SECURITIES AND EXCHANGE COMMISSION

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, 2004

Commission File Number 33-82034

INDIANTOWN COGENERATION, L.P.

INDIANTOWN COGENERATION FUNDING CORPORATION
(Exact name of co-registrant as specified in its charter)

7600 Wisconsin Avenue

(301)-280-6800

Indicate by check mark whether the co-registrants (1) have 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 such shorter period that the co-registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.     [X]  Yes     [   ]  No

Indicate by check mark whether the co-registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act)     [   ]  Yes     [X]  No

As of August 12, 2004, there were 100 shares of common stock of Indiantown Cogeneration Funding Corporation, $1 par value, outstanding.

Indiantown Cogeneration, L.P.
Indiantown Cogeneration Funding Corporation

PART I
FINANCIAL INFORMATION

Indiantown Cogeneration, L.P. and Subsidiary
Condensed Consolidated Balance Sheets
(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

1

Indiantown Cogeneration, L. P. and Subsidiary
Condensed Consolidated Balance Sheets
(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

2

Indiantown Cogeneration, L.P. and Subsidiary
Consolidated Statements of Operations
(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

3

Indiantown Cogeneration, L.P. and Subsidiary
Consolidated Statements of Cash Flows
(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

4

Indiantown Cogeneration, L.P. and Subsidiary
Notes to Consolidated Financial Statements
As of June 30, 2004
(Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION:

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”) under a Power Purchase Agreement (“PPA”) and supplies steam to Louis Dreyfus Citrus, Inc. (“LDC”), successor to Caulkins Indiantown Citrus Co., under an Energy Services Agreement (“ESA”). In July 1994, the Partnership formed a wholly owned subsidiary, Indiantown Cogeneration Funding Corporation, solely for the purpose of issuing debt securities in connection with the financing of the Facility.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by accounting principles generally accepted in the United States for complete statements. Management believes that the accompanying unaudited consolidated financial statements, which have been prepared in accordance with interim reporting requirements, reflect all adjustments that are necessary to present a fair statement of the consolidated financial position and results of operations for the interim periods for Indiantown Cogeneration, L.P. and Indiantown Cogeneration Funding Corporation. All material adjustments are of a normal recurring nature unless otherwise disclosed in this report on Form 10-Q. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year.

This quarterly report should be read in conjunction with the Partnership’s consolidated financial statements and notes to consolidated financial statements included in its December 31, 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

2. RELATIONSHIP WITH NATIONAL ENERGY & GAS TRANSMISSION, INC.:

The Partnership is managed by Power Services Company (“PSC”, formerly known as PG&E National Energy Group Company), pursuant to a Management Services Agreement (the “MSA”). The Facility is operated by U.S. Operating Services Company (“OSC”, formerly known as PG&E Operating Services Company), pursuant to an Operation and Maintenance Agreement (the “O&M Agreement”). PSC and OSC are general partnerships indirectly wholly owned by National Energy & Gas Transmission, Inc. (“NEGT”, formerly known as PG&E National Energy Group, Inc.). NEGT is an indirect subsidiary of PG&E Corporation.

5

On July 8, 2003, NEGT and certain subsidiaries voluntarily filed petitions for relief under the provisions of Chapter 11 of the U.S. Bankruptcy Code (collectively, the “NEGT Bankruptcy”) in the Greenbelt Division of the United States Bankruptcy Court for the District of Maryland (the “Bankruptcy Court”).

Neither the Partnership nor any of its NEGT affiliated partners, including Toyan Enterprises (“Toyan”) and Indiantown Project Investment, L.P. (“IPILP”), or PSC and OSC, are parties to the filings by NEGT or other affiliates for protection under the NEGT Bankruptcy. The Partnership believes that it will not be substantively consolidated with NEGT in any bankruptcy proceeding involving NEGT and the NEGT Bankruptcy does not result in an event of default under the principal project contracts or the principal financing documents of the Facility.

