<PAGE> 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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number (Under the Securities Act of 1933) 33-37977
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2726166
------------------------------------- ----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 PROGRESS PLACE, MIDLAND, MICHIGAN 48640
-------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 839-6000
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF
(In Thousands)
<TABLE>
<CAPTION>
March 31,
1996 December 31,
ASSETS (Unaudited) 1995
- - ------ ----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 118,073 $ 163,953
Restricted cash and cash equivalents 13,670 13,455
Accounts receivable 66,505 70,496
Gas inventory 2,515 14,396
Unamortized property taxes 19,349 -
Prepaid expenses 5,860 1,053
----------- ------------
Total current assets 225,972 263,353
----------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 2,365,446 2,357,881
Pipeline 21,410 21,410
----------- ------------
Total property, plant and equipment 2,386,856 2,379,291
Accumulated depreciation (457,911) (431,749)
----------- ------------
Net property, plant and equipment 1,928,945 1,947,542
----------- ------------
OTHER ASSETS:
Restricted non-current cash and cash equivalents 138,566 139,852
Deferred financing costs, net of accumulated amortization
of $7,352 and $7,059, respectively 11,225 11,518
Materials, supplies and other 5,789 4,740
----------- ------------
Total other assets 155,580 156,110
----------- ------------
TOTAL ASSETS $ 2,310,497 $ 2,367,005
=========== ============
LIABILITIES AND PARTNERS' EQUITY
- - --------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 75,635 $ 60,865
Interest payable 44,856 91,840
Current portion of long-term debt 75,252 72,190
----------- ------------
Total current liabilities 195,743 224,895
----------- ------------
NON-CURRENT LIABILITIES:
Long- term debt 1,978,776 2,007,815
Other 371 335
----------- ------------
Total non-current liabilities 1,979,147 2,008,150
----------- ------------
CONTINGENCIES
TOTAL LIABILITIES 2,174,890 2,233,045
----------- ------------
PARTNERS' EQUITY 135,607 133,960
----------- ------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,310,497 $ 2,367,005
=========== ============
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-1-
<PAGE> 3
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING REVENUES:
Capacity $ 91,299 $ 100,380
Electric 52,112 49,404
Steam and other 7,610 7,351
--------- ---------
Total operating revenues 151,021 157,135
--------- ---------
OPERATING EXPENSES:
Fuel costs 64,437 57,726
Depreciation 26,203 23,428
Operations 4,159 3,442
Maintenance 4,266 3,082
Property and single business taxes 6,628 6,699
Administrative, selling and general 2,229 2,417
--------- ---------
Total operating expenses 107,922 96,794
--------- ---------
OPERATING INCOME 43,099 60,341
--------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 3,756 3,517
Interest expense (45,208) (46,717)
--------- ---------
Total other income (expense), net (41,452) (43,200)
--------- ---------
NET INCOME $ 1,647 $ 17,141
========= =========
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-2-
<PAGE> 4
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
------------------------------
General Limited
Partners Partners Total
--------- --------- --------
<S> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $105,264 $28,696 $133,960
Net income 1,434 213 1,647
-------- ------- --------
BALANCE, END OF PERIOD $106,698 $28,909 $135,607
======== ======= ========
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-3-
<PAGE> 5
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,647 $ 17,141
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and amortization 26,496 23,731
Decrease in accounts receivable 3,991 541
Decrease in gas inventory 11,881 5,387
Increase in unamortized property taxes (19,349) (19,642)
Increase in prepaid expenses (4,807) (2,161)
Increase in materials, supplies and other (1,049) (1,401)
Increase in accounts payable and accrued liabilities 14,770 4,068
Decrease in interest payable (46,984) (48,382)
Increase (decrease) in other non-current liabilities 36 (64)
--------- ---------
Net cash used by operating activities (13,368) (20,782)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant and equipment (7,606) (4,980)
--------- ---------
Net cash used in investing activities (7,606) (4,980)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (25,977) (22,721)
Decrease in restricted non-current cash and cash equivalents 1,286 9
--------- ---------
Net cash used in financing activities (24,691) (22,712)
--------- ---------
NET DECREASE IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH -- CURRENT (45,665) (48,474)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -- CURRENT,
AT BEGINNING OF PERIOD 177,408 132,980
--------- ---------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -- CURRENT,
AT END OF PERIOD $ 131,743 $ 84,506
========= =========
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-4-
<PAGE> 6
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements and condensed notes should be read
along with the audited financial statements and notes as contained in the
Annual Report on Form 10-K for the year ended December 31, 1995 of Midland
Cogeneration Venture Limited Partnership ("MCV") which includes the Report of
Independent Public Accountants. In the opinion of management, the unaudited
information herein reflects all adjustments (which include only normal
recurring adjustments) necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented.
Prior period amounts have been reclassified for comparative purposes. These
reclassifications had no effect on net income. The consolidated financial
statements include the accounts of MCV and its wholly owned subsidiaries. All
material transactions and balances among entities which comprise MCV have been
eliminated in the consolidated financial statements.
(1) THE PARTNERSHIP AND ASSOCIATED RISKS
MCV was organized to construct, own and operate a combined-cycle,
gas-fired cogeneration facility (the "Facility") located in Midland,
Michigan. MCV was formed on January 27, 1987, and the Facility entered into
commercial operation in 1990.
In February 1992, MCV acquired the outstanding common stock of PVCO
Corp., a previously inactive company. MCV and PVCO Corp. entered into a
partnership agreement to form MCV Gas Acquisition General Partnership for
the purpose of buying and selling natural gas on the spot market and other
transactions involving natural gas activities.
The Facility is designed to provide approximately 1,370 megawatts ("MW")
of electricity and a maximum of 1.5 million pounds of process steam per
hour. MCV has contracted to supply up to 1,240 MW of electric capacity to
Consumers Power Company ("Consumers") for resale to its customers, to supply
electricity and steam to The Dow Chemical Company ("Dow") under the Steam
and Electric Power Agreement ("SEPA") and to supply steam to Dow Corning
Corporation ("DCC") beginning in mid-1996, under the Steam Purchase
Agreement ("SPA"). Results of operations are primarily dependent on
successfully operating the Facility at or near contractual capacity levels
and on Consumers' ability to honor its obligations under the Power Purchase
Agreement ("PPA") with MCV. Sales pursuant to the PPA are expected to
account for over 90% of MCV's revenue over the next ten years.
