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, 1999
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
- --------------------------------------------------------------------------------
(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,
1999 December 31,
ASSETS (Unaudited) 1998
----------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 235,016 $ 193,116
Restricted cash and cash equivalents 5,547 8,913
Accounts and notes receivable 104,959 104,315
Gas inventory 16,190 15,144
Unamortized property taxes 29,452 15,742
Prepaid expenses and other 3,665 4,031
----------- -----------
Total current assets 394,829 341,261
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 2,406,751 2,392,829
Pipeline 21,222 21,222
----------- -----------
Total property, plant and equipment 2,427,973 2,414,051
Accumulated depreciation (673,137) (640,659)
----------- -----------
Net property, plant and equipment 1,754,836 1,773,392
----------- -----------
OTHER ASSETS:
Restricted investment securities held-to-maturity 139,872 143,444
Deferred financing costs, net of accumulated amortization of
$10,928 and $10,416, respectively 7,649 8,161
Prepaid gas costs, materials and supplies 23,810 20,248
----------- -----------
Total other assets 171,331 171,853
----------- -----------
TOTAL ASSETS $ 2,320,996 $ 2,286,506
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 65,303 $ 60,718
Interest payable 78,372 78,959
Current portion of long-term debt 111,823 64,331
----------- -----------
Total current liabilities 255,498 204,008
----------- -----------
NON-CURRENT LIABILITIES:
Long-term debt 1,663,174 1,723,960
Other 1,104 990
----------- -----------
Total non-current liabilities 1,664,278 1,724,950
----------- -----------
CONTINGENCIES (Note 6)
TOTAL LIABILITIES 1,919,776 1,928,958
----------- -----------
PARTNERS' EQUITY 401,220 357,548
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,320,996 $ 2,286,506
=========== ===========
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,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
OPERATING REVENUES:
Capacity $ 101,974 $ 101,474 $ 200,467 $ 201,812
Electric 47,065 48,046 102,459 100,417
Steam and other 3,060 6,425 7,296 13,694
--------- --------- --------- ---------
Total operating revenues 152,099 155,945 310,222 315,923
--------- --------- --------- ---------
OPERATING EXPENSES:
Fuel costs 58,150 59,329 117,945 124,942
Depreciation 23,892 22,954 47,499 49,558
Operations 3,642 3,666 7,354 7,705
Maintenance 2,965 3,211 6,245 5,983
Property and single business taxes 6,469 6,427 12,887 12,837
Administrative, selling and general 2,221 2,422 5,039 4,934
--------- --------- --------- ---------
Total operating expenses 97,339 98,009 196,969 205,959
--------- --------- --------- ---------
OPERATING INCOME 54,760 57,936 113,253 109,964
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 4,905 5,509 9,335 11,534
Interest expense (39,816) (42,227) (78,916) (83,636)
--------- --------- --------- ---------
Total other income (expense), net (34,911) (36,718) (69,581) (72,102)
--------- --------- --------- ---------
NET INCOME $ 19,849 $ 21,218 $ 43,672 $ 37,862
========= ========= ========= =========
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)
General Limited
Partners Partners Total
-------- -------- --------
BALANCE, BEGINNING OF PERIOD $299,927 $ 57,621 $357,548
Net income 38,022 5,650 43,672
-------- -------- --------
BALANCE, END OF PERIOD $337,949 $ 63,271 $401,220
======== ======== ========
The accompanying condensed notes are an integral part of these statements.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Six Months Ended
June 30,
-------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,672 $ 37,862
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 48,011 50,100
Increase in accounts receivable (644) (3,790)
(Increase) decrease in gas inventory (1,046) 337
Increase in unamortized property taxes (13,710) (12,582)
Decrease in prepaid expenses and other 366 41
Increase in prepaid gas costs, materials and supplies (3,562) (247)
Increase in accounts payable and accrued liabilities 4,585 14,883
Decrease in interest payable (587) (2,284)
Increase in other non-current liabilities 114 136
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Net cash provided by operating activities 77,199 84,456
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CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant and equipment (28,943) (25,846)
--------- ---------
Net cash used in investing activities (28,943) (25,846)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (13,294) (51,722)
Maturity of restricted investment securities held-to-maturity 215,217 145,093
Purchase of restricted investment securities held-to-maturity (211,645) (144,681)
--------- ---------
Net cash used in financing activities (9,722) (51,310)
--------- ---------
NET INCEASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT
38,534 7,300
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT BEGINNING
OF PERIOD 202,029 234,526
--------- ---------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT END OF
PERIOD $ 240,563 $ 241,826
========= =========
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, 1998 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 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 was originally designed to provide approximately 1,370
megawatts ("MW") of electricity and approximately 1.5 million pounds of
process steam per hour. Subsequent improvements to the Facility have
increased net electrical generating capacity. MCV has entered into three
principal energy sales agreements. MCV has contracted to supply up to 1,240
MW of electric capacity ("Contract Capacity") to Consumers Energy Company
("Consumers") under the Power Purchase Agreement ("PPA") 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"). From time to time, MCV enters into other short-term sales
agreements for the sale of excess capacity and/or energy available above
MCV's internal use and obligations under the PPA, SEPA and 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 PPA with MCV. Sales pursuant to the PPA have
historically accounted for over 90% of MCV's revenues.
The PPA 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 if the Michigan Public Service Commission
("MPSC") does not permit Consumers to recover from its customers the
capacity and energy charges specified in the PPA (the "regulatory out"
provision). Pursuant to Amendment 3 to the PPA, for the first 17-1/2 years
of commercial operation, the capacity charge may not be reduced below an
average capacity rate of 3.77 cents per kWh for the available Contract
Capacity notwithstanding the "regulatory out" provision.
Consumers and MCV are required to support and defend the terms of the PPA.
The Facility is a qualifying cogeneration facility ("QF") originally
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 and certain ownership
limitations must be met. 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
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 1999, the Facility achieved a Thermal
Percentage of 19.0% and a PURPA Efficiency Percentage of 47.3%. 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, the Facility will meet the required Thermal and the
corresponding Efficiency Percentages in 1999. In addition, MCV currently
meets the ownership limitations of PURPA.
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, and each year thereafter, 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. MCV
believes it can meet the requirement of continuing assurances. 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.