On February 26, 2004, NEGT filed with the Bankruptcy Court its Third Amended Plan of Reorganization and the related Disclosure Statement. A Modified Third Amended Plan of Reorganization (“POR”) was confirmed by order of the Bankruptcy Court on May 3, 2004. The POR contemplates that NEGT will retain and continue to operate its power generation and pipeline businesses unless they are sold (as described in the POR), separate from PG&E Corporation, and issue new debt securities and common stock.

On July 23, 2004, NEGT entered into a definitive agreement with Denali Power, LLC, a company formed by affiliates of ArcLight Capital Partners, LLC and Caithness Energy, LLC, (the “Denali Agreement”) to acquire NEGT’s equity interests in 12 power plants and a natural gas pipeline, including NEGT’s indirect interests in the Partnership. The Denali Agreement will be subject to Bankruptcy Court approval, and contemplates a court-sanctioned auction process in accordance with customary bidding procedures approved by the Bankruptcy Court. On August 10, 2004, the Bankruptcy Court issued an order approving the bidding procedures. In the court-sanctioned auction, NEGT will seek offers that are higher or otherwise better than that which has been negotiated with Denali Power, LLC. The transaction is expected to close in the first quarter of 2005 and is subject to regulatory and third party approvals.

NEGT’s indirect ownership interest in the Partnership is included within the Denali Agreement. The Partnership cannot predict whether a sale by NEGT of its interest in the Partnership, whether pursuant to the Denali Agreement or otherwise (a “NEGT Interest Sale”), will be completed. As presently contemplated, the NEGT Interest Sale is not expected to affect the MSA and the O&M Agreement with the Partnership.

On August 4, 2004, Standard and Poor’s (“S&P”) issued a press release, which stated that the announcement by NEGT of its agreement to sell National Energy Power Company, LLC, through which NEGT holds interest in the Partnership, to Denali Power, LLC will not affect the rating on the Partnership. S&P further stated that it believes the management and operations functions will continue to be performed by PSC and OSC, respectively, after the sale is consummated. S&P’s rating on the senior secured debt of Indiantown Cogeneration Funding Corporation remains at BBB- with a credit watch negative.

3. SIGNIFICANT ACCOUNTING POLICIES:

Except as disclosed herein, the Partnership is following the same accounting principles discussed in the Partnership’s December 31, 2003 Annual Report on Form 10-K.

6

Adoption of New Accounting Pronouncements

On January 1, 2003, the Partnership adopted SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 provides accounting requirements for costs associated with legal obligations to retire tangible, long-lived assets. The statement requires that an asset retirement obligation be recorded at fair value in the period in which it is incurred, if a reasonable estimate of fair value can be made. In the same period, the associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the long-lived asset.

Upon implementation of this statement, the Partnership recorded approximately $44,000 in property, plant and equipment to reflect the fair value of the asset retirement costs as of the date the obligation was incurred, approximately $9,000 of accumulated depreciation through December 31, 2002 and an asset retirement obligation of approximately $84,000. The cumulative effect of the change in accounting principle as a result of adopting this statement was a loss of approximately $49,000. The Partnership recognized accretion of $4,000 in the six month period ended June 30, 2004 and $8,000 in the year ended December 31, 2003.

4. RELATED PARTY TRANSACTIONS:

The Partnership has an MSA with PSC for the day-to-day management and administration of the Partnership’s business relating to the Facility. The agreement commenced on September 30, 1992, was amended and restated on November 1, 1994, and will continue through October 31, 2028. The cost of services is included in general and administrative expenses in the accompanying consolidated statements of operations. The total expense incurred for these services for each of the six months ended June 30, 2004 and 2003 was $389,000.

The Partnership has an O&M Agreement with OSC for the operation and maintenance of the Facility for a period of 30 years (starting September 30, 1992). Compensation to OSC under the agreement includes an annual base fee of which a portion is subordinate to debt service and certain other costs. The base fee is included in operating and maintenance expenses in the accompanying consolidated statements of operations. The total expense incurred for these services for the six months ended June 30, 2004 and 2003 was $921,000 and $904,000, respectively.

