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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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number (Under the Securities Act of 1933) 33-37977
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-2726166
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 PROGRESS PLACE, MIDLAND, MICHIGAN 48640
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 839-6000
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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)
March 31,
1997 December 31,
ASSETS (Unaudited) 1996
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 144,767 $ 209,959
Restricted cash and cash equivalents 14,459 14,041
Accounts receivable 71,010 73,811
Gas inventory 3,617 13,539
Unamortized property taxes 19,287 -
Prepaid expenses and other 9,236 4,078
----------- ------------
Total current assets 262,376 315,428
----------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 2,414,065 2,403,640
Pipeline 21,222 21,222
----------- ------------
Total property, plant and equipment 2,435,287 2,424,862
Accumulated depreciation (561,763) (535,590)
----------- ------------
Net property, plant and equipment 1,873,524 1,889,272
----------- ------------
OTHER ASSETS:
Restricted non-current cash and cash equivalents 139,076 143,049
Deferred financing costs, net of accumulated amortization
of $8,513 and $8,231, respectively 10,064 10,346
Materials, supplies and other 21,445 5,850
----------- ------------
Total other assets 170,585 159,245
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TOTAL ASSETS $ 2,306,485 $ 2,363,945
=========== ============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued and other liabilities $ 70,811 $ 67,539
Interest payable 43,213 88,652
Current portion of long-term debt 101,257 78,574
----------- ------------
Total current liabilities 215,281 234,765
----------- ------------
NON-CURRENT LIABILITIES:
Long-term debt 1,877,518 1,929,241
Other 575 455
----------- ------------
Total non-current liabilities 1,878,093 1,929,696
----------- ------------
CONTINGENCIES
TOTAL LIABILITIES 2,093,374 2,164,461
----------- ------------
PARTNERS' EQUITY 213,111 199,484
----------- ------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,306,485 $ 2,363,945
=========== ============
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
March 31,
-------------------------
1997 1996
--------- ---------
OPERATING REVENUES:
Capacity $ 100,369 $ 91,299
Electric 55,467 52,112
Steam and other 8,370 7,610
--------- ---------
Total operating revenues 164,206 151,021
--------- ---------
OPERATING EXPENSES:
Fuel costs 69,205 64,437
Depreciation 26,207 26,203
Operations 4,345 4,159
Maintenance 2,912 4,266
Property and single business taxes 6,468 6,628
Administrative, selling and general 2,191 2,229
--------- ---------
Total operating expenses 111,328 107,922
--------- ---------
OPERATING INCOME 52,878 43,099
--------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 4,322 3,756
Interest expense (43,573) (45,208)
--------- ---------
Total other income (expense), net (39,251) (41,452)
--------- ---------
NET INCOME $ 13,627 $ 1,647
========= =========
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)
Three Months Ended
March 31, 1997
------------------------------------
General Limited
Partners Partners Total
--------- --------- --------
BALANCE, BEGINNING OF PERIOD $ 162,312 $ 37,172 $199,484
Net income 11,864 1,763 13,627
--------- --------- --------
BALANCE, END OF PERIOD $ 174,176 $ 38,935 $213,111
========= ========= ========
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)
Three Months Ended
March 31,
------------------------
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,627 $ 1,647
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and amortization 26,489 26,496
Decrease in accounts receivable 2,801 1,081
Decrease in gas inventory 9,922 11,881
Increase in unamortized property taxes (19,287) (19,349)
Increase in prepaid expenses (5,158) (4,807)
Increase in materials, supplies and other (15,595) (1,049)
Increase in accounts payable, accrued and other liabilities 3,272 17,680
Decrease in interest payable (45,439) (46,984)
Increase in other non-current liabilities 120 36
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Net cash used by operating activities (29,248) (13,368)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant and equipment (10,459) (7,606)
--------- --------
Net cash used in investing activities (10,459) (7,606)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (29,040) (25,977)
Decrease in restricted non-current cash and cash equivalents 3,973 1,286
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Net cash used in financing activities (25,067) (24,691)
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NET DECREASE IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH -- CURRENT (64,774) (45,665)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -- CURRENT,
AT BEGINNING OF PERIOD 224,000 177,408
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -- CURRENT,
--------- ---------
AT END OF PERIOD $ 159,226 $ 131,743
========= =========
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, 1996 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
("MCV GAGP") for the purpose of buying and selling natural gas on the
spot market and other transactions involving natural gas activities.
Currently, MCV GAGP is not actively engaged in any business activity.
The Facility is designed to provide approximately 1,370 megawatts ("MW")
of electricity and approximately 1.5 million pounds of process steam per
hour. MCV has contracted to supply up to 1,240 MW of electric capacity
to Consumers Energy Company, formerly 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") 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' honoring its
obligations under the Power Purchase Agreement ("PPA") with MCV. Sales
pursuant to the PPA have historically accounted for over 90% of MCV's
revenues.
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 three months
ended March 31, 1997, the Facility achieved a Thermal Percentage of
18.9% and a PURPA Efficiency Percentage of 45.9%. 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
1997.
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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 consist of the
costs of 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. Commencing
in 1998, MCV must provide at Consumers request, continuing annual assurances
of such capability for each succeeding five-year period. If MCV is unable
to provide these continuing assurances, Consumers is entitled to withhold in
a separate escrow fund a portion of capacity charges until these assurances
are provided. 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 energy charges payable under
the PPA and in future fuel costs under new or existing contracts cannot
accurately be predicted.
