Item 4. Submission of Matters to a Vote of Security Holders 12
Part II -------
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters (Not applicable) --
Item 6.
ITEM 6. SELECTED FINANCIAL DATA
The Partnership was in the development stage from its inception in November 1990 through December 29, 1994. All construction costs and all project development costs incurred subsequent to obtaining the Con Edison Energy Purchase Agreement in 1991 were capitalized.
The selected consolidated financial data presented below for, and at the end of, each of the years in the five year period ended December 31, 1997 are derived from the Partnership's audited consolidated financial statements.
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(a) The Partnership commenced commercial operation for financial reporting purposes on December 29, 1994. The net losses for 1994 and 1993 are attributable to the net interest expense resulting from the excess of the 8.65% weighted average interest rate on the Securities over the rate earned on the investment of the unspent construction funds which was required to be charged against income.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Partnership was formed to develop, construct and own the Project. The Partnership was in the development stage from its inception, November 1, 1990, through December 29, 1994, when the Project commenced commercial operation for financial reporting purposes.
Results of Operations -- 1997, 1996 and 1995
Revenue for 1997 decreased from 1996 by $23.6 million (6%) due to lower incremental revenue from selling gas instead of electricity as the mild 1997 winter and resultant low gas prices afforded fewer arbitrage opportunities than in 1996; the fact that 1996 included a 1995 tariff adjustment payment from Con Edison; one less day of generation than in 1996 which was a leap year; and a change in the mix of sales due to certain curtailments on transmission of energy deliveries to Con Edison.
Cost of sales for 1997 increased by $2.0 million (.8%) from 1996 due to higher fuel costs as a result of a scheduled price increase under the Partnership's long-term gas supply contract and higher depreciation expense, partially offset by an $8.2 million credit to maintenance expense that the Partnership was required to record in connection with the discontinuance of its major overhaul cost normalization policy for its gas turbines, steam turbines and generators.
Revenue and cost of sales for 1996 increased by $43.1 million (13%) and $12.9 million (5%), respectively, over 1995. Revenue increased as a result of 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 1996. The increase in cost of sales was primarily attributable to higher fuel costs reflecting higher quantities and the scheduled increase in the price of gas associated with energy deliveries to Con Edison. As a result of these factors, operating income for 1996 increased by $30.3 million (34%) over 1995 which was the Partnership's first full year of operations.
Interest expense for 1997 and 1996 decreased by $1.4 million (2%) and $.8 million (1%) from 1996 and 1995 respectively, as a result of lower outstanding amounts of long-term debt.
Interest and other income, net, for 1997 and 1996 consisted of interest income. Interest and other income, net for 1995 consisted of $2.6 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
Financing for the Project consisted of a loan to the Partnership by Sithe Funding of the proceeds of its issuance of $717.2 million of notes and bonds and $60 million of capital contributions by the Partners. In addition, the Partners 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 December 31, 1997, letters of credit aggregating $14.1 million were outstanding in connection with such obligations. Also, the Partnership secured the Project's debt service obligations with a letter of credit in the amount of $50 million and as of December 31, 1997, the Project's cumulative additional debt service and major overhaul reserve requirements of $33.0 million and $5.4 million, respectively, were fully funded. 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.
Although the Partnership's net income could decline through the fourth quarter of 1999 due largely to Tier I gas pricing increasing at a greater rate than increases in the energy component of billings to Con Edison, 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.
The Partnership utilizes a number of computerized operating and control systems at the Project, including applications used in plant operations and various administrative functions. To the extent that the computer applications can not properly interpret the calendar year 2000 and beyond, some level of modification or replacement of such applications will be necessary. The Partnership is working to identify its applications that are not year 2000 compliant and plans to modify or replace such applications, as necessary. Based upon information currently available about the Partnership's systems that are non-compliant and the Partnership's ongoing, normal course-of-business efforts to upgrade or replace critical systems, as necessary, the Partnership does not expect that year 2000 compliance costs will have a material adverse impact on its financial statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to financial statements appears on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
All management functions of the Partnership are the responsibility of the General Partner.
The following table sets forth certain information with respect to directors and executive officers of Sithe Funding and the General Partner:
Name Age Position ---- --- --------
William Kriegel 52 Chairman of the Board, Chief Executive Officer and President Bruce J. Wrobel 40 Executive Vice President Steven D. Burton 50 Secretary, General Counsel and Director Richard J. Cronin III 51 Chief Financial Officer, Senior Vice President and Director Frank J. Donohoue 50 Senior Vice President for Construction Ralph J. Grutsch 65 Senior Vice President for Operations Sandra J. Manilla 46 Treasurer and Vice President W. Harrison Wellford 57 Director
William Kriegel founded Sithe Energies in 1984 and has been Chairman of the Board, President and Chief Executive Officer of Sithe Energies since that time. Mr. Kriegel also serves in such capacities for each of the Limited Partners and the Operator. Prior to coming to the United States in 1984, Mr. Kriegel co-founded an unaffiliated French energy company that within three years of its formation in 1980 became France's largest privately-owned company engaged in the development of small hydroelectric projects. In 1978, he co-founded S.I.I.F., S.A., an unaffiliated company specializing in the purchase and rehabilitation of residential buildings and historical properties in France.
