3. DEPOSITS:
In 1991, in accordance with the Planned Unit Development Zoning Agreement between the Partnership and Martin County, the Partnership deposited $1,000,000 in trust with the Board of County Commissioners of Martin County (the "PUD Trustee"). Income from this trust will be used solely for projects benefiting the community of Indiantown. On July 23, 2025, the PUD Trustee is required to return the deposit to the Partnership. As of March 31, 2000 and December 31, 1999, estimated present value of this deposit was $150,675 and $80,000, respectively. The remaining balance has been included in property plant, and equipment as part of total construction expenses.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements of the Partnership and the notes thereto included elsewhere in this report.
General
The Partnership is primarily engaged in the ownership and operation of a non-utility electric generating facility. From its inception and until December 21, 1995, the Partnership was in the development stage and had no operating revenues or expenses. On December 22, 1995 the Facility commenced commercial operation. As of March 31, 2000, the Partnership had approximately $638 million of property, plant and equipment (net of accumulated depreciation) consisting primarily of purchased equipment, construction related labor and materials, interest during construction, financing cost, and other costs directly associated with the construction of the Facility. For the three months ended March 31, 2000, the Partnership had total operating revenues of approximately $ 44.1 million, total operating costs of $24.3 million, total net interest expenses of approximately $14.0 million, and a cumulative effect of change in accounting principle of $0.9 million resulting in net income of approximately $6.7 million.
The Partnership is engaged in litigation with FPL, the Partnership's primary source of revenue. Under certain circumstances, an adverse ruling in the litigation could have a material adverse effect on the Partnership's business and financial condition. Please see Part II Item 1, Legal Proceedings, for a description of the litigation, and Part II, Item 5, Other Information, for a description of the Partnership's options to mitigate the risk posed by an adverse ruling in such litigation.
The Partnership has obtained all material environmental permits and approvals required as of March 31, 2000, in order to continue the operation of the Facility. Certain of these permits and approvals are subject to periodic renewal. Certain additional permits and approvals will be required in the future for the continued operation of the Facility. The Partnership is not aware of any technical circumstances that would prevent the issuance of such permits and approvals or the renewal of currently existing permits.
The Partnership timely filed its application for a Title V air permit on May 24, 1996. The permit was issued on October 11, 1999.
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Results of Operations
For the three months ending March 31, 2000 and 1999, the Facility achieved an average Capacity Billing Factor of 100.01% and 101.64%, respectively. This resulted in earning monthly capacity payments aggregating $28.2 million and $28.1 million and bonuses aggregating $2.8 million for the three months ended March 31, 2000 and 1999. The Capacity Billing Factor measures the overall availability of the Facility, but gives a heavier weighting to on-peak availability. During the three months ended March 31, 2000, the Facility was dispatched by FPL and generated 571,896 megawatt-hours compared to 208,484 megawatt-hours during the same period in 1999. The increase was due to higher oil and gas prices incurred by FPL during the first quarter to generate energy. The monthly dispatch rate for the first three months of 2000 ranged from 73% to 87%, as compared to a range of 18% to 35% for the corresponding period in 1999.
Net income for the three months ended March 31, 2000, was approximately $6.7 million compared to the net income of approximately $6.5 million for the corresponding period in the prior year. The $0.2 million increase is primarily attributable to lower net energy costs of $0.1 million, an increase in capacity revenue of $0.1 million, a reduction in insurance and taxes of $0.2 million, and an expense reversal of $0.9 million for a cumulative change in accounting principle relating to major maintenance costs. This is offset by higher general and administrative costs of $0.2 million for legal fees for the FPL litigation and an increase in operating and maintenance costs of $0.9 million due to the increase in dispatch.
Electric Energy Revenues
For the three months ended
March 31, 2000 March 31, 1999
-------------- --------------
Revenues $ 44.1 million $35.7 million
KWhs 571.9 208.5
Average Capacity Billing Factor 100.01% 101.64%
Average Dispatch Rate 80.45% 29.56%
For the three months ended March 31, 2000, the Partnership had total operating revenues of approximately $44.1 million as compared to $35.7 million for the corresponding period in the prior year. The $8.4 million increase in operating revenue is primarily due to higher energy revenue resulting from higher dispatch by FPL.
