Indiantown Cogeneration, L.P. (the "Partnership") is a special purpose Delaware limited partnership formed on October 4, 1991. The Partnership was formed to develop, construct, and operate an approximately 330 megawatt (net) pulverized coal-fired cogeneration facility (the "Facility") located on an approximately 240 acre site in southwestern Martin County, Florida. The Facility produces electricity for sale to Florida Power & Light Company ("FPL") and supplies steam to Caulkins Indiantown Citrus Co. ("Caulkins") for its plant located near the Facility.
The original general partners were Toyan Enterprises ("Toyan"), a California corporation and a wholly owned special purpose indirect subsidiary of PG&E National Energy Group, Inc. ("NEG, Inc."), and Palm Power Corporation ("Palm"), a Delaware corporation and a special purpose indirect subsidiary of Bechtel Enterprises, Inc. ("Bechtel Enterprises"). The sole limited partner was TIFD III-Y, Inc. ("TIFD"), a special purpose indirect subsidiary of General Electric Capital Corporation ("GECC"). During 1994, the Partnership formed its sole, wholly owned subsidiary, Indiantown Cogeneration Funding Corporation ("ICL Funding"), to act as agent for, and co-issuer with, the Partnership in accordance with the 1994 bond offering of $505,000,000 of First Mortgage Bonds. ICL Funding has no separate operations and has only $100 in assets.
In 1998, Toyan consummated transactions with DCC Project Finance Twelve, Inc. ("PFT"), whereby PFT, through a new partnership (Indiantown Project Investment, L.P. ("IPILP")) with Toyan, became a new general partner in the Partnership. Toyan is the sole general partner of IPILP. Prior to the PFT transaction, Toyan converted some of its general partnership interest into a limited partnership interest such that Toyan now directly holds only a limited partnership interest in the Partnership. In addition, Bechtel Generating Company, Inc. ("Bechtel Generating"), sold all of the stock of Palm to a wholly owned indirect subsidiary of Cogentrix Energy, Inc. ("Cogentrix"). Palm holds a 10% general partner interest in the Partnership.
On June 4, 1999, Thaleia, LLC ("Thaleia"), a wholly-owned subsidiary of Palm and indirect wholly-owned subsidiary of Cogentrix, acquired from TIFD a 19.9% limited partner interest in the Partnership. On September 20, 1999, Thaleia acquired another 20.0% limited partnership interest from TIFD and TIFD's membership on the Board of Control. On November 24, 1999, Thaleia purchased TIFD's remaining limited partner interest in the Partnership from TIFD.
The net profits and losses of the Partnership are allocated to Toyan, Palm, TIFD and IPILP and Thaleia (collectively, the "Partners") based on the following ownership percentages:
*Now beneficially owned by Cogentrix.
**PFT’s beneficial ownership in the Partnership through IPILP was equal to 10% as of
August 21, 1998, and 15% as of November 23, 1998.
The changes in ownership were the subject of notices of self-recertification of Qualifying Facility status filed by the Partnership with the Federal Energy Regulatory Commission on August 20, 1998, November 16, 1998, June 4, 1999, September 21, 1999, and November 24, 1999.
All distributions other than liquidating distributions will be made based on the Partners' percentage interest as shown above, in accordance with the project documents and at such times and in such amounts as the Board of Control of the Partnership determines.
The Partnership is managed by PG&E National Energy Group Company ("NEG"), formerly known as PG&E Generating Company, pursuant to a Management Services Agreement (the "MSA"). The Facility is operated by PG&E Operating Services Company ("PG&E OSC"), formerly known as U.S. Operating Services Company, pursuant to an Operation and Maintenance Agreement (the "O&M Agreement"). NEG and PG&E OSC are general partnerships wholly owned by NEG, Inc.
NEG, Inc. is a wholly-owned indirect subsidiary of PG&E Corporation. Because the California energy markets situation has caused financial difficulties for Pacific Gas and Electric Company, a wholly owned subsidiary of PG&E Corporation, PG&E Corporation's credit ratings were downgraded to below investment grade in January 2001, which caused PG&E Corporation to default on outstanding commercial paper and bank borrowings. In January 2001, certain corporate actions were taken to insulate the assets of NEG and its direct and indirect subsidiaries from an effort to substantively consolidate those assets in any insolvency or bankruptcy proceeding of PG&E Corporation. In March 2001, PG&E Corporation refinanced all of its outstanding commercial paper and bank borrowings, and Standard & Poor's subsequently removed its below investment grade credit rating since PG&E Corporation no longer had rated securities outstanding. Management of NEG believes that NEG and its direct and indirect subsidiaries as described above, including the Partnership, would not be substantively consolidated with PG&E Corporation in any insolvency or bankruptcy proceeding involving PG&E Corporation.
The Partnership began construction of the Facility in October 1992 and was in the development phase through the commencement of commercial operation. The Facility commenced commercial operation under its power purchase agreement (the "Power Purchase Agreement" or "PPA") with FPL on December 22, 1995. The Facility synchronized with the FPL system on June 30, 1995 and the Partnership sold to FPL electricity produced by the
Facility during startup and testing. The Partnership’s continued existence is dependent on the ability of the Partnership to maintain successful commercial operation under the Power Purchase Agreement. The Partnership has filed a complaint against FPL with respect to the interpretation of a certain provision of the Power Purchase Agreement. Please see “Item 3 Legal Proceedings” below. Management of the Partnership is of the opinion that the assets of the Partnership are realizable at their current carrying value. The Partnership has no assets other than the Facility, the Facility site, contractual arrangements relating to the Facility (the “Project Contracts”) and the stock of ICL Funding.
Certain Project Contracts
The Facility supplies (i) electric generating capacity and energy to FPL pursuant to the Power Purchase Agreement and (ii) steam to Caulkins Indiantown Citrus Company ("Caulkins") pursuant to a long-term energy services agreement (the "Energy Services Agreement").
Payments from FPL pursuant to the Power Purchase Agreement provide approximately 99% of Partnership revenues. Under and subject to the terms of the Power Purchase Agreement, FPL is obligated to purchase electric generating capacity made available to it and associated energy from the Facility through December 22, 2025.
Payments by FPL consist of capacity payments and energy payments. FPL is required to make capacity payments to the Partnership on a monthly basis for electric generating capacity made available to FPL during the preceding month regardless of the amount of electric energy actually purchased. The capacity payments have two components, an un-escalated fixed capacity payment and an escalated fixed operation and maintenance payment, which together are expected by the Partnership to cover all of the Partnership's fixed costs, including debt service. Energy payments are made only for the amount of electric energy actually delivered to FPL. The energy payments made by FPL are expected by the Partnership to cover the Partnership's variable costs of electric energy production but will be insufficient to cover the variable costs of steam production for steam supplied to Caulkins. The amount of this shortfall is not expected by the Partnership to have a material adverse effect on its ability to service its debt.
The Partnership supplies thermal energy to Caulkins in order for the Facility to meet the operating and efficiency standards under the Public Utility Regulatory Policy Act of 1978, as amended, and the FERC's regulations promulgated thereunder (collectively, "PURPA"). The Facility has been certified as a Qualifying Facility under PURPA. Under PURPA, Qualifying Facilities are exempt from certain provisions of the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), most provisions of the Federal Power Act (the "FPA"), and, except under certain limited circumstances, rate and financial regulation under state law. The Energy Services Agreement with Caulkins requires Caulkins to purchase the lesser of (i) 525 million pounds of steam per year or (ii) the minimum quantity of steam per year necessary for the Facility to maintain its status as a Qualifying Facility under PURPA (currently estimated by the Partnership not to exceed 525 million pounds per year).
The Partnership has a coal purchase agreement (the "Coal Purchase Agreement") with Lodestar Energy, Inc. ("Lodestar") pursuant to which Lodestar supplies all of the Facility's coal needs, which are estimated to be 1 million tons of coal per year. The Partnership has no obligation to purchase a minimum quantity of coal under the Coal Purchase Agreement. The fuel price escalation provisions in the Coal Purchase Agreement are substantially the same as
escalation of the fuel price component of the energy price contained in the Power Purchase Agreement with FPL. This mechanism is intended to mitigate any mismatch between the price the Partnership pays for coal and the energy payments received from FPL. Lodestar’s parent, Lodestar Holding’s Inc., announced in November, 2000 that it did not make a scheduled interest payment on its outstanding debt and that its primary surety of its performance bonds no longer meets local, state, and federal credit requirements. As of March 19, 2001, the interest payment remained unpaid and no alternative bonding arrangements had been made. The Partnership is currently evaluating alternative sources of coal and options for ash disposal. Such alternatives may result in increased fuel costs and waste handling expenses to the Partnership.
During 1997, coal ash produced during operation of the Facility was disposed of pursuant to the Coal Purchase Agreement and back-up disposal arrangements with Chambers Waste Systems, Inc. of Florida ("Chambers"). In 1998, the Partnership entered into agreements with Lodestar and VFL Technology Corporation ("VFL") for ash disposal at alternative sites. These agreements will reduce the cost of ash disposal. The Partnership has been informed that Lodestar, Chambers, and VFL have obtained the permits necessary to receive such coal ash.
The Partnership entered into a lime purchase agreement (the "Lime Purchase Agreement") with Chemical Lime Company ("Chemlime"), an Alabama corporation, to supply the lime requirements of the Facility's dry scrubber and sulfur dioxide removal system. The initial term of the Lime Purchase Agreement is 15 years from the commercial operation date. Chemlime is obligated to provide all of the Facility's lime requirements, but the Partnership has no obligation to purchase a minimum quantity of lime. The price of lime was renegotiated in 1999 for a three-year period beginning January 1, 2000. Chemlime notified the Partnership of its intention to cancel the agreement effective in the first quarter of 2002. The Partnership expects to put a replacement contract in place during the third quarter of 2001.
