<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1998 Commission File Number 33-59960
SITHE/INDEPENDENCE FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3677475
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
450 LEXINGTON AVENUE, NEW YORK, NY 10017
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(Address of principal executive offices) (Zip code)
(212)-450-9000
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(Registrant's telephone number, including area code)
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0468704
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
450 LEXINGTON AVENUE, NEW YORK, NY 10017
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(Address of principal executive offices) (Zip code)
(212)-450-9000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[ X ] Yes [ ] No
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
SITHE/INDEPENDENCE FUNDING CORPORATION
PAGE NO.
PART I FINANCIAL INFORMATION
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
Financial Statements:
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 (Unaudited). . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1998 and 1997 (Unaudited) . . . . . . . 4
Consolidated Statement of Partners' Capital for the Nine
Months Ended September 30, 1998 (Unaudited). . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (Unaudited). . . . . . . . . . . 6
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 714 $ 3
Restricted cash and cash equivalents 70,626 40,643
Restricted investments 45,617 34,674
Accounts receivable - trade 26,635 33,384
Fuel inventory and other current assets 3,845 1,872
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TOTAL CURRENT ASSETS 147,437 110,576
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land 5,010 5,010
Electric and steam generating facilities 767,328 765,239
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772,338 770,249
Accumulated depreciation (72,134) (56,975)
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700,204 713,274
DEBT ISSUANCE COSTS 8,454 9,212
OTHER ASSETS 3,943 4,985
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TOTAL ASSETS $ 860,038 $ 838,047
========= =========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Trade payables $ 21,837 $ 20,823
Accrued interest 14,929 174
Current portion of long-term debt 23,133 18,856
Accrued construction costs and retentions 1,476 443
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TOTAL CURRENT LIABILITIES 61,375 40,296
LONG-TERM DEBT:
7.90% secured notes due 2002 96,191 109,897
8.50% secured bonds due 2007 150,839 150,839
9.00% secured bonds due 2013 408,609 408,609
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655,639 669,345
OTHER LIABILITIES 5,214 7,842
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 137,810 120,564
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TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 860,038 $ 838,047
========= =========
See notes to consolidated financial statements.
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 81,489 $ 91,108 $ 262,946 $ 275,903
--------- --------- --------- ---------
Cost of sales:
Fuel 53,635 53,418 158,871 157,347
Operations and maintenance 9,732 10,329 30,663 23,147
Depreciation 4,902 4,918 15,159 14,752
--------- --------- --------- ---------
68,269 68,665 204,693 195,246
--------- --------- --------- ---------
Operating income 13,220 22,443 58,253 80,657
Non-operating income (expense):
Interest expense (15,400) (15,502) (46,045) (46,962)
Interest income 1,564 1,781 5,038 5,370
--------- --------- --------- ---------
Net income (loss) $ (616) $ 8,722 $ 17,246 $ 39,065
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (Unaudited)
(In thousands)
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNERS CAPITAL
--------- --------- ---------
BALANCE, JANUARY 1, 1998 $ 1,280 $ 119,284 $ 120,564
Net income 172 17,074 17,246
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BALANCE, SEPTEMBER 30, 1998 $ 1,452 $ 136,358 $ 137,810
========= ========= =========
See notes to consolidated financial statements.
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,246 $ 39,065
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 15,159 14,752
Amortization of deferred financing costs 758 798
Changes in operating assets and liabilities:
Accounts receivable - trade 6,749 9,582
Fuel inventory and other current assets (1,973) 1,287
Other assets 1,042 1,041
Trade payables 1,014 (3,437)
Accrued interest payable 14,755 15,042
Other liabilities (2,628) (8,116)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 52,122 70,014
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,056) (16,087)
Restricted funds (40,926) (44,944)
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NET CASH USED IN INVESTING ACTIVITIES (41,982) (61,031)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (9,429) (5,101)
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NET CASH USED IN FINANCING ACTIVITIES (9,429) (5,101)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 711 3,882
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3 4
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 714 $ 3,886
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments:
Interest $ 31,290 $ 30,228
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. THE PARTNERSHIP
Sithe/Independence Power Partners, L.P. (the "Partnership"), in which
Sithe Energies, Inc. and certain of its direct and indirect wholly-owned
subsidiaries (the "Partners") hold all the partnership interests, is a Delaware
limited partnership that was formed in November 1990 for a term of 50 years to
develop, construct and own a gas-fired cogeneration facility with a design
capacity of approximately 1,000 megawatts (the "Project") located in the Town of
Scriba, County of Oswego, New York. The Project commenced commercial operation
for financial reporting purposes on December 29, 1994. The majority of the
capacity and electric energy generated by the Project is sold to Consolidated
Edison Company of New York, Inc. ("Con Edison") and Alcan Aluminum Corporation
("Alcan") with the remainder of the electric energy being sold to Niagara Mohawk
Power Corporation.