(2) RESTRICTED CASH AND CASH EQUIVALENTS
Current and non-current restricted cash and cash equivalents consist of the
following as of (in thousands):
March 31, December 31,
1997 1996
--------- ------------
Current:
Funds restricted for plant modifications $ 14,459 $ 14,041
========= =========
Non-current:
Funds restricted for rental payments pursuant
to the Overall Lease Transaction $ 138,530 $ 142,624
Funds restricted for management non-qualified plans 546 425
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$ 139,076 $ 143,049
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(3) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of
(in thousands):
March 31, December 31,
1997 1996
--------- ------------
Accounts payable
Related parties $ 17,241 $ 11,743
Trade creditors 25,640 40,076
Property and single business taxes 26,025 11,835
Other 1,905 3,885
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Total $ 70,811 $ 67,539
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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):
March 31, December 31,
1997 1996
------------ ------------
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 $ 1,978,775 $2,007,815
Less current portion (101,257) (78,574)
----------- ----------
Total long-term debt $ 1,877,518 $1,929,241
=========== ==========
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
three months ended March 31, 1997 and 1996 were $43.3 million and $44.9
million, respectively. Interest and fees paid for the three months ended
March 31, 1997 and 1996 were $88.7 million and $91.9 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 retail customers with
actual revenues it collected that same year), ruled that Consumers could not
recover from its retail customers 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 MPSC
jurisdiction), resulting in a disallowance to Consumers of approximately
$7.4 million of which approximately $.7 million relates to fixed energy
charges (the "jurisdictional issue"). 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 MCV below an
average rate of 3.77 cents per kWh for available contract capacity as a
result of the regulatory disallowance described above. In October 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 allocated to
non-jurisdictional customers disallowed by the MPSC and Michigan Court of
Appeals due to the jurisdictional issue. In addition, Consumers requested a
refund from MCV of $1.9 million plus interest, for the calendar years 1993
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
and 1994 and the first eight months of 1995. In November 1995, MCV
responded to Consumers indicating that MCV would, pursuant to the PPA,
refund the appropriate funds, if any, and determine the appropriate
calculation of the correct escrow amount, if any, at such time as a final
and non-appealable order disallowing these recoveries is entered. The
decision involving the jurisdictional issue has become final, affirming the
MPSC's decision. Based on this decision, Consumers notified MCV that it
would continue withholding the fixed energy charges on the jurisdictional
issue (approximately $53,000 per month).In addition, MCV agreed to the
release to Consumers of the escrowed funds of approximately $1.0 million
plus interest (covering the period of September 1995 through December 1996),
subject to a final resolution of the energy charge to be paid to MCV, which
will be adjusted with any refund of the $1.9 million (discussed above), as a
result of the finality of the jurisdictional issue. MCV has not recognized
any of these amounts related to the jurisdictional issue as operating
revenues.
The MPSC ruled in the 1993 Reconciliation Case that Consumers could not
recover from its retail customers approximately $.6 million of fixed energy
charges payable to MCV for energy delivered above the off-peak cap of 732 MW
(the "off-peak cap issue"). Consumers had paid into escrow approximately
$.4 million of this sum and the balance had been paid to MCV. Consumers and
MCV appealed the MPSC February 23, 1995 Order to the Michigan Court of
Appeals and on November 1, 1996, the Michigan Court of Appeals affirmed the
MPSC's decision. MCV and Consumers filed motions for rehearing of the
November 1, 1996 Michigan Court of Appeals Order which were denied on
January 27, 1997. MCV petitioned the Michigan Supreme Court to review the
off-peak cap issue. MCV has not recognized any of these amounts related to
the off-peak cap issue as operating revenues. MCV Management cannot predict
the outcome of this proceeding.
In addition, as part of its order in Consumers' 1994 PSCR Plan proceedings,
the MPSC ruled that for 1994 Consumers would not be permitted to recover
fixed energy costs for energy associated with the off-peak cap issue. MCV
believed the MPSC order on this issue was erroneous and filed an appeal of
the MPSC decision. The Michigan Court of Appeals affirmed the MPSC. MCV
has petitioned the court for rehearing. Other PSCR Plan and Reconciliation
Cases for the years 1994 - 1997 are pending before the MPSC at this time.
Consumers has escrowed approximately $2.8 million in 1996 and $1.0 million
for the years 1995 and 1994 of fixed energy charges payable to MCV based on
the MPSC ruling. MCV Management cannot predict the outcome of these
proceedings.
