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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 and
Exchange Act of 1934
For the fiscal year ended December 31, 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)
Registrant's telephone number, including area code: (212) 351- 0000
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)
Registrant's telephone number, including area code: (212) 351-0000
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. / /
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SITHE/INDEPENDENCE FUNDING CORPORATION
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
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PART 1 PAGE
<S> <C>
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
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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 and, at December 31, 1999, fully-owned, had interests in or leased
through its subsidiaries, 49 operating power plants in North America,
including the Project, having an aggregate average net capacity of 8,074 MW.
During the first quarter of 2000, Sithe Energies announced that it had entered
into a definitive agreement to sell to Reliant Energy Power Generation, Inc.,
21 power plants purchased from GPU Inc. in November 1999 with an aggregate
average net capacity of 4,276 MW. Upon the closing of this transaction which
is expected in the second quarter of 2000, Sithe Energies will have 28 power
plants in operation in North America representing an aggregate average net
capacity of approximately 3,798 MW. In addition, At December 31, 1999, Sithe
Energies had six projects under advanced development representing
approximately 4,230 net MW.
As of December 31, 1999, Sithe Energies was privately owned 61.4% by
Vivendi, one of France's leading municipal services companies and the world's
largest water distribution company, 29.6% by Marubeni Corporation, one of
Japan's largest trading companies and 9.0% 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.
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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 293-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.
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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 $607,754, 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
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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"), which began on November 1, 1999, 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 is 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 is also 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.)
On March 9, 1999, Sithe Energies (on behalf of the Partnership), Con
Edison and the staff of the New York State Department of Public Service entered
into a settlement agreement concerning the future method for determining Actual
Con Edison Avoided Energy Costs, which was approved by the New York State Public
Service Commission (the "PSC") on March 31, 1999 (the "Settlement"). Under the
Settlement, the parties agreed, among other things, to transition to
market-based energy buy-back rates within sixty days after the establishment of
the New York Independent System Operator ("NYISO") and the commencement of a
competitive energy market in New York State. Under the Settlement, Actual Con
Edison Avoided Energy Costs would be measured as the applicable market clearing
prices for each hour in which energy is sold to Con Edison.
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 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.
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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 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 NYISO. To the extent that Niagara Mohawk has excess capacity on its
transmission system, it has agreed to accommodate the Project's additional
transmission requirements above 853 MW. Upon the commencement of the NYISO in
November 1999, the NYISO is charging the Partnership for transmission losses
associated with the transmission of electricity through the interconnection
facilities to the NYISO. This charge, which is included in operations and
maintenance expense in the Partnership's statement of operations, is
calculated based on the NYISO's determination of the marginal loss component
of the locational-based marginal price.
Since the commencement of the NYISO in November 1999, the NYISO has
charged the Partnership for transmission losses associated with its transmission
of electric energy to the Con Edison Interconnection. In a filing made with the
Federal Energy Regulatory Commission (the "FERC") on August 3, 1999, by
Niagara Mohawk and the other Member Systems of the New York Power Pool
(the "NYPP"), the NYPP sought authority to amend the Partnership's Transmission
Services Agreement. The unilateral amendments, among other things, included
amendments which permit the NYISO to charge the Partnership for transmission
losses. In orders issued on September 30, 1999 and January 14, 2000, the FERC
permitted the amendments to become effective, subject to refund, and set the
reasonableness of the amendments for an evidentiary hearing. The Partnership
has protested the NYPP's amendments to the Transmission Services Agreement and
is currently challenging the lawfulness of the amendments, including the NYISO's
charges for transmission losses, in the ongoing administrative hearing.
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Prior to commencement of the NYISO, Niagara Mohawk was charging the
Partnership for transmission losses and on March 29, 1995, the Partnership filed
a petition with the FERC alleging that Niagara Mohawk had overcharged 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 have been calculated on
an average basis. The Partnership has been recording its transmission expense
at the disputed, higher rate. As of December 31, 1999, the Partnership
estimates it was owed more than $12.3 million for these 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.
