10-Q 1 a2030655z10-q.txt FORM10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the Quarterly Period Ended September 30, 2000 [ ] 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 incorporation or organization) Identification Number) 335 MADISON AVENUE, NEW YORK, NY 10017 (Address of principal executive offices) (Zip code) (212)-351-0000 (Registrant's telephone number, including area code) SITHE/INDEPENDENCE POWER PARTNERS, L.P. (Exact name of registrant as specified in its charter) DELAWARE 33-0468704 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 335 MADISON AVENUE, NEW YORK, NY 10017 (Address of principal executive offices) (Zip code) (212)-351-0000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No SITHE/INDEPENDENCE POWER PARTNERS, L.P. SITHE/INDEPENDENCE FUNDING CORPORATION

-2- SITHE/INDEPENDENCE POWER PARTNERS, L.P. (A DELAWARE LIMITED PARTNERSHIP) CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

See notes to condensed consolidated financial statements -3- SITHE/INDEPENDENCE POWER PARTNERS, L.P. (A DELAWARE LIMITED PARTNERSHIP) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)

See notes to condensed consolidated financial statements -4- SITHE/INDEPENDENCE POWER PARTNERS, L.P. (A DELAWARE LIMITED PARTNERSHIP) CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (UNAUDITED) (IN THOUSANDS)

See notes to condensed consolidated financial statements - 5 - SITHE/INDEPENDENCE POWER PARTNERS, L.P. (A DELAWARE LIMITED PARTNERSHIP) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

