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 June 30, 2002
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.
PART I
1
Indiantown Cogeneration, L. P. and Subsidiary
2
Indiantown Cogeneration, L.P. and Subsidiary
3
Indiantown Cogeneration, L.P. and Subsidiary
4
Indiantown Cogeneration, L.P. and Subsidiary
1. ORGANIZATION AND BUSINESS:
5
The net profits and losses of the Partnership are currently allocated to
Toyan, Palm, IPILP, and Thaleia (collectively, the "Partners") based on the
following ownership percentages:
*Now beneficially owned by Cogentrix.
6
2. BASIS OF PRESENTATION:
7
Property, Plant and Equipment
8
Adoption of New Accounting Pronouncements
9
In 2002, deposits totaling $710,000 have been paid to General Electric
Energy Services for stator bars and long shelf items to perform full repairs to
the generator during the 2002 fall scheduled outage.
10
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.
11
Net income for the three months ended June 30, 2002 was approximately
$0.5 million compared to the net income of approximately $5.1 million for the
corresponding period in the prior year. The $4.6 million decrease is primarily
attributable to not receiving monthly capacity bonus payments of $2.8 million in
2002 and lower electric energy revenue of $2.4 due to a lower price per
megawatt-hour and lower mega-watt generation. This is offset by lower interest
expense in 2002 of $0.5 million.
For the six months ended June 30, 2002, the Partnership had total operating
revenues of approximately $82.3 million as compared to $91.7 million for the
corresponding period in the prior year. The $9.4 million decrease in operating
revenue is primarily due to lower energy revenue resulting from the decrease in
the index used to adjust the unit energy cost paid by FPL and from decreased
capacity bonus payments due to the lower CBF resulting from decreased
availability primarily caused by boiler tube leaks and repairs to the generator.
12
Non-Operating Income (Expense)
13
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.
As of June 30, 2002, the Partnership has made semi-annual installments
totaling $28,404,234 for the A-9 series, which does not fully mature until
December 15, 2010.
14
The Partnership entered into a debt service reserve letter of credit and
reimbursement agreement, dated as of November 1, 1994, with BNP Paribas
(formerly known as Banque Nationale de Paris) pursuant to which a debt service
reserve letter of credit in the amount of approximately $60 million was issued.
On January 11, 1999, in accordance with the Partnership's financing documents,
the debt service reserve letter of credit was reduced to approximately $30
million, which, together with cash in the debt service reserve account,
represents the maximum remaining semi-annual debt service on the First Mortgage
Bonds and the 1994 Tax Exempt Bonds. BNP Paribas notified the Partnership on May
18, 2001 of its intention not to extend the term of the agreement, which expires
on November 22, 2005. Pursuant to the terms of the Disbursement Agreement,
available cash flows are required to be deposited on a monthly basis beginning
on May 22, 2002 into the Debt Service Reserve Account or the Tax Exempt Debt
Service Reserve Account, as the case may be, until the required Debt Service
Reserve Account Maximum Balance is achieved, which is $29,925,906. No funds have
been deposited as of June 30, 2002. The Partnership hopes to obtain a
replacement letter of credit provider before the current letter of credit
expires.
15
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the current requirement that gains and
losses on debt extinguishment must be classified as extraordinary items in the
income statement. Instead, such gains and losses will be classified as
extraordinary items only if they are deemed to be unusual and infrequent, in
accordance with the current GAAP criteria for extraordinary classification. In
addition, SFAS 145 eliminates an inconsistency in lease accounting by requiring
that modifications of capital leases that result in reclassification as
operating leases be accounted for consistent with sale-leaseback accounting
rules. The statement also contains other 46 nonsubstantive corrections to
authoritative accounting literature. The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for transactions occurring after
May 15, 2002. The Partnership does not expect that implementation of this
statement will have a significant impact on its consolidated financial
statements.
PART II
Item 5 OTHER INFORMATION
16
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. The Partnership and LEI agreed to and executed Amendment No. 3 to the
Coal Purchase Agreement effective October 16, 2001 (the "Amendment"). 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 agreement also reduced the amount of ash
the Partnership is required to provide to LEI. The transportation and
administrative fees the Partnership is required to pay remain unchanged, but
will continue to adjust in accordance with the terms of the Coal Purchase
Agreement. The Amendment also includes market price reopener provisions,
beginning October 16, 2003.
