SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2001
Commission File Number 33-82034
INDIANTOWN COGENERATION, L.P.
(Exact name of co-registrant as specified in its charter)
Delaware 52-1722490
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
INDIANTOWN COGENERATION FUNDING CORPORATION
(Exact name of co-registrant as specified in its charter)
Delaware 52-1889595
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7500 Old Georgetown Road, 13th Floor
Bethesda, Maryland 20814-6161
(Registrants' address of principal executive offices)
(301)-280-6800
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No
Indiantown Cogeneration, L.P.Indiantown Cogeneration Funding Corporation
PART I FINANCIAL INFORMATION Page No.
Item 1 Financial Statements:
Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and
December 31, 2000.................................................1
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2001 (Unaudited)
and September 30, 2000 (Unaudited)................................3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 (Unaudited) and September 30, 2000
(Unaudited).......................................................4
Notes to Consolidated Financial Statements (Unaudited) ..................5
Item 2 Management’s Discussion and Analysis of Financial
Condition and Results of Operations...............................9
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................13
Item 5 Other Information................................................16
Item 6 Exhibits and Reports on Form 8K...................................18
Item 7 Market Risk Information...........................................18
Signatures................................................................19
PART I
FINANCIAL INFORMATION
Indiantown Cogeneration, L.P.
Consolidated Balance Sheets
As of September 30, 2001 and December 31, 2000
September 30, December 31,
ASSETS 2001 2000
- --------------------------------------------------------------- ----------------------- ---------------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 379,482 $ 821,955
Accounts receivable-trade 13,586,810 13,853,485
Inventories 1,110,742 2,116,636
Prepaids 1,208,646 800,238
Deposits 44,450 44,450
Investments held by Trustee, including restricted funds
of $18,743,677 and $2,694,068, respectively
26,155,464 2,980,292
----------------------- ---------------------
Total current assets 42,485,594 20,617,056
----------------------- ---------------------
INVESTMENTS HELD BY TRUSTEE,
restricted funds 15,187,560 15,108,428
DEPOSITS 168,557 159,365
PROPERTY, PLANT & EQUIPMENT:
Land 8,582,363 8,582,363
Electric and steam generating facilities 702,078,533 700,310,050
Less accumulated depreciation (91,809,399) (80,537,655)
----------------------- ---------------------
Net property, plant & equipment 618,851,497 628,354,758
----------------------- ---------------------
FUEL RESERVE 2,134,732 922,254
DEFERRED FINANCING COSTS, net of accumulated amortization of
$45,297,629 and $44,679,212, respectively
14,889,287 15,507,704
----------------------- ---------------------
Total assets $ 693,717,227 $ 680,669,565
======================= =====================
The accompanying notes are an integral part of these consolidated balance sheets.
1
Indiantown Cogeneration, L. P.
Consolidated Balance Sheets
As of September 30, 2001 and December 31, 2000
September 30, December 31, 2000
LIABILITIES AND PARTNERS' CAPITAL 2001
- -------------------------------------------------------------- ---------------------- ----------------------
(Unaudited)
CURRENT LIABILITIES:
Accrued payables/liabilities $ 11,261,979 $ 9,325,173
Accrued interest 15,553,918 2,370,686
Current portion - First Mortgage Bonds 11,300,651 11,140,896
Current portion lease payable - railcars 350,076 331,628
---------------------- ----------------------
Total current liabilities 38,466,624 23,168,383
---------------------- ----------------------
LONG TERM DEBT:
First Mortgage Bonds 437,837,766 443,567,969
Tax Exempt Facility Revenue Bonds 125,010,000 125,010,000
Lease payable - railcars 3,678,627 3,943,538
---------------------- ----------------------
Total long term debt 566,526,393 572,521,507
---------------------- ----------------------
Total liabilities 604,993,017 595,689,890
---------------------- ----------------------
PARTNERS' CAPITAL:
Toyan Enterprises 26,661,626 25,536,395
Palm Power Corporation 8,872,420 8,497,967
Indiantown Project Investment Partnership 17,700,480 16,953,444
Thaleia 35,489,684 33,991,869
---------------------- ----------------------
---------------------- ----------------------
Total partners' capital 88,724,210 84,979,675
---------------------- ----------------------
Total liabilities and partners' capital $ 693,717,227 $ 680,669,565
====================== ======================
The accompanying notes are an integral part of these consolidated balance sheets.