Competition
Since the Partnership has a long-term contract to sell electric generating capacity and energy from the Facility to FPL, it does not expect competitive forces to have a significant effect on its business. As discussed under "Energy Prices " below, the cost of power available to FPL from other sources will affect FPL's dispatch of the Facility and, therefore, the amount of electric energy FPL purchases from the Partnership. The Partnership expects that the capacity payments under the Power Purchase Agreement, which are not affected by the level of FPL's dispatch of the Facility, will cover all of the Partnership's fixed costs, including debt service.
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.
Employees
The Partnership has no employees and does not anticipate having any employees in the future because, under a management services agreement, NEG acts as the Partnership's representative in all aspects of managing the operation of the Facility as directed by the Partnership's Board of Control. As noted above, PG&E OSC is providing operations and maintenance services for the Partnership.
Business Strategy and Outlook
The Partnership's overall business plan is to safely produce clean, reliable energy at competitive prices. The Facility commenced commercial operation on December 22, 1995 and completed its fifth full calendar year of operation on December 31, 2000.
During 2000, the Facility produced 2,343,677 MW-hr of energy for sale to FPL compared to 1,745,760 MW-hr in 1999. This increase was due primarily to FPL's higher dispatch of the Facility. Dispatch of the Facility by FPL averaged approximately 87.56% over the year compared to 65.41% for 1999.
The Facility produced approximately 649 million pounds of steam for sale to Caulkins in 2000 compared to approximately 390 million pounds in 1999 thereby exceeding the minimum requirements to maintain Qualifying Facility status. The 259 million-pound increase in steam deliveries was due primarily to higher production of juice by Caulkins in 2000.
The Facility ended the year with a twelve-month rolling average Capacity Billing Factor of 98.636% in 2000 and 100.636% in 1999. The Capacity Billing Factor measures the overall
availability of the Facility, but gives a heavier weighting to on-peak availability. Cash flows during 2000 were sufficient to fund all operating expenses and debt repayment obligations.
Dispatch of the unit by FPL during the summer months is expected to be similar to 2000 levels. Dispatch during the winter is highly dependent on weather and FPL's cost of running its oil and gas fired units. Caulkins expects a strong citrus crop for processing in 2001 and steam demand from Caulkins is expected to be similar to 2000 levels.
The Facility is planning on four weeks of scheduled outages during 2001 to perform routine inspections and maintenance. The primary outage is scheduled for October and November 2001, which is before or at the beginning of citrus production.
In the absence of any major equipment failures, unit availability is expected to be comparable to 2000 levels. If this is achieved, the Capacity Billing Factor and associated capacity bonuses would be similar. The Partnership believes that its current financial resources will be adequate to cover operating expenses and debt repayment obligations in 2001.
Forward Looking Statements
When used in this report, words or phrases that are predictions of or indicate future events and trends are subject to a number of risks and uncertainties which could cause actual results to differ materially from those projected. Given such uncertainties, readers are cautioned not to place undue reliance on such statements. The Partnership undertakes no obligation to publicly update or revise any forward-looking statement to reflect current or future events or circumstances.
Governmental Approvals
The Partnership has obtained all material environmental permits and approvals required, as of December 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 addition of a carbon dioxide plant and clarifications of the operation of the auxiliary boilers related to operation rules. DEP approved these site certification changes on April 20, 2000.
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.
On November 10, 2000 the Partnership submitted to the DEP an application for modifications to the Site Certificate. The proposed modifications include a requested increase of the groundwater withdrawal, clarification of authority to allow emergency water withdrawals, changes to groundwater monitoring requirements and programs, and changing the address of the facility. On March 14, 2001 DEP approved and issued a final order modifying the Conditions of Certification related to South Florida Management District (“SFWMD”) authority to authorize withdrawals of ground or surface water and a modification for storage pond elevation changes. The remaining modifications remain under review with DEP.
Item 2 PROPERTIES
The Facility is located in a predominantly industrial area in southwestern Martin County, Florida, on approximately 240 acres of land owned by the Partnership (the "Site"). Other than the Facility, the Site, and the make-up water pipeline and associated equipment, the Partnership does not own or lease any material properties.
Item 3 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 since March 10, 1999, 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 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 asserts 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. FPL was expected to file a new motion to dismiss the amended complaint. The second amended complaint, which was filed on March 21, 2000, is attached as an exhibit to the Report.
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.
On December 19, 2000, FPL and the Partnership participated in a mediation conference with respect to the pending litigations described herein. As a result of this conference, FPL and the Partnership executed two Settlement Agreements intended to resolve all pending litigation. Only the Settlement Agreement for the pending federal court litigation requires amendment of the power sales agreement. The amendment must be approved by the Florida Public Service Commission, and certain conditions set forth in the Indenture for the Bonds, including confirmation of the Bonds' investment grade rating, must be met for it to become effective.
An outline of the business terms set forth in this Settlement Agreement provides that if the Facility is off-line for any reason, the Partnership shall have the right, upon up to 6 hours notice and subject only to safety and system reliability issues, to reconnect to FPL's system and produce up to 100 MW. The Settlement Agreement provides that if this occurs when FPL has decommitted the Facility, the Partnership will be paid FPL's actual "as available" energy rates for the first 360 of such hours each year (in this context, "as available" energy costs reflect actual energy production costs avoided by FPL resulting from the production or purchase of energy from the Facility and other sources). If fewer than 360 hours are used in any year, FPL may carry the balance forward, not to exceed a total of 1440 hours in any year. If the hours
accumulated exercising this reconnection right exceed FPL’s balance, the Partnership will be paid for energy produced during those hours at the energy rates set forth under the power sales agreement.
Management of the Partnership believes that this resolution provides the Partnership with the flexibility it requires to maintain its Qualifying Facility status without materially adversely affecting the Project.
On December 12, 2000, FPL filed a complaint against the Partnership in the Circuit Court of the 19th Judicial District in and for Martin County, Florida. In its complaint, FPL alleged that the Partnership breached the power sales agreement by failing to include certain payments from its coal supplier and its coal transporter in the Partnership's calculation of its fuel costs which are included in the calculation of the actual energy costs under the power sales agreement. The power sales agreement requires a sharing of actual energy costs between FPL and the Partnership to the extent the actual costs differ (either upward or downward) from a formula contained in the agreement. FPL sought unspecified damages and declaratory relief including a finding that the Partnership breached the power sales agreement. The Settlement Agreement provides that the Partnership will include in future calculations of its fuel costs all costs, credits, rebates, discounts, and allowances/concessions from all past, current or future vendors of fuel, ash, lime, and fuel transportation subject to execution of a definitive agreement embodying the terms of this Settlement Agreement. The Partnership will make a one time payment of $800,000 to FPL as settlement for disputed amounts under fuel audits performed for calendar years 1997 and 1998.
Property Tax Matter
The Partnership was contacted in 1998 by the local Martin County property appraiser concerning the proper qualification of some of its pollution control equipment, which equipment receives reduced valuation for property tax purposes. After review by the Partnership, and discussion directly with the appraiser's office, the Partnership provided the appraiser with all requested information. The appraiser has not taken any further action on this matter.
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 2000.
The following is a summary of the quarterly results of operations (unaudited) for the years ended December 31, 2000 and 1999.
Quarter Ended
March 31 June 30 September 30 December 31 Total
-------- ------- ------------ ----------- -----
(in thousands)
2000
- ----
Operating revenues $44,106 $42,589 $47,318 $43,777 $177,790
Gross profit 22,611 20,965 22,977 20,813 87,367
Net income before
cumulative change in
accounting principle 5,794 4,529 6,466 4,426 21,215
Net income 6,714 4,529 6,466 4,426 22,135
1999
- ----
Operating revenues $35,751 $40,457 $45,600 $41,462 $163,270
Gross profit 23,190 21,743 22,313 21,235 88,481
Net income 6,517 5,108 5,794 4,995 22,414
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Year ended December 31, 2000 Compared to the Year Ended December 31, 1999
For the years ended December 31, 2000 and 1999, the Partnership had total operating revenues of $177.8 million and $163.3 million, respectively. This increase in 2000 was attributable primarily to increased energy revenues of $14.2 million and by increased capacity bonus and capacity revenues of $0.3 million. For the years ending December 31, 2000 and 1999, the Facility achieved an average Capacity Billing Factor of 98.64% and 100.64% respectively. This decrease was primarily attributable to minor mechanical problems with turbine control valves. This resulted in earning full monthly capacity payments aggregating $112.8 million for the year in 2000 and $112.5 million for the year in 1999. Bonuses aggregated $11.2 million for the year in both 2000 and 1999. The increased revenues from capacity are due primarily to the quarterly escalations on the fixed operating & maintenance component of the capacity charge. The higher energy revenues are due primarily to greater dispatch levels by FPL. During 2000 and 1999, the Facility was dispatched by FPL and generated 2,343,677 megawatt-hours and 1,745,760 megawatt-hours, respectively. The monthly average dispatch rate requested by FPL was 87.6% and 65.4% for the twelve months ended December 31, 2000 and 1999, respectively. Total operating costs were $102.1 million and $85.5 million for the years ended December 31, 2000 and 1999, respectively. This increase
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was due primarily to an increase of $16.1 million in fuel and ash costs, both resulting from higher dispatch by FPL, and an increase of $0.7 million in general and administrative expenses relating to the FPL litigation costs. For the years ended December 31, 2000 and 1999, the total net interest expense was approximately $54.5 million and $55.4 million, respectively. The decrease was primarily due to a $0.8 million reduction in bond interest expense due to installment payments of the Series A-9 First Mortgage Bonds on June 15, 2000 and on December 15, 2000, an increase in interest income of $0.3 million, and an increase in letter of credit fees of $0.2 million. Net income was $22.1 million and $22.4 million for the twelve months ended December 31, 2000 and 1999, respectively. This $0.3 million decrease was primarily attributable to a $16.6 million increase in operating costs offset by the increased revenues of $14.5 million, the effect of a cumulative change in accounting principle for major maintenance of $0.9 million, and a decrease in net interest expense of $0.9 million.
