Fitch Downgrades Indiantown Cogeneration to 'BB' from 'BBB-'.

CHICAGO -- Fitch Ratings has downgraded to 'BB' from 'BBB-' the senior secured rating on Indiantown Cogeneration L.P. and Indiantown Cogeneration Funding Corp.'s (ICL) taxable first mortgage bonds and tax-exempt facility revenue bonds. The Rating Watch Negative has been removed. The rating action is a result of the deterioration in ICL's financial performance following the execution of the second amendment to the coal sales agreement. Debt service coverage ratios for the annual period ending December 2005 are expected to fall below 1.2 times (x) based on ICL's current fuel costs. Absent a significant improvement in energy revenues, ICL faces heightened exposure to operating risks that could increase operating costs or reduce availability and therefore capacity payments. Fitch assigned the Rating Watch in December 2004 after ICL agreed to the second amendment, which required a 42% increase above the contractual coal price previously in effect.

The ongoing failure to adjust the unit energy payment cost (UEPC) in the power purchase agreement (PPA) and the increase in the fixed contractual coal price have combined to exacerbate the mismatch between energy revenues and fuel costs. Energy revenues improved slightly after the replacement fuel index, the basis for the coal-cost component of the energy payments made to ICL, took effect in late 2004. However, with the execution of the second amendment, ICL's actual fuel costs subsequently climbed well above the cost of coal specified in the replacement index. Consequently, energy revenues continue to fall short of fuel costs, putting pressure on ICL's liquidity. Though the PPA provides for adjustment of the UEPC in the event that fuel costs exceed energy revenues, the adjustment process has not been resolved in a timely manner.

Fitch believes that ICL will eventually achieve an increase in energy revenues as required by the PPA, but the magnitude and the timing of such an increase remains uncertain; the introduction of a lawsuit has the potential to prolong the adjustment process. On Sept. 8, 2005, ICL filed a complaint against Florida Power & Light Co. (FPL), the counterparty to the PPA, in the United States District Court for the Middle District of Florida. In the complaint, ICL alleges breach of contract for FPL's failure to adjust the UEPC. The outcome of the lawsuit cannot be determined at this time.

ICL may be vulnerable to price volatility in the coal market, as the coal supply agreement is subject to a price re-opener in 2007. If ICL and FPL cannot establish a precedent for resolving the adjustment process in a timely manner and coal prices continue to rise, further disparities between energy payments and fuel costs could develop. However, cash flows could stabilize and credit quality could be enhanced if ICL receives substantial assurance that the UEPC will be promptly adjusted to compensate for rising fuel costs.

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. ICL is a special purpose limited partnership jointly owned by Dana Commercial Credit and Cogentrix Energy, Inc., an indirect wholly owned subsidiary of Goldman Sachs Group, Inc. ICL's management, operations, and maintenance functions are performed by subsidiaries of Cogentrix.

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.