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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 1$(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, 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 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 I5(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, 2000
PART 1 PAGE
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ITEMS 1, 2 AND 3. Business, Properties and Legal Proceedings 3
ITEM 4. Submission of Matters to a Vote of Security Holders 13
PART II
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ITEM 5. Market for the Registrant's Common Equity and
Related Stockholder Matters (Not applicable) --
ITEM 6. Selected Financial Data 14
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 17
ITEM 8. Financial Statements and Supplementary Data 18
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
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ITEM 10. Directors and Executive Officers of the Registrants 18
ITEM 11. Executive Compensation 20
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 20
ITEM 13. Certain Relationships and Related Transactions 21
PART IV
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ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
Signatures 26
2
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, 2000, fully-owned, had interests in or leased
through its subsidiaries, 28 operating power plants in North America, including
the Project, having an aggregate average net capacity of 3,768 MW. In addition,
at December 31, 2000, Sithe Energies had five projects under advanced
development representing approximately 3,340 net MW and four projects under
construction representing approximately 2,630 net MW.
As of December 31, 2000, Sithe Energies was privately owned 49.9% by
Exelon Fossil Holdings, Inc. ("Exelon"), a wholly owned subsidiary of Exelon
Corporation, 34.2% by Vivendi Universal, SA ("Vivendi"), 14.9% by Marubeni
Corporation and 1.0% by management.
Sithe Energies owns, directly or indirectly, 100% of the partnership
interests in the Partnership. The following chart sets forth the organizational
structure of the Partners in the Partnership and of the other affiliates of
Sithe Energies involved with the Partnership.
3
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, Exelon, Vivendi or Marubeni or any affiliate of Sithe Energies,
Exelon, 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.
4
Prior to September 1, 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 with the remainder of the
electric energy sold to Niagara Mohawk Power Corporation ("Niagara Mohawk").
Effective September 1, 2000, while the majority of the capacity of 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" or the "NYISO") with the remainder continuing to
be sold to Niagara Mohawk and Alcan. The electric energy sold to Con Edison
was 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 Corp., 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 to Con Edison, Niagara
Mohawk, the ISO Administered Markets 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 $638,142, 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
Prior to September 1, 2000, the majority of the capacity and electric
energy generated by the Project was sold to Con Edison and Alcan with the
remainder of the electric energy sold to Niagara Mohawk. Effective September 1,
2000, while the majority of the capacity of the Project continues to be sold to
Con Edison, the majority of the electric energy generated by the Project is
being sold into the ISO Administered Markets with the remainder continuing to
be sold to Niagara Mohawk and Alcan.
5
CON EDISON
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 to Niagara
Mohawk and into the ISO Administered Markets. The Amended EPA also eliminated
any obligation that the Project remain a Qualifying Facility 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, New York 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
(the "Subordinated Payments") to Con Edison during the term of the Amended
EPA which are subordinated to the notes and bonds issued by Sithe Funding.
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 costs related to 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.
Prior to the execution of the Amended EPA, the contract term with
Con Edison was for 40 years through October 31, 2034 and Con Edison was
obligated to purchase 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 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 were 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 (which effective January 17, 2000 is determined by
reference to the locational based marginal price in the ISO Administered
markets for energy at the point where the Project's energy was delivered to
Con Edison prior to the Amended EPA (the "Pleasant Valley bus")) and 88.75%
of Actual Con Edison Avoided Energy Costs in years 21 through 40 of the
contract term. In addition to payments for electricity delivered to Con
Edison during the Second Period, Con Edison was 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
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month and (c) a fixed capacity charge equal to $6.7455/kilowatt ("KW"). During
the Second Period, Con Edison was 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 EPA.
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 and
commencement of the ISO Administered Markets in New York State, on November 17,
1999. Under the Settlement which took effect on January 17, 2000, the Actual Con
Edison Avoided Energy Costs are based on the locational based marginal price in
the ISO Administered markets for energy at the Pleasant Valley bus.
NIAGARA MOHAWK
Under the Niagara Mohawk Power Purchase Agreement (the "NIMO PPA"),
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 NIMO PPA 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 determined by the real time price at the Independence bus in the
ISO Administered Market. Niagara Mohawk has no right of first refusal for any
additional electricity or capacity to be sold by the Partnership.