As of December 31, 2000 and 1999 the Partnership had approximately $628.4 million and $641.4 million, respectively, of property, plant and equipment consisting primarily of purchased equipment, construction related labor and materials, interest during construction, financing costs, and other costs directly associated with the construction of the Facility. This decrease is due primarily to depreciation of $15.0 million, offset by $2.1 million of capital improvements.
Year ended December 31, 1999 Compared to the Year Ended December 31, 1998
For the years ended December 31, 1999 and 1998, the Partnership had total operating revenues of $163.3 million and $159.2 million, respectively. This increase was attributable primarily to increased energy revenues of $3.9 million and by increased capacity bonus and capacity revenues of $0.2 million. For the years ending December 31, 1999 and 1998, the Facility achieved an average Capacity Billing Factor of 100.64% and 101.038% respectively. The decrease was primarily attributable to minor mechanical problems. This resulted in earning full monthly capacity payments aggregating $112.5 million for the year in 1999 and $112.3 million for the year in 1998. Bonuses aggregated $11.2 million for the year in both 1999 and 1998. The increased revenues from capacity are due primarily to the quarterly escalations on the Fixed O&M component. The higher energy revenues are due primarily to greater dispatch levels by FPL. Total operating costs were $85.5 million and $80.6 million for the years ended December 31, 1999 and 1998, respectively. This increase was due primarily to an increase of $3.6 million in fuel and ash costs, both resulting from higher dispatch by FPL and an increase of $1.0 million in operations and maintenance expenses. During 1999 and 1998, the Facility was dispatched by FPL and generated 1,745,760 megawatt-hours and 1,485,008 megawatt-hours, respectively. The monthly average dispatch rate requested by FPL was 65.4% and 51.6% for the twelve months ended December 31, 1999 and 1998, respectively. For the years ended December 31, 1999 and 1998, the total net interest expense was approximately $55.4 million and $56.4 million, respectively. The decrease was primarily due to a $0.8 million reduction in bond interest expense due to the maturity of Series A-7 of the First Mortgage Bonds on June 15, 1999 and Series A-8 of the First Mortgage Bonds on December 15, 1999, a reduction in LOC fees of $0.4 million, and a reduction in interest income of $0.2 million. Net income was $22.4 million and $21.4 million for the twelve months ended December 31, 1999 and 1998, respectively. This $1.0 million increase was primarily attributable to the increased revenues of $4.1 million and the effect in 1998 for the write off of $0.8 million for start-up costs, a $1.0 million decrease in net interest expense and offset by a $4.9 million increase in operating costs.
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As of December 31, 1999 and 1998, the Partnership had approximately $641.4 million and $654.2 million, respectively, of property, plant and equipment consisting primarily of purchased equipment, construction related labor and materials, interest during construction, financing costs, and other costs directly associated with the construction of the Facility. This decrease is due primarily to depreciation of $15.2 million, offset by $2.1 million of capital improvements.
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"). Of this amount, $236.6 million of the First Mortgage Bonds bear an average interest rate of 9.05% and $268.4 million of the First Mortgage Bonds bear an interest rate of 9.77%. Concurrent 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. 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 used: (i) to finance completion of construction, testing, and initial operation of the Facility; (ii) to finance construction interest and construction-related contingencies; 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 December 2000 were $769 million. The equity loan of $139 million was repaid on December 26, 1995. As of December 31, 2000, the outstanding 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
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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**
**Note the A-9 Series does not fully mature until December 15, 2010.
The weighted average interest rate paid by the Partnership on its debt for the years ended December 31, 2000 and 1999, was 9.204% and 9.182% respectively.
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 First Boston 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 December 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 BNP Paribas (formerly known as 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 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 December 31, 2000, no drawings have been made on the debt service reserve letter of credit. On January 11, 1999, in accordance with the Partnership's financing documents, the debt service reserve letter of credit was reduced to approximately $30 million, which, together with cash in the debt service reserve account, represents the maximum remaining semi-annual debt service on the First Mortgage Bonds and the 1994 Tax Exempt Bonds.
In order to provide for the Partnership's working capital needs, the Partnership entered into a Revolving Credit Agreement with Credit Suisse First Boston 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. During 2000, working capital loans were made to the Partnership under the working capital loan facility. All working capital loans were repaid in a timely manner and as of December 31, 2000 no borrowings were outstanding.
For 2001, we have identified possible capital improvements that will enhance the reliability of the facility. This list includes the purchase of heavy mobile equipment, baghouse upgrades, additional upper aquifer wells, and water treatment modifications.
14
Item 7A Qualitative and Quantitative Disclosures About Market Risk
The only material market risk to which the Partnership is exposed is interest rate risk. The Partnership's exposure to market risk for changes in interest rates relates primarily to the opportunity costs of long-term fixed rate obligations in a falling interest rate environment.
The table below presents principal, interest and related weighted average interest rates by year of maturity (in thousands).
- --------------------------------------------------------------------------------------------------------------------------------
DEBT (all fixed rate) 2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Tax Exempt Bonds:
Principal $0.0 $0.0 $0.0 $0.0 $0.0 $125,010 $125,010 $127,510
Interest $9,865 $9,865 $9,865 $9,865 $9,865 $175,683 $225,012
Average Interest Rate 7.89% 7.89% 7.89% 7.89% 7.89% 7.89%
First Mortgage Bonds:
Principal $11,141 $11,460 $14,566 $16,785 $16,257 $384,499 $454,708 $492,484
Interest $43,217 $42,178 $41,045 $39,645 $38,102 $282,582 $486,769
Average Interest Rate 9.56% 9.57% 9.58% 9.59% 9.61% 9.71%
- --------------------------------------------------------------------------------------------------------------------------------
15
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Index to Financial Statements Page
----------------------------- ----
Report of Independent Public Accountants 18
Consolidated Balance Sheets 19
Consolidated Statements of Operations 21
Consolidated Statements of Changes in Partners' Capital 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
16
Report of independent public accountants
To Indiantown Cogeneration, L.P.:
We have audited the accompanying consolidated balance sheets of Indiantown Cogeneration, L.P., (a Delaware limited partnership) and subsidiaries (the “Partnership”) as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in partners’ capital and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Indiantown Cogeneration, L.P. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 to the financial statements, the Partnership changed its method of accounting for scheduled major overhauls in 2000 and costs of start-up activities in 1998.
Vienna, Virginia
January 11, 2001 (except with respect to matters discussed in Note 1, as to which the date is March 15, 2001)
17
Indiantown Cogeneration, L.P. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2000 and 1999
--------------------------------
ASSETS 2000 1999
- ---------------------------------------------------------------------- ------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 821,955 $ 2,416,997
Accounts receivable-trade 13,853,485 13,471,985
Inventories 2,116,636 1,146,017
Prepaid expenses 800,238 807,372
Deposits 44,450 44,450
Investments held by Trustee, including restricted funds
of $2,694,068 and $2,752,669 respectively 2,980,292 3,283,909
------------------ ------------------
Total current assets 20,617,056 21,170,730
INVESTMENTS HELD BY TRUSTEE,
restricted funds 15,108,428 14,501,877
DEPOSITS 159,365 80,000
PROPERTY, PLANT & EQUIPMENT:
Land 8,582,363 8,582,363
Electric and steam generating facilities 700,310,050 698,401,089
Less - accumulated depreciation (80,537,655) (65,534,397)
------------------ ------------------
Net property, plant & equipment 628,354,758 641,449,055
FUEL RESERVE 922,254 1,318,099
DEFERRED FINANCING COSTS, net of accumulated
amortization of $44,679,212 and $43,854,648 respectively 15,507,704 16,332,268
------------------ ------------------
Total assets $ 680,669,565 $ 694,852,029
================== ==================
The accompanying notes are an integral part of these consolidated
balance sheets.
18
Indiantown Cogeneration, L.P. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2000 and 1999
--------------------------------
LIABILITIES AND PARTNERS' CAPITAL 2000 1999
- --------------------------------------------------------------- ----------------- -----------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 9,325,173 $ 7,584,226
Accrued interest 2,370,686 2,267,017
Current portion - First Mortgage Bonds 11,140,896 11,533,135
Current portion of lease payable - railcars 331,628 308,534
----------------- -----------------
Total current liabilities 23,168,383 21,692,912
----------------- -----------------
LONG TERM DEBT:
First Mortgage Bonds 443,567,969 454,708,865
Tax Exempt Facility Revenue Bonds 125,010,000 125,010,000
Lease payable - railcars 3,943,538 4,275,166
----------------- -----------------
Total long term debt 572,521,507 583,994,031
Scheduled major overhaul costs -- 920,536
----------------- -----------------
Total liabilities 595,689,890 606,607,479
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Toyan Enterprises 25,536,395 26,517,489
Palm Power Corporation 8,497,967 8,824,455
Indiantown Project Investment, L.P. Partnership 16,953,444 17,604,787
Thaleia, LLC 33,991,869 35,297,819
----------------- -----------------
Total partners' capital 84,979,675 88,244,550
----------------- -----------------
Total liabilities and partners' capital $ 680,669,565 $ 694,852,029
================= =================
19
The accompanying notes are an integral part of these consolidated
balance sheets.
