<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number (Under the Securities Act of 1933) 33-37977
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2726166
- ------------------------------- --------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 PROGRESS PLACE, MIDLAND, MICHIGAN 48640
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 839-6000
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF
(In Thousands)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
ASSETS (Unaudited) 1998
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 175,786 $ 193,116
Restricted cash and cash equivalents 5,547 8,913
Accounts and notes receivable 93,786 104,315
Gas inventory 8,238 15,144
Unamortized property taxes 35,792 15,742
Prepaid expenses and other 7,511 4,031
----------- -----------
Total current assets 326,660 341,261
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 2,397,110 2,392,829
Pipeline 21,222 21,222
----------- -----------
Total property, plant and equipment 2,418,332 2,414,051
Accumulated depreciation (655,112) (640,659)
----------- -----------
Net property, plant and equipment 1,763,220 1,773,392
----------- -----------
OTHER ASSETS:
Restricted investment securities held-to-maturity 138,918 143,444
Deferred financing costs, net of accumulated amortization of
$10,669 and $10,416, respectively 7,908 8,161
Prepaid gas costs, materials and supplies 19,213 20,248
----------- -----------
Total other assets 166,039 171,853
----------- -----------
TOTAL ASSETS $ 2,255,919 $ 2,286,506
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 59,708 $ 60,718
Interest payable 38,762 78,959
Current portion of long-term debt 111,823 64,331
----------- -----------
Total current liabilities 210,293 204,008
----------- -----------
NON-CURRENT LIABILITIES:
Long-term debt 1,663,174 1,723,960
Other 1,081 990
----------- -----------
Total non-current liabilities 1,664,255 1,724,950
----------- -----------
CONTINGENCIES (Note 6)
TOTAL LIABILITIES 1,874,548 1,928,958
----------- -----------
PARTNERS' EQUITY 381,371 357,548
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,255,919 $ 2,286,506
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-1-
<PAGE> 3
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
OPERATING REVENUES:
Capacity $ 98,493 $ 100,338
Electric 55,394 52,371
Steam and other 4,236 7,269
--------- ---------
Total operating revenues 158,123 159,978
--------- ---------
OPERATING EXPENSES:
Fuel costs 59,795 65,613
Depreciation 23,607 26,604
Operations 3,712 4,039
Maintenance 3,280 2,772
Property and single business taxes 6,418 6,410
Administrative, selling and general 2,818 2,512
--------- ---------
Total operating expenses 99,630 107,950
--------- ---------
OPERATING INCOME 58,493 52,028
--------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 4,430 6,025
Interest expense (39,100) (41,409)
--------- ---------
Total other income (expense), net (34,670) (35,384)
--------- ---------
NET INCOME $ 23,823 $ 16,644
========= =========
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-2-
<PAGE> 4
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
----------------------------------------
General Limited
Partners Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $299,927 $ 57,621 $357,548
Net income 20,741 3,082 23,823
-------- -------- --------
BALANCE, END OF PERIOD $320,668 $ 60,703 $381,371
======== ======== ========
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-3-
<PAGE> 5
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,823 $ 16,644
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 23,860 26,872
Decrease in accounts receivable 10,529 3,813
Decrease in gas inventory 6,906 1,294
(Increase) in unamortized property taxes (20,050) (19,008)
(Increase) decrease in prepaid expenses and other (3,480) 314
Decrease (increase) in prepaid gas costs, materials and supplies 1,035 (548)
(Decrease) increase in accounts payable and accrued liabilities (1,010) 16,367
(Decrease) in interest payable (40,197) (44,182)
Increase in other non-current liabilities 91 109
--------- ---------
Net cash provided by operating activities 1,507 1,675
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant and equipment (13,435) (13,076)
--------- ---------
Net cash used in investing activities (13,435) (13,076)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (13,294) (51,722)
Maturity of restricted investment securities held-to-maturity 162,644 108,922
Purchase of restricted investment securities held-to-maturity (158,118) (107,984)
--------- ---------
Net cash used in financing activities (8,768) (50,784)
--------- ---------
NET DECEASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT (20,696) (62,185)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT BEGINNING
OF PERIOD 202,029 234,526
--------- ---------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT END OF
PERIOD $ 181,333 $ 172,341
========= =========
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-4-
<PAGE> 6
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements and condensed notes should be read along
with the audited financial statements and notes as contained in the Annual
Report on Form 10-K for the year ended December 31, 1998 of Midland Cogeneration
Venture Limited Partnership ("MCV") which includes the Report of Independent
Public Accountants. In the opinion of management, the unaudited information
herein reflects all adjustments (which include only normal recurring
adjustments) necessary to assure the fair presentation of financial position,
results of operations and cash flows for the periods presented. Prior period
amounts have been reclassified for comparative purposes. These reclassifications
had no effect on net income. The consolidated financial statements include the
accounts of MCV and its wholly-owned subsidiaries. All material transactions and
balances among entities which comprise MCV have been eliminated in the
consolidated financial statements.
(1) THE PARTNERSHIP AND ASSOCIATED RISKS
MCV was organized to construct, own and operate a combined-cycle, gas-fired
cogeneration facility (the "Facility") located in Midland, Michigan. MCV
was formed on January 27, 1987, and the Facility entered into commercial
operation in 1990.
In 1992, MCV acquired the outstanding common stock of PVCO Corp., a
previously inactive company. MCV and PVCO Corp. entered into a partnership
agreement to form MCV Gas Acquisition General Partnership ("MCV GAGP") for
the purpose of buying and selling natural gas on the spot market and other
transactions involving natural gas activities. Currently, MCV GAGP is not
actively engaged in any business activity.
The Facility was originally designed to provide approximately 1,370
megawatts ("MW") of electricity and approximately 1.5 million pounds of
process steam per hour. Subsequent improvements to the Facility have
increased net electrical generating capacity. MCV has contracted to supply
up to 1,240 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. For the three months ended March 31, 1999, the
Facility achieved a Thermal Percentage of 21.2% and a PURPA Efficiency
Percentage of 47.1%. The loss of QF status could, among other things, cause
the Facility to lose its rights under PURPA to sell power to Consumers at
Consumers' "avoided cost" and subject the Facility to additional federal
and state regulatory requirements. MCV believes that given projected levels
of steam and electricity sales, the Facility will meet the required Thermal
and the corresponding Efficiency Percentages in 1999. In addition, MCV
currently meets the ownership limitations of PURPA.
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<PAGE> 7
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Facility is wholly dependent upon natural gas for its fuel supply and a
substantial portion of the Facility's operating expenses consist of the
costs of natural gas. MCV recognizes that its existing gas contracts are
not sufficient to satisfy the anticipated gas needs over the term of the
PPA and, as such, no assurance can be given as to the availability or price
of natural gas after the expiration of the existing gas contracts.
Commencing in 1998, and each year thereafter, MCV must provide at Consumers
request, continuing annual assurances of such capability for each
succeeding five-year period. If MCV is unable to provide these continuing
assurances, Consumers is entitled to withhold in a separate escrow fund a
portion of capacity charges until these assurances are provided. MCV
believes it can meet the requirement of continuing assurances. In addition,
to the extent that the costs associated with production of electricity rise
faster than the energy charge payments, MCV's financial performance will be
negatively affected. The amount of such impact will depend upon the amount
of the average energy charge payable under the PPA, which is based upon
costs incurred at Consumers' coal-fired plants and upon the amount of
energy scheduled by Consumers for delivery under the PPA. However, given
the unpredictability of these factors, the overall economic impact upon MCV
of changes in energy charges payable under the PPA and in future fuel costs
under new or existing contracts cannot accurately be predicted.
At both the state and federal level, efforts continue on restructuring the
electric industry. In 1997, 1998 and 1999, 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
multiple-year phase-in period beginning September 1999, with complete open
access by January 1, 2002. Similar efforts, in the form of proposed
legislation, exist at the federal level. Two issues generally involved in
these restructuring efforts which could impact MCV the most are stranded
assets or transition cost recovery 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 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
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents and short-term investments
approximate fair value because of the short maturity of these instruments.
MCV's short-term investments, which are made up of investment securities
held-to-maturity, as of March 31, 1999 and December 31, 1998, have original
maturity dates of less than one year. The unique nature of the negotiated
financing obligation discussed in Note 5 makes it impractical to estimate
the fair value of the lessor group ("Owner Participants") underlying debt
and equity instruments supporting such financing obligation.
Forward Foreign Exchange Contracts
An amended service agreement was entered into between MCV and ABB Power
Generation ("ABB Power") (the "amended Service Agreement"), under which ABB
Power provides hot gas path parts for MCV's twelve gas turbines through the
sixth series of major gas turbine generator ("GTG") inspections, which are
expected to be completed by year-end 2008. The payments due to ABB Power
under this amended Service Agreement are adjusted annually based on the
ratio of the U.S. dollar to Swiss franc currency exchange rate. MCV
maintains a foreign currency hedging program to be used only with respect
to MCV payments subject to foreign currency exposure under the amended
Service Agreement.
To manage this currency exchange rate risk and hedge against adverse
currency fluctuations impacting the payments under this amended Service
Agreement, MCV enters into forward purchase contracts for Swiss francs.
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<PAGE> 8
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The forward foreign currency exchange contracts qualify as hedges under
Statement of Financial Accounting Standards ("SFAS") 52, "Foreign Currency
Translation," since they hedge the identifiable foreign currency commitment
of the amended Service Agreement. The gains and losses on these
transactions, accounted for as hedges, are deferred on the balance sheet
and included in the measurement of the underlying capitalized major renewal
costs when incurred. On December 29, 1998, MCV closed out its forward
purchase contracts involving Swiss francs in the notional amount of $10.0
million, resulting in a deferred $1.0 million gain recorded in current
liabilities. As of March 31, 1999, MCV has not entered into any new forward
purchase contracts.
Natural Gas Options and Futures
To manage market risks associated with the volatility of natural gas
prices, MCV maintains a gas hedging program. MCV enters into natural gas
options and futures contracts in order to hedge against unfavorable changes
in the market price of natural gas in future months when gas is expected to
be needed. These financial instruments are being utilized only to secure
anticipated natural gas requirements necessary for projected electric sales
at a cost of gas less than that available under MCV's long-term natural gas
contracts and to hedge sales of natural gas previously obtained in order to
optimize MCV's existing gas supply, storage and transportation
arrangements. The natural gas futures contracts qualify as hedges under
SFAS 80, "Accounting for Futures Contracts," since the contracts cover
probable future transactions.
Cash is deposited with the broker in a margin account, at the time futures
or options contracts are initiated. The change in market value of these
contracts requires adjustment of the margin account balances. The margin
balance, recorded in prepaid expenses and other, was $2.8 million and $.5
million as of March 31, 1999 and December 31, 1998, respectively. MCV's
deferred gains and losses on futures and options contracts, recorded in
current liabilities, will be offset by the corresponding underlying
physical transaction and then included in operating expenses as part of
fuel cost in the same period the natural gas is burned to operate the
Facility. As of March 31, 1999, MCV had net open futures and options
contracts of 3.8 Bcf with a deferred gain of $.5 million. As of December
31, 1998, MCV had net open futures and options contracts of 1.7 Bcf with a
deferred gain of $.9 million. In addition, MCV recorded approximately $.4
million in net deferred gains on contracts closed prior to March 31, 1999,
related to 1999 purchase commitments, and had approximately $.2 million in
net deferred gains on contracts closed prior to December 31, 1998, also
related to 1999 purchase commitments.
Interest Rate Swap Hedges
To manage the effects of interest rate volatility on interest income while
maximizing return on permitted investments, MCV established an interest
rate hedging program. The notional amounts of the hedges are tied directly
to MCV's anticipated cash investments, without physically exchanging the
underlying notional amounts.
