================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 33-59960
SITHE/INDEPENDENCE FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3677475
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
450 Lexington Avenue, New York, NY 10017
---------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 450-9000
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 33-0468704
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
450 Lexington Avenue, New York, NY 10017
---------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 450-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
7.90% Secured Notes due 2002
8.50% Secured Bonds due 2007
9.00% Secured Bonds due 2013
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 such 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
================================================================================
<PAGE>
SITHE/INDEPENDENCE FUNDING CORPORATION
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
Part 1 Page
----
Items 1, 2 and 3. Business, Properties and Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters (Not applicable) --
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
Part III
Item 10. Directors and Executive Officers of the Registrants 17
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management 19
Item 13. Certain Relationships and Related Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 20
Signatures 25
2
<PAGE>
PART I
ITEMS 1, 2 AND 3. BUSINESS, PROPERTIES AND LEGAL PROCEEDINGS
THE PARTNERSHIP
Sithe/Independence Power Partners, L.P. (the "Partnership") was formed to
develop, construct and own a natural gas-fired cogeneration facility having a
design capacity of approximately 1,000 megawatts ("MW") located in the Town of
Scriba, County of Oswego, New York (the "Project"). Cogeneration is a power
production technology that provides for the sequential generation of two or more
useful forms of energy (in the Project's case, electricity and thermal energy)
from a single primary fuel source (in the Project's case, natural gas). The
Partnership is a Delaware limited partnership formed in November 1990 by
Sithe/Independence, Inc. (the "General Partner"), its sole general partner. The
overall strategy of the Partnership is to operate the Project as one of the most
reliable, economically efficient and environmentally clean fossil-fueled
electrical power plants in the United States. The Project began commercial
operation for financial reporting purposes on December 29, 1994.
The General Partner is an indirect wholly-owned subsidiary of Sithe
Energies, Inc. ("Sithe Energies"). The limited partners of the Partnership are
Sithe Energies and certain of its direct and indirect wholly-own subsidiaries
(the "Limited Partners"). The General Partner and Limited Partners are referred
to herein as the "Partners". Sithe Energies is a leader in independent power
generation in North America and among the top independent power producers in the
world. In North America, at December 31, 1998, Sithe Energies owned or leased
through its subsidiaries 28 operating power plants, including the Project,
having an aggregate installed capacity of 3,762 megawatts ("MW") and had five
projects representing 4,270 MW under active development. Sithe Energies' pending
acquisition from GPU Inc. of 23 operating plants representing 4,113 MW, which is
expected to close in the third quarter of 1999, will more than double Sithe
Energies' North American operating capacity to 7,875 MW. Internationally, at
December 31, 1998, Sithe Energies and its affiliates had in the Asia region,
interests in 6 plants in operation having an aggregate installed capacity of 958
MW and 5 plants under construction representing 890 MW, and had interests in 17
projects representing 7,820 MW under active development in 12 countries.
As of December 31, 1998, Sithe was privately owned 59.7% by Vivendi,
formerly Compagnie Generale des Eaux, one of France's leading municipal services
companies and the world's largest water distribution company, 29.5% by Marubeni
Corporation, one of Japan's largest trading companies and 10.8% by the Sithe
Employee Stock Ownership L.P. and management.
Sithe Energies owns, directly or indirectly, 100% of the partnership
interests in the Partnership. The following chart sets forth the organizational
structure of the Partners in the Partnership and of the other affiliates of
Sithe Energies involved with the Partnership.
3
<PAGE>
Sithe Energies, Inc.
- -------------------------------(Limited Partner)
| |-------------------------------------------|
| | |
| 100% 100%
| Sithe Energies U.S.A., Inc. Energy Factors, Inc.
| (Limited Partner) |
- ----------------------------------------| -------------------
| | | |
| 100% 100% 100%
| Mitex, Inc. Sithe/Independence, Inc. Sithe Energies Power
| (Limited Partner) (General Partner) Services, Inc.
| | | | (Operator)
| | | |
| | | |
45% 10% 44% 1%
| | | |
- ------------------The Partnership-------|
|
100%
Sithe/Independence
Funding Corporation
Sithe/Independence Funding Corporation ("Sithe Funding"), a Delaware
corporation, was established for the sole purpose of issuing the 7.90% Notes due
2002, the 8.50% Bonds due 2007 and the 9.00% Bonds due 2013 (collectively, the
"Securities") for its own account and as agent acting on behalf of the
Partnership. Sithe Funding loaned the proceeds of the sale of the Securities to
the Partnership (the "Loans"), which applied the proceeds of such Loans to the
development and construction of the Project. The terms of the Loans are
identical to the terms of the Securities. The Loans are the only assets of Sithe
Funding.
The Securities are not guaranteed by or otherwise obligations of Sithe
Energies, Vivendi or Marubeni or any affiliate of Sithe Energies, Vivendi or
Marubeni other than Sithe Funding and the Partnership.
THE PROJECT
The Project is a natural gas-fired cogeneration facility having a design
capacity of approximately 1,000 MW. The Project is located on an approximately
340-acre site adjacent to the Alcan Aluminum Corporation (doing business as
Alcan Rolled Products Company ("Alcan")) plant in the Town of Scriba, County of
Oswego, New York, approximately two miles northeast of Oswego, New York. The
Project consists of four General Electric Model MS7001FA combustion gas turbine
generators designed to generate approximately 160 MW each at their design point
conditions, four heat recovery steam generators ("HRSG"), two steam turbines
designed to generate 208 MW each and air quality control systems to reduce the
nitrous oxide and other emissions of the Project.
4
<PAGE>
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 with the remainder of the electric energy being sold to Niagara Mohawk
Power Corporation ("Niagara Mohawk"). The electric energy sold to Con Edison is
transported by Niagara Mohawk through Niagara Mohawk's electric transmission
system. Thermal energy generated by the Project is sold to Alcan. Natural gas
supplies to fuel the Project are provided by Enron Power Services, Inc. ("Enron
Power Services"), an indirect wholly-owned subsidiary of Enron Corporation, and
are transported to the Project by seven separate pipeline companies. Each of the
principal contracts entered into by the Partnership has a term of 20 years or
longer from the date the Project was placed into commercial operation.
For the uncommitted portion of the capacity, the Project may, from time to
time, enter into short- or long-term capacity sales of electricity to Con
Edison, Niagara Mohawk or others, subject to certain restrictions set forth in
the Trust Indenture dated as of January 1, 1993 and entered into by Sithe
Funding, the Partnership and IBJ Schroder Bank & Trust Company (the
"Indenture").
The Partnership has designed the Project as a qualifying facility ("QF" or
"Qualifying Facility") under the Public Utilities Regulatory Policies Act of
1978 ("PURPA") and the regulations promulgated thereunder. Accordingly, the
Project must satisfy certain annual operating and efficiency standards in order
to maintain QF status.
Operations and Maintenance
The Project is operated by Sithe Energies Power Services, Inc. (the
"Operator"), a wholly-owned subsidiary of Sithe Energies, pursuant to an
Operations and Maintenance Agreement. The Operations and Maintenance Agreement
terminates on October 31, 2014.
The Operator has agreed to operate the Project, to provide all operations
and maintenance services necessary or advisable in order to efficiently operate
and maintain the Project, and to be liable for all expenses relating to
operating, maintaining and managing the Project. The Partnership pays the
Operator an annual management fee of $578,813, escalating at 5% per annum, and
reimburses the Operator on a monthly basis for all direct and indirect necessary
costs and expenses reasonably incurred by the Operator in fulfilling its
obligations under the Operations and Maintenance Agreement.
Sale of Capacity and Electricity
The majority of the capacity and electric energy generated by the Project
is sold to Con Edison and Alcan, with the remainder of the electric energy being
sold to Niagara Mohawk. Accordingly, the Partnership depends on one purchaser
for a major portion of the Project's capacity, on one purchaser currently for
all energy required to maintain the status of the Project as a Qualifying
Facility and currently on two electric energy purchasers for substantially all
of the electricity to be produced by the Project.
Con Edison
Pursuant to the terms of the Con Edison Energy Purchase Agreement, Con
Edison is obligated to purchase for a term of 40 years following the Date of
Commercial Operation of the Project 740 MW of the Project's capacity and all of
the electrical energy to be derived therefrom up to a maximum in any hour
produced by the Project at a temperature-adjusted summer dependable maximum net
capacity ("Summer DMNC") level of 740 MW plus two percent. During the first five
years of the operation of the Project (the "First Period"), Con Edison was
obligated to pay for the first
5
<PAGE>
6.6 billion kilowatt-hours ("KWH") of electricity delivered to Con Edison in any
Annual Period at a price equal to the sum of (a) 100% of Actual Con Edison
Avoided Energy Costs and (b) $0.026/KWH. For each KWH in excess of 6.6 billion
KWH in any Annual Period, Con Edison was obligated to pay a price equal to
93.75% of Actual Con Edison Avoided Energy Costs. The payments for electricity
during the remainder of the contract are equal to 93.75% of Actual Con Edison
Avoided Energy Costs in years six through 20 of the contract term (the "Second
Period") and 88.75% of Actual Con Edison Avoided Energy Costs in years 21
through 40 of the contract term (the "Third Period"). In addition to payments
for electricity delivered to Con Edison, during the Second Period, Con Edison
will be obligated to make monthly capacity payments in an amount equal to the
product of (a) the Summer DMNC of the Dedicated Plant applicable to such month,
(b) the Equivalent Availability Ratio applicable to such month and (c) a fixed
capacity charge equal to $6.7455/kilowatt ("KW"). During the Third Period, Con
Edison will be obligated to make monthly capacity payments in an amount equal to
the product of (a) the Summer DMNC of the Dedicated Plant applicable to such
month, (b) the Equivalent Availability Ratio applicable to such month and (c) a
fixed capacity charge equal to $3.3727/KW. During the Second Period, Con Edison
will also be obligated to make payments for operation and maintenance at a price
equal to $0.01/KWH during calendar year 2000 escalating on the first day of each
calendar year thereafter during the remainder of the Second Period with the
index contained in the Con Edison Energy Purchase Agreement. During the Third
Period, Con Edison will also be obligated to make payments for operation and
maintenance at a price equal to one-half of the per KWH price during the last
calendar year of the Second Period escalating on the first day of each calendar
year during the Third Period with the index contained in the Con Edison Energy
Purchase Agreement. Con Edison has the option to terminate the power sales
contract with the Partnership upon satisfaction of certain conditions including
assuming all of the Partnership's financial and contractual obligations related
to the Project and paying an amount to the Partnership determined by a formula
based on estimated future revenues and expenses under the contract. (Terms not
defined in this section have the respective meanings set forth in the Con Edison
Energy Purchase Agreement.)
