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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, 1999
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)-718-6800
(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
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Keep this page!
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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, 1999
(Unaudited) and December 31, 1998.................................1
Consolidated Statements of Operations for the
Nine Months Ended September 30, 1999
(Unaudited) and September 30, 1998 (Unaudited)....................3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999
(Unaudited) and September 30, 1998
(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..................................................16
Item 5 Other Information..................................................16
Item 6 Exhibits and Reports on Form 8-K...................................18
Signatures.................................................................21
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PART I
FINANCIAL INFORMATION
Indiantown Cogeneration, L.P.
Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998
<S> <C> <C>
September 30, December 31,
ASSETS 1999 1998
- -------------------------------------------------------------- ------------------- ---------------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,739,648 $ 2,419,089
Accounts receivable-trade 14,737,540 12,369,594
Inventories 226,043 940,125
Prepaids 926,878 736,700
Deposits 44,450 44,000
Investments held by Trustee, including restricted funds
of $18,965,565 and $2,718,549, respectively 27,604,266 2,770,774
------------------- ---------------------
Total current assets 45,278,825 19,280,282
INVESTMENTS HELD BY TRUSTEE,
restricted funds 14,181,081 14,001,428
DEPOSITS 75,000 75,000
PROPERTY, PLANT & EQUIPMENT:
Land 8,582,363 8,582,363
Electric and steam generating facilities 697,335,209 695,929,380
Less accumulated depreciation (61,765,618) (50,323,285)
------------------- ---------------------
Net property, plant & equipment 644,131,954 654,188,458
FUEL RESERVE 1,062,458 3,428,403
DEFERRED FINANCING COSTS, net of accumulated amortization of
$43,647,347 and $43,020,796, respectively 16,539,569 17,166,120
------------------- ---------------------
Total assets $ 721,268,887 $708,139,691
=================== =====================
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The accompanying notes are an integral part of these
consolidated balance sheets.
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<TABLE>
<CAPTION>
Indiantown Cogeneration, L. P.
Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998
<S> <C> <C>
September 30, December 31, 1998
LIABILITIES AND PARTNERS' CAPITAL 1999
- -------------------------------------------------------- --------------------- ----------------------
(Unaudited)
CURRENT LIABILITIES:
Accrued payables/liabilities $ 11,100,176 $ 7,405,610
Accrued interest 15,992,035 2,302,048
Current portion - First Mortgage Bonds 10,765,567 9,997,000
Current portion lease payable - railcars 303,015 287,048
--------------------- ----------------------
Total current liabilities 38,160,793 19,991,706
LONG TERM DEBT:
First Mortgage Bonds 460,475,433 466,242,000
Tax Exempt Facility Revenue Bonds 125,010,000 125,010,000
Lease payable - railcars 4,354,400 4,583,699
--------------------- ----------------------
Total long term debt 589,839,833 595,835,699
Reserve-Major Maintenance 818,341 511,756
--------------------- ----------------------
Total liabilities 628,818,967 616,339,161
--------------------- ----------------------
PARTNERS' CAPITAL:
Toyan Enterprises 27,781,202 27,586,061
Palm Power Corporation 9,244,991 9,180,052
TIFD III-Y, Inc. 211,778 36,720,212
Indiantown Project Investment Partnership 18,443,759 18,314,205
Thaleia 36,768,190 0
--------------------- ----------------------
--------------------- ----------------------
Total partners' capital 92,449,920 91,800,530
--------------------- ----------------------
Total liabilities and partners'
capital $721,268,887 $708,139,691
===================== ======================
The accompanying notes are an integral part of these
consolidated balance sheets.
</TABLE>
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<TABLE>
<CAPTION>
Indiantown Cogeneration, L.P.