The Facility is a qualifying cogeneration facility ("QF") certified by
the Federal Energy Regulatory Commission ("FERC") under the Public Utility
Regulatory Policies Act of 1978, as amended ("PURPA"). In order to maintain
QF status, certain operating and efficiency standards must be maintained on
a calendar-year basis. In the case of a topping-cycle generating plant such
as the Facility, the applicable operating standard requires that the portion
of total energy output that is put to some useful purpose other than
facilitating the production of power (the "Thermal Percentage") be at least
5%. In addition, the Facility must achieve a PURPA efficiency standard (the
sum of the useful power output plus one-half of the useful thermal energy
output, divided by the energy input (the "Efficiency Percentage")) of at
least 45%. If the Facility maintains a Thermal Percentage of 15% or higher,
the required Efficiency Percentage is reduced to 42.5%. Since 1990, the
Facility has achieved the applicable Thermal and Efficiency Percentages. For
the three months ended March 31, 1996, the Facility has achieved a Thermal
Percentage of 17.7% and a PURPA Efficiency Percentage of 45.1%. The loss of
QF status could, among other things, cause the Facility to lose its rights
under PURPA to sell power to Consumers at Consumers' "avoided cost" and
subject the Facility to additional federal and state regulatory
requirements. MCV believes that, given projected levels of steam and
electricity sales, coupled with continued diligent operating practices, the
Facility will meet the required Thermal and the corresponding Efficiency
Percentages in 1996.
-5-
<PAGE> 7
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Facility is wholly dependent upon natural gas for its fuel supply
and a substantial portion of the Facility's operating expenses will consist
of the costs of obtaining natural gas. MCV recognizes that its existing gas
contracts are not sufficient to satisfy the anticipated gas needs over the
term of the PPA and, as such, no assurance can be given as to the
availability or price of natural gas after the expiration of the existing
gas contracts. In addition, to the extent that the costs associated with
production of electricity rise faster than the energy charge payments, MCV's
financial performance will be negatively affected. The amount of such
impact will depend upon the amount of the average energy charge payable
under the PPA, which is based upon costs incurred at Consumers' coal-fired
plants and upon the amount of energy scheduled by Consumers for delivery
under the PPA. However, given the unpredictability of these factors, the
overall economic impact upon MCV of changes in future fuel costs under new
or existing contracts cannot accurately be predicted.
(2) RESTRICTED CASH AND CASH EQUIVALENTS
Current and non-current restricted cash and cash equivalents consist of the
following as of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Current:
--------
Funds restricted for plant modifications $ 13,670 $ 13,455
======== ========
Non-current:
------------
Funds restricted for rental payments pursuant
to the Overall Lease Transaction $138,225 $139,546
Funds restricted for management non-qualified plans 341 306
-------- --------
$138,566 $139,852
======== ========
</TABLE>
(3) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of
(in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Accounts payable
Related parties $ 12,652 $ 11,652
Trade creditors 29,250 26,956
Property and single business taxes 27,815 13,675
Other 5,918 8,582
-------- ---------
Total $ 75,635 $ 60,865
======== =========
</TABLE>
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<PAGE> 8
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):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Financing obligation, maturing through 2015,
effective interest rate of approximately 8.7%,
payable in semi-annual installments of principal
and interest, secured by property, plant and equipment $ 2,054,028 $ 2,080,005
Less current portion (75,252) (72,190)
------------- ------------
Total long-term debt $ 1,978,776 $ 2,007,815
============= ============
</TABLE>
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, 1996 and 1995 were $44.9 million and $46.4
million, respectively. Interest and fees paid for the three months ended
March 31, 1996 and 1995 were $91.9 million and $94.8 million, respectively.
(5) CONTINGENCIES
PPA - 25 MW Regulatory Disallowance, Fixed Energy Payments for
Deliveries Above the Caps
On February 23, 1995, the Michigan Public Service Commission ("MPSC") in
Case No. U-10155-R (the 1993 power supply cost recovery reconciliation
proceeding conducted by the MPSC to reconcile actual costs incurred by
Consumers in 1993 in providing power supply to its customers with actual
revenues it collected that same year), ruled that Consumers could not
recover the full 915 MW of MCV capacity and fixed energy charges provided
under the terms of the 1993 revised settlement proposal approved by the
MPSC in Case Nos. U-10127 and U-8871 et al. Instead, the MPSC "allocated"
approximately 25 MW of MCV capacity to "non-jurisdictional" customers (i.e.
customers not subject to PSCR rates), resulting in a disallowance to
Consumers of approximately $7.4 million of which approximately $.7 million
relates to fixed energy charges. In addition, the MPSC ruled in this case
that Consumers could not recover approximately $.6 million of fixed energy
charges payable to MCV for energy delivered above the off-peak cap of 732
MW. (Consumers has paid into escrow approximately $.4 million of this sum
and the balance was paid to MCV.) Consumers and MCV have appealed the MPSC
February 23, 1995 Order to the Michigan Court of Appeals where the matter
is pending. MCV management cannot predict the outcome of this proceeding.
Under the "regulatory out" provision of the PPA Consumers may, under
certain conditions, be relieved of paying energy charges to MCV to the
extent the MPSC does not allow Consumers to recover such charges from its
customers. Consumers is not permitted for the first 17 1/2 years of the PPA
to reduce capacity
-7-
<PAGE> 9
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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. On October 19, 1995, Consumers notified MCV that pursuant
to the "regulatory out" provision of the PPA, it would be increasing the
amount being escrowed each month to reflect its calculation of fixed energy
charge payments related to the 25 MW disallowed by the MPSC described above.
In addition, Consumers requested a refund from MCV of $1.9 million plus
interest, for the calendar years 1993 and 1994 and the first eight months of
1995. On November 21, 1995, MCV responded to Consumers indicating that MCV
would, pursuant to the PPA, refund the appropriate funds, if any, and
determine the appropriate escrowing of funds, if any, at such time as a final
and non-appealable order disallowing these recoveries is entered. As of
March 31, 1996, MCV has not recognized as operating revenues approximately
$2.4 million for amounts placed in escrow and the potential refund.
Currently, Consumers is escrowing approximately $78,000 per month in fixed
energy charge payments from MCV due to this issue.
In addition, as part of its order in Consumers' 1994 PSCR Plan proceedings,
the MPSC, on August 18, 1994, ruled that for 1994 Consumers would not be
permitted to recover fixed energy costs during off-peak hours for energy
delivered above the availability "caps" contained in the Settlement Order
and below 915 MW. MCV believes the MPSC order on this issue is erroneous
and has filed an appeal of the MPSC decision. Other PSCR Plan and
Reconciliation Cases for the years 1994 - 1996 are pending before the MPSC
at this time. MCV Management cannot predict the outcome of these
proceedings. For the first three months of 1996 and the years 1995 and 1994
Consumers has escrowed approximately $.6 million, $.5 million and $.5
million, respectively, of fixed energy charges payable to MCV based on this
MPSC ruling and continues escrowing approximately $.2 million per month for
this portion of fixed energy charges. MCV has not recognized these amounts
as operating revenues.
Fuel Matters
MCV has entered into long-term gas transportation arrangements with four
U.S. interstate transporters: ANR Pipeline Company, Panhandle Eastern Pipe
Line Company, Trunkline Gas Company and Great Lakes Gas Transmission Company
("Great Lakes"). The transportation rates from these transporters are
subject to FERC regulation.
In 1990, Great Lakes expanded its interstate pipeline system to accommodate
gas purchases from MCV and other customers. Historically, such capital
costs were "rolled-in" to the rate base, thus combining the capital cost of
common use facility additions with the cost of existing common use
facilities for the purpose of determining the transportation rates to be
charged to all system shippers. In 1991, FERC issued an order that rejected
rolled-in pricing for the MCV-related expansion costs and, instead, imposed
incremental pricing which, for MCV, took effect April 1, 1993. The
incremental methodology allocates the capital cost of facility additions
solely to the new shippers who will gain access to the expanded facilities.