At both the state and federal level, efforts continue on restructuring the
electric industry. The MPSC entered a series of orders dated June 5, 1997,
October 29, 1997, January 14, 1998, and February 11, 1998 (collectively the
"Restructuring Orders"), now final at the MPSC level, mandating that
utilities "wheel" third-party power to the utilities' customers, thus
permitting customers to choose their power provider. This "retail wheeling"
is to be phased-in over a four-year period scheduled to start in September
1999. Similar efforts, in the form of proposed legislation, exist at the
state and federal level. Two issues generally involved in these
restructuring efforts which could impact MCV the most are stranded assets
or transition cost recovery by utilities for PPA charges and contract (PPA)
sanctity. To date, these restructuring efforts have not negatively impacted
MCV's cash flow, but if the MPSC's Restructuring Orders are construed so as
to deny stranded cost recovery of above-market PPA costs, and if such order
is not reversed on appeal, MCV's cash flows may be negatively impacted in
the period after 2007. MCV, as well as others, filed an appeal in the
Michigan Court of Appeals and a complaint in the U.S. District Court for
the Western District of Michigan challenging the Restructuring Orders. In
June 1999, the Michigan Supreme Court issued an opinion in the appeal of an
order in an MPSC "retail wheeling" experiment case holding, among other
things, that the MPSC lacks the statutory authority to mandate that
utilities transmit power of third parties to the utilities' customers
("Michigan Supreme Court Order"). While this Michigan Supreme Court Order
was not directed at the Restructuring Orders, it is likely to be applied to
them. Consumers Energy has stated that it intends to voluntarily comply
with the Restructuring Orders. The MPSC has asked interested parties to
file comments on the applicability/effect of the Michigan Supreme Court
Order on the Restructuring Orders. In an order dated July 7, 1999, the U.S.
District Court granted MCV's Motion for Summary Judgment declaring that the
Restructuring Orders are preempted by PURPA and the Supremacy Clause of the
United States Constitution to the extent that they prohibit any utility
from recovering from its customers any charge for avoided costs (or
"stranded costs") to be paid to MCV and the other QFs under PURPA pursuant
to their PPAs. The order further provides that the MPSC's prior orders
approving the avoided cost rates set forth in MCV's and the other QFs' PPAs
take precedence over the Restructuring Orders. The Defendants in the
lawsuit (the Commissioners of the MPSC) were permanently enjoined from
enforcing the Restructuring Orders in any manner which denies any utility
from recovering its avoided costs as set forth in MCV's and the other QFs'
PPAs or which precludes them from recovering the full avoided cost rate as
set forth in the PPAs, including but not limited to interpreting or
enforcing the Restructuring Orders to preclude any utility from recovering
all or any portion of its avoided costs previously
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
approved by the MPSC from its customers, whether before, during, or after
the year 2007. This order is subject to appeal. MCV continues to monitor
and participate in these matters, as appropriate and to evaluate potential
impacts on both cash flows and recoverability of the carrying value of
property, plant and equipment. MCV management cannot, at this time, predict
the impact or outcome of these matters.
(2) SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents and short-term investments
approximate fair value because of the short maturity of these instruments.
MCV's short-term investments, which are made up of investment securities
held-to-maturity, as of June 30, 1999 and December 31, 1998, have original
maturity dates of less than one year. The unique nature of the negotiated
financing obligation discussed in Note 5 makes it impractical to estimate
the fair value of the lessor group ("Owner Participants") underlying debt
and equity instruments supporting such financing obligation.
Forward Foreign Exchange Contracts
An amended service agreement was entered into between MCV and ABB Power
Generation ("ABB Power") (the "amended Service Agreement"), under which ABB
Power provides hot gas path parts for MCV's twelve gas turbines through the
sixth series of major gas turbine generator ("GTG") inspections, which are
expected to be completed by year-end 2008. The payments due to ABB Power
under this amended Service Agreement are adjusted annually based on the
ratio of the U.S. dollar to Swiss franc currency exchange rate. MCV
maintains a foreign currency hedging program to be used only with respect
to MCV payments subject to foreign currency exposure under the amended
Service Agreement.
To manage this currency exchange rate risk and hedge against adverse
currency fluctuations impacting the payments under this amended Service
Agreement, MCV enters into forward purchase contracts for Swiss francs. The
forward foreign currency exchange contracts qualify as hedges under
Statement of Financial Accounting Standards ("SFAS") 52, "Foreign Currency
Translation," since they hedge the identifiable foreign currency commitment
of the amended Service Agreement. The gains and losses on these
transactions, accounted for as hedges, are deferred on the balance sheet
and included in the measurement of the underlying capitalized major renewal
costs when incurred. As of June 30, 1999, MCV had forward purchase
contracts involving Swiss Francs in the notional amount of $5.0 million,
with a deferred $.2 million loss, recorded in prepaid expenses and other.
On December 29, 1998, MCV closed out its forward purchase contracts
involving Swiss francs in the notional amount of $10.0 million, resulting
in a deferred $1.0 million gain recorded in current liabilities.
Natural Gas Options and Futures
To manage market risks associated with the volatility of natural gas
prices, MCV maintains a gas hedging program. MCV enters into natural gas
options and futures contracts in order to hedge against unfavorable changes
in the market price of natural gas in future months when gas is expected to
be needed. These financial instruments are being utilized only to secure
anticipated natural gas requirements necessary for projected electric sales
at a cost of gas less than that available under MCV's long-term natural gas
contracts and to hedge sales of natural gas previously obtained in order to
optimize MCV's existing gas supply, storage and transportation
arrangements. The natural gas futures contracts qualify as hedges under
SFAS 80, "Accounting for Futures Contracts," since the contracts cover
probable future transactions.
Cash is deposited with the broker in a margin account, at the time futures
or options contracts are initiated. The change in market value of these
contracts requires adjustment of the margin account balances. The margin
balance, recorded in prepaid expenses and other, was $.7 million and $.5
million as of June 30, 1999 and
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 1998, respectively. MCV's deferred gains and losses on futures
and options contracts, recorded in current liabilities, will be offset by
the corresponding underlying physical transaction and then included in
operating expenses as part of fuel cost in the same period the natural gas
is burned to operate the Facility. As of June 30, 1999, MCV had net open
futures and options contracts of .6 Bcf with a deferred gain of $.4
million. As of December 31, 1998, MCV had net open futures and options
contracts of 1.7 Bcf with a deferred gain of $.9 million. In addition, MCV
recorded an immaterial deferred gain on contracts closed prior to June 30,
1999, related to year 2000 purchase commitments, and had approximately $.2
million in net deferred gains on contracts closed prior to December 31,
1998, related to 1999 purchase commitments.
Interest Rate Swap Hedges
To manage the effects of interest rate volatility on interest income while
maximizing return on permitted investments, MCV established an interest
rate hedging program. The notional amounts of the hedges are tied directly
to MCV's anticipated cash investments, without physically exchanging the
underlying notional amounts.