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, which ended on December 31, 1999, the price paid by the
Partnership for 116,000 MMBtus of natural gas per day (the "Tier I" gas) was
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 maintains a notional tracking account to
account for differences between the contract price and spot gas prices, except
that there was no such tracking with respect to the Tier I gas during the
first five years of the Gas Supply Agreement, which ended on December 31, 1999.
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
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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.
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, have moved toward deregulating
the electric power markets with the creation of a regional market power pools.
The NYISO commenced operation in November 1999 and at this point, it is
impossible to predict what, if any, impact that the deregulated energy market
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 293-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;
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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.
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, 1999, the Operator employed 45 individuals in
connection with the Project.
LEGAL PROCEEDINGS
Other than the Partnership's petition for review of the FERC order,
which was remanded back to the FERC by 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, the 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
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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 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
11
<PAGE>
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.
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 1999.
12
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
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, 1999
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,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue $ 382,084 $ 313,739 $ 355,432 $ 379,024 $ 335,844
Operating income 72,049 53,165 94,672 120,211 89,886
Non-operating income and (expense):
Interest expense (60,044) (61,943) (62,369) (63,441) (64,261)
Interest and other income, net 5,498 6,746 7,026 4,187 4,525
Income (loss) before cumulative
effect of change in accounting
for major overhaul costs 17,503 (2,032) 39,329 60,957 30,150
Cumulative effect of change in account-
ing for major overhaul costs 3,775 -- -- -- --
Net income (loss) 21,278 (2,032) 39,329 60,957 30,150
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Property, plant and equipment $ 685,762 $ 702,021 $ 713,274 $ 723,188 $ 737,716
Total assets 813,469 811,120 838,047 867,471 845,888
Long-term debt 622,638 641,934 669,345 688,201 698,405
Partners' capital 139,810 118,532 120,564 123,699 62,734
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -- 1999, 1998 AND 1997
Revenue for 1999 increased from 1998 by $68.3 million (22%) due to
higher net generation ($61.2 million) and higher energy rates ($7.1 million).
Unusually warm winter weather experienced in the region of the project during
1998 (the average temperature for the year was 3.96(degree)F, or 7.7%, above
the historical average and the warmest in the last 103 years) required the
Project to curtail 1998 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. No such weather-related
curtailments occurred during 1999. Furthermore, as a result of projects
completed in 1999 for the purpose of increasing thermal energy deliveries to
Alcan, the Partnership believes that it will be able to maintain the Project's
QF status without curtailing future electricity generation even if 1998-type
weather patterns were to reoccur. These factors have also resulted in a $18.6
million increase in accounts receivable at December 31, 1999 from December 31,
1998.
Consistent with positions expressed by the Securities and Exchange
Commission, in 1999, the Partnership changed its method of accounting for
major overhaul costs for major equipment not covered by a service agreement
(the "Non-covered Units"), whereby the Partnership expenses such costs as
incurred. Previously, the Partnership normalized major overhaul costs by
establishing maintenance reserves during the operating period prior to the
major overhaul. As a result of this change in accounting for major overhaul
costs in 1999, the Partnership reversed to income approximately $3.8 million,
reported as a cumulative effect of a change in accounting on the consolidated
statement of operaitons, representing the balance of the major overhaul
reserve for Non-covered Units as of January 1, 1999.
Cost of sales for 1999 increased from 1998 by $49.5 million (19%) due
largely to higher fuel costs ($41.1 million) as well as a contractual price
increase under the Partnership's long-term equipment maintenance contract. The
higher fuel cost is 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 electricity generation during 1999. These factors have
also resulted in an $11.4 million increase in accounts payable at December 31,
1999 from December 31, 1998.
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 winter weather in the
region of the Project during 1998 as discussed above, the Partnership was
required to curtail electricity generation 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.
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, offset by 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 Project's gas turbines, steam
turbines and generators, which are subject to a service agreement with General
Electric Company.
