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================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 1997            Commission File Number  33-59960

                     SITHE/INDEPENDENCE FUNDING CORPORATION
             (Exact name of registrant as specified in its charter)

                Delaware                                13-3677475
                --------                                ----------
     (State or other jurisdiction of     (I.R.S. Employer Identification Number)
     incorporation or organization)

450 Lexington Avenue, New York, NY                           10017
----------------------------------                           -----
(Address of principal executive offices)                   (Zip code)

       Registrant's telephone number, including area code: (212) 450-9000

                     SITHE/INDEPENDENCE POWER PARTNERS, L.P.
             (Exact name of registrant as specified in its charter)

                Delaware                                33-0468704
                --------                                ----------
     (State or other jurisdiction of     (I.R.S. Employer Identification Number)
     incorporation or organization)

450 Lexington Avenue, New York, NY                           10017
(Address of principal executive offices)                   (Zip code)

       Registrant's telephone number, including area code: (212) 450-9000

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

                          7.90% Secured Notes due 2002
                          8.50% Secured Bonds due 2007
                          9.00% Secured Bonds due 2013

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

<PAGE>

                     SITHE/INDEPENDENCE FUNDING CORPORATION
                     SITHE/INDEPENDENCE POWER PARTNERS, L.P.

                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1997

                                     Part 1                               Page
                                     ------                               ----

Items 1, 2 and 3.  Business, Properties and Legal Proceedings              3

Item 4.            Submission of Matters to a Vote of Security Holders    12

                                     Part II
                                     -------

Item 5.            Market for the Registrant's Common Stock and
                      Related Stockholder Matters (Not applicable)        --

Item 6.            Selected Financial Data                                13

Item 7.            Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                 14

Item 8.            Financial Statements and Supplementary Data            16

Item 9.            Changes in and Disagreements with Accountants on
                      Accounting and Financial Disclosure                 16

                                    Part III
                                    --------

Item 10.           Directors and Executive Officers of the Registrants    16

Item 11.           Executive Compensation                                 18

Item 12.           Security Ownership of Certain Beneficial Owners and
                      Management                                          18

Item 13.           Certain Relationships and Related Transactions         19


                                  Part IV
                                  -------

Item 14.           Exhibits, Financial Statement Schedules and Reports
                   on Form 8-K                                            19

                   Signatures                                             24


                                       2
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                                     PART I

ITEMS 1, 2 AND 3. BUSINESS, PROPERTIES AND LEGAL PROCEEDINGS

THE PARTNERSHIP

      Sithe/Independence Power Partners, L.P. (the "Partnership") was formed to
develop, construct and own a natural gas-fired cogeneration facility having a
design capacity of approximately 1,000 megawatts ("MW") located in the Town of
Scriba, County of Oswego, New York (the "Project"). Cogeneration is a power
production technology that provides for the sequential generation of two or more
useful forms of energy (in the Project's case, electricity and thermal energy)
from a single primary fuel source (in the Project's case, natural gas). The
Partnership is a Delaware limited partnership formed in November 1990 by
Sithe/Independence, Inc. (the "General Partner"), its sole general partner. The
overall strategy of the Partnership is to operate the Project as one of the most
reliable, economically efficient and environmentally clean fossil-fueled
electrical power plants in the United States. The Project began commercial
operation for financial reporting purposes on December 29, 1994.

      The General Partner is an indirect wholly-owned subsidiary of Sithe
Energies, Inc. ("Sithe Energies"). The limited partners of the Partnership are
Sithe Energies and certain of its direct and indirect wholly-owned subsidiaries
(the "Limited Partners"). The General Partner and the Limited Partners are
referred to herein as the "Partners." Sithe Energies, which was founded in 1984,
is an independent power producer engaged in the development, construction,
ownership and operation of electric generating facilities throughout the United
States and in selected international power markets. At December 31, 1997, Sithe
Energies owned or leased, through its subsidiaries, 23 operating power plants,
in addition to the Project, in the United States, Australia and Canada with an
installed capacity of 1,912 MW. Sithe has four projects under advanced
development in Brazil, Australia, Colombia and Tunisia representing an aggregate
capacity of 1,819 MW and is in the process of acquiring the non-nuclear
generating assets of Boston Edison, which when completed in the second quarter
of 1998, will more than double Sithe's MW capacity in operation in North America
to 3,629 MW. At December 31, 1997, Sithe's Asian joint venture with the AIG
Asian Infrastructure Fund and the Government of Singapore Investment Corporation
had two plants in operation in China and Pakistan (158 MW), two projects under
construction in China (133 MW) and 10 projects representing approximately 2,532
MW under advanced development in various countries including China, India,
Pakistan and the Philippines. Also, a Sithe subsidiary which does business in
Thailand and is in the process of being acquired by Sithe China, had the 120 MW
Samutprakarn gas-fired cogeneration project under construction and two projects
(240 MW) under advanced development.