ALCAN
Alcan, a subsidiary of Alcan Aluminum Limited, owns and operates an
aluminum production facility adjacent to the Project site. The Alcan facility
engages in the production and recycling of aluminum alloys and rolled aluminum,
which are used principally in the beverage container industry.
Pursuant to the terms of the Alcan Energy Sales Contract, the
Partnership has agreed for a period of 22 years from the commencement of
commercial operation of the Project to sell to Alcan up to 44 MW of the
Project's capacity and associated energy. In addition, the Partnership has
agreed to supply and, subject to the terms and provisions of the Alcan Energy
Sales Contract, Alcan has 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.
7
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. Since the
commencement of the ISO Administered markets in November 1999 and up to
September 1, 2000, the NYISO had charged the Partnership for transmission
losses associated with the transmission of electricity through the
interconnection facilities to the NYISO. This charge, which was recorded as a
reduction of revenue in the Partnership's statement of operations through
September 1, 2000, was calculated based on the NYISO's determination of the
marginal loss component of the locational-based marginal price. Effective
September 1, 2000 with the consummation of the Amended EPA, all the electric
energy generated by the Project is sold at the point where the Project
delivers energy to the NYISO (the "Independence bus") and as a result, the
Partnership no longer incurs a charge for transmission losses.
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.
Prior to commencement of the ISO Administered Markets, 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 had been recording its transmission expense at
the disputed, higher rate. As of December 31, 2000, 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
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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.
On February 23, 2001, the Partnership entered into a partial settlement
agreement (the "PSA") with Niagara Mohawk whereby Niagara Mohawk will pay the
Partnership $2.3 million representing partial settlement of claims for
transmission loss overcharges during the period of July 2, 1999 to November 17,
1999. The terms of the PSA also stipulate that the Interconnection Agreement be
amended to provide that the currently effective firm transmission rate will be
fixed at $1.76 KW per month for the period commencing on July 2, 1999 and ending
December 31, 2004. The PSA does not address the claims made for transmission
loss overcharges for the periods prior to July 2, 1999 and for November 18, 1999
to August 31, 2000 which will be settled by the FERC upon review of the petition
described above. The PSA is currently being reviewed by the FERC and becomes
binding on the parties to the PSA upon the FERC's approval.
The PSA noted above also has a provision for the partial settlement of
a previous complaint that Niagara Mohawk overcharged the Partnership for
construction costs related to the construction and upgrade of Niagara Mohawk's
transmission system (the "Interconnection Facilities") located at the Project.
The original complaint filed with the FERC by the Partnership sought
reimbursement of approximately $63.0 million for overcharges on construction and
upgrades made to the Interconnection Facilities for the purpose of connecting
the Project to the Interconnection Facilities. The terms of the PSA require
Niagara Mohawk to pay the Partnership $15.1 million (representing the full
fair-market value) to purchase a portion of the Interconnection Facilities from
the Partnership. A provision of this PSA also requires approval by the FERC
which is still pending.
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, 2000, 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 (which,
effective January 17, 2000 is determined by reference to the locational based
marginal price in the ISO Administered Markets for energy at the Pleasant Valley
bus), as well as the price paid by Con Edison to the Project for capacity. The
remaining 76,291 MMBtus of gas per day will be priced in relation to Niagara
Mohawk's "energy only" electric rate which is determined by the real time price
at the Independence bus in the ISO Administered Market.
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, 2000. The
tracking account is increased if the then current spot gas price is greater than
the contract price and is 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 or (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 as defined in the Gas Supply Agreement plus all incremental revenues.
If a positive balance exists in the tracking account at the
9
end of the contract term, the Partnership will be required to either pay the
balance in the tracking account or to convey to Enron Power Services an equity
ownership in the Project based on the ratio of the tracking account balance to
the plant's fair market value at such time.
GAS TRANSPORTATION AGREEMENTS
The Partnership has entered into gas transportation agreements with
seven pipeline companies in order to transport, on a firm basis, the natural gas
purchased pursuant to the Gas Supply Agreement. Each of the gas transportation
agreements entered into by the Partnership has a 20-year term from the Date of
Commercial Operation, and together the agreements will provide for sufficient
transportation capacity to supply the Project with all of its anticipated
natural gas requirements. In addition to Niagara Mohawk, the other parties to
the gas transportation agreements are Union Gas Limited, Panhandle Eastern Pipe
Line Company, ANR Pipeline Company, Empire State Pipeline, Great Lakes Gas
Transmission Limited Partnership and TransCanada Pipelines Limited.