Niagara Mohawk
Under the Niagara Mohawk Power Purchase Agreement, Niagara Mohawk will
purchase all of the electricity delivered to Niagara Mohawk by the Project, up
to a maximum of three million megawatthours ("MWH") of electricity in any
calendar year (provided the Project does not deliver electricity at a rate in
excess of 300 MW in any hourly period, or such greater amount as may be accepted
by Niagara Mohawk). The Niagara Mohawk Power Purchase Agreement has a term of 20
years from January 15, 1995, the date on which the Partnership commenced
deliveries of commercial quantities of electricity to Niagara Mohawk on a
continuous basis. Niagara Mohawk will purchase electricity at its "energy only"
rate, which is Niagara Mohawk's Public Service Commission of the State of New
York ("PSC") filed tariff for the purchase of electricity from on-site
generators, such as the Partnership, in effect at the time of delivery of
electrical energy to Niagara Mohawk. Niagara Mohawk has no right of first
refusal for any additional electricity or capacity to be sold by the
Partnership.
Alcan
Alcan, a subsidiary of Alcan Aluminum Limited, owns and operates an
aluminum production facility adjacent to the Project site. The Alcan facility
engages in the production and recycling of aluminum alloys and rolled aluminum,
which are used principally in the beverage container industry.
Pursuant to the terms of the Alcan Energy Sales Contract, the Partnership
has agreed for a period of 22 years from the commencement of commercial
operation of the Project to sell to Alcan up to 44 MW of the Project's capacity
and associated energy. In addition, the Partnership has agreed to supply and,
subject to the terms and provisions of the Alcan Energy Sales Contract, Alcan
has
6
<PAGE>
agreed to purchase thermal energy on a firm, non-interrupted basis in an amount
equal to 1.618 trillion British Thermal Units ("Btus") per year of operation.
On September 8, 1994, the PSC issued a certificate of public convenience
and necessity permitting the Partnership to make retail sales of electricity to
Alcan and to a containerboard recycling facility then being developed by a
partnership of paper industry companies, and invited comment on an appropriate
and equitable equalization fee that would be paid by the Partnership to Niagara
Mohawk. On September 29, 1994, the PSC issued an order establishing an
equalization fee with a present value of $19.6 million, which the Partnership
has elected to pay in equal annual amounts of approximately $3 million for ten
years, beginning on December 31, 1995. The order establishing the equalization
fee also contains provisions for the amount of such fee to be reconsidered if
the containerboard facility or a facility of comparable economic development is
not developed. Sithe Energies continues to actively pursue facilities of
comparable economic development.
Electrical Interconnection and Transmission
Niagara Mohawk's transmission lines have been interconnected to the
Project through the construction of the facilities necessary to effect the
transfer of electricity produced at the Project into Niagara Mohawk's
transmission system (the "Interconnection Facilities"). Pursuant to the
Interconnection Agreement between the Partnership and Niagara Mohawk, the
Partnership has agreed to reimburse Niagara Mohawk for all reasonable costs
incurred by Niagara Mohawk in connection with operation and maintenance of the
Interconnection Facilities. The Interconnection Agreement will terminate 20
years from the Date of Commercial Operation.
Pursuant to the Transmission Services Agreement, Niagara Mohawk has agreed
to provide transmission services from the Project to the point of
interconnection between Niagara Mohawk's transmission system and Con Edison's
transmission system (the "Con Edison Interconnection") for a period of 20 years
from the Date of Commercial Operation. The agreement specifies that Niagara
Mohawk will be obligated to transmit up to 853 MW of electricity to the Con
Edison Interconnection, subject to interruption if required to meet the demands
of its retail customers, its current wholesale customers and its obligations to
the New York Power Pool. To the extent that Niagara Mohawk has excess capacity
on its transmission system, it has agreed to accommodate the Project's
additional transmission requirements. On March 29, 1995, the Partnership filed a
petition with the Federal Energy Regulatory Commission (the "FERC") alleging
that Niagara Mohawk has been overcharging the Partnership for the transmission
of electricity in violation of the FERC policy by calculating transmission
losses on an incremental basis. The Partnership believes that transmission
losses should be calculated on an average basis. The Partnership has been
recording its transmission expense at the disputed, higher rate. As of December
31, 1998, the Partnership estimates it was owed more than $9.7 million for
transmission overcharges. The Partnership requested that the FERC order Niagara
Mohawk to recalculate the transmission losses beginning in October 1994, when it
began wheeling power from the Project. In September 1996, the FERC issued an
order dismissing the Partnership's complaint and requiring Niagara Mohawk to
provide the Partnership with information regarding the calculation of
transmission losses. In October 1996, the Partnership filed a request for
rehearing of the FERC's order, which was denied by the FERC. In December 1997,
the Partnership filed a petition for review of the FERC orders in the United
States Court of Appeals. On January 29, 1999, the Court of Appeals found the
FERC had not engaged in reasoned decision-making or reached conclusions
supported by the record in the underlying proceeding, and therefore remanded the
case to the FERC for further proceedings.
7
<PAGE>
Gas Supply Agreement
Natural gas for the Project is supplied by Enron Power Services pursuant
to the Gas Supply Agreement (the "Gas Supply Agreement") between Enron Power
Services and the Partnership. The Gas Supply Agreement provides that, for a
period of 20 years following the Date of Commercial Operation, Enron Power
Services is obligated to deliver to the Partnership up to a maximum of 192,291
million Btus ("MMBtus") of natural gas per day, which represents the Project's
daily fuel requirement when operating at design conditions. The Partnership is
obligated to purchase a sufficient amount of natural gas each month so that its
daily average for the month is at least 159,600 MMBtus and the Partnership is
obligated to purchase a sufficient amount of natural gas each year so that its
daily average for the year is at least 173,061 MMBtus of natural gas. During the
First Period, the price to be paid by the Partnership for 116,000 MMBtus of
natural gas per day (the "Tier I" gas) is fixed on an increasing-rate basis as
specified in the Gas Supply Agreement. During the remainder of the term of the
Gas Supply Agreement, the price of Tier I gas will fluctuate based on Actual Con
Edison Avoided Energy Costs, as well as the price paid by Con Edison to the
Project. The remaining 76,291 MMBtus of gas per day will be priced in relation
to Niagara Mohawk's "energy only" electric rate.
Enron Power Services will maintain a notional tracking account to account
for differences between the contract price and spot gas prices, except that
there will be no such tracking with respect to the Tier I gas during the first
five years of the Gas Supply Agreement. The tracking account would be increased
if the then current spot gas price is greater than the contract price and would
be decreased if the then current spot gas price is lower than the contract
price. The tracking account bears interest at 1% over prime. Enron Power
Services has been given a security interest in the plant, which is subordinated
to payments for the Securities and certain letter of credit reimbursement
obligations, to secure any tracking account balance. If at any time the tracking
account balance exceeds 50% of the plant's then fair market value, the
Partnership will be required to reduce the tracking account balance by paying to
Enron Power Services the lesser of (a) the amount necessary to reduce the
tracking balance to 50% of the plant's fair market value and (b) (i) during
years 6 through 15 of the Gas Supply Agreement, all incremental revenues as
defined in the Gas Supply Agreement and (ii) thereafter 50% of qualifying cash
flows also as defined in the Gas Supply Agreement plus all incremental revenues.
If a positive balance exists in the tracking account at the end of the contract
term, the Partnership will be required to either pay the balance in the tracking
account or to convey to Enron Power Services an equity ownership in the Project
based on the ratio of the tracking account balance to the plant's fair market
value at such time.
Gas Transportation Agreements
The Partnership has entered into gas transportation agreements with seven
pipeline companies in order to transport, on a firm basis, the natural gas
purchased pursuant to the Gas Supply Agreement. Each of the gas transportation
agreements entered into by the Partnership has a 20-year term from the Date of
Commercial Operation, and together the agreements will provide for sufficient
transportation capacity to supply the Project with all of its anticipated
natural gas requirements. In addition to Niagara Mohawk, the other parties to
the gas transportation agreements are Union Gas Limited, Panhandle Eastern Pipe
Line Company, ANR Pipeline Company, Empire State Pipeline, Great Lakes Gas
Transmission Limited Partnership and TransCanada Pipelines Limited.
8
<PAGE>
Competition
Many organizations, including equipment manufacturers and subsidiaries of
utilities and contractors, as well as other organizations similar to Sithe
Energies, have entered the cogeneration market. The resultant increased
competition has reduced the price utilities are willing to pay to independent
power producers for electrical capacity and energy. These factors may adversely
affect the price the Partnership may be paid under the Energy Purchase
Agreements (due to potential declines in a utility's long run avoided cost). In
addition, a number of states, including New York, are moving toward deregulating
the electric power markets. At this point, it is impossible to predict what, if
any, impact that deregulation will have on the Partnership's future financial
position and results of operations.
BUSINESS
General
The Partnership's sole business is the ownership of the Project. The
Partnership has long-term contracts to sell capacity and electricity produced by
the Project to Con Edison and Alcan, electricity to Niagara Mohawk and thermal
energy to Alcan. The Project is located on an approximately 340-acre site,
located in the Town of Scriba, County of Oswego, New York, approximately two
miles northeast of Oswego, New York. The site is bounded on the north by Lake
Ontario. Alcan owns and operates a facility adjacent to the site for the
production of rolled aluminum stock which is used principally in the production
of beverage containers.