      Sithe Energies owns, directly or indirectly, 100% of the partnership
interests in the Partnership. The following chart sets forth the organizational
structure of the Partners in the Partnership and of the other affiliates of
Sithe Energies involved with the Partnership.


                                       3
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                               Sithe Energies, Inc.
------------------------------- (Limited Partner)
|                    ----------------------------------------------
|                    |                                             |
|                    |                                             |
|                   100%                                          100%
|       Sithe Energies U.S.A., Inc.                        Energy Factors, Inc.
|           (Limited Partner)
|   -----------------------------------                    --------------------
|    |               |              |                               |
   100%              |             100%                            100%
|Mitex, Inc.         |  Sithe/Independence, Inc.            Sithe Energies Power
|(Limited Partner)   |     (General Partner)                  Services, Inc.
|    |               |              |                           (Operator)
|    |               |              |
|    |               |              |
|    |               |              |
45%  10%             44%            1%
|    |               |              |
-------------The Partnership---------
                     |
                    100%
             Sithe/Independence
             Funding Corporation

      Sithe Energies is privately owned 59.7% by Compagnie Generale des Eaux
("CGE"), 29.5% by Marubeni Corporation ("Marubeni"), and 10.8% by its other two
founders. CGE is one of France's leading municipal services companies and the
world's largest water distribution company. Marubeni is one of Japan's leading
general trading companies.

      Sithe/Independence Funding Corporation ("Sithe Funding"), a Delaware
corporation, was established for the sole purpose of issuing the 7.90% Notes due
2002, the 8.50% Bonds due 2007 and the 9.00% Bonds due 2013 (collectively, the
"Securities") for its own account and as agent acting on behalf of the
Partnership. Sithe Funding loaned the proceeds of the sale of the Securities to
the Partnership (the "Loans"), which applied the proceeds of such Loans to the
development and construction of the Project. The terms of the Loans are
identical to the terms of the Securities. The Loans are the only assets of Sithe
Funding.

      The Securities are not guaranteed by or otherwise obligations of Sithe
Energies, CGE or Marubeni or any affiliate of Sithe Energies, CGE or Marubeni
other than Sithe Funding and the Partnership.

THE PROJECT

      The Project is a natural gas-fired cogeneration facility having a design
capacity of approximately 1,000 MW. The Project is located on an approximately
340-acre site adjacent to the Alcan Aluminum Corporation (doing business as
Alcan Rolled Products Company ("Alcan")) plant in the Town of Scriba, County of
Oswego, New York, approximately two miles northeast of Oswego, New York. The
Project consists of four General Electric Model MS7001FA combustion gas turbine
generators designed to generate approximately 160 MW each at their design point
conditions, four heat recovery steam generators ("HRSG"), two steam turbines
designed to generate 208 MW each and air quality control systems to reduce the
nitrous oxide and other emissions of the Project.


                                       4
<PAGE>

      The majority of the capacity and electric energy generated by the Project
is sold to Consolidated Edison Company of New York, Inc. ("Con Edison") and
Alcan with the remainder of the electric energy being sold to Niagara Mohawk
Power Corporation ("Niagara Mohawk"). The electric energy sold to Con Edison is
transported by Niagara Mohawk through Niagara Mohawk's electric transmission
system. Thermal energy generated by the Project is sold to Alcan. Natural gas
supplies to fuel the Project are provided by Enron Power Services, Inc. ("Enron
Power Services"), an indirect wholly-owned subsidiary of Enron Corp., and are
transported to the Project by seven separate pipeline companies. Each of the
principal contracts entered into by the Partnership has a term of 20 years or
longer from the date the Project was placed into commercial operation.

      For the portion of the capacity not already committed, the Project may,
from time to time, enter into short- or long-term capacity sales of electricity
to Con Edison, Niagara Mohawk or others, subject to certain restrictions set
forth in the Trust Indenture dated as of January 1, 1993 entered into by Sithe
Funding, the Partnership and IBJ Schroder Bank & Trust Company (the
"Indenture").

      The Partnership has designed the Project as a qualifying facility ("QF" or
"Qualifying Facility") under the Public Utilities Regulatory Policies Act of
1978 ("PURPA") and the regulations promulgated thereunder. Accordingly, the
Project must satisfy certain annual operating and efficiency standards in order
to maintain QF status.

      The Project was designed, constructed, equipped and tested pursuant to a
fixed-price (approximately $505 million, including change orders) turnkey design
and construction agreement (the "Independence Construction Contract") among
Raytheon Constructors Inc. and General Electric Company (collectively, the
"Independence Contractors") and the Partnership. The Partnership and the
Independence Contractors have settled all punchlist items under the Independence
Construction Contract and have agreed to arbitration for a determination of any
performance bonuses that may be payable under the Independence Construction
Contract.