Indiantown Cogeneration, L.P. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998
----------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Operating Revenues:
Electric capacity and capacity bonus $124,029,498 $123,682,957 $123,461,237
Electric energy revenue 53,652,475 39,461,349 35,549,353
Steam 108,418 125,813 172,809
-------------- ------------- ------------
Total operating revenues 177,790,391 163,270,119 159,183,399
-------------- ------------- ------------
Cost of Sales:
Fuel and ash 55,910,214 39,794,007 36,220,511
Operating and maintenance 19,353,798 19,767,743 18,807,227
Depreciation 15,003,258 15,227,631 15,091,155
Loss on disposal of assets 155,780 -- --
------------- ------------ -------------
Total cost of sales 90,423,050 74,789,381 70,118,893
------------- ------------ -------------
Gross Profit 87,367,341 88,480,738 89,064,506
------------- ------------ -------------
Other Operating Expenses:
General and administrative 5,179,313 4,501,136 3,826,290
Insurance and taxes 6,475,006 6,212,453 6,689,843
------------ ----------- ------------
Total other operating expenses 11,654,319 10,713,589 10,516,133
------------ ----------- -----------
Operating Income 75,713,022 77,767,149 78,548,373
------------ ----------- -----------
Non-Operating Income (Expense):
Interest expense (56,905,787) (57,475,271) (58,868,345)
Interest income 2,407,354 2,122,142 2,493,655
------------- ------------- --------------
Net non-operating expense (54,498,433) (55,353,129) (56,374,690)
-------------- ------------- -------------
Income before cumulative effect of change in accounting
principles 21,214,589 22,414,020 22,173,683
Cumulative effect of a change in accounting
for costs of start-up activities (Note 2) -- -- (818,716)
Cumulative effect of a change in accounting
for scheduled major overhaul costs (Note 2) 920,536 -- --
-------------- ----------- ------------
Net Income $22,135,125 $22,414,020 $21,354,967
=========== =========== ============
The accompanying notes are an integral part of these consolidated statements.
20
Indiantown Cogeneration, L. P. and Subsidiaries
Consolidated Statements of Changes in Partners' Capital
For the Years Ended December 31, 2000, 1999 and 1998
----------------------------------------------------
Toyan Palm Power TIFD III-Y,
Enterprises Corporation Inc. IPILP Thaleia, LLC Total
----------- ----------- ----------- ----- ------------ -----
Partners' capital,
December 31, 1997 $53,062,783 $10,612,556 $42,450,225 $-- $ -- $106,125,564
Net Income (1/1/98 through 8/21/98) 7,228,833 1,445,767 5,783,066 14,457,666
Capital Distributions (1/1/98 through (13,240,000) (2,648,000) (10,592,000) -- -- (26,480,000)
8/21/98)
------------ ------------ ------------ -------- ------------ -------------
Partners' capital, August 21, 1998 $47,051,616 $ 9,410,323 $37,641,291 $-- $ -- $94,103,230
=========== =========== =========== ========= ============ =============
Transfer Toyan 19.95% interest to IPILP (18,773,594) -- -- 18,773,594 -- --
Net Income (8/22/98 through 12/31/98) 2,072,639 689,730 2,758,920 1,376,011 -- 6,897,300
Capital Distributions (8/22/98 through (2,764,600) (920,000) (3,680,000) (1,835,400) -- (9,200,000)
12/31/98 ------------- -------------- -------------- ------------- ---------- --------------
Partners' capital, December 31, 1998 $27,586,061 $9,180,053 $36,720,211 $18,314,205 $-- $91,800,530
============= ============= ============= ============= ========== ==============
Net Income (1/1/99 through 6/4/99) 3,139,325 1,044,700 4,178,802 2,084,177 -- 10,447,004
Partners' capital, June 4, 1999 $30,725,386 $10,224,753 $40,899,013 $20,398,382 $-- $102,247,534
============= ============== ============ ============= ========== ==============
Transfer TIFD 19.90% interest to
Thaleia, LLC -- -- (20,347,259) -- 20,347,259 --
Net Income (6/5/99 through 9/20/99) 1,915,912 637,575 1,281,525 1,271,961 1,268,773 6,375,746
Capital distributions (6/5/99 through) --
9/20/99) (5,039,385) (1,677,000) (3,370,770) (3,345,615) (3,337,230) (16,770,000)
------------ -------------- ------------- ------------- ------------ --------------
Partners' capital, September 20, 1999 $27,601,913 $ 9,185,328 $18,462,509 $18,324,728 $18,278,802 $91,853,280
=========== ============== ============= ============= ============ ==============
Transfer TIFD 20.00% interest to
Thaleia, LLC -- -- (18,370,656) -- 18,370,656 --
Net Income (9/21/99 through 11/24/99) 1,175,664 391,236 3,912 780,517 1,561,032 3,912,361
Partners' capital, November 24, 1999 $28,777,577 $ 9,576,564 $ 95,765 $19,105,245 $38,210,490 $95,765,641
=========== ============ ========== ============ =========== =============
Transfer TIFD 0.10% interest to
Thaleia, LLC
-- -- (95,765) -- 95,76 --
Net Income (11/25/99 through 12/31/99) 504,51 167,891 -- 334,942 671,564 1,678,90
Capital distributions (11/25/99 through
12/31/99) (2,764,600) (920,000) -- (1,835,400) (3,680,000) (9,200,000)
------------ ------------- ------------ ------------- ------------ -------------
Partners' capital, December 31, 1999 $26,517,489 $8,824,455 -- $ 17,604,787 $35,297,819 $88,244,550
=========== ============ ============ ============ ============ =============
Net Income 6,651,60 2,213,512 -- 4,415,957 8,854,050 22,135,125
Capital distributions (7,632,700) (2,540,000) (5,067,300) (10,160,000) (25,400,000)
------------ ------------- ------------ ------------- ------------- --------------
Partners' capital, December 31, 2000 $25,536,395 $8,497,967 $ 16,953,444 $ 33,991,869 $84,979,675
=========== ============ ============ ============= ============ =============
The accompanying notes are an integral part of these consolidated statements.
21
Indiantown Cogeneration, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999, and 1998
-----------------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $22,135,125 $22,414,020 $21,354,967
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of a change in accounting principles (920,536) -- 818,716
Depreciation and amortization 15,827,822 15,681,507 15,666,912
Loss on disposal of assets 155,780 -- --
Effect of changes in assets and liabilities:
(Increase) decrease in accounts receivable-trade (381,500) (1,102,391) 2,113,496
(Increase) decrease in inventories and fuel reserve (574,774) 1,904,412 (890,538)
(Increase) decrease in deposits and prepaids (72,231) (76,122) 428,029
Increase (decrease) in accounts payable,
accrued liabilities and (2,471,228)
-----------
accrued interest 1,844,616 552,186
--------- -------
Net cash provided by operating activities 38,014,302 39,373,612 37,020,354
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant & equipment, net of retirements (2,064,741) (2,108,071) (1,361,673)
(Increase) decrease in investments held by trustee (302,934) (1,013,585) 9,738,087
--------- ----------- ---------
Net cash (used in) provided by investing activities (2,367,675) (3,121,656) 8,376,414
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in lease payable--railcars (308,534) (287,048) (267,058)
Borrowings under revolving credit agreement 12,835,436 14,568,378 17,662,159
Repayments under revolving credit agreement (12,835,436) (14,568,378) (17,662,159)
Payment of bonds (11,533,135) (9,997,000) (10,265,000)
Capital distributions (25,400,000) (25,970,000) (35,680,000)
------------ ------------ ------------
Net cash used in financing activities (37,241,669) (36,254,048) (46,212,058)
------------ ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS (1,595,042) (2,092) (815,290)
Cash and cash equivalents, beginning of year 2,416,997 2,419,089 3,234,379
--------- --------- ---------
Cash and cash equivalents, end of year $821,955 $2,416,997 $2,419,089
======== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $54,141,427 $55,039,501 $55,879,716
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
22
Indiantown Cogeneration, L.P. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2000 and 1999
1. ORGANIZATION AND BUSINESS:
Indiantown Cogeneration, L.P. (the "Partnership") is a special purpose Delaware limited partnership formed on October 4, 1991. The Partnership was formed to develop, construct, and operate an approximately 330 megawatt (net) pulverized coal-fired cogeneration facility (the "Facility") located on an approximately 240 acre site in southwestern Martin County, Florida. The Facility produces electricity for sale to Florida Power & Light Company ("FPL") and supplies steam to Caulkins Indiantown Citrus Co. ("Caulkins") for its plant located near the Facility.
The original general partners were Toyan Enterprises ("Toyan"), a California corporation and a wholly owned special purpose indirect subsidiary of PG&E National Energy Group, Inc. ("NEG, Inc.") and Palm Power Corporation ("Palm"), a Delaware corporation and a special purpose indirect subsidiary of Bechtel Enterprises, Inc. ("Bechtel Enterprises"). The sole limited partner was TIFD III-Y, Inc. ("TIFD"), a special purpose indirect subsidiary of General Electric Capital Corporation ("GECC"). During 1994, the Partnership formed its sole, wholly owned subsidiary, Indiantown Cogeneration Funding Corporation ("ICL Funding"), to act as agent for, and co-issuer with, the Partnership in accordance with the 1994 bond offering discussed in Note 4. ICL Funding has no separate operations and has only $100 in assets.
In 1998, Toyan consummated transactions with DCC Project Finance Twelve, Inc. ("PFT"), whereby PFT, through a new partnership (Indiantown Project Investment, L.P. ("IPILP")) with Toyan, became a new general partner in the Partnership. Toyan is the sole general partner of IPILP. Prior to the PFT transaction, Toyan converted some of its general partnership interest into a limited partnership interest such that Toyan now directly holds only a limited partnership interest in the Partnership. In addition, Bechtel Generating Company, Inc. ("Bechtel Generating"), sold all of the stock of Palm to a wholly owned indirect subsidiary of Cogentrix Energy, Inc. ("Cogentrix"). Palm holds a 10% general partner interest in the Partnership.
