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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 June 30, 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
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
335 MADISON AVENUE, NEW YORK, NY 10017
-------------------------------- -----
(Address of principal executive offices) (Zip code)
(212)-351-0000
(Registrant's telephone number, including area code)
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0468704
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
335 MADISON AVENUE, NEW YORK, NY 10017
-------------------------------- -----
(Address of principal executive offices) (Zip code)
(212)-351-0000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
/X/ Yes / / No
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
SITHE/INDEPENDENCE FUNDING CORPORATION
<Table>
<Caption>
PAGE NO.
PART I FINANCIAL INFORMATION
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2001 (Unaudited)
and December 31, 2000....................................................................... 3
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2001 and 2000 (Unaudited).................................................... 4
Condensed Consolidated Statement of Partners' Capital Deficiency for the Six Months
Ended June 30, 2001 (Unaudited)............................................................. 5
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 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....................................................................... 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................... 17
Signatures.......................................................................................... 20
</Table>
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SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
--------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 738 $ 2,116
Restricted cash and cash equivalents 92,545 52,287
Restricted investments 24,222 24,173
Accounts receivable - trade 35,582 52,463
Fuel inventory and other current assets 21,740 7,079
Current portion of transmission constraint contract derivative asset 19,553 0
--------- ---------
TOTAL CURRENT ASSETS 194,380 138,118
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land 5,010 5,010
Electric and steam generating facilities 744,453 777,444
--------- ---------
749,463 782,454
Accumulated depreciation (121,118) (116,680)
--------- ---------
628,345 665,774
DEBT ISSUANCE COSTS 5,859 6,297
OTHER ASSETS 5,744 14,070
TRANSMISSION CONSTRAINT CONTRACT DERIVATIVE ASSET 148,576 0
--------- ---------
TOTAL ASSETS $ 982,904 $ 824,259
========= =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY)
CURRENT LIABILITIES:
Trade payables $ 32,158 $ 30,461
Accrued interest 27,609 154
Current portion of long-term debt 47,811 32,431
Current portion of transmission constraint contract derivative obligation 17,684 0
--------- ---------
TOTAL CURRENT LIABILITIES 125,262 63,046
LONG-TERM DEBT:
7.90% secured notes due 2002 15,379 30,759
8.50% secured bonds due 2007 150,839 150,839
9.00% secured bonds due 2013 408,609 408,609
Subordinated debt 419,282 0
--------- ---------
994,109 590,207
OTHER LIABILITIES 5,057 7,512
TRANSMISSION CONSTRAINT CONTRACT DERIVATIVE OBLIGATION 148,061 0
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL (DEFICIENCY) (289,585) 163,494
--------- ---------
TOTAL LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) $ 982,904 $ 824,259
========= =========
</Table>
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)
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUE $ 104,175 $ 96,080 $ 229,151 $ 193,186
COST OF SALES:
Fuel 55,630 51,688 120,124 100,811
Operations and maintenance 13,298 11,718 24,988 22,746
Depreciation 4,923 5,000 9,910 9,999
Loss on project restructuring 428,675 0 428,675 0
--------- --------- --------- ---------
502,526 68,406 583,697 133,556
OPERATING INCOME (LOSS) (398,351) 27,674 (354,546) 59,630
NON-OPERATING INCOME (EXPENSE):
Interest expense (14,484) (14,803) (28,588) (29,194)
Interest and other income (expense), net (491) 1,921 3,305 2,344
--------- --------- --------- ---------
NET INCOME (LOSS) ($413,326) $ 14,792 ($379,829) $ 32,780
========= ========= ========= =========
</Table>
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 (DEFICIENCY) (UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNERS CAPITAL
--------- --------- ---------
BALANCE, JANUARY 1, 2001 $ 1,435 $ 162,059 $ 163,494
Net income (loss) and total
comprehensive income (loss) (418,887) 39,058 (379,829)
Capital contribution 35 3,504 3,539
Distributions to partners (768) (76,021) (76,789)
--------- --------- ---------
BALANCE, JUNE 30, 2001 $(418,185) $ 128,600 $(289,585)
========= ========= =========
</Table>
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)
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30,
------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($379,829) $ 32,780
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 9,910 9,999
Loss on project restructuring 428,675 0
Unrealized gain on transmission constraint contract derivative (2,384) 0
