1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number (Under the Securities Act of 1933) 33-37977
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2726166
------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 PROGRESS PLACE, MIDLAND, MICHIGAN 48640
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 839-6000
--------------
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 such 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. Yes X No
--- ---
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF
(In Thousands)
June 30,
1996 December 31,
ASSETS (Unaudited) 1995
- - ------ ----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 189,727 $ 163,953
Restricted cash and cash equivalents 13,923 13,455
Accounts receivable 74,816 64,021
Gas inventory 6,326 14,396
Unamortized property taxes 12,899 -
Prepaid expenses and other 4,962 1,053
---------- ----------
Total current assets 302,653 256,878
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 2,378,424 2,357,881
Pipeline 21,222 21,410
---------- ----------
Total property, plant and equipment 2,399,646 2,379,291
Accumulated depreciation (483,877) (431,749)
---------- ----------
Net property, plant and equipment 1,915,769 1,947,542
---------- ----------
OTHER ASSETS:
Restricted non-current cash and cash equivalents 139,841 139,852
Deferred financing costs, net of accumulated
amortization of $7,651 and $7,059, respectively 10,926 11,518
Materials, supplies and other 5,789 4,740
---------- ----------
Total other assets 156,556 156,110
---------- ----------
TOTAL ASSETS $2,374,978 $2,360,530
========== ==========
LIABILITIES AND PARTNERS' EQUITY
- - --------------------------------
CURRENT LIABILITIES:
Accounts payable, accrued and other liabilities $ 81,073 $ 54,390
Interest payable 90,693 91,840
Current portion of long-term debt 75,252 72,190
---------- ----------
Total current liabilities 247,018 218,420
---------- ----------
NON-CURRENT LIABILITIES:
Long-term debt 1,978,776 2,007,815
Other 392 335
---------- ----------
Total non-current liabilities 1,979,168 2,008,150
---------- ----------
CONTINGENCIES
TOTAL LIABILITIES 2,226,186 2,226,570
---------- ----------
PARTNERS' EQUITY 148,792 133,960
---------- ----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $2,374,978 $2,360,530
========== ==========
The accompanying condensed notes are an integral part of these statements.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
OPERATING REVENUES:
Capacity $100,275 $ 99,751 $191,574 $200,131
Electric 56,052 46,872 108,164 96,276
Steam and other 6,647 6,502 14,257 13,853
-------- -------- -------- --------
Total operating revenues 162,974 153,125 313,995 310,260
-------- -------- -------- --------
OPERATING EXPENSES:
Fuel costs 66,287 54,744 130,724 112,470
Depreciation 26,166 23,441 52,369 46,869
Operations 3,693 3,311 7,852 6,753
Maintenance 3,255 3,072 7,521 6,154
Property and single business
taxes 6,545 6,527 13,173 13,226
Administrative, selling and
general 1,971 2,088 4,200 4,505
-------- -------- -------- --------
Total operating expenses 107,917 93,183 215,839 189,977
-------- -------- -------- --------
OPERATING INCOME 55,057 59,942 98,156 120,283
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest and other income 4,325 4,147 8,081 7,664
Interest expense (46,197) (47,736) (91,405) (94,453)
-------- -------- -------- --------
Total other income
(expense), net (41,872) (43,589) (83,324) (86,789)
-------- -------- -------- --------
NET INCOME $ 13,185 $ 16,353 $ 14,832 $ 33,494
======== ======== ======== ========
The accompanying condensed notes are an integral part of these statements.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (Unaudited)
(In Thousands)
Six Months Ended
June 30, 1996
---------------------------------
General Limited
Partners Partners Total
----------- -------- ---------
BALANCE, BEGINNING OF PERIOD $ 105,264 $ 28,696 $ 133,960
Net income 12,914 1,918 14,832
--------- --------- ---------
BALANCE, END OF PERIOD $ 118,178 $ 30,614 $ 148,792
========= ========= =========
The accompanying condensed notes are an integral part of this statement.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Six Months Ended
June 30,
----------------
1996 1995
------- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,832 $ 33,494
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 52,961 47,482
Increase in accounts receivable (10,795) (549)
Decrease in gas inventory 8,070 383
Increase in unamortized property taxes (12,899) (11,883)
Increase in prepaid expenses and other (3,909) (1,146)
Increase in materials, supplies and other (1,049) (1,398)
Increase in accounts payable, accrued and other liabilities 26,683 661
Decrease in interest payable (1,147) (1,002)
Increase (decrease) in other non-current liabilities 57 (59)
-------- --------
Net cash provided by operating activities 72,804 65,983
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant and equipment (20,596) (12,666)
-------- --------
Net cash used in investing activities (20,596) (12,666)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (25,977) (22,721)
Decrease (increase) in restricted non-current cash and
cash equivalents 11 (1,346)
-------- --------
Net cash used in financing activities (25,966) (24,067)
-------- --------
NET INCREASE IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH -- CURRENT 26,242 29,250
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -- CURRENT,
AT BEGINNING OF PERIOD 177,408 132,980
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -- CURRENT, -------- --------
AT END OF PERIOD $203,650 $162,230
======== ========
The accompanying condensed notes are an integral part of these statements.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements and condensed notes should be read
along with the audited financial statements and notes as contained in the
Annual Report on Form 10-K for the year ended December 31, 1995 of Midland
Cogeneration Venture Limited Partnership ("MCV") which includes the Report of
Independent Public Accountants. In the opinion of management, the unaudited
information herein reflects all adjustments (which include only normal
recurring adjustments) necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented.
Prior period amounts have been reclassified for comparative purposes. These
reclassifications had no effect on net income. The consolidated financial
statements include the accounts of MCV and its wholly owned subsidiaries. All
material transactions and balances among entities which comprise MCV have been
eliminated in the consolidated financial statements.
(1) THE PARTNERSHIP AND ASSOCIATED RISKS
MCV was organized to construct, own and operate a combined-cycle, gas-
fired cogeneration facility (the "Facility") located in Midland, Michigan.
MCV was formed on January 27, 1987, and the Facility entered into
commercial operation in 1990.
In February 1992, MCV acquired the outstanding common stock of PVCO
Corp., a previously inactive company. MCV and PVCO Corp. entered into a
partnership agreement to form MCV Gas Acquisition General Partnership for
the purpose of buying and selling natural gas on the spot market and other
transactions involving natural gas activities.
The Facility is designed to provide approximately 1,370 megawatts
("MW") of electricity and a maximum of 1.5 million pounds of process steam
per hour. MCV has contracted to supply up to 1,240 MW of electric capacity
to Consumers Power Company ("Consumers") for resale to its customers, to
supply electricity and steam to The Dow Chemical Company ("Dow") under the
Steam and Electric Power Agreement ("SEPA") and to supply steam to Dow
Corning Corporation ("DCC") which commenced in July 1996, under the Steam
Purchase Agreement ("SPA"). Results of operations are primarily dependent
on successfully operating the Facility at or near contractual capacity
levels and on Consumers' ability to honor its obligations under the Power
Purchase Agreement ("PPA") with MCV. Sales pursuant to the PPA are
expected to account for over 90% of MCV's revenue over the next ten years.
