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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number (Under the Securities Act of 1933) 33-37977
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-2726166
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 PROGRESS PLACE, MIDLAND, MICHIGAN 48640
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 839-6000
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
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<S> <C> <C>
Item 1. Business ................................................................ 1
A.General ............................................................... 1
B.The Partners .......................................................... 1
C.The Facility .......................................................... 2
D.Major Issues Facing MCV ............................................... 2
E.Contracts ............................................................. 3
F.Employees ............................................................. 12
G.Regulation ............................................................ 12
H.Environmental Matters ................................................. 17
I.Overall Lease Transaction ............................................. 19
Item 2. Properties .............................................................. 21
Item 3. Legal Proceedings ....................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders ..................... 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ... 23
Item 6. Selected Financial Data ................................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 23
Item 8. Financial Statements and Supplementary Data ............................. 31
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Reporting Matters ...................................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant ...................... 32
Item 11. Executive Compensation .................................................. 34
Item 12. Security Ownership of Certain Beneficial Owners and Management .......... 36
Item 13. Certain Relationships and Related Transactions .......................... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......... 38
</TABLE>
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PART I
Item 1. BUSINESS
A. General
In January 1987, Midland Cogeneration Venture Limited Partnership ("MCV")
was formed as a limited partnership to convert a portion of an uncompleted
Consumers Power Company, now known as Consumers Energy Company
("Consumers"), nuclear power plant into a natural gas-fired,
combined-cycle, cogeneration facility located in Midland County, Michigan
(the "Facility"). The Facility commenced commercial operation (the
"Commercial Operation Date") in 1990 and is capable of generating
approximately 1370 megawatts ("MW") of electricity and approximately 1.5
million pounds of process steam per hour. The Facility is dependent upon
natural gas for its fuel supply and a substantial portion of the Facility's
operating expenses consist of the costs of obtaining natural gas.
The Facility is a cogeneration facility, meaning that it sequentially
produces electricity and useful thermal energy through an integrated system
using a single fuel source. The Facility has been certified by the Federal
Energy Regulatory Commission ("FERC") as a qualifying cogeneration facility
("QF") under the Public Utility Regulatory Policies Act of 1978, as amended
("PURPA"). As a QF, the Facility is exempt from various provisions of the
Federal Power Act, as amended (the "FPA"), the Public Utility Holding
Company Act of 1935, as amended (the "1935 Act"), certain state laws
regarding rate, financial and organizational regulation, and is entitled to
sell electric capacity and related energy to a public utility (such as
Consumers) at such utility's incremental cost of alternative electric
energy, otherwise known as "avoided cost". A utility's "incremental cost
of alternative electric energy" means, with respect to electric energy
purchased from a QF, the cost to the electric utility of the electric
energy (determined, at the option of the QF, at either the time of delivery
or at the time the obligation is incurred) which, but for the purchase from
such QF, such utility would generate or purchase from another source.
MCV has entered into three separate energy sales agreements. The first is
a Power Purchase Agreement (the "PPA") effective in 1990, providing for the
sale to Consumers of electric capacity and related energy from the Facility
for a term of 35 years. Under the terms of the PPA, MCV will supply up to
1240 MW of electric capacity and related energy to Consumers for resale to
its customers. The second is a Steam and Electric Power Agreement (the
"SEPA") also effective in 1990, providing for the sale to The Dow Chemical
Company ("Dow") of steam and electricity produced by the Facility for terms
of 25 years and 15 years, respectively. The third is a Steam Purchase
Agreement (the "SPA") effective in 1996, providing for the sale of steam
produced by the Facility to Dow Corning Corporation ("DCC") for a term of
15 years.
B. The Partners
The current general partners of MCV are CMS Midland, Inc. ("CMS Midland"),
a wholly-owned subsidiary of Consumers, Source Midland Limited Partnership
("Source Midland"), a wholly-owned limited partnership of MCN Energy Group
Inc., Coastal Midland, Inc., a wholly-owned subsidiary of The Coastal
Corporation ("Coastal"), and MEI Limited Partnership, an affiliate of Asea
Brown Boveri, Inc. ("ABB"). On May 16, 1997, MCNIC Power Company, a
wholly-owned subsidiary of MCN Energy Group Inc., acquired all of
the partnership interests in Source Midland from PanEnergy Corp., the
previous parent company. MCV's current limited partners are C-E Midland
Energy, Inc., an affiliate of ABB, Dow, Micogen Limited Partnership, an
affiliate of Fluor Corporation ("Fluor"), and Alanna Corporation
("Alanna"), a wholly-owned subsidiary of Alanna Holdings Corporation
("Alanna Holding"). The capital stock of Alanna Holding is owned by Dow,
CMS Energy Corporation ("CMS Energy"), an affiliate of Consumers, Coastal
Natural Gas Company, an affiliate of Coastal, Source Midland, Fluor and ABB.
The general partners and limited partners of MCV are referred to herein as
the "Partners." The ownership interests of the Partners are described in
Part III, Item 12, "Security Ownership of Certain Beneficial Owners and
Management."
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C. The Facility
MCV's principal business is the operation of the Facility and the sale of
electric capacity and related energy (principally to Consumers) and steam
(to Dow and DCC) produced at the Facility. The Facility is located on an
approximately 1,200-acre site that is leased from Consumers (the "Site").
The Facility consists of the following:
- 12 gas turbine generators ("GTGs") capable of producing approximately
1045 MW (gross) under design ambient conditions;
- 12 heat recovery steam generators ("HRSGs") which create steam using heat
from the GTG exhaust;
- A steam turbine (the "Unit 1 Steam Turbine") capable of producing 355
MW (gross) under design ambient conditions from the steam generated by
the HRSGs;
- A second steam turbine (the "Unit 2 Steam Turbine") which serves as a
backup to the Unit 1 Steam Turbine;
- Pollution control assets;
- A 25-mile gas pipeline connecting the interstate gas pipeline system to
the Facility;
- Pipelines to deliver steam to Dow and DCC; and
- Various associated equipment and improvements.
The Facility is designed to have a net electrical generating capacity of
approximately 1370 MW and to produce approximately 1,500,000 pounds per
hour of process steam under design ambient conditions. Electricity is
produced from the 12 GTGs, and the steam is produced by the 12 HRSGs using
the heat from the GTG exhaust. The Unit 1 Steam Turbine is designed to
produce electricity from the steam generated by the HRSGs and process steam
that is provided to Dow and DCC. Demineralized water is sold by Dow to MCV
from the Dow plant. Electricity is sold by MCV to Consumers through an
interconnect and to Dow through dedicated transmission lines.
D. Major Issues Facing MCV
MCV faces several major issues crucial to its future success. These
issues, briefly summarized here, are discussed more fully in the sections
cross referenced below:
Electric Industry Restructuring. At both the state and federal level,
efforts continue on restructuring the electric industry. In Michigan, the
Michigan Public Service Commission ("MPSC") has entered a final order
permitting customers to choose their power provider over a four-year
phase-in period beginning in 1998. Similar efforts, in the form of
proposed legislation, exist at the federal level. Two issues generally
involved in these restructuring efforts which could impact MCV the most are
stranded assets or transition cost recovery for utilities and contract
(PPA) sanctity. Approximately 90% of MCV's revenues come from sales
pursuant to the PPA. To date, these restructuring efforts have not
negatively impacted MCV, but if the final order of the MPSC is construed so
as to deny stranded cost recovery of above-market PPA costs, and such order
is not reversed on appeal, MCV may be negatively impacted especially in the
period after 2007. MCV continues to monitor and participate in these
matters, as appropriate. (See Part I, Item 1, Section G, "Regulation -
Michigan Electric Industry Restructuring Proceedings", Part II, Item 7,
"MD&A - Outlook - Michigan Electric Industry Restructuring Proceedings",
Part I, Item 1, Section G, "Regulation - Federal Electric Industry
Restructuring", Part II, Item 7, "MD&A - Outlook - Federal Electric
Industry Restructuring" and Notes to Consolidated Financial Statements,
Note 1, "The Partnership and Associated Risks".)
Energy Rate and Cost of Production. Since January 1992, MCV has
experienced an overall reduction in the energy charges it is paid for
electricity under the PPA, primarily due to declining coal costs at
Consumers' generating
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plants and Consumers' exercise of the "regulatory out" provision of the PPA
with respect to fixed energy charges. In addition, MCV's costs associated
with production of electricity have continued to rise. These circumstances
have negatively affected cash flow. (See Part I, Item 1, Section G,
"Regulation -- MPSC and Other Proceedings Relating to Capacity and Energy
Charges", Section I, "Overall Lease Transaction", and Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") -- Liquidity and Financial Resources.")
Plant Availability. Approximately 65% of PPA revenues are capacity
payments based on the Facility's availability to generate electricity. PPA
availability will depend on the level of scheduled and unscheduled
maintenance and on the level of output from the GTGs and steam turbines.
Over the past seven years, some of the GTGs have experienced cracking in
the hot gas casings. As a result of these cracking problems, MCV and ABB
Power Generation, Inc. ("ABB Power") implemented a program of hot gas
casing inspections for all GTGs. MCV and ABB Power continue to address
equipment reliability issues to alleviate future outages. (See Part II,
Item 7, "MD&A -- Outlook -- Operating Outlook" and Notes to Consolidated
Financial Statements, Note 8, "Contingencies -- GTG Equipment Problems.")
Natural Gas Availability and Price. MCV is wholly dependent on natural gas
for its fuel supply. While MCV continues to acquire long-term fuel supply,
the availability or price of natural gas after the expiration of existing
gas contracts is uncertain. (See Part I, Item 1, Section G "Regulation --
Other Regulatory Issues," Part II, Item 7, "MD&A -- Outlook -- Natural Gas"
and Notes to Consolidated Financial Statements, Note 1, "The Partnership
and Associated Risks.")
E. Contracts
MCV has entered into the PPA, which provides for the sale to Consumers of
electric capacity and related energy; the SEPA, which provides for the sale
of steam and electricity to Dow; the SPA, which provides for the sale of
steam to DCC; gas supply, storage and transportation contracts with a
number of companies; a transmission service agreement with Consumers; an
agreement covering gas turbine inspection services and spare parts with ABB
Power and an agreement covering steam turbine inspection services and parts
with General Electric Company ("GE"). MCV's interests in all the foregoing
contracts, except the SPA, have been assigned to the Owner Trustees, which
in turn subassigned such contracts to MCV and granted a security interest
in such contracts to the Note Trustees. (See Part I, Item 1, Section I,
"Overall Lease Transaction.") The following is intended to summarize
briefly certain provisions of such contracts and is qualified in its
entirety by reference thereto.
Power Purchase Agreement
Under the PPA, Consumers contracted to purchase specified amounts (the
"Contract Capacity") of the Facility's electric capacity, for an initial
35-year term commencing on the Commercial Operation Date, and thereafter
subject to yearly extensions that are automatic in the absence of a
termination notice from either party. Beginning in 1995 and thereafter,
Contract Capacity is 1240 MW/hour.
In allocating the available electrical output of the Facility, MCV must
first satisfy Dow's requirements under the SEPA before supplying power to
Consumers.
Consumers has the right of first refusal to purchase any available electric
capacity and related energy produced by the Facility in excess of Contract
Capacity. Pursuant to an agreement between Consumers and MCV (the
"Transmission Agreement"), MCV is entitled to sell excess electric capacity
and related energy to other electric utilities, and Consumers is required,
if requested by such utilities, to transmit electrical energy to them.
Capacity charges are payable for available Contract Capacity, whether or
not electricity is dispatched. The capacity charges for on-peak and
off-peak power average 4.15 cents per available kilowatt hour ("kWh");
however, for the first 17-1/2 years of the term of the PPA the capacity
charge may be reduced by Consumers to a level of no less than an average of
3.77 cents per kWh.
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Energy charges are based on costs incurred by Consumers at certain of its
coal-fired plants (i.e., those coal plants wholly or partially owned by
Consumers having a net demonstrated capacity of at least 100 MW, available
for generating electrical energy for not less than 5500 hours during the
most recent year and having a capacity factor of at least 40% when
connected to Consumers' system and generating electrical energy).
Fixed Energy Charges. Like the capacity charges, fixed energy
charges are payable for available kWhs of Contract Capacity. Fixed
energy charges are adjusted each year based on a fuel inventory
charge, administrative and general expenses and one-half of
operation and maintenance expenses (excluding fuel) incurred at
these plants during either the immediately preceding calendar year
or the calendar year preceding that year depending on when the
adjustment is being made. In 1991, Consumers asserted that, under
the PPA, it had the right to withhold that portion of fixed energy
charges payable on the basis of energy available but not delivered
since it was not permitted by the MPSC to collect such charges from
its electric customers. In a final order issued in February 1995,
an arbitrator ruled that Consumers was entitled under the PPA to
reduce its payments of fixed energy charges for energy available
but not delivered. (See Part I, Item 1, Section G, "Regulation --
MPSC and Other Proceedings Relating to Capacity and Energy
Charges.")
Variable Energy Charges. Variable energy charges are payable for
energy actually delivered. Variable energy charges are determined
monthly and are equal to one-half of operation and maintenance
expenses incurred at these plants, as calculated annually, and the
actual cost of coal burned at these plants as determined monthly
based on a rolling twelve-month average (with a two-month lag) and
converted to an overall cost per kWh.
As noted above, 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). For the
first 17-1/2 years of commercial operation, however, 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. (See Part I, Item 1, Section G, "Regulation -- MPSC and Other
Proceedings Relating to Capacity and Energy Charges.")
Under the PPA, MCV must provide initial assurances that it has adequate gas
supplies under contract to generate at least 60% of the maximum annual
output of Contract Capacity for the period commencing on the Commercial
Operation Date through 1999. Consumers has acknowledged that MCV has
provided, such initial assurances to Consumers. In addition, commencing in
1998, MCV must provide at Consumers request continuing annual assurances of
such capability for each succeeding five-year period. MCV believes it can
meet the requirement of continuing assurances in 1998 for the 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. The portion of such
capacity charges is a function of the percentage of unmet fuel needs and an
increasing factor based on the number of consecutive months that capacity
charges have been withheld. Assuming a 3.77 cents per kWh capacity charge,
the maximum capacity charges which could be withheld and escrowed under
this provision are as follows:
<TABLE>
<CAPTION>
Maximum Possible
Consecutive Months That Reduction in
MCV Fails to Provide Capacity Charge
Adequate Continuing Assurance (cents/kWh)
----------------------------- ----------------
<S> <C>
1-12 .............. .1885
13-24 .............. .5655
25-36 .............. 1.5080
37 and thereafter .. 2.6390
</TABLE>
The PPA does not make any provision for the use of escrowed funds, except
that the PPA provides that interest earned, if any, on the escrowed funds
is to be divided equally between MCV and Consumers. After withholding
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capacity charges for 48 months without fuel assurances being provided,
Consumers may terminate the PPA. In the event of termination, MCV must pay
an early termination charge.
If any party is rendered unable by force majeure to carry out its
obligations under the PPA, these obligations are suspended during the
period of force majeure. Force majeure includes all natural calamities;
war; curtailments, orders, regulations or restrictions imposed by
governmental authority; and all other causes beyond the reasonable control
of the affected party, but specifically does not include shortages of fuel
and supplies (unless caused by calamity or unusual world events applicable
to other major industrial users as well as MCV), mechanical breakdowns,
labor strikes or explosions or fires (unless caused by criminal acts).
Consumers schedules all deliveries of electricity from the Facility to its
system and is obligated to do so in a manner consistent with the safe and
prudent operation of the Facility. Consumers' determination of the amount
of energy that it dispatches from the Facility will be subject to its
contractual relationships with The Detroit Edison Company, with which
Consumers established a Michigan Electric Coordinated System ("MECS") to
coordinate generation between the two utilities. The operation and
management of the MECS is subject to FERC Order 888 - "Open Access and
Stranded Costs Rulemaking". Through December 31, 1995, Consumers was
scheduling deliveries of electricity pursuant to a March 31, 1993 MPSC
Order. Beginning January 1, 1996, Consumers began dispatching MCV at
higher levels, consistent with the Consumers/MPSC staff proposed settlement
agreement, filed with the MPSC on September 8, 1995, which settlement was
approved, with modifications, by the MPSC on November 14, 1996. (See Part
I, Item 1, Section G, "Regulation -- MPSC and Other Proceedings Relating to
Capacity and Energy Charges.") On March 13, 1998, MCV received notice from
Consumers that it would begin 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.
As long as the annual availability of Contract Capacity equals or exceeds
75% of Contract Capacity, Consumers must purchase sufficient electrical
energy from the Facility to achieve at least a 60% capacity factor on an
annual basis. This purchase obligation decreases, based on a prescribed
formula, if annual availability falls below 75% of Contract Capacity.
Consumers must purchase a specified minimum amount of electrical energy at
all times, except during emergencies on its system. MCV determines a
minimum level of generation designed to assure that the Facility operates
in a stable manner and that MCV meets its obligations to supply steam and
electricity to Dow, but MCV cannot specify a minimum generating level which
exceeds 350 MW. Outages, other than forced outages, are to be scheduled to
accommodate Consumers' requirements to the extent MCV deems practicable.
MCV is obligated to have the Facility inspected at least once each year by
a consulting engineer selected by it from a list of engineering firms
approved by Consumers. The annual inspection includes, at a minimum, all
equipment, structures, operating procedures and maintenance practices
necessary for the generation and delivery of energy to Consumers. Upon
completion of an annual inspection, the consulting engineer must promptly
issue a written report. Any recommendations in this report regarding
equipment, structure and maintenance practices which have been approved by
MCV's management must be implemented within a specified period of time. In
its April 1997 report, Cummins & Barnard, Inc., the consulting engineer,
found no conditions which they considered would constitute a serious risk
to meeting PPA commitments although they recommended that management focus
attention on implementing recommendations to improve the operation and
reliability of the condensate demineralizer system, and made several other
suggestions to be considered as enhancements. During 1998, MCV is
scheduled to implement mechanical and instrumentation control upgrades to
the condensate demineralizer system and other approved recommendations.
With regard to the most recent inspection, MCV expects to receive the
report by the end of April, 1998 and does not anticipate any substantial
problems.
Steam and Electric Power Agreement; Related Dow Agreements
SEPA. Pursuant to the SEPA, Dow has agreed to purchase steam from the
Facility for an initial term of 25 years commencing in 1990 and to purchase
electricity from the Facility for 15 years (any electricity to be purchased
thereafter at Dow's option, although MCV remains obligated to make certain
amounts of electricity available for an
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additional 10 years). The SEPA is subject to automatic extensions for up
to 10 additional years after its 25-year term in the absence of a
three-year notice of termination from either party.
Under the SEPA, Dow has agreed to notify MCV quarterly of the amount of
steam and annually of the amount of electricity expected to be delivered.
In any year, MCV is not obligated to deliver more than 691,900 pounds of
steam per hour and 60 MW of electricity on an annual average basis except
as Dow may increase its entitlement as discussed below. 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). However,
Dow's obligation with respect to minimum annual steam purchases is an
average of 440,000 pounds per hour (less amounts supplied by certain
standby facilities owned by Dow and less 50% of amounts purchased by any
other steam customers of MCV) and is binding only for the initial 25-year
term of the SEPA. During 1997, MCV sold an average of 543,151 pounds of
steam and 61 MW of electricity per hour to Dow.
Dow may increase its steam or electricity entitlement to 110% of the steam
or electricity delivered in the previous 12-month period, plus any steam or
electricity required by any addition to or modification of the Dow plant,
provided that any increase above an annual average of 1,000,000 pounds of
steam per hour or 75 MW of electricity requires MCV's consent. MCV,
however, may be required, on an instantaneous basis, to deliver steam at a
rate of up to 135% of the maximum annual average hourly quantity of steam
or to deliver power at a rate up to 20 MW greater than the applicable
annual average. During 1997, Dow gave notice to MCV that pursuant to the
SEPA it was increasing its electric entitlement to 67.75 MW/hr beginning
April 1, 1997.
On November 1, 1994, MCV and Dow entered into the Seventh Amendment to
SEPA. This amendment provided that Dow would install a steam line to the
Dow Corporate Center for the purpose of delivering MCV-generated steam for
heating and air conditioning purposes. In return, MCV agreed to a 30%
price discount on steam used at the corporate center for a period of five
years for up to 262.8 million pounds of steam per year (an average of
30,000 pounds per hour). On October 5, 1995, steam deliveries to the Dow
Corporate Center began under this provision.
Under the SEPA, there is a base charge for steam and electricity which is
subject to adjustment each quarter based on changes in MCV's fuel costs,
producer price for capital equipment and certain compensation per hour
indices. In 1993, Dow exercised its option under the SEPA to provide the
gas necessary to generate Dow's take of steam and electricity ("toll").
Dow agreed to purchase from MCV the gas used under this tolling option at a
price of $2.72 per million British thermal units ("MMBtu") escalating at 4%
per year, through July 31, 2006 (the "Gas Tolling Agreement"). On April
15, 1996, MCV and Dow entered into an agreement (the "April 15, 1996
Agreement") concerning gas tolling which terminated the Gas Tolling
Agreement. The April 15, 1996 Agreement provides that Dow may toll up to
9,000 MMBtu per day, subject to certain limitations and conditions, until
January 1, 2002, at which time Dow's tolling rights revert to the
provisions in the SEPA. Under the provisions of the SEPA, Dow receives a
billing credit of 5/8 of its steam and electric charges in exchange for Dow
purchasing the gas from MCV. Dow has been tolling gas under the April 15,
1996 Agreement since April 1, 1997. In addition, Dow must make 36
consecutive quarterly installment payments of $3,817,500 each, through the
year 1998, to MCV in consideration for the delivery of steam and
electricity.
In order to assure reliable steam for the Dow plant, Dow owns and maintains
certain standby facilities consisting of certain package boilers, which are
not part of the Facility (the "Standby Facilities"). The Seventh Amendment
to SEPA also provided that Dow would retire certain of the Standby
Facilities located on the MCV site and would progressively reduce the
annual standby fees payable to Dow from $700,000 per year to a level of
$350,000 per year in 1998 and thereafter. These fees are subject to
adjustment each quarter based on changes in fuel costs, capital equipment
costs and wage rates. In addition, the fee charged by Dow for each use of
the Standby Facilities, necessitated by MCV's failure to deliver steam
under the SEPA, was increased from $100,000 to $150,000. From the
Commercial Operation Date through December 31, 1997, MCV has paid or
incurred an aggregate of $900,000 to Dow for eight instances requiring use
of the Standby Facilities.
The terms of the SEPA provide that Dow may terminate the SEPA if one or
more "contract outages" occur for a cumulative period greater than 60 hours
in the first year after the Commercial Operation Date, 40 hours in the
second year and 24 hours in any subsequent year, provided that a single
outage of more than 24 consecutive hours
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but less than 72 consecutive hours will not give rise to a right of
termination unless another such contract outage has occurred within the
previous 60 months.
A "contract outage" generally occurs when MCV fails to deliver minimum
operation steam (i.e., an hourly flow rate of at least 75% of the then
current rate), or fails to meet pressure specifications after having failed
to deliver steam for 15 consecutive minutes, or fails to meet pressure and
quantity specifications after having failed to deliver steam for seven
consecutive days, except in each case as a result of scheduled maintenance
outages, outages forced at Dow's request or resulting from Dow's failure to
provide demineralized water or waste water treatment services or outages
caused by an event of force majeure lasting no more than two years. Steam
provided to Dow from the Standby Facilities is treated as steam delivered
by MCV for this purpose. For such a contract outage to occur, more than
ten of the Facility's GTGs would have to be out of service at the same time
that Dow's Standby Facilities are unavailable.
The SEPA and various backup agreements among MCV, Consumers and Dow contain
various provisions designed to assure a continuous supply of steam and
electricity to Dow in the event the SEPA is terminated.
Dow Facilities and Demineralized Water. Dow owns the electrical
transmission lines which carry electricity from the Facility to the Dow
plant. Dow also owns certain steam and demineralized water lines which are
used in the operation of the Facility, and which have been leased by Dow to
MCV. Dow has contracted to provide MCV sufficient demineralized water to
meet the Facility's requirements until 30 months after MCV's obligation to
supply steam to Dow ceases.
Steam Purchase Agreement
On November 15, 1995, MCV entered into the SPA with DCC which generally
provides that MCV will construct, own and operate a steam line and
appurtenant equipment to serve steam to DCC's Midland Plant. DCC has
agreed to purchase steam from MCV for an initial term of fifteen years with
automatic year-to-year renewals thereafter. Under the SPA, MCV expects to
supply steam at the rate of up to 180,000 pounds per hour with a minimum of
90,000 pounds per hour. The steam MCV provides DCC must meet operational
and content specifications. The provision of steam to DCC is subject to
Dow's first preference to the steam under the SEPA. MCV began supplying
steam to DCC in July, 1996. The parties have certain termination rights
after the declared in service date but may be subject to penalties or
payment of damages for such termination.
Gas Supply Arrangements
MCV has a portfolio of natural gas purchase contracts (the "Gas
Contracts"), having remaining terms of 2 to 13 years, with U.S. and
Canadian suppliers for a maximum supply of natural gas as of January 1,
1998 of 236,500 Mcf/day. No single Gas Contract accounts for more than 8%
of MCV's portfolio, and no single supplier accounts for more than 14% of
MCV's portfolio. Gas Contracts with U.S. suppliers ("U.S. Gas Contracts")
provide for the purchase of 156,500 Mcf/day as of January 1, 1998, while
Gas Contracts with Canadian suppliers ("Canadian Gas Contracts") provide
for the purchase of 80,000 Mcf/day.
The Gas Contracts have a fixed price in a base year which is subject to
adjustment under various methods -- a fixed escalator; an index based on
Consumers' energy charges under the PPA; or a combination thereof -- which
permits the seller to increase the price by the greater of the fixed
escalator or the energy charge index. Over the terms of the contracts,
approximately 37% of the volume is priced with a fixed escalator, 28% is
priced with the energy index and 35% with a combination thereof. While the
price of gas under the U.S. Gas Contracts is exclusive of transportation
charges (beyond the point of delivery into a pipeline servicing MCV), the
Canadian Gas Contracts require the payment of a monthly charge whether or
not MCV buys any gas (the "Demand Charge") to cover the costs incurred by
Canadian suppliers for the provision of transportation capacity to the
U.S.-Canada border.
7
<PAGE> 10
MCV has entered into the following Gas Contracts:
<TABLE>
<CAPTION>
Maximum
Daily Contract Base
Quantity Expiration Price/Year Pricing
Current U.S. Suppliers in Mcf(a) Date $/MMBtu Formula
- -------------------------------------- ---------- ---------- ----------------- -----------------------
<S> <C> <C> <C> <C>
ANR Production Co. 5,000 4/1/2002 2.15/1988 Fixed plus 4% escalator
Apache Corp. ("Apache I") 20,000 12/31/2000 2.25/1988 Fixed plus 4% escalator
Apache Corp ("Apache II"). 12,000 1/1/2002 1.95/1987 Energy index
Apollo Exploration and Development, Greater of fixed price
Delta Oil Co., Inc., Force Energy plus 4% escalator or
Inc. ("Apollo") 7,500(b) 4/1/2011 2.79/1995 energy index
Aquila Energy Marketing Corp. 11,000 12/31/2004 2.319/1990 Greater of fixed plus
4% escalator or energy
index through 1999,
scheduled price
increases from $4.06
in 2000 to $5.02 in
2004
Greater of fixed price
CMS Energy Corporation and CMS NOMECO Oil plus 4% escalator or
& Gas Co. 10,000 12/31/2006 2.15/1988 energy index
CNG Producing Co. 20,000 4/1/2002 1.85/1987 Fixed plus 4% escalator
CNG Producing Co. 12,000 4/1/2000 2.27/1989 Fixed plus 4% escalator
CoEnergy Trading Co.
("Co Energy I") 5,000 12/31/2006 2.15/1988 Greater of fixed price
plus 4% escalator or
CoEnergy Trading Co. energy index
("Co Energy II") 10,000 12/31/2006 2.34/1992 Greater of fixed price
plus 4% escalator or
energy index
Dominion Midwest Energy, Inc. (b)
("Dominion") 5,500(b) 1/1/2007 2.54/1991 Greater of fixed price
plus 4% escalator or
energy index
Enron Power Services, Inc. ("Enron I") 8,500 12/31/2007 2.65/1997 Greater of scheduled
price or energy index
through 1999,
scheduled price
increases from $3.33
in 2000 to $6.37 in
2007
Enron Capital & Trade Resources Corp.
("Enron II") 15,000 9/30/2006 2.45/1997 Scheduled price
increases from
$2.45/MMBtu in 1997 to
$3.365/MMBtu in 2005.
Oxy USA, Inc. 15,000 12/31/2001 2.25/1988 Energy index plus floor
-------
Subtotal as of 1/1/97 156,500
Current Canadian Suppliers
- --------------------------------------
Coral Energy Canada, Inc. (c) 15,000 11/1/2004 1.95/1988 Energy index
Husky Oil Operations, Ltd. ("Husky") 15,000 11/1/2006 1.90/1988 Energy index plus floor
Norcen Energy Resources Limited 10,000 11/1/2001 1.95/1988 Energy index
North Canadian Oils, Ltd. 10,000 11/1/2000 1.95/1989 Greater of fixed price
plus escalator or
energy index
Poco Petroleum Ltd. 15,000 11/1/2004 1.95/1988 Greater of fixed price
plus escalator or
energy index
TransCanada Pipelines Limited
through its agent Western Gas
Marketing Limited 15,000 11/1/2004 1.95/1988 Energy index
-------
Subtotal 80,000
-------
Total as of 1/1/97 236,500
=======
Future U. S. Suppliers
- --------------------------------------
Engage Energy US, L.P. (d)
(Gas deliveries begin on 1/1/2002) 30,000 12/31/2006 3.05/2002 4% escalator to 2005
$3.60 in 2006
CMS Marketing, Services and Trading
Company (Gas deliveries begin on
1/1/2003) 15,000 12/31/2004 2.21/2003 Price remains constant
(for 5,000/ day) over the two-year term
of the contract
2.13/2003
(for 10,000/ day)
</TABLE>
8
<PAGE> 11
- ---------------------
(a) Some contracts are in thousand cubic feet ("Mcf"),
some in MMBtu. Depending on the heat content of the gas, one
Mcf may be more or less than one MMBtu. This analysis assumes
an equivalent heat content.