In September 1995, Consumers and the MPSC staff filed a motion to create a
consolidated proceeding for the purpose of reviewing a settlement agreement
("325 MW 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 one-hundred percent
jurisdictional cost recovery of the remaining 325 MW of capacity purchased
from MCV. Cost recovery approval for the 325 MW of MCV Contract Capacity is
in addition to the 915 MW already approved (subject to the jurisdictional
issue) by the MPSC. Recovery from Consumers retail customers 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
settlement agreement, but reserving all of its rights and privileges under
the PPA. Consumers increased MCV's dispatch in 1996 consistent with the
terms of the settlement agreement. On November 14, 1996, the MPSC approved,
with modifications, the settlement agreement effective January 1, 1996 ("325
MW Settlement Order"). The modifications were generally related to issues
not material to MCV, except the jurisdictional issue which the MPSC deferred
to the 1996 PSCR Plan proceeding. Various parties have petitioned the MPSC
for rehearing and on April 10, 1997 the MPSC granted in part and denied in
part those petitions. No issues associated with the 325 MW recovery of
MCV's capacity or energy were part of the grant of rehearing. However, in
the 1996 PSCR Plan proceeding, which is subject to further proceedings, the
MPSC ordered, on May 7, 1997, that the 325 MW of additional MCV capacity
would be allocated between jurisdictional and non-jurisdictional customers
of Consumers in the same manner as the original 915 MW. The Attorney
General,
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
among others, has filed an appeal of the 325 MW Settlement Order. As a
result of the approval of the 325 MW Settlement Order, Consumers notified
MCV in February 1997, that it would cease escrowing for the off-peak cap
issue and has released to MCV the 1996 escrowed funds of approximately $2.8
million discussed in the proceeding paragraph, subject to a final decision
upholding the 325 MW Settlement Order on this issue. The $1.4 million
escrowed in 1993, 1994 and 1995 remains in escrow. MCV has not recognized
any of these amounts related to the off-peak cap issue as operating
revenues. MCV Management cannot predict the outcome of either the 325 MW
Settlement Order proceeding or the 1996 PSCR Plan proceeding.
GTG Equipment Problems
In 1991 and 1992, several of the gas turbine generators ("GTG's")
experienced cracking in the hot gas casings which, in two cases, caused
extensive damage to the turbine blades and vanes. As a result of these
cracking problems, modifications were made on all GTG's and, MCV and ABB
Power Generation, Inc. ("ABB Power") implemented a program of hot gas casing
inspections for all GTG's. In January 1996, two additional GTG's experienced
severe cracking in the hot gas casings causing extensive damage to the
turbine blades and vanes. Extensive analysis and review by MCV and ABB Power
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 all
the turbines which has significantly reduced pulsations in the hot gas
casings and installed additional measuring devices to detect any pulsations
which are suspected of accelerating crack propagation. MCV and ABB Power
continue to study whether any modifications are needed in the high stress
areas of the hot gas casings, but MCV believes that the burner modifications
have resolved the pulsation problems and there should be no significant
future impacts on plant availability or efficiency from pulsations, 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 through the fourth series of major GTG inspections which
are expected to be completed by year end 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 second quarter of 1998. Failure to maintain insurance,
subject to certain exceptions, not currently applicable, 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 March 31,
1997, and the nature and amount of related party transactions or agreements
that existed with the Partners or affiliates as of March 31, 1997 and 1996,
and for each of the three month periods ended March 31, (in thousands).
Equity Partner, Type of Partner Equity
and Nature of Related Party Interest Interest
- ---------------------------------- --------- --------
CMS Midland, Inc. $104,424 49.0%
General Partner; wholly-owned
subsidiary of Consumers Energy
Company (formerly Consumers Power
Company)
The Dow Chemical Company 28,970 7.5
Limited Partner
Source Midland Limited Partnership 33,215 18.1
General Partner; affiliate of
PanEnergy Corp
Coastal Midland, Inc. 19,929 10.9
General Partner; wholly-owned
subsidiary of The Coastal
Corporation
MEI Limited Partnership 16,608 9.1
General Partner; affiliate of
ASEA Brown Boveri, Inc.
Micogen Limited Partnership 8,304 4.5
Limited Partner; affiliate of
Fluor Corporation
C-E Midland Energy, Inc. 1,660 .9
Limited Partner; affiliate of
ASEA Brown Boveri, Inc.
Alanna Corporation 1* .00001
Limited Partner; wholly-owned
subsidiary of Alanna Holdings Corporation
Related Party Transactions
and Agreements 1997 1996
- --------------------------------------------------------- -------- --------
Power purchase agreement $151,016 $138,521
Power purchase agreement administrative fees 6 6
Purchases under gas transportation agreements 2,405 2,321
Purchases under spot gas agreements 132 740
Purchases under gas supply agreements 3,132 3,063
Gas storage agreement 641 641
Land lease/easement agreements 150 150
General construction/service/engineering agreement 5 39
Facilities agreement - transmission line and metering
facility maintenance 4 11
Accounts receivable 52,100 50,635
Accounts payable 10,209 5,105
Gas exchanges 470 2,789
Steam and electric power agreement 13,190 12,501
Steam purchase agreement - Dow Corning Corp (affiliate) 995 --
Purchases under demineralized water supply agreement 2,137 1,640
Rent under office building lease agreement 103 114
Accounts receivable 6,523 2,934
Accounts payable 1,698 1,770
Standby and backup fees 214 540
Purchases under gas transportation agreements 3,644 3,581
Purchases under spot gas agreements 133 2,735
Accounts receivable -- 507
Accounts payable 1,351 1,791
Gas exchanges -- 2,082
Purchases under gas transportation agreements 3,514 3,688
Purchases under spot gas agreement 320 592
Purchases under gas supply agreement 1,376 1,324
Gas agency agreement 435 365
Deferred reservation charges under gas purchase agreement 3,940 2,955
Accounts receivable 4 9
Accounts payable 3,528 3,224
Gas exchanges 152 633
Gas turbine maintenance and spare parts agreement 8,265 7,170
Accounts payable 280 390
Partner cash withdrawal (including accrued interest)** 4,339 --
Partner cash withdrawal (including accrued interest)** 1,950 --
Service Agreement 583 925
Accounts Payable 168 372
Note receivable 1 1
* 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, 1996 of the Midland Cogeneration Venture
Limited Partnership ("MCV").