17
*John R. Cooper has been elected to the additional position of Treasurer,
18
b) Exhibits:
19
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.
20
Indiantown Cogeneration Funding Corporation
PART I FINANCIAL INFORMATION Page No.
Item 1 Financial Statements:
Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and
December 31, 2001...................................................1
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2002 (Unaudited) and
June 30, 2001 (Unaudited)...........................................3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 (Unaudited) and June 30, 2001 (Unaudited)..........4
Notes to Consolidated Financial Statements (Unaudited) ...............5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................10
PART II OTHER INFORMATION
Item 5 Other Information....................................................17
Item 6 Exhibits and Reports on Form 8K......................................18
Signatures...................................................................20
FINANCIAL INFORMATION
Indiantown Cogeneration, L.P. and Subsidiary
Consolidated Balance Sheets
As of June 30, 2002 and December 31, 2001
June 30, December 31,
ASSETS 2002 2001
- --------------------------------------------------------------- ----------------------- ---------------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 275,943 $ 331,956
Accounts receivable-trade 13,519,140 14,443,374
Inventories 1,509,454 259,282
Prepaids 1,402,251 981,571
Deposits 774,950 44,450
Investments held by Trustee, including restricted funds
of $2,778,770 and $2,666,539, respectively
9,153,793 9,572,996
----------------------- ---------------------
Total current assets 26,635,531 25,633,629
----------------------- ---------------------
INVESTMENTS HELD BY TRUSTEE,
restricted funds 15,519,885 15,502,121
DEPOSITS 178,279 171,737
PROPERTY, PLANT & EQUIPMENT:
Land 8,582,363 8,582,363
Electric and steam generating facilities 702,215,576 702,175,087
Less accumulated depreciation (103,219,808) (95,613,164)
----------------------- ---------------------
Net property, plant & equipment 607,578,131 615,144,286
----------------------- ---------------------
FUEL RESERVE 4,184,496 4,059,534
DEFERRED FINANCING COSTS, net of accumulated amortization of
$45,916,038 and $45,503,768, respectively 14,270,870 14,683,148
----------------------- ---------------------
Total assets $ 668,367,192 $ 675,194,455
======================= =====================
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Balance Sheets
As of June 30, 2002 and December 31, 2001
June 30, December 31, 2001
LIABILITIES AND PARTNERS' CAPITAL 2002
- -------------------------------------------------------------- --------------------- ----------------------
(Unaudited)
CURRENT LIABILITIES:
Accrued payables/liabilities $ 8,237,775 $ 11,474,326
Accrued interest 2,301,728 2,324,178
Current portion - First Mortgage Bonds 13,013,247 11,460,407
Current portion lease payable - railcars 369,550 358,575
--------------------- ----------------------
Total current liabilities 23,922,300 25,617,486
--------------------- ----------------------
LONG TERM DEBT:
First Mortgage Bonds 424,824,519 432,107,562
Tax Exempt Facility Revenue Bonds 125,010,000 125,010,000
Lease payable - railcars 3,398,979 3,584,963
--------------------- ----------------------
Total long term debt 553,233,498 560,702,525
--------------------- ----------------------
Total liabilities 577,155,798 586,320,011
--------------------- ----------------------
PARTNERS' CAPITAL:
Toyan Enterprises 27,409,026 26,706,773
Palm Power Corporation 9,121,138 8,887,444
Indiantown Project Investment Partnership 18,196,673 17,730,450
Thaleia 36,484,557 35,549,777
--------------------- ----------------------
--------------------- ----------------------
Total partners' capital 91,211,394 88,874,444
--------------------- ----------------------
Total liabilities and partners' capital $ 668,367,192 $ 675,194,455
===================== ======================
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 2002 and June 30, 2001
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------------------ ---------------------- -------------------- ---------------------