(b) Dominion Midwest Energy, Inc. ("Dominion") changed
its name from Wolverine Oil and Gas Company Inc., effective
January 1, 1998. The Dominion contract is a dedication of gas
production from certain Michigan Antrim Shale gas reserves.
Unlike MCV's other Gas Contracts, the Dominion and Apollo
contracts do not impose an obligation on Dominion or Apollo to
deliver the MDQ. Under the Dominion contract, Dominion is
only obligated to deliver 500 Mcf/day. MCV, however, is
required to take the quantity delivered, up to the MDQ, or
reimburse Dominion for the difference in price between the
contract price and the spot market price. Under the Apollo
contract, Apollo is obligated to deliver only 500 Mcf/day and
no explicit payment is defined if MCV fails to take up to the
MDQ.
(c) Effective May 31, 1997, the gas contract formerly
with Shell Canada Limited was assigned to Coral Energy Canada,
Inc.
(d) Effective June 1, 1997, the gas contract formerly
with Coastal Gas Marketing Company was assigned to Engage
Energy US, L.P.
Current U.S. Gas Contracts. The U.S. Gas Contracts provide for either a
corporate "warranty of deliverability" or a "dedication of reserves."
Under a dedication of reserves, specific reserves are dedicated to fulfill
the supplier's obligations and under a corporate warranty, reserves are not
dedicated but generally MCV is indemnified for the cost of purchasing
supplies elsewhere if the gas is not delivered as warranted.
Most of the U.S. Gas Contracts contain "take-or-pay" provisions obligating
MCV to purchase at least a specified percentage (generally 75%) of the MDQ
to which MCV is entitled under the contract, unless such failure is due to
force majeure, failure of the gas to meet quality standards or, in some
cases, failure of the supplier to deliver the quantity nominated by MCV.
If, over the course of a contract year, MCV has a take deficiency, it must
make a deficiency payment that is based, in most cases, on the product of
the take deficiency and either all or some percentage of the contract
price. In addition, under some of the U.S. Gas Contracts, the producer may
terminate the contract if, for reasons other than force majeure, MCV fails
to purchase a specified percentage of the MDQ (generally between 50 and
100%) within a specified period (generally 120 days). Most U.S. Gas
Contracts allow a "make-up period" ranging from one to five years to make
up the deficiency. Apache currently has the right to reduce the MDQ, under
its contract Apache I, by 5,000 Mcf/day because MCV purchased gas
quantities at less than 75% of the MDQ during the first five years of the
contract.
Most U.S. Gas Contracts provide that MCV has the right to terminate upon 20
days' written notice if the supplier, for any reason other than force
majeure, fails to provide a specific percentage of the requested volumes of
gas for a period of at least 120 consecutive days. MCV may terminate two
other U.S. Gas Contracts upon 30 days' written notice if the producer, for
any reason, including force majeure, fails to deliver 500 Mcf/day for a
period of four consecutive months.
Current Canadian Gas Contracts. All Canadian Gas Contracts warrant the
delivery of quantities requested by MCV up to the MDQ, subject to force
majeure, and in one case, a 2% tolerance is allowed. Subject to MCV's
obligation to mitigate, Canadian suppliers have agreed to indemnify MCV for
the Facility's replacement gas costs, excluding indirect or consequential
damages or loss of profit, for any breach of this supply warranty. One
producer may be relieved of its supply warranty under certain circumstances
if its ratio of remaining reserves to annual production is less than ten.
Prices under the Canadian Gas Contracts are based on reference prices
indexed to Consumers' energy charges under the PPA, subject in some
instances to floor prices below which the reference price cannot fall. All
the Canadian Gas Contracts provide for deliveries at the international
border near Emerson, Manitoba.
In addition to an amount per MMBtu based on the quantity of gas actually
delivered (the "Commodity Charge"), MCV pays each Canadian supplier a
Demand Charge to cover the transportation demand charges incurred by the
9
<PAGE> 12
Canadian suppliers to have transportation capacity for the MDQ available to
the U.S.-Canada border. To the extent that MCV takes less than 100% of the
MDQ from its Canadian Gas Contracts, gas costs per unit taken by MCV
increase because Demand Charges are being paid for the quantity of gas not
being taken. Two contracts provide discounts to the Commodity Charge where
monthly takes are in excess of 85% of MDQ.
The Canadian Gas Contracts establish specific minimum annual takes
(generally 75%). Generally, MCV is required to make deficiency payments to
the Canadian suppliers equal to all or some percentage of the Commodity
Charge multiplied by any deficiency. MCV has make-up rights in some
circumstances under some of the Canadian Gas Contracts.
If a Canadian supplier underdelivers to MCV in any month, subject to
certain force majeure provisions, the contract price is reduced by a
proportionate share of the Canadian and U.S. transporters' Demand Charges.
Further, if a Canadian supplier fails, for reasons other than force
majeure, to deliver 90% of quantities requested up to the MDQ over any 120
consecutive day period then, in most cases following a cure period, MCV can
reduce the MDQ or, under certain circumstances, terminate the agreement.
If the MDQ is reduced, MCV can request the Canadian supplier to assign to
it, to the extent permitted, the quantity of firm transportation capacity
on Canadian transporters that corresponds to the reduction in MDQ. One of
the Canadian suppliers may terminate its contract if MCV fails to take
specified percentages of the MDQ. Another supplier may reduce the MDQ
after the 7th year if the Facility's operating load factor is above 75% but
MCV's nominations under the contract during the particular year are less
than 75% of the MDQ.
Gas Transportation and Storage Arrangements
The location of the Facility permits gas to be transported over a number of
U.S. interstate pipelines. MCV has signed long-term transportation
contracts with four of these pipelines: ANR Pipeline Company ("ANR");
Panhandle Eastern Pipe Line Company ("Panhandle Pipe Line"); Trunkline Gas
Company ("Trunkline"); and Great Lakes Gas Transmission Company ("Great
Lakes"). ANR and Great Lakes are affiliates of Coastal and Panhandle Pipe
Line and Trunkline are affiliates of PanEnergy, the previous parent company
of Source Midland. In addition, certain of the gas suppliers will arrange
with pipelines for the gathering and transportation of gas from their
supply sources to the interconnection points with the major interstate
pipelines with which MCV has contracts.
MCV has also entered into long-term transportation arrangements with two
connecting pipelines which link the Facility and its own pipeline to these
interstate pipelines: Michigan Gas Storage Company (a subsidiary of
Consumers) and Consumers. Michigan gas produced by suppliers is currently
transported to Consumers' pipeline system by the supplier under contracts
the suppliers have with Michigan Consolidated Gas Company ("MichCon"), a
wholly-owned subsidiary of MCN Energy Group, on the MichCon pipeline system
in northern Michigan.
The remaining terms of MCV's agreements with the U.S. transporters range
from 4 to 27 years. The transportation rates of ANR, Panhandle Pipe Line,
Trunkline, Great Lakes and Michigan Gas Storage Company are subject to FERC
regulation.
The suppliers under the Canadian Gas Contracts are themselves responsible
for arranging transportation within Canada, and are responsible for paying
the transportation rates charged by the Canadian transporters, which are
then reimbursed by MCV. All suppliers have been allocated firm
transportation capacity on the relevant pipelines. Great Lakes
transports Canadian gas from the U.S.-Canada border to Michigan.
MCV has also entered into a gas storage agreement with Consumers for the
underground storage of eight billion cubic feet of gas in exchange for
delivery to Consumers of 1.75% of the gas placed in storage (for fuel) and
the payment by MCV to Consumers of an annual storage service charge of
32.04 cents per Dth times the eight billion cubic feet of storage service
provided. Consumers is obligated to provide deliveries from storage up to
a rate of 120,000 Mcf/day, subject to certain restrictions relating to
levels of storage gas maintained in inventory by MCV. This storage
capability allows MCV to meet fluctuating daily operating requirements and to
take advantage of opportunities to make spot purchases during periods of the
year when gas prices are favorable.
10
<PAGE> 13
Transmission Agreement
Pursuant to the Transmission Agreement with MCV, Consumers has agreed to
enter into transmission service agreements with other electric utilities
(including municipals and cooperatives) to which MCV may sell power,
provided that such agreements are not contrary to applicable law or
regulation. The transmission service agreements contemplated by the
Transmission Agreement may provide short-term service on an interruptible
or firm basis, or long-term service on a firm basis. ("Firm" transmission
service is defined as transmission service which is intended to be
available at all times during the period covered by the commitment.
"Interruptible" transmission service refers to transmission service
provided under agreements which permit curtailment or cessation by the
transmission company.)Consumers has agreed to provide short-term service
(up to one year) on an interruptible or firm basis. Charges for
interruptible service are those currently on file with FERC; and on
request, Consumers will develop charges for firm service, to be filed with
FERC. Consumers has reserved the right to make a unilateral application to
FERC to change these charges.
Consumers has agreed to provide long-term service (for more than one year),
unless such service would significantly impair Consumers' reliability or
its own use of its transmission facilities. If requested, Consumers will
develop charges for long-term service to be filed with FERC. MCV must pay
for necessary additions and modifications to Consumers' transmission system
to permit any transportation requested by MCV. No such additions or
modifications are anticipated at this time.
Gas Turbine Service Agreement
Under a service agreement (the "Service Agreement") between MCV and ABB
Power (formerly ABB Energy Services, Inc.), an affiliate of ABB, ABB Power
sold MCV an initial inventory of spare parts for the GTGs and provides
qualified service personnel and supporting staff to assist MCV, to perform
scheduled inspections on the GTGs, and to repair the GTGs at MCV's request.
The Service Agreement, as amended, commenced on January 1, 1990, and will
expire upon the earlier of the completion of the sixth series of major GTG
inspections or December 31, 2009. ABB Power does not assure any level of
performance by the GTGs in the Service Agreement but warrants all repairs
made by it pursuant to the Service Agreement.
MCV must pay a $325,322 (in 1997 dollars) per month inspection fee (which
escalates based upon various wage level indices and may be increased under
certain events of force majeure or change of laws), and maintenance and
repair fees (equal to material and other direct costs, amounts payable to
subcontractors, and ABB Powers' out-of-pocket costs, plus 15% except in the
case of fees relating to certain service engineers, supervisors and
specialists where the maintenance fee shall be equal to the ABB rate). ABB
Power warrants that all repairs performed and all spare parts supplied by
it will be free of defects for one year from the date of completion or date
of use, respectively.
The Service Agreement terminates (i) if either ABB Power or MCV fails to
perform the duties outlined under the Service Agreement, at the option of
the other party; or (ii) at MCV's option, if MCV is unable to operate the
Facility for 60 consecutive days due to force majeure. Upon cessation of
the force majeure, the Service Agreement may be reinstated by either party
upon 60 days' notice, together with payment by MCV of a $400,000
remobilization fee. Upon termination of the Service Agreement (except for
nonperformance by ABB Power), MCV must pay a cancellation payment
($2,000,000 in 1998, $1,500,000 in 1999, $1,000,000 in 2000 and $500,000 in
any year thereafter, escalated in 1988 dollars).
On March 22, 1994, MCV and ABB Power signed an agreement effective December
31, 1993, to amend the Service Agreement with respect to supplying hot gas
path parts. Under the amended Service Agreement, ABB Power would provide
hot gas path parts for MCV's twelve gas turbines through the fourth series
of major GTG inspections. In January 1998, MCV and ABB Power amended the
length of the amended Service Agreement to extend through the sixth series
of major GTG inspections, which are expected to be completed by year-end
2008, for a lump sum fixed price covering the entire term of the amended
Service Agreement of $266.5 million (in 1993 dollars, which is
adjusted based on exchange rates and Swiss inflation indices), payable on
the basis of operating hours as they occur over the same period. The
amendment is severable and may be terminated separately from the existing
Service Agreement. This agreement has reduced uncertainties associated with
maintenance and the cost of spare parts.
11
<PAGE> 14
In addition to the January 1998 amendment to the term of the amended
Service Agreement, MCV has also contracted to purchase from ABB Power 11NM
GTG upgrade packages for eleven of the gas turbine generators for $41.6
million. The purchase of these upgrades comes after successfully testing
one upgrade package at the Facility in 1997. The upgrade packages are
expected to add to available capacity and significantly improve the
efficiency of the Facility. The installation of all eleven upgrade
packages is expected to be completed by the end of 1999. Maintenance and
spare parts for the upgrade packages are covered by the amended Service
Agreement. The installation of the upgrade packages is severable and may
be terminated separately from the Service Agreement and amended Service
Agreement. Upon termination of the amendment (except for non-performance
of ABB Power), MCV must pay a cancellation payment of $15,000,000, which is
reduced to $5,000,000 upon completion of the fourth major inspection or
July 1, 2003, whichever comes last. MCV also agreed to purchase a spare
GTG rotor to facilitate maintenance activities and improve reliability.
Steam Turbine Service Agreement
MCV has entered into a nine year Steam Turbine Maintenance Agreement with
GE effective January 1, 1995, which is designed to improve unit
reliability, increase availability and minimize unanticipated maintenance
costs. In addition, this contract includes performance incentives and
penalties which are based on the length of each scheduled outage and the
number of forced outages during a calendar year. MCV is to make monthly
payments over the life of the contract totaling $13.0 million (in 1995
dollars).
F. Employees
As of February 28, 1998, MCV had 134 employees, including 90 engineering,
operating and maintenance personnel. Fifty-two of MCV's employees are
members of the Utility Workers Union of America, AFL-CIO Local 564 (the
"Union"), and are subject to the terms of a collective bargaining agreement
between MCV and the Union. MCV and the Union signed a new agreement
effective March 1, 1995. It is a five year contract with a wage reopener
on the fourth anniversary (March 1, 1999). MCV believes that its
relationship with its employees is good.
G. Regulation
Introduction
The Facility is not subject to most state and federal public utility laws
and regulations. The following is a discussion of the principal regulatory
proceedings and issues which could have an impact on the Facility.
QF Certification
In order to be a QF under PURPA and to maintain this status, not more than
50% of the "equity interest" in a facility may be owned by electric
utilities or their affiliates. In addition, 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 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) of at least 45% (the
"Efficiency Percentage"). However, if the plant maintains a Thermal
Percentage of 15% or higher, the required Efficiency Percentage is reduced
to 42.5%. Since 1990, the Facility has achieved the required Thermal and
Efficiency Percentages. During 1997, the Facility achieved a Thermal
Percentage of 16.0% and an Efficiency Percentage of 45.7%.
The Facility's QF certification by FERC became effective when portions of
the Facility were first synchronized to Consumers' system in June 1989. As
a QF, the Facility is exempt from various provisions of the FPA and the
1935 Act and from certain state laws and regulations respecting rate,
financial and organizational regulation of public utilities. On January 31
and March 1, 1990, FERC recertified the Facility as a QF in the context
of an ownership structure in which MCV owns the Facility and in the context
of a leveraged lease transaction in which the Facility is owned by owner
trustees on behalf of institutional investors. In September 1997, MCV filed
a Notice of Self-
12
<PAGE> 15
Recertification with the FERC to reflect technical changes in the
configuration and equipment of the Facility as modified to date, changes in
MCV Partnership ownership (which changes did not result in a change in the
percentage of utility ownership) and elimination of Dow's back-pressure
turbine from the Facility description because it was never installed. (See
Part II, Item 7, "MD&A -- Outlook -- Maintaining QF Status".)
MPSC and Other Proceedings Relating to Capacity and Energy Charges
Background. Michigan law requires Consumers to file on an annual basis a
"Power Supply Cost Recovery Plan" (the "PSCR Plan") describing, among other
things, the anticipated sources of electric power to be purchased during
the upcoming year. The PSCR Plan must be filed at least three months
before the beginning of the 12-month period covered by the plan. If the
MPSC fails to allow or disallow the costs of purchased power in the PSCR
Plan by the beginning of the year covered thereby, Consumers may adjust its
rates to recover such costs, as proposed by Consumers, until the MPSC acts.
Actual costs are reconciled with the costs billed to customers in a
subsequent filing (made by March 31 of the year subsequent to the plan
year) known as the "Power Supply Cost Recovery Reconciliation Proceeding"
("Reconciliation Case"). The MPSC believes it has the authority to suspend
the PSCR plan and reconciliation process. By law, the MPSC must disallow
in the Reconciliation Case any capacity charges associated with power
purchases for periods in excess of six months unless the MPSC has
previously approved the capacity charge. Under a Michigan statute known as
Act 81, once a capacity charge in a contract for a purchase from a QF has
been approved by the MPSC, the MPSC may not disallow recovery by the
utility of that capacity charge from its customers for a 17-1/2 year period
commencing with commercial operation of the QF.
The PPA contains a "regulatory out" provision which permits Consumers,
under certain conditions, to reduce the capacity and/or energy charges
payable to MCV and/or to receive refunds of capacity and/or energy charges
paid to MCV under the PPA if the MPSC does not permit Consumers to recover
from its customers the capacity and energy charges specified in the PPA.
For the first 17-1/2 years after the Facility's Commercial Operation Date,
however, the PPA further provides that Consumers may not reduce the average
capacity charge below 3.77 cents per kWh notwithstanding the MPSC's failure
to approve either the amount of capacity Consumers has agreed to purchase
from MCV under the PPA or the capacity charge specified in the PPA for such
purchase.
Energy charges payable by Consumers under the PPA are separate and distinct
from the capacity charge in that no 17-1/2 year protection against the
exercise of the "regulatory out" provision for energy charges is provided
for in the PPA. Although prior approval of energy charges is not required
or provided for under Michigan law, the MPSC has asserted the authority to
disallow Consumers' recovery of a portion of such energy charges paid to
MCV. Any disallowance by the MPSC of Consumers' ability to pass energy
charges through to its customers could, pursuant to the "regulatory out"
provision of the PPA, result in a reduction or refund of the fixed and
variable portions of the energy charge under the PPA.
MPSC and Other Proceedings. In September 1987, in order to comply with the
prior approval requirement for contracts exceeding six months and to obtain
the benefit of the 17-1/2 year rate protection provided by Michigan law,
MCV requested MPSC approval of the 4.15 cents per kWh capacity rate
provided for in the PPA. The MPSC hearing held on the request was
consolidated with numerous dockets involving other qualifying facility
projects, and resulted in a number of MPSC orders. Numerous appeals from
the MPSC orders were taken to the Michigan Court of Appeals and the
Michigan Supreme Court by parties to the MPSC proceedings, including
Consumers and MCV. During the pendency of this matter before the Court of
Appeals, Consumers, MPSC staff and other parties negotiated a Revised
Settlement Proposal which was submitted to the MPSC for approval.
On March 31, 1993, the MPSC issued an order, effective January 1, 1993 (the
"Settlement Order"), which approved with modifications the Revised
Settlement Proposal filed by Consumers, the MPSC staff and ten small power
and cogeneration developers. Although MCV was not a party to the Revised
Settlement Proposal, the MPSC staff required that MCV file a letter of
non-objection to the Revised Settlement Proposal. The Settlement Order
addressed, among other things, the amount Consumers could recover from its
electric customers for the costs of capacity and energy purchased by it
from MCV. Generally, the Settlement Order approved cost recovery of 915 MW
of MCV capacity subject to certain "availability caps" associated with
on-peak and off-peak periods of time each day and recovery of energy
payments based on coal proxy prices (the formula in the PPA). However,
instead of capacity and fixed energy payments being based on "availability"
as provided in the PPA, the Settlement Order
13
<PAGE> 16
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 1993 and subsequent years. Opponents to the Revised Settlement
Proposal, filed appeals of the Settlement Order with the Michigan Court of
Appeals. On March 19, 1996, the Court of Appeals issued a decision which
affirmed the Settlement Order. The Appellants unsuccessfully sought further
judicial review and the decision has now become final.
Because the Settlement Order did not approve the capacity charges
authorized for recovery in the PPA, and thereby denied the protection
provided under Michigan law from reconsideration for a 17-1/2 year period,
Consumers' cost recovery relating to purchases from MCV is reviewed in the
annual PSCR Plan and Reconciliation Cases.
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 (see Part I, Item 1, Section I, "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 this dispute below
which payments to MCV of fixed energy charges in dispute could not fall.
Consumers would schedule deliveries of this energy in accordance with the
provisions of the PPA. This unilateral commitment, which became effective
as of January 1, 1993, to pay fixed energy charges on delivered energy from
the block of Contract Capacity above 915 MW will expire on September 15,
2007.
On June 23, 1993, Consumers exercised its rights under the PPA to obtain a
determination through arbitration proceedings of whether Consumers could
exercise the "regulatory out" provision of the PPA in view of Consumers'
acceptance of the Settlement Order. In a Final Order issued on February
16, 1995, the arbitrator ruled that Consumers may withhold the fixed energy
charges for available but undelivered energy, as well as for energy
delivered between the "caps" contained in the Settlement Order and 915 MW,
subject to completion of appellate review in all regulatory and judicial
proceedings with respect to the Settlement Order and then pending PSCR
cases.
On February 23, 1995, the MPSC applied the Settlement Order to Consumers'
1993 Reconciliation Case and ruled that Consumers could not recover from
its retail customers the full 915 MW of MCV capacity and fixed energy
charges provided under the terms of the Revised Settlement Proposal
approved by the MPSC in the Settlement Order. Instead, the MPSC
"allocated" approximately 25 MW of MCV capacity to "non-jurisdictional"
customers (i.e. customers not subject to PSCR rates) resulting in a
disallowance to Consumers of approximately $7.4 million of which
approximately $.7 million relates to fixed energy charges (the
"Jurisdictional Issue"). On October 19, 1995, Consumers notified MCV that,
pursuant to the "regulatory out" provision of the PPA, it would be
increasing the amount being escrowed each month to reflect its calculation
of fixed energy charge payments allocated to non-jurisdictional customers
disallowed by the MPSC and Michigan Court of Appeals due to the
Jurisdictional Issue. In addition, Consumers requested a refund from MCV
of $1.9 million plus interest, for the calendar years 1993 and 1994 and the
first eight months of 1995. On November 21, 1995, MCV responded to
Consumers indicating that MCV would, pursuant to the PPA, refund the
appropriate funds, if any, and determine the appropriate calculation of the
correct escrow amount, if any, at such time as a final and non-appealable
order disallowing these recoveries is entered. The decision involving the
Jurisdictional Issue has become final, affirming the MPSC's decision.
Based on this decision, Consumers notified MCV that it would continue
withholding the fixed energy charges on the Jurisdictional Issue (currently
averaging approximately $45,000 per month). In addition, MCV agreed to
release to Consumers the escrowed funds of approximately $1.0 million plus
interest (covering the period of September 1995 through December 1996),
subject to a final resolution between MCV and Consumers as to the
appropriate escrow amount, and to refund the $1.9 million (discussed above),
as a result of the finality of the Jurisdictional Issue. MCV has not
recognized any of these amounts related to the Jurisdictional Issue as
operating revenues.
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The MPSC ruled in the 1993 Reconciliation Case that Consumers could not
recover from its retail customers fixed energy charges payable to MCV for
energy delivered above the off-peak cap of 732 MW (the "off-peak cap
issue"). Consumers and MCV appealed the MPSC February 23, 1995 Order to the
Michigan Court of Appeals and on November 1, 1996, the Michigan Court of
Appeals affirmed the MPSC's decision. MCV and Consumers filed motions for
rehearing of the November 1, 1996 Michigan Court of Appeals Order which
were denied on January 27, 1997. MCV petitioned the Michigan Supreme Court
to review the off-peak cap issue of this case. On January 30, 1998, the
Michigan Supreme Court denied MCV's petition for review, thus, the case is
now final.
In addition, as part of its order in Consumers' 1994 PSCR Plan proceedings,
the MPSC, on August 18, 1994, ruled that for 1994 Consumers would not be
permitted to recover fixed energy costs for energy associated with the
off-peak cap issue. MCV believed the MPSC order on this issue was
erroneous and filed an appeal of the MPSC decision. The Michigan Court of
Appeals affirmed the MPSC. MCV has petitioned the Michigan Supreme Court
to review this case. Other PSCR Plan and Reconciliation Cases for the
years 1995 through 1997 are pending before the MPSC at this time.
Consumers has escrowed approximately $2.8 million in 1996 and $1.0 million
for the years 1994 and 1995 of fixed energy charges payable to MCV based on
the MPSC ruling. MCV Management cannot predict the outcome of these
proceedings.
On September 8, 1995, Consumers and the MPSC staff filed a motion to create
a consolidated proceeding for the purpose of reviewing a settlement
agreement ("325 MW Proposed Settlement") entered into between the MPSC
staff and Consumers related to three cases: Case No. U-10685, Consumers'
electric general rate case; Case No. U-10787, Consumers' request for
approval of a special competitive services tariff (Rate SCS); and Case No.
U-10754, Consumers' application for approval of revised depreciation rates
for electric and common utility plant. MCV was a party to the consolidated
proceeding. The settlement agreement proposed 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 was in addition
to the 915 MW already approved by the MPSC with recovery from Consumers
retail customers to begin January 1, 1996. The initial average capacity
charge recovered would be 2.86 cents per kWh escalating to 3.62 cents per
kWh in 2004 and thereafter. On September 22, 1995, MCV filed a position
statement not objecting to the settlement agreement, but reserving all of
its rights and privileges under the PPA. Consumers increased MCV's
dispatch in 1996 consistent with the terms of the settlement agreement. On
November 14, 1996, the MPSC approved, with modifications, the settlement
agreement effective January 1, 1996 ("325 MW Settlement Order"). The
modifications were related to issues not material to MCV, except the
Jurisdictional Issue, which the MPSC deferred to the 1996 PSCR plan
proceeding. As a result of the approval of the 325 MW Settlement Order,
Consumers notified MCV in February 1997, that it would cease escrowing for
the off-peak cap issue and has released to MCV the 1996 escrowed funds of
approximately $2.8 million discussed in the proceeding paragraph, relating
to the off-peak cap issue, subject to a final decision upholding the 325 MW
Settlement Order on this issue. The $1.0 million escrowed in 1994 and 1995
remains in escrow. MCV has not recognized any of these amounts related to
the off-peak issue as operating revenues. Various parties have appealed
the 325 MW Settlement Order to the Michigan Court of Appeals. MCV
Management cannot predict the outcome of this proceeding.
Michigan Electric Industry Restructuring Proceedings
On December 20, 1996, the MPSC issued an order on its own motion to
consider the restructuring of the electric industry in Michigan. 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 MPSC ordered a phased-in program (from
1998 through 2001) for this competitive regime known as "direct access"
whereby all customers (industrial, commercial and residential) would be
eligible to select the power supplier of their choice. The MPSC also
addressed many transition issues including reliability, stranded cost (or
transition cost) recovery, rates, and other issues. As noted above (Part
I, Item 1, Section D, "Major Issues Facing MCV - Electric Industry
Restructuring"), the two issues involved in this restructuring which could
impact MCV the most 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
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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) may be limited to the period 1998
through 2007 (MCV's PPA expires in 2025). The Restructuring Orders do not
specifically address the issue of stranded cost recovery after 2007. In
addition, the Restructuring Orders permit Consumers to elect to freeze its
PSCR factor through which charges under the PPA are recovered from retail
customers. The MPSC has also suspended the annual PSCR (Plan and
Reconciliation Case) process indefinitely, at Consumers' request. 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, has filed an appeal
of the MPSC Restructuring Orders 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 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. 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 are pending before the
United States Court of Appeals for the Second 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.
Other Regulatory Issues
MCV has been granted a permanent exemption from the Power Plant and
Industrial Fuel Use Act of 1978, as amended, relating to the use of natural
gas as its primary energy source. This exemption permits MCV to consume
gas without restriction as to hours of operation or the capacity of the
Facility to consume an alternate fuel.
The Canadian Gas Contracts require permits from both Canadian and U.S.
authorities. All of the suppliers have received approval from Canadian
provincial authorities to lift and remove sufficient gas volumes to meet
MCV contract requirements and from the National Energy Board ("NEB") to
export these volumes. The U.S. Gas Contracts are not subject to regulatory
approvals.
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
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(ii) refund to MCV, subject to FERC approval, the principal amount,
excluding interest, paid in excess of rolled-in rates. MCV had, from April
1, 1993 to October 1, 1995, reflected in current operating results Great
Lakes gas transportation costs associated with incremental pricing. On
April 25, 1996, FERC affirmed its Order on Remand as it pertains to the MCV
issues described above ("Order on Rehearing"). On June 3, 1996, FERC
granted rehearing for further consideration. Rehearing was requested by
MCV, among others, for clarification of the timing of refunds, surcharges
and interest thereon subsequent to October 1, 1995. On July 31, 1996, FERC
clarified its April 25, 1996 order stating that interest on refunds was to
commence October 1, 1995 and otherwise denied the relief requested in the
petitions for rehearing. In August 1996, MCV recognized in its current
operating results approximately $19.0 million (which represented $17.6
million in transportation costs included as a reduction in fuel costs and
$1.4 million of accrued interest subsequent to October 1, 1995) of the
Great Lakes refund. The FERC Order on Rehearing and its July 31, 1996
order were appealed by MCV and others to the United States Court of Appeals
for the District of Columbia ("Court of Appeals") challenging certain
aspects of the Order on Remand. On January 16, 1998, the United States
Court of Appeals ruled that MCV should have been paid interest for the
period prior to October 1, 1995 on the Great Lakes refund and denied all
other petitions that had been filed challenging the refund. This decision
is subject to further appeal. MCV Management cannot predict the outcome of
any such appeal, but believes that the likelihood of reversal of any
portion of the Court of Appeals' decision is remote.
