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, 2002
[ ]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
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
SITHE/INDEPENDENCE FUNDING CORPORATION
PAGE NO.
--------
Part I Financial Information
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2002 (Unaudited)
and December 31, 2001....................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2002 and 2001 (Unaudited)................................................... 4
Condensed Consolidated Statement of Partners' Deficiency for the Three
Months Ended March 31, 2002 (Unaudited)..................................................... 5
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001 (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................................................... 15
Signatures ................................................................................... 16
2
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2002 2001
(UNAUDITED) (AUDITED)
----------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,094 $ 4
Restricted cash and cash equivalents 66,405 45,741
Restricted investments 31,041 19,971
Accounts receivable - trade 27,722 29,765
Fuel inventory and other current assets 5,815 4,609
Current portion of transmission congestion contract derivative asset 12,252 9,452
Current portion of financial swap derivative asset 3,289 6,930
-------------- ------------
TOTAL CURRENT ASSETS 148,618 116,472
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land 4,862 4,862
Electric and steam generating facilities 747,485 747,040
-------------- ------------
752,347 751,902
Accumulated depreciation (135,693) (130,876)
-------------- ------------
616,654 621,026
DEBT ISSUANCE COSTS 5,236 5,434
OTHER ASSETS 6,234 7,026
TRANSMISSION CONGESTION CONTRACT DERIVATIVE ASSET 138,952 139,778
FINANCIAL SWAP DERIVATIVE ASSET 45,829 59,649
-------------- ------------
TOTAL ASSETS $ 961,523 $ 949,385
============== ============
LIABILITIES AND PARTNERS' DEFICIENCY
CURRENT LIABILITIES:
Trade payables $ 14,171 $ 18,563
Accrued interest 22,890 2,646
Current portion of long-term debt 30,759 30,759
Current portion of transmission congestion contract derivative obligation 17,823 19,327
-------------- ------------
TOTAL CURRENT LIABILITIES 85,643 71,295
LONG-TERM DEBT:
8.50% secured bonds due 2007 150,839 150,839
9.00% secured bonds due 2013 408,609 408,609
Subordinated debt 419,282 419,282
-------------- ------------
978,730 978,730
OTHER LIABILITIES 1,297 1,486
TRANSMISSION CONGESTION CONTRACT DERIVATIVE OBLIGATION 145,476 148,777
COMMITMENTS AND CONTINGENCIES - -
PARTNERS' DEFICIENCY (249,623) (250,903)
-------------- ------------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $ 961,523 $ 949,385
============== ============
See notes to condensed consolidated financial statements.
3
<Page>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2001
---- ----
REVENUE $ 62,459 $ 124,976
------------ -----------
COST OF SALES:
Fuel 23,859 64,494
Operations and maintenance 12,571 11,690
Depreciation 4,817 4,987
------------ -----------
41,247 81,171
------------ -----------
OPERATING INCOME 21,212 43,805
NON-OPERATING INCOME (EXPENSE):
Interest expense (20,172) (14,104)
Interest and other income, net 240 3,796
------------ -----------
NET INCOME $ 1,280 $ 33,497
============ ===========
See notes to condensed consolidated financial statements.
4
<Page>
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIENCY (UNAUDITED)
(IN THOUSANDS)
Total
General Limited Partners'
Partner Partners Deficiency
------- -------- ----------
BALANCE, JANUARY 1, 2002 $ (417,978) $ 167,075 $ (250,903)
Net income (loss) and total comprehensive income (loss) (21) 1,301 1,280
------------- ------------ --------------
BALANCE, MARCH 31, 2002 $ (417,999) $ 168,376 $ (249,623)
============= ============ ==============
5
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
March 31,
---------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,280 $ 33,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,817 4,987
Unrealized loss on derivatives 10,682 -
Gain on sale of fixed assets - (2,071)
Amortization of deferred financing costs 198 219
Unrealized (gain) loss on marketable securities 39 (110)
Changes in operating assets and liabilities:
Accounts receivable - trade 2,043 9,697
Fuel inventory and other current assets (1,206) (1,485)
Other assets 792 (476)
Trade payables (4,392) 4,541
Accrued interest 20,244 13,647
Other liabilities (189) (6,476)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,308 55,970
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets - 15,075
Capital expenditures (445) (51)
Restricted funds, net (31,773) (41,875)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (32,218) (26,851)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners - (32,113)
Capital contribution - 3,539
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES - (28,574)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,090 545
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4 2,116
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,094 $ 2,661
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest $ - $ -
See notes to condensed consolidated financial statements.