The Facility is a qualifying cogeneration facility ("QF") certified by
the Federal Energy Regulatory Commission ("FERC") under the Public Utility
Regulatory Policies Act of 1978, as amended ("PURPA"). In order to
maintain QF status, certain operating and efficiency standards must be
maintained on a calendar-year basis. In the case of a topping-cycle
generating plant such as the Facility, the applicable operating standard
requires that the portion of total energy output that is put to some useful
purpose other than facilitating the production of power (the "Thermal
Percentage") be at least 5%. In addition, the Facility must achieve a
PURPA efficiency standard (the sum of the useful power output plus one-half
of the useful thermal energy output, divided by the energy input (the
"Efficiency Percentage")) of at least 45%. If the Facility maintains a
Thermal Percentage of 15% or higher, the required Efficiency Percentage is
reduced to 42.5%. Since 1990, the Facility has achieved the applicable
Thermal and Efficiency Percentages. For the six months ended June 30,
1996, the Facility has achieved a Thermal Percentage of 15.4% and a PURPA
Efficiency Percentage of 45.3%. The loss of QF status could, among other
things, cause the Facility to lose its rights under PURPA to sell power to
Consumers at Consumers' "avoided cost" and subject the Facility to
additional federal and state regulatory requirements. MCV believes that,
given projected levels of steam and electricity sales, coupled with
continued diligent operating practices, the Facility will meet the required
Thermal and the corresponding Efficiency Percentages in 1996.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Facility is wholly dependent upon natural gas for its fuel supply
and a substantial portion of the Facility's operating expenses will consist
of the costs of obtaining natural gas. MCV recognizes that its existing
gas contracts are not sufficient to satisfy the anticipated gas needs over
the term of the PPA and, as such, no assurance can be given as to the
availability or price of natural gas after the expiration of the existing
gas contracts. In addition, to the extent that the costs associated with
production of electricity rise faster than the energy charge payments,
MCV's financial performance will be negatively affected. The amount of
such impact will depend upon the amount of the average energy charge
payable under the PPA, which is based upon costs incurred at Consumers'
coal-fired plants and upon the amount of energy scheduled by Consumers for
delivery under the PPA. However, given the unpredictability of these
factors, the overall economic impact upon MCV of changes in future fuel
costs under new or existing contracts cannot accurately be predicted.
Other Matters
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This standard requires that long-lived assets and identifiable
intangibles that are used in the operations be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets might not be recoverable or information indicates that
an impairment might exist. The partnership adopted this standard on
January 1, 1996, the adoption of this standard has not had an impact on the
financial position or results of operations.
(2) RESTRICTED CASH AND CASH EQUIVALENTS
Current and non-current restricted cash and cash equivalents consist of the
following as of (in thousands):
June 30, December 31,
1996 1995
-------- ------------
Current:
Funds restricted for plant modifications $ 13,923 $ 13,455
======== ========
Non-current:
Funds restricted for rental payments pursuant
to the Overall Lease Transaction $139,478 $139,546
Funds restricted for management non-qualified plans 363 306
-------- --------
$139,841 $139,852
======== ========
(3) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of (in
thousands):
June 30, December 31,
1996 1995
-------- ------------
Accounts payable
Related parties $16,830 $ 11,652
Trade creditors 26,847 26,956
Property and single business taxes 27,792 13,675
Other 9,604 2,107
------- --------
Total $81,073 $ 54,390
======= ========
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) LONG-TERM DEBT
Long-term debt consists of the following as of (in thousands):
June 30, December 31,
1996 1995
-------- ------------
Financing obligation, maturing through 2015,
effective interest rate of approximately 8.7%,
payable in semi-annual installments of principal
and interest, secured by property, plant and
equipment $ 2,054,028 $ 2,080,005
Less current portion (75,252) (72,190)
----------- -----------
Total long-term debt $ 1,978,776 $ 2,007,815
=========== ===========
Financing Obligation
In 1990, MCV obtained permanent financing for the Facility by entering
into sale and leaseback agreements ("Overall Lease Transaction") with a
lessor group ("Owner Participants"), related to substantially all of MCV's
fixed assets. Proceeds of the financing were used to retire borrowings
outstanding under existing loan commitments, make a capital distribution
to the Partners and retire a portion of the notes issued by MCV to MEC
Development Corporation ("MDC") in connection with the transfer of certain
assets by MDC to MCV. In accordance with SFAS No. 98, "Accounting For
Leases," the sale and leaseback transaction has been accounted for as a
financing arrangement.
Interest and fees incurred related to long-term debt arrangements
during the six months ended June 30, 1996 and 1995 were $90.8 million and
$93.8 million, respectively. Interest and fees paid for the six months
ended June 30, 1996 and 1995 were $92.0 million and $94.9 million,
respectively.
(5) CONTINGENCIES
PPA - 25 MW Regulatory Disallowance, Fixed Energy Payments for
Deliveries Above the Caps
On February 23, 1995, the Michigan Public Service Commission ("MPSC")
in Case No. U-10155-R (the 1993 power supply cost recovery reconciliation
proceeding conducted by the MPSC to reconcile actual costs incurred by
Consumers in 1993 in providing power supply to its customers with actual
revenues it collected that same year), ruled that Consumers could not
recover the full 915 MW of MCV capacity and fixed energy charges provided
under the terms of the 1993 revised settlement proposal approved by the
MPSC in Case Nos. U-10127 and U-8871 et al. Instead, the MPSC "allocated"
approximately 25 MW of MCV capacity to "non-jurisdictional" customers
(i.e. customers not subject to PSCR rates), resulting in a disallowance to
Consumers of approximately $7.4 million of which approximately $.7 million
relates to fixed energy charges. In addition, the MPSC ruled in this case
that Consumers could not recover approximately $.6 million of fixed energy
charges payable to MCV for energy delivered above the off-peak cap of 732
MW. (Consumers has paid into escrow approximately $.4 million of this sum
and the balance was paid to MCV.) Consumers and MCV have appealed the MPSC
February 23, 1995 Order to the Michigan Court of Appeals where the matter
is pending. MCV management cannot predict the outcome of this proceeding.
Under the "regulatory out" provision of the PPA Consumers may, under
certain conditions, be relieved of paying energy charges to MCV to the
extent the MPSC does not allow Consumers to recover such charges from its
customers. Consumers is not permitted for the first 17 1/2 years of the
PPA to reduce capacity payments to
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
MCV below an average rate of 3.77 cents per kWh for available contract
capacity as a result of the regulatory disallowance described above. On
October 19, 1995, Consumers notified MCV that pursuant to the "regulatory
out" provision of the PPA, it would be increasing the amount being
escrowed each month to reflect its calculation of fixed energy charge
payments related to the 25 MW disallowed by the MPSC described above. In
addition, Consumers requested a refund from MCV of $1.9 million plus
interest, for the calendar years 1993 and 1994 and the first eight months
of 1995. On November 21, 1995, MCV responded to Consumers indicating that
MCV would, pursuant to the PPA, refund the appropriate funds, if any, and
determine the appropriate escrowing of funds, if any, at such time as a
final and non-appealable order disallowing these recoveries is entered.
As of June 30, 1996, MCV has not recognized as operating revenues
approximately $2.5 million for amounts placed in escrow and the potential
refund. Currently, Consumers is escrowing approximately $66,000 per month
in fixed energy charge payments from MCV due to this issue.
In addition, as part of its order in Consumers' 1994 PSCR Plan
proceedings, the MPSC, on August 18, 1994, ruled that for 1994 Consumers
would not be permitted to recover fixed energy costs during off-peak hours
for energy delivered above the availability "caps" contained in the
Settlement Order and below 915 MW. MCV believes the MPSC order on this
issue is erroneous and has filed an appeal of the MPSC decision. Other
PSCR Plan and Reconciliation Cases for the years 1994 - 1996 are pending
before the MPSC at this time. MCV Management cannot predict the outcome of
these proceedings. For the first six months of 1996 and the years 1995
and 1994 Consumers has escrowed approximately $1.3 million, $.5 million
and $.5 million, respectively, of fixed energy charges payable to MCV
based on this MPSC ruling and continues escrowing approximately $.2
million per month for this portion of fixed energy charges. MCV has not
recognized these amounts as operating revenues.
Fuel Matters
MCV has entered into long-term gas transportation arrangements with
four U.S. interstate transporters: ANR Pipeline Company, Panhandle
Eastern Pipe Line Company, Trunkline Gas Company and Great Lakes Gas
Transmission Company ("Great Lakes"). The transportation rates from these
transporters are subject to FERC regulation.