Results of Operations: Comparison of the three months ended March 31, 1997 and
1996.
Overview
For the first quarter of 1997, MCV recorded net income of $13.6 million as
compared with net income of $1.6 million for the first quarter of 1996. The
increase in net income for the first quarter of 1997 as compared to 1996 is
primarily the result of a higher available capacity under the PPA due to
significantly fewer equipment problems during the first quarter of 1997.
Operating Revenues
The following represents significant operating revenue statistics for the three
months ended March 31 (dollars in thousands except average rates):
1997 1996
-------------- --------------
Operating Revenues $ 164,206 $ 151,021
Capacity Revenue $ 100,369 $ 91,299
PPA Contract Capacity (MW) 1,240 1,240
PPA Availability 99.3% 89.3%
Electric Revenue $ 55,467 $ 52,112
PPA Delivery as a Percentage of Contract Capacity 91.3% 84.4%
PPA, and SEPA Electric Deliveries (MWh) 2,579,726 2,419,810
Average PPA Variable Energy Rate ($/MWh) $ 16.94 $ 17.00
Average PPA Fixed Energy Rate ($/MWh) $ 4.10 $ 3.90
Steam Revenue $ 4,552 $ 3,792
Steam Deliveries (Mlbs) 1,710,462 1,486,910
Other Operating Income $ 3,818 $ 3,818
For the first quarter of 1997, MCV's operating revenues increased $13.2 million
from the first quarter of 1996 due primarily to higher capacity and electric
revenues generated under the PPA. The capacity revenue increase of $9.1
million is the result of higher capacity payments under the PPA due to fewer
scheduled and unscheduled maintenance outages. In the first quarter of 1996
MCV experienced severe cracking in the hot gas casings of the gas turbine
generators ("GTG's") which reduced the capacity payments under the PPA. The
increase in 1997 first quarter electric revenue of $3.4 million is primarily
due to higher electric deliveries resulting from increased availability of the
GTG's.
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Operating Expenses
For the first quarter of 1997, MCV's operating expenses were $111.3 million,
which includes $69.2 million of fuel costs. During this period MCV purchased
approximately 27.5 billion cubic feet ("bcf") of natural gas, of which 24.6 bcf
was consumed at the plant to produce energy and 2.9 bcf was used for either
transportation fuel or as a net change to gas in storage. The average commodity
cost of fuel for the first quarter of 1997 was $2.45 per million British
thermal units ("MMBtu"). For the first quarter of 1996, MCV's operating
expenses were $107.9 million, which includes $64.4 million of fuel costs.
During this period MCV purchased approximately 28.4 bcf of natural gas, of
which 23.5 bcf was consumed at the plant to produce energy and 4.9 bcf was used
for either transportation fuel or as a net change to gas in storage. The
average commodity cost of fuel for the first quarter of 1996 was $2.36/MMBtu.
The increase in fuel costs for the first quarter of 1997 of $4.8 million
compared to 1996 was due to an increase in fuel usage resulting from the higher
Consumers dispatch level and due to higher gas prices in both the short and
long-term markets.
For the first quarter of 1997, operating expenses other than fuel costs
decreased $1.4 million over the first quarter of 1996 due primarily to a
provision for the insurance claims on two gas turbine failures in January,
1996. Other expenses incurred in these periods were considered normal
expenditures to achieve the recorded operating revenues.
Other Income (Expense)
The increase in interest and other income in the first quarter of 1997 compared
to 1996 is due to maintaining a higher average cash investment balance. The
decrease in interest expense in the first quarter of 1997 from the first
quarter of 1996 is due to a lower principal balance on MCV's financing
obligation.
Liquidity and Financial Resources
During the first three months of 1997 and 1996, net cash used by MCV's
operations was $29.2 million and $13.4 million, respectively. The primary use
of net cash was for the payment of principal on the financing obligation and
capital expenditures. 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 eighteen years. In January, 1997 and 1996, MCV
paid the basic rent requirements of $117.7 million, and $117.8 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 March 31, 1997, the
borrowing base was $49.5 million. The Working Capital Facility term currently
extends to August 31, 1997. MCV did not utilize the Working Capital Facility
during the first three months of 1997, except for letters of credit associated
with normal business practices. MCV believes that amounts available to it
under the Working Capital Facility will be sufficient to meet working capital
shortfalls, which might occur.
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. 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 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 March 31, 1997, there was $259.8 million
(which includes $55.6 million reserved for capital improvements and spare parts
purchases), including accrued interest, in available reserves for such
purposes.
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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
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, industry restructuring, 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 MCV is also influenced by economic
factors, weather conditions, pricing and transportation of commodities and
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 65% of PPA revenues are capacity payments
which are based on the Facility's availability. PPA availability was 99.3% for
the first three months of 1997, 96.4% in 1996 and 98.1% in 1995 . 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%.