FERC's decision was appealed by MCV and others to the United States Court of
Appeals for the District of Columbia Circuit, which held that FERC had
failed to adequately explain the adoption of incremental rates and remanded
the orders to FERC for reconsideration. On July 26, 1995, FERC issued its
Order on Remand reversing its prior order and directed Great Lakes to: (i)
implement rolled-in rates prospectively beginning October 1, 1995, for the
expansion facilities including those applicable to MCV; and (ii) refund to
MCV, subject to FERC approval, the principal amount, excluding interest,
paid in excess of rolled-in rates. The estimated economic effect to MCV of
this order is twofold. First, annual transportation costs on the Great
Lakes system will decrease approximately $7.0 million per year as compared
to incremental pricing. Second, the refund to MCV will be approximately
$17.5 million which includes a $3.4 million refund for fuel usage during
transportation. On April 25, 1996, FERC affirmed its Order on Remand as it
pertains to the MCV issues described above ("Order on Rehearing"). The FERC
Order on Rehearing is subject to further administrative and judicial
processes. On May 2, 1996, FERC granted a motion filed by Great Lakes for
clarification of the timing of refunds, surcharges and interest thereon
subsequent to October 1, 1995. Management cannot predict the outcome of
these processes and has not, at this time, reflected in results of
operations any refunds of prior transportation costs. MCV had, from April
1, 1993 to October 1, 1995, reflected in current operating results Great
Lakes gas transportation costs associated with incremental pricing.
-8-
<PAGE> 10
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GTG Equipment Problems
In 1991 and 1992, several gas turbine generators ("GTGs") experienced
cracking in the hot gas casing which, in two cases, caused extensive damage
to the turbine blades. As a result of the cracking problems, modifications
were made on all GTGs and MCV and ABB Power Generation, Inc. ("ABB Power")
implemented a program of hot gas casing inspections for all GTGs. During
1994, ABB Power completed an analysis of cracking problems present in two of
the modified GTG hot gas casings and determined that additional
modifications should be made to the hot gas casings. New hot gas casings
which include these modifications were installed on four units during the
major GTG inspection program in 1995 and are expected to be installed on the
remaining eight units by the first quarter of 1997.
In January 1996, two additional GTGs experienced severe cracking in the hot
gas casing (one of which included the newest hot gas casing modifications),
causing extensive damage to the turbine blades and vanes. MCV immediately
inspected all of the remaining GTG hot gas casings for evidence of cracking
and identified an additional five GTGs which required casing replacements.
During the first quarter of 1996, MCV and ABB Power increased the frequency
of inspections on these units which resulted in additional scheduled and
unscheduled maintenance outages. Extensive analysis and review by MCV and
ABB Power has concluded that crack initiation tended to start in high stress
areas of the hot gas casing and that pulsations were the key factor in crack
propagation in these units. MCV and ABB Power have modified the burner
geometry of the affected turbines which has significantly reduced pulsations
in the hot gas casings. MCV has also installed additional measuring devices
to detect any pulsations which are suspected of accelerating crack
propagation. In addition, MCV and ABB Power continue to study whether any
modifications are needed in the high stress areas of the hot gas casings.
MCV believes that the burner modifications have resolved the pulsation
problems and there should be no significant future impacts on plant
availability or efficiency, although no assurance can be given that
additional equipment problems will not occur.
MCV will be completing its second round of 800 hour GTG inspections in May
1996. If no additional cracking problems occur during the remainder of this
second round of inspections, MCV will increase its GTG inspections to 2000
hours on certain units.
The cost of casing replacements and modifications is covered by ABB Power
(with the exception of insurable events) pursuant to the amended Service
Agreement, under which ABB Power is providing hot gas path parts for MCV's
twelve gas turbines for the next three series of major GTG inspections which
are expected to be completed by the year 2002.
MCV's insurance carriers continue to monitor and review all the GTG
inspection findings. At this time, MCV currently maintains property
insurance policies that include the hot gas casing equipment and are in
effect through the first quarter of 1997. Failure to maintain insurance is
an Event of Default under the Overall Lease Transaction.
-9-
<PAGE> 11
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, 1996, and the nature and amount of related party transactions or
agreements that existed with the Partners or affiliates as of March 31, 1996
and 1995, and for each of the three month periods ended March 31 (in
thousands).
<TABLE>
<CAPTION>
Equity Partner, Type of Partner Equity Related Party Transactions
and Nature of Related Party Interest Interest and Agreements 1996 1995
- - ---------------------------------- ----------- -------- ---------------------------------------------------- -------- --------
<S> <C> <C> <C> <C> <C>
CMS Midland, Inc. $66,447 49.0% Power purchase agreement $138,521 $145,038
General Partner; wholly-owned Power purchase agreement administrative fees 6 6
subsidiary of Consumers Power Purchases under gas transportation agreements 2,321 2,296
Company Purchases under spot gas agreements 740 (60)
Purchases under gas supply agreements 3,063 2,156
Gas storage agreement 641 641
Land lease/easement agreements 150 150
General construction/service/engineering
agreement 39 24
Facilities agreement - transmission line and
metering facility maintenance 11 6
Accounts receivable 50,635 49,628
Accounts payable 5,105 3,545
Gas exchanges 2,789 5,277
The Dow Chemical Company 23,158 7.5 Steam and electric power agreement 12,501 12,096
Limited Partner Purchases under demineralized water supply
agreement 1,640 1,467
Rent under office building lease agreement 114 100
Accounts receivable 2,934 2,672
Accounts payable 1,770 1,551
Standby and backup fees 540 261
Gas exchanges -- 4
Source Midland Limited Partnership 19,167 18.1 Purchases under gas transportation agreements 3,581 2,493
General Partner; affiliate of Purchases under spot gas agreements 2,735 630
PanEnergy Corp Accounts receivable 507 3
Accounts payable 1,791 1,287
Gas exchanges 2,082 207
Coastal Midland, Inc. 11,500 10.9 Purchases under gas transportation agreements 3,688 5,670
General Partner; wholly-owned Purchases under spot gas agreement 592 2,008
subsidiary of The Coastal Purchases under gas supply agreement 1,324 637
Corporation Gas agency agreement 365 198
Deferred reservation charges under gas purchase
agreement 2,955 1,757
Accounts receivable 9 --
Accounts payable 3,224 3,858
Gas exchanges 633 --
MEI Limited Partnership 9,584 9.1 Gas turbine maintenance and spare parts agreement 7,170 3,966
General Partner; affiliate of Accounts payable 390 403
ASEA Brown Boveri, Inc.
Micogen Limited Partnership 4,792 4.5 (No activity to report)
Limited Partner; affiliate of
Fluor Corporation
C-E Midland Energy, Inc. 958 .9 Service Agreement 925 861
Limited Partner; wholly-owned Accounts Payable 372 193
subsidiary of Combustion
Engineering, Inc. which is a
wholly-owned subsidiary
of ASEA Brown Boveri, Inc.