Cash may be deposited with the broker at the time the interest rate swap
transactions are initiated. The change in market value of these contracts
may require further adjustment of the margin account balance. The margin
balance recorded in prepaid expenses and other, was approximately $175,000
and $181,000, as of March 31, 1999 and December 31, 1998, respectively. In
December 1998 and December 1997, MCV entered into separate interest rate
swap hedges in the notional amount of $20 million each, with the periods of
performance from July 23, 1999 through January 23, 2000 and from April 1,
1998 through December 1, 2002, respectively. The difference between the
amounts received and paid under the interest rate swap transaction is
accrued and recorded as an adjustment to the interest income over the life
of the hedged agreement. For the year-to-date periods ending March 31, 1999
and December 31, 1998, MCV had losses under the December 1997 interest rate
swap hedge of approximately $4,000 and $61,000, respectively.
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<PAGE> 9
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
New Accounting Standard
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 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.
(3) RESTRICTED CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
HELD-TO-MATURITY
Current and non-current restricted cash and cash equivalents and investment
securities held-to-maturity consist of the following as of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Current:
Funds restricted for plant modifications $ 5,547 $ 8,913
======== ========
Non-current:
Funds restricted for rental payments pursuant to the Overall Lease
Transaction $137,836 $142,453
Funds restricted for management non-qualified plans 1,082 991
-------- --------
Total $138,918 $143,444
======== ========
</TABLE>
(4) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ----------
<S> <C> <C>
Accounts payable
Related parties $ 7,160 $17,231
Trade creditors 23,509 27,457
Property and single business taxes 26,671 11,822
Other 2,368 4,208
------- -------
Total $59,708 $60,718
======= =======
</TABLE>
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<PAGE> 10
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5) LONG-TERM DEBT
Long-term debt consists of the following as of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------- ----------------
<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
$ 1,774,997 $ 1,788,291
Less current portion (111,823) (64,331)
----------- -----------
Total long-term debt $ 1,663,174 $ 1,723,960
=========== ===========
</TABLE>
Financing Obligation
In 1990, MCV obtained permanent financing for the Facility by entering into
sale and leaseback agreements ("Overall Lease Transaction") with the Owner
Participants, related to substantially all of MCV's fixed assets. Proceeds
of the financing were used to retire borrowings outstanding under existing
loan commitments, make a capital distribution to the Partners and retire a
portion of the notes issued by MCV to MEC Development Corporation ("MDC")
in connection with the transfer of certain assets by MDC to MCV. In
accordance with SFAS No. 98, "Accounting For Leases," the sale and
leaseback transaction has been accounted for as a financing arrangement.
Interest and fees incurred related to long-term debt arrangements during
the three months ended March 31, 1999 and 1998 were $38.8 million and $41.1
million, respectively. Interest and fees paid for the three months ended
March 31, 1999 and 1998 were $79.0 million and $85.2 million, respectively.
(6) 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 lawfully 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
-9-
<PAGE> 11
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 (averaging approximately $47,000 per month in 1999). MCV
previously 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 and Consumers have resolved
this issue through at least 2001. See the discussion below under, "PPA
- Settlement of PPA Issues."
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 and Consumers have resolved this
issue through September 15, 2007. See the discussion below under, "PPA
- Settlement of PPA Issues."
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
$.6 million for the three months ending March 31, 1999, $2.5 million
for the year 1998 and $2.8 million for the year 1997, for energy
delivered above the off-peak cap, which payments are now final because
of the settlement of PPA issues. See the discussion below under, "PPA -
Settlement of PPA Issues."
PPA - 1998 PSCR Rate Freeze
In January 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 disputed Consumer's contention that
availability based payments occur only up to 915 MW. MCV had 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. MCV and Consumers have resolved this issue. See the
discussion below under, "PPA - Settlement of PPA Issues." Under the
Settlement Agreement (as defined in "PPA - Settlement of PPA Issues"),
Consumers will pay MCV the energy rates set forth in the PPA based on
availability for the first 915 MW and on delivered energy above 915 MW
through September 15, 2007.
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<PAGE> 12
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 related to Consumers' special
contract customers, pricing of the energy delivered during off-peak
ramp hours (when MCV adjusts its output to match Consumers' dispatch)
and energy delivered in the band width (energy delivered above
dispatch, within certain limits). In addition, Consumers notified MCV
that it did 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 had
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 had recognized amounts related to the above
issues as operating revenues, except for revenues associated with the
band width (averaging approximately $7,000 per month in 1999). MCV and
Consumers have addressed all of these issues in the Settlement
Agreement. See the discussion below under, "PPA - Settlement of PPA
Issues."
PPA - Settlement of PPA Issues
MCV and Consumers entered into a settlement agreement ("Settlement
Agreement"), effective January 1, 1999, which resolves (for the various
time periods specified in the Settlement Agreement) all disputed issues
discussed in this Note 6, "Contingencies - PPA "Regulatory-Out"
Provision," including the Jurisdictional Issue, the off-peak cap issue,
issues associated with the 325 MW Settlement Order, the 1998 PSCR rate
freeze and other PPA issues. MCV recognized a one-time net $6.4 million
increase in electric revenues in the first quarter of 1999 based upon
the resolution of these issues. On an ongoing basis and for the various
time periods specified in the Settlement Agreement, the Settlement
Agreement is not expected to materially affect MCV's earnings and cash
flows.
PPA - Sale and Assignment
In October 1998, Consumers initiated a process for the solicitation of
bids to acquire Consumers' rights to the 1240 MW of Contract Capacity
and associated energy under the PPA. On March 10, 1999, Consumers
announced that it signed a contract with PECO Energy Company ("PECO")
whereby Consumers will sell 1240 MW of capacity and associated energy
to PECO from the MCV PPA beginning January 1, 2002 and ending in
September 2007. In addition, Consumers will sell PECO between 100 MW to
150 MW in 1999 through 2001. The announcement also states the contract
with PECO is subject to satisfactory regulatory approvals. On March 19,
1999, Consumers filed an application with the MPSC seeking regulatory
approval of various ratemaking and accounting treatments associated
with the PECO contract. On April 30, 1999, the MPSC entered an order
which did not grant all of the relief Consumers requested, but does
permit the transaction to go forward. At this time, MCV Management
cannot predict whether Consumers will accept the MPSC's order. MCV does
not expect the sale of Consumers' rights to capacity and associated
energy under the PPA to materially affect its financial position or
results of operations.
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<PAGE> 13
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) PARTNERS' EQUITY AND RELATED PARTY TRANSACTIONS
The following table summarizes the nature and amount of each of MCV's
Partner's equity interest, interest in profits and losses of MCV at March
31, 1999, and the nature and amount of related party transactions or
agreements that existed with the Partners or affiliates as of March 31,
1999 and 1998, and for each of the three month periods ended March 31, (in
thousands).
<TABLE>
<CAPTION>
Equity Partner, Type of Partner and Equity
Nature of Related Party Interest Interest Related Party Transactions and Agreements 1999 1998
- -------------------------------------- ---------- ------- -------------------------------------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
CMS Midland, Inc. $186,871 49.0% Power purchase agreement $149,112 $149,262
General Partner; wholly-owned Purchases under gas transportation agreements 2,394 2,414
subsidiary of Consumers Energy Purchases under spot gas agreements 207 180
Company (formerly Consumers Purchases under gas supply agreements 1,073 2,149
Power Company) Gas storage agreement 641 641
Land lease/easement agreements 150 150
Accounts receivable 46,192 52,441
Accounts payable 3,109 11,385
Gas exchanges 297 807
The Dow Chemical Company 41,590 7.5 Steam and electric power agreement 8,290 10,682
Limited Partner Steam purchase agreement - Dow Corning Corp 1,099 950
(affiliate)
Purchases under demineralized water supply 1,710 1,851
agreement
Accounts receivable 2,341 1,966
Accounts payable 609 576
Standby and backup fees 164 188
Source Midland Limited Partnership 63,712 18.1 Purchases under spot gas agreements -- 2,089
("SMLP") General Partner; wholly- Purchases under gas supply agreements 2,528 3,087
owned limited partnership of MCN Accounts payable 951 2,908
Energy Group Inc. Partner cash withdrawal (including accrued 18,583 12,091
interest) (1)
Coastal Midland, Inc. ("Coastal") 38,228 10.9 Purchases under gas transportation agreements 3,403 3,490
General Partner; wholly-owned Purchases under spot gas agreement 574 4,811
subsidiary of The Coastal Purchases under gas supply agreement 513 493
Corporation Gas agency agreement 338 382
Deferred reservation charges under gas purchase 5,910 4,925
agreement
Accounts receivable -- 2,765
Accounts payable 2,491 4,112
Gas exchanges 9 3,117
Partner cash withdrawal (including accrued 16,371 8,302
interest) (1)
MEI Limited Partnership ("MEI") (2) MEI - Under Ownership of Coastal and SMLP A
General and Limited Partner; See related party activity listed under Coastal
Midland, Inc.
50% interest owned by Coastal and Source Midland Limited Partnership
Midland, Inc. and 50% interest
owned by SMLP MEI - Under Ownership of ASEA Brown Boveri, Inc.
General Partnership Interest 31,857 9.1 Gas turbine maintenance and spare parts agreement -- 10,251
Limited Partnership Interest 3,185 .9 Accounts payable -- 90
Micogen Limited Partnership 15,927 4.5 MLP - Under Ownership of The Coastal
Corporation ("MLP") Limited Partner; See related party activity listed under Coastal
owned by subsidiaries of The Coastal Midland Inc.
Corporation (3)
C-E Midland Energy, Inc. ("C-E") (4) -- -- Service Agreement -- 602
Interest in MCV acquired by MEI Accounts Payable -- 174
Limited Partnership
Alanna Corporation 1 (6) .00001 Note receivable 1 1
Limited Partner; wholly-owned
subsidiary of Alanna Holdings
Corporation
</TABLE>
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<PAGE> 14
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Footnotes to Partners' Equity and Related Party Transactions
(1) Letters of credit have been issued and recorded as notes receivables
from various equity partners, pursuant to the Participation Agreement.
In the case of SMLP, the amount includes their share of the cash
available to MEI Limited Partnership ("MEI"). In the case of Coastal
Midland, Inc. ("Coastal"), the amount includes their share of cash
available of MEI and Micogen Limited Partnership ("MLP").
(2) On June 16, 1998, Coastal and SMLP, each acquired a 50% interest in
MEI. All MEI related party activity under the ownership of Coastal and
SMLP is shown under the equity partners, Coastal and SMLP. All MEI
related party activity under the ownership of ASEA Brown Boveri, Inc.
is for the three months ended March 31, 1998, and as of March 31, 1998.
(3) On April 30, 1998 Coastal and an affiliate of The Coastal Corporation
acquired all of the partnership interests in MLP from Fluor Corporation
("Fluor"). All MLP related party activity under the ownership of The
Coastal Corporation is shown under the equity partner, Coastal, which
is also wholly-owned by The Coastal Corporation.
(4) C-E Midland Energy, Inc.'s ("C-E") limited partnership interest was
acquired by MEI, which was subsequently acquired by Coastal and SMLP.
All C-E related party activity under the ownership of ASEA Brown
Boveri, Inc. is for the three months ended March 31, 1998 and as of
March 31, 1998.
(5) Alanna's capital stock is pledged to secure MCV's obligation under the
lease and other overall lease transaction documents.
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<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
This MD&A should be read along with the MD&A in the Annual Report on Form 10-K
for the year ended December 31, 1998 of the Midland Cogeneration Venture Limited
Partnership ("MCV").