Gain on sale of property, plant and equipment (173) 0
Unrealized (gain) loss on marketable securities (112) 607
Amortization of deferred financing costs 438 464
Changes in operating assets and liabilities:
Accounts receivable - trade 16,881 (11,837)
Fuel inventory and other current assets (1,623) 517
Other assets (1,067) (2,357)
Trade payables 1,697 61
Accrued interest payable 27,455 (17)
Other liabilities (2,455) 359
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 97,413 30,576
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 15,075 0
Capital expenditures (421) (73)
Restricted funds (40,195) 7,686
--------- ---------
NET CASH PROVIDED BY (USED IN) USED IN INVESTING ACTIVITIES (25,541) 7,613
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (76,789) (31,635)
Principal payments on secured notes 0 (9,648)
Capital contribution 3,539 0
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (73,250) (41,283)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,378) (3,094)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,116 6,076
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 738 $ 2,982
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION Cash payments:
Interest $ 1,133 $ 28,747
</Table>
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") was formed in
November 1990 for a term of 50 years to develop, construct and own a natural
gas-fired cogeneration facility having capacity of approximately 1,000 megawatts
("MW") located in the Town of Scriba, County of Oswego, New York (the
"Project"). The Project began commercial operation for financial reporting
purposes on December 29, 1994. The Partnership is a Delaware limited partnership
formed by Sithe/Independence, Inc. (the "General Partner"), its sole general
partner. The General Partner is an indirect wholly-owned subsidiary of Sithe
Energies, Inc. ("Sithe Energies"). Prior to June 29, 2001, the limited partners
of the Partnership were Sithe Energies and certain of its direct and indirect
wholly-owned subsidiaries (the "Limited Partners"). On June 29, 2001 one of the
Limited Partners sold its 40% ownership interest in the Partnership to Oswego
Cogen Company, LLC ("Oswego Cogen"), an indirect, wholly-owned subsidiary of
Enron Corp. Accordingly, as of June 30, 2001, the Partnership is owned 60% by
Sithe Energies (directly and indirectly through its wholly-owned subsidiaries)
and 40% by Oswego Cogen.
Through June 30, 2001, the majority of the Project's capacity was 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 market administered by the New York Independent System Operator,
Inc. (the "NYISO" or "ISO Administered Market"). The majority of the electric
energy generated by the Project was sold into the ISO Administered Market, with
the remainder of the generation sold to Niagara Mohawk Power Corporation
("Niagara Mohawk") and Alcan. Effective July 1, 2001, while the majority of the
Project's capacity will continue to be sold to Con Edison, and up to 44 MW of
the Project's capacity and associated energy will continue to be sold to Alcan,
as discussed in Note 4, the Partnership has entered into tolling arrangements
with Dynegy Power Marketing, Inc. ("DPM"), under which DPM will pay the
Partnership tolling fees for the right to supply natural gas to the Project to
be converted to electric energy.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheets at June 30, 2001 and
December 31, 2000 and the condensed consolidated statements of operations for
the three and six months ended June 30, 2001 and 2000 and cash flows for the six
months ended June 30, 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 and six months ended June 30, 2001
are not necessarily indicative of the results to be expected for the full year.
The unaudited financial information at June 30, 2001 and for the three and six
months ended June 30, 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.
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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.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 prohibits the use of the pooling-of-interest method for business
combinations initiated after June 30, 2001 and also applies to all business
combinations accounted for by the purchase method that are completed after
June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001 as to all goodwill and other intangible assets recognized
in an entity's statement of financial position at that date, regardless of
when those assets were initially recognized. The Partnership is currently
evaluating the provisions of SFAS No. 141 and SFAS No. 142, which it has not
yet adopted.
Effective January 1, 2001, the Partnership adopted 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 impact of the Partnership's
adoption of SFAS No. 133 as of January 1, 2001 was not material.
As of June 30, 2001, the Partnership had one derivative, a Transmission
Congestion Contract ("TCC"), which is not designated as a hedge under SFAS No.
133. Effective with the September 1, 2000 consummation of the Amended and
Restated Energy Purchase Agreement between the Partnership and Con Edison (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").