Costs of revenues for the three months ended March 31, 2000, were approximately $21.5 million on sales of 571,896 MWhs as compared to $12.6 million on sales of 208,484 MWhs for the corresponding period in the prior year. This increase is primarily a result of higher fuel and ash costs of $8.2 million and an increase of $0.9 million for operating and maintenance costs, both resulting from higher dispatch.
Total other operating expenses for the three months ended March 31, 2000, were approximately $2.8 million compared to the $2.6 million of total other operating expenses for the corresponding period in the prior year. The $0.2 million increase is due to higher general and administrative expenses for legal expenses for the FPL litigation.
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Net interest expense for the three months ended March 31, 2000, of approximately $14.0 million compared to $14.0 million of net interest expense for the same period in the prior year.
Liquidity and Capital Resources
On November 22, 1994 the Partnership and ICL Funding issued first mortgage bonds in an aggregate principal amount of $505 million (the "First Mortgage Bonds"), $236.6 million of which bear an average interest rate of 9.26% and $268.4 million of which bear an interest rate of 9.77%. Concurrently with the Partnership's issuance of its First Mortgage Bonds, the Martin County Industrial Development Authority issued $113 million of Industrial Development Refunding Revenue Bonds (Series 1994A) which bear an interest rate of 7.875% (the "1994A Tax Exempt Bonds"). A second series of tax exempt bonds (Series 1994B) in the approximate amount of $12 million, which bear an interest rate of 8.05%, were issued by the Martin County Industrial Development Authority on December 20, 1994 (the "1994B Tax Exempt Bonds" and, together with the 1994A Tax Exempt Bonds, the "1994 Tax Exempt Bonds"). The First Mortgage Bonds and the 1994 Tax Exempt Bonds are hereinafter collectively referred to as the "Bonds."
Certain proceeds from the issuance of the First Mortgage Bonds were used to repay $421 million of the Partnership's indebtedness and financing fees and expenses incurred in connection with the development and construction of the Facility and the balance of the proceeds were deposited in various restricted funds that are being administered by an independent disbursement agent pursuant to trust indentures and a disbursement agreement. Funds administered by such disbursement agent are invested in specified investments. These funds together with other funds available to the Partnership were being used: (i) to finance completion of construction, testing, and initial operation of the Facility; (ii) to finance construction interest and contingency; and (iii) to provide for initial working capital.
The proceeds of the 1994 Tax Exempt Bonds were used to refund $113 million principal amount of Industrial Development Revenue Bonds (Series 1992A and Series 1992B) previously issued by the Martin County Industrial Development Authority for the benefit of the Partnership, and to fund, in part, a debt service reserve account for the benefit of the holders of its tax-exempt bonds and to complete construction of certain portions of the Facility. The Partnership’s total borrowings from inception through March 2000 were $769 million. The equity loan of $139 million was repaid on December 26, 1995. As of March 31, 2000, the borrowings included $125 million from the 1994 Tax Exempt Bonds and all of the available First Mortgage Bond proceeds. The First Mortgage Bonds have matured as follows:
Series Aggregate Principal Amount Date Matured and Paid
- ------ -------------------------- ---------------------
A-1 $4,397,000 June 15, 1996
A-2 4,398,000 December 15, 1996
A-3 4,850,000 June 15, 1997
A-4 4,851,000 December 15, 1997
A-5 5,132,000 June 15, 1998
A-6 5,133,000 December 15, 1998
A-7 4,998,000 June 15, 1999
A-8 4,999,000 December 15, 1999
The weighted average interest rate paid by the Partnership on its debt for the three months ended March 31, 2000 and 1999, was 9.204% and 9.167%, respectively.