Consolidated Statements of Operations
For the Nine Months Ended September 30, 1999 and September 30, 1998
<S> <C>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------------- -------------------------
Operating Revenues: (Unaudited) (Unaudited)
Electric capacity and capacity bonus revenue $92,722,266 $92,577,872
Electric energy revenue 28,992,289 29,188,679
Steam revenue 93,420 139,476
----------- -----------
Total operating revenues 121,807,975 121,906,027
----------- -----------
Cost of Sales:
Fuel and ash 29,428,041 29,563,460
Operating and maintenance 13,674,954 13,370,864
Depreciation 11,458,853 11,321,461
---------- ----------
Total cost of sales 54,561,848 54,255,785
---------- ----------
Gross Profit 67,246,127 67,650,242
---------- ----------
Other Operating Expenses:
General and administrative 3,185,472 2,538,779
Insurance and taxes 4,871,790 5,063,310
--------- ---------
Total other operating expenses 8,057,262 7,602,089
--------- ---------
Operating Income 59,188,865 60,048,153
---------- ----------
Non-Operating Income (Expenses):
Interest expense (43,158,654) (44,233,638)
Interest/Other income 1,389,179 1,817,987
--------- ---------
Net non-operating expense (41,769,475) (42,415,651)
------------ ------------
Net Income $17,419,390 $17,632,502
=========== ===========
The accompanying notes are an integral part of these
consolidated statements.
</TABLE>
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<TABLE>
<CAPTION>
Indiantown Cogeneration, L.P.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
<S> <C> <C>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1999 1998
-------------------- ----------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,419,390, $ 17,632,502
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 12,068,885 11,824,181
(Increase)Decrease in accounts receivable (2,367,946) 748,670
Decrease (Increase) in inventories and fuel reserves 3,080,027 (1,021,404)
(Increase) Decrease in deposits and prepaids (190,628) 564,014
Increase in accounts payable, accrued liabilities and 17,384,553 16,434,130
accrued interest
Increase in major maintenance reserve 306,585 136,358
(Decrease) in lease payable (213,332) (198,476)
------------------ ----------------------
Net cash provided by operating activities 47,487,534 46,119,975
------------------ ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant & equipment (1,385,831) (1,511,955)
Increase in investment held by trustee (25,013,144) (14,558,348)
------------------ ----------------------
Net cash used in investing activities (26,398,975) (16,070,303)
------------------ ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of bonds (4,998,000) (5,132,000)
Capital distributions (16,770,000) (26,480,000)
------------------ ----------------------
Net cash used in financing activities (21,768,000) (31,612,000)
------------------ ----------------------
CHANGE IN CASH AND CASH EQUIVALENTS (679,441) (1,562,328)
CASH and CASH EQUIVALENTS, beginning of year 2,419,089 3,234,379
------------------ ----------------------
CASH and CASH EQUIVALENTS, end of period $ 1,739,648 $ 1,672,051
=================== ======================
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
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Indiantown Cogeneration, L.P.
Notes to Consolidated Financial Statements
As of September 30,1999
(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.
The original general partners were Toyan Enterprises ("Toyan"), a
California corporation and a wholly-owned special purpose indirect subsidiary of
PG&E Generating Company, LLC 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.
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. Thaleia has agreed, subject to
certain conditions precedent and certain termination rights of both Thaleia and
TIFD, to purchase 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, if applicable, IPILP and Thaleia (collectively, the "Partners")
based on the following ownership percentages:
5
As of As of As of As of As of
September 20, August 21, October 20, June 4, September 20,
1997 1998 1998 1999 1999
---- ---- ---- ----- ----
Toyan 50% 30.05% 30.05% 30.05% 30.05%
Palm 10% 10% 10%* 10% 10%
IPILP -- 19.95%** 19.95%** 19.95% 19.95%
TIFD 40% 40% 40% 20.1% .1%
Thaleia -- -- -- 19.9% 39.9%
* 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, and September 21, 1999. Another filing will be made in connection
with the transfer of the final 0.1% interest.
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 Generating Company ("PG&E Gen"),
formerly known as U.S. 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"). PG&E
Gen and PG&E OSC are general partnerships originally formed between affiliates
of PG&E Enterprises and Bechtel Enterprises, Inc. On September 19, 1997, PG&E
Gen and PG&E OSC each separately redeemed Bechtel Enterprises, Inc.'s interests
in PG&E Gen and PG&E OSC so that PG&E Generating Company, LLC now indirectly
owns all of the interests in PG&E Gen and PG&E OSC. This will not affect PG&E
Gen's obligations under the MSA or PG&E OSC's obligations under the O&M
Agreement. Also on September 19, 1997, Toyan purchased 16.67% of Palm's interest
in the Partnership, which represents a 2% ownership in the Partnership.