H. Environmental Matters
MCV has obtained all material federal, state and local environmental
permits necessary to construct and operate the Facility. MCV believes that
the Facility complies in all material respects with all applicable federal,
state and local environmental regulations and laws. There is no litigation
or, to the knowledge of MCV, any administrative proceeding or investigation
pending or threatened with respect to environmental issues at the Facility.
It is possible that applicable environmental laws and regulations may
change, making compliance more costly, time consuming and difficult. Any
such changes, however, are likely to apply to similarly situated power
plants and not only to the Facility.
Water Quality. On five instances in 1997, MCV exceeded the discharge
limits on oil and grease from the oily waste treatment system. A new
filtration unit was installed and is presently being evaluated. The
Michigan Department of Environmental Quality ("MDEQ") has taken no action
to date on this issue. Oily treated waste falls out to MCV's 4.1 billion
gallon cooling pond. MCV's NPDES permit expires October 1, 1998 with the
application for renewal due on April 1, 1998. MCV does not expect any
difficulty in the reissuance of this permit.
Air Quality. On September 24, 1996, MCV submitted a Renewable Operating
Permit ("ROP") Application and received notification that it was
administratively complete on October 2, 1996. This determination affords
the Facility an "application shield", which authorizes operation of the
plant in accordance with its current permits and rules until such time as
the ROP application is formally acted upon by the MDEQ Air Quality
Division. Although the requirements that might be imposed at this time are
not yet known, MCV does not currently foresee any impediments to issuance
of that ROP. MDEQ Air Quality Division may request additional information
during the technical review of the application followed by the issuance of
a draft permit for public notice and comment, followed by a final permit.
This process is scheduled for late 1998 with the issuance of the final
permit in early 1999.
Dow Operations. Portions of the Site were previously owned by Dow. At one
time, Dow had a brine pond, a portion of which was on the Site. Brine
pipelines previously crossed the Site. Some underground brine lines were
capped and abandoned in place. Dow had brine lines running near the Site.
One brine well was used by Dow on the Site. Dow brine pipeline spills off
the Site are listed on Michigan's "List of Sites of Environmental
Contamination" established under Michigan Environmental Response Act
("MERA"). The principal contaminant of concern at the pipeline spill
locations is brine. The Site also may have been used for the testing of
explosives during the 1950s or the 1960s.
The Dow Plant, immediately across the Tittabawassee River from the Site, is
on Michigan's "List of Sites of Environmental Contamination" established
under MERA. The principal contaminants of concern at the Dow Plant are
dioxins believed to have originated from chemical product manufacturing.
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While it is possible that MCV or Consumers could incur liability under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980 ("CERCLA") or MERA for Site conditions from previous Dow activities,
MCV does not know of any conditions on the Site that MCV believes require
cleanup. In any event, to the extent that such liability could be shown to
be due to Dow's activities, MCV or Consumers would seek contribution from
Dow for any costs incurred in connection with Dow's activities.
Michigan Department of Natural Resources and the United Stated
Environmental Protection Agency required Dow to install a groundwater
collection tile system to prevent migration of tertiary treatment pond
leakage from Dow's property. The system involves hydraulic monitoring and
collection of groundwater at the border of the MCV Site. Installation of
the system has been completed. MCV retained an engineering firm (Gilbert
Commonwealth Corporation) to review Dow's plans and evaluate the effects on
Facility operations and the MCV Site of the groundwater collection tile
system. In 1992, Gilbert Commonwealth Corporation issued a report which
concluded that the installation of the system "will not materially involve
or adversely affect the occupation, use, possession, ownership, operation
and maintenance of the Facility." As a result, MCV granted the requested
easement to Dow and the groundwater collection tile system was completed in
early 1993.
Noise. MCV has received complaints from nearby residents regarding noise
from the Facility. Although the majority of the complaints have stemmed
from noise generated by construction, startup and equipment testing, there
have been some complaints regarding plant operation noise. In 1990, MCV
completed installation of silencers in all of the stacks to reduce plant
operation noise. Installation of stack silencers has resulted in a
reduction of noise during normal plant operation. MCV has installed a
silencer on the hogging air ejector and anti-noise insulation on the gas
knockout drum. Additionally, steam venting silencers have been installed
on all 12 HRSGs to control noise in connection with startup and shutdown
operation. In 1996, MCV installed mufflers on the atmospheric dump valves
to reduce noise in the event of a steam turbine trip or during periods when
the steam turbines are out of service.
Environmental Indemnity Agreements. CMS Energy has executed environmental
indemnity agreements in favor of the Senior Bond Trustee, the Subordinated
Bond Trustee, the Tax-Exempt Trustee (all as defined in Part I, Item 1,
Section I, "Overall Lease Transaction"), MCV and the holders, from time to
time, of the Bonds. Pursuant to these indemnity agreements, CMS Energy has
agreed to indemnify these parties and certain related parties against all
expense, damage and liability suffered or incurred by them at any time and
which is caused by certain classes of environmental matters to the extent
these occurred at the Site before June 15, 1990 (with certain exceptions).
These matters include (i) the presence of any environmentally hazardous
materials at the Site, (ii) any environmentally hazardous activity at the
Site and (iii) any event which is a violation of environmental laws
affecting the Site (including amendments and supplements to such laws
whenever enacted except, in the case of such enactments after June 15,
1990, to the extent they would require installation or modification of
equipment). CMS Energy has entered into a similar environmental indemnity
agreement for the benefit of the Owner Trustee (in its individual and trust
capacities), the Owner Participants (as defined in Part I, Item 1, Section
I, "Overall Lease Transaction") and certain related parties. In the
agreement in favor of MCV, payments by CMS Energy are subject to a
deductible of $20,000 per occurrence and $240,000 in the aggregate. The
agreement in favor of MCV terminates when all the Senior Bonds (as defined
in Part I, Item 1, Section I, "Overall Lease Transaction") have been paid
in full and all the holders of the Bonds (as defined in Part I, Item 1,
Section I, "Overall Lease Transaction") have been paid all amounts owed
under the general indemnity in the Participation Agreements, except that
such indemnity shall not terminate with respect to certain rights arising
prior to such final payment.
MCV has also executed an environmental indemnification agreement in favor
of CMS Energy under which it has agreed to indemnify CMS Energy in
connection with (i) any violation of the environmental laws by MCV with
respect to the Site after June 5, 1988, (ii) the release or disposal of any
hazardous materials at, on or to the Site after June 5, 1988 (unless caused
by CMS Energy or resulting from hazardous materials at or on the Site prior
to June 5, 1988), and (iii) any hazardous activities at the Site after June
5, 1988, provided that CMS Energy may satisfy these obligations only from
amounts that are otherwise available for distribution to Partners under the
Participation Agreements.
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I. Overall Lease Transaction
General
Permanent financing for the Facility has been provided through five
separate but contemporaneous sale and leaseback transactions (the "Overall
Lease Transaction"), pursuant to which MCV sold undivided interests in all
of the fixed assets comprising the Facility to the Owner Trustee under five
separate owner trusts (the "Owner Trusts") established for the benefit of
the Owner Participants. State Street Bank and Trust Company (formerly
Fleet National Bank) serves as Owner Trustee under each of the Owner Trusts
(in each such capacity, an "Owner Trustee" and, collectively, the "Owner
Trustees"). Each Owner Trustee leases its undivided interest in the
Facility to MCV under one of five separate leases, each having a 25-year
base term (the "Basic Lease Term") commencing in 1990. The Overall Lease
Transaction was closed in two phases. The first closing (involving
pollution control and certain related assets) occurred on March 16, 1990,
(the "First Closing" or the "First Closing Date") and the second closing
(involving the remainder of the Facility) occurred on June 16, 1990 (the
"Second Closing" or the "Second Closing Date").
Each purchase of an undivided interest in the Facility by an Owner Trustee
and the lease of such undivided interest back to MCV constitutes a separate
transaction (each, a "Lease Transaction"). The undivided interests are in
varying "undivided interest percentages" ranging from approximately 4.4% to
75.5%. Each Lease Transaction was effected through separate, but
substantially identical, documents relating to a particular undivided
interest, including a Trust Agreement pursuant to which the Owner
Participant established the Owner Trust with the Owner Trustee and
authorized the Owner Trustee to hold title to its undivided interest on its
behalf and lease the same to MCV (each a "Trust Agreement"), a
Participation Agreement pursuant to which MCV, the Owner Participant, the
Owner Trustee and the various other parties to such Lease Transaction
agreed to the terms and conditions thereof (each, a "Participation
Agreement"), a Lease Agreement pursuant to which the Owner Trustee leases
the undivided interest to MCV (each, a "Lease") and two separate Trust
Indentures pursuant to which the Owner Trustee issued Senior Notes (as
defined in this Section I, "Overall Lease Transaction -- The Lease
Funding") (each, a "Senior Note Indenture") and Subordinated Notes (as
defined in this Section I, "Overall Lease Transaction -- The Lease
Funding") (each, a "Subordinated Note Indenture" and, together with the
Senior Note Indentures, the "Note Indentures"). The United States Trust
Company and First Union National Bank (formerly Meridian Trust Company) are
note trustees under the Senior Note Indenture and the Subordinated Note
Indenture, respectively (the "Note Trustees"). There is, however, a single
Collateral Agency and Intercreditor Agreement (the "Intercreditor
Agreement"), executed by the Owner Trustees, MCV, the Note Trustees, the
Working Capital Lender (as defined below) and First Trust Michigan (which
acquired the trust assets of Comerica Bank) as collateral Agent (the
"Collateral Agent"), which provides for the creation and maintenance of
certain reserves, the deposit of all revenues generated by the Facility,
the payment of operating expenses, and the distribution of remaining
revenues according to the priorities set forth therein to or for the
account of the Working Capital Lender, the Note Trustees, the Owner
Trustees, MCV and the affiliates of certain Partners. MCV has arranged for
a $50 million working capital line (the "Working Capital Facility") with
Bank of Montreal (the "Working Capital Lender") which expires August 31,
1999. As security for its obligation to repay advances made under the
Working Capital Facility, MCV has granted to the Working Capital Lender a
first priority security interest in certain receivables earned by MCV
through the sale of electricity, electric generating capacity, natural gas,
or steam to third parties, including Dow, Consumers and DCC (the "Earned
Receivables") and in MCV's natural gas inventory (the "Natural Gas
Inventory"). Payments due under the Working Capital Facility are direct
obligations of MCV and will in general have a priority in payment over
payments under the Leases (and thus on the Notes, as defined in this
Section I, "Overall Lease Transaction -- The Lease Funding," and the
Bonds).
Pursuant to separate Tax Indemnification Agreements between MCV and the
Owner Participants (the "Tax Indemnification Agreements"), MCV has agreed
to indemnify the Owner Participants against certain adverse federal income
tax consequences.
Statement of Financial Accounting Standards ("SFAS") No. 98, which applies
to sale and leaseback transactions entered into after June 30, 1988,
specifies the accounting required by generally accepted accounting
principles for a seller-lessee's sale and simultaneous leaseback
transaction involving real estate, including real estate with equipment.
In accordance with SFAS No. 98, the Overall Lease Transaction must be
accounted for as a financing
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obligation and not a sale, since MCV has the option to purchase the undivided
interests in the Facility at the end of the Basic Lease Term, which expires
on July 23, 2015, and has other forms of continuing involvement with the
Facility throughout the Basic Lease Term.
The Lease obligation is recorded as long-term debt, at the present value of
future minimum Lease payments. There is no change to property, plant and
equipment as the transaction was accounted for as a financing arrangement
for financial reporting purposes. Certain Lease transaction expenses of
MCV are recorded as deferred financing costs and amortized using the
interest method over the term of the Lease. On an ongoing basis, the
monthly accrual for the semi-annual Lease payments will be divided between
interest and principal components using the effective interest method.
The Lease Funding
Each Owner Trustee has financed the purchase of its undivided interest in
the Facility through a combination of equity invested by its related Owner
Participant ($556,320,000 in the aggregate) and debt incurred through the
issuance of nonrecourse notes by the Owner Trustee under the related Note
Indentures, consisting of senior secured notes ($1,200,000,000 in the
aggregate) (the "Senior Notes") and subordinated secured notes
($567,180,000 in the aggregate) (the "Subordinated Notes," and together
with the Senior Notes, the "Notes"). In order to facilitate the sale of
this debt (other than the debt evidenced by the Subordinated Notes pledged
to secure the Tax-Exempt Bonds) (as defined below), two funding
corporations have been established. Midland Funding Corporation I was
established for the purpose of issuing various series of senior bonds (the
"Senior Bonds"), each series secured by a pledge of the corresponding
series of Senior Notes issued by the five Owner Trustees. Midland Funding
Corporation II was established for the purpose of issuing various series of
subordinated bonds (the "Subordinated Bonds" and, together with the Senior
Bonds, the "Bonds"), each series secured by a pledge of the corresponding
series of the Subordinated Notes issued by the five Owner Trustees. These
pledged Subordinated Notes are secured pari passu with the Subordinated
Notes pledged to secure the Tax-Exempt Bonds issued by the Tax-Exempt
Issuer (as defined below). The use of the funding corporations facilitated
the sale of debt by permitting the offer and sale of three series of Senior
Bonds and two series of Subordinated Bonds, each secured equally and
ratably by the corresponding series of Notes issued by each of the five
Owner Trusts, thus eliminating the need to offer a greater number of
separate series of Notes to the investor. In addition, the use of a
corporate obligor facilitates compliance with certain investment laws by
certain institutional purchasers of the Senior and Subordinated Bonds. The
aggregate principal amount, maturity date, interest rate, redemption
provisions and other material terms of each series of the Bonds are
identical to those of the Notes pledged as security therefore.
The Economic Development Corporation of the County of Midland (the
"Tax-Exempt Issuer") has issued certain series of tax-exempt bonds (the
"Tax-Exempt Bonds"), which are issued under and secured by a tax-exempt
collateral trust indenture. The proceeds from the issuance and sale of the
Tax-Exempt Bonds were used to finance certain pollution control assets
constituting a portion of the Facility. Each series of Tax-Exempt Bonds is
secured solely by a corresponding series of Subordinated Notes issued by
the Owner Trustees, which are secured by a junior security interest in the
undivided interests of the Owner Trustees in the Facility and certain of
their rights under and to the related Leases, including rents thereunder
and the Lease Collateral, including (subject to the rights of the Working
Capital Lender, which include a prior security interest in certain of MCV's
receivables and natural gas inventory securing the Working Capital
Facility) the revenues and other payments received thereunder. The
Subordinated Notes securing the Tax-Exempt Bonds and the Subordinated Notes
issued by the Owner Trustees to secure the Subordinated Bonds are secured
by junior security interests in a shared collateral pool.
Security and Sources of Payment
The sole sources of payment for the Senior Bonds and Subordinated Bonds are
certain pledged Senior Notes and pledged Subordinated Notes, respectively,
issued by each of the five Owner Trustees and pledged under the Senior Bond
Indenture and Subordinated Bond Indenture, respectively. The pledged
Senior Notes and pledged Subordinated Notes of each Owner Trustee are
nonrecourse obligations of such Owner Trustee payable solely from the
rental payments made by MCV under its related Lease and the other security
therefor. The Senior Notes are secured by a senior security interest in
such Owner Trustee's undivided interest in the Facility and certain of its
rights under and to the related Lease, including rents thereunder and the
Lease collateral, including (subject to the
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rights of the Working Capital Lender) the revenues and other payments
received thereunder. The Pledged Subordinated Notes are secured on a
pari passu basis with the Subordinated Notes pledged to secure the Tax-Exempt
Bonds, by a junior lien on and security interest in such collateral. Such
lien, security interest and assignment are subordinated to the senior lien,
security interest and assignment securing the Senior Notes issued by such
Owner Trustee (and pledged to secure the Senior Bonds).
Additional Senior Notes may be issued (i) to refinance the Senior Notes, in
whole but not in part, and (ii) to provide funds for the payment of all or
any portion of certain costs associated with certain modifications to the
Facility. Additional Subordinated Notes may be issued (i) to support the
issuance of up to an additional $366 million principal amount of
Subordinated Bonds to MEC Development Corporation ("MDC") (which is
unlikely to occur in the foreseeable future), (ii) to refinance any series
of Subordinated Notes, in whole or in part, and (iii) to provide funds for
the payment of all or any portion of certain costs associated with
modifications to the Facility. Any additional Senior and Subordinated
Notes will rank pari passu with all Senior and Subordinated Notes,
respectively, then outstanding. The aggregate principal amount of Senior
and Subordinated Bonds that may be issued is unlimited, provided that at no
time may the aggregate principal amount of Senior and Subordinated Bonds
exceed the aggregate principal amount of Senior and Subordinated Notes,
respectively, then outstanding. The future issuance of additional Senior
and Subordinated Bonds (other than for refinancing purposes) would create
additional claims against the security for the Note Indentures and the
amounts available to repay amounts in respect of the Bonds currently
outstanding in the event of foreclosure.
The rental payments under the Leases are established to provide funds
sufficient to service the debt issued by the Owner Trustees and to provide
the Owner Participants with a return on their equity investment. MCV is
unconditionally obligated to make rental payments under the Leases in
amounts sufficient to provide for scheduled payments of the principal of,
premium, if any, and interest on the Notes, which amounts, in turn, are
equal to scheduled payments of principal of, premium, if any, and interest
on the Bonds. MCV has pledged to each Owner Trustee an undivided interest
percentage of all revenues to be derived from the operation of the
Facility, together with its rights with respect to the PPA, the SEPA, and
various other contracts of MCV relating to the Facility (the "Lease
Collateral") to secure its rental obligations under the Leases. Neither
the Bonds nor the Notes are direct obligations of, or guaranteed by, MCV
nor do any Partners of MCV have any liability under the terms of the Notes,
the Bonds or the Leases. Neither the Partners nor the Partner Affiliates
have any obligations under the Leases, and the obligations of MCV under the
Leases and the other documents related to the Overall Lease Transaction are
nonrecourse to the Partners and the Partner Affiliates.
Any default or foreclosure with respect to the undivided interest of an
Owner Trustee relates solely to such undivided interest. There is no
cross-collateralization among Owner Trustees and the Subordinated Bond
trustee as holder of the pledged Subordinated Notes. The Leases, however,
contain identical events of default including an event of default related
to a failure by MCV to pay principal of or interest on any indebtedness for
borrowed money or other financing obligations (including lease obligations)
with respect to an amount greater than $10 million.
Pursuant to the Intercreditor Agreement, a reserve account has been created
for the benefit of the holders of the Notes, which had been initially
funded with $90 million in cash (the "Reserve Account"). The Intercreditor
Agreement further sets forth circumstances under which amounts in the
Reserve Account will be adjusted to equal the greater (for so long as the
Senior Bonds are outstanding) or the lesser (after the Senior Bonds have
been paid in full) of $137 million or the debt portion of basic rent under
the Leases payable on the next succeeding basic rent payment date, and
limited circumstances under which no more than $10 million contained
therein may be withdrawn therefrom to provide working capital. As of
December 31, 1997, MCV had funds of $138.2 million in the Reserve Account.
Excess funds in the Reserve Account are periodically transferred to MCV.
Item 2. PROPERTIES
MCV leases the Facility from the Owner Trustees pursuant to the Leases. For a
description of the Facility, see Part I, Item 1, Section C, "The Facility."
For a description of the financing arrangements in connection with the lease
of the Facility to MCV, including a description of the liens on the Facility,
see Part I, Item 1, Section I, "Overall Lease Transaction."
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<PAGE> 24
The Facility is located on the Site, previously the location of Consumers'
abandoned Midland Nuclear Generating Plant in Midland County, Michigan. The
Site contains approximately 1,200 acres, including an 880-acre cooling pond.
By a lease dated as of December 29, 1987, Consumers, as fee simple owner,
leased the land on which the Facility is located to MCV, CMS Midland and MDC
(the "Original Lease"). By Amended and Restated Agreement of Lease dated as
of June 9, 1988, such parties amended and restated the Original Lease in its
entirety. By five separate instruments, each dated as of June 1, 1990,
Consumers and MCV created undivided interests in the amended Original Lease
and amended and restated the lease to reflect the creation of such interests
(the Original Lease as so amended and restated is referred to as the "Ground
Lease"). In connection with the Overall Lease Transaction, MCV assigned to
each Owner Trustee an undivided interest in the Ground Lease equal to such
Owner Trustee's undivided interest percentage. Each Owner Trustee in turn
subleased its undivided interest back to MCV pursuant to separate subleases of
the Site.
In addition to leasing the Site, the Ground Lease assigns to MCV appurtenant
easement rights for a gas pipeline in Midland and Isabella Counties, Michigan
and easements in the City of Midland for a railroad spur track and a water
pipeline. The Ground Lease is for a term commencing on December 29, 1987 and
ending on December 31, 2035, with two renewal terms of five years each and
with additional renewal terms of two years each as provided therein. The
annual rental under each of the Ground Leases is equal to the undivided
interest percentage of $600,000 per annum through the two five-year renewal
terms; thereafter, it is fair market rental. The Ground Leases are fully net
leases.
Item 3. LEGAL PROCEEDINGS
In 1997, MCV filed a property tax appeal contesting the assessed value of
MCV's property for 1997 taxes, which is pending before the Michigan Tax
Tribunal. MCV may also file such an appeal for 1998 taxes. MCV Management
cannot predict the outcome of these proceedings.
Other than as discussed in Part I, Item 1, Section G, "Regulation" there are
no other pending legal proceedings to which MCV is a party and to which any of
its property is subject, that are material in relation to the consolidated
financial statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 25
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of MCV. The
selected operating and financial position data as of December 31, 1997, 1996,
1995, 1994 and 1993 and for each of the five years ended December 31, 1997 have
been derived from audited financial statements. This information should be
read in conjunction with Part II, Item 7, "MD&A" and the financial statements
and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Revenues $ 651,581 $ 645,168 $ 617,818 $ 578,741 $ 548,483
Operating Income 216,499 227,883 232,347 200,593 186,150
Cumulative Effect on Prior
Years (to December 31,
1996) of Change in Method of
Accounting for Property
Taxes (1) 15,533 -- -- -- --
Net Income (Loss) 77,737 65,524 60,936 17,689 (2,637)
BALANCE SHEET DATA: (2)
Total Assets 2,351,271 2,363,945 2,360,530 2,372,106 2,399,942
Capitalization
Partners' Equity 277,221 199,484 133,960 73,024 55,335
Long-Term Debt, Excluding
Current Maturities 1,788,291 1,929,241 2,007,815 2,080,005 2,145,886
</TABLE>
(1) Effective January 1, 1997, MCV changed its method of accounting for property
taxes so that such taxes are expensed monthly during the fiscal period of
the taxing authority for which the taxes are levied. This change provides a
better matching of property tax expense with both the payment for services
and those services provided by the taxing authorities. Prior to January 1,
1997, the Partnership expensed property taxes monthly during the year
following the assessment date (December 31). Also see Part II, Item 7,
MD&A "Cumulative Effect of Accounting Change" and Notes to Consolidated
Financial Statements, Note 3, "Change in Method of Accounting for Property
Taxes."
(2) Balance sheet data consists of the balances at December 31.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ("MD&A")
Results of Operations
Overview
For the year ended December 31, 1997, MCV recorded net income of $77.7 million
as compared to 1996 net income of $65.5 million. The increase in 1997 earnings
is primarily the result of the 1997 change in method of accounting for property
taxes (the cumulative effect on prior years of this change increased earnings
for the year 1997 by approximately $15.5 million while the current year effect
increased 1997 earnings by approximately $.6 million). Contributing to the
higher earnings is higher available PPA capacity and lower interest expense on
MCV's financing obligation, partially offset by the recognition of the Great
Lakes gas transportation refund in 1996.
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<PAGE> 26
For the year ended December 31, 1996, MCV's recorded net income was $4.6
million higher than the 1995 net income of $60.9 million. The increase in 1996
earnings was primarily the result of the Great Lakes gas transportation refund
and lower interest expense. This increase was partially offset by higher
natural gas prices, lower capacity payments under the PPA due to the 1996 first
quarter equipment problems and higher depreciation expense.
Operating Revenues
The following represents significant operating revenue statistics for the years
ended December 31 (dollars in thousands except average rates):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating Revenues $ 651,581 $ 645,168 $ 617,818
Capacity Revenue $ 405,488 $ 396,244 $ 401,935
PPA Contract Capacity (MW) 1,240 1,240 1,240
PPA Availability 98.9% 96.4% 98.1%
Electric Revenue $ 218,219 $ 220,803 $ 188,739
PPA Delivery as a Percentage of Contract Capacity 91.2% 89.4% 75.2%
PPA and SEPA Electric Deliveries (MWh) 10,455,717 10,286,934 8,693,500
Average PPA Variable Energy Rate ($ / MWh) $ 16.87 $ 17.00 $ 17.20
Average PPA Fixed Energy Rate ($ / MWh) $ 3.94 $ 4.10 $ 3.90
Steam Revenue $ 12,604 $ 12,851 $ 11,874
Steam Deliveries (Mlbs) 5,717,720 5,215,537 4,680,080
Other Revenue $ 15,270 $ 15,270 $ 15,270
</TABLE>
For the year ended December 31, 1997, MCV's operating revenues increased $6.4
million over 1996 due primarily to higher capacity revenue generated under the
PPA. The capacity revenue increase of $9.2 million is the result of higher
capacity payments under the PPA due to fewer 1997 scheduled and unscheduled
maintenance outages. In the first quarter of 1996, MCV experienced severe
cracking in the hot gas casings of several of the gas turbine generators
("GTG's") which reduced the capacity payments under the PPA during that period.
Also contributing to the increase in operating revenues are increases in the
Consumers electric dispatch and DCC steam deliveries. The increase in
operating revenues was partially offset by lower Dow electric and steam
revenues due to the credit given to Dow for the tolling of gas.
For the year ended December 31, 1996, MCV's operating revenues increased $27.4
million over 1995 due primarily to higher electric revenue generated under the
PPA, which was partially offset by lower capacity revenue under the PPA. The
increase in electric revenue of $32.1 million was primarily the result of
Consumers' decision to increase MCV's electric dispatch in 1996 consistent with
the terms of the 325 MW Settlement Order. The capacity revenue reduction of
$5.7 million was the result of lower capacity payments under the PPA due
primarily to additional scheduled and unscheduled maintenance outages on the
gas turbines during the first quarter of 1996.
Operating Expenses
For the year ended December 31, 1997, MCV's operating expenses were $435.1
million, which includes $266.4 million of fuel costs. During this period MCV
purchased approximately 96.1 bcf of natural gas, of which 3.5 bcf was used
either for transportation fuel or a net change to gas in storage. During this
same period MCV consumed 95.0 bcf of natural gas at the plant to produce
energy, of which 2.4 bcf of this total was gas provided by Dow. The average
commodity cost of fuel for the year 1997 was $2.42/MMBtu. For the year ended
December 31, 1996, MCV's operating expenses were $417.3 million, which includes
$250.5 million of fuel costs. The fuel costs for the year 1996 include the
Great Lakes gas transportation refund of approximately $17.6 million (excluding
interest). Excluding the Great Lakes refund fuel costs
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<PAGE> 27
were $268.1 million for the year 1996. During this period MCV purchased
approximately 96.8 bcf of natural gas, of which 3.6 bcf was used either for
transportation fuel or as a net change to gas in storage. During this same
period MCV consumed 93.2 bcf of natural gas at the plant to produce energy.
The average commodity cost of fuel for the year 1996 was $2.37/MMBtu. The
decrease in fuel costs for the year 1997 of $1.7 million (excluding the Great
Lakes refund) compared to 1996 is due to a decrease in fuel usage resulting
from Dow's providing gas to generate part of its take of steam and electricity,
partially offset by higher gas prices primarily due to the escalation of prices
in MCV's long-term contracts.
In 1997, operating expenses other than fuel costs increased $1.9 million over
1996 due primarily to higher legal fees and higher operating costs due to the
increased energy dispatch and higher maintenance material and service costs.
This increase was partially offset by the 1996 establishment of a provision for
the insurance claims on two gas turbine failures in January 1996. Other
expenses incurred in these periods were considered normal expenditures to
achieve the recorded operating revenues.
In 1996, MCV's operating expenses increased $31.8 million over 1995, which
includes a $20.9 million increase in fuel costs. The 1996 fuel costs includes
the recognition of the Great Lakes gas transportation refund of approximately
$17.6 million (excluding interest). Excluding the Great Lakes refund, fuel
costs increased $38.5 million over 1995 due primarily to a 13.6 bcf increase in
fuel usage resulting from the higher Consumers dispatch level and to a $.13 per
MMBtu increase in the fuel rate due to an increase in purchases of more
expensive long-term gas over short-term purchases due to a substantial rise in
short-term market prices over 1995. This increase was partially offset by
lower Great Lakes demand charges as a result of implementing rolled-in rates
beginning October 1, 1995.
In 1996, operating expenses other than fuel costs increased $10.9 million over
1995 due primarily to higher depreciation expense, resulting from the
amortization of increased payments under the amended Service Agreement for hot
gas path parts and a provision for the insurance claims on the two gas turbine
failures in January 1996. This increase was partially offset by lower property
taxes and lower legal fees. Other expenses incurred in these periods were
considered normal expenditures to achieve the recorded operating revenues.
Other Income (Expense)
The increase in interest and other income for the year ended December 31, 1997
compared to the year 1996 is due to maintaining a higher average cash
investment balance and to higher interest rates. This increase was partially
offset by the 1996 receipt of approximately $1.4 million of interest income on
the Great Lakes gas transportation refund. The increase in interest and other
income for the year ended December 31, 1996 compared to the year 1995 is due to
interest received of approximately $1.4 million on the Great Lakes gas
transportation refund and to maintaining a higher average cash investment
balance. The decrease in interest expense for the year ended December 31, 1997
compared to the year 1996 and in 1996 compared to 1995 is due to a lower
principal balance on MCV's financing obligation.