GTG Equipment Problems. In 1991 and 1992, several of the gas turbine
generators ("GTG's") experienced cracking in the hot gas casings which, in two
cases, caused extensive damage to the turbine blades and vanes. As a result of
these cracking problems, modifications were made on all GTG's and, MCV and ABB
Power Generation, Inc. ("ABB Power") implemented a program of hot gas casing
inspections for all GTG's. In January 1996, two additional GTG's experienced
severe cracking in the hot gas casings causing extensive damage to the turbine
blades and vanes. Extensive analysis and review by MCV and ABB Power 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 all the turbines
which has significantly reduced pulsations in the hot gas casings and installed
additional measuring devices to detect any pulsations which are suspected of
accelerating crack propagation. MCV and ABB Power continue to study whether any
modifications are needed in the high stress areas of the hot gas casings, but
MCV believes that the burner modifications have resolved the pulsation problems
and there should be no significant future impacts on plant availability or
efficiency from pulsations, 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 through the fourth series of major GTG inspections which are expected
to be completed by year end 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 second
quarter of 1998. Failure to maintain insurance, subject to certain exceptions,
not currently applicable, is an Event of Default under the Overall Lease
Transaction.
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Natural Gas. The Facility is wholly dependent upon natural gas for its fuel
supply and a substantial portion of the Facility's operating expenses consist
of the costs of natural gas. While MCV continues to pursue the acquisition of
fuel supply beyond the year 2002, 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 March 1997, the energy charge (fixed and
variable) paid to MCV has declined by .21 cents per kWh, while the average
variable cost of delivered fuel for the period 1990 - 1996, has risen by $0.18
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 three 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 February 23, 1995, the MPSC applied the
Settlement Order to Consumers' 1993 Reconciliation Case and ruled that
Consumers could not recover from its retail customers the full 915 MW of MCV
capacity and fixed energy charges provided under the terms of the 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 MPSC jurisdiction) resulting in a
disallowance to Consumers of approximately $7.4 million of which approximately
$.7 million relates to fixed energy charges (the "jurisdictional issue"). In
October 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 allocated to
non-jurisdictional customers disallowed by the MPSC and Michigan Court of
Appeals due to the jurisdictional issue. 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. In November 1995, MCV responded to
Consumers indicating that MCV would, pursuant to the PPA, refund the
appropriate funds, if any, and determine the appropriate calculation of the
correct escrow amount, if any, at such time as a final and non-appealable order
disallowing these recoveries is entered. The decision involving the
jurisdictional issue has become final, affirming the MPSC's decision. Based on
this decision, Consumers notified MCV that it would continue withholding the
fixed energy charges on the jurisdictional issue (approximately $53,000 per
month). In addition, MCV agreed to the release to Consumers of the escrowed
funds of approximately $1.0 million plus interest (covering the period of
September 1995 through December 1996), subject to a final resolution of the
energy charge to be paid to MCV, which will be adjusted with any refund of the
$1.9 million (discussed above), as a result of the finality of the
jurisdictional issue. MCV has not recognized any of these amounts related to
the jurisdictional issue as operating revenues.
The MPSC ruled in the 1993 Reconciliation Case that Consumers could not recover
from its retail customers approximately $.6 million of fixed energy charges
payable to MCV for energy delivered above the off-peak cap of 732 MW (the
"off-peak cap issue"). Consumers had paid into escrow approximately $.4
million of this sum and the balance had been paid to MCV. Consumers and MCV
appealed the MPSC February 23, 1995 Order to the Michigan Court of Appeals and
on November 1, 1996, the Michigan Court of Appeals affirmed the MPSC's
decision. MCV and Consumers filed motions for rehearing of the November 1,
1996 Michigan Court of Appeals Order which were denied on January 27, 1997.
MCV petitioned the Michigan Supreme Court to review the off-peak cap issue.
MCV has not recognized any of these amounts related to the off-peak cap issue
as operating revenues. MCV Management cannot predict the outcome of this
proceeding.
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In addition, as part of its order in Consumers' 1994 PSCR Plan proceedings, the
MPSC ruled that for 1994 Consumers would not be permitted to recover fixed
energy costs for energy associated with the off-peak cap issue. MCV believed
the MPSC order on this issue was erroneous and filed an appeal of the MPSC
decision. The Michigan Court of Appeals affirmed the MPSC. MCV has petitioned
the court for rehearing. Other PSCR Plan and Reconciliation Cases for the
years 1994 - 1997 are pending before the MPSC at this time. Consumers has
escrowed approximately $2.8 million in 1996 and $1.0 million for the years 1995
and 1994 of fixed energy charges payable to MCV based on the MPSC ruling. MCV
Management cannot predict the outcome of these proceedings.
In September 1995, Consumers and the MPSC staff filed a motion to create a
consolidated proceeding for the purpose of reviewing a settlement agreement
("325 MW 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 one-hundred percent jurisdictional cost
recovery of the remaining 325 MW of capacity purchased from MCV. Cost recovery
approval for the 325 MW of MCV Contract Capacity is in addition to the 915 MW
already approved (subject to the jurisdictional issue) by the MPSC. Recovery
from Consumers retail customers 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 settlement agreement, but reserving all
of its rights and privileges under the PPA. Consumers increased MCV's dispatch
in 1996 consistent with the terms of the settlement agreement. On November 14,
1996, the MPSC approved, with modifications, the settlement agreement effective
January 1, 1996 ("325 MW Settlement Order"). The modifications were generally
related to issues not material to MCV, except the jurisdictional issue which
the MPSC deferred to the 1996 PSCR Plan proceeding. Various parties have
petitioned the MPSC for rehearing and on April 10, 1997, the MPSC granted in
part and denied in part those petitions. No issues associated with the 325 MW
recovery of MCV's capacity or energy were part of the grant of rehearing.