In 1990, Great Lakes expanded its interstate pipeline system to
accommodate gas purchases from MCV and other customers. Historically,
such capital costs were "rolled-in" to the rate base, thus combining the
capital cost of common use facility additions with the cost of existing
common use facilities for the purpose of determining the transportation
rates to be charged to all system shippers. In 1991, FERC issued an order
that rejected rolled-in pricing for the MCV-related expansion costs and,
instead, imposed incremental pricing which, for MCV, took effect April 1,
1993. The incremental methodology allocates the capital cost of facility
additions solely to the new shippers who will gain access to the expanded
facilities. FERC's decision was appealed by MCV and others to the United
States Court of Appeals for the District of Columbia Circuit, which held
that FERC had failed to adequately explain the adoption of incremental
rates and remanded the orders to FERC for reconsideration. On July 26,
1995, FERC issued its Order on Remand reversing its prior order and
directed Great Lakes to: (i) implement rolled-in rates prospectively
beginning October 1, 1995, for the expansion facilities including those
applicable to MCV; and (ii) refund to MCV, subject to FERC approval, the
principal amount, excluding interest, paid in excess of rolled-in rates.
The estimated economic effect to MCV of this order is twofold. First,
annual transportation costs on the Great Lakes system will decrease
approximately $7.0 million per year as compared to incremental pricing.
Second, the refund to MCV will be approximately $17.5 million (excluding
interest) which includes a $3.4 million refund for fuel usage during
transportation. On April 25, 1996, FERC affirmed its Order on Remand as
it pertains to the MCV issues described above ("Order on Rehearing"). On
June 3, 1996, FERC granted rehearing for further consideration of its
April 25, 1996 order. Rehearing was requested by, among others, MCV for
clarification of the timing of refunds, surcharges and interest thereon
subsequent to October 1, 1995. On July 31, 1996 FERC clarified its April
25, 1996 order stating that interest on refunds was to commence October 1,
1995 and otherwise denied the relief requested in the petitions for
rehearing. The FERC Order on Rehearing and its July 31, 1996 order
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
are subject to further administrative and judicial process and, MCV and
others have filed appeals to the United States Court of Appeals for the
District of Columbia challenging certain aspects of the Order on Remand.
Management cannot predict the outcome of these proceedings and has not, at
this time, reflected in results of operations any refunds of prior
transportation costs. MCV had, from April 1, 1993 to October 1, 1995,
reflected in current operating results Great Lakes gas transportation
costs associated with incremental pricing.
GTG Equipment Problems
In 1991 and 1992, several gas turbine generators ("GTGs") experienced
cracking in the hot gas casing which, in two cases, caused extensive
damage to the turbine blades. As a result of the cracking problems,
modifications were made on all GTGs and MCV and ABB Power Generation, Inc.
("ABB Power") implemented a program of hot gas casing inspections for all
GTGs. During 1994, ABB Power completed an analysis of cracking problems
present in two of the modified GTG hot gas casings and determined that
additional modifications should be made to the hot gas casings. New hot
gas casings which include these modifications were installed on four units
during the major GTG inspection program in 1995 and are expected to be
installed on the remaining eight units by the first quarter of 1997.
In January 1996, two additional GTGs experienced severe cracking in the
hot gas casing (one of which included the newest hot gas casing
modifications), causing extensive damage to the turbine blades and vanes.
MCV immediately inspected all of the remaining GTG hot gas casings for
evidence of cracking and identified an additional five GTGs which required
casing replacements. During the first quarter of 1996, MCV and ABB Power
increased the frequency of inspections on these units which resulted in
additional scheduled and unscheduled maintenance outages. Extensive
analysis and review by MCV and ABB Power has concluded that crack
initiation tended to start in high stress areas of the hot gas casing and
that pulsations were the key factor in crack propagation in these units.
MCV and ABB Power have modified the burner geometry of the affected
turbines which has significantly reduced pulsations in the hot gas
casings. MCV has also installed additional measuring devices to detect
any pulsations which are suspected of accelerating crack propagation. In
addition, MCV and ABB Power continue to study whether any modifications
are needed in the high stress areas of the hot gas casings. In May 1996,
MCV successfully completed its second round of 800 hour GTG inspections
which indicated no additional cracking. Therefore, MCV has increased its
GTG inspections to 2000 hours on certain units. MCV believes that the
burner modifications have resolved the pulsation problems and there should
be no significant future impacts on plant availability or efficiency,
although no assurance can be given that additional equipment problems will
not occur.
The cost of casing replacements and modifications is covered by ABB
Power (with the exception of insurable events) pursuant to the amended
Service Agreement, under which ABB Power is providing hot gas path parts
for MCV's twelve gas turbines for the next three series of major GTG
inspections which are expected to be completed by the year 2002.
MCV's insurance carriers continue to monitor and review all the GTG
inspection findings. At this time, MCV currently maintains property
insurance policies that include the hot gas casing equipment and are in
effect through the first quarter of 1997. Failure to maintain insurance
is an Event of Default under the Overall Lease Transaction.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(6) PARTNERS' EQUITY AND RELATED PARTY TRANSACTIONS
The following table summarizes the nature and amount of each of MCV's
Partner's equity interest, interest in profits and losses of MCV at June
30, 1996, and the nature and amount of related party transactions or
agreements that existed with the Partners or affiliates as of June 30, 1996
and 1995, and for each of the six month periods ended June 30 (in
thousands).
Equity Partner, Type of Partner Equity Related Party Transactions
and Nature of Related Party Interest Interest and Agreements 1996 1995
- - ------------------------------ -------- -------- ---------------------------- ------ ------
CMS Midland, Inc. $ 72,908 49.0% Power purchase agreement $289,909 $ 286,908
General Partner; wholly-owned Power purchase agreement administrative fees 12 12
subsidiary of Consumers Power Purchases under gas transportation agreements 4,716 4,627
Company Purchases under spot gas agreements 1,498 (10)
Purchases under gas supply agreements 5,283 3,585
Gas storage agreement 1,282 1,282
Land lease/easement agreements 300 300
General construction/service/engineering
agreement 62 41
Facilities agreement - transmission line and
metering facility maintenance 16 9
Accounts receivable 50,406 46,576
Accounts payable 5,940 3,355
Gas exchanges 3,208 5,409
The Dow Chemical Company 24,146 7.5 Steam and electric power agreement 24,087 23,353
Limited Partner Purchases under demineralized water supply
agreement 3,085 2,737
Rent under office building lease agreement 200 199
Accounts receivable 6,264 6,146
Accounts payable 1,305 949
Standby and backup fees 758 494
Source Midland Limited Partnership 21,557 18.1 Purchases under gas transportation agreements 7,661 6,406
General Partner; affiliate of Purchases under spot gas agreements 3,044 1,122
PanEnergy Corp Accounts receivable -- 3
Accounts payable 1,345 1,415
Gas exchanges 2,082 207
Coastal Midland, Inc. 12,934 10.9 Purchases under gas transportation agreements 7,111 11,202
General Partner; wholly-owned Purchases under spot gas agreement 6,796 6,580
subsidiary of The Coastal Purchases under gas supply agreement 2,282 1,280
Corporation Gas agency agreement 660 395
Deferred reservation charges under gas
purchase agreement 2,955 1,757
Accounts receivable 631 --
Accounts payable 5,060 5,082
Gas exchanges 3,412 1,123
MEI Limited Partnership 10,779 9.1 Gas turbine maintenance and spare parts
General Partner; affiliate of agreement 15,155 11,349
ASEA Brown Boveri, Inc. Accounts payable 1,259 325
Partner cash withdrawal (including accrued
interest)** 4,173 --
Micogen Limited Partnership 5,389 4.5 Maintenance/Engineering agreement -- 243
Limited Partner; affiliate of Accounts payable -- 14
Fluor Corporation Computer maintenance software agreement -- 15
Partner cash withdrawal (including accrued
interest)** 1,874 --
C-E Midland Energy, Inc. 1,078 .9 Service Agreement 4,130 1,532
Limited Partner; wholly-owned Accounts Payable 1,915 336
subsidiary of Combustion
Engineering, Inc. which is a
wholly-owned subsidiary
of ASEA Brown Boveri, Inc.
Alanna Corporation 1* .00001 Note receivable 1 1
Limited Partner; wholly-owned
subsidiary of Alanna Holdings
Corporation
* Alanna's capital stock is pledged to secure MCV's obligation under the lease
and other overall lease transaction documents.