Results of Operations:
Operating Revenues Statistics
The following represents significant operating revenue statistics for the
following periods (dollars in thousands except average rates):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1999 1998
------------ --------------
<S> <C> <C>
Operating Revenues $ 158,123 $ 159,978
Capacity Revenue $ 98,493 $ 100,338
PPA Contract Capacity (MW) 1,240 1,240
Billed PPA Availability 98.5%(1) 99.3%
Electric Revenue $ 55,394 $ 52,371
PPA Delivery as a Percentage of Contract Capacity 79.3% 88.7%
PPA, SEPA and Other Electric Deliveries (MWh) 2,289,402 2,509,649
Average PPA Variable Energy Rate ($/MWh) $ 16.37 $ 16.96
Average PPA Fixed Energy Rate ($/MWh) $ 3.60 $ 3.89
Steam Revenue $ 4,236 $ 3,451
Steam Deliveries (Mlbs) 1,757,860 1,670,951
Other Revenue $ -- $ 3,818
</TABLE>
(1) As part of the Settlement Agreement (see Part I, Item 1, "Condensed
Notes to Unaudited Consolidated Financial Statements," Note 6,
"Contingencies - PPA "Regulatory-Out" Provision"), MCV agreed not to
bill Consumers for PPA availability greater than 98.5% in each calendar
year.
Comparison of the Three Months ended March 31, 1999 and 1998
Overview
For the first quarter of 1999, MCV recorded net income of $23.8 million as
compared to net income of $16.6 million for the first quarter of 1998. The
earnings increase for the first quarter of 1999 over 1998 is primarily due to a
Settlement Agreement between MCV and Consumers effective January 1, 1999, which
resolved a number of disputed issues under the PPA between the parties. MCV
recognized a one-time net $6.4 million increase in
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<PAGE> 16
operating revenues in the first quarter of 1999 based upon the resolution of
these issues. Also contributing to this increase was lower interest expense on
MCV's financing obligation and lower depreciation expense.
Operating Revenues
For the first quarter of 1999, MCV's operating revenues decreased $1.9 million
from the first quarter of 1998. This decrease is due to a lower electric
dispatch under the PPA, resulting from Consumers change to economic dispatch of
the facility in mid-March 1998 and due to the expiration of the installment
payments under the SEPA with Dow. This decline in revenue due to the decrease in
dispatch is largely offset by a decline in fuel costs. This decrease was
partially offset by the $6.4 million increase in electric revenues as a result
of the Settlement Agreement with Consumers.
Operating Expenses
For the first quarter of 1999, MCV's operating expenses were $99.6 million,
which includes $59.8 million of fuel costs. During this period, MCV purchased
approximately 18.8 billion cubic feet ("bcf") of natural gas, of which a net 1.6
bcf was drawn from gas in storage and used for transportation fuel. During this
same period, MCV consumed 20.9 bcf, of which .5 bcf of this total was gas
provided by Dow. The average commodity cost of fuel for the first quarter of
1999 was $2.40 per million British thermal units ("MMBtu"). For the first
quarter of 1998, MCV's operating expenses were $108.0 million, which includes
$65.6 million of fuel costs. During this period, MCV purchased approximately
23.0 bcf of natural gas, of which .4 bcf was used for transportation fuel and as
a net change to gas in storage. During this same period, MCV consumed 23.4 bcf,
of which .8 bcf of this total was gas provided by Dow. The average commodity
cost of fuel for the first quarter of 1998 was $2.40 per MMBtu. Fuel costs for
the first quarter of 1999 compared to 1998 decreased $5.8 million. This decrease
was primarily due to a lower electric dispatch by Consumers under the PPA.
For the first quarter of 1999, operating expenses other than fuel costs
decreased $2.6 million from the first quarter of 1998, primarily resulting from
lower depreciation expense. All other expenses incurred in these periods were
considered normal expenditures to achieve the recorded operating revenues.
Other Income (Expense)
The decrease in interest and other income in the first quarter of 1999 compared
to 1998 reflects the 1998 accrual for the interest income refund due from Great
Lakes Gas Transmission, pursuant to a Federal Appeals Court decision made in
January, 1998. The decrease in interest expense in the first quarter of 1999
from the first quarter of 1998 is due to a lower principal balance on MCV's
financing obligation.
Market Risk Sensitivity
Market risks relating to MCV's operations result primarily from changes in
commodity prices, interest rates and foreign exchange rates. To address these
risks, MCV enters into various hedging transactions as described below. MCV does
not use financial instruments for trading purposes and does not use leveraged
instruments. Fair values included herein have been determined based upon quoted
market prices. The information presented below should be read in conjunction
with Note 2, " Significant Accounting Policies" and Note 5, "Long-Term Debt" to
the Consolidated Financial Statements of MCV.
Interest Rate Risks. In 1990, MCV obtained permanent financing for the Facility
by entering into sale and leaseback agreements ("Overall Lease Transaction")
with a lessor group, related to substantially all of MCV's fixed assets. In
accordance with SFAS No. 98, "Accounting For Leases," the sale and leaseback
transaction has been accounted for as a financing arrangement. Under the terms
of the Overall Lease Transaction, MCV sold undivided interests in all of the
fixed assets of the Facility for approximately $2.3 billion, to the Owner Trusts
established for the benefit of the Owner Participants. The financing
arrangement, entered into for a term of 25 years, maturing in 2015, has an
effective interest rate of approximately 8.7%, payable in semi-annual
installments of principal and
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<PAGE> 17
interest. Due to the unique nature of the negotiated financing obligation it is
impractical to estimate the fair value of the Owner Participants' underlying
debt and equity instruments supporting this financing obligation.
The carrying amounts of MCV's short-term investments approximate fair value
because of the short term maturity of these instruments. MCV's short-term
investments are made up of investment securities held to maturity and as of
March 31, 1999 have original maturity dates of less than one year. In addition,
to manage the effects of interest rate volatility on interest income while
maximizing return on permitted investments, MCV has established an interest rate
hedging program.
For MCV's debt obligations, the table below presents principal cash flows and
the related interest rate by expected maturity dates. The interest rate reflects
the fixed effective rate of interest of the financing arrangement. For the
interest rate swap transactions, the table presents the notional amounts and
related interest rates by fiscal year of maturity. The variable rates presented
are the average of the forward rates for the term of each contract, as valued at
March 31, 1999.
<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 $1,790.5 $3,116.2 N/A
(in millions)
Avg. Interest Rate 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%
Interest Rate Swaps:
Variable to Fixed $20.0 Immaterial
(in millions)
Avg. Pay Rate 5.21%
Avg. Receive Rate 4.89%
Floating to Floating $20.0 Immaterial
(in millions)
Avg. Pay Rate 5.45%
Avg. Receive Rate 5.37%
</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 nine months. The table presents the carrying
amounts and fair values at March 31, 1999:
<TABLE>
<CAPTION>
Expected Maturity in 1999 Fair Value
------------------------- ----------
<S> <C> <C>
Futures Contracts:
Contract Volumes (Net) (10,000 MMBtu) Long (Buy) 283 --
Weighted Average Price (per MMBtu) $1.968 $2.081
Contract Amount ($US in Millions) $5.3 $5.7
</TABLE>
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<PAGE> 18
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 March 31, 1999.
Liquidity and Financial Resources
During the three months ended March 31, 1999 and 1998, net cash generated by
MCV's operations was $1.5 million and $1.7 million, respectively. The primary
use of net cash was for the payment of principal on the financing obligation and
capital expenditures. MCV's cash and cash equivalents have a normal cycle of
collecting six months of revenues less operating expenses prior to making the
semiannual interest and principal payments of the financing obligation due in
January and July for the next sixteen years. In January 1999 and 1998, MCV paid
the basic rent requirements of $92.3 million and $136.9 million, respectively,
as required under the Overall Lease Transaction.
MCV also has arranged for a $50 million working capital line ("Working Capital
Facility") from the Bank of Montreal to provide temporary financing, as
necessary, for operations. The Working Capital Facility has been secured by
MCV's natural gas inventory and earned receivables. At any given time,
borrowings and letters of credit are limited by the amount of the borrowing
base, defined as 90% of earned receivables. The borrowing base varies over the
month as receivables are earned, billed and collected. At March 31, 1999, the
borrowing base was $43.7 million. The Working Capital Facility term currently
extends to August 31, 1999. MCV did not utilize the Working Capital Facility
during the first three months of 1999, except for letters of credit associated
with normal business practices. MCV believes that amounts available to it under
the Working Capital Facility will be sufficient to meet any working capital
shortfalls which might occur.
For the foreseeable future, MCV expects to fund current operating expenses,
payments under the amended Service Agreement and rental payments primarily
through cash flow from operations. If necessary, MCV could fund any operating
cash flow shortfalls from cash reserves to the extent available for such
purposes. As of March 31, 1999, there was $357.4 million (which includes $82.8
million reserved for capital improvements and spare parts purchases), including
accrued interest, in available reserves for such purposes.
Outlook
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995. The following discussion of the outlook for MCV contains certain
"forward-looking statements" as defined by the Private Securities Litigation
Reform Act of 1995 (the "Act"), including, without limitation, discussion as to
expectations, beliefs, plans, objectives and future financial performance, or
assumptions underlying or concerning matters discussed reflecting MCV's current
expectations of the manner in which the various factors discussed therein may
affect its business in the future. Any matters that are not historical facts are
forward-looking and, accordingly, involve estimates, assumptions, and
uncertainties which could cause actual results or outcomes to differ materially
from those expressed in the forward-looking statements. Accordingly, this "Safe
Harbor" Statement contains additional information about such factors relating to
the forward-looking statements. There is no assurance that MCV's expectations
will be realized or that unexpected events will not have an adverse impact on
MCV's business.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include the
final outcome of the MPSC Restructuring Orders and challenges thereto,
governmental policies, legislation and other regulatory actions (including those
of the Michigan Legislature, Congress, Federal Energy Regulatory Commission and
the Michigan Public Service Commission) with respect to cost recovery under the
PPA, industry restructuring or deregulation, operation and construction of plant
facilities including natural gas pipeline and storage facilities, and present or
prospective wholesale and retail competition, among others. The business and
profitability of MCV is also influenced by other factors such as weather
conditions, pricing and transportation of commodities, environmental
legislation/regulation, Year 2000 compliance issues and inflation, among other
important factors. In October 1998, Consumers announced that it is offering for
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<PAGE> 19
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. On April 30, 1999, the MPSC entered an order
which did not grant all of the relief Consumers requested, but does permit the
transaction to go forward. At this time, MCV management cannot predict whether
Consumers will accept the MPSC's order. MCV does not expect the sale of the PPA
to materially affect its financial position or results of operations. All such
factors are difficult to predict, contain uncertainties which may materially
affect actual results, and are beyond the control of MCV.
Results of operations are largely dependent on successfully operating the
Facility at or near contractual capacity levels, the availability of natural
gas, the level of energy rates paid to MCV relative to the cost of fuel used for
generation, Consumers' performance of its obligations under the PPA, capacity
payments made by Consumers and maintenance of the Facility's QF status.
Operating Outlook. In the first quarter of 1999, approximately 66% of PPA
revenues were capacity payments which are billed on availability, subject to an
annual availability cap of 98.5% pursuant to the Settlement Agreement, beginning
January 1, 1999. PPA availability was 99.4% in 1998 and 98.9% in 1997.
Availability depends on the level of scheduled and unscheduled maintenance
outages, and on the sustained level of output from each of the GTGs and the
steam turbines. MCV expects long-term PPA availability to exceed 90%.
In mid-March 1998, Consumers began economically dispatching the Facility by
scheduling energy deliveries on an economic basis relative to the cost of other
energy resources, instead of at the higher dispatch levels experienced over the
past several years. MCV consequently has seen both electric operating revenues
and operating costs decline. However, MCV Management does not expect this change
to have a material impact on MCV's financial position.