Bruce J. Wrobel has served as Executive Vice President in charge of project development and finance activities for Sithe Energies since January 1986. Mr. Wrobel also serves in such capacity for each of the Limited Partners and the Operator. From 1980 to 1986, he was Vice President for business development and project finance at Mitex, an alternative energy development company which was co-founded by Mr. Wrobel and acquired by Sithe Energies in 1986. Prior to 1980, he was with Temple, Barker & Sloan as a member of its Energy Strategy and Management Group.
Steven D. Burton has been Secretary and General Counsel of Sithe Energies since January 1987. Mr. Burton also serves in such capacities for each of the Limited Partners and the Operator. From 1984 to 1986, he was a consultant to Sithe Energies while he was a Vice President and General Counsel of Winner/Wagner & Associates, Inc., a communications and political consulting firm which specializes in energy related issues. Prior to entering private practice, he served as Chief Counsel to the California Air Resources Board. Mr. Burton is Chairman of the Electric Power Supply Association. He has also chaired the efforts of the California Independent Energy Producers on industry restructuring and currently serves as President of the Independent Power Producers of New York.
Richard J. Cronin III has been Senior Vice President since September 1996 and Chief Financial Officer and Vice President of Sithe Energies since September 1990. Mr. Cronin also serves in such capacities for each of the Limited Partners and the Operator. From September 1986 to September 1990, Mr. Cronin was Vice President and Director of Financial Reporting at Drexel Burnham Lambert, Inc., a financial services company. His prior financial experience, in reverse chronology, includes eight years at Freeport-McMoRan, Inc., three years at American Electric Power, Inc. and five years at Coopers & Lybrand.
Frank J. Donohue joined Sithe Energies as Senior Vice President for Construction in March 1992. Mr. Donohue has over 19 years of experience in heavy industrial construction and construction contract negotiation and management. From 1977 until 1992, he was with Century Contractors West, Inc. where, as Vice President of Operations, he had direct responsibility for construction projects, including nine cogeneration projects representing over 1,500 MW of capacity.
Ralph J. Grutsch is Senior Vice President for Operations and has been with Sithe Energies since its acquisition in 1988 of Energy Factors, Incorporated, which was a publicly-held independent energy producer and of which he was a co-founder. Mr. Grutsch also serves in such capacity for each of the Limited Partners and the Operator. Mr. Grutsch served as President and Chief Operating Officer of Energy Factors immediately prior to its acquisition by Sithe Energies. From 1964 until 1983, Mr. Grutsch was with Solar Turbines, Incorporated where he held numerous management positions ultimately serving as Senior Vice-President-Marketing and director of that company.
Sandra J. Manilla joined Sithe Energies in September 1986 and has been Vice President since September 1996 and Treasurer since May 1990. Ms. Manilla also serves in such capacities for each of the Limited Partners and the Operator. From 1979 until 1986, she worked in Deloitte & Touche's consulting group where she managed several financial consulting engagements with the Government. From 1976 until 1979, Ms. Manilla was Assistant to the Special Deputy Comptroller of New York City and, prior to that, spent three years on Citicorp's internal audit staff.
W. Harrison Wellford is currently a partner in the law firm of Latham & Watkins and specializes in energy, trade, and environmental law. During the transition from the Bush to Clinton administration, he served as White House transition adviser and as a member of the Economic Policy Group. From 1977 to 1981, he served as Executive Director of the Office of Management and Budget in the White House. Mr. Wellford is also a fellow of the National Academy of Public Administration.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
No cash compensation or non-cash compensation was paid in 1997 or is proposed to be paid in the current calendar year to any of the executive officers listed under Item 10. "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT" for their services to Sithe Funding, the Partnership or the General Partner. Operations and maintenance services for the Project are performed on a cost reimbursement basis by the Operator pursuant to the Operations and Maintenance Agreement. In addition, the Operator receives a $551,250 annual fee, which escalates at the rate of 5% per annum, for certain management and administrative services provided by it. See Item 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following information is given with respect to the Partners of the Partnership:
Amount and Nature Percentage Name and Address of Beneficial Ownership Title of Class of Beneficial Owner Ownership (1)(2) Interest -------------- ------------------- ---------------- --------
Partnership Interest Sithe/Independence, Inc. General Partner 1% 450 Lexington Avenue New York, NY 10017
Partnership Interest Sithe Energies, Inc. Limited Partner 45% 450 Lexington Avenue New York, NY 10017
Partnership Interest Sithe Energies U.S.A., Inc. Limited Partner 44% 450 Lexington Avenue New York, NY 10017
Partnership Interest Mitex, Inc. Limited Partner 10% 450 Lexington Avenue New York, NY 10017
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(1) None of the persons listed has the right to acquire beneficial ownership of Securities as specified in Rule 13d-3(d)(1) under the Securities Exchange Act of 1934.
(2) Sithe Energies is the direct or indirect beneficial owner of each of the other Partners.