2
Indiantown Cogeneration, L.P.
Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 2001 and
September 30, 2000
------------------------
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, 2000 September 30, September 30, 2000
2001 2001
----------------------- ---------------------- -------------------- ---------------------
Operating Revenues: (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Electric capacity and capacity bonus revenue $ 31,050,188 $31,032,537 $93,234,527 $92,934,747
Electric energy revenue 14,880,333 16,255,453 44,181,448 40,999,423
Steam revenue 41,973 29,749 235,437 78,669
------------ ----------- ----------- -----------
Total operating revenues 45,972,494 47,317,739 137,651,412 134,012,839
------------ ----------- ----------- -----------
Cost of Sales:
Fuel and ash 14,866,474 16,594,405 46,623,296 42,291,534
Operating and maintenance 4,918,801 3,954,014 14,383,730 13,801,455
Depreciation 3,798,397 3,791,714 11,383,269 11,366,169
------------ ---------- ----------- ----------
Total cost of sales 23,583,672 24,340,133 72,390,295 67,459,158
------------ ---------- ----------- -----------
Gross Profit 22,388,822 22,977,606 65,261,117 66,553,681
------------ ---------- ---------- ----------
Other Operating Expenses:
General and administrative 758,755 1,248,806 3,119,801 3,719,234
Insurance and taxes 1,700,636 1,603,558 5,006,646 4,820,204
--------- --------- --------- ---------
Total other operating expenses 2,459,391 2,852,364 8,126,447 8,539,438
--------- --------- --------- ---------
Operating Income 19,929,431 20,125,242 57,134,670 58,014,243
---------- ---------- ---------- ----------
Non-Operating Income (Expenses):
Interest expense (14,233,047) (14,099,272) (42,340,721) (42,807,244)
Interest/Other income (expense) 370,830 440,191 1,350,586 1,581,732
------------ ----------- ---------- ------------
Net non-operating expense (13,862,217) (13,659,081) (40,990,135) (41,225,512)
------------ ------------ ------------ ------------
Income before cumulative effect of
change in accounting principle 6,067,214 6,466,161 16,144,535 16,788,731
Cumulative effect of change in accounting principle - - - 920,536
-------------------- ----------------- ----------------- ------------
Net Income $6,067,214 $6,466,161 $16,144,535 $17,709,267
==================== ================= =============== =============
The accompanying notes are an integral part of these consolidated statements.
3
Indiantown Cogeneration, L.P.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000
Nine Months Nine Months
Ended Ended
September 30, September 30,
2001 2000
---------------------- ----------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,144,535 $ 17,709,267
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,001,686 11,984,594
Loss on disposal of assets 609,067 1,032
Decrease (increase) in accounts receivable 266,675 (859,061)
Increase in inventories and fuel reserves (206,584) (1,325,012)
Increase in deposits and prepaids (417,600) (133,645)
Increase in accrued payable/liabilities
and accrued interest 15,120,038 18,383,778
Decrease in major maintenance
Reserve - (920,536)
Decrease in lease payable (246,463) (229,300)
--------------------- ----------------------
Net cash provided by operating activities 43,271,354 44,611,117
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant & equipment (2,489,075) (1,899,103)
Increase in investment held by trustee (23,254,30) (23,085,053)
--------------------- ----------------------
Net cash used in investing activities (25,743,379) (24,984,156)
--------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of bonds (5,570,448) (5,766,567)
Capital distribution (12,400,000) (15,300,000)
Increase in working capital loan - -
--------------------- ----------------------
Net cash used in financing activities (17,970,448) (21,066,567)
CHANGE IN CASH AND CASH EQUIVALENTS (442,473) (1,439,606)
CASH and CASH EQUIVALENTS, beginning of year 821,955 2,416,997
--------------------- ----------------------
CASH and CASH EQUIVALENTS, end of period $ 379,482 $ 977,391
===================== ======================
The accompanying notes are an integral part of these consolidated statements.
4
Indiantown Cogeneration, L.P.