The Project consists of the following equipment, systems and facilities:
o Four General Electric Model MS7001FA combustion gas turbine
generators, each able to produce approximately 160 MW of electricity
under design point conditions;
o Four Henry Vogt Machine Company HRSGs which create thermal energy
using heat from the turbine exhaust;
o Two General Electric steam turbines which are able to produce an
additional 208 MW each of electricity under design point conditions
from the thermal energy generated by the HRSGs;
o Air quality control systems; and
o Various associated equipment and improvements, including a
demineralization system to produce high purity water for use in
creating steam, wastewater collection and treatment facilities and
two 345kV transmission circuits.
The Project was designed to have an average net electrical output
available to customers of 963 MW and an average steam flow of up to 235,000
lbs./hr. The performance of the Project is dependent on ambient conditions,
which affect the combustion turbine efficiency and capacity. Ambient conditions
also affect the steam turbine cycle efficiency by affecting the operation of the
cooling tower and the circulating water temperature, and therefore the condenser
pressure.
9
<PAGE>
Employees
The Partnership has no employees. The Operator provides operations and
maintenance services and certain management and administrative support for the
Project.
As of December 31, 1998, the Operator employed 45 individuals in
connection with the Project.
Legal Proceedings
Other than the Partnership's petition for review of the FERC order with
the United States Court of Appeals alleging that Niagara Mohawk has been
overcharging the Partnership for the transmission of electricity, neither Sithe
Funding nor the Partnership is a party to any legal proceedings.
REGULATION
Energy Regulation
PURPA. PURPA and the regulations promulgated thereunder provide an
electric generating project with rate and regulatory incentives if the project
is a Qualifying Facility. A cogeneration facility is a Qualifying Facility if it
(i) sequentially produces both electricity and a certain quantity of useful
thermal energy which is used for industrial, commercial, heating or cooling
purposes, (ii) meets certain energy efficiency standards when oil or natural gas
is used as a fuel source and (iii) is not more than 50% owned by an electric
utility, electric utility holding company or an entity or person owned by either
of the above.
Under PURPA and the regulations promulgated thereunder, Qualifying
Facilities receive two primary benefits. First, PURPA and the regulations
promulgated thereunder exempt Qualifying Facilities from the Public Utility
Holding Company Act of 1935 ("PUHCA"), most provisions of the Federal Power Act
(the "FPA") and certain state laws relating to securities, rate and financial
regulation. Second, FERC's regulations promulgated under PURPA require that (i)
electric utilities purchase electricity generated by Qualifying Facilities,
construction of which commenced on or after November 9, 1978, at a price based
on the purchasing utility's full "avoided costs," and (ii) the utilities sell
supplementary, back-up, maintenance and interruptible power to the Qualifying
Facility on a just and reasonable and non-discriminatory basis. PURPA and the
regulations promulgated thereunder define "avoided costs" as the "incremental
costs to an electric utility of electric energy or capacity or both which, but
for the purchase from the qualifying facility or qualifying facilities, such
utility would generate itself or purchase from another source". Utilities may
also purchase power at prices other than "avoided costs" pursuant to
negotiations with potential suppliers as provided by the FERC regulations.
The Project currently meets all of the criteria for a Qualifying Facility
under PURPA and the regulations promulgated thereunder. If at any time the
Project were to fail to meet such criteria, the Partnership may become subject
to regulation as a public utility company under PUHCA, the FPA and state utility
laws.
PUHCA. PUHCA provides that any corporation, partnership or other entity or
organized group which owns, controls or holds power to vote 10% of the
outstanding voting securities of a "public utility company" or a company which
is a "holding company" of a public utility company is subject to registration
with the Securities and Exchange Commission (the "Commission") and
10
<PAGE>
PUHCA regulation, unless eligible for an exemption or unless a Commission order
declaring it not to be a holding company is granted. PUHCA requires registration
for a holding company of a public utility company, and requires a public utility
holding company to limit its utility operations to a single integrated utility
system and to divest any other operations not functionally related to the
operation of the utility system. In addition, a public utility company, which is
a subsidiary of a registered holding company under PUHCA, is subject to
financial and organizational regulation, including approval by the Commission of
its financing transactions.
The Energy Policy Act of 1992 (the "Policy Act") contains amendments to
PUHCA that may allow the Partnership to operate its business without becoming
subject to PUHCA in the event the Project loses its status as a Qualifying
Facility. Under the Policy Act, a company engaged exclusively in the business of
owning and/or operating a facility used for the generation of electric energy
exclusively for sale at wholesale may be exempted from PUHCA. In order to
qualify for such an exemption, a company must apply to the FERC for a
determination of eligibility, pursuant to implementing rules that the FERC will
promulgate. Although the Policy Act and its implementing rules may exempt the
Partnership from PUHCA in the event that Qualifying Facility status is lost, the
Policy Act may also encourage greater competition in wholesale electricity
markets, which could result in a decline in long-term rates to be paid by
electric utilities such as Con Edison and Niagara Mohawk.
FPA. Under the FPA, the FERC has exclusive rate-making jurisdiction over
wholesale sales of electricity and transmission in interstate commerce. These
rates may be based on a cost of service approach or may be determined through
competitive bidding or negotiation. If the Project were to lose its Qualifying
Facility status, the rates set forth in each of the Energy Purchase Agreements
would have to be filed with the FERC and would be subject to review by the FERC
under the FPA. The Con Edison Energy Purchase Agreement and the Niagara Mohawk
Power Purchase Agreement contain provisions for a reduction in the rates to be
paid for electric energy in such event.
State Regulation. The Project, by virtue of being a Qualifying Facility,
is exempt from New York State rate, financial and organizational regulations
which are applicable to a public utility. The PSC's general supervisory powers
relating to environmental and safety matters apply to Qualifying Facilities.
Wheeling and Interconnection. Under Section 201 of the FPA, the FERC
regulates the rates, terms and conditions for the transmission of electric
energy in interstate commerce. This has been interpreted to mean that the FERC
has jurisdiction when the transmission system is interconnected and capable of
transmitting energy across a state boundary, even if the utility has no direct
connection with another utility outside its state but is interconnected with
another utility which in turn has interstate connections with other utilities.
Accordingly, the rates to be paid by the Partnership to Niagara Mohawk under the
Transmission Services Agreement are subject to the jurisdiction of the FERC
under the FPA. Niagara Mohawk has obtained approval by the FERC of the
Transmission Services Agreement under the FPA, but has reserved the right to
apply for future changes in rates under the FPA. The Interconnection Agreement,
which is subject to review under Sections 205 and 206 of the FPA, was accepted
by the FERC in the fall of 1993.
The FERC's authority under the FPA to require electric utilities to
provide transmission service to Qualifying Facilities and other wholesale
electricity producers has been significantly expanded by the Policy Act.
Pursuant to the Policy Act, the Partnership may apply to the FERC for an order
requiring a utility to provide transmission services. The FERC may issue such an
order provided that the reliability of the affected electric systems would not
be unreasonably impaired. The Policy Act may enhance the Partnership's ability
to obtain transmission access necessary to sell electric energy or capacity to
purchasers other than Con Edison or Niagara Mohawk. However, there is no
assurance that the rates for such transmission service would be economical for
the Partnership. The Policy Act may also result in greater competition among
wholesale electric energy producers.
11
<PAGE>
IDA Agreements
The Partnership has leased the Project site to the County of Oswego
Industrial Development Agency (the "IDA") pursuant to a ground lease between the
Partnership and the IDA (the "IDA Lease"). The IDA has leased the site back to
the Partnership pursuant to a sublease agreement between the Partnership and the
IDA (the "IDA Sublease"). The IDA's participation in the Project exempts the
Project from certain mortgage recording taxes, certain state and local real
property taxes and certain sales and use taxes within New York State. The
Partnership has also entered into an agreement whereby the Partnership will be
required to make payments in lieu of property taxes during the term of the IDA
Lease and IDA Sublease.
The IDA is a corporate governmental agency, constituting a public benefit
corporation of the State of New York. It is authorized to promote, attract,
encourage and develop economically sound commerce and industry for the purpose
of preventing unemployment and economic deterioration. The IDA is authorized to
lease real property interests and industrial and commercial facilities and may
exercise appropriate financing powers, including the granting of mortgages and
indentures of mortgage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Partnership during the fourth quarter of 1998.
12
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
The Partnership was in the development stage from its inception in
November 1990 through December 29, 1994. All construction costs and all project
development costs incurred subsequent to obtaining the Con Edison Energy
Purchase Agreement in 1991 were capitalized.
The selected consolidated financial data presented below for, and at the
end of, each of the years in the five year period ended December 31, 1998 are
derived from the Partnership's audited consolidated financial statements and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7 on page 14.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994 (a)
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenue $313,739 $355,432 $379,024 $335,844 $ 2,749
Operating income 53,165 94,672 120,211 89,886 1,064
Non-operating income and (expense):
Interest expense (61,943) (62,369) (63,441) (64,261) (13,910)
Interest and other income, net 6,746 7,026 4,187 4,525 5,704
Net income (loss) (2,032) 39,329 60,957 30,150 (7,142)
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Property, plant and equipment $702,021 $713,274 $723,188 $737,716 $752,820
Total assets 811,120 838,047 867,471 845,888 794,063
Long-term debt 641,934 669,345 688,201 698,405 702,333
Partners' capital (deficiency) 118,532 120,564 123,699 62,734 (7,631)
</TABLE>
- ----------
(a) The Partnership commenced commercial operation for financial reporting
purposes on December 29, 1994. The net losses for 1994 are attributable to
the net interest expense resulting from the excess of the 8.65% weighted
average interest rate on the Securities over the rate earned on the
investment of the unspent construction funds which was required to be
charged against income.
