<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the Quarterly Period Ended September 30, 1999
[ ] 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)
335 MADISON AVENUE, NEW YORK, NY 10017
-------------------------------- -----
(Address of principal executive offices) (Zip code)
(212)-351-0000
--------------
(Registrant's telephone number, including area code)
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0468704
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
335 MADISON AVENUE, NEW YORK, NY 10017
-------------------------------- -----
(Address of principal executive offices) (Zip code)
(212)-351-0000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
/X/ Yes / / No
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
SITHE/INDEPENDENCE FUNDING CORPORATION
PAGE NO.
PART I FINANCIAL INFORMATION
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
Financial Statements:
Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998 (Unaudited)..................................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998 (Unaudited).............. 4
Consolidated Statement of Partners' Capital for the Nine
Months Ended September 30, 1999 (Unaudited)....................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited)..................... 6
Notes to Consolidated Financial Statements (Unaudited).............. 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 8
Quantitative and Qualitative Disclosures about Market Risk................ 12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 13
Signatures .......................................................... 14
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<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,810 $ 2,147
Restricted cash and cash equivalents 60,382 39,522
Restricted investments 46,916 38,180
Accounts receivable - trade 29,105 11,738
Fuel inventory and other current assets 5,401 2,670
-------- --------
TOTAL CURRENT ASSETS 144,614 94,257
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land 5,010 5,010
Electric and steam generating facilities 776,085 772,581
-------- --------
781,095 777,591
Accumulated depreciation (91,611) (77,046)
-------- --------
689,484 700,545
DEBT ISSUANCE COSTS 7,455 8,197
OTHER ASSETS 5,604 6,645
-------- --------
TOTAL ASSETS $847,157 $809,644
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Trade payables $ 23,722 $ 16,574
Accrued interest 14,472 173
Current portion of long-term debt 23,353 27,411
-------- --------
TOTAL CURRENT LIABILITIES 61,547 44,158
LONG-TERM DEBT:
7.90% secured notes due 2002 72,838 82,486
8.50% secured bonds due 2007 150,839 150,839
9.00% secured bonds due 2013 408,609 408,609
-------- --------
632,286 641,934
OTHER LIABILITIES 7,928 5,020
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 145,396 118,532
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $847,157 $809,644
======== ========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------- ------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 99,565 $ 81,489 $ 300,366 $ 262,946
-------------- -------------- -------------- --------------
Cost of sales:
Fuel 60,171 53,635 182,391 158,871
Operations and maintenance 12,070 9,732 35,125 30,663
Depreciation 5,035 4,902 14,965 15,159
-------------- -------------- -------------- --------------
77,276 68,269 232,481 204,693
-------------- -------------- -------------- --------------
Operating income 22,289 13,220 67,885 58,253
Non-operating income (expense):
Interest expense (14,843) (15,400) (45,140) (46,045)
Other income, net 1,577 1,564 4,119 5,038
-------------- -------------- -------------- --------------
Net income (loss) $ 9,023 $ (616) $ 26,864 $ 17,246
============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (Unaudited)
(In thousands)
Total
General Limited Partners'
Partner Partners Capital
--------------- ----------- ------------------
<S> <C> <C> <C>
Balance, January 1, 1999 $ 985 $ 117,547 $ 118,532
Net income and total comprehensive income 269 26,595 26,864
------------- -------------- ---------------
Balance, September 30, 1999 $ 1,254 $ 144,142 $ 145,396
============= ============== ===============
See notes to consolidated financial statements.