6
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(a Delaware Limited Partnership)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. THE PARTNERSHIP
Sithe/Independence Power Partners, L.P. (the "Partnership") 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 March 31, 2002, 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,
the Partnership has entered into tolling arrangements (the "Tolling Agreement")
with Dynegy Power Marketing, Inc. ("DPM"), under which DPM pays 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 March 31, 2002
and December 31, 2001 and the condensed consolidated statements of operations
and cash flows for the three months ended March 31, 2002 and 2001 and the
condensed consolidated statements of partners deficiency for the three months
ended March 31, 2002 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, 2001 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, 2002 and
2001 are not necessarily indicative of the results to be expected for the
full year. The unaudited financial information at March 31, 2002 and for the
three months ended March 31, 2002 and 2001 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.
7
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" and SFAS No. 143, "Accounting for Asset Retirement
Obligations". In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
On January 1, 2002, the Partnership adopted the provisions of SFAS No. 142
which became effective for fiscal years beginning after December 15, 2001 for
all goodwill and other intangible assets recognized in an entities statement of
financial position regardless of when such assets were initially recognized. The
adoption of SFAS No. 142 had no impact on the Partnership's results of
operations or financial position.
SFAS No. 143 requires that asset retirement obligations be reported at fair
value in the period incurred for fiscal years beginning after June 15, 2002 and
recognized as expense in subsequent periods. The Partnership is currently
evaluating the provisions of SFAS No. 143, which it has not yet adopted.
On January 1, 2002, the Partnership adopted the provisions of SFAS No. 144
which became effective for fiscal years beginning after December 15, 2001. SFAS
No. 144 requires one accounting model to be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and
retains the previous recognition and measurement standards for impairment
losses. The adoption of SFAS No. 144 had no impact on the Partnership's results
of operations or financial position.
4. DERIVATIVE INSTRUMENTS
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. Ongoing discussions and
interpretations of SFAS No. 133 by the FASB could alter the definition of
derivative instruments. The Partnership has implemented SFAS No. 133 based upon
current rules and guidance, and any changes in these rules and guidance could
impact the Partnership's subsequent reported operating results.
As of March 31, 2002, the Partnership had three derivatives, a Transmission
Congestion Contract ("TCC") and a multi-agreement financial swap (the "Financial
Swap Agreement") and a gas supply agreement (the "Gas Supply Agreement"), which
are part of the Tolling Agreement with DPM. None of these derivatives are
designated as hedges under SFAS No. 133.
As of March 31, 2002, the Partnership recorded the TCC at fair value by
recognizing a current asset of $12.3 million, a long-term asset of $138.9
million, a current liability of $17.8 million, a long-term obligation of $145.5
million and additional revenue of $6.8 million.
8
Although, the Partnership accounts for the Financial Swap Agreement and the
Gas Supply Agreement as derivatives which are not designated as hedges, 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. As of March 31, 2002, the Partnership
recorded the Financial Swap Agreement at fair value by recognizing a current
asset of $3.3 million, a long-term asset of $45.8 million and a charge to income
of $17.5 million reflected as a reduction of revenue on the Partnership's
Statement of Operations. Since natural gas purchased by the Partnership under
the Gas Supply Agreement is at current market price, this derivative had a zero
fair value at March 31, 2002.
9
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the first quarter of 2002 of $62.5 million was $62.5 million
(50%) lower than in the corresponding period last year. Of this decrease,
$47.1 million was attributable to the fact that the Partnership operated the
Project under tolling arrangements with DPM in the first quarter of 2002
versus the corresponding period of last year when the majority of the
Project's output was sold to the NYISO and Niagara Mohawk with the energy
rates based on locational based marginal prices ("LBMP") as determined by the
NYISO. The remaining $15.4 million decrease from the corresponding period of
last year resulted from a $17.5 million decrease in the estimated fair value
of the Financial Swap Agreement, a $3.3 million decrease in TCC revenue and a
$1.0 million decrease in ancillary services revenue, as well as the fact that
the first quarter of 2001 reflected $2.3 million of additional revenue for
the settlement of claims against Niagara Mohawk for transmission loss
overcharges and $1.3 million of incremental revenue from selling gas instead
of generating electricity, offset in part by a $6.8 million increase in the
estimated fair value of the TCC during the first quarter of 2002 and $3.2
million of higher capacity revenue in the first quarter of 2002 versus the
corresponding period of last year.