** In exchange for a letter of credit pursuant to the Participation Agreement.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
This MD&A should be read along with the MD&A in the Annual Report on Form 10-K
for the year ended December 31, 1995 of the Midland Cogeneration Venture
Limited Partnership ("MCV").
Results of Operations
Operating Revenue Statistics
The following represents significant operating revenue statistics for the
following periods (dollars in thousands except average rates):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Operating Revenues $ 162,974 $ 153,125 $ 313,995 $ 310,260
Capacity Revenue $ 100,275 $ 99,751 $ 191,574 $ 200,131
PPA Contract Capacity (MW) 1,240 1,240 1,240 1,240
PPA Availability 98.2% 97.7% 93.7% 98.5%
Electric Revenue $ 56,052 $ 46,872 $ 108,164 $ 96,276
Average PPA Variable Energy Rate ($/MWh) $ 17.00 $ 17.23 $ 17.00 $ 17.35
Average PPA Fixed Energy Rate ($/MWh) $ 4.09 $ 4.00 $ 4.05 $ 3.80
PPA Delivery as a Percentage of Contract Capacity 91.0% 73.4% 87.7% 76.3%
PPA and SEPA Electric Deliveries (MW) 2,597,297 2,116,253 5,017,834 4,371,973
Steam and Other Revenue $ 6,647 $ 6,502 $ 14,257 $ 13,853
Steam Deliveries (Mlbs) 1,116,640 1,051,750 2,603,550 2,434,920
Comparison of the Three Months Ended June 30, 1996 and 1995
Overview
For the second quarter of 1996, MCV recorded net income of $13.2 million as
compared with net income of $16.4 million for the second quarter of 1995. The
decrease in net income for the second quarter of 1996 as compared to 1995 is
primarily the result of higher natural gas prices, partially offset by a higher
electric dispatch under the PPA.
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Operating Revenues
For the second quarter of 1996, MCV's operating revenues increased $9.8 million
from the second quarter of 1995 due primarily to higher electric revenue
generated under the PPA. The increase in 1996 second quarter electric revenue
of $9.2 million is primarily the result of Consumers' decision to increase
MCV's electric dispatch in 1996 consistent with the terms of the Proposed
Settlement. (See Part II, Item 1, "Legal Proceedings - MPSC Proceedings
Relating to Capacity and Energy Charges" for definition of Proposed
Settlement.) The capacity revenue increase of $.5 million is the result of
higher capacity payments under the PPA due to fewer scheduled and unscheduled
maintenance outages of the GTG's during the second quarter of 1996.
Operating Expenses
For the second quarter of 1996, MCV's operating expenses were $107.9
million, which includes $66.3 million of fuel costs. During this period, MCV
used approximately 24.3 billion cubic feet ("bcf") of natural gas at an average
fuel rate of $2.35 per MMBtu. For the second quarter of 1995, operating
expenses were $93.2 million, which includes $54.7 million of fuel costs.
During this period, MCV used approximately 20.3 bcf of natural gas at an
average fuel rate of $2.15 per MMBtu. The increase in fuel costs for the
second quarter of 1996 of $11.5 million compared to 1995 is due to an increase
in fuel usage resulting from the higher Consumers dispatch level and to an
increase in natural gas prices in the short-term market.
For the second quarter of 1996, operating expenses other than fuel costs
increased $3.2 million over the second quarter of 1995 due primarily to higher
depreciation expense resulting from the amortization of increased payments for
hot gas path parts and an additional allowance for potential insurance claims
on the two hot gas casings which experienced severe cracking during the first
quarter of 1996 (and consequent damage to the turbine blades and vanes). Other
expenses incurred in these periods were considered normal expenditures to
achieve the recorded operating revenues.
Other Income (Expense)
The decrease in interest expense in the second quarter of 1996 from the second
quarter of 1995 is due to a lower principal balance on MCV's financing
obligation.
Comparison of the Six Months Ended June 30, 1996 and 1995
Overview
For the first six months of 1996, MCV recorded net income of $14.8 million as
compared with net income of $33.5 million for the first six months of 1995.
The decrease in net income for the first six months of 1996 as compared to 1995
is primarily the result of lower available capacity under the PPA due to first
quarter 1996 equipment problems, higher natural gas prices and higher
depreciation expense.
Operating Revenues
For the first six month of 1996, MCV's operating revenues increased $3.7
million from the first six months of 1995 due primarily to higher electric
revenue generated under the PPA, which was partially offset by lower capacity
revenue under the PPA. The increase in electric revenue during the first six
months of 1996 of $11.9 million is primarily the result of Consumers' decision
to increase MCV's electric dispatch in 1996 consistent with the terms of the
Proposed Settlement. The capacity revenue reduction of $8.6 million is the
result of lower capacity payments under the PPA due to additional scheduled and
unscheduled maintenance outages on the hot gas casing equipment during the
first quarter of 1996.
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Operating Expenses
For the first six months of 1996, MCV's operating expenses were $215.8 million,
which includes $130.7 million of fuel costs. During this period, MCV used
approximately 47.8 billion cubic feet ("BCF") of natural gas at an average fuel
rate of $2.35 per MMBtu. For the first six months of 1995, operating expenses
were $190.0 million, which includes $112.5 million of fuel costs. During this
period, MCV used approximately 42.2 bcf of natural gas at an average fuel rate
of $2.17 per MMBtu. The increase in fuel costs for the first six months of
1996 of $18.2 million compared to 1995 is due to an increase in fuel usage
resulting from the higher Consumers dispatch level and to an increase in
purchases of more expensive long-term gas over short-term gas purchases since
there has been a substantial rise in short-term market prices over the first
six months of 1995.
For the first six months of 1996, operating expenses other than fuel costs
increased $7.6 million over the first six months of 1995 due primarily to
higher depreciation expense resulting from the amortization of increased
payments for hot gas path parts and an allowance for potential insurance claims
on the two hot gas casings which experienced severe cracking (and consequent
damage to the turbine blades and vanes). Other expenses incurred in these
periods were considered normal expenditures to achieve the recorded operating
revenues.
Other Income (Expense)
The decrease in interest expense in the first six months of 1996 from the first
six months of 1995 is due to a lower principal balance on MCV's financing
obligation.
Liquidity and Financial Resources
During the first six months of 1996 and 1995, net cash generated by MCV's
operations was $72.8 million and $66.0 million, respectively. The primary use
of cash was for the payment of interest and principal on the financing
obligation, fuel costs, maintenance costs and other operating expenses. MCV's
cash and cash equivalents have a normal cycle of collecting six months of
revenues less operating expenses prior to making the semiannual interest and
principal payments of the financing obligation due in January and July for the
next nineteen years. During the first six months of 1996, and 1995, MCV paid
the basic rent requirements of $117.8 million and $117.5 million, respectively,
as required under the Overall Lease Transaction.
MCV also has arranged for a $50 million working capital line ("Working Capital
Facility") from Bank of Montreal to provide temporary financing, as necessary,
for operations. The Working Capital Facility has been secured by MCV's natural
gas inventory and earned receivables. At any given time, borrowings and
letters of credit are limited by the amount of the borrowing base, defined as
90% of earned receivables. The borrowing base varies over the month as
receivables are earned, billed and collected. At June 30, 1996, the borrowing
base was $47.3 million. The Working Capital Facility term currently extends to
August 31, 1996 and is expected to be extended beyond that date.
MCV did not utilize the Working Capital Facility during the first six months of
1996. MCV believes that amounts available to it under the Working Capital
Facility will be sufficient to meet working capital shortfalls, primarily
during months when rent payments are due. In addition, affiliates of certain
MCV Partners have agreed (under certain conditions and for a limited time) to
make loans to MCV in an aggregate amount not to exceed $10 million to cover
working capital expenses, as appropriate. To date, MCV has not made any
borrowings under these agreements with MCV Partners.