Operating Revenues: (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Electric capacity and capacity bonus
revenue $28,314,901 $31,094,750 $56,657,977 $62,184,339
Electric energy revenue 11,629,295 14,083,618 25,517,849 29,301,115
Steam revenue 61,389 41,973 146,801 193,464
---------- ----------- ----------- -----------
Total operating revenues 40,005,585 45,220,341 82,322,627 91,678,918
---------- ----------- ----------- -----------
Cost of Sales:
Fuel and ash 14,191,410 14,576,635 31,251,274 31,756,822
Operating and maintenance 5,607,592 5,524,469 9,317,642 9,464,929
Depreciation 3,803,373 3,795,635 7,606,644 7,584,872
---------- ---------- ---------- ----------
Total cost of sales 23,602,375 23,896,739 48,175,560 48,806,623
---------- ---------- ---------- ----------
Gross Profit 16,403,210 21,323,602 34,147,067 42,872,295
---------- ---------- ---------- ----------
Other Operating Expenses:
General and administrative 845,128 985,303 1,605,271 2,361,046
Insurance and taxes 1,726,692 1,672,532 3,447,470 3,306,010
---------- --------- --------- ----------
Total other operating expenses 2,571,820 2,657,835 5,052,741 5,667,056
----------- --------- --------- ----------
Operating Income 13,831,390 18,665,767 29,094,326 37,205,239
---------- ---------- ---------- ----------
Non-Operating Income (Expenses):
Interest expense (13,659,522) (14,157,857) (27,328,763) (28,107,674)
Interest/Other income (expense) 296,001 593,150 571,387 979,756
----------- ------------ ------------- -----------
Net non-operating expense (13,363,521) (13,564,707) (26,757,376) (27,127,918)
------------ ------------ ------------- ------------
Net Income $467,869 $5,101,060 $2,336,950 $10,077,321
============ ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001
Six Months Six Months
Ended Ended
June 30, June 30,
2002 2001
-------------------- ----------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,336,950 $ 10,077,321
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,018,742 7,997,150
Loss on disposal of assets - 203,032
Decrease in accounts receivable 924,234 113,983
(Increase) in inventories and fuel reserves (1,375,134) (269,012)
(Increase) in deposits and prepaids (1,157,722) (952,269)
(Decrease) increase in accounts payable, accrued
liabilities and accrued interest (3,259,001) 3,631,959
(Decrease) in lease payable (175,009) (162,822)
-------------------- ----------------------
Net cash provided by operating activities 5,313,060 20,639,342
-------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant & equipment (40,309) (743,264)
Decrease (increase) in investment held by trustee 401,439 (661,496)
-------------------- ----------------------
Net cash provided by (used in) investing
activities 361,130 (1,404,760)
-------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of bonds (5,730,203) (5,570,448)
Capital distribution - (12,400,000)
-------------------- ----------------------
Net cash used in financing activities (5,730,203) (17,970,448)
CHANGE IN CASH AND CASH EQUIVALENTS (56,013) 1,264,134
CASH and CASH EQUIVALENTS, beginning of year 331,956 821,955
-------------------- ----------------------
CASH and CASH EQUIVALENTS, end of period $ 275,943 $ 2,086,089
==================== ======================
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
As of June 30, 2002
(Unaudited)
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, own 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 processing plant
to Louis Dreyfus Citrus, Inc. ("LDC").
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. On April
29, 2002, Cogentrix and Aquila, Inc. ("Aquila") entered into a definitive
agreement for Aquila (through certain subsidiaries) to acquire all of the
outstanding common stock of Cogentrix (the "Aquila Merger Agreement"). Also on
April 29, 2002, Cogentrix and certain of its wholly-owned subsidiaries entered
into an asset purchase agreement with General Electric Capital Corporation
("GECC") to acquire several of Cogentrix's QF interests, including its interests
in the Partnership ("GECC Purchase Agreement"). On August 2, 2002, Cogentrix and
Aquila agreed to terminate the Aquila Merger Agreement. Consequently, Cogentrix
and GECC have also terminated the GECC Purchase Agreement.