See notes to condensed consolidated financial statements - 6 - SITHE/INDEPENDENCE POWER PARTNERS, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. THE PARTNERSHIP Sithe/Independence Power Partners, L.P. (the "Partnership"), in which Sithe Energies, Inc. and certain of its direct and indirect wholly-owned subsidiaries (the "Partners") hold all the partnership interests, is a Delaware limited partnership that was formed in November 1990 for a term of 50 years to develop, construct and own a gas-fired cogeneration facility with a design capacity of approximately 1,000 megawatts ("MW") (the "Project") located in the Town of Scriba, County of Oswego, New York. The Project commenced commercial operation for financial reporting purposes on December 29, 1994. For the first eight months of 2000, the majority of the capacity and electric energy generated by the Project was sold to Consolidated Edison Company of New York, Inc. ("Con Edison") and Alcan Aluminum Corporation ("Alcan") with the remainder of the electric energy sold to Niagara Mohawk Power Corporation. As discussed in Note 3, effective September 1, 2000, while the majority of the capacity generated by the Project continues to be sold to Con Edison, the majority of the electric energy generated by the Project is being sold into the electric energy markets administered by the New York Independent System Operator, Inc. (the "ISO Administered Markets"). 2. BASIS OF PRESENTATION The accompanying condensed consolidated balance sheets at September 30, 2000 and December 31, 1999 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000 and 1999 should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 1999 for the Partnership and its wholly-owned subsidiary, Sithe/Independence Funding Corporation ("Sithe Funding"). The results of operations for the three and nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the full year. The unaudited financial information at September 30, 2000 and for the three and nine months ended September 30, 2000 and 1999 contains all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the financial position and operating results for such periods. Since the commencement of the ISO Administered Markets in November 1999, revenue is recorded net of payments made by the Partnership to the New York Independent System Operator for transmission losses. Consistent with positions expressed by the Securities and Exchange Commission (the "SEC"), 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, the Partnership reversed to income approximately $3.8 million, reported as the cumulative effect of a change in accounting on the 1999 consolidated statement of operations, representing the balance of the major overhaul reserve for Non-covered Units as -7- of January 1, 1999. Results of operations for the nine months ended September 30, 1999 have been restated, giving effect to this change in accounting as if it had occurred on January 1, 1999. 3. AMENDMENT TO CON EDISON ENERGY PURCHASE AGREEMENT Pursuant to the Amended and Restated Energy Purchase Agreement dated as of September 1, 2000 between the Partnership and Con Edison ("the Amended EPA"), Con Edison is obligated to purchase 740 MW of the Project's capacity through October 31, 2014. The Partnership has the right to supply the capacity from sources other than the Project so long as such capacity satisfies applicable New York State installed capacity requirements. Effective September 1, 2000, Con Edison is no longer obligated to purchase from the Partnership and the Partnership is no longer obligated to sell to Con Edison any of the electrical energy produced by the Project, and all of the electrical energy from the Project, except for the portion being sold to Alcan, is being sold into the ISO Administered Markets. The Amended EPA also eliminated any obligation that the Project remain a qualifying facility ("QF") under federal law. Effective September 1, 2000, the monthly capacity payment received by the Partnership is equal to the sum of (1) $4,748,174 per month plus (2) $5,500,000 per month escalating with inflation. The monthly capacity payment is reduced by an amount equal to 6.25% of the applicable locational based marginal price in the ISO Administered Markets for energy delivered at the Pleasant Valley bus for all hours of such month multiplied by the relevant monthly quantity of megawatt hours set forth on a schedule to the Amended EPA. The monthly capacity payments are also subject to adjustment in the event that the amount of installed capacity provided to Con Edison is less than 740 MW. The Partnership has also agreed to make certain payments to Con Edison during the term of the Amended EPA which are subordinated to the notes and bonds issued by Sithe Funding. Prior to the execution of the Amended EPA, the contract term was for 40 years, through October 31, 2034 and assuming an equivalent availability ratio each month of at least 93.6%, the Partnership was entitled to (a) a monthly capacity payment equal to $6.7455 per kilowatt per month ("KW") for 740,000 KW or $59,900,040 per year minus the refund for curtailment of $2,921,953 per year resulting in a net monthly capacity payment of $4,748,174, (b) a payment for operation and maintenance at a price equal to $0.01/kilowatt-hour ("kwh") during calendar year 2000 escalating thereafter with inflation for the first 6.6 billion kwh delivered in each annual period or $66,000,000, resulting in a net monthly payment for operation and maintenance of $5,500,000 escalating with inflation and (c) energy payments at a price equal to 93.75% of Con Edison's avoided energy costs (which effective January 17, 2000 was determined by reference to the locational based marginal price in the ISO Administered Markets for energy at the Pleasant Valley bus). Under the Amended EPA, the monthly capacity payment, the refund for curtailment, the payment for operation and maintenance and the discount on energy that were applicable prior to the execution of the Amended EPA are all incorporated directly into the monthly capacity payment as described above. Since the Partnership is also free to sell the energy generated by the Project into the ISO Administered Markets at 100% of the applicable locational based marginal price for energy, the Partnership believes that the Amended EPA will not result in a material change in the Partnership's revenues from the sale of capacity and energy. The Partnership also believes that the amount of the subordinated payments to Con Edison under the Amended EPA are more than offset by the elimination of the Project's obligation to remain a QF under federal law, the elimination of Con Edison's curtailment rights and the Project's increased operating flexibility. -8- 4. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in the Financial Statements ("SAB 101"). The bulletin addresses the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues and must be implemented no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Partnership will implement SAB 101 during the fourth quarter of fiscal 2000 and the Partnership has determined that the implementation of SAB 101 will not have any impact on the results of operations or financial position of the Partnership. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("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. 