Since January 1992, MCV has experienced a reduction in the energy charges it
is paid for electricity under the PPA due both to declining coal costs at
Consumers' generating plants and Consumers' ability, under the "regulatory out"
provisions of the PPA, to withhold fixed energy charges for available but
undelivered energy. These circumstances have resulted in rent coverage ratios
(as defined in the Overall Lease Transaction) of less than 1.11 to 1.00. If
there are continued reductions in energy charges relative to MCV's cost of fuel
used in production, there could be a material adverse impact on MCV's ability
to make future rental payments out of cash flow from operations. For the
foreseeable future, MCV expects to fund current operating expenses, payments
under the amended Service
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Agreement and rental payments primarily through cash flow from operations. If
necessary, MCV could fund any operating cash flow shortfalls from cash reserves
to the extent available for such purposes. As of June 30, 1996, there was
$218.4 million (which includes $34.8 million reserved for capital improvements
and spare parts purchases), including accrued interest, in available reserves
for such purposes.
Outlook
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995. The following discussion of the outlook for MCV contains certain
"forward-looking statements" as defined by the Private Securities Litigation
Reform Act of 1995 (the "Act"), including (without limitation) discussion as to
expectations, beliefs, plans, objectives and future financial performance, or
assumptions underlying or concerning matters discussed reflecting MCV's current
expectations of the manner in which the various factors discussed therein may
affect its business in the future. Any matters that are not historical facts
are forward-looking and, accordingly, involve estimates, assumptions, and
uncertainties which could cause actual results or outcomes to differ materially
from those expressed in the forward-looking statements. Accordingly, this
"Safe Harbor" Statement contains additional information about such factors
relating to the forward-looking statements. There is no assurance that MCV's
expectations will be realized or that unexpected events will not have an
adverse impact on MCV's business.
Some important factors that could cause actual results or outcomes to
differ materially from those discussed in the forward-looking statements
include prevailing governmental policies and regulatory actions (including
those of the Federal Energy Regulatory Commission and the Michigan Public
Service Commission) with respect to cost recovery under the PPA, acquisition
and disposal of assets and facilities, operation and construction of plant
facilities including natural gas pipeline and storage facilities, and present
or prospective wholesale and retail competition, among others. The business
and profitability of the Company is also influenced by economic factors,
weather conditions, pricing and transportation of commodities, inflation, among
other important factors. All such factors are difficult to predict, contain
uncertainties which may materially affect actual results, and are beyond the
control of MCV.
Results of operations are largely dependent on successfully operating the
Facility at or near contractual capacity levels, the availability of natural
gas, the level of energy rates paid to MCV relative to the cost of fuel used
for generation, Consumers' performance of its obligations under the PPA, and
maintenance of the Facility's QF status.
Operating Outlook. Approximately 70% of PPA revenues are capacity payments
which are based on the Facility's availability. PPA availability was 98.1% in
1995 and 97.2% in 1994. In future years, PPA availability is expected to
decline from the historically high levels as Contract Capacity is sustained at
the PPA contractual level of 1240 MW. Availability will depend on the level of
scheduled and unscheduled maintenance outages, and on the sustained level of
output from each of the GTGs and the steam turbine. MCV expects long-term PPA
availability to exceed 90%.
In 1991 and 1992, several GTGs experienced cracking in the hot gas casing
which, in two cases, caused extensive damage to the turbine blades. As a
result of the cracking problems, modifications were made on all GTGs and MCV
and ABB Power implemented a program of hot gas casing inspections for all GTGs.
During 1994, ABB Power completed an analysis of cracking problems present in
two of the modified GTG hot gas casings and determined that additional
modifications should be made to the hot gas casings. New hot gas casings which
include these modifications were installed on four units during the major GTG
inspection program in 1995 and are expected to be installed on the remaining
eight units by the first quarter of 1997.
In January 1996, two additional GTGs experienced severe cracking in the hot gas
casing (one of which included the newest hot gas casing modifications), causing
extensive damage to the turbine blades and vanes. MCV immediately inspected all
of the remaining GTG hot gas casings for evidence of cracking and identified an
additional five GTGs which required casing replacements. During the first
quarter of 1996, MCV and ABB Power increased the frequency of inspections on
these units which resulted in additional scheduled and unscheduled maintenance
outages. Extensive analysis and review by MCV and ABB Power has concluded that
crack initiation tended to start in high stress areas of the hot gas casing and
that pulsations were the key factor in crack propagation in these units.
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MCV and ABB Power have modified the burner geometry of the affected
turbines which has significantly reduced pulsations in the hot gas casings.
MCV has also installed additional measuring devices to detect any pulsations
which are suspected of accelerating crack propagation. In addition, MCV and
ABB Power continue to study whether any modifications are needed in the high
stress areas of the hot gas casings. In May 1996, MCV successfully completed
its second round of 800 hour GTG inspections which indicated no additional
cracking. Therefore, MCV has increased its GTG inspections to 2000 hours on
certain units. MCV believes that the burner modifications have resolved the
pulsation problems and there should be no significant future impacts on plant
availability or efficiency, although no assurance can be given that additional
equipment problems will not occur.
The cost of casing replacements and modifications is covered by ABB Power (with
the exception of insurable events) pursuant to the amended Service Agreement,
under which ABB Power is providing hot gas path parts for MCV's twelve gas
turbines for the next three series of major GTG inspections which are expected
to be completed by the year 2002.
MCV's insurance carriers continue to monitor and review all the GTG
inspection findings. At this time, MCV currently maintains property
insurance policies that include the hot gas casing equipment and are in effect
through the first quarter of 1997. Failure to maintain insurance is an Event of
Default under the Overall Lease Transaction.
Natural Gas. The Facility is wholly dependent upon natural gas for its fuel
supply and a substantial portion of the Facility's operating expenses will
consist of the costs of obtaining natural gas. Over the last several years
additional gas contracts have been entered into or amended, extending the
period over which fuel supplies are secured. While MCV will continue to pursue
the acquisition of fuel supply beyond the year 2001, MCV recognizes that its
existing gas contracts are not sufficient to satisfy the anticipated gas needs
over the term of the PPA and, as such, no assurance can be given as to the
availability or price of natural gas after the expiration of the existing gas
contracts.
Energy Rates and Cost of Production. Under the PPA, energy charges are based
on the costs associated with fuel inventory, operations and maintenance, and
administrative and general expenses associated with certain of Consumers' coal
plants. However, MCV's costs of producing electricity are tied, in large part,
to the cost of natural gas. To the extent that the costs associated with
production of electricity with natural gas rise faster than the energy charge
payments, which are based largely on Consumers' coal plant operation and
maintenance costs, MCV's financial performance would be negatively affected.
For the period April 1990 through June 1996, the energy charge (fixed and
variable) paid to MCV has declined by .20 cents per kWh, while the average
variable cost of production, as indicated by the average cost of delivered fuel
for the period 1990 - 1995, has risen by $0.05 per MMBtu.
The divergence between variable revenues and costs will become greater if the
energy charge (based largely on the cost of coal) declines or escalates more
slowly than the contract prices under which MCV purchases fuel (generally
escalated at either the total PPA energy charge or 4% per year). The
difference could be further exacerbated in approximately four years as MCV's
gas contracts begin to expire if the cost of replacement fuel is materially
higher than the prices in the expiring contracts.
Energy Payments Under the PPA. On June 7, 1993, Consumers notified MCV that,
based on its interpretation of the 1993 Settlement Order, it would be applying
the "regulatory out" provision of the PPA and withholding fixed energy payments
on energy delivered during off-peak periods above the "availability caps" but
below 915 MW. In the first six months of 1996 and for the years 1995 and 1994
Consumers paid into escrow fixed energy payments of approximately $1.3 million,
$.5 million and $.5 million, respectively, for energy delivered above the
availability caps but below 915 MW. MCV has not recognized these amounts
placed in escrow as operating revenues. MCV and Consumers have appealed the
MPSC orders denying recovery of the fixed energy charges for energy delivered
to Consumers. MCV management cannot predict the outcome of these appeals.
(See Part II, Item 1, " Legal Proceedings - MPSC Proceedings Relating to
Capacity and Energy Charges.")