Notes to Consolidated Financial Statements
As of September 30, 2001
(Unaudited)
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. In September 2001, Caulkins sold its production plant to Louis Dreyfus Citrus, Inc. ("LDC"). LDC and its parent, Louis Dreyfus Citrus, S.A. ("Dreyfus"), have significant market positions in the world citrus industry with operations in Florida and Brazil.
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. 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 partner interest in the Partnership from TIFD.
5
The net profits and losses of the Partnership are currently allocated to Toyan, Palm, TIFD, IPILP, and Thaleia (collectively, the "Partners") based on the following ownership percentages:
Toyan 30.05%
Palm 10%*
IPILP 19.95%**
TIFD --
Thaleia 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.
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"), pursuant to a Management Services Agreement (the "MSA"). The Facility is operated by PG&E Operating Services Company ("PG&E OSC"), 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.
PG&E Corporation is also the parent of Pacific Gas and Electric Company, the California utility. Because the California energy markets situation has caused financial difficulties for Pacific Gas and Electric Company, 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, Inc. 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. On April 6, 2001, Pacific Gas and Electric Company filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On September 20, 2001, PG&E Corporation and Pacific Gas and Electric Company jointly filed a proposed plan of reorganization.
Management of NEG, Inc. believes that NEG, Inc. and its direct and indirect subsidiaries as described above, including the Partnership, would not be substantively consolidated with PG&E Corporation or Pacific Gas and Electric Company in any insolvency or bankruptcy proceeding involving PG&E Corporation.
2. FINANCIAL STATEMENTS:
The consolidated balance sheet as of September 30, 2001, and the consolidated statements of operations and cash flows for the three and nine months ended September 30, 2001 and 2000, have been prepared by the Partnership, without audit and in accordance with the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Partnership as of September 30, 2001, and the results of operations and cash flows for the three and nine months ended September 30, 2001 and 2000.
6
The financial statements and related notes contained herein should be read in conjunction with the Partnership's Annual Report on Form 10-K for the year ended December 31, 2000.
Investments Held by Trustee
The investments held by trustee represent bond and equity proceeds and revenue funds 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 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 in long-term assets in the accompanying balance sheets.
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 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.
New Accounting Pronouncement
The Partnership adopted 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 to 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 are not reflected on the balance sheet at fair value. The impact of adopting this standard did not have a material impact on the financial statements of the Partnership, since all contracts are exempt as normal purchases and sales, as currently defined.
7
In June 2001, the Financial Accounting Standards Board ("FASB") approved an interpretation issued by the Derivatives Implementation Group ("DIG") that changes the definition of normal purchases and sales for certain power contracts. Based on our current analysis, the power contract with FPL is a derivative, but qualifies as a normal purchase and sales exemption. The FASB has also approved another DIG interpretation that disallows normal purchases and sales treatment for commodity contracts (other than power contracts) that contain volumetric variability or optionality. Certain of our derivative commodity contracts may no longer be exempt from the requirements of SFAS No. 133. We are evaluating the impact of the implementation guidance on our financial statements, and will implement this guidance, as appropriate, by the implementation deadline of April 1, 2002.
3.DEPOSITS:
In 1991, in accordance with the Planned Unit Development Zoning Agreement between the Partnership and Martin County, the Partnership deposited $1,000,000 in trust with the Board of County Commissioners of Martin County (the "PUD Trustee"). Income from this trust will be used solely for projects benefiting the community of Indiantown. On July 23, 2025, the PUD Trustee is required to return the deposit to the Partnership. As of September 30, 2001 and December 31, 2000, estimated present value of this deposit was $168,557 and $159,365, respectively. The remaining balance has been included in property plant, and equipment as part of total construction expenses.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of the Partnership and the notes thereto included elsewhere in this report.
General
The Partnership is primarily engaged in the ownership and operation of a non-utility electric generating facility. From its inception and until December 21, 1995, the Partnership was in the development stage and had no operating revenues or expenses. On December 22, 1995 the Facility commenced commercial operation. As of September 30, 2001, the Partnership had approximately $618.9 million of property, plant and equipment (net of accumulated depreciation) consisting primarily of purchased equipment, construction related labor and materials, interest during construction, financing cost, and other costs directly associated with the construction of the Facility. For the nine months ended September 30, 2001, the Partnership had total operating revenues of approximately $137.6 million, total operating costs of approximately $80.5 million, and total net interest expenses of approximately $41.0 million, resulting in net income of approximately $16.1 million.
