly capitalized developer. 8. While the Siting Board has the authority to exempt projects from local ordinances and zoning requirements, it is reluctant to overrule the authority of local government by granting such exemptions. As a minimum, the Siting Board expects applicants to consult with local government agencies to explore compliance options, and to make serious attempts to comply. The Board can only grant a waiver request upon a demonstration by an applicant that it would be impossible or impractical to comply. SCS apparently failed to consult with PSC Staff and with local government agencies, as required in the project stipulations. Such consultations are likely to delay completion of the application for several months, with no assurance that the - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-15 Board will ultimately grant waiver requests. However, inasmuch as SCS did not requests waiver requests on the basis of impossibility or impracticality, it is assumed that compliance is possible and that delays in the Article X process could be avoided if SCS elects to rescind its requests for exemptions. 3.3 Fuel Supply Assessment The Astoria Energy Project is located in the franchise territory of Consolidated Edison Company of New York, Inc. (Con Ed). It can receive high-pressure gas supply in one of two ways: by connection to Con Ed's high-pressure transmission system or by construction of an underwater lateral connecting to the proposed Eastchester Expansion of the Iroquois Gas Transmission System (Iroquois). The project is within close proximity of the New York Facility System (NYF), a high-pressure transmission system that is jointly operated by Con Ed and KeySpan Distribution. Con Edison would construct a 0.5 mile, 20" diameter pipeline from NYF to the plant site. They would charge a fixed-rate carrying charge to recover the cost of the lateral, as well as a transportation charge for transportation from the city gate to the lateral. Transportation upstream of the city gate would be Astoria Energy's responsibility. This alternative is relatively easy to implement but has some drawbacks. Con Ed has flexibility in what it could charge for transportation. Historically, they have been very difficult in their negotiations. The New York Power Authority (NYPA) has been a Con Ed transportation customer in this area for many years and is routinely seeking alternatives, such as underwater bypass, because of the high rate that Con Ed charges. A second problem with this alternative is the firmness of gas supply. Pipeline capacity into the Northeast is severely constrained. The largest transporter into this area is Transcontinental Gas Pipe Line Company (Transco). Transco's line operates at near capacity for most of the year either transporting gas to market or to its storage fields in Western Pennsylvania. Other pipelines into the area are Texas Eastern Transmission (Tetco), Tennessee Gas Pipeline (Tennessee) and Iroquois. These pipelines also operate at high capacity factors, especially in the winter. There are several proposals for expansion of existing capacity or construction of new pipelines. Two of these - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-16 proposals have been approved by the Federal Energy Regulatory Commission (FERC). Transportation capacity to the NYF could be increased by as much as 1.4 BOF per day in the next few years, although, it is likely that the increased capacity would be under contract to shippers. All existing capacity into the area currently is under contract to the LDCs. In the winter, capacity is extremely tight and becomes very expensive, especially in cold winters. In addition to the difficulty of getting supplies to the city gate, there is a complicated allocation system in effect for transportation on the NYF. Even if upstream supply is delivered on a firm basis, transportation on NYF could be denied since it would be considered interruptible by Con Ed. Actual access to NYF is governed by an agreement between Con Ed and KeySpan and is allocated between them in relation to their own peak day contracts and does not recognize any rights of third parties. In addition, the location of the Astoria Energy Project is in the center of NYF and the addition of such a large load could cause pressure problems in the area. In the summer, the Astoria Energy project would compete with older, less efficient generating plants and should be able to outbid them for gas supply. In the winter, those plants would burn natural gas or low sulfur residual fuel oil and interruption in this period could be extensive in winters that are colder than normal. The second gas supply alternative requires construction of a 13.7 mile underwater lateral to Iroquois' Eastchester Expansion. Although this alternative would have a significantly higher construction cost, it presents some significant advantages. The cost of the lateral would likely be shared by NYPA since NYPA's Poletti plant is in close proximity to the Astoria Energy site and NYPA could use it as an alternative to Con Ed. This alternative is free of NYF's allocation priorities and could deliver firm gas on a year around basis. Transportation rates on Iroquois are declining and a portion of the daily requirement could be firmed up on Iroquois to upstream interconnects with Tennessee and Algonquin Gas Transmission (Algonquin). The Eastchester Expansion Lateral would also deliver gas at higher pressure than the Con Ed alternative, thereby reducing compression costs. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-17 The lateral would provide access to supplies from Canada or the US but would not have the disadvantage of having access controlled by the local utility. A direct pipeline connection would be a distinct advantage. The biggest drawback to the Eastchester Expansion lateral is that the project may never be built. It has not been finalized as yet, so no filing has been made FERC. When the project is filed, it is likely that several parties will attempt to have it delayed or rejected altogether. The timing may be such that the Con Ed alternative may be necessary, at least to get the project started. Overall, the gas supply for this project is realistically achievable. Supply should be readily available for most of the year. Fortunately, supply availability coincides with the periods of peak electric demand and high electric prices. Several alternatives exist to ensure supply for longer periods and those alternatives will need to be examined and priced out. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 3-18 4. ASTORIA ENERGY CAPITAL COST ANALYSIS Navigant Consulting has refined its study of the cost of proposed generation in the United States. With this refinement, we are in a position to evaluate the competitive position of the plant proposed in Queens County, New York City: Astoria Energy. 4.1 Summary The purpose of this section is, first, to compare the total installed cost of Astoria Energy relative to other similar plants proposed in the US, and second, to state our opinion as to the appropriate level of cost of the plant. We recently completed a study of combined cycle generating plants proposed for development in the United States. We have modified the study to focus on mature plants in the mature stage of development with financing in place. Financed plants disclose most of the full cost of development of generation. We compare these costs to the total cost of Astoria Energy. We believe a critical element of the cost of Astoria Energy is its location. New York City intensifies the cost impact of an urban, densely populated environment. We conclude that although high cost, Astoria Energy is comparable to the high end of the cost of generation development experienced in Texas, California, and New England. This conclusion is grounded by our opinion of the increased cost of development in an extremely dense urban area, and by comparison with another plant proposed for a comparably high cost site on Long Island, NY. 4.1.1 Study of the Cost of Proposed Generation in the US The objective of our recent study of proposed generation was to evaluate the competitive position of the installed cost of individual electric generating plants: both combined cycle and simple combustion turbine. In addition, the study included an analysis of the cost impacts of different factors such as different markets, in service dates, developers, sizes in MW, stage of development, and experience of the developer. The study identified competitive advantages and disadvantages that influence relative costs. In doing this study, we: . Compiled a database of proposed merchant plants. . Searched and reviewed a number of publications and data sources to compile this information, including trade publications and specialized databases. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 4-1 . Identified data by electric market. . Developed a sub-database of projects for which we had cost estimates. . Classified projects into categories based on perceived reliability of cost data. . Adjusted costs to reflect regional cost differences using the Handy-Whitman index. . Compared costs by category on a $/KW basis for combined cycles and CT's. . Compared different developers, the projected costs of development. . Identified and analyzed factors that could account for cost differences. Some of the conclusions we can draw from the data are the following: . The data show a wide variation in cost. . As development proceeds, estimates increase for: . Discovery, for example, of required design changes . Disclosure, relating to information requirements of publicly held companies. . Economies of scale appear in the data trends up to about 500 MW. . The data are ambiguous about economies of scale of larger plants. This conclusion for larger plants does not deny economies of scale up to and perhaps beyond 1000 MW, but only that the data do not readily exhibit such economies. . The Handy-Whitman index may under count the high cost of development in high cost regions. (See Exhibit 4-1 for a map of the Handy-Whitman regions.) . The index reports comparable costs through out the northeast quadrant of the US, including states from West Virginia to Maine and Ohio to Missouri. In this large region, the high costs of urban areas like New York City, Chicago or Boston is masked by the lower costs of less urban areas and states. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 4-2 . An index of developer experience does not predict low cost for high experience. . We further conclude from these 5, especially 1 and 5 that the market is not mature and has not rung out the lesser performers. All this suggests opportunity for the performers. Exhibit 4-1 Handy Whitman Regions [Image Removed] The study did not evaluate the relative cost of generation development in dense urban areas versus less dense suburban or rural locations. In fact, the standard tool for adjusting for relative regional cost differences, the Handy-Whitman Index, divides the US into 6 cost regions. The one containing New York City, also contains states from West Virginia to Maine. In fact, the cost difference between the Northeast and the Midwest region is barely 2%. The Midwest includes 7 states west of the Mississippi: North Dakota, South Dakota, Nebraska, Kansas, Missouri, Iowa, and Missouri. We think the costs in rural areas of the US under represent the costs in more urban areas. This bias is especially true for the cost of project development and construction in New York City. In analyzing the data, we segregate the data for Combined Cycle plants into: . Financed, Advanced Stage Development, and Not Under Construction. We found the data show higher costs for financed than for not yet financed plants. . We also concluded that only selected costs found their way into a published cost estimate. Financed plants generally reported costs including the following: . Site; . Energy Connections (but not transmission gas pipeline extensions or transmission lines and reinforcements); . Plant costs, including interest during construction; - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 4-3 . Development costs; and . Corporate overheads. 4.1.2 Astoria Energy Before calculating the actual position that Astoria Energy might have in the range of costs exhibited by proposed plants, we have to deal with the fact of constructing a plant in New York City. One of the aspects of the City is congestion: congestion of all kinds. For example, only 50% of the electric load within the transmission constraint around New York City can be supplied by sources outside the constraint. The high cost of transmission construction in a dense urban area and the potentially even more costly burden of risk to permit electric transmission construction are an important element of the opportunity to supply load in the City. Transmission constraints have kept electric prices high in New York City. Although a plant proposed for an existing brownfield near existing electric generation may find it easier to obtain government permits and approvals, the costs of construction are higher due to higher labor costs, site congestion, urban construction requirements and limitations, and the costs of transportation congestion. When comparing plant costs across the country, we recommend reducing the cost of plants located in New York City by 10 % or more for design and construction congestion costs and labor costs. Astoria Energy is proposed to cost $793.4 million for 1,090 MWs or $728 per KW. In our study, Handy-Whitman indicates an 8% higher cost of installed plant in the Northeast US, including lower cost rural regions of eastern states. Because urban costs are higher, we would compound Handy- whitman cost difference with another 10% for New York City. Therefore, in comparison with all other plants whose costs have been adjusted to Northeast quadrant US costs, the cost of Astoria Energy is reduced by 10% to $662 per KW. Exhibit 4-2 shows this range of costs for Astoria in comparison with other proposed combined cycle plants in the the different electricity markets across the US. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 4-4 Exhibit 4-2 Cost Comparison of New Plants by Region [Image Removed] Though not a perfect picture, Astoria falls at the top end of most of the proposed plants in the US: just as electricity prices are at the top end in comparison with electric prices in the US. We note that four financed plants in New England are equal in cost or higher than Astoria. However we also note that these four plants are substantially smaller ranging from 150 MW to 274 MW. Our finding of economies of scale to 500 MW suggest that if larger, these plants would individually have cost less per KW than they did. Exhibit 4-3 provides a comparison of the cost of Astoria Energy against the more limited set of proposed plants: those with financing. We note that Astoria is in an earlier stage of development and that it is likely to make commitments for major components of the plant including turbine generators at a later date than those plants financed to date. Because of the opening competition in the electric generation market, developers of generation have been committing to new combustion turbine units at a record rate. The three or four manufacturers of this equipment have already raised prices of these units substantially. Exhibit 4-3 Cost Comparison of Plants and Financing [Image Removed] There is another way to evaluate the cost of Astoria Energy. We have an example of another plant proposed for a heavily congested area near New York City: on Long Island. PP&L Global has proposed a site for simple combustion turbine development, 300 MW at first, more to follow. The cost of this proposal is $500 per KW. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 4-5 From our study of proposed electric generation plants in the US, we have compared the median cost of proposed simple cycle plants with the median for combined cycle plants, $336 and $484 per KW, respectively. Combined Cycle plants cost about 144% of the simple cycle. If we apply that ratio to the PP&L simple cycle proposal, adjusting it to the combined cycle cost, we find a cost of $720 per KW. The estimated cost of Astoria is $728 per KW ($793 million and 1090 MW). 4.2 Comparable Asset Values found in Utility Asset Divestitures Much of the utility generation in New York has been sold to third parties as part of the divestiture process and a portion of the purchased power contracts have been sold or restructured. Exhibit 4-4 summarizes the divestiture activity to date in New York and identifies the new owners of the assets. Several New York utilities are in a position to retain some of the revenues received form the sale of the assets, providing an incentive to maximize the sales prices. Exhibit 4-4 Generation Divestment in New York [Image Removed] Sales of assets through utility divestiture have brought prices as high as $1,000/kW in some areas and for some types of assets. This section of the report compares the asset sales to date by region and fuel type as a way to gauge the inherent market value of the Astoria Energy Project. While utility generation divestiture has generally been considered to have been highly successful for the selling utilities, there has also been a great deal of speculation to justify the prices that have been paid. Many factors contribute to power plant valuation including: expected prices for energy, capacity, and ancillary services; option value inherent in the price volatility and uncertainty of start- up markets; first-mover advantage; option value of future development on an existing brownfield site; portfolio advantages; etc. A comparison, however, of the divestitures across the country reveals that there are ranges of values for certain asset types as can be seen in Exhibit 4-5 below. Exhibit 4-5 - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 4-6 US Generation Divestitures by Region and Timing ($/kW) [Image Removed] The highest prices were paid for asset portfolios with an abundance of hydro and coal units. Coal plants have low variable costs and will typically run whenever they are available. Hydro plants have variable costs near zero, and if they also have the ability to store water can target the highest prices periods thus maximizing their margins. Plants located in metropolitan areas sold at a median price of around $275/kW, but many of these plants are quite old and inefficient and are only dispatched during periods of high demand. Exhibit 4-6 shows a comparison of generation divestitures by region and chronology. Definitive conclusions cannot be drawn from the exhibit about market maturity affecting prices. That is, prices don't tend either up or down depending on how early or late the divestiture occurred. There is a marked difference, however, between sales in the Northeast and those in the West. Average prices in the Northeast were $43 11kW versus $237/kW in Western states. Exhibit 4-6 US Generation Divestitures by Region and Timing ($/kW) [Image Removed] Based on this analysis we can conclude that baseload plants in Northeast markets are inherently more valuable than peaking or cycling plants in the Northeast, and that at the time of the divestitures, entry into Northeastern markets was valued more highly than entry into Western markets. The inherent market value of the Astoria Energy Project should be above the average for Northeast plants based on the following factors. . It should operate as a baseload plant. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 4-7 . It should have a price advantage over other in-city generation and be able to compete with out-of-city generation during some periods. . Capital expenditure requirements should be less than neighboring plants due to age. . There are market advantages related to in-city capacity requirements established by the NYISO. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 4-8 5. DESCRIPTION OF THE PRICE FORECASTING APPROACH AND METHODOLOGY 5.1 Background The approach Navigant used to develop the price projection, discussed in detail below, is consistent with the approaches that have been used by market participants in assessing market prices within the restructured New York power market. Navigant has prepared market price forecasts using the same approach to assist bidders in deriving market values -- and ultimately purchase bids -- for numerous utility assets being divested in New York and elsewhere. Specifically, over the past couple of years, Navigant provided such price projections to confidential bidders in the following utility divestitures: New England Electric System ("NEES"), Central Maine Power ("CMP"), Maine Public Service ("MPS"), New York State Electric and Gas ("NYSEG"), Niagara Mohawk ("NiMO"), and Consolidated Edison ("Con Ed"). In addition, Navigant has provided similar price forecasting services, employing the same basic approach, to numerous merchant plant developers in New York, New England, the Pennsylvania-New Jersey-Maryland Interconnection (" PJM"), various Midwestern states, and Ontario. Through these consulting engagements, Navigant's forecasts have withstood considerable scrutiny from a number of sources, including senior managements, boards of directors, and lending institutions. 5.2 Description of Market Price Forecast Methodology The following sections present the details of our analytical approach to projecting market prices for each of the major wholesale supply products traded within NYPP. 5.2.1 Approach to Projecting Energy-Clearing Prices To prepare the energy price forecast presented in this report, Navigant used a simulation model called PROPHET. PROPHET is a multi-area, bid-based pooling simulation model designed for projecting wholesale energy prices in a competitive electricity market. PROPHET was specifically developed to simulate generator bidding and dispatch in bid-based pooling energy markets, such as has been implemented within New York. PROPHET clears the spot energy market based on the sell "offers" specified for all generating plants within the relevant market and projected load levels. The market-clearing price established by PROPHET reflects detailed plant operating characteristics, random plant forced outage rates, planned maintenance schedules, and seasonal resource characteristics. In addition, PROPHET allows for the modeling of inter-regional transmission limitations, and in times of constraint, calculates locational clearing prices on both sides of the constrained interface to reflect the costs of transmission congestion. The diagram in Exhibit 5-1 provides an overview of the energy simulation process using PROPHET. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 5-1 Exhibit 5-1 Overview of Energy Simulation Process [Image Removed] Navigant used PROPHET to optimally dispatch the New York utilities' and independent power producers' generation resources to meet projected hourly loads within New York in a least-cost manner. The energy-clearing price in each hour is set equal to the bid (or offer) price to supply energy of the last increment of generation needed to meet load within the New York market. This is consistent with the manner in which the NYISO calculates hourly energy market-clearing prices and facilitates spot market settlements in its role as administrator of the bid-based energy market. As discussed later in this report, Navigant assumed that all generators bid an energy price equal to their short-run marginal cost, consisting of fuel, variable operations and maintenance expenses, and emissions allowance costs./4/ Translating the energy-clearing price calculation method discussed above into fundamental economic theory, the energy-clearing price calculated for a given hour reflects the price at the intersection of the supply and demand curves for energy in that hour, as illustrated in Exhibit 5-2 below. Exhibit 5-2 Illustration of Energy-clearing Price Process [Image Removed] In the above exhibit, the hourly clearing price P*, represents the bid price of the unit of supply needed to meet the last increment of the total system demand of Q*. In effect, the PROPHET ________ /4/ As discussed later, generators will bid energy in at prices above their short-run marginal costs during high demand periods in an attempt to maximize energy margins contributing to paying down the fixed costs of operations. As a result, our marginal cost-based energy prices understate somewhat the true energy prices generators would earn. We account for these additional energy revenues through an estimate of a supplemental revenue adder, which implicitly includes not only these "premium" energy revenues, but also capacity and ancillary service revenues. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 5-2 model analyzes energy market supply and demand curves similar to those illustrated above for each of the 8,760 hours of each year of our analysis, in each case calculating the clearing price at the intersection of the supply and demand curves. Thus, the algorithm used by the PROPHET model is consistent with the fundamental economic theory of supply and demand equilibrium that underlies the anticipated market behavior in the bid-based energy market in New York. Based on the generating unit dispatch and energy-clearing price results calculated by the PROPHET model, Navigant calculated the revenues that each generating unit would receive from the sale of energy. The variable costs (e.g., fuel, etc.) that were incurred to produce the energy that was sold were netted off from these energy revenues, resulting in a net profit margin on the sale of energy. Importantly, in many hours, generating units will receive higher revenues for the sale of energy than the cost incurred to produce the energy sold. This would be the case when the energy-clearing price is higher than a given unit's energy bid price, assuming the unit's bid price reflects its short-run marginal production cost. This is more often the case for low-cost, baseload resources than for relatively higher-cost peaking resources, and the net margin on energy sales -- defined as energy revenues less energy production costs is typically much larger for baseload resources than for peaking resources. This resulting net margin on the sale of energy represents a contribution towards paying down some portion of the fixed costs of unit operations. The illustration in Exhibit 5-3 demonstrates the relationship between a generator's marginal costs and the net energy margins it would receive. Exhibit 5-3 Relationship Between Generator Marginal Costs and Net Energy Margins [Image Removed] The graph on the left-hand side of Exhibit 5-3 presents a hypothetical energy price duration curve assuming generators bid their short-run marginal costs into the energy market. Given that resources would generally be dispatched in order of increasing bid price,/5/ one can use the price duration curve to assess both the likely number of hours a given generator would be dispatched, ________ /5/ The presence of transmission constraints or operating limitations could cause resources to be dispatched out of economic merit order. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 5-3 as well as the net profit that generator would earn on the sale of energy. For example, a generator with a marginal cost (i.e., energy bid price) of $20/MWh would dispatch for just under 80% of the hours of the year, as denoted in the exhibit. Since the generator would get paid the hourly energy-clearing price for its energy production in each hour it operates, its total energy revenues would be represented as the area under the price duration curve for the hours in which it operates. In order to calculate the net profit margin on sales (i.e., the white area in the graph), we must net off the variable costs of production that were incurred to produce the energy sold (i.e., the gray area of the graph). The graph on the right-hand side of Exhibit 5-3 provides a hypothetical relationship between the marginal cost of a generator and the energy profit margin it would earn. As can be seen, generators with lower marginal costs tend to earn significantly higher energy profits than higher marginal-cost generators. This is intuitive, as the white area in the graph on the left-hand side of the exhibit would tend to get smaller for higher-cost, lower capacity factor generators. For most units, this net margin on the sale of energy (assuming marginal cost bidding) falls significantly short of fully covering the fixed costs of operations, even for some low marginal-cost baseload plants which earn very sizable energy profit margins/6/. Given that most units are unable to fully cover their fixed costs from the sale of energy at their short-run marginal costs alone, these units must make up the remaining revenue shortfall from other means/7/. These additional sources of revenue will likely come in a number of distinct forms, as summarized below: . Strategic Bidding of Energy - Although we have assumed that generators will bid to supply energy at their short-run marginal costs in performing the PROPHET simulation, many generators, in practice, will bid significantly above their marginal costs in an attempt to ____________ /6/ Recent nuclear plant retirements in New England (e.g., Maine Yankee and Millstone 1) are empirical evidence of this. Despite the fact that these