Operations and Maintenance

      The Project is operated by Sithe Energies Power Services, Inc. (the
"Operator"), a wholly-owned subsidiary of Sithe Energies, pursuant to an
Operations and Maintenance Agreement. The Operations and Maintenance Agreement
terminates on October 31, 2014.

      The Operator has agreed to operate the Project, to provide all operations
and maintenance services necessary or advisable in order to efficiently operate
and maintain the Project, and to be liable for all expenses relating to
operating, maintaining and managing the Project. The Partnership pays the
Operator an annual management fee of $551,250, escalating at 5% per annum, and
reimburses the Operator on a monthly basis for all direct and indirect necessary
costs and expenses reasonably incurred by the Operator in fulfilling its
obligations under the Operations and Maintenance Agreement.

Sale of Capacity and Electricity

      The majority of the capacity and electric energy generated by the Project
is sold to Con Edison and Alcan, with the remainder of the electric energy being
sold to Niagara Mohawk. Accordingly, the Partnership depends on one purchaser
for a major portion of the Project's capacity, on one purchaser currently for
all energy required to maintain the status of the Project as a Qualifying
Facility and currently on two electric energy purchasers for substantially all
of the electricity to be produced by the Project.


                                       5
<PAGE>

    Con Edison

      Pursuant to the terms of the Con Edison Energy Purchase Agreement, Con
Edison is obligated to purchase for a term of 40 years following the Date of
Commercial Operation of the Project 740 MW of the Project's capacity and all of
the electrical energy to be derived therefrom up to a maximum in any hour
produced by the Project at a temperature-adjusted summer dependable maximum net
capacity ("Summer DMNC") level of 740 MW plus two percent. During the first five
years of the operation of the Project (the "First Period"), Con Edison is
obligated to pay for the first 6.6 billion kilowatt-hours ("KWH") of electricity
delivered to Con Edison in any Annual Period at a price equal to the sum of (a)
100% of Actual Con Edison Avoided Energy Costs and (b) $0.026/KWH. For each KWH
in excess of 6.6 billion KWH in any Annual Period, Con Edison is obligated to
pay a price equal to 93.75% of Actual Con Edison Avoided Energy Costs. The
payments for electricity during the remainder of the contract are equal to
93.75% of Actual Con Edison Avoided Energy Costs in years six through 20 of the
contract term (the "Second Period") and 88.75% of Actual Con Edison Avoided
Energy Costs in years 21 through 40 of the contract term (the "Third Period").
In addition to payments for electricity delivered to Con Edison, during the
Second Period, Con Edison will be obligated to make monthly capacity payments in
an amount equal to the product of (a) the Summer DMNC of the Dedicated Plant
applicable to such month, (b) the Equivalent Availability Ratio applicable to
such month and (c) a fixed capacity charge equal to $6.7455/kilowatt ("KW").
During the Third Period, Con Edison will be obligated to make monthly capacity
payments in an amount equal to the product of (a) the Summer DMNC of the
Dedicated Plant applicable to such month, (b) the Equivalent Availability Ratio
applicable to such month and (c) a fixed capacity charge equal to $3.3727/KW.
During the Second Period, Con Edison will also be obligated to make payments for
operation and maintenance at a price equal to $0.01/KWH during calendar year
2000 escalating on the first day of each calendar year thereafter during the
remainder of the Second Period with the index contained in the Con Edison Energy
Purchase Agreement. During the Third Period, Con Edison will also be obligated
to make payments for operation and maintenance at a price equal to one-half of
the per KWH price during the last calendar year of the Second Period escalating
on the first day of each calendar year during the Third Period with the index
contained in the Con Edison Energy Purchase Agreement. Con Edison has the option
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. (Terms not defined in this section have the
respective meanings set forth in the Con Edison Energy Purchase Agreement.)

    Niagara Mohawk

      Under the Niagara Mohawk Power Purchase Agreement, Niagara Mohawk will
purchase all of the electricity delivered to Niagara Mohawk by the Project, up
to a maximum of three million megawatthours ("MWH") of electricity in any
calendar year (provided the Project does not deliver electricity at a rate in
excess of 300 MW in any hourly period, or such greater amount as may be accepted
by Niagara Mohawk). The Niagara Mohawk Power Purchase Agreement has a term of 20
years from the date on which the Partnership commences deliveries of commercial
quantities of electricity to Niagara Mohawk on a continuous basis. Niagara
Mohawk will purchase electricity at its "energy only" rate, which is Niagara
Mohawk's Public Service Commission of the State of New York ("PSC") filed tariff
for the purchase of electricity from on-site generators, such as the
Partnership, in effect at the time of delivery of electrical energy to Niagara
Mohawk. Niagara Mohawk has no right of first refusal for any additional
electricity or capacity to be sold by the Partnership.


                                       6
<PAGE>

      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 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'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 operating
revenue of the Project.

    Alcan

      Alcan, a subsidiary of Alcan Aluminum Limited, owns and operates an
aluminum production facility adjacent to the Project site. The Alcan facility
engages in the production and recycling of aluminum alloys and rolled aluminum
which are used principally in the beverage container industry.