8
The Partnership was engaged in litigation with FPL, the Partnership's primary source of revenue. Under certain circumstances, an adverse ruling in the litigation could have had a material adverse effect on the Partnership's business and financial condition. Please see Part II Item 1, Legal Proceedings, for a description of the litigation and the pending settlement. The Partnership's fuel supplier is in bankruptcy. Please see Part II, Item 5, Other Information, for a description of the bankruptcy and the Partnership's actions in respect of the bankruptcy.
The Facility was taken out of service for a scheduled three week maintenance outage on October 23, 2001. As part of the routine maintenance activities, the turbine generator was inspected and tested to ensure it was in proper operating condition. As a result of these tests, the liquid cooled generator was found to have leaks in several of its stator bars. General Electric Corporation, the manufacturer of the generator, and the Partnership are currently assessing the generator condition and developing a plan to make temporary repairs that will allow the Partnership to return the Facility to service as soon as possible. The current scheduled outage was to have been completed by November 13, 2001. The earliest the Facility will be returned to service, however, is now estimated to be November 24, 2001. If the Partnership makes only temporary repairs at this time, the Partnership will subsequently have to make permanent repairs to the turbine generator. Under the current plan, the Partnership would make those permanent repairs during a scheduled maintenance outage in 2002. The Partnership is still assessing the financial impact of these repairs and the extended maintenance outage on the results of its operations this year and next, which could be material.
The Partnership has obtained all material environmental permits and approvals required as of September 30, 2001, in order to continue the operation of the Facility. Certain of these permits and approvals are subject to periodic renewal. Certain additional permits and approvals will be required in the future for the continued operation of the Facility. The Partnership is not aware of any technical circumstances that would prevent the issuance of such permits and approvals or the renewal of currently existing permits.
The Partnership timely filed its application for a Title V air permit on May 24, 1996. The permit was issued on October 11, 1999.
Results of Operations
For the nine months ending September 30, 2001 and 2000, the Facility achieved an average Capacity Billing Factor ("CBF") of 96.69% and 98.31%, respectively. For the nine months ended September 30, 2001 and 2000, respectively, this resulted in earning monthly capacity payments aggregating $84.8 million and $84.5 million and bonuses aggregating $8.4 million in each period. The Capacity Billing Factor measures the overall availability of the Facility, but gives a heavier weighting to on-peak availability. During the nine months ended September 30, 2001, the Facility was dispatched by FPL and generated 1,879,194 megawatt-hours compared to 1,782,262 megawatt-hours during the same period in 2000. The increase was due to higher oil and gas prices incurred by FPL during the first three quarters to generate energy from its facilities. The monthly dispatch rate for the first nine months of 2001 ranged from 78% to 95%, as compared to a range of 62% to 97% for the corresponding period in 2000.
9
For the three months ended September 30, 2001 and 2000, respectively, the Partnership earned monthly capacity payments aggregating $28.3 million and $28.2 million and bonuses aggregating $2.8 million in each period. During the three months ended September 30, 2001, the Facility was dispatched by FPL and generated 619,521 megawatt-hours compared to 703,105 megawatt-hours during the same period in 2000. The decrease was due to forced unit outages to repair boiler tube leaks. The monthly dispatch rate for the three months ended September 30, 2001 ranged from 78% to 95%, as compared to a range of 95% to 97% for the corresponding period in 2000.
Net income for the nine months ended September 30, 2001, was approximately $16.1 million compared to the net income of approximately $17.7 million for the corresponding period in the prior year. The $1.6 million decrease is primarily attributable to an increase in net energy costs of $1.2 million primarily due to ash disposal. An alternate method known as pugging has been implemented to help alleviate the increase in volume of ash resulting from higher dispatch from FPL. Also included is an increase in operating and maintenance costs of $0.6 million, and an expense reversal of $0.9 million made in 2000 for a cumulative change in accounting principle relating to major maintenance costs. This is offset by a decrease in net non-operating costs of $0.2 million, an increase of electric capacity and bonus revenue of $0.3 million, and a decrease in general and administrative costs of $0.6 million.
