SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1996 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) 450 Lexington Avenue, New York, NY 10017 (Address of principal executive offices) (Zip code) (212)-450-9000 (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) 450 Lexington Avenue, New York, NY 10017 (Address of principal executive offices) (Zip code) (212)-450-9000 (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: Consolidated Balance Sheets at June 30, 1996 and December 31, 1995 (Unaudited)....................................... 3 Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1996 and 1995 (Unaudited)............................................... 4 Consolidated Statement of Partners' Capital for the Six Months Ended June 30, 1996 (Unaudited)............................ 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 (Unaudited).......................... 6 Notes to Consolidated Financial Statements (Unaudited)............... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 8 Part II Other Information Item 6. Exhibits and Reports on Form 8-K......................... 10 Signatures ......................................................... 11 - 2 - SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) June 30, December 31, 1996 1995 -------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 1,616 $ 942 Restricted funds 94,237 56,036 Accounts receivable - trade 32,374 35,321 Fuel inventory and other current assets 2,131 2,862 -------------- ------------ Total current assets 130,358 95,161 Property, plant and equipment, at cost: Land 5,875 5,875 Electric and steam generating facilities 752,677 750,769 -------------- ------------ 758,552 756,644 Accumulated depreciation (28,317) (18,928) -------------- ------------ 730,235 737,716 Debt issuance costs 10,807 11,350 Other assets 967 1,661 -------------- ------------ Total assets $ 872,367 $ 845,888 ============== ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Trade payables $ 21,228 $ 20,190 Accrued interest 30,460 30,910 Current portion of long-term debt 9,030 11,382 Accrued construction costs and retentions 9,185 16,587 -------------- ------------ Total current liabilities 69,903 79,069 Long-term debt: 7.90% secured notes due 2002 133,854 138,957 8.50% secured bonds due 2007 150,839 150,839 9.00% secured bonds due 2013 408,609 408,609 -------------- ------------ 693,302 698,405 Other liabilities 8,984 5,680 Commitments and contingencies Partners' capital 100,178 62,734 -------------- ------------ Total liabilities and partners' capital $ 872,367 $ 845,888 ============== ============ See notes to consolidated financial statements. - 3 - SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands) Three Months Six Months Ended June 30, Ended June 30, ------------------------------- ------------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Revenue $ 82,172 $ 82,569 $ 195,582 $ 169,555 ------------ ------------ ------------ ------------ Cost of sales: Fuel 44,953 46,876 98,180 94,776 Operations and maintenance 9,985 10,315 20,318 19,525 Depreciation 4,694 4,705 9,389 9,410 ------------ ------------ ------------ ------------ 59,632 61,896 127,887 123,711 ------------ ------------ ------------ ------------ Operating income 22,540 20,673 67,695 45,844 Non-operating income (expenses): Interest expense (15,887) (16,180) (31,689) (32,260) Other income, net 966 3,225 1,430 3,411 ------------ ------------ ------------ ------------ Net income $ 7,619 $ 7,718 $ 37,436 $ 16,995 ============ ============ ============ ============ See notes to consolidated financial statements. - 4 - SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (Unaudited) (In thousands) Unrealized Loss on Total General Limited Marketable Partners' Partner Partners Securities Capital ------------ ----------- ----------- ---------- Balance, January 1, 1996 $ 3,141 $ 59,601 $ (8) $ 62,734 Net income 3,744 33,692 -- 37,436 Change in unrealized loss on marketable securities -- -- 8 8 --------- ------------ ----------- --------- Balance, June 30, 1996 $ 6,885 $ 93,293 $ -- $ 100,178 ========= ============ =========== ========= See notes to consolidated financial statements. - 5 - SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, -------------------- 1996 1995 -------- -------- Cash flows from operating activities: Net income $ 37,436 $ 16,995 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 9,389 9,410 Amortization of deferred financing costs 543 536 Changes in operating assets and liabilities: Accounts receivable - trade 2,947 (19,202) Fuel inventory and other current assets 731 (2,291) Other assets 694 -- Trade payables 1,038 16,468 Accrued interest payable (450) -- Other liabilities 3,304 2,870 -------- -------- Net cash provided by operating activities 55,632 24,786 -------- -------- Cash flows from investing activities: Construction costs (9,310) (26,297) Restricted funds (38,193) 393 Investment of funds designated for construction -- (31,283) -------- -------- Net cash used in investing activities (47,503) (57,187) -------- -------- Cash flows from financing activities: Principal payments of long-term debt (7,455) (7,454) Capital contribution -- 40,000 -------- -------- Net cash provided by (used in) financing activities (7,455) 32,546 -------- -------- Net increase in cash and cash equivalents 674 145 Cash and cash equivalents at beginning of period 942 4 -------- -------- Cash and cash equivalents at end of period $ 1,616 $ 149 ======== ======== Supplement cash flow information Cash payments: Interest (net of amounts capitalized) $ 30,736 $ 31,031 See notes to consolidated financial statements. - 6 - SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) NOTES TO 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 (the "Project") located in the Town of Scriba, County of Oswego, New York. The Partnership commenced commercial operation for financial reporting purposes on December 29, 1994. The majority of the capacity and electric energy generated by the Project is sold to Consolidated Edison Company of New York, Inc. ("Con Edison") and Alcan Aluminum Corporation with the remainder of the electric energy being sold to Niagara Mohawk Power Corporation ("Niagara Mohawk"). 