13
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations -- 1998, 1997 and 1996
Revenue for 1998 decreased from 1997 by $41.7 million (12%) due largely to
lower net generation ($49.1 million) offset in part by higher Con Edison tariffs
($7.4 million). Because of the unusually warm weather in the region of the
Project during 1998 (the average temperature for the year was 3.96(degrees)F, or
7.7%, above the historical average and the warmest in the last 103 years for
which recorded data was available), the Partnership was required to curtail
electricity generation to ensure that the Project's ratio of thermal energy
deliveries to total energy deliveries was at the level required to maintain the
Project's QF status. These same factors have also resulted in a $21.6 million
decrease in accounts receivable at December 31, 1998 from December 31, 1997. The
Partnership and Alcan have taken certain actions and additional efforts are
underway toward increasing thermal energy deliveries to Alcan and QF margin in
1999 and beyond.
Cost of sales for 1998 was flat with 1997, with 1998 reflecting a
contractual price increase under the Partnership's long-term gas supply
contract, lower fuel consumption and a $3.0 million gas transportation cost
rebate and 1997 reflecting 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.
Revenue for 1997 decreased from 1996 by $23.6 million (6%) due to lower
incremental revenue from selling gas instead of electricity as the mild 1997
winter and resultant low gas prices afforded fewer arbitrage opportunities than
in 1996; the fact that 1996 included a 1995 tariff adjustment payment from Con
Edison; one less day of generation than in 1996 which was a leap year; and a
change in the mix of sales due to certain curtailments on transmission of energy
deliveries to Con Edison.
Cost of sales for 1997 increased from 1996 by $2.0 million (.8%) due to
higher fuel costs as a result of a scheduled price increase under the
Partnership's long-term gas supply contract and higher depreciation expense,
partially offset by an $8.2 million credit to maintenance expense that the
Partnership was required to record in connection with the discontinuance of its
major overhaul cost normalization policy for its gas turbines, steam turbines
and generators.
Interest expense for 1998 and 1997 decreased by $.4 million (.1%) and $1.1
million (2%) from 1997 and 1996 respectively, as a result of lower outstanding
amounts of long-term debt.
Liquidity and Capital Resources
Financing for the Project consisted of a loan to the Partnership by Sithe
Funding of the proceeds of its issuance of $717.2 million of notes and bonds and
$60 million of capital contributions by the Partners. In addition, 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 December 31, 1998, letters of credit aggregating $13.4
million were outstanding in 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 December 31, 1998, the
Partnership had restricted funds and investments aggregating $77.7 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 $17.5 million that was utilized for January 1999
operating expenses, $15.3 million in the Partnership distribution account and
the balance reserved for the June 1999 debt service payment. Funds in the
Partnership distribution account are available as additional operating and debt
service reserves until such time as certain coverage ratios are achieved. To
secure the Partnership's obligation to pay any amounts drawn under the debt
service
14
<PAGE>
letter of credit, the letter of credit provider has been assigned a security
interest and lien on all of the collateral in which the holders of the
Securities have been assigned a security interest and lien.
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 has completed the inventory of systems and components
which could be affected by year 2000 non-compliance and has completed its
assessment of the state of year 2000 readiness of both its information
technologies and non-information technology systems. The Partnership engaged
Raytheon Engineers and Constructors Inc., an affiliate of one of the Project's
construction contractors, to perform an independent review of the inventory and
assessment activities. This independent review was completed and Raytheon
completed work with the Partnership to develop a comprehensive plan to
remediate, test and implement any necessary corrections. The Partnership joined
the Electric Power Research Institute Year 2000 Program to gain access to the
pooled expertise and databases of over 100 power generation companies and
utilities that participate in this program. As of December 31, 1998 the
Partnership's remediation and test program was 50% complete. The Partnership
presently anticipates that 95% of the remediation and test efforts will be
completed by June 30, 1999, with final completion by September 1999.
Based upon information currently available to the Partnership, the
Partnership anticipates that the cost of remediation will be less than $1
million, of which $.1 million was spent in 1998 with the balance expected to be
spent through the end of 1999.
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 fully developed its contingency plans with respect to year 2000
compliance, but is currently in the process of doing 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.
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 impact its operations and business, or expose
it to third party liability.
15
<PAGE>
Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934. The words "anticipate", "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, 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership has investments in financial instruments subject to
interest rate risk consisting of $39.5 million of restricted cash and cash
equivalents and $38.2 million of restricted investments. In the case of
restricted cash and cash equivalents, due to the short duration of these
financial instruments a 10% immediate change in interest rates would not have a
material effect on the Partnership's financial condition. In the case of
restricted investments, the resulting potential decrease in fair value from a
10% immediate change in interest rates would be approximately $.4 million.
The Partnership's outstanding long-term debt at December 31, 1998 bears
interest at fixed rates and therefore the Partnership's results of operations
would not be affected by changes in interest rates as they apply to borrowings.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
The index to financial statements appears on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
All management functions of the Partnership are the responsibility of the
General Partner.
The following table sets forth certain information with respect to
directors and executive officers of Sithe Funding and the General Partner:
Name Age Position
---- --- --------
William Kriegel 53 Chairman of the Board, Chief
Executive Officer and President
Bruce J. Wrobel 41 Executive Vice President
Richard J. Cronin III 52 Chief Financial Officer, Senior
Vice President and Director
Frank J. Donohue 51 Senior Vice President for Construction
Ralph J. Grutsch 66 Senior Vice President for Operations
Sandra J. Manilla 47 Treasurer and Vice President
W. Harrison Wellford 58 Director
William Kriegel founded Sithe Energies in 1984 and has been Chairman of
the Board, President and Chief Executive Officer of Sithe Energies since that
time. Mr. Kriegel also serves in such capacities for each of the Limited
Partners and the Operator. Mr. Kriegel also serves as a Director of Vivendi and
as Chairman of the Board of Aqua Alliance Inc. Prior to coming to the United
States in 1984, Mr. Kriegel co-founded an unaffiliated French energy company
that within three years of its formation in 1980 became France's largest
privately-owned company engaged in the development of small hydroelectric
projects. In 1978, he co-founded S.I.I.F., S.A., an unaffiliated company
specializing in the purchase and rehabilitation of residential buildings and
historical properties in France.
Bruce J. Wrobel has served as Executive Vice President in charge of
project development and finance activities for Sithe Energies since January
1986. Mr. Wrobel also serves in such capacity for each of the Limited Partners
and the Operator. From 1980 to 1986, he was Vice President for business
development and project finance at Mitex, an alternative energy development
company which was co-founded by Mr. Wrobel and acquired by Sithe Energies in
1986. Prior to 1980, he was with Temple, Barker & Sloan as a member of its
Energy Strategy and Management Group.
17
<PAGE>
Richard J. Cronin III has been Senior Vice President since September 1996
and Chief Financial Officer of Sithe Energies since September 1990. Mr. Cronin
also serves in such capacities for each of the Limited Partners and the
Operator. From September 1986 to September 1990, Mr. Cronin was Vice President
and Director of Financial Reporting at Drexel Burnham Lambert, Inc., a financial
services company. His prior financial experience, in reverse chronology,
includes eight years at Freeport-McMoRan, Inc., three years at American Electric
Power, Inc. and five years at Coopers & Lybrand.
Frank J. Donohue joined Sithe Energies as Senior Vice President for
Construction in March 1992. Mr. Donohue has over 19 years of experience in heavy
industrial construction and construction contract negotiation and management.
From 1977 until 1992, he was with Century Contractors West, Inc. where, as Vice
President of Operations, he had direct responsibility for construction projects,
including nine cogeneration projects representing over 1,500 MW of capacity.
Ralph J. Grutsch is Senior Vice President for Operations and has been with
Sithe Energies since its acquisition in 1988 of Energy Factors, Incorporated,
which was a publicly-held independent energy producer and of which he was a
co-founder. Mr. Grutsch also serves in such capacity for each of the Limited
Partners and the Operator. Mr. Grutsch served as President and Chief Operating
Officer of Energy Factors immediately prior to its acquisition by Sithe
Energies. From 1964 until 1983, Mr. Grutsch was with Solar Turbines,
Incorporated where he held numerous management positions ultimately serving as
Senior Vice-President-Marketing and director of that company.
Sandra J. Manilla joined Sithe Energies in September 1986 and has been
Vice President since September 1996 and Treasurer since May 1990. Ms. Manilla
also serves in such capacities for each of the Limited Partners and the
Operator. From 1979 until 1986, she worked in Deloitte & Touche's consulting
group where she managed several financial consulting engagements with the
Government. From 1976 until 1979, Ms. Manilla was Assistant to the Special
Deputy Comptroller of New York City and, prior to that, spent three years on
Citicorp's internal audit staff.
W. Harrison Wellford is a partner in the law firm of Latham & Watkins and
Vice-Chairman of Sithe Energies, and specializes in energy, trade, and
environmental law. Mr. Wellford also serves as a Director of General Nutrition
Companies, Inc. During the transition from the Bush to Clinton administration,
he served as White House transition adviser and as a member of the Economic
Policy Group. From 1977 to 1981, he served as Executive Director of the Office
of Management and Budget in the White House. Mr. Wellford is also a fellow of
the National Academy of Public Administration.