The Partnership was in the development stage through December 21, 1995
and commenced commercial operations on December 22, 1995 (the "Commercial
Operation Date"). The original partners contributed, pursuant to an equity
commitment agreement, approximately $140,000,000 of equity when commercial
operation of the Facility commenced in December 1995. The Partnership's
continued existence is dependent on the ability of the Partnership to sustain
successful operations. Management of the Partnership is of the opinion that the
assets of the Partnership are realizable at their current carrying value.
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2. FINANCIAL STATEMENTS:
The consolidated balance sheets as of September 30, 1999, and the
consolidated statements of operations and cash flows for the nine months ended
September 30, 1999 and 1998, 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, 1999, and the results of operations and cash flows for the nine
months ended September 30, 1999 and 1998.
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, 1998.
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 approximately $1.7
million 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.
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 in the consolidated balance sheet as of December 31, 1997. These funds
were returned in September 1998 when the
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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 September 30, 1999 and
December 31, 1998, estimated present values of this deposit was $75,000. 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, 1999, the Partnership had approximately $644
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, 1999, the Partnership had total operating revenues of
approximately $ 121.8 million, total operating costs of $62.6 million, and total
net interest expenses of approximately $41.8 million resulting in net income of
approximately $17.4 million.
The Partnership is engaged in litigation with FPL, the Partnership's
primary source of revenue. Under certain circumstances, an adverse ruling in the
litigation could have a material adverse effect on the Partnership's business
and financial condition. Please see Part I Item I, Legal Proceedings, for a
description of the litigation, and Part II, Item 5, Other Information, for a
description of the Partnership's options to mitigate the risk posed by an
adverse ruling in such litigation.
Results of Operations
For the nine months ending September 30, 1999 and 1998, the Facility
achieved an average Capacity Billing Factor of 100.72% and 101.21%,
respectively. This resulted in earning monthly capacity payments aggregating
$84.3 million and $84.2 million and bonuses aggregating $8.4 million for the
nine months ended September 30, 1999 and 1998. The Capacity Billing Factor
measures the overall availability of the Facility, but gives a heavier weighting
to
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on-peak availability. During the nine months ended September 30, 1999, the
Facility was dispatched by FPL and generated 1,248,743 megawatt-hours compared
to 1,206,349 megawatt-hours during the same period in 1998. The increase was due
to higher oil and gas prices and an FPL unit offline for refueling during the
third quarter. The monthly dispatch rate for the first nine months of 1999
ranged from 18% to 88%, as compared to a range of 35% to 82% for the
corresponding period in 1998.
Net income for the nine months ended September 30, 1999, was
approximately $17.4 million compared to the net income of approximately $17.6
million for the corresponding period in the prior year. The $0.2 million
decrease is primarily attributable to an increase in gas consumption of $0.3
million and to higher general and administrative and other operating costs of
$0.5 million for addressing the Year 2000 system issues, for operations support,
and for legal fees for the FPL litigation. This is offset by lower net interest
expense of $ 0.6 million.
Electric Energy Revenues
For the nine months ended
September 30, 1999 September 30, 1998
------------------ ------------------
Revenues $ 121.8 million $ 121.9 million
KWhs 1,248.7 1,206.3
Average Capacity Billing Factor 100.72% 101.21%
Average Dispatch Rate 60.88% 57.27%
For the nine months ended September 30, 1999, the Partnership had total
operating revenues of approximately $121.8 million as compared to $121.9 million
for the corresponding period in the prior year. The $0.1 million decrease in
operating revenue is primarily due to lower energy revenue resulting from a
decrease in unit energy costs per megawatt.