On June 4, 1999, Thaleia, LLC ("Thaleia"), a wholly owned subsidiary of Palm and indirect wholly owned subsidiary of Cogentrix, acquired from TIFD a 19.9% limited partner interest in the Partnership. On September 20, 1999, Thaleia acquired another 20% limited partnership interest from TIFD and TIFD's membership on the Board of Control. On November 24, 1999, Thaleia purchased TIFD's remaining limited partnership interest in the Partnership from TIFD.
The net profits and losses of the Partnership are allocated to Toyan, Palm, TIFD and IPILP and Thaleia (collectively, the “Partners”) based on the following ownership percentages:
23
As of As of As of As of As of
August 21, October 20, June 4, September 20, November 24,
1998 1998 1999 1999 1999
---- ---- ----- ---- ----
Toyan 30.05% 30.05% 30.05% 30.05% 30.05%
Palm 10% 10%* 10%* 10%* 10%*
IPILP 19.95%** 19.95%** 19.95% 19.95% 19.95%
TIFD 40% 40% 20.1% 0.1% --
Thaleia -- -- 19.9% 39.9% 40%
*Now beneficially owned by Cogentrix.
**PFT’s beneficial ownership in the Partnership through IPILP was equal to 10%
as of August 21, 1998, and 15% as of November 23, 1998.
The changes in ownership were the subject of notices of self-recertification of Qualifying Facility status filed by the Partnership with the Federal Energy Regulatory Commission on August 21, 1998, November 16, 1998, June 4, 1999, September 21, 1999, and November 24, 1999.
All distributions other than liquidating distributions will be made based on the Partners' percentage interest as shown above, in accordance with the project documents and at such times and in such amounts as the Board of Control of the Partnership determines.
The Partnership is managed by PG&E National Energy Group Company ("NEG"), formerly known as PG&E Generating Company pursuant to a Management Services Agreement (the "MSA"). The Facility is operated by PG&E Operating Services Company ("PG&E OSC"), formerly known as U.S. Operating Services Company, pursuant to an Operation and Maintenance Agreement (the "O&M Agreement"). NEG and PG&E OSC are general partnerships indirectly wholly owned by NEG, Inc., an indirect wholly owned subsidiary of PG&E Corporation.
The Partnership commenced commercial operations on December 22, 1995 (the "Commercial Operation Date"). /P>
24
NEG, Inc. is a wholly-owned indirect subsidiary of PG&E Corporation. Because the California energy markets situation has caused financial difficulties for Pacific Gas and Electric Company, a wholly owned subsidiary of PG&E Corporation, PG&E Corporation's credit ratings were downgraded to below investment grade in January 2001, which caused PG&E Corporation to default on outstanding commercial paper and bank borrowings. In January 2001, certain corporate actions were taken to insulate the assets of NEG and its direct and indirect subsidiaries from an effort to substantively consolidate those assets in any insolvency or bankruptcy proceeding of PG&E Corporation. In March 2001, PG&E Corporation refinanced all of its outstanding commercial paper and bank borrowings, and Standard & Poor's subsequently removed its below investment grade credit rating since PG&E Corporation no longer had rated securities outstanding. Management of NEG believes that NEG and its direct and indirect subsidiaries as described above, including the Partnership, would not be substantively consolidated with PG&E Corporation in any insolvency or bankruptcy proceeding involving PG&E Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Presentation
The Partnership's consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
The accompanying consolidated financial statements include the accounts of the Partnership and ICL Funding. All significant intercompany balances have been eliminated in consolidation.
Cash and Cash Equivalents
For the purposes of reporting cash flows, cash equivalents include short-term investments with original maturities of three months or less.
Inventories
Coal and lime inventories are stated at the lower of cost or market using the average cost method.
25
Prepaid Expenses
Prepaid expenses of $800,238 as of December 31, 2000, include $500,000 for operation and maintenance funding, $229,230 for insurance costs related to property damage and other general liability policies and $71,008 for prepayments of the annual administrative fees for the letters of credit and for the trustee.
Prepaid expenses of $807,372 as of December 31, 1999, include $500,000 for operation and maintenance funding, $243,135 for insurance costs related to property damage and other general liability policies and $64,237 for prepayments of the annual administrative fees for the letters of credit and for the trustee.
Deposits
Deposits are stated at cost and include amounts required under certain of the Partnership's agreements as described in Note 3.
Investments Held by Trustee
The investments held by the trustee represent bond and equity proceeds held by a bond trustee/disbursement agent and are carried at cost, which approximates market. All funds are invested in either Nations Treasury Fund-Class A or other permitted investments for longer periods. The Partnership also maintains restricted investments covering a portion of the partnership's debt as required by the financing documents. The proceeds include $12,501,000 of restricted tax-exempt debt service reserve required by the financing documents and are classified as a noncurrent asset on the accompanying consolidated balance sheets. The Partnership maintains restricted investments covering a portion of debt principal and interest payable, as required by the financing documents. These investments are classified as current assets in the accompanying consolidated balance sheets. A qualifying facility ("QF") reserve of $2,500,000 is also held as a non-current asset (see Note 4).
Property, Plant and Equipment
Property, plant and equipment, which consist primarily of the Facility, are recorded at actual cost. The Facility is depreciated on a straight-line basis over 35 years with a residual value on the Facility approximating 25 percent of the gross Facility costs.
Other property, plant and equipment are depreciated on a straight-line basis over the estimated economic or service lives of the respective assets (ranging from five to seven years). Routine maintenance and repairs are charged to expense as incurred.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes criteria for recognizing and measuring impairment losses when recovery of recorded long-lived asset values is uncertain. In the opinion of Management of the Partnership, there has been no impact on the Partnership's financial condition or results of operations in 2000, 1999, or 1998.
26
Fuel Reserve
The fuel reserve, carried at cost, represents an approximate six-day supply of coal held for emergency purposes. Management plans to rebuild the fuel reserve in order to maintain an approximate twenty-day supply on hand throughout the year.
Deferred Financing Costs
Financing costs, consisting primarily of the costs incurred to obtain project financing, are deferred and amortized using the effective interest rate method over the term of the related permanent financing.
Scheduled major overhauls
The Securities and Exchange Commission ("SEC") has recently stated that it objects to the accrue in advance method for scheduled significant replacement and overhaul costs. The SEC has asked the Accounting Standards Executive Committee ("AcSEC") to issue guidance related to accounting for these costs, which will not include the accrue in advance method. Prior to the issuance of guidance from the AcSEC, the SEC has stated that it will allow companies to recognize the change from accrue in advance as a cumulative effect of a change in accounting principle. The Partnership has, therefore, changed its method of accounting for scheduled major overhaul to the as incurred method effective January 1, 2000.
As such, the Partnership has recognized a cumulative effect of a change in accounting principle of $920,536 to increase net income. The effect of adopting this new accounting principle in 2000 was to reduce operating and maintenance costs and increase net income by approximately $424,000.
Revenue Recognition
Revenues from the sale of electricity are recorded based on output delivered and capacity provided at rates as specified under contract terms.
Income Taxes
Under current law, no Federal or state income taxes are paid directly by the Partnership. All items of income and expense of the Partnership are allocable to and reportable by the Partners in their respective income tax returns. Accordingly, no provision is made in the accompanying consolidated financial statements for Federal or state income taxes.
Reclassifications
Certain reclassifications have been made in the 1999 financial statements to conform to the 2000 presentation.
Derivative Financial Instruments
27
The Partnership will adopt SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138, on January 1, 2001. This standard requires the Partnership recognize all derivatives, as defined in the statements listed above, on the balance sheet at fair value. Derivatives, or any portion thereof, that are not effective hedges must be adjusted to fair value through income. If derivatives are effective hedges, depending on the nature of the hedges, changes in the fair value of derivatives either will offset the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or will be recognized in other comprehensive income until the hedged items are recognized in earnings. The Partnership has certain derivative commodity contracts for the physical delivery of purchase and sale quantities transacted in the normal course of business. These derivatives are exempt from the requirements of SFAS No. 133 under the normal purchases and sales exception, and thus will not be reflected on the balance sheet at fair value. Due to this exception and the Partnership's current adoption of SFAS No. 133 will not have a material impact on its financial condition or results of operations.
Organization Costs
The Partnership adopted the American Institute of Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5") during 1998 which resulted in the write-off of all organization costs reflected on the accompanying consolidated financial statements.
3. DEPOSITS:
In 1991, in accordance with a contract between the Partnership and Martin County, the Partnership provided Martin County with a security deposit in the amount of $149,357 to secure installation and maintenance of required landscaping materials. In January 1998, the Partnership received a refund of funds in excess of the required deposit as security for the first year maintenance as set forth in the contract between the Partnership and Martin County. The remaining deposit in the amount of $39,804 was included in current assets as of December 31, 1997. These funds were returned in September 1998 when the Partnership submitted a surety bond for the refund amount. In July 1999, Martin County Growth Management Environmental Division authorized release of the funds securing the landscaping.
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 December 31, 2000 and 1999, estimated present values of this deposit of $159,365 and $80,000, respectively, are included in deposits in the accompanying consolidated balance sheets. The remaining balance is included in property, plant and equipment as part of total capitalized construction expenses.
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4. BONDS AND NOTES PAYABLE:
First Mortgage Bonds
The Partnership and ICL Funding jointly issued $505,000,000 of First Mortgage Bonds (the "First Mortgage Bonds") in a public issuance registered with the SEC. Proceeds from the issuance were used to repay outstanding balances of $273,513,000 on a prior construction loan and to complete the project. The First Mortgage Bonds are secured by a lien on and security interest in substantially all of the assets of the Partnership. The First Mortgage Bonds were issued in 10 separate series with fixed interest rates ranging from 7.38 to 9.77 percent and with maturities ranging from 1996 to 2020. Interest is payable semi-annually on June 15 and December 15 of each year. Interest expense related to the First Mortgage Bonds was $44,275,872, $45,138,915, and $46,014,161, in 2000, 1999, and 1998 respectively.
