SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934 For the Quarterly Period Ended March 31,
2001
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
335 MADISON AVENUE, NEW YORK, NY 10017
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(Address of principal executive offices) (Zip code)
(212)-351-0000
(Registrant's telephone number, including area code)
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0468704
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
335 MADISON AVENUE, NEW YORK, NY 10017
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(Address of principal executive offices) (Zip code)
(212)-351-0000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[ X ] Yes [ ] No
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
SITHE/INDEPENDENCE FUNDING CORPORATION
PAGE NO
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PART I FINANCIAL INFORMATION
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2001 (Unaudited)
and December 31, 2000....................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2001 and 2000 (Unaudited)................................................... 4
Condensed Consolidated Statement of Partners' Capital for the Three Months
Ended March 31, 2001 (Unaudited)............................................................ 5
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000 (Unaudited)................................................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited).............................. 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 13
Signatures ................................................................................... 14
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,661 $ 2,116
Restricted cash and cash equivalents 90,388 52,287
Restricted investments 28,057 24,173
Accounts receivable - trade 42,766 52,463
Fuel inventory and other current assets 8,564 7,079
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TOTAL CURRENT ASSETS 172,436 138,118
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land 5,010 5,010
Electric and steam generating facilities 762,097 777,444
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767,107 782,454
Accumulated depreciation (119,273) (116,680)
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647,834 665,774
DEBT ISSUANCE COSTS 6,078 6,297
OTHER ASSETS 14,546 14,070
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TOTAL ASSETS $840,894 $824,259
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Trade payables $ 35,002 $ 30,461
Accrued interest 13,801 154
Current portion of long-term debt 32,431 32,431
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TOTAL CURRENT LIABILITIES 81,234 63,046
LONG-TERM DEBT:
7.90% secured notes due 2002 30,759 30,759
8.50% secured bonds due 2007 150,839 150,839
9.00% secured bonds due 2013 408,609 408,609
-------- --------
590,207 590,207
OTHER LIABILITIES 1,036 7,512
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 168,417 163,494
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $840,894 $824,259
======== ========
See notes to condensed consolidated financial statements
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
---------------------------
2001 2000
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REVENUE $ 124,976 $ 97,106
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COST OF SALES:
Fuel 64,494 49,123
Operations and maintenance 11,690 11,028
Depreciation 4,987 4,999
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81,171 65,150
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OPERATING INCOME 43,805 31,956
NON-OPERATING INCOME (EXPENSE):
Interest expense (14,203) (14,391)
Other income, net 3,895 423
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NET INCOME $ 33,497 $ 17,988
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See notes to condensed consolidated financial statements
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (UNAUDITED)
(IN THOUSANDS)
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNERS CAPITAL
------- -------- ---------
BALANCE, JANUARY 1, 2001 $ 1,435 $162,059 $163,494
Net income and total comprehensive income 335 33,162 33,497
Capital contribution 35 3,504 3,539
Distribution to Partners (321) (31,792) (32,113)
-------- -------- --------
BALANCE, MARCH 31, 2001 $ 1,484 $166,933 $168,417
======== ======== ========
See notes to condensed consolidated financial statements
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
---------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,497 $ 17,988
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,987 4,999
Amortization of deferred financing costs 219 232
Unrealized (gain) loss on marketable securities (110) 862
Gain on sale of fixed assets (2,071) -
Changes in operating assets and liabilities:
Accounts receivable - trade 9,697 (924)
Fuel inventory and other current assets (1,485) (602)
Other assets (476) (2,703)
Trade payables 4,541 (3,543)
Accrued interest payable 13,647 14,029
Other liabilities (6,476) (144)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 55,970 30,194
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 15,075 -
Capital expenditures (51) (73)
Restricted funds (41,875) (31,522)
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NET CASH USED IN INVESTING ACTIVITIES (26,851) (31,595)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to Partners (32,113) -
Capital contribution 3,539 -
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NET CASH USED IN FINANCING ACTIVITIES (28,574) -
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 545 (1,401)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,116 6,076
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,661 $ 4,675
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments:
Interest $ - $ -
See notes to condensed consolidated financial statements
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. THE PARTNERSHIP
Sithe/Independence Power Partners, L.P. (the "Partnership"), in which
Sithe Energies, Inc. and certain of its direct and indirect wholly-owned
subsidiaries (the "Partners") hold all the partnership interests, is a Delaware
limited partnership that was formed in November 1990 for a term of 50 years to
develop, construct and own a gas-fired cogeneration facility with a design
capacity of approximately 1,000 megawatts ("MW") (the "Project") located in the
Town of Scriba, County of Oswego, New York. The Project commenced commercial
operation for financial reporting purposes on December 29, 1994. The majority of
the Project's capacity is sold to Consolidated Edison Company of New York, Inc.