GTG Equipment Problems. In 1996, several of the GTGs experienced severe cracking
in the hot gas casings, which in some cases caused extensive damage to the
turbine blades and vanes. After each such incident, MCV and ABB Power have
identified and modified each of the GTGs to eliminate the problems and have
implemented a program of hot gas path inspections for all GTGs, which are
currently being performed every 3,000 hours. MCV and ABB Power continue to
address reliability issues to alleviate future outages, and MCV believes that
with the modifications that have been made to date there should be no
significant future impacts on plant availability or efficiency, although no
assurance can be given that additional equipment problems will not occur.
The cost of casing replacements and modifications is covered by ABB Power (with
the exception of insurable events) pursuant to the amended Service Agreement,
under which ABB Power is providing hot gas path parts for MCV's twelve gas
turbines through the sixth series of major GTG inspections which are expected to
be completed by year-end 2008.
MCV's insurance carriers continue to monitor and review all the GTG inspection
findings. At this time, MCV currently maintains property insurance policies that
include the hot gas casing equipment and are in effect through the second
quarter of 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 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
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<PAGE> 20
gas. To the extent that the costs associated with production of electricity with
natural gas rise faster than the energy charge payments, which are based largely
on Consumers' coal plant operation and maintenance costs, MCV's financial
performance would be negatively affected. For the period April 1990 through
March 1999, the energy charge (fixed and variable) paid to MCV has declined by
.30 cents per kWh, while the average variable cost of delivered fuel for the
period 1990 - 1998, has risen by $0.26 per MMBtu.
The divergence between variable revenues and costs will become greater if the
energy charge (based largely on the cost of coal) declines or escalates more
slowly than the spot market or contract prices under which MCV purchases fuel
(contract prices generally escalate at a fixed price, a fixed price with an
escalator, an index based on Consumers' energy charges under the PPA, or a
combination thereof). The difference could be further exacerbated in
approximately five years as MCV's gas contracts begin to expire if the cost of
uncontracted fuel is materially higher than the prices in the expiring
contracts.
Energy Payments Under the PPA 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 lawfully 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 (averaging
approximately $47,000 per month in 1999). MCV previously 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 and Consumers have resolved this issue
through at least 2001. See the discussion below under, "PPA -
Settlement of PPA Issues."
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 and Consumers have resolved this issue through
September 15, 2007. See the discussion below under, "PPA - Settlement
of PPA Issues."
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
-19-
<PAGE> 21
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 $.6
million for the three months ending March 31, 1999, $2.5 million for
the year 1998 and $2.8 million for the year 1997, for energy delivered
above the off-peak cap, which payments are now final because of the
settlement of PPA issues. See the discussion below under, "PPA -
Settlement of PPA Issues."
PPA - 1998 PSCR Rate Freeze. In January 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.
MCV and Consumers have resolved this issue. See the discussion below
under, "PPA - Settlement of PPA Issues." Under the Settlement
Agreement, Consumers will pay MCV the energy rates set forth in the PPA
based on availability for the first 915 MW and on delivered energy
above 915 MW through September 15, 2007.
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 related to
Consumers' special contract customers, pricing of the energy delivered
during off-peak ramp hours (when MCV adjusts its output to match
Consumers' dispatch) and energy delivered in the band width (energy
delivered above dispatch, within certain limits). In addition,
Consumers notified MCV that it did 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 had 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 had recognized
amounts related to the above issues as operating revenues, except for
revenues associated with the band width (averaging approximately $7,000
per month in 1999). MCV and Consumers have addressed all of these
issues in the Settlement Agreement. See the discussion below under,
"PPA Settlement of PPA Issues."
PPA - Settlement of PPA Issues. MCV and Consumers entered into a
Settlement Agreement, effective January 1, 1999, which resolves (for
the various time periods specified in the Settlement Agreement) all
disputed issues discussed in this section, "Energy Payments Under the
PPA," including the Jurisdictional Issue, the off-peak cap issue,
issues associated with the 325 MW Settlement Order, the 1998 PSCR rate
freeze and other PPA issues. MCV recognized a one-time net $6.4 million
increase in electric revenues in the first quarter of 1999 based upon
the resolution of these issues. On an ongoing basis and for the various
time periods specified in the Settlement Agreement, the Settlement
Agreement is not expected to materially affect MCV's earnings and cash
flows.
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<PAGE> 22
PPA - Sale and Assignment. In October 1998, Consumers initiated a
process for the solicitation of bids to acquire Consumers' rights to
the 1240 MW of Contract Capacity and associated energy under the PPA.
On March 10, 1999, Consumers announced that it signed a contract with
PECO Energy Company ("PECO") whereby Consumers will sell 1240 MW of
capacity and associated energy to PECO from the MCV PPA beginning
January 1, 2002 and ending in September 2007. In addition, Consumers
will sell PECO between 100 MW to 150 MW in 1999 through 2001. The
announcement also states the contract with PECO is subject to
satisfactory regulatory approvals. On March 19, 1999, Consumers filed
an application with the MPSC seeking regulatory approval of various
ratemaking and accounting treatments associated with the PECO contract.
On April 30, 1999, the MPSC entered an order which did not grant all of
the relief Consumers requested, but does permit the transaction to go
forward. At this time, MCV Management cannot predict whether Consumers
will accept the MPSC's order. MCV does not expect the sale of
Consumers' rights to capacity and associated energy under the PPA to
materially affect its financial position or results of operations.
Michigan Electric Industry Restructuring Proceedings. On December 20, 1996, the
MPSC issued an order on its own motion to consider the restructuring of the
electric industry in Michigan. After public hearings and contested case hearings
the MPSC issued its initial order on June 5, 1997, intermediate orders in
related dockets on October 29, 1997, its final order on January 14, 1998, and a
clarification order on February 11, 1998 (collectively the "Restructuring
Orders"). While the Restructuring Orders are not entirely clear, they generally
provide for a transition to a competitive regime whereby electric retail
customers will be able to chose their power supplier and pay negotiated or
market-based rates for such power supply. The MPSC ordered a phased-in program
(from 1999 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.
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<PAGE> 23
Federal Electric Industry Restructuring. FERC has jurisdiction over wholesale
energy sales in interstate commerce and is moving towards "market" based pricing
of electricity in some circumstances as opposed to traditional cost-based
pricing. In April 1996, FERC issued Order No. 888 requiring all utilities FERC
regulates to file uniform transmission tariffs providing for, among other
things, non-discriminatory "open access" to all wholesale buyers and sellers,
including the transmission owner, on terms and conditions established by FERC.
Order No. 888 also requires utilities to "functionally unbundle" transmission
and separate transmission personnel from those responsible for marketing
generation. Appeals of Order No. 888 and subsequent related orders are pending
before the United States Court of Appeals for the D.C. Circuit. In addition,
several bills have been introduced in Congress to require states to permit
consumers to choose their supplier of electricity and manage other issues such
as transition cost recovery and FERC jurisdiction of retail electric sales. MCV
Management cannot predict the impact on MCV or the outcome of these proceedings.
Maintaining QF Status. In the case of a topping-cycle generating plant such as
the Facility, to maintain QF Status the applicable operating standard requires
that the portion of total energy output that is put to some useful purpose other
than facilitating the production of power (the "Thermal Percentage") be at least
5%. In addition, the plant must achieve and maintain an average PURPA efficiency
standard (the sum of the useful power output plus one-half of the useful thermal
energy output, divided by the energy input (the "Efficiency Percentage")) of at
least 45%. However, if the plant maintains a Thermal Percentage of 15% or
higher, the required Efficiency Percentage is reduced to 42.5%. The tests are
applied on a calendar year basis. The Facility has achieved the applicable
Efficiency Percentage of 42.5% in each year since commercial operation, and in
the years 1995 through 1998 the Facility achieved an Efficiency Percentage in
excess of 45%.
The Facility's achievement of a Thermal Percentage of 15% (thereby requiring
compliance with the reduced Efficiency Percentage of 42.5%) is dependent upon
both the amount of Dow and DCC steam purchases and the level of electricity
generated by the Facility. Dow has agreed to take as much steam as is necessary
for the Facility to retain its QF status under the FERC regulations in effect on
November 1, 1986 (which regulations have not been revised in relevant part in
any material respect), subject to an annual average purchase obligation of no
less than approximately 440,000 lbs/hr. of steam (less amounts supplied by the
Standby Facilities and less 50% of the amount sold by MCV to other steam
customers). The SEPA can be terminated by Dow under certain circumstances. Such
termination would likely lead to a loss of QF status for the Facility. Dow and
DCC steam purchases for the first three months of 1999 averaged 813,824 lbs/hr,
reflecting in part, the relatively high usage of steam related to cold weather.
Actual steam usage has varied and will vary with product mix, seasonal delivery
fluctuations and other factors which may change over time. MCV believes annual
steam sales will be sufficient to allow the Facility 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%. In the first quarter of 1999, MCV achieved an Efficiency Percentage of
47.1% and a Thermal Percentage of 21.2%.
The loss of QF status could, among other things, cause the Facility to lose its
right under PURPA to sell power to Consumers at Consumers' "avoided cost" and
subject the Facility to additional federal and state regulatory requirements,
including the Federal Power Act (under which FERC has authority to establish
rates for electricity, which may be different than existing contractual rates).
If the Facility were to lose its QF status, the Partners of MCV, the Owner
Participants, the bank acting as the Owner Trustee and their respective parent
companies could become subject to regulation under the 1935 Act (under which,
among other things, the Securities and Exchange Commission has authority to
order divestiture of assets under certain circumstances). The loss of QF status
would not, however, entitle Consumers to terminate the PPA. Under the PPA,
Consumers is obligated to continue purchasing power from MCV at FERC-approved
rates (provided that the FERC-approved rates do not exceed the existing
contractual rates) and MCV, not Consumers, is entitled to terminate the PPA
(which MCV has covenanted not to do under the Participation Agreements). There
can be no assurance that FERC-approved rates would be the same as the rates
currently in effect under the PPA. If the FERC-approved rates are materially
less than the rates under the PPA,
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<PAGE> 24
MCV may not have sufficient revenue to make rent payments under the Overall
Lease Transaction. The loss of QF status would constitute an Event of Default
under the Lease (and a corresponding Event of Default under the Indenture)
unless, among other requirements, FERC approves (or accepts for filing) rates
under the PPA or other contracts of MCV for the sale of electricity sufficient
to meet certain target coverage ratios (as defined in the Overall Lease
Transaction).
Year 2000
Risks of MCV's Year 2000 Issues. MCV utilizes information technologies and
non-information technologies (collectively "Systems") in the Facility, some of
which may be affected by the year 2000 ("Y2K") date change. If uncorrected, the
Y2K date change could cause, among other things, MCV to incur failures and
outages of the Facility's generating equipment, the equipment operating systems
and business systems. In particular, if MCV's critical systems, i.e., GTGs,
steam turbines and the control system, are adversely affected, these negative
conditions could result in a failure to keep the GTGs running and inhibit MCV's
ability to produce electricity and steam.
Because of the integrated nature of MCV's business with third party suppliers,
customers and other vendors (collectively "associates") MCV may also be affected
by Y2K compliance complications of these associates. MCV's key associates
include vendors supplying MCV's plant control system, natural gas vendors,
Consumers as a transmission provider and certain financial institutions. Y2K
compliance complications of these associates could adversely impact MCV's
ability to transmit power and cause difficulties in obtaining natural gas to
fuel the Facility, among other things.
MCV expects that all new equipment software and hardware installations or other
modifications to its Systems will be completed prior to 2000. However, there can
be no guarantee that costs, plans or time estimates will be achieved, and
adverse implications of Y2K non-compliance will not occur. Specific factors that
may cause such adverse results include, but are not limited to, the availability
of personnel trained in this area, the ability to locate and correct all
relevant computer code and the Y2K readiness of MCV's associates.