The Partnership has a 20 year Transmission Services Agreement through November
14, 2014 with Niagara Mohawk (the "TSA"), under which Niagara Mohawk is
obligated to transmit 853 MW from the Independence Bus to the point of
interconnection between Niagara Mohawk's transmission system and Con Edison's
transmission system (the "Pleasant Valley Bus"). As a result of the Amended EPA,
the Partnership no longer transmits power under the TSA, and effective September
1, 2000, the Partnership converted its grandfathered physical transmission
rights under the TSA to a financial TCC under the NYISO's open access
transmission tariff. Under the TCC, the Partnership receives from, or pays to
the NYISO, the product of (i) the positive or negative difference, respectively,
between the locational based marginal price ("LBMP") per MWH at the Pleasant
Valley Bus and the Independence Bus for each hour that is due to congestion, and
(ii) 853 MW. The Partnership continues to pay Niagara Mohawk under the TSA,
which must remain in place as part of the TCC.
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Recent interpretations and deliberations of the FASB's Derivatives
Implementation Group due to uncertainties as to whether contracts of this type
are derivatives caused the Partnership to reevaluate the TCC and conclude that
it is a derivative. As of and for the six months ended June 30, 2001, the
Partnership recognized assets of $168.1 million, liabilities of $165.7 million
and revenues of $2.4 million for the estimated fair value of amounts expected to
be received and paid under the TCC.
As discussed in Note 4, two of the agreements comprising the tolling
arrangements that the Partnership entered into with DPM effective July 1, 2001
will be accounted for as derivatives which are not designated as hedges under
SFAS No. 133, as amended and interpreted.
4. PROJECT RESTRUCTURING
On June 29, 2001, the Partnership (i) amended its long-term gas supply
agreement with Enron North America Corp., as successor in interest by merger to
Enron Power Services, Inc. ("Enron"); (ii) transferred its obligations under
five of its seven gas transportation arrangements to Enron, which has agreed to
assume such obligations; and (iii) entered into a tolling arrangement with DPM
that commenced on July 1, 2001. Also on June 29, 2001, Sithe Energies, through
an indirect, wholly owned subsidiary, sold a forty percent limited partnership
interest in the Partnership to Oswego Cogen.
GAS SUPPLY AGREEMENT AMENDMENT
Prior to the June 29, 2001 amendment to the Partnership's long-term gas
supply agreement, the Partnership recognized 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 fluctuated with pricing based on a
pre-determined multiple of Con Edison's actual avoided energy price (which,
effective January 17, 2000, was determined by reference to the LBMP 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") was priced based
on the pre-determined multiple applied to Niagara Mohawk's "energy only" rate
which was determined by the real time price at the Independence Bus in the ISO
Administered Market.
Enron maintained 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
contract. The tracking account was increased if the then current spot gas price
was greater than the contract price and was decreased if the then current spot
gas price was lower that the contract price. Interest was accrued on the
tracking account at 1% over prime.
As a result of the amendment to the gas supply agreement, the Partnership
and Enron agreed to terminate the Partnership's obligation to purchase natural
gas from Enron and the tracking account balance of $419.3 million was fixed and
converted to a secured subordinated loan (the "Tracking Account Loan") resulting
in a $419.3 million charge, recorded as a loss on project restructuring on the
Partnership's condensed consolidated statement of operations. The Tracking
Account Loan is subordinate to the Partnership's secured notes and bonds (the
"Securities") and to certain payments due to Con Edison under the Amended EPA.
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The Tracking Account Loan bears interest at an annual rate of 7%, which is
payable semi-annually, beginning December 31, 2001 from cash distributable to
the partners under the indenture pursuant to which the Securities were issued.
The Tracking Account Loan will be repaid in 40 semi-annual principal payments
commencing June 30, 2015.
GAS TRANSPORTATION AGREEMENTS
The Partnership had previously entered into long-term gas transportation
agreements with seven pipeline companies in order to transport, on a firm
basis, the natural gas purchased pursuant to the Partnership's then existing
obligations under the gas supply agreement. In connection with the
cancellation of the Partnership's fuel purchase obligations, Enron has
assumed and agreed to perform all of the Partnership's future obligations for
all but two of these gas transportation arrangements. The Partnership will
continue to pay fixed demand charges under contracts with Niagara Mohawk and
Empire State Pipeline.