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 all quarters beginning January 1, 2001. Management is currently evaluating what impact the adoption of SFAS No. 133 will have on the Partnership's results of operations and financial position. The Partnership has not used derivatives historically and as such, the adoption of SFAS No. 133 is not expected to have a material impact on the Partnership's results of operations and financial position. 5. COMMITMENTS AND CONTINGENCIES Reference is made to Note 5 of the Partnership's audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 1999 for information concerning the Partnership's method of recognizing fuel expense and the maintenance of the notional tracking account under the Partnership's 20-year gas supply agreement with Enron Power Services, Inc. ("Enron"). The tracking account accounts for differences between the contract price and spot gas prices and Enron has been given a subordinated, security interest in the plant to secure any tracking balance. Because of the significant spike in spot gas prices during the first nine months of 2000, which more than offset the effects of the higher electrical energy prices received by the Partnership during such period and upon which contract gas prices are based, the tracking account balance increased during the period by $71.7 million to approximately $243.3 million as of September 30, 2000. -9- SITHE/INDEPENDENCE POWER PARTNERS, L.P. (A DELAWARE LIMITED PARTNERSHIP) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenue for the third quarter of 2000 of $121.8 million was $22.3 million (22%) higher than in the corresponding period of last year due primarily to higher energy rates received since January 17, 2000 when pricing for the majority of the Project's electrical energy began to be based on locational based marginal prices as determined by the New York Independent Systems Operator. Revenue for the nine months ended September 30, 2000 of $315.0 million was $14.6 million (5%) higher than in the corresponding period of last year due to higher energy rates partially offset by lower electric generation due to a scheduled Spring major overhaul outage and an unplanned generator outage which occurred during the second quarter of 2000. See Note 3 of the Notes to Condensed Consolidated Financial Statements for information concerning an amendment to the Con Edison Energy Purchase Agreement that became effective on September 1, 2000. Cost of sales for the third quarter and nine months ended of $73.1 million and $206.6 million, respectively, was $4.1 million (5%) and $25.5 million (11%), respectively, lower than in the corresponding period of last year, largely due to a decrease in fuel expense resulting from a scheduled contractual change under the Partnership's long-term gas supply agreement, effective January 1, 2000, in the method of pricing fuel associated with energy deliveries to Con Edison and the ISO Administered Markets from fixed prices to lower variable prices based on the prices paid by Con Edison and the ISO Administered Markets to the Partnership for capacity and electric energy. Interest expense for the third quarter and nine months ended September 30, 2000 of $14.3 million and $43.5 million, respectively, was $.5 million (4%) and $1.6 million (4%), respectively, lower than in the corresponding periods of last year as a result of lower outstanding amounts of long-term debt. For the third quarter and nine months ended September 30, 2000, other income, net of $1.6 million and $4.0 million, respectively, consisted of interest income of $1.5 million and $4.5 million, respectively, and unrealized gains on restricted investments of $.1 million in the third quarter of 2000 and unrealized losses on restricted investments of $.5 million in the first nine months of 2000. Other income, net for the corresponding periods of 1999 consisted entirely of interest income. 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 (the "Securities") and $60 million of capital contributions by the Partners. In addition, under a credit facility obtained by the Partners, one or more letters of credit may be issued in connection with their obligations pursuant to certain Project contracts, and, as of September 30, 2000, 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 September 30, 2000, the Partnership had -10- restricted funds and investments aggregating $120.2 million, including the Project's cumulative cash debt service reserve and major overhaul reserve of $33.0 million and $6.0 million, respectively. In addition, these restricted funds included $25.5 million that was utilized for October 2000 operating expenses, $.6 million in the Partnership distribution account and the balance reserved for the December 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 is precluded from making distributions to Partners unless project reserve accounts are funded to specified levels and unless the required debt service coverage ratio is met. On June 16, 2000, the Partnership made a distribution to its Partners in the amount of $31.6 million. 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. FORWARD-LOOKING STATEMENTS Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934. The words "anticipate", "believe", "expect", "estimated" and similar expressions generally identify forward-looking statements. While the Partnership believes in the veracity of all statements made herein, forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by the Partnership, are inherently subject to significant business, economic and competitive uncertainties and contingencies, the price of natural gas and the demand for and price of electricity. These uncertainties and contingencies could cause the Partnership's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Partnership. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership has investments in financial instruments subject to interest rate risk consisting of $91.0 million of restricted cash and cash equivalents and $29.2 million of restricted investments. In the case of restricted cash and cash equivalents, due to the short duration of these financial instruments, a 10% immediate change in interest rates would not have a material effect on the Partnership's financial condition. In the case of restricted investments, the resulting potential decrease in fair value from a 10% immediate change in interest rates would be approximately $.3 million. The Partnership's outstanding long-term debt at September 30, 2000 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. -11- PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT NO. DESCRIPTION OF EXHIBIT 27 ---- Article 5 Financial Data Schedule of Sithe/Independence Power Partners, L.P. for the quarter ended September 30, 2000. (b) Reports on Form 8-K: No report on Form 8-K was filed during the quarter covered by this report. -12- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SITHE/INDEPENDENCE FUNDING CORPORATION (REGISTRANT) November 14, 2000 /S/ THOMAS M. BOEHLERT -------------------------------------- THOMAS M. BOEHLERT CHIEF FINANCIAL OFFICER AND SENIOR VICE PRESIDENT (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, the co-registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SITHE/INDEPENDENCE POWER PARTNERS, L.P. (REGISTRANT) By: SITHE/INDEPENDENCE, INC. GENERAL PARTNER November 14, 2000 /S/ THOMAS M. BOEHLERT ----------------------- THOMAS M. BOEHLERT CHIEF FINANCIAL OFFICER AND SENIOR VICE PRESIDENT (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) -13-

SITHE INDEPENDENCE FUNDING CORP 10-Q