Toyan 30.05%
Palm 10%*
IPILP 19.95%
Thaleia 40%*
The changes in ownership were the subject of notices of
self-recertification of Qualifying Facility status filed by the Partnership with
the Federal Energy Regulatory Commission on August 21, 1998, November 16, 1998,
June 4, 1999, September 21, 1999, and November 24, 1999.
All distributions other than liquidating distributions will be made based
on the Partners' percentage interest as shown above, in accordance with the
project documents and at such times and in such amounts as the Board of Control
of the Partnership determines.
The Partnership is managed by PG&E National Energy Group Company
("NEG"), formerly known as PG&E Generating Company, pursuant to a Management
Services Agreement (the "MSA"). The Facility is operated by PG&E Operating
Services Company ("PG&E OSC"), formerly known as U.S. Operating Services
Company, pursuant to an Operation and Maintenance Agreement (the "O&M
Agreement"). NEG and PG&E OSC are general partnerships indirectly wholly
owned by NEG, Inc., an indirect wholly owned subsidiary of PG&E
Corporation.
In December 2000, and in January and February 2001, PG&E Corporation
and NEG completed a corporate restructuring that involved the use or creation of
limited liability companies ("LLCs") as intermediate owners between a parent
company and its subsidiaries. One of these LLCs is PG&E National Energy
Group, LLC, which owns 100% of the stock of NEG. After the restructuring was
completed, two independent rating agencies, Standard and Poor's and Moody's
Investor Services issued investment grade ratings for NEG and reaffirmed such
ratings for certain NEG subsidiaries. On April 6, 2001, Pacific Gas and Electric
Company (the "Utility"), another subsidiary of PG&E Corporation, filed a
voluntary petition for relief under the provisions of Chapter 11 of the U.S.
Bankruptcy Code. Pursuant to Chapter 11 of the U.S. Bankruptcy Code, the Utility
retains control of its assets and is authorized to operate its business as a
debtor-in-possession while being subject to the jurisdiction of the Bankruptcy
Court. On September 20, 2001, the Utility and PG&E Corporation jointly filed
a plan of reorganization that entails separating the Utility into four distinct
businesses. The plan of reorganization does not directly affect NEG or any of
its subsidiaries. Subsequent to the bankruptcy filing, the investment grade
ratings of NEG were reaffirmed on April 6 and 9, 2001. On July 31, 2002,
Standard and Poor's downgraded NEG, Inc. to BB+ with CreditWatch with negative
implications from BBB with a stable outlook. On August 5, 2002, Moody's
downgraded NEG, Inc. to Ba2 from Baa2 and maintained its negative rating
outlook. Neither agency took any ratings action with respect to the rating of
the Partnership's debt. NEG's management believes that the credit agency action
will have no impact on the financial condition or results of operations of the
Partnership. In addition, NEG's management believes that NEG and its direct and
indirect subsidiaries, including the Partnership, would not be substantively
consolidated with PG&E Corporation in any insolvency or bankruptcy
proceeding involving PG&E Corporation or the Utility.
The consolidated balance sheet as of June 30, 2002, and the consolidated
statements of operations and cash flows for the six months ended June 30, 2002
and 2001, 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 June 30, 2002, and the results
of operations and cash flows for the six months ended June 30, 2002 and 2001.
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, 2001.
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 $3,000,000 is also held
in long-term assets in the accompanying balance sheets.
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.
Derivative Financial Instruments
The Partnership adopted SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities"("SFAS No. 133"), 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, a component of partners' capital, 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. Since these activities qualify as
normal purchase and sale activities, the Partnership has not recorded the value
of the related contracts on its balance sheet, as permitted under the standards.
In December 2001, the 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 the Partnership's
current analysis, the power contract with FPL is a derivative, but qualifies as
a normal purchase and sales exemption, thus is exempt from the requirements of
SFAS No. 133 and is not reflected on the balance sheet at fair value. 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. Based on the Partnership's
current analysis, the commodity contracts held by the Partnership are exempt
from the requirements of SFAS No. 133.
In June 2001, the FASB issued SFAS No. 141, entitled, Business
Combinations. This statement prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001 and
applies to all business combinations accounted for under the purchase method
that are completed after June 30, 2001. This statement was adopted on January 1,
2002, and did not have an impact on the Partnership's consolidated financial
statements.