      Pursuant to the terms of the Alcan Energy Sales Contract, the Partnership
has agreed for a period of 22 years from the commencement of commercial
operation of the Project to sell to Alcan up to 44 MW of the Project's capacity
and associated energy. In addition, the Partnership has agreed to supply and,
subject to the terms and provisions of the Alcan Energy Sales Contract, Alcan
has agreed to purchase thermal energy on a firm, non-interrupted basis in an
amount equal to 1.618 trillion British Thermal Units ("Btus") per year of
operation.

      On September 8, 1994, the PSC issued a certificate of public convenience
and necessity ("CPCN") permitting the Partnership to make retail sales of
electricity to Alcan and to a containerboard recycling facility then being
developed by a partnership of paper industry companies, and invited comment on
an appropriate and equitable equalization fee that would be paid by the
Partnership to Niagara Mohawk. On September 29, 1994, the PSC issued an order
establishing an equalization fee with a present value of $19.6 million, which
the Partnership has elected to pay in equal annual amounts of approximately $3
million for ten years, beginning on December 31, 1995. The order establishing
the equalization fee also contains provisions for the amount of such fee to be
reconsidered if the containerboard facility or a facility of comparable economic
development is not developed. Sithe Energies continues to actively pursue
facilities of comparable economic development.

Electrical Interconnection and Transmission

      Niagara Mohawk's transmission lines have been interconnected to the
Project through the construction of the facilities necessary to effect the
transfer of electricity produced at the Project into Niagara Mohawk's
transmission system (the "Interconnection Facilities"). Pursuant to the
Interconnection Agreement between the Partnership and Niagara Mohawk, the
Partnership has agreed to reimburse Niagara Mohawk for all reasonable costs
incurred by Niagara Mohawk in connection with operation and maintenance of the
Interconnection Facilities. The Interconnection Agreement will terminate 20
years from the Date of Commercial Operation.

      Pursuant to the Transmission Services Agreement, Niagara Mohawk has agreed
to provide transmission services from the Project to the point of
interconnection between Niagara Mohawk's transmission system and Con Edison's
transmission system (the "Con Edison Interconnection") for a period of 20 years
from the Date of Commercial Operation. The agreement specifies that Niagara
Mohawk will be obligated to transmit up to 805 MW of electricity to the Con
Edison Interconnection, subject to interruption if required to meet the demands
of its retail customers, its current wholesale customers and its obligations to
the New York Power Pool. The Partnership has the ability to increase this amount
by up to 2% per annum, up to a maximum of 853 MW of


                                       7
<PAGE>

electricity. To the extent that Niagara Mohawk has excess capacity on its
transmission system, it has agreed to accommodate the Project's additional
transmission requirements. On March 29, 1995, the Partnership filed a petition
with the Federal Energy Regulatory Commission (the "FERC") alleging that Niagara
Mohawk has been overcharging the Partnership 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, 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 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.

Gas Supply Agreement

      Natural gas for the Project is supplied by Enron Power Services pursuant
to the Gas Supply Agreement (the "Gas Supply Agreement") between Enron Power
Services and the Partnership. The Gas Supply Agreement provides that, for a
period of 20 years following the Date of Commercial Operation, Enron Power
Services is obligated to deliver to the Partnership up to a maximum of 192,291
million Btus ("MMBtus") of natural gas per day, which represents the Project's
daily fuel requirement when operating at design conditions. The Partnership is
obligated to purchase a sufficient amount of natural gas each month so that its
daily average for the month is at least 159,600 MMBtus and the Partnership is
obligated to purchase a sufficient amount of natural gas each year so that its
daily average for the year is at least 173,061 MMBtus of natural gas. During the
First Period, the price to be paid by the Partnership for 116,000 MMBtus of
natural gas per day (the "Tier I" gas) is fixed on an increasing-rate basis as
specified in the Gas Supply Agreement. During the remainder of the term of the
Gas Supply Agreement, the price of Tier I gas will fluctuate based on Actual Con
Edison Avoided Energy Costs, as well as the price paid by Con Edison to the
Project. The remaining 76,291 MMBtus of gas per day will be priced in relation
to Niagara Mohawk's "energy only" electric rate.

      Enron Power Services 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 Gas Supply Agreement. 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 Power
Services has been given a security interest in the plant, which is subordinated
to payments for the Securities and certain letter of credit reimbursement
obligations, to secure any tracking account balance. 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 account balance by paying to
Enron Power Services the lesser of (a) the amount necessary to reduce the
tracking balance to 50% of the plant's fair market value and (b) (i) during
years 6 through 15 of the Gas Supply Agreement, all incremental revenues as
defined in the Gas Supply Agreement and (ii) thereafter 50% of qualifying cash
flows also as defined in the Gas Supply Agreement 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 to either pay the balance in the tracking
account or to convey to Enron Power Services an equity ownership in the Project
based on the ratio of the tracking account balance to the plant's fair market
value at such time.