Cumulative Effect of Accounting Change
Effective January 1, 1997, MCV changed its method of accounting for property
taxes so that such taxes are expensed monthly during the fiscal period of the
taxing authority for which the taxes are levied. This change provides a better
matching of property tax expense with both the payment for services and those
services provided by the taxing authorities. Prior to January 1, 1997, the
Partnership expensed property taxes monthly during the year following the
assessment date (December 31). The cumulative effect on prior years of this
change increased earnings for the year 1997 by approximately $15.5 million
while the current year effect increased 1997 earnings by approximately $.6
million.
Liquidity and Financial Resources
During the years ended December 31, 1997 and 1996, net cash generated by MCV's
operations was $121.1 million and $167.9 million, respectively. The primary
use of net cash was for the payment of principal on the financing obligation
and capital expenditures. No distributions to the Partners for federal tax
obligations were made in the last three years; instead, funds totaling $13.2
million, $18.1 million and $5.8 million were retained by MCV as working capital
in 1997, 1996 and 1995, respectively, since the Reserve Account was funded to
the maximum amount of $137 million in 1994, per the Intercreditor Agreement.
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
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<PAGE> 28
January and July for the next seventeen years. During 1997, 1996 and 1995, MCV
paid the basic rent requirements of $254.6 million, $254.7 million and $254.4
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 December 31, 1997,
the borrowing base was $49.2 million. The Working Capital Facility term
currently extends to August 31, 1999. MCV did not utilize the Working Capital
Facility during 1997, except for letters of credit associated with normal
business practices. MCV believes that amounts available to it under the
Working Capital Facility will be sufficient to meet 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 December 31, 1997, there was $279.9 million (which includes
$67.1 million reserved for capital improvements and spare parts purchases),
including accrued interest, in available reserves for such purposes.
Inflation
MCV does not expect inflation to have a significant effect on future results of
operations in the near term. MCV's gas contracts have a fixed price in a base
year which is subject to adjustment under various methods -- a fixed escalator,
an index based on Consumers' energy charges under the PPA, or a combination
thereof -- which permits the seller to increase the price by the greater of the
fixed escalator or the energy charge index. Management believes these
provisions provide a measure of relief from inflation risks inasmuch as none of
the long term gas contracts are indexed either to the price of natural gas or
to the rate of general inflation. Under the terms of MCV's financing
obligations under the Overall Lease Transaction, all of the outstanding
long-term borrowings are at fixed rates.
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, 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 economic factors,
weather conditions, pricing and transportation of commodities and inflation,
among other important factors. All such factors are difficult to predict,
contain uncertainties which may materially affect actual results, and are
beyond the control of MCV.
Results of operations are largely dependent on successfully operating the
Facility at or near contractual capacity levels, the availability of natural
gas, the level of energy rates paid to MCV relative to the cost of fuel used
for generation,
26
<PAGE> 29
Consumers' performance of its obligations under the PPA, capacity payments made
by Consumers and maintenance of the Facility's QF status.
Operating Outlook. Approximately 65% of PPA revenues are capacity payments
which are based on the Facility's availability. PPA availability was 98.9% in
1997, 96.4% in 1996 and 98.1% in 1995. Availability will depend on the level
of scheduled and unscheduled maintenance outages, and on the sustained level of
output from each of the GTGs and the steam turbines. MCV expects long-term PPA
availability to exceed 90%.
On March 13, 1998, MCV received notice from Consumers that it would begin
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 expects both electric operating revenues and operating costs to
decline. However, MCV Management does not expect this change to have a material
impact on MCV's financial position.
GTG Equipment Problems. Over the past seven years and most recently in January
1996, several of the gas turbine generators "GTGs" have experienced severe
cracking in the hot gas casings, which in some cases has 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 2,000 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 1998. Failure to maintain insurance, subject to certain exceptions,
not currently applicable, 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 2002, MCV recognizes that its existing gas
contracts are not sufficient to satisfy the anticipated gas needs over the term
of the PPA and, as such, no assurance can be given as to the availability or
price of natural gas after the expiration of the existing gas contracts.
Energy Rates and Cost of Production. Under the PPA, energy charges are based
on the costs associated with fuel inventory, operations and maintenance, and
administrative and general expenses associated with certain of Consumers' coal
plants. However, MCV's costs of producing electricity are tied, in large part,
to the cost of natural gas. To the extent that the costs associated with
production of electricity with natural gas rise faster than the energy charge
payments, which are based largely on Consumers' coal plant operation and
maintenance costs, MCV's financial performance would be negatively affected.
For the period April 1990 through December 1997, the energy charge (fixed and
variable) paid to MCV has declined by .23 cents per kWh, while the average
variable cost of delivered fuel for the period 1990 - 1997, has risen by $0.21
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 either the total PPA energy charge or 4%
per year). The difference could be further exacerbated in approximately three
years as MCV's gas contracts begin to expire if the cost of replacement fuel is
materially higher than the prices in the expiring contracts.
Energy Payments Under the PPA
PPA - "Regulatory Out" Provision. Under the "regulatory out" provision of the
PPA Consumers may, under certain conditions, be relieved of paying capacity
and/or energy charges to MCV to the extent the MPSC does not allow Consumers to
recover such charges from its customers. Consumers is not permitted for the
first 17 1/2 years of the PPA to reduce capacity payments to MCV below an
average rate of 3.77 cents per kWh for available contract capacity as a result
of a regulatory disallowance.
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<PAGE> 30
PPA - Jurisdictional Disallowance. On February 23, 1995, the Michigan
Public Service Commission ("MPSC") in Case No. U-10155-R (the 1993 power
supply cost recovery reconciliation proceeding, "1993 Reconciliation Case"
conducted by the MPSC to reconcile actual costs incurred by Consumers in
1993 in providing power supply to its retail customers with actual revenues
it collected that same year), ruled that Consumers could not recover from
its retail customers the full 915 MW of MCV capacity and fixed energy
charges as Consumers contended it was entitled to under the terms of the
1993 revised settlement proposal approved by the MPSC in Case Nos. U-10127
and U-8871 et al. Instead, the MPSC "allocated" approximately 25 MW of MCV
capacity to "non-jurisdictional" customers (i.e., customers not subject to
MPSC jurisdiction) (the "Jurisdictional Issue"). In October 1995, Consumers
notified MCV that, pursuant to the "regulatory out" provision of the PPA, it
would increase the amount escrowed each month to reflect its calculation of
fixed energy charge payments allocated to non-jurisdictional customers
disallowed by the MPSC and Michigan Court of Appeals due to the
Jurisdictional Issue. In addition, Consumers requested a refund from MCV of
$1.9 million plus interest, for the calendar years 1993 and 1994 and the
first eight months of 1995. In November 1995, MCV responded to Consumers
indicating that MCV would, pursuant to the PPA, refund the appropriate
funds, if any, and determine the appropriate calculation of the correct
escrow amount, if any, at such time as a final and non-appealable order
disallowing these recoveries is entered. The Michigan Court of Appeals
decision involving the Jurisdictional Issue has become final. Based on this
decision, Consumers notified MCV that it would continue withholding the
fixed energy charges on the Jurisdictional Issue (currently averaging
approximately $45,000 per month in 1997). MCV agreed to the release to
Consumers of the escrowed funds of approximately $1.0 million plus interest
(covering the period of September 1995 through December 1996), subject to a
final resolution between MCV and Consumers of the energy charge to be paid
to MCV, which will be adjusted with any refund of the $1.9 million
(discussed above), as a result of the finality of the Jurisdictional Issue.
MCV has not recognized any of these amounts related to this Jurisdictional
Issue as operating revenues.
PPA - Fixed Energy Payments for Deliveries Above the Caps. The MPSC ruled
in the 1993, 1994 and 1995 Reconciliation and Plan Cases that Consumers
would not be permitted to recover from its retail customers fixed energy
costs for energy delivered above the off-peak cap ("the off-peak cap issue")
of 732 MW in 1993 and 750.3 MW in 1994 and 1995. MCV and Consumers appealed
the MPSC orders for both the years 1993 and 1994 to the Michigan Court of
Appeals, and in the 1993 Reconciliation and 1994 Plan Cases the Michigan
Court of Appeals affirmed the MPSC's decisions. MCV believes these rulings
are erroneous and petitioned the Michigan Supreme Court to review the
off-peak cap issue in the 1993 Reconciliation and 1994 Plan Cases. On
January 30, 1998, the Michigan Supreme Court denied MCV's petition for
review of the 1993 Reconciliation Case, thus, this case is now final. Other
PSCR Plan and/or Reconciliation Cases for the years 1995 through 1997 are
pending before the MPSC at this time which involve this same issue.
Consumers escrowed approximately $2.8 million for 1996 and $1.0 million for
1994 and 1995 of fixed energy charges payable to MCV based upon the MPSC
rulings. MCV has not recognized any of these amounts related to the off-peak
cap issue as operating revenues. MCV Management cannot predict the outcome
of these proceedings.
PPA - Additional 325 MW. In September 1995, Consumers and the MPSC staff
filed a motion to create a consolidated proceeding for the purpose of
reviewing a settlement agreement ("325 MW Proposed Settlement") entered into
between the MPSC staff and Consumers. The settlement agreement proposed
approving one-hundred percent jurisdictional cost recovery of an additional
325 MW of capacity purchased from MCV. Cost recovery approval for the 325
MW of MCV Contract Capacity was in addition to the 915 MW already approved
(subject to the Jurisdictional Issue) by the MPSC. On November 14, 1996,
the MPSC approved, with modifications, the settlement agreement effective
January 1, 1996 ("325 MW Settlement Order"). The modifications were
generally related to issues not material to MCV, except the Jurisdictional
Issue which the MPSC deferred to the 1996 PSCR Plan proceeding. In the 1996
PSCR Plan proceeding, which is subject to further proceedings, the MPSC
ordered, on May 7, 1997, that the 325 MW of additional MCV capacity would be
allocated between jurisdictional and non-jurisdictional customers of
Consumers in the same manner as the original 915 MW. As a result of the
approval of the 325 MW Settlement Order, Consumers notified MCV in February
1997, that it would cease escrowing for the off-peak cap issue. Consumers
released to MCV the 1996 escrowed funds of approximately $2.8 million
discussed in the preceding paragraph and Consumers has paid to MCV
approximately $2.8 million for energy delivered above the off-peak cap
during 1997, subject to a final decision upholding the 325 MW Settlement
Order on this issue. MCV has not recognized these amounts paid to MCV as
operating revenues. Various parties have appealed the MPSC's 325 MW
Settlement Order to the Michigan Court of Appeals. MCV Management cannot
predict the outcome of either the 325 MW Settlement Order proceeding or the
1996 PSCR Plan proceeding.
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<PAGE> 31
PPA - Other Issues. Recently, Consumers informed MCV of several other
potential issues it may pursue, pursuant to the "regulatory out" provision
of the PPA. These issues relate to Consumers' special contract customers,
pricing of the energy delivered during off-peak ramp hours (when MCV adjusts
its output to match Consumers' dispatch) and energy delivered in the band
width (energy delivered above dispatch, within certain limits). In
addition, Consumers notified MCV that it does not believe that MCV can use
the approximately 15 MW of generating capacity attributable to the back
pressure turbine, which was placed into service in July 1997, towards
available Contract Capacity under the PPA. MCV is still studying these
issues and cannot accurately determine the financial impact of these issues
and what specific action will be taken. MCV Management believes, based upon
limited information, that these potential issues will not have a material
impact upon MCV's financial position, if recognized.
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 MPSC ordered a phased-in
program (from 1998 through 2001) for this competitive regime known as "direct
access" whereby all customers (industrial, commercial and residential) would be
eligible to select the power supplier of their choice. The MPSC also addressed
many transition issues including reliability, stranded cost (or transition
cost) recovery, rates, and other issues. As noted above (Part I, Item 1,
Section D, "Major Issues Facing MCV - Electric Industry Restructuring"), the
two issues involved in this restructuring which could impact MCV the most 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) may
be limited to the period 1998 through 2007 (MCV's PPA expires in 2025). The
Restructuring Orders do not specifically address the issue of stranded cost
recovery after 2007. In addition, the Restructuring Orders permit Consumers to
elect to freeze its PSCR factor through which charges under the PPA are
recovered from retail customers. The MPSC has also suspended the annual PSCR
(Plan and Reconciliation Case) process indefinitely, at Consumers' request.
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, has filed an
appeal of the MPSC Restructuring Orders 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 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. 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 are pending
before the United States Court of Appeals for the Second 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
29
<PAGE> 32
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 1997 the Facility achieved an Efficiency Percentage in
excess of 45%.
The Facility's achievement of a Thermal Percentage of 15% (thereby requiring
compliance with the reduced Efficiency Percentage of 42.5%) is dependent upon
both the amount of Dow and DCC steam purchases and the level of electricity
generated by the Facility. Dow has agreed to take as much steam as is
necessary for the Facility to retain its QF status under the FERC regulations
in effect on November 1, 1986 (which regulations have not been revised in
relevant part in any material respect), subject to an annual average purchase
obligation of no less than approximately 440,000 lbs/hr. of steam (less amounts
supplied by the Standby Facilities and less 50% of the amount sold by MCV to
other steam customers). The SEPA can be terminated by Dow under certain
circumstances. Such termination would likely lead to a loss of QF status for
the Facility. The amounts of steam that Dow is obligated to take under the
SEPA are expected to be sufficient to allow the Facility to maintain a Thermal
Percentage of 5% (which would require the Facility to achieve the 45% PURPA
Efficiency Percentage) but will not be sufficient to allow the Facility to
maintain a Thermal Percentage of 15% (which would allow a reduction of the
required PURPA efficiency standard to 42.5%). As a result of Consumers'
decision, in 1996, to increase MCV's electric dispatch consistent with the
terms of the 325 MW Settlement Order, energy deliveries under the PPA have
exceeded 90% of Contract Capacity. Due to this increase in dispatch, Dow and
DCC steam purchases must average approximately 600,000 lbs/hour for the
Facility to achieve a 15% Thermal Percentage. Higher levels of electric energy
deliveries will require higher levels of steam purchases in order to achieve a
15% Thermal Percentage. Dow and DCC steam purchases for 1997 averaged 652,708
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 even if electricity deliveries under the PPA exceed
90% of Contract Capacity.
MCV believes that, given projected levels of steam and electricity sales, and
through diligent management of the issue, the Facility will be able to maintain
QF 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 1997, MCV achieved
an Efficiency Percentage of 45.7% and a Thermal Percentage of 16.0%.
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 FPA (under which FERC has authority to establish rates for
electricity, which may be different than existing contractual rates). If the
Facility were to lose its QF status, the Partners of MCV, the Owner
Participants, the bank acting as the Owner Trustee and their respective parent
companies could become subject to regulation under the 1935 Act (under which,
among other things, the Securities and Exchange Commission has authority to
order divestiture of assets under certain circumstances). The loss of QF
status would not, however, entitle Consumers to terminate the PPA. Under the
PPA, Consumers is obligated to continue purchasing power from MCV at
FERC-approved rates (provided that the FERC-approved rates do not exceed the
existing contractual rates) and MCV, not Consumers, is entitled to terminate
the PPA (which MCV has covenanted not to do under the Participation
Agreements). There can be no assurance that FERC-approved rates would be the
same as the rates currently in effect under the PPA. If the FERC-approved
rates are materially less than the rates under the PPA, MCV may not have
sufficient revenue to make rent payments under the Overall Lease Transaction.
The loss of QF status would constitute an Event of Default under the Lease (and
a corresponding Event of Default under the Indenture) unless, among other
requirements, FERC approves (or accepts for filing) rates under the PPA or
other contracts of MCV for the sale of electricity sufficient to meet certain
target coverage ratios (as defined in the Overall Lease Transaction).
Year 2000 Computer Issues. MCV utilizes certain software and related
technologies throughout the Facility which will be affected by the year 2000
date change. Modifications to computer software systems to process year 2000
date transactions and receipt of vendor confirmations that their software is
year 2000 compliant began in 1997. MCV expects that all new software
installations or other modifications to its computer systems will be completed
by 2000. Anticipated spending for
30
<PAGE> 33
modifications will be expensed as incurred, while the costs for new software
will be capitalized and amortized over the software's useful life. At this
time, MCV does not expect that the cost of these modifications or software will
have a material effect on its financial position, liquidity or results of
operations.
See Part II, Item 8, "Financial Statements and Supplementary Data -- Notes 1
through 8 to the Consolidated Financial Statements" for a further discussion of
associated risks and contingencies.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Public Accountants and Financial Statements are set
forth on Pages F-2 to F-19 of this Annual Report on Form 10-K and are hereby
incorporated herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL REPORTING MATTERS
None.
31
<PAGE> 34
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information with respect to those individuals who serve as
executive officers of MCV as well as those individuals who serve as members of
its Management Committee, with their ages in parenthesis. The executive
officers of MCV are each appointed by the Management Committee and serve until
his or her successor is duly chosen or until his or her death, ineligibility to
serve, resignation or removal by the Management Committee. Members of the
Management Committee are each appointed by a General Partner and serve until
his or her successor is appointed by the appropriate General Partner. Members
of the Management Committee receive no compensation from MCV for serving on the
Management Committee. For a discussion of the relationships between members of
the Management Committee, Executive Officers and the Partners, the ownership
interests of each of the general and limited partners of MCV, and the voting
percentages of each of the members of the Management Committee, see Part III,
Item 12, "Security Ownership of Certain Beneficial Owners and Management" and
Part III, Item 13, "Certain Relationships and Related Transactions."
<TABLE>
<S> <C> <C>
Management Committee
William T. McCormick, Jr. (53) Management Committee Chairman
David A. Arledge (53) Management Committee Member
Peter Giller (55) Management Committee Member
Joseph L. Roberts, Jr. (43) Management Committee Member
Executive Officers
James M. Kevra (49) President and Chief Executive Officer
Bruce C. Grant (51) Vice President of Human Resources,
Communications and Public Affairs
James A. Mooney (58) Vice President of Engineering, Operations and
Construction
Gary B. Pasek (42) Vice President, General Counsel and Secretary
James M. Rajewski (50) Vice President and Controller
Stephen A. Shulman (41) Vice President of Finance and Treasurer
LeRoy W. Smith (56) Vice President of Gas Supply
</TABLE>
William T. McCormick, Jr. has served as Chairman of the Management Committee of
MCV since its creation in January, 1987. Mr. McCormick has served as Chairman
of the Board, Chief Executive Officer and Director of CMS Energy (diversified
energy holding company) since it was incorporated in February 1987 and as
Chairman of Consumers since November 1985.
David A. Arledge has served as a member of the Management Committee since July
1988. Mr. Arledge is Chairman, President and Chief Executive Officer of The
Coastal Corporation, a diversified energy holding company. Prior to becoming
Chief Executive Officer in October 1995, Mr. Arledge was Chief Operating
Officer of The Coastal Corporation from March, 1994. He is also a Director of
Coastal and of Coastal Midland, Inc., a subsidiary of Coastal and has held
these positions since February 1988 and April 1989, respectively. He has held
various executive positions in Coastal and numerous subsidiaries of Coastal for
at least the last five years.
32
<PAGE> 35
Peter Giller has served as a member of the Management Committee since June
1990. Mr. Giller is also serving as President of ABB Energy Ventures Inc.
(engaged in power plant development) and has held this position since May 1989.
Joseph L. Roberts, Jr. has served as a member of the Management Committee since
May 1997. Since August 1997, Mr. Roberts has been President of MCNIC Pipeline
& Processing Company and a member of the Board of Directors of MCN Investment
Corporation, both subsidiaries of MCN Energy Group Inc. He is also Vice
President of MCNIC Power Company, a position he has held since 1993. From 1993
through 1997 Mr. Roberts was Vice President of MCNIC Pipeline & Processing
Company. Prior to 1993, Mr. Roberts was employed by Michigan Consolidated Gas
Company, where he held various technical and management positions, including
Director of Industrial Marketing.
James M. Kevra has served as President and Chief Executive Officer of MCV since
July 1995. Mr. Kevra has served as a member of the Management Committee from
April 1992 to June 1995. Mr. Kevra has previously served as President of Pan
National Gas Sales, Inc. (engaged in the marketing of liquefied natural gas), a
subsidiary of PanEnergy, and held that position from February 1995 to June
1995, was Vice President of Centana Energy Corporation (engaged in the
gathering and processing of natural gas), a subsidiary of PanEnergy, and was
Vice President of Planning for Panhandle Eastern Pipe Line Company (engaged in
the interstate transportation of natural gas). Mr. Kevra also served as the
President of Source Cogeneration Company, Inc., (an affiliate of PanEnergy) and
served in that capacity from April 1992 to June 1995.
Bruce C. Grant has served as Vice President of Human Resources, Communications
and Public Affairs of MCV since February 1998. From May 1988 to February 1998
he served as the Director of Human Resources and Communications.
James A. Mooney has served as Vice President of Engineering, Operations and
Construction of MCV since October 1987.
Gary B. Pasek has served as General Counsel and Secretary of MCV since May 1995
and was elected Vice President in February 1998. From 1991 until joining MCV,
Mr. Pasek was Assistant General Counsel and Assistant Secretary of the Illinois
Power Company ("IP") (an investor owned electric and gas utility) as well as
General Counsel and Secretary of Illinova Generating Company ("IGC") (an
independent power generation company); both IP and IGC are affiliates of
Illinova Corporation. Prior to his employment at IP Mr. Pasek was in the
private practice of law since 1980.
James M. Rajewski has served as Vice President and Controller of MCV since
January 1988.
Stephen A. Shulman has served as Vice President of Finance and Treasurer since
February 1994. From February 1990 to February 1994 he served as Treasurer and
Manager of Financial Analysis.
LeRoy W. Smith has served as Vice President of Gas Supply of MCV since July
1988.
33
<PAGE> 36
Item 11. EXECUTIVE COMPENSATION
Compensation
The following table sets forth certain compensation data with respect to the
chief executive officer and four other most highly compensated executive
officers of MCV for each of the three years ended December 31, 1997, 1996 and
1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Name ---------------------------------------------
and Other Annual All Other
Principal Position Year Salary ($) Bonus ($)(a) Compensation ($)(b) Compensation($)
- ------------------------- ---- ---------- ------------ ------------------- ---------------
<S> <C> <C> <C> <C> <C>
James M. Kevra 1997 221,750 127,302 -- 45,942(c)
President and 1996 200,535 112,300 -- 40,270
Chief Executive Officer 1995 100,267 55,000 4,650 22,770
(commencing 7/1/95)
James A. Mooney 1997 169,139 63,639 -- 37,126(d)
Vice President of 1996 163,247 57,991 -- 35,637
Engineering, Operations 1995 158,989 71,100 -- 35,617
and Construction
LeRoy W. Smith 1997 145,505 59,813 -- 24,306(e)
Vice President of 1996 140,425 57,525 -- 23,551
Gas Supply 1995 138,016 65,570 -- 23,234
Gary B. Pasek 1997 142,380 51,195 -- 21,329(f)
General Counsel & 1996 134,403 49,347 -- 20,135
Secretary 1995 82,595 29,792 17,075 12,000
(commencing 5/15/95)
Stephen A. Shulman 1997 129,932 46,303 -- 19,465(g)
Vice President of Finance 1996 122,382 42,439 -- 18,335
and Treasurer 1995 118,109 47,016 -- 11,802
</TABLE>
- ----------------
(a) Represents bonuses accrued under the Senior Management Incentive Plan.
(b) Represents relocation costs (including tax reimbursements) paid either to
or on behalf of Mr. Kevra and Mr. Pasek in connection with their moves to
MCV.
(c) Includes company contributions of $8,000 to the 401(k) Savings Plan,
$12,500 to the Defined Contribution Retirement Plan, $12,769 to the
Supplement Retirement Plan and $12,673 to the Excess Benefit Plan.
(d) Includes company contributions of $8,000 to the 401(k) Savings Plan,
$12,500 to the Defined Contribution Retirement Plan, $11,914 to the
Supplemental Retirement Plan and $4,712 to the Excess Benefit Plan.
(e) Includes company contributions of $7,154 to the 401(k) Savings Plan,
$13,346 to the Defined Contribution Retirement Plan, $2,608 to the
Supplemental Retirement Plan and $1,198to the Excess Benefit Plan.
(f) Includes company contributions of $6,834 to the 401(k) Savings Plan,
$13,666 to the Defined Contribution Retirement Plan and $829 to the
Supplemental Retirement Plan.
(g) Includes company contributions of $6,488 to the 401(k) Savings Plan and
$12,977 to the Defined Contribution Retirement Plan.
34
<PAGE> 37
Compensation Committee Interlocks and Insider Participation
The members of the Management Committee also serve as members of MCV's
Compensation Committee. Members of the Compensation Committee are each
appointed by a General Partner and serve until his or her successor is
appointed by the appropriate General Partner. No member of the Compensation
Committee was or is an officer or employee of MCV. Members of the Compensation
Committee receive no compensation from MCV.
Mr. Arledge is a member of the Compensation Committee of MCV as well as
Chairman, President and Chief Executive Officer and a Director of Coastal and a
Director of Coastal Midland, Inc. Coastal Midland, Inc. and affiliates of
Coastal have engaged in numerous transactions in the ordinary course of
business to provide services or products to MCV. In 1997, Coastal affiliates
engaged in transactions with MCV which included the sale of natural gas, sale
of natural gas transportation and various natural gas marketing services that
amounted in aggregate to approximately $38.6 million. A similar level of
transactions is expected to occur in 1998. In addition, in 1997 Coastal made a
cash withdrawal from the Partnership in the amount of $7.3 million (including
accrued interest) in exchange for a letter of credit, pursuant to the
Participation Agreement.
Mr. Giller is a member of the Compensation Committee of MCV as well as
President of ABB Energy Ventures Inc. Affiliates of ABB Energy Ventures have
engaged in numerous transactions in the ordinary course of business to provide
services or products to MCV. In 1997, ABB affiliates engaged in transactions
with MCV which included the inspections and repairs of the GTGs and the sale of
spare parts for the GTGs that aggregated to approximately $29.9 million. A
higher level of transactions is expected to occur in 1998 due to the additional
expenditure of approximately $21.1 million for the GTG 11NM upgrade packages to
be installed in 1998. In addition, in 1996 ABB made a cash withdrawal from the
Partnership in the amount of $4.3 million (including accrued interest) in
exchange for a letter of credit pursuant to the Participation Agreement, which
was repaid to MCV in 1997.
Mr. McCormick is Chairman of the Compensation Committee of MCV as well as
Chairman of the Board and Director of CMS Energy and Consumers. CMS Energy and
its affiliates have the following direct and indirect interests in MCV and the
Facility: CMS Midland Holdings Company has a partnership interest in MCV,
representing indirectly a 35% equity interest in the Facility; CMS Midland has
a 49% general partnership interest in MCV; and Consumers has contractual
obligations under the PPA to purchase electric capacity and related energy from
MCV, has contractual obligations under various backup agreements among MCV,
Consumers and Dow to assure a continuous supply of steam and electricity to Dow
in the event the SEPA is terminated, has contractual obligations to enter into
transmission service agreements with other utilities for MCV's benefit, and has
leased undivided interests in the Site to the Owner Trustees (as MCV's
assignees) pursuant to the Ground Lease. In 1997, Consumers purchased electric
capacity and related energy from the Facility that aggregated approximately
$608.6 million. In addition, CMS Energy affiliates have engaged in numerous
transactions in the ordinary course of business to provide services or products
to MCV. In 1997, CMS Energy affiliates engaged in transactions with MCV which
included the sale of natural gas, the sale of natural gas transportation, the
sale of natural gas storage and the purchase of natural gas that amounted in
aggregate to approximately $30.0 million. A similar level of transactions is
expected to occur in 1998.
Mr. Roberts is a member of the Compensation Committee of MCV, as well as
President of MCNIC Pipeline & Processing Company, a member of the Board of
Directors of MCN Investment Corporation and Vice President of MCNIC Power
Company. Affiliates of MCN Energy Group Inc. have engaged in numerous
transactions in the ordinary course of business to provide services or products
to MCV. In 1997, MCN Energy Group Inc. affiliates engaged in transactions with
MCV which included the sale of natural gas and the purchase of natural gas that
amounted in aggregate to approximately $10.8 million. A similar level of
transactions is expected to occur in 1998. In addition, in 1997 MCN Energy
Group Inc. made a cash withdrawal from the Partnership in the amount of $11.9
million (including accrued interest) in exchange for a letter of credit,
pursuant to the Partnership Agreement.
For further detailed discussions of MCV's contracts and leases with Partners,
see Part I, Item 1, Section E, "Contracts", Item 2, "Properties" and Part II,
Item 8, "Financial Statements and Supplementary Data -- Note 10 to the
Consolidated Financial Statements."
35
<PAGE> 38
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is given with respect to the Partners of MCV, its
Management Committee members and all Management Committee members and officers
as a group.
Security Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership(a)
----------------------------------------------
Approximate Percent Approximate Percent
Title of Class Name and Address of Beneficial Owner of Voting Rights of Partnership Interest
- -------------- ------------------------------------ ------------------- --------------------
<S> <C> <C> <C>
General Partnership Interest CMS Midland, Inc. 49.0% 49.0%
212 West Michigan Avenue
Jackson, MI 49201
General Partnership Interest Source Midland Limited Partnership (b) 24.2% 18.1%
500 Griswold Street
Detroit, MI 48226
General Partnership Interest Coastal Midland, Inc. 14.6% 10.9%
Coastal Tower
Nine Greenway Plaza
Houston, TX 77046
General Partnership Interest MEI Limited Partnership 12.2% 9.1%
c/o ABB Energy Ventures Inc.