Also in June 2001, the FASB issued SFAS No. 142, entitled, Goodwill and
Other Intangible Assets. This statement eliminates the amortization of goodwill,
and requires goodwill to be reviewed periodically for impairment. This statement
also requires the useful lives of previously recognized intangible assets to be
reassessed and the remaining amortization periods to be adjusted accordingly.
This statement is effective for fiscal years beginning after December 15, 2001,
for all goodwill and other intangible assets recognized on the Partnership's
consolidated balance sheets at that date, regardless of when the assets were
initially recognized. This statement was adopted on January 1, 2002, and did not
have an impact on the Partnership's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, entitled, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No.
121, entitled, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, but retains its fundamental provisions for
recognizing and measuring impairment of long-lived assets to be held and used.
This statement also requires that all long-lived assets to be disposed of by
sale are carried at the lower of carrying amount or fair value less cost to
sell, and that depreciation should cease to be recorded on such assets. SFAS No.
144 standardizes the accounting and presentation requirements for all long-lived
assets to be disposed of by sale, superceding previous guidance for discontinued
operations of business segments. This statement is effective for fiscal years
beginning after December 15, 2001. This statement was adopted on January 1,
2002, and did not have an impact on the Partnership's consolidated financial
statements.
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 June 30, 2002 and December 31,
2001, estimated present value of this deposit was $178,279 and $171,737,
respectively. The remaining balance has been included in property plant, and
equipment as part of total construction expenses.
4. DEBT SERVICE RESERVE LETTER OF CREDIT:
The Partnership entered into a debt service reserve letter of credit and
reimbursement agreement, dated as of November 1, 1994, with BNP Paribas
(formerly known as Banque Nationale de Paris) pursuant to which a debt service
reserve letter of credit in the amount of approximately $60 million was issued.
On January 11, 1999, in accordance with the Partnership's financing documents,
the debt service reserve letter of credit was reduced to approximately $30
million. BNP Paribas notified the Partnership on May 18, 2001 of its intention
not to extend the term of the agreement, which expires on November 22, 2005.
Pursuant to the terms of the Disbursement Agreement, available cash flows are
required to be deposited on a monthly basis beginning on May 22, 2002 into the
Debt Service Reserve Account or the Tax Exempt Debt Service Reserve Account, as
the case may be, until the required Debt Service Reserve Account Maximum Balance
is achieved, which is $29,925,906. No funds have been deposited as of June 30,
2002.
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.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements included herein are forward-looking statements
concerning the Partnership's operations, economic performance and financial
condition. Such statements are subject to various risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including general business and economic conditions; the
performance of equipment; levels of dispatch; the receipt of certain capacity
and other fixed payments; and electricity prices.
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 June 30, 2002, the Partnership had approximately $607.6 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 six months ended June
30, 2002, the Partnership had total operating revenues of approximately $82.3
million, total operating costs of approximately $53.2 million, and total net
interest expenses of approximately $26.8 million, resulting in net income of
approximately $2.3 million.
The Partnership has obtained all material environmental permits and
approvals required as of June 30, 2002, 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.
Results of Operations
For the six months ending June 30, 2002 and 2001, the Facility achieved an
average Capacity Billing Factor ("CBF") of 89.79% and 98.91%, respectively. The
CBF measures the overall availability of the Facility, but gives a heavier
weighting to on-peak availability. The lower CBF in 2002 resulted from decreased
availability in the fall of 2001 primarily caused by boiler tube leaks and
repairs to the generator, which required the Facility to be out of service for
eleven days. For the six months ended June 30, 2002 and 2001, respectively, this
resulted in earning monthly capacity payments aggregating $56.7 million and
$56.6 million. In addition to the monthly capacity payments, the Partnership is
entitled to capacity bonus payments if the CBF, at the end of each month,
exceeds certain levels. Since the CBF was below these levels due to the
decreased availability in the fall of 2001, no bonus has been received in 2002
compared to $5.6 million in the same period in 2001.