                                       8
<PAGE>

Gas Transportation Agreements

      The Partnership has entered into gas transportation agreements with seven
pipeline companies in order to transport, on a firm basis, the natural gas
purchased pursuant to the Gas Supply Agreement. Each of the gas transportation
agreements entered into by the Partnership has a 20-year term from the Date of
Commercial Operation, and together the agreements will provide for sufficient
transportation capacity to supply the Project with all of its anticipated
natural gas requirements. In addition to Niagara Mohawk, the other parties to
the gas transportation agreements are Union Gas Limited, Panhandle Eastern Pipe
Line Company, ANR Pipeline Company, Empire State Pipeline, Great Lakes Gas
Transmission Limited Partnership and TransCanada Pipelines Limited.

Competition

      Many organizations, including equipment manufacturers and subsidiaries of
utilities and contractors, as well as other organizations similar to Sithe
Energies, have entered the cogeneration market. The resultant increased
competition has reduced the price utilities are willing to pay to independent
power producers for electrical capacity and energy. These factors may adversely
affect the price the Partnership may be paid under the Energy Purchase
Agreements (due to potential declines in a utility's long run avoided cost).

BUSINESS

General

      The Partnership's sole business is the ownership of the Project. The
Partnership has long-term contracts to sell capacity and electricity produced by
the Project to Con Edison and Alcan, electricity to Niagara Mohawk and thermal
energy to Alcan. The Project is located on an approximately 340-acre site,
located in the Town of Scriba, County of Oswego, New York, approximately two
miles northeast of Oswego, New York. The site is bounded on the north by Lake
Ontario. Alcan owns and operates a facility adjacent to the site for the
production of rolled aluminum stock which is used principally in the production
of beverage containers.

      The Project consists of the following equipment, systems and facilities:

      o     Four General Electric Model MS7001FA combustion gas turbine
            generators, each able to produce approximately 160 MW of electricity
            under design point conditions;

      o     Four Henry Vogt Machine Company HRSGs which create thermal energy
            using heat from the turbine exhaust;

      o     Two General Electric steam turbines which are able to produce an
            additional 208 MW each of electricity under design point conditions
            from the thermal energy generated by the HRSGs;

      o     Air quality control systems; and

      o     Various associated equipment and improvements, including a
            demineralization system to produce high purity water for use in
            creating steam, wastewater collection and treatment facilities and
            two 345kV transmission circuits.


                                       9
<PAGE>

      The Project was designed to have an average net electrical output
available to customers of 963 MW and an average steam flow of up to 235,000
lbs./hr. The performance of the Project is dependent on ambient conditions,
which affect the combustion turbine efficiency and capacity. Ambient conditions
also affect the steam turbine cycle efficiency by affecting the operation of the
cooling tower and the circulating water temperature, and therefore the condenser
pressure.

Employees

      The Partnership has no employees. The Operator provides operations and
maintenance services and certain management and administrative support for the
Project.

      As of December 31, 1997, the Operator employed 44 individuals in
connection with the Project.

Legal Proceedings

      Other than the Partnership's petition for review of the FERC order with
the United States Court of Appeals alleging that Niagara Mohawk has been
overcharging the Partnership for the transmission of electricity, neither Sithe
Funding nor the Partnership is a party to any legal proceedings.

REGULATION

Energy Regulation

      PURPA. PURPA and the regulations promulgated thereunder provide an
electric generating project with rate and regulatory incentives if the project
is a Qualifying Facility. A cogeneration facility is a Qualifying Facility if it
(i) sequentially produces both electricity and a certain quantity of useful
thermal energy which is used for industrial, commercial, heating or cooling
purposes, (ii) meets certain energy efficiency standards when oil or natural gas
is used as a fuel source and (iii) is not more than 50% owned by an electric
utility, electric utility holding company or an entity or person owned by either
of the above.

      Under PURPA and the regulations promulgated thereunder, Qualifying
Facilities receive two primary benefits. First, PURPA and the regulations
promulgated thereunder exempt Qualifying Facilities from the Public Utility
Holding Company Act of 1935 ("PUHCA"), most provisions of the Federal Power Act
(the "FPA") and certain state laws relating to securities, rate and financial
regulation. Second, FERC's regulations promulgated under PURPA require that (i)
electric utilities purchase electricity generated by Qualifying Facilities,
construction of which commenced on or after November 9, 1978, at a price based
on the purchasing utility's full "avoided costs," and (ii) the utilities sell
supplementary, back-up, maintenance and interruptible power to the Qualifying
Facility on a just and reasonable and non-discriminatory basis. PURPA and the
regulations promulgated thereunder define "avoided costs" as the "incremental
costs to an electric utility of electric energy or capacity or both which, but
for the purchase from the qualifying facility or qualifying facilities, such
utility would generate itself or purchase from another source". Utilities may
also purchase power at prices other than "avoided costs" pursuant to
negotiations with potential suppliers as provided by FERC regulations.