Interest expense for 1999 and 1998 decreased by $1.9 million (3.1%) and
$.4 million (.7%) from 1998 and 1997, 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
14
<PAGE>
of December 31, 1999, letters of credit aggregating $13.5 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, 1999, the Partnership had
restricted funds and investments aggregating $75.7 million, including the
Project's cumulative cash debt service reserve and major overhaul reserve of
$33.0 million and $5.7 million, respectively. In addition, these restricted
funds included $24.5 million that was utilized for January 2000 operating
expenses, $9.9 million in the Partnership distribution account and the balance
reserved for the June 2000 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 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. In 1998, the Partnership initiated a program
to address the Project's Year 2000 exposure. The program was completed in 1999
and the Partnership experienced no material adverse effects related to the
arrival of 2000.
The costs of the Year 2000 program were approximately $1.0 million
including approximately $.1 million in the fourth quarter of 1999. These costs
were funded from the normal operating cash flows of the Partnership and did not
have a material adverse impact on the Partnership's financial position or
results of operations.
The Partnership believes that the remediation efforts with respect to
its software and hardware systems were successful. However, there remains the
possibility of latent Year 2000 problems in systems at the Project or of third
parties which could cause a failure in the Partnership's systems. Such failure
could result in an interruption in, or failure of, certain normal business
operations, which could have a material adverse impact on the Partnership's
financial position or results of operations. The Partnership believes that such
an occurrence is unlikely.
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.
15
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership has investments in financial instruments subject to
interest rate risk consisting of $40.1 million of restricted cash and cash
equivalents and $35.6 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 $.6 million.
The Partnership's outstanding long-term debt at December 31, 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.
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 54 Chairman of the Board, Chief
Executive Officer and President
Richard J. Cronin III 53 Chief Financial Officer, Senior
Vice President and Director
Ralph J. Grutsch 67 Executive Vice President for Operations
Sandra J. Manilla 48 Treasurer and Vice President
W. Harrison Wellford 60 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.
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.
Ralph J. Grutsch is Executive 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
17
<PAGE>
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.
Harrison Wellford is a partner in the Washington D.C. office of the law
firm of Latham & Watkins where he is the firm's International Chairman. He is
also a Founder of the National Independent Energy Producers. He is a director
and treasurer of the Friends of Art and Preservation in Embassies, and a
director of APBI Interactive Systems. Mr. Wellford was a partner at the law firm
of Olwine, Chase, O'Donnell & Weyher from 1989 through 1991; and prior to that
time period, he was a partner at the law firm of Wellford, Wegman and Hoff from
1981 through 1988. In addition, Mr. Wellford was executive Director of the
President's Reorganization Project and Executive Associate Director of the
Office of Management and Budget in the Executive Office of the President from
1977 to 1981. Mr. Wellford also served as a White House transition advisor to
Presidents-elect Carter (1976) and Clinton (1992) and Executive Branch
transition director in the Carter - Reagan Presidential transition (1980 -
1981).
18
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
No cash compensation or non-cash compensation was paid in 1999 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 received an annual fee of
$607,754 in 1999, 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%
335 Madison Avenue
New York, NY 10017
Partnership Interest Sithe Energies, Inc. Limited Partner 45%
335 Madison Avenue
New York, NY 10017
Partnership Interest Sithe Energies U.S.A., Inc. Limited Partner 44%
335 Madison Avenue
New York, NY 10017
Partnership Interest Mitex, Inc. Limited Partner 10%
335 Madison 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 received an annual fee of $607,754 in 1999,
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.
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, 1999.
(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 *
18 ---- Deloitte and Touche LLP letter re: change in accounting
principles*******
27 ---- Article 5 Financial Data Schedule of the Partnership for
the year ended December 31, 1999*******
- ----------------
* 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 Power Partners, L.P.
--------------------------------------
(REGISTRANT)
By: Sithe/Independence, Inc.