State of Readiness. In 1997, MCV staff developed a Y2K plan to address the
Systems. The MCV's Y2K plan addresses the Y2K issues in four phases: (1) the
awareness phase, completed in April 1998, brought the Y2K issues to the
attention of all employees; (2) the assessment phase, completed in September
1998, which identified, inventoried and prioritized all Systems; (3) the
renovation phase, expected to be completed by the end of August 1999, which
consists of converting and replacing Systems or components and applications in
Systems which are business critical and non Y2K compliant; and (4) the
validation and testing phase, scheduled to be completed by October 1999, which
is being done simultaneously with the renovation phase.
Off-site and pre-installation of the plant control system has been completed
successfully and MCV has recently completed configuration, installation and
implementation of the new equipment and software supporting the plant control
system. The feasibility of conducting an online test of the plant control system
is being reviewed. Testing and validation of the business network and associated
applications was completed successfully. 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.
In late 1997, MCV began contacting key associates to determine their
organizations' Y2K state of preparedness and is continuing to follow up based on
each entity's Y2K target completion dates. In addition, Y2K status and readiness
meetings have been and will continue to be conducted with key gas suppliers and
other third-party entities.
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. Training and refresher training of plant personnel will
be conducted throughout the remainder of the year on emergency and manual
operations of plant equipment. Contingency plans and procedures exist in draft
form and will continue to be revised and updated throughout the remainder of the
year.
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<PAGE> 25
Costs. Anticipated spending to make the Systems Y2K compliant will be expensed
as incurred, except costs for new software which will be capitalized and
amortized over the software's useful life. At this time, MCV estimates the
aggregate expenditures for Y2K compliance and new software to be $300,000. This
estimate does not include any estimated costs that may be incurred by MCV as a
result of the failure of any associate to become Y2K compliant or costs to
implement any contingency plans.
See Part I, Item 1, "Financial Statements and Supplementary Data -- Notes 1 and
6 to the Condensed Notes to Unaudited Consolidated Financial Statements" for a
further discussion of associated risks and contingencies.
-24-
<PAGE> 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Settlement of Power Purchase Agreement Issues Relating to Capacity and Energy
Charges
MCV and Consumers entered into a settlement agreement ("Settlement Agreement"),
effective January 1, 1999, which resolves (for the various time periods
specified in the Settlement Agreement) all disputed issues which include the
Jurisdictional Issue, the off-peak cap issue, issues associated with the 325 MW
Settlement Order, the 1998 PSCR rate freeze and other PPA issues. MCV recognized
a one-time net $6.4 million increase in electric revenues in the first quarter
of 1999 based upon the resolution of these issues. On an ongoing basis and for
the various time periods specified in the Settlement Agreement, the Settlement
Agreement is not expected to materially affect MCV's earnings and cash flows.
(Also see Part I, Item 1, "Condensed Notes to Unaudited Consolidated Financial
Statements," Note 6, "Contingencies - PPA "Regulatory-Out" Provision" and Part
I, Item 2, "MD&A - Outlook Energy Payments Under the PPA.")
PPA - Sale or Assignment
In October 1998, Consumers initiated a process for the solicitation of bids to
acquire Consumers' rights to the 1240 MW of Contract Capacity and associated
energy under the PPA. On March 10, 1999, Consumers announced that it signed a
contract with PECO Energy Company ("PECO") whereby Consumers will sell 1240 MW
of capacity and associated energy to PECO from the MCV PPA beginning January 1,
2002 and ending in September 2007. In addition, Consumers will sell PECO between
100 MW to 150 MW in 1999 through 2001. The announcement also states the contract
with PECO is subject to satisfactory regulatory approvals. On March 19, 1999,
Consumers filed an application with the MPSC seeking regulatory approval of
various ratemaking and accounting treatments associated with the PECO contract.
On April 30, 1999, the MPSC entered an order which did not grant all of the
relief Consumers requested, but does permit the transaction to go forward. At
this time, MCV Management cannot predict whether Consumers will accept the
MPSC's order. MCV does not expect the sale of Consumers' rights to capacity and
associated energy under the PPA to materially affect its financial position or
results of operations.
Michigan Electric Industry Restructuring Proceedings
On December 20, 1996, the MPSC issued an order on its own motion to consider the
restructuring of the electric industry in Michigan. After public hearings and
contested case hearings the MPSC issued its initial order on June 5, 1997,
intermediate orders in related dockets on October 29, 1997, its final order on
January 14, 1998, and a clarification order on February 11, 1998 (collectively
the "Restructuring Orders"). While the Restructuring Orders are not entirely
clear, they generally provide for a transition to a competitive regime whereby
electric retail customers will be able to chose their power supplier and pay
negotiated or market-based rates for such power supply. The MPSC ordered a
phased-in program (from 1999 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
-25-
<PAGE> 27
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.
Property Tax Appeal
MCV has filed property tax appeals contesting the assessed value of MCV's
property for 1997 and 1998 taxes, which are pending before the Michigan Tax
Tribunal. MCV also filed an appeal for 1999 taxes. MCV Management cannot predict
the outcome of these proceedings.
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<PAGE> 28
Item 6. Exhibits and Reports on Form 8-K
a.) List of Exhibits
(10.1) Settlement Agreement dated April 5, 1999, between MCV and Consumers
Energy Company.
(10.2) Summer Peaking Call Option Agreement dated April 5, 1999, between
MCV and Consumers Energy Company.
(27) Financial Data Schedule
b.) Reports on Form 8-K
Current report dated April 5, 1999, covering matters reported pursuant to
Item 5, "Other Events."
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<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
(Registrant)
Dated: May 13, 1999 /s/ James M. Kevra
--------------- -------------------------------------
James M. Kevra
President and Chief Executive Officer
Dated: May 13, 1999 /s/ James M. Rajewski
--------------- -------------------------------------
James M. Rajewski
Vice President and Controller
(Principal Accounting Officer)
-28-
<PAGE> 30
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 Settlement Agreement dated April 5, 1999, between MCV and Consumers
Energy Company.
10.2 Summer Peaking Call Option Agreement dated April 5, 1999, between
MCV and Consumers Energy Company.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
SETTLEMENT AGREEMENT EXHIBIT 10.1
THIS SETTLEMENT AGREEMENT is entered into as of January 1, 1999, by and between
Midland Cogeneration Venture Limited Partnership ("MCV") and Consumers Energy
Company ("Consumers"). MCV and Consumers may sometimes hereinafter be referred
to as a "Party" or collectively as the "Parties."
WHEREAS, MCV and Consumers (formerly known as Consumers Power Company) entered
into a Power Purchase Agreement dated as of July 17, 1986, as amended by
Amendment No. 3 dated as of August 28, 1989, and Amendment No. 4A dated as of
May 25, 1989 (Amendment No. 1 being superseded by Amendment No. 3 and Amendment
No. 2 having been rendered void ab initio) (the "PPA"), which is currently in
effect; and
WHEREAS, disputes have arisen between the Parties concerning the meaning and
application of the PPA and the Parties have settled their disputes upon the
terms and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing and for other good and valuable
consideration the Parties agree:
General
1. Capitalized terms not defined herein shall have the meaning given
to those terms in the PPA.
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<PAGE> 2
Available Capacity and Commercial Energy
2. The Parties agree that for purposes of delivering Commercial
Energy under the PPA during the term of paragraphs 2 through 6 of
this Agreement, MCV may, in its sole discretion, install, add to,
upgrade, modify, substitute for or otherwise change any equipment:
(i) at or to its existing facility (collectively "Modifications");
and/or (ii) at the MCV site (collectively "New Equipment")
provided that for New Equipment, MCV, or someone acting on behalf
of MCV can only construct on the MCV site in accordance with any
other applicable agreements between the Parties and provided
further that the presence of Modifications and/or New Equipment at
the site shall not increase the 1240 MW of Contract Capacity which
Consumers is obligated to purchase under the PPA and its
associated energy. Any energy generated by such Modifications,
and/or New Equipment may be used by MCV, at its sole discretion,
to provide Commercial Energy under the PPA provided that
Consumers' rights under Section 8 of the PPA to dispatch and
schedule deliveries of energy are not adversely affected in any
way.
3. Any capacity available from Modifications made to the existing
fifteen (15) generating units at MCV may be used by MCV towards
determination of Available Capacity under the PPA. Any capacity
available from New Equipment at the MCV site, may not be used by
MCV towards determination of Available Capacity under the PPA and
is not a part of the MC-Facility under the PPA.
4. For purposes of billing pursuant to the PPA, beginning with
calendar year 1999, MCV shall not bill and Consumers shall not be
required to pay capacity charges
-2-
<PAGE> 3
which would produce capacity charge revenue to MCV in excess of
the amount of capacity charge revenue which would otherwise be
produced if the Annual Availability of Contract Capacity was
greater than 98.5% during the calendar year. Nothing in this
Agreement relieves MCV of its obligation to perform under the PPA
by having Contract Capacity available and capable of providing
service in order to receive capacity charge revenue. The monthly
billing protocol to implement this paragraph is set forth in
paragraph 5 of this Agreement.
5. In billing Consumers for capacity charges each month, MCV shall
bill Available Capacity at the rates set forth in the PPA and
shall base its bill on the actual Available Capacity during the
month and the balance in the cumulative bank of Available Capacity
at the end of the prior month. (See the example and table set
forth below.) The monthly bill shall be at a level such that the
cumulative year-to-date billing shall never be greater than would
have resulted from 98.5% Available Capacity during each month.
Available Capacity above that required to bring the year-to-date
billings to 98.5% shall be carried over to the next month or
subsequent months as a "bank." Available Capacity which has been
"banked" cannot be carried over from year to year. The units of
"banked" Available Capacity shall be in MWh. MCV shall determine
the bank and provide Consumers with documentation demonstrating
its determination of the bank, upon request. MCV may also bill,
and Consumers shall pay, any "banked" MWh retroactively, in the
same calendar year (also, MCV may bill for December, in January of
the following year), for a prior month when billed Available
Capacity was less than 98.5%.
EXAMPLE: Assume for 1999, that MCV's Available Capacity in January
is 99.0%
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<PAGE> 4
(913,334 MWh), in February it is 98.5% (820,781 MWh), in March it
is 97.0% (894,883 MWh) and in April it is 99.9% (890,668 MWh). MCV
would bill Consumers for capacity charges each month as follows:
<TABLE>
<CAPTION>
(a) (b) (c) (d)
Actual Available Billed Available Capacity Banked
Capacity Capacity (a) - (b) Cumulative Bank
(MWh) (MWh) (MWh) (MWh)
------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
January 913,334 908,722 4,612 4,612
February 820,781 820,781 0 4,612
March 894,883 899,495 (4,612) 0
April 890,668 887,414 3,254 3,254
</TABLE>
6. Subject to paragraph 27 below, the provisions of paragraphs 2
through 5 shall apply through March 15, 2025, subject to billings
and payments in subsequent months, to implement said provisions.
Resolution of the issues addressed in paragraphs 2 through 5 shall
not prejudice either Party or have any precedential effect
whatsoever when these issues or similar issues are considered
again by the Parties or in any proceeding involving the Parties,
including, without limitation, any arbitration under the PPA.
August Billing Dispute
7. MCV withdraws, without prejudice or precedent, its claim for the
dispute which arose between the Parties concerning the capacity
charge for Available Capacity
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<PAGE> 5
declared and billed by MCV in August 1997, and Consumers shall not
be obligated to pay MCV the $1,040,506.37 withheld by Consumers
from MCV's October 1997 bill. Nor does Consumers owe any
late-payment interest billed by MCV on such amount. Resolution of
this issue shall not prejudice either Party or have any
precedential effect whatsoever when the same or a similar issue is
considered again by the Parties or in any proceeding involving the
Parties, including, without limitation, any arbitration under the
PPA.