18
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
No cash compensation or non-cash compensation was paid in 1998 or is
proposed to be paid in the current calendar year to any of the executive
officers listed under Item 10. "DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT" for their services to Sithe Funding, the Partnership or the General
Partner. Operations and maintenance services for the Project are performed on a
cost reimbursement basis by the Operator pursuant to the Operations and
Maintenance Agreement. In addition, the Operator receives a $578,813 annual fee,
which escalates at the rate of 5% per annum, for certain management and
administrative services provided by it. See Item 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is given with respect to the Partners of the
Partnership:
<TABLE>
<CAPTION>
Amount and Nature Percentage
Name and Address of Beneficial Ownership
Title of Class of Beneficial Owner Ownership (1)(2) Interest
-------------- ------------------- ---------------- --------
<S> <C> <C> <C>
Partnership Interest Sithe/Independence, Inc. General Partner 1%
450 Lexington Avenue
New York, NY 10017
Partnership Interest Sithe Energies, Inc. Limited Partner 45%
450 Lexington Avenue
New York, NY 10017
Partnership Interest Sithe Energies U.S.A., Inc. Limited Partner 44%
450 Lexington Avenue
New York, NY 10017
Partnership Interest Mitex, Inc. Limited Partner 10%
450 Lexington Avenue
New York, NY 10017
</TABLE>
- ----------
(1) None of the persons listed has the right to acquire beneficial ownership
of Securities as specified in Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934.
(2) Sithe Energies is the direct or indirect beneficial owner of each of the
other Partners.
Except as specifically provided or required by law, Limited Partners may
not participate in the management or control of the Partnership. Thus, although
the General Partner has the smallest interest in the Partnership, it has sole
responsibility for management of the Partnership. The General Partner is an
indirect wholly-owned subsidiary of Sithe Energies, a Limited Partner. See Item
13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
The Partnership is a limited partnership wholly-owned by its Partners.
Beneficial interests in the Partnership are not available to any persons other
than the Partners.
19
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Operation and maintenance services for the Project are provided on a cost
reimbursement basis by the Operator pursuant to an Operations and Maintenance
Agreement, dated as of August 15, 1992, between the Partnership and the
Operator. The Operator receives a $578,813 annual fee, which escalates at a rate
of 5% per annum, for certain management and administrative services provided by
it. See Items 1, 2 and 3. "BUSINESS, PROPERTIES AND LEGAL PROCEEDINGS -- The
Project -- Operations and Maintenance." Management and administrative services
performed by the Operator, with the prior consent of the Partnership, include
collecting of all sums payable to or due the Partnership under the Project
Documents and accounting for and depositing all such funds in the operating
account; obtaining such insurance as is necessary to protect the interest of the
Partnership and complying with the provisions of the Project Documents;
estimating and advising the Partnership of all federal, state and local taxes
payable by the Partnership that are attributable to the ownership and operation
of the Project; and determining and recommending to the Partnership any
necessary or desirable improvements, modifications or alterations to the
Project. Upon the occurrence of any transfer, assignment or reassignment of the
Partnership's interest in the Project wherein neither the Partnership nor any
affiliate of the Partnership (other than the Operator) retains an interest in
the Project, the continuance of the Operator's duties and obligations under the
Operations and Maintenance Agreement are expressly conditioned upon the
renegotiation of the Operator's compensation.
Mr. Wellford is a partner in the law firm of Latham & Watkins, which
serves from time to time as an outside legal counsel for Sithe Energies and the
Partnership. Mr. Wellford became a Vice-Chairman of Sithe Energies effective
July 1, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Sithe/Independence Power Partners, L.P.
Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Partners' Capital
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the three months
ended December 31, 1998.
(c) Exhibits
20
<PAGE>
Exhibit No. Description of Exhibit
3.1 --Certificate of Incorporation of Sithe/Independence Funding Corporation
("Sithe Funding") *
3.2 --By-laws of Sithe Funding *
3.3 --Certificate of Limited Partnership of Sithe/Independence Power
Partners, L.P. (the "Partnership") *
3.4 --Amendment to Certificate of Limited Partnership of the Partnership *
3.5 --Agreement of Limited Partnership of Sithe/Independence Power Partners,
L.P., among Sithe/Independence, Inc. (the "General Partner"), Sithe
Energies, Inc., Sithe Energies U.S.A., Inc. and Mitex, Inc. *
3.6 --Certificate of Incorporation of the General Partner *
3.7 --Amendment to Certificate of Incorporation of the General Partner *
3.8 --By-laws of the General Partner *
4 --Indenture
4.1 --Indenture dated as of January 1, 1993 among Sithe Funding, the
Partnership and IBJ Schroder Bank & Trust Company, as trustee (the
"Trustee") *
4.2 --First Series Supplemental Indenture dated as of January 1, 1993 among
Sithe Funding, the Partnership and the Trustee *
10.1 --Credit Facilities
10.1.1 --Senior Secured Revolving Credit Agreement among Sithe Energies, Inc.
(as Borrower) and Energy Factors, Incorporated and Sithe Energies,
U.S.A., Inc. and Sithe International, Inc. and Sithe Energies
Development Corporation (together with the Borrower as Loan Parties)
and Bank of Montreal and the additional Financial Institutions from
time to time set forth on Appendix I (the Lenders) and Bank of Montreal
(as Agent) dated as of December 19, 1997. ******
10.1.2 --Amended and Restated Letter of Credit and Reimbursement Agreement among
the Partnership, the Banks named therein and the Sumitomo Bank,
Limited, New York Branch, dated September 28, 1994. ***
10.2 --Intentionally Omitted
10.3 --Power Purchase Agreements
10.3.1 --Energy Purchase Agreement, dated May 20, 1991, by and between
Consolidated Edison Company of New York, Inc. ("Con Ed") and Lake View,
Inc. *
10.3.2 --Supplement No. 1 to Contract No. 403, dated September 27, 1991, by and
between Con Ed and Tamarac Properties (Lake View, Inc.) *
10.3.3 --Assignment and Assumption of Energy Purchase Agreement, dated as
of December 9, 1992, entered into by the General Partner (formerly
named Lake View, Inc.), Con Ed and the Partnership *
10.3.4 --Amendment to Energy Purchase Agreement, dated as of December 9, 1992,
entered into between the Partnership and Con Ed *
10.3.5 --Amendment to Energy Purchase Agreement dated as of April 5, 1993
between the Partnership and Con Ed *
10.3.6 --Power Purchase Agreement, dated as of July 24, 1992, between the
Partnership and Niagara Mohawk Power Corporation ("Niagara Mohawk") *
10.3.7 --First Amendment to the Power Purchase Agreement, dated as of November
16, 1992, between the Partnership and Niagara Mohawk *
10.3.8 --Energy Sales Contract, dated as of November 18, 1992, between the
Partnership and Alcan Aluminum Corporation d/b/a Alcan Rolled Products
Company ("Alcan") *
10.3.9 --Letter Agreement dated January 29, 1993 between Alcan and the
Partnership regarding Sections 9.12 and 9.13 of the Alcan Energy Sales
Contract *
10.3.10--Amendment No. 1 to the Energy Sales Contract dated as of February 3,
1993 between Alcan and the Partnership *
10.3.11--Written notice dated March 10, 1993 from Alcan to the Partnership
exercising the Fixed Price Option for Energy Sales Contract *
10.3.12--Fixed Price Option for Energy Sales Contract between Alcan and the
Partnership *
21
<PAGE>
10.3.13--Amendment No. 2 to the Energy Sales Contract dated March 21, 1996
between the Partnership and Alcan *****
10.4 --Amended and Restated Operations and Maintenance Agreement, dated as of
August 25, 1992, between the Partnership and Sithe Energies Power
Services, Inc. *
10.5 --Transmission Agreements
10.5.1 --Transmission Services Agreement, dated as of November 5, 1991, between
Niagara Mohawk and Lake View, Inc. *
10.5.2 --Assignment, Assumption and Amendment of Transmission Services
Agreement, dated as of March 9, 1992, between Niagara Mohawk, the
General Partner and the Partnership *
10.6 --Interconnection Agreements
10.6.1 --Interconnection Agreement, dated as of March 9, 1992, between the
Partnership and Niagara Mohawk *
10.6.2 --Supplement to Interconnection Agreement, dated as of March 10, 1992,
between the Partnership and Niagara Mohawk *
10.6.3 --Amendment No. 1 to Interconnection Agreement, dated as of July 24,
1992, between the Partnership and Niagara Mohawk *
10.6.4 --Amendment No. 2 to the Interconnection Agreement, dated as of November
17, 1992, entered into by Niagara Mohawk and the Partnership **
10.7 --Gas Supply Agreements
10.7.1 --Amended and Restated Base Gas Sales Agreement, dated as of October 26,
1992, between the Partnership and Enron Power Services, Inc. ("Enron")*
10.7.2 --First Amendment to Amended and Restated Base Gas Sales Agreement, dated
as of December 1, 1992, between the Partnership and Enron *
10.7.3 --Second Amendment to Amended and Restated Base Gas Sales Agreement dated
as of August 1, 1992 between the Partnership and Enron **
10.7.4 --Third Amendment to Amended and Restated Base Gas Sales Agreement dated
as of December 31, 1993 between the Partnership and Enron **
10.7.5 --Base Guarantee Agreement, dated as of December 1, 1992, by Enron Corp.
in favor of the Partnership *
10.7.6 --Fourth Amendment to Amended and Restated Base Gas Sales Agreement dated
October 31, 1994 by and between Enron Power Services, Inc. and the
Partnership. ***
10.7.7 --Fifth Amendment to Amended and Restated Base Gas Sales Agreement dated
January 30, 1995 by and between Enron Capital & Trade Resources Corp.