2. BASIS OF PRESENTATION
The accompanying consolidated balance sheets at September 30, 1998 and
December 31, 1997 and the consolidated statements of operations for the three
and nine months ended September 30, 1998 and 1997 and cash flows for the nine
months ended September 30, 1998 and 1997 should be read in conjunction with the
audited consolidated financial statements included in the Annual Report on Form
10-K for the year ended December 31, 1997 for the Partnership and its
wholly-owned subsidiary, Sithe/Independence Funding Corporation.
The results of operations for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year. The unaudited financial information at September 30, 1998
and for the three and nine months ended September 30, 1998 and 1997 contains all
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for a fair presentation of the operating results for such
periods.
Operations and maintenance expense for the first quarter of 1997
reflects an $8.2 million credit as a result of the Partnership's discontinuance
of its major overhaul cost normalization policy for its gas turbines, steam
turbines and generators (the "covered units"). This policy was discontinued
effective January 1, 1997, when the Partnership entered into a twelve-year
service agreement with General Electric Company ("GE") under which GE performs
all scheduled major overhauls of the covered units.
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the third quarter and first nine months of 1998 of
$81.5 million and $262.9 million, respectively, was lower than in
corresponding periods of last year by $9.6 million (11%) and $13.0 million
(5%), respectively, due largely to lower net generation in the third quarter
of 1998 offset in part by higher Con Edison tariffs.
As a result of the unusually warm weather in the first half of this
year, the Partnership has been required to begin curtailing second-half
electricity generation to ensure that, by year end, the Project's ratio of
thermal energy deliveries to total energy deliveries is at the level required to
maintain the Project's Qualifying Facility ("QF") status. Additional QF-related
curtailments will be required in the fourth quarter with the resulting adverse
impact on operating income for that period presently estimated at approximately
$13 million. Certain action has already been taken and additional efforts are
underway toward increasing thermal energy deliveries and QF margin in 1999 and
beyond.
Cost of sales for the third quarter of 1998 of $68.3 million was $.4
million (.6%) lower than in the third quarter of 1997 reflecting lower
operations and maintenance expense and lower fuel consumption due to lower net
generation, almost entirely offset by higher fuel costs due to a contractual
price increase under the Partnership's long-term gas supply contract.
Cost of sales for the first nine months of 1998 of $204.7 million was
$9.5 million (5%) higher than in the first nine months of 1997 principally
reflecting (a) higher fuel costs due to a contractual price increase under the
Partnership's long-term gas supply contract, partly offset by lower fuel
consumption and a $3.0 million gas transportation cost rebate and (b) the fact
that the first nine months of 1997 included an $8.2 million credit to
maintenance expense associated with the discontinuance of the Partnership's
major overhaul cost normalization policy for the covered units.
Interest expense for the third quarter of 1998 and the first nine
months of 1998 decreased by $.1 million and $.9 million, respectively, from the
corresponding periods of last year due to lower outstanding amounts of long-term
debt.
LIQUIDITY AND CAPITAL RESOURCES
Under a credit facility obtained by the Partners, one or more letters
of credit may be issued in connection with their obligations pursuant to certain
Project contracts, and, as of September 30, 1998, letters of credit aggregating
$14.0 million were outstanding in
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connection with such obligations. Also, the Partnership has secured the
Project's debt service reserve obligations with a letter of credit in the
amount of $50 million. As of September 30, 1998, the Partnership had
restricted funds aggregating $116.2 million, including the Project's
cumulative cash debt service reserve and major overhaul reserve of $33.0
million and $5.6 million, respectively. In addition, these restricted funds
included $21.5 million that was utilized for October operating expenses,
$24.4 million reserved for the December 31 debt service payment, $4.9 million
reserved for Project completion and $26.8 million in the partnership
distribution account. Funds in the distribution account are available as
additional operating and debt service reserves until such time as certain
coverage ratios are achieved.
Although the Partnership's net income for 1998 is being reduced due to
QF-related curtailments and its net income could also decline through the fourth
quarter of 1999 due largely to Tier I gas prices increasing at a greater rate
than increases in the energy component of billings to Con Edison, the
Partnership believes that funds available from cash on hand, restricted funds,
operations and the debt service letter of credit will be more than sufficient to
liquidate Partnership obligations as they come due and pay scheduled debt
service.