Except as specifically provided or required by law, Limited Partners may not participate in the management or control of the Partnership. Thus, although the General Partner has the smallest interest in the Partnership, it has sole responsibility for management of the Partnership. The General Partner is an indirect wholly-owned subsidiary of Sithe Energies, a Limited Partner. See Item 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Operation and maintenance services for the Project are provided on a cost reimbursement basis by the Operator pursuant to an Operations and Maintenance Agreement, dated as of August 15, 1992, between the Partnership and the Operator. The Operator receives a $551,250 annual fee, which escalates at a rate of 5% per annum, for certain management and administrative services provided by it. See Items 1, 2 and 3. "BUSINESS, PROPERTIES AND LEGAL PROCEEDINGS -- The Project -- Operations and Maintenance." Management and administrative services performed by the Operator, with the prior consent of the Partnership, include collecting of all sums payable to or due the Partnership under the Project Documents and accounting for and depositing all such funds in the operating account; obtaining such insurance as is necessary to protect the interest of the Partnership and complying with the provisions of the Project Documents; estimating and advising the Partnership of all federal, state and local taxes payable by the Partnership that are attributable to the ownership and operation of the Project; and determining and recommending to the Partnership any necessary or desirable improvements, modifications or alterations to the Project. Upon the occurrence of any transfer, assignment or reassignment of the Partnership's interest in the Project wherein neither the Partnership nor any affiliate of the Partnership (other than the Operator) retains an interest in the Project, the continuance of the Operator's duties and obligations under the Operations and Maintenance Agreement are expressly conditioned upon the renegotiation of the Operator's compensation.
Mr. Wellford is a partner in the law firm of Latham & Watkins, which firm from time to time serves as outside legal counsel for Sithe Energies and the Partnership.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Sithe/Independence Power Partners, L.P. Financial Statements Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Partners' Capital Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the three months ended December 31, 1997.
(c) Exhibits
Exhibit No. Description of Exhibit - ----------- ----------------------
3.1 --Certificate of Incorporation of Sithe/Independence Funding Corporation ("Sithe Funding") * 3.2 --By-laws of Sithe Funding * 3.3 --Certificate of Limited Partnership of Sithe/Independence Power Partners, L.P. (the "Partnership") * 3.4 --Amendment to Certificate of Limited Partnership of the Partnership * 3.5 --Agreement of Limited Partnership of Sithe/Independence Power Partners, L.P., among Sithe/Independence, Inc. (the "General Partner"), Sithe Energies, Inc., Sithe Energies U.S.A., Inc. and Mitex, Inc.* 3.6 --Certificate of Incorporation of the General Partner * 3.7 --Amendment to Certificate of Incorporation of the General Partner * 3.8 --By-laws of the General Partner * 4 --Indenture 4.1 --Indenture dated as of January 1, 1993 among Sithe Funding, the Partnership and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee")* 4.2 --First Series Supplemental Indenture dated as of January 1, 1993 among Sithe Funding, the Partnership and the Trustee * 10.1 --Credit Facilities 10.1.1--Senior Secured Revolving Credit Agreement among Sithe Energies, Inc. (as Borrower) and Energy Factors, Incorporated and Sithe Energies, U.S.A., Inc. and Sithe International, Inc. and Sithe Energies Development Corporation (together with the Borrower as Loan Parties) and Bank of Montreal and the additional Financial Institutions from time to time set forth on Appendix I (the Lenders) and Bank of Montreal (as Agent) dated as of December 19, 1997. ****** 10.1.2--Amended and Restated Letter of Credit and Reimbursement Agreement among the Partnership, the Banks named therein and the Sumitomo Bank, Limited, New York Branch, dated September 28, 1994. *** 10.2 --Intentionally Omitted 10.3 --Power Purchase Agreements 10.3.1--Energy Purchase Agreement, dated May 20, 1991, by and between Consolidated Edison Company of New York, Inc. ("Con Ed") and Lake View, Inc. * 10.3.2--Supplement No. 1 to Contract No. 403, dated September 27, 1991, by and between Con Ed and Tamarac Properties (Lake View, Inc.) * 10.3.3--Assignment and Assumption of Energy Purchase Agreement, dated as of December 9, 1992, entered into by the General Partner (formerly named Lake View, Inc.), Con Ed and the Partnership * 10.3.4--Amendment to Energy Purchase Agreement, dated as of December 9, 1992, entered into between the Partnership and Con Ed * 10.3.5--Amendment to Energy Purchase Agreement dated as of April 5, 1993 between the Partnership and Con Ed * 10.3.6--Power Purchase Agreement, dated as of July 24, 1992, between the Partnership and Niagara Mohawk Power Corporation ("Niagara Mohawk")* 10.3.7--First Amendment to the Power Purchase Agreement, dated as of November 16, 1992, between the Partnership and Niagara Mohawk * 10.3.8--Energy Sales Contract, dated as of November 18, 1992, between the Partnership and Alcan Aluminum Corporation d/b/a Alcan Rolled Products Company ("Alcan") * 10.3.9--Letter Agreement dated January 29, 1993 between Alcan and the Partnership regarding Sections 9.12 and 9.13 of the Alcan Energy Sales Contract * 10.3.10-Amendment No. 1 to the Energy Sales Contract dated as of February 3, 1993 between Alcan and the Partnership *