Costs of revenues for the nine months ended September 30, 1999, were
approximately $54.6 million on sales of 1,248,743 MWhs as compared to $54.3
million on sales of 1,206,349 MWhs for the corresponding period in the prior
year. This increase of $0.3 is a result of higher dispatch and depreciation
offset by a decrease in ash disposal costs resulting from savings on the ash
disposal agreement.
Total other operating expenses for the nine months ended September 30,
1999, were approximately $8.1 million compared to the $7.6 million of total
other operating expenses for the corresponding period in the prior year. The
$0.5 million increase is due to higher general and administrative expenses to
address the year 2000 system issues, additional corporate support for operations
and legal expenses for the FPL litigation.
Net interest expense for the nine months ended September 30, 1999, of
approximately $41.8 million compared to $42.4 million of net interest expense
for the same period in the prior year. The $0.6 million decrease was caused by a
decrease in interest expense due to the maturity of Series A-5 and A-6 of the
First Mortgage Bonds and from lower fees resulting from the reduction in the
debt service letter of credit.
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Liquidity and Capital Resources
On November 22, 1994 the Partnership and ICL Funding issued first
mortgage bonds in an aggregate principal amount of $505 million (the "First
Mortgage Bonds"), $236.6 million of which bear an average interest rate of 9.26%
and $268.4 million of which bear an interest rate of 9.77%. Concurrently with
the Partnership's issuance of its First Mortgage Bonds, the Martin County
Industrial Development Authority issued $113 million of Industrial Development
Refunding Revenue Bonds (Series 1994A) which bear an interest rate of 7.875%
(the "1994A Tax Exempt Bonds"). A second series of tax exempt bonds (Series
1994B) in the approximate amount of $12 million, which bear an interest rate of
8.05%, were issued by the Martin County Industrial Development Authority on
December 20, 1994 (the "1994B Tax Exempt Bonds" and, together with the 1994A Tax
Exempt Bonds, the "1994 Tax Exempt Bonds"). The First Mortgage Bonds and the
1994 Tax Exempt Bonds are hereinafter collectively referred to as the "Bonds."
Certain proceeds from the issuance of the First Mortgage Bonds were used
to repay $421 million of the Partnership's indebtedness and financing fees and
expenses incurred in connection with the development and construction of the
Facility and the balance of the proceeds were deposited in various restricted
funds that are being administered by an independent disbursement agent pursuant
to trust indentures and a disbursement agreement. Funds administered by such
disbursement agent are invested in specified investments. These funds together
with other funds available to the Partnership were being used: (i) to finance
completion of construction, testing, and initial operation of the Facility; (ii)
to finance construction interest and contingency; and (iii) to provide for
initial working capital.
The proceeds of the 1994 Tax Exempt Bonds were used to refund $113
million principal amount of Industrial Development Revenue Bonds (Series 1992A
and Series 1992B) previously issued by the Martin County Industrial Development
Authority for the benefit of the Partnership, and to fund, in part, a debt
service reserve account for the benefit of the holders of its tax-exempt bonds
and to complete construction of certain portions of the Facility.
The Partnership's total borrowings from inception through September 1999
were $769 million. The equity loan of $139 million was repaid on December 26,
1995. As of September 30, 1999, 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
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The weighted average interest rate paid by the Partnership on its debt for the
nine months ended September 30, 1999 and 1998, was 9.177% and 9.171%,
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, 1999, no drawings have been
made on any of these letters of credit. The Letter of Credit and Reimbursement
Agreement has a term of seven years subject to extension at the discretion of
the banks party thereto.
The Partnership entered into a debt service reserve letter of credit and
reimbursement agreement, dated as of November 1, 1994, with Banque Nationale de
Paris pursuant to which a debt service reserve letter of credit in the amount of
approximately $60 million was issued. 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 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, 1999, no drawings have been made on the debt service
reserve letter of credit.
In order to provide for the Partnership's working capital needs, the
Partnership entered into a Revolving Credit Agreement with Credit Suisse dated
as of November 1, 1994. Such Agreement has a term of seven years subject to
extension at the discretion of the banks party thereto. The revolving credit
agreement has a maximum available amount of $15 million and may be drawn on by
the Partnership from time to time. The interest rate is based upon various
short-term indices at the Partnership's option and is determined separately for
each draw. As of September 30, 1999, eleven working capital loans had been made
to the Partnership under the working capital loan facility. All working capital
loans were repaid.