202 Carnegie Center, Suite 100
Princeton, NJ 08540
Limited Partnership Interest The Dow Chemical Company -- 7.5%
2030 Dow Center
Midland, MI 48674
Limited Partnership Interest Micogen Limited Partnership -- 4.5%
Fluor Daniel Corporation
3333 Michelson Drive
Irvine, CA 92730
Limited Partnership Interest C-E Midland Energy, Inc. -- 0.9%
c/o ABB Energy Ventures Inc.
202 Carnegie Center, Suite 100
Princeton, NJ 08540
Limited Partnership Interest Alanna Corporation -- 0.00001%
c/o MCV Limited Partnership
100 Progress Place
Midland, MI 48640
------ --------
100.0% 100.0%
</TABLE>
36
<PAGE> 39
- --------------------
(a) Each partner has sole voting and investment power with respect to its
general partnership interest. Limited partners have no voting rights,
except in consenting (with the General Partners) to certain specified acts
of the Management Committee. MCV is a limited partnership wholly owned by
its Partners. Beneficial interests in the partnership are not available to
any persons other than the Partners. Accordingly, none of the members of
the Management Committee and none of the executive officers of MCV have
any beneficial ownership in MCV.
(b) On May 16, 1997, MCNIC Power Company, a subsidiary of MCN Energy Group
Inc., acquired all of the partnership interests in Source Midland Limited
Partnership from PanEnergy Corp., the previous parent company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Part III, Item 11, "Executive Compensation -- Compensation Committee
Interlocks and Insider Partnerships."
37
<PAGE> 40
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial statements.
The following consolidated financial statements are as of December 31,
1997 and 1996 or for each of the three years ended December 31, 1997,
1996 and 1995.
Page
----
Index to Consolidated Financial Statements and
Supplemental Schedules F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Partners' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
2. All schedules are omitted because they are inapplicable, not required
or the information is included in the financial statements or notes
thereto.
3. The Exhibits that are filed or incorporated by reference as part of
this report are listed in the Exhibit Index filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of 1997.
38
<PAGE> 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Reference
in Annual Report on
Form 10-K
-------------------
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Partners' Equity for the Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners and the Management Committee of the
Midland Cogeneration Venture Limited Partnership:
We have audited the accompanying consolidated balance sheets of the MIDLAND
COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and
subsidiaries (MCV) as of December 31, 1997 and 1996, and the related
consolidated statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of MCV's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Midland
Cogeneration Venture Limited Partnership and subsidiaries as of December 31,
1997 and 1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, effective January 1, 1997,
MCV changed its method of accounting for property taxes.
Arthur Andersen LLP
Detroit, Michigan,
January 30, 1998.
F-2
<PAGE> 43
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
(In Thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 222,365 $ 209,959
Restricted cash and cash equivalents (Notes 2 and 4) 12,161 14,041
Accounts and notes receivable (Notes 6 and 10) 93,674 73,811
Gas inventory (Notes 2 and 6) 12,910 13,539
Unamortized property taxes (Note 3) 16,097 --
Prepaid expenses and other 4,578 4,078
----------- -----------
Total current assets 361,785 315,428
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Notes 2 and 6):
Property, plant and equipment 2,439,651 2,403,640
Pipeline 21,222 21,222
----------- -----------
Total property, plant and equipment 2,460,873 2,424,862
Accumulated depreciation (640,170) (535,590)
----------- -----------
Net property, plant and equipment 1,820,703 1,889,272
----------- -----------
OTHER ASSETS:
Restricted investment securities held-to-maturity (Notes 2 and 4) 138,898 --
Restricted non-current cash and cash equivalents -- 143,049
Deferred financing costs, net of accumulated amortization of
$9,358 and $8,231, respectively (Notes 2 and 6) 9,219 10,346
Prepaid gas costs, materials and supplies (Note 2) 20,666 5,850
----------- -----------
Total other assets 168,783 159,245
----------- -----------
TOTAL ASSETS $ 2,351,271 $ 2,363,945
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Notes 5 and 10) $ 58,942 $ 67,539
Interest payable (Note 6) 85,183 88,652
Current portion of long-term debt (Note 6) 140,950 78,574
----------- -----------
Total current liabilities 285,075 234,765
----------- -----------
NON-CURRENT LIABILITIES:
Long-term debt (Note 6) 1,788,291 1,929,241
Other 684 455
----------- -----------
Total non-current liabilities 1,788,975 1,929,696
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 6, 7 and 8)
TOTAL LIABILITIES 2,074,050 2,164,461
----------- -----------
PARTNERS' EQUITY (Note 10) 277,221 199,484
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,351,271 $ 2,363,945
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 44
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES (Notes 2, 7, 8 and 10):
Capacity $ 405,488 $ 396,244 $ 401,935
Electric 218,219 220,803 188,739
Steam and other 27,874 28,121 27,144
--------- --------- ----------
Total operating revenues 651,581 645,168 617,818
--------- --------- ----------
OPERATING EXPENSES:
Fuel costs 266,417 250,511 229,637
Depreciation 104,755 104,189 93,683
Operations 16,080 15,585 13,796
Maintenance 13,403 13,885 12,145
Property and single business taxes 26,044 25,947 27,565
Administrative, selling and general 8,383 7,168 8,645
--------- --------- ----------
Total operating expenses 435,082 417,285 385,471
--------- --------- ----------
OPERATING INCOME 216,499 227,883 232,347
--------- --------- ----------
OTHER INCOME (EXPENSE):
Interest and other income 19,645 18,420 15,637
Interest expense (173,940) (180,779) (187,048)
--------- --------- ----------
Total other income (expense), net (154,295) (162,359) (171,411)
--------- --------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 62,204 65,524 60,936
Cumulative effect on prior years (to
December 31, 1996) of change in method of
accounting for property taxes (Note 3) 15,533 -- --
--------- --------- ----------
NET INCOME $ 77,737 $ 65,524 $ 60,936
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 45
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
---------- ---------- ----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 52,212 $ 20,812 $ 73,024
Net income 53,052 7,884 60,936
---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 105,264 28,696 133,960
Net income 57,048 8,476 65,524
---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 162,312 37,172 199,484
Net income 67,680 10,057 77,737
---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 $ 229,992 $ 47,229 $ 277,221
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 46
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 77,737 $ 65,524 $ 60,936
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 105,882 105,361 94,896
Cumulative effect of change in accounting principle (15,533) -- --
Increase in accounts and notes receivable (19,863) (9,790) (6,432)
(Increase) decrease in gas inventory 629 857 (29)
Increase in unamortized property taxes (564) -- --
Increase in prepaid expenses (500) (3,025) (385)
Increase in prepaid gas costs, materials and supplies (14,816) (1,110) (1,584)
Increase (decrease) in accounts payable, accrued and other liabilities (8,597) 13,149 (3,468)
Decrease in interest payable (3,469) (3,188) (2,908)
Increase (decrease) in other non-current liabilities 229 120 (255)
---------- ---------- ----------
Net cash provided by operating activities 121,135 167,898 140,771
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant and equipment (36,186) (45,919) (29,133)
---------- ---------- ----------
Net cash used in investing activities (36,186) (45,919) (29,133)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (78,574) (72,190) (65,881)
Purchase of restricted investment securities held-to-maturity (138,898) -- --
(Increase) decrease in restricted non-current cash and cash equivalents 143,049 (3,197) (1,329)
---------- ---------- ----------
Net cash used in financing activities (74,423) (75,387) (67,210)
---------- ---------- ----------
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT 10,526 46,592 44,428
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT BEGINNING OF
PERIOD 224,000 177,408 132,980
---------- ---------- ----------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT END OF PERIOD $ 234,526 $ 224,000 $ 177,408
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 47
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE PARTNERSHIP AND ASSOCIATED RISKS
Midland Cogeneration Venture Limited Partnership ("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. The
Partners, their respective equity interests and interests in the profit and
losses of the Partnership and transactions between MCV and affiliates of the
Partners are discussed in Note 10.
In February 1992, MCV acquired the outstanding common stock of PVCO Corp.,
a previously inactive company. MCV and PVCO Corp. entered into a
partnership agreement to form MCV Gas Acquisition General Partnership ("MCV
GAGP") for the purpose of buying and selling natural gas on the spot market
and other transactions involving natural gas activities. Currently, MCV
GAGP is not actively engaged in any business activity.
The Facility is designed to provide approximately 1370 megawatts ("MW") of
electricity and approximately 1.5 million pounds of process steam per hour.
MCV has contracted to supply up to 1240 MW of electric capacity ("Contract
Capacity") to Consumers Energy Company, formerly Consumers Power Company,
("Consumers") for resale to its customers, to supply electricity and steam
to The Dow Chemical Company ("Dow") under the Steam and Electric Power
Agreement ("SEPA") and to supply steam to Dow Corning Corporation ("DCC")
under the Steam Purchase Agreement ("SPA"). Results of operations are
primarily dependent on successfully operating the Facility at or near
contractual capacity levels and on Consumers honoring its obligations under
the Power Purchase Agreement ("PPA") with MCV. Sales pursuant to the PPA
have historically accounted for over 90% of MCV's revenues.
The Facility is a qualifying cogeneration facility ("QF") 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 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.
During 1997, the Facility achieved a Thermal Percentage of 16.0% and a PURPA
Efficiency Percentage of 45.7%. 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 1998. MCV 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, 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 1998 for the succeeding five-year period. 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. In Michigan, the Michigan Public Service Commission
("MPSC") has entered a final order permitting customers to choose their
power provider
F-7
<PAGE> 48
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
over a four-year phase-in period beginning in 1998. Similar efforts, in
the form of proposed legislation, exist at the federal level. Two
issues generally involved in these restructuring efforts which could
impact MCV the most are stranded assets or transition cost recovery for
utilities and contract (PPA) sanctity. Approximately 90% of MCV's revenues
come from sales pursuant to the PPA. To date, these restructuring efforts
have not negatively impacted MCV, but if the final order of the MPSC is
construed so as to deny stranded cost recovery of above-market PPA costs,
and such order is not reversed on appeal, MCV cashflows may be negatively
impacted especially in the period after 2007. MCV, as well as others, has
filed an appeal of the MPSC restructuring orders 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 continues to monitor
and participate in these matters, as appropriate and to evaluate potential
impacts on both cashflows 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
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Following is a discussion of MCV's significant accounting policies.
Principles of Consolidation
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.
Revenue Recognition
MCV recognizes revenue for the sale of variable energy and fixed energy
when delivered (see Notes 7 and 8). Capacity and other installment
revenues are recognized based on plant availability or other contractual
arrangements.
Inventory
MCV's inventory of natural gas is stated at the lower of cost or market,
and valued using the last-in, first-out ("LIFO") method. Inventory
includes the costs of purchased gas, variable transportation and storage.
The amount of reserve to reduce inventories from first-in, first-out
("FIFO") basis to the LIFO basis at December 31, 1997 and 1996, was $1.9
million and $2.8 million, respectively. Inventory cost, determined on a
FIFO basis, approximates current replacement cost.
Materials and Supplies
Materials and supplies are stated at the lower of cost or market using the
weighted average cost method.
Deferred Financing Costs
Financing costs incurred with the issuance of debt are deferred and
amortized using the interest method over the life of the related financing
obligation. Deferred financing costs of approximately $1.1 million were
amortized in 1997 and $1.2 million were amortized in each of the years 1996
and 1995.
Depreciation
Plant, equipment and pipeline are valued at cost for new construction and
at the asset transfer price for purchased and contributed assets, and are
depreciated using the straight-line method over an estimated useful life of
3 to 35 years.
F-8
<PAGE> 49
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Major renewals and replacements which extend the useful life of plant and
equipment are capitalized, while maintenance and repairs are expensed when
incurred. Personal property is depreciated using the straight-line method
over an estimated useful life of 3 to 15 years. The cost to remove an asset
is assumed to equal the proceeds of any asset disposition. The cost of
assets and related accumulated depreciation are removed from the accounts
when sold or retired, and any resulting gain or loss reflected in
operations.
Federal Income Tax
MCV is not subject to Federal income tax. Partnership earnings are taxed
directly to each individual partner.
Statement of Cash Flows
All liquid investments purchased with a maturity of three months or less
at time of purchase are considered to be current cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and 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 December 31, 1997 have original maturity
dates of less than one year. The unique nature of the negotiated financing
obligation discussed in Note 6 makes it impractical to estimate the fair
value of the Owner Participants' underlying debt and equity instruments
supporting such financing obligation.
Forward Foreign Exchange Contracts
An amended service agreement (the "amended Service Agreement") was entered
into between MCV and ABB Power Generation ("ABB Power"), under which ABB
Power will provide 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 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. On December 29, 1997, MCV closed out the forward
purchase contracts involving Swiss francs in the notional amount of $10.0
million, resulting in a deferred $.2 million gain, recorded in current
liabilities. As of December 31, 1996, MCV had forward purchase contracts
involving Swiss francs in the notional amount of $15.0 million, with a
deferred $1.4 million loss, recorded in other assets.
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 option 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 under the PPA 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.
F-9
<PAGE> 50
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Cash is deposited with the broker in a margin account, at the time future or
option 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 $1.6 million and $1.7
million as of December 31, 1997 and 1996, respectively. MCV's deferred
gains and losses on future and option 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
December 31, 1997, MCV had net open futures and options contracts of .3 Bcf
with a deferred loss of $.1 million. As of December 31, 1996, MCV had net
open futures contracts of 3.0 Bcf with a deferred gain of $.4 million. In
addition, MCV recorded approximately $.6 million in net deferred gains on
contracts closed prior to December 31, 1997, related to January and February
1998 purchase commitments, while MCV recorded approximately $.1 million in
net deferred gains on contracts closed prior to December 31, 1996, related
to January 1997 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 will tie directly to
MCV's anticipated cash investments, without physically exchanging the
underlying notional amounts. These agreements will maximize the yield on
MCV's investments and minimize the impact of fluctuating interest rates.
In December 1997, MCV entered into an interest rate swap hedge in the
notional amount of $20 million, with the period of performance from April
1, 1998 through December 1, 2002. Cash was deposited with the broker at the
time the interest rate swap was initiated. The change in market value of
this contract requires adjustment of the margin account balance. The margin
deposit was $25,000, recorded in prepaid expenses and other, as of December
31, 1997. The difference between the amounts received and paid under the
interest rate swap transaction will be accrued and recorded as an adjustment
to the interest income over the life of the hedged agreement.
New Accounting Standards
In 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. MCV
does not expect the application of this statement to have a material impact
on its financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified for comparative
purposes. These reclassifications have no effect on net income.
(3) CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES
Effective January 1, 1997, MCV changed its method of accounting for property
taxes so that such taxes are expensed monthly during the fiscal period of
the taxing authority for which the taxes are levied. This change provides a
better matching of property tax expense with both the payment for services
and those services provided by the taxing authorities. Prior to January 1,
1997, the Partnership expensed property taxes monthly during the year
following the assessment date (December 31). The cumulative effect of this
change in accounting for property taxes increased earnings for the year 1997
by approximately $15.5 million. The pro forma effect on 1997 and prior
years' consolidated net income, including all interim periods, of
retroactively recording property taxes as if the new method of accounting
had been in effect for all periods presented is not material.
F-10
<PAGE> 51
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENT SECURITIES
HELD-TO-MATURITY
Current and non-current restricted cash and cash equivalents consist of
the following at December 31 (in thousands):
<TABLE>
<CAPTION>
Current: 1997 1996
-------- -------- --------
<S> <C> <C>
Funds restricted for plant modifications $ 12,161 $ 14,041
Non-current:
------------
Funds restricted for rental payments
pursuant to the Overall Lease Transaction $138,242 $142,624
Funds restricted for management
non-qualified plans 656 425
-------- --------
Total $138,898 $143,049
======== ========
</TABLE>
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accounts payable
Related parties $15,382 $11,743
Trade creditors 28,531 40,076
Property and single business taxes 12,379 11,835
Other 2,650 3,885
------- -------
Total $58,942 $67,539
======= =======
</TABLE>
(6) LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<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 $1,929,241 $2,007,815
Less current portion (140,950) (78,574)
---------- ----------
Total long-term debt $1,788,291 $1,929,241
========== ==========
</TABLE>
Financing Obligation
In June 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. 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 notes issued by MCV to MEC Development Corporation ("MDC") in
connection
F-11
<PAGE> 52
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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 five separate owner trusts ("Owner Trusts") established for the
benefit of certain institutional investors ("Owner Participants"). State
Street Bank and Trust Company (formerly Fleet National Bank) serves as owner
trustee ("Owner Trustee") under each of the Owner Trusts, and leases
undivided interests in the Facility on behalf of the Owner Trusts to MCV for
an initial term of 25 years. CMS Midland Holdings Company ("CMS Holdings"),
currently a wholly owned subsidiary of Consumers, acquired a 35% indirect
equity interest in the Facility through its purchase of an interest in one
of the Owner Trusts.
The Overall Lease Transaction requires MCV to achieve certain rent coverage
ratios and other financial tests prior to a distribution to the Partners.
Generally, these financial tests become more restrictive with the passage
of time. Further, MCV is restricted to making permitted investments and
incurring permitted indebtedness as specified in the Overall Lease
Transaction. The Overall Lease Transaction also requires filing of certain
periodic operating and financial reports, notification to the lessors of
events constituting a material adverse change, significant litigation or
governmental investigation, and change in status as a qualifying facility
under FERC proceedings or court decisions, among others. Notification and
approval is required for plant modification, new business activities, and
other significant changes, as defined. In addition, MCV has agreed to
indemnify various parties to the sale and leaseback transaction against any
expenses or environmental claims asserted, or certain Federal and state
taxes imposed on the Facility, as defined in the Overall Lease Transaction.
Under the terms of the Overall Lease Transaction, approximately $18.6
million of transaction costs were a liability of MCV and have been recorded
as a deferred cost. These costs are being amortized using the interest
method over the 25-year lease term.
Revolving Credit Agreement
MCV has also entered into a revolving credit agreement with the Bank of
Montreal ("Working Capital Lender") which expires August 31, 1999. Under
the terms of the existing agreement, MCV can borrow up to the $50 million
commitment, in the form of revolving credit loans or letters of credit
secured by MCV's natural gas inventory and earned receivables. A fee of
.25% per annum is payable on the average daily unused portion of the
commitment in addition to a letter of credit fee of .625% per annum. At
this time, outstanding borrowings under this agreement are limited to 90% of
earned accounts receivable. At December 31, 1997, the borrowing base
calculated under this agreement was $49.2 million. During 1997, MCV did not
utilize the Working Capital Facility, except for letters of credit
associated with normal business practice. At December 31, 1997, MCV had
letters of credit outstanding of $27.2 million related to gas purchase
transactions.
Intercreditor Agreement
MCV has also entered into an Intercreditor Agreement with the Owner Trustee,
Working Capital Lender, First Trust Michigan (which acquired the trust
assets of Comerica Bank) as Collateral Agent ("Collateral Agent") and
the Senior and Subordinated Indenture Trustees. Under the terms of this
agreement, MCV is required to deposit all revenues derived from the
operation of the Facility with the Collateral Agent for purposes of paying
operating expenses and rent. In addition, these funds are required to pay
construction modification costs and to secure future rent payments. As of
December 31, 1997, MCV has deposited $138.2 million into the reserve account
and $12.2 million into the construction repair account. The reserve account
is to be maintained at not less than $40 million nor more than $137 million
(or debt portion of next succeeding basic rent payment, whichever is
greater). Excess funds in the reserve account are periodically transferred
to MCV. This agreement also contains provisions governing the distribution
of revenues and rents due under the Overall Lease Transaction, and
establishes the priority of payment among the Owner Trusts, creditors of the
Owner Trusts, creditors of MCV and the Partnership.
F-12
<PAGE> 53
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Summary
Interest and fees incurred related to long-term debt arrangements during
1997, 1996 and 1995 were $172.8 million, $179.6 million and $185.8 million,
respectively.
Interest and fees paid during 1997, 1996 and 1995 were $176.2 million,
$182.8 million and $188.7 million, respectively.
Minimum payments due under these long-term debt arrangements over the next
five years are (in thousands):
<TABLE>
<CAPTION>
Principal Interest Total
--------- -------- ----------
<S> <C> <C> <C>
1998 $140,950 $168,082 $ 309,032
1999 64,330 157,332 221,662
2000 139,095 149,554 288,649
2001 155,210 136,999 292,209
2002 185,791 123,379 309,170
-------- -------- ----------
$685,376 $735,346 $1,420,722
======== ======== ==========
</TABLE>
(7) COMMITMENTS AND OTHER AGREEMENTS
MCV has entered into numerous commitments and other agreements related to
the Facility. Principal agreements are summarized as follows:
Power Purchase Agreement
MCV and Consumers have executed the PPA for the sale to Consumers of a
minimum amount of electricity, subject to the capacity requirements of Dow
and any other permissible electricity purchasers. Consumers has the right
to terminate and/or withhold payment under the PPA if the Facility fails to
achieve certain operating levels or if MCV fails to provide adequate fuel
assurances. In the event of early termination of the PPA, MCV would have a
maximum liability of approximately $270 million if the PPA were terminated
in the 12th through 24th years. The term of this agreement is 35 years from
the commercial operation date and year-to-year thereafter.
Steam and Electric Power Agreement
MCV and Dow have executed the SEPA for the sale to Dow of certain minimum
amounts of steam and electricity for Dow's facilities. In addition to the
contractual steam and electric charges, Dow will pay 36 quarterly payments,
pursuant to the agreement, of $3.8 million each. These installment payments
commenced in the first quarter of 1990 and continue, notwithstanding
performance of the Facility, in each quarter thereafter until all 36
installments have been paid, or the agreement is terminated.
If the SEPA is terminated, and Consumers does not fulfill MCV's commitments
as provided in the Backup Steam and Electric Power Agreement, MCV will be
required to pay Dow a termination fee, calculated at that time, ranging from
a minimum of $60 million to a maximum of $85 million. This agreement
provides for the sale to Dow of steam and electricity produced by the
Facility for terms of 25 years and 15 years, respectively, commencing on the
commercial operation date and year-to-year thereafter.
Steam Purchase Agreement
MCV and DCC have executed the SPA for the sale to DCC of certain minimum
amounts of steam for use at the DCC Midland site. Steam sales under the SPA
commenced in July 1996. Termination of this agreement, prior to
F-13
<PAGE> 54
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
expiration, requires the terminating party to pay to the other party a
percentage of future revenues which would have been realized had the initial
term of 15 years been fulfilled. The percentage of future revenues payable
is 50% if termination occurs prior to the fifth anniversary of the
commercial operation date and 33-1/3% if termination occurs after the fifth
anniversary of this agreement. The term of this agreement is 15 years from
the commercial operation date of steam deliveries under the contract and
year-to-year thereafter.
Gas Supply Agreements
MCV has entered into gas purchase agreements with various producers for the
supply of natural gas. The current contracted volume totals 236.5 million
cubic feet ("MMcf") per day as of January 1, 1998. As of January 1, 1998,
gas contracts with U.S. suppliers provide for the purchase of 156.5 MMcf per
day while gas contracts with Canadian suppliers provide for the purchase of
80.0 MMcf per day. Some of these contracts require MCV to pay for a minimum
amount of natural gas per year, whether or not taken. The estimated minimum
commitments under these contracts for gas for the years 1998 through 2002
are $110.1 million, $113.9 million, $118.5 million, $120.5 million and
$106.5 million, respectively. A portion of these payments may be utilized
in future years to offset the cost of quantities of natural gas taken above
the minimum amounts.
Gas Transportation Agreements
MCV has entered into firm natural gas transportation agreements with various
pipeline companies. These agreements require MCV to pay certain
reservation charges in order to reserve the transportation capacity. MCV
incurred reservation charges in 1997, 1996 and 1995, of $34.4 million, $36.5
million (excluding the Great Lakes Gas Transportation Refund of $17.6
million (see Note 8 - Contingencies, "Fuel Matters")) and $41.0 million,
respectively. The estimated minimum reservation charges required under these
agreements are $36.5 million for each of the years 1998 through 2002. These
projections are based on current commitments.
Gas Turbine Service Agreement
MCV has entered into a service agreement, as amended, with ABB Power which
commenced on January 1, 1990 and will expire upon the earlier of the
completion of the sixth series of major gas-fired turbine generators
("GTG") inspections or December 31, 2009. Under the terms of this
agreement, ABB Power sold MCV an initial inventory of spare parts for the
GTGs and provides qualified service personnel and supporting staff to assist
MCV to perform scheduled inspections on the GTGs and to repair the GTGs at
MCV's request. Upon termination of the Service Agreement (except for
nonperformance by ABB Power), MCV must pay a cancellation payment of $2.0
million in 1998, $1.5 million in 1999, $1.0 million in 2000 and $.5 million
in any year thereafter escalated in 1988 dollars. MCV and ABB Power
amended the Service Agreement, effective December 31, 1993, to include the
supply of hot gas path parts. Under the amended Service Agreement, ABB Power
will provide hot gas path parts for MCV's twelve gas turbines through the
fourth series of major GTG inspections. In January 1998, MCV and ABB Power
amended the length of the amended Service Agreement to extend through the
sixth series of major GTG inspections which are expected to be completed by
year end 2008, for a lump sum fixed price covering the entire term of the
amended Service Agreement of $266.5 million (in 1993 dollars, which is
adjusted based on exchange rates and Swiss inflation indices), payable on
the basis of operating hours as they occur over the same period. MCV has
made payments totaling approximately $79.2 million under this amended
Service Agreement through December 31, 1997.
In addition to the January 1998 amendment to the term of the amended Service
Agreement, MCV has also contracted to purchase from ABB Power 11NM GTG
upgrade packages for eleven of the gas turbine generators for $41.6 million.
The purchase of these upgrades comes after successfully testing one upgrade
package at the Facility in 1997. The upgrade packages are expected to add to
available capacity and significantly improve the efficiency of the Facility.
The installation of all eleven upgrade packages is expected to be completed
by the end of 1999. Maintenance and spare parts for the upgrade packages are
covered by the amended Service Agreement. MCV also agreed to purchase a
spare GTG rotor to facilitate maintenance activities and improve
reliability.
F-14
<PAGE> 55
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Steam Turbine Service Agreement
MCV has entered into a nine year Steam Turbine Maintenance Agreement with
General Electric Company effective January 1, 1995, which is designed to
improve unit reliability, increase availability and minimize unanticipated
maintenance costs. In addition, this contract includes performance
incentives and penalties which are based on the length of each scheduled
outage and the number of forced outages during a calendar year. MCV is to
make monthly payments over the life of the contract totaling $13.0 million
(in 1995 dollars).
Site Lease
In December 1987, MCV leased the land on which the Facility is located from
Consumers ("Site Lease"). MCV and Consumers amended and restated the Site
Lease to reflect the creation of five separate undivided interests in the
Site Lease as of June 1, 1990. Pursuant to the Overall Lease Transaction,
MCV assigned these undivided interests in the Site Lease to the Owner
Trustees, which in turn subleased the undivided interests back to MCV under
five separate site subleases.
The Site Lease is for a term which commenced on December 29, 1987, and ends
on December 31, 2035, including two renewal options of five years each.
The rental under the Site Lease is $.6 million per annum, including the two
five-year renewal terms.
(8) CONTINGENCIES
PPA - "Regulatory Out" Provision
Under the "regulatory out" provision of the PPA Consumers may, under
certain conditions, be relieved of paying capacity and/or energy
charges to MCV to the extent the MPSC does not allow Consumers to recover
such charges from its customers. Consumers is not permitted for the first
17 1/2 years of the PPA to reduce capacity payments to MCV below an average
rate of 3.77 cents per kWh for available contract capacity as a result of a
regulatory disallowance.
PPA - Jurisdictional Disallowance
On February 23, 1995, the MPSC in Case No. U-10155-R (the 1993 power
supply cost recovery reconciliation proceeding, "1993 Reconciliation
Case," conducted by the MPSC to reconcile actual costs incurred by
Consumers in 1993 in providing power supply to its retail customers
with actual revenues it collected that same year), ruled that Consumers
could not recover from its retail customers the full 915 MW of MCV
capacity and fixed energy charges as Consumers contended it was
entitled to under the terms of the 1993 revised settlement proposal
approved by the MPSC in Case Nos. U-10127 and U-8871 et al. Instead,
the MPSC "allocated" approximately 25 MW of MCV capacity to
"non-jurisdictional" customers (i.e., customers not subject to MPSC
jurisdiction) (the "Jurisdictional Issue"). In October 1995, Consumers
notified MCV that, pursuant to the "regulatory out" provision of the
PPA, it would increase the amount escrowed each month to reflect its
calculation of fixed energy charge payments allocated to
non-jurisdictional customers disallowed by the MPSC and Michigan Court
of Appeals due to the Jurisdictional Issue. In addition, Consumers
requested a refund from MCV of $1.9 million plus interest, for the
calendar years 1993 and 1994 and the first eight months of 1995. In
November 1995, MCV responded to Consumers indicating that MCV would,
pursuant to the PPA, refund the appropriate funds, if any, and
determine the appropriate calculation of the correct escrow amount, if
any, at such time as a final and non-appealable order disallowing these
recoveries is entered. The Michigan Court of Appeals decision
involving the Jurisdictional Issue has become final. Based on this
decision, Consumers notified MCV that it would continue withholding the
fixed energy charges on the Jurisdictional Issue (currently averaging
approximately $45,000 per month in 1997). MCV agreed to the release to
Consumers of the escrowed funds of approximately $1.0 million plus
interest (covering the period of September 1995 through December 1996),
subject to a final resolution between MCV and Consumers of the energy
charge to be paid to MCV, which will be adjusted with any refund of the
$1.9 million (discussed above), as a result of the finality of the
Jurisdictional Issue. MCV has not recognized any of these amounts
related to this Jurisdictional Issue as operating revenues.