                                       10
<PAGE>

      The Project currently meets all of the criteria for a Qualifying Facility
under PURPA and the regulations promulgated thereunder. If at any time the
Project were to fail to meet such criteria, the Partnership may become subject
to regulation as a public utility company under PUHCA, the FPA and state utility
laws.

      PUHCA. PUHCA provides that any corporation, partnership or other entity or
organized group which owns, controls or holds power to vote 10% of the
outstanding voting securities of a "public utility company" or a company which
is a "holding company" of a public utility company is subject to registration
with the Securities and Exchange Commission (the "Commission") and PUHCA
regulation, unless eligible for an exemption or unless a Commission order
declaring it not to be a holding company is granted. PUHCA requires registration
for a holding company of a public utility company, and requires a public utility
holding company to limit its utility operations to a single integrated utility
system and to divest any other operations not functionally related to the
operation of the utility system. In addition, a public utility company which is
a subsidiary of a registered holding company under PUHCA is subject to financial
and organizational regulation, including approval by the Commission of its
financing transactions.

      The Energy Policy Act of 1992 (the "Policy Act") contains amendments to
PUHCA that may allow the Partnership to operate its business without becoming
subject to PUHCA in the event the Project loses its status as a Qualifying
Facility. Under the Policy Act, a company engaged exclusively in the business of
owning and/or operating a facility used for the generation of electric energy
exclusively for sale at wholesale may be exempted from PUHCA. In order to
qualify for such an exemption, a company must apply to the FERC for a
determination of eligibility, pursuant to implementing rules that the FERC will
promulgate. Although the Policy Act and its implementing rules may exempt the
Partnership from PUHCA in the event that Qualifying Facility status is lost, the
Policy Act may also encourage greater competition in wholesale electricity
markets, which could result in a decline in long-term rates to be paid by
electric utilities such as Con Edison and Niagara Mohawk.

      FPA. Under the FPA, the FERC has exclusive rate-making jurisdiction over
wholesale sales of electricity and transmission in interstate commerce. These
rates may be based on a cost of service approach or may be determined through
competitive bidding or negotiation. If the Project were to lose its Qualifying
Facility status, the rates set forth in each of the Energy Purchase Agreements
would have to be filed with the FERC and would be subject to review by the FERC
under the FPA. The Con Edison Energy Purchase Agreement and the Niagara Mohawk
Power Purchase Agreement contain provisions for a reduction in the rates to be
paid for electric energy in such event.

      State Regulation. The Project, by virtue of being a Qualifying Facility,
is exempt from New York State rate, financial and organizational regulations
which are applicable to a public utility. The PSC's general supervisory powers
relating to environmental and safety matters apply to Qualifying Facilities.

      Wheeling and Interconnection. Under Section 201 of the FPA, FERC regulates
the rates, terms and conditions for the transmission of electric energy in
interstate commerce. This has been interpreted to mean that the FERC has
jurisdiction when the transmission system is interconnected and capable of
transmitting energy across a state boundary, even if the utility has no direct
connection with another utility outside its state but is interconnected with
another utility which in turn has interstate connections with other utilities.
Accordingly, the rates to be paid by the Partnership to Niagara Mohawk under the
Transmission Services Agreement are subject to the jurisdiction of the FERC
under the FPA. Niagara Mohawk has obtained approval by the FERC of the
Transmission Services Agreement under the FPA, but has reserved the right to
apply for future changes in rates under the FPA. The Interconnection Agreement,
which is subject to review under Sections 205 and 206 of the FPA, was accepted
by the FERC in the fall of 1993.


                                       11
<PAGE>

      The FERC's authority under the FPA to require electric utilities to
provide transmission service to Qualifying Facilities and other wholesale
electricity producers has been significantly expanded by the Policy Act.
Pursuant to the Policy Act, the Partnership may apply to the FERC for an order
requiring a utility to provide transmission services. The FERC may issue such an
order provided that the reliability of the affected electric systems would not
be unreasonably impaired. The Policy Act may enhance the Partnership's ability
to obtain transmission access necessary to sell electric energy or capacity to
purchasers other than Con Edison or Niagara Mohawk. However, there is no
assurance that the rates for such transmission service would be economical for
the Partnership. The Policy Act may also result in greater competition among
wholesale electric energy producers.

IDA Agreements

      The Partnership has leased the Project site to the County of Oswego
Industrial Development Agency (the "IDA") pursuant to a ground lease between the
Partnership and the IDA (the "IDA Lease"). The IDA has leased the site back to
the Partnership pursuant to a sublease agreement between the Partnership and the
IDA (the "IDA Sublease"). The IDA's participation in the Project exempts the
Project from certain mortgage recording taxes, certain state and local real
property taxes and certain sales and use taxes within New York State. The
Partnership has also entered into an agreement whereby the Partnership will be
required to make payments in lieu of property taxes during the term of the IDA
Lease and IDA Sublease.