However, in the 1996 PSCR Plan proceeding, which is subject to further
proceedings, the MPSC ordered, on May 7, 1997, that the 325 MW of additional
MCV capacity would be allocated between jurisdictional and non-jurisdictional
customers of Consumers in the same manner as the original 915 MW. The Attorney
General, among others, has filed an appeal of the 325 MW Settlement Order. As
a result of the approval of the 325 MW Settlement Order, Consumers notified MCV
in February 1997, that it would cease escrowing for the off-peak cap issue and
has released to MCV the 1996 escrowed funds of approximately $2.8 million
discussed in the proceeding paragraph, subject to a final decision upholding
the 325 MW Settlement Order on this issue. The $1.4 million escrowed in 1993,
1994 and 1995 remains in escrow. MCV has not recognized any of these amounts
related to the off-peak cap issue as operating revenues. MCV Management cannot
predict the outcome of either the 325 MW Settlement Order proceeding or the
1996 PSCR Plan proceeding.
Michigan Electric Industry Restructuring Proceedings. On December 20, 1996,
the MPSC issued an order on its own motion to consider the restructuring of the
electric industry in Michigan. Generally, the MPSC is considering a transition
to a competitive regime whereby electric retail customers will be able to chose
their power supplier. The MPSC held three public hearings to receive comments
on a "Staff Report on Electric Industry Restructuring" ("Staff Report")
prepared by the MPSC staff. The Staff Report recommends a phased-in program
(from 1997 through 2004) for this competitive regime known as "direct access"
whereby all customers (industrial, commercial and residential) would be
eligible to select the electricity supplier of their choice. The report
addresses many transition issues including reliability, stranded cost (or
transition cost) recovery, rates, and other issues. The Staff Report
recommends recovery by utilities of stranded costs including energy supply
costs (such as purchased power contracts previously approved by the MPSC )
incurred during the regulated era that will be above market prices during the
new competitive regime proposed in the Staff Report. MCV filed comments to the
Staff Report. MCV advocated, among other things, full recovery of PPA charges.
On February 5, 1997, the MPSC issued a subsequent order which, among other
things, concluded that additional information would be useful for the MPSC to
fully evaluate the Staff Report. To that end, four additional public hearings
were scheduled, Consumers and Detroit Edison Company (the two largest investor
owner utilities in Michigan) were directed to make an informational filing by
March 7, 1997 and interested parties were given the opportunity to file
written comments by April 7, 1997. On March 7, 1997, Consumers made its
informational filing addressing all of the requested issues. Generally,
Consumers' filing approved of the Staff Report with certain significant
modifications. Of importance to
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MCV, Consumers' filing stated that Consumers has approximately $1.8 billion of
existing transition costs (which includes costs associated with the purchases
of capacity from MCV through the year 2007) which would be recovered by a
transition charge to be paid by direct access customers. MCV filed reply
comments on April 7, 1997 supporting its previous comments including stranded
cost recovery for the life of the PPA. No other proceedings are scheduled by
the MPSC at this time. The Michigan legislature has also begun a hearing
process to consider electric industry restructuring and deregulation. While
restructuring could have a material impact on MCV, MCV Management cannot
predict the impact on MCV or the outcome of this proceeding.
Federal Electric Industry Restructuring. FERC has jurisdiction over wholesale
energy sales in interstate commerce and is moving towards "market" based
pricing of electricity in some circumstances as opposed to traditional
cost-based pricing. In April 1996, FERC issued Order No. 888 requiring all
utilities FERC regulates to file uniform transmission tariffs providing for,
among other things, non-discriminatory "open access" to all wholesale buyers
and sellers, including the transmission owner, on terms and conditions
established by FERC. Order No. 888 also requires utilities to "functionally
unbundle" transmission and separate transmission personnel from those
responsible for marketing generation. In addition, several bills have been
introduced in Congress to require states to permit consumers to choose their
supplier of electricity and manage other issues such as transition cost
recovery and FERC jurisdiction of retail electric sales. MCV Management cannot
predict the impact on MCV or the outcome of these developments.
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, and in 1996 and 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 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, in 1996, to increase MCV's electric dispatch consistent with the
terms of the 325 MW Settlement Order, energy deliveries under the PPA could
exceed 90% of Contract Capacity in the future. In that event, Dow and DCC
steam purchases must average approximately 600,000 lbs/hour 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.
Under an agreement signed November 1, 1994, Dow began purchasing steam for its
corporate center in October 1995, which has added an annual average of
approximately 22,000 lbs/hr in steam sales. Under an agreement signed
November 15, 1995, DCC began purchasing steam for its Midland site in July
1996, a use MCV believes will add an annual average of approximately 115,000
lbs/hr in steam sales. Dow and DCC steam purchases for the first three months
of 1997 averaged 791,881 lbs/hr reflecting, in part, the relatively high usage
of steam related to cold weather. Actual steam usage has varied and will vary
with product mix, seasonal delivery fluctuations and other factors which may
change over time. MCV believes annual steam sales will be sufficient to allow
the Facility
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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, 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 will not cause the Facility to fail to satisfy
the annual PURPA qualification requirements and thus lose its QF certification.