Tax Exempt Facility Revenue Bonds
The proceeds from the issuance of $113,000,000 of Series 1992A and 1992B Industrial Development Revenue Bonds (the "1992 Bonds") through the Martin County Industrial Development Authority (the "MCIDA") were invested in an investment portfolio with Fidelity Investments Institutional Services Company. On November 22, 1994, the Partnership refunded the 1992 Bonds with proceeds from the issuance of $113,000,000 Series 1994A and of $12,010,000 Series 1994B Tax Exempt Facility Refunding Revenue Bonds which were issued on December 20, 1994 (the Series 1994A Bonds and the Series 1994B Bonds, collectively, the "1994 Tax Exempt Bonds").
The 1994 Tax Exempt Bonds were issued by the MCIDA pursuant to an Amended and Restated Indenture of Trust between the MCIDA and NationsBank of Florida, N.A. (succeeded by The Bank of New York Trust Company of Florida, N.A.) as trustee (the "Trustee"). Proceeds from the 1994 Tax Exempt Bonds were loaned to the Partnership pursuant to the MCIDA Amended and Restated Authority Loan Agreement dated as of November 1, 1994 (the "Authority Loan"). The Authority Loan is secured by a lien on and a security interest in substantially all of the assets of the Partnership. The 1994 Tax Exempt Bonds, which mature December 15, 2025, carry fixed interest rates of 7.875 percent and 8.05 percent for Series 1994A and 1994B, respectively. Total interest paid related to the 1994 Tax Exempt Bonds was $9,865,555 for each of the years ended December 31, 2000, 1999, and 1998. The Tax Exempt Bonds and the First Mortgage Bonds are equal in seniority.
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Future minimum payments related to outstanding First Mortgage Bonds and 1994 Tax Exempt Bonds at December 31, 2000 are as follows:
2001 $ 11,140,896
2002 11,460,408
2003 14,566,086
2004 16,785,152
2005 16,257,206
Thereafter 509,509,117
-------------
Total $579,718,865
=============
Equity Contribution Agreement
Pursuant to an Equity Contribution Agreement, dated as of November 1, 1994, between TIFD and NationsBank of Florida, N.A. (succeeded by The Bank of New York Trust Company of Florida, N.A.), the Partners contributed approximately $140,000,000 of equity on December 26, 1995. Proceeds were used to repay the $139,000,000 outstanding under the Equity Loan Agreement. The remaining $1,000,000 was deposited with the Trustee according to the disbursement agreement among the Partnership, the Trustee and the other lenders to the Partnership. On June 15, 1998, the funds were released and subsequently distributed in accordance with the Disbursement Agreement.
Revolving Credit Agreement
The Revolving Credit Agreement provides for the availability of funds for the working capital requirements of the Facility. It has a term of seven years from November 1, 1994, subject to extension at the discretion of the bank party thereto. The interest rate is based upon various short-term indices chosen at the Partnership's option and is determined separately for each draw. The weighted average interest rate for the borrowings were approximately 7.98%, 6.58% and 6.84% during 2000, 1999 and 1998, respectively. This credit facility includes commitment fees, to be paid quarterly, of 0.375 percent on the unborrowed portion. The face amount of the original working capital letter of credit was increased in November 1994 from $10 million to $15 million. Under the original and new working capital credit facilities, the Partnership paid $52,919, $52,836 and $54,274 in commitment fees in 2000, 1999 and 1998, respectively. All borrowings made under this agreement were repaid in the year borrowed. As of December 31, 2000, 1999, and 1998, no borrowings were outstanding. The Partnership incurred interest expense of $84,574, $78,343 and $90,274 in 2000, 1999 and 1998, respectively, related to the aforementioned borrowings.
30
FPL Termination Fee Letter of Credit
On or before the Commercial Operation Date, the Partnership was required to provide FPL with a letter of credit equal to the total termination fee as defined in the Power Purchase Agreement in each year not to exceed $50,000,000. Pursuant to the terms of the Letter of Credit and Reimbursement Agreement, the Partnership obtained a commitment for the issuance of this letter of credit. At the Commercial Operation Date, this letter of credit replaced the completion letter of credit. The initial amount of $13,000,000 was issued for the first year of operations and increased to $40,000,000 in January 1999 and then to $50,000,000 in January 2000. During 2000, 1999, and 1998 no draws were made on this letter of credit. Commitment fees of $689,092, $704,555, and $643,076, were paid on this letter of credit in 2000 1999, and 1998, respectively.
FPL QF Letter of Credit
Within 60 days after the Commercial Operation Date, the Partnership was required to provide a letter of credit for use in the event of a loss of Qualifying Facility ("QF") status under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). The initial amount was $500,000 increasing by $500,000 per agreement year to a maximum of $5,000,000. Pursuant to the terms of the Letter of Credit and Reimbursement Agreement, the Partnership obtained a commitment for the issuance of this letter of credit. The amount will be used by the Partnership as necessary to maintain or reinstate the Facility's qualifying facility status. The Partnership may, in lieu of a letter of credit, make regular cash deposits to a dedicated account in amounts of $500,000 per agreement year to a maximum of $5,000,000. In February 1996, the Partnership established a QF account with the Trustee. The balance in this account at December 31, 2000 and 1999, was $2,500,000 and $2,000,000, respectively, and is included in noncurrent, restricted funds held by trustee in the accompanying consolidated balance sheets.
Steam Host Letter of Credit
At financial closing in October 1992, the Partnership provided Caulkins a letter of credit in the amount of $10,000,000 pursuant to the Energy Services Agreement (see Note 6). This letter of credit was terminated in 1994 and a new one was issued with essentially the same terms. In the event of a default under the Energy Services Agreement (see Note 6), the Partnership is required to pay liquidated damages in the amount of $10,000,000. Failure by the Partnership to pay the damages within 30 days allows the steam host to draw on the letter of credit for the amount of damages suffered by Caulkins. As of December 31, 2000, 1999, and 1998, no draws had been made on this letter of credit. Commitment fees of $137,818, $143,011 and $156,315 were paid relating to this letter of credit in 2000, 1999 and 1998, respectively.
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Debt Service Reserve Letter of Credit
On November 22, 1994, the Partnership also entered into a debt service reserve letter of credit and reimbursement agreement with Banque Nationale de Paris pursuant to which a debt service reserve letter of credit in the amount of approximately $60,000,000 was issued. Such 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 are available 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 prior to any drawings on the debt service reserve letter of credit. As of December 31, 2000, 1999, and 1998, no draws had been made on this letter of credit. Commitment fees of $410,733, $488,281, and $877,901 were paid on this letter of credit in 2000, 1999, and 1998, respectively. On January 11, 1999, pursuant to the Disbursement Agreement, the Debt Service Reserve Letter of Credit was reduced to $29,925,906.
5. PURCHASE AGREEMENTS:
Coal Purchase and Transportation Agreement
The Partnership entered into a 30-year purchase contract with Lodestar Energy, Inc. ("Lodestar") (formerly known as Costain Coal, Inc.), commencing from the first day of the calendar month following the Commercial Operation Date, for the purchase of the Facility's annual coal requirements at a price defined in the agreement, as well as for the disposal of ash residue. The Partnership has no obligation to purchase a minimum quantity of coal under this agreement.
On June 8, 1998, the Partnership entered into a three-year agreement with Lodestar, which established an arrangement for the Partnership's disposal of ash at alternative locations. The Partnership also entered a three-year agreement with VFL Technology Corporation for the disposal of ash with similar terms.
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Lime Purchase Agreement
On May 1, 1992, the Partnership entered into a lime purchase agreement with Chemical Lime Company of Alabama, Inc. for supply of the Facility's lime requirements for the Facility's dry scrubber sulfur dioxide removal system. The initial term of the agreement is 15 years from the Commercial Operation Date and may be extended for a successive 5-year period. Either party may cancel the agreement after January 1, 2000, upon proper notice. The Partnership has no obligation to purchase a minimum quantity of lime under the agreement. The price of lime was renegotiated in 1999 for a three-year period beginning January 1, 2000. Chemlime notified the Partnership of its intention to cancel the agreement effective in the first quarter of 2002. The Partnership expects to put a replacement contract in place during the third quarter of 2001.
6. SALES AND SERVICES AGREEMENTS:
Power Purchase Agreement
On May 21, 1990, the Partnership entered into a Power Purchase Agreement with FPL for sales of the Facility's electric output. As amended, the agreement is effective for a 30-year period, commencing with the Commercial Operation Date. The pricing structure provides for both capacity and energy payments.
Capacity payments remain relatively stable because the amounts do not vary with dispatch. Price increases are contractually provided. Capacity payments include a bonus or penalty payment if actual capacity is in excess of or below specified levels of available capacity. Energy payments are derived from a contractual formula defined in the agreement based on the actual cost of domestic coal at another FPL plant, St. Johns River Power Park.
Energy Services Agreement
On September 30, 1992, the Partnership entered into an energy services agreement with Caulkins. Commencing on the Commercial Operation Date and continuing throughout the 15-year term of the agreement, Caulkins is required to purchase the lesser of 525 million pounds of steam per year or the minimum quantity of steam per year necessary for the Facility to maintain its status as a Qualifying Facility under PURPA. The Facility declared Commercial Operation with Caulkins on March 1, 1996.
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7. COMMITMENTS AND CONTINGENCIES
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 since March 10, 1999, 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 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 asserts 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
34
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. FPL was expected to file a new motion to dismiss the amended complaint. The second amended complaint, which was filed on March 21, 2000, is attached as an exhibit to the Report.
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.