Year 2000
The Partnership is, with the assistance of PG&E OSC and PG&E Gen,
conducting a review of its computer systems to identify, test where necessary,
and remediate the systems that could be affected by the new millennium. The year
2000 may pose problems in software applications because many computer systems
and applications currently use two-digit date fields to designate a year. As the
century date occurs, date sensitive systems may recognize the year 2000 as 1900
or not at all. This potential inability to recognize or properly treat the year
2000 may cause systems to process financial or operational information
incorrectly. Management has inventoried those systems which it reasonably
believes may be adversely affected and prioritized them based on the extent of
any potential disruption in operations and the resulting potential impact on the
Partnership's ability to generate and deliver electricity or steam.
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To date, the Partnership has inventoried ninety-one potentially affected
systems, of which forty-eight have been classified as having the highest
priority based upon likelihood and extent of impact. Among these priority
systems is the Facility's Distributed Control System ("DCS"), which is the
primary computerized control system for the Facility. The manufacturer of the
Facility's DCS is Westinghouse Electric Corporation ("Westinghouse").
Westinghouse visited the Facility to determine what remediation would be
required for the DCS to be insulated from disruptions due to the year 2000 and
installed hardware and software code as required to address the year 2000 issue.
On October 17, 1998, the Partnership conducted a year 2000 test on the DCS by,
among other things, manually resetting the internal calendar to experience the
transition from December 31, 1999 to January 1, 2000. The DCS handled this
simulated transition with no significant interruptions in power production or
ordinary operation. Other systems that have been remediated include the HART
communicators and the Continuous Emissions Monitoring System. In addition, the
Partnership is utilizing a network test environment developed by the Partnership
with support from PG&E Gen to test other information technology systems. This
testing is conducted on an integrated and unit basis. The integrated system test
is intended to replicate the Partnership's typical business processes. The unit
tests supplement the integrated test to evaluate remaining functions which were
not part of the integrated test. The Partnership has either retired or upgraded
all of its computer servers and the computer for the Turbine Vibration Analysis
System has been replaced. The telephone system was successfully tested.
Through September 30, 1999, the Partnership spent approximately $460,000
on year 2000 related projects. The Partnership currently estimates that the
completion of its year 2000 efforts will cost approximately $472,000 (including
amounts spent to date), encompassing remediation and replacement of equipment
(including the DCS described above), the performance of Facility testing,
communication with and evaluation of third party readiness and the development
of required contingency plans. This estimate is based solely upon information
currently available to the Partnership and may be revised as more information
becomes available. The Partnership has no employees and has been utilizing
employees of PG&E Gen provided pursuant to the MSA. Such costs are principally
the related payroll costs for PG&E Gen employees and the costs of payments under
independent consulting contracts by PG&E Gen, which are charged to the
Partnership under the MSA.
In addition, the Partnership recognizes that it is dependent upon
numerous third parties in the conduct of its business. A significant
interruption in services or resources provided by such third parties could have
material adverse financial consequences on the Partnership. These third parties
include those supplying fuel and other operating supplies, as well as FPL and
its ability to continue to accept the output of the Facility. Therefore, the
Partnership has sent out 187 inquiries to vendors, suppliers, customers and
other businesses seeking information on the status of such companies' equipment
and year 2000 remediation efforts. The Partnership believes that FPL's
preparedness to perform under the PPA is the most important status of any of
these parties. The Partnership has sent FPL two inquiries with respect to its
year 2000 preparedness but has not yet received a response. The Partnership has
also reviewed FPL's internet and securities filings disclosure on this matter,
which have been insufficient for the Partnership to evaluate FPL's readiness for
the year 2000. However, FPL has reported to the North American Electric
Reliability Council ("NERC") that it meets NERC's Year 2000 Ready criterion as
set forth in NERC's report dated August 3, 1999. To date, the other responses
and disclosures from parties other than FPL have not identified any year 2000
issues of which the Partnership had
12
<PAGE>
been unaware. However, the responses and disclosures have also not been
sufficient to ensure that there will be no impacts on the Partnership as a
result of the year 2000 affecting parties doing business with the Partnership.