Net income for the three months ended September 30, 2001, was approximately $6.1 million compared to the net income of approximately $6.5 million for the corresponding period in the prior year. The $0.5 million decrease is primarily attributable to an increase in operating and maintenance costs of $1.0 million in 2001 for the replacement of baghouse bags, offset by a decrease in general and administrative costs of $0.5 million relating to the reduction of legal costs associated with the FPL litigation.
Electric Energy Revenues
For the nine months ended For the three months ended
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
--------------- -------------- --------------- --------------
Revenues $137.6 million $134.0 million $46.0 million $47.3 million
KWhs 1,879,194,000 1,782,262,000 619,521,000 703,105,000
Avg. CBF 96.69% 99.06% 96.69% 99.06%
Avg. Dispatch Rate 89.11% 85.38% 85.00% 96.51%
For the nine months ended September 30, 2001, the Partnership had total operating revenues of approximately $137.6 million as compared to $134.0 million for the corresponding period in the prior year. The $3.6 million increase in operating revenue is primarily due to higher energy revenue resulting from higher dispatch by FPL.
10
For the three months ended September 30, 2001, the Partnership had total operating revenues of approximately $46.0 million as compared to $47.3 million for the corresponding period in the prior year. The $1.3 million decrease in operating revenue is primarily due to forced unit outages to repair boiler tube leaks.
Costs of revenues for the nine months ended September 30, 2001, were approximately $72.4 million on sales of 1,879,194 MWhs as compared to $67.5 million on sales of 1,782,262 MWhs for the corresponding period in the prior year. This increase is primarily a result of higher fuel and ash costs of $4.3 million resulting from higher dispatch and the higher cost to dispose of ash to alternate facilities using the pugging method, and an increase in operating and maintenance expenses of $0.6 million primarily for baghouse bag replacements.
Costs of revenues for the three months ended September 30, 2001, were approximately $23.6 million on sales of 619,521 MWhs as compared to $24.3 million on sales of 703,105 MWhs for the corresponding period in the prior year. This decrease is primarily due to lower dispatch resulting from forced unit outages to repair boiler tube leaks.
Total other operating expenses for the nine months ended September 30, 2001 and 2000, were approximately $8.1 million and $8.5 million, respectively. Total other operating expenses for the three months ended September 30, 2001 and 2000, were approximately $2.5 million and $2.9 million, respectively.
Net interest expense for the nine months ended September 30, 2001, was approximately $41.0 million compared to $41.2 million for the same period in the prior year. December 2000 and June 2001 payments on Series A-9 of the first mortgage bonds decreased interest expense by approximately $0.5 million.
Net interest expense for the three months ended September 30, 2001, was approximately $13.9 million compared to $13.7 million for the same period in the prior year.
Liquidity and Capital Resources
On November 22, 1994 the Partnership and ICL Funding issued first mortgage bonds in an aggregate principal amount of $505 million (the "First Mortgage Bonds"), $236.6 million of which bear an average interest rate of 9.26% and $268.4 million of which bear an interest rate of 9.77%. Concurrently with the Partnership's issuance of its First Mortgage Bonds, the Martin County Industrial Development Authority issued $113 million of Industrial Development Refunding Revenue Bonds (Series 1994A) which bear an interest rate of 7.875% (the "1994A Tax Exempt Bonds"). A second series of tax exempt bonds (Series 1994B) in the approximate amount of $12 million, which bear an interest rate of 8.05%, were issued by the Martin County Industrial Development Authority on December 20, 1994 (the "1994B Tax Exempt Bonds" and, together with the 1994A Tax Exempt Bonds, the "1994 Tax Exempt Bonds"). The First Mortgage Bonds and the 1994 Tax Exempt Bonds are hereinafter collectively referred to as the "Bonds."