On February 23, 1995, the MPSC applied the Settlement Order (See Part II, Item
1, "Legal Proceedings - MPSC Proceedings Relating to Capacity and Energy
Charges" for definition of Settlement Order) to Consumers' 1993 Reconciliation
Case and ruled that Consumers could not recover the full 915 MW of MCV capacity
and fixed
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energy charges provided under the terms of the 1993 Revised Settlement Proposal
approved by the MPSC in the Settlement Order. Instead, the MPSC "allocated"
approximately 25 MW of MCV capacity to "non-jurisdictional" customers (i.e.
customers not subject to PSCR rates), resulting in a disallowance to Consumers
of approximately $7.4 million of which approximately $.7 million relates to
fixed energy charges. In addition, the MPSC ruled in this case that Consumers
could not recover approximately $.6 million of fixed energy charges payable to
MCV for energy delivered above the off-peak cap of 732 MW. (Consumers has paid
into escrow approximately $.4 million of this sum and the balance was paid to
MCV). It is likely that the MPSC will apply these types of disallowances in
future PSCR cases unless the Michigan Court of Appeals or other court reverses
the Order of the MPSC. Consumers and MCV have appealed the MPSC February 23,
1995 Order to the Michigan Court of Appeals where the matter is pending. MCV
management cannot predict the outcome of this proceeding.
On October 19, 1995, Consumers notified MCV that pursuant to the
"regulatory out" provision of the PPA, it would be increasing the amount being
escrowed each month, to reflect its calculation of fixed energy charge payments
related to 25 MW disallowed by the MPSC in Consumers' 1993 Reconciliation Case.
In addition, Consumers requested a refund from MCV of $1.9 million plus
interest, for the calendar years 1993 and 1994 and the first eight months of
1995. On November 21, 1995, MCV responded to Consumers indicating that MCV
would, pursuant to the PPA, refund the appropriate funds, if any, and determine
the appropriate escrowing of funds, if any, at such time as a final and
non-appealable order disallowing these recoveries is entered. As of June 30,
1996, MCV has not recognized as operating revenues approximately $2.5 million
for amounts placed in escrow and the potential refund. Currently, Consumers is
escrowing approximately $66,000 per month in fixed energy charge payments from
MCV due to this issue.
On September 8, 1995, Consumers and the MPSC staff filed a motion to create a
consolidated proceeding for the purpose of reviewing a proposed settlement
agreement entered into between the MPSC staff and Consumers related to three
cases: Case No. U-10685, Consumers' electric general rate case; Case No.
U-10787, Consumers' request for approval of a special competitive services
tariff (Rate SCS); and Case No. U-10754, Consumers' application for approval of
revised depreciation rates for electric and common utility plant. MCV is a
party to the consolidated proceeding. The settlement agreement proposes
approving the jurisdictional cost recovery of an additional 325 MW of capacity
purchased from MCV. Cost recovery approval for the 325 MW of MCV contract
capacity would be in addition to the 915 MW already approved by the MPSC.
Recovery would begin January 1, 1996. The initial average capacity charge
recovered would be 2.86 cents per kWh escalating to 3.62 cents per kWh in 2004
and thereafter. On September 22, 1995, MCV filed a position statement not
objecting to the proposed settlement agreement, but reserving all of its rights
and privileges under the PPA. If the settlement is approved as filed it will
likely result in an increase in dispatch under the PPA. Consumers has, in
fact, increased MCV's dispatch in 1996 on the expectation that the proposed
settlement agreement will be approved. This should have a positive impact on
MCV's cash flow and earnings, assuming current gas prices and energy rates
continue in effect. Management cannot predict the outcome of this proceeding.
Maintaining QF Status. In the case of a topping-cycle generating plant such as
the Facility, the applicable operating standard requires that the portion of
total energy output that is put to some useful purpose other than facilitating
the production of power (the "Thermal Percentage") be at least 5%. In
addition, the plant must achieve and maintain an average PURPA efficiency
standard (the sum of the useful power output plus one-half of the useful
thermal energy output, divided by the energy input (the "Efficiency
Percentage")) of at least 45%. However, if the plant maintains a Thermal
Percentage of 15% or higher, the required Efficiency Percentage is reduced to
42.5%. The tests are applied on a calendar year basis. The Facility has
achieved the applicable Efficiency Percentage of 42.5% in each year since
commercial operation, while in 1995 the Facility achieved an Efficiency
Percentage in excess of 45%.
The Facility's achievement of a Thermal Percentage of 15% (thereby
requiring compliance with the reduced Efficiency Percentage of 42.5%) is
dependent upon both the amount of Dow and DCC steam purchases and the level of
electricity generated by the Facility. Dow has agreed to take as much steam as
is necessary for the Facility to retain its QF status under the FERC
regulations in effect on November 1, 1986 (which regulations have not been
revised in relevant part in any material respect), subject to an annual average
purchase obligation of no less than approximately 440,000 lbs/hr. of steam
(less amounts supplied by the Standby Facilities and less 50% of the amount
sold by MCV to other steam customers). The SEPA can be terminated by Dow under
certain circumstances. Such
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termination would likely lead to a loss of QF status for the Facility. The
amounts of steam that Dow is obligated to take under the SEPA are expected to
be sufficient to allow the Facility to maintain a Thermal Percentage of 5%
(which would require the Facility to achieve the 45% PURPA Efficiency
Percentage) but will not be sufficient to allow the Facility to maintain a
Thermal Percentage of 15% (which would allow a reduction of the required PURPA
efficiency standard to 42.5%). As a result of Consumers decision to increase
MCV's electric dispatch in 1996 consistent with the terms of the Proposed
Settlement, energy deliveries under the PPA could exceed 90% of contract
capacity for the year 1996. In that event, Dow and DCC steam purchases must
average approximately 600,000 lbs/hour in 1996 and beyond for the Facility to
achieve a 15% Thermal Percentage. Higher levels of electric energy deliveries
will require higher levels of steam purchases in order to achieve a 15% Thermal
Percentage.
From 1991 through 1995 Dow steam purchases have averaged 504,236 lbs/hr. Dow
steam purchases during the first six months of 1996 averaged 595,914 lbs/hr
reflecting, in part, the relatively high usage of steam related to cold weather
in the first three months of 1996. Actual steam usage has varied and will vary
with product mix, seasonal delivery fluctuations and other factors which may
change over time. Under an agreement signed November 1, 1994, Dow committed to
purchase steam for its corporate center which began in October, 1995. MCV
believes this will add an annual average of approximately 25,000 to 30,000
lbs/hr in steam sales. MCV has also entered an agreement with DCC in which DCC
has committed to purchase steam for its Midland site (under which deliveries
commenced in July 1996), a use MCV believes will add an annual average of
approximately 115,000 lbs/hr in steam sales. Thus, MCV believes steam sales
will be sufficient to allow the Facility to exceed the 15% Thermal Percentage
even if electricity deliveries under the PPA exceed 90% of contract capacity.
MCV believes that, given projected levels of steam and electricity sales, as a
result of recent equipment modifications, and through diligent management of
the issue, the Facility will be able to maintain QF Certification and should be
capable of achieving a 45% PURPA Efficiency Percentage on a long-term basis.
However, no assurance can be given that factors outside MCV's control such as
Dow and DCC steam requirements, Consumers' dispatch of the Facility pursuant to
the Settlement Order or the Proposed Settlement, extended outage of the Unit 1
steam turbine, major malfunctions of other equipment, or degradation of plant
heat rate will not cause the Facility to fail to satisfy the annual PURPA
qualification requirements and thus lose its QF certification. In 1995 MCV
achieved an Efficiency Percentage of 45.2% and an Operating Percentage of
15.7%.