Alanna Corporation 1* .00001 Note receivable 1 1
Limited Partner; wholly-owned
subsidiary of Alanna Holdings
Corporation
</TABLE>
* Alanna's capital stock is pledged to secure MCV's obligation under the lease
and other overall lease transaction documents.
-10-
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This MD&A should be read along with the MD&A in the Annual Report on Form 10-K
for the year ended December 31, 1995 of the Midland Cogeneration Venture
Limited Partnership ("MCV").
Results of Operations: Comparison of the three months ended March 31, 1996 and
1995.
Overview
For the first quarter of 1996, MCV recorded net income of $1.6 million as
compared with net income of $17.1 million for the first quarter of 1995. The
decrease in net income for the first quarter of 1996 as compared to 1995 is
primarily the result of a lower available capacity under the PPA due to first
quarter 1996 equipment problems as well as higher natural gas prices.
Operating Revenues
The following represents significant operating revenue statistics for the three
months ended March 31 (dollars in thousands except average rates):
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Operating Revenues $ 151,021 $ 157,135
Capacity Revenue $ 91,299 $ 100,380
PPA Contract Capacity (MW) 1,240 1,240
PPA Availability 89.3% 99.5%
Electric Revenue $ 52,112 $ 49,404
PPA Delivery as a Percentage of Contract Capacity 84.4% 79.3%
PPA, Additional PPA and SEPA Electric Deliveries (MW) 2,419,810 2,255,730
Average PPA Variable Energy Rate ($/MWh) $ 17.00 $ 17.50
Average PPA Fixed Energy Rate ($/MWh) $ 3.90 $ 3.60
Steam and Other Revenue $ 7,610 $ 7,351
Steam Deliveries (Mlbs) 1,486,910 1,383,170
</TABLE>
For the first quarter of 1996, MCV's operating revenues decreased $6.1 million
from the first quarter of 1995 due primarily to lower capacity revenue under
the PPA, partially offset by the higher electric revenue generated under the
PPA. The capacity revenue reduction of $9.1 million is the result of lower
capacity payments under the PPA due to additional scheduled and unscheduled
maintenance outages on the hot gas casing equipment during the first quarter of
1996. The increase in 1996 first quarter electric revenue of $2.7 million is
primarily the result of
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Consumers' decision to increase MCV's electric dispatch in 1996 consistent with
the terms of the Proposed Settlement, partially offset by lower variable energy
rates.
Operating Expenses
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 used
approximately 23.5 billion cubic feet ("bcf") of natural gas at an average fuel
rate of $2.36 per MMBtu. For the first quarter of 1995, operating expenses
were $96.8 million, which includes $57.7 million of fuel costs. During this
period, MCV used approximately 21.9 bcf of natural gas at an average fuel rate
of $2.19 per MMBtu. The increase in fuel costs for the first quarter of 1996
of $6.7 million compared to 1995 is due to an increase in fuel usage resulting
from the higher Consumers dispatch level and to an increase in purchases of
more expensive long-term gas over short-term gas purchases since there has been
a substantial rise in short-term market prices.
For the first quarter of 1996, operating expenses other than fuel costs
increased $4.4 million over the first quarter of 1995 due primarily to higher
depreciation expense resulting from the amortization of increased payments for
hot gas path parts, an allowance for potential insurance claims on the two hot
gas casings which experienced severe cracking (and consequent damage to the
turbine blades and vanes) and the fees incurred to Dow for two 1996 steam
outages. Other expenses incurred in these periods were considered normal
expenditures to achieve the recorded operating revenues.
Other Income (Expense)
The decrease in interest expense in the first quarter of 1996 from the first
quarter of 1995 is due to a lower principal balance on MCV's financing
obligation.
Liquidity and Financial Resources
During the first quarter of 1996 and 1995, net cash used by MCV's operations
was $13.4 million and $20.8 million, respectively. The primary use of cash was
for the payment of interest and principal on the financing obligation, fuel
costs, maintenance costs and other operating expenses. MCV's cash and cash
equivalents have a normal cycle of collecting six months of revenues less
operating expenses prior to making the semiannual interest and principal
payments of the financing obligation due in January and July for the next
nineteen years. During the first quarters of 1996, and 1995, MCV paid the
basic rent requirements of $117.8 million and $117.5 million, respectively, as
required under the Overall Lease Transaction.
MCV also has arranged for a $50 million working capital line ("Working Capital
Facility") from Bank of Montreal to provide temporary financing, as necessary,
for operations. The Working Capital Facility has been secured by MCV's natural
gas inventory and earned receivables. At any given time, borrowings and
letters of credit are limited by the amount of the borrowing base, defined as
90% of earned receivables. The borrowing base varies over the month as
receivables are earned, billed and collected. At March 31, 1996, the borrowing
base was $48.0 million. The Working Capital Facility term currently extends to
August 31, 1996.
MCV did not utilize the Working Capital Facility during the first quarter of
1996. MCV believes that amounts available to it under the Working Capital
Facility will be sufficient to meet working capital shortfalls, primarily
during months when rent payments are due. In addition, affiliates of certain
MCV Partners have agreed (under certain conditions and for a limited time) to
make loans to MCV in an aggregate amount not to exceed $10 million to cover
working capital expenses, as appropriate. To date, MCV has not made any
borrowings under these agreements with MCV Partners.
Since January 1992, MCV has experienced a reduction in the energy charges it
is paid for electricity under the PPA due both to declining coal costs at
Consumers' generating plants and Consumers' ability, under the "regulatory out"
provisions of the PPA, to withhold fixed energy charges for available but
undelivered energy. These circumstances have resulted in rent coverage ratios
(as defined in the Overall Lease Transaction) of less than
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1.11 to 1.00. If there are continued reductions in energy charges relative to
MCV's cost of fuel used in production, there could be a material adverse impact
on MCV's ability to make future rental payments out of cash flow from
operations. For the foreseeable future, MCV expects to fund current
operating expenses, payments under the amended Service 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, 1996, there was $215.1 million
(which includes $34.1 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 could cause actual results or outcomes to differ materially from
those expressed in the forward-looking statements. Accordingly, this "Safe
Harbor" Statement contains additional information about such factors relating
to the forward-looking statements. There is no assurance that MCV's
expectations will be realized or that unexpected events will not have an
adverse impact on MCV's business.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include
prevailing governmental policies and regulatory actions (including those of the
Federal Energy Regulatory Commission and the Michigan Public Service
Commission) with respect to cost recovery under the PPA, industry and rate
structure, acquisition and disposal of assets and facilities, operation and
construction of plants facilities, natural gas pipeline and storage facilities,
and present or prospective wholesale and retail competition, among others. The
business and profitability of the Company is also influenced by economic
factors, weather conditions, pricing and transportation of commodities,
inflation, among other important factors. All such factors are difficult to
predict, contain uncertainties which may materially affect actual results, and
are beyond the control of MCV.
Results of operations are largely dependent on successfully operating the
Facility at or near contractual capacity levels, the availability of natural
gas, the level of energy rates paid to MCV relative to the cost of fuel used
for generation, Consumers' performance of its obligations under the PPA, and
maintenance of the Facility's QF status.