11
Certain proceeds from the issuance of the First Mortgage Bonds were used to repay $421 million of the Partnership's indebtedness and financing fees and expenses incurred in connection with the development and construction of the Facility and the balance of the proceeds were deposited in various restricted funds that are being administered by an independent disbursement agent pursuant to trust indentures and a disbursement agreement. Funds administered by such disbursement agent are invested in specified investments. These funds together with other funds available to the Partnership were being used: (i) to finance completion of construction, testing, and initial operation of the Facility; (ii) to finance construction interest and contingency; and (iii) to provide for initial working capital.
The proceeds of the 1994 Tax Exempt Bonds were used to refund $113 million principal amount of Industrial Development Revenue Bonds (Series 1992A and Series 1992B) previously issued by the Martin County Industrial Development Authority for the benefit of the Partnership, and to fund, in part, a debt service reserve account for the benefit of the holders of its tax-exempt bonds and to complete construction of certain portions of the Facility.
The Partnership’s total borrowings from inception through September 30, 2001 were $769 million. The equity loan of $139 million was repaid on December 26, 1995. As of September 30, 2001, the borrowings included $125 million from the 1994 Tax Exempt Bonds and all of the available First Mortgage Bond proceeds. The First Mortgage Bonds have matured as follows:
Series Aggregate Principal Amount Date Matured and Paid
- ------ -------------------------- ---------------------
A-1 $4,397,000 June 15, 1996
A-2 4,398,000 December 15, 1996
A-3 4,850,000 June 15, 1997
A-4 4,851,000 December 15, 1997
A-5 5,132,000 June 15, 1998
A-6 5,133,000 December 15, 1998
A-7 4,998,000 June 15, 1999
A-8 4,999,000 December 15, 1999**
**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 nine months ended September 30, 2001 and 2000, was 9.197% and 9.204%, 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 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 September 30, 2001, 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. In September 2001, Credit Suisse notified the Partnership of its intention not to extend the term of these agreements, which are due to expire in the fourth quarter of 2002. The Partnership expects to obtain a replacement letter of credit provider before the current letters of credit expire. In 1996, Credit Suisse merged with First Boston and is now known as Credit Suisse First Boston ("CSFB").
12
The Partnership entered into a debt service reserve letter of credit and reimbursement agreement, dated as of November 1, 1994, with Banque Nationale de Paris ("BNP") pursuant to which a debt service reserve letter of credit in the amount of approximately $60 million was issued. This agreement has a rolling term of five years, subject to extension at the discretion of the banks party thereto. Drawings on the debt service reserve letter of credit became available on the Commercial Operation Date of the Facility to pay principal and interest on the First Mortgage Bonds, the 1994 Tax Exempt Bonds and interest on any loans created by drawings on such debt service reserve letter of credit. Cash and other investments held in the debt service reserve account will be drawn on for the Tax Exempt Bonds prior to any drawings on the debt service reserve letter of credit. As of September 30, 2001, no drawings have been made on the debt service reserve letter of credit. In April 2000, BNP merged with Banque Paribas and is now known as BNP Paribas.
In order to provide for the Partnership's working capital needs, the Partnership entered into a Revolving Credit Agreement with CSFB 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 the nine months ended September 30, 2001, working capital loans were made under the working capital facility. All working capital loans were timely repaid. In September 2001, CSFB properly notified the Partnership of its intention not to extend the term of the agreement, which expires on November 22, 2001. The Partnership is actively engaging in discussions with other financial institutions to obtain another working capital facility. The Partnership believes that it has adequate cashflow from operations to timely fund all working capital requirements even if no replacement working capital facility is obtained.
PART II
OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
Dispute with FPL
On March 19, 1999, the Partnership filed a complaint against FPL in the United States District Court for the Middle District of Florida. The lawsuit stems from a course of action pursued by FPL beginning in the Spring of 1997, in which FPL purported to exercise its dispatch and control rights under the Power Purchase Agreement in a manner which the Partnership believes violated the terms of the power sales agreement. In its complaint, the Partnership charges that such conduct was deliberately calculated to cause the Partnership to be unable to meet the requirements to maintain the Facility's status as a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978.
13
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 took action to address this matter.