5. LETTERS OF CREDIT:

As previously reported, on October 10, 2003, the Partnership closed a transaction with Calyon New York Branch (“Calyon”, formerly known as Credit Lyonnais New York Branch), as agent and arranger, to replace certain letters of credit. The facilities include a Debt Service Reserve Letter of Credit up to $29.9 million, which has a term of seven years; Performance Letters of Credit up to $15.0 million, which have a term of five years; and a Working Capital Revolving Facility up to $10.0 million, which has a term of three years and is presently capped at $3.0 million. Under the Performance Letters of Credit, the ESA Letter of Credit for $10.0 million was issued in favor of LDC.

7

On June 11, 2004, under the Performance Letters of Credit, a Qualifying Facility (“QF”) Letter of Credit was issued in favor of FPL for an aggregate amount of $4.0 million, which is to be increased from time to time up to $5.0 million. Amounts previously deposited into a cash reserve account of $4.0 million held in lieu of a letter of credit were released and deposited in accordance with the terms set forth in the Amended and Restated Disbursement Agreement.

6. COMMITMENTS AND CONTINGENCIES:

In 2003, a long-term interruption of the delivery of Appalachian coal to St. John’s River Power Park (“SJRPP”) meeting the criteria contained in the PPA occurred. As a result of the interruption, the PPA requires that the Partnership and FPL agree upon a comparable replacement index (the “Replacement Index”) to escalate the coal cost component of the Unit Energy Cost (“UEC”) paid by FPL to the Partnership. A Letter Agreement, dated as of July 29, 2004, was entered into by the Partnership and FPL to fulfill the mutual obligation to develop a Replacement Index. The Replacement Index, which will be used to calculate the coal cost component of the UEC beginning with the first calendar quarter of 2004, is based on the weighted-average of Appalachian coal delivered by rail to Florida utilities and municipalities. The Replacement Index will comprise data meeting the same coal specifications as the SJRPP coal data used in the original index. The Letter Agreement provides for reversion to the original index should qualified Appalachian coal deliveries resume to SJRPP in sufficient quantities as specified in the Letter Agreement.

FPL will file a letter in August, 2004 to the Florida Public Service Commission (“FPSC”) to inform the Division of Economic Regulation that, as explicitly contemplated by the terms of the PPA, the original index has been replaced with the Replacement Index and falls within the rule that states an application for approval is not required if the modification was explicitly contemplated by the terms of the contract. Although the Partnership agrees with the position of FPL that the Replacement Index does not require formal approval by the FPSC, the Partnership will file a petition for a declaratory statement from the FPSC, requesting the FPSC to confirm this position. The effectiveness of the Letter Agreement is contingent upon an order of the FPSC finding that no approval of the Letter Agreement is necessary. No adjustment has been made to electric energy revenues in 2004 relating to the Replacement Index.

The Partnership has included its coal supplier, Massey Coal Sales Company, Inc. (“Massey”), in the process to achieve a similar index, as contemplated in the First Amendment to the Coal Purchase and Sales Agreement. To date the parties have been unable to agree on pricing terms consistent with the Replacement Index. Discussions are continuing. The Partnership cannot predict whether such an agreement will be reached in the future.

7. RECLASSIFICATIONS:

Certain prior year amounts have been reclassified to conform with the current year presentation.

8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements of the Partnership and the notes to the accompanying consolidated financial statements included herein. Further, this Quarterly Report on Form 10-Q should be read in conjunction with the Partnership’s December 31, 2003 Annual Report on Form 10-K.

Cautionary Statement Regarding Forward-Looking Statements

The information in this Quarterly Report on Form 10-Q includes forward-looking statements about the future that are necessarily subject to various risks and uncertainties. Use of words like “anticipate,” “estimate,” “intend,” “project,” “plan,” “expect,” “will,” “believe,” “could,” and similar expressions help identify forward-looking statements and constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and assumptions, which the Partnership believes are reasonable and on information currently available to the Partnership. Actual results could differ materially from those contemplated by the forward-looking statements. Although the Partnership believes that the expectations reflected in the forward-looking statements are reasonable, future results, events, levels of activity, performance or achievements cannot be guaranteed. Although the Partnership is not able to predict all the factors that may affect future results, some of the factors that could cause future results to differ materially from those expressed or implied by the forward-looking statements include:

Operational Risks

The Partnership’s future results of operations and financial condition may be affected by the performance of equipment, levels of dispatch, the receipt of certain capacity and other fixed payments, electricity prices, fuel deliveries and fuel prices and any mismatch between the actual energy costs and the energy revenue reimbursement of those costs; unanticipated changes in operating expenses or capital expenditures or other maintenance activities; variations in weather and natural disasters; and the potential impacts of threatened or actual terrorism and war. Currently, coal supply and transportation demands and constraints in the eastern region of the United States have resulted in a general decline in fuel inventories at power stations, including the Facility. CSX Transportation, Inc. (“CSX”) has communicated to the Partnership that, for an unspecified period of time, CSX may not meet all expected schedules for fuel deliveries. The Partnership believes that CSX has provided similar communication to all eastern region customers. CSX has stated that it will maintain service such that the Facility will be able to maintain minimum fuel inventories and that operations at the Facility will not be impacted due to shortages of fuel. The Partnership normally maintains approximately thirty days in fuel supply on site. As of August 12, 2004, on-site fuel inventory was approximately ten days. Although the Partnership has not had to interrupt operations due to restricted fuel supplies, the Partnership cannot predict whether in the future it will suffer any interruptions of operations due to fuel supply constraints. The Partnership continues to closely monitor this situation and conducts necessary communications with CSX and Massey Coal Sales Company, Inc. (“Massey”) to address the needs of the Facility.

9

Actions of Florida Power & Light and Other Counterparties

The Partnership’s future results of operations and financial condition may be affected by the extent to which counterparties require additional assurances in the form of letters of credit or cash collateral and the potential future failure of the Partnership to maintain qualifying facility status, which failure could cause a default under PPA.

Accounting and Risk Management

The Partnership’s future results of operations and financial condition may be affected by the effect of new accounting pronouncements, changes in critical accounting policies or estimates, the effectiveness of the Partnership’s risk management policies and procedures, the ability of the Partnership’s counterparties to satisfy their financial commitments to the Partnership and the impact of counterparties’ nonperformance on the Partnership’s liquidity position and heightened rating agency criteria and the impact of changes in the Partnership’s credit ratings.

Legislative and Regulatory Matters

The Partnership’s business may be affected by legislative or regulatory changes affecting the electric and natural gas industries in the United States, including the pace and extent of efforts to restructure the electric and natural gas industries; heightened regulatory and enforcement agency focus on the energy business with the potential for changes in industry regulations and in the treatment of the Partnership by state and federal agencies; and changes in or application of federal, state, and local laws and regulations to which the Partnership is subject including changes in corporate governance and securities laws requirements.

Litigation and Environmental Matters

The Partnership’s future results of operations and financial condition may be affected by compliance with existing and future environmental and safety laws, regulations, and policies, the cost of which could be significant, and the outcome of any potential future litigation and environmental matters.

Business Description

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. Revenues are derived primarily from capacity and bonus payments, measured by the Capacity Billing Factor (“CBF”), and sales of electricity. The facility is dispatched for electric energy by FPL on an economic basis. Each agreement year the facility is entitled to four weeks of outages to perform scheduled maintenance, and each fifth agreement year, a total of ten weeks of outage time to perform major maintenance. Differences in the timing and scope of scheduled and major maintenance can have a significant impact on the revenues and operational costs.

10

Executive Summary

During the quarter ended June 30, 2004, the Facility’s operating performance continued to be strong in a challenging business environment. The Partnership received the maximum amount for its capacity bonus payments from FPL. The electric energy payments received in the quarter ended June 30, 2004 were not sufficient to cover the Partnership’s variable costs of electric energy production, since the energy price paid by FPL for the coal cost component of the energy payment was less than the price of base coal in the amended coal purchase agreement.