----------------------------------
General Partner
March 30, 2000 /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.
<TABLE>
<S> <C> <C>
/s/ William Kriegel Chief Executive Officer, President March 30, 2000
- ---------------------------- and Director (Principal Executive
William Kriegel Officer)
/s/ Richard J. Cronin III Chief Financial Officer, Senior March 30, 2000
- ---------------------------- Vice President and Director
Richard J. Cronin III (Principal Financial and
Accounting Officer)
/s/ W. Harrison Wellford Director March 30, 2000
- ----------------------------
W. Harrison Wellford
</TABLE>
26
<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 30, 2000 /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.
<TABLE>
<S> <C> <C>
/s/ William Kriegel Chief Executive Officer, President March 30, 2000
- ---------------------------- and Director (Principal Executive
William Kriegel Officer)
/s/ Richard J. Cronin III Chief Financial Officer, Senior March 30, 2000
- ---------------------------- Vice President and Director
Richard J. Cronin III (Principal Financial and
Accounting Officer)
/s/ W. Harrison Wellford Director March 30, 2000
- ----------------------------
W. Harrison Wellford
</TABLE>
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, 1999
and 1998 .........................................................F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997 ..........................F-4
Consolidated Statements of Partners' Capital for
the Years Ended December 31, 1999, 1998 and 1997 ................F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 ..........................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 (collectively, the "Partnership") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, partners' capital and
cash flows for each of the three years in the period ended December 31, 1999.
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 audits 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 the Partnership as of December
31, 1999 and 1998 and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 1999, the Partnership changed its method of accounting for major
overhaul costs.
Deloitte and Touche LLP
New York, New York
March 3, 2000
F-2
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,076 $ 2,147
Restricted cash and cash equivalents 40,112 39,522
Restricted investments 35,621 38,180
Accounts receivable - trade 30,315 11,738
Fuel inventory and other current assets 3,113 2,670
--------- ---------
TOTAL CURRENT ASSETS 115,237 94,257
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land 5,010 5,010
Electric and steam generating facilities 777,356 774,057
--------- ---------
782,366 779,067
Accumulated depreciation (96,604) (77,046)
--------- ---------
685,762 702,021
DEBT ISSUANCE COSTS 7,213 8,197
OTHER ASSETS 5,257 6,645
--------- ---------
TOTAL ASSETS $ 813,469 $ 811,120
========= =========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Trade payables $ 27,945 $ 16,574
Accrued interest 173 173
Current portion of long-term debt 19,296 27,411
Accrued construction costs and retentions 0 1,476
--------- ---------
TOTAL CURRENT LIABILITIES 47,414 45,634
LONG-TERM DEBT:
7.90% secured notes due 2002 63,190 82,486
8.50% secured bonds due 2007 150,839 150,839
9.00% secured bonds due 2013 408,609 408,609
--------- ---------
622,638 641,934
OTHER LIABILITIES 3,607 5,020
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 139,810 118,532
--------- ---------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 813,469 $ 811,120
========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUE $ 382,084 $ 313,739 $ 355,432
--------- --------- ---------
COST OF SALES:
Fuel 242,102 201,016 207,713
Operations and maintenance 48,375 39,487 33,779
Depreciation 19,558 20,071 19,268
--------- --------- ---------
310,035 260,574 260,760
--------- --------- ---------
OPERATING INCOME 72,049 53,165 94,672
NON-OPERATING INCOME (EXPENSES):
Interest expense (60,044) (61,943) (62,369)
Interest and other income, net 5,498 6,746 7,026
--------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR MAJOR OVERHAUL COSTS 17,503 (2,032) 39,329
Cumulative effect of change in accounting for major
overhaul costs 3,775 0 0
--------- --------- ---------
NET INCOME (LOSS) $ 21,278 $ (2,032) $ 39,329
========= ========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNERS CAPITAL
--------- --------- ---------
<S> <C> <C> <C>
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
Net income and total comprehenisve income 213 21,065 21,278
--------- --------- ---------
BALANCE, DECEMBER 31, 1999 $ 1,198 $ 138,612 $ 139,810
========= ========= =========
</TABLE>
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,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 21,278 $ (2,032) $ 39,329