2. Basis of Presentation The accompanying consolidated balance sheets at June 30, 1996 and December 31, 1995 and the consolidated statements of operations for the three and six months ended June 30, 1996 and 1995 and cash flows for the six months ended June 30, 1996 and 1995 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, 1995 for the Partnership and its wholly-owned subsidiary, Sithe/Independence Funding Corporation. The results of operations for the three and six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the full year. The unaudited financial information at June 30, 1996 and for the three and six months ended June 30, 1996 and 1995 contains all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the operating results for such periods. - 7 - 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 and cost of sales for the second quarter of 1996 decreased by $.4 million (.5%) and $2.3 million (4%), respectively, over the corresponding quarter of last year. Revenue decreased slightly as the impacts of a longer Spring maintenance outage than in 1995 and a first quarter 1996 tariff adjustment payment to Niagara Mohawk were largely offset by higher avoided cost based tariff prices on energy deliveries to Con Edison and a 1995 tariff adjustment payment from Con Edison. The decrease in cost of sales primarily reflected lower fuel costs as a result of the extended maintenance outage and a rebate of first quarter fuel costs resulting from the downward adjustment to Niagara Mohawk's first quarter 1996 tariffs. As a result of these factors, operating income for the second quarter increased by $1.9 million (9%) over the corresponding quarter of last year. Revenue, cost of sales and operating income for the first six months of 1996 increased by $26.0 million (15%), $4.2 million (3%), and $21.9 million (48%), respectively, over the corresponding period of last year, with the increases reflecting higher avoided cost based tariff prices on energy deliveries to Con Edison, a 1995 tariff adjustment payment from Con Edison, overall higher plant availability and incremental revenue from selling gas instead of generating electricity at certain times during the first quarter of 1996. Interest expense for the second quarter of 1996 decreased by $.3 million (2%) from the corresponding quarter of last year as a result of lower outstanding amounts of long-term debt. Other income, net, for the second quarter of 1996 consisted of interest income. Other income, net, for the second quarter of 1995 consisted of $1.1 million of interest income and $2.1 million of income from a natural gas arbitrage transaction. Interest expense for the first six months of 1996 decreased by $.6 million (2%) from the corresponding period of last year as a result of lower outstanding amounts of long-term debt. Other income, net, for the first six months of 1996 consisted of interest income. Other income, net, for the first six months of 1995 consisted of $1.5 million of interest income, $2.1 million of income from a natural gas arbitrage transaction and $.2 million of realized losses on short-term investments designated for construction. Liquidity and Capital Resources The Partners have obtained a credit facility under which one or more letters of credit may be issued in connection with their obligations pursuant to certain Project contracts, and, as of June 30, 1996, letters of credit aggregating $17.0 million were outstanding in connection with such obligations. - 8 - The Partnership secured the Project's debt service obligations with a letter of credit in the amount of $50 million and entered into a secured working capital facility for a maximum available amount of $20 million through January 1997, which may be extended by the parties thereto for additional one-year periods. Amounts outstanding under the working capital facility will accrue interest at the prime commercial lending rate of the reference bank in effect from time to time. To secure the Partnership's obligation to pay interest, principal and other amounts payable in respect of the working capital facility, the working capital provider has been assigned a security interest and lien on all of the collateral in which the holders of the Partnership's long-term debt issued to finance the development and construction of the Project have been assigned a security interest and lien. The Partnership presently believes that funds available from cash on hand, operations, the working capital facility and the debt service letter of credit will be more than sufficient to liquidate Partnership obligations as they come due and to pay 1996 Project debt service. The Partnership is required to fund reserves for debt service and major overhauls from available cash flow after debt service as follows: $32.3 million in 1996, $16.4 million in 1997 and approximately $6 million annually thereafter. Changes in the avoided-cost-based energy component of billings by the Partnership to Con Edison will impact the Partnership's profitability, particularly during the first five years of operation when the price for gas associated with energy deliveries to Con Edison is fixed. - 9 - PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No. Description of Exhibit ----------- ---------------------- 27 ---- Article 5 Financial Data Schedule of Sithe/Independence Power Partners, L.P. for the quarter ended June 30, 1996. (b) Reports on Form 8-K: No report on Form 8-K was filed during the quarter covered by this report. - 10 - 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, 1996 /s/ Richard J. Cronin III ------------------------- Richard J. Cronin III Chief Financial Officer and 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, 1996 /s/ Richard J. Cronin III ------------------------- Richard J. Cronin III Chief Financial Officer and Vice President (Principal Financial and Accounting Officer) - 11 -