Wholesale Allocation
8. A. In its annual Power Supply Cost Recovery ("PSCR") proceedings
before the Michigan Public Service Commission ("MPSC"), Consumers'
recovery of a portion of its fixed energy payments to MCV have
been allocated to Consumers' wholesale customers and thus, not
recovered from Consumers' retail customers ("Wholesale
Allocation"). Consumers has withheld payment from MCV for such
Wholesale Allocation and has requested refunds from MCV for
previous amounts paid.
B. Regardless of how the MPSC may treat this issue in any further
proceedings covering the period January 1, 1999 through December
31, 2001, for the period of January 1993 through December 1998,
Consumers agrees to pay MCV $78,047.69 to resolve this Wholesale
Allocation issue and MCV shall not be obligated to refund any sums
to Consumers. No late-payment interest shall be paid by Consumers
with respect to this amount. This payment of $78,047.69 by
Consumers resolves the claim for a $1,859,914.07 refund which
Consumers had
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previously sought from MCV and finalizes Consumers' right to keep
$1,028,986.15 which was released to Consumers from MCV Escrow
Account III in March 1997. Further, the Parties agree that the
Standstill Agreement, dated March 11, 1996, related to this matter
is terminated and the dispute referred to therein rendered moot by
the resolution reached in this paragraph 8.
C. From January 1, 1999 through December 31, 2001, Consumers will
not be obligated to pay MCV fixed energy charges pursuant to
Subsection 10(b) of the PPA for Commercial Energy from the first
11.5 MW of Available Capacity under the PPA, regardless of how the
MPSC may treat this issue in any further proceedings covering the
period January 1, 1999 through December 31, 2001.
D. Subject to the provisions in paragraph 27 whereby this issue
may be resolved through September 15, 2007, resolution of this
issue beyond December 31, 2001, will be deferred by the Parties
and the resolution set forth in this paragraph 8 shall not
prejudice either Party or have any precedential effect whatsoever
when this issue is considered again by the Parties or in any
proceeding involving the Parties, including, without limitation,
any arbitration under the PPA.
Special Contract Customers
9. With the approval of the MPSC, Consumers has entered into
"special" contracts with certain of its customers charging them
other than standard tariff rates, and may enter into such
contracts or similar contracts in the future ("Special
Contracts"). Consumers has claimed it is entitled to a reduction
in fixed energy payments to
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<PAGE> 7
MCV under the PPA as a result of Special Contracts, beginning in
1996 and thereafter. For the years 1996, 1997 and 1998, MCV shall
reimburse Consumers $690,000 for 1996, $930,000 for 1997 and
$930,000 for 1998. For the years 1999 through 2001, MCV will
reduce its December invoice payable by Consumers during January of
the next year by $930,000 for fixed energy charges to be
attributed to Special Contracts customers. These reduced December
invoices shall not change or otherwise be affected in any manner
whatsoever by any change of circumstances, including, without
limitation, any MPSC action or order, any change or modification
of any nature whatsoever in Consumers' contractual relations with
any of its customers (existing or prospective), any change in law,
or any additional Special Contracts. Subject to the provisions in
paragraph 27 whereby this issue may be resolved through September
15, 2007, resolution of this issue beyond December 31, 2001, will
be deferred by the Parties and the resolution set forth in this
paragraph 9 shall not prejudice either Party or have any
precedential effect whatsoever when this issue is considered again
by the Parties or in any proceeding involving the Parties,
including, without limitation, any arbitration under the PPA.
Bandwidth, Ramping and Availability Caps
10. This paragraph resolves all issues involving fixed and variable
energy charges for the time periods specified, associated with
bandwidth, ramping and energy delivered from capacity above the
availability caps (i.e., fixed energy charges for energy delivered
in excess of the off-peak caps established in the Revised
Settlement Proposal approved by the MPSC and in the 325 MW
Settlement Agreement approved by the MPSC in Docket No. U-10685,
as applicable).
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<PAGE> 8
A. For the period 1994 through 1997, MCV agrees to release from
the Escrow Accounts I and II (Account # 76692730 and 76692731) to
Consumers $1.1 million (plus interest earned on that amount in
that account) for fixed energy charges for energy delivered in
excess of the off-peak caps and to pay Consumers $678,000 for
variable energy charges on said issues, irrespective of any
further MPSC action or order on the issues resolved in this
paragraph.
B. For calendar years 1998 through 2007, annual payments to MCV
will be reduced by $120,000 (at the rate of $10,000 per month)
attributable to said issues, regardless of any MPSC action or
order or any other change whatsoever in any circumstance
concerning the disallowances associated with said issues,
provided, however, for calendar year 1998 only, the full $120,000
reduction will be made on MCV's March invoice payable in April
1999, plus an additional $30,000 reduction attributable to the
$10,000/month allocation for the months of January, February and
March, 1999.
C. As part of the resolution of the issues involved in this
paragraph, Consumers consents to the release from Escrow Account V
(Account # 76692734) to MCV of the total amount of principal and
interest contained therein and the escrow account will be closed.
D. The Parties agree that the remaining amount of principal and
interest in Escrow Accounts I and II (Account # 76692730 and
76692731), after the reduction attributable to paragraph 10A
above, shall be released to Consumers and the escrow accounts will
be closed.
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<PAGE> 9
E. The Parties agree that MCV may continue its appeal which is
pending in Court of Appeals Docket No. 203734. In the event MCV is
successful in its appeal and the MPSC ultimately directs in an
order, which becomes final and subject to no further appeals, that
Consumers is entitled to receive a refund or rate increase
attributable to the issues raised by MCV in the appeal referenced
in this subparagraph 10 E, then Consumers shall only pay to MCV
the amount, as so determined by the MPSC, related to MCV's issues.
11. Resolution of the issues addressed in paragraph 10 beyond 2007,
will be deferred by the Parties and the resolution set forth in
paragraph 10 shall not prejudice either Party or have any
precedential effect whatsoever when these issues are considered
again by the Parties or in any proceeding involving the Parties,
including, without limitation, any arbitration under the PPA.
Fixed Energy Payments Under the PSCR Freeze
12. For the period January 1, 1998 through September 15, 2007,
Consumers shall pay MCV fixed energy charges calculated in
accordance with Exhibit C to the PPA for Commercial Energy from
the first 915 MW of Available Capacity on the basis of
availability, provided, however, that the fixed energy payments
attributable to the Wholesale Allocation in accordance with
subparagraph 8 C, above, shall be deducted for the time period
specified in subparagraph 8 C, subject to paragraph 27.
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<PAGE> 10
13. For the period January 1, 1998 through September 15, 2007, for kWh
delivered from the 325 MW of Contract Capacity above the 915 MW,
Consumers shall pay MCV fixed energy charges, calculated in
accordance with Exhibit C of the PPA.
14. All payments made to MCV since January 1, 1998, under or pursuant
to the PSCR freeze ordered in Case Nos. U-11453 et al on February
11, 1998, are final and non-refundable regardless of any change in
any MPSC order, any new MPSC order or any court ruling affecting
any MPSC order related to said PSCR freeze. Resolution of the
issues addressed in paragraphs 12 through 14 shall not prejudice
either Party or have any precedential effect whatsoever when the
issues are considered again by the Parties or in any proceeding
involving the Parties, including, without limitation, any
arbitration under the PPA.
Interruptible Spot Sales
15. In the event Consumers has not dispatched the MC-Facility to the
full Contract Capacity under the PPA, the Parties agree that MCV
has the right to make interruptible energy sales from Contract
Capacity to any third party. MCV shall notify Consumers, in
advance, of the existence of such sales, including the MW
involved, but not the economic terms thereof and shall keep
Consumers informed on a timely basis of any changes to the MW
involved in such sales. Should Consumers increase the dispatch of
the MC-Facility during the course of such sales, MCV shall be
obligated to begin delivery of the requested power as follows: (i)
if Consumers' notice to MCV to increase dispatch is received
within 30 minutes past the start of an hour, Consumers shall
receive the MW involved (up to the
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<PAGE> 11
amount by which Consumers increases the dispatch) in the
third-party sale at the beginning of the next hour and upon
receipt of the notice, MCV will begin ramping the MC-Facility in
accordance with Operating Practice 2 in effect between the Parties
if necessary to meet the requested dispatch; or (ii) if Consumers'
notice to MCV to increase dispatch is received between 30 minutes
past the hour and 59 minutes past the hour, Consumers shall
receive the MW involved (up to the amount by which Consumers
increases the dispatch) in the third-party sale at the beginning
of the next succeeding hour and upon receipt of the notice, MCV
will begin ramping the MC-Facility in accordance with Operating
Practice 2 in effect between the Parties if necessary to meet the
requested dispatch. Nothing in this paragraph 15 or any
third-party sales by MCV shall be interpreted to relieve Consumers
of its obligations with respect to Minimum Generation and Annual
Minimum Deliveries under the PPA, including, but not limited to,
Section 8 thereof.
16. The Parties shall establish mutually agreeable procedures dealing
with third-party sales. The absence of such procedures shall not,
however, affect MCV's right or ability to make such sales. Until
such procedures are in place, MCV agrees to follow the following
protocol with respect to those sales. MCV shall make a good faith
effort to avoid any generation shortfall. In the event that MCV
expects or experiences a generation shortfall, MCV must work
closely with its third-party sales customers and with Consumers'
transmission system operator to ensure that transmission
scheduling is as close as possible to MCV's actual generating
capacity available to service its third-party sales transactions
and sales to Consumers. Further, by telephone, MCV will promptly
notify Consumers' trading floor (telephone
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<PAGE> 12
(517) 788-2952) and Consumers' transmission system operator
(telephone (734) 665-3425) of any potential or actual generation
shortfall.
MCV Sales of Residual Capacity
17. MCV has the right to make energy sales to third parties of any
Residual Capacity and/or Energy from the MC-Facility consistent
with MCV's obligation to Consumers under Subsection 3(c) of the
PPA. MCV also has the right to make third-party sales from
Modifications and/or New Equipment at MCV's site, provided that
such sales when made from Modifications are also subject to
Consumers' rights under Subsection 3(c) of the PPA and provided
further that no third-party sales from the MC-Facility shall ever
have priority over the availability and generation of Commercial
Energy pursuant to the PPA.
18. As part of the compromises reached in this Agreement, any and all
claims Consumers has or may have with respect to any third-party
sales MCV has made prior to April 1, 1999, have been resolved and
no amounts withheld by Consumers related thereto shall be returned
to MCV. Any claims by Consumers for the period on and after April
1, 1999, shall be limited to the relief it may receive from its
transmission customers pursuant to its Open Access Transmission
Tariff.
19. Intentionally left blank.
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<PAGE> 13
Warranty/Remedies
20. Consumers represents and warrants that it does not need any
regulatory approvals in order to enter into or perform this
Agreement or for this Agreement to become effective in accordance
with its terms. In the event Consumers breaches this
representation and warranty because regulatory approvals are
necessary, then Consumers will have 120 days to cure its breach by
obtaining those regulatory approvals. If Consumers is unable to
obtain said regulatory approvals, then MCV shall have the right,
in its sole discretion, to: (i) declare this Agreement to be void
ab initio and all disputes contained in and settled by this
Agreement shall be reinstated as outstanding disputes and shall
not be deemed barred by the lapse of time, waiver, settlement,
estoppel or otherwise; or (ii) keep the portions of this Agreement
not in dispute in full force and effect and, negotiate a
satisfactory resolution or seek any other remedy available at law
and/or in equity through arbitration under paragraph 30 of this
Agreement for the portions for which no regulatory approval has
been obtained in order that the Parties are placed in the same
position as though those portions were in effect.
Miscellaneous
21. This Agreement shall be governed by and construed in accordance
with the laws of the state of Michigan.
22. If a provision of this Agreement conflicts with the PPA, the
provision of this Agreement shall control.
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<PAGE> 14
23. The Parties stipulate and agree that this Agreement was jointly
prepared by them, with the advice and participation of their
respective legal counsel, and that any claimed ambiguity in this
Agreement shall not be construed adversely against either Party on
the basis that such Party was the drafter or preparer of this
Agreement or any portion thereof.
24. This Agreement may be amended only by a written instrument
executed by the Parties.
25. No waiver by either MCV or Consumers of any default by the other
Party under this Agreement shall operate as a waiver of any future
default, whether of like or different character or nature.
26. Subject to the provision in paragraph 20 whereby MCV declares this
Agreement void ab initio, once this Agreement is signed by both
Parties, it shall become effective to finally and irrevocably
resolve the disputes and issues raised by both Parties under the
PPA which are addressed by the Agreement for the time periods
covered in its various paragraphs. Subject to its revival pursuant
to the operation of paragraph 20 whereby MCV declares this
Agreement void ab initio, Consumers waives the right to assert a
regulatory-out claim pursuant to Subsection 10 (c) of the PPA with
respect to those disputes and issues and time periods
notwithstanding any past or future orders of the Michigan Public
Service Commission or the reviewing courts that may otherwise
create the potential for such claims with respect to the same
dispute or issue for time periods covered in this Agreement.
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<PAGE> 15
27. Assignment and Partial Termination
This Agreement shall inure to the benefit of and be binding upon
the successors in interest of the respective Parties hereto. It
shall not be assigned by either Party without the prior written
consent of the non-assigning Party, which consent shall not be
unreasonably withheld, provided if there is a transfer by
Consumers (whether pursuant to the provisions of Section 22 of the
PPA or by a separate contract for a power sale to a third party)
for an extended period of time (a transfer period) of Consumers'
rights of up to 1240 MW of capacity and associated energy derived
from the PPA, then the paragraphs, or provisions of paragraphs, of
this Agreement, as listed in (i) through (iv) below, shall
terminate effective with the commencement of the transfer period.
If a benefit accrues to Consumers at the end of a calendar year or
other applicable period, then the rights and benefits to which
Consumers is entitled shall be prorated on the basis of time
passed prior to termination and megawatts not transferred.
(i) Paragraphs 4 and 5 shall terminate once the transfer
period has begun, but shall be reinstated on September
15, 2007;
(ii) The prospective benefit to Consumers beginning January
1, 1999, under paragraph 8 C shall terminate for the
duration of the transfer period once the transfer
period has begun, notwithstanding the fact that this
issue was resolved only through December 31, 2001;
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<PAGE> 16
(iii) The prospective benefit to Consumers under paragraph 9
beginning with calendar year 1999, shall terminate for
the duration of the transfer period once the transfer
period has begun, notwithstanding the fact that this
issue was resolved only through December 31, 2001; and
(iv) The prospective benefit to Consumers under paragraph
10 B shall terminate once the transfer period has
begun.
MCV and Consumers agree that if the Power Purchase Agreement
between Consumers and PECO Energy Company, dated as of March 5,
1999 ("PECO PPA"), becomes effective in 1999 in accordance with
Section 1.25 thereof ("Effective Date"), the provisions of (i)
through (iv) above, shall be implemented as follows:
(v) With regard to paragraphs 4 and 5, the Annual
Availability of Contract Capacity billed by MCV to
Consumers will be increased from 98.5% to: (a) 98.62%
beginning on the Effective Date of the PECO PPA
through December 31, 1999; (b) 98.65% from January 1,
2000 through December 31, 2000; and (c) 98.68% from
January 1, 2001 through December 31, 2001. Beginning
January 1, 2002, paragraphs 4 and 5 shall terminate,
but will be reinstated on September 15, 2007.
(vi) With regard to paragraph 8 C, the megawatts for which
Consumers will not be obligated to pay MCV fixed
energy charges pursuant to Subsection 10(b) of the PPA
for Commercial Energy shall be reduced from 11.5 MW
to: (a) 10.6 MW from the Effective Date through
year-end 1999; (b) 10.3 MW for
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<PAGE> 17
calendar year 2000; and (c) 10.1 MW for calendar year
2001. Beginning January 1, 2002, the prospective
benefit to Consumers under paragraph 8 C shall
terminate through September 15, 2007, notwithstanding
the fact that this issue was resolved only through
December 31, 2001;
(vii) With regard to paragraph 9, MCV will reduce its
December invoices as follows: (a) $855,000 in 1999;
(b) $836,250 in 2000; and (c) $817,500 in 2001,
instead of the $930,000 currently provided for in said
paragraph. There will be no reduction in December
invoices under paragraph 9 for the years 2002 through
2007; and
(viii) With regard to paragraph 10 B, the reduction in annual
payments to MCV will be at the rate of $9,192 per
month from the Effective Date through December 31,
1999; for calendar year 2000, the annual reduction
shall be $107,903 ($8,992 per month); and for calendar
year 2001, the annual reduction shall be $105,484
($8,790 per month). There will be no reduction under
paragraph 10 B for the years 2002 through 2007.
Headings
28. The various headings set forth in this Agreement are for
convenience only and shall not affect the construction or
interpretation of this Agreement.
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<PAGE> 18
Exculpation
29. Notwithstanding anything to the contrary contained in this
Agreement, the liabilities and obligations of MCV arising out of,
or in connection with, this Agreement or any other agreements
entered into pursuant hereto, shall not be enforced by any action
or proceeding wherein damages or any money judgment or specific
performance of any covenant in any such document, and whether
based upon contract, warranty, negligence, indemnity, strict
liability or otherwise, shall be sought against the assets of the
Partners comprising MCV. By entering into this Agreement,
Consumers waives any and all right to sue for, seek or demand any
judgment against such Partners and their affiliates, other than
MCV, by reason of the liabilities and obligations of MCV arising
out of, or in connection with, this Agreement or any other
agreements entered into pursuant hereto, except to the extent such
Partners are legally required to be named in any action to be
brought against MCV.
Dispute Resolution
30. The Parties shall submit any dispute arising under this Agreement
to the arbitration provisions set forth in Section 18 of the PPA.
Section 18 of the PPA shall govern the conduct of the arbitration.
Claims
31. Written notice of any potential claim arising under this Agreement
shall be provided by one Party to the other Party within one year
of the date on which the Party with
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<PAGE> 19
the potential claim had actual notice or reasonably should have
had notice of the act or omission giving rise to the potential
claim. Failure to submit such written notice within one year shall
constitute a waiver of the potential claim. After notice is given,
the potential claim shall be subject to the provisions of
paragraph 30.
Notices
32. Unless otherwise expressly provided, every notice under this
Agreement, or related thereto, shall be effective only if actually
delivered by hand or by prepaid United States Mail to the Party
for whom it is intended at the following address. Any notice not
provided in writing shall be effective only if acknowledged in
writing by the below designated representative of the Party to
whom it was provided. Notices may be given by one Party to the
other via electronic means such as by a facsimile machine and the
associated confirmation reports or electronic receipts generated
by such a process shall constitute acknowledgment that the notice
was received. Each Party may change the following address and
designated representative by providing advance written notice to
the other Party.
ADDRESSES:
Midland Cogeneration Venture Consumers Energy Company
Limited Partnership
100 Progress Place 1945 West Parnall Road
Midland, MI 48640 Jackson, MI 49201
Attention: President and CEO Attention: William E. Garrity
Facsimile: (517) 839-6016 Facsimile: (517) 788-5882
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<PAGE> 20
33. With respect to the subject matter hereof, this Agreement
supersedes all previous representations and negotiations either
written or oral between the Parties hereto or their
representatives, which were made prior to its execution.
34. In the event the Parties are involved in any dispute in the future
(other than a dispute involving this Agreement), this Agreement
shall not be submitted as evidence or otherwise used in any
proceeding involving the Parties, including, without limitation,
any arbitration under the PPA.
IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate
originals to be effective the date first above written.
MIDLAND COGENERATION VENTURE CONSUMERS ENERGY COMPANY
LIMITED PARTNERSHIP
By: James M. Kevra By: David W. Joos
----------------------------- ------------------------------------------
Its: President and CEO Its: President and Chief Executive Officer-
Electric and Executive Vice President
Date: April 5, 1999 Date: March 30, 1999
--------------------------- --------------------------------------
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<PAGE> 1
SUMMER PEAKING CALL OPTION AGREEMENT EXHIBIT 10.2
1. This Agreement is made as of April 1, 1999, between Midland Cogeneration
Venture Limited Partnership (MCV or Seller), with offices at 100 Progress
Place, Midland, Michigan, a Michigan limited partnership and Consumers
Energy Company, (Consumers or Buyer) with offices at 212 West Michigan
Avenue, Jackson, Michigan, a Michigan corporation. MCV and Consumers are
sometimes referred to herein as a "Party" or collectively as the "Parties."
2. Seller agrees to supply and sell to Buyer and Buyer agrees to purchase and
accept from the Seller the electrical energy specified on the terms and
conditions set forth herein. Seller's obligation to supply energy hereunder
shall be limited to energy generated from Seller's existing fifteen
generating units (numbered by MCV as Units 1 - 15) and associated equipment
as may be modified by MCV from time to time.
3. The following terms, when used in this Agreement with initial
capitalization, whether in the singular form or in the plural form, shall
have the meaning specified below:
3.1 Agreement: This Agreement between Seller and Buyer, including all
appendices attached hereto, all documents incorporated by reference
and all amendments and supplements which can only be approved in
writing by the Parties, as may be made from time to time.
3.2 Monthly Option Premium: The Monthly Option Premium shall be the price
paid by Buyer to Seller for each Option Month. Appendix A contains the
schedule of Monthly
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<PAGE> 2
Option Premiums for each Option Month during the Initial Term (defined
in Section 4 below) of this Agreement.
3.3 Delivery Location: Any energy delivered under the terms of this
Agreement shall be delivered to the MCV busbar, which connects
directly to Consumers' Tittabawassee Substation.
3.4 Scheduling Agent: For the Seller, the person or persons authorized to
receive notices from Buyer nominating the amount of energy to be
delivered to Buyer. For the Buyer, the person or persons authorized to
nominate the amount of energy to be delivered to Buyer under this
Agreement.
3.5 Authorized Representatives: For each Party, the person authorized to
receive any notices, required under this Agreement, other than
nomination notices, and resolve any controversy, dispute or claim
arising from this Agreement.
3.6 On-Peak Hours: Those hours between the times of 7:00 AM EDT and 11:00
PM EDT, Monday through Friday, excluding the legal holidays of
Independence Day and Labor Day.
3.7 MCV PPA: The Power Purchase Agreement between Consumers and MCV dated
as of July 17, 1986, as amended by Amendment No. 3, dated as of August
28, 1989 and Amendment No. 4A, dated as of May 25, 1989 (Amendment No.
1 being superseded by Amendment No. 3 and Amendment No. 2 having been
rendered void ab initio).
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<PAGE> 3
3.8 Ramping: The amount of energy delivered during the hour immediately
prior to and the hour immediately after the Buyer's nominations
pursuant to Section 6 of this Agreement, as Seller is increasing or
decreasing generation in order to begin deliveries or cease deliveries
of the Buyer's nominated energy.
3.9 Option Months: The months of June, July, August and September.
4. This Agreement shall become effective as of April 1, 1999, and shall have
an initial term ending December 31, 2001(the "Initial Term"). The Agreement
may be extended by mutual agreement of the Parties for the period January
1, 2002 through December 31, 2007, conditioned on the Parties reaching, on
or before December 31, 2001, a mutually agreeable level of Monthly Option
Premiums for the Option Months for the period after the Initial Term and
mutually agreeable revisions to Section 9 hereof. If the Parties fail to
reach such an agreement, this Agreement shall automatically terminate at
the end of the Initial Term. Applicable provisions of this Agreement shall
remain in effect after termination to the extent necessary to provide for
final billing, billing adjustments and payment.
5. (a) For each Option Month, Buyer shall pay to Seller the Monthly Option
Premium set forth in Appendix A to this Agreement for 110 MW of
available generating capacity in addition to the 1240 MW of Contract
Capacity under the MCV PPA and irrespective of whether Buyer opts to
purchase any energy during an Option Month from such additional
capacity. Such Monthly Option Premium payment shall be made by wire
transfer on or before 1:00 PM of the last Friday of the calendar month
prior to each Option Month.
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<PAGE> 4
(b) For each Option Month (for which the Monthly Option Premium has been
timely paid) the Buyer has the right (but not the obligation) to
purchase 110 MWh/hr in accordance with Section 6 of this Agreement.
(c) If Buyer exercises the right set forth in Section 5(b), Buyer shall pay
an energy charge, for each MWh delivered (including MWh delivered during
Ramping), equal to the sum of (i) the energy charge associated with
fixed expense during On-Peak Hours and (ii) the energy charge associated
with variable expense (as each is defined and calculated in Exhibit C to
the MCV PPA, which Exhibit is incorporated herein by reference and made
a part hereof) in accordance with the terms of this Agreement. Buyer
will be under no obligation to pay for more energy during any given hour
than the greater of the capacity levels nominated pursuant to this
Agreement for the hour before or the hour after the given hour.
6. For any of the On-Peak Hours of an Option Month for which Buyer elects to
purchase electrical energy from Seller under the terms of this Agreement,
Buyer shall provide notice to Seller's Scheduling Agent on or before 10:00
AM EDT of the calendar day prior to the day for which energy is to be
delivered. Such notice shall nominate the capacity of the energy to be
delivered (stated in MW) in one or more periods of at least 6 consecutive
On-Peak Hours at a constant level for each period.
-4-
<PAGE> 5
7. For any of the On-Peak Hours of an Option Month for which Buyer elects to
purchase electrical energy from Seller under the terms of this Agreement,
Seller shall deliver the nominated energy (stated in MW) to the Delivery
Location.
8. (a) In the event the delivery of energy is interrupted by Buyer, due to
causes solely related to Buyer's system or transmission system
constraints occurring between the Delivery Location and Buyer's system
or if delivery of energy is not accepted by Buyer for reason of Buyer's
preference or election, Buyer shall nevertheless pay the energy charge
(determined pursuant to Section 5(c)) for the nominated energy that
otherwise would have been delivered during the period of interruption or
non-acceptance.
(b) In the event Buyer fails to timely pay any Monthly Option Premium,
Seller may suspend its performance under this Agreement until the unpaid
Monthly Option Premiums have been paid by Buyer, with interest
(calculated from the due date at the rate set forth in Section 13(b))
and Seller's reasonable attorney fees for collection.
(c) The remedies set forth in this Section 8 shall be the sole and
exclusive remedies of Seller for Buyer's interruption or non-acceptance
of energy deliveries nominated by Buyer and/or Buyer's failure to timely
pay the Monthly Option Premium, as the case may be.
9. In the event Seller fails to deliver the full amount of nominated energy to
the Delivery Location for any reason (including, but not limited to,
Seller's obligation to deliver energy under the MCV PPA as acknowledged in
Section 12 hereof) other than an interruption, non-acceptance or failure to
pay the Monthly Option Premium by Buyer, Buyer shall pay no
-5-
<PAGE> 6
energy charge determined pursuant to Section 5(c) hereof for any
undelivered MWh and Seller shall refund a portion of the Monthly Option
Premium to Buyer as follows: (i) $37.70 per MWh for each MWh that was
undelivered during any of the months of June, July or August; or (ii)
$18.90 per MWh for each MWh that was undelivered during the month of
September. In addition, for periods in which Buyer has not nominated
deliveries pursuant to Section 6 and in which capacity was not available
(availability to be determined in the same fashion as determined pursuant
to the MCV PPA), Seller shall also refund a portion of the Monthly Option
Premium to Buyer as follows: (i) $37.70 per MWh for each MWh that was not
available during any of the months of June, July or August; or (ii) $18.90
per MWh for each MWh that was not available during the month of September.
The remedies set forth in this Section 9 shall be the sole and exclusive
remedies of Buyer for Seller's failure to deliver energy and for capacity
which was not available hereunder. In the event Seller fails to deliver the
full amount of nominated energy to the Delivery Location for six (6)
consecutive hours, Buyer may at the end of said six consecutive hours,
while such failure to deliver the nominated energy exists, and at its
option, suspend for the rest of the day the nomination for the portion of
the capacity of energy which the Seller has failed to deliver, provided
that the portion suspended cannot reduce the nomination below the highest
amount of MW Seller had been able to deliver during the six (6) consecutive
hours. Seller shall have an obligation to make refunds of a portion of the
Monthly Option Premium for the undelivered MWh in accordance with this
Subsection and Seller's obligation to refund shall not be reduced because
of Buyer's suspension.
10. Title to the nominated capacity and energy shall pass from Seller to Buyer
at the Delivery Location.
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<PAGE> 7
11. All energy delivered to Buyer at the Delivery Location shall be three-phase
alternating current with a nominal frequency of 60 hertz.
12. For purposes for this Agreement only and not as precedence and otherwise
without prejudice, the Parties agree that any energy provided to Buyer in
accordance with this Agreement is "Residual Energy" as such term is defined
in the MCV PPA. The Parties agree that Seller's obligation to provide
energy under this Agreement is subordinate to its obligation to deliver:
(i) energy under the MCV PPA; (ii) energy and steam under MCV's Steam and
Electric Power Agreement with The Dow Chemical Company; and (iii) steam
under MCV's Steam Purchase Agreement with the Dow Corning Corporation
(collectively the "Prior Commitments"). Except as to the Prior Commitments,
the Parties also agree that Seller's obligation to provide energy under
this Agreement has priority over its obligations to deliver energy to any
third parties with whom Seller contracts after December 31, 1998.
Deliveries to such third parties shall be terminated by Seller before any
reductions by Seller in deliveries to Buyer under this Agreement.
13. Billing:
(a) Within 5 days after the end of each Option Month under this Agreement,
Seller shall issue an invoice for the Option Month to Buyer stating the
amount of energy delivered, the price for such energy, the unavailable
capacity (in MWh) and refunds related thereto, the MWh of energy
undelivered and refunds related thereto and the total net amount due if
positive. Buyer shall pay such invoices by wire transfer on the 21st
day of the calendar month in which the invoice was received. In the
event any portion of an
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<PAGE> 8
invoice is disputed by Buyer: (i) the undisputed amount shall be paid
by the normal due date; (ii) Buyer shall promptly provide Seller a
written detailed explanation concerning the amount in dispute; and
(iii) Buyer shall promptly pay the correct amount after the dispute is
resolved with interest calculated from the original due date to the
date of payment in accordance with the interest rate specified in
Subsection 13 (b) of this Agreement. In the event the total net amount
is negative, Seller shall provide a payment to Buyer by electronic wire
transfer of the amount by which the refund owed is different than zero
within 3 business days of such invoice.
(b) Amounts billed but not paid on or before the due date shall be payable
with interest accrued daily at the prime rate of interest per annum
established by the Bank of America, or its successor, on the last
business day of the Option Month for which an invoice was rendered,
plus one percent per annum, but in no event greater than the maximum
interest rate permitted by law.
(c) All billings shall be sent as follows:
To Buyer: Consumers Energy Company
1945 West Parnall Road
Jackson. MI 49201
Attn: Karen E. Feahr
Fax (517)788-1105
-8-
<PAGE> 9
(d) All payments shall be made by electronic wire transfer as follows:
U.S. Bank Trust N A
Minneapolis, MN
ABA# 091000022
Acct. No.: 180121167365
Ml Clearing #47300196 - FBO MCV 76608640
14. Limitation of Liability and Indemnification: Neither Party shall, in any
event, be liable to the other Party for any consequential, incidental,
indirect or special damages to person or property whether arising in tort,
contract or otherwise, by reason of this Agreement or any services
performed or undertaken to be performed by Seller or Buyer hereunder.
Liability of Seller shall be limited to the money payment provided above.
15. Consents, Approvals and Authorizations: Each Party shall be responsible for
obtaining all consents, approvals and authorizations necessary for it to
enter into this Agreement, including, but not limited to, regulatory
approvals and shall supply the other Party with copies of such consents,
approvals and authorizations upon request. Each Party shall be entitled to
rely on the other Party's execution of this Agreement as evidence of its
having acquired all such consents, approvals and authorizations.
16. Scheduling Agent: Within 30 days after executing this Agreement the Buyer
shall provide notice to the Seller as to the name, title, address, phone
number, and fax number of the person or persons authorized to act as
Buyer's Scheduling Agent. Within 30 days after executing this Agreement the
Seller shall provide notice to the Buyer as to the name, title, address,
phone number, and fax number of the person authorized to act as Seller's
Scheduling Agent. Nominations and Notice of Nominations by Buyer shall be
in writing and
-9-
<PAGE> 10
delivered by Fax and Seller shall promptly confirm, in writing and
delivered by Fax, receipt of such notices.
17. Disputes: Any controversy, dispute or claim arising out of or relating to
this Agreement shall first be submitted to the Authorized Representatives
for resolution. If the Authorized Representatives are unable to reach
agreement within 60 days after submission, either Party may request
arbitration of the controversy, dispute or claim. Such arbitration shall be
conducted only if both Parties agree to arbitration and shall be conducted
in accordance with arbitration rules agreed upon by the Parties. If the
Parties do not agree to arbitration, either Party shall have the right to
seek resolution of the controversy, dispute or claim in such manner as may
be provided by law, except as limited by this Agreement.
18. Non-Waiver: Any waiver of the requirements or provisions of this Agreement
shall be in writing. The failure of either Party to insist upon strict
performance of such requirements or provisions or to exercise any right
hereunder shall not be construed as a waiver of such requirement or
provision or a relinquishment of such right.
19. Force Majeure: Force Majeure means causes beyond the reasonable control of
and without fault or negligence of the Party claiming Force Majeure.
Neither Party shall be considered in default in the performance of its
obligations under this Agreement, if its failure to perform was caused by
or results, directly or indirectly, from Force Majeure. For purposes of
this Agreement, Force Majeure shall include, sabotage to machinery,
transmission lines or facilities; flood, earthquake, storm, drought, fire,
pestilence, lightning, and other natural catastrophes; epidemic, war, riot,
civil disturbance or disobedience, strike, labor dispute, labor or material
shortage, sabotage, government priorities, restraint by court order, which
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<PAGE> 11
by exercise of due diligence such Party has been unable to overcome,
provided however, that a change in market conditions or transmission system
availability, including Line Load Relief procedures, shall not constitute
Force Majeure. A Party unable to fulfill any of its obligations under this
Agreement shall notify the other Party in writing as soon as possible and
shall exercise due diligence to remove such inability with all reasonable
dispatch. Nothing in this Section shall be construed so as to require a
Party to settle any labor strike or labor dispute in which it may be
involved. All Monthly Option Premium payments made by Buyer to Seller for
any day in which the Force Majeure conditions are claimed by Seller to
exist shall be refunded to the Buyer in accordance with Section 9 of this
Agreement.
20. Governing Law: This Agreement shall be interpreted in accordance with the
laws of the State of Michigan and any actions with respect thereto may be
brought only in a court of competent jurisdiction in Michigan.
21. Notices: Any formal notice, demand or request provided for in this