YORK RESEARCH CORP (YORK) - Description of business

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Company Description
------ --------A. General York Research Corporation (together with its subsidiaries, "York", the "Company" or "we") is a developer, owner and marketer of environmentally friendly ("Greenenergy") projects and products. Through our subsidiaries, partnerships, joint ventures and affiliates, we are in the business of developing, constructing and operating energy production facilities, including those that utilize natural gas as fuel to produce thermal and electric power ("cogeneration"), and renewable energy projects that convert wind energy into transmittable electric power (collectively, "Greenpower"). Within our Greenpower business, we have five currently operating facilities: in New York City, a 38 Megawatt ("MW") Warbasse cogeneration facility (the "Warbasse facility") and a 286 MW Brooklyn Navy Yard cogeneration facility (the "BNY facility"), in Big Spring, Texas a 34 MW wind energy facility (the "Big Spring facility") and a 6.6 MW wind energy project (the "West Texas project") and a 225 MW natural gas fueled power project in the Republic of Trinidad and Tobago (the "Trinidad project"). Other power projects, both domestic and international, are in earlier stages of development. York's Greenpower project development strategy is to increase development activities selectively around the world, giving priority to negotiated rather than publicly bid opportunities. We believe that the market for wind energy projects will grow as wind power becomes increasingly competitive as a source of energy, as a function of its price and environmental benefits. On August 4, 1998, a $150,000,000, 12% portfolio bond financing due October 30, 2007 was completed. This financing provided funding for construction and completion of the Big Spring facility and the Trinidad project, and other bond related costs, and future development activities. This financing was underwritten by CS First Boston and is non-recourse to York but is secured by certain assets and cash flow related to the BNY and Warbasse facilities, as well as all of the cash flow and assets of the Big Spring facility and Trinidad project. Construction of these projects has been completed and they are in commercial operation. On March 2, 2000 North American Energy Conservation, Inc. ("NAEC"), an 85% owned subsidiary of the Company, filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code with The United States Bankruptcy Court for the Southern District of New York. Reference is made to the Company's Current Report on Form 8-K dated March 2, 2000 for a description of the background and circumstances surrounding the NAEC filing. As of February 28, 2000, the Company accounted for the NAEC wholesale and retail natural gas marketing business as a discontinued operation, as well as the electric marketing business, which was discontinued previously. On April 20, 2000 NAEC sold its retail natural gas marketing business to Amerada Hess Corporation (See Note 17). As of March 2, 2000 NAEC estimated that the total third party obligations that would be the subject of the Chapter 11 proceedings approximated $66 million. Of this amount approximately $25.6 million represents liquidated damages alleged to be owed to certain gas suppliers. York has guaranteed approximately $37 million of such $66 million total pre-petition debt of NAEC. York and NAEC are conducting ongoing discussions with both the guaranteed and non-guaranteed creditor groups in an effort to seek to arrive at a consensual method of liquidating the liabilities. York has retained Credit Suisse First Boston ("CSFB") to help explore strategic financing alternatives for selected York domestic and international power projects. If these efforts are successful, York expects to utilize a portion of the net proceeds (after redeeming the existing $150,000,000 senior secured portfolio bonds, see Note 11) to fund all or part of its NAEC related liabilities and the balance to fund continuing project development and for general corporate purposes. There can be no assurance that the discussions referred to above being conducted with the creditor groups will culminate in an agreement to resolve NAEC's liabilities or York's obligations with respect to such liabilities. There also can be no assurance that CSFB's efforts on behalf of the Company will be successful. See Item 3 below as to litigation involving the NAEC creditors, and Item 7. All note references are to the Notes to the Consolidated Financial Statements.B. Greenpower See Item 1.A for information as to the possible sale, refinancing or restructuring of certain York power projects. 1. Big Spring Renewable Energy Facility On October 21, 1997, York acquired 100% of the partnership interest in New World Power Texas Renewable Energy Limited Partnership, whose significant asset was a power purchase agreement ("PPA") with Texas Utilities Electric Company ("TU Electric"). York began commercial operation of this wind power project in May 1999 in accordance with the PPA. The facility has a capacity of 34 MW and includes 46 turbines, including four 1,650 Kilowatt ("kW") wind turbines ("V-66 turbines"). 