10.3.11-Written notice dated March 10, 1993 from Alcan to the Partnership exercising the Fixed Price Option for Energy Sales Contract * 10.3.12-Fixed Price Option for Energy Sales Contract between Alcan and the Partnership * 10.3.13-Amendment No. 2 to the Energy Sales Contract dated March 21, 1996 between the Partnership and Alcan ***** 10.4 -Amended and Restated Operations and Maintenance Agreement, dated as of August 25, 1992, between the Partnership and Sithe Energies Power Services, Inc. * 10.5 -Transmission Agreements 10.5.1 -Transmission Services Agreement, dated as of November 5, 1991, between Niagara Mohawk and Lake View, Inc. * 10.5.2 -Assignment, Assumption and Amendment of Transmission Services Agreement, dated as of March 9, 1992, between Niagara Mohawk, the General Partner and the Partnership * 10.6 -Interconnection Agreements 10.6.1 -Interconnection Agreement, dated as of March 9, 1992, between the Partnership and Niagara Mohawk * 10.6.2 -Supplement to Interconnection Agreement, dated as of March 10, 1992, between the Partnership and Niagara Mohawk * 10.6.3 -Amendment No. 1 to Interconnection Agreement, dated as of July 24, 1992, between the Partnership and Niagara Mohawk * 10.6.4 -Amendment No. 2 to the Interconnection Agreement, dated as of November 17, 1992, entered into by Niagara Mohawk and the Partnership ** 10.7 -Gas Supply Agreements 10.7.1 -Amended and Restated Base Gas Sales Agreement, dated as of October 26, 1992, between the Partnership and Enron Power Services, Inc. ("Enron") * 10.7.2 -First Amendment to Amended and Restated Base Gas Sales Agreement, dated as of December 1, 1992, between the Partnership and Enron * 10.7.3 -Second Amendment to Amended and Restated Base Gas Sales Agreement dated as of August 1, 1992 between the Partnership and Enron ** 10.7.4 -Third Amendment to Amended and Restated Base Gas Sales Agreement dated as of December 31, 1993 between the Partnership and Enron ** 10.7.5 -Base Guarantee Agreement, dated as of December 1, 1992, by Enron Corp. in favor of the Partnership * 10.7.6 -Fourth Amendment to Amended and Restated Base Gas Sales Agreement dated October 31, 1994 by and between Enron Power Services, Inc. and the Partnership. *** 10.7.7 -Fifth Amendment to Amended and Restated Base Gas Sales Agreement dated January 30, 1995 by and between Enron Capital & Trade Resources Corp. and the Partnership. *** 10.7.8 -Sixth Amendment to Amended and Restated Base Gas Sales Agreement dated March 1, 1995 by and between Enron Capital & Trade Resources Corp. and the Partnership. *** 10.7.9 -Seventh Amendment to Amended and Restated Base Gas Sales Agreement dated March 31, 1995 by and between Enron Capital & Trade Resources Corp. and the Independence Partnership. **** 10.8 -Gas Transportation Agreements 10.8.1 -Gas Transportation Agreement, dated as of March 11, 1992, by and between the Partnership and Niagara Mohawk * 10.8.2 -Transportation Service Agreement, dated as of May 5, 1992, by and between the Partnership and Great Lakes Gas Transmission Limited Partnership ("Great Lakes") * 10.8.3 -Supplemental Agreement, dated May 6, 1992, between the Partnership and Great Lakes* 10.8.4 -Amended and Restated FTS Agreement, dated as of November 23, 1992, between the Partnership and ANR Pipeline Company ("ANR") * 10.8.5 -Precedent Agreement for Firm Transportation Service, dated as of March 20, 1992, between the Partnership and Panhandle Eastern Pipe Line Company ("Panhandle") * 10.8.6 -Discounted Rate for Firm Transportation Services Agreement, dated March 20, 1992, between the Partnership and Panhandle *
10.8.7 -Agreement, dated as of October 4, 1993 between the Partnership and Empire State Pipeline Company, Inc. ("Empire"), St. Clair Pipeline Company, Inc. and Energy Line Corporation, providing for firm transportation service (Contract No. 95000) ** 10.8.8 -Supplemental Agreement, dated as of February 28, 1992, between Empire and the Partnership (incorporated by reference into Agreement dated as of October 4, 1993) ** 10.8.9 -Firm Service Contract dated as of March 9, 1994, between TransCanada Pipelines, Ltd. ("TCPL") and the Partnership re Panhandle Volumes ** 10.8.10-Firm Service Contract dated as of March 9, 1994, between TCPL and the Partnership re ANR Volumes ** 10.8.11-Contract No. M12012, M12 Firm Transportation Contract Dawn to Kirkwall, dated as of April 6, 1992, between Union Gas Limit ("Union") and the Partnership * 10.8.12-Contract No. M12016, M12 Firm Transportation Contract Dawn to Kirkwall, Enron Corp., dated as of April 21, 1992, between Union and the Partnership * 10.8.13-Contract No. M12017, M12 Firm Transportation Contract Dawn to Kirkwall, dated as of April 10, 1992, between Union and the Partnership * 10.8.14-Amending Agreement for M12 Firm Transportation Contract (No. M12017) dated as of February 19, 1993 between Union and the Partnership * 10.8.15-Contract No. M12022, M12 Firm Transportation Contract Dawn to Kirkwall, dated as of April 20, 1992, between Union and the Partnership * 10.8.16-Amending Agreement for M12 Firm Transportation Contract (No. M12022) dated as of February 19, 1993 between Union and the Partnership * 