During the six months ended June 30, 2002, the Facility was dispatched by
FPL and generated 1,159,324 megawatt-hours compared to 1,259,288 megawatt-hours
during the same period in 2001. The decrease in 2002 was due to a unit outage to
repair condenser tube leaks and for a scheduled two week outage in 2002 compared
to only a scheduled one week outage in 2001. The monthly dispatch rate for the
first six months of 2002 ranged from 78% to 94%, as compared to a range of 89%
to 95% for the corresponding period in 2001.
Net income for the six months ended June 30, 2002, was approximately
$2.3 million compared to the net income of approximately $10.1 million for the
corresponding period in the prior year. The $7.8 million decrease is primarily
attributable to not receiving monthly capacity bonus payments of $5.6 million in
2002 due to the lower CBF resulting from decreased availability in the fall of
2001. Additionally, there was a decrease in net energy margins of $3.3 million.
This was due in part to higher costs of coal of $2.0 million under the amended
contract for coal supply (see Part II, Item 5, Coal Supplier Bankruptcy). The
energy margins were narrowed also because of a decrease in the index used to
adjust quarterly the mine coal component of the unit energy cost in the Power
Purchase Agreement ("PPA") with FPL. This index decrease reduced energy revenue
by $1.6 million, but was offset by reduced ash disposal and lime costs of $0.3
million as a result of lower mega-watt generation. Offsetting these variances is
a decrease in general and administrative costs of $0.8 million and a decrease in
net non-operating expenses of $0.3 million.
Operating Revenues
For the six months ended
June 30, 2002 June 30, 2001
Revenues $ 82.3 million $ 91.7 million
KWhs 1,159,324,000 1,259,288,000
Average Capacity Billing Factor 89.79% 98.91%
Average Dispatch Rate 87.65% 91.38%
Cost of Sales
Costs of sales for the six months ended June 30, 2002, were approximately
$48.2 million on sales of 1,159,324 MWhs as compared to $48.8 million on sales
of 1,259,288 MWhs for the corresponding period in the prior year. The overall
cost of fuel and ash decreased $0.5 million due to lower dispatch causing lower
fuel consumption; however, the cost per ton of coal increased as a result of the
amended coal purchase agreement, resulting in a disproportionate decrease in
fuel and ash costs as compared to the lower dispatch. There was also a decrease
in operating and maintenance costs of $0.1 million.
Net interest expense for the six months ended June 30, 2002, was
approximately $26.8 million compared to $27.1 million for the same period in the
prior year. June 2002 and December 2001 payments on Series A-9 of the first
mortgage bonds decreased interest expense by approximately $0.8 million. This
was offset by reduced interest income earned of $0.4 million in 2002 as compared
to the corresponding period in 2001 due to lower rates on investments held by
the trustee.
Liquidity and Capital Resources
Net cash provided by operating activities for the six months ended June 30,
2002 was approximately $5.3 million as compared to $20.6 million for the
corresponding period in 2001. The decrease is primarily driven by the reduction
in net income, a decrease in 2002 in accrued liabilities for a payment of 2001
property taxes processed in March 2002, and the effect of coal invoices paid net
ten days after receipt of each shipment in accordance with the amended coal
purchase agreement. Previously, coal invoices were paid twenty days after
receipt of each invoice for all coal loaded for delivery during the preceding
month.
Net cash provided by investing activities for the six months ended June 30,
2002 was approximately $0.4 million primarily due to a decrease in investments
held by the trustee, partially offset by capital expenditures. This compares to
an increase in net cash used for investing activities for the six months ended
June 30, 2001 of approximately $1.4 million primarily driven by capital
expenditures and an increase in investments held by the trustee.
Net cash used in financing activities for the six months ended June 30,
2002 and 2001 was $5.7 million and $18.0 million, respectively. A capital
distribution of $12.4 million was made in 2001; however, no distributions were
made in 2002.