Cost of sales for the first quarter of 2002 of $41.2 million was $39.9
million (49%) lower than in the corresponding period of last year. The
commencement of the tolling arrangements with DPM and an amendment to the
Partnership's gas supply agreement with Enron, which eliminated the
Partnership's obligation to purchase natural gas from Enron and transferred to
Enron its obligations under five of the Partnership's seven fuel transportation
arrangements, resulted in a $40.6 million decrease in fuel expense when compared
to the corresponding period of last year. In addition, operations and
maintenance expense for the first quarter of 2002 was approximately $.9 million
higher than in the corresponding period of last year and depreciation expense
was approximately $.2 million lower for the first quarter of 2002 than in the
corresponding period of last year.
Interest expense for the first quarter of 2002 of $20.2 million was $6.1
million (43%) higher than the corresponding period of last year due to $7.2
million of interest expense on the $419.3 million subordinated tracking account
loan (the "Tracking Account Loan"), offset by $1.1 million of lower interest
expense due to the lower outstanding principal amount of the Securities and
lower letter of credit fees.
For the first quarter of 2002, interest and other income, net, of $.2
million consisted of interest income of $.5 million and unrealized losses on
the Partnership's restricted investments of $.3 million. For the first
quarter of 2001, interest and other income, net, of $3.9 million consisted
principally of a gain on the sale of certain interconnection facility assets
to Niagara Mohawk under a settlement agreement of $2.1 million, interest
income of $1.6 million and unrealized gains on the Partnership's restricted
investments of $.2 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 the Securities and
$60.0 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, 2002, letters of credit aggregating $2.2 million
10
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 $50.0 million. As of March 31, 2002, the Partnership had
restricted funds and investments aggregating $97.4 million, including the
Project's cumulative cash debt service reserve and major overhaul reserve of
$33.0 million and $6.3 million, respectively. In addition, these restricted
funds included $12.4 million that was utilized for April 2002 operating
expenses, $41.4 million reserved for the June 2002 debt service payment and the
balance available for transfer to and deposit in 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 $419.3 million Tracking Account Loan bears interest at an annual
rate of 7%, which is payable semi-annually, and which payments began on December
1, 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 1, 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 and the Partnership's obligation to pay the
subordinated payments to Con Edison under the Amended EPA, which amount to $5.0
million in 2002, are satisfied. During the first three months of 2002, no
distributions were made by the Partnership to its Partners.
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.
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission encouraged all
registrants to disclose their most critical accounting policies. Critical
accounting policies are defined as those that are reflective of significant
judgement by management and potentially produce materially different results
under different assumptions and conditions. The Partnership believes that its
critical accounting policies are limited to accounting for the TCC and Financial
Swap Agreement derivative instruments.
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. However, under SFAS No.
133, as amended and interpreted, the Partnership must account for the Financial
Swap Agreement and the Gas Supply Agreement as derivatives which are not
designated as hedges, using mark to market accounting, with changes in fair
value of these derivatives recognized in the consolidated statement of
operations.
The Partnership uses financial models and pricing assumptions to estimate
the fair values of the TCC and the Financial Swap Agreement derivatives, whose
terms extend beyond the periods for which any quoted market prices are
available. Although the Partnership believes that the financial models and
pricing assumptions used are reasonable, changes in valuation techniques,
pricing assumptions and the availability of actively quoted market prices will
result in changes to the reported estimated fair values of these derivatives,
which could be significant.
11
Although changes in the estimated fair values of the Financial Swap
Agreement and TCC will affect reported earnings, such changes will not affect
the Partnership's cash flows from operating activities, which are largely
dependent on payments from DPM under the Tolling Agreement and the Financial
Swap Agreement and on payments from Con Edison under the Amended EPA.