      The IDA is a corporate governmental agency, constituting a public benefit
corporation of the State of New York. It is authorized to promote, attract,
encourage and develop economically sound commerce and industry for the purpose
of preventing unemployment and economic deterioration. The IDA is authorized to
lease real property interests and industrial and commercial facilities and may
exercise appropriate financing powers, including the granting of mortgages and
indentures of mortgage.

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 1997.


                                       12
<PAGE>

                                     PART II

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.

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                          ---------------------------------------------------------
                                          1997         1996         1995          1994         1993
                                          ----         ----         ----          ----         ----
                                                              (in thousands)
<S>                                   <C>          <C>          <C>          <C>          <C>
Statement of Operations Data (a)
Revenue                               $ 355,432    $ 379,024    $ 335,844    $   2,749    $      --
Operating income                         94,672      120,211       89,886        1,064           --
Non-operating income and (expense):
     Interest expense                   (62,369)     (63,441)     (64,261)     (13,910)     (33,969)
     Interest and other income, net       7,026        4,187        4,525        5,704       13,703
Net income (loss)                        39,329       60,957       30,150       (7,142)     (20,266)

<CAPTION>

                                                                December 31,
                                          ---------------------------------------------------------
                                          1997         1996         1995         1994          1993
                                          ----         ----         ----          ----         ----
                                                              (in thousands)
<S>                                   <C>          <C>          <C>          <C>          <C>
Balance Sheet Data
Property, plant and equipment         $ 713,274    $ 723,188    $ 737,716    $ 752,820    $ 490,272
Total assets                            838,047      867,471      845,888      794,063      779,977
Long-term debt                          669,345      688,201      698,405      702,333      717,241
Partners' capital  (deficiency)         120,564      123,699       62,734       (7,631)        (266)
</TABLE>
----------

(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.


                                       13
<PAGE>

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


                                       14
<PAGE>

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.


                                       15
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      Index to Financial Statements
            The index to financial statements appears on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

            None.

                                    PART III

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.


                                       16
<PAGE>

      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.


                                       17
<PAGE>

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. 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

----------

(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. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".

      The Partnership is a limited partnership wholly-owned by its Partners.
Beneficial interests in the Partnership are not available to any persons other
than the Partners.


                                       18
<PAGE>

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. 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


                                       19
<PAGE>

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 *


                                       20
<PAGE>

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 *



                                       21
<PAGE>

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") *


                                       22
<PAGE>

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.


                                       23
<PAGE>

                                   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


                                       24
<PAGE>

                                   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


                                       25
<PAGE>

                     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.


                                      F-1
<PAGE>

                          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


                                      F-2
<PAGE>

                     SITHE/INDEPENDENCE POWER PARTNERS, L.P.
                        (a Delaware Limited Partnership)

                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                               December 31,
                                                         ---------------------
                                                          1997            1996
                                                         -----           -----
<S>                                                    <C>            <C>
ASSETS

Current assets:
   Cash and cash equivalents                           $       3      $       4
   Restricted cash and cash equivalents                   40,643         73,412
   Restricted investments                                 34,674         14,610
   Accounts receivable - trade                            33,384         39,782
   Fuel, inventory and other current assets                1,872          2,887
                                                       ---------      ---------
        Total current assets                             110,576        130,695

Property, plant and equipment, at cost:
   Land                                                    5,010          5,875
   Electric and steam generating facilities              765,239        755,020
                                                       ---------      ---------
                                                         770,249        760,895
   Accumulated depreciation                              (56,975)       (37,707)
                                                       ---------      ---------
                                                         713,274        723,188

Debt issuance costs                                        9,212         10,265

Other assets                                               4,985          3,323
                                                       ---------      ---------

   Total assets                                        $ 838,047      $ 867,471
                                                       =========      =========

LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
   Trade payables                                      $  20,823      $  24,264
   Accrued interest                                          174            174
   Current portion of long-term debt                      18,856         10,202
   Accrued construction costs and retentions                 443          9,249
                                                       ---------      ---------
      Total current liabilities                           40,296         43,889

Long-term debt:
   7.90% secured notes due 2002                          109,897        128,753
   8.50% secured bonds due 2007                          150,839        150,839
   9.00% secured bonds due 2013                          408,609        408,609
                                                       ---------      ---------
                                                         669,345        688,201

Other liabilities                                          7,842         11,682

Commitments and contingencies

Partners' capital                                        120,564        123,699
                                                       ---------      ---------

Total liabilities and partners' capital                $ 838,047      $ 867,471
                                                       =========      =========
</TABLE>

                    See notes to consolidated financial statements.