F-15
<PAGE> 56
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
PPA - Fixed Energy Payments for Deliveries Above the Caps
The MPSC ruled in the 1993, 1994 and 1995 Reconciliation and Plan
Cases that Consumers would not be permitted to recover from its
retail customers fixed energy costs for energy delivered above the
off-peak cap ("the off-peak cap issue") of 732 MW in 1993 and 750.3 MW
in 1994 and 1995. MCV and Consumers appealed the MPSC orders for both
the years 1993 and 1994 to the Michigan Court of Appeals, and in the
1993 Reconciliation and 1994 Plan Cases the Michigan Court of Appeals
affirmed the MPSC's decisions. MCV believes these rulings are
erroneous and petitioned the Michigan Supreme Court to review the
off-peak cap issue in the 1993 Reconciliation and 1994 Plan Cases. On
January 30, 1998, the Michigan Supreme Court denied MCV's petition for
review of the 1993 Reconciliation Case, thus, this case is now final.
Other PSCR Plan and/or Reconciliation Cases for the years 1995 through
1997 are pending before the MPSC at this time which involve this same
issue. Consumers escrowed approximately $2.8 million for 1996 and
$1.0 million for the period 1994 and 1995 of fixed energy charges
payable to MCV based upon the MPSC rulings. MCV has not recognized any
of these amounts related to the off-peak cap issue as operating
revenues. MCV Management cannot predict the outcome of these
proceedings.
PPA - Additional 325 MW
In September 1995, Consumers and the MPSC staff filed a motion to
create a consolidated proceeding for the purpose of reviewing a
settlement agreement ("325 MW Proposed Settlement") entered into
between the MPSC staff and Consumers. The settlement agreement
proposed approving one-hundred percent jurisdictional cost recovery of
an additional 325 MW of capacity purchased from MCV. Cost recovery
approval for the 325 MW of MCV Contract Capacity was in addition to the
915 MW already approved (subject to the Jurisdictional Issue) by the
MPSC. On November 14, 1996, the MPSC approved, with modifications, the
settlement agreement effective January 1, 1996 ("325 MW Settlement
Order"). The modifications were generally related to issues not
material to MCV, except the Jurisdictional Issue which the MPSC
deferred to the 1996 PSCR Plan proceeding. In the 1996 PSCR Plan
proceeding, which is subject to further proceedings, the MPSC ordered,
on May 7, 1997, that the 325 MW of additional MCV capacity would be
allocated between jurisdictional and non-jurisdictional customers of
Consumers in the same manner as the original 915 MW. The Attorney
General, among others, has filed an appeal of the 325 MW Settlement
Order. As a result of the approval of the 325 MW Settlement Order,
Consumers notified MCV in February 1997, that it would cease escrowing
for the off-peak cap issue. Consumers released to MCV the 1996
escrowed funds of approximately $2.8 million discussed in the preceding
paragraph and Consumers has paid to MCV approximately $2.8 million for
energy delivered above the off-peak cap during the first twelve months
of 1997, subject to a final decision upholding the 325 MW Settlement
Order on this issue. MCV has not recognized these amounts paid to MCV
as operating revenues. Various parties have appealed the MPSC's 325 MW
Settlement Order to the Michigan Court of Appeals. MCV Management
cannot predict the outcome of either the 325 MW Settlement Order
proceeding or the 1996 PSCR Plan proceeding.
PPA - Other Issues
Recently, Consumers informed MCV of several other potential issues it
may pursue, pursuant to the "regulatory out" provision of the PPA.
These issues relate to Consumers' special contract customers, pricing
of the energy delivered during off-peak ramp hours (when MCV adjusts
its output to match Consumers' dispatch) and energy delivered in the
band width (energy delivered above dispatch, within certain limits).
In addition, Consumers notified MCV that it does not believe that MCV
can use the approximately 15 MW of generating capacity attributable to
the back pressure turbine, which was placed into service in July 1997,
towards available Contract Capacity under the PPA. MCV is still
studying these issues and cannot accurately determine the financial
impact of these issues and what specific action will be taken. MCV
Management believes, based upon limited information, that these
potential issues will not have a material impact upon MCV's financial
position, if recognized.
F-16
<PAGE> 57
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GTG Equipment Problems
Over the past seven years and most recently in January 1996, several of the
gas turbine generators "GTGs" have experienced severe cracking in the hot
gas casings, which in some cases has 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 2,000 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 1998. Failure to maintain insurance,
subject to certain exceptions, not currently applicable, is an Event of
Default under the Overall Lease Transaction.
Fuel Matters
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, rather than treated as incremental
costs, and allocated solely to the new shippers who would gain access to the
expanded facilities. 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. After
numerous appeals by MCV and others of FERC's incremental pricing decision,
FERC reversed its prior order and, commencing October 1, 1995, prospectively
implemented rolled-in rates and granted interest on the refund paid in
excess of the rolled-in rates from October 1, 1995 until paid. MCV had, from
April 1, 1993 to October 1, 1995, reflected in current operating results
Great Lakes gas transportation costs associated with incremental pricing. In
August 1996, MCV recognized in its current operating results approximately
$19.0 million (which represented $17.6 million in transportation costs
included as a reduction in fuel costs and $1.4 million of accrued interest
subsequent to October 1, 1995) of the Great Lakes refund. MCV's refund was
approximately $5.9 million, $8.0 million and $3.7 million for each of the
years 1995, 1994 and, 1993 and prior respectively. On January 16, 1998, the
United States Court of Appeals ruled that MCV should have been paid interest
for the period prior to October 1, 1995 (totaling approximately $1.5
million) on the Great Lakes refund and denied all other petitions that had
been filed challenging the refund. This decision is subject to further
appeal. MCV Management cannot predict the outcome of any such appeal, but
believes that the likelihood of reversal of any portion of the Court of
Appeals' decision is remote.
(9) RETIREMENT BENEFITS
Postretirement Health Care Plans
In 1992, MCV established defined cost postretirement health care plans that
cover all full-time employees. The plans provide health care credits
which can be utilized to purchase medical plan coverage and pay qualified
health care expenses. Participants become eligible for the benefits if they
retire on or after the attainment of age 65 or upon a qualified disability
retirement, or if they have 10 or more years of service and retire at age 55
or older. The plans granted retroactive benefits for all employees hired
prior to January 1, 1992. This prior service cost has been amortized to
expense over a five year period. MCV annually funds the current year
service and interest cost as well as amortization of prior service cost to
both qualified and non-qualified trusts.
F-17
<PAGE> 58
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table reconciles the plans' funded status to the accrued
postretirement benefits liability as reflected on the balance sheet as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accumulated postretirement benefits obligation
("APBO"); Active employees not fully eligible $1,413.1 $1,089.1
Less plan assets at fair value 1,400.0 1,140.6
-------- --------
13.1 (51.5)
Unrecognized net actuarial gain 176.6 224.9
-------- --------
Accrued postretirement benefits liability $ 189.7 $ 173.4
======== ========
</TABLE>
Net periodic postretirement health care cost for years ending December 31,
included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost, benefits attributed to employee
services rendered during the year $ 146.8 $ 136.6 $ 160.0
Interest cost on accumulated postretirement
benefit obligation and service cost (47.3) 13.1 21.1
Amortization of prior service cost 36.2 52.0 90.5
-------- -------- --------
Net periodic postretirement benefits expense $ 135.7 $ 201.7 $ 271.6
======== ======== ========
</TABLE>
Assumptions used in accounting for the Post-Retirement Health Care Plan
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Discount rate 7.00% 7.50% 7.50%
Long-term rate of return on plan assets 8.50% 8.50% 8.50%
Inflation benefit amount
1996 through 1998 0.00% 0.00% 0.00%
1999 and later years 4.00% 4.00% 4.00%
</TABLE>
Retirement and Savings Plans
MCV sponsors a defined contribution retirement plan covering all
employees. Under the terms of the plan, MCV makes contributions to the plan
of either five or ten percent of an employee's eligible annual compensation
dependent upon the employee's age. MCV also sponsors a 401(k) savings plan
for employees. Contributions and costs for this plan are based on matching
an employee's savings up to a maximum level. In 1997, 1996, and 1995, MCV
contributed $1.0 million, $.9million and $.8 million, respectively, under
these plans.
Supplemental Retirement Benefits
MCV provides supplemental retirement and excess benefit plans for key
management. These plans are not qualified plans under the Internal Revenue
Code; therefore, earnings of the trusts maintained by MCV to fund these
plans are taxable to the Partners and trust assets are included in the
assets of MCV.
F-18
<PAGE> 59
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(10) 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
December 31, 1997, and the nature and amount of related party transactions
or agreements that existed with the Partners or affiliates as of December
31, 1997 and 1996, and for each of the twelve month periods ended December
31, (in thousands).
<TABLE>
<CAPTION>
Equity Partner, Type
of Partner and Nature Equity
of Related Party Interest Interest Related Party Transactions and Agreements 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CMS Midland, Inc. $135,838 49.0% Power purchase agreement $608,640 $598,127 $571,444
General Partner; Purchases under gas transportation agreements 9,713 9,507 9,346
wholly-owned subsidiary Purchases under spot gas agreements 6,490 2,352 1,633
of Consumers Energy Purchases under gas supply agreements 9,543 10,121 9,526
Company (formerly Gas storage agreement 2,563 2,563 2,563
Consumers Power Land lease/easement agreements 600 600 600
Company) Accounts receivable 53,513 52,048 47,907
Accounts payable 9,276 5,469 7,029
Gas exchanges 1,674 3,444 6,886
The Dow Chemical Company 33,779 7.5 Steam and electric power agreement 42,937 47,041 46,374
Limited Partner Steam purchase agreement - Dow Corning
Corp (affiliate) 3,167 1,239 --
Purchases under demineralized water supply
agreement 7,336 6,292 5,510
Accounts receivable 1,896 2,247 2,861
Accounts payable 678 1,427 1,138
Standby and backup fees 792 1,156 968
Source Midland Limited
Partnership ("SMLP") 44,835 18.1 SMLP - Under Ownership of MCNIC Power Company
General Partner; ---------------------------------------------
wholly-owned limited Purchases under spot gas agreements 578 -- --
partnership of MCN Purchases under gas supply agreements 8,364 -- --
Energy Group Inc. (1) Accounts receivable 1,125 -- --
Accounts payable 588 -- --
Partner cash withdrawal (including accrued
interest) (3) 11,922 -- --
Gas exchanges 1,845 -- --
SMLP - Under Ownership of Pan Energy Corp
-----------------------------------------
Purchases under gas transportation agreements 4,648 15,393 14,060
Purchases under spot gas agreements 911 3,313 2,421
Gas exchanges 50 2,082 1,271
Accounts payable -- 1,272 2,102
Coastal Midland, Inc. 26,901 10.9 Purchases under gas transportation agreements (2) 13,593 (3,296) 20,469
General Partner; Purchases under spot gas agreement 9,920 13,986 10,137
wholly-owned Purchases under gas supply agreement 4,188 4,018 3,802
subsidiary of The Gas agency agreement 1,497 1,314 952
Coastal Deferred reservation charges under gas purchase 3,940 2,955 1,970
Corporation agreement
Accounts receivable 2,271 -- 882
Accounts payable 4,569 2,257 2,841
Gas exchanges 5,486 4,494 3,139
Partner cash withdrawal (including accrued
interest) (3) 7,343 -- --
MEI Limited Partnership 22,418 9.1 Gas turbine maintenance and spare parts agreement 29,900 30,623 26,170
General Partner; Accounts payable 88 1,043 6
affiliate of ASEA Partner cash withdrawal (including accrued
Brown Boveri, Inc. interest) (3) -- 4,284 --
Micogen Limited Partnership 11,208 4.5 Partner cash withdrawal (including accrued
Limited Partner; interest) (3) 3,142 1,925 --
affiliate of
Fluor Corporation
C-E Midland Energy, Inc. 2,241 .9 Service Agreement 2,195 5,983 3,065
Limited Partner; affiliate Accounts Payable 182 281 437
of ASEA Brown Boveri, Inc.
Alanna Corporation 1(4) .00001 Note receivable 1 1 1
Limited Partner;
wholly-owned
subsidiary of Alanna
Holdings Corporation
</TABLE>
(1) On May 16, 1997, MCNIC Power Company acquired all of the partnership
interests in Source Midland Limited Partnership ("SMLP") from PanEnergy
Corp. The SMLP amounts listed Under Ownership of MCNIC Power Company are
as of December 31, 1997 and for the period May 16, 1997 to
December 31, 1997. The SMLP amounts listed Under Ownership of PanEnergy
Corp. are for the period January 1, 1997 to May 15, 1997, and as of December
31, 1996 and 1995 and the twelve month periods ended December 31, 1996 and
1995.
(2) 1996 includes the Great Lakes gas transportation refund of $17.6 million.
(3) In exchange for a letter of credit pursuant to the Participation
Agreement, recorded as notes receivables.
(4) Alanna's capital stock is pledged to secure MCV's obligation under the
lease and other overall lease transaction documents.
F-19
<PAGE> 60
SUPPLEMENTAL INFORMATION
Supplemental information is to be furnished with reports filed pursuant to
Section 15 (d) of the Act by registrants which have not registered securities
pursuant to Section 12 of the Act. No such annual report or proxy statement
has been sent to security holders.
S-1
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 23, 1998 By /s/ James M. Kevra
---------------------------------------
James M. Kevra
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James M. Kevra President and Chief Executive Officer March 23, 1998
- ----------------------------- (Principal Executive Officer)
James M. Kevra
/s/ Stephen A. Shulman Vice President of Finance and Treasurer March 23, 1998
- ----------------------------- (Principal Financial Officer)
Stephen A. Shulman
/s/ James M. Rajewski Vice President and Controller March 23, 1998
- ----------------------------- (Principal Accounting Officer)
James M. Rajewski
/s/ William T. McCormick, Jr. Chairman, Management Committee March 23, 1998
- -----------------------------
William T. McCormick, Jr.
/s/ Joseph L. Roberts, Jr. Member, Management Committee March 23, 1998
- -----------------------------
Joseph L. Roberts, Jr.
/s/ David A. Arledge Member, Management Committee March 23, 1998
- -----------------------------
David A. Arledge
/s/ Peter Giller Member, Management Committee March 23, 1998
- -----------------------------
Peter Giller
</TABLE>
S-2
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 - Restated Certificate of Limited Partnership dated June 13, 1988 ((a), Exhibit 3.1)).
3.2 - Amended and Restated Limited Partnership Agreement of MCV dated as of June 13, 1988 ((a) (Exhibit 3.2)).
3.2 (a) - Amendment No. 1 dated as of May 26, 1989 to Amended and Restated Limited Partnership Agreement ((a) (Exhibit 3.3)).
3.2 (b) - Amendment No. 2 dated as of November 28, 1989 to Amended and Restated Limited Partnership Agreement ((a), Exhibit
3.4)).
3.2 (c) - Amendment No. 3 dated as of June 1, 1990 to Amended and Restated Limited Partnership Agreement (incorporated by
reference to Exhibit (2)(b) to CMS Energy Corporation's Form 10-K dated March 21, 1990, File No. 1-9513).
3.3 - Memorandum of Agreement, dated March 2, 1990, relating to Amended and Restated Partnership Agreement ((a), (Exhibit
3.6)).
4.1 - Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between Shawmut Bank and
United States Trust Company of New York ((a), Exhibit 4.1)).
4.1 (a) - Senior Trust Indenture Supplement No. 1 dated as of June 1, 1990 ((a), (Exhibit 4.2)).
4.2 - Subordinated Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between Shawmut
Bank and Meridian Trust Company ("Subordinated Trust Indenture") ((a), (Exhibit 4.5)).
4.2 (a) - Subordinated Trust Indenture Supplement No. 1 dated as of June 1, 1990 ((a), (Exhibit 4.6)).
4.2 (b) - Subordinated Trust Indenture Supplement No. 2 dated as of July 1, 1990 ((a), (Exhibit 4.7)).
4.3 - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, MCV and United States Trust
Company of New York (incorporated by reference to Exhibit No. (28)(b) to CMS Energy Corporation's Form 10-Q for the
quarter ended June 30, 1990, File No. 1-9513).
4.3 (a) - Collateral Trust Indenture Supplement No. 1 dated June 1, 1990 ((a), (Exhibit 4.4)).
4.4 - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation II, MCV and Meridian Trust
Company (incorporated by reference to Exhibit No. (28)(d) to CMS Energy Corporation's Form 10-Q for the quarter
ended June 30, 1990, File No. 1-9513).
4.4 (a) - Collateral Trust Indenture Supplement No. 1 dated June 1, 1990 ((a), (Exhibit 4.9)).
4.5 - Amended and Restated Trust Agreement dated as of March 1, 1990 between Shawmut Bank and Owner Participant ((a),
(Exhibit 4.10)).
4.6 - Lease Agreement, dated as of March 1, 1990 between MCV and Shawmut Bank ((a), (Exhibit 4.11)).
4.6 (a) - Amended and Restated Lease Agreement dated as of June 1, 1990 between MCV and Shawmut Bank ((a), (Exhibit 4.12)).
</TABLE>
E-1
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
4.6 (b) - Amendment No. 1 dated as of January 1, 1992 to Amended and Restated Lease Agreement ((d), (Exhibit 4.17)).
4.6 (c) - Second Amended and Restated Agreement of Lease [Part A] dated as of June 1, 1990 among Consumers, MCV, CMS Midland,
Inc. and MEC Development Corporation ((a), (Exhibit 4.14)).
4.7 - Amended and Restated Participation Agreement dated as of June 1, 1990 among MCV, Owner Participant, Shawmut Bank,
United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding Corporation II,
MDC and Institutional Senior Bond Purchasers ((a), (Exhibit 4.13)).
4.8 - Ground Lease Assignment and Assumption Agreement dated as of June 1, 1990 among Shawmut Bank and MCV ((a), (Exhibit
4.15)).
4.9 - Collateral Agency and Intercreditor Agreement dated as of June 1, 1990 between Shawmut Bank, MCV, United States
Trust Company, Meridian Trust Company, Bank of Montreal and Manufacturers National Bank of Detroit ((a), (Exhibit
4.16)).
10.1 - Tax Exempt Collateral Trust Indenture dated as of July 1, 1990 among The Economic Development Corporation of the
County of Midland, MCV and Meridian Trust Company (incorporated by reference to Exhibit No. (28)(g) to CMS Energy
Corporation's Form 10-Q for the quarter ended June 30, 1990, File No. 1-9513).
10.1 (a) - Tax Exempt Collateral Trust Indenture Supplement No. 1 dated July 1, 1990 ((a), (Exhibit 10.2)).
10.2 - Credit Agreement dated as of June 16, 1990 among Bank of Montreal as Agent, the Lenders named therein and MCV ((a),
(Exhibit 10.3)).
10.3 - CMS Transfer Agreement dated as of January 27, 1987, as amended as of June 13, 1988, among Consumers Power Company,
CMS Midland, Inc. and MCV (incorporated by reference to Exhibit (19)(a) to Consumers Power Company's Form 10-Q for
the quarter ended June 30, 1988, File No. 1-5611).
10.4 - Amended and Restated MDC Transfer Agreement dated as of June 13, 1988, among Consumers Power Company, MEC
Development Corporation and MCV, as amended by the March 2, 1990 Memorandum of Agreement with respect to the Amended
and Restated Partnership Agreement (incorporated by reference to Exhibit No. (19)(b) to Consumers Power Company's
Form 10-Q for the quarter ended June 30, 1988, File No. 1-5611), as amended by the March 2, 1990 Memorandum of
Agreement with respect to the Amended and Restated MDC Transfer Agreement (incorporated by reference to Exhibit
(2)(b) to CMS Energy Corporation's Form 8-K dated March 21, 1990, File No. 1-9513).
10.5 - Amended and Restated Tax Indemnification Agreement, dated as of June 1, 1990, among MCV and Owner Participant ((a),
(Exhibit 10.70)).
10.6 - Capacity Support Agreement dated as of June 9, 1988, between CMS Energy Corporation and MCV (incorporated by
reference to Exhibit No. 10(m) to CMS Energy Corporation's Annual Report on Form 10-K, for the year ended December
31, 1988, File No. 1-9513).
10.7 - Registration Rights Agreement dated as of December 17, 1993 among Midland Funding Corporation I, MCV, Consumers and
Morgan Stanley & Co. Incorporated and Donaldson, Lufkin & Jearette Securities Corporation ((e), (Exhibit 10.97)).
</TABLE>
E-2
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.8 - Power Purchase Agreement, dated as of July 17, 1986, between MCV and Consumers Power Company ("PPA") ((a), (Exhibit
10.4)).
10.8 (a) - Amendment No. 1 to PPA dated September 10, 1987 ((a), (Exhibit 10.5)).
10.8 (b) - Amendment No. 2 to PPA dated March 18, 1988 ((a), (Exhibit 10.6)).
10.8 (c) - Amendment No. 3 to PPA dated August 28, 1989 ((a), (Exhibit 10.7)).
10.8 (d) - Amendment No. 4A to PPA dated May 25, 1989 ((a), (Exhibit 10.8)).
10.9 - Special Facilities/Interconnection Agreement dated as of July 8, 1988 between MCV and Consumers Power Company ((a),
(Exhibit 10.25)).
10.10 - Residual Open Access Interconnection Service Purchase Agreement between Consumers Power Company and MCV, dated
December 5, 1991 ((c), (Exhibit 10.83)).
10.11 - Agreement with respect to the transmission of power dated as of June 9, 1988, between Consumers Power Company and
MCV ((a), (Exhibit 10.69)).
10.12 - MCV Backup Agreement dated June 9, 1988 between MCV and Consumers Power Company with respect to Alternative
Generating Equipment ((a), (Exhibit 10.27)).
10.13 - Interconnection Option between MCV, Consumers Power Company, Michigan Gas Storage Company and The Dow Chemical
Company dated April 27, 1988 ((a), (Exhibit 10.14)).
10.14 - Steam and Electric Power Agreement between The Dow Chemical Company and MCV dated January 27, 1987 (the "SEPA")
((a), (Exhibit 10.10)).
10.14 (a) - First Amendment to SEPA ((a), (Exhibit 10.11)).
10.14 (b) - Exhibit "A" to SEPA ((a), (Exhibit 10.13)).
10.14 (c) - Fourth Amendment to SEPA ((a), (Exhibit 10.15)).
10.14 (d) - Fifth Amendment to SEPA ((a), (Exhibit 10.16)).
10.14 (e) - Sixth Amendment to SEPA, dated November 20, 1989 ((f), (Exhibit 10.14(e)).
10.14 (f) - Seventh Amendment to SEPA, dated November 22, 1994 ((f), (Exhibit 10.14(f)).
10.15 - Demineralized Water Supply Agreement dated as of January 27, 1987 between MCV and The Dow Chemical Company ((a),
(Exhibit 10.31)).
10.16 - Package Boiler Sale and Support Agreement between The Dow Chemical Company, Consumers Power Company and MCV dated as
of January 27, 1987 ((a), (Exhibit 10.32)).
10.17 - Equipment Lease dated as of January 27, 1987 between The Dow Chemical Company and MCV (the "Equipment Lease") ((a),
(Exhibit 10.71)).
10.17 (a) - First Amendment to Equipment Lease effective March 1, 1988 and dated as of May 4, 1988 ((a), (Exhibit 10.72)).
</TABLE>
E-3
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.17 (b) - Second Amendment to Equipment Lease effective December 1, 1989 and dated November 20, 1989 ((a), (Exhibit 10.73)).
10.18 - Equipment Lease Easement dated as of January 27, 1988 between The Dow Chemical Company and MCV ((a), (Exhibit
10.74)).
10.18 (a) - First Amendment to Equipment Lease Easement effective March 1, 1988 and dated May 4, 1988 ((a), (Exhibit 10.75)).
10.18 (b) - Second Amendment to Equipment Lease Easement effective December 1, 1989 and dated November 20, 1989 ((a), (Exhibit
10.76)).
10.19 - Service Agreement dated as of June 9, 1988 between MCV and ABB Power Generation, Inc. (Previously ABB Energy
Services, Inc.) ((a), (Exhibit 10.22)).
10.19 (a) - Hot Gas Path Parts Addendum to the Service Agreement dated March 22, 1994 ((e), (Exhibit 10.99)).
10.19 (b) - Amendment No. 1 to the Service Agreement dated April 1, 1995 ((g), (Exhibit 10.20(b))).
10.19 (c) - Amendment No. 2 to the Service Agreement dated January 15, 1998.
10.20 - Operating Agreement, dated as of June 1, 1990, between MCV and Shawmut Bank, as Owner Trustee ((a),
(Exhibit 10.23)).
10.21 - Lessee Mortgage and Security Agreement, dated as of June 1, 1990, between Shawmut Bank, as Owner Trustee, and MCV
((a), (Exhibit 10.24)).
10.22 - Cogeneration Agreements Assignment, dated as of June 1, 1990, between Shawmut Bank, Owner Trustee, and MCV ((a),
(Exhibit 10.26)).
10.23 - Support Facilities License and Easement Agreement dated as of June 1, 1990 between MCV and Shawmut Bank ((a),
(Exhibit 10.29)).
10.24 - Facility Agreements and Governmental Actions Assignment Agreement dated as of June 1, 1990 between MCV and Shawmut
Bank ((a), (Exhibit 10.30)).
10.25 - Development Agreement, dated as of June 1, 1990 between MCV, Shawmut Bank, as Owner Trustee, and MCV2 ((a),
(Exhibit 10.33)).
10.26 - Amended and Restated Consent and Agreement, dated as of June 1, 1990, between The Dow Chemical Company, Shawmut
Bank, as Owner Trustee, Meridian Trust Company and United States Trust Company, MCV and Consumers Power Company
((a), (Exhibit 10.34)).
10.27 - Consent and Agreement, dated as of June 1, 1990, between Consumers Power Company, MCV, Shawmut Bank, as Owner
Trustee, Meridian Trust Company and United States Trust Company ((a), (Exhibit 10.35)).
10.28 - Natural Gas Purchase Agreement, dated as of May 1, 1989 between Northern Michigan Gas Exploration Company
("Nomeco"), CMS Energy Corporation and MCV ((a), (Exhibit 10.39)).
10.28 (a) - Amendment dated March 1, 1992 to the Natural Gas Purchase Agreement dated as of May 1, 1989 between Nomeco, CMS
Energy Corporation and MCV ((e), (Exhibit 10.95)).
</TABLE>
E-4
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.28 (b) - Amendment dated May 11, 1994 to the Natural Gas Purchase Agreement dated as of May 1, 1989 between Nomeco, CMS
Energy and MCV,((f), (Exhibit 10.29(b)).
10.29 - Natural Gas Purchase Agreement, dated as of May 13, 1988 between ANR Production Company and MCV ((a), (Exhibit
10.41)).
10.30 - Natural Gas Purchase Contract dated August 18, 1994, between Coastal Gas Marketing and MCV ((f), (Exhibit 10.32)).
10.31 - Natural Gas Purchase Agreement, dated May 1, 1989 between CoEnergy Trading Company (previously Northern Michigan
Gas Exploration Company before being assigned to CoEnergy Trading Company on March 14, 1995) and MCV ((a), (Exhibit
10.40)).
10.32 - Natural Gas Purchase Agreement, dated February 1, 1992 between CoEnergy Trading Company (previously Nomeco Oil and
Gas Company before being assigned to CoEnergy Trading Company on July 22, 1994) and MCV ((d), (Exhibit 10.84)).
10.33 - Natural Gas Purchase Agreement, dated as of June 2, 1997 between MCV and CMS Marketing, Services and Trading
Company.
10.34 - Transportation Service Agreement, dated as of May 25, 1988 between Great Lakes Gas Transmission Company and MCV and
letter agreements dated May 25, 1988 and May 26, 1988 ((a), (Exhibit 10.60)).
10.35 - Transportation Agreement (#17800) dated November 24, 1993 between ANR Pipeline Company and MCV ((f), (Exhibit
10.35)).
10.36 - Transportation Agreement (#17850) dated November 24, 1993 between ANR Pipeline Company and MCV ((f), (Exhibit
10.36)).
10.37 - Gas Exchange Agreement (Interruptible Service), dated as of March 2, 1988, between Consumers Power Company and MCV,
as amended September 21, 1988 ((a), (Exhibit 10.62)).
10.38 - Gas Exchange Agreement (Firm Service), dated as of March 2, 1988, between Consumers Power Company and MCV, as
amended September 21, 1988 ((a), (Exhibit 10.63)).
10.39 - Gas Storage Agreement (Firm Service) between MCV and Consumers Power Company dated March 2, 1988 ((a), (Exhibit
10.68)).
10.40 - Gas Transportation Agreement (Firm Service), dated as of March 2, 1988, between Michigan Gas Storage and MCV and
amendment thereto dated September 21, 1988 ((a), (Exhibit 10.64)).
10.41 - The Gas Supply Option dated as of January 27, 1987, between The Dow Chemical Company and MCV ((a), (Exhibit 10.67)).
10.42 - MCV Senior Management Incentive Plan ((a), (Exhibit 10.80)), (*).
10.43 - MCV Supplemental Retirement Plan dated July 6, 1992 ((d), (Exhibit 10.87)), (*).
10.44 - MCV Supplemental Benefit Plan dated January 1, 1989 ((d), (Exhibit 10.88)), (*).
</TABLE>
E-5
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.45 - MCV Excess - Benefit Plan dated July 1, 1989 ((d), (Exhibit 10.89)), (*).
21 - Subsidiaries of Registrant -- MCV subsidiaries are in the aggregate not significant subsidiaries as defined in Rule
1-02 (v) of Regulation S-X.
27 - Financial Data Schedule for year Ended 1997.
99.01 - Unaudited - MCV Selected Proforma Operating Cash Flow Data for the years ended 1997 and 1996.
</TABLE>
--------------------
(a) Incorporated by reference to MCV's registration statement on
Form S-1 (File No. 33-37977) as the bracketed numbered exhibits.