Operating Outlook. Approximately 70% of PPA revenues are capacity payments
which are based on the Facility's availability. PPA availability was 98.1% in
1995 and 97.2% in 1994. In future years, PPA availability is expected to
decline from the historically high levels as Contract Capacity is sustained at
the PPA contractual level of 1240 MW. Availability will depend on the level of
scheduled and unscheduled maintenance outages, and on the sustained level of
output from each of the GTGs and the steam turbine. MCV expects long-term PPA
availability to exceed 90%.
In 1991 and 1992, several GTGs experienced cracking in the hot gas casing
which, in two cases, caused extensive damage to the turbine blades. As a
result of the cracking problems, modifications were made on all GTGs and MCV
and ABB Power implemented a program of hot gas casing inspections for all GTGs.
During 1994, ABB Power completed an analysis of cracking problems present in
two of the modified GTG hot gas casings and determined that additional
modifications should be made to the hot gas casings. New hot gas casings which
include these modifications were installed on four units during the major GTG
inspection program in 1995 and are expected to be installed on the remaining
eight units by the first quarter of 1997.
In January 1996, two additional GTGs experienced severe cracking in the hot gas
casing (one of which included the newest hot gas casing modifications), causing
extensive damage to the turbine blades and vanes. MCV immediately inspected all
of the remaining GTG hot gas casings for evidence of cracking and identified an
additional five GTGs which required casing replacements. During the first
quarter of 1996, MCV and ABB Power
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<PAGE> 15
increased the frequency of inspections on these units which resulted in
additional scheduled and unscheduled maintenance outages. Extensive analysis
and review by MCV and ABB Power has concluded that crack initiation tended to
start in high stress areas of the hot gas casing and that pulsations were the
key factor in crack propagation in these units. MCV and ABB Power have modified
the burner geometry of the affected turbines which has significantly reduced
pulsations in the hot gas casings. MCV has also installed additional measuring
devices to detect any pulsations which are suspected of accelerating crack
propagation. In addition, MCV and ABB Power continue to study whether any
modifications are needed in the high stress areas of the hot gas casings. MCV
believes that the burner modifications have resolved the pulsation problems and
there should be no significant future impacts on plant availability or
efficiency, although no assurance can be given that additional equipment
problems will not occur.
MCV will be completing its second round of 800 hour GTG inspections in May
1996. If no additional cracking problems occur during the remainder of this
second round of inspections, MCV will increase its GTG inspections to 2000
hours on certain units.
The cost of casing replacements and modifications is covered by ABB Power (with
the exception of insurable events) pursuant to the amended Service Agreement,
under which ABB Power is providing hot gas path parts for MCV's twelve gas
turbines for the next three series of major GTG inspections which are expected
to be completed by the year 2002.
MCV's insurance carriers continue to monitor and review all the GTG inspection
findings. At this time, MCV currently maintains property insurance policies
that include the hot gas casing equipment and are in effect through the first
quarter of 1997. Failure to maintain insurance is an Event of Default under the
Overall Lease Transaction.
Natural Gas. The Facility is wholly dependent upon natural gas for its fuel
supply and a substantial portion of the Facility's operating expenses will
consist of the costs of obtaining natural gas. Over the last several years
additional gas contracts have been entered into or amended, extending the
period over which fuel supplies are secured. While MCV will continue to pursue
the acquisition of fuel supply beyond the year 2001, MCV recognizes that its
existing gas contracts are not sufficient to satisfy the anticipated gas needs
over the term of the PPA and, as such, no assurance can be given as to the
availability or price of natural gas after the expiration of the existing gas
contracts.
Energy Rates and Cost of Production. Under the PPA, energy charges are based
on the costs associated with fuel inventory, operations and maintenance, and
administrative and general expenses associated with certain of Consumers' coal
plants. However, MCV's costs of producing electricity are tied, in large part,
to the cost of natural gas. To the extent that the costs associated with
production of electricity with natural gas rise faster than the energy charge
payments, which are based largely on Consumers' coal plant operation and
maintenance costs, MCV's financial performance would be negatively affected.
For the period April 1990 through March 1996, the variable energy charge paid
to MCV has declined by .21 cents per kWh, while the average variable cost of
production, as indicated by the average cost of delivered fuel for the period
1990 - 1995, has risen by $0.05 per MMBtu.
The divergence between variable revenues and costs will become greater if the
energy charge (based largely on the cost of coal) declines or escalates more
slowly than the contract prices under which MCV purchases fuel (generally
escalated at either the total PPA energy charge or 4% per year). The
difference could be further exacerbated in approximately four years as MCV's
gas contracts begin to expire if the cost of replacement fuel is materially
higher than the prices in the expiring contracts.
Energy Payments Under the PPA. On June 7, 1993, Consumers notified MCV that,
based on its interpretation of the 1993 Settlement Order, it would be applying
the "regulatory out" provision of the PPA and withholding fixed energy payments
on energy delivered during off-peak periods above the "availability caps" but
below 915 MW. In the first three months of 1996 and for the years 1995 and
1994 Consumers paid into escrow fixed energy payments of approximately $.6
million, $.5 million and $.5 million, respectively, for energy delivered above
the availability caps but below 915 MW. MCV has not recognized these amounts
placed in escrow as operating revenues. MCV
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<PAGE> 16
and Consumers have appealed the MPSC orders denying recovery of the fixed energy
charges for energy delivered to Consumers. MCV management cannot predict the
outcome of these appeals. (See Part II, Item 1, " Legal Proceedings - MPSC
Proceedings Relating to Capacity and Energy Charges.")
On February 23, 1995, the MPSC applied the Settlement Order to Consumers' 1993
Reconciliation Case and ruled that Consumers could not recover the full 915 MW
of MCV capacity and fixed energy charges provided under the terms of the 1993
Revised Settlement Proposal approved by the MPSC in the Settlement Order.
Instead, the MPSC "allocated" approximately 25 MW of MCV capacity to
"non-jurisdictional" customers (i.e. customers not subject to PSCR rates),
resulting in a disallowance to Consumers of approximately $7.4 million of which
approximately $.7 million relates to fixed energy charges. In addition, the
MPSC ruled in this case that Consumers could not recover approximately $.6
million of fixed energy charges payable to MCV for energy delivered above the
off-peak cap of 732 MW. (Consumers has paid into escrow approximately $.4
million of this sum and the balance was paid to MCV). It is likely that the
MPSC will apply these types of disallowances in future PSCR cases unless the
Michigan Court of Appeals or other court reverses the Order of the MPSC.
Consumers and MCV have appealed the MPSC February 23, 1995 Order to the
Michigan Court of Appeals where the matter is pending. MCV management cannot
predict the outcome of this proceeding.