plants had among the lowest short-run marginal operating costs of any units in NYPP, and thus would earn very high energy margins, the operators of these plants did not believe these energy margins would be sufficient to cover the high fixed operating costs of these facilities. /7/ This shortfall would need to be covered in order to achieve market equilibrium. Otherwise, operators would elect to retire plants that are not covering their fixed costs of operations, which in turn would put upward pressure on prices - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 5-4 maximize their energy sale profits. The importance of this type of strategic bidding is particularly evident for operators of peaking plants, since there will be few hours in which the energy-clearing price exceeds their operating costs (perhaps as few as 100 hours or less). As a result, the spread between the energy-clearing price and their marginal costs must be sufficiently large to enable them to cover their fixed operating costs. If energy prices were simply set at short-run marginal costs, this spread would inevitably be insufficient to allow these peaking plant operators to fully cover their fixed costs, leading to the likely retirement of these facilities. This strategic bidding behavior has been witnessed in other bid-based energy markets both in the U.S. (e.g., PJM, NEPOOL, California) and abroad (e.g., UK, Australia, Alberta, etc.), as well as in NYPP since the implementation of bid-based energy markets December 1, 1999. As shown previously in Exhibit 2-10, energy prices in NYPP have been bid up to as high as about $1000/MWh, and have been higher than $100/MWh for approximately 3% of the hours. By comparison, Navigant estimates that the short-run marginal costs of the more expensive peaking plants in NYPP are generally in the $50-$100/MWh range. Thus, the energy-clearing prices to date reflect significant departures from marginal cost bidding. While these strategic bidding premiums are likely to occur during a relatively few hours of the year, all plants that are operating in those hours will receive the benefits of these higher prices. As shown in Exhibit 2-10, these price spikes above marginal costs will likely contribute to significant energy profits that may be used to pay down fixed costs of operations. . Revenues from ICAP Sales - Suppliers of retail load within NYPP will be required to hold sufficient amounts of Installed Capacity (ICAP) or otherwise be deemed to purchase from the spot market at market-based clearing prices. As such, revenue from the sale of these products represents another source of supplemental revenue over and above the marginal cost-based energy prices that are calculated using PROPHET. . Revenues from Ancillary Service Sales - As with ICAP, suppliers of retail load within NYPP will be required to provide sufficient amounts of operating reserves and (AGC). While Navigant believes that incremental revenue opportunities from the sale of ancillary services is not likely to be significant, any revenue earned on the sale of these products would constitute another source of incremental value above the marginal energy prices calculated using PROPHET. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 5-5 . Other Revenue Sources - Other sources of supplemental revenue include call option premiums and fuel tolling agreement fees. While the markets for these products are less uniform and visible, these arrangements could provide an important source of incremental value. The following section discusses the approach we used to estimate the level of these forms of supplemental revenues, which when added to the energy prices derived using PROPHET, constitute Navigant's estimate of the "all-in" price projection for NYPP. 5.2.2 Approach to Projecting Supplemental Revenues While generators will likely earn revenues from a number of sources as discussed above, Navigant believes that the aggregate level of revenues earned is the most important factor in achieving market equilibrium. That is, owners of existing plants will decide to continue to operate or retire - and developers of new plants will decide to build or not build - based on their expectations of the total revenue they will earn from all sources. The manner in which these total --- revenues are distributed across the various sources of value is not, in itself, a key driver of plant retirement and entry decisions. Therefore, Navigant's approach to forecasting supplemental revenues focused on ensuring that the resulting all-in prices (i.e., the sum of marginal cost-based energy prices and supplemental revenues) would be sufficient to encourage enough generating capacity to remain in service to meet the minimum regional installed reserve margin requirement. Navigant assumed that the total capacity requirement is set at 118% of the projected peak demand for New York, consistent with the approximately 18% reserve margin resulting from application of the NYISO's installed capacity reliability criteria. In order to calculate the supplemental revenues that would be needed to ensure enough capacity to meet the reserve requirements at least breaks even economically, we first calculated each unit's net shortfall in covering its "going-forward costs" after considering energy revenues earned in the PROPHET dispatch. This shortfall for each unit represents the amount of supplemental revenues each unit would need to avoid operating at a loss. For existing generating units, Navigant defines "going-forward costs" as those annual operating and maintenance ("O&M") costs needing to be recovered such that continued operations at an existing - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 5-6 generating unit does not result in an operating loss. If these costs were not capable of being recovered for a given generating unit, retirement of that unit would be the most economically rational decision since the alternative would be to operate at a loss. Previous capital investments for existing units have not been included, since these costs are considered sunk. With respect to prospective new generating units, Navigant defines "going-forward costs" to not only include those costs which would need to be recovered in order to cover annual operating expenses, but also the up-front investment costs and a sufficient return on investment that would be required to attract a new entrant to the market. Stated differently, Navigant defines going-forward costs for existing units as those costs that could be avoided if the unit were retired. On the other hand, Navigant defines going-forward costs for a prospective new unit as those costs - including up-front investment costs - that could be avoided if the unit were not brought on-line. For existing generating facilities, going-forward costs included all fixed and variable O&M costs, fuel costs, environmental emissions allowance costs, and an estimate of property tax payments. Going-forward costs for existing plants also included estimated future capital expenditure requirements, but did not include previous capital investments because these costs are "sunk" and non-avoidable even if a plant were retired. The going-forward costs of new capacity additions included not only the basic fixed and variable O&M expenses assumed for existing plants, but also the annual carrying costs of initial investment (including an estimate of the return on equity which would be required to attract new development). Based on the calculated going-forward cost shortfalls for each unit, a supply curve for capacity was constructed by stacking generating units in order of decreasing profitability (i.e., increasing going- forward cost shortfalls). This was done to determine the lowest-priced means of ensuring that sufficient capacity at least breaks even economically to meet the regional reserve requirement. Exhibit 5-4 illustrates the manner in which the sorted supply stack for capacity and the assumed installed capacity requirements were used to derive the supplemental revenue adder to be added to our marginal cost-based energy prices determined using PROPHET to arrive at an all-in price. Specifically, the bars reflect the magnitude of various units' (labeled A through I) net shortfall in covering their going-forward costs, and as such, also reflect the amount of supplemental revenues each unit needs to at least break even./8/ _________________ /8/ A positive bar reflects that the unit was actually able to more than cover its full going-forward costs solely from the sale of energy, such that any capacity revenues earned would fully contribute to net profits. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 5-7 Exhibit 5-4 Illustration of Process for Determining Supplemental Revenue Adder [Image Removed] As indicated in the above graphic, generating unit H is the last unit required to meet the market's total capacity requirement. Therefore, we would set the supplemental revenue adder at unit H's going-forward cost shortfall. Based on this supplemental adder, unit H would exactly break even on covering its going-forward costs. Importantly, we assume that all units would receive this payment, consistent with market-clearing principles. Units A through G would see a positive net profit, since their net revenue shortfalls were less than that of unit H. On the other hand, unit I would fall short in covering its full going-forward costs, since its net shortfall was greater than the shortfall of the marginal capacity unit, unit H. Given that unit I would suffer a net loss, it would be a prime candidate for retirement if this situation prevailed over a period of time because the operator of that unit would be better off ceasing operations of the unit than continuing to operate for a loss. This is the basic rationale Navigant employed in the analysis to prompt economic retirements of existing units. Based on the approach described above, Navigant assumed that the supplemental revenue adder in the long run would be established by the costs of new entrants to the market. More specifically, Navigant assumed that the supplemental adder would be capped at a level that, when combined with energy clearing prices, would not exceed the all-in price required to attract a new entrant. This assumption is premised on the view that if the supplemental revenues paid to essential generators are too high, new entrants would be attracted and their entry would result in a reduction in prices back to equilibrium levels. _______________________ profits. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 5-8 6. SUMMARY OF MODELING ASSUMPTIONS Navigant's analysis was based on the use of the most recent, reliable, and objective information, including regional demand and energy forecasts, actual utility hourly load profiles, fuel price forecasts, generating plant ratings, and other pertinent generating unit operating parameters. This chapter provides a summary of those modeling assumptions, as well as the sources and basis for those assumptions. 6.1 New York Demand/Energy Forecasts and Hourly Load Profiles The PROPHET model requires the specification of hourly load profiles for each year of the analysis. In order to derive hourly load profiles for each year of the forecast, Navigant utilized hourly load information for 1997 which was filed by NYPP in the FERC Form No. 714/9/. This historical hourly load profile was scaled appropriately for each year of the analysis to reflect the expected growth in peak demand and energy. To accomplish this, Navigant used the annual peak demand and energy forecasts for New York as reported in the 2000 NY/SO Load and Capacity Data report. The Load an Capacity Data forecast is developed by staff at the NYISO using econometric forecasting models, and reflects substantial input from NYPP members regarding key factors affecting load and energy growth in their respective service territories. The year-by-year peak demand and energy assumptions for New York used in the PROPHET model are summarized below in Exhibit 6-1. _________ /9/ While the 1998 and 1999 load shapes were also available, Navigant felt that the 1997 load shape provided a better representation of a "typical" year. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-1 Exhibit 6-1 New York Peak Demand and Energy Forecast Assumptions Year of Projected Summer Peak Projected Annual Energy Analysis Demand (MW) Requirements (GWh) 2003 31,070 161,880 2004 31,300 163,570 2005 31,510 164,770 2006 31,740 166,240 2007 31,990 167,740 2008 32,250 169,320 2009 32,480 170,680 2010 32,720 172,280 2011 32,970 173,890 2012 33,200 175,450 2013 33,470 176,860 2014 33,730 178,370 2015 33,970 179,980 6.2 Existing Resource Capabilities Navigant relied on the 2000 Load and Capacity Data Report as the primary source for all generating unit capacity ratings. PROPHET was specified with both the summer and winter generating plant capability ratings reported in the Load and Capacity Data Report, thus reflecting the fact that many facilities have lower ratings during the summer peak period. 6.3 Existing Generating Unit Outage Parameters The maintenance schedule for units was based on a representative three-year schedule for 1998 through 2000 developed by NYPP, which was repeated in a cyclical fashion throughout the forecast period. The forced outage rate assumptions for each of the generating units in New York were based on values provided in the Summary of the NEPOOL Generation Task Force Long-Range Study Assumptions ("GTF Assumptions") prepared by the NEPOOL Generation Task Force and - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-2 NEPLAN staff. The GTF Assumptions provide planning forced outage rate assumptions for generic types of generating units which are applicable for New York based generating technology. 6.4 Existing Unit Heat Rates For existing plant heat rates, Navigant relied on a number of sources of information, including heat rate information filed with NYPP, heat rate information provided in the GTF Assumptions, actual heat rates calculated using data filed by New York utilities in their FERC Form 1 filings, and Navigant's own judgement. 6.5 Fuel Price Forecast The year-by-year fuel price forecast assumptions that Navigant used in its analysis are summarized below in Exhibit 6-2. These prices are intended to reflect prices delivered to the generator, and as such, are inclusive of any transportation charges that would be incurred./10/ The prices shown in Exhibit 6-2 for interruptible gas also accounts for the cost of fuel oil when an interruptible gas plant has been interrupted and is required to operate on distillate fuel oil. Exhibit 6-2 Fuel Price Forecast Assumptions ($/MMBtu in nominal dollars) [Image Removed] Navigant combined these fuel forecasts with the assumed heat rates for each generating unit to convert the $/mmBtu fuel prices to a $/MWh basis. This $/MWh marginal fuel cost was used as the primary component of each generating unit's bid price for the sale of energy in PROPHET. In addition to this marginal fuel price, we also included estimated variable O&M costs in each unit's energy bid price. Furthermore, we included within each unit's energy bid prices the costs of the SO\\2\\ and NOx allowances that would be required by the units, given their respective SO\\2\\ and NOx __________ /10/ Transportation charges will vary from plant to plant, depending on which pipeline is used, the transportation services that have been contracted, and the specific receipt points used for the contract. For example, two projects purchasing gas at two different receipt points on a particular pipeline would likely pay similar prices for the gas, but pay different charges for the transportation, which are considered fixed costs and are appropriately not reflected in the plant's dispatch costs. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-3 emission rates in generating electricity./11/ The escalation rates underlying the above fuel price projections are summarized in Exhibit 6-3 below. Exhibit 6-3 Summary of Nominal Fuel price Escalation Rates Nominal Escalation Rates: 2003-2015 ------------------------------------------------- Inflation: 2.50% Delivered Gas: 2.22% Resid Oil: 2.20% Distillate: 2.20% Coal 1.60% A more detailed discussion of the basis for Navigant's price projection and escalation assumptions for each fuel type follows. 6.5.1 Natural Gas In developing its gas price forecast assumptions, Navigant relied on the Gas Research Institute (GRI) 2000 Baseline Projection report. The GRI model incorporates various macroeconomic drivers into its complex modeling effort to achieve an internally consistent energy supply and demand outlook across all energy sources and end-use demand sectors. Development of the GRI Baseline Projection is an ongoing process that seeks to incorporate technological advances and penetration of gas into end-use sectors. Since the forecast reflects prices at the spot market (Henry Hub), Navigant included a transportation differential to reflect deliveries into the Northeast. These estimates reflect recent history for delivery costs. Navigant believes its gas price projection represents a reasonable estimate of delivered prices to the Northeast, taking into consideration the profound impacts the pipeline expansions and the significant increase in demand by power generators will have on delivered gas prices. With respect to longer-term gas price escalation (see Exhibit 6-3), we assumed that gas prices escalate more slowly than the general inflation rate of 2.5% (i.e., 0.28% real decline in prices). It is important to ________ /11/ We assumed allowance costs of $200/ton and $1,000/ton for SO2 and NOx, respectively, and held these ft throughout the forecast. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-4 note that the gas prices presented in Exhibit 6-2 were used for all New York gas-fired generating units. 6.5.2 Residual and Distillate Oil Like natural gas, Navigant relied upon GRI price forecast for oil. Exhibit 6-2 provides a graphical depiction of the GRI forecast. With respect to long-term escalation, Navigant assumes that residual oil will escalate at 2.2% per year (i.e., -0.3% real escalation) while distillate oil was assumed to escalate at 2.5% per year (i.e., 0% real escalation). While residual oil and natural gas have historically been viewed as substitutes and thus tended to increase in price with one another, we have assumed that residual oil will escalate at a lower rate than gas for two primary reasons. First, residual oil will increasingly be disfavored for environmental reasons and gas will become a premium fuel due to its clean burning properties, thus likely leading to gas prices increasing at a greater rate than residual oil prices. Second, most of the dual-fueled oil/gas steam units which burn residual oil in New York are relatively inefficient, and these units will likely get displaced by newer more efficient gas-fired combined-cycle plants within New York. This would lead to a drop in demand for residual oil for power generation, and thus likely soften prices for residual oil as compared to gas. We have assumed that distillate oil will escalate at the same rate as natural gas, both due to its relatively better environmental properties than residual oil as well as the fact that most new combined-cycle facilities will use distillate oil as a backup fuel. 6.5.3 Coal The longer-term coal price escalation underlying Navigant's forecast is 1.6% per year (i.e., -0.9% real escalation), which is consistent with the escalation rates underlying the GRI. This drop in coal prices in real terms is consistent with