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The Partnership, pursuant to certain of the Project Contracts, is required to post letters of credit which, in the aggregate, will have a face amount of no more than $65 million. Certain of these letters of credit have been issued pursuant to a Letter of Credit and Reimbursement Agreement with Credit Suisse and the remaining letters of credit will be issued when required under the Project Contracts, subject to conditions contained in such Letter of Credit and Reimbursement Agreement. As of March 31, 2000, no drawings have been made on any of these letters of credit. The Letter of Credit and Reimbursement Agreement has a term of seven years subject to extension at the discretion of the banks party thereto.
The Partnership entered into a debt service reserve letter of credit and reimbursement agreement, dated as of November 1, 1994, with Banque Nationale de Paris pursuant to which a debt service reserve letter of credit in the amount of approximately $60 million was issued. This agreement has a rolling term of five years, subject to extension at the discretion of the banks party thereto. Drawings on the debt service reserve letter of credit became available on the Commercial Operation Date of the Facility to pay principal and interest on the First Mortgage Bonds, the 1994 Tax Exempt Bonds and interest on any loans created by drawings on such debt service reserve letter of credit. Cash and other investments held in the debt service reserve account will be drawn on for the Tax Exempt Bonds prior to any drawings on the debt service reserve letter of credit. As of March 31, 2000, no drawings have been made on the debt service reserve letter of credit.
In order to provide for the Partnership's working capital needs, the Partnership entered into a Revolving Credit Agreement with Credit Suisse dated as of November 1, 1994. This Agreement has a term of seven years subject to extension at the discretion of the banks party thereto. The revolving credit agreement has a maximum available amount of $15 million and may be drawn on by the Partnership from time to time. The interest rate is based upon various short-term indices at the Partnership's option and is determined separately for each draw. As of March 31, 2000, thirteen working capital loans had been made to the Partnership under the working capital loan facility. All working capital loans were repaid.
PART II
OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
Dispute with FPL
On March 19, 1999, the Partnership filed a complaint against FPL in the United States District Court for the Middle District of Florida. The lawsuit stems from a course of action pursued by FPL beginning in the Spring of 1997, in which FPL purported to exercise its dispatch and control rights under the Power Purchase Agreement in a manner which the Partnership believes violated the terms of the power sales agreement. In its complaint, the Partnership charges that such conduct was deliberately calculated to cause the Partnership to be unable to meet the requirements to maintain the Facility's status as a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978.
The complaint alleges that FPL took the position that if the Facility is off-line for any reason, then FPL is under no obligation to allow the Facility to reconnect to FPL's system. The original complaint asserted, however, that the Partnership specifically and successfully negotiated for a contractual right to operate the Facility up to 100 MW ("Minimum Load") in order to enable it to
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cogenerate sufficient steam to maintain its Qualifying Facility status. While FPL has not disputed that the Partnership may maintain Minimum Load operations if the Facility is delivering power when FPL requests the Partnership to decommit the Facility, the complaint states that FPL has claimed absolute discretion to deny the Partnership permission to reconnect the Facility with FPL's system.
Since the loss of Qualifying Facility status may result in an event of default under the Power Purchase Agreement, the Partnership must take action to address this matter. The Partnership is investigating various alternatives to mitigate its QF risk. These are described under "QF Mitigation Options" below.
The complaint asserted causes of action for (i) FPL's breach of the Power Purchase Agreement, (ii) FPL's anticipatory repudiation of the Power Purchase Agreement, (iii) breach of the implied covenant of good faith, fair dealing and commercial reasonableness and (iv) a declaratory judgment by the court of the rights of the parties under the Power Purchase Agreement. The Partnership seeks (a) a declaratory ruling that FPL's actions constitute a breach of the terms of the Power Purchase Agreement and that the Partnership has the absolute right to operate the Facility at Minimum Load (except for reasons of safety or system security) at the rates provided for in the Power Purchase Agreement, (b) injunctive relief preventing FPL from further violating the Power Purchase Agreement, (c) compensatory damages and (d) other relief as the court may deem appropriate.