                                       F-3

<PAGE>

                     SITHE/INDEPENDENCE POWER PARTNERS, L.P.
                        (a Delaware Limited Partnership)

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                          -------------------------------------
                                             1997          1996          1995
                                          ---------     ---------     ---------
<S>                                       <C>           <C>           <C>
Revenue                                   $ 355,432     $ 379,024     $ 335,844
                                          ---------     ---------     ---------

Cost of sales:
   Fuel                                     207,713       198,947       187,847
   Operations and maintenance                33,779        41,087        39,333
   Depreciation                              19,268        18,779        18,778
                                          ---------     ---------     ---------
                                            260,760       258,813       245,958
                                          ---------     ---------     ---------

Operating income                             94,672       120,211        89,886

Non-operating income (expenses):
   Interest expense                         (62,369)      (63,441)      (64,261)
   Interest and other income, net             7,026         4,187         4,525
                                          ---------     ---------     ---------

Net income                                $  39,329     $  60,957     $  30,150
                                          =========     =========     =========
</TABLE>

                 See notes to consolidated financial statements.


                                           F-4

<PAGE>

                     SITHE/INDEPENDENCE POWER PARTNERS, L.P.
                        (a Delaware Limited Partnership)

                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
                                 (In thousands)


<TABLE>
<CAPTION>
                                                       Unrealized
                                                        Loss on       Total
                              General     Limited      Marketable    Partners'
                              Partner     Partners     Securities    Capital
                             ---------    ---------    ---------    ---------
<S>                         <C>          <C>          <C>          <C>
Balance, January 1, 1995     $      --    $  (7,408)   $    (223)   $  (7,631)

Capital contribution               400       39,600           --       40,000

Net income                         302       29,848           --       30,150

Change in unrealized loss
on marketable securities            --           --          215          215
                             ---------    ---------    ---------    ---------

Balance, December 31, 1995         702       62,040           (8)      62,734

Net income                         610       60,347           --       60,957

Change in unrealized loss
on marketable securities            --           --            8            8
                             ---------    ---------    ---------    ---------

Balance, December 31, 1996       1,312      122,387           --      123,699

Net income                         393       38,936           --       39,329

Distribution                      (425)     (42,039)          --      (42,464)
                             ---------    ---------    ---------    ---------

Balance, December 31, 1997   $   1,280    $ 119,284    $      --    $ 120,564
                             =========    =========    =========    =========
</TABLE>

                 See notes to consolidated financial statements.


                                       F-5

<PAGE>

                     SITHE/INDEPENDENCE POWER PARTNERS, L.P.
                        (a Delaware Limited Partnership)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                                                --------------------------------
                                                                   1997         1996      1995
                                                                ---------    --------- ---------
<S>                                                             <C>          <C>       <C>
Cash flows from operating activities:
   Net income                                                   $  39,329    $  60,957 $  30,150
   Adjustments to reconcile net income  to net cash
   provided by operating activities:
        Depreciation                                               19,268       18,779    18,778
        Amortization of deferred financing costs                    1,053        1,085     1,150
        Changes in operating assets and liabilities:
              Accounts receivable - trade                           6,398       (4,461)  (24,816)
              Fuel inventory and other current assets               1,015          (25)   (2,598)
              Other assets                                         (1,662)      (1,662)   (1,661)
              Trade payables and other current liabilities         (3,441)       4,074    14,767
              Accrued interest payable                                 --      (30,736)   30,738
              Other liabilities                                    (3,840)       6,002     5,680
                                                                ---------    --------- ---------
Net cash provided by operating activities                          58,120      54,013    72,188
                                                                ---------    --------- ---------

Cash flows from investing activities:
      Construction costs                                          (18,160)     (11,589)  (65,945)
      Restricted funds                                             12,705      (31,978)  (55,643)
      Use of funds designated for construction                         --           --    17,792
                                                                ---------    --------- ---------
Net cash used in investing activities                              (5,455)     (43,567) (103,796)
                                                                ---------    --------- ---------

Cash flows from financing activities:
   Principal payments on secured notes                            (10,202)     (11,384)   (7,454)
   Distribution to partners                                       (42,464)          --        --
   Capital contribution                                                --           --    40,000
                                                                ---------    --------- ---------
Net cash used in financing activities                             (52,666)     (11,384)   32,546
                                                                ---------    --------- ---------

Net increase (decrease) in cash and cash equivalents                   (1)        (938)      938

Cash and cash equivalents at beginning of year                          4          942         4
                                                                ---------    --------- ---------

Cash and cash equivalents at end of year                        $       3    $       4 $     942
                                                                =========    ========= =========

Supplemental cash flow information:
   Cash payments for interest                                   $  62,031    $  61,179 $  31,031
</TABLE>

                 See notes to consolidated financial statements.


                                       F-6

<PAGE>

                     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.


                                      F-7
<PAGE>

                     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.


                                      F-8
<PAGE>

                     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.


                                      F-9
<PAGE>

                     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


                                      F-10
<PAGE>

                     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.


                                      F-11
<PAGE>

                     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.

                                      F-12