On December 19, 2000, FPL and the Partnership participated in a mediation conference with respect to the pending litigations described herein. As a result of this conference, FPL and the Partnership executed two Settlement Agreements intended to resolve all pending litigation. Only the Settlement Agreement for the pending federal court litigation requires amendment of the power sales agreement. The amendment must be approved by the Florida Public Service Commission, and certain conditions set forth in the Indenture for the Bonds, including confirmation of the Bonds' investment grade rating, must be met for it to become effective.
An outline of the business terms set forth in this Settlement Agreement provides that if the Facility is off-line for any reason, the Partnership shall have the right, upon up to 6 hours notice and subject only to safety and system reliability issues, to reconnect to FPL's system and produce up to 100 MW. The Settlement Agreement provides that if this occurs when FPL has decommitted the Facility, the Partnership will be paid FPL's actual "as available" energy rates for the first 360 of such hours each year (in this context, "as available" energy costs reflect actual energy production costs avoided by FPL resulting from the production or purchase of energy from the Facility and other sources). If fewer than 360 hours are used in any year, FPL may carry the balance forward, not to exceed a total of 1440 hours in any year. If the hours accumulated exercising this reconnection right exceed FPL's balance, the Partnership will be paid for energy produced during those hours at the energy rates set forth under the power sales agreement.
Management of the Partnership believes that this resolution provides the Partnership with the flexibility it requires to maintain its Qualifying Facility status without materially adversely affecting the Project.
On December 12, 2000, FPL filed a complaint against the Partnership in the Circuit Court of the 19th Judicial District in and for Martin County, Florida. In its complaint, FPL alleged that the Partnership breached the power sales agreement by failing to include certain payments from its coal supplier and its coal transporter in the Partnership's calculation of its fuel costs which are included in the calculation of the actual energy costs under the power sales agreement. The power sales agreement requires a sharing of actual energy costs between FPL and the Partnership to the extent the actual costs differ (either upward or downward) from a formula contained in the agreement. FPL sought unspecified damages and declaratory relief including a finding that the Partnership breached the power sales agreement. The Settlement Agreement provides that the Partnership will include in future calculations of its fuel costs all costs, credits, rebates, discounts, and allowances/concessions from all past, current or future
35
vendors of fuel, ash, lime, and fuel transportation subject to execution of a definitive agreement embodying the terms of this Settlement Agreement. The Partnership will make a one time payment of $800,000 to FPL as settlement for disputed amounts under fuel audits performed for calendar years 1997 and 1998.
8. RELATED PARTY TRANSACTIONS:
Management Services Agreement
The Partnership has a Management Services Agreement with NEG, a California general partnership and a wholly owned indirect subsidiary of NEG, Inc., for the day-to-day management and administration of the Partnership's business relating to the Facility. The agreement commenced on September 30, 1992 and will continue through August 31, 2026. Compensation to NEG under the agreement includes an annual base fee of $650,000 (adjusted annually), wages and benefits for employees performing work on behalf of the Partnership and other costs directly related to the Partnership. Payments of $4,324,042, $4,120,468, and $2,800,644, in 2000, 1999, and 1998 were made to NEG, respectively. At December 31, 2000 and 1999, the Partnership owed NEG $437,925 and $432,068, respectively, which are included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.
Operations and Maintenance Agreement
The Partnership has an Operation and Maintenance Agreement with PG&E OSC, a California general partnership and a wholly owned indirect subsidiary of NEG, Inc., for the operations and maintenance of the Facility for a period of 30 years (starting September 30, 1992). Thereafter, the agreement will be automatically renewed for periods of 5 years until terminated by either party with 12 months notice. If targeted plant performance is not reached, PG&E OSC will pay liquidated damages to the Partnership. Compensation to PG&E OSC under the agreement includes an annual base fee of $1.5 million ($900,000 of which is subordinate to debt service and certain other costs), certain earned fees and bonuses based on the Facility's performance and reimbursement for certain costs including payroll, supplies, spare parts, equipment, certain taxes, licensing fees, insurance and indirect costs expressed as a percentage of payroll and personnel costs. The fees are adjusted quarterly by a measure of inflation as defined in the agreement. Payments of $9,921,638, $9,790,473, and $9,605,917 were made to PG&E OSC in 2000, 1999, and 1998, respectively. At December 31, 2000 and 1999, the Partnership owed PG&E OSC $201,840 and $836,346 respectively, which is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.
Railcar Lease
The Partnership entered into a 15 year Car Leasing Agreement with GE Capital Railcar Services Corporation, an affiliate of GECC, to furnish and lease 72 pressure differential hopper railcars to the Partnership for the transportation of fly ash and lime. The cars were delivered starting in April 1995, at which time the lease was recorded as a capital lease. The leased asset of $5,753,375 and accumulated depreciation of $2,168,022 and $1,784,463 is included in property, plant and equipment as of December 31, 2000 and 1999. Payments of $629,856, including principal and interest, were made in 2000, 1999, and 1998 and the lease obligation of approximately $4,275,166 and $4,583,700, as
36
of December 31, 2000 and 1999 is reported as a lease payable in the accompanying consolidated balance sheets.
Future minimum payments related to the Car Leasing Agreement as of December 31, 2000 are as follows:
2001 $ 629,856
2002 629,856
2003 629,856
2004 629,856
2005 629,856
Thereafter 2,744,767
---------
Total minimum lease payments 5,894,047
Interest portion of lease payable (1,618,881)
-----------
Present value of future minimum lease
payments 4,275,166
Current portion (331,628)
-----------
Long-term portion $3,943,538
===========
Distribution to Partners
On June 15 and December 15, 2000, as provided in the Partnership Agreement, Indiantown distributed approximately $15.3 million and $10.1 million, respectively, to the Partners. An additional $0.6 million of distributable cash was retained for capital projects and is included in cash and cash equivalents as of December 31, 2000, on the accompanying consolidated balance sheet.
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9. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of certain of the Partnership's financial instruments as of December 31, 2000 and 1999.
December 31, 2000
Financial Liabilities Carrying Amount Fair Value
- --------------------- --------------- ----------
Tax Exempt Bonds $125,010,000 $127,510,200
First Mortgage Bonds $454,708,865 $492,483,915
December 31, 1999
Financial Liabilities Carrying Amount Fair Value
- --------------------- --------------- ----------
Tax Exempt Bonds $125,010,000 $127,510,200
First Mortgage Bonds $466,242,000 $465,188,912
For the Tax Exempt Bonds and First Mortgage Bonds, the fair values of the Partnership's bonds payable are based on the stated rates of the Tax Exempt Bonds and First Mortgage Bonds and current market interest rates to estimate market values for the Tax Exempt Bonds and the First Mortgage Bonds.
The carrying amounts of the Partnership's cash and cash equivalents, accounts receivable, deposits, prepaid expenses, investments held by trustee, accounts payable, accrued liabilities and accrued interest approximate fair value.
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our report dated January 11, 2001 (except with respect to matters discussed in Note 1, as to which the date is March 15, 2001) in this Form 10-K included in Registration Statement File No. 33-82034. It should be noted that we have not audited any financial statements of the company subsequent to December 31, 2000 or performed any audit procedures subsequent to the date of our report.
/S/ ARTHUR ANDERSEN LLP
Vienna, VA
March 28, 2001
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS
Indiantown Cogeneration, L.P. Board of Control
The following table sets forth the names, ages and positions of the members of the Board of Control of the Partnership. Members of the Board of Control are selected from time to time by, and serve at the pleasure of, the Partners of the Partnership.
Name Age Position
---- --- --------
Thomas J. Bonner................. 46 Palm Representative and
Thaleia Representative
Thomas F. Schwartz .............. 39 Palm Representative and
Thaleia Representative
P. Chrisman Iribe................ 49 IPILP Representative
Sanford L. Hartman............... 47 IPILP Representative
Thomas J. Bonner is Vice President - Asset Management for Cogentrix Energy, Inc. and has been with Cogentrix since 1987. Prior to joining Cogentrix Energy, Inc., Mr. Bonner spent five years as a utilities manager in an integrated fiber and chemical production facility. Mr. Bonner holds a B.S. from the U.S. Naval Academy, and an M.B.A. from Old Dominion University.
Thomas F. Schwartz is Group Senior Vice President and Chief Financial Officer of Cogentrix Energy, Inc. He is responsible for the areas of corporate finance and tax planning. Mr. Schwartz joined Cogentrix Energy, Inc. in 1991, and has held various positions in accounting and finance. Prior to joining Cogentrix Energy, Inc., Mr. Schwartz was Audit Manager with Arthur Andersen, LLP. Mr. Schwartz holds a B.A. degree in accounting from the University of North Carolina - Charlotte.
P. Chrisman Iribe is President of NEG and has been with NEG since it was formed in 1989. Prior to joining NEG, Mr. Iribe was senior vice president for planning, state relations and public affairs with ANR Pipeline Company, a natural gas pipeline company and a subsidiary of the Coastal Corporation. Mr. Iribe holds a B.A. degree in Economics from George Washington University.
Sanford L. Hartman joined NEG's legal group in 1990 and became its General Counsel in April 1999. Prior to joining NEG, Hartman was counsel to Long Lake Energy Corporation, an independent power producer with headquarters in New York City and was an attorney with Bishop, Cook, Purcell & Reynolds, a Washington, D.C., law firm. Mr. Hartman has a BA in Political Science from Drew University and a JD from Temple University.
ICL Funding Corporation Board of Directors
The following table sets forth the names, ages and positions of the directors and executive officers of ICL Funding. Directors are elected annually and each elected director
40
holds office until a successor is elected. Officers are elected from time to time by vote of the Board of Directors.
Name Age Position
---- --- --------
P. Chrisman Iribe 49 Director, President
Sanford L. Hartman 47 Director
John R. Cooper 52 Vice President, Chief
Financial Officer and
Principal Accounting
Officer
Item 11 REMUNERATION OF DIRECTORS AND OFFICERS
No cash compensation or non-cash compensation was paid in any prior year or is currently proposed to be paid in the current calendar year by ICL Funding or the Partnership to any of the officers and directors listed above. Accordingly, the Summary Compensation Table and other tables required under Item 402 of the Securities and Exchange Commission's Regulation S-K have been omitted, as presentation of such tables would not be meaningful.