("Con Edison") with the remainder of the capacity sold to Alcan Aluminum
Corporation ("Alcan") and into the electric energy markets administered by the
New York Independent System Operator, Inc. (the "NYISO" or "ISO Administered
Markets"). The majority of the electric energy generated by the Project is sold
into the ISO Administered Markets, with the remainder of the generation sold to
Niagara Mohawk Power Corporation ("Niagara Mohawk") and Alcan.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheets at March 31,
2001 and December 31, 2000 and the condensed consolidated statements of
operations for the three months ended March 31, 2001 and 2000 and cash flows for
the three months ended March 31, 2001 and 2000 should be read in conjunction
with the audited consolidated financial statements included in the Annual Report
on Form 10-K for the year ended December 31, 2000 for the Partnership and its
wholly-owned subsidiary, Sithe/Independence Funding Corporation ("Sithe
Funding").
The results of operations for the three months ended March 31, 2001 are
not necessarily indicative of the results to be expected for the full year. The
unaudited financial information at March 31, 2001 and for the three months ended
March 31, 2001 and 2000 contains all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for a fair
presentation of the financial position and operating results for such periods.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in the Financial Statements" ("SAB 101"). The bulletin
addresses the SEC staff's views in applying accounting principles generally
accepted in the United States of America to selected revenue recognition issues.
The Partnership adopted SAB 101 during the fourth quarter of fiscal 2000. The
adoption of SAB 101 did not have any impact on the results of operations or
financial position of the Partnership.
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The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards requiring that
all derivatives, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at their fair value. When specific hedge accounting criteria are not
met, SFAS No. 133 requires that changes in a derivative's fair value be
recognized currently in earnings. If a derivative is designated as a
fair-value hedge, the changes in the fair value of the derivative and the
hedged item will be recognized in earnings. If the derivative is designated
as a cash-flow hedge, changes in the fair value of the derivative will be
recorded in other comprehensive income and will be recognized in the income
statement when the hedged item affects earnings. SFAS No. 133 requires that
an entity formally document, designate and perform ongoing assessments of the
effectiveness of transactions that receive hedge accounting. The provisions
of SFAS No. 133, as amended and interpreted, were adopted by the Partnership
on January 1, 2001 and did not have an impact on the Partnership's financial
position or results of operations.
4. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
On March 29, 1995, the Partnership filed a petition with the Federal
Energy Regulatory Commission (the "FERC") alleging Niagara Mohawk has been
overcharging for the transmission of electricity in violation of the FERC
policy by calculating transmission losses on an incremental basis. The
Partnership believes that transmission losses should be calculated on an
average basis. The Partnership has been recording its transmission expense at
the disputed, higher rate. 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 and on February 28, 2001 Niagara Mohawk paid 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 $2.3 million was recognized as revenue in the first quarter of
2001. 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 the period November 18, 1999 to
August 31, 2000 which will be settled by the FERC upon review of the petition
described above. The Partnership estimates that it is still owed
approximately $11.2 million for transmission overcharges for the periods not
covered by the PSA.
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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. Under the terms of the PSA, on
February 28, 2001 Niagara Mohawk paid the Partnership $15.1 million
(representing the full fair-market value) to purchase a portion of the
Interconnection Facilities with a net book value of $13.0 million from the
Partnership, resulting in a gain on sale of fixed assets of $2.1 million in the
first quarter of 2001, included in other income, net on the condensed
consolidated statement of operations. A provision of this PSA also requires
approval by the FERC which is still pending.
OTHER
Reference is made to Note 6 of the Partnership's audited consolidated
financial statements included in its Annual Report on Form 10-K for the year
ended December 31, 2000 for information concerning the Partnership's method of
recognizing fuel expense and the maintenance of the notional tracking account
under the Partnership's 20-year gas supply agreement with Enron Power Services,
Inc. ("Enron"). The tracking account accounts for differences between the
contract price and spot gas prices and Enron has been given a subordinated
security interest in the plant to secure any tracking balance. Because of the
significant spike in spot gas prices during the first quarter of 2001, which
more than offset the effects of the higher electrical energy prices received by
the Partnership during such period and upon which contract gas prices are based,
the tracking account balance increased during the period by $88.5 million to
approximately $377.7 million as of March 31, 2001.
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the first quarter of 2001 of $125.0 million was $27.9
million (29%) higher than in the corresponding period of last year due to
higher energy rates received during the current period ($22.5 million), sales
of installed capacity and ancillary services ($1.8 million), incremental
revenue from selling gas instead of generating electricity ($1.3 million) and
partial settlement of a dispute with Niagara Mohawk regarding transmission
loss overcharges ($2.3 million) as discussed below.
On February 23, 2001, the Partnership entered into a partial
settlement agreement (the "PSA") with Niagara Mohawk to settle a
long-standing claim that the Partnership has been overcharged by Niagara
Mohawk for transmission losses. Prior to the commencement of the ISO
Administered Markets, Niagara Mohawk was charging the Partnership for
transmission losses which it had calculated on an incremental basis, which
the Partnership claimed resulted in a higher charge than if Niagara Mohawk
had used an average basis for calculating such losses. On February 28, 2001,
Niagara Mohawk paid 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 and agreed that transmission losses for all
periods not covered by the PSA would be settled by the Federal Energy
Regulatory Commission (the "FERC") upon its review of a petition filed by the
Partnership alleging the overcharge for transmission losses.