TOLLING ARRANGEMENTS
The Partnership has entered into tolling arrangements for the Project with
DPM and its affiliates which commenced on July 1, 2001 and run through 2014.
Under the tolling arrangement (the "Tolling Agreement"), DPM will pay the
Partnership a monthly tolling fee for the right (1) to supply natural gas to the
Project, (2) to request the Partnership to run the Project as needed to convert
such natural gas to electrical energy within certain efficiency parameters and
(3) to receive such electrical energy at an electrical transmission delivery
point at the Project. Approximately sixty percent of the output of the Project
is covered by the Tolling Agreement. DPM is responsible for payment of all
natural gas commodity and transportation costs associated with the natural gas
necessary to generate electric energy under the Tolling Agreement, except for
demand charges due Niagara Mohawk and Empire State Pipeline, which remain the
obligation of the Partnership. In addition to the monthly tolling fee, DPM will
be required to pay the Partnership variable payments designed to reimburse the
Partnership for its costs of operating and maintaining the Project. If the
Project is not available, the Partnership will have the right to meet its
contractual obligations under the Tolling Agreement by supplying electric energy
from other sources. If the Project is not available and the Partnership does not
supply replacement energy, the monthly tolling fee will be subject to an
availability adjustment. However, the Project will not be responsible to DPM for
any damages resulting from the Project's failure to deliver electric energy
under the Tolling Agreement. DPM does not have a direct right to terminate the
Tolling Agreement due to the unavailability of the Project.
In addition, the Partnership has entered into a multi-agreement financial
swap (collectively, the "Financial Swap Agreement") with respect to 375 MW.
To hedge its exposure under the Financial Swap Agreement, using natural gas
supplied by Dynegy Canada Marketing and Trade ("DCMT"), the Partnership will
generate electricity from forty percent of the Project and sell such
electricity to the NYISO. DPM will pay the Partnership (i) a monthly fixed
payment under the financial swap and (ii) a payment designed to cover the
Partnership's costs of generating electric energy (including amounts paid
under the gas supply agreement described below) from the Project's reserved
capability. The Partnership will pay to DPM amounts equal to amounts received
from the NYISO for the sales of energy associated with the reserved forty
percent of the Project. In connection with the Financial Swap Agreement,
affiliates of the General and Limited Partners will be obligated to provide a
credit support reserve in the form of cash, letters of credit or corporate
guarantees. The monthly fixed payments are subject to reduction if the
Project is not available at a time DPM calls on the Financial Swap Agreement.
However, the Partnership's exposure to damages under the Financial Swap
Agreement (beyond the reductions in the monthly fixed payments) resulting
from market energy prices at times that the Project is not available is
limited over the life of the Financial Swap Agreement to the amount of the
credit support reserve. If the credit support reserve is called upon, the
Partnership is not obligated to
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replenish the reserve. The Financial Swap Agreement contains restrictions on the
start and stop times and durations of the individual financial swaps designed to
mirror the operational requirements of the Project. The Financial Swap Agreement
will be in place through 2014.
Pursuant to a gas supply agreement between the Partnership and DCMT (the
"Gas Supply Agreement"), the Partnership will purchase from DCMT at a defined
index price, all natural gas required to operate forty percent of the Project.
The pricing under the Gas Supply Agreement is structured so that payments for
natural gas associated with operation of the reserved capability are covered by
the payments from DPM under the Financial Swap Agreement. In addition, if DCMT
fails to deliver natural gas to the Project at any time that the Partnership is
intending to operate the Project to sell electric energy to the NYISO to cover
its exposure under the Financial Swap Agreement, DCMT is obligated to reimburse
the Partnership at the NYISO market price for the amount of such electric
energy.
Under SFAS No. 133, as amended and interpreted, the Partnership will account
for the Financial Swap Agreement and the Gas Supply Agreement as derivatives
which are not designated as hedges. However, the Partnership believes that
together, the Tolling Agreement, the Financial Swap Agreement and the Gas Supply
Agreement eliminate the financial risks associated with the purchase of natural
gas to operate the Project on a full-time, base load basis as well as
eliminating the variable market prices associated with the marketing of power
into the NYISO. The Partnership estimates that the Financial Swap Agreement and
Gas Supply Agreement derivatives each had a zero fair value as of July 1, 2001.