On October 19, 1995, Consumers notified MCV that pursuant to the "regulatory
out" provision of the PPA, it would be increasing the amount being escrowed
each month, to reflect its calculation of fixed energy charge payments related
to 25 MW disallowed by the MPSC in Consumers' 1993 Reconciliation Case. In
addition, Consumers requested a refund from MCV of $1.9 million plus interest,
for the calendar years 1993 and 1994 and the first eight months of 1995. On
November 21, 1995, MCV responded to Consumers indicating that MCV would,
pursuant to the PPA, refund the appropriate funds, if any, and determine the
appropriate escrowing of funds, if any, at such time as a final and
non-appealable order disallowing these recoveries is entered. As of March 31,
1996, MCV has not recognized as operating revenues approximately $2.4 million
for amounts placed in escrow and the potential refund. Currently, Consumers is
escrowing approximately $78,000 per month in fixed energy charge payments from
MCV due to this issue.
On September 8, 1995, Consumers and the MPSC staff filed a motion to create a
consolidated proceeding for the purpose of reviewing a proposed settlement
agreement entered into between the MPSC staff and Consumers related to three
cases: Case No. U-10685, Consumers' electric general rate case; Case No.
U-10787, Consumers' request for approval of a special competitive services
tariff (Rate SCS); and Case No. U-10754, Consumers' application for approval of
revised depreciation rates for electric and common utility plant. MCV is a
party to the consolidated proceeding. The settlement agreement proposes
approving the jurisdictional cost recovery of an additional 325 MW of capacity
purchased from MCV. Cost recovery approval for the 325 MW of MCV contract
capacity would be in addition to the 915 MW already approved by the MPSC.
Recovery would begin January 1, 1996. The initial average capacity charge
recovered would be 2.86 cents per kWh escalating to 3.62 cents per kWh in 2004
and thereafter. On September 22, 1995, MCV filed a position statement not
objecting to the proposed settlement agreement, but reserving all of its rights
and privileges under the PPA. If the settlement is approved as filed it will
likely result in an increase in dispatch under the PPA. Consumers has, in
fact, increased MCV's dispatch in 1996 on the expectation that the proposed
settlement agreement will be approved. This should have a positive impact on
MCV's cash flow and earnings, assuming current gas prices and energy rates
continue in effect. Management cannot predict the outcome of this proceeding.
Maintaining QF Status. In the case of a topping-cycle generating plant such as
the Facility, the applicable operating standard requires that the portion of
total energy output that is put to some useful purpose other than facilitating
the production of power (the "Thermal Percentage") be at least 5%. In
addition, the plant must achieve and maintain an average PURPA efficiency
standard (the sum of the useful power output plus one-half of the useful
thermal energy output, divided by the energy input (the "Efficiency
Percentage")) of at least 45%. However, if the plant maintains a Thermal
Percentage of 15% or higher, the required Efficiency Percentage is reduced to
42.5%. The tests are applied on a calendar year basis. The Facility has
achieved the applicable Efficiency Percentage of 42.5% in each year since
commercial operation, while in 1995 the Facility achieved an Efficiency
Percentage in excess of 45%.
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<PAGE> 17
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%). If the Proposed Settlement is approved by the MPSC as filed, energy
deliveries under the PPA could exceed 90% of contract capacity. In that event,
Dow and DCC steam purchases must average approximately 600,000 lbs/hour in 1996
and beyond for the Facility to achieve a 15% Thermal Percentage. Higher levels
of electric energy deliveries will require higher levels of steam purchases in
order to achieve a 15% Thermal Percentage.
From 1991 through 1995 Dow steam purchases have averaged 504,236 lbs/hr. Dow
steam purchases during the first quarter of 1996 averaged 680,820 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.
Under an agreement signed November 1, 1994, Dow committed to purchase steam for
its corporate center which began in October, 1995. MCV believes this will add
an annual average of approximately 25,000 to 30,000 lbs/hr in steam sales. MCV
has also entered an agreement with DCC in which DCC has committed to purchase
steam for its Midland Site beginning in mid 1996, a use MCV believes will add
an annual average of approximately 115,000 lbs/hr in steam sales. Thus, MCV
believes that if deliveries are made pursuant to the SPA, steam sales will be
sufficient to allow the Facility to exceed the 15% Thermal Percentage even if
electricity deliveries under the PPA exceed 90% of contract capacity.
MCV believes that, given projected levels of steam and electricity sales, as a
result of recent equipment modifications, and through diligent management of
the issue, the Facility will be able to maintain QF Certification and should be
capable of achieving a 45% PURPA Efficiency Percentage on a long-term basis.
However, no assurance can be given that factors outside MCV's control such as
Dow and DCC steam requirements, Consumers' dispatch of the Facility pursuant to
the Settlement Order or the Proposed Settlement, extended outage of the Unit 1
steam turbine, major malfunctions of other equipment, or degradation of plant
heat rate will not cause the Facility to fail to satisfy the annual PURPA
qualification requirements and thus lose its QF certification. In 1995 MCV
achieved an Efficiency Percentage of 45.2% and an Operating Percentage of
15.7%.
The loss of QF status could, among other things, cause the Facility to lose its
right under PURPA to sell power to Consumers at Consumers' "avoided cost" and
subject the Facility to additional federal and state regulatory requirements,
including the Federal Power Act (under which FERC has authority to establish
rates for electricity based upon the seller's cost of service, which may be
different than existing contractual rates). If the Facility were to lose its
QF status, the Partners of MCV, the Owner Participants, the bank acting as the
Owner Trustee and their respective parent companies could become subject to
regulation under the Public Utility Holding Company Act of 1935 (under which,
among other things, the Securities and Exchange Commission has authority to
order divestiture of assets under certain circumstances). The loss of QF
status would not, however, entitle Consumers to terminate the PPA. Under the
PPA, Consumers is obligated to continue purchasing power from MCV at
FERC-approved rates (provided that the FERC-approved rates do not exceed the
existing contractual rates) and MCV, not Consumers, is entitled to terminate
the PPA (which MCV has covenanted not to do under the Participation
Agreements). There can be no assurance that FERC-approved rates would be the
same as the rates currently in effect under the PPA. If the FERC-approved
rates are materially less than the rates under the PPA, MCV may not have
sufficient revenue to make rent payments under the Overall Lease Transaction.
The loss of QF status would constitute an event of default under the Lease (and
a corresponding event of default under the Indenture) unless, among other
requirements, FERC approves (or accepts for filing) rates under the PPA
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<PAGE> 18
or other contracts of MCV for the sale of electricity sufficient to meet
certain target coverage ratios (as defined in the Overall Lease Transaction).
See Part I, Item 1, "Financial Statements -- Notes 1 and 5 to the Condensed
Notes to Unaudited Consolidated Financial Statements" for a further discussion
of associated risks and contingencies.
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<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
MPSC Proceedings Relating to Capacity and Energy Charges
Background. Michigan law requires Consumers to file on an annual basis a
"Power Supply Cost Recovery Plan" (the "PSCR Plan") describing, among other
things, the anticipated sources of electric power to be purchased during the
upcoming year. The PSCR Plan must be filed at least three months before the
beginning of the 12-month period covered by the plan. If the MPSC fails to
allow or disallows the costs of purchased power in the PSCR Plan by the
beginning of the year covered thereby, Consumers may adjust its rates to
recover such costs until the MPSC acts. Actual costs are reconciled with the
costs billed to customers in a subsequent filing (made by March 31 each year)
known as the "Power Supply Cost Reconciliation Proceeding" ("Reconciliation
Case"). By law, the MPSC must disallow in the Reconciliation Case any capacity
charges associated with power purchases for periods in excess of six months
unless the MPSC has previously approved the capacity charge. Under a Michigan
statute known as Act 81, once a capacity charge in a contract for a purchase
from a QF has been approved by the MPSC, the MPSC may not disallow recovery by
the utility of that capacity charge from its customers for a 17-1/2 year period
commencing with commercial operation of the QF.