recent trends and, in Navigant's view, would be required in order for coal to remain competitive given the increasing environmental costs associated with burning coal. 6.6 Fixed and Variable O&M Costs Fixed and variable O&M costs for utility generating units were calculated based on an average of actual operating cost information filed by the New York utilities in their FERC Form No.1 filings over the 1992-1996 period. This period was selected due to its availability at the time the production costs model's was being developed. However, since this time, Navigant has benchmarked its data - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-5 for accuracy. The various FERC Form 1 O&M expense accounts were allocated between fixed and variable expenses as shown in Exhibit 6-4 below. Exhibit 6-4 Assumed Allocation of O&M Expenses Between Fixed and Variable ---------------------------------------------------------------------- Op Super & Engin. Fixed ---------------------------------------------------------------------- Fuel Fuel ---------------------------------------------------------------------- Coolants and Water/ Water for Power Variable ---------------------------------------------------------------------- Steam/ Hydraulic Expenses 50/50 Variable/Fixed ---------------------------------------------------------------------- Steam from Other Sources Variable ---------------------------------------------------------------------- Steam Trans. (Cr.) Fixed ---------------------------------------------------------------------- Electric Expenses Fixed ---------------------------------------------------------------------- Misc. Steam (Nuclear/Hydraulic) Expenses Fixed ---------------------------------------------------------------------- Rents Fixed ---------------------------------------------------------------------- Maint., Super & Engin, Fixed ---------------------------------------------------------------------- Maint. of Structures Fixed ---------------------------------------------------------------------- Maint. of Plant/ or Res, & Waterways Fixed ---------------------------------------------------------------------- Maint. of Electric Plant Fixed ---------------------------------------------------------------------- Maint, Misc. Steam (Nuclear/ Hydraulic )Plant Fixed ---------------------------------------------------------------------- 6.7 Inflation Assumption We assumed an annual inflation rate of 2.5%, which is consistent with sources Navigant reviewed, including data reported by the Bureau of Economic Analysis and the Bureau of Labor Statistics. In addition, Navigant reviewed the Congressional Budget Office's Economic & Budget Outlook for the Fiscal Years 2000-2009. In this report, the Congressional Budget Office projects Consumer Price Index ("CPI") growth of 2.6% per year. Our inflation assumption was used to escalate the fixed and variable O&M expenses for each generating unit from one year to the next, and, therefore, has an underlying influence on the escalation embedded into our wholesale market price forecast. 6.8 New Entrant Cost and Operating Assumptions Navigant's assumptions regarding the unit specifications, costs, and other pertinent assumptions with respect to combined-cycle gas turbine ("CCGT") and simple-cycle gas turbine ("SCGT") new entrants are set forth in Exhibit 6-5. Specifically, Exhibit 6-5 provides cost and operational information for CCGT and SOGT facilities and the financing and economic assumptions which we applied to our analysis of both CCGTs and SCGTs. These assumptions were derived based on Navigant's market insights and experience with respect to the costs and characteristics of new entrant generation. These assumptions are supported by a wide array of other timely and authoritative sources, including quotes from equipment vendors and publicly available information regarding the cost and operational characteristics of the proposed new generating facilities in the Northeast. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-6 Exhibit 6-5 New Entrant cost and Operational Assumptions
- ---------------------------------------------------------------------------------------------------------------------------------- Parameter CCGT SCGT Notes - ---------------------------------------------------------------------------------------------------------------------------------- Plant Rating (MW) - Winter 504 176 Assume 20 MW of SCGT capacity added for each CCGT capacity addition as proxy for CCGT dud firing capacity - Spring 494 169 - Summer 473 165 - Fall 492 176 - ---------------------------------------------------------------------------------------------------------------------------------- Plant Construction Cost - Through 2005 ($/kW) 550 315 Reflects tightness in CC equipment mkt. - ---------------------------------------------------------------------------------------------------------------------------------- Plant Construction Cost - Post.2005 ($/kW) 510 315 Reflects CC equipment supply catching up WI demand - ---------------------------------------------------------------------------------------------------------------------------------- Percent Annual Growth in Capital Costs 1.88% 1.88% Reflects 75% of the inflation value - ---------------------------------------------------------------------------------------------------------------------------------- Fixed Operating and Maintenance Expenses ($/kW-Yr) 9.00 5.25 - ---------------------------------------------------------------------------------------------------------------------------------- Variable Operating and Maintenance Expenses ($/MWh) 2.50 2.63 - ---------------------------------------------------------------------------------------------------------------------------------- Percent Annual Growth in 2.50% 2 50% Reflects 100% of the inflation value Operating Costs - ---------------------------------------------------------------------------------------------------------------------------------- Net Plant Heat Rate (Btu/kWh - Study assumes CCGT/SCGT reductions of 200/320 mmBtu/GWh in 2008. HHV) for incremental plants See below 10900 Heat rate represents degraded heat rate to account for partial load entering commercial operation operation and efficiency deterioration between major maintenance during the study period. overhauls 1998 6958 1999 7219 2000 6860 2001 6825 2002 6760 2003 6700 2004 and thereafter 6700 - ---------------------------------------------------------------------------------------------------------------------------------- Gas Arrangements Firm Interruptible - ---------------------------------------------------------------------------------------------------------------------------------- Debt Leverage 65% 65% - ---------------------------------------------------------------------------------------------------------------------------------- Cost of Debt 8% 8% - ---------------------------------------------------------------------------------------------------------------------------------- Term of Debt (Years) 15 15 - ---------------------------------------------------------------------------------------------------------------------------------- Return on Equity 15% 15% - ---------------------------------------------------------------------------------------------------------------------------------- Book Life (Years) 15 15 - ---------------------------------------------------------------------------------------------------------------------------------- Tax Life (Years) 20 15 - ---------------------------------------------------------------------------------------------------------------------------------- Property Tax Rate 2% 2% - ---------------------------------------------------------------------------------------------------------------------------------- Inflation Rate 2.5% 2.5% - ----------------------------------------------------------------------------------------------------------------------------------
Note: All Costs are in 1999 Dollars In addition to the above, Navigant's modeling assumptions assume increased capital costs for projects developed in New York City and on Long Island. Our assumptions include $625/kW for In-City and $600/kW for Long Island, reflecting much higher construction costs Of particular note in the above new entrant assumptions is the assumed drop in CCGT installed capital costs after 2005. This assumed drop is intended to reflect the fact that current CCGT prices are somewhat inflated as a result of a significant backlog in orders for such equipment with all the major equipment manufacturers. Current estimates are that new equipment orders cannot be met any earlier than 2002. This equipment shortage, combined with a frenzy of developers vying to be "first to market", has caused prices for CCGT equipment to exceed equilibrium levels. Navigant - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-7 believes that by 2005 the supply-demand imbalance will have been reversed, and CCGT equipment prices will drop to equilibrium levels. It should be noted that the heat rates for the CCGTs, as provided in Exhibit 6-5, reflects the average heat rate for all of the plants entering commercial operation during that year. 6.9 New Entry Timing/Amount Assumptions Based on the status of proposed merchant plant developments in New York and our opinion regarding which of the proposed merchant plants are most likely to go forward, we fixed a certain level of entry of new gas-fired capacity through the year 2006. The specific assumptions regarding which of the proposed merchant plants would go forward are presented on Exhibit 6-6. Beyond the fixed entry, additional new entrants were added based on economics and need. The new entrant plants listed in Exhibit 6-6 represent the most viable of the proposed merchant plants, as these plants constitute those plants which are in operation, under construction, or have reached significant milestones in their development process (e.g., siting approval, air permit approval, financing, etc.). In general, the plants included have a high probability of materializing. 