The loss of QF status could, among other things, cause the Facility to lose its
right under PURPA to sell power to Consumers at Consumers' "avoided cost" and
subject the Facility to additional federal and state regulatory requirements,
including the Federal Power Act (under which FERC has authority to establish
rates for electricity based upon the seller's cost of service, which may be
different than existing contractual rates). If the Facility were to lose its
QF status, the Partners of MCV, the Owner Participants, the bank acting as the
Owner Trustee and their respective parent companies could become subject to
regulation under the Public Utility Holding Company Act of 1935 (under which,
among other things, the Securities and Exchange Commission has authority to
order divestiture of assets under certain circumstances). The loss of QF
status would not, however, entitle Consumers to terminate the PPA. Under the
PPA, Consumers is obligated to continue purchasing power from MCV at
FERC-approved rates (provided that the FERC-approved rates do not exceed the
existing contractual rates) and MCV, not Consumers, is entitled to terminate
the PPA (which MCV has covenanted not to do under the Participation
Agreements). There can be no assurance that FERC-approved rates would be the
same as the rates currently in effect under the PPA. If the FERC-approved
rates are materially less than the rates under the PPA, MCV may not have
sufficient revenue to make rent payments under the Overall Lease Transaction.
The loss of QF status would constitute an event of default under the Lease (and
a corresponding event of default under the Indenture) unless, among other
requirements, FERC approves (or accepts for filing) rates under the PPA or
other contracts of MCV for the sale of electricity sufficient to meet certain
target coverage ratios (as defined in the Overall Lease Transaction).
See Part I, Item 1, "Financial Statements -- Notes 1 and 5 to the Condensed
Notes to Unaudited Consolidated Financial Statements" for a further discussion
of associated risks and contingencies.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
MPSC Proceedings Relating to Capacity and Energy Charges
Background. Michigan law requires Consumers to file on an annual basis a
"Power Supply Cost Recovery Plan" (the "PSCR Plan") describing, among other
things, the anticipated sources of electric power to be purchased during the
upcoming year. The PSCR Plan must be filed at least three months before the
beginning of the 12-month period covered by the plan. If the MPSC fails to
allow or disallows the costs of purchased power in the PSCR Plan by the
beginning of the year covered thereby, Consumers may adjust its rates to
recover such costs until the MPSC acts. Actual costs are reconciled with the
costs billed to customers in a subsequent filing (made by March 31 each year)
known as the "Power Supply Cost Reconciliation Proceeding" ("Reconciliation
Case"). By law, the MPSC must disallow in the Reconciliation Case any capacity
charges associated with power purchases for periods in excess of six months
unless the MPSC has previously approved the capacity charge. Under a Michigan
statute known as Act 81, once a capacity charge in a contract for a purchase
from a QF has been approved by the MPSC, the MPSC may not disallow recovery by
the utility of that capacity charge from its customers for a 17-1/2 year period
commencing with commercial operation of the QF.
The PPA. The PPA contains a "regulatory out" provision which permits
Consumers, under certain conditions, to reduce the capacity and energy charges
payable to MCV and/or to receive refunds of capacity and energy charges paid to
MCV under the PPA if the MPSC does not permit Consumers to recover from its
customers the capacity and energy charges specified in the PPA. For the first
17-1/2 years after the Facility's Commercial Operation Date, however, the PPA
further provides that Consumers may not reduce the average capacity charge
below 3.77 cents per kWh notwithstanding the MPSC's failure to approve either
the amount of capacity Consumers has agreed to purchase from MCV under the PPA
or the capacity charge specified in the PPA for such purchase.
Energy charges payable by Consumers under the PPA are separate and distinct
from the capacity charge in that no 17-1/2 year protection against the exercise
of the "regulatory out" provision for energy charges is provided for in the
PPA. Although prior approval of energy charges is not required or provided for
under Michigan law, the MPSC has asserted the authority to disallow Consumers'
recovery of a portion of such energy charges paid to MCV. Any disallowance by
the MPSC of Consumers' ability to pass energy charges through to its customers
could, pursuant to the "regulatory out" provision of the PPA, result in a
reduction or refund of the fixed and variable portions of the energy charge
under the PPA.
MPSC Proceedings. In September 1987, in order to comply with the prior
approval requirement for contracts exceeding six months and to obtain the
benefit of the 17-1/2 year rate protection provided by Michigan law, MCV
requested MPSC approval of the 4.15 cents per kWh capacity rate provided for in
the PPA. The MPSC hearing held on the request was consolidated with numerous
dockets involving other qualifying facility projects, and resulted in a number
of MPSC orders. Numerous appeals from the MPSC orders were taken to the
Michigan Court of Appeals and the Michigan Supreme Court by parties to the MPSC
proceedings, including Consumers and MCV. During the pendency of this matter
before the Court of Appeals, Consumers, MPSC staff and other parties negotiated
a Revised Settlement Proposal which was submitted to the MPSC for approval.
On March 31, 1993, the MPSC issued an order, effective January 1, 1993 (the
"Settlement Order"), which approved with modifications the Revised Settlement
Proposal filed by Consumers, the MPSC staff and ten small power and
cogeneration developers. Although MCV was not a party to the Revised
Settlement Proposal, the MPSC staff required that MCV file a letter of non-
objection to the Revised Settlement Proposal. The Settlement Order addressed
the amount Consumers could recover from its electric customers for the costs of
capacity and energy purchased by it from MCV. Generally, the Settlement Order
approved cost recovery of 915 MW of MCV capacity subject to certain
"availability caps" associated with on-peak and off-peak periods of time each
day and recovery of energy payments based on coal proxy prices (the formula in
the PPA). However, instead of capacity and fixed
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energy payments being based on "availability" as provided in the PPA, the
Settlement Order provided for recovery of such payments on an energy
"delivered" basis. The MPSC did not order that the PPA be modified to conform
with the cost recovery approved in the Settlement Order. However, the MPSC
found that since the capacity charges approved for recovery under the PPA would
not be reflected in the PPA, approval for the purposes of Act 81 could not be
extended to those capacity charges. The MPSC did indicate in its order,
however, that its Settlement Order would be implemented for rate-making
purposes in the PSCR Plan and Reconciliation Case for 1993 and was intended to
be applied in subsequent years if the MPSC deemed it to be appropriate.
Petitions for Rehearing of the Settlement Order filed with the MPSC by
opponents to the Revised Settlement Proposal, including the Michigan Attorney
General, were denied by the MPSC in May 1993. In accordance with the
provisions of the Settlement Order, in August 1993 Consumers and MCV withdrew
their remaining appeals relating to MCV cost recovery issues (from 1990, 1991
and 1992 PSCR Reconciliation Cases) pending before the Michigan Court of
Appeals and the Michigan Supreme Court. An appeal of the Settlement Order has
been filed with the Michigan Court of Appeals by a group representing some of
Consumers' industrial customers and by the Michigan Attorney General
("Appellants"). On March 19, 1996, the Court of Appeals issued a decision
which affirmed the Settlement Order. The Appellants did not seek further
judicial review of the Court of Appeals' decision and thus the March 19, 1996
decision has become final.
Because the Settlement Order did not approve the capacity charges authorized
for recovery in the PPA, and thereby denied the protection provided under
Michigan law from reconsideration for a 17-1/2 year period, Consumers' cost
recovery relating to purchases from the MCV is subject to annual PSCR reviews.
In connection with a dispute between MCV and Consumers regarding the payment of
certain fixed energy charges which stemmed from the Revised Settlement
Proposal, on December 10, 1993, Consumers made a written irrevocable offer of
relief ("Offer of Relief") to MCV. The Offer of Relief was for the purpose of
facilitating the sale of Senior Secured Lease Obligation Bonds, issued in
connection with the financing of the Overall Lease Transaction and held by
Consumers. Pursuant to the Offer of Relief, which was rendered final and
irrevocable on December 28, 1993, Consumers committed to pay MCV the fixed
energy charges on all energy delivered by MCV from the block of contract
capacity above 915 MW. Consumers did not commit to pay MCV for fixed energy
charges on energy delivered above the "caps" established in the Settlement
Order up to 915 MW. The Offer of Relief represented a "floor" for the
arbitration of said dispute below which payments to MCV of fixed energy charges
in dispute could not fall. Consumers would schedule deliveries of this energy
in accordance with the provisions of the PPA. This unilateral commitment,
which became effective as of January 1, 1993, to pay fixed energy charges on
delivered energy from the block of contract capacity above 915 MW will expire
on September 15, 2007. This commitment will continue to apply even if the
Settlement Order is later amended.