In 1996, MCV achieved an Efficiency Percentage of 45.5% and an Thermal
Percentage of 15.0%.
PanEnergy Corp ("PanEnergy"), the parent company of Source Midland Limited
Partnership ("Source Midland"), one of the general partners of MCV, announced
on November 25, 1996, that its Board of Directors had approved a definitive
merger agreement with Duke Power Company. The merger remains subject to
regulatory approval. To the extent that the merger would cause Source Midland
to be regulated as a utility under PURPA, Source Midland would be required by
the MCV Limited Partnership Agreement to divest itself of its interest in MCV
in order to keep the utility ownership in MCV below 50% in compliance with
PURPA QF ownership limitations. On April 29, 1997, it was announced that MCN
Investment Corporation ("MCNIC"), a subsidiary of MCN Energy Group, Inc.
("MCN"), executed an agreement to purchase PanEnergy's interest in MCV.
Neither MCNIC or MCN is an electric utility and hence MCV's utility ownership
will remain below 50%, as required by PURPA.
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 FPA (under which FERC has authority to establish rates for
electricity, 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 1935 Act (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 and Supplementary Data -- Notes 1
through 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 and Other 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 disallow 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, as proposed by Consumers, until the MPSC acts. Actual
costs are reconciled with the costs billed to customers in a subsequent filing
(made by March 31 of the year subsequent to the plan 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 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 and Other 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 was
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 unsuccessfully sought
further judicial review of the Court of Appeals' decision and that decision has
now 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.
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 from its retail
customers the full 915 MW of MCV capacity and fixed energy charges provided
under the terms of the 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 MPSC
jurisdiction) resulting in a disallowance to Consumers of approximately $7.4
million of which approximately $.7 million relates to fixed energy charges (the
"jurisdictional issue"). 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 allocated to non-jurisdictional customers disallowed by the
MPSC and Michigan Court of Appeals due to the jurisdictional issue. 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
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appropriate calculation of the correct escrow amount, if any, at such time as a
final and non-appealable order disallowing these recoveries is entered. The
decision involving the jurisdictional issue has become final, affirming the
MPSC's decision. Based on this decision, Consumers notified MCV that it would
continue withholding the fixed energy charges on the jurisdictional issue
(approximately $53,000 per month). In addition, MCV agreed to the release to
Consumers of the escrowed funds of approximately $1.0 million plus interest
(covering the period of September 1995 through December 1996), subject to a
final resolution of the energy charge to be paid to MCV, which will be adjusted
with any refund of the $1.9 million (discussed above), as a result of the
finality of the jurisdictional issue. MCV has not recognized any of these
amounts related to the jurisdictional issue as operating revenues.
The MPSC ruled in the 1993 Reconciliation Case that Consumers could not recover
from its retail customers approximately $.6 million of fixed energy charges
payable to MCV for energy delivered above the off-peak cap of 732 MW (the
"off-peak cap issue"). Consumers had paid into escrow approximately $.4
million of this sum and the balance had been paid to MCV. Consumers and MCV
appealed the MPSC February 23, 1995 Order to the Michigan Court of Appeals and
on November 1, 1996, the Michigan Court of Appeals affirmed the MPSC's
decision. MCV and Consumers filed motions for rehearing of the November 1,
1996 Michigan Court of Appeals Order which were denied on January 27, 1997.
MCV petitioned the Michigan Supreme Court to review the off-peak cap issue.
MCV has not recognized any of these amounts related to the off-peak cap issue
as operating revenues. MCV Management cannot predict the outcome of this
proceeding.
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 for energy associated with the off-peak cap
issue. MCV believed the MPSC order on this issue was erroneous and filed an
appeal of the MPSC decision. The Michigan Court of Appeals affirmed the MPSC.
MCV has petitioned the court for rehearing. Other PSCR Plan and Reconciliation
Cases for the years 1994 - 1997 are pending before the MPSC at this time.
Consumers has escrowed approximately $2.8 million in 1996 and $1.0 million for
the years 1995 and 1994 of fixed energy charges payable to MCV based on the
MPSC ruling. MCV Management cannot predict the outcome of these 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
("325 MW 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 one-hundred percent jurisdictional cost
recovery of the remaining 325 MW of capacity purchased from MCV. Cost recovery
approval for the 325 MW of MCV Contract Capacity is in addition to the 915 MW
already approved (subject to the jurisdictional issue) by the MPSC. Recovery
from Consumers retail customers 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 settlement agreement, but reserving all
of its rights and privileges under the PPA. Consumers increased MCV's dispatch
in 1996 consistent with the terms of the settlement agreement. On November 14,
1996, the MPSC approved, with modifications, the settlement agreement effective
January 1, 1996 ("325 MW Settlement Order"). The modifications were generally
related to issues not material to MCV, except the jurisdictional issue which
the MPSC deferred to the 1996 PSCR Plan proceeding. Various parties have
petitioned the MPSC for rehearing and on April 10, 1997, the MPSC granted in
part and denied in part those petitions. No issues associated with the 325 MW
recovery of MCV's capacity or energy were part of the grant of rehearing.
