Fitch Places Indiantown Cogeneration On Rating Watch Negative.

CHICAGO -- Fitch Ratings has placed the 'BBB-' rating on Indiantown Cogeneration L.P. and Indiantown Cogeneration Funding Corp.'s (ICL) taxable first mortgage bonds and tax-exempt facility revenue bonds on Rating Watch Negative.

This action is in response to the recently executed second amendment to the coal purchase and sale agreement, which introduces the potential for a mismatch between energy revenues and fuel costs. Previous projections of ICL's financial performance indicate ICL's credit metrics are weak compared to other investment-grade Qualifying Facility (QF) power projects. The current rating presumes a strong correlation between energy revenues and fuel costs, naturally mitigating ICL's exposure to the market price of coal. A downgrade by Fitch could result if the second amendment is deemed to increase ICL's vulnerability to market prices. Conversely, if the mismatch can be mitigated by certain adjustment mechanisms embedded in the power purchase agreement, or if projected market prices indicate the mismatch is not a threat to ICL's cash flow, the current rating could be affirmed by Fitch.

ICL has been negotiating pricing terms with both its coal supplier, Massey Coal Sales Company (Massey), and energy offtaker, Florida Power & Light Co. (FP&L). Earlier this year, ICL and FP&L developed a replacement index reflecting the prevailing price of coal delivered to Florida. The index is used to escalate the coal cost component of the unit energy price that ICL receives for delivering power to FP&L. Although earlier discussions between ICL and Massey indicated a similar index would be used to set the price of coal purchased by ICL, the second amendment fixes the price at $47 per ton through 2007. In essence, ICL will be purchasing coal at a fixed price while being reimbursed for coal costs at prices that will vary with the replacement index.

The contract price of $47 per ton represents an increase of $14 above the contract price in effect prior to the second amendment. Fitch believes that this increase is consistent with the magnitude of increase in market prices for coal delivered to Florida. However, such a significant increase could exacerbate any minor discrepancy between the mechanism on which energy revenues are based and ICL's actual fuel cost. Furthermore, the timing for adjusting the unit energy price could require additional working capital, straining ICL's liquidity. In addition, if the trend of increasing prices is reversed, ICL may not fully recover the cost of coal.

The Rating Watch will be resolved once Fitch has performed a detailed analysis of the financial impact of the second amendment.

The Indiantown Cogeneration, L.P. project is a 330 MW operating coal-fired facility. As a QF under the Public Utility Regulatory Policy Act of 1978, the project supplies capacity and energy to Florida Power and Light Co., as well as steam to Louis Dreyfus Citrus Co., under long-term agreements.