(b) Incorporated by reference to MCV's registration statement on
Form S-1 (File No. 33-37977) originally filed on November 23, 1990,
as amended, in Amendment No. 1 to File No. 33-37977 as the
bracketed numbered exhibits.
(c) Incorporated by reference to MCV's Annual Report on Form 10-K
for the year ended December 31, 1991 as the bracketed numbered
exhibits.
(d) Incorporated by reference to MCV's Annual Report on Form 10-K
for the year ended December 31, 1992 as the bracketed numbered
exhibits.
(e) Incorporated by reference to MCV's Annual Report on Form 10-K
for the year ended December 31, 1993 as the bracketed numbered
exhibits.
(f) Incorporated by reference to MCV's Annual Report on Form 10-K
for the year ended December 31, 1994 as the bracketed numbered
exhibits.
(g) Incorporated by reference to MCV's Annual Report on Form 10-K
for the year ended December 31, 1995 as the bracketed numbered
exhibits.
(*) Exhibits represent Management Contracts and Compensatory Plans
and Arrangements.
E-6
<PAGE> 1
ABB
EXHIBIT 10.19 (C)
AMENDMENT NO. 2
THIS AMENDMENT NO. 2, to the Service Agreement dated the 9th day of June
1988, (hereinafter "Service Agreement"), as previously amended by:
(i) Hot Gas Path Parts Addendum (hereinafter "HGPP Addendum")
dated 31st day of December 1993;
(ii) Amendment No. 1 to the HGPP Addendum (hereinafter "HGPP
Amendment No. 1") dated the 18th day of July 1994; and
(iii) Amendment No. 1 to the Service Agreement (hereinafter
"Agreement Amendment No. 1") dated 1st day of April 1995;
(all collectively hereinafter identified as the "Contract"), is made and
entered into as of the 15th day of January, 1998, by and between ABB Power
Generation Inc. ("ABB"), a Delaware Corporation, successor in interest to ABB
Energy Services Inc. and Midland Cogeneration Venture Limited Partnership
("MCV"), a Michigan limited partnership, referenced jointly herein as the
"Parties" or singularly as the "Party".
W I T N E S S E T H:
WHEREAS, MCV and ABB entered into the Contract for the provision of
inspections, maintenance, repair and spare parts by ABB for MCV gas turbines
and their auxiliary systems;
WHEREAS, MCV desires to enter into an arrangement specifically for the
supply and installation of 11NM GT Parts ("11NM Parts") for an additional
eleven (11) 11N GT units;
WHEREAS, ABB, as consideration for supply and installation of 11NM Parts,
desires to extend the entire term of the Contract covering the provision of
inspections, maintenance, repair and spare parts by ABB for MCV gas turbines
(including the Hot Gas Path ("HGP") Parts for all twelve 11NM or 11N gas
turbines, as the case may be) (hereinafter the "Plan") and their auxiliary
systems; and
WHEREAS, the Parties desire to describe this new long-term arrangement in
this Amendment No. 2, to the Contract;
NOW THEREFORE, in consideration of the mutual promises contained herein,
the Parties hereby agree as follows:
GENERAL
This Amendment No. 2, modifies certain portions of the Contract including the
(i) Service Agreement; (ii) Agreement Amendment No. 1; (iii) HGPP Addendum; and
(iv) HGPP Amendment No. 1, all of which relate to performance of the Plan and
the supply and service of HGP Parts, 11N parts, and the provision of
inspections, maintenance, repair and spare parts by ABB for MCV gas turbines
and their auxiliary systems. Except where expressly modified by this Amendment
No. 2, all provisions of the Contract shall remain in full force and effect.
In case of conflict, the provisions of this Amendment No. 2, shall prevail with
respect to the supply of HGP Parts under the Plan and the provision of
inspections, maintenance, repair and spare parts by ABB for MCV gas turbines
and their auxiliary systems.
<PAGE> 2
ABB
MODIFICATIONS AND ADDITIONS:
1.ARTICLE 1 - DEFINITIONS:
Add the following new definitions:
1.33 11NM Parts shall consist of the following elements, which shall
replace their 11N equivalents under the Plan for those units converted
to 11NM:
(i) Blade Rows 1 - 5, including 11NM hardware;
(ii) Vane Rows 1 - 5, including 11NM hardware;
(iii) Heatshields (Vane Carrier), including 11NM hardware;
(iv) Heatshields (Rotor), including 11NM hardware;
(v) Inlet C Segments, including 11NM hardware;
(vi) Vane Carrier; and
(vii) Exhaust Gas Housing.
1.34 Variable Inlet Guide Vanes ("VIGVs") shall mean hardware excluding
wiring, installation and commissioning. (Note: VIGVs shall be provided
only if unit is not already equipped, and are not included as spare
parts to be provided under the Plan.)
1.35 The Installation Outage ("Outage") during which the 11NM Parts are
installed is defined as occurring during the Scheduled 72,000 EOH "C"
Inspection. The Outage associated with the initial installation of 11NM
Parts will be counted as fulfillment of ABB's contractual outage
obligation for "C" inspections under the Contract for the unit into
which the 11NM Parts are installed.
1.36 An 11NM "Emergency Set" is defined as a set of:
(i) Row 1, 2, 3, 4 and 5 blades, including 11NM hardware;
(ii) Row 1, 2, 3, 4 and 5 vanes, including 11NM hardware;
(iii) Vane Carrier heat shields, including 11NM hardware; and
(iv) Inlet C Segments, including 11NM hardware; and
(v) Vane carrier.
1.37 GT Rotor is defined as HTCT 001540R0001 including:
(i) Labyrinth seals and overspeed trip device
(ii) Initial run out
(iii) Installation of compressor blades and turbine blades (compressor
blades supplied by MCV)
(iv) High speed balancing
(v) Final run out and inspection
(vi) Transport fully bladed GT Rotor to MCV site
(vii) Rotor will installed during one of the scheduled 72,000
EOH "C" Inspections during which time the 11NM parts are installed
during Fall 1999.
2.ARTICLE 2 - OBLIGATIONS OF THE PARTIES
Delete and replace existing paragraphs 2.13 and 2.17 of the Contract and add
new paragraphs as follows:
2.13 During the term of this Amendment No. 2, ABB agrees to perform the
Plan and to supply, in a timely manner, all HGP Parts required for the
normal, efficient operation of the Equipment, whether required as a
result of a scheduled or an unscheduled inspection; provided however
that HGP Parts which are replaced by reason of Excluded Events are
<PAGE> 3
ABB
not covered by the Plan, this Amendment No. 2; the HGPP Addendum, or
HGPP Amendment No. 1, but will be provided by ABB pursuant to Article
5.5(a) of the Service Agreement and upon receipt of a Purchase Order.
2.17 MCV shall own and maintain one (1) set of 11N HGP Parts at MCV
Facility site ("Emergency Parts"). Title to the Emergency Parts shall
be held by MCV. ABB may, with the consent of MCV, use the Emergency
Parts in the Equipment. If so used, ABB shall replace the Emergency
Parts with new or reconditioned parts within a reasonable amount of
time. ABB may at any time replace new parts with reconditioned ones.
Upon conversion of the last 11N to 11NM the following 11N Emergency
Parts shall become the property of ABB:
(i) Row 1, 2, 3, 4 and 5 blades including 11N hardware;
(ii) Row 1, 2, 3, 4 and 5 vanes including 11N hardware;
(iii) Vane Carrier;
(iv) Vane Carrier heat shields, including 11N hardware; and
(v) Inlet C segments, including 11N hardware.
2.25 With respect to 11NM Parts provided under this Amendment No. 2,
delivery, for purposes of title passage, shall be deemed to have
occurred when the 11NM Parts are removed from ABB's on-site storage for
installation into the Equipment. Upon completion of the 11NM upgrade,
all 11N Parts removed from the unit become the property of ABB.
2.26 During the remaining term of the Plan ABB agrees to supply, for
future outages on the upgraded 11NM GT units and 11N GT Units, provided
that such 11N GT Unit has not exceeded 96,000 EOH, HGP Parts in a timely
manner required for fulfillment of the obligations under the Plan. ABB,
at its discretion, may supply either new or reconditioned HGP Parts
under the Plan, provided that reconditioned parts meet prevailing ABB
quality standards.
2.27 ABB shall arrange and pay for the transportation of the new 11NM
Parts to MCV Facility.
2.28 MCV is responsible for re-certification of the upgraded 11NM GT
unit's emissions and associated permits upon completion of the 11NM
upgrade.
2.29 ABB will upon completion of the last 144,000 EOH "C" inspection
provide MCV with one (1) new or reconditioned 11NM Emergency Set.
2.30 ABB shall timely support scheduled HGP Parts rotation under the Plan
by making available up to two (2) sets of 11NM Parts, including those
11N HGP Parts required.
2.31 ABB will make base load adjustments to the 11NM units (immediately
following conversion). MCV will provide and set up instrumentation
required to gather and process data necessary to make the base load
adjustments.
2.32 MCV will operate and maintain their 11N and 11NM GT units in
accordance with ABB's recommendations and written Operating Instruction
Manuals for the MCV Units unless MCV determines that such operation may
be detrimental to the Equipment (e.g. MCV may operate the Equipment
below ABB's recommended firing temperature but may not operate Equipment
above ABB's recommend firing temperature or modify the logic that is
used to define and measure such limit).
2.33 ABB and MCV agree to negotiate an equitable agreement for the
implementation of improvements in availability and performance, in
accordance with ABB recommendations, on the 11N or NM units at MCV.
These improvements are not included in the scope of work contained
herein and will be priced separately.
<PAGE> 4
ABB
3.ARTICLE 4 - TERM OF AGREEMENT
This paragraph modifies the Term of the Contract as follows:
"The Term of the Contract and this Amendment No. 2 shall expire upon the
completion of the sixth "C" Inspection for the Equipment except that in no
event shall the Term extend beyond December 31, 2009. If by the end of 2008
all "C" Inspections are not complete, the Parties agree to negotiate in good
faith a mutually acceptable reconciliation of each Party's obligations.
ABB's responsibility under the Contract shall expire progressively as each
"C" Inspection on the Equipment is concluded at or about 144,000 EOH."
4.ARTICLE 5 - FEES AND PAYMENTS
Delete and replace existing paragraphs 5.3(a) and 5.5(d) and (e) of the
Contract and add new paragraph 5.5(f) as follows:
INSPECTION FEE:
5.3 (a)
(1) The Inspection Fee shall be payable in monthly installments on the
first day of each calendar month after the Commencement Date. The first
payment shall be due on the Commencement Date.
(2) The Inspection Fee ("IF") for the performance of ABB's obligations is
Two Hundred Thirty-three Thousand Two Hundred Fifty Dollars ($233,250)
per calendar month from the Commencement Date through March 31, 1995.
Beginning April 1, 1995, MCV will pay a total of Twenty-seven Million
One Hundred Sixty-nine Thousand Seven Hundred Thirteen Dollars
($27,169,713), in 1994 dollars ("Base IF Price"), as the IF, which will
be paid in monthly installments of Two Hundred Eighty-three Thousand
Seventeen Dollars and Eighty-four Cents ($283,017.84) per calendar month
and will continue until the monthly payments in 1994 dollars total
Twenty-seven Million One Hundred Sixty-nine Thousand Seven Hundred
Thirteen Dollars ($27,169,713), prior to adjustment for inflation, which
will occur upon the accumulation of 768,000 EOH ("Base IF Period"),
utilizing March 1, 1995, as the EOH starting date.
(3) Beginning with the first month after the Base IF Price of
Twenty-seven Million One Hundred Sixty-nine Thousand Seven Hundred
Thirteen Dollars ($27,169,713), has been paid (in 1994 dollars before
adjustments for escalation) MCV will then pay ABB the sum of Twenty
Million Three Hundred Seventy-seven Thousand Two Hundred Eighty-four
Dollars ($20,377,284), stated in 1994 dollars ("Second Base IF Price"),
covering the period of the subsequent two "C" Inspections of the
Equipment which is expected to conclude at 1,344,000 EOH (the "Second
Base IF Period"), utilizing March 1, 1995, as the EOH starting date.
This amount will be paid in monthly installments of Two Hundred
Eighty-three Thousand Seventeen Dollars and Eighty-four Cents
($283,017.84, in 1994 dollars) per calendar month and are subject to
adjustments for inflation and EOH. If the final payment of the Base IF
Price is less than a full month's payment, then a full month's payment
will be invoiced by prorating the remaining portion of the monthly
payment utilizing the Second Base IF Price.
(4) Beginning with the April 1, 1998, fiscal year (i.e.; April to March),
both the Base IF Price and Second Base IF Price monthly payments will be
adjusted (up or down), each April 1, according to actual EOH utilization
rates for the prior years, relative to an assumed 8,000 EOH per year for
each unit of Equipment. The actual EOH for each unit of Equipment will
be calculated based on actual operations for the twelve (12) month
period beginning on March 1 of each year. Monthly payments will be
adjusted for contract-to-date cumulative EOH variations from the 96,000
EOH/year plan which will be spread over the remaining months of the
applicable period, according to the formulas in 5.3 (a)(6) below.
<PAGE> 5
ABB
(5) Effective immediately the monthly IF payments, for each month in the
contract fiscal year of April to March, after being adjusted for EOH
will then be increased or decreased, as the case may be, by the same
percentage as each of the following: Fifty percent (50%) of the increase
or decrease, if any, in the "Industry Labor Index", as defined and
calculated pursuant to Section 5.3(b) of the Service Agreement, from
January of the previous year to January of the subject calendar year and
Fifty percent (50%) of the increase or decrease, if any, in the
"Millwright Wage Rate", as defined and calculated pursuant to Section
5.3(b) of the Service Agreement, from January 1 of the previous calendar
year to January of the subject calendar year and as shown in the formula
contained in 5.3 (a)(6) below.
(6) Beginning with the April 1, 1998, payment and each year thereafter,
monthly payments will be calculated in accordance with the following
formula:
BASE IF PRICE FORMULA:
IFAMP = [BIFPRCV / ((768,000 - CAEOH) / 8,000)] x EOH x IFA
SECOND BASE IF PRICE FORMULA:
IFAMP = [SBIFPRCV / ((1,344,000 - CAEOH) / 8,000)] x EOH x IFA
Where:
IFAMP = Adjusted Monthly Payments
BIFPRCV = $27,169,713 less all amounts previously paid
SBIFPRCV = $20,377,284 less all amounts previously paid
768,000 = Total contract EOH (12 units x 8,000 EOH x 8 years) for
Base IF Period
1,344,000 = Total contract EOH (12 units x 8,000 EOH x 14 years) for
Second Base IF Period
CAEOH = Cumulative actual EOH of all units as of March 1 of each year
8,000 = 8,000 EOH per unit x 12 units / 12 months per year
EOH = CAEOH / Cumulative assumed EOH of all units as of March 1
of each year (12 units x 8,000 EOH x number of years into the
contract EOH, utilizing March 1, 1995, as the EOH starting
date).
IFA = Inspection Fee Adjustment: 50% of the increase or decrease
in both the Industry Labor Index and Millwright Wage Rate,
pursuant to Section 5.3 (b) of the Service Agreement.
*** SEE EXHIBIT C FOR SAMPLE CALCULATION.
(7) At 768,000 cumulative EOH, utilizing March 1, 1995, as EOH start date
(end of Base IF Period) and at 1,344,000 cumulative EOH, utilizing March
1, 1995, as EOH start date (end of Second Base IF Period) the Parties
will reconcile all payments made to ensure that the total payment,
expressed in 1994 dollars equals Twenty-seven Million One Hundred
Sixty-nine Thousand Seven Hundred Thirteen Dollars ($27,169,713) and
Twenty Million Three Hundred Seventy-seven Thousand Two Hundred
Eighty-four Dollars ($20,377,284) respectively. If the payments total
less than Base IF Price or Second Base IF Price at the end of the
respective terms, then MCV will make a true-up payment to ABB, if
payments will exceed the Base IF Price or Second Base IF Price prior to
reaching the applicable cumulative EOH levels, then payments will cease
once the Base IF Price or Second Base IF Price total payments have been
made.
(8) The IF shall be increased or decreased for Force Majeure Costs or
Change of Law Costs (as defined and set forth in the Contract).
<PAGE> 6
ABB
HOT GAS PATH PARTS ADDENDUM FEE:
5.5(d)
(1) MCV shall pay ABB for the supply of HGP Parts (including 11NM Parts
to be provided under this Amendment No. 2) and related technical
support, described in this Amendment No. 2. MCV shall pay ABB the sum
of One Hundred Fifty Eight Million Dollars ($158,000,000), in monthly
installments as set forth herein, stated in 1993 dollars ("Base Price")
and subject to adjustments for inflation and for US dollar to Swiss
Franc exchange rate differences. Payments will begin with the April 1,
1994, payment and continue until the monthly payments in 1993 dollars
totals One Hundred Fifty Eight Million Dollars ($158,000,000), prior to
adjustments for inflation and for US dollar to Swiss Franc exchange
differences, which will occur upon the accumulation of 864,000 EOH (the
"Base Period") utilizing March 1, 1994, as the EOH start date.
(2) Beginning with the first month after the Base Price of One Hundred
Fifty Eight Million Dollars ($158,000,000) has been paid (in 1993
dollars before adjustments for escalation or the Swiss Franc exchange
rate) MCV will then pay ABB the sum of One Hundred Eight Million Four
Hundred Ninety-three Thousand Three Hundred Thirty-three Dollars
($108,493,333), stated in 1993 dollars ("Second Base Price"), for the
supply of HGP Parts (including 11NM Parts to be provided under this
Amendment No. 2) and related technical support over the period covering
the subsequent two "C" Inspections of the Equipment which is expected to
conclude at 1,440,000 EOH (the "Second Base Period") utilizing March 1,
1994, as EOH starting date. This amount will be paid in monthly
installments and subject to adjustments for inflation, for US dollar to
Swiss France exchange differences. If the final payment of the Base
Price is less than a full month's payment, then a full month's payment
will be invoiced by prorating the remaining portion of the month
utilizing the Second Base Price.
(3) All payments are to be made monthly and are due on the first day of
each month.
(4) Beginning with the April 1, 1998, fiscal year (i.e.; April to March)
monthly Base Price and the monthly Second Base Price payments will be
adjusted (up or down), each April 1, according to actual EOH utilization
rates for the previous years, relative to an assumed 8,000 EOH per year
unit of Equipment. The actual EOH for each unit of Equipment will be
calculated based on actual operations for the twelve month period
beginning on March 1 of each year. Monthly payments will be adjusted
for contract-to-date cumulative EOH variations from the 96,000 EOH/year
plan, which will be spread over the remaining months of the applicable
period according to the formula shown in 5.5(d)(6).
(5) In addition the monthly payments will be adjusted for:
(i) Swiss inflation indices from January 1 of the previous
calendar year to January 1 of the current calendar year, pursuant
to Sections 5.5 (b) of the Service Agreement, and for
(ii) US dollar to Swiss Franc exchange rate differences, in
which the monthly payments will be further increased or decreased,
as the case may be, by the same percentage as the increase or
decrease, if any, from the 1993 contract base US dollar equivalent
of the Swiss Franc rate of $0.6750/SFr to that rate published in
the Wall Street Journal (WSJ) for trading in the spot market on
January 1 (or the first business day thereafter if a holiday) of
the current calendar year, in accordance with the following formula
and as shown in the formula contained in 5.5(d)(6).
Exchange Rate Adjustment = (Current year exchange rate, measured in
US$ per Swiss Franc, as published in the
WSJ on the first business day of the year
- Contract Base Exchange Rate of .6750) /
Contract Base Exchange Rate of .6750 .
<PAGE> 7
ABB
(6) Beginning with the April 1, 1998, payment and each year thereafter,
monthly payments will be calculated in accordance with the following
formula:
BASE PRICE FORMULA:
BPAMP = [BPRCV / ((864,000 - CAEOH) / 8,000] x EOH x E&CAF
SECOND BASE PRICE FORMULA:
SBPAMP = [SBPRCV / ((1,440,000 - CAEOH) / 8,000] x EOH x E&CAF
Where:
BPAMP = Adjusted Base Price Monthly Payments
SBPAMP = Adjusted Second Base Price Monthly Payments
BPRCV = $158,000,000 less all amounts previously paid during the
Base Period
SBPRCV = $108,493,333 less all amounts previously paid during the
Second Base Period
864,000= Base Price total contract EOH (12 units x 8,000 EOH x 9
years)
1,440,000 = Second Base Price total contract EOH (12 units x 8,000 EOH x
15 years)
CAEOH = Cumulative actual EOH of all units as of March 1 of each year
8,000 = 8,000 EOH per unit x 12 units / 12 months per year
EOH = CAEOH / Cumulative assumed EOH of all units as of March 1
of each year (12 units x 8,000 EOH x number of years into the
contract EOH, utilizing March 1, 1994, as EOH start date)
E&CAF = Cumulative Escalation and Yearly Currency Adjustment
Factor (Base Year 1993) in accordance with this Article 5.
*** SEE EXHIBIT D FOR SAMPLE CALCULATION.
(7) At 864,000 cumulative EOH, utilizing March 1, 1994, as EOH start date
(end of Base Period) and at 1,440,000 cumulative EOH, utilizing March 1,
1994, as EOH start date (end of Second Base Period) the Parties will
reconcile all payments made to ensure that the total payment, expressed
in 1993 dollars equals One Hundred Fifty Eight Million Dollars
($158,000,000) and One Hundred Eight Million Four Hundred Ninety-three
Thousand Three Hundred Thirty-three Dollars ($108,493,333),
respectively. If the payments total less than Base Price or Second Base
Price at the end of the respective terms, then MCV will make a true-up
payment to ABB, if payments will exceed the Base Price or Second Base
Price prior to reaching the applicable cumulative EOH levels , then
payments will cease once the Base Price or Second Base Price total
payments have been made.
5.5(e)
MCV shall pay ABB Forty-one Million Five Hundred Sixty Thousand Dollars
($41,560,000) for the supply of 11 sets of 11NM Parts, nine sets of VIGV's
and one (1) GT Rotor. Ten percent (10%) is to be invoiced upon signing of
this Amendment No. 2 and the remaining ninety percent (90%) will be invoiced
unit by unit (1/11 of the 90% balance) upon completion of each 72,000 EOH "C"
inspection. Payment is net thirty (30) days.
5.5(f)
MCV shall pay ABB a "One Time Payment" of Four Million Dollars ($4,000,000),
prior to adjustments for escalation or the Swiss Franc exchange rate. One
hundred percent (100%) will be invoiced upon completion of the first
scheduled 11NM "C" inspection of a NM converted unit. Payment is net thirty
(30) days. This payment is subject to the following adjustments:
<PAGE> 8
ABB
(i) Swiss inflation indices as of the calendar quarter of the year in
which the payment is to be made, relative to the first calendar quarter
of 1998, pursuant to Sections 5.5 (b) of the Service Agreement, and for
(ii) US dollar to Swiss Franc exchange rate differences, in which the
payment will be further increased or decreased, as the case may be, by
the same percentage as the increase or decrease, if any, from the US
dollar equivalent of the Swiss Franc rate published in the Wall Street
Journal (WSJ) on the first business day following the date of this
agreement to that rate published in the WSJ for trading in the spot
market on January 1 (or the first business day thereafter if a holiday)
of the year in which the payment is to be made, in accordance with the
following formula.
Exchange Rate Adjustment = [Current year exchange rate, as published in
the WSJ on first business day of year the
payment is to be made - Contract Base Exchange
Rate (the exchange rate on the first business
day following the date of this agreement as
published in the WSJ)] / Contract Base
Exchange Rate.
5.ARTICLE 9 - TERMINATION
Modify the Article by addition of the following language:
"Certain obligations in this Amendment No. 2, are severable from the Service
Agreement and Agreement Amendment No. 1, and may be separately terminated.
Should the:
- Service Agreement and Agreement Amendment No. 1 be terminated prior
to the completion of all ABB obligations under the Plan, the (i) HGPP
Addendum; (ii) HGP Parts Amendment No. 1; (iii) those provision of this
Amendment No. 2, applicable to the Plan; and (iv) all the terms and
conditions of the Service Agreement applicable to performance of the
Plan shall continue in full force and effect.
- Plan obligations of this Amendment No. 2, no longer be in effect
during the term of this Amendment No. 2, then the Service Agreement,
Agreement Amendment No. 1, and those portions of this Amendment No. 2
not applicable to the Plan will remain in effect and the purchase of
future HGP Parts shall be performed as if the Plan never existed.
In the event of any termination of the Plan and/or the services under the
Services Agreement pursuant to this Article 9, whether by MCV or ABB, MCV
shall pay ABB all amounts accrued and owing under Article 5, Payment, and in
addition, shall pay a pro rata share of the monthly payment, for the month in
which termination occurs, calculated by dividing the number of days in the
month occurring prior to the date of termination with the number of days in
the month of termination. Furthermore, if termination of the Plan is by MCV
for other than cause per 9.1 of the Services Agreement, MCV shall pay or
cause to be paid to ABB the amount of Fifteen Million Dollars ($15,000,000)
as liquidated damages and not as a penalty, which amount shall be the full
measure of damages of any kind whatsoever for MCV's termination of the Plan.
The liquidated damage value applicable to the Plan shall be reduced to Five
Million Dollars ($5,000,000) upon completion of the last 96,000 EOH "C"
inspection or July 1, 2003, which ever comes last. If termination of the
services under the Service Agreement is by MCV for other than cause per 9.1
of the Services Agreement after 2001 (prior to 2001 the Contract termination
schedule shown in Exhibit 9.2, shall continue to apply), MCV shall pay or
cause to be paid to ABB the amount of Five Hundred Thousand Dollars
($500,000), escalated in 1988 Dollars, as liquidated damages and not as a
penalty, which amount shall be the full measure of damages of any kind
whatsoever for MCV's termination of the services under the Services
Agreement. Any payment of liquidated damages required hereunder shall be
made within ten (10) calendar days of such termination of the Plan."
<PAGE> 9
ABB
6.ACCEPTANCE TESTING AND PERFORMANCE GUARANTEES
6.1 General:
ABB guarantees that the 11N GT units converted to 11NM will have, on
average, a gross:
1. KW Output increase, as measured at the gas turbine
generator terminals, of no less than 6.9% (i.e. 6,000 kW per unit
at MCV reference performance of 86.66 MW).
2. Efficiency increase, as measured at the gas turbine
generator terminals and combustor fuel input, of no less than 5%
multiplicative. (e.g. pre outage efficiency measured as 30% the
post installation performance guarantee point will be 31.5% [30% X
1.05])
6.2 Acceptance and Performance Testing:
All acceptance and performance testing ("Testing") shall be performed
by MCV at MCV's expense. A pre-outage test shall be performed by MCV on
each Unit within sixty (60) days of the "C" Inspection at which the
Unit will be upgraded and no more than seven (7) days after initial
operation of the Unit following completion of that "C" Inspection. Any
re-Testing that may be required shall be performed by MCV no more than
seven (7) days after initial operation of the Unit following ABB
correction. The final Testing procedure shall be mutually agreed upon.
ABB's and MCV's agreement on the Testing procedure shall not be
unreasonably withheld. If ABB and MCV are unable to mutually agree on
the test procedure, MCV may perform Testing, using calibrated
instruments, in accordance with the test procedure contained within
Unit 7 upgrade contract dated September 16, 1996. ABB shall be
provided the opportunity to witness all Testing and review all Testing
results. All test results shall be made available to ABB within thirty
(30) days following each test.
The Testing shall (i) utilize the data acquired during the Testing
allowing one (1) times the test uncertainty for verification of MWe
increase; and (ii) be furnished to ABB with a detailed description of
the analytical procedure used to perform the calculations.
6.3 Acceptance
Conformance:
If following Testing on a unit ABB has demonstrated that the 11 NM unit
performance (power and efficiency) is equal to or better than that
measured during the performance test conducted prior to conversion to
11NM, the unit shall be considered Accepted for the purposes of this
Agreement. Acceptance Testing shall not be deemed to have been
completed unless ABB has first been provided the opportunity to repair,
replace, modify or otherwise correct such Equipment, as may be
necessary to improve the performance to the specified performance.
Non-Conformance:
If following Testing on a unit ABB has not demonstrated that the 11 NM
unit performance (power and efficiency) is equal to or better than that
measured during the performance Testing conducted prior to conversion
to 11NM, MCV may, at its option:
(i) Accept the unit for the purposes of this Agreement,
notwithstanding any performance non-conformity, and ABB shall
proceed with the installation of the remaining units; or
(ii) Cancel the installation of the remaining units based upon
that unit's nonconformance with the performance acceptance
criteria. In the event of cancellation:
- ABB is obligated to fix within 36 months the
performance deficiency of any unit converted that does not at
least achieve the performance measure prior to conversion or
return the unit to 11N configuration;
- ABB shall be entitled to full payment for the
units actually converted;
<PAGE> 10
ABB
- ABB shall be paid any performance bonus for the
units actually installed and be responsible for any LDs for
the units actually installed which are not returned to 11N
configuration.
- All other provisions of this Amendment shall be
considered terminated, except that ABB shall be obligated to
support all 11 NM GT Units (if any) under the Contract which
are retained in operation by MCV and the Contract will be
restated as if this Amendment No. 2 never existed.
6.4 Remedy:
Liquidated Damages:
To the extent that upgraded Units are Accepted but fail to meet the
specified performance guarantees ABB, at its option, may within 36
months first repair, replace, modify or otherwise correct such
Equipment, as may be necessary to improve the performance to the
specified performance in lieu of liquidated damages.
In the event such repair, replacement, modification or otherwise
corrective work is performed successfully, as demonstrated by MCV
Testing performed within seven (7) days following completion by ABB of
the corrective action, the provisions of this Article regarding
liquidated damages ("LDs") shall not apply.