The PPA provides for a quarterly indexing of the coal component of the energy price. This indexing involved the computation each quarter of the percent change in St. John’s River Power Park’s (“SJRPP”) domestic Appalachian coal purchases, contract and spot, as reported to the Florida Public Service Commission (“FPSC”). In 2003, a long-term interruption of the delivery of coal to SJRPP meeting the criteria contained in the PPA occurred. A Letter Agreement, dated as of July 29, 2004, was entered into by the Partnership and FPL to fulfill the mutual obligation to develop a comparable replacement index (the “Replacement Index”). The Replacement Index, which will be used to calculate the coal cost component of the UEC beginning with the first calendar quarter of 2004, is based on the weighted-average of Appalachian coal delivered by rail to Florida utilities and municipalities. The effectiveness of the Letter Agreement is contingent upon an order of the FPSC finding that no approval of the Letter Agreement is necessary. No adjustment has been made to electric energy revenues in 2004 relating to the Replacement Index.

The Partnership has included its coal supplier, Massey Coal Sales Company, Inc. (“Massey”), in the process to achieve a similar index, as contemplated in the First Amendment to the Coal Purchase and Sales Agreement. To date the parties have been unable to agree on pricing terms consistent with the Replacement Index. Discussions are continuing. The Partnership cannot predict whether such an agreement will be reached in the future.

In accordance with the terms of the PPA, the Partnership has scheduled the Facility for four weeks of maintenance outages during 2004, which is for the same duration experienced during 2003. Since the scope and duration of the scheduled maintenance outages for 2004 is comparable to those experienced during 2003, the Partnership expects maintenance expenses to be approximately the same in 2004 as compared to 2003.

The Partnership has obtained all material environmental permits and approvals required as of June 30, 2004, 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.

11

Relationship with NEGT

On July 8, 2003, NEGT and certain subsidiaries voluntarily filed petitions for relief under the provisions of Chapter 11 of the U.S. Bankruptcy Code (collectively, the “NEGT Bankruptcy”) in the Greenbelt Division of the United States Bankruptcy Court for the District of Maryland (the “Bankruptcy Court”).

Neither the Partnership nor any of its NEGT affiliated partners, Toyan and IPILP, or PSC and OSC, are parties to the NEGT Bankruptcy. The Partnership believes that it will not be substantively consolidated with NEGT in any bankruptcy proceeding involving NEGT and the NEGT Bankruptcy does not result in an event of default under the principal project contracts or the principal financing documents of the Facility.

On February 26, 2004, NEGT filed with the Bankruptcy Court its Third Amended Plan of Reorganization and the related Disclosure Statement. A Modified Third Amended Plan of Reorganization (“POR”) was confirmed by order of the Bankruptcy Court on May 3, 2004. The POR contemplates that NEGT will retain and continue to operate its power generation and pipeline businesses unless they are sold (as described in the POR), separate from PG&E Corporation, and issue new debt securities and common stock.

On July 23, 2004, NEGT entered into a definitive agreement with Denali Power, LLC, a company formed by affiliates of ArcLight Capital Partners, LLC and Caithness Energy, LLC, (the “Denali Agreement”) to acquire NEGT’s equity interests in 12 power plants and a natural gas pipeline, including NEGT’s indirect interests in the Partnership. The Denali Agreement will be subject to Bankruptcy Court approval, and contemplates a court-sanctioned auction process in accordance with customary bidding procedures approved by the Bankruptcy Court. On August 10, 2004, the Bankruptcy Court issued an order approving the bidding procedures. In the court-sanctioned auction, NEGT will seek offers that are higher or otherwise better than that which has been negotiated with Denali Power, LLC. The transaction is expected to close in the first quarter of 2005 and is subject to regulatory and third party approvals.

NEGT’s indirect ownership interest in the Partnership is included within the Denali Agreement. The Partnership cannot predict whether a sale by NEGT of its interest in the Partnership, whether pursuant to the Denali Agreement or otherwise (a “NEGT Interest Sale”), will be completed. As presently contemplated, the NEGT Interest Sale is not expected to affect the MSA and the O&M Agreement with the Partnership.