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 and the unregulated wholesale generation
markets. In addition, a number of states, including New York, have moved toward
deregulating the electric power markets with the creation of regional market
power pools. The NYISO commenced operation in November 1999. It is not possible
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 to Con Edison, energy to
Alcan and Niagara Mohawk and thermal energy to Alcan. Effective September 1,
2000, the majority of the electric energy produced by the Project is being sold
into the ISO Administered Market. 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;
10
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, 2000, the Operator employed 45 individuals in
connection with the Project.
LEGAL PROCEEDINGS
Other than the Partnership's petition to the FERC for transmission loss
overcharges not covered by the pending PSA by and between the Partnership and
Niagara Mohawk, neither Sithe Funding or 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
11
may also purchase power at prices other than "avoided costs" pursuant to
negotiations with potential suppliers as provided by the FERC regulations.
The Project currently meets all of the criteria for a Qualifying
Facility under PURPA and the regulations promulgated thereunder. If at any time
the Project were to fail to meet such criteria, the Partnership may become
subject to regulation as a public utility company under PUHCA, the FPA and state
utility laws.
PUHCA. PUHCA provides that any corporation, partnership or other entity
or organized group which owns, controls or holds power to vote 10% of the
outstanding voting securities of a "public utility company" or a company which
is a "holding company" of a public utility company is subject to registration
with the Securities and Exchange Commission (the "Commission") and 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 the NIMO PPA would have to be
filed with the FERC and would be subject to review by the FERC under the FPA.
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
12
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, the ISO Administered Markets 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 2000.
13
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, 2000
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 15.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
STATEMENT OF OPERATIONS DATA
Revenue $440,735 $382,084 $313,739 $355,432 $379,024
Operating income 156,936 72,049 53,165 94,672 120,211
Non-operating income and (expense):
Interest expense (58,016) (60,044) (61,943) (62,369) (63,441)
Interest and other income, net 6,195 5,498 6,746 7,026 4,187
Income (loss) before cumulative
effect of change in accounting
for major overhaul costs 105,115 17,503 (2,032) 39,329 60,957
Cumulative effect of change in account-
ing for major overhaul costs --- 3,775 --- --- ---
Net income (loss) 105,115 21,278 (2,032) 39,329 60,957
DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA
Property, plant and equipment, net $665,774 $685,762 $702,021 $713,274 $723,188
Total assets 824,259 813,469 811,120 838,047 867,471
Long-term debt 590,207 622,638 641,934 669,345 688,201
Partners' capital 163,494 139,810 118,532 120,564 123,699
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - 2000, 1999 AND 1998
Revenue for 2000 increased from 1999 by $58.7 million (15%) due
primarily to higher energy rates received during 2000 ($47.9 million) and the
sales of installed capacity and ancillary services ($5.8 million) to the NYISO.
Effective January 17, 2000, the majority of the Project's electrical energy
began to be based on locational based marginal prices as determined by the NYISO
which resulted in a 12.4% increase in average rates received for sales of energy
during 2000. These factors resulted in a $22.1 million increase in accounts
receivable at December 31, 2000 from December 31, 1999.
Cost of sales for 2000 decreased from 1999 by $26.2 million (8%) due
largely to a decrease in fuel expense resulting from a scheduled contractual
change effective January 1, 2000 in the Partnership's long-term gas supply
agreement. Under the change, the method of pricing fuel associated with energy
deliveries to Con Edison and the ISO Administered Markets switched 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.
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. 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.
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.
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
operations, representing the balance of the major overhaul reserve for
Non-covered Units as of January 1, 1999.