The Partnership, DPM, and Dynegy Marketing and Trade ("DMT") have entered
into an energy management agreement (the "Energy Management Agreement"), whereby
DMT is responsible for all bidding and scheduling of gas under the Gas Supply
Agreement and the Tolling Agreement, and DPM is responsible for all bidding and
scheduling of electric purchases and sales under the Tolling Agreement and
resulting from the Financial Swap Agreement. Dynegy Holdings Inc., the parent of
DPM, DCMT and DMT, guarantees certain obligations of DPM, DCMT and DMT under the
Tolling Agreement, the Financial Swap Agreement, the Gas Supply Agreement and
the Energy Management Agreement pursuant to four separate Guaranty Agreements.
OTHER
The Partnership recognized an additional $9.4 million loss on project
restructuring to write-off prepaid equalization fees that were included in other
assets. The $9.4 million balance of prepaid equalization fees represented the
difference between the six annual $3.0 million equalization payments made to
Niagara Mohawk between December 31, 1995 and December 31, 2000 and the
amortization of such fees over the 22 year term of the Alcan Energy Sales
Contract. The Partnership is no longer obligated to make the four remaining
annual equalization fee payments to Niagara Mohawk.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
On March 29, 1995, the Partnership filed a petition with the Federal Energy
Regulatory Commission (the "FERC") alleging Niagara Mohawk has been overcharging
for the transmission of electricity in violation of the FERC policy by
calculating transmission losses on an incremental basis. The Partnership
believes that transmission losses should be calculated on an average basis. The
Partnership had 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,
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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 June 28, 2001, the Partnership
entered into a settlement agreement (the "Settlement") with Niagara Mohawk which
superceded a previous, partial settlement agreement (the "PSA") dated February
23, 2001. Under the terms of the Settlement, $2.3 million paid by Niagara Mohawk
to the Partnership under the PSA on March 2, 2001 now represents full settlement
of all claims for transmission loss overcharges. The terms of the Settlement
also stipulate that the TSA between Niagara Mohawk and the Partnership be
amended to provide that the currently effective firm transmission rate be fixed
at $1.76 per kw/month and the currently effective contract demand of 853 MW be
fixed for the period commencing on July 2, 1999 and ending December 31, 2005.
The $2.3 million was recognized as revenue in the first quarter of 2001.
The Settlement also supercedes the PSA and fully settles a previous
complaint filed with the FERC by the Partnership seeking reimbursement of
approximately $63.0 million for overcharges by Niagara Mohawk for the
construction and upgrade of Niagara Mohawk's transmission system (the
"Interconnection Facilities") for the purpose of connecting the Project to the
Interconnection Facilities. Under the PSA, on March 2, 2001 Niagara Mohawk paid
the Partnership $15.1 million to purchase the assets defined as the
Interconnection Facilities under the PSA with a book value of $13.0 million,
resulting in a $2.1 million gain which was included in interest and other income
for the first quarter of 2001. The Settlement changed the purchase price and the
definition of the assets included in the Interconnection Facilities, and on
August 1, 2001 Niagara Mohawk paid an additional $13.0 million to the
Partnership for the Interconnection Facilities. As a result, during the second
quarter of 2001, the Partnership reversed $1.9 of the $2.1 million gain
recognized in the first quarter resulting in a net $.2 million gain from the
sale of the Interconnection Facilities for the six months ended June 30, 2001,
representing the difference between the $28.1 million proceeds received from
Niagara Mohawk under the Settlement, and the net book value of the
Interconnection Facility assets of $27.9 million. The Settlement, together with
the related amendments to the TSA and the Interconnection Agreement, have been
submitted to the FERC for approval. Although FERC approval of the Settlement is
still pending as of the date hereof, the Partnership anticipates that the FERC
will ultimately approve the Settlement.
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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 second quarter of 2001 of $104.2 million was $8.1 million
(8%) higher than in the corresponding period of last year. $5.7 million of this
increase was due to higher net generation and sales of installed capacity and
ancillary services offset by the effect of lower energy rates received during
the period, and the remaining $2.4 million increase was due to the change in
estimated fair value of the TCC.