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 19,558 20,071 19,268
Cumulative effect of change in accounting
for major overhaul costs (3,775) 0 0
Amortization of deferred financing costs 984 1,015 1,053
Changes in operating assets and liabilities:
Accounts receivable - trade (18,577) 21,646 6,398
Fuel inventory and other current assets (443) (798) 1,015
Other assets 1,388 (1,660) (1,662)
Trade payables and other current liabilities 11,371 (4,249) (3,441)
Accrued interest payable 0 (1) 0
Other liabilities 2,362 (2,822) (3,840)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,146 31,170 58,120
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction costs (4,775) (7,785) (18,160)
Restricted funds 1,969 (2,385) 12,705
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,806) (10,170) (5,455)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on secured notes (27,411) (18,856) (10,202)
Distribution to partners 0 0 (42,464)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (27,411) (18,856) (52,666)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,929 2,144 (1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,147 3 4
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,076 $ 2,147 $ 3
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 59,060 $ 60,929 $ 61,316
</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 and, at
December 31, 1999, fully-owned, had interests in or leased through its
subsidiaries, 49 operating power plants in North America, including the
Project, having an aggregate average net capacity of 8,074 MW. During the
first quarter of 2000, Sithe Energies announced that it had entered into a
definitive agreement to sell to Reliant Energy Power Generation, Inc., 21
power plants purchased from GPU Inc. in November 1999 with an aggregate
average net capacity of 4,276 MW. Upon the closing of this transaction which
is expected in the second quarter of 2000, Sithe Energies will have 28 power
plants in operation in North America representing an aggregate average net
capacity of approximately 3,798 MW. In addition, at December 31, 1999, Sithe
Energies had six projects under advanced development representing
approximately 4,230 net MW.
Sithe Energies is presently privately owned 61.4% by Vivendi, 29.6% by
Marubeni Corporation and 9.0% 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 trading 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 1999 consisted of $382.1 million from sales of electricity
and steam with Con Edison, Alcan and Niagara Mohawk accounting for 91%, 6% and
3%, respectively. 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.
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
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
F-8
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
million of major overhaul reserves for the Covered Units that had been
established in prior years under that policy.
Consistent with positions expressed by the Securities and Exchange
Commission, in 1999, the Partnership changed its method of accounting for
major overhaul costs for major equipment not covered by a service agreement
(the "Non-covered Units"), whereby the Partnership expenses such costs as
incurred. Previously, the Partnership normalized major overhaul costs by
establishing maintenance reserves during the operating period prior to the
major overhaul. As a result of this change in accounting for major overhaul
costs in 1999, the Partnership reversed to income approximately $3.8 million,
reported as the cumulative effect of a change in accounting on the
consolidated statement of operations, representing the balance of the major
overhaul reserve for Non-covered Units as of January 1, 1999.
Interim results of operations for the first three quarters of 1999 have
been restated, giving effect to this change in accounting as if it had occurred
on January 1, 1999, as follows (unaudited, in thousands):
<TABLE>
<CAPTION>
For the quarter ended
--------------------------------
March 31, June 30, Sept. 30,
1999 1999 1999
------- ------- -------
<S> <C> <C> <C>
AS RESTATED
Income (loss) before cumulative
effect of change in accounting for
major overhaul costs $18,637 $ (592) $ 9,125
Cumulative effect of change in
accounting for major overhaul
costs 3,775 0 0
------- ------- -------
Net income (loss) $22,412 $ (592) $ 9,125
======= ======= =======
AS PREVIOUSLY REPORTED
Net income (loss) $18,535 $ (694) $ 9,023
======= ======= =======
</TABLE>
Proforma results of operations for 1998 and 1997, assuming the change
in accounting for major overhaul costs had been applied retroactively, would
have been a net loss of $1.5 million and net income of $39.1 million,
respectively.