Cash may be deposited with the broker at the time the interest rate swap
transactions are initiated. The change in market value of these contracts
may require further adjustment of the margin account balance. The margin
balance recorded in prepaid expenses and other, was approximately $183,000
and $181,000, as of June 30, 1999 and December 31, 1998, respectively. In
December 1998 and December 1997, MCV entered into separate interest rate
swap hedges in the notional amount of $20 million each, with the periods of
performance from July 23, 1999 through January 23, 2000 and from April 1,
1998 through December 1, 2002, respectively. The difference between the
amounts received and paid under the interest rate swap transaction is
accrued and recorded as an adjustment to the interest income over the life
of the hedged agreement. For the year-to-date period ending June 30, 1999,
MCV had an immaterial gain under the December 1997 interest rate swap hedge
while for the year ended 1998, MCV had an immaterial loss under the
December 1997 interest rate swap hedge.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement establishes accounting and reporting standards requiring
that every derivative instrument be recorded in the balance sheet as either
an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges in some cases allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement or permits recognition of the hedge results in other
comprehensive income. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." This statement defers the
effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000. MCV expects to adopt the new statement effective January 1, 2001. MCV
is continuing to study the impact of SFAS No. 133, however, MCV does not
expect the application of this standard to materially affect its financial
position or results of operations.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(3) RESTRICTED CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
HELD-TO-MATURITY
Current and non-current restricted cash and cash equivalents and investment
securities held-to-maturity consist of the following as of (in thousands):
June 30, December 31,
1999 1998
-------- ------------
Current:
Funds restricted for plant modifications $ 5,547 $ 8,913
======== ============
Non-current:
Funds restricted for rental payments pursuant to the Overall Lease
Transaction $138,767 $ 142,453
Funds restricted for management non-qualified plans 1,105 991
-------- ------------
Total $139,872 $ 143,444
======== ============
(4) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of (in
thousands):
June 30, December 31,
1999 1998
-------- ------------
Accounts payable
Related parties $ 13,009 $ 17,231
Trade creditors 23,129 27,457
Property and single business taxes 26,500 11,822
Other 2,665 4,208
-------- ------------
Total $ 65,303 $ 60,718
======== ============
(5) LONG-TERM DEBT
Long-term debt consists of the following as of (in thousands):
June 30, December 31,
1999 1998
-------------- ----------------
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
$ 1,774,997 $ 1,788,291
Less current portion (111,823) (64,331)
-------------- ----------------
Total long-term debt $ 1,663,174 $ 1,723,960
============== ================
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Financing Obligation
In 1990, MCV obtained permanent financing for the Facility by entering into
sale and leaseback agreements ("Overall Lease Transaction") with the 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, 1999 and 1998 were $78.5 million and $83.0
million, respectively. Interest and fees paid for the six months ended June
30, 1999 and 1998 were $79.1 million and $85.3 million, respectively.
(6) CONTINGENCIES
PPA - Settlement of PPA Issues
On April 5, 1999, MCV and Consumers entered into a settlement agreement
("Settlement Agreement"), effective January 1, 1999, which resolves (for
the various time periods specified in the Settlement Agreement) all
disputed issues which include all issues involving energy payments under
the PPA. MCV recognized a one-time net $6.4 million increase in electric
revenues in the first quarter of 1999 based upon the resolution of these
issues. On an ongoing basis and for the various time periods specified in
the Settlement Agreement, the Settlement Agreement is not expected to
materially affect MCV's earnings and cash flows.
PPA - Sale and Assignment
In October 1998, Consumers initiated a process for the solicitation of bids
to acquire Consumers' rights to the 1240 MW of Contract Capacity and
associated energy under the PPA. On March 10, 1999, Consumers announced
that it signed a contract with PECO Energy Company ("PECO") whereby
Consumers will sell 1240 MW of capacity and associated energy to PECO from
the MCV PPA beginning January 1, 2002 and ending in September 2007. In
addition, Consumers will sell PECO between 100 MW to 150 MW in 1999 through
2001. The announcement also states the contract with PECO is subject to
satisfactory regulatory approvals. On March 19, 1999, Consumers filed an
application with the MPSC seeking regulatory approval of various ratemaking
and accounting treatments associated with the PECO contract. On April 30,
1999, the MPSC entered an order which did not grant all of the relief
Consumers requested, but does permit the transaction to go forward.
Consumers has sought clarification and/or rehearing of that order. MCV does
not expect the sale of Consumers' rights to capacity and associated energy
under the PPA to materially affect its financial position or results of
operations.
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12
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) 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, 1999, and the nature and amount of related party transactions or
agreements that existed with the Partners or affiliates as of June 30, 1999
and 1998, and for each of the six month periods ended June 30, (in
thousands).
Equity Partner, Type of Partner and Equity
Nature of Related Party Interest Interest Related Party Transactions and Agreements 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
CMS Midland, Inc. $196,597 49.0% Power purchase agreement $293,967 $294,587
General Partner; wholly-owned Purchases under gas transportation agreements 8,438 4,791
subsidiary of Consumers Energy Purchases under spot gas agreements 207 487
Company (formerly Consumers Purchases under gas supply agreements 3,454 3,231
Power Company) Gas storage agreement 1,282 1,282
Land lease/easement agreements 300 300
Accounts receivable 46,309 49,406
Accounts payable 7,036 13,596
Gas exchanges 408 832
The Dow Chemical Company 43,078 7.5 Steam and electric power agreement 13,717 20,630
Limited Partner Steam purchase agreement - Dow Corning Corp 1,817 1,700
(affiliate)
Purchases under demineralized water supply 3,217 3,297
agreement
Accounts receivable 2,336 2,407
Accounts payable 511 527
Standby and backup fees 326 350
Source Midland Limited Partnership 67,310 18.1 Purchases under spot gas agreements 2,116 4,035
("SMLP") General Partner; wholly- Purchases under gas supply agreements 6,012 5,735
owned limited partnership of MCN Accounts receivable 777 --
Energy Group Inc. Accounts payable 1,641 1,761
Gas exchanges 2,478 --
Partner cash withdrawal (including accrued 23,294 17,841
interest) (1)
Coastal Midland, Inc. ("Coastal") 40,386 10.9 Purchases under gas transportation agreements 6,813 6,742
General Partner; wholly-owned Purchases under spot gas agreement 2,501 7,159
subsidiary of The Coastal Purchases under gas supply agreement 1,485 1,428
Corporation Gas agency agreement 801 728
Deferred reservation charges under gas purchase 5,910 4,925
agreement
Accounts receivable 740 1,961
Accounts payable 3,820 3,587
Gas exchanges 31 4,111
Partner cash withdrawal (including accrued 20,552 15,715
interest) (1)
MEI Limited Partnership ("MEI") (2) MEI - Under Ownership of Coastal and SMLP
A General and Limited Partner; See related party activity listed under Coastal
50% interest owned by Coastal Midland, Inc. and Source Midland Limited Partnership
Midland, Inc. and 50% interest
owned by SMLP MEI - Under Ownership of ASEA Brown Boveri, Inc.
General Partnership Interest 33,656 9.1 Gas turbine maintenance and spare parts agreement -- 23,377
Limited Partnership Interest 3,365 .9
Micogen Limited Partnership 16,827 4.5 MLP - Under Ownership of The Coastal Corporation
("MLP") Limited Partner; owned See related party activity listed under Coastal
by subsidiaries of The Coastal Midland Inc.
Corporation (3)
C-E Midland Energy, Inc. ("C-E") (4) -- -- Service Agreement -- 1,252
Interest in MCV acquired by MEI
Limited Partnership
Alanna Corporation 1 (5) .00001 Note receivable 1 1
Limited Partner; wholly-owned
subsidiary of Alanna Holdings
Corporation
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Footnotes to Partners' Equity and Related Party Transactions
(1) Letters of credit have been issued and recorded as notes
receivables from various equity partners, pursuant to the
Participation Agreement. In the case of SMLP, the amount includes
their share of the cash available to MEI Limited Partnership
("MEI"). In the case of Coastal Midland, Inc. ("Coastal"), the
amount includes their share of cash available to both MEI and
Micogen Limited Partnership ("MLP").