and the Partnership. ***
10.7.8 --Sixth Amendment to Amended and Restated Base Gas Sales Agreement dated
March 1, 1995 by and between Enron Capital & Trade Resources Corp. and
the Partnership. ***
10.7.9 --Seventh Amendment to Amended and Restated Base Gas Sales Agreement
dated March 31, 1995 by and between Enron Capital & Trade Resources
Corp. and the Independence Partnership. ****
10.8 --Gas Transportation Agreements
10.8.1 --Gas Transportation Agreement, dated as of March 11, 1992, by and
between the Partnership and Niagara Mohawk *
10.8.2 --Transportation Service Agreement, dated as of May 5, 1992, by and
between the Partnership and Great Lakes Gas Transmission Limited
Partnership ("Great Lakes") *
10.8.3 --Supplemental Agreement, dated May 6, 1992, between the Partnership and
Great Lakes*
10.8.4 --Amended and Restated FTS Agreement, dated as of November 23, 1992,
between the Partnership and ANR Pipeline Company ("ANR") *
10.8.5 --Precedent Agreement for Firm Transportation Service, dated as of March
20, 1992, between the Partnership and Panhandle Eastern Pipe Line
Company ("Panhandle") *
10.8.6 --Discounted Rate for Firm Transportation Services Agreement, dated March
20, 1992, between the Partnership and Panhandle *
10.8.7 --Agreement, dated as of October 4, 1993 between the Partnership and
Empire State Pipeline Company, Inc. ("Empire"), St. Clair Pipeline
Company, Inc. and Energy Line Corporation, providing for firm
transportation service (Contract No. 95000) **
22
<PAGE>
10.8.8 --Supplemental Agreement, dated as of February 28, 1992, between Empire
and the Partnership (incorporated by reference into Agreement dated as
of October 4, 1993) **
10.8.9 --Firm Service Contract dated as of March 9, 1994, between TransCanada
Pipelines, Ltd. ("TCPL") and the Partnership re Panhandle Volumes **
10.8.10--Firm Service Contract dated as of March 9, 1994, between TCPL and the
Partnership re ANR Volumes **
10.8.11--Contract No. M12012, M12 Firm Transportation Contract Dawn to Kirkwall,
dated as of April 6, 1992, between Union Gas Limited ("Union") and the
Partnership *
10.8.12--Contract No. M12016, M12 Firm Transportation Contract Dawn to Kirkwall,
Enron Corp., dated as of April 21, 1992, between Union and the
Partnership *
10.8.13--Contract No. M12017, M12 Firm Transportation Contract Dawn to Kirkwall,
dated as of April 10, 1992, between Union and the Partnership *
10.8.14--Amending Agreement for M12 Firm Transportation Contract (No. M12017)
dated as of February 19, 1993 between Union and the Partnership *
10.8.15--Contract No. M12022, M12 Firm Transportation Contract Dawn to Kirkwall,
dated as of April 20, 1992, between Union and the Partnership *
10.8.16--Amending Agreement for M12 Firm Transportation Contract (No. M12022)
dated as of February 19, 1993 between Union and the Partnership *
10.8.17--Contract No. C10018, C-1 Firm Transportation Contract Ojibway to Dawn,
dated as of April 10, 1992, between Union and the Partnership *
10.8.18--Amending Agreement for C-1 Firm Transportation Contract (No. C10018)
dated as of February 19, 1993 between Union and the Partnership *
10.8.19--Contract No. C10020, C-1 Firm Transportation Contract Ojibway to Dawn,
dated as of April 20, 1992, between Union and the Partnership *
10.8.20--Amending Agreement for C-1 Firm Transportation Contract (No. C10020)
dated as of February 19, 1993 between Union and the Partnership *
10.8.21--Union Supplemental Letter, dated May 26, 1992, between Union and the
Partnership *
10.8.22--Union Supplemental Letter, dated November 4, 1992, between Union and
the Partnership*
10.8.23--Assignment Agreement dated as of March 9, 1994 between TCPL, Union and
the Partnership **
10.8.24--Firm Transportation Service Agreement dated July 13, 1994 by and
between Panhandle Eastern Pipeline Company and the Partnership. ***
10.8.25--Service Agreement dated August 8, 1994 by and between Great Lakes Gas
Transmission Limited Partnership and the Partnership (FT089) ***
10.8.26--Service Agreement dated August 19, 1994 by and between Great Lakes Gas
Transmission Limited Partnership and the Partnership (FT056-02) ***
10.8.27--Gathering Agreement by ANR Pipeline Company and the Partnership dated
May 1, 1994. ***
10.8.28--Second Amended and Restated Agreement dated August 23, 1994 by and
between ANR Pipeline Company and the Partnership. ***
10.8.29--FTS-1 Service Agreement dated August 23, 1994 by and between ANR
Pipeline Company and the Partnership. ***
10.9 --Agreements re Real Property
10.9.1 --Main Transmission Line Licensing Agreement, dated as of November 18,
1992, between the Partnership and Alcan *
10.9.2 --Piping and Wiring Licensing Agreement, dated as of November 18, 1992,
between the Partnership and Alcan *
10.9.3 --Mortgage and Security Agreement, dated as of January 1, 1993, given by
County of Oswego Industrial Development Agency (the "IDA") and the
Partnership to Manufacturers and Traders Trust Company (the "Collateral
Agent") *
10.9.4 --Mortgage and Security Agreement, dated as of January 1, 1993, given by
the IDA and the Partnership to the Collateral Agent *
23
<PAGE>
10.9.5 --Mortgage and Security Agreement, dated as of January 1, 1993, given by
the IDA and the Partnership to the Collateral Agent *
10.9.6 --Credit Line Mortgage and Security Agreement, dated as of January 1,
1993, given by the IDA and the Partnership to the Collateral Agent *
10.9.7 --First Building Loan Mortgage and Security Agreement, dated as of
January 1, 1993, given by the IDA and the Partnership to the Collateral
Agent *
10.9.8 --Second Building Loan Mortgage and Security Agreement, dated as of
January 1, 1993, given by the IDA and the Partnership to the Collateral
Agent *
10.9.9 --First Building Loan Agreement, dated as of January 1, 1993, among the
Trustee, Sithe Funding and the Partnership *
10.9.10--Second Building Loan Agreement, dated as of January 1, 1993, among the
Trustee, Sithe Funding and the Partnership *
10.9.11--Bill of Sale and Assignment and Assumption Agreement dated as of August
25, 1992 between the General Partner, as assignor, and the Partnership,
as assignee *
10.10 --Water Service Agreements
10.10.1--Water Service Agreement, dated as of May 11, 1992, by and between the
Partnership and the City of Oswego *
10.10.2--Water Facilities Agreement, dated as of August 18, 1992, between the
Partnership and the County of Oswego *
10.11 --IDA Agreements
10.11.1--Lease Agreement, dated as of January 22, 1993, between the IDA and the
Partnership*
10.11.2--Ground Lease, dated as of January 22, 1993, between the IDA and the
Partnership *
10.11.3--Payment in Lieu of Taxes Agreement dated as of January 22, 1993 between
the IDA and the Partnership *
10.12 --Security Documents
10.12.1--Collateral Agency and Intercreditor Agreement, dated as of January 1,
1993, among Union Bank, the Trustee, Enron, the Partnership, Sithe
Funding, the IDA and the Collateral Agent*
10.12.2--Security Agreement and Assignment of Contracts, dated as of January 1,
1993, made by the Partnership in favor of the Collateral Agent *
10.12.3--Partner Security Agreement, dated as of January 1, 1993, among the
General Partner, Sithe Energies U.S.A., Inc., Sithe Energies, Inc.,
Mitex, Inc. and the Collateral Agent*
10.12.4--Equity Contribution Agreement, dated as of January 1, 1993, by the
General Partner, Sithe Energies, Inc., Sithe Energies U.S.A., Inc.,
Mitex, Inc. in favor of the Partnership and for the benefit of the
Collateral Agent *
27 --Article 5 Financial Data Schedule of the Partnership for the year ended
December 31, 1998*******
- ----------
* Incorporated herein by reference from the Registration Statement on Form
S-1, file No. 33-59960, filed with the Securities and Exchange
Commission (the "SEC") by Sithe/Independence Power Partners, L.P. on
March 23, 1993, as amended.
** Incorporated herein by reference from the Annual Report on Form 10-K for
the year ended December 31, 1993 for Sithe/Independence Power Partners,
L.P. filed with the SEC.
*** Incorporated herein by reference from the Annual Report on Form 10-K for
the year ended December 31, 1994 for Sithe/Independence Power Partners,
L.P. filed with the SEC.
**** Incorporated herein by reference from the Annual Report on Form 10-K for
the year ended December 31, 1995 for Sithe Independence Power Partners,
L.P. filed with the SEC.
***** Incorporated herein by reference from the Annual Report on Form 10-K for
the year ended December 31, 1996 for Sithe/Independence Power Partners,
L.P. filed with the SEC.
****** Incorporated herein by reference from the Annual Report on Form 10-K for
the year ended December 31, 1997 for Sithe/Independence Power Partners,
L.P. filed with the SEC.
******* Filed herewith.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Sithe/Independence Funding Corporation
---------------------------------------
(Registrant)
March 31, 1999 /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, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ William Kriegel Chief Executive Officer, President March 31, 1999
- -------------------------- and Director (Principal Executive
William Kriegel Officer)
/s/ Bruce Wrobel Executive Vice President and March 31, 1999
- -------------------------- Director
Bruce Wrobel
/s/ Frank Donohue Senior Vice President and Director March 31, 1999
- --------------------------
Frank Donohue
/s/ Richard J. Cronin III Chief Financial Officer, Senior March 31, 1999
- -------------------------- Vice President and Director
Richard J. Cronin III (Principal Financial and
Accounting Officer)
/s/ W. Harrison Wellford Director March 31, 1999
- --------------------------
W. Harrison Wellford
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
---------------------------------------
(Co-Registrant)
By: Sithe/Independence, Inc.
-----------------------------------
General Partner
March 31, 1999 /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, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ William Kriegel Chief Executive Officer, President March 31, 1999
- -------------------------- and Director (Principal Executive
William Kriegel Officer)
/s/ Bruce Wrobel Executive Vice President and March 31, 1999
- -------------------------- Director
Bruce Wrobel
/s/ Frank Donohue Senior Vice President and Director March 31, 1999
- --------------------------
Frank Donohue
/s/ Richard J. Cronin III Chief Financial Officer, Senior March 31, 1999
- -------------------------- Vice President and Director
Richard J. Cronin III (Principal Accounting Financial
and Officer)
/s/ W. Harrison Wellford Director March 31, 1999
- --------------------------
W. Harrison Wellford
26
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
Page No.