15
Interest expense for 2000 and 1999 decreased by $2.0 million (3%) and
$1.9 million (3%) from 1999 and 1998, respectively, as the result of lower
outstanding amounts of long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
Financing for the Project consisted of a loan to the Partnership by
Sithe Funding of the proceeds of its issuance of $717.2 million of notes and
bonds and $60 million of capital contributions by the Partners. In addition,
under a credit facility obtained by the Partners, one or more letters of credit
may be issued in connection with their obligations pursuant to certain Project
contracts, and, as of December 31, 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 December 31, 2000, the
Partnership had restricted funds and investments aggregating $76.5 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 $28.5 million that was utilized for January 2001
operating expenses, and the balance reserved for the June 2001 debt service
payment. 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, the required
debt service coverage ratio is met and the Partnership's obligation to pay
the Subordinated Payments to Con Edison under the Amended EPA, which amount
to $6.4 million in 2001, $5.0 million in 2002 and 2003 and $2.4 million
through October 31, 2004, are satisfied. During 2000 all conditions for
making a distribution were met and as a result, the Partnership made
distributions to its Partners in the amount of $83.0 million.
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.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership has investments in financial instruments subject to
interest rate risk consisting of $52.3 million of restricted cash and cash
equivalents and $24.2 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 $.2 million.
The Partnership's outstanding long-term debt at December 31, 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.
17
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 55 Chairman of the Board, Chief
Executive Officer, President and
Director
Thomas E. Boehlert 41 Chief Financial Officer, Senior
Vice President and Director
Richard J. Cronin III 54 Director
Ralph J. Grutsch 68 Executive Vice President for Operations
Sandra J. Manilla 49 Treasurer and Vice President
Hyun Park 39 Secretary
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 the Chief Executive
Officer of K Road Ventures, a newly established internet business to business
energy company in which Sithe Energies owns a 33 1/3% interest. Mr. Kriegel also
serves as the Chairman of the Board of Vivendi North America Holdings which has
significant investments in water, energy and waste management including a
majority stake in Aqua Alliance, a publicly traded entity specializing in the
operation, maintenance, engineering and design of municipal water and waste
water systems. Mr. Kriegel is also the Chairman of the Board of Aqua Alliance.
Mr. Kriegel is also a co-founder of the National Independent Energy Producers
(the "NIEP"), a Washington, D.C. based entity established to represent the
independent power producing industry and has chaired the NIEP's Clean Air Task
Force. 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.
18
Thomas Boehlert has been Chief Financial Officer and Senior Vice
President of Sithe Energies since June 2000. Mr. Boehlert also serves in such
capacities for each of the Limited Partners and the Operator. From 1986 to 1999,
Mr. Boehlert was employed by Credit Suisse First Boston ("CSFB") and served in
several capacities, including Director of Investment Banking (1997 to 1999)
responsible for independent power banking and project finance, Head of Project
Finance for Europe, Africa and Middle East (1993 - 1997) responsible for
establishing CSFB's London-based project finance business and Associate (1986 -
1993) where he was an original member of the project finance department
responsible for building the project finance business for independent power
producers.
Richard J. Cronin III was Senior Vice President and Chief Financial
Officer of Sithe Energies from September 1990 until June 2000 and presently
serves as President of Sithe Asia Holdings, Ltd. 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 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.
Hyun Park has been General Counsel of Sithe Energies, Inc. since July
1998 and heads the Company's Legal Department. From 1989 to June 1998, Mr. Park
was a partner of Latham & Watkins, an international law firm with more than 950
lawyers worldwide. At Latham & Watkins, Mr. Park was a member of the firm's
Corporate Finance Practice Group, Project Finance Capital Markets Practice Group
and International Practice Group and his practice centered around international
joint ventures, mergers and acquisitions, corporate and project finance, and
general securities and corporate matters.
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.
19
ITEM 11. EXECUTIVE COMPENSATION
No cash compensation or non-cash compensation was paid in 2000 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
$638,142 in 2000, 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:
AMOUNT AND NATURE PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP (1)(2) INTEREST
-------------- ------------------- ---------------- ----------
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
- ------------
(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.
20
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 $638,142 in 2000, 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, 2000.