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.
F-9
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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: $19.3 million in 2000, $32.4 million in 2001, $30.8 million in 2002,
$28.8 million in 2003 and $31.3 million in 2004. 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, 1999, letters of credit aggregating
$13.5 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, 1999, the
Partnership had restricted funds aggregating $75.7 million, including the
Project's cumulative cash debt service reserve and major overhaul reserve of
$33.0 million and $5.7 million, respectively. In addition, these restricted
funds included $24.5 million that was utilized for January 2000 operating
expenses, $9.9 million in the Partnership distribution account and the balance
reserved for the June 2000 debt service payment. Funds in the Partnership
distribution account are available as additional operating
F-10
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1999 or 1998 because, although project
reserve accounts were funded to the required levels, the required debt service
coverage ratio was not met.
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,
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, 1999
and 1998 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,
1999 and 1998 were $673.4 million and $762.2 million, respectively, based on
quoted market prices, which were $31.5 million and $92.9 million higher,
respectively, than the historical carrying values of $641.9 million and $669.3
million, respectively.
DERIVATIVE INSTRUMENTS
The Financial Accounting Standards Board has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires all derivatives to be recognized as either assets or liabilities on the
balance sheet and be measured at fair value.
F-11
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes in such fair value are required to be recognized in earnings to the
extent that the derivatives are not effective as hedges. The provisions of SFAS
133, as amended, are effective for fiscal years beginning after June 15, 2000,
and are effective for all quarters beginning after January 1, 2001. 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 Federal
Energy Regulatory Commission (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, 1999, the Partnership estimates
it was owed more than $12.3 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.
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: $165.4 million in 2000,
$164.9 million in 2001, $164.1 million in 2002 and $165.3 million in both 2003
and 2004.
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
F-12
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 pre-determined 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, 1999, the Partnership estimates
that the balance in the tracking account amounted to approximately $171.8
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.
OTHER
On September 8, 1994, the New York State Public Service Commission
(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.
F-13
<PAGE>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $607,754 annual fee, which escalates at 5% per annum, for
management and administrative services, provided by Sithe Power Services to the
Partnership.
F-14
<PAGE>
Exhibit 18
Sithe/Independence Power Partners, L.P.
335 Madison Avenue, 28th Floor
New York, New York 10017
Dear Sirs:
We have audited the consolidated financial statements of Sithe/Independence
Power Partners, L.P. and its subsidiary (collectively, the "Partnership") as
of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, included in your Annual Report on Form 10-K for the
year ended December 31, 1999 to the Securities and Exchange Commission, and
have issued our report thereon dated March 3, 2000. Note 2 to such financial
statements contains a description of your adoption during the year ended
December 31, 1999 of the expense as incurred method of accounting for major
overhaul costs. In our judgement, such change is to an alternative accounting
principle that is preferable under the circumstances.
Yours truly,
Deloitte and Touche LLP
New York, New York
March 3, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE PARTNERSHIP'S FORM 10Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000899281
<NAME> SITHE/INDEPENDENCE FUNDING CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,076
<SECURITIES> 0
<RECEIVABLES> 30,315
<ALLOWANCES> 0
<INVENTORY> 3,113
<CURRENT-ASSETS> 115,237
<PP&E> 782,366
<DEPRECIATION> (96,604)
<TOTAL-ASSETS> 813,469
<CURRENT-LIABILITIES> 47,414
<BONDS> 622,638
0
0
<COMMON> 0
<OTHER-SE> 139,810
<TOTAL-LIABILITY-AND-EQUITY> 813,469
<SALES> 382,084
<TOTAL-REVENUES> 382,084
<CGS> 310,035
<TOTAL-COSTS> 310,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,044
<INCOME-PRETAX> 17,503
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,775
<NET-INCOME> 21,278
<EPS-BASIC> 0
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