10.8.17-Contract No. C10018, C-1 Firm Transportation Contract Ojibway to Dawn, dated as of April 10, 1992, between Union and the Partnership * 10.8.18-Amending Agreement for C-1 Firm Transportation Contract (No. C10018) dated as of February 19, 1993 between Union and the Partnership * 10.8.19-Contract No. C10020, C-1 Firm Transportation Contract Ojibway to Dawn, dated as of April 20, 1992, between Union and the Partnership * 10.8.20-Amending Agreement for C-1 Firm Transportation Contract (No. C10020) dated as of February 19, 1993 between Union and the Partnership * 10.8.21-Union Supplemental Letter, dated May 26, 1992, between Union and the Partnership * 10.8.22-Union Supplemental Letter, dated November 4, 1992, between Union and the Partnership* 10.8.23-Assignment Agreement dated as of March 9, 1994 between TCPL, Union and the Partnership ** 10.8.24-Firm Transportation Service Agreement dated July 13, 1994 by and between Panhandle Eastern Pipeline Company and the Partnership. *** 10.8.25-Service Agreement dated August 8, 1994 by and between Great Lakes Gas Transmission Limited Partnership and the Partnership (FT089) *** 10.8.26-Service Agreement dated August 19, 1994 by and between Great Lakes Gas Transmission Limited Partnership and the Partnership (FT056-02) *** 10.8.27-Gathering Agreement by ANR Pipeline Company and the Partnership dated May 1, 1994. *** 10.8.28-Second Amended and Restated Agreement dated August 23, 1994 by and between ANR Pipeline Company and the Partnership. *** 10.8.29-FTS-1 Service Agreement dated August 23, 1994 by and between ANR Pipeline Company and the Partnership. *** 10.9 -Agreements re Real Property 10.9.1 -Main Transmission Line Licensing Agreement, dated as of November 18, 1992, between the Partnership and Alcan * 10.9.2 -Piping and Wiring Licensing Agreement, dated as of November 18, 1992, between the Partnership and Alcan * 10.9.3 -Mortgage and Security Agreement, dated as of January 1, 1993, given by County of Oswego Industrial Development Agency (the "IDA") and the Partnership to Manufacturers and Traders Trust Company (the "Collateral Agent") *
10.9.4 -Mortgage and Security Agreement, dated as of January 1, 1993, given by the IDA and the Partnership to the Collateral Agent * 10.9.5 -Mortgage and Security Agreement, dated as of January 1, 1993, given by the IDA and the Partnership to the Collateral Agent * 10.9.6 -Credit Line Mortgage and Security Agreement, dated as of January 1, 1993, given by the IDA and the Partnership to the Collateral Agent * 10.9.7 -First Building Loan Mortgage and Security Agreement, dated as of January 1, 1993, given by the IDA and the Partnership to the Collateral Agent * 10.9.8 -Second Building Loan Mortgage and Security Agreement, dated as of January 1, 1993, given by the IDA and the Partnership to the Collateral Agent * 10.9.9 -First Building Loan Agreement, dated as of January 1, 1993, among the Trustee, Sithe Funding and the Partnership * 10.9.10-Second Building Loan Agreement, dated as of January 1, 1993, among the Trustee, Sithe Funding and the Partnership * 10.9.11-Bill of Sale and Assignment and Assumption Agreement dated as of August 25, 1992 between the General Partner, as assignor, and the Partnership, as assignee * 10.10 -Water Service Agreements 10.10.1-Water Service Agreement, dated as of May 11, 1992, by and between the Partnership and the City of Oswego * 10.10.2-Water Facilities Agreement, dated as of August 18, 1992, between the Partnership and the County of Oswego * 10.11 -IDA Agreements 10.11.1-Lease Agreement, dated as of January 22, 1993, between the IDA and the Partnership* 10.11.2-Ground Lease, dated as of January 22, 1993, between the IDA and the Partnership * 10.11.3-Payment in Lieu of Taxes Agreement dated as of January 22, 1993 between the IDA and the Partnership * 10.12 -Security Documents 10.12.1-Collateral Agency and Intercreditor Agreement, dated as of January 1, 1993, among Union Bank, the Trustee, Enron, the Partnership, Sithe Funding, the IDA and the Collateral Agent* 10.12.2-Security Agreement and Assignment of Contracts, dated as of January 1, 1993, made by the Partnership in favor of the Collateral Agent * 10.12.3-Partner Security Agreement, dated as of January 1, 1993, among the General Partner, Sithe Energies U.S.A., Inc., Sithe Energies, Inc., Mitex, Inc. and the Collateral Agent* 10.12.4-Equity Contribution Agreement, dated as of January 1, 1993, by the General Partner, Sithe Energies, Inc., Sithe Energies U.S.A., Inc., Mitex, Inc. in favor of the Partnership and for the benefit of the Collateral Agent *
27 -Article 5 Financial Data Schedule of the Partnership for the year ended December 31, 1997 ****** - ----------------
* Incorporated herein by reference from the Registration Statement on Form S-1, file No. 33-59960, filed with the Securities and Exchange Commission (the "SEC") by Sithe/Independence Power Partners, L.P. on March 23, 1993, as amended.
** Incorporated herein by reference from the Annual Report on Form 10-K for the year ended December 31, 1993 for Sithe/Independence Power Partners, L.P. filed with the SEC.
*** Incorporated herein by reference from the Annual Report on Form 10-K for the year ended December 31, 1994 for Sithe/Independence Power Partners, L.P. filed with the SEC.
**** Incorporated herein by reference from the Annual Report on Form 10-K for the year ended December 31, 1995 for Sithe Independence Power Partners, L.P. filed with the SEC.