On June 23, 1993, Consumers exercised its rights under the PPA to obtain a
determination through arbitration proceedings of whether Consumers could
exercise the "regulatory out" provision of the PPA in view of Consumers'
acceptance of the Settlement Order. In a Final Order issued on February 16,
1995, the arbitrator ruled that Consumers may withhold the fixed energy charges
for available but undelivered energy, as well as for energy delivered between
the "caps" contained in the Settlement Order and 915 MW, subject to completion
of appellate review in all regulatory and judicial proceedings with respect to
the Settlement Order and then pending PSCR cases.
On February 23, 1995, the MPSC applied the Settlement Order to Consumers' 1993
Reconciliation Case and ruled that Consumers could not recover the full 915 MW
of MCV capacity and fixed energy charges provided under the terms of the 1993
Revised Settlement Proposal approved by the MPSC in the Settlement Order.
Instead, the MPSC "allocated" approximately 25 MW of MCV capacity to
"non-jurisdictional" customers (i.e., customers not subject to PSCR rates)
resulting in a disallowance to Consumers of approximately $7.4 million of which
approximately $.7 million relates to fixed energy charges. In addition, the
MPSC ruled in this case that Consumers could not recover approximately $.6
million of fixed energy charges payable to MCV for energy delivered above the
off-peak cap of 732 MW. (Consumers has paid into escrow approximately $.4
million of this sum and the balance was paid to MCV.) Consumers and MCV have
appealed the MPSC February 23, 1995 Order to the Michigan Court of Appeals
where the matter is pending. MCV Management cannot predict the outcome of this
proceeding.
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On October 19, 1995, Consumers notified MCV that, pursuant to the
"regulatory out" provision of the PPA, it would be increasing the amount being
escrowed each month to reflect its calculation of fixed energy charge payments
related to the 25 MW disallowed by the MPSC described above. In addition,
Consumers requested a refund from MCV of $1.9 million plus interest, for the
calendar years 1993 and 1994 and the first eight months of 1995. On November
21, 1995, MCV responded to Consumers indicating that MCV would, pursuant to the
PPA, refund the appropriate funds, if any, and determine the appropriate
escrowing of funds, if any, at such time as a final and non-appealable order
disallowing these recoveries is entered. Currently, Consumers is escrowing
approximately $66,000 per month in fixed energy charge payments from MCV due to
this issue.
As part of its order in Consumers' 1994 PSCR Plan proceedings, the MPSC, on
August 18, 1994, ruled that for 1994 Consumers would not be permitted to
recover fixed energy costs during off-peak hours for energy delivered above
the availability "caps" contained in the Settlement Order and below 915 MW.
MCV believes the MPSC order on this issue is erroneous and has filed an appeal
of the MPSC decision. Other PSCR Plan and Reconciliation Cases for the years
1994 - 1996 are pending before the MPSC at this time. MCV Management cannot
predict the outcome of these proceedings. For the first six months of 1996 and
the years 1995 and 1994, Consumers has escrowed approximately $1.3 million, $.5
million and $.5 million, respectively, of fixed energy charges payable to MCV
based on this MPSC ruling and continues escrowing approximately $.2 million per
month for this portion of fixed energy charges.
1995 Settlement Proceedings. On September 8, 1995, Consumers and the MPSC
staff filed a motion to create a consolidated proceeding for the purpose of
reviewing a settlement agreement ("Proposed Settlement") entered into between
the MPSC staff and Consumers related to three cases: Case No. U-10685,
Consumers' electric general rate case; Case No. U-10787, Consumers' request for
approval of a special competitive services tariff (Rate SCS); and Case No.
U-10754, Consumers' application for approval of revised depreciation rates for
electric and common utility plant. MCV is a party to the consolidated
proceeding. The settlement agreement proposes approving the jurisdictional
cost recovery of an additional 325 MW of capacity purchased from MCV. Cost
recovery approval for the 325 MW of MCV contract capacity would be in addition
to the 915 MW already approved by the MPSC. Recovery would begin January 1,
1996. The initial average capacity charge recovered would be 2.86 cents per
kWh escalating to 3.62 cents per kWh in 2004 and thereafter. On September 22,
1995, MCV filed a position statement not objecting to the Proposed Settlement,
but reserving all of its rights and privileges under the PPA. If the
settlement is approved as filed it will likely result in an increase in MCV's
dispatch under the PPA. Consumers has, in fact, increased MCV's dispatch in
1996 consistent with the terms of the Proposed Settlement. Based on current
gas prices and energy rates, this should have a positive impact on MCV's cash
flow and earnings, assuming current gas prices and energy rates continue in
effect. Management cannot predict the outcome of this proceeding.
Great Lakes Pricing of Gas Transportation Costs
In 1990, Great Lakes expanded its interstate pipeline system to accommodate gas
purchases from MCV and other customers. Historically, such capital costs were
"rolled-in" to the rate base, thus combining the capital cost of common use
facility additions with the cost of existing common use facilities for the
purpose of determining the transportation rates to be charged to all system
shippers. In 1991, FERC issued an order that rejected rolled-in pricing for
the MCV-related expansion costs and, instead, imposed incremental pricing
which, for MCV, took effect April 1, 1993. The incremental methodology
allocates the capital cost of facility additions solely to the new shippers who
will gain access to the expanded facilities. FERC's decision was appealed by
MCV and others to the United States Court of Appeals for the District of
Columbia Circuit, which held that FERC had failed to adequately explain the
adoption of incremental rates and remanded the orders to FERC for
reconsideration. On July 26, 1995, FERC issued its Order on Remand reversing
its prior order and directed Great Lakes to: (i) implement rolled-in rates
prospectively beginning October 1, 1995, for the expansion facilities including
those applicable to MCV; and (ii) refund to MCV, subject to FERC approval, the
principal amount, excluding interest, paid in excess of rolled-in rates. The
estimated economic effect to MCV of this order is twofold. First, annual
transportation costs on the Great Lakes system will decrease approximately $7.0
million per year as compared to incremental pricing. Second, the refund to MCV
will be approximately $17.5 million which (excluding interest) includes a $3.4
million refund for fuel usage during transportation. On April 25, 1996, FERC
affirmed its Order on Remand as it pertains to the MCV issues described above
("Order on Rehearing"). On June 3, 1996, FERC granted rehearing for further
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consideration of its April 25, 1996 order. Rehearing was requested by, among
others, MCV for clarification of the timing of refunds, surcharges and interest
thereon subsequent to October 1, 1995. On July 31, 1996 FERC clarified its
April 25, 1996 order stating that interest on refunds was to commence October
1, 1995 and otherwise denied the relief requested in the petitions for
rehearing. The FERC Order on Rehearing and its July 31, 1996 order are subject
to further administrative and judicial process and, MCV and others have filed
appeals to the United States Court of Appeals for the District of Columbia
challenging certain aspects of the Order on Remand. Management cannot predict
the outcome of these proceedings. MCV had, from April 1, 1993 to October 1,
1995, reflected in current operating results Great Lakes gas transportation
costs associated with incremental pricing.
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Item 6. Exhibits and Reports on Form 8-K
a.) List of Exhibits
27(a) Financial Data Schedule (2nd Quarter 1996)
27(b) Restated Financial Data Schedule (1st Quarter 1996)
b.) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter for which this
report is filed.
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SIGNATURES
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.
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
-------------------------------------
(Registrant)
Dated: August 12, 1996 /s/ James M. Kevra
--------------- -------------------------------------
James M. Kevra
President and Chief Executive Officer
Dated: August 12, 1996 /s/ James M. Rajewski
--------------- -------------------------------------
James M. Rajewski
Vice President and Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Sequential
Number Page No.
- - ------- ----------
27(a) Financial Data Schedule (2nd Quarter 1996) 25
27(b) Restated Financial Data Schedule (1st Quarter 1996) 26
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