To the extent that the Partnership is not able to gain such adequate assurances,
the Partnership is completing contingency plans to mitigate the consequences of
potential disruptions.
These contingency plans are also required because testing, by its nature
cannot comprehensively address all future combinations of dates and events. Some
uncertainty will remain after testing as to the ability of code to process
future dates, as well as the ability of remediated systems to work in an
integrated fashion with other systems. In addition, until the year 2000 occurs,
no certainty can be assured with respect to external party preparedness. The
Partnership's contingency plans will take into account the possibility of
multiple system failures, both internal and external, due to the year 2000.
These contingency plans will build upon existing emergency and business
restoration plans. Although no definitive list of scenarios for this planning
has yet been developed, the events that the Partnership is considering for
planning purposes include increased frequency and duration of interruptions of
the power, computing, financial and communications infrastructure. Due to the
speculative nature of contingency planning, it is uncertain whether the
Partnership's contingency plans to address failure of external parties or
internal systems will be sufficient to reduce the risk of material impacts on
the Partnership's operations due to year 2000 problems. The Partnership
completed risk assessment and contingency planning in the third quarter of 1999.
The Partnership is concerned about isolated failures of FPL's
transmission system. FPL is important to the Partnership because it provides the
Partnership with the Partnership's only access to the electric transmission
system. Because FPL has provided insufficient responses to the Partnership's
inquiries, the Partnership is compelled to rely on FPL's report to NERC which
the Partnership cannot independently verify. However, nothing has come to the
attention of the Partnership that would lead the Partnership to conclude that
the failures of FPL's transmission system are reasonably likely. While the
Partnership's revenues will not be adversely affected by FPL's inability to
accept the Facility's output, it could be affected by lack of start-up power
from FPL which would prevent the Partnership from restarting the Facility after
an outage. Therefore, the Partnership has a contingency plan pursuant to which
it will rent a diesel generator to enable the Facility to start without regard
to the availability of power of FPL. The only reasonably likely worst case
scenario identified by the Partnership is localized telephone problems due to
congestion. The Partnership's contingency plans call for availability of two-way
radios as well as additional personnel for face to face communication, if
required.
Notwithstanding the Partnership's efforts, management of the Partnership
is unable to determine whether or not, as a result of the year 2000, disruptions
will occur or whether such disruptions, if they do occur, will materially impair
the ability of the Partnership to conduct its business.
13
<PAGE>
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 since March 10, 1999, in which FPL
has purported to exercise its dispatch and control rights under the Power
Purchase Agreement in a manner which the Partnership believes violates the terms
of the power sales agreement. In its complaint, the Partnership charges that
such conduct is 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 has taken 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 complaint asserts, however, that
the Partnership specifically and successfully negotiated for a contractual right
to operate the Facility at 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.
Because 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" in Item 5 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) Power Purchase Agreement 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.
Subsequent to the filing of the complaint, FPL reconnected the Facility
to FPL's system on Sunday, March 28, 1999. 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
14
<PAGE>
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 has moved to
dismiss the entire amended complaint and the Partnership filed its opposition
papers an August 2, 1999. The Court has also ordered a mediation session. In
addition, a trial period has been established by the Court in April 2001.
This summary of the Partnership's complaint against FPL is qualified in
its entirety by the complaint, which was filed with the court in docket
99-317-CIV-ORL-19C. This summary does not, nor does it purport to, include all
of the material statements and claims made in the complaint, and has been
provided solely for the reader's convenience. This summary is not intended to be
relied upon for any purpose without reference to the complaint.
Item 5 OTHER INFORMATION
QF Mitigation Options
If the court rules against the Partnership in the litigation with FPL,
the Facility could lose its QF status, unless the Partnership is able to
implement mitigating action. Loss of QF status would result in an event of
default under the Power Purchase Agreement and the indenture for the Bonds.
