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 June 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
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
SITHE/INDEPENDENCE FUNDING CORPORATION
Page No.
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Part I Financial Information
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
Financial Statements:
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997 (Unaudited)...................................... 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997 (Unaudited).................... 4
Consolidated Statement of Partners' Capital for the Six
Months Ended June 30, 1998 (Unaudited)............................. 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 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................................. 10
Signatures .............................................................. 11
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<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
June 30, December 31,
1998 1997
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 3
Restricted cash and cash equivalents 76,892 40,643
Restricted investments 17,330 34,674
Accounts receivable - trade 26,912 33,384
Fuel inventory and other current assets 6,511 1,872
--------- ---------
Total current assets 127,645 110,576
Property, plant and equipment, at cost:
Land 5,010 5,010
Electric and steam generating facilities 765,317 765,239
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770,327 770,249
Accumulated depreciation (67,232) (56,975)
--------- ---------
703,095 713,274
Debt issuance costs 8,710 9,212
Other assets 4,290 4,985
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Total assets $ 843,740 $ 838,047
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Trade payables $ 20,176 $ 20,823
Accrued interest 311 174
Current portion of long-term debt 23,133 18,856
Accrued construction costs and retentions -- 443
--------- ---------
Total current liabilities 43,620 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
--------- ---------
655,639 669,345
Other liabilities 6,055 7,842
Commitments and contingencies
Partners' capital 138,426 120,564
--------- ---------
Total liabilities and partners' capital $ 843,740 $ 838,047
========= =========
See notes to consolidated financial statements.
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<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 78,430 $ 79,328 $ 181,457 $ 184,795
--------- --------- --------- ---------
Cost of sales:
Fuel 49,426 50,550 105,236 103,929
Operations and maintenance 10,451 10,812 20,931 12,818
Depreciation 4,918 4,917 10,257 9,834
--------- --------- --------- ---------
64,795 66,279 136,424 126,581
--------- --------- --------- ---------
Operating income 13,635 13,049 45,033 58,214
Non-operating income (expense):
Interest expense (16,038) (15,763) (30,645) (31,460)
Other income, net 2,211 1,930 3,474 3,589
--------- --------- --------- ---------
Net income (loss) (192) $ (784) $ 17,862 $ 30,343
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
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 179 17,683 17,862
-------- -------- --------
Balance, June 30, 1998 $ 1,459 $136,967 $138,426
======== ======== ========
See notes to consolidated financial statements.
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<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six Months
Ended June 30,
---------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 17,862 $ 30,343
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,257 9,834
Amortization of deferred financing costs 502 532
Changes in operating assets and liabilities:
Accounts receivable - trade 6,472 10,925
Fuel inventory and other current assets (4,639) 1,025
Other assets 695 695
Trade payables (647) (5,588)
Accrued interest payable 137 --
Other liabilities (1,787) (5,945)
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Net cash provided by operating activities 28,852 41,821
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Cash flows from investing activities:
Capital expenditures (521) (13,473)
Restricted funds (18,905) (20,241)
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Net cash used in investing activities (19,426) (33,714)
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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 (decrease) in cash and cash equivalents (3) 3,006
Cash and cash equivalents at beginning of period 3 4
-------- --------
Cash and cash equivalents at end of period $ -- $ 3,010
======== ========
Supplemental cash flow information
Cash payments:
Interest $ 30,508 $ 30,228
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 June 30, 1998 and December
31, 1997 and the consolidated statements of operations for the three and six
months ended June 30, 1998 and 1997 and cash flows for the six months ended June
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 six months ended June 30, 1998
are not necessarily indicative of the results to be expected for the full year.
The unaudited financial information at June 30, 1998 and for the three and six
months ended June 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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<PAGE>
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 second quarter of 1998 of $78.4 million was $.9 million
(1%) lower than in the second quarter of 1997 due primarily to lower net
generation in the second quarter of 1998 than in 1997 offset in part by higher
Con Edison tariffs in the second quarter of 1998 compared to the same period of
last year.