Cost of sales, exclusive of the loss on project restructuring discussed
below, for the second quarter of 2001 of $73.9 million was $5.4 million (8%)
higher than in the corresponding period of last year due largely to higher fuel
expense resulting from higher net generation and the price risk management fee
under the Partnership's long-term gas supply agreement as well as higher
operations and maintenance expense due largely to higher maintenance costs
associated with scheduled equipment maintenance which took place in April and
May of 2001 and a contractual price increase under the Partnership's long-term
equipment maintenance contract.
On June 29, 2001, the Partnership entered into a series of transactions
which included (i) an amendment to the Partnership's long-term gas supply
agreement with Enron which effectively terminated the Partnership's
obligation to purchase natural gas from Enron, (ii) the transfer of its
obligations under five of its seven gas transportation arrangements to Enron,
(iii) a tolling arrangement with Dynegy Power Marketing, Inc. which commenced
on July 1, 2001 and (iv) the sale of a 40% limited partnership interest in
the Partnership to Oswego Cogen Company, LLC, an indirect wholly-owned
subsidiary of Enron Corp.
As a result of the amendment to the gas supply agreement, the Partnership
and Enron agreed to terminate the Partnership's obligation to purchase
natural gas from Enron and the tracking account balance of $419.3 million was
fixed and converted to a secured subordinated loan (the "Tracking Account
Loan") resulting in a $419.3 million charge, recorded as a loss on project
restructuring on the Partnership's condensed consolidated statement of
operations. The Tracking Account Loan is subordinate to the Securities and to
certain payments due to Con Edison under the Amended EPA.
The Partnership recognized an additional $9.4 million loss on project
restructuring to write-off prepaid equalization fees that were included in
other assets. The $9.4 million balance of prepaid equalization fees
represented the difference between the six annual $3.0 million equalization
payments made to Niagara Mohawk between December 31, 1995 and December 31,
2000 and the amortization of such fees over the 22 year term of the Alcan
Energy Sales Contract. The Partnership is no longer obligated to make the
four remaining annual equalization fee payments to Niagara Mohawk.
Interest expense for the second quarter of 2001 of $14.5 million was $.3
million (2%) lower than the corresponding period of last year due to lower
outstanding amounts of long-term debt.
Interest and other expense for the second quarter of 2001 of $.5 million
consists of $1.4 million of interest income offset by the reversal of a portion
of the gain on sale of the Interconnection Facilities of $1.9 million that was
recorded during the first quarter of 2001 under the terms of a partial
settlement agreement and later superceded by a revised settlement agreement
discussed below.
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At June 30, 2001, the current portion of long-term debt and accrued interest
payable were $15.4 million and $27.5 million higher than the end of December 31,
2000 due to the fact that the principal and interest payment scheduled for June
30, 2001, which was a weekend, was not made until the next business day which
was July 2, 2001.
Revenue for the six months ended June 30, 2001 of $229.2 million was $36.0
million (19%) higher than in the corresponding period of last year. $33.6
million of this increase was due to higher net generation, higher average energy
rates received during the period, sales of installed capacity and ancillary
services, incremental revenue from selling gas instead of generating electricity
and final settlement of a dispute with Niagara Mohawk regarding transmission
loss overcharges discussed below. The remaining $2.4 million increase was due to
the change in estimated fair value of the TCC.
On June 28, 2001, the Partnership entered into a settlement agreement (the
"Settlement") with Niagara Mohawk which superceded a previous, partial
settlement agreement (the "PSA") dated February 23, 2001. Under the terms of the
Settlement, $2.3 million paid by Niagara Mohawk to the Partnership under the PSA
on March 2, 2001 now represents full settlement of all claims for transmission
loss overcharges. The terms of the Settlement also stipulate that the TSA
between Niagara Mohawk and the Partnership be amended to provide that the
currently effective firm transmission rate be fixed at $1.76 per kw/month and
the currently effective contract demand of 853 MW be fixed for the period
commencing on July 2, 1999 and ending December 31, 2005.