6.10 Heat Rates for New Entrants There are several projects in the region that are either under construction or under development and have been included as new entrants in the market price analysis. It should be noted that the heat rates for the CCGTs, as provided in Exhibit 6-6, reflects the average heat rate for all of the plants entering commercial operation during that year. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-8 Exhibit 6-6 New Entrants Fixed Into the Market Price Analysis Plant Additions Nominal Estimated Project Capacity COD ============================================================= Cogen Tech Expansion 300 2001 Athens Generating Plant 1,080 2003 Astonia Energy 1,090 2003 Heritage Station 800 2004 Bethlehem Energy Center 750 2005 Bowline Unit 3 750 2005 East River Repowering 360 2005 Ravenswood Cogeneration Project 250 2006 Torne Valley Station (1) 860 2006 Poletti Expansion 500 2006 Brookhaven 580 2006 Plant Retirements Nominal Estimated Project Capacity COD ============================================================= Waterside (2) 160 2005 Albany 1-4 (Bethlehem) (3) 381 2005 1. ANP Ramapo also proposed in same area. 2. Retired when East River Repowering enters CO. 3. Retired when Bethlehem Energy Center enters CO. 6.11 NYPP Transmission Region Assumptions and Modeling Methodology The NYISO has identified 11 sub-regions within New York that it uses for planning and operational purposes. While it monitors thousands of locational bus prices for energy and congestion, load weighted average prices are calculated within these 11 zones for withdrawals of energy from the system. The map of New York shown earlier in Exhibit 2-5 illustrates these sub-zones identified by the NYISO and the transmission interfaces demarcating them. While the New York ISO has identified Zones A-K for planning and operational purposes, Navigant's analysis has shown that significant prices differences exist primarily between only four - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-9 aggregated regions. To reflect the locational marginal pricing and congestion management framework that has been proposed by NYPP, Navigant sub-divided the New York region into the following four sub-zones for transmission congestion analysis: . ConEd (Zone J) . Long Island (Zone K) . NY-West (Zones A-E) . Southeast New York (SENY, Zone F-I) In addition, Navigant has modeled the New England market at the same level of detail and integrated with New York. Exhibit 6-8 provides a graphical representation of these transmission zones and the megawatt transfer capabilities assumed between each zone for both New York and New England. Exhibit 6-8 Inter-Zonal Transmission Transfer Assumptions (MW)/12/ [Imaged Removed] Navigant mapped these transmission interfaces into the PROPHET model based on a review of detailed transmission system and load information submitted in various filings by NYPP to the FERC. A summary of the steps which Navigant employed to segment the NYPP region into the four zones is provided below: . Directional transfer limits between the four transmission zones were based on the thermal/stability transfer limits presented in the FERC Form 715. Specifically, Navigant used the thermal constraint basis reported in the Form 715. In cases where a range of transfer limits are presented, Navigant used the midpoint of that range for its assumption. . Loads were mapped to the transmission zones in the following manner: . Navigant used 1997 hourly load shape data for each New York utility as filed in the FERC Form 714. Navigant advocates using 1997 load shape data as a more representative "typical year" than 1998, 1999, or another year's data. . In cases where a utility's service area falls entirely within one of the four transmission zones identified above, the entire utility load profile was mapped to that zone. . In cases where a utility's service area spans two or more of the transmission zones, Navigant utilized bus-level load information contained in transmission power flow cases filed by NYPP in the FERC Form 715. Navigant aggregated the bus-level load data contained in the power flow cases by transmission zone. Based on the _________ /12/ In directions where no limit is specified, there is essentially no binding limit in that direction. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-10 relative aggregate bus-level loads in each zone, Navigant calculated allocation factors by which to allocate utility aggregate hourly load shapes across the multiple zones in which that utility serves load. . In some cases, utility holding companies report hourly load profiles in aggregate for their operating companies. In such cases, Navigant used monthly energy data for each operating company to derive allocation factors by which to allocate the aggregate company load profiles to each of the operating companies by month. . Existing resources were mapped to each transmission zone based on their geographic location . Imports into New York were mapped to zones as follows: . Navigant explicitly modeled the interconnections between New York and New England. Navigant's modeling of New England was at the same resolution as New York (i.e., individual generating units, with some less important units aggregated together). Moreover, Navigant's modeling of New York appropriately reflects the internal constraints within it which impact the ability for economic energy to flow into New England from New York. . Other interconnections (PJM, Quebec, New Brunswick) were represented as injections of energy within the appropriate zone, based on the terminus of the interconnection within New York. New entrants were mapped to the transmission regions in the following manner: . Based on the status of current merchant proposals, Navigant fixed a certain amount of entry in the early years of the study (as indicated in Exhibit 6-6). . Generic new entry was mapped to the transmission zones such that zones with highest energy prices were targeted first. This reflects the fact that developers will target plants in areas that offer the promise of greatest revenues. However, Navigant imparted judgement as to the potential for/pace of entry in any single zone given siting climate, constraint issues, etc. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 6-11 7. PRICE PROJECTION RESULTS This chapter of the report presents the results of Navigant's market price projections and related assessment of the economic feasibility of the Astoria Energy Project based on the assumptions and approach outlined in the previous chapters. First, this chapter presents a high-level overview of the forecast results. Next, we provide a general discussion of the economic feasibility of the Astoria Energy Project. Included as part of this section of the report is a pro forma assessment of the economic feasibility related to the Astoria Energy Project for each of the scenarios analyzed. Finally, we provide NYPP price forecast results reflective of the capacity and energy payments associated with sales by the Astoria Energy Project into the New York power market. 7.1 Overview of Price Forecast Results Exhibit 7-1 summarizes the forecast results for the period from 2003 through 2015./13/ Specifically, the graph presents the average energy-only and all-in price results for the Con Ed zone of NYPP, which is the relevant region for the Project. The energy-only prices plotted in Exhibit 7-1 reflect likely energy-clearing prices assuming that market participants bid energy in at their short-run marginal costs for all hours (average price of energy for all hours in the year). As such, these prices do not include capacity or ancillary service revenues. Moreover, the energy-only prices do not include "premium" energy revenues that generators would earn in periods of tight supply and demand when participants may bid above their short-run marginal costs./14/ The "all-in line" on the graph combines the marginal-cost energy prices with Navigant's estimate of these other sources of supplemental revenue (capacity, ancillary service, and energy premiums) to arrive at an "all-in" price projection. This all-in price represents the composite wholesale market revenue stream that a generator would earn. Energy-only prices are presented in Exhibit 7-1 for two specific time periods: (1) an average over all 8,760 hours of the year (referred to as "all-hours"); and (2) an average of the 876 highest hourly energy-clearing prices for the year (referred to as "Top-10%"). The all-hours energy price reflects the average energy revenue that a baseload generator operating at a 100% capacity factor would earn, while the top-10% energy price reflects the average energy revenue that a peaking resource operating at a 10% capacity factor would receive./15/ ___________ /13/ Navigant did not explicitly model each year in this period. Rather, Navigant prepared capacity and energy price forecasts for each year from 2003 through 2010, and then 2012 and 2015 /14/ While we have assumed all generators bid their short-run marginal costs, experience to date indicates that participants will bid significantly above short-run marginal costs in select hours when available supplies tighten up. /15/ In actuality, this represents the upper bound on the average energy revenue that a peaking unit operating at a 10% capacity factor would receive, since it implicitly assumes that the hours that the unit is operating are coincident with the 876 highest-priced hours of the year. In practice however, unexpected forced outages and the inability to predict the precise timing of price spikes would likely result in that unit not capturing some of the highest-priced hours, thus resulting in a slightly lower average energy price than the top-i 0% price presented in Exhibit 7-1. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 7-1 Exhibit 7-1 Summary of Price Forecast Results Summary Comparison of All-in and Energy Only Prices [Image Removed] A review of Exhibit 7-1 provides some key observations, as noted below: . The overall pricing trend follows the trends in the gas forecast noted earlier. This is due to gas-fired generation being on the margin (i.e. setting the market clearing price) for a significant number of hours. . There is a drop in prices between the years 2005 and 2009 reflecting both the contribution of additional gas pipeline capacity and an overbuild of electric generating capacity. By 2009, load growth catches up the earlier growth of supply and again prices begin to climb. These increases in capacity supply result in a discounting of capacity values below the full level needed to allow new entrants to realize their target returns for the front years of the analysis. This capacity discounting derives from the fact that we have assumed more new entry will come on line than is needed to meet ICAP requirements over the 2005-2009 period, creating a short-term capacity overbuild situation of almost 1000 MW in 2006. However, with load growth and some small retirements, the short-term surplus is eliminated resulting in a significant upward shift in pricing. . Between 2009 and 2012, energy prices climb steadily and then level off due to a leveling off of gas prices. The price results discussed above reflect all-in prices over all 8,760 hours of the year. In addition, the numerical price forecast results underlying the graph in Exhibit 7-1 are presented in tabular format in Appendix A to this report. 7.2 Pricing Applicable to the Astoria Energy Project Exhibit 7-1 provides the energy price projection results applicable to the Astoria Energy Project for the years 2003 through 2015, as well as supplemental revenues that would likely be available to the Project./16/ The all-in price figures in Exhibit 7-1 reflect the likely composite revenue stream that the Astoria Energy Project could earn for its sale of energy, capacity, and ancillary service into NYPP, as calculated in accordance with the approach outlined in this report. In addition, our analysis suggests that the majority of the total annual supplemental revenue is likely to occur during the summer months. This is due to the fact that NYPP loads are highest in the summer, ________________ /16/ As discussed previously, these supplemental revenues not only reflect ICAP revenue potential, but also serve as a catch-all for other forms of revenues that generators would be able to earn over and above the energy prices we have calculated based on marginal cost bidding behavior. Most notably, these additional forms of revenue include energy price premiums earned during periods in which participants bid to supply energy at prices above their short-run marginal costs (i.e., as has been experienced recently when prices were bid up as high as $1,000/MWh) - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 7-2 causing most of the strategic bidding energy premiums and capacity value to occur in the summer months. 7.3 Economic Feasibility of the Astoria Energy Project As described above, the production cost assessment provides a forecast of the dispatch and operation of the plant within the NYPP environment, and, as a result, is able to provide a projection of the total revenue for the project from selling energy into the markets. This revenue projection can be used to measure the financial feasibility of the Astoria Energy Project in a pro forma model. Navigant has prepared a pro forma analysis, measuring the profitability of the project using assumptions with regard to capital costs, debt and equity costs, and taxes. For this analysis, we relied on SCS's generic proforma model that includes specific costs related to project's operation and maintenance (O&M) and other variable costs specific to the proposed project. Results of the analysis conclude that the project earns internal rates of return (IRR) between 11.4 and 13 percent using SCS Energy's proforma and Navigant's fuel costs and energy and capacity revenues for the project. Details can be found in the in the proformas in Appendix A. Return On High Capacity Payment Case 12.99% Cash on Cash 31.51% Pre-Tax Leveraged 19.16% After-Tax Leveraged Return On Low Capacity Payment Case 11.40% Cash on Cash 21.32% Pre-Tax Leveraged 13.09% After-Tax Leveraged - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page 7-3 APPENDIX A Detailed Price Forecast Results Exhibits A provides a detailed summary of the pricing results./17/ In reading the price forecast summaries in these exhibits, the top block of prices are energy-only prices based on the PROPHET model simulations assuming marginal cost bidding of energy. The bottom block of prices are all-in prices reflecting the composite of the energy-only prices and the supplemental revenue adder. As discussed in detail in the body of this report, the supplemental revenue adder captures the incremental value associated with strategic energy bidding premiums and capacity/ancillary service revenues. The all-in prices capture the composite revenue that generating units are likely to receive from all value components in the unbundled wholesale power market. The "all-hours" energy prices are the average of the hourly prices determined using the PROPHET model over all 8,760 hours in the year, whereas the prices at the various percentages reflect the cumulative average of the highest energy prices for those respective percentiles of hours in the year. For example, the prices on the 10% line reflect the average of the 876 (i.e., 10% times 8760) highest-priced hours. The energy-only prices in Exhibit A can be used to approximate the average marginal cost-based energy price a unit would receive based on its capacity factor. For example, a peaking facility in NYPP that operates at a 10% capacity factor in 2003 would realize an average energy price of approximately $36.88/MWh. A baseload generator could expect to be compensated for its output at approximately the all-hours energy price, which in 2003 is projected to be $31.22/MWh. To arrive at the all-in price figures presented in Exhibit A, the supplemental revenue adder was translated to a $/MWh basis by "spreading" the annual price (in $IkW-yr.) over the appropriate number of hours. For example, for the all-in price at the 10% level the $/kW-year value was converted to $/MWh as follows: $/MWh = ($/kW-year)*[1 year/(8760 hours *10%)](1000 kW/MW). _____________________ /17/ The prices presented in these exhibits reflect energy pricing for the Con Ed transmission zone, which is most relevant for the Project since it will be located in that zone. - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page A-1 IN-CITY ENERGY PRICES AND CAPACITY PAYMENTS 09-Aug-00
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Supplemental Adders ($/KW-Yr) 49.67 51.67 52.28 65.23 66.64 67.84 66.41 67.35 65.44 65.53 65.21 66.88 68.56 - -------------------------------------------------------------------------------------------------------------------- All Hours Energy ($/MWh) 31.22 32.81 35.95 33.09 32.38 31.74 31.69 36.10 39.09 42.08 41.91 41.74 41.57 - -------------------------------------------------------------------------------------------------------------------- 10% 36.88 38.49 41.46 40.14 39.68 38.91 38.85 43.65 47.36 51.06 50.85 50.64 50.43 20% 35.56 37.50 40.53 39.74 39.05 38.21 38.11 43.12 46.72 50.31 50.12 49.94 49.75 30% 35.09 37.12 40.15 39.48 38.68 37.74 37.56 42.65 45.89 49.13 49.19 49.26 49.33 40% 34.69 36.70 39.94 38.61 38.00 37.32 37.18 43.31 45.25 48.20 48.39 48.57 48.76 50% 34.34 36.39 39.77 37.24 36.62 36.00 36.04 41.17 44.11 47.05 47.07 47.10 47.13 60% 34.07 36.13 39.61 36.12 35.49 34.88 34.90 39.89 42.87 45.86 45.81 45.77 45.72 70% 33.61 35.31 38.63 35.19 34.53 33.90 33.89 38.69 41.67 44.65 44.57 44.50 44.42 80% 32.73 34.39 37.64 34.37 33.64 33.03 33.02 37.67 40.67 43.67 43.53 43.39 43.25 90% 31.93 33.53 36.75 33.68 32.95 32.32 32.28 36.81 39.80 42.79 42.64 42.48 42.32 - -------------------------------------------------------------------------------------------------------------------- 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 All Hours All-in Price ($/MWh) 36.89 38.71 41.92 40.54 39.99 39.48 39.27 43.79 46.56 49.33 49.35 49.37 49.40 - -------------------------------------------------------------------------------------------------------------------- 10% 93.59 97.48 101.14 114.60 115.75 116.35 114.66 120.54 122.06 123.58 125.29 126.99 128.70 20% 63.92 67.00 70.37 76.97 77.08 76.93 76.01 81.57 84.07 86.57 87.34 88.11 88.88 30% 53.99 56.78 60.05 64.30 64.04 63.55 62.83 68.27 70.79 73.30 74.01 74.71 75.42 40% 48.86 51.44 54.86 57.23 57.02 56.68 56.14 61.53 63.93 66.33 67.00 67.66 68.33 50% 45.68 48.18 51.71 52.14 51.83 51.49 51.20 56.55 59.05 61.55 61.96 62.37 62.79 60% 43.52 45.96 49.56 48.53 48.17 47.79 47.53 52.70 55.32 57.95 58.22 58.49 58.77 70% 41.71 43.74 47.15 45.83 45.39 44.97 44.72 49.68 52.34 55.01 58.21 55.40 55.60 80% 39.82 41.76 45.10 43.68 43.15 42.71 42.50 47.28 50.01 52.74 52.84 52.93 53.03 90% 38.23 40.09 43.38 41.96 41.41 40.92 40.71 45.35 48.10 50.85 50.91 50.96 51.02 - --------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page A-2 [Financial Information Removed] - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page A-3 [Financial Information Removed] - -------------------------------------------------------------------------------- Navigant Consulting, Inc. Page A-4 -----END PRIVACY-ENHANCED MESSAGE-----