Cost of sales for the second quarter of 1998 of $64.8 million was $1.5
million (2%) lower than in the second quarter of 1997 reflecting a $3.0 million
gas transportation cost rebate and lower fuel usage due to lower net generation,
partly offset by higher fuel costs due to a contractual price increase under the
Partnership's long-term gas supply contract.
Revenue for the first six months of 1998 of $181.5 million was $3.3
million (2%) lower than in the first six months of 1997 reflecting lower net
generation during the first half of 1998 compared to the same period of 1997.
Cost of sales for the first six months of 1998 of $136.4 million was $9.8
million (8%) higher than in the first six months of 1997 principally reflecting
higher fuel costs due to a contractual price increase under the Partnership's
long-term gas supply contract, partly offset by a $3.0 million gas
transportation cost rebate and the fact that the first half 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 first six months of 1998 decreased by $.8 million
from the same period as last year due to lower outstanding amounts of long-term
debt.
Other income, net, consisted of interest income for all periods.
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 June 30, 1998, letters of credit aggregating $13.9
million were outstanding in connection with such obligations. Also, the
Partnership secured the Project's debt service reserve obligations with a letter
of credit in the amount of $50 million and as of June 30, 1998, the Project's
cumulative additional debt service reserve and major overhaul reserve
requirements of $33.0 million and $5.6 million, respectively, were fully funded.
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<PAGE>
Above-normal temperatures in the first half of 1998 limited the amount of
thermal energy delivered to Alcan for heating purposes during such period.
Accordingly, the Partnership may be required to reduce electricity generation in
the second half of 1998 in order to maintain the ratio of thermal energy to
electricity production required to ensure the Project's Qualifying Facility
("QF") status for 1998. The Partnership is actively pursuing a number of
initiatives to mitigate the impact of weather variances on the Project's QF
status and operations in the second-half of 1998 and thereafter. While a
reduction in the level of electricity generation during the second half of 1998
could reduce the Partnership's 1998 net income, the Partnership believes that
this will not have an adverse impact on the Partnership's ability to liquidate
Partnership obligations as they come due and pay scheduled debt service.
Although the Partnership's net income could decline through the fourth
quarter of 1999 due largely to Tier I gas pricing 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.
The Partnership utilizes a number of computerized operating and control
systems at the Project, including applications used in plant operations and
various administrative functions. To the extent that the computer applications
cannot properly interpret the calendar year 2000 and beyond, some level of
modification or replacement of such applications will be necessary. The
Partnership has a comprehensive plan to identify all of its applications that
are not year 2000 compliant and, by December 31, 1998, expects to have commenced
the necessary modifications and replacements of such applications. Based upon
information currently available about the Partnership's systems that are
non-compliant and the Partnership's ongoing efforts to upgrade or replace
critical systems, as necessary to address the year 2000 issue, the Partnership
believes that its plan of action is sufficient to secure year 2000 compliance of
its critical systems in a timely manner and currently does not anticipate any
material adverse impact on its financial position, year 2000 compliance costs or
operations as a result of the year 2000 issue directly affecting the systems at
the Project. The Partnership is also assessing its exposure to year 2000 issues
of third parties with whom it has material contracts. If the Partnership's
and/or third party computer systems fail to achieve year 2000 compliance, such
failures could have a material adverse impact on the Partnership's financial
position or results of operations.
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" 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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<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description of Exhibit
----------- ----------------------
27 -- Article 5 Financial Data Schedule of
Sithe/Independence Power Partners, L.P. for the
quarter ended June 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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<PAGE>
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)
August 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
August 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>
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 26,912
<ALLOWANCES> 0
<INVENTORY> 6,511
<CURRENT-ASSETS> 127,645
<PP&E> 770,327
<DEPRECIATION> (67,232)
<TOTAL-ASSETS> 843,740
<CURRENT-LIABILITIES> 43,620
<BONDS> 655,639
0
0
<COMMON> 0
<OTHER-SE> 138,426
<TOTAL-LIABILITY-AND-EQUITY> 843,740
<SALES> 181,457
<TOTAL-REVENUES> 181,457
<CGS> 136,424
<TOTAL-COSTS> 136,424
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,645
<INCOME-PRETAX> 17,862
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,862
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