***** Incorporated herein by reference from the Annual Report on Form 10-K for the year ended December 31, 1996 for Sithe/Independence Power Partners, L.P. filed with the SEC.
****** Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Sithe/Independence Funding Corporation -------------------------------------- (Registrant)
March 31, 1998 /s/ Richard J. Cronin III --------------------------- Richard J. Cronin III Chief Financial Officer and Senior Vice President (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ William Kriegel Chief Executive Officer, President March 31, 1998 ------------------------ and Director (Principal Executive William Kriegel Officer)
/s/ Bruce Wrobel Executive Vice President and March 31, 1998 ----------------------- Director Bruce Wrobel
/s/ Frank Donohue Senior Vice President and Director March 31, 1998 ----------------------- Frank Donohue
/s/ Steven D. Burton Secretary, General Counsel and March 31, 1998 -------------------------- Director Steven D. Burton
/s/ Richard J. Cronin III Chief Financial Officer, Senior March 31, 1998 -------------------------- Vice President and Director Richard J. Cronin III (Principal Financial and Accounting Officer)
/s/ W. Harrison Wellford Director March 31, 1998 --------------------------- W. Harrison Wellford
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the co-registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Sithe/Independence Power Partners, L.P. --------------------------------------- (Co-Registrant)
By: Sithe/Independence, Inc. ------------------------ General Partner
March 31, 1998 /s/ Richard J. Cronin III --------------------------- Richard J. Cronin III Chief Financial Officer and Senior Vice President (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ William Kriegel Chief Executive Officer, President March 31, 1998 ------------------------ and Director (Principal Executive William Kriegel Officer)
/s/ Bruce Wrobel Executive Vice President and March 31, 1998 ----------------------- Director Bruce Wrobel
/s/ Frank Donohue Senior Vice President and Director March 31, 1998 ----------------------- Frank Donohue
/s/ Steven D. Burton Secretary, General Counsel and March 31, 1998 -------------------------- Director Steven D. Burton
/s/ Richard J. Cronin III Chief Financial Officer, Senior March 31, 1998 -------------------------- Vice President and Director Richard J. Cronin III (Principal Financial and Accounting Officer)
/s/ W. Harrison Wellford Director March 31, 1998 --------------------------- W. Harrison Wellford
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership)
Page No. -------- Financial Statements
Independent Auditors' Report ...................................F-2 Consolidated Balance Sheets at December 31, 1997 and 1996 .....................................................F-3 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 ......................F-4 Consolidated Statements of Partners' Capital for the Years Ended December 31, 1997, 1996 and 1995 ............F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 ......................F-6 Notes to Consolidated Financial Statements.......................F-7
All financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the Financial Statements or Notes thereto.
INDEPENDENT AUDITORS' REPORT
SITHE/INDEPENDENCE POWER PARTNERS, L.P.
We have audited the accompanying consolidated balance sheets of Sithe/Independence Power Partners, L.P. (a Delaware limited partnership) and its subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sithe/Independence Power Partners, L.P. and its subsidiary as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche, LLP
New York, New York March 17, 1998
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership)
CONSOLIDATED BALANCE SHEETS (In thousands)
See notes to consolidated financial statements.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
See notes to consolidated financial statements.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (In thousands)
See notes to consolidated financial statements.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See notes to consolidated financial statements.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Partnership
Sithe/Independence Power Partners, L.P. (the "Partnership"), in which Sithe Energies, Inc. ("Sithe Energies") and certain of its direct and indirect wholly-owned subsidiaries (the "Partners") hold all the partnership interests, is a Delaware limited partnership that was formed in November 1990 for a term of 50 years to develop, construct and own a gas fired cogeneration facility with a design capacity of approximately 1,000 megawatts (the "Project") located in the Town of Scriba, County of Oswego, New York. Sithe/Independence, Inc., an indirect wholly-owned subsidiary of Sithe Energies, is the General Partner. The Project commenced commercial operation for financial reporting purposes on December 29, 1994 and on September 10, 1997, the Partnership notified the Trustee under the Indenture that final completion of construction had been achieved.
The Partnership has entered into a 40-year power sales contract with Consolidated Edison Company of New York ("Con Edison"), a 20-year power sales contract with Niagara Mohawk Power Corporation ("Niagara Mohawk") and a 22-year contract for thermal energy and electricity sales with Alcan Aluminum Corporation ("Alcan").
Sithe Energies is an independent energy producer engaged, through its subsidiaries, in the development, construction, ownership and operation of non-utility electric generating facilities. At December 31, 1997, Sithe Energies owned or leased twenty-four electric generating facilities, including the Project, representing approximately 1,912 megawatts ("MW") of operating capacity. Sithe Energies is actively pursuing a number of development projects in the United States and internationally as discussed in Business, Properties and Legal Proceedings. Sithe Energies is presently owned 59.7% by Compagnie Generale des Eaux, 29.5% by Marubeni Corporation and 10.8% by its two other founders.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of the Partnership and Sithe/Independence Funding Corporation ("Sithe Funding"), a wholly-owned subsidiary formed by the Partnership for the purpose of issuing debt securities in connection with financing the Project. All significant intercompany transactions and balances have been eliminated.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents, including restricted cash, consist of bank deposits, commercial paper and certificates of deposit that mature within three months of their purchase.
Restricted investments include U.S. treasury notes and other debt securities with maturities of more than three months from the date of their purchase.