The PPA. The PPA contains a "regulatory out" provision which permits
Consumers, under certain conditions, to reduce the capacity and energy charges
payable to MCV and/or to receive refunds of capacity and energy charges paid to
MCV under the PPA if the MPSC does not permit Consumers to recover from its
customers the capacity and energy charges specified in the PPA. For the first
17-1/2 years after the Facility's Commercial Operation Date, however, the PPA
further provides that Consumers may not reduce the average capacity charge
below 3.77 cents per kWh notwithstanding the MPSC's failure to approve either
the amount of capacity Consumers has agreed to purchase from MCV under the PPA
or the capacity charge specified in the PPA for such purchase.
Energy charges payable by Consumers under the PPA are separate and distinct
from the capacity charge in that no 17-1/2 year protection against the exercise
of the "regulatory out" provision for energy charges is provided for in the
PPA. Although prior approval of energy charges is not required or provided for
under Michigan law, the MPSC has asserted the authority to disallow Consumers'
recovery of a portion of such energy charges paid to MCV. Any disallowance by
the MPSC of Consumers' ability to pass energy charges through to its customers
could, pursuant to the "regulatory out" provision of the PPA, result in a
reduction or refund of the fixed and variable portions of the energy charge
under the PPA.
MPSC Proceedings. In September 1987, in order to comply with the prior
approval requirement for contracts exceeding six months and to obtain the
benefit of the 17-1/2 year rate protection provided by Michigan law, MCV
requested MPSC approval of the 4.15 cents per kWh capacity rate provided for in
the PPA. The MPSC hearing held on the request was consolidated with numerous
dockets involving other qualifying facility projects, and resulted in a number
of MPSC orders. Numerous appeals from the MPSC orders were taken to the
Michigan Court of Appeals and the Michigan Supreme Court by parties to the MPSC
proceedings, including Consumers and MCV. During the pendency of this matter
before the Court of Appeals, Consumers, MPSC staff and other parties negotiated
a Revised Settlement Proposal which was submitted to the MPSC for approval.
On March 31, 1993, the MPSC issued an order, effective January 1, 1993 (the
"Settlement Order"), which approved with modifications the Revised Settlement
Proposal filed by Consumers, the MPSC staff and ten small power and
cogeneration developers. Although MCV was not a party to the Revised
Settlement Proposal, the MPSC staff required that MCV file a letter of
non-objection to the Revised Settlement Proposal. The Settlement Order
addressed the amount Consumers could recover from its electric customers for
the costs of capacity and energy purchased by it from MCV. Generally, the
Settlement Order approved cost recovery of 915 MW of MCV capacity subject to
certain "availability caps" associated with on-peak and off-peak periods of
time each day and recovery of energy payments based on coal proxy prices (the
formula in the PPA). However, instead of capacity
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<PAGE> 20
and fixed energy payments being based on "availability" as provided in the PPA,
the Settlement Order provided for recovery of such payments on an energy
"delivered" basis. The MPSC did not order that the PPA be modified to conform
with the cost recovery approved in the Settlement Order. However, the MPSC
found that since the capacity charges approved for recovery under the PPA would
not be reflected in the PPA, approval for the purposes of Act 81 could not be
extended to those capacity charges. The MPSC did indicate in its order,
however, that its Settlement Order would be implemented for rate-making purposes
in the PSCR Plan and Reconciliation Case for 1993 and was intended to be applied
in subsequent years if the MPSC deemed it to be appropriate. Petitions for
Rehearing of the Settlement Order filed with the MPSC by opponents to the
Revised Settlement Proposal, including the Michigan Attorney General, were
denied by the MPSC in May 1993. In accordance with the provisions of the
Settlement Order, in August 1993 Consumers and MCV withdrew their remaining
appeals relating to MCV cost recovery issues (from 1990, 1991 and 1992 PSCR
Reconciliation Cases) pending before the Michigan Court of Appeals and the
Michigan Supreme Court. An appeal of the Settlement Order has been filed with
the Michigan Court of Appeals by a group representing some of Consumers'
industrial customers and by the Michigan Attorney General ("Appellants"). On
March 19, 1996, the Court of Appeals issued a decision which affirmed the
Settlement Order. The Appellants did not seek further judicial review of the
Court of Appeals' decision and thus the March 19, 1996 decision has become
final.
Because the Settlement Order did not approve the capacity charges authorized
for recovery in the PPA, and thereby denied the protection provided under
Michigan law from reconsideration for a 17-1/2 year period, Consumers' cost
recovery relating to purchases from the MCV is subject to annual PSCR reviews.
In connection with a dispute between MCV and Consumers regarding the payment of
certain fixed energy charges which stemmed from the Revised Settlement
Proposal, on December 10, 1993, Consumers made a written irrevocable offer of
relief ("Offer of Relief") to MCV. The Offer of Relief was for the purpose of
facilitating the sale of Senior Secured Lease Obligation Bonds, issued in
connection with the financing of the Overall Lease Transaction and held by
Consumers. Pursuant to the Offer of Relief, which was rendered final and
irrevocable on December 28, 1993, Consumers committed to pay MCV the fixed
energy charges on all energy delivered by MCV from the block of contract
capacity above 915 MW. Consumers did not commit to pay MCV for fixed energy
charges on energy delivered above the "caps" established in the Settlement
Order up to 915 MW. The Offer of Relief represented a "floor" for the
arbitration of said dispute below which payments to MCV of fixed energy charges
in dispute could not fall. Consumers would schedule deliveries of this energy
in accordance with the provisions of the PPA. This unilateral commitment,
which became effective as of January 1, 1993, to pay fixed energy charges on
delivered energy from the block of contract capacity above 915 MW will expire
on September 15, 2007. This commitment will continue to apply even if the
Settlement Order is later amended.
On June 23, 1993, Consumers exercised its rights under the PPA to obtain a
determination through arbitration proceedings of whether Consumers could
exercise the "regulatory out" provision of the PPA in view of Consumers'
acceptance of the Settlement Order. In a Final Order issued on February 16,
1995, the arbitrator ruled that Consumers may withhold the fixed energy charges
for available but undelivered energy, as well as for energy delivered between
the "caps" contained in the Settlement Order and 915 MW, subject to completion
of appellate review in all regulatory and judicial proceedings with respect to
the Settlement Order and then pending PSCR cases.
On February 23, 1995, the MPSC applied the Settlement Order to Consumers' 1993
Reconciliation Case and ruled that Consumers could not recover the full 915 MW
of MCV capacity and fixed energy charges provided under the terms of the 1993
Revised Settlement Proposal approved by the MPSC in the Settlement Order.