In any event, if the specified performance guarantees are not achieved
as demonstrated by MCV Testing performed within seven (7) days
following completion by ABB of the corrective action, ABB shall pay, as
LDs and not as a penalty, the sum of:
(i) Two Hundred Fifty Dollars ($250) per kW for each full kW
of performance less than the guaranteed KW Output increase
calculated as follows for those Units subject to LDs:
KWLDs = [(POKW * 1.069) - PIKW] x $250
Where:
KWLDs = KW Output Liquidated Damages (calculation must result
in a positive number to require payment of liquidated
damages)
POKW = Sum of the Pre-Outage Measured KW
PIKW = Sum of the Post Installation Measured KW
(ii) One Hundred Thousand Dollars ($100,000) for each full %,
on average, the units subject to LDs actual performance is less
than the guaranteed efficiency calculated as follows:
EFLD = [(1 - ((PIE)/(POE x 1.05))) x 100]** x $100,000
** Rounded down (e.g. 1.25% converts to 1%)
Where:
EFLD = Efficiency Liquidated Damages (calculation must result
in a positive number to require payment of liquidated
damages)
POE = Sum of the Pre-Outage Measured Efficiencies
PIE = Sum of the Post Installation Measured Efficiency
In no event shall the LDs set forth above exceed One Million Seven
Hundred Fifty Thousand Dollars ($1,750,000) per unit for all units
subject to LDs.
Bonus:
To the extent that the upgraded Unit exceed the following specified
levels, ABB shall be paid a Bonus equal to the sum of:
<PAGE> 11
ABB
(i) Two Hundred Fifty Dollars ($250) per kW for each full kW
of performance more than the Bonus KW Output increase level
calculated as follows for those Units subject to Bonus:
KWB = [PIKW - (POKW * 1.161)] x $250
Where:
KWB = KW Output Bonus (calculation must result in a positive
number to require payment of bonus)
POKW = Sum of the Pre-Outage Measured KW
PIKW = Sum of the Post Installation Measured KW
(ii) One Hundred Thousand Dollars ($100,000) for each full %,
on average, the Units subject to Efficiency Bonus, actual
performance is more than the efficiency bonus point calculated as
follows:
EB = [(1 - ((PIE)/(POE x 1.19))) x 100]** x $100,000
** Rounded down (e.g. 1.25% converts to 1%)
Where:
EB = Efficiency Bonus (calculation must result in a negative
number to require payment of EB)
POE = Sum of the Pre-Outage Measured Efficiencies
PIE = Sum of the Post Installation Measured Efficiency
6.5 Exclusivity of Remedies:
ABB's obligations with respect to performance guarantees shall
terminate at the time (i) Testing is conducted and ABB pays LDs in
accordance with the provisions of 6.3 above; or (ii) the Testing is
conducted and the upgraded turbines meet or exceed the performance
guarantees; or (iii) the pre-outage or post outage Testing of any unit
is not conducted by MCV in accordance with the terms hereof. In the
event Testing is not conducted (i) all eleven (11) units will be deemed
Accepted by MCV for the purposes of this Agreement; (ii) all eleven
(11) units will be considered to have met all performance guarantees;
and to the extent that a Bonus is due ABB for units actually tested,
MCV shall pay such Bonus to ABB within thirty (30) days following
receipt therefor.
No additional warranty shall apply to such performance guarantees. The
guarantees contained herein and the specified remedies are the sole and
exclusive: (i) obligations of ABB and (ii) remedies and obligations of
MCV with respect to performance of the Work.
ENTIRE AGREEMENT:
Except as herein modified all other provisions of the Contract shall remain in
full force and effect. This Amendment No. 2, shall inure to the benefit of,
and be binding upon, the parties to this Contract and their respective
successors and assignees.
IN WITNESS WHEREOF, the Parties hereto have caused this Amendment No. 2,
to be executed by their duly authorized officers or representatives effective
as of the date first above written.
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP ABB POWER GENERATION INC.
BY: JAMES M, KEVRA BY: Alex Brnilovich Jr.
------------------------------ ----------------------------
NAME: JAMES M. KEVRA NAME: ALEX BRNILOVICH JR.
------------------------------ ----------------------------
TITLE: PRESIDENT TITLE: PRESIDENT
------------------------------ ----------------------------
DATE: JANUARY 20, 1998 DATE: JANUARY 20, 1998
------------------------------ ----------------------------
<PAGE> 1
GAS SALES AGREEMENT EXHIBIT 10.33
This Agreement is made this 2nd day of June, 1997, between Midland Cogeneration
Venture Limited Partnership ("MCV" or "Buyer") And CMS Marketing, Services and
Trading Company ("Seller") for the purpose of entering into a long-term gas
supply arrangement on the terms and conditions which follow:
1. Definitions. The following terms, when used in this Agreement, shall have
the following meanings:
(A) The term "Agreement" means this Agreement.
(B) The term "business day" shall mean: (i) for payments due Buyer, a
business day is any day other than a day on which banks in Michigan are allowed
by law to be closed; and (ii) for payments due Seller, a business day is any
day other than a day on which banks in Michigan are allowed by law to be
closed.
(C) The term "Btu" shall mean a British thermal unit.
(D) The term "Contract Year" shall mean any calendar year during the term
of this Agreement,
(E) The term "cubic foot of gas" shall mean the volume of gas contained in
one (1) cubic foot of space at a pressure of fourteen and seventy-three
hundredths (14.73) psia, at a temperature of sixty degrees (60) Fahrenheit.
(F) The term "day" shall mean a period of twenty-four (24) consecutive
hours (23 hours when changing from Standard to Daylight time and 25 hours when
changing back to Standard time), beginning and ending at 9:00 a.m. Central
clock time at the Point(s) of Delivery.
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<PAGE> 2
(G) The term "Disputed Amount" shall have the meaning set forth in Section
4A (ii).
(H) The term "gas" shall mean any mixture of hydrocarbon and
non-combustible gases in a gaseous form, consisting primarily of methane, and
includes natural gas produced from gas wells (gas well gas), gas which
immediately prior to being produced from a reservoir is in solution with crude
oil, or dispersed in an intimate association with crude oil, or in contact with
crude oil across a gas-oil contact (casinghead gas), or residue gas resulting
from the processing of either or both casinghead gas and gas well gas.
(I) The term "Heating Value" shall mean the quantity of heat in Btu
produced by the complete combustion of a cubic foot of gas under standard
conditions at constant pressure with air of the same temperature and pressure
as the gas where the products of combustion are cooled to the initial
temperature of the gas and air and where water formed by the combustion is
condensed to a liquid state, all adjusted to reflect the actual water vapor
content of the gas delivered except that if the water vapor content is seven
(7) pounds or less per one million cubic feet, the gas shall be assumed to be
dry. Standard conditions for the gas shall be sixty degrees (60) Fahrenheit,
fourteen and seventy-three hundredths (14.73) psia and saturated with water
vapor.
(J) The term "Mcf" shall mean one thousand (1,000) cubic feet of gas.
(K) The term "MMBtu" shall mean a quantity of gas having a Heating Value
of one million (1,000,000) Btu.
(L) The term "month" shall mean the period beginning at 9:00 a.m. Central
clock time at the Point(s) of Delivery on the first day of any calendar month
and ending at
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<PAGE> 3
9:00 a.m. Central clock time at the Point(s) of Delivery on the first day of
the next succeeding calendar month.
(M) The terms "Point of Delivery" and "Point(s) of Delivery" shall mean
any point(s) where Seller tenders gas to Buyer pursuant to Section 5.
(N) The term "Prime Rate" shall mean the fluctuating per annum lending
rate of interest from time to time published by CITIBANK, NA, or its successor,
for its best commercial customers.
(O) The term "psia" shall mean pounds per square inch absolute.
(P) The term "psig" shall mean pounds per square inch gauge.
(Q) The term "Transporter" shall mean any pipeline transporting gas
subject to this Agreement.
(R) The term "Undisputed Amount" shall have the meaning set forth in
section 4A (ii).
2. Quantity. Seller agrees to sell and MCV agrees to purchase on a firm basis
15,000 MMBtu/day commencing January 1, 2003. The quantity shall be divided
with 5,000 MMBtu/day to be delivered into Trunkline (South Texas) and 10,000
MMBtu/day to be delivered into Panhandle (Field Zone).
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<PAGE> 4
3. Price.
(A) The price to be paid by Buyer to Seller for all quantities of gas
hereunder inclusive of all taxes and other adjustments or costs not provided
for herein shall be as follows:
(1) $2.21 per MMBtu for all gas delivered into Trunkline
(2) $2.13 per MMBtu for all gas delivered into Panhandle
(B) Seller shall be responsible for all taxes prior to delivery. MCV
shall be responsible for all taxes, including, but not limited to all sales,
gross receipts or similar taxes, at and after delivery.
4. Billing and Payments.
(A) Billing and payment procedures are to be defined as follows:
(i) After the delivery of gas has commenced hereunder, Seller
shall, on or about the tenth day of each month, render to Buyer a statement
showing the estimated (or actual if available) quantity of gas delivered at
each Point(s) of Delivery during the prior month, and the amounts due Seller.
Seller shall also render to Buyer, if necessary, a separate statement showing
the adjustment, if any, required to conform the prior month's estimated and
actual deliveries and prices. Payment of the amount due based on such
statements shall be made by Buyer to Seller by wire transfer with immediately
available funds the later of (a) ten (10) days following receipt of such
statement or (b) the twentieth (20th) day of the month. If the due date falls
on a day which is not a business day, then payment shall be made on or before
the last business day prior to the due date.
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<PAGE> 5
(ii) In the event that either party shall in good faith dispute any
portion of the amount shown in the other party's statement (hereinafter called
the "Disputed Amount"), the disputing party shall (a) notify the other party in
writing as to the Disputed Amount, and (b) pay the remaining undisputed portion
of the other party's statement (hereinafter, the "Undisputed Amount"). Both
parties will mutually resolve the Disputed Amount in a timely manner. Seller
may, at Seller's option, within ten (10) days of receipt of such notice of
dispute from Buyer, establish an escrow account at a bank selected by Seller,
the cost of establishment and maintenance of same to be borne initially out of
the funds escrowed in such account. The terms of said escrow account shall
specify that the depository bank may act only upon instructions from both Buyer
and Seller. Buyer shall deposit the Disputed Amount in said escrow account
within five (5) days of establishment thereof. Upon resolution as to which
party is entitled to the Disputed Amount, whether by final judgment of a court
of competent jurisdiction not subject to further appeal, written agreement of
the parties, or final arbitration (if the parties hereafter mutually agree to
submit such dispute to binding arbitration), Seller and Buyer shall, within ten
(10) days of final resolution, direct the depository bank to make payment of
the moneys in said escrow account, including interest earned thereon, to the
appropriate party entitled to same consistent with such final resolution. It
is agreed that the non-prevailing party shall reimburse the prevailing party
for the costs of establishment and maintenance of the escrow account.
(iii) If for any reason either party does not pay any Undisputed
Amount of any statement, interest on such Undisputed Amount shall accrue at a
rate per annum equal to the Prime Rate, plus one percent (1.0%), from the time
payment would have
5
<PAGE> 6
been due until the time payment is made, but in no event shall the interest on
such unpaid portion exceed the applicable lawful nonusurious rate of interest.
Payment of any previously unpaid Undisputed Amount shall be credited first to
all interest accrued and then to principle.
(B) Each party hereto shall have the right, upon reasonable written
notice, during normal business hours to examine the books and records of the
other party to the extent necessary to verify the accuracy of any statement,
charge, computation or demand made under or pursuant to this Agreement. Any
error or discrepancy in charts or statements furnished pursuant to this
Agreement shall be promptly reported to Seller or Buyer, as applicable, and
proper adjustment thereof shall be made within thirty (30) days after final
determination of the correct volumes or amounts involved; provided, however,
that, if no such errors or discrepancies are reported to Seller or Buyer, as
applicable, within two (2) years from the end of the calendar year in which
such errors or discrepancies occurred, the same shall be conclusively deemed to
be correct.
(C) If either party fails to pay any Undisputed Amount when due, the
other party may, upon written notice, suspend performance of its obligations
hereunder, and should such nonpayment continue for a period of thirty days
after such notice, terminate this Agreement upon written notice to the other.
Such right to suspend performance and terminate shall be in addition to any
other rights or remedies that the party may have.
5. Commencement And Scheduling Of Deliveries.
(A) Exhibit C hereto sets forth the Point(s) of Delivery. Seller may,
subject to the provisions of Section 2, request to shift quantities of gas
available hereunder between
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<PAGE> 7
mainline Point(s) of Delivery on a Transporter by giving written notice to
Buyer. Buyer agrees to request additional/different service from transporters
within thirty (30) days of Seller's written request to add such additional
Point(s) of Delivery.
(B) Imbalances shall be treated as stated in Paragraph 21.
(C) To the extent that the procedures set forth herein conflict with the
rules and tariffs of any Transporter, the Transporter's rules and tariffs will
control and the parties shall cooperate fully with each other in complying with
such rules and tariffs.
6. Warranty of Deliverability; Remedies. Except as otherwise provided in this
Agreement, Buyer shall purchase and Seller shall deliver 15,000 MMBtu/day.
Buyer understands and agrees the gas delivered hereunder may be supplied either
from Seller's gas or from gas purchased by Seller from third parties, provided
however, if such gas is purchased from third parties, Seller shall be solely
responsible for the payment of the purchase price of gas to such third parties.
7. Title. Title and risk of loss to gas delivered hereunder shall pass from
Seller to Buyer at the Point(s) of Delivery.
8. Delivery Pressure. Seller shall be required to deliver or cause delivery
of the gas at the Point(s) of Delivery hereunder against the varying pressures
in the facilities of Buyer's Transporter(s); provided however, Seller shall
have the right but not the obligation to install compression.
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<PAGE> 8
9. Quality Of Gas. The gas to be delivered hereunder shall comply with the
quality requirements of the Transporter receiving the gas at the Point(s) of
Delivery.
10. Measurement And Tests Of Gas. The quantity of gas delivered to the
Transporter for Buyer's account at the Point(s) of Delivery shall be determined
by the Buyer's Transporter in accordance with the then current standard terms
and conditions applicable to such Transporter's gas transportation contracts.
11. Warranty Of Title. Seller hereby warrants (i) title to all gas sold
hereunder or the right to sell such gas, (ii) that it has the right to sell
same to Buyer and (iii) that all such gas shall be free from any and all liens
and adverse claims of any nature whatsoever.
12. Corporate Guaranty. Seller agrees to give a guaranty from CMS Energy
Corporation in the form attached hereto as Exhibit "A" guaranteeing Seller's
financial obligations under this Agreement.
13. Term. Deliveries of gas shall commence on January 1, 2003 and continue
through December 31, 2004.
14. Right To Terminate Agreement.
(A) In addition to any other remedy of Buyer under law or provided under
this Agreement, Buyer shall have the right at its election to terminate this
Agreement upon
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<PAGE> 9
twenty (20) days' written notice to Seller if Seller, for any reason, other
than (i) force majeure, (ii) Buyer's failure to take, or (iii) a failure by
Buyer to pay any Undisputed Amounts, fails, over a period of at least sixty
(60) days, to provide an average of ninety percent (90%) of the agreed quantity
and provided further that such failure occurred not more than one hundred forty
(140) days immediately preceding the giving of such notice of termination.
Seller shall have twenty (20) days after receipt of such cancellation notice to
cure any failure in which case Buyer's cancellation is null and void and this
Agreement shall remain in full force and effect.
(B) In addition to the other remedies of Seller under law or provided
under this Agreement, Seller shall have the right at its election to terminate
this Agreement upon twenty (20) days written notice to Buyer if Buyer, for any
reason, other than force majeure, Seller's failure to deliver, or a failure by
Seller to pay any Undisputed Amounts, fails, over a period of at least sixty
(60) days, to take a volume of gas not less than an average of ninety percent
(90%) of the agreed quantity, and provided further that such failure occurred
not more than one hundred forty (140) days immediately preceding the giving of
such notice of termination. Buyer shall have twenty (20) days after receipt of
such cancellation notice to cure any failure in which case Seller's
cancellation is null and void and this Agreement shall remain in full force and
effect.
15. Governmental Rules And Regulations. This Agreement shall be subject to
all valid laws, orders, directives, rules and regulations of any governmental
body or official having jurisdiction provided, however, that no such present or
future law, order,
9
<PAGE> 10
directive, rule or regulation shall be construed to require Seller to repay,
refund or offset any payment previously paid by Buyer under this Agreement.
Buyer and Seller shall in any event endeavor to maintain this Agreement and
neither party shall unilaterally petition to amend it.
16. Assignment.
(A) The terms, covenants and conditions hereof shall be binding on the
parties hereto and on their successors and assigns.
(B) Either party may assign its interest under this Agreement, with the
consent of the other party, which consent shall not be unreasonably withheld,
to an affiliate or any company which shall succeed, by merger or
consolidation, to substantially all of its assets. In the event of any such
assignment, such successor shall be entitled to the rights and shall be subject
to the obligations of its predecessor. Seller acknowledges that pursuant to a
certain Gas Backup Agreement among Consumers Power Company, The Dow Chemical
Company (Dow) and the Midland Cogeneration Venture Limited Partnership dated
January 27, 1987, Buyer may be required to make an assignment to Dow of certain
rights under this Agreement. Seller specifically agrees to accept such
assignments, if any, made by Buyer to Dow in accordance with the aforementioned
Gas Backup Agreement; provided, however, that such assignment shall not relieve
Buyer of its obligations under this Agreement absent Seller's written consent.
Except as provided above, neither party shall assign this Agreement without the
prior consent of the other party, which consent shall not be unreasonably
withheld. Nothing herein contained shall prevent or restrict either party from
pledging, granting a security
10
<PAGE> 11
interest in, or assigning as collateral all or any portion of such party's
interest to secure any debt or obligation of such party under any mortgage,
deed of trust, security agreement or similar instrument.
(C) Any party desiring to make an assignment for which it has the right
pursuant to the foregoing may upon request obtain a written consent within
sixty (60) days to such assignment) from the other party evidencing its
consent.
17. Notices. Except as otherwise herein provided, any notice, request, demand
or statement given in writing or required to be given in writing by the terms
of this Agreement shall be deemed given when deposited in the government mail,
postage prepaid, as certified mail, directed to the post office address of the
parties as follows:
TO SELLER: Andrew V. Coppola
CMS Marketing, Services And
Trading Company
330 Town Center Drive
Suite 1100
Dearborn, MI 48126-2712
Telephone No: (313) 536-9416
Telecopier: (313) 982-9359
TO BUYER: Midland Cogeneration Venture
Limited Partnership
100 Progress Place
Midland, MI 48640
Attention: Gas Supply Department
Telephone No.: (517) 839-6008
Telecopier: (517) 839-6793
or at such other address as either party may from time to time specify as its
address for such purposes by registered for certified letter addressed to the
other party. Notices, requests, demands or statements made in person, by
telephone, Telecopier, Telex or
11
<PAGE> 12
wire shall be deemed given when received provided, however, that if such
notices are received after 5:00 p.m. (recipient's local time), they shall not
be effective until the next business day. Gas nomination notices will be as
determined by the Buyer's Transporter in accordance with the standard terms and
conditions applicable to such Transporters contracts.
18. Remedies. In the event Seller fails to deliver the daily quantities for
reasons not otherwise excused by Force Majeure, Seller shall be responsible for
any incremental gas costs incurred by MCV in replacing such gas. MCV agrees to
use commercially reasonable efforts to purchase replacement gas at the lowest
available price. Seller's obligation to pay MCV for incremental replacement
gas costs (and any transportation penalties or transportation demand charges
resulting from unused transportation) shall be MCV's sole and exclusive remedy
for Seller's failure to deliver. In the event that MCV fails to take gas for
reasons not otherwise excused by Force Majeure, MCV shall pay Seller for any
incremental decrease in the resale price of such gas. Seller agrees to use
commercially reasonable efforts to resell such deficiency gas at the highest
available price. MCV's obligation to pay Seller for such decrease (and any
transportation penalties or transportation demand charges resulting from unused
transportation) shall be Seller's sole and exclusive remedy for MCV's failure
to take gas.
12
<PAGE> 13
19. Arbitration.
(A) If the parties hereto are unable to resolve a disagreement arising
from Paragraph 18 of this Agreement or on any other major matter pertaining to
the Agreement, such disagreement shall, upon mutual agreement, be settled by
arbitration. Either party may then commence arbitration by serving written
notice thereof on the other party designating the issue to be arbitrated.
(B) Should a disagreement be submitted to arbitration, the parties shall
each appoint one (1) arbitrator and the two (2) arbitrators so appointed will
select a third arbitrator, all of such arbitrators to be qualified by
education, knowledge, and experience to resolve the dispute or controversy.
If either party fails to appoint an arbitrator within ten (10) days after a
request for such appointment is made by the other party in writing, or if the
two (2) appointed fail, within ten (10) days after the appointment of the
second, to agree on a third arbitrator, the arbitrator or arbitrators necessary
to complete a board of three (3) arbitrators will be appointed upon application
by either party therefor to the American Arbitration Association.
(C) The jurisdiction of the arbitrators will be limited to the single
issue referred to arbitration and the arbitration shall be conducted pursuant
to the guidelines set forth by the American Arbitration Association; provided,
however, that should there be any conflict between such guidelines and the
procedures set forth in this Agreement, the terms of this Agreement shall
control.
(D) Within fifteen (15) days following selection of the third arbitrator,
each party shall furnish the arbitrators in writing its position regarding the
issue being arbitrated. The arbitrators may, if they deem necessary, convene a
hearing regarding the issue
13
<PAGE> 14
being arbitrated. Within thirty (30) days following the later of the
appointment of the third arbitrator or of the hearing, if one is held, the
arbitrators shall notify the parties in writing as to which of the two (2)
positions submitted is most consistent with the meaning of this Agreement with
respect to the issue being arbitrated. No other position may be selected.
Such decision shall be binding on the parties hereto and shall remain in effect
until and unless changed in accordance with the provisions of this Agreement.
(E) Enforcement of the award may be entered in any court having
jurisdiction over the parties.
(F) Each party will pay the expenses of the arbitrator selected by or for
it, and its counsel, witnesses and employees. All other costs of arbitration
will be equally divided between the parties.
20. Force Majeure. The term "force majeure" as employed herein and for all
purposes relating hereto, shall mean acts of God, strikes, lockouts or other
industrial disturbances, acts of public enemy, wars, blockades, insurrections,
riots, epidemics, landslides, lightning, earthquakes, explosions, fires,
arrests and restraints of governments and people, civil disturbance, freeze-up
of Seller's wells or wells from which Seller is furnishing gas hereunder, or
other temporary inability of Seller wells or wells from which Seller is
furnishing gas hereunder to produce, repairs to remedy breakage or accident
affecting MCV's plant or pipeline facilities used to transport gas hereunder on
the pipeline facilities of any Transporter, mechanical breakdowns of MCV's
plant or pipeline facilities or those of any Transporter used to transport gas
hereunder, inability of any party hereto to obtain necessary materials,
supplies or
14
<PAGE> 15
permits due to existing or future rules, regulations, orders, laws or
proclamations of governmental authorities (federal, state or local), including
both civil and military, and any other causes whether of the kind herein
enumerated or otherwise, not within the control of the party claiming
suspension and which by the exercise of due diligence such party is unable to
prevent or overcome.
21. Transportation. Both parties shall cooperate in an effort to eliminate
imbalances on either party's transporting pipeline(s). The parties further
agree that if any imbalance penalties or charges (including cash out charges)
are imposed on a party as a result of the other party's failure to deliver or
accept the required quantities, then the failing party shall reimburse the
non-failing party for such charges or penalties.
22. Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUCTED ACCORDING TO THE
LAWS OF THE STATE OF MICHIGAN.
23. Miscellaneous.
(A) No waiver by either Seller or Buyer of any default by the other under
this Agreement shall operate as a waiver of any future default, whether of like
or different character or nature.
(B) The descriptive headings of particular provisions of this Agreement
are for the purpose of facilitating administration and shall not be construed
as having any substantive effect on the terms of this Agreement.
15
<PAGE> 16
(C) Each of the parties agrees to proceed with due diligence and make
good faith effort to obtain such governmental authorizations as may be
necessary to enable performance of this Agreement.
(D) This Agreement is subject to the January 27, 1987 Gas Supply Option
between Buyer and Dow and to Dow's rights under a certain Gas Backup Agreement
with Buyer and Consumers Power Company dated January 27, 1987.
(E) If any provision of this Agreement is determined to be invalid, void
or unenforceable by any court having jurisdiction, such determination shall not
invalidate void or make unenforceable any other provision of this Agreement.
(F) Neither Buyer nor Seller shall disclose to any third party other than
its partners, parents, affiliates, directors, officers, employees, consultants,
representatives, agents or those third parties providing financing to it any
information received from the other party that is explicitly marked
"Confidential" (such information hereinafter referred to as ("Confidential
Information"); provided however, that nothing shall be deemed Confidential
Information which:
(i) is part of the public domain;
(ii) becomes publicly known otherwise than through an action or
inaction of the receiving party;
(iii) is independently developed by the receiving party; or
(iv) is required to be disclosed pursuant to any law, rule, or
regulation, or pursuant to any order of a governmental instrumentality,
provided that the party receiving the order shall, if feasible, notify the
other party of any such requirement at least ten (10) days before compliance is
required, and if so requested by the other
16
<PAGE> 17
party, shall use reasonable efforts to oppose the required disclosure, as
appropriate under the circumstances, or to otherwise make such disclosure
pursuant to a protective order or other similar arrangement for
confidentiality.
(G) This Agreement may be amended only by a written instrument executed
by the parties hereto. This Agreement contains the entire understanding of the
parties with respect to the matter contained herein. There are no promises,
covenants or undertakings other than those expressly set forth herein.
(H) Buyer represents and warrants that it has full and complete authority
to enter into and to perform this Agreement. Seller represents and warrants
that it has full and complete authority to enter into and to perform this
Agreement. Each person who executes this Agreement on behalf of Buyer
represents and warrants that he or she has full and complete authority to do so
and that Buyer will be bound thereby. Each person who executes this Agreement
on behalf of Seller represents and warrants that he or she has full and
complete authority to do so and that Seller will be bound thereby.
(I) Notwithstanding anything to the contrary contained in this Agreement,
the liabilities and obligations of MCV arising out of, or in connection with,
this Agreement or any other agreements entered into pursuant hereto shall not
be enforced by any action or proceeding wherein damages or any money judgment
or specific performance of any covenant in any such document and whether based
upon contract, warranty, negligence, indemnity, strict liability or otherwise,
shall be sought against the assets of the partners of MCV. By entering into
this Agreement, Seller waives any and all right to sue for, seek or demand any
judgement against such partners and their affiliates, other than MCV by reason
of the performance by MCV of its obligations under this
17
<PAGE> 18
Agreement or any other agreements entered into pursuant hereto, except to the
extent such partners are legally required to be named in any action to be
brought against MCV.
IN WITNESS WHEREOF, this Agreement is executed in multiple originals
effective as of the day and year first herein above written.
BUYER MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
By: LeRoy W. Smith
------------------------------------
Name: LeRoy W. Smith
Title: Vice President Gas Supply
SELLER CMS MARKETING, SERVICES AND
TRADING COMPANY
By: William W. Shivley
------------------------------------
Name: William W. Schivley
Title: Executive Vice President & Chief Operating Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATIOH EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
MIDLAND COGENERATION VENTURE FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 234,526
<SECURITIES> 138,898
<RECEIVABLES> 93,674
<ALLOWANCES> 0
<INVENTORY> 12,910
<CURRENT-ASSETS> 361,785
<PP&E> 2,460,873
<DEPRECIATION> 640,170
<TOTAL-ASSETS> 2,351,271
<CURRENT-LIABILITIES> 285,075
<BONDS> 1,788,291
0
0
<COMMON> 0
<OTHER-SE> 277,221
<TOTAL-LIABILITY-AND-EQUITY> 2,351,271
<SALES> 0
<TOTAL-REVENUES> 651,581
<CGS> 0
<TOTAL-COSTS> 435,082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173,940
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 62,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 15,533
<NET-INCOME> 77,737
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
SELECTED PRO FORMA OPERATING CASH FLOW DATA (a)
FOR THE YEARS 1997 AND 1996
(In Millions of Dollars) (Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenue
Power Purchase Agreement $611 $598
Steam and Electric Power Agreement 40 46
Other Revenue 4 2
Interest on Revenue Account 4 6
---- ----
Total Revenue 659 652
---- ----
Operating Expenses
Fuel, transportation, storage 285 249
Operations and maintenance 41 39
Property, other taxes 27 28
Other (b) 32 68
---- ----
Total Operating Expenses 385 384
---- ----
Net Operating Income $274 $268
==== ====
Lease Payments $274 $255
Coverage Ratios
Senior Interest 3.58 3.06
Senior Debt Service 1.36 1.45
Total Interest 1.99 1.80
Total Debt Service 1.04 1.09
</TABLE>
(a) The above table presents selected pro forma information on operating cash
flows of MCV in a format consistent with that presented in the Feasibility
Study to the Prospectus filed as part of MCV's Registration Statement on
Form S-1 (File No. 33-3977). This format is used to compute various debt
service coverage ratios on an annual basis by aligning annual operating
cash flows with the semi-annual rent payments made in July and January of
each year. For example, the cash flow presented for 1997 reflects
revenues and expenses associated with 1997 activity, as well as the Lease
rental payments made on July 23, 1997, and January 23, 1998. In addition
to the revenues presented in this table, interest income on reserves
totaled $11.1 million in 1997 and $9.7 in 1996.
(b) Includes use of funds available for payment of spare parts, maintenance
and capital expenditures that had been reserved in prior years and funding
of reserves for future spare parts, maintenance and capital expenditures.
In 1997 and 1996, approximately $4.0 million and $27.7 million,
respectively, in additional funds was reserved for future years
expenditures.