(2) On June 16, 1998, Coastal and SMLP, each acquired a 50% interest
in MEI. All MEI related party activity under the ownership of
Coastal and SMLP is shown under the equity partners, Coastal and
SMLP. All MEI related party activity under the ownership of ASEA
Brown Boveri, Inc. is for the period ended June 16, 1998, and as
of June 16, 1998.
(3) On April 30, 1998 Coastal and an affiliate of The Coastal
Corporation acquired all of the partnership interests in MLP from
Fluor Corporation ("Fluor"). All MLP related party activity under
the ownership of The Coastal Corporation is shown under the equity
partner, Coastal, which is also wholly-owned by The Coastal
Corporation.
(4) C-E Midland Energy, Inc.'s ("C-E") limited partnership interest
was acquired by MEI, which was subsequently acquired by Coastal
and SMLP. All C-E related party activity under the ownership of
ASEA Brown Boveri, Inc. is for the period ended June 16, 1998 and
as of June 16, 1998.
(5) Alanna's capital stock is pledged to secure MCV's obligation under
the lease and other overall lease transaction documents.
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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, 1998 of the Midland Cogeneration Venture Limited
Partnership ("MCV").
Results of Operations:
Operating Revenues 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,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Operating Revenues $ 152,099 $ 155,945 $ 310,222 $ 315,923
Capacity Revenue $ 101,974 $ 101,474 $ 200,467 $ 201,812
PPA Contract Capacity (MW) 1,240 1,240 1,240 1,240
Billed PPA Availability (1) 98.5% 99.3% 98.5% 99.3%
Electric Revenue $ 47,065 $ 48,046 $ 102,459 $ 100,417
PPA Delivery as a Percentage of Contract Capacity 78.4% 78.5% 78.9% 83.6%
PPA, SEPA and Other Electric Deliveries (MWh) 2,285,755 2,271,031 4,577,024 4,780,680
Average PPA Variable Energy Rate ($/MWh) $ 16.07 $ 16.90 $ 16.22 $ 16.93
Average PPA Fixed Energy Rate ($/MWh) $ 3.50 $ 3.70 $ 3.55 $ 3.80
Steam Revenue $ 3,060 $ 2,607 $ 7,296 $ 6,059
Steam Deliveries (Mlbs) 1,314,420 1,257,167 3,072,280 2,928,118
Other Revenue $ -- $ 3,818 $ -- $ 7,635
(1) As part of the Settlement Agreement (see Part I, Item 1, "Condensed Notes to
Unaudited Consolidated Financial Statements," Note 6, "Contingencies - PPA
"Regulatory-Out" Provision"), effective January 1, 1999, MCV agreed not to
bill Consumers for PPA availability greater than 98.5% in each calendar
year.
Comparison of the Three Months ended June 30, 1999 and 1998
Overview
For the second quarter of 1999, MCV recorded net income of $19.8 million as
compared to net income of $21.2 million for the second quarter of 1998. The
earnings decrease for the second quarter of 1999 from 1998 is primarily due to
expiration of the installment payments under the SEPA with Dow, partially offset
by lower interest expense on MCV's financing obligation.
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Operating Revenues
For the second quarter of 1999, MCV's operating revenues decreased by $3.8
million from the second quarter of 1998. This decrease is due to the expiration
of the installment payments under the SEPA with Dow, lower energy rates under
the PPA and lower capacity revenues under the PPA resulting from the capping of
the capacity payments under the Settlement Agreement. This decrease was slightly
offset by additional capacity revenues and electric sales outside of the PPA.
Operating Expenses
For the second quarter of 1999, MCV's operating expenses were $97.3 million ,
which includes $58.1 million of fuel costs. During this period, MCV purchased
approximately 23.3 bcf of natural gas, of which a net 3.7 bcf was used for
transportation fuel and as a net change to gas in storage. During this same
period, MCV consumed 20.0 bcf, of which .4 bcf of this total was gas provided by
Dow. The average commodity cost of fuel for the second quarter of 1999 was $2.40
per MMBtu. For the second quarter of 1998, MCV's operating expenses were $98.0
million, which includes $59.3 million of fuel costs. During this period, MCV
purchased approximately 21.2 bcf of natural gas, of which 1.4 bcf was used for
transportation fuel and as a net change to gas in storage. During this same
period, MCV consumed 20.6 bcf, of which .8 bcf of this total was gas provided by
Dow. The average commodity cost of fuel for the second quarter of 1998 was $2.42
per MMBtu. Fuel costs for the second quarter of 1999 compared to 1998 decreased
$1.2 million. This decrease was primarily due to a lower average commodity cost
of fuel resulting from increased purchases of lower cost gas on the spot market.
For the second quarter of 1999, operating expenses other than fuel costs
increased $.5 million from the second quarter of 1998. All expenses incurred in
these periods were considered normal expenditures to achieve the recorded
operating revenues.
Other Income (Expenses)
The decrease in interest and other income in the second quarter of 1999 compared
to 1998 reflects lower interest rates on MCV's average cash investments. The
decrease in interest expense in the second quarter of 1999 from the second
quarter of 1998 is due to a lower principal balance on MCV's financing
obligation.
Comparison of the Six Months ended June 30, 1999 and 1998
Overview
For the first six months of 1999, MCV recorded net income of $43.7 million as
compared to net income of $37.9 million for the first six months of 1998. The
earnings increase for the first six months of 1999 over 1998 is primarily due to
a Settlement Agreement between MCV and Consumers effective January 1, 1999,
which resolved a number of disputed issues under the PPA between the parties.
MCV recognized a one-time net $6.4 million increase in operating revenues in
1999 based upon the resolution of these issues. Also contributing to this
increase was lower interest expense on MCV's financing obligation and lower
depreciation expense. This increase was partially offset by lower revenues from
Dow.
Operating Revenues
For the first six months of 1999, MCV's operating revenues decreased by $5.7
million from the first six months of 1998. This decrease is due to the
expiration of the installment payments under the SEPA with Dow, a lower electric
dispatch under the PPA, resulting from Consumers change to economic dispatch of
the facility in mid-March 1998, lower energy rates under the PPA and lower
capacity revenues under the PPA resulting from the capping of the capacity
payments under the Settlement Agreement. This decrease was partially offset by
the $6.4 million increase in electric revenues as a result of the Settlement
Agreement with Consumers and additional capacity revenues and electric sales
outside of the PPA.