Cost of sales, exclusive of the loss on project restructuring, for the six
months ended June 30, 2001 of $155.0 million was $21.5 million (16%) higher than
in the corresponding period of last year due largely to higher fuel expense
resulting from higher net generation, increased fuel costs due to higher average
energy rates during the period and the price risk management fee, which
commenced January 1, 2001 under the Partnership's long-term gas supply
agreement, as well as higher operations and maintenance expense due largely to
higher maintenance costs associated with scheduled equipment maintenance during
the second quarter of 2001 and a contractual price increase under the
Partnership's long-term equipment maintenance contract.
Interest expense for the six months ended June 30, 2001 of $28.6 million was
$.6 million (2%) lower than in the corresponding period of last year due to
lower outstanding amounts of long-term debt.
Interest and other income, net for the six months ended June 30, 2001 of
$3.3 million consisted of interest income ($2.8 million), unrealized gains on
the Partnership's restricted investments ($.3 million) and a net gain on the
sale of the Interconnection Facilities to Niagara Mohawk in accordance with the
terms of the Settlement ($.2 million) discussed below.
The Settlement also supercedes the PSA and fully settles a previous
complaint filed with the FERC by the Partnership seeking reimbursement of
approximately $63.0 million for overcharges by Niagara Mohawk for the
construction and upgrade of Niagara Mohawk's transmission system (the
"Interconnection Facilities") for the purpose of connecting the Project to the
Interconnection Facilities. Under the PSA, on March 2, 2001 Niagara Mohawk paid
the Partnership $15.1 million to purchase the assets defined as the
Interconnection Facilities under the PSA with a book value of $13.0 million,
resulting in a $2.1 million gain which was included in interest and other income
for the first quarter of 2001. The Settlement changed the purchase price and the
definition of the assets included in the Interconnection Facilities, and on
August 1, 2001 Niagara Mohawk paid an additional $13.0 million to the
Partnership for the Interconnection Facilities. As a result, during the second
quarter of 2001, the Partnership reversed $1.9 of the $2.1 million gain
recognized in the first quarter resulting in a net $.2 million gain from the
sale of the Interconnection Facilities for the six months ended June 30, 2001,
representing the difference between the $28.1 million proceeds received from
Niagara Mohawk under the
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Settlement, and the net book value of the Interconnection Facility assets of
$27.9 million. At June 30, 2001, the $13.0 million due from Niagara Mohawk was
included in other current assets.
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 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 June 30, 2001, letters of credit aggregating $7.3
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 June 30, 2001, the
Partnership had restricted funds and investments aggregating $116.8 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 $33.0 million that was utilized for
July 2001 operating expenses, $43.5 million used for the June 2001 debt
service payment made on July 2, 2001 and the balance reserved for the
December 2001 debt service payment. Funds in the Partnership distribution
account are available as additional operating and debt service reserves until
such time as certain coverage ratios are achieved. To secure the
Partnership's obligation to pay any amounts drawn under the debt service
letter of credit, the letter of credit provider has been assigned a security
interest and lien on all of the collateral in which the holders of the
Securities have been assigned a security interest and lien. The Tracking
Account Loan bears interest at 7%, which is payable semi-annually, beginning
December 31, 2001 from cash distributable to the partners in accordance with
the terms of the Securities. The Tracking Account Loan will be repaid in 40
semi-annual principal payments commencing on June 30, 2015.
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 six months of 2001, the
Partnership made distributions to its Partners in the amount of $76.8 million.
The Partnership believes that funds available from cash on hand, restricted
funds, operations and the debt service letter of credit will be more than
sufficient to liquidate Partnership obligations as they come due and pay
scheduled debt service.
FORWARD-LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q are
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934. The words "anticipate", "believe", "expect", "estimated" and
similar expressions generally identify forward-looking statements. While the
Partnership believes in the veracity of all statements made herein,
forward-looking statements are necessarily based upon a number of estimates and
assumptions that, while considered reasonable by the Partnership, are inherently
subject to significant business, economic and competitive uncertainties and
contingencies, the price of natural gas and the demand for and price of
electricity. These uncertainties and contingencies could cause the Partnership's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Partnership.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership uses the sensitivity analysis methodology to disclose the
quantitative information for interest rate and commodity price risks. The
sensitivity analysis estimates the potential loss of fair value from market risk
sensitive instruments due to a 10% unfavorable change in interest rates and
commodity prices.