(c) EXHIBITS
21
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 *
22
10.3.13 ---- Amendment No. 2 to the Energy Sales Contract dated March 21, 1996
between the Partnership and Alcan *****
10.3.14 ---- Amended and Restated Energy Purchase Agreement by and between the
Partnership and Con Ed.*******
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 *
23
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) **
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") *
24
10.9.4 ---- Mortgage and Security Agreement, dated as of January 1, 1993,
given by the IDA and the Partnership to the Collateral Agent *
10.9.5 ---- Mortgage and Security Agreement, dated as of January 1, 1993,
given by the IDA and the Partnership to the Collateral Agent *
10.9.6 ---- Credit Line Mortgage and Security Agreement, dated as of January
1, 1993, given by the IDA and the Partnership to the Collateral
Agent *
10.9.7 ---- First Building Loan Mortgage and Security Agreement, dated as of
January 1, 1993, given by the IDA and the Partnership to the
Collateral Agent *
10.9.8 ---- Second Building Loan Mortgage and Security Agreement, dated as of
January 1, 1993, given by the IDA and the Partnership to the
Collateral Agent *
10.9.9 ---- First Building Loan Agreement, dated as of January 1, 1993, among
the Trustee, Sithe Funding and the Partnership *
10.9.10 ---- Second Building Loan Agreement, dated as of January 1, 1993, among
the Trustee, Sithe Funding and the Partnership *
10.9.11 ---- Bill of Sale and Assignment and Assumption Agreement dated as of
August 25, 1992 between the General Partner, as assignor, and the
Partnership, as assignee *
10.10 ---- Water Service Agreements
10.10.1 ---- Water Service Agreement, dated as of May 11, 1992, by and between
the Partnership and the City of Oswego *
10.10.2 ---- Water Facilities Agreement, dated as of August 18, 1992, between
the Partnership and the County of Oswego *
10.11 ---- IDA Agreements
10.11.1 ---- Lease Agreement, dated as of January 22, 1993, between the IDA and
the Partnership*
10.11.2 ---- Ground Lease, dated as of January 22, 1993, between the IDA and
the Partnership *
10.11.3 ---- Payment in Lieu of Taxes Agreement dated as of January 22, 1993
between the IDA and the Partnership *
10.12 ---- Security Documents
10.12.1 ---- Collateral Agency and Intercreditor Agreement, dated as of January
1, 1993, among Union Bank, the Trustee, Enron, the Partnership,
Sithe Funding, the IDA and the Collateral Agent*
10.12.2 ---- Security Agreement and Assignment of Contracts, dated as of
January 1, 1993, made by the Partnership in favor of the
Collateral Agent *
10.12.3 ---- Partner Security Agreement, dated as of January 1, 1993, among the
General Partner, Sithe Energies U.S.A., Inc., Sithe Energies,
Inc., Mitex, Inc. and the Collateral Agent*
10.12.4 ---- Equity Contribution Agreement, dated as of January 1, 1993, by the
General Partner, Sithe Energies, Inc., Sithe Energies U.S.A.,
Inc., Mitex, Inc. in favor of the Partnership and for the benefit
of the Collateral Agent *
27 ---- Article 5 Financial Data Schedule of the Partnership for the year
ended December 31, 2000********
- ------------------
* 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.
******* Incorporated herein by reference from the 10-Q for the quarter
ended September 30, 2000.
******** Filed herewith.
25
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, 2001 /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, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ William Kriegel Chief Executive Officer, President March 30, 2001
---------------------------------- and Director (Principal Executive
William Kriegel Officer)
/s/ Thomas M. Boehlert Chief Financial Officer, Senior March 30, 2001
---------------------------------- Vice President and Director
Thomas M. Boehlert (Principal Financial and
Accounting Officer)
/s/ Richard J. Cronin III Director March 30, 2001
----------------------------------
Richard J. Cronin III
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the co-registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Sithe/Independence Power Partners, L.P.
---------------------------------------
(CO-REGISTRANT)
By: SITHE/INDEPENDENCE, INC.
------------------------
GENERAL PARTNER
March 30, 2001 /s/ Thomas J. 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, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ William Kriegel Chief Executive Officer, President March 30, 2001
---------------------------------- and Director (Principal Executive
William Kriegel Officer)
/s/ Thomas M. Boehlert Chief Financial Officer, Senior March 30, 2001
---------------------------------- Vice President and Director
Thomas M. Boehlert (Principal Accounting Financial
and Officer)
/s/ Richard J. Cronin Iii Director March 30, 2001
----------------------------------
Richard J. Cronin III
27
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, 2000
and 1999 ..................................................................................F-3
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998 ...................................................F-4
Consolidated Statements of Partners' Capital for
the Years Ended December 31, 2000, 1999 and 1998 .........................................F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998 ...................................................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
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, 2000 and 1999,
and the related consolidated statements of operations, partners' capital and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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,
2000 and 1999 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
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.