On April 14, 1999, FPL filed a responsive pleading to the complaint including a motion to dismiss two of the four counts raised in the complaint, raising certain affirmative defenses and seeking declaration that FPL has unfettered dispatch rights under the Power Purchase Agreement. On April 23, 1999, FPL filed answer to the counts which were not challenged in the motion to dismiss. On May 13, 1999, the Partnership filed its response to FPL's motion to dismiss and request for declaratory judgement. On May 18, 1999, the Court denied FPL's Motion to Dismiss in its entirety. The Partnership filed an amended complaint which was accepted on June 17, 1999. The amended complaint simply consolidated the Partnership's claims for breach of contract and breach of the implied obligation of good faith and fair dealing which was, in part, in response to a recent federal court decision. FPL moved to dismiss the entire amended complaint and the Partnership filed its opposition papers August 2, 1999. The Court granted FPL's motion to dismiss only with respect to the first count of the complaint. The Partnership has amended its complaint to address issues raised by the Court in its decision to dismiss this count. The second amended complaint which was filed on March 21, 2000, is attached as an exhibit to the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2000. On April 7, 2000, FPL filed a motion to dismiss ICL's second amended complaint and the Partnership filed its opposition papers April 21, 2000. The Court has not yet ruled on FPL's motion to dismiss the second amended complaint. The Court has also ordered a mediation session. In addition, a trial period has been established by the Court in April 2001.
This summary of the Partnership's complaint against FPL is qualified in its entirety by the complaint, which was filed with the court in docket 99-317-CIV-ORL-19C. This summary does not, nor does it purport to, include all of the material statements and claims made in the complaint, and has been provided solely for the reader's convenience. This summary is not intended to be relied upon for any purpose without reference to the complaint.
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Item 5 OTHER INFORMATION
QF Mitigation Options
If the court rules against the Partnership in the litigation with FPL, the Facility could lose its QF status, unless the Partnership is able to implement mitigating action. Loss of QF status would result in an event of default under the Power Purchase Agreement and the indenture for the Bonds. Unless cured, such events of default would have a material adverse effect on the Partnership's business, results of operation and financial condition.
To mitigate the risk of a possible adverse ruling by the Court, the Partnership has analyzed the feasibility of various options. The analyses included the following:
• providing steam to Caulkins for refrigeration
• constructing a liquid carbon dioxide production facility to which the Facility would supply steam
• installing distilled water production equipment to which the Facility would supply steam
• providing steam for a facility to dry chicken manure at a nearby farm for use as a fertilizer
• providing steam to Caulkins to dry orange peels for use in cattle feed
• providing steam to Caulkins for wash-water cooling
• providing steam or chilled water for water temperature control at a nearby fish farm
• constructing a cold storage food distribution center to which the Facility would supply chilled water
• providing chilled water to a nearby hen house for cooling
• constructing a lumber kiln to dry wood using steam provided by the Facility
• providing chilled water to a nearby flour mill for temperature control
The analyses included an evaluation as to whether the steam usage for these alternatives would qualify for QF purposes and to determine each option's feasibility - whether the option can increase steam production on a schedule, which may include regulatory approval, that would assure maintenance of QF status at an acceptable cost to the Partnership. The Partnership has completed its initial analyses of the options, but has not yet determined whether to implement any option. The Partnership has, however, commenced the lengthy process of amending its Site Certification to allow for a chilled water plant and a carbon dioxide facility. The Partnership may defer a decision to implement any option until a judgment is made in the litigation with FPL. If any option is implemented, the Partnership may, subject to the terms of the indenture for the Bonds, finance such option with senior secured debt ranking pari passu with the Bonds.
No assurance can be given that of any option under consideration or any other option will finally be determined to be feasible or that, even if one or more options are determined to be feasible, that such option(s) will be implemented or will result in assuring the maintenance of QF status.
Notwithstanding the 18-day period, in March of 1999, during which FPL prevented the Facility from reconnecting to FPL's system and thereby cogenerating qualifying steam, the Partnership cogenerated steam totaling 6.1% of electrical output in 1999 thereby exceeding the statutorily required 5% threshold.