The complaint asserted causes of action for (i) FPL's breach of the Power Purchase Agreement, (ii) FPL's anticipatory repudiation of the Power Purchase Agreement, (iii) breach of the implied covenant of good faith, fair dealing and commercial reasonableness and (iv) a declaratory judgment by the court of the rights of the parties under the Power Purchase Agreement. The Partnership seeks (a) a declaratory ruling that FPL's actions constitute a breach of the terms of the Power Purchase Agreement and that the Partnership has the absolute right to operate the Facility at Minimum Load (except for reasons of safety or system security) at the rates provided for in the Power Purchase Agreement, (b) injunctive relief preventing FPL from further violating the Power Purchase Agreement, (c) compensatory damages and (d) other relief as the court may deem appropriate.
On April 14, 1999, FPL filed a responsive pleading to the complaint including a motion to dismiss two of the four counts raised in the complaint, raising certain affirmative defenses and seeking declaration that FPL has unfettered dispatch rights under the Power Purchase Agreement. On the same day, FPL also filed an answer to the counts that were not challenged in the motion to dismiss. 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 that 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 on March 21, 2000 to address issues raised by the Court in its decision to dismiss this count.
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 May 17, 2001, the Partnership and FPL executed an amendment to the power purchase agreement to implement the Settlement Agreement relating to the litigation pending in federal court. The amendment was filed for approval by the Florida Public Service Commission ("FPSC") on June 7, 2001. At a public meeting on July 24, 2001, the FPSC voted to approve the amendment. On August 8, 2001, the FPSC issued its order on Proposed Agency Action ("PAA"), in which it proposed to approve the amendment. To avoid the possibility that the PAA could be misinterpreted, on August 29, 2001 the Partnership filed a motion in which it asked the FPSC to modify certain language of the PAA. To satisfy the technical requirements of FPSC procedures, within the 21 day protest period provided by the PAA the Partnership also filed a Petition on Proposed Agency Action to prevent the PAA from becoming final while the FPSC considered the Partnership's request. On October 11, the FPSC issued an order in which it granted the Partnership's request and clarified the PAA, thereby rendering the Partnership's separate petition moot. At that time, the FPSC's action was subject to an appeal period, which will expire on November 12, 2001. In addition, the conditions set forth in the Indenture for the Bonds have been met.
14
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. A Settlement Agreement was executed on October 17, 2001, which 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. The Partnership will make a one time payment of $1,289,579 to FPL in November, 2001, which constitutes a settlement of all issues and claims with respect thereto, and permanently closes, FPL's audits for calendar years 1996, 1997, 1998, 1999, and 2000.
Item 5 OTHER INFORMATION
Coal Supplier Bankruptcy
Indiantown Cogeneration, L.P. (Partnership) has a coal purchase agreement (the "Coal Purchase Agreement") with Lodestar Energy, Inc. (LEI) pursuant to which LEI supplies all of the coal for the Partnership's 330 megawatt (net) pulverized coal-fired cogeneration facility located in Indiantown, Florida and disposes of ash produced at that facility. Power produced from the facility is sold to Florida Power and Light under a long-term power purchase agreement.
As previously reported, on April 27, 2001, an order for relief was entered in the Involuntary Petition under Chapter 11 of the United States Bankruptcy Code with respect to LEI and its parent, Lodestar Holdings Inc. (LHI), in the U.S. Bankruptcy Court in Lexington, Kentucky. Since that time, LHI and LEI have been operating their business as "debtors in possession." On October 3, 2001, LEI filed a motion with the Bankruptcy Court seeking to reject the Coal Purchase Agreement. With the goal of avoiding rejection, the Partnership continued negotiating with LEI to modify the Coal Purchase Agreement. LEI requested and was granted a deferral of the scheduled hearing date for its motion.
The Partnership and LEI have subsequently agreed to and executed Amendment No. 3 to the Coal Purchase Agreement effective October 16, 2001 (the "Amendment"), which is subject to satisfaction of two conditions. First, the Partnership must satisfy by December 12, 2001 indenture covenants that require the Partnership to certify that the Amendment is not reasonably expected to have, or to materially increase the likelihood of a future, material adverse effect (as defined in the indentures) and second, thereafter the U.S. Bankruptcy Court must approve the Amendment. The covenant further provides that the Independent Engineer (as defined in the indentures) must not, within thirty days of receiving the Partnership's certificate to that effect, disagree with the Partnership's certification.