Depreciation of electric and steam generating facilities is computed using the straight-line method over the 40-year estimated economic life of the Project.
Revenue from the sale of electricity and steam is recorded based upon output delivered and capacity provided at the payment rates as specified under contract terms.
Revenue for 1997 consisted of $353.5 million from sales of electricity and steam and $1.9 million from gas sale transactions with Con Edison, Niagara Mohawk and Alcan accounting for 92%, 5% and 3%, respectively, of the sales of electricity and steam. Revenue for 1996 consisted of $343.3 million from sales of electricity and steam and $35.7 million from gas sale transactions with Con Edison, Niagara Mohawk and Alcan accounting for 92%, 5% and 3%, respectively, of the sales of electricity and steam. During 1995, Con Edison, Niagara Mohawk and Alcan accounted for 91%, 6% and 3%, respectively, of revenue.
The Partnership evaluates the operating and financial performance of its long-lived assets for potential impairments in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which prescribes the method for measuring impairment. If an asset is determined to be impaired, the capitalized costs are written down to fair value.
Routine maintenance and repairs are charged to expense as incurred. Effective January 1, 1997, the Partnership entered into a twelve-year service agreement with General Electric Company ("GE") under which the Partnership will pay GE specified amounts per megawatt-hour of net generation to perform all scheduled major equipment overhauls for the Project's gas turbines, steam turbines and generators (the "covered units") during such period. As a result of such agreement, which, among other things, was entered into to lock in the cost of future major overhauls for the covered units, the Partnership discontinued the application of its major overhaul cost normalization policy for the covered units as of the beginning of the first quarter of 1997. In that connection, in the first quarter of 1997, the Partnership was required to reverse to income as a credit to maintenance expense the $8.2 million of major overhaul reserves for the covered units that had been established in prior years under that policy.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Legal fees and other direct costs incurred in connection with the issuance of long-term debt are being deferred and amortized to interest expense using the interest method over the term of the long-term debt.
Since the Partnership is not an income tax paying entity, the accompanying consolidated financial statements do not reflect any income tax effects. Sithe Funding is a taxable entity, but has no taxable income since its interest income is equal to its interest expense.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards for reporting comprehensive income. The Partnership is required to adopt SFAS No. 130 beginning in the first quarter of 1998 and, based on current circumstances, does not believe that adoption of this pronouncement will have a material impact on its financial statements.
3. Financing
Financing for the project consisted of a loan to the Partnership by Sithe Funding of the proceeds of its issuance of $717.2 million of notes and bonds (the "Securities") and $60 million of capital contributions by the Partners. Aggregate maturities of the Securities over the next five years are as follows: $18.9 million in 1998, $27.4 million in 1999, $19.3 million in 2000, $32.4 million in 2001 and $30.8 in 2002. The Securities are guaranteed by the Partnership and secured by substantially all of the assets of the Partnership.
In addition, the Partners 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 December 31, 1997, letters of credit aggregating $14.1 million were outstanding in connection with such obligations. The Partnership has funded the Project's debt service reserve fund with a letter of credit in the amount of $50 million and as of December 31, 1997 its cumulative additional debt service reserve and major overhaul reserve funding requirements of $33.0 million and $5.4 million, respectively, were fully funded. The Partnership is also required to fund additional reserves for debt service and major overhauls from available cash flow after debt service of approximately $6 million annually. To secure the Partnership's obligation to pay any amounts drawn under the debt service letter of credit, the letter of credit provider has been assigned a security interest and lien on all of the collateral in which the holders of the Securities have been assigned a security interest and lien.
The Partnership is precluded from making distributions to the Partners unless project reserve accounts are funded to specified levels, as discussed above, and unless the required debt service coverage ratio is met, which was the case in 1997 and 1996. A distribution to the Partners of $42.4 million was made in November 1997.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Although the Partnership's net income could decline through the fourth quarter of 1999 due largely to Tier I gas pricing increasing at a greater rate than increases in the energy component of billings to Con Edison, 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.
4. Financial Instruments
Financial instruments which potentially subject the Partnership to concentrations of risk consist principally of temporary cash investments, restricted funds and trade receivables. The Partnership invests its temporary cash investments and restricted investments in U.S. government obligations and financial instruments of highly-rated financial institutions. Trade receivables are from major regulated electric utilities and the associated credit risks are limited.
The carrying values reflected in the balance sheet at December 31, 1997 and 1996 reasonably approximate the fair values for cash and cash equivalents, restricted investments, trade receivables and construction payables and retentions. In making such assessment, the Partnership utilized credit reviews. The Partnership estimates that the fair value of the Securities at December 31, 1997 and 1996 were $762.7 million and $710.3 million, respectively, based on quoted market prices, which were $74.5 million and $11.9 million higher, respectively, than the historical carrying values of $688.2 million and $698.4 million, respectively.
At December 31, 1997 and 1996, the aggregate fair value of the Partnership's available-for-sale debt securities closely approximated the amortized cost of such securities.