On August 4, 2004, Standard and Poor’s (“S&P”) issued a press release, which stated that the announcement by NEGT of its agreement to sell National Energy Power Company, LLC, through which NEGT holds interest in the Partnership, to Denali Power, LLC will not affect the rating on the Partnership. S&P further stated that it believes the management and operations functions will continue to be performed by PSC and OSC, respectively, after the sale is consummated. S&P’s rating on the senior secured debt of Indiantown Cogeneration Funding Corporation remains at BBB- with a credit watch negative.

12

Results of Operations

The following table sets forth operating revenue and related data for the three months and six months ended June 30, 2004 and 2003 (dollars and volumes in millions).

The Average Capacity Billing Factor (“CBF”) measures the overall availability of the Facility, but gives a heavier weighting to on-peak availability.

The Average Dispatch Rate is the amount of electric energy produced in a given period expressed as a percentage of the total contract capability amount of potential electric energy production in that time period.

13

Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30, 2003

Overall Results

Net income for the three months ended June 30, 2004 was approximately $3.2 million compared to the net loss of approximately $1.0 million for the corresponding period in the prior year.

Operating Revenues

For the three months ended June 30, 2004, the Partnership had total operating revenues of approximately $44.9 million as compared to $44.8 million for the corresponding period in the prior year. The $0.1 million increase in operating revenue is primarily due to increased capacity payments of $0.1 million resulting from the escalation of the fixed operation and maintenance component of the capacity payment from FPL.

Cost of Sales

Costs of sales for the three months ended June 30, 2004 were approximately $26.2 million as compared to $29.4 million for the corresponding period in the prior year. The overall cost of fuel and ash decreased $1.9 million resulting primarily from the decrease in coal transportation costs. In the three months ended June 30, 2003 the Partnership paid Lodestar Energy, Inc. $0.8 million to terminate the coal purchase agreement and paid an additional $1.6 million to CSX Transportation (“CSX”) based on the then current tariff rates for delivered coal, which were approximately 30% higher than system car rates. The tariff rates were in effect until the Partnership and CSX entered into a Coal Transportation Agreement on August 6, 2003. The difference between the tariff rates and the system car rates for all coal shipments for the period from April 1, 2003 through the effective date of the Coal Transportation Agreement was subsequently reimbursed to the Partnership in the third quarter of 2003. Offsetting are lime costs that increased by $0.4 million primarily due to an increase in usage resulting from an increase in the sulfur content of coal and reduced lime quality. Ash costs increased by $0.1 million for the three months ended June 30, 2004.

Operating and maintenance costs have decreased by $1.4 million. In the three months ended June 30, 2003 the Partnership incurred additional costs for tube leak repairs in the main boiler, as well as repairs to one auxiliary boiler and to the pulverizers.

Other Operating Expenses

Other operating expenses decreased by $0.3 million primarily due to the absence of legal and consulting costs incurred in the second quarter of 2003 associated with the termination of the Coal Purchase Agreement with Lodestar Energy, Inc. and the execution of the replacement Coal Purchase and Sales Agreement with Massey.

Non-Operating Income (Expense)

Net interest expense for the three months ended June 30, 2004 and 2003 was approximately $13.3 million and $13.9 million, respectively. June 2003 and December 2003 principal payments on Series A-9 of the first mortgage bonds decreased interest expense by approximately $0.3 million. For the three months ended June 30, 2003, interest on letter of credit loans and subordinated debt amounted to $0.3 million.

14

Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003

Overall Results

Net income for the six months ended June 30, 2004 was approximately $8.5 million compared to net income of approximately $3.6 million for the corresponding period in the prior year.

Operating Revenues

For the six months ended June 30, 2004, the Partnership had total operating revenues of approximately $91.4 million as compared to $89.6 million for the corresponding period in the prior year. The $1.7 million increase in operating revenues is primarily due to an increase in energy revenues of $1.4 million resulting from the escalations in the quarterly unit energy costs in 2004 and due to an increase in capacity payments of $0.3 million resulting from the escalation of the fixed operation and maintenance component of the capacity payment from FPL in 2004.