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 Partnership's total borrowings from inception through June 30, 2002
were $769 million. The equity loan of $139 million was repaid on December 26,
1995. As of June 30, 2002, the borrowings included $125 million from the 1994
Tax Exempt Bonds and all of the available First Mortgage Bond proceeds. The
First Mortgage Bonds have matured as follows:
Series Aggregate Principal Amount Date Matured and Paid
A-1 $4,397,000 June 15, 1996
A-2 4,398,000 December 15, 1996
A-3 4,850,000 June 15, 1997
A-4 4,851,000 December 15, 1997
A-5 5,132,000 June 15, 1998
A-6 5,133,000 December 15, 1998
A-7 4,998,000 June 15, 1999
A-8 4,999,000 December 15, 1999
The weighted average interest rate paid by the Partnership on its debt for
the six months ended June 30, 2002 and 2001, was 9.202% and 9.197%,
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 June 30, 2002, 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 current amount of these letters of credit is
$13.1 million, which, if not renewed 30 days prior to expiration, will convert
into letter of credit loans. The Partnership hopes to obtain a replacement
letter of credit provider before the current letters of credit expire, although
there are no assurances the Partnership will be successful.
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. In September 2001, Credit Suisse notified the
Partnership of its intention not to extend the term of the agreement, which
expired 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 cash flow from
operations to timely fund all of its working capital, capital expenditures and
major maintenance requirements even if no replacement working capital facility
is obtained.
See Report on Form 10-K dated December 31, 2001 for qualitative and
quantitative disclosures about market risk regarding the fair value of debt.
Accounting Principles Issued But Not Yet Adopted
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Statements ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." This statement is effective for fiscal years
beginning after June 15, 2002. SFAS No. 143 provides accounting requirements for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Under the statement, the asset retirement
obligation is recorded at fair value in the period in which it is incurred by
increasing the carrying amount of the related long-lived asset. The liability is
accreted to its present value in each subsequent period and the capitalized cost
is depreciated over the useful life of the related asset. The Partnership is
currently evaluating the impact of SFAS No. 143 on its consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. This
statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. SFAS No. 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of a company's commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. The Partnership does not expect that implementation of this
statement will have a significant impact on its consolidated financial
statements.
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 facility.
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 June 30, 2002, 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.
Newly Appointed Officers
A Board of Control written consent in lieu of a meeting was executed on
April 1, 2002 for the Partnership. The following tables set forth the names and
positions of newly appointed officers.
Indiantown Cogeneration, L.P.
Name Position
John R. Cooper* Senior Vice President and Treasurer
Thomas E. Legro Vice President, Controller and
Principal Accounting Officer
Indiantown Cogeneration Funding Corporation
Name Position
John R. Cooper* Vice President, Chief Financial
Officer, Treasurer and Principal
Accounting Officer
Thomas E. Legro Vice President and Controller
replacing David N. Bassett.
Thomas E. Legro is Vice President, Controller and Chief Accounting Officer of PG&E
National Energy Group, Inc., an affiliate of the Partnership, and has been with PG&E
National Energy Group, Inc. since July 2001. From January 1994 to June 2001, Mr. Legro
was Vice President and Controller of Edison Mission Energy.
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 May 15,
2002, announcing a change of certifying accountants.
Exhibit
No.
Description
99.1
Certification of P. Chrisman Iribe, President of Indiantown Cogeneration, L.P.
and Indiantown Cogeneration Funding Corporation, pursuant to 18 U.S.C. Section 1350.
99.2
Certification of Thomas E. Legro, Vice President, Controller and Principal Accounting
Officer of Indiantown Cogeneration, L.P., pursuant to 18 U.S.C. Section 1350.
99.3
Certification of John R. Cooper, Vice President, Treasurer, Chief Financial Officer
and Principal Accounting Officer of Indiantown Cogeneration Funding Corporation, pursuant to
18 U.S.C. Section 1350.
INDIANTOWN COGENERATION, L.P.
(Co-Registrant)
Date: August 14, 2002 __________________________________
Thomas E. Legro
Vice President, Controller and Principal
Accounting Officer
INDIANTOWN COGENERATION FUNDING
CORPORATION
(Co-Registrant)
Date: August 14, 2002 __________________________________
John R. Cooper
Vice President, Treasurer, Chief Financial
Officer and Principal Accounting Officer