Unless cured, such events of default would have a material adverse effect on the
Partnership's business, results of operation and financial condition.
To mitigate the risk of a possible adverse ruling by the court, the
Partnership is analyzing the feasibility of various options. The analyses,
several of which are only in the preliminary stage, include the following:
o providing steam to Caulkins for refrigeration
o constructing a liquid carbon dioxide production facility to which the
Facility would supply steam
o installing distilled water production equipment to which the Facility
would supply steam
o providing steam for a facility to dry chicken manure at a nearby farm for
use as a fertilizer
o providing steam to Caulkins to dry orange peels for use in cattle feed
o providing steam to Caulkins for wash-water cooling
o providing steam or chilled water for water temperature control at a nearby
fish farm
o constructing a cold storage food distribution center to which the Facility
would supply chilled water
o providing chilled water to a nearby chicken house for cooling
o constructing a lumber kiln to dry wood using steam provided by the
Facility
o providing chilled water to a nearby flour mill for temperature control
The options being analyzed are subject to further analysis and completion.
This includes an evaluation as to whether or not the steam usage for these
alternatives would qualify for QF purposes and inclusion on this list does not
imply that an affirmative conclusion on this matter has been reached. Other
options may be considered in addition to the foregoing. Before the Partnership
can determine whether or not to implement an option, if any option is to be
implemented, the Partnership needs to determine each option's feasibility -
whether the option can increase steam production on a schedule, which may
include regulatory approval, that would assure maintenance of QF status at an
acceptable cost to the Partnership. The Partnership may defer a decision whether
or
15
<PAGE>
not to implement any option until a judgment is made in the litigation with FPL.
If any option is implemented, the Partnership expects, subject to the terms of
the indenture for the Bonds, to finance such option with senior secured debt
ranking pari passu with the Bonds.
No assurance can be given that the analysis will be completed, that the
completion of the analysis will result in the implementation of any option, that
any option under consideration or any other option will be determined to be
feasible or that, even if one or more options are determined to be feasible,
that such option(s) will be implemented or will result in assuring the
maintenance of QF status.
Governmental Approvals
The Partnership has obtained all material environmental permits and
approvals required, as of September 30, 1999, 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. A draft permit was issued by the Florida Department of Environmental
Protection for comments by Federal Environmental Protection Agency. The EPA has
responded with questions to which the Partnership is preparing answers. Based
upon the extent of EPA's inquiries, the Partnership does not anticipate
difficulties in obtaining a final Title V air permit.
Energy Prices
In October 1999, FPL filed with the Florida Public Service Commission its
projections for its 1997-1999 "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. Because 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. The Partnership has filed a
complaint against FPL with respect to the interpretation of a provision of the
Power Purchase Agreement related to this matter. Please see "Legal
Proceedings"above. Such operations may result in decreased net operating income
for such periods. The Partnership expects that the decrease, if any, will not be
material. For the nine months ended September 30, 1999, FPL requested the
Partnership to decommit the Facility numerous times and the Partnership
typically exercised its rights to operate at minimum load (100MW) during such
decommit requests. The Partnership's election to operate at minimum load has not
had a material impact on the Partnership
16
<PAGE>
or its financial condition although energy delivered during such operations is
sold at reduced prices. Based upon FPL's projections, the Partnership does not
expect that, if the filed projections prove to reflect actual rates, its
dispatch rate will change materially during the period covered by such
projections.
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 $12,500,000 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 Reports on Form 8-K on March 22, March 29,
June 11, and September 21, 1999 regarding the FPL litigation and
changes in ownership.
b) Exhibits:
Exhibit 27 - Financial Data Schedule (electronic filing only)
17
<PAGE>
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 15, 1999 ________________________
John R. Cooper
Vice President and
Chief Financial Officer
INDIANTOWN COGENERATION FUNDING
CORPORATION
(Co-Registrant)
Date: November 15, 1999 ________________________
John R. Cooper
Vice President and
Chief Financial Officer
<PAGE>
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