Cost of sales for the first quarter of 2001 of $81.2 million was
$16.0 million (25%) higher than in the corresponding period of last year due
largely to an increase in fuel expense of $15.4 million resulting from higher
energy rates during the first quarter of 2001 ($9.6 million), higher
transportation costs ($1.1 million) and the January 1, 2001 scheduled
commencement of the price risk management fee under the Partnership's
long-term gas supply agreement ($4.7 million).
Commencing January 1, 2001, the Partnership is obligated to pay to
Enron each month a price risk management fee (the "Price Risk Management
Fee") for gas scheduled or to be scheduled under the Partnership's long-term
gas supply agreement, an amount equal to the lesser of (a) $1,554,850 for any
month beginning in 2001 through 2005 and in any month thereafter $1,971,516
or (b) 1/12th of the aggregate Qualifying Project Cash Flow for that month
and the immediately preceding 5 months (calculated without including any
amounts payable in respect of the Price Risk Management Fee).
Interest expense for the first quarter of 2001 of $14.2 million was
$.2 million (1%) lower than in the corresponding period of last year due to
lower outstanding amounts of long-term debt.
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For the first quarter of 2001, other income, net of $3.9 million
consisted principally of a gain on the sale of certain interconnection facility
assets to Niagara Mohawk under the PSA ($2.1 million), interest income ($1.6
million) and unrealized gains on the Partnership's restricted investments ($.2
million). For the first quarter of 2000, other income, net of $.4 million
consisted of interest income ($1.3 million) and unrealized losses on the
Partnership's restricted investments ($.9 million).
The PSA noted above also had a provision for the partial settlement of
a previous complaint filed by the Partnership with the FERC alleging that
Niagara Mohawk had 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. In accordance with the
terms of the PSA on February 28, 2001, Niagara Mohawk paid the Partnership $15.1
million, representing the full fair-market value, to purchase a portion of the
Interconnection Facilities from the Partnership. As a result, the Partnership
recognized a gain on the sale of the Interconnection Facilities in the amount of
$2.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Financing for the Project consisted of a loan to the Partnership by
Sithe Funding of the proceeds of its issuance of $717.2 million of notes and
bonds (the "Securities") and $60 million of capital contributions by the
Partners. In addition, under a credit facility obtained by the Partners, one or
more letters of credit may be issued in connection with their obligations
pursuant to certain Project contracts, and, as of March 31, 2001, 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
March 31, 2001, the Partnership had restricted funds and investments aggregating
$118.4 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 $22.5 million that was utilized for
April 2001 operating expenses, $43.5 million reserved for the June 2001 debt
service payment and the balance available for transfer to the Partnership
distribution account. Funds in the Partnership distribution account are
available as additional operating and debt service reserves until such time as
certain coverage ratios are achieved. To secure the Partnership's obligation to
pay any amounts drawn under the debt service letter of credit, the letter of
credit provider has been assigned a security interest and lien on all of the
collateral in which the holders of the Securities have been assigned a security
interest and lien.
The Partnership is precluded from making distributions to Partners
unless project reserve accounts are funded to specified levels and unless the
required debt service coverage ratio is met. During the first quarter of 2001,
the Partnership made distributions to its Partners in the amount of $32.1
million.
The Partnership believes that funds available from cash on hand,
restricted funds, operations and the debt service letter of credit will be more
than sufficient to liquidate Partnership obligations as they come due and pay
scheduled debt service.
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FORWARD-LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q are
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934. The words "anticipate", "believe", "expect", "estimated" and
similar expressions generally identify forward-looking statements. While the
Partnership believes in the veracity of all statements made herein,
forward-looking statements are necessarily based upon a number of estimates and
assumptions that, while considered reasonable by the Partnership, are inherently
subject to significant business, economic and competitive uncertainties and
contingencies, the price of natural gas and the demand for and price of
electricity. These uncertainties and contingencies could cause the Partnership's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Partnership.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership has investments in financial instruments subject to
interest rate risk consisting of $90.4 million of restricted cash and cash
equivalents and $28.1 million of restricted investments. In the case of
restricted cash and cash equivalents, due to the short duration of these
financial instruments, a 10% immediate change in interest rates would not have a
material effect on the Partnership's financial condition. In the case of
restricted investments, the resulting potential decrease in fair value from a
10% immediate change in interest rates would be approximately $.3 million.
The Partnership's outstanding long-term debt at March 31, 2001 bears
interest at fixed rates and therefore the Partnership's results of operations
would not be affected by changes in interest rates as they apply to borrowings.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
No exhibits were filed during the quarter covered by this report.
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the quarter covered by
this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SITHE/INDEPENDENCE FUNDING CORPORATION
(REGISTRANT)
May 14, 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, the
co-registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(REGISTRANT)
By: SITHE/INDEPENDENCE, INC.
GENERAL PARTNER
May 14, 2001 /s/ Thomas M. Boehlert
------------------------------------
THOMAS M. BOEHLERT
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
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