New York, New York
March 21, 2001
F-2
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------------------------------
2000 1999
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,116 $ 6,076
Restricted cash and cash equivalents 52,287 40,112
Restricted investments 24,173 35,621
Accounts receivable - trade 52,463 30,315
Fuel inventory and other current assets 7,079 3,113
-------------- --------------
TOTAL CURRENT ASSETS 138,118 115,237
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land 5,010 5,010
Electric and steam generating facilities 777,444 777,356
-------------- --------------
782,454 782,366
Accumulated depreciation (116,680) (96,604)
-------------- --------------
665,774 685,762
DEBT ISSUANCE COSTS 6,297 7,213
OTHER ASSETS 14,070 5,257
-------------- --------------
TOTAL ASSETS $ 824,259 $ 813,469
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Trade payables $ 30,461 $ 27,945
Accrued interest 154 173
Current portion of long-term debt 32,431 19,296
-------------- --------------
TOTAL CURRENT LIABILITIES 63,046 47,414
LONG-TERM DEBT:
7.90% secured notes due 2002 30,759 63,190
8.50% secured bonds due 2007 150,839 150,839
9.00% secured bonds due 2013 408,609 408,609
-------------- --------------
590,207 622,638
OTHER LIABILITIES 7,512 3,607
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 163,494 139,810
-------------- --------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 824,259 $ 813,469
============== ==============
See notes to consolidated financial statements.
F-3
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998
------------- ------------- -------------
REVENUE $ 440,735 $ 382,084 $ 313,739
------------- ------------- -------------
COST OF SALES:
Fuel 217,435 242,102 201,016
Operations and maintenance 46,288 48,375 39,487
Depreciation 22,076 19,558 20,071
------------- ------------- -------------
283,799 310,035 260,574
------------- ------------- -------------
OPERATING INCOME 156,936 72,049 53,165
NON-OPERATING INCOME (EXPENSE):
Interest expense (58,016) (60,044) (61,943)
Interest and other income, net 6,195 5,498 6,746
------------- ------------- -------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR MAJOR OVERHAUL COSTS 105,115 17,503 (2,032)
Cumulative effect of change in accounting for major
overhaul costs - 3,775 -
------------- ------------- -------------
NET INCOME (LOSS) $ 105,115 $ 21,278 $ (2,032)
============= ============= =============
See notes to consolidated financial statements.
F-4
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNERS CAPITAL
---------- ---------- ---------
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 comprehensive income 213 21,065 21,278
---------- ---------- ---------
BALANCE, DECEMBER 31, 1999 $ 1,198 $ 138,612 $ 139,810
Net income and total comprehensive income 1,051 104,064 105,115
Capital contribution 16 1,599 1,615
Distributions (830) (82,216) (83,046)
---------- ---------- ---------
BALANCE, DECEMBER 31, 2000 $ 1,435 $ 162,135 $ 163,494
========== ========== =========
See notes to consolidated financial statements.
F-5
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 105,115 $ 21,278 $ (2,032)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 20,076 19,558 20,071
Amortization of deferred financing costs 916 984 1,015
Unrealized loss on marketable securities 181 - -
Cumulative effect of change in accounting for major
overhaul costs - (3,775) -
Changes in operating assets and liabilities:
Accounts receivable - trade (22,148) (18,577) 21,646
Fuel inventory and other current assets (3,966) (443) (798)
Other assets (8,813) 1,388 (1,660)
Trade payables and other current liabilities 2,516 11,371 (4,249)
Accrued interest payable (19) - (1)
Other liabilities 3,905 2,362 (2,822)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 97,763 34,146 31,170
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (88) (4,775) (7,785)
Restricted funds (908) 1,969 (2,385)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (996) (2,806) (10,170)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on secured notes (19,296) (27,411) (18,856)
Capital contribution 1,615 - -
Distributions to partners (83,046) - -
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (100,727) (27,411) (18,856)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,960) 3,929 2,144
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,076 2,147 3
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,116 $ 6,076 $ 2,147
============ ============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 57,119 $ 59,060 $ 60,929
See notes to consolidated financial statements.
