Fitch Affirms Indiantown Cogeneration at 'BB'.

CHICAGO -- Fitch Ratings has affirmed the 'BB' rating on Indiantown Cogeneration L.P. and Indiantown Cogeneration Funding Corp.'s (ICL) $505 million ($345 million outstanding) taxable first mortgage bonds due 2010 & 2020 and $125 million tax-exempt facility revenue bonds due 2025. The rating affirmation is based on the ongoing mismatch between ICL's variable fuel costs and energy revenues earned under the power purchase agreement (PPA) with Florida Power and Light Company (FP&L). Fitch has evaluated ICL's credit quality on a stand-alone basis, independent of the credit quality of its owners. The Rating Outlook is Stable.

Financial performance showed improvement in 2007, though ICL remains exposed to the same long-term risk factors responsible for previous strains on liquidity. ICL's variable production costs continue to exceed PPA energy revenues, which are not directly linked to the expenses actually incurred by ICL. Rather, ICL is reimbursed at a variable energy rate (the unit energy payment cost, or UEPC) primarily based on a commodity coal index and a coal transportation index, as defined in the PPA.

The discrepancy between ICL's coal costs and the commodity index has narrowed due to the escalation of the commodity index in 2007. ICL currently procures coal under supply agreements with Appalachian coal producers and pays fixed prices that exceed the corresponding coal price in the commodity index. Recent improvements in the commodity index were partially offset by higher coal transportation costs due to an increase in the oil-based fuel surcharge under the coal transportation agreement with CSX Transportation, Inc. (CSX). While the coal transportation index is aligned with ICL's cost basis under the CSX agreement, the PPA does not include a reimbursement mechanism for the fuel surcharge. Thus, both the commodity price of coal and the associated transportation costs continue to exceed the corresponding components of the UEPC.

Unless ICL resolves the mismatch between PPA energy revenues and fuel costs, ICL will remain exposed to a potential increase in the price of coal when a key coal supply agreement's price reopens in 2011. Though the PPA includes a provision (Section 8.5) intended to adjust the UEPC for discrepancies between energy payments and fuel costs, ICL and FPL have disagreed over the implementation of this provision. Over the past two years, FPL has paid a total of approximately $4 million in true-up payments pursuant to Section 8.5. Each payment has been retroactively applied to energy payments made in prior periods. ICL contends that FPL's Section 8.5 payments have been insufficient to fully reimburse ICL's fuel costs and the UEPC should be adjusted on a look-ahead basis.

ICL has been engaged in negotiations with FPL concerning Section 8.5 for several years, and it is uncertain whether ICL can streamline the UEPC adjustment process going forward. ICL's credit quality would be enhanced if ICL secures timely UEPC adjustments that adequately compensate ICL for shortfalls between energy revenues and fuel costs. Absent a favorable resolution to the negotiations, ICL will face heightened exposure to operating risks as long as fuel costs exceed energy payments.

Fitch expects relatively stable financial performance over the next two years with debt service coverage ratios remaining below 1.3 times (x). ICL's management has pursued several cost containment measures, but certain major expenses are rigid, such as the contractual price of coal, or remain subject to cost inflation, such as the fuel surcharge in the coal transportation agreement. ICL continues to earn the maximum capacity payment under the PPA on strong operational performance. It is unlikely that energy revenues will significantly improve, as Fitch expects the commodity fuel index to remain flat over the next 12 - 18 months. See Fitch's Special Report 'Coal Outlook for 2008: Are Higher Exports Enough?' dated Feb. 7, 2008, for Fitch's view on the domestic coal market.

Fitch considers ICL's credit quality unaffected by Energy Investors Fund's (EIF) November 2007 acquisition of an indirect 80% ownership interest in ICL. Cogentrix Energy, LLC. (Cogentrix) owns the remaining 20% equity interest and retains veto power over key ownership decisions. Subsidiaries of Cogentrix will continue to perform the day-to-day management, operations, and maintenance functions at ICL.

The Indiantown project consists of a 330-megawatt coal-fired qualifying facility located in Martin County, Florida, supplying energy and capacity to FPL and steam to Louis Dreyfus Citrus. Fitch has assigned FPL a long-term Issuer Default Rating of 'A' with a Stable Outlook. ICL is a special purpose limited partnership jointly owned by indirect subsidiaries of EIF and Cogentrix, itself an indirect wholly owned subsidiary of Goldman Sachs Group, Inc. The taxable first mortgage bonds were issued jointly by ICL and its wholly owned subsidiary, Indiantown Cogeneration Funding Corp. The tax-exempt facility revenue bonds were issued by the Martin County Industrial Development Authority on behalf of ICL.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.