5. Commitments and Contingencies
Litigation and Claims
On March 29, 1996, the Partnership filed a petition with the Federal Energy Regulatory Commission ("FERC") alleging Niagara Mohawk has been overcharging for the transmission of electricity in violation of the FERC policy by calculating transmission losses on an incremental basis. The Partnership believes that transmission losses should be calculated on an average basis. The Partnership has been recording its transmission expense at the disputed, higher rate. As of December 31, 1997, the Partnership estimates it was owed approximately $7.7 million for transmission overcharges. The Partnership requested that the FERC order Niagara Mohawk to recalculate the transmission losses beginning in October 1994, when it began wheeling power from the Project. In September 1996, the FERC issued an order dismissing the Partnership's complaint and requiring Niagara Mohawk to provide the Partnership with information regarding the calculation of transmission losses. In October 1996, the Partnership filed a request for rehearing of the FERC's order which was denied by
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the FERC. In December 1997, the Partnership filed a petition for review of the FERC orders in the United States Court of Appeals. The Court of Appeals has not yet set a briefing schedule for this proceeding. The Partnership intends to continue to vigorously pursue this matter.
Gas Supply
The Partnership has entered into a 20-year gas supply agreement with Enron Power Services, Inc. ("Enron"), and 20-year transmission services and interconnection agreements for gas transportation with several pipeline companies, each with a term or expected term of at least twenty years. Aggregate minimum commitments under these contracts over the next five years are as follows: $234.6 million in 1998, $245.0 million in 1999, $200.6 million in 2000, $200.8 million in 2001 and $201.0 in 2002.
The Partnership recognizes fuel expense for gas consumed at its plant based on pricing provided for in the Project's 20-year gas supply agreement with Enron. Pursuant to such agreement, the price for the first 116,000 MMBtu's of natural gas per day ("Tier I" gas) is fixed for the first five years of the agreement and thereafter fluctuates with pricing based on a pre-determined multiple of Con Edison's actual avoided energy price as well as certain other payments made by Con Edison to the Project. Up to an additional 76,291 MMBtu's of gas consumed per day by the Project ("Tier II" gas) is priced based on the pre-determined multiple applied to Niagara Mohawk's "energy only" rate.
Enron will maintain a notional tracking account to account for differences between the contract price and spot gas prices, except that there will be no such tracking with respect to the Tier I gas during the first five years of the contract. The tracking account would be increased if the then current spot gas price is greater than the contract price and would be decreased if the then current spot gas price is lower than the contract price. The tracking account bears interest at 1% over prime. Enron has been given a security interest in the plant, which is subordinated to payments for secured debt service and certain letter of credit reimbursement obligations, to secure any tracking account balance. As of December 31, 1997, the Partnership estimates that the balance in the tracking account amounted to approximately $103.0 million. If at any time the tracking account balance exceeds 50% of the plant's then fair market value, the Partnership will be required to reduce the tracking balance by paying to Enron the lesser of (a) the amount necessary to reduce the tracking balance to 50% of the plant's fair market value or (b) (i) during years 6 through 15 of the contract, all incremental revenues as defined in the contract and (ii) thereafter 50% of qualifying cash flows also as defined in the contract plus all incremental revenues. If a positive balance exists in the tracking account at the end of the contract term, the Partnership will be required either to pay the balance in the tracking account or to convey to Enron an equity ownership in the plant based on the ratio of the tracking account balance to the facility's fair market value at such time.
At present, the Partnership's expectation based on its projection of energy and gas prices is that there will not be a positive balance in the tracking account at the end of the contract term and that during the term of the contract it will not be required to make any tracking account balance reduction payments.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
The Partnership's power sales contract with Con Edison includes an option that would allow Con Edison to terminate the power sales contract with the Partnership upon satisfaction of certain conditions including assuming all of the Partnership's financial and contractual obligations related to the Project and paying an amount to the Partnership determined by a formula based on estimated future revenues and expenses under the contract.
Under the terms of the power sales contract with Con Edison, electricity will generally be sold to Con Edison at prices based on Con Edison's actual avoided energy costs plus a fixed price per KWH. 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.
A petition requesting permission to curtail (i.e., limit or suspend) purchases of power from independent power producers was filed by Niagara Mohawk, and the Public Service Commission of the State of New York (the "PSC") instituted a proceeding to consider the merits of the petition. In August 1996, the PSC issued a notice inviting comments regarding whether and when utilities should be permitted to curtail purchases from independent power producers. In December 1997, the Partnership submitted comments to the PSC with respect to this matter but the PSC has not yet issued an order. The Partnership intends to vigorously oppose any efforts by the PSC and/or individual utilities to curtail purchases of power from independent power producers. The Partnership's power sales contract with Niagara Mohawk covers up to approximately 300MW in any hourly period. A decision by the PSC permitting Niagara Mohawk to implement curtailment could adversely affect the Partnership's operating revenue.
6. Related Party Transactions
The Partnership has entered into an operations and maintenance agreement with Sithe Energies Power Services, Inc. ("Sithe Power Services"), an indirect wholly-owned subsidiary of Sithe Energies, under which Sithe Power Services will provide all operations and maintenance services for the Project for twenty years following the Date of Commercial Operation on a cost reimbursement basis. In addition, the agreement calls for the Partnership to pay Sithe Power Services a $551,250 annual fee, which escalates at 5% per annum, for management and administrative services, provided by Sithe Power Services to the Partnership.
During the second quarter of 1997, the Partnership obtained from the Trustee a release of the lien and transferred ownership of approximately 160 acres of land to a wholly-owned subsidiary of Sithe Energies. The land, which is not required for operation of the Project or for any potential future Project expansion, was transferred at book value (approximately $.9 million) and no gain or loss was recorded by the Partnership.