F-6
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.
The Partnership has a long-term energy purchase agreement (the "Amended
EPA") with Consolidated Edison Company of New York ("Con Edison") with a
remaining term of 14 years, a power sales contract with Niagara Mohawk Power
Corporation ("Niagara Mohawk") with a remaining term of 14 years and a contract
for thermal energy and electricity sales with Alcan Aluminum Corporation
("Alcan") with a remaining term of 16 years.
Sithe Energies is a leader in independent power generation and, at
December 31, 2000, fully-owned, had interests in or leased through its
subsidiaries, 28 operating power plants in North America, including the Project,
having an aggregate average net capacity of 3,768 MW. In addition, at December
31, 2000, Sithe Energies had five projects under advanced development
representing approximately 3,340 net MW and four projects under construction
representing approximately 2,630 net MW.
Sithe Energies is presently privately owned 49.9% by Exelon Fossil
Holdings, Inc., a wholly owned subsidiary of Exelon Corporation, 34.2% by
Vivendi Universal, SA ("Vivendi"), 14.9% by Marubeni Corporation and 1.0% by
Sithe 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
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 in accordance with 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. In December 1999, the Securities and Exchange Commission (the
"SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in the
Financial Statements ("SAB 101"). SAB 101 addresses the SEC staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues with an implementation date of no later than the fourth
quarter of fiscal years beginning after December 15, 1999. The implementation of
SAB 101 had no impact on the results of operations or financial position of the
Partnership.
Revenue for 2000 consisted of $440.7 million from sales of
electricity and steam with Con Edison, Alcan, Niagara Mohawk and the New York
Independent System Operator, Inc. (the "NYISO" or the "ISO Administered
Markets") accounting for 56%, 3%, 10% and 29%, respectively. 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. Since commencement of the ISO Administered Market in
November 1999 and up to September 1, 2000, revenue was recorded net of
payments made by the Partnership to the NYISO for transmission losses.
Effective September 1, 2000 with the consummation of the Amended EPA, all the
electric energy generated by the Project is sold at the point where the
Project delivers energy to the NYISO (the "Independence bus") and as a
result, the Partnership does not incur a charge for transmission losses.
The Partnership evaluates the carrying amount of its long-lived
assets for potential impairments based upon operating and financial
performance 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.
F-8
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Consistent with positions expressed by 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, 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.
Proforma results of operations in 1998, assuming the change in
accounting for major overhaul costs had been applied retroactively, would have
been a net loss of $1.5 million.
Legal fees and other direct costs incurred in connection with the
issuance of long-term debt are being deferred and amortized to interest expense
using the interest method over the term of the long-term debt.
Since the Partnership is not an income tax paying entity, the
accompanying consolidated financial statements do not reflect any income tax
effects. Sithe Funding is a taxable entity, but has no taxable income since its
interest income is equal to its interest expense.
3. AMENDMENT TO CON EDISON ENERGY PURCHASE AGREEMENT
Pursuant to the Amended EPA dated as of September 1, 2000 between the
Partnership and Con Edison, 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
F-9
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
point where the Project's energy was delivered to Con Edison prior to the
Amended EPA (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. A provision of the Amended EPA obligates the
Partnership to make certain payments (the "Subordinated Payments") to Con
Edison during the term of the Amended EPA. The Subordinated Payments are
subordinated to the notes and bonds (the "Securities") issued by Sithe
Funding. The Partnership may, at any time, prepay all or a portion of the
total Subordinated Payments due through October 31, 2014. The amount of any
prepayment would be equal to the net present value of the prepayment amount
using a discount rate as defined in the Amended EPA. The Subordinated
Payments are made in equal quarterly installments in each contract year,
which runs from November 1 to October 31. The Subordinated Payments due in
each contract year amount to $6.4 million in 2001, $5.0 million in 2002 and
2003 and $2.3 million thereafter.