YEAR 2000 COMPLIANCE
The Partnership utilizes a number of computerized operating and
control systems at the Project, including applications used in plant
operations and various administrative functions.
The Partnership is nearing the completion of its assessment of the
state of year 2000 readiness of both its information technologies and
non-information technology systems. The Partnership has completed the
development of a comprehensive database of its systems which could be
affected by year 2000 non-compliance and is in the process of communicating
with the applicable suppliers and manufacturers of such systems to determine
the state of year 2000 compliance of such systems. The Partnership has
engaged Raytheon Engineers and Constructors Inc. ("Raytheon"), an affiliate
of one of the Project's construction contractors, to perform an independent
review of this assessment and to work with the Partnership to develop a
comprehensive plan to remediate, test and implement any necessary
corrections. The Partnership presently anticipates that this plan will be
completed by the end of November 1998, that it will begin remediation
efforts, to the extent required, by December 1998 and that any necessary
remediation will be implemented prior to the end of 1999.
Based upon information currently available to the Partnership, it
estimates that the cost of remediation will be less than $1 million, of which
less than of $.1 million has been expended in the first three quarters of
1998.
The Partnership is also assessing its exposure to year 2000 issues
of the third parties with whom it has material contracts. Questionnaires
have been sent to these third parties to determine their year 2000 status.
The Partnership has not yet developed any contingency plans with respect to
year 2000 compliance, but will do so, in order to deal with any problems that
are revealed as a result of the Partnership's internal and external
assessment. If the systems of the Partnership or the third parties on which
it relies fail because they are not year 2000 ready, such failures could have
a material adverse impact on the Partnership's financial position or results
of operations.
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<PAGE>
The dates on which the Partnership believes it will have achieved
year 2000 compliance are based on the Partnership's best estimates which were
derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved, or that there will not be a delay in, or increased costs
associated with, the year 2000 issue. Specific factors that might cause
differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas,
the ability to locate and correct all relevant computer code, timely
responses to and corrections by third parties and suppliers, and similar
uncertainties. Due to the general uncertainty inherent in the year 2000
issue, resulting in part from the uncertainty of the year 2000 readiness of
third parties, the Partnership cannot ensure its ability to timely and
cost-effectively resolve problems associated with the year 2000 issue that
may affect its operations and business, or expose it to third party liability.
FORWARD-LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q are
forward-looking statements as defined in Section 21E of the Securities
Exchange Act of 1934. The words "believe", "expect", "estimated" and similar
expressions generally identify forward-looking statements. While the
Partnership believes in the veracity of all statements made herein,
forward-looking statements are necessarily based upon a number of estimates
and assumptions that, while considered reasonable by the Partnership, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, including the continuation of above normal
temperatures, the price of natural gas and the demand for and price of
electricity. These uncertainties and contingencies could cause the
Partnership's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Partnership.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description of Exhibit
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27 -- Financial Data Schedule of
Sithe/Independence Power Partners, L.P. for the
quarter ended September 30, 1998.
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the quarter covered by this
report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sithe/Independence Funding Corporation
--------------------------------------
(REGISTRANT)
November 13, 1998 /s/ Richard J. Cronin III
--------------------------------------
RICHARD J. CRONIN III
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
co-registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sithe/Independence Power Partners, L.P.
---------------------------------------
(REGISTRANT)
By: Sithe/Independence, Inc.
------------------------
GENERAL PARTNER
November 13, 1998 /s/ Richard J. Cronin III
---------------------------------------
RICHARD J. CRONIN III
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE PARTNERSHIP'S FORM 10Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000899281
<NAME> SITHE/INDEPENDENCE FUNDING CORP.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 714
<SECURITIES> 0
<RECEIVABLES> 26,635
<ALLOWANCES> 0
<INVENTORY> 3,845
<CURRENT-ASSETS> 147,437
<PP&E> 772,338
<DEPRECIATION> (72,134)
<TOTAL-ASSETS> 860,038
<CURRENT-LIABILITIES> 61,375
<BONDS> 655,639
0
0
<COMMON> 0
<OTHER-SE> 137,810
<TOTAL-LIABILITY-AND-EQUITY> 860,038
<SALES> 262,946
<TOTAL-REVENUES> 262,946
<CGS> 204,693
<TOTAL-COSTS> 204,693
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,045
<INCOME-PRETAX> 17,246
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,246
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