2. Trinidad Project On February 12, 1998, InnCOGEN Limited ("InnCOGEN"), a wholly owned indirect Trinidadian subsidiary of York, signed a 30 year PPA with Trinidad and Tobago Electricity Commission ("T&TEC"), the government owned transmission and distribution company, under which T&TEC will purchase the bulk of the project output. The Company constructed a 225 MW natural gas fueled combustion turbine project which achieved commercial operation in September 1999 in accordance with the PPA. Fixed capacity payments, primarily tied to U.S. inflation rates, constitute the majority of project revenues. T&TEC has the obligation to supply and pay for fuel for the project, thereby eliminating InnCOGEN's fuel risk on the project. T&TEC's obligations under the PPA are supported by a guarantee of the Trinidad government. The Trinidad project may also supply energy to several proposed new industrial developments. The Trinidad facility utilizes three General Electric turbines. 3. West Texas Renewable Energy Project On February 26, 1999 a second PPA was signed with TU Electric for 6.6 MW of capacity from a wind energy facility to be located on property adjacent to the Big Spring facility. The Company has developed and is operating this second facility, which is owned by a partnership of York and Primesouth, Inc. The new contract requires TU Electric to buy all of the power generated by the four V-66 turbines, the largest in North America, for 15 years plus options for two additional five-year periods, in a similar manner to the Big Spring facility. Power from the new program will be dedicated for use in Waco, Texas, as part of a renewable energy program called "TU Renew" being offered to customers of TU Electric/Lone Star Gas. 4. The Warbasse Cogeneration Facility The 38MW combined cycle Warbasse facility, which is owned by Warbasse-Cogeneration Technologies Partnership L.P. ("WCTP"), supplies all of the thermal and electric needs of Amalgamated Warbasse Houses, Inc. ("AWH") and the full capacity requirements of WCTP's 21MW electric power contract with Consolidated Edison Company of New York, Inc. ("Con Edison"), as dispatched. York constructed the Warbasse facility and continues to operate it under a long-term operations and maintenance agreement. See Note 5 for information regarding transactions between the Company and WCTP. 5. Brooklyn Navy Yard Cogeneration Facility Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), is owned equally by a subsidiary of Edison Mission Energy ("Mission"), which is an indirect wholly owned subsidiary of Edison International, and B-41 Associates L.P. ("B-41LP") an entity in which York holds an indirect 74.7% equity interest (see Item 1.C). BNYLP was formed to develop, construct, finance, own and operate the 286 MW natural gas fired combined cycle BNY Facility. The facility has been operational since 1996 and supplies Con Ed with both electricity and steam under a 40-year contract. Steam is delivered to Con Ed's New York City district steam system, the world's largest, through a tunnel under the East River. The BNY facility currently provides more than 15% of Con Ed's total steam in New York City. Electric energy delivered represents about 3% of peak power demand in the service territory. The facility also supplies energy to the host industrial park and to an adjacent waste water facility. 6. Other Greenpower and Renewable Energy Projects Under Development We have been funding development work on a variety of large and small potential projects in the United States and internationally. There can be no assurances that any of these projects will be completed or successful. 7. Discontinued Operations As of February 28, 2000, York accounted for the NAEC wholesale and retail natural gas marketing business as a discontinued operation, in addition to the previously discontinued electric marketing business. See Items 1.A and 3 for information about NAEC's Chapter 11 filing and claims against York relating to NAEC.C. Subsidiaries, Partnerships and Joint Ventures The Company conducts a substantial portion of its business through subsidiaries, partnerships and joint ventures, in some of which affiliates of York have an interest. York owns 100% of the outstanding shares of B-41 Management Corp. ("B-41MC"), Cogeneration Technologies, Inc. ("Cogen"), and York Internet Power Services, Inc., York and its subsidiaries own 74.7% of B-41LP, the 50% partner in BNYLP, as a result of the following: B-41MC holds a 5% general partnership interest in B-41LP. Cogen holds a 22% limited partnership in B-41LP resulting from assignment of a 40 MW PPA to B-41LP. York holds a 90% limited partnership interest in York Cogen Partners L.P. ("YCP"), which in turn holds a 53% limited partnership interest in B-41LP resulting from assignment of a 90 MW PPA to B-41LP. RV Associates L.P. ("RVA"), an entity indirectly controlled by York's Chairman, holds a 5% general partnership interest and a 15% limited partnership interest in B-41LP, resulting from assignment of a 40 MW PPA to B-41LP, assumption of certain partnership liabilities and acceptance of a reduced share of development fees and reimbursements. A portion of B-41LP's partnership interest in BNYLP has been pledged as collateral to unaffiliated third parties to secure certain obligations of B-41LP. York, through wholly owned subsidiaries, some of which are offshore, owns 100% of the Big Spring facility and the Trinidad project. WCTP is a limited partnership whose 25% general partner is RRR'S Ventures Ltd. ("RRR'S"). York's Chairman is president and a shareholder in RRR'S. Entities unaffiliated with York or RRR'S own an aggregate of 75% limited partnership interest in WCTP. RRR'S also holds a 10% general partnership interest in YCP. The West Texas Renewables Limited Partnership is a partnership whose 1% general partner is a subsidiary of York, and whose 99% limited partner is Primesouth, Inc. York continues to own 85% of NAEC, which is in Chapter 11. See Items 1.A and 3.D. Backlog We do not currently calculate backlog because the revenue streams are dependent upon a number of variable factors such as inflation, fuel prices