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Operating Expenses
For the first six months of 1999, MCV's operating expenses were $197.0 million ,
which includes $117.9 million of fuel costs. During this period, MCV purchased
approximately 42.2 bcf of natural gas, of which a net 2.1 bcf was used for
transportation fuel and as a net change to gas in storage. During this same
period, MCV consumed 41.0 bcf, of which .9 bcf of this total was gas provided by
Dow. The average commodity cost of fuel for the first six months of 1999 was
$2.40 per MMBtu. For the first six months of 1998, MCV's operating expenses were
$206.0 million, which includes $124.9 million of fuel costs. During this period,
MCV purchased approximately 44.2 bcf of natural gas, of which 1.8 bcf was used
for transportation fuel and as a net change to gas in storage. During this same
period, MCV consumed 44.0 bcf, of which 1.6 bcf of this total was gas provided
by Dow. The average commodity cost of fuel for the first six months of 1998 was
$2.41 per MMBtu. Fuel costs for the first six months of 1999 compared to 1998
decreased $7.0 million. This decrease was primarily due to a lower electric
dispatch by Consumers under the PPA.
For the first six months of 1999, operating expenses other than fuel costs
decreased $2.0 million from the first six months of 1998, primarily resulting
from lower depreciation expense. All other expenses incurred in these periods
were considered normal expenditures to achieve the recorded operating revenues.
Other Income (Expenses)
The decrease in interest and other income in the first six months of 1999
compared to 1998 reflects the 1998 accrual for the interest income refund from
Great Lakes Gas Transmission, pursuant to a Federal Appeals Court decision made
in January, 1998 and lower interest rates during 1999 on MCV's average cash
investments. The decrease in interest expense in the first six months of 1999
from the first six months 1998 is due to a lower principal balance on MCV's
financing obligation.
Market Risk Sensitivity
Market risks relating to MCV's operations result primarily from changes in
commodity prices, interest rates and foreign exchange rates. To address these
risks, MCV enters into various hedging transactions as described below. MCV does
not use financial instruments for trading purposes and does not use leveraged
instruments. Fair values included herein have been determined based upon quoted
market prices. The information presented below should be read in conjunction
with Note 2, " Significant Accounting Policies" and Note 5, "Long-Term Debt" to
the Unaudited Consolidated Financial Statements of MCV.
Interest Rate Risks. In 1990, MCV obtained permanent financing for the Facility
by entering into sale and leaseback agreements ("Overall Lease Transaction")
with a lessor group, related to substantially all of MCV's fixed assets. In
accordance with SFAS No. 98, "Accounting For Leases," the sale and leaseback
transaction has been accounted for as a financing arrangement. Under the terms
of the Overall Lease Transaction, MCV sold undivided interests in all of the
fixed assets of the Facility for approximately $2.3 billion, to the Owner Trusts
established for the benefit of the Owner Participants. The financing
arrangement, entered into for a term of 25 years, maturing in 2015, has an
effective interest rate of approximately 8.7%, payable in semi-annual
installments of principal and interest. Due to the unique nature of the
negotiated financing obligation it is impractical to estimate the fair value of
the Owner Participants' underlying debt and equity instruments supporting this
financing obligation.
The carrying amounts of MCV's short-term investments approximate fair value
because of the short term maturity of these instruments. MCV's short-term
investments are made up of investment securities held to maturity and as of June
30, 1999 have original maturity dates of less than one year. In addition, to
manage the effects of interest rate volatility on interest income while
maximizing return on permitted investments, MCV has established an interest rate
hedging program.
For MCV's debt obligations, the table below presents principal cash flows and
the related interest rate by expected maturity dates. The interest rate reflects
the fixed effective rate of interest of the financing arrangement. For the
interest rate swap transactions, the table presents the notional amounts and
related interest rates by fiscal year of
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maturity. The variable rates presented are the average of the forward rates for
the term of each contract, as valued at June 30, 1999.
Expected Maturity Date
---------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
-------- --------- -------- --------- -------- ---------- ---------- ----------
Debt:
Long-Term Debt Fixed
Rate $ 221.7 $ 288.6 $ 292.2 $ 309.2 $ 214.0 $ 1,790.5 $ 3,116.2 N/A
(in millions)
Avg. Interest Rate 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%
Interest Rate Swaps:
Variable to Fixed $ 20.0 $ .06
(in millions)
Avg. Pay Rate 5.68%
Avg. Receive Rate 4.89%
Floating to Floating $ 20.0 $ .06
(in millions)
Avg. Pay Rate 5.62%
Avg. Receive Rate 5.48%
Commodity Risk. MCV is a purchaser of natural gas. MCV enters into natural gas
futures and option contracts in order to hedge against unfavorable changes in
the market price of natural gas in future months when gas is expected to be
needed. These financial instruments are being utilized only to secure
anticipated natural gas requirements necessary for projected electric sales at a
cost of gas less than that available under MCV's long term natural gas contracts
and to hedge sales of natural gas previously obtained in order to optimize MCV's
existing gas supply, storage and transportation arrangements. The natural gas
futures and option contracts qualify as hedges under SFAS No. 80, "Accounting
for Futures Contracts," since the contracts cover probable future transactions.
MCV's futures and forward contracts generally have maturities not exceeding
twelve months.
The following table provides information about MCV's futures contracts that are
sensitive to changes in natural gas prices; these futures contracts have
maturity dates ranging from one to nine months. The table presents the carrying
amounts and fair values at June 30, 1999:
Expected Maturity in 1999 Fair Value
------------------------- ----------
Futures Contracts:
Contract Volumes (Net) (10,000 MMBtu) Long (Buy) 32 --
Weighted Average Price Long (per 10,000 MMBtu) $2.214 $2.335
Weighted Average Price Short (per 10,000 MMBtu) $2.483 $2.467
Contract Amount ($US in Thousands) $14 $408
Foreign Currency Risks. MCV periodically enters into foreign exchange forward
purchase contracts for Swiss Francs to hedge its foreign currency exposure
against adverse currency fluctuations impacting the payments under the amended
Service Agreement with ABB Power. The gains and losses on these transactions,
accounted for as hedges, are deferred on the balance sheet and included in the
measurement of the underlying capitalized major renewal costs when incurred.
Forward contracts which are entered into have maturity dates of less than one
year. As of June 30, 1999, MCV had forward purchase contracts involving Swiss
Francs in the notional amount of $5.0 million, with a deferred $.2 million loss.
Liquidity and Financial Resources
During the six months ended June 30, 1999 and 1998, net cash generated by MCV's
operations was $77.2 million and $84.5 million, respectively. The primary use of
net cash was for the payment of principal on the financing
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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 sixteen years. In January 1999
and 1998, MCV paid the basic rent requirements of $92.3 million and $136.9
million, respectively, as required under the Overall Lease Transaction.
MCV also has arranged for a $50 million working capital line ("Working Capital
Facility") from the 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, 1999, the
borrowing base was $43.7 million. The Working Capital Facility term currently
extends to August 31, 1999, although MCV expects to extend. MCV did not utilize
the Working Capital Facility during the first six months of 1999, 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 any working capital shortfalls which might occur.
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 June 30, 1999, there was $319.4 million (which includes $78.1
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 the
final outcome of the MPSC Restructuring Orders and challenges thereto,
governmental policies, legislation and other regulatory actions (including those
of the Michigan Legislature, Congress, Federal Energy Regulatory Commission and
the Michigan Public Service Commission) with respect to cost recovery under the
PPA, industry restructuring or deregulation, 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 other factors such as weather
conditions, pricing and transportation of commodities, environmental
legislation/regulation, Year 2000 compliance issues 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, capacity
payments made by Consumers and maintenance of the Facility's QF status.