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Governmental Approvals
The Partnership has obtained all material environmental permits and approvals required, as of March 31, 2000, in order to continue commercial operation of the Facility. Certain of these permits and approvals are subject to periodic renewal. Certain additional permits and approvals will be required in the future for the continued operation of the Facility. The Partnership is not aware of any technical circumstances that would prevent the issuance of such permits and approvals or the renewal of currently issued permits. The Partnership timely filed its application for a Title V air permit on May 24, 1996. The permit was issued on October 11, 1999.
On December 22, 1999, the Partnership submitted to the Florida Department of Environmental Protection ("DEP") a request for amendments to the Site Certification and an application for modifications of the Site Certificate. The amendments to the Site Certification are being provided to inform DEP of certain changes to the Facility's design and operation. The requests will not require changes to the Conditions of Certification for the Facility and do not involve significant environmental impacts that would require new environmental permits or approvals. Also submitted was an application for modifications of the Site Certificate, which describes other proposed changes to the Facility design and operations. The modifications will require changes to the Conditions of Certification. The requests include modifications to allow the additions of a carbon dioxide plant and a chilled water plant, changes in the cooling water storage pond elevation, and modifications of the operation of the pulverized coal-fired boiler to increase the electric generation output.
The DEP has proposed to modify the conditions of the Site Certification to allow emergency discharge of cooling water and process water to conform to NPDES Permit Number FL0183750, which was issued on January 19, 2000.
Energy Prices
In October 1999, FPL filed with the Florida Public Service Commission its projections for its 2000-2001 "as available" energy costs (in this context, "as available" energy costs reflect actual energy production costs avoided by FPL resulting from the purchase of energy from the Facility and other Qualifying Facilities). The projections filed by FPL are lower for certain periods than the energy prices specified in the Power Purchase Agreement for energy actually delivered by the Facility. At other times, the projections exceed the energy prices specified in the Power Purchase Agreement. Should FPL's "as available" energy cost projections prove to reflect actual rates, FPL may elect, pursuant to its dispatch and control rights over the Facility set forth in the Power Purchase Agreement, to run the Facility less frequently or at lower loads than if the Facility's energy prices were lower than the cost of other energy sources available to FPL. Since capacity payments under the Power Purchase Agreement are not affected by FPL's dispatch of the Facility and because capacity payments are expected by the Partnership to cover all of the Partnership's fixed costs, including debt service, the Partnership currently expects that, if the filed projections prove to reflect actual rates, such rates and the resulting dispatch of the Facility will not have a material adverse effect on the Partnership's ability to service its debt. To the extent the Facility is not operated by FPL during Caulkins' processing season (November to June), the Partnership may elect to run the Facility at a minimum load or shut down the Facility and run auxiliary boilers to produce steam for Caulkins in amounts required under the Partnership's steam agreement with Caulkins. Such operations may result in decreased net operating income for such periods. The Partnership expects that the decrease, if any, will not be material. For the three months ended March 31, 2000, FPL has
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not requested the Partnership to decommit the Facility. The Partnership's election to operate at minimum load has not had a material impact on the Partnership or its financial condition although energy delivered during such operations is sold at reduced prices.
Debt Service Reserve Account
As permitted by the Partnership's financing arrangements, on August 19, 1998, the Partnership requested that the balance in the Debt Service Reserve Account be reduced to the Debt Service Reserve Account Required Balance by reducing the Debt Service Reserve Letter of Credit. On January 11, 1999, the reduction was approved. The Debt Service Reserve Account now contains the $29,609,840 Debt Service Reserve Letter of Credit and $12,501,000 of cash (available only as a debt service reserve for the Tax Exempt Bonds).
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Reports on Form 8-K:
None
b) Exhibits:
Exhibit
No. Description
--- -----------
27 Financial Data Schedule
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INDIANTOWN COGENERATION, L.P.
(Co-Registrant)
Date: May 15, 2000 ________________________
John R. Cooper
Vice President and
Chief Financial Officer
INDIANTOWN COGENERATION FUNDING
CORPORATION
(Co-Registrant)
Date: May 15, 2000 ________________________
John R. Cooper
Vice President and
Chief Financial Officer
