ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Partnership during the fourth quarter of 1996.
PART II
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. Statement of Operations Data is presented for 1996, 1995, 1994 and 1993 only since the Partnership did not have expenses or income prior to 1993.
The selected financial data have been derived from the audited consolidated financial statements of the Partnership.
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 -- 1996, 1995 AND 1994
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.
Interest expense for 1996 decreased by $.8 million (1%) from 1995 as a result of lower outstanding amounts of long-term debt.
Interest and other income, net, for 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.
For the period December 29, 1994 through December 31, 1994, the Partnership had revenues of $2.7 million, costs of sales of $1.7 million and operating income of $1.1 million. Net interest expense subsequent to December 28, 1994 was $.5 million.
Results of operations for 1994 were affected by the recognition of interest expense required with respect to the "negative interest arbitrage" associated with the financing and construction of the Project. 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 is required to be charged against income. In 1994, this net interest expense amounted to $7.7 million. The Indenture restricts the investment of unspent construction funds to high quality, short-term financial instruments.
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, 1996, letters of credit aggregating $16.1 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, 1996 had sufficient restricted cash on hand to meet its cumulative additional debt service reserve and major overhaul reserve funding requirements as of such date of $22.0 million and $5.1 million, respectively. 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 presently 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, pay 1997 Project debt service and make 1997 required contributions to project reserve accounts.
Although the Partnership's net income could decline over the next three years 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 cash flow will be more than sufficient to pay scheduled debt service.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to financial statements appears on page.
ITEM 9.

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:
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 a director of the National Independent Energy Producers Association, a trade association working with companies committed to shaping the long-term future of competitive electric power generation, and served as its Chairman from April 1991 to April 1993. He is also President of the Independent Power Producers of New York. He has served as a sub-committee Vice Chairman of the Energy Committee of the Bar Association of the City of New York and as a Vice Chairman of the American Bar Association's Special Committee on Energy Finance.
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 18 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 1996 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 $525,000 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:
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".
The Partnership is limited partnership wholly-owned by its Partners. Beneficial interests in the Partnership are not available to any persons other than the Partners.
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 $525,000 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 (Deficiency) 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, 1996.
(C) EXHIBITS
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 27, 1997 /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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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. --------------------------------------- (CO-REGISTRANT)
By: Sithe/Independence, Inc. ---------------------------------- GENERAL PARTNER
March 27, 1997 /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.
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, 1996 and 1995 .....................................................F-3 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 .......................F-4 Consolidated Statements of Partners' Capital (Deficiency) for the Years Ended December 31, 1996, 1995 and 1994 .............F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 .......................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, 1996 and 1995, and the related consolidated statements of operations, partners' capital (deficiency) and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York March 7, 1997
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 (DEFICIENCY) (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/lndependence 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/lndependence, Inc., an indirect wholly-owned subsidiary of Sithe Energies, is the General Partner. Prior to the commencement of commercial operation for financial reporting purposes on December 29, 1994, the Partnership was in the development stage and its activities consisted of development and construction of the Project.
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, 1996, Sithe Energies owned or leased twenty-three electric generating facilities, including the Project, representing approximately 1,752 megawatts ("MW") of operating capacity and its approximately 160 MW Smithfield project near Sydney, Australia was under construction with commercial operation anticipated in the second quarter of 1997. As of December 31, 1996, Sithe Energies is actively pursuing a number of development projects in the United States and internationally. Sithe Energies is presently owned 61.3% by Compagnie Generale des Eaux, 27.6% by Marubeni Corporation and 11.1 % by its two other founders.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of the Partnership and Sithe/lndependence 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. Certain amounts have been reclassified to conform to the 1996 presentation.
From its inception on November 1, 1990 through December 29, 1994, the Partnership was in the development stage. All construction costs and all project development costs incurred subsequent to obtaining the power sales contract with Con Edison in 1991 were capitalized.
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.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Prior to the commencement of commercial operations on December 29, 1994, all interest on qualifying construction expenditures was capitalized. All interest costs incurred subsequent to such date have been charged to expense. The total amount of interest costs incurred in 1996, 1995 and 1994 was $63.4 million, $64.3 million and $63.2 million, respectively, of which $49.3 million was capitalized in 1994.
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 1996 consisted of $343.3 million from sales of electricity and steam and $35.7 million from gas sale transactions. During 1996, Con Edison, Niagara Mohawk and Alcan accounted for 92%, 5% and 3%, respectively, of the sales of electricity and steam. During 1995, Con Edison accounted for 91% of the Partnership's revenue, Niagara Mohawk accounted for 6% and Alcan accounted for the remaining 3%.
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. The estimated cost of scheduled major equipment overhauls is normalized through systematic charges to cost of sales.
Legal fees and other direct costs incurred in connection with the issuance of long-term debt are being deferred and amortized to interest cost 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.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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: $10.2 million in 1997, $18.9 million in 1998, $27.4 million in 1999, $19.3 million in 2000 and $32.4 million in 2001. 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, 1996, letters of credit aggregating $16.1 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, 1996 had sufficient restricted cash on hand to meet its cumulative additional debt service reserve and major overhaul reserve funding requirements as of such date of $22.0 million and $5.1 million, respectively. 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 until formal notice of final construction completion is given to the trustee for the Securities, which is expected to occur in the second quarter of 1997, 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 1996.
4. Interest Income and Expense
Results of operations for 1994 were impacted by the recognition of interest expense required with respect to the "negative interest arbitrage" associated with the financing and construction of the Project. Proceeds from the issuance of the Securities included an amount sufficient to pay interest on the Securities during the construction period. 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 funds is required to be charged against income. Negative interest arbitrage for 1994 was $7.7 million.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. 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, 1996 and 1995 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, 1996 and 1995 were $710.3 million and $735.5 million, respectively, based on quoted market prices, which were $11.9 million and $25.7 million higher, respectively, than the historical carrying values of $698.4 million and $709.8 million, respectively.
At December 31, 1996 and 1995, the aggregate fair value of the Partnership's available-for-sale debt securities closely approximated the amortized cost of such securities.
During the year ended December 31, 1995, proceeds from sales of available-for-sale securities were $54.1 million and realized losses were $.2 million.
6. 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 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, 1996, the Partnership estimates it was owed approximately $5.6 million for transmission overcharges. The Partnership requested that 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. The FERC has yet to act on this request. The Partnership intends to continue to vigorously pursue this matter.
SITHE/INDEPENDENCE POWER PARTNERS, L.P. (a Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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: $226.5 million in 1997, $237.0 million in 1998, $247.4 million in 1999, $203.8 million in 2000 and $203.9 million in 2001.
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, 1996, the Partnership estimates that the balance in the tracking account amounted to approximately $56.3 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 1996, 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.
7. 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 $525,000 annual fee, which escalates at 5% per annum, for management and administrative services provided by Sithe Power Services to the Partnership.