INTEREST RATE RISK
The Partnership has investments in financial instruments subject to interest
rate risk consisting of $92.5 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 $.3 million.
The Partnership's outstanding long-term debt at June 30, 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.
COMMODITY PRICE RISK
The Partnership is subject to commodity price risk on the fair value of
the TCC from changes in the differential between the LBMP at the Pleasant
Valley Bus and the Independence Bus due to congestion. The Partnership
estimates that a 10% decrease in this differential would decrease the
estimate fair value of the TCC assets by $16.8 million.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<Table>
<Caption>
Exhibit No. Description of Exhibit
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3.9 Amended and Restated Agreement of
Limited Partnership of
Sithe/Independence Power Partners,
L.P. (the "Partnership") dated as of
June 29, 2001 among
Sithe/Independence, Inc., Sithe
Energies, Inc., Sithe Energies U.S.A.,
Inc., Mitex, Inc. and Cogeneration
National Corporation.
3.10 Second Amended and Restated Agreement
of Limited Partnership of the
Partnership dated as of June 29, 2001
among Sithe/Independence, Inc., Sithe
Energies, Inc., Sithe Energies U.S.A.,
Inc., Mitex, Inc. and Oswego Cogen
Company, LLC.
10.3 Power Purchase Agreements
10.3.15* Tolling Agreement dated as of July 1,
2001 between the Partnership and
Dynegy Power Marketing, Inc.
10.3.16 ISDA Master Agreement dated as of July
1, 2001 between the Partnership and
Dynegy Power Marketing, Inc.
10.3.17* Schedule to the Master Agreement dated
as of July 1, 2001 between Dynegy
Power Marketing, Inc. and the
Partnership.
10.3.18* Confirmation #1A, regarding the Master
Agreement, between Dynegy Power
Marketing, Inc. and the Partnership,
dated July 1, 2001.
10.3.19* Energy Management Agreement dated as
of July 1, 2001 by and among Dynegy
Marketing and Trade, Dynegy Power
Marketing, Inc. and the Partnership.
</Table>
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<Table>
<Caption>
Exhibit No. Description of Exhibit
----------- ----------------------
10.3.20 Second Amendment to Energy Purchase
Agreement dated as of June 28, 2001
between the Partnership and Niagara
Mohawk Power Corporation.
10.5 Transmission Agreements
10.5.3 Amended and Restated Transmission
Services Agreement dated as of June
29, 2001 between the Partnership and
Niagara Mohawk Power Corporation.
10.5.4 Settlement Agreement dated June 28,
2001 between the Partnership and
Niagara Mohawk Power Corporation and
relating to Docket Nos. EL99-65-000
and EL-95-38-000.
10.6 Interconnection Agreements
10.6.5 Amended and Restated Inter- connection
Agreement dated as of June 29, 2001
between the Partnership and Niagara
Mohawk Power Corporation.
10.7 Gas Supply Agreements
10.7.10 Tenth Amendment to Amended and
Restated Base Gas Sales Agreement
dated as of June 29, 2001 by and
between Enron North America Corp. and
the Partnership.
10.7.11* Gas Supply Agreement dated as of July
1, 2001 between the Partnership and
Dynegy Canada Marketing and Trade (a
division of Dynegy Canada Inc.).
10.8 Gas Transportation Agreements
10.8.30 Assignment and Assumption Agreement
dated as of June 29, 2001 by and
between the Partnership and Enron
North America Corp.
</Table>
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<Table>
<Caption>
Exhibit No. Description of Exhibit
----------- ----------------------
10.8.31 Capacity Release Transfer Agreement
dated as of June 29, 2001 by and
between the Partnership and Enron
North America Corp.
10.12.5* Financial Swap Credit Support
Contribution Agreement dated as of
June 30, 2001 among Enron Corp.,
Exelon Generation Company, L.L.C. and
the Partnership.
</Table>
* Certain confidential portions of this exhibit were omitted by
means of redacting a portion of the text. This exhibit has been
filed separately with the Secretary of the SEC without such text
pursuant to an Application Requesting Confidential Treatment
under Rule 24b-2 under the Securities Exchange Act.
(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)
August 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
August 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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