Management services for the Partnership are being performed by NEG on a cost-plus basis in addition to the payment of a base fee. Operation and maintenance services for the Partnership will be performed by PG&E OSC on a cost-plus basis. In addition to a base fee, PG&E OSC may earn certain additional fees and bonuses based on specified performance criteria.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Partnership interests in the Partnership, as of December 31, 2000, are held as follows:
Toyan 30.05% L.P.
IPILP 19.95% G.P.
Palm 10.00% G.P.
Thaleia 40.00% L.P.
All of the outstanding shares of common stock of ICL Funding are owned by the Partnership.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership has several material contracts with affiliated entities. These contracts, which include the Construction Contract, the Management Services Agreement, the Operations and Maintenance Agreement and the Railcar Lease, are described elsewhere in this report, most notably in Note 7 to the Partnership's consolidated financial statements.
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PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
a) Documents filed as of this Report Page
(1) Consolidated financial statements:
Report of Independent Public Accountants............ 18
Consolidated Balance Sheets as of
December 31, 2000 and 1999 ........................ 19
Consolidated Statements of Operations for the
years ended December 31, 2000, 1999 and 1998....... 21
Consolidated Statements of Changes
in Partners' Capital for the years ended
December 31, 2000, 1999 and 1998................... 22
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998....... 23
Notes to Consolidated Financial
Statements......................................... 24
(2) Consolidated Financial Statement
Schedules.......................................... None
b) Reports on Form 8-K:
None
c) Exhibits:
Exhibit
No. Description
3.1 Certificate of Incorporation of Indiantown Cogeneration
Funding Corporation.*
3.2 By-laws of Indiantown Cogeneration Funding Corporation.*
3.3 Certificate of Limited Partnership of Indiantown
Cogeneration, L.P.*
3.4 Amended and Restated Limited Partnership Agreement of
Indiantown Cogeneration, L.P., among Palm Power Corporation,
Toyan Enterprises and TIFD III-Y Inc.*
3.5 Form of First Amendment to Amended and Restated Limited
Partnership Agreement of Indiantown Cogeneration, L.P.*
42
3.6 Dana Amendment to Amended and Restated Limited Partnership
Agreement of Indiantown Cogeneration, L.P.******
3.7 Cogentrix Amendment to Amended and Restated Limited
Partnership Agreement of Indiantown Cogeneration, L.P.******
3.8 Third Amendment to Amended and Restated Limited Partnership
Agreement of Indiantown Cogeneration, L.P.******
4.1 Trust Indenture, dated as of November 1, 1994, among
Indiantown Cogeneration Funding Corporation, Indiantown
Cogeneration, L.P., and NationsBank of Florida, N.A., as
Trustee, and First Supplemental Indenture thereto.**
4.2 Amended and Restated Mortgage, Assignment of Leases, Rents,
Issues and Profits and Security Agreement and Fixture Filing
among Indiantown Cogeneration, L.P., as Mortgagor, and Bankers
Trust Company as Mortgagee, and NationsBank of Florida, N.A.,
as Disbursement Agent and, as when and to the extent set forth
therein, as Mortgagee with respect to the Accounts, dated as
of November 1, 1994.**
4.3 Assignment and Security Agreement between Indiantown
Cogeneration, L.P., as Debtor, and Bankers Trust Company as
Secured Party, and NationsBank of Florida, N.A., as
Disbursement Agent and, as when, and to the extent set forth
therein, a Secured Party with respect to the Accounts, dated
as of November 1, 1994.**
10.1.1 Amended and Restated Indenture of Trust between Martin County
Industrial Development Authority, as Issuer, and NationsBank
of Florida, N.A., as Trustee, dated as of November 1, 1994.**
10.1.2 Amended and Restated Authority Loan Agreement by and between
Martin County Industrial Development Authority and Indiantown
Cogeneration, L.P., dated as of November 1, 1994.**
10.1.3 Letter of Credit and Reimbursement Agreement among Indiantown
Cogeneration, L.P., as Borrower, and the Banks Named Therein,
and Credit Suisse, as Agent, dated as of November 1, 1994.**
10.1.4 Disbursement Agreement, dated as of November 1, 1994, among
Indiantown Cogeneration, L.P., Indiantown Cogeneration Funding
Corporation, NationsBank of Florida, N.A., as Tax-Exempt
Trustee, NationsBank of Florida, N.A., as Trustee, Credit
Suisse, as Letter of Credit Provider, Credit Suisse, as
Working Capital Provider, Banque Nationale de Paris, as Debt
Service Reserve Letter of Credit Provider, Bankers Trust
Company, as Collateral Agent, Martin County Industrial
Development Authority, and NationsBank of Florida, N.A., as
Disbursement Agent.**
10.1.5 Revolving Credit Agreement among Indiantown Cogeneration,
L.P., as Borrower, and the Banks Named Therein, and Credit
Suisse, as Agent, dated as of November 1, 1994.**
10.1.6 Collateral Agency and Intercreditor Agreement, dated as of
November 1, 1994, among NationsBank of Florida, N.A., as
Trustee under the Trust Indenture, dated as of November 1,
1994, NationsBank of Florida, N.A., as
43
Tax-Exempt Trustee under the Tax Exempt Indenture, dated as of
November 1, 1994, Credit Suisse, as letter of Credit Provider,
Credit Suisse, as Working Capital Provider, Banque Nationale
de Paris, as Debt Service Reserve Letter of Credit Provider,
Indiantown Cogeneration, L.P., Indiantown Cogeneration Funding
Corporation, Martin County Industrial Development Authority,
NationsBank of Florida, N.A., as Disbursement Agent under the
Disbursement Agreement dated as of November 1, 1994, and
Bankers Trust Company, as Collateral Agent.**
10.1.7 Amended and Restated Equity Loan Agreement dated as of
November 1, 1994, between Indiantown Cogeneration, L.P., as
the Borrower, and TIFD III-Y Inc., as the Equity Lender.**
10.1.8 Equity Contribution Agreement, dated as of November 1, 1994,
between TIFD III-Y Inc. and NationsBank of Florida, N.A., as
Disbursement Agent.**
10.1.9 GE Capital Guaranty Agreement, dated as of November 1, 1994,
between General Electric Capital Corporation, as Guarantor,
and NationsBank of Florida, N.A., as Disbursement Agent.**
10.1.11 Debt Service Reserve Letter of Credit and Reimbursement
Agreement among Indiantown Cogeneration, L.P., as Borrower,
and the Banks Named Therein, and Banque Nationale de Paris, as
Agent, dated as of November 1, 1994.**
10.2.18 Amendment No. 2 to Coal Purchase Agreement, dated as of April
19, 1995.***
10.2.19 Fourth Amendment to Energy Services Agreement, dated as of
January 30, 1996.****
21 Subsidiaries of Registrant*
99 Copy of Registrants' press release dated January 3, 1996.****
99.1 Copy of Registrant’s complaint against FPL filed March 19,
1999.*****
99.2 Copy of Registrant’s Second Amended Complaint against FPL filed
March 21, 2000.*******
- --------------------
* Incorporated by reference from the Registrant Statement on Form S-1, as
amended, file no. 33-82034 filed by the Registrants with the SEC in July 1994.
** Incorporated by reference from the quarterly report on Form 10-Q, file no.
33-82034 filed by the Registrants with the SEC in December 1994.
*** Incorporated by reference from the quarterly report on Form 10-Q, file no.
33-82034 filed by the Registrants with the SEC in May 1995. **** Incorporated by
reference from the current report on Form 8-K, file no. 33-82034 filed by the
Registrants with the SEC in January 1996.
***** Incorporated by reference from the current report on Form 8-K file no.
33-82034 filed by the Registrants with the SEC in March 1999.
****** Incorporated by reference from the quarterly report on Form 10-Q file no.
33-82034 filed by the Registrants with the SEC in August 1999
*******Incorporated by reference from annual report on Form 10-K file no.
33-82034 filed by Registrants with the SEC in March 2000.
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the co-registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Bethesda, state of Maryland, on March 30, 2001.
INDIANTOWN COGENERATION, L.P.
Date: March 30, 2001 /s/ John R. Cooper
-----------------------------
Name: John R. Cooper
Title: Chief Financial Officer,
Principal Accounting Officer
and Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ P. Chrisman Iribe Member of Board of Control, March 30, 2001
- ---------------------- President and Secretary
P. Chrisman Iribe
/s/ John R. Cooper Chief Financial Officer, March 30, 2001
- ---------------------- Principal Accounting
John R. Cooper Officer and Senior
Vice President
/s/ Thomas J. Bonner Member of Board of Control March 30, 2001
- --------------------
Thomas J. Bonner
/s/ Thomas F. Schwartz Member of Board of Control March 30, 2001
- ----------------------
Thomas F. Schwartz
/s/ Sanford L. Hartman Member of Board of Control March 30, 2001
- ---------------------- and Senior Vice President
Sanford L. Hartman
45
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the co-registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Bethesda, state of Maryland, on March 30, 2001.
INDIANTOWN COGENERATION
FUNDING CORPORATION
Date: March 30, 2001 /s/ John R. Cooper
------------------
Name: John R. Cooper
Title: Chief Financial Officer,
Principal Accounting Officer
and Vice President
Pursuant to the requirements of the Securities Act of 1933, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ P. Chrisman Iribe Director and President March 30, 2001
- ---------------------
P. Chrisman Iribe
/s/ John R. Cooper Chief Financial Officer, March 30, 2001
- ---------------------- Principal Accounting
John R. Cooper Officer and Vice President
46