The principal change effected in the Coal Purchase Agreement by the Amendment is an increase from $26.632 to $34.00 per ton in the base coal price for coal delivered after October 16, 2001, with a 2% additional increase in the base coal price effective October 16, 2002. The transportation and administrative fees the Partnership is required to pay remain unchanged, but will continue to be subject to adjustment in accordance with the terms of the Coal Purchase Agreement. The Amendment also includes market price reopener provisions, beginning October 16, 2003. In the event that the parties are unable to agree at that time on a new contract price for coal and price adjustment mechanism, either party will have the right in its sole discretion and for any reason to terminate the Coal Purchase Agreement. LEI is obligated to make deliveries on a specified schedule that will build a 30 day stockpile of coal by February 28, 2002.
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The Amendment includes provisions that shorten payment terms for LEI's invoices and give the Partnership greater flexibility on the amount of ash the Partnership is required to send to LEI for disposal. In addition, the Amendment allows LEI to grant to third parties a mortgage and security interest in its coal reserves that is not subordinated to the Partnership's rights under the Coal Purchase Agreement. But LEI is required to certify annually to the Partnership that LEI owns or controls adequate reserves to meet LEI's obligations under the Coal Purchase Agreement.
The Partnership believes the changes effected by the Amendment are in the best interests of the Project, the Senior Secured Parties and the holders of the Partnership's senior secured bonds. Accordingly, the Partnership intends to take action promptly to satisfy the applicable indenture covenants and to cooperate with LEI in obtaining the required bankruptcy court approval.
Other than with respect to developments that may have a material impact on the Partnership or its business operations, the Partnership is under no obligation nor does it intend to continuously provide updates of the LEI bankruptcy proceedings. However, copies of all pleadings filed with the Bankruptcy Court are available from the office of the clerk of the Bankruptcy Court.
Governmental Approvals
The Partnership has obtained all material environmental permits and approvals required, as of September 30, 2001, 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 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 the 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 to the Site Certificate for additional wells in the Upper Floridian Aquifer and to revise groundwater and surface water monitoring are presently on hold. Pending further review and approval of the well issues with SFWMD, these modifications will remain inactive with the DEP.
On October 16, 2001 the Partnership submitted to the DEP a request for modifications to the Site Certification. The proposed modification requests authorization for modifications to the Facility's water withdrawal system to withdraw surface water from Taylor Creek (L-63N) when the elevation of the creek is at or above 16.5 feet National Geodetic Vertical Datun. This request would allow the Facility to withdraw water at a lower elevation than had previously been permitted. This request is currently under review by DEP.
Debt Service Reserve Account
As permitted by the Partnership's financing arrangements, on August 19, 1998, the Partnership requested that the balance in the Debt Service Reserve Account be reduced to the Debt Service Reserve Account Required Balance by reducing the Debt Service Reserve Letter of Credit. On January 11, 1999, the reduction was approved. The Debt Service Reserve Account now contains the $29,609,840 Debt Service Reserve Letter of Credit and $12,501,000 of cash (available only as a debt service reserve for the Tax Exempt Bonds).Item 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Reports on Form 8-K:
The Partnership filed a current report on Form 8-K on April 16, 2001,
announcing Lodestar's bankruptcy.
The Partnership filed a current report on Form 8-K on October 9, 2001,
announcing Lodestar’s decision to reject the coal purchase
agreement. This report was amended by a report on Form 8-K/A, filed on
October 12, 2001.
The Partnership filed a current report on Form 8-K on October 22,
2001, announcing the deferral of the hearing on the motion to reject
the coal purchase agreement.
The Partnership filed a current report on Form 8-K on November 9,
2001, announcing Amendment No. 3 to the Coal Purchase Agreement on
November 2, 2001.
Item 7 MARKET RISK INFORMATION
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. No material changes have occurred since the Report on Form 10-K was filed on March 30, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
INDIANTOWN COGENERATION, L.P.
(Co-Registrant)
Date: November 14, 2001 ________________________
John R. Cooper
Vice President and
Chief Financial Officer
INDIANTOWN COGENERATION FUNDING
CORPORATION
(Co-Registrant)
Date: November 14, 2001 ________________________
John R. Cooper
Vice President and
Chief Financial Officer