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months
Ended September 30,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,864 $ 17,246
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 14,565 15,159
Amortization of deferred financing costs 742 758
Changes in operating assets and liabilities:
Accounts receivable - trade (17,367) 6,749
Fuel inventory and other current assets (2,731) (1,973)
Other assets 1,041 1,042
Trade payables 7,148 1,014
Accrued interest payable 14,299 14,755
Other liabilities 2,908 (2,628)
-------------- -------------
Net cash provided by operating activities 47,469 52,122
-------------- -------------
Cash flows from investing activities:
Capital expenditures (3,504) (1,056)
Restricted funds (29,596) (40,926)
-------------- -------------
Net cash used in investing activities (33,100) (41,982)
-------------- -------------
Cash flows from financing activities:
Principal payments of long-term debt (13,706) (9,429)
-------------- -------------
Net cash used in financing activities (13,706) (9,429)
-------------- -------------
Net increase in cash and cash equivalents 663 711
Cash and cash equivalents at beginning of period 2,147 3
-------------- -------------
Cash and cash equivalents at end of period $ 2,810 $ 714
============== =============
Supplemental cash flow information
Cash payments:
Interest $ 30,841 $ 31,290
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. THE PARTNERSHIP
Sithe/Independence Power Partners, L.P. (the "Partnership"), in which
Sithe Energies, Inc. and certain of its direct and indirect wholly-owned
subsidiaries (the "Partners") hold all the partnership interests, is a Delaware
limited partnership that was formed in November 1990 for a term of 50 years to
develop, construct and own a gas-fired cogeneration facility with a design
capacity of approximately 1,000 megawatts (the "Project") located in the Town of
Scriba, County of Oswego, New York. The Project commenced commercial operation
for financial reporting purposes on December 29, 1994. The majority of the
capacity and electric energy generated by the Project is sold to Consolidated
Edison Company of New York, Inc. ("Con Edison") and Alcan Aluminum Corporation
("Alcan") with the remainder of the electric energy being sold to Niagara Mohawk
Power Corporation.
2. BASIS OF PRESENTATION
The accompanying consolidated balance sheets at September 30, 1999 and
December 31, 1998 and the consolidated statements of operations for the three
and nine months ended September 30, 1999 and 1998 and cash flows for the nine
months ended September 30, 1999 and 1998 should be read in conjunction with the
audited consolidated financial statements included in the Annual Report on Form
10-K for the year ended December 31, 1998 for the Partnership and its
wholly-owned subsidiary, Sithe/Independence Funding Corporation ("Sithe
Funding"). Certain prior year amounts have been reclassified to conform to the
1999 presentation.
The results of operations for the three and nine months ended September
30, 1999 are not necessarily indicative of the results to be expected for the
full year. The unaudited financial information at September 30, 1999 and for the
three and nine months ended September 30, 1999 and 1998 contains all
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for a fair presentation of the operating results for such
periods.
Effective January 1, 1999, the Partnership adopted Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which
was issued by the American Institute of Certified Public Accountants in April
1998. SOP 98-5 requires costs of start-up activities and organization costs to
be expensed as incurred. The adoption of SOP 98-5 had no effect on the financial
position or results of operations of the Partnership.
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the third quarter of 1999 of $99.6 million was $18.1
million (22%) higher than in the corresponding period of last year due to higher
electric generation ($11.5 million) and higher energy rates ($6.6 million).
The lower generation in the 1998 quarter reflects the fact that in
light of the record warm 1998 temperatures (the warmest in 103 years) and
resulting low thermal deliveries to Alcan, the Project was required to curtail
electric production in order to ensure maintenance of its 1998 Qualifying
Facility ("QF") status. No such curtailments have occurred or are anticipated
for 1999. Furthermore, as a result of projects completed in 1999 for the purpose
of increasing thermal deliveries to Alcan, the Partnership believes that it will
be able to maintain the Project's QF status without curtailing generation even
if 1998-type weather patterns were to reoccur.
Cost of sales for the third quarter of 1999 of $77.3 million was $9.0
million (13%) higher than in the corresponding period of last year due largely
to higher fuel costs as well as a contractual price increase under the
Partnership's long-term equipment maintenance contract. The higher fuel cost was
attributable to a contractual price increase under the Partnership's long-term
gas supply contract and higher fuel consumption as a result of higher net
generation in the third quarter of 1999.
Interest expense for the third quarter of 1999 of $14.8 million was $.6
million lower than in the corresponding period of last year due primarily to the
lower outstanding amount of long-term debt.
Revenue for the first nine months of 1999 of $300.4 million was $37.4
million (14%) higher than in the corresponding period of last year due primarily
to higher net generation ($21.2 million) and higher energy rates ($16.2
million).
Cost of sales for the first nine months of 1999 of $232.5 million was
$27.8 million (14%) higher than in the corresponding period of last year due
largely to higher fuel costs as well as a contractual price increase under the
Partnership's long-term equipment maintenance contract. The higher fuel cost was
attributable to a contractual price increase under the Partnership's long-term
gas supply contract, higher fuel consumption resulting from higher net
generation and the fact that fuel expense for the first nine months of 1998
included a $3.0 million gas transportation rebate.