Cost of Sales

Costs of sales for the six months ended June 30, 2004 were approximately $52.0 million as compared to $53.7 million for the corresponding period in the prior year. The overall cost of fuel and ash decreased $1.2 million resulting primarily from the decrease in coal transportation costs. In the three months ended June 30, 2003 the Partnership paid Lodestar Energy, Inc. $0.8 million to terminate the coal purchase agreement and paid an additional $1.6 million to CSX Transportation (“CSX”) based on the then current tariff rates for delivered coal, which were approximately 30% higher than system car rates. The tariff rates were in effect until the Partnership and CSX entered into a Coal Transportation Agreement on August 6, 2003. The difference between the tariff rates and the system car rates for all coal shipments for the period from April 1, 2003 through the effective date of the Coal Transportation Agreement was subsequently reimbursed to the Partnership in the third quarter of 2003. The cost of natural gas used to stabilize the plant when responding to dispatch requests from FPL decreased in 2004 by $0.3 million due to a decrease in gas utilized compared to the same period in 2003. Offsetting are lime costs that increased by a total of $0.9 million primarily due to a temporary interruption of deliveries in March 2004 from the supplier, Chemical Lime, caused by the shut-down of their processing facility for a two-week maintenance outage. This resulted in a higher transportation price paid by the Partnership for replacement lime. Also, an increase in lime usage resulted from an increase in the sulfur content of coal reduced lime quality. Ash disposal costs increased by $0.6 million due to an alternate method of pugging, which is a process of adding water to the ash to make it transportable by truck.

Operating and maintenance costs have decreased by $0.5 million. In the six months ended June 30, 2003 the Partnership incurred additional costs for tube leak repairs in the main boiler, as well as repairs to one auxiliary boiler.

15

Other Operating Expenses

Other operating expenses decreased by $0.7 million primarily due to the absence of legal and consulting costs incurred in the six months ended June 30, 2003 associated with the termination of the Coal Purchase Agreement with Lodestar Energy, Inc. and the execution of the replacement Coal Purchase and Sales Agreement with Massey.

Non-Operating Income (Expense)

Net interest expense for the six months ended June 30, 2004 and 2003 was approximately $26.6 million and $27.3 million, respectively. June 2003 and December 2003 principal payments of Series A-9 of the first mortgage bonds decreased interest expense by approximately $0.7 million. For the six months ended June 30, 2003 interest on letter of credit loans and subordinated debt amounted to $0.5 million. This was offset by an increase in letter of credit fees for the six months ended June 30, 2004 of $0.5 million.

Liquidity and Capital Resources

Net cash provided by operating activities for the six months ended June 30, 2004 was approximately $13.2 million as compared to $11.1 million for the corresponding period in 2003. Net cash provided by operating activities represents net income, adjusted by non-cash expenses and income, which primarily consist of depreciation, amortization and accretion, plus the net effect of changes within the Partnership’s operating assets and liability accounts. Net income for the six months ended June 30, 2004 increased by $4.9 million from the corresponding period in 2003. Depreciation, amortization and accretion increased in 2004 by $0.2 million from 2003 due to the deferred financing costs for the replacement letters of credit. Inventories and fuel reserves increased in 2004 by $0.4 million from 2003 due to the timing of coal shipments. Accounts receivable increased in 2004 by $0.2 million from 2003 primarily due to an increase in energy revenue in the first quarter of 2004 caused by an increase in unit energy cost adjustment for the fourth quarter of 2003. Deposits and prepaids decreased in 2004 by $0.1 million from 2003 and accounts payable, accrued liabilities and accrued interest decreased in 2004 by $3.4 million from 2003.

Net cash provided by investing activities for the six months ended June 30, 2004 was approximately $4.6 million as compared net cash used in investing activities of $2.8 million for the six months ended June 30, 2003. Net cash provided by investing activities increased due to a decrease in investments held by trustee.

Net cash used in financing activities for the six months ended June 30, 2004 was $18.3 million compared to $8.2 million for the corresponding period in 2003. The increase is due to a partner distribution of $9.7 million and an increase in the payment of overall debt of $0.4 million.

The Partnership believes that it will have adequate cash flows from operations in 2004 to timely fund future working capital requirements and to cover debt repayment obligations.

16