Operating Outlook. In the first six months of 1999, approximately 64% of PPA
revenues were capacity payments which are billed on availability, subject to an
annual availability cap of 98.5% pursuant to the Settlement Agreement, beginning
January 1, 1999. PPA availability was 99.4% in 1998 and 98.9% in 1997.
Availability
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depends on the level of scheduled and unscheduled maintenance outages, and on
the sustained level of output from each of the GTGs and the steam turbines. MCV
expects long-term PPA availability to exceed 90%.
In mid-March 1998, Consumers began economically dispatching the Facility by
scheduling energy deliveries on an economic basis relative to the cost of other
energy resources, instead of at the higher dispatch levels experienced over the
past several years. MCV consequently has seen both electric operating revenues
and operating costs decline. However, MCV Management does not expect this change
to have a material impact on MCV's financial position.
GTG Equipment Problems. In 1996, several of the GTGs experienced severe cracking
in the hot gas casings, which in some cases caused extensive damage to the
turbine blades and vanes. After each such incident, MCV and ABB Power have
identified and modified each of the GTGs to eliminate the problems and have
implemented a program of hot gas path inspections for all GTGs, which are
currently being performed every 3,000 hours. MCV and ABB Power continue to
address reliability issues to alleviate future outages, and MCV believes that
with the modifications that have been made to date 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 through the sixth series of major GTG inspections which are expected to
be completed by year-end 2008.
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 2000. Failure to maintain insurance, subject to certain exceptions,
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 consist of
the costs of natural gas. While MCV continues to pursue the acquisition of fuel
supply beyond the year 2004, 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 1999, the energy charge (fixed and variable)
paid to MCV has declined by .35 cents per kWh, while the average variable cost
of delivered fuel for the period 1990 - 1998, has risen by $0.26 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 spot market or contract prices under which MCV purchases fuel
(contract prices generally escalate at a fixed price, a fixed price with an
escalator, an index based on Consumers' energy charges under the PPA, or a
combination thereof). The difference could be further exacerbated in
approximately five years as MCV's gas contracts begin to expire if the cost of
uncontracted fuel is materially higher than the prices in the expiring
contracts.
Energy Payments Under the PPA. The PPA 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 if the MPSC does not
permit Consumers to recover from its customers the capacity and energy charges
specified in the PPA (the "regulatory out" provision). Pursuant to Amendment 3
of the PPA, for the first 17-1/2 years of commercial operation, the capacity
charge may not be reduced below an average capacity rate of 3.77 cents per
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kWh for the available Contract Capacity notwithstanding the "regulatory out"
provision. Consumers and MCV are required to support and defend the terms of the
PPA.
MCV and Consumers entered into a Settlement Agreement, effective January 1,
1999, which resolves (for the various time periods specified in the Settlement
Agreement) all disputed issues which include all issues involving energy
payments under the PPA. MCV recognized a one-time net $6.4 million increase in
electric revenues in the first quarter of 1999 based upon the resolution of
these issues. On an ongoing basis and for the various time periods specified in
the Settlement Agreement, the Settlement Agreement is not expected to materially
affect MCV's earnings and cash flows.
PPA - Sale and Assignment. In October 1998, Consumers initiated a process for
the solicitation of bids to acquire Consumers' rights to the 1240 MW of Contract
Capacity and associated energy under the PPA. On March 10, 1999, Consumers
announced that it signed a contract with PECO Energy Company ("PECO") whereby
Consumers will sell 1240 MW of capacity and associated energy to PECO from the
MCV PPA beginning January 1, 2002 and ending in September 2007. In addition,
Consumers will sell PECO between 100 MW to 150 MW in 1999 through 2001. The
announcement also states the contract with PECO is subject to satisfactory
regulatory approvals. On March 19, 1999, Consumers filed an application with the
MPSC seeking regulatory approval of various ratemaking and accounting treatments
associated with the PECO contract. On April 30, 1999, the MPSC entered an order
which did not grant all of the relief Consumers requested, but does permit the
transaction to go forward. Consumers has sought clarification and/or rehearing
of that order. MCV does not expect the sale of Consumers' rights to capacity and
associated energy under the PPA to materially affect its financial position or
results of operations.
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. After public hearings and contested case hearings
the MPSC issued its initial order on June 5, 1997, intermediate orders in
related dockets on October 29, 1997, its final order on January 14, 1998, and a
clarification order on February 11, 1998 (collectively the "Restructuring
Orders"). While the Restructuring Orders are not entirely clear, they generally
provide for a transition to a competitive regime whereby electric retail
customers will be able to chose their power supplier and pay negotiated or
market-based rates for such power supply. The Restructuring Orders also mandate
that utilities "wheel" third-party power to the utilities' customers. This
"retail wheeling" is to be phased-in over a four-year period scheduled to start
in September 1999. The MPSC also addressed many transition issues including
reliability, stranded cost (or transition cost) recovery, rates, and other
issues. The two issues involved in this restructuring which could significantly
impact MCV are contract sanctity and stranded cost recovery. On the issue of
contract sanctity, the Restructuring Orders indicate that it was not the intent
of the MPSC to take any action that would affect the contractual rights of QFs,
including MCV. On the issue of stranded cost recovery, the Restructuring Orders
allow recovery by utilities (including Consumers) of stranded costs including
capacity charges previously approved by the MPSC in power contracts incurred
during the regulated era that will be above market prices during the new
competitive regime. However, it appears that stranded cost recovery of
above-market capacity charges in power purchase contracts (i.e., MCV's PPA) is
limited to the period 1998 through 2007 (MCV's PPA expires in 2025). The
Restructuring Orders do not specifically address the recovery of PPA capacity
charges after 2007. The Restructuring Orders permitted Consumers to elect to
suspend the power supply cost recovery ("PSCR") process and freeze its PSCR rate
factor through which charges under the PPA are recovered from retail customers.
The MPSC has suspended the annual PSCR (plan and reconciliation case) process
indefinitely, and froze Consumers' PSCR rate factor. The suspension of the PSCR
process and the PSCR "rate freeze" were effective January 1, 1998. This PCSR
rate freeze is subject to the final outcome of Consumers' 1997 PSCR
reconciliation case (conducted by the MPSC to reconcile actual costs incurred by
Consumers in providing power supply to its retail customers with actual revenue
it collected that same year) which is in progress. This case will determine the
level at which Consumers' PSCR rates (including recovery of MCV capacity and
energy charges) will be frozen during the period 1998 through 2001. MCV is a
party in the 1997 PSCR reconciliation case.
In the restructuring cases before the MPSC, MCV has advocated, among other
things, full recovery of PPA charges (capacity and energy) for the life of the
PPA. MCV, as well as others, filed an appeal in the Michigan Court of Appeals
and a complaint in the U.S. District Court for the Western District of Michigan
challenging the Restructuring Orders. MCV's appeal seeks, among other things,
enforcement of prior MPSC orders (the Settlement
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Order and the 325 MW Settlement Order). MCV's complaint seeks, among other
things, a declaration that the Restructuring Orders are preempted by PURPA to
the extent that they fail to provide for assured retail rate recovery of
payments made by Consumers to MCV pursuant to PURPA and an injunction barring
enforcement of the Restructuring Orders to the extent they are preempted by
PURPA. In June 1999, the Michigan Supreme Court issued an opinion in the appeal
of an order in an MPSC "retail wheeling" experiment case holding, among other
things, that the MPSC lacks the statutory authority to mandate that utilities
transmit power of third parties to the utilities' customers ("Michigan Supreme
Court Order"). While this Michigan Supreme Court Order was not directed at the
Restructuring Orders, it is likely to be applied to them. Consumers Energy has
stated that it intends to voluntarily comply with the Restructuring Orders. The
MPSC has asked interested parties to file comments on the applicability/effect
of the Michigan Supreme Court Order on the Restructuring Orders. In an order
dated July 7, 1999, the U.S. District Court granted MCV's Motion for Summary
Judgment declaring that the Restructuring Orders are preempted by PURPA and the
Supremacy Clause of the United States Constitution to the extent that they
prohibit any utility from recovering from its customers any charge for avoided
costs (or "stranded costs") to be paid to MCV and the other QFs under PURPA
pursuant to their PPAs. The order further provides that the MPSC's prior orders
approving the avoided cost rates set forth in MCV's and the other QFs' PPAs take
precedence over the Restructuring Orders. The Defendants in the lawsuit (the
Commissioners of the MPSC) were permanently enjoined from enforcing the
Restructuring Orders in any manner which denies any utility from recovering its
avoided costs as set forth in MCV's and the other QFs' PPAs or which precludes
them from recovering the full avoided cost rate as set forth in the PPAs,
including but not limited to interpreting or enforcing the Restructuring Orders
to preclude any utility from recovering all or any portion of its avoided costs
previously approved by the MPSC from its customers, whether before, during, or
after the year 2007. This order is subject to appeal. The Michigan legislature
has also begun the process to consider electric industry restructuring and
deregulation. While restructuring could have a material impact on MCV, MCV
Management cannot, at this time, predict the impact or the outcome of these
administrative, judicial and legislative proceedings.
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. Appeals of Order No. 888 and subsequent related orders are pending
before the United States Court of Appeals for the D.C. Circuit. 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 proceedings.
Maintaining QF Status. In the case of a topping-cycle generating plant such as
the Facility, to maintain QF Status 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
the years 1995 through 1998 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. Dow and
DCC steam purchases for the first six months of 1999 averaged 707,410 lbs/hr.
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 to exceed the 15% Thermal
Percentage.
MCV believes that, given projected levels of steam and electricity sales, the
Facility will be able to maintain QF status and 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 status.
In 1998, MCV achieved an Efficiency Percentage of 45.7% and a Thermal Percentage
of 17.3%. During the first six months of 1999, MCV achieved an Efficiency
Percentage of 47.3% and a Thermal Percentage of 19.0%.
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, 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).
Year 2000
Risks of MCV's Year 2000 Issues. MCV utilizes information technologies and
non-information technologies (collectively "Systems") in the Facility, some of
which may be affected by the year 2000 ("Y2K") date change. If uncorrected, the
Y2K date change could cause, among other things, MCV to incur failures and
outages of the Facility's generating equipment, the equipment operating systems
and business systems. In particular, if MCV's critical systems, i.e., GTGs,
steam turbines and the control system, are adversely affected, these negative
conditions could result in a failure to keep the GTGs running and inhibit MCV's
ability to produce electricity and steam.
Because of the integrated nature of MCV's business with third party suppliers,
customers and other vendors (collectively "associates") MCV may also be affected
by Y2K compliance complications of these associates. MCV's key associates
include vendors supplying MCV's plant control system, natural gas vendors,
Consumers as a transmission provider and certain financial institutions. Y2K
compliance complications of these associates could adversely impact MCV's
ability to transmit power and cause difficulties in obtaining natural gas to
fuel the Facility, among other things.
MCV expects that all new equipment software and hardware installations or other
modifications to its Systems will be completed prior to 2000. However, there can
be no guarantee that costs, plans or time estimates will be achieved, and
adverse implications of Y2K non-compliance will not occur. Specific factors that
may cause such adverse results include, but are not limited to, the availability
of personnel trained in this area, the ability to locate and correct all
relevant computer code and the Y2K readiness of MCV's associates.
State of Readiness. In 1997, MCV staff developed a Y2K plan to address the
Systems. The MCV's Y2K plan addresses the Y2K issues in four phases: (1) the
awareness phase, completed in April 1998, brought the Y2K issues to the
attention of all employees; (2) the assessment phase, completed in September
1998, which identified,
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inventoried and prioritized all Systems; (3) the renovation phase, expected to
be completed by the end of August 1999, which consists of converting and
replacing Systems or components and applications in Systems which are business
critical and non Y2K compliant; and (4) the validation and testing phase,
scheduled to be completed by October 1999, which is being done simultaneously
with the renovation phase.
Off-site and pre-installation of the plant control system has been completed
successfully and MCV has completed configuration, installation and
implementation of the new equipment and software supporting the plant control
system. An online integrated test of the plant control system is planned for
early October 1999. Testing and validation of the business network and
associated applications was completed successfully. MCV's work to date indicates
that the GTGs, steam turbine and back-pressure steam turbine appear to have no
Y2K problems and could be operated in a manual mode, if necessary.
In late 1997, MCV began contacting key associates to determine their
organizations' Y2K state of preparedness and is continuing to follow up based on
each entity's Y2K target completion dates. In addition, Y2K status and readiness
meetings have been and will continue to be conducted with key gas suppliers,
customers and other third-party entities.
Contingency Plans. MCV has developed and continues to refine various contingency
plans and procedures which include alternative operating plans for the most
reasonably likely worst-case scenarios. These plans and procedures outline
alternate methods of operations (manual or otherwise) and all resources
required, including staffing needs where necessary. Training and refresher
training of plant personnel has begun and will be conducted throughout the
remainder of the year on emergency and manual operations of plant equipment and
emergency communication systems.
Costs. Anticipated spending to make the Systems Y2K compliant will be expensed
as incurred, except costs for new software which will be capitalized and
amortized over the software's useful life. At this time, MCV estimates the
aggregate expenditures for Y2K compliance and new software to be $300,000. This
estimate does not include any estimated costs that may be incurred by MCV as a
result of the failure of any associate to become Y2K compliant or costs to
implement any contingency plans.
See Part I, Item 1, "Financial Statements -- Notes 1 and 6 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
Settlement of Power Purchase Agreement Issues Relating to Capacity and Energy
Charges
MCV and Consumers entered into a settlement agreement ("Settlement Agreement"),
effective January 1, 1999, which resolves (for the various time periods
specified in the Settlement Agreement) all disputed issues which include all
issues involving energy payments under the PPA. MCV recognized a one-time net
$6.4 million increase in electric revenues in the first quarter of 1999 based
upon the resolution of these issues. On an ongoing basis and for the various
time periods specified in the Settlement Agreement, the Settlement Agreement is
not expected to materially affect MCV's earnings and cash flows.
PPA - Sale or Assignment
In October 1998, Consumers initiated a process for the solicitation of bids to
acquire Consumers' rights to the 1240 MW of Contract Capacity and associated
energy under the PPA. On March 10, 1999, Consumers announced that it signed a
contract with PECO Energy Company ("PECO") whereby Consumers will sell 1240 MW
of capacity and associated energy to PECO from the MCV PPA beginning January 1,
2002 and ending in September 2007. In addition, Consumers will sell PECO between
100 MW to 150 MW in 1999 through 2001. The announcement also states the contract
with PECO is subject to satisfactory regulatory approvals. On March 19, 1999,
Consumers filed an application with the MPSC seeking regulatory approval of
various ratemaking and accounting treatments associated with the PECO contract.
On April 30, 1999, the MPSC entered an order which did not grant all of the
relief Consumers requested, but does permit the transaction to go forward.
Consumers has sought clarification and/or rehearing of that order. MCV does not
expect the sale of Consumers' rights to capacity and associated energy under the
PPA to materially affect its financial position or results of operations.
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. After public hearings and
contested case hearings the MPSC issued its initial order on June 5, 1997,
intermediate orders in related dockets on October 29, 1997, its final order on
January 14, 1998, and a clarification order on February 11, 1998 (collectively
the "Restructuring Orders"). While the Restructuring Orders are not entirely
clear, they generally provide for a transition to a competitive regime whereby
electric retail customers will be able to chose their power supplier and pay
negotiated or market-based rates for such power supply. The Restructuring Orders
also mandate that utilities "wheel" third-party power to the utilities'
customers. This "retail wheeling" is to be phased-in over a four-year period
scheduled to start in September 1999. The MPSC also addressed many transition
issues including reliability, stranded cost (or transition cost) recovery,
rates, and other issues. The two issues involved in this restructuring which
could significantly impact MCV are contract sanctity and stranded cost recovery.
On the issue of contract sanctity, the Restructuring Orders indicate that it was
not the intent of the MPSC to take any action that would affect the contractual
rights of QFs, including MCV. On the issue of stranded cost recovery, the
Restructuring Orders allow recovery by utilities (including Consumers) of
stranded costs including capacity charges previously approved by the MPSC in
power contracts incurred during the regulated era that will be above market
prices during the new competitive regime. However, it appears that stranded cost
recovery of above-market capacity charges in power purchase contracts (i.e.,
MCV's PPA) is limited to the period 1998 through 2007 (MCV's PPA expires in
2025). The Restructuring Orders do not specifically address the recovery of PPA
capacity charges after 2007. The Restructuring Orders permitted Consumers to
elect to suspend the PSCR process and freeze its PSCR rate factor through which
charges under the PPA are recovered from retail customers. The MPSC has
suspended the annual PSCR (plan and reconciliation case) process indefinitely,
and froze Consumers' PSCR rate factor. The suspension of the PSCR process and
the PSCR "rate freeze" were effective January 1, 1998. This PSCR rate freeze is
subject to the final outcome of Consumers' 1997 PSCR reconciliation case
(conducted by the MPSC to reconcile actual costs incurred by Consumers in
providing
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power supply to its retail customers with actual revenue it collected that same
year) which is in progress. This case will determine the level at which
Consumers' PSCR rates (including recovery of MCV capacity and energy charges)
will be frozen during the period 1998 through 2001. MCV is a party in the 1997
PSCR reconciliation case.
In the restructuring cases before the MPSC, MCV has advocated, among other
things, full recovery of PPA charges (capacity and energy) for the life of the
PPA. MCV, as well as others, filed an appeal in the Michigan Court of Appeals
and a complaint in the U.S. District Court for the Western District of Michigan
challenging the Restructuring Orders. MCV's appeal seeks, among other things,
enforcement of prior MPSC orders (the Settlement Order and the 325 MW Settlement
Order). MCV's complaint seeks, among other things, a declaration that the
Restructuring Orders are preempted by PURPA to the extent that they fail to
provide for assured retail rate recovery of payments made by Consumers to MCV
pursuant to PURPA and an injunction barring enforcement of the Restructuring
Orders to the extent they are preempted by PURPA. In June 1999, the Michigan
Supreme Court issued an opinion in the appeal of an order in an MPSC "retail
wheeling" experiment case holding, among other things, that the MPSC lacks the
statutory authority to mandate that utilities transmit power of third parties to
the utilities' customers ("Michigan Supreme Court Order"). While this Michigan
Supreme Court Order was not directed at the Restructuring Orders, it is likely
to be applied to them. Consumers Energy has stated that it intends to
voluntarily comply with the Restructuring Orders. The MPSC has asked interested
parties to file comments on the applicability/effect of the Michigan Supreme
Court Order on the Restructuring Orders. In an order dated July 7, 1999, the
U.S. District Court granted MCV's Motion for Summary Judgment declaring that the
Restructuring Orders are preempted by PURPA and the Supremacy Clause of the
United States Constitution to the extent that they prohibit any utility from
recovering from its customers any charge for avoided costs (or "stranded costs")
to be paid to MCV and the other QFs under PURPA pursuant to their PPAs. The
order further provides that the MPSC's prior orders approving the avoided cost
rates set forth in MCV's and the other QFs' PPAs take precedence over the
Restructuring Orders. The Defendants in the lawsuit (the Commissioners of the
MPSC) were permanently enjoined from enforcing the Restructuring Orders in any
manner which denies any utility from recovering its avoided costs as set forth
in MCV's and the other QFs' PPAs or which precludes them from recovering the
full avoided cost rate as set forth in the PPAs, including but not limited to
interpreting or enforcing the Restructuring Orders to preclude any utility from
recovering all or any portion of its avoided costs previously approved by the
MPSC from its customers, whether before, during, or after the year 2007. This
order is subject to appeal. The Michigan legislature has also begun the process
to consider electric industry restructuring and deregulation. While
restructuring could have a material impact on MCV, MCV Management cannot, at
this time, predict the impact or the outcome of these administrative, judicial
and legislative proceedings.
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. Appeals of Order No. 888 and
subsequent related orders are pending before the United States Court of Appeals
for the D.C. Circuit. 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 proceedings.
Property Tax Appeal
MCV has filed property tax appeals contesting the assessed value of MCV's
property for 1997 and 1998 taxes, which are pending before the Michigan Tax
Tribunal. MCV also filed an appeal for 1999 taxes. MCV Management cannot predict
the outcome of these proceedings.
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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
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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, 1999 /s/ James M. Kevra
------------------ -------------------------------------
James M. Kevra
President and Chief Executive Officer
Dated: August 12, 1999 /s/ James M. Rajewski
------------------ -------------------------------------
James M. Rajewski
Vice President and Controller
(Principal Accounting Officer)
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Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule