<PAGE> 1
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, 1998
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
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2726166
- -------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 PROGRESS PLACE, MIDLAND, MICHIGAN 48640
- ------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 839-6000
------------------------
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
--- ---
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]
<PAGE> 2
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I Page
- ------ ----
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.......................................................10
G. Regulation......................................................10
H. Environmental Matters...........................................15
I. Overall Lease Transaction.......................................17
Item 2. Properties..........................................................20
Item 3. Legal Proceedings...................................................20
Item 4. Submission of Matters to a Vote of Security Holders.................20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...........................................................21
Item 6. Selected Financial Data.............................................21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................21
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......37
Item 13. Certain Relationships and Related Transactions......................38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....39
<PAGE> 3
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 in
excess of 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.
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 principal 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. From time to time, MCV enters into other
short-term sales agreements for the sale of excess capacity and/or energy
available above MCV's internal use and obligations MCV has to Consumers,
Dow and DCC.
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. ("Coastal Midland"), a wholly-owned subsidiary
of The Coastal Corporation ("Coastal") and MEI Limited Partnership
("MEI"), which is a general and limited partner, owned 50% by Coastal
Midland and 50% by Source Midland. MCV's other limited partners are Dow,
Micogen Limited Partnership, owned by subsidiaries of Coastal, 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, MCN
Energy Group Inc. and Panhandle Eastern Corporation. On April 30, 1998,
Coastal Midland and an affiliate of The Coastal Corporation acquired all
of the partnership interests in Micogen Limited Partnership from Fluor
Corporation, the previous parent company. On June 16, 1998, MEI was
acquired by Coastal Midland and Source Midland, with each company
acquiring a 50% interest in MEI from Asea Brown Boveri, Inc., the previous
parent company. C-E Midland Energy Inc., a previous limited partner, was
acquired by MEI just prior to the acquisition of MEI by Coastal Midland
and Source Midland. 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."
1
<PAGE> 4
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") originally designed to produce
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;
- A back-pressure steam turbine, capable of producing approximately 15
MW;
- 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 was originally designed to have a net electrical generating
capacity of approximately 1370 MW and to produce approximately 1.5 million
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. Subsequent improvements to
the Facility have increased the net electrical generating capacity. 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 1997 and 1998,
the Michigan Public Service Commission ("MPSC") entered a series of
orders, now final at the MPSC level, permitting customers to choose their
power provider over a four-year phase-in period which was to start in 1998
("Restructuring Orders"), (these orders are further described in Part I,
Item 1, Section G, "Regulation - Michigan Electric Industry Restructuring
Proceedings"). Similar efforts, in the form of proposed legislation, exist
at the federal level. Two issues generally involved in these restructuring
efforts which could significantly impact MCV are stranded assets or
transition cost recovery by utilities for PPA charges and contract (PPA)
sanctity. Over 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 MPSC's Restructuring Orders are construed so as to deny stranded
cost recovery of above-market PPA costs, and if such order is not reversed
on appeal, MCV's cash flows may be negatively impacted especially in the
period after 2007. MCV, as well as others, filed an appeal in the Michigan
Court of Appeals and a complaint in the US District Court for the Western
District of Michigan challenging the Restructuring Orders. MCV continues
to monitor and participate in these matters, as appropriate.
2
<PAGE> 5
(See Part I, Item 1, Section G, "Regulation - Michigan Electric Industry
Restructuring Proceedings and Federal Electric Industry Restructuring",
Part II, Item 7, "MD&A - Outlook - Michigan Electric Industry
Restructuring Proceedings and 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 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. In 1998, approximately 70% of PPA revenues were
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. In 1996, some of the GTGs 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."
E. Contracts
MCV has entered into a number of contracts; the material operating
contracts include 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; 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 if MCV is willing to sell the same for a period of six
months or longer. MCV is entitled to sell excess electric capacity and
related energy to other electric utilities, and Consumers is required, if
requested by such utilities or MCV, to transmit electrical energy for them
subject to certain conditions.
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.
3
<PAGE> 6
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 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 and each year thereafter, 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. 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
4
<PAGE> 7
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.") In March 1998,
Consumers began 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 prior
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 1998 report, Cummins & Barnard, Inc., the consulting engineer,
found no specific issues that MCV should take under advisement or act
upon. With regard to the most recent inspection, MCV expects to receive
the report by the end of April, 1999 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 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
5
<PAGE> 8
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 1998, MCV sold an average of 529,993 pounds of steam
and 62 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; no such increase was requested during 1998.
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). In 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. Dow also has the option under the SEPA to provide the gas
necessary to generate Dow's take of steam and electricity ("toll"). In
1996, MCV and Dow entered into an agreement (the "April 15, 1996
Agreement") concerning gas tolling. 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 made 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.
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 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
6
<PAGE> 9
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
In 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 1 to 12 years, with U.S. and
Canadian suppliers for a maximum supply of natural gas as of January 1,
1999 of 236,500 Mcf/day. No single Gas Contract currently 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,
1999, 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 price; a fixed price with an
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 32% of the volume is priced with a
fixed price or a fixed price with an escalator, 28% is priced with the
energy index and 40% 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.
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
minimum daily quantity ("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
7
<PAGE> 10
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 one of
its contracts 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 and
are denominated in U.S. dollars. 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
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"); Trunkline Gas Company
("Trunkline"); and Great Lakes Gas Transmission Company ("Great Lakes").
ANR and Great Lakes are affiliates of Coastal. CMS Energy is currently in
the final stage of its acquisition of Panhandle and Trunkline. 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.
8
<PAGE> 11
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 3 to 26 years. The transportation rates of ANR, Panhandle, 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.
Gas Turbine Service Agreement
Under a service agreement between MCV and ABB Power (the "Service
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. 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 $358,361 (in 1998 dollars) per month inspection fee (which
escalates based upon various wage level indices, is payable on the basis
of operating hours as they occur over the same period 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 Power
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 $.4 million
remobilization fee. Upon termination of the Service Agreement (except for
nonperformance by ABB Power), MCV must pay a cancellation payment ($1.5
million in 1999, $1.0 million in 2000 and $.5 million 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 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
9
<PAGE> 12
over the same period. The amendment is severable and may be terminated
separately from the existing Service Agreement.
In addition to the January 1998 amendment to the term of the amended
Service Agreement, MCV has 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. Five upgrade packages were installed during
1998 with the remaining six 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
$15.0 million, which is reduced to $5.0 million upon completion of the
fourth major inspection or July 1, 2003, whichever comes last. As part of
this amended Service Agreement, MCV 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, 1999, MCV had 132 employees, including 89 engineering,
operating and maintenance personnel. Fifty-three 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, 1999. It is a five year contract with a wage
reopener in each of the last two years. 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 1998, the Facility achieved a Thermal
Percentage of 17.3% 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
10
<PAGE> 13
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-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. In 1998, MCV filed two Notices of Self-Recertification with the
FERC to reflect changes in MCV Partnership ownership (which changes did
not result in a change in the percentage of utility ownership). (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. 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
11
<PAGE> 14
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 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 Revised Settlement Proposal 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 unsuccessfully filed appeals of the Settlement Order and the
decision is now 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 prior to January 1, 1998,
from MCV has been reviewed in the annual PSCR Plan and Reconciliation
Cases. On January 14, 1998, the MPSC issued a ruling suspending Consumers'
annual PSCR Plan and Reconciliation Cases and set a PSCR "rate freeze"
effective January 1, 1998. This PSCR rate freeze is subject to a final
adjustment in Consumers' 1997 PSCR Reconciliation Case, which is in
progress. This case will determine the level at which Consumers' PSCR
rates will be frozen during the period 1998 through 2001.
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. 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 $39,000 per month in 1998). In
addition, MCV agreed to
12
<PAGE> 15
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.
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 unsuccessfully appealed the MPSC's ruling and
the case is now final.
In addition, as part of its order in Consumers' 1994 PSCR Plan
proceedings, the MPSC ruled that for 1994 Consumers would not be permitted
to recover fixed energy costs for energy associated with the off-peak cap
issue. MCV believed the MPSC order on this issue was erroneous and filed
an appeal of the MPSC decision. The Michigan Court of Appeals affirmed the
MPSC. MCV has petitioned the Michigan Supreme Court to review this case.
Other PSCR Plan and Reconciliation Cases for the years 1996 and 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. 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 by
the MPSC with recovery from Consumers retail customers to begin January 1,
1996. 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 preceding paragraph. In addition, Consumers
has paid MCV approximately $2.5 million for the year 1998 and $2.8 million
for the year 1997 for energy deliveries 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
significantly impact MCV are contract sanctity and stranded cost recovery.
On the issue of contract sanctity, the Restructuring Orders indicate that
it was not the intent of the MPSC to take any action that would affect the
contractual rights of QFs, including MCV. On the issue of stranded cost
recovery, the Restructuring Orders allow recovery by utilities (including
Consumers) of
13
<PAGE> 16
stranded costs including capacity charges previously approved by the MPSC
in power contracts incurred during the regulated era that will be above
market prices during the new competitive regime. However, it appears that
stranded cost recovery of above-market capacity charges in power purchase
contracts (i.e., MCV's PPA) is limited to the period 1998 through 2007
(MCV's PPA expires in 2025). The Restructuring Orders do not specifically
address the recovery of PPA capacity charges after 2007. The Restructuring
Orders permitted Consumers to elect to suspend the PSCR process and freeze
its PSCR rate factor through which charges under the PPA are recovered
from retail customers. The MPSC has suspended the annual PSCR (Plan and
Reconciliation Case) process indefinitely, and froze Consumers' PSCR rate
factor. The suspension of the PSCR process and the PSCR "rate freeze" were
effective January 1, 1998. This PSCR rate freeze is subject to the final
outcome of Consumers' 1997 PSCR Reconciliation Case which is in progress.
This case will determine the level at which Consumers' PSCR rates
(including recovery of MCV capacity and energy charges) will be frozen
during the period 1998 through 2001. MCV is a party in the 1997 PSCR
Reconciliation Case.
In the restructuring cases before the MPSC, MCV has advocated, among other
things, full recovery of PPA charges (capacity and energy) for the life of
the PPA. MCV, as well as others, filed an appeal in the Michigan Court of
Appeals and a complaint in the U.S. District Court for the Western
District of Michigan challenging the Restructuring Orders. MCV's appeal
seeks, among other things, enforcement of prior MPSC orders (the
Settlement Order and the 325 MW Settlement Order). MCV's complaint seeks,
among other things, a declaration that the Restructuring Orders are
preempted by PURPA to the extent that they fail to provide for assured
retail rate recovery of payments made by Consumers to MCV pursuant to
PURPA and an injunction barring enforcement of the Restructuring Orders to
the extent they are preempted by PURPA. The Michigan legislature has also
begun the process to consider electric industry restructuring and
deregulation. While restructuring could have a material impact on MCV, MCV
Management cannot, at this time, predict the impact or the outcome of
these administrative, judicial and legislative proceedings.
Federal Electric Industry Restructuring
FERC has jurisdiction over wholesale energy sales in interstate commerce
and is moving towards "market" based pricing of electricity in some
circumstances as opposed to traditional cost-based pricing. In April 1996,
FERC issued Order No. 888 requiring all utilities FERC regulates to file
uniform transmission tariffs providing for, among other things,
non-discriminatory "open access" to all wholesale buyers and sellers,
including the transmission owner, on terms and conditions established by
FERC. Order No. 888 also requires utilities to "functionally unbundle"
transmission and separate transmission personnel from those responsible
for marketing generation. Appeals of Order No. 888 and subsequent related
orders are pending before the United States Court of Appeals for the D.C.
Circuit. In addition, several bills have been introduced in Congress to
require states to permit consumers to choose their supplier of electricity
and manage other issues such as transition cost recovery and FERC
jurisdiction of retail electric sales. MCV Management cannot predict the
impact on MCV or the outcome of these proceedings.
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.
PPA - Sale or Assignment
In October 1998, Consumers initiated a process for the solicitation of
bids to acquire Consumers' rights to the 1240 MW of Contract Capacity and
associated energy under the PPA. On March 10, 1999, Consumers announced
that it signed a contract with PECO Energy Company ("PECO") whereby
Consumers will sell 1240 MW of capacity and associated energy to PECO from
the MCV PPA beginning January 1, 2002 and ending in September 2007. In
14
<PAGE> 17
addition, the announcement states Consumers will sell PECO between 100 MW
to 150 MW in 1999 through 2001. The announcement also states the contract
with PECO is subject to satisfactory regulatory approvals. On March 19,
1999, Consumers filed an application with the MPSC seeking regulatory
approval of various ratemaking and accounting treatments associated with
the PECO contract. The PPA prohibits a party from transferring or
otherwise alienating the agreement without the prior written consent of
the other party, which consent shall not be unreasonably withheld. At
this time, MCV Management has not been requested by Consumers to approve
any assignments. MCV is currently evaluating this proposed sale, however,
it cannot predict the outcome or potential impacts of this issue.
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 method allocates the capital cost of facility
additions solely to the new shippers who will gain access to the expanded
facilities. FERC's decision was successfully appealed by MCV and as a
result thereof, 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. Further, in January 1998, the United States Court of Appeals
ruled that MCV should have been paid additional interest for the period
prior to October 1, 1995 on the Great Lakes refund. This case is now
final.
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 two instances in March 1998, MCV exceeded the discharge
limits of oil and grease from the oily waste treatment system. Treated
waste water from this system discharges into MCV's 4.1 billion gallon
cooling pond. The system along with various plant sumps were cleaned and
pumped out. Through proper operational controls, the oily waste treatment
system should not see large amounts of oil and grease and since March
1998, no further exceedances have occurred. The Michigan Department of
Environmental Quality ("MDEQ") has taken no action to date on this issue.
Application for National Pollutant Discharge Elimination System permit
renewal was submitted to the MDEQ on March 26, 1998, and MCV received
notification that it was "administratively complete" on September 2, 1998.
The permit reissuance is scheduled to occur before October 1, 1999. MCV
does not expect any difficulty in its reissuance.
Air Quality. In September 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. This process is presently in
progress with MCV's comments incorporated into the draft permit. Public
notice/comment period is scheduled for March 1999.
15
<PAGE> 18
In September 1998, the United States Environmental Protection Agency
("EPA") announced three rulemaking actions to address interstate and
regional transport of ground level ozone, namely the NOXSIP Call Final
Rule ("SIP Call Rule"), Proposed Federal Implementation Plan ("FIP Plan")
and Section 126 Petitions. The SIP Call Rule requires 22 states (including
Michigan) to submit state implementation plans ("SIPs") which address the
regional transport of ground level ozone through reductions in nitrogen
oxide ("NOX") emissions from combustion sources, including gas turbines.
States must submit plans to meet certain overall reduction percentages
established in the SIP Call Rule by September 30, 1999, with emission
reduction measures in place by May 1, 2003 and overall compliance by
September 30, 2007. The FIP Plan includes the same NOX reduction
requirements and time tables contained in the SIP Call Rule. The FIP Plan
will be implemented in any state which fails to submit an approvable NOX
SIP by September 30, 1999 or otherwise fails to require applicable NOX
emission reduction requirements to be in place. The Section 126 Petitions
deal with eight petitions filed by northeastern states under Clean Air
Act, Section 126, against sources in "upwind" states in the Midwest,
including Michigan. The EPA proposes to postpone taking action on the
petitions pending completion of the SIP Call Rule process. Public hearings
were held and comments have been filed on all three of these rulemaking
actions. MCV management cannot predict the outcome of these proceedings or
their impact on MCV.
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.
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. To minimize noise from normal plant operations, MCV has installed
silencers in all of the exhaust stacks, 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
16
<PAGE> 19
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.
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 certain institutional investors ("Owner Participants"). State
Street Bank and Trust Company 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 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 as collateral Agent (the
"Collateral Agent"),
17
<PAGE> 20
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 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, on the Consolidated Balance Sheet, 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.
18
<PAGE> 21
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 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 refinance
any series of Subordinated Notes, in whole or in part, and (ii) 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
19
<PAGE> 22
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, 1998, MCV had funds of $142.5 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."
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
MCV has filed property tax appeals contesting the assessed value of MCV's
property for 1997 and 1998 taxes, which are pending before the Michigan Tax
Tribunal. MCV also filed an appeal for 1999 taxes. MCV Management cannot predict
the outcome of these proceedings.
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.
20
<PAGE> 23
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, 1998, 1997,
1996, 1995 and 1994 and for each of the five years ended December 31, 1998 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,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Revenues $ 627,054 $ 651,581 $ 645,168 $ 617,818 $ 578,741
Operating Income 222,461 216,499 227,883 232,347 200,593
Cumulative Effect on Prior Years (to -- 15,533 -- -- --
Dec-ember 31, 1996) of Change in Method of
Accounting for Property Taxes (1)
Net Income (Loss) 80,327 77,737 65,524 60,936 17,689
BALANCE SHEET DATA: (2)
Total Assets 2,286,506 2,351,271 2,363,945 2,360,530 2,372,106
Capitalization
Partners' Equity 357,548 277,221 199,484 133,960 73,024
Long-Term Debt, Excluding Current Maturities 1,723,960 1,788,291 1,929,241 2,007,815 2,080,005
</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, 1998, MCV recorded net income of $80.3 million
as compared to 1997 net income of $77.7 million. The increase in 1998 earnings
is primarily the result of lower interest expense on MCV's financing obligation,
lower depreciation expense and higher available PPA capacity. This increase was
partially offset by the 1997 change in method of accounting for property taxes
(the cumulative effect on prior years of this change increased 1997 earnings by
$15.5 million) and an increase in the average cost of gas.
For the year ended December 31, 1997, MCV's recorded net income was $12.2
million higher than the 1996 net income of $65.5 million. The increase in 1997
earnings was primarily the result of the 1997 change in method of accounting for
21
<PAGE> 24
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 was higher available PPA capacity and lower interest expense
on MCV's financing obligation, partially offset by the recognition of a Great
Lakes Gas Transmission Company ("Great Lakes") gas transportation refund in
1996.
Operating Revenues
The following represents significant operating revenue statistics for the years
ended December 31 (dollars in thousands except average rates):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues $ 627,054 $ 651,581 $ 645,168
Capacity Revenue $ 407,518 $ 405,488 $ 396,244
PPA Contract Capacity (MW) 1,240 1,240 1,240
PPA Availability 99.4% 98.9% 96.4%
Electric Revenue $ 192,258 $ 218,219 $ 220,803
PPA Delivery as Percentage of Contract Capacity 79.3% 91.2% 89.4%
PPA, SEPA and Other Electric Deliveries (MWh) 9,194,474 10,455,717 10,286,934
Average PPA Variable Energy Rate ($ / MWh) $ 16.76 $ 16.87 $ 17.00
Average PPA Fixed Energy Rate ($ / MWh) $ 3.75 $ 3.94 $ 4.10
Steam Revenue $ 12,008 $ 12,604 $ 12,851
Steam Deliveries (Mlbs) 5,584,273 5,717,720 5,215,537
Other Revenue $ 15,270 $ 15,270 $ 15,270
</TABLE>
For the year ended December 31, 1998, MCV's operating revenues decreased $24.5
million over 1997. This decrease primarily resulted from lower electric
deliveries under the PPA with Consumers, resulting from Consumers' change to
economic dispatch of the facility (See Part II, Item 7, MD&A, "Outlook -
Operating Outlook") and to lower variable and fixed energy rates. This decline
in electric revenue is largely offset by a decline in fuel costs also associated
with the decrease in dispatch. The decrease in energy related revenues was
partially offset by higher capacity payments generated under the PPA.
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 GTGs 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.
Operating Expenses
For the year ended December 31, 1998, MCV's operating expenses were $404.6
million, which includes $244.7 million of fuel costs. During this period, MCV
purchased approximately 85.7 bcf of natural gas, of which 4.4 bcf was used
either for transportation fuel or a net change to gas in storage. During this
same period, MCV consumed 84.1 bcf of natural gas at the plant to produce
energy, of which 2.8 bcf of this total was gas provided by Dow. The average
commodity cost of fuel for the year 1998 was $2.45/MMBtu. 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
22
<PAGE> 25
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. Fuel costs for the year 1998 compared to 1997
decreased $21.7 million. This decrease was primarily due to lower gas usage
resulting from a lower electric dispatch by Consumers, and Dow's election to
provide its own gas to generate part of its take of steam and electricity. This
decrease was partially offset by a higher 1998 average cost of gas due to
increases in the long-term natural gas prices.
In 1998, operating expenses other than fuel costs decreased $8.8 million from
the year 1997. This decrease is primarily due to lower depreciation expense,
resulting from a revision to the useful lives of the gas turbines and certain
related capital spares to more closely reflect the economic lives of these
assets. Other expenses incurred in these periods were considered normal
expenditures to achieve the recorded operating revenues.
In 1997, MCV's operating expenses increased $17.8 million, which includes a
$15.9 million increase in fuel costs. The 1996 fuel costs include the
recognition of a Great Lakes gas transportation refund of approximately $17.6
million (excluding interest). Excluding the Great Lakes refund, fuel costs for
1997 were $1.7 million lower than 1996 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.
Other Income (Expense)
The increase in interest and other income for the year 1998 compared to 1997
reflects an interest income refund from Great Lakes, pursuant to a Federal
Appeals Court decision made in January, 1998. The increase in interest and other
income for the year 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 a related Great Lakes gas transportation refund. The
decrease in interest expense for the year 1998 compared to the year 1997 and in
1997 compared to 1996 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.
Market Risk Sensitivity
Market risks relating to MCV's operations result primarily from changes in
commodity prices, interest rates and foreign exchange rates. To address these
risks, MCV enters into various hedging transactions as described below. MCV does
not use financial instruments for trading purposes and does not use leveraged
instruments. Fair values included herein have been determined based upon quoted
market prices. The information presented below should be read in conjunction
with Note 2, " Significant Accounting Policies" and Note 6, "Long-Term Debt" to
the Consolidated Financial Statements of MCV.
Interest Rate Risks. In 1990, MCV obtained permanent financing for the Facility
by entering into sale and leaseback agreements ("Overall Lease Transaction")
with a lessor group, related to substantially all of MCV's fixed assets. In
accordance with SFAS No. 98, "Accounting For Leases," the sale and leaseback
transaction has been accounted for as a financing arrangement. Under the terms
of the Overall Lease Transaction, MCV sold undivided interests in all of the
fixed assets of the Facility for approximately $2.3 billion, to the Owner Trusts
established for the benefit of the Owner
23
<PAGE> 26
Participants. The financing arrangement, entered into for a term of 25 years,
maturing in 2015, has an effective interest rate of approximately 8.7%,
payable in semi-annual installments of principal and interest. Due to the unique
nature of the negotiated financing obligation it is impractical to estimate the
fair value of the Owner Participants' underlying debt and equity instruments
supporting this financing obligation.
In addition, to manage the effects of interest rate volatility on interest
income while maximizing return on permitted investments, MCV has established an
interest rate hedging program. The carrying amounts of MCV's short-term
investments approximate fair value because of the short term maturity of these
instruments. MCV's short-term investments are made up of investment securities
held to maturity and as of December 31, 1998 have original maturity dates of
less than one year.
For MCV's debt obligations, the table below presents principal cash flows and
the related interest rate by expected maturity dates. The interest rate reflects
the fixed effective rate of interest of the financing arrangement. For the
interest rate swap transactions, the table presents the notional amounts and
related interest rates by fiscal year of maturity. The variable rates presented
are the average of the forward rates for the term of each contract, as valued
at December 31, 1998.
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
------- ------ ------ ------ ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Long-Term Debt Fixed
Rate $ 221.7 $288.6 $292.2 $309.2 $214.0 $ 1,790.1 $3,116.2 N/A
(in millions)
Avg. Interest Rate 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%
Interest Rate Swaps:
Variable to Fixed $ 20.0 Immaterial
(in millions)
Avg. Pay Rate 4.90%
Avg. Receive Rate 4.89%
Floating to Floating $ 20.0 $(.1)
(in millions)
Avg. Pay Rate 4.93%
Avg. Receive Rate 4.75%
</TABLE>
Commodity Risk. MCV is a purchaser of natural gas. MCV enters into natural gas
futures and option contracts in order to hedge against unfavorable changes in
the market price of natural gas in future months when gas is expected to be
needed. These financial instruments are being utilized only to secure
anticipated natural gas requirements necessary for projected electric sales at a
cost of gas less than that available under MCV's long term natural gas contracts
and to hedge sales of natural gas previously obtained in order to optimize MCV's
existing gas supply, storage and transportation arrangements. The natural gas
futures and option contracts qualify as hedges under SFAS No. 80, "Accounting
for Futures Contracts," since the contracts cover probable future transactions.
MCV's futures and forward contracts generally have maturities not exceeding
twelve months.
The following table provides information about MCV's futures contracts that are
sensitive to changes in natural gas prices; these futures contracts have
maturity dates ranging from one to ten months. The table presents the carrying
amounts and fair values at December 31, 1998:
<TABLE>
<CAPTION>
Expected Maturity in 1999 Fair Value
------------------------- ----------
<S> <C> <C>
Futures Contracts:
Contract Volumes (Net)
(10,000 MMBtu) Long (Buy) 174 --
Weighted Average Price
(per MMBtu) $1.997 $1.902
Contract Amount ($US in Millions) $ 2.5 $ 3.4
</TABLE>
24
<PAGE> 27
Foreign Currency Risks. MCV periodically enters into foreign exchange forward
purchase contracts for Swiss Francs to hedge its foreign currency exposure
against adverse currency fluctuations impacting the payments under the amended
Service Agreement with ABB Power. The gains and losses on these transactions,
accounted for as hedges, are deferred on the balance sheet and included in the
measurement of the underlying capitalized major renewal costs when incurred.
Forward contracts which are entered into have maturity dates of less than one
year. MCV did not have any such forward purchase contracts for Swiss Francs
outstanding as of December 31, 1998.
Liquidity and Financial Resources
During the years ended December 31, 1998 and 1997, net cash generated by MCV's
operations was $162.9 million and $121.1 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 $23.2
million, $13.2 million and $18.1 million were retained by MCV as working capital
in 1998, 1997 and 1996, 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 January and July for the
next sixteen years. During 1998, 1997 and 1996, MCV paid the basic rent
requirements of $309.0 million, $254.6 million and $254.7 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, 1998, the
borrowing base was $45.2 million. The Working Capital Facility term currently
extends to August 31, 1999. MCV did not utilize the Working Capital Facility
during 1998, 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, 1998, there was $313.3 million (which includes
$76.8 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 price, a
fixed price with an 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.
25
<PAGE> 28
There is no assurance that MCV's expectations will be realized or that
unexpected events will not have an adverse impact on MCV's business.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include the
final outcome of the MPSC Restructuring Orders and challenges thereto,
governmental policies, legislation and other regulatory actions (including those
of the Michigan Legislature, Congress, Federal Energy Regulatory Commission and
the Michigan Public Service Commission) with respect to cost recovery under the
PPA, industry restructuring or deregulation, operation and construction of plant
facilities including natural gas pipeline and storage facilities, and present or
prospective wholesale and retail competition, among others. The business and
profitability of MCV is also influenced by other factors such as weather
conditions, pricing and transportation of commodities, environmental
legislation/regulation, Year 2000 compliance issues and inflation, among other
important factors. In October 1998, Consumers announced that it is offering for
sale and assignment, its rights under the PPA. On March 10, 1999, Consumers
announced that it signed a contract with PECO Energy Company ("PECO") whereby
Consumers will sell 1240 MW of capacity and associated energy to PECO from the
MCV PPA beginning January 1, 2002 and ending in September 2007. In addition, the
announcement states Consumers will sell PECO between 100 MW to 150 MW in 1999
through 2001. The announcement also states the contract with PECO is subject to
satisfactory regulatory approvals. MCV's business and profitability may also be
materially affected by the results of such sale of the PPA. All such factors are
difficult to predict, contain uncertainties which may materially affect actual
results, and are beyond the control of MCV.
Results of operations are largely dependent on successfully operating the
Facility at or near contractual capacity levels, the availability of natural
gas, the level of energy rates paid to MCV relative to the cost of fuel used for
generation, Consumers' performance of its obligations under the PPA, capacity
payments made by Consumers and maintenance of the Facility's QF status.
Operating Outlook. In 1998, approximately 70% of PPA revenues were capacity
payments which are based on the Facility's availability. PPA availability was
99.4% in 1998, 98.9% in 1997 and 96.4% in 1996. 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%.
In March 1998, Consumers began economically dispatching the Facility by
scheduling energy deliveries on an economic basis relative to the cost of other
energy resources, instead of at the higher dispatch levels experienced over the
past several years. MCV consequently 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. In 1996, several of the GTGs experienced severe cracking
in the hot gas casings, which in some cases caused extensive damage to the
turbine blades and vanes. After each such incident, MCV and ABB Power have
identified and modified each of the GTGs to eliminate the problems and have
implemented a program of hot gas path inspections for all GTGs, which are
currently being performed every 3,000 hours. MCV and ABB Power continue to
address reliability issues to alleviate future outages, and MCV believes that
with the modifications that have been made to date there should be no
significant future impacts on plant availability or efficiency, although no
assurance can be given that additional equipment problems will not occur.
The cost of casing replacements and modifications is covered by ABB Power (with
the exception of insurable events) pursuant to the amended Service Agreement,
under which ABB Power is providing hot gas path parts for MCV's twelve gas
turbines through the sixth series of major GTG inspections which are expected to
be completed by year-end 2008.
MCV's insurance carriers continue to monitor and review all the GTG inspection
findings. At this time, MCV currently maintains property insurance policies that
include the hot gas casing equipment and are in effect through the second
quarter of 1999. Failure to maintain insurance, subject to certain exceptions,
is an Event of Default under the Overall Lease Transaction.
Natural Gas. The Facility is wholly dependent upon natural gas for its fuel
supply and a substantial portion of the Facility's operating expenses consist of
the costs of natural gas. While MCV continues to pursue the acquisition of fuel
supply beyond the year 2004, MCV recognizes that its existing gas contracts are
not sufficient to satisfy the anticipated gas needs
26
<PAGE> 29
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 1998, the energy charge (fixed and
variable) paid to MCV has declined by .29 cents per kWh, while the average
variable cost of delivered fuel for the period 1990 - 1998, has risen by $0.26
per MMBtu.
The divergence between variable revenues and costs will become greater if the
energy charge (based largely on the cost of coal) declines or escalates more
slowly than the spot market or contract prices under which MCV purchases fuel
(contract prices generally escalate at either the total PPA energy charge or 4%
per year). The difference could be further exacerbated in approximately six
years as MCV's gas contracts begin to expire if the cost of uncontracted fuel is
materially higher than the prices in the expiring contracts.
Energy Payments Under the PPA
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 Allocation. In February 1995, the MPSC in Case No.
U-10155-R (the power supply cost recovery ("PSCR") reconciliation
proceeding for 1993, "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.
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 in accordance with the MPSC order which
was upheld by the Michigan Court of Appeals. In addition, Consumers
requested a refund from MCV of $1.9 million plus interest, for the
calendar years 1993 and 1994 and the first nine 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 became final in January 1998. Based on this
decision, Consumers notified MCV that it would continue withholding the
fixed energy charges on the Jurisdictional Issue (currently averaging
approximately $39,000 per month in 1998). MCV released 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 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 through 1997 Reconciliation and/or 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"). MCV and Consumers unsuccessfully appealed the
MPSC order for 1993 and that case is final. The 1994 Reconciliation
Case is currently on appeal to the Michigan Supreme Court. 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.
27
<PAGE> 30
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. In November 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 Case. In the 1996 PSCR Plan Case, 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 $2.5
million for the year 1998 and $2.8 million for the year 1997, for
energy delivered above the off-peak cap, 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. MCV
Management cannot predict the outcome of either the 325 MW Settlement
Order proceeding, the 1996 PSCR Plan Case, subsequent PSCR proceedings,
or appeals, if any.
PPA - 1998 PSCR Rate Freeze. On January 14, 1998, the MPSC issued a
ruling suspending Consumers annual PSCR Plan and Reconciliation Cases
and set a PSCR "rate freeze" effective January 1, 1998. This PSCR rate
freeze is subject to a final adjustment in Consumers' 1997 PSCR
Reconciliation Case, which is in progress. This case will determine the
level at which Consumers' PSCR rates will be frozen during the period
1998 through 2001. Beginning with the payment of the March 1998
invoice, Consumers began paying MCV fixed energy payments based upon
MCV's availability up to 915 MW and on deliveries above 915 MW, rather
than the higher level established in the PSCR rate freeze. MCV disputes
Consumer's contention that availability based payments occur only up to
915 MW and is continuing to discuss this issue with Consumers. MCV has
recognized the fixed energy payment based on availability up to the
caps in the 915 MW Settlement Order and on deliveries above 915 MW as
operating revenues. At this time, MCV Management cannot predict the
outcome of this issue.
PPA - Other Issues. In 1997, Consumers informed MCV of several other
potential payment issues it may pursue, pursuant to the "regulatory
out" and other provisions 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). Consumers has estimated that
the financial impact of these issues for 1996 would decrease MCV's
operating revenues by an estimated $2.5 million. In addition, Consumers
notified MCV that it does not believe that MCV can use the
approximately 15 MW of generating capacity and energy attributable to
the back pressure turbine, which was placed into service in July 1997,
towards available Contract Capacity or electric deliveries under the
PPA. Consumers has also indicated that they may take a similar position
on the incremental energy and capacity resulting from MCV's
installation of 11NM upgrade packages on the GTGs. MCV has recognized
amounts related to the above issues as operating revenues, except for
revenues associated with the band width (currently averaging
approximately $7,000 per month in 1998). MCV and Consumers have
continued to negotiate a settlement of the above issues. At this time,
MCV Management cannot predict the outcome of these negotiations or
issues.
PPA - Sale and Assignment. In October 1998, Consumers initiated a
process for the solicitation of bids to acquire Consumers' rights to
the 1240 MW of Contract Capacity and associated energy under the PPA.
On March 10, 1999, Consumers announced that it signed a contract with
PECO Energy Company ("PECO") whereby Consumers will sell 1240 MW of
capacity and associated energy to PECO from the MCV PPA beginning
January 1, 2002 and ending in September 2007. In addition, the
announcement states Consumers will sell PECO between 100 MW to 150 MW
in 1999 through 2001. The announcement also states the contract with
PECO is subject to satisfactory regulatory approvals. On March 19,
1999, Consumers filed an application with the MPSC seeking regulatory
approval of various ratemaking and accounting treatments associated
with the PECO contract. The PPA prohibits a party from transferring or
otherwise alienating the agreement without the prior written
28
<PAGE> 31
consent of the other party, which consent shall not be unreasonably
withheld. At this time, MCV Management is currently evaluating this
proposed sale, however, it cannot predict the outcome or potential
impacts of this issue.
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. The two issues involved in this restructuring
which could significantly impact MCV are contract sanctity and stranded cost
recovery. On the issue of contract sanctity, the Restructuring Orders indicate
that it was not the intent of the MPSC to take any action that would affect the
contractual rights of QFs, including MCV. On the issue of stranded cost
recovery, the Restructuring Orders allow recovery by utilities (including
Consumers) of stranded costs including capacity charges previously approved by
the MPSC in power contracts incurred during the regulated era that will be above
market prices during the new competitive regime. However, it appears that
stranded cost recovery of above-market capacity charges in power purchase
contracts (i.e., MCV's PPA) is limited to the period 1998 through 2007 (MCV's
PPA expires in 2025). The Restructuring Orders do not specifically address the
recovery of PPA capacity charges after 2007. The Restructuring Orders permitted
Consumers to elect to suspend the PSCR process and freeze its PSCR rate factor
through which charges under the PPA are recovered from retail customers. The
MPSC has suspended the annual PSCR (Plan and Reconciliation Case) process
indefinitely, and froze Consumers' PSCR rate factor. The suspension of the PSCR
process and the PSCR "rate freeze" were effective January 1, 1998. This PCSR
rate freeze is subject to the final outcome of Consumers' 1997 PSCR
Reconciliation Case which is in progress. This case will determine the level at
which Consumers' PSCR rates (including recovery of MCV capacity and energy
charges) will be frozen during the period 1998 through 2001. MCV is a party in
the 1997 PSCR Reconciliation Case.
In the restructuring cases before the MPSC, MCV has advocated, among other
things, full recovery of PPA charges (capacity and energy) for the life of the
PPA. MCV, as well as others, filed an appeal in the Michigan Court of Appeals
and a complaint in the U.S. District Court for the Western District of Michigan
challenging the Restructuring Orders. MCV's appeal seeks, among other things,
enforcement of prior MPSC orders (the Settlement Order and the 325 MW Settlement
Order). MCV's complaint seeks, among other things, a declaration that the
Restructuring Orders are preempted by PURPA to the extent that they fail to
provide for assured retail rate recovery of payments made by Consumers to MCV
pursuant to PURPA and an injunction barring enforcement of the Restructuring
Orders to the extent they are preempted by PURPA. The Michigan legislature has
also begun the process to consider electric industry restructuring and
deregulation. While restructuring could have a material impact on MCV, MCV
Management cannot, at this time, predict the impact or the outcome of these
administrative, judicial and legislative proceedings.
Federal Electric Industry Restructuring. FERC has jurisdiction over wholesale
energy sales in interstate commerce and is moving towards "market" based pricing
of electricity in some circumstances as opposed to traditional cost-based
pricing. In April 1996, FERC issued Order No. 888 requiring all utilities FERC
regulates to file uniform transmission tariffs providing for, among other
things, non-discriminatory "open access" to all wholesale buyers and sellers,
including the transmission owner, on terms and conditions established by FERC.
Order No. 888 also requires utilities to "functionally unbundle" transmission
and separate transmission personnel from those responsible for marketing
generation. Appeals of Order No. 888 and subsequent related orders are pending
before the United States Court of Appeals for the D.C. Circuit. In addition,
several bills have been introduced in Congress to require states to permit
consumers to choose their supplier of electricity and manage other issues such
as transition cost recovery and FERC jurisdiction of retail electric sales. MCV
Management cannot predict the impact on MCV or the outcome of these proceedings.
Maintaining QF Status. In the case of a topping-cycle generating plant such as
the Facility, to maintain QF Status the applicable operating standard requires
that the portion of total energy output that is put to some useful purpose other
than facilitating the production of power (the "Thermal Percentage") be at least
5%. In addition, the plant must achieve and maintain an average PURPA efficiency
standard (the sum of the useful power output plus one-half of the useful thermal
energy output, divided by the energy input (the "Efficiency Percentage")) of at
least 45%. However, if the plant maintains
29
<PAGE> 32
a Thermal Percentage of 15% or higher, the required Efficiency Percentage is
reduced to 42.5%. The tests are applied on a calendar year basis. The Facility
has achieved the applicable Efficiency Percentage of 42.5% in each year since
commercial operation, and in the years 1995 through 1998 the Facility achieved
an Efficiency Percentage in excess of 45%.
The Facility's achievement of a Thermal Percentage of 15% (thereby requiring
compliance with the reduced Efficiency Percentage of 42.5%) is dependent upon
both the amount of Dow and DCC steam purchases and the level of electricity
generated by the Facility. Dow has agreed to take as much steam as is necessary
for the Facility to retain its QF status under the FERC regulations in effect on
November 1, 1986 (which regulations have not been revised in relevant part in
any material respect), subject to an annual average purchase obligation of no
less than approximately 440,000 lbs/hr. of steam (less amounts supplied by the
Standby Facilities and less 50% of the amount sold by MCV to other steam
customers). The SEPA can be terminated by Dow under certain circumstances. Such
termination would likely lead to a loss of QF status for the Facility. Dow and
DCC steam purchases for 1998 averaged 637,474 lbs/hr. Actual steam usage has
varied and will vary with product mix, seasonal delivery fluctuations and other
factors which may change over time. MCV believes annual steam sales will be
sufficient to allow the Facility to exceed the 15% Thermal Percentage.
MCV believes that, given projected levels of steam and electricity sales, the
Facility will be able to maintain QF status and be capable of achieving a 45%
PURPA Efficiency Percentage on a long-term basis. However, no assurance can be
given that factors outside MCV's control will not cause the Facility to fail to
satisfy the annual PURPA qualification requirements and thus lose its QF status.
In 1998, MCV achieved an Efficiency Percentage of 45.7% and a Thermal Percentage
of 17.3%.
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
Risks of MCV's Year 2000 Issues. MCV utilizes information technologies and
non-information technologies (collectively "Systems") in the Facility, some of
which may be affected by the year 2000 ("Y2K") date change. If uncorrected, the
Y2K date change could cause, among other things, MCV to incur failures and
outages of the Facility's generating equipment, the equipment operating systems
and business systems. In particular, if MCV's critical systems, i.e., GTGs,
steam turbines and the control system, are adversely affected, these negative
conditions could result in a failure to keep the GTGs running and inhibit MCV's
ability to produce electricity and steam.
Because of the integrated nature of MCV's business with third party suppliers,
customers and other vendors (collectively "associates") MCV may also be affected
by Y2K compliance complications of these associates. MCV's key associates
include vendors supplying MCV's plant control system, natural gas vendors,
Consumers as a transmission provider and certain financial institutions. Y2K
compliance complications of these associates could adversely impact MCV's
ability to transmit power and cause difficulties in obtaining natural gas to
fuel the Facility, among other things.
MCV expects that all new equipment software and hardware installations or other
modifications to its Systems will be completed prior to 2000. However, there can
be no guarantee that costs, plans or time estimates will be achieved, and
30
<PAGE> 33
adverse implications of Y2K non-compliance will not occur. Specific factors that
may cause such adverse results include, but are not limited to, the availability
of personnel trained in this area, the ability to locate and correct all
relevant computer code and the Y2K readiness of MCV's associates.
State of Readiness. In 1997, MCV staff developed a Y2K plan to address the
Systems. The MCV's Y2K plan addresses the Y2K issues in four phases: (1) the
awareness phase, completed in April 1998, brought the Y2K issues to the
attention of all employees; (2) the assessment phase, completed in September
1998, which identified, inventoried and prioritized all Systems; (3) the
renovation phase, expected to be completed by the end of August 1999, which
consists of converting and replacing Systems or components and applications in
Systems which are business critical and non Y2K compliant. Currently, MCV is
concentrating on configuration of new equipment and software supporting the
plant control system, GTG vibration monitoring replacements and natural gas
metering and regulating equipment; and (4) the validation and testing phase,
scheduled to be completed by October 1999, which is being done simultaneously
with the renovation phase.
MCV's work to date indicates that the GTGs appear to have no Y2K problems and
could be operated in a manual mode, if necessary. The main steam turbines also
appear to have no Y2K problems. Testing results to date on the plant control
system have been positive, but validation is incomplete at this time.
In late 1997, MCV began contacting key associates to determine their
organizations' Y2K state of preparedness and is continuing to follow up based on
each entity's Y2K target completion dates.
Contingency Plans. MCV is currently in the process of developing contingency
plans and procedures which include alternative operating plans for the most
reasonably likely worst-case scenarios, including associates in such plans where
appropriate. These plans and procedures will outline alternate methods of
operations (manual or otherwise) and all resources required, including staffing
needs where necessary. These contingency plans and procedures are targeted for
completion in the second quarter of 1999.
Costs. Anticipated spending to make the Systems Y2K compliant will be expensed
as incurred, except costs for new software which will be capitalized and
amortized over the software's useful life. At this time, MCV estimates the
aggregate expenditures for Y2K compliance and new software to be $300,000. This
estimate does not include any estimated costs that may be incurred by MCV as a
result of the failure of any associate to become Y2K compliant or costs to
implement any contingency plans.
See Part II, Item 8, "Financial Statements and Supplementary Data -- Notes 1 and
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-21 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."
Management Committee
William T. McCormick, Jr. (54) Management Committee Chairman
David A. Arledge (54) Management Committee Member
Joseph L. Roberts, Jr. (44) Management Committee Member
Executive Officers
James M. Kevra (50) President and Chief Executive Officer
Bruce C. Grant (52) Vice President of Human Resources,
Communications and Public Affairs
James A. Mooney (59) Vice President of Engineering,
Operations and Construction
Gary B. Pasek (43) Vice President, General Counsel and
Secretary
James M. Rajewski (51) Vice President and Controller
Stephen A. Shulman (42) Chief Financial Officer and Treasurer
LeRoy W. Smith (57) Vice President of Energy Supply and
Marketing
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
Joseph L. Roberts, Jr. has served as a member of the Management Committee since
May 1997. Mr. Roberts is President and Chief Executive Officer of MCNIC Power
Company since July 1998 and a member of the Board of Directors of MCN Investment
Corporation since August 1997. Prior to becoming President and Chief Executive
Officer, Mr. Roberts was President of MCNIC Pipeline & Processing Company since
August 1997 and Vice President of MCNIC Power Company, a position he held since
1993. From 1993 through 1997 Mr. Roberts was also Vice President of MCNIC
Pipeline & Processing Company. MCN Investment Corporation, MCNIC Power Company
and MCNIC Pipeline & Processing are subsidiaries of MCN Energy Group, Inc.
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., 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.
James M. Rajewski has served as Vice President and Controller of MCV since
January 1988.
Stephen A. Shulman has served as Chief Financial Officer and Treasurer since
February 1999. From February 1994 to January 1999, he served as Vice President
of Finance and Treasurer.
LeRoy W. Smith has served as Vice President of Energy Supply and Marketing since
October 1998. From July 1988 to September 1998, he served as Vice President of
Gas Supply.
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, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation
----------------------------------------------------------------
Name and All Other
Principal Position Year Salary ($) Bonus ($)(a) Compensation($)
- ------------------------------ ---- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
James M. Kevra 1998 226,008 225,000 46,519(b)
President and 1997 221,750 127,302 45,942
Chief Executive Officer 1996 200,535 112,300 40,270
James A. Mooney 1998 176,900 122,559 38,279(c)
Vice President of 1997 169,139 63,639 37,126
Engineering, Operations 1996 163,247 57,991 35,637
and Construction
LeRoy W. Smith 1998 152,335 103,173 25,321(d)
Vice President of Energy 1997 145,505 59,813 24,306
Supply and Marketing 1996 140,425 57,525 23,551
Gary B. Pasek 1998 152,169 106,287 22,794(e)
Vice President, 1997 142,380 51,195 21,329
General Counsel & Secretary 1996 134,403 49,347 20,135
Stephen A. Shulman 1998 137,100 95,116 20,538(f)
Chief Financial Officer 1997 129,932 46,303 19,465
and Treasurer 1996 122,382 42,439 18,335
</TABLE>
- ------------------------------
(a) Represents bonuses accrued under the Senior Management Incentive Plan.
(b) Includes company contributions of $8,000 to the 401(k) Savings Plan,
$12,000 to the Defined Contribution Retirement Plan, $12,769 to the
Supplement Retirement Plan and $13,750 to the Excess Benefit Plan.
(c) Includes company contributions of $8,000 to the 401(k) Savings Plan,
$12,000 to the Defined Contribution Retirement Plan, $11,914 to the
Supplemental Retirement Plan and $6,365 to the Excess Benefit Plan.
(d) Includes company contributions of $7,571 to the 401(k) Savings Plan,
$12,429 to the Defined Contribution Retirement Plan, $2,608 to the
Supplemental Retirement Plan and $2,713 to the Excess Benefit Plan.
(e) Includes company contributions of $7,598 to the 401(k) Savings Plan,
$12,402 to the Defined Contribution Retirement Plan and $2,794 to the
Excess Benefit Plan.
(f) Includes company contributions of $6,846 to the 401(k) Savings Plan,
$13,154 to the Defined Contribution Retirement Plan and $538 to the Excess
Benefit Plan.
34
<PAGE> 37
1998 Long-Term Incentive Plan Table
-----------------------------------
<TABLE>
<CAPTION>
Performance or Other Periods Estimated Future Payout Under
Name Until Maturation or Payout (a) Non-Stock Price Based Plan
- ------------------------------- ------------------------------- -----------------------------
Maximum($)
<S> <C> <C>
James M. Kevra 3-5 years 73,000
James A. Mooney 3-5 years 57,500
Gary B. Pasek 3-5 years 49,800
LeRoy W. Smith 3-5 years 49,500
Stephen A. Shulman 3-5 years 44,800
</TABLE>
(a) In 1998, MCV established a new long-term incentive plan under which
officers and certain management personnel could receive cash payouts based
on achieving certain targeted cashflows on a projected basis, thus enabling
cash distributions to be made to the Partners for their annual federal tax
obligations pursuant to provisions in the Participation Agreement. If, in
any of the years 2000 through 2002, MCV is able to make a cash distribution
to its Partners greater than 75% of the Partners' estimated tax obligation,
each participant in the plan could receive a payout equal to a range of
1%-30% of their base salary depending on the specific amount of cash
distributed to the Partners and the year that such distribution occurs.
Where the cash distribution to the Partners is 75% or less of the estimated
tax obligation for each of these three years, no cash payout to
participants will occur under this plan.
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 1998, Coastal affiliates engaged in
transactions with MCV which included the sale of natural gas, sale of natural
gas transportation, various natural gas marketing services and the purchase of
electricity that amounted in aggregate to approximately $36.3 million. A similar
level of transactions is expected to occur in 1999. In addition, as of December
31, 1998, Coastal had an outstanding cash withdrawal from the Partnership in the
amount of $16.2 million (including accrued interest) in exchange for a letter of
credit, pursuant to the Participation Agreement.
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 1998, Consumers purchased electric
capacity and related energy from the Facility that aggregated approximately
$583.7 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 1998, 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
35
<PAGE> 38
storage and the purchase of natural gas that amounted in aggregate to
approximately $23.8 million. A similar level of transactions is expected to
occur in 1999.
Mr. Roberts is a member of the Compensation Committee of MCV, as well as
President and Chief Executive Officer of MCNIC Power Company and a member of the
Board of Directors of MCN Investment Corporation. 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 1998, 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 $20.2
million. A similar level of transactions is expected to occur in 1999. In
addition, as of December 31, 1998, MCN Energy Group Inc. had an outstanding cash
withdrawal from the Partnership in the amount of $18.3 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."
36
<PAGE> 39
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 of
Name and Address of Beneficial Owner Title of Class of Voting Rights Partnership Interest
- --------------------------------------------- ---------------------------- -------------------- -----------------------
<S> <C> <C> <C>
CMS Midland, Inc. General Partnership Interest 49.0% 49.0%
212 West Michigan Avenue
Jackson, MI 49201
Source Midland Limited Partnership General Partnership Interest 24.2% 18.1%
500 Griswold Street
Detroit, MI 48226
Coastal Midland, Inc. General Partnership Interest 14.6% 10.9%
Coastal Tower
Nine Greenway Plaza
Houston, TX 77046
MEI Limited Partnership (b) General Partnership Interest 12.2% 9.1%
Source Midland Limited Partnership and Limited Partnership Interest -- 0.9%
Coastal Midland, Inc. each own a 50%
interest in both the General and Limited
partnership interests of MEI Limited
Partnership, see previous addresses listed
for these companies
The Dow Chemical Company Limited Partnership Interest -- 7.5%
2030 Dow Center
Midland, MI 48674
Micogen Limited Partnership (c) Limited Partnership Interest -- 4.5%
Coastal Tower
Nine Greenway Plaza
Houston, TX 77046
Alanna Corporation Limited Partnership Interest -- 0.00001%
c/o MCV Limited Partnership
100 Progress Place
Midland, MI 48640
-------------------- -----------------------
100.0% 100.0%
</TABLE>
37
<PAGE> 40
- --------------------
(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 June 16, 1998, Coastal Midland, Inc. ("Coastal Midland") and Source
Midland Limited Partnership ("Source Midland") each acquired a 50% interest
in MEI Limited Partnership ("MEI") from Asea Brown Boveri, Inc., the
previous parent company. In addition, C-E Midland Energy, Inc., a previous
limited partner, was acquired by MEI just prior to the acquisition of MEI
by Coastal Midland and Source Midland.
(c) On April 30, 1998, Coastal Midland and an affiliate of the Coastal
Corporation acquired all of the partnership interests in Micogen Limited
Partnership from Fluor Corporation, the previous parent company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Part III, Item 11, "Executive Compensation -- Compensation Committee
Interlocks and Insider Partnerships."
38
<PAGE> 41
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, 1998 and 1997 or for each of the three years ended December 31,
1998, 1997 and 1996.
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 1998.
39
<PAGE> 42
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, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Partners' Equity for the Years
Ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 43
ARTHUR ANDERSEN LLP
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, 1998 and 1997, and the related
consolidated statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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,
1998 and 1997, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, 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 29, 1999.
F-2
<PAGE> 44
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
(In Thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 193,116 $ 222,365
Restricted cash and cash equivalents (Notes 2 and 4) 8,913 12,161
Accounts and notes receivable (Notes 6 and 10) 104,315 93,674
Gas inventory (Notes 2 and 6) 15,144 12,910
Unamortized property taxes (Note 3) 15,742 16,097
Prepaid expenses and other 4,031 4,578
----------- -----------
Total current assets 341,261 361,785
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Notes 2 and 6):
Property, plant and equipment 2,392,829 2,439,651
Pipeline 21,222 21,222
----------- -----------
Total property, plant and equipment 2,414,051 2,460,873
Accumulated depreciation (640,659) (640,170)
----------- -----------
Net property, plant and equipment 1,773,392 1,820,703
----------- -----------
OTHER ASSETS:
Restricted investment securities held-to-maturity (Notes 2 and 4) 143,444 138,898
Deferred financing costs, net of accumulated amortization of $10,416 and $9,358,
respectively (Notes 2 and 6) 8,161 9,219
Prepaid gas costs, materials and supplies (Note 2) 20,248 20,666
----------- -----------
Total other assets 171,853 168,783
----------- -----------
TOTAL ASSETS $ 2,286,506 $ 2,351,271
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Notes 5 and 10) $ 60,718 $ 58,942
Interest payable (Note 6) 78,959 85,183
Current portion of long-term debt (Note 6) 64,331 140,950
----------- -----------
Total current liabilities 204,008 285,075
----------- -----------
NON-CURRENT LIABILITIES:
Long-term debt (Note 6) 1,723,960 1,788,291
Other 990 684
----------- -----------
Total non-current liabilities 1,724,950 1,788,975
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 6, 7 and 8)
TOTAL LIABILITIES 1,928,958 2,074,050
----------- -----------
PARTNERS' EQUITY (Note 10) 357,548 277,221
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,286,506 $ 2,351,271
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 45
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES (Notes 2, 7, 8 and 10):
Capacity $ 407,518 $ 405,488 $ 396,244
Electric 192,258 218,219 220,803
Steam and other 27,278 27,874 28,121
--------- --------- ---------
Total operating revenues 627,054 651,581 645,168
--------- --------- ---------
OPERATING EXPENSES:
Fuel costs 244,670 266,417 250,511
Depreciation 97,239 104,755 104,189
Operations 14,880 16,080 15,585
Maintenance 12,596 13,403 13,885
Property and single business taxes 25,687 26,044 25,947
Administrative, selling and general 9,521 8,383 7,168
--------- --------- ---------
Total operating expenses 404,593 435,082 417,285
--------- --------- ---------
OPERATING INCOME 222,461 216,499 227,883
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 21,092 19,645 18,420
Interest expense (163,226) (173,940) (180,779)
--------- --------- ---------
Total other income (expense), net (142,134) (154,295) (162,359)
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 80,327 62,204 65,524
Cumulative effect on prior years (to December 31, 1996) of change in
method of accounting for property taxes (Note 3) -- 15,533 --
--------- --------- ---------
NET INCOME $ 80,327 $ 77,737 $ 65,524
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 46
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, 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
Net income 69,935 10,392 80,327
-------- -------- --------
BALANCE, DECEMBER 31, 1998 $299,927 $ 57,621 $357,548
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 47
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 80,327 $ 77,737 $ 65,524
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 98,297 105,882 105,361
Cumulative effect of change in accounting principle -- (15,533) --
Increase in accounts and notes receivable (10,641) (19,863) (9,790)
(Increase) decrease in gas inventory (2,234) 629 857
(Increase) decrease in unamortized property taxes 355 (564) --
(Increase) decrease in prepaid expenses and other 547 (500) (3,025)
(Increase) decrease in prepaid gas costs, materials and supplies 418 (14,816) (1,110)
Increase (decrease) in accounts payable, accrued and other liabilities 1,776 (8,597) 13,149
Decrease in interest payable (6,224) (3,469) (3,188)
Increase in other non-current liabilities 306 229 120
--------- --------- ---------
Net cash provided by operating activities 162,927 121,135 167,898
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant and equipment (49,928) (36,186) (45,919)
--------- --------- ---------
Net cash used in investing activities (49,928) (36,186) (45,919)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (140,950) (78,574) (72,190)
Purchase of restricted investment securities held-to-maturity (414,541) (138,898) --
Maturity of restricted investment securities held-to-maturity 409,995 -- --
(Increase) decrease in restricted non-current cash and cash equivalents -- 143,049 (3,197)
--------- --------- ---------
Net cash used in financing activities (145,496) (74,423) (75,387)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT (32,497) 10,526 46,592
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT BEGINNING OF PERIOD 234,526 224,000 177,408
--------- --------- ---------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT END OF PERIOD $ 202,029 $ 234,526 $ 224,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 48
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 1992, MCV acquired the outstanding common stock of PVCO Corp., a
previously inactive company. MCV and PVCO Corp. entered into a partnership
agreement to form MCV Gas Acquisition General Partnership ("MCV GAGP") for
the purpose of buying and selling natural gas on the spot market and other
transactions involving natural gas activities. Currently, MCV GAGP is not
actively engaged in any business activity.
The Facility was originally designed to provide approximately 1370
megawatts ("MW") of electricity and approximately 1.5 million pounds of
process steam per hour. Subsequent improvements to the Facility have
increased the net electrical generating capacity. MCV has contracted to
supply up to 1240 MW of electric capacity ("Contract Capacity") to
Consumers Energy 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 1998, the Facility achieved a Thermal
Percentage of 17.3% 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, the Facility will meet the required Thermal and the
corresponding Efficiency Percentages in 1999. In addition, MCV currently
meets the ownership limitations of PURPA.
The Facility is wholly dependent upon natural gas for its fuel supply and a
substantial portion of the Facility's operating expenses consist of the
costs of natural gas. MCV recognizes that its existing gas contracts are
not sufficient to satisfy the anticipated gas needs over the term of the
PPA and, as such, no assurance can be given as to the availability or price
of natural gas after the expiration of the existing gas contracts.
Commencing in 1998, and each year thereafter, MCV must provide, at
Consumers request, continuing annual assurances of such capability for each
succeeding five-year period. If MCV is unable to provide these continuing
assurances, Consumers is entitled to withhold in a separate escrow fund a
portion of capacity charges until these assurances are provided. MCV
believes it can meet the requirement of continuing assurances. In addition,
to the extent that the costs associated with production of electricity rise
faster than the energy charge payments, MCV's financial performance will be
negatively affected. The amount of such impact will depend upon the amount
of the average energy charge payable under the PPA, which is based upon
costs incurred at Consumers' coal-fired plants and upon the amount of
energy scheduled by Consumers for delivery under the PPA. However, given
the unpredictability of these factors, the overall economic impact upon MCV
of changes in energy charges payable under the PPA and in future fuel costs
under new or existing contracts cannot accurately be predicted.
F-7
<PAGE> 49
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At both the state and federal level, efforts continue on restructuring the
electric industry. In 1997 and 1998, the Michigan Public Service Commission
("MPSC") entered a series of orders, now final at the MPSC level,
permitting customers to choose their power provider over a four-year
phase-in period which was to start 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 significantly impact
MCV are stranded assets or transition cost recovery by utilities for PPA
charges and contract (PPA) sanctity. To date, these restructuring efforts
have not negatively impacted MCV, but if the MPSC's Restructuring Orders
are construed so as to deny stranded cost recovery of above-market PPA
costs, and if such order is not reversed on appeal, MCV's cash flows may be
negatively impacted especially in the period after 2007. MCV, as well as
others, filed an appeal in the Michigan Court of Appeals and a complaint in
the U.S. District Court for the Western District of Michigan challenging
the restructuring orders. MCV continues to monitor and participate in these
matters, as appropriate and to evaluate potential impacts on both cash
flows and recoverability of the carrying value of property, plant and
equipment. MCV management cannot, at this time, predict the impact or
outcome of these matters.
(2) SIGNIFICANT ACCOUNTING POLICIES
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, 1998 and 1997, was $2.7 million and $1.9
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 each of the years 1998 and 1997 and $1.2 million was amortized
in 1996.
F-8
<PAGE> 50
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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. 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.
Effective January 1, 1998, MCV prospectively revised its useful lives of
the gas turbine generators ("GTGs") and certain related capital spares, to
more closely reflect the economic useful lives of these assets. These
assets are serviced and maintained by ABB Power Generation ("ABB Power")
under the amended service agreement, which will extend through the sixth
series of major GTG inspections, with expected coverage through 2008. The
effect of this change in accounting estimate resulted in a decrease to
operating expenses of approximately $9.0 million for the year ending
December 31, 1998.
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, 1998 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 was entered into between MCV and ABB Power
(the "amended Service Agreement"), 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-end 2008.
The payments due to ABB Power under this amended Service Agreement are
adjusted annually based on the ratio of the U.S. dollar to Swiss franc
currency exchange rate. MCV maintains a foreign currency hedging program to
be used only with respect to MCV payments subject to foreign currency
exposure under the amended Service Agreement.
To manage this currency exchange rate risk and hedge against adverse
currency fluctuations impacting the payments under this amended Service
Agreement, MCV enters into forward purchase contracts for Swiss francs. The
forward foreign currency exchange contracts qualify as hedges under
Statement of Financial Accounting Standards ("SFAS") No. 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, 1998 and December 29, 1997, MCV closed
out its forward purchase contracts involving Swiss francs in the notional
amount of $10.0 million in each of the two years, resulting in a deferred
$1.0 million and $.2 million gain, respectively, recorded in current
liabilities.
F-9
<PAGE> 51
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Natural Gas Options and Futures
To manage market risks associated with the volatility of natural gas
prices, MCV maintains a gas hedging program. MCV enters into natural gas
options and futures contracts in order to hedge against unfavorable changes
in the market price of natural gas in future months when gas is expected to
be needed. These financial instruments are being utilized only to secure
anticipated natural gas requirements necessary for projected electric sales
at a cost of gas less than that available under MCV's long-term natural gas
contracts and to hedge sales of natural gas previously obtained in order to
optimize MCV's existing gas supply, storage and transportation
arrangements. The natural gas futures contracts qualify as hedges under
SFAS No. 80, "Accounting for Futures Contracts," since the contracts cover
probable future transactions.
Cash is deposited with the broker in a margin account, at the time futures
or options contracts are initiated. The change in market value of these
contracts requires adjustment of the margin account balances. The margin
balance, recorded in prepaid expenses and other, was $.5 million and $1.6
million as of December 31, 1998 and December 31, 1997, respectively. MCV's
deferred gains and losses on futures and options contracts, recorded in
current liabilities, will be offset by the corresponding underlying
physical transaction and then included in operating expenses as part of
fuel cost in the same period the natural gas is burned to operate the
Facility. As of December 31, 1998, MCV had net open futures and options
contracts of 1.7 Bcf with a deferred gain of $.9 million. As of December
31, 1997, MCV had net open futures and options contracts of .3 Bcf with a
deferred loss of $.1 million. In addition, MCV recorded approximately $.2
million in net deferred gains on contracts closed prior to December 31,
1998, related to 1999 purchase commitments, and had approximately $.6
million in net deferred gains on contracts closed prior to December 31,
1997, related to 1998 purchase/sales commitments.
Interest Rate Swap Hedges
To manage the effects of interest rate volatility on interest income while
maximizing return on permitted investments, MCV established an interest
rate hedging program. The notional amounts of the hedges are tied directly
to MCV's anticipated cash investments, without physically exchanging the
underlying notional amounts. These agreements will maximize the yield on
MCV's investments and minimize the impact of fluctuating interest rates.
Cash may be deposited with the broker at the time the interest rate swap
transactions are initiated. The change in market value of these contracts
may require further adjustment of the margin account balance. The margin
balance recorded in prepaid expenses and other, was approximately $181,000
and $25,000, as of December 31, 1998 and December 31, 1997, respectively.
In December 1998 and December 1997, MCV entered into separate interest rate
swap hedges in the notional amount of $20 million each, with the periods of
performance from July 23, 1999 through January 23, 2000 and from April 1,
1998 through December 1, 2002, respectively. The difference between the
amounts received and paid under the interest rate swap transaction is
accrued and recorded as an adjustment to the interest income over the life
of the hedged agreement. As of December 31, 1998, MCV had a loss under the
December 1997 interest rate swap hedge of approximately $61,000.
New Accounting Standard
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." MCV adopted this standard effective
January 1, 1998. Since the MCV does not currently have activity classified
as other comprehensive income, the application of this standard does not
have any impact on MCV's financial position, results of operations and
financial statement disclosure.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting
and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at
its fair value. The statement requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges in
some cases allows a derivative's gains and losses to offset related results
on the hedged item in the income statement or permits recognition of the
hedge results in other comprehensive income. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. MCV expects to adopt the new
statement effective
F-10
<PAGE> 52
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
January 1, 2000. MCV is continuing to study the impact of SFAS No. 133,
however, MCV does not expect the application of this standard to materially
affect its financial position or results of operations.
Emerging Issues Task Force ("EITF") Issue 98-10 is effective for financial
statements issued for fiscal years beginning after December 15, 1998 and
requires derivatives contracts entered into under trading activities to be
marked to market with the gains and losses shown net in the income
statement. Derivative contracts that are designated as and effective as
hedges of nontrading activities would continue to be accounted for in
accordance with an entity's existing hedge accounting policy. Since MCV
does not engage in trading activities, the current accounting policy of MCV
for derivative contracts is unaffected by this EITF.
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.
(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: 1998 1997
- -------- -------- --------
<S> <C> <C>
Funds restricted for plant modifications $ 8,913 $ 12,161
======== ========
Non-current:
Funds restricted for rental payments pursuant
to the Overall Lease Transaction $142,453 $138,242
Funds restricted for management non-qualified
plans 991 656
-------- --------
Total $143,444 $138,898
======== ========
</TABLE>
F-11
<PAGE> 53
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Accounts payable
Related parties $17,231 $15,382
Trade creditors 27,457 28,531
Property and single business taxes 11,822 12,379
Other 4,208 2,650
------- -------
Total $60,718 $58,942
======= =======
</TABLE>
(6) LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<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 $ 1,788,291 $ 1,929,241
Less current portion (64,331) (140,950)
----------- -----------
Total long-term debt $ 1,723,960 $ 1,788,291
=========== ===========
</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 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 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
F-12
<PAGE> 54
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
Outstanding borrowings under this agreement are limited to 90% of earned
accounts receivable. At December 31, 1998, the borrowing base calculated
under this agreement was $45.2 million. During 1998, MCV did not utilize
the Working Capital Facility, except for letters of credit associated with
normal business practice. At December 31, 1998, 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 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, 1998, MCV has deposited $142.5 million
into the reserve account and $8.9 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.
Summary
Interest and fees incurred related to long-term debt arrangements during
1998, 1997 and 1996 were $162.1 million, $172.8 million and $179.6 million,
respectively.
Interest and fees paid during 1998, 1997 and 1996 were $168.3 million,
$176.2 million and $182.8 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>
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
2003 103,109 110,866 213,975
----------- ----------- -----------
$ 647,535 $ 678,130 $ 1,325,665
=========== =========== ===========
</TABLE>
F-13
<PAGE> 55
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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 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 paid 36 quarterly payments,
pursuant to the agreement, of $3.8 million each. These installment payments
commenced in the first quarter of 1990 and continued through the fourth
quarter of 1998, notwithstanding performance of the Facility.
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 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 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, 1999. As of January 1, 1999,
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
1999 through 2003 are $112.5 million, $116.7 million, $118.4 million,
$129.1 million and $144.6 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
F-14
<PAGE> 56
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
reservation charges in 1998, 1997 and 1996, of $35.9 million, $34.4 million
and $36.5 million (excluding the Great Lakes Gas Transportation Refund of
$17.6 million), respectively. The estimated minimum reservation charges
required under these agreements for each of the years 1999 through 2003 are
$35.9 million, $35.9 million, $35.9 million, $35.5 million and $35.3
million, respectively. These projections are based on current commitments.
Gas Turbine Service Agreement
MCV 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 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 $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 $98.7 million under this amended Service Agreement
through December 31, 1998.
In addition to the January 1998 amendment to the term of the amended
Service Agreement, MCV has 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. Five upgrade packages were installed during
1998, with the remaining six expected to be completed by the end of 1999.
Maintenance and spare parts for the upgrade packages are covered by the
amended Service Agreement. As part of this amended Service Agreement, MCV
agreed to purchase a spare GTG rotor to facilitate maintenance activities
and improve reliability.
Steam Turbine Service Agreement
MCV 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.
F-15
<PAGE> 57
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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 Allocation
In February 1995, the MPSC in Case No. U-10155-R (the power supply cost
recovery ("PSCR") reconciliation proceeding for 1993, "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. 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 in accordance with
the MPSC order which was upheld by the Michigan Court of Appeals. In
addition, Consumers requested a refund from MCV of $1.9 million plus
interest, for the calendar years 1993 and 1994 and the first nine
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 became final in January
1998. Based on this decision, Consumers notified MCV that it would
continue withholding the fixed energy charges on the Jurisdictional
Issue (currently averaging approximately $39,000 per month in 1998).
MCV released 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
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 through 1997 Reconciliation and/or 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"). MCV and Consumers unsuccessfully
appealed the MPSC order for 1993 and that case is final. The 1994
Reconciliation Case is currently on appeal to the Michigan Supreme
Court. 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.
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. In November 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 Case. In the 1996 PSCR Plan Case, 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.
F-16
<PAGE> 58
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $2.5 million for the year 1998 and $2.8 million for
the year 1997, for energy delivered above the off-peak cap, 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.
MCV Management cannot predict the outcome of either the 325 MW
Settlement Order proceeding, the 1996 PSCR Plan Case, subsequent PSCR
proceedings, or appeals, if any.
PPA - 1998 PSCR Rate Freeze
On January 14, 1998, the MPSC issued a ruling suspending Consumers
annual PSCR Plan and Reconciliation Cases and set a PSCR "rate freeze"
effective January 1, 1998. This PSCR rate freeze is subject to a final
adjustment in Consumers' 1997 PSCR Reconciliation Case, which is in
progress. This case will determine the level at which Consumers' PSCR
rates will be frozen during the period 1998 through 2001. Beginning
with the payment of the March 1998 invoice, Consumers began paying MCV
fixed energy payments based upon MCV's availability up to 915 MW and on
deliveries above 915 MW, rather than the higher level established in
the PSCR rate freeze. MCV disputes Consumer's contention that
availability based payments occur only up to 915 MW and is continuing
to discuss this issue with Consumers. MCV has recognized the fixed
energy payment based on availability up to the caps in the 915 MW
Settlement Order and on deliveries above 915 MW as operating revenues.
At this time, MCV Management cannot predict the outcome of this issue.
PPA - Other Issues
In 1997, Consumers informed MCV of several other potential payment
issues it may pursue, pursuant to the "regulatory out" and other
provisions 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). Consumers has estimated that the
financial impact of these issues for 1996 would decrease MCV's
operating revenues by an estimated $2.5 million. In addition, Consumers
notified MCV that it does not believe that MCV can use the
approximately 15 MW of generating capacity and energy attributable to
the back pressure turbine, which was placed into service in July 1997,
towards available Contract Capacity or electric deliveries under the
PPA. Consumers has also indicated that they may take a similar position
on the incremental energy and capacity resulting from MCV's
installation of 11NM upgrade packages on the GTGs. MCV has recognized
amounts related to the above issues as operating revenues, except for
revenues associated with the band width (currently averaging
approximately $7,000 per month in 1998). MCV and Consumers have
continued to negotiate a settlement of the above issues. At this time,
MCV Management cannot predict the outcome of these negotiations or
issues.
PPA - Sale or Assignment
In October 1998, Consumers initiated a process for the solicitation of
bids to acquire Consumers' rights to the 1240 MW of Contract Capacity
and associated energy under the PPA. On March 10, 1999, Consumers
announced that it signed a contract with PECO Energy Company ("PECO")
whereby Consumers will sell 1240 MW of capacity and associated energy
to PECO from the MCV PPA beginning January 1, 2002 and ending in
September 2007. In addition, the announcement states Consumers will
sell PECO between 100 MW to 150 MW in 1999 through 2001. The
announcement also states the contract with PECO is subject to
satisfactory regulatory approvals. On March 19, 1999, Consumers filed
an application with the MPSC seeking regulatory approval of various
ratemaking and accounting treatments associated with the PECO
contract. The PPA prohibits a party from transferring or otherwise
alienating the agreement without the prior written consent of the other
party, which consent shall not be unreasonably withheld. At this time,
MCV Management is currently evaluating this proposed sale, however, it
cannot predict the outcome or potential impacts of this issue.
F-17
<PAGE> 59
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(9) RETIREMENT BENEFITS
Postretirement Health Care Plans
In accordance with SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," which was issued in 1998 by the FASB, this
standard requires expanded disclosures which are effective for 1998 and
have been reflected below.
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.
The following table reconciles the change in the plans' benefit obligation
and change in plan assets as reflected on the balance sheet as of December
31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 1,413.1 $ 1,089.1
Service cost 200.9 146.8
Interest cost 119.5 92.7
Actuarial gain (51.5) 84.5
----------- -----------
Benefit obligation at end of year 1,682.0 1,413.1
----------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 1,400.0 1,140.6
Actual return on plan assets 148.0 140.0
Employer contribution 176.1 119.4
----------- -----------
Fair value of plan assets at end of year 1,724.1 1,400.0
----------- -----------
Unfunded (funded) status (42.1) 13.1
Unrecognized net gain 252.9 176.6
----------- -----------
Accrued (prepaid) benefit cost $ 210.8 $ 189.7
=========== ===========
</TABLE>
Net periodic postretirement health care cost for years ending December 31,
included the following components (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 200.9 $ 146.8 $ 136.6
Interest cost 119.5 92.7 76.0
Expected return on plan assets (119.0) (97.0) (73.5)
Amortization of unrecognized net (gain) or loss (4.2) (6.8) (10.0)
Amortization of unrecognized transition
(asset)/obligation -- -- 77.2
---------- ---------- ----------
Net periodic benefit cost $ 197.2 $ 135.7 $ 206.3
========== ========== ==========
</TABLE>
F-18
<PAGE> 60
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage-Point 1-Percentage
Increase Point Decrease
------------------ --------------
<S> <C> <C>
Effect on total of service and interest cost components $ 46.0 $ (39.1)
Effect on postretirement benefit obligation $ 181.7 $ (157.3)
</TABLE>
Assumptions used in accounting for the Post-Retirement Health Care Plan
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Discount rate 6.75% 7.00% 7.50%
Long-term rate of return on plan assets 8.50% 8.50% 8.50%
Inflation benefit amount
1996 through 2001 0.00% 0.00% 0.00%
2002 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 1998, 1997, and 1996, MCV
contributed $1.0 million, $1.0 million and $.9 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-19
<PAGE> 61
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, 1998, and the nature and amount of related party
transactions or agreements that existed with the Partners or affiliates
as of December 31, 1998 and 1997, and for each of the twelve month
periods ended December 31, (in thousands).
<TABLE>
<CAPTION>
Equity Partner, Type of Partner and Equity
Nature of Related Party Interest Interest Related Party Transactions and Agreements 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CMS Midland, Inc. $175,198 49.0% Power purchase agreements $583,662 $608,640 $598,127
General Partner; wholly-owned Purchases under gas transportation
subsidiary of Consumers Energy agreements 9,678 9,713 9,507
Company (formerly Consumers Purchases under spot gas agreements 520 6,490 2,352
Power Company) Purchases under gas supply agreements 9,855 9,543 10,121
Gas storage agreement 2,563 2,563 2,563
Land lease/easement agreements 600 600 600
Accounts receivable 48,652 53,513 52,048
Accounts payable 13,682 9,276 5,469
Gas exchanges 1,148 1,674 3,444
The Dow Chemical Company 39,803 7.5 Steam and electric power agreement 42,141 42,937 47,041
Limited Partner Steam purchase agreement - Dow Corning
Corp (affiliate) 3,256 3,167 1,239
Purchases under demineralized water
supply agreement 6,280 7,336 6,292
Accounts receivable 2,246 1,896 2,247
Accounts payable 580 678 1,427
Standby and backup fees 743 792 1,156
Source Midland Limited Partnership 59,394 18.1 SMLP - Under Ownership of MCNIC Power Co
("SMLP") General Partner; wholly- Purchases under spot gas agreements 6,810 578 --
owned limited partnership of MCN Purchases under gas supply agreements 13,230 8,364 --
Energy Group Inc. (1) Accounts receivable -- 1,125 --
Accounts payable 1,178 588 --
Partner cash withdrawal (incl. accrued
interest) (2) 18,341 11,922 --
Gas exchanges 169 1,845 --
SMLP - Under Ownership of Pan Energy Corp
Purchases under gas transportation
agreements -- 4,648 15,393
Purchases under spot gas agreements -- 911 3,313
Gas Exchanges -- 50 2,082
Accounts Payable -- -- 1,272
Coastal Midland, Inc. ("Coastal 35,637 10.9 Purchases under gas transportation
Midland") agreements (7) 13,547 13,593 (3,296)
General Partner; wholly-owned Purchases under spot gas agreement 10,382 9,920 13,986
subsidiary of The Coastal Purchases under gas supply agreement 4,339 4,188 4,018
Corporation Gas agency agreement 1,604 1,497 1,314
Deferred reservation charges under gas
purchase agreement 4,925 3,940 2,955
Accounts receivable 16 2,271 --
Accounts payable 1,791 4,569 2,257
Gas exchanges 5,253 5,486 4,494
Partner cash withdrawal (incl. accrued
interest) (2) 16,157 7,343 --
Electric power purchase agreement 216 -- --
MEI Limited Partnership ("MEI") (3) MEI - Under Ownership of Coastal and SMLP
A General and Limited Partner; See related party activity listed under
50% interest owned by Coastal Coastal Midland, Inc.
Midland, Inc. and 50% interest and Source Midland Limited Partnership
owned by SMLP
MEI - Under Ownership of ASEA Brown
Boveri, Inc.
General Partnership Interest 29,698 9.1 Gas turbine maint. and spare parts
agreement 23,377 29,900 30,623
Limited Partnership Interest 2,969 .9 Accounts payable -- 88 1,043
Partner cash withdrawal (including
accrued interest) (2) -- -- 4,284
</TABLE>
F-20
<PAGE> 62
<TABLE>
<CAPTION>
Equity Partner, Type of Partner and Equity
Nature of Related Party Interest Interest Related Party Transactions and Agreements 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Micogen Limited Partnership 14,848 4.5 MLP - Under Ownership of The Coastal
("MLP") Limited Partner; owned Corporation
by subsidiaries of The Coastal See related party activity listed under
Corporation (4) Coastal Midland Inc.
MLP - Under Ownership of Fluor Corporation
Partner cash withdrawal (including -- 3,142 1,925
accrued interest) (2)
C-E Midland Energy, Inc. ("C-E") (5) -- -- C-E - Under Ownership of ASEA Brown
Interest in MCV acquired by MEI Boveri, Inc.
Limited Partnership Service Agreement 1,252 2,195 5,983
Alanna Corporation 1 (6) .00001 Note receivable 1 1 1
Limited Partner; wholly-owned
subsidiary of Alanna Holdings
Corporation
</TABLE>
Footnotes to Partners' Equity and Related Party Transactions
(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, 1998 and for the twelve month period ended December 31,
1998; and 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 for the
twelve month period ended December 31, 1996, and as of December 31, 1996.
(2) Letters of credit have been issued and recorded as notes receivables from
various equity partners, pursuant to the Participation Agreement. In the
case of SMLP, the amount includes their share of the cash available to MEI
Limited Partnership ("MEI"). In the case of Coastal Midland, Inc. ("Coastal
Midland"), the amount includes their share of cash available of MEI and
Micogen Limited Partnership ("MLP").
(3) On June 16, 1998, Coastal Midland and SMLP, each acquired a 50% interest in
MEI. All MEI related party activity under the ownership of Coastal Midland
and SMLP is shown under the equity partners, Coastal Midland and SMLP. All
MEI related party activity under the ownership of ASEA Brown Boveri, Inc.
is for the period January 1, 1998 to June 16, 1998, and as of December 31,
1997 and 1996 and for the twelve month periods ended December 31, 1997 and
1996.
(4) On April 30, 1998 Coastal and an affiliate of The Coastal Corporation
acquired all of the partnership interests in MLP from Fluor Corporation
("Fluor"). All MLP related party activity under the ownership of The
Coastal Corporation is shown under the equity partner, Coastal Midland,
which is also wholly-owned by The Coastal Corporation.
(5) C-E Midland Energy, Inc.'s ("C-E") limited partnership interest was
acquired by MEI, which was subsequently acquired by Coastal and SMLP. All
C-E related party activity under the ownership of ASEA Brown Boveri, Inc.
is for the period January 1, 1998 to June 16, 1998, and for the twelve
month periods ended December 31, 1997 and 1996.
(6) Alanna's capital stock is pledged to secure MCV's obligation under the
lease and other overall lease transaction documents.
(7) 1996 includes the Great Lakes gas transportation refund of $17.6 million.
F-21
<PAGE> 63
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> 64
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 25, 1999 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 25, 1999
- ------------------------------------ (Principal Executive Officer)
James M. Kevra
/s/ Stephen A. Shulman Chief Financial Officer and Treasurer March 25, 1999
- ------------------------------------ (Principal Financial Officer)
Stephen A. Shulman
/s/ James M. Rajewski Vice President and Controller March 25, 1999
- ------------------------------------ (Principal Accounting Officer)
James M. Rajewski
/s/ William T. McCormick, Jr. Chairman, Management Committee March 25, 1999
- ------------------------------------
William T. McCormick, Jr.
/s/ Joseph L. Roberts, Jr. Member, Management Committee March 25, 1999
- ------------------------------------
Joseph L. Roberts, Jr.
/s/ David A. Arledge Member, Management Committee March 25, 1999
- ------------------------------------
David A. Arledge
</TABLE>
S-2
<PAGE> 65
EXHIBIT INDEX
Exhibit
Number Description
- ------- ----------------------------------------------------------------
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 0Corporation'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. (284)(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)).
E-1
<PAGE> 66
EXHIBIT INDEX
Exhibit
Number Description
- ------- ----------------------------------------------------------------
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)).
E-2
<PAGE> 67
EXHIBIT INDEX
Exhibit
Number Description
- ------- ----------------------------------------------------------------
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)).
E-3
<PAGE> 68
Exhibit
Number Description
- ------- ----------------------------------------------------------------
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
((h), (Exhibit 10.19(c))).
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)).
E-4
<PAGE> 69
EXHIBIT INDEX
Exhibit
Number Description
- ------- ----------------------------------------------------------------
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 ((h),
(Exhibit 10.33)).
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 (*).
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)), (*).
10.45 - MCV Excess - Benefit Plan dated July 1, 1989 ((d), (Exhibit
10.89)), (*).
E-5
<PAGE> 70
EXHIBIT INDEX
Exhibit
Number Description
- ------- ----------------------------------------------------------------
10.46 - MCV Long-Term Incentive Plan. (*)
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 1998.
99.01 - Unaudited - MCV Selected Proforma Operating Cash Flow Data for
the years ended 1998 and 1997.
--------------------
(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.
(h) Incorporated by reference to MCV's Annual Report on Form 10-K for the
year ended December 31, 1997 as the bracketed numbered exhibits.
(*) Exhibits represent Management Contracts and Compensatory Plans and
Arrangements.
E-6
<PAGE> 1
EXHIBIT 10.42
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
AMENDED SENIOR MANAGEMENT INCENTIVE PLAN
1. Purpose: The purpose of the Senior Management Incentive Plan is to:
- Provide an equitable and competitive level of compensation that
will permit the Midland Cogeneration Venture to attract, retain,
and motivate highly competent senior management employees.
- Provide a financial incentive for senior management employees to
achieve expected levels of Company and individual performance and
thereby assist in the achievement of MCV goals.
2. Eligibility: Senior management employees in salary grades 15 and above
are eligible for participation in the Plan. All participants will
receive a pro rata award equal to 1/12 of the amount they would
otherwise be entitled to for each full month of employment during the
performance year.
3. Administration: The Senior Management Incentive Plan will be
administered by the President and Chief Executive Officer of MCV and
the Vice President, Human Resources under the general direction of the
MCV Partnership.
4. Standard Award: The standard award for each senior management employee
will amount to a percentage of the midpoint of his or her salary grade
in the performance year. The percentage will vary by position level as
indicated below:
<TABLE>
<CAPTION>
Position Standard Award
-------- --------------
(as a percentage of midpoint)
<S> <C> <C>
Level 5 40%
Level 4 30%
Level 3 25%
Level 2 20%
Level 1 15%
</TABLE>
The position levels for an employee will be designated by the President
and Chief Executive Officer based on the individual's contribution to
the MCV goals, base salary, and other considerations. These position
levels may vary from award year to award year, as appropriate.
5. Final Award and Performance Factors: Each standard award is converted
to a final award based on the degree of achievement of both Company and
individual performance factors. Individual goals of each participant in
this plan are prepared and approved by the President and Chief
Executive Officer prior to (or shortly after) the start of a
performance year. At the end of the year, or shortly thereafter, each
plan participant prepares a written evaluation on their goals and their
immediate supervisor establishes an achievement factor on the written
evaluation of each participant.
The Company financial performance factor is determined by calculating
the ratio of MCV's actual net income for the performance year, divided
by the budgeted net income for the performance year. Where
<PAGE> 2
the ratio is less than .80, no final awards for any plan participant
will be made for that specific performance year.
The calculation of the final award for each participant will be
computed as follows: % individual goal achievement x net income factor
x standard award % x base salary.
6. Payment of Awards: One half of the total award will be paid in cash no
later than March 15 of the year following the performance year after
approval by the President and Chief Executive Officer of MCV and the
Midland Cogeneration Partnership. The amounts required by law to be
withheld for income tax and Social Security taxes will be deducted from
the award payments.
The second half of the total award will be made during the first week
of January, one full year after the performance year. This second
payment will be credited with sums in lieu of interest from the first
day of the month following the month in which the award was granted to
the date of payment. The "interest rate" will be equivalent to the
prime rate of interest set by Citibank, N.A. compounded quarterly as of
the first day of January, April, July, and October of each year during
the deferral period. The prime rate in effect on the first day of
January, April, July, and October shall be the prime rate in effect for
that quarterly period.
Those employees eligible to receive the deferred portion of the award
will be regular full-time employees of MCV still actively employed the
first normal business day of January one full year after each
performance year; those otherwise qualified employees on an approved
leave of absence on such date; and those of the qualified employees
whose employment terminated during or after the Performance Year due
to:
- Retirement with Retirement Income or Disability payments under
the Pension Plan;
- Layoff because of changes in Company operations; or
- Death of the employee.
An employee whose services are terminated for cause during the
Performance Year shall not be eligible for any deferred amounts. Any
employee who resigns to accept employment elsewhere shall also be
ineligible for payment of deferred awards.
If for any reason the Midland Cogeneration Venture Senior Management
Incentive Plan should terminate, all deferred awards shall be
immediately payable to eligible participants as defined above.
7. Change of Status During the Performance Year:
a. New Hire: A newly hired employee may be recommended for a pro
rata award based on the percentage of the Performance Year the
employee is in the position.
b. Demotion: No award will be made to an employee who has been
demoted during the Performance Year due to performance. If the
demotion is due to an organizational change, a pro rata award
will be made as stated above.
c. Termination: An employee whose services are terminated during
the Performance Year for reasons of misconduct, failure to
perform, or other performance-related reasons shall not be
considered for an award. If the termination is due to other
reasons such as reorganization and
<PAGE> 3
the termination is not due to a fault of the employee, the
employee may be considered for a pro rata award.
d. Resignation: An employee who resigns to accept employment
elsewhere (including self-employment) will not be considered
for an award. If the resignation is due to other reasons
(i.e., ill health in the immediate family), the employee may
be considered for a pro rata award.
e. Death, Disability, Retirement, and Leave of Absence: An
employee whose status as an active employee is changed during
the Performance Year for any of the reasons cited may be
considered for a pro rata award.
8. Impact on Benefit Plans: Payments made under the Plan will not be
considered as earnings for purposes of the Pension Plan, Savings Plan,
insurance plans, or any other employee benefit.
9. Termination or Amendment of the Plan: Midland Cogeneration Venture at
any time may in writing terminate or amend the Plan.
<PAGE> 1
EXHIBIT 10.46
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
LONG-TERM INCENTIVE PLAN
PURPOSE
The purpose of this plan is to attract, retain and reward certain key employees,
by providing a long-term compensation incentive plan which recognizes the
achievement by MCV Senior personnel of specific goals that are aligned with
Partner and Investor goals. The plan is initiated with one goal as detailed
below. Additional goals may be added as determined by the Organization and
Compensation Subcommittee.
INITIAL GOAL
The initial goal focuses on the achievement of paying the annual tax liability
payments to each Partner, as detailed in the debt agreement, by the year 2001.
Participants in the plan will be eligible for long-term incentive payments
according to the attached award schedule.
PLAN GUIDELINES
Participants are full time, managerial, professional or administrative personnel
who are recommended by the President/CEO and approved by the Organization and
Compensation Subcommittee. Awards will be calculated based on the participant's
annualized base salary as of the date of payment and will be subject to
applicable withholding. Such awards are excluded from the earnings base for
determining contributions to the 401(k) Employee Savings Plan, Defined
Contribution Retirement Plan, and determining Life Insurance coverage. See the
attached page for a list of initial participants.
If a participant's employment terminates due to retirement, total and permanent
disability, layoff due to changes in MCV operations, the participant (or their
estate) is eligible for a prorated award. Exceptions must be approved by the
Organization and Compensation Subcommittee.
At the discretion of the Organization and Compensation Subcommittee, this plan
can be amended or terminated at any time. Participants may receive a prorated
award at the date of termination.
EFFECTIVE DATE: JANUARY 1, 1998
<PAGE> 2
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
LONG-TERM INCENTIVE PLAN
TARGET ACHIEVEMENT
<TABLE>
<CAPTION>
2000 2001 2002
---------------------------------- --------------------------------- -----------------------------
Base Salary Base Salary Base Salary
Award Award Tax Award
Tax ----- Tax ----- --- -----
Payment Payment Payment
------- ------- -------
<C> <C> <C> <C> <C> <C>
100 30% 100 25% 100 18.75%
95 25% 95 20% 95 15.00%
90 20% 90 15% 90 11.25%
85 15% 85 10% 85 8.43%
80 10% 80 5% 80 6.32%
75 0% 75 0% 75 0.0%
</TABLE>
NOTE: Award is based on the participant's base salary as of the payout year.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
MIDLAND COGENERATION VENTURE FOR THE YEAR ENDED DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 202,029
<SECURITIES> 143,444
<RECEIVABLES> 104,315
<ALLOWANCES> 0
<INVENTORY> 15,144
<CURRENT-ASSETS> 341,261
<PP&E> 2,414,051
<DEPRECIATION> 640,659
<TOTAL-ASSETS> 2,286,506
<CURRENT-LIABILITIES> 204,008
<BONDS> 1,723,960
0
0
<COMMON> 0
<OTHER-SE> 357,548
<TOTAL-LIABILITY-AND-EQUITY> 2,286,506
<SALES> 0
<TOTAL-REVENUES> 627,054
<CGS> 0
<TOTAL-COSTS> 404,593
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163,226
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,327
<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 1998 AND 1997
(In Millions of Dollars) (Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenue
Power Purchase Agreement $587 $611
Steam and Electric Power Agreement 42 40
Other Revenue 2 4
Interest on Revenue Account 6 4
---- ----
Total Revenue 637 659
---- ----
Operating Expenses
Fuel, transportation, storage 248 285
Operations and maintenance 37 41
Property, other taxes 27 27
Other (b) 49 32
---- ----
Total Operating Expenses 361 385
---- ----
Net Operating Income $276 $274
==== ====
Lease Payments $264 $274
Coverage Ratios
Senior Interest 4.40 3.58
Senior Debt Service 1.96 1.36
Total Interest 2.23 1.99
Total Debt Service 1.37 1.04
</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 1998 reflects revenues
and expenses associated with 1998 activity, as well as the Lease rental
payments made on July 23, 1998, and January 22, 1999. In addition to the
revenues presented in this table, interest income on reserves totaled
$11.4 million in 1998 and $11.1 in 1997.
(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 1998 and 1997, approximately $5.8 million and $4.0 million,
respectively, in additional funds was reserved for future years
expenditures.