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<PAGE>
Interest expense for the first nine months of 1999 of $45.1 million was
$.9 million lower than in the corresponding period of last year due to the lower
outstanding amount of long-term debt.
Other income, net, consisted of interest income for all periods.
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 September 30, 1999, letters of credit aggregating $13.7
million were outstanding in connection with such obligations. Also, the
Partnership has secured a portion of the Project's debt service reserve
obligations with a letter of credit in the amount of $50 million. As of
September 30, 1999, the Partnership had restricted funds and investments
aggregating $107.3 million, including the Project's cumulative cash debt service
reserve and major overhaul reserve of $33.0 million and $5.8 million,
respectively. In addition, these restricted funds included $21.5 million that
was utilized for October 1999 operating expenses, $19.2 million segregated for
the December 1999 interest payment on the Partnership's long-term debt and the
balance in the Partnership distribution account. 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 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
-9-
<PAGE>
power generation companies and utilities that participate in this program. As
of September 7, 1999, the Partnership's remediation and test program for
mission critical equipment, components and systems was complete. In July
1999, the Partnership's year 2000 program was validated through an on-site
review process that was conducted at the request of, and performed by, the
North American Electric Reliability Council ("NERC"). The NERC's review
concluded that the Partnership has a well implemented and documented year
2000 plan and a strong Project and corporate commitment to achieving year
2000 readiness. The results of this review were also reported to the Public
Service Commission of the State of New York.
Based upon information currently available to the Partnership, the
Partnership anticipates that the total cost of remediation will be approximately
$1.1 million, of which $1.0 million was spent through the third quarter of 1999
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 and discussions
are being held to finalize the assessment of third party year 2000 readiness.
The Partnership's contingency plans with respect to year 2000 readiness are
about 90% complete and should be completed by the end of November 1999. In the
absence of third party responses to such questionnaires, the Partnership has
performed alternate procedures (i.e., review of year 2000 disclosures on third
party company web-sites and review of quarterly and annual reports filed with
the Securities and Exchange Commission) to determine the year 2000 status of the
third parties on which it relies. The year 2000 status of many of these third
parties is monitored by Federal and state regulatory authorities and as a
result, the Partnership has reasonable assurance that all third parties on which
it relies have or will have achieved year 2000 readiness. 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 has or 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, remediation of 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.
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<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q are
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934. The words "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.
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<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership has investments in financial instruments subject to
interest rate risk consisting of $60.4 million of restricted cash and cash
equivalents and $46.9 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 $.7 million.
The Partnership's outstanding long-term debt at September 30, 1999
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.
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<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description of Exhibit
----------- ----------------------
27 -- Article 5 Financial Data Schedule of
Sithe/Independence Power Partners, L.P. for the
quarter ended September 30, 1999.
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the quarter covered by
this report.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sithe/Independence Funding Corporation
--------------------------------------
(REGISTRANT)
November 15, 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, the
co-registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sithe/Independence Power Partners, L.P.
---------------------------------------
(REGISTRANT)
By: Sithe/Independence, Inc.
-------------------------
GENERAL PARTNER
November 15, 1999 /s/ Richard J. Cronin III
--------------------------------------
RICHARD J. CRONIN III
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE PARTNERSHIP'S FOR 10Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000899281
<NAME> SITHE/INDEPENDENCE FUNDING CORP.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,810
<SECURITIES> 0
<RECEIVABLES> 29,105
<ALLOWANCES> 0
<INVENTORY> 5,401
<CURRENT-ASSETS> 144,614
<PP&E> 781,095
<DEPRECIATION> (91,611)
<TOTAL-ASSETS> 847,157
<CURRENT-LIABILITIES> 61,547
<BONDS> 632,286
0
0
<COMMON> 0
<OTHER-SE> 145,396
<TOTAL-LIABILITY-AND-EQUITY> 847,157
<SALES> 300,366
<TOTAL-REVENUES> 300,366
<CGS> 232,481
<TOTAL-COSTS> 232,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,140
<INCOME-PRETAX> 26,864
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,864
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,864
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