--------
Financial Statements
Independent Auditors' Report ......................................... F-2
Consolidated Balance Sheets at December 31, 1998
and 1997 ........................................................... F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1998, 1997 and 1996 ............................. F-4
Consolidated Statements of Partners' Capital for
the Years Ended December 31, 1998, 1997 and 1996 ................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 ............................. F-6
Notes to Consolidated Financial Statements ........................... F-7
All financial statement schedules are omitted because they are not applicable,
or not required, or because the required information is included in the
Financial Statements or Notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
We have audited the accompanying consolidated balance sheets of
Sithe/Independence Power Partners, L.P. (a Delaware limited partnership) and its
subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of operations, partners' capital and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sithe/Independence Power Partners,
L.P. and its subsidiary as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
New York, New York
February 15, 1999
F-2
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
------------------------
1998 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,147 $ 3
Restricted cash and cash equivalents 39,522 40,643
Restricted investments 38,180 34,674
Accounts receivable - trade 11,738 33,384
Fuel, inventory and other current assets 2,670 1,872
--------- ---------
Total current assets 94,257 110,576
Property, plant and equipment, at cost:
Land 5,010 5,010
Electric and steam generating facilities 774,057 765,239
--------- ---------
779,067 770,249
Accumulated depreciation (77,046) (56,975)
--------- ---------
702,021 713,274
Debt issuance costs 8,197 9,212
Other assets 6,645 4,985
--------- ---------
Total assets $ 811,120 $ 838,047
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Trade payables $ 16,574 $ 20,823
Accrued interest 173 174
Current portion of long-term debt 27,411 18,856
Accrued construction costs and retentions 1,476 443
--------- ---------
Total current liabilities 45,634 40,296
Long-term debt:
7.90% secured notes due 2002 82,486 109,897
8.50% secured bonds due 2007 150,839 150,839
9.00% secured bonds due 2013 408,609 408,609
--------- ---------
641,934 669,345
Other liabilities 5,020 7,842
Commitments and contingencies
Partners' capital 118,532 120,564
--------- ---------
Total liabilities and partners' capital $ 811,120 $ 838,047
========= =========
See notes to consolidated financial statements.
F-3
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Years Ended December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Revenue $ 313,739 $ 355,432 $ 379,024
Cost of sales:
Fuel 201,016 207,713 198,947
Operations and maintenance 39,487 33,779 41,087
Depreciation 20,071 19,268 18,779
--------- --------- ---------
260,574 260,760 258,813
--------- --------- ---------
Operating income 53,165 94,672 120,211
Non-operating income (expenses):
Interest expense (61,943) (62,369) (63,441)
Interest and other income, net 6,746 7,026 4,187
--------- --------- ---------
Net income (loss) $ (2,032) $ 39,329 $ 60,957
========= ========= =========
See notes to consolidated financial statements.
F-4
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In thousands)
Accumulated
Other Total
General Limited Comprehensive Partners'
Partner Partners Income Capital
-------- --------- ------------- ----------
Balance, January 1, 1996 $ 427 $ 62,315 $ (8) $ 62,734
Comprehensive income:
Net income 610 60,347 -- 60,957
Change in unrealized loss
on marketable securities -- -- 8 8
------- --------- --------- ---------
Total comprehensive income 610 60,347 8 60,965
------- --------- --------- ---------
Balance, December 31, 1996 1,037 122,662 -- 123,699
Net income and total
comprehensive income 393 38,936 -- 39,329
Distribution (425) (42,039) -- (42,464)
------- --------- --------- ---------
Balance, December 31, 1997 1,005 119,559 -- 120,564
Net loss and total
comprehensive loss (20) (2,012) -- (2,032)
------- --------- --------- ---------
Balance, December 31, 1998 $ 985 $ 117,547 $ -- $ 118,532
======= ========= ========= =========
See notes to consolidated financial statements.
F-5
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,032) $ 39,329 $ 60,957
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 20,071 19,268 18,779
Amortization of deferred financing costs 1,015 1,053 1,085
Changes in operating assets and liabilities:
Accounts receivable - trade 21,646 6,398 (4,461)
Fuel inventory and other current assets (798) 1,015 (25)
Other assets (1,660) (1,662) (1,662)
Trade payables and other current liabilities (4,249) (3,441) 4,074
Accrued interest payable (1) -- (30,736)
Other liabilities (2,822) (3,840) 6,002
-------- -------- --------
Net cash provided by operating activities 31,170 58,120 54,013
-------- -------- --------
Cash flows from investing activities:
Construction costs (7,785) (18,160) (11,589)
Restricted funds (2,385) 12,705 (31,978)
-------- -------- --------
Net cash used in investing activities (10,170) (5,455) (43,567)
-------- -------- --------
Cash flows from financing activities:
Principal payments on secured notes (18,856) (10,202) (11,384)
Distribution to partners -- (42,464) --
-------- -------- --------
Net cash used in financing activities (18,856) (52,666) (11,384)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,144 (1) (938)
Cash and cash equivalents at beginning of year 3 4 942
-------- -------- --------
Cash and cash equivalents at end of year $ 2,147 $ 3 $ 4
======== ======== ========
Supplemental cash flow information:
Cash payments for interest $ 61,943 $ 62,031 $ 61,179
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Partnership
Sithe/Independence Power Partners, L.P. (the "Partnership"), in which
Sithe Energies, Inc. ("Sithe Energies") 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. Sithe/Independence, Inc., an
indirect wholly-owned subsidiary of Sithe Energies, is the General Partner. The
Project commenced commercial operation for financial reporting purposes on
December 29, 1994 and on September 10, 1997, the Partnership notified the
Trustee under the Indenture that final completion of construction had been
achieved.
The Partnership has entered into a 40-year power sales contract with
Consolidated Edison Company of New York ("Con Edison"), a 20-year power sales
contract with Niagara Mohawk Power Corporation ("Niagara Mohawk") and a 22-year
contract for thermal energy and electricity sales with Alcan Aluminum
Corporation ("Alcan").
Sithe Energies is a leader in independent power generation in North
America and among the top independent power producers in the world. In North
America, at December 31, 1998, Sithe Energies owned or leased through its
subsidiaries 28 operating power plants, including the Project, having an
aggregate installed capacity of 3,762 megawatts ("MW") and had five projects
representing 4,270 MW under active development. Sithe Energies' pending
acquisition from GPU Inc. of 23 operating plants representing 4,113 MW, which is
expected to close in the third quarter of 1999, will more than double Sithe
Energies' North American operating capacity to 7,875 MW. Internationally, at
December 31, 1998, Sithe Energies and its affiliates had in the Asia region,
interests in 6 plants in operation having an aggregate installed capacity of 958
MW and 5 plants under construction representing 890 MW, and had interests in 17
projects representing 7,820 MW under active development in 12 countries.
Sithe Energies is presently privately owned 59.7% by Vivendi, formally
Compagnie Generale des Eaux, 29.5% by Marubeni Corporation and 10.8% by the
Sithe Employee Stock Ownership L.P. and management.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
the Partnership and Sithe/Independence Funding Corporation ("Sithe Funding"), a
wholly-owned subsidiary formed by the Partnership for the purpose of issuing
debt securities in connection with financing the Project. All significant
intercompany transactions and balances have been eliminated.
F-7
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents, including restricted cash, consist of bank
deposits, commercial paper and certificates of deposit that mature within three
months of their purchase.
Restricted investments include U.S. treasury notes and other debt
securities with maturities of more than three months from the date of their
purchase, and are accounted for as available-for-sale securities under Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".
Depreciation of electric and steam generating facilities is computed using
the straight-line method over the 40-year estimated economic life of the
Project.
Revenue from the sale of electricity and steam is recorded based upon
output delivered and capacity provided at the payment rates as specified under
contract terms.
Revenue for 1998 consisted of $313.7 million from sales of electricity and
steam with Con Edison, Alcan and Niagara Mohawk accounting for 94%, 4% and 2%,
respectively. Revenue for 1997 consisted of $353.5 million from sales of
electricity and steam and $1.9 million from gas sale transactions with Con
Edison, Niagara Mohawk and Alcan accounting for 92%, 5% and 3%, respectively, of
the sales of electricity and steam. Revenue for 1996 consisted of $343.3 million
from sales of electricity and steam and $35.7 million from gas sale transactions
with Con Edison, Niagara Mohawk and Alcan accounting for 92%, 5% and 3%,
respectively, of the sales of electricity and steam.
The Partnership evaluates the operating and financial performance of its
long-lived assets for potential impairments in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which prescribes the method for measuring impairment. If an
asset is determined to be impaired, the capitalized costs are written down to
fair value.
Routine maintenance and repairs are charged to expense as incurred.
Effective January 1, 1997, the Partnership entered into a twelve-year service
agreement with General Electric Company ("GE") under which the Partnership pays
GE specified amounts per megawatt-hour of net generation to perform all
scheduled major equipment overhauls for the Project's gas turbines, steam
turbines and generators (the "covered units") during such period. As a result of
such agreement, which, among other things, was entered into to lock in the cost
F-8
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of future major overhauls for the covered units, the Partnership discontinued
the application of its major overhaul cost normalization policy for the covered
units as of the beginning of the first quarter of 1997. In that connection, in
the first quarter of 1997, the Partnership was required to reverse to income as
a credit to maintenance expense the $8.2 million of major overhaul reserves for
the covered units that had been established in prior years under that policy.
Legal fees and other direct costs incurred in connection with the issuance
of long-term debt are being deferred and amortized to interest expense using the
interest method over the term of the long-term debt.
Since the Partnership is not an income tax paying entity, the accompanying
consolidated financial statements do not reflect any income tax effects. Sithe
Funding is a taxable entity, but has no taxable income since its interest income
is equal to its interest expense.
Effective January 1, 1998, the Partnership adopted SFAS No. 130,
"Reporting Comprehensive Income," which establishes new rules for the reporting
and display of comprehensive income and its components. Comprehensive income
consists of net income and the change in the unrealized loss on marketable
securities and is presented in the Consolidated Statements of Partners' Capital.