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
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
4. 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 the
Securities and $60 million of capital contributions by the Partners. Aggregate
maturities of the Securities over the next five years are as follows: $32.4
million in 2001, $30.8 million in 2002, $28.8 million in 2003, $31.3 million in
2004 and $34.0 million in 2005. 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, 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 December 31, 2000, the
Partnership had restricted funds aggregating $76.5 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 $28.5 million that was utilized for January 2001 operating
expenses, and the balance reserved for the June 2001 debt service payment. 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. All
conditions for making a distribution were met during 2000 and as a result, the
Partnership made distributions to its Partners of $83.0 million. 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.
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. 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, 2000
and 1999 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,
2000 and 1999 were $679.5 million and $673.4 million, respectively, based on
quoted market prices, which were $56.9 million and $31.5 million higher,
respectively, than the historical carrying values of $622.6 million and $641.9
million, respectively.
DERIVATIVE INSTRUMENTS
The Financial Accounting Standards Board has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended by SFAS No. 138, 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 No. 133, as amended, are effective for all quarters beginning January 1,
2001. SFAS No. 133 did not have a material impact on the Partnership's results
of operations and financial position.
6. 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
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. On February 23, 2001, the Partnership entered into a
partial settlement agreement (the "PSA") with Niagara Mohawk whereby Niagara
Mohawk will pay the Partnership $2.3 million representing partial settlement of
claims for transmission loss overcharges during the period of July 2, 1999 to
November 17, 1999. The terms of the PSA also stipulate that the current
interconnection agreement between Niagara Mohawk and the Partnership be amended
to provide that the currently effective firm transmission rate be fixed at $1.76
KW per month for the period commencing on July 2, 1999 and ending December 31,
2004. The PSA does not address the claims made for transmission loss overcharges
for the periods prior to July 2, 1999 and for November 18, 1999 to August 31,
2000 will be settled by the FERC upon review of the petition described above.
The PSA is currently being reviewed by the FERC and becomes binding on the
parties to the PSA upon the FERC's approval.
The PSA noted above also has a provision for the partial settlement of
a previous complaint that Niagara Mohawk overcharged the Partnership for
construction costs related to the construction and upgrade of Niagara Mohawk's
transmission system (the "Interconnection Facilities") located at the Project.
The original complaint filed with the FERC by the Partnership sought
reimbursement of approximately $63.0 million for overcharges on construction and
upgrades made to the Interconnection Facilities for the purpose of connecting
the Project to the Interconnection Facilities. The terms of the PSA require
Niagara Mohawk to pay the Partnership $15.1 million (representing the full
fair-market value) to purchase a portion of the Interconnection Facilities from
the Partnership. A provision of this PSA also requires approval by the FERC
which is still pending.
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: $177.7 million in 2001,
$178.2 million in 2002, $178.9 million in 2003, $179.6 in 2004 and $187.7
million in 2005.
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) was 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 (which, effective January
17, 2000, is determined by reference to the locational based marginal price in
the ISO Administered Market for energy at the Pleasant Valley bus) as well as
certain other payments made by Con Edison to the Project. Up to an additional
76,291 MMBtu's of gas consumed per day by the Project ("Tier II" gas) is priced
based on the pre-determined multiple applied to Niagara Mohawk's "energy only"
rate which is determined by the real time price at the Independence bus in the
ISO Administered Market.
Enron maintains 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 is increased if the then current spot gas price
is greater than the contract price and is 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, 2000, the Partnership estimates that the balance in the tracking
account amounted to approximately $289.2 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.
The Partnership believes, based on its projection of electric energy
and gas prices, 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
F-14
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The Partnership's Amended EPA with Con Edison includes an option that
would allow Con Edison to terminate the Amended EPA 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.
7. 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 $638,142 annual fee, which escalates at 5% per annum, for
management and administrative services, provided by Sithe Power Services to the
Partnership.
In the ordinary course of business, the Partnership borrows from
Sithe Energies and its affiliates. Any borrowings bear interest at the
average monthly interest rate that Sithe Energies pays for borrowings under
its senior secured credit facility. Outstanding borrowings from Sithe
Energies and its affiliates at December 31, 2000 and 1999 amounted to $7.5
million and $3.6 million, respectively and are reflected as other liabilities
on the Partnership's balance sheets. Interest expense from Sithe Energies
and its affiliates for 2000 and 1999 amounted to $34,000 and $157,000,
respectively.
F-15