However, in the 1996 PSCR Plan proceeding, which is subject to further
proceedings, the MPSC ordered, on May 7, 1997, that the 325 MW of additional
MCV capacity would be allocated between jurisdictional and non-jurisdictional
customers of Consumers in the same manner as the original 915 MW. The Attorney
General, among others, has filed an appeal of the 325 MW Settlement Order. As
a result of the approval of the 325 MW Settlement Order, Consumers notified MCV
in February 1997, that it would cease escrowing for the off-peak cap issue and
has released to MCV the 1996 escrowed funds of approximately $2.8 million
discussed in the proceeding paragraph, subject to a final decision upholding
the 325 MW Settlement Order on this issue. The $1.4 million escrowed in 1993,
1994 and 1995 remains in escrow. MCV has not recognized any
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of these amounts related to the off-peak cap issue as operating revenues. MCV
Management cannot predict the outcome of either the 325 MW Settlement Order
proceeding or the 1996 PSCR Plan proceeding.
Michigan Electric Industry Restructuring Proceedings
On December 20, 1996, the MPSC issued an order on its own motion to consider
the restructuring of the electric industry in Michigan. Generally, the MPSC is
considering a transition to a competitive regime whereby electric retail
customers will be able to chose their power supplier. The MPSC held three
public hearings to receive comments on a "Staff Report on Electric Industry
Restructuring" ("Staff Report") prepared by the MPSC staff. The Staff Report
recommends a phased-in program (from 1997 through 2004) for this competitive
regime known as "direct access" whereby all customers (industrial, commercial
and residential) would be eligible to select the electricity supplier of their
choice. The report addresses many transition issues including reliability,
stranded cost (or transition cost) recovery, rates, and other issues. The
Staff Report recommends recovery by utilities of stranded costs including
energy supply costs (such as purchased power contracts previously approved by
the MPSC ) incurred during the regulated era that will be above market prices
during the new competitive regime proposed in the Staff Report. MCV filed
comments to the Staff Report. MCV advocated, among other things, full recovery
of PPA charges. On February 5, 1997, the MPSC issued a subsequent order which,
among other things, concluded that additional information would be useful for
the MPSC to fully evaluate the Staff Report. To that end, four additional
public hearings were scheduled, Consumers and Detroit Edison Company (the two
largest investor owner utilities in Michigan) were directed to make an
informational filing by March 7, 1997 and interested parties were given the
opportunity to file written comments by April 7, 1997. On March 7, 1997,
Consumers made its informational filing addressing all of the requested issues.
Generally, Consumers' filing approved of the Staff Report with certain
significant modifications. Of importance to MCV, Consumers' filing stated that
Consumers has approximately $1.8 billion of existing transition costs (which
includes costs associated with the purchases of capacity from MCV through the
year 2007) which would be recovered by a transition charge to be paid by direct
access customers. MCV filed reply comments on April 7, 1997 supporting its
previous comments including stranded cost recovery for the life of the PPA. No
other proceedings are scheduled by the MPSC at this time. The Michigan
legislature has also begun a hearing process to consider electric industry
restructuring and deregulation. While restructuring could have a material
impact on MCV, MCV Management cannot predict the impact on MCV or the outcome
of this proceeding.
Federal Electric Industry Restructuring
FERC has jurisdiction over wholesale energy sales in interstate commerce and is
moving towards "market" based pricing of electricity in some circumstances as
opposed to traditional cost-based pricing. In April 1996, FERC issued Order
No. 888 requiring all utilities FERC regulates to file uniform transmission
tariffs providing for, among other things, non-discriminatory "open access" to
all wholesale buyers and sellers, including the transmission owner, on terms
and conditions established by FERC. Order No. 888 also requires utilities to
"functionally unbundle" transmission and separate transmission personnel from
those responsible for marketing generation. In addition, several bills have
been introduced in Congress to require states to permit consumers to choose
their supplier of electricity, manage other issues such as transition cost
recovery and FERC jurisdiction of retail electric sales. MCV Management cannot
predict the impact on MCV or the outcome of these developments.
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,
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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. MCV had, from April 1, 1993 to
October 1, 1995, reflected in current operating results Great Lakes gas
transportation costs associated with incremental pricing. 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. 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. In
August 1996, MCV recognized in its current operating results approximately
$19.0 million (which represented $17.6 million in transportation costs included
as a reduction in fuel costs and $1.4 million of accrued interest subsequent to
October 1, 1995) of the Great Lakes refund. The FERC Order on Rehearing and
its July 31, 1996 order are subject to further administrative and judicial
processes, and MCV and others have filed appeals to the United States Court of
Appeals for the District of Columbia ("Court of Appeals") challenging certain
aspects of the Order on Remand. MCV Management cannot predict the outcome of
these proceedings but believes that the likelihood of a reversal by the Court
of Appeals of that portion of the FERC Order on Rehearing requiring rolled-in
rate treatment is remote.
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Item 6. Exhibits and Reports on Form 8-K
a.) List of Exhibits
(27) Financial Data Schedule
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: May 14, 1997 /s/ James M. Kevra
------------ -------------------------------------
James M. Kevra
President and Chief Executive Officer
Dated: May 14, 1997 /s/ James M. Rajewski
------------ -------------------------------------
James M. Rajewski
Vice President and Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
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Exhibit Sequential
Number Page No.
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27 Financial Data Schedule 26
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