The adoption had no impact on partners' capital or results of operations. Prior
year financial statements have been reclassified to conform to SFAS No. 130
requirements.
Effective January 1, 1998, the Partnership adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information", which
requires the reporting of profit and loss, specific revenue and expense items
and assets for reportable segments. The Partnership is engaged in one reportable
segment - independent power generation, with all of its revenues derived from
and all of its assets located in the United States.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities", which the Partnership is required to adopt effective January 1,
1999. SOP 98-5 requires costs of start-up activities and organization costs to
be expensed as incurred. Management does not anticipate that the adoption of SOP
98-5 will have a significant effect on the financial position or results of
operations of the Partnership.
F-9
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Financing
Financing for the project consisted of a loan to the Partnership by Sithe
Funding of the proceeds of its issuance of $717.2 million of notes and bonds
(the "Securities") and $60 million of capital contributions by the Partners.
Aggregate maturities of the Securities over the next five years are as follows:
$27.4 million in 1999, $19.3 million in 2000, $32.4 million in 2001, $30.8
million in 2002 and $28.8 million in 2003. The Securities are guaranteed by the
Partnership and secured by substantially all of the assets of the Partnership.
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 December 31, 1998, letters of credit aggregating
$13.4 million were outstanding in 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 December 31, 1998, the
Partnership had restricted funds aggregating $77.7 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 $17.5 million that was utilized for January 1999 operating
expenses, $15.3 million in the Partnership distribution account and the balance
reserved for the June 1999 debt service payment. Funds in the Partnership
distribution account are available as additional operating and debt service
reserves until such time as certain coverage ratios are achieved. To secure the
Partnership's obligation to pay any amounts drawn under the debt service letter
of credit, the letter of credit provider has been assigned a security interest
and lien on all of the collateral in which the holders of the Securities have
been assigned a security interest and lien.
The Partnership is precluded from making distributions to the Partners
unless project reserve accounts are funded to specified levels, as discussed
above, and unless the required debt service coverage ratio is met. No
distribution to the Partners was made in 1998 because, although project reserve
accounts were funded to the required levels, the required debt service coverage
ratio was not met. A distribution to the Partners of $42.4 million was made in
November 1997.
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.
4. Financial and Derivative Instruments
Financial Instruments
Financial instruments which potentially subject the Partnership to
concentrations of risk consist principally of temporary cash investments,
F-10
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
restricted funds and trade receivables. The Partnership invests its temporary
cash investments and restricted investments in U.S. government obligations and
financial instruments of highly-rated financial institutions. Trade receivables
are from major regulated electric utilities and the associated credit risks are
limited.
The carrying values reflected in the balance sheet at December 31, 1998
and 1997 reasonably approximate the fair values for cash and cash equivalents,
restricted investments, trade receivables and construction payables and
retentions. In making such assessment, the Partnership utilized credit reviews.
The Partnership estimates that the fair value of the Securities at December 31,
1998 and 1997 were $762.2 million and $762.7 million, respectively, based on
quoted market prices, which were $92.9 million and $74.5 million higher,
respectively, than the historical carrying values of $669.3 million and $688.2
million, respectively.
At December 31, 1998 and 1997, the aggregate fair value of the
Partnership's available-for-sale debt securities closely approximated the
amortized cost of such securities.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in fiscal years beginning after June 15, 1999. Although
the Partnership has not used derivatives historically, management has not yet
determined what the effect of SFAS No. 133 will be on the results of operations
and financial position of the Partnership.
5. Commitments and Contingencies
Litigation and Claims
On March 29, 1995, the Partnership filed a petition with the FERC alleging
Niagara Mohawk has been overcharging for the transmission of electricity in
violation of the FERC policy by calculating transmission losses on an
incremental basis. The Partnership believes that transmission losses should be
calculated on an average basis. The Partnership has been recording its
transmission expense at the disputed, higher rate. As of December 31, 1998, the
Partnership estimates it was owed more than $9.7 million for transmission
overcharges. The Partnership requested that the FERC order Niagara Mohawk to
recalculate the transmission losses beginning in October 1994, when it began
wheeling power from the Project. In September 1996, the FERC issued an order
dismissing the Partnership's complaint and requiring Niagara Mohawk to provide
the Partnership with information regarding the calculation of transmission
losses. In October 1996, the Partnership filed a request for rehearing of the
FERC's order which was denied by the FERC. In December 1997, the Partnership
filed a petition for review of the FERC orders in the United States Court of
Appeals. On January 29, 1999, the Court of Appeals found the FERC had not
engaged in reasoned decision-making or reached conclusions supported by the
record in the underlying proceeding, and therefore remanded the case to the FERC
for further proceedings. The Partnership intends to continue to vigorously
pursue this matter.
F-11
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gas Supply
The Partnership has entered into a 20-year gas supply agreement with Enron
Power Services, Inc. ("Enron"), and 20-year transmission services and
interconnection agreements for gas transportation with several pipeline
companies, each with a term or expected term of at least twenty years from the
date of commercial operation. Aggregate minimum commitments under these
contracts over the next five years are as follows: $240.8 million in 1999,
$196.2 million in 2000, $201.1 million in 2001, $203.2 million in 2002 and
$205.6 million in 2003.
The Partnership recognizes fuel expense for gas consumed at its plant
based on pricing provided for in the Project's 20-year gas supply agreement with
Enron. Pursuant to such agreement, the price for the first 116,000 MMBtu's of
natural gas per day ("Tier I" gas) is fixed for the first five years of the
agreement and thereafter fluctuates with pricing based on a pre-determined
multiple of Con Edison's actual avoided energy price, as well as certain other
payments made by Con Edison to the Project. Up to an additional 76,291 MMBtu's
of gas consumed per day by the Project ("Tier II" gas) is priced based on the
predetermined multiple applied to Niagara Mohawk's "energy only" rate.
Enron will maintain a notional tracking account to account for differences
between the contract price and spot gas prices, except that there will be no
such tracking with respect to the Tier I gas during the first five years of the
contract. The tracking account would be increased if the then current spot gas
price is greater than the contract price and would be decreased if the then
current spot gas price is lower than the contract price. The tracking account
bears interest at 1% over prime. Enron has been given a security interest in the
plant, which is subordinated to payments for secured debt service and certain
letter of credit reimbursement obligations, to secure any tracking account
balance. As of December 31, 1998, the Partnership estimates that the balance in
the tracking account amounted to approximately $133.4 million. If at any time
the tracking account balance exceeds 50% of the plant's then fair market value,
the Partnership will be required to reduce the tracking balance by paying to
Enron the lesser of (a) the amount necessary to reduce the tracking balance to
50% of the plant's fair market value or (b) (i) during years 6 through 15 of the
contract, all incremental revenues as defined in the contract and (ii)
thereafter 50% of qualifying cash flows also as defined in the contract plus all
incremental revenues. If a positive balance exists in the tracking account at
the end of the contract term, the Partnership will be required either to pay the
balance in the tracking account or to convey to Enron an equity ownership in the
plant based on the ratio of the tracking account balance to the facility's fair
market value at such time.
At present, the Partnership's expectation based on its projection of
energy and gas prices is that there will not be a positive balance in the
tracking account at the end of the contract term and that during the term of the
contract it will not be required to make any tracking account balance reduction
payments.
F-12
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
On September 8, 1994, the PSC issued a certificate of public convenience
and necessity permitting the Partnership to make retail sales of electricity to
Alcan and to a containerboard recycling facility then being developed by a
partnership of paper industry companies, and invited comment on an appropriate
and equitable equalization fee that would be paid by the Partnership to Niagara
Mohawk. On September 29, 1994, the PSC issued an order establishing an
equalization fee with a present value of $19.6 million, which the Partnership
has elected to pay in equal annual amounts of approximately $3 million for ten
years, beginning on December 31, 1995. The order establishing the equalization
fee also contains provisions for the amount of such fee to be reconsidered if
the containerboard facility or a facility of comparable economic development is
not developed. Sithe Energies continues to actively pursue facilities of
comparable economic development.
The Partnership's power sales contract with Con Edison includes an option
that would allow Con Edison to terminate the power sales contract with the
Partnership upon satisfaction of certain conditions including assuming all of
the Partnership's financial and contractual obligations related to the Project
and paying an amount to the Partnership determined by a formula based on
estimated future revenues and expenses under the contract.
6. Related Party Transactions
The Partnership has entered into an operations and maintenance agreement
with Sithe Energies Power Services, Inc. ("Sithe Power Services"), an indirect
wholly-owned subsidiary of Sithe Energies, under which Sithe Power Services will
provide all operations and maintenance services for the Project for twenty years
following the Date of Commercial Operation on a cost reimbursement basis. In
addition, the agreement calls for the Partnership to pay Sithe Power Services a
$578,813 annual fee, which escalates at 5% per annum, for management and
administrative services, provided by Sithe Power Services to the Partnership.
During the second quarter of 1997, the Partnership obtained from the
Trustee a release of the lien and transferred ownership of approximately 160
acres of land to a wholly-owned subsidiary of Sithe Energies. The land, which is
not required for operation of the Project or for any potential future Project
expansion, was transferred at book value (approximately $.9 million) and no gain
or loss was recorded by the Partnership.
F-13
<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>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,147
<SECURITIES> 0
<RECEIVABLES> 11,738
<ALLOWANCES> 0
<INVENTORY> 2,670
<CURRENT-ASSETS> 94,257
<PP&E> 779,067
<DEPRECIATION> (77,046)
<TOTAL-ASSETS> 811,120
<CURRENT-LIABILITIES> 45,634
<BONDS> 641,934
0
0
<COMMON> 0
<OTHER-SE> 118,532
<TOTAL-LIABILITY-AND-EQUITY> 811,120
<SALES> 313,739
<TOTAL-REVENUES> 313,739
<CGS> 260,574
<TOTAL-COSTS> 260,574
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,943
<INCOME-PRETAX> (2,032)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,032)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,032)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