The following tables summarize changes in the estimated fair value of the
Partnership's derivative contracts for the three months ended March 31, 2002 and
maturities of derivative contracts as of March 31, 2002 (in millions):
Fair value of contracts outstanding at December 31, 2001 $47.7
Contracts realized or otherwise settled during the period 2.4
Fair value of new contracts when entered into during the period -
Changes in fair value attributable to changes in valuation techniques
and other assumptions
Other changes in fair value (13.1)
-----
Fair value of contracts outstanding at March 31, 2002 $37.0
=====
Fair Value of Contracts at March 31, 2002
--------------------------------------------------------------------------------------------------
Maturities of:
-----------------------------------------------------------------------------
More than More than
one year but three years
Source of One Year less than but less than More than Total Fair
Fair Value Or Less three years five years Five years Value
---------- ------- ----------- ---------- ---------- -----
Prices provided
by other external
sources, models and
other valuation methods $3.7 $8.5 $6.4 $18.4 $37.0
==== ==== ==== ===== =====
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
12
contingencies, the continued performance of counterparties to derivative
contracts and gas supply agreements, the demand for and price of electricity and
changes in government regulations and the continuing deregulation of the
electric energy industry. 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 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 $66.4 million of restricted cash and cash
equivalents and $31.0 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 $.5 million.
The Partnership's outstanding long-term debt at March 31, 2002 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 approximately $7.6 million.
The Partnership is also subject to commodity price risk on the fair value
of the Financial Swap Agreement from changes in the spread between prices of
natural gas and electricity. The Partnership estimates that a 10% increase in
this price spread would decrease the estimated fair value of the Financial Swap
Agreement assets by approximately $2.3 million.
The Partnership uses financial models and pricing assumptions to estimate
the fair values of the TCC and the Financial Swap Agreement derivatives, whose
terms extend beyond the periods for which any quoted market prices are
available. Although the Partnership believes that the financial models and
pricing assumptions used are reasonable, changes in valuation techniques,
pricing assumptions and the availability of actively quoted market prices will
result in changes to the reported estimated fair values of these derivatives,
which could be significant.
13
Fluctuations in the underlying assumptions used to determine the
estimated fair value of the TCC, including quoted market prices and forward
curve data, could cause the estimated fair value of the TCC to fluctuate
significantly from quarter to quarter. The fluctuations for the quarter ended
December 31, 2001 to the quarter ended March 31, 2002 are summarized in the
following table (in millions):
QUARTERS ENDED
-----------------------------
March 31, December 31,
2002 2001
------------- -------------
ASSETS:
Current portion of TCC derivative asset $ 12.3 $ 9.5
Long-term portion of TCC derivative asset 138.9 139.8
------ -----
Total Assets 151.2 149.3
====== =====
LIABILITIES:
Current portion of TCC derivative obligation 17.8 19.3
Long-term portion of TCC derivative obligation 145.5 148.8
------ -----
Total Liabilities: 163.3 168.1
====== =====
NET INCOME (LOSS):
Revenue $ 6.8 $ (8.2)
======= ========
Fluctuations in the underlying assumptions used to determine the
estimated fair value of the Financial Swap Agreement derivative instrument,
including quoted market prices and forward curve data, could cause the estimated
fair value of the Financial Swap Agreement to fluctuate significantly from
quarter to quarter. The fluctuations for the quarter ended December 31, 2001 to
the quarter ended March 31, 2002 are summarized in the following table (in
millions):
QUARTERS ENDED
-----------------------------
March 31, December 31,
2002 2001
-------------- -------------
ASSETS:
Current portion of financial swap derivative asset $ 3.3 $ 6.9
Long-term financial swap derivative asset 45.8 59.7
------- ------
Total Assets 49.1 66.6
======= ======
NET INCOME (LOSS):
Revenue $(17.5) $79.9
====== =====
Although changes in the estimated fair values of the TCC and Financial
Swap Agreement have an impact on reported earnings, such changes will not affect
the Partnership's cash flows from operating activities, which are largely
dependent on payments from DPM under the Tolling Agreement and the Financial
Swap Agreement and on payments from Con Edison under the Amended EPA.
14
PART II -- OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
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.
15
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 15, 2002 /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 15, 2002 /s/ Thomas M. Boehlert
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THOMAS M. BOEHLERT
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
16