and electric utility rates and utilizations.E. Patents and Trademarks We have no patents or trademarks that can be considered material to our businesses.F. Research and Development Since research and development costs are not significant, we do not account separately for these costs.G. Raw Materials and Suppliers We are not dependent on any single source of supplies or services for our activities. Certain of the facilities enter into long-term contracts with suppliers; however alternative sources are typically available.H. Marketing We market our projects and products through a dedicated sales staff, supplemented by our technical support personnel and management personnel, and by consultants internationally.I. Employees As of May 1, 2000, we employed 35 people on a full-time basis. Most of our executives are technically trained and actively engaged in the project development and sales areas.J. Competition There are many companies with access to greater financial resources that are active in various aspects of our energy business. These companies will continue to compete in the energy marketplace. We cannot assess the effect of competition in the future.K. Customers During fiscal 2000, substantially all of the revenues were derived from operating power projects. Each of the power projects is dependent on one customer, typically a utility, for substantially all of its revenues.L. Environmental Matters We believe that the various technologies we employ, which provide for increased efficiency, compared to conventional power generation facilities, are not environmentally sensitive. The construction of power generation facilities requires typical environmental impact statements and permitting procedures which may result in delays. We believe that we are in compliance with federal, state and local laws involving the protection of the environment. We do not believe that continued compliance will require any material capital expenditures. Our facilities are designed to comply with all applicable environmental laws.M. Regulation A subsidiary of the Company has been retained through an operations and maintenance agreement to operate the Warbasse cogeneration facility in New York, a qualifying cogeneration facility ("QF") pursuant to the Public Utility Regulatory Policies Act of 1978 ("PURPA"). The BNY facility in New York has also obtained QF status. Cogeneration projects that meet the QF criteria stated in the federal rules generally are exempt from most of the federal, state and local regulations that apply to generating facilities which are not QFs. However, the New York State Public Service Commission ("NYPSC") has determined that it has the authority to regulate sales of electricity by QFs to retail customers, though the regulatory regime is less burdensome than that applied to traditional utilities. Under New York statutes, QFs, like the Warbasse cogeneration facility, having a maximum generating capacity of less than 80 MW, may distribute electricity to users located at or near a project site and remain exempt from NYPSC regulation. One of the criteria for QF status is that a total of no more than 50 percent of the equity interests may be owned by one or more companies that are electric utility holding companies under the Public Utility Holding Company Act of 1935 ("PUHCA"). Under PUHCA, an entity which owns 10 percent or more of the voting securities of, or otherwise controls an electric utility company, is an electric utility holding company. An electric utility holding company is defined in PUHCA to mean a company that owns or operates physical facilities for the generation, transmission or distribution of electricity for sale. QFs are expressly exempt from this definition, and the Company therefore is not a public utility holding company by virtue of its interests in QFs. The BNY facility intends to operate as an exempt wholesale generator ("EWG"). An EWG must be engaged exclusively in the business of owning or operating an eligible facility and selling electricity at wholesale. An eligible facility is a generating facility that is used solely to produce electricity for sale at wholesale. An EWG is exempt under PUHCA and the Company would not become a holding company under PUHCA by virtue of it or one of its subsidiaries or affiliates holding 10% or more of the voting securities or partnership interests in the BNY facility. When operated solely as an EWG, the BNY facility would be subject to the New York Public Service Law and the jurisdiction of the NYPSC with respect to matters other than the sale of electricity at wholesale. Assuming that the NYPSC applies the policies that it has applied to other EWGs in previous cases, the BNY facility will be required to comply with minimal regulatory requirements regarding financial and organizational matters. The NYPSC has no jurisdiction over the rates, terms and conditions of the sale of electricity generated by the BNY facility and sold to Con Edison and Brooklyn Navy Yard Development Corp. for resale. Further, to the extent operated solely as an EWG, the BNY facility operates and maintains a steam plant and would be subject to regulation by the NYPSC as a steam corporation. The NYPSC has issued a certificate of public convenience and necessity to the BNY facility as a steam corporation, and has required that the BNY facility comply with only minimal regulatory requirements regarding financial and organizational matters. The Big Spring facility has been self-certified as a QF. The Federal Energy Regulatory Commission granted EWG status to the Trinidad project and the West Texas Renewable Energy project.

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