Instead, the MPSC "allocated" approximately 25 MW of MCV capacity to
"non-jurisdictional" customers (i.e., customers not subject to PSCR rates)
resulting in a disallowance to Consumers of approximately $7.4 million of which
approximately $.7 million relates to fixed energy charges. In addition, the
MPSC ruled in this case that Consumers could not recover approximately $.6
million of fixed energy charges payable to MCV for energy delivered above the
off-peak cap of 732 MW. (Consumers has paid into escrow approximately $.4
million of this sum and the balance was paid to MCV.) Consumers and MCV have
appealed the MPSC February 23, 1995 Order to the Michigan Court of Appeals
where the matter is pending. MCV Management cannot predict the outcome of this
proceeding.
-19-
<PAGE> 21
On October 19, 1995, Consumers notified MCV that, pursuant to the "regulatory
out" provision of the PPA, it would be increasing the amount being escrowed
each month to reflect its calculation of fixed energy charge payments related
to the 25 MW disallowed by the MPSC described above. In addition, Consumers
requested a refund from MCV of $1.9 million plus interest, for the calendar
years 1993 and 1994 and the first eight months of 1995. On November 21, 1995,
MCV responded to Consumers indicating that MCV would, pursuant to the PPA,
refund the appropriate funds, if any, and determine the appropriate escrowing
of funds, if any, at such time as a final and non-appealable order disallowing
these recoveries is entered. Currently, Consumers is escrowing approximately
$78,000 per month in fixed energy charge payments from MCV due to this issue.
As part of its order in Consumers' 1994 PSCR Plan proceedings, the MPSC, on
August 18, 1994, ruled that for 1994 Consumers would not be permitted to
recover fixed energy costs during off-peak hours for energy delivered above
the availability "caps" contained in the Settlement Order and below 915 MW.
MCV believes the MPSC order on this issue is erroneous and has filed an appeal
of the MPSC decision. Other PSCR Plan and Reconciliation Cases for the years
1994 - 1996 are pending before the MPSC at this time. MCV Management cannot
predict the outcome of these proceedings. For the first three months of 1996
and the years 1995 and 1994, Consumers has escrowed approximately $.6 million,
$.5 million and $.5 million, respectively, of fixed energy charges payable to
MCV based on this MPSC ruling and continues escrowing approximately $.2 million
per month for this portion of fixed energy charges.
1995 Settlement Proceedings. On September 8, 1995, Consumers and the MPSC
staff filed a motion to create a consolidated proceeding for the purpose of
reviewing a settlement agreement ("Proposed Settlement") entered into between
the MPSC staff and Consumers related to three cases: Case No. U-10685,
Consumers' electric general rate case; Case No. U-10787, Consumers' request for
approval of a special competitive services tariff (Rate SCS); and Case No.
U-10754, Consumers' application for approval of revised depreciation rates for
electric and common utility plant. MCV is a party to the consolidated
proceeding. The settlement agreement proposes approving the jurisdictional
cost recovery of an additional 325 MW of capacity purchased from MCV. Cost
recovery approval for the 325 MW of MCV contract capacity would be in addition
to the 915 MW already approved by the MPSC. Recovery would begin January 1,
1996. The initial average capacity charge recovered would be 2.86 cents per
kWh escalating to 3.62 cents per kWh in 2004 and thereafter. On September 22,
1995, MCV filed a position statement not objecting to the Proposed Settlement,
but reserving all of its rights and privileges under the PPA. If the
settlement is approved as filed it will likely result in an increase in MCV's
dispatch under the PPA. Consumers has, in fact, increased MCV's dispatch in
1996 consistent with the terms of the Proposed Settlement. Based on current
gas prices and energy rates, this should have a positive impact on MCV's cash
flow and earnings, assuming current gas prices and energy rates continue in
effect. Management cannot predict the outcome of this proceeding.
Great Lakes Pricing of Gas Transportation Costs
In 1990, Great Lakes expanded its interstate pipeline system to accommodate gas
purchases from MCV and other customers. Historically, such capital costs were
"rolled-in" to the rate base, thus combining the capital cost of common use
facility additions with the cost of existing common use facilities for the
purpose of determining the transportation rates to be charged to all system
shippers. In 1991, FERC issued an order that rejected rolled-in pricing for
the MCV-related expansion costs and, instead, imposed incremental pricing
which, for MCV, took effect April 1, 1993. The incremental methodology
allocates the capital cost of facility additions solely to the new shippers who
will gain access to the expanded facilities. FERC's decision was appealed by
MCV and others to the United States Court of Appeals for the District of
Columbia Circuit, which held that FERC had failed to adequately explain the
adoption of incremental rates and remanded the orders to FERC for
reconsideration. On July 26, 1995, FERC issued its Order on Remand reversing
its prior order and directed Great Lakes to: (i) implement rolled-in rates
prospectively beginning October 1, 1995, for the expansion facilities including
those applicable to MCV; and (ii) refund to MCV, subject to FERC approval, the
principal amount, excluding interest, paid in excess of rolled-in rates. The
estimated economic effect to MCV of this order is twofold. First, annual
transportation costs on the Great Lakes system will decrease approximately $7.0
million per year as compared to incremental pricing. Second, the refund to MCV
will be approximately $17.5 million which includes a $3.4 million refund for
fuel usage during transportation. On April 25, 1996, FERC affirmed its Order
on Remand as it pertains to the MCV
-20-
<PAGE> 22
issues described above ("Order on Rehearing"). The FERC Order on Rehearing is
subject to further administrative and judicial processes. On May 2, 1996,
FERC granted a motion filed by Great Lakes for clarification of the timing of
refunds, surcharges and interest thereon subsequent to October 1, 1995.
Management cannot predict the outcome of these proceedings. MCV had, from April
1, 1993 to October 1, 1995, reflected in current operating results Great Lakes
gas transportation costs associated with incremental pricing.
-21-
<PAGE> 23
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.
-22-
<PAGE> 24
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, 1996 /s/ James M. Kevra
------------- -----------------------------------------
James M. Kevra
President and Chief Executive Officer
Dated: May 14, 1996 /s/ James M. Rajewski
------------- -----------------------------------------
James M. Rajewski
Vice President and Controller
(Principal Accounting Officer)
-23-
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Page No.
- - ------- ----------
<S> <C> <C>
27 Financial Data Schedule 25
</TABLE>
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 270,309
<SECURITIES> 0
<RECEIVABLES> 66,505
<ALLOWANCES> 0
<INVENTORY> 2,515
<CURRENT-ASSETS> 225,972
<PP&E> 2,386,856
<DEPRECIATION> 457,911
<TOTAL-ASSETS> 2,310,497
<CURRENT-LIABILITIES> 195,743
<BONDS> 1,978,776
0
0
<COMMON> 0
<OTHER-SE> 135,607
<TOTAL-LIABILITY-AND-EQUITY> 2,310,497
<SALES> 0
<TOTAL-REVENUES> 151,021
<CGS> 0
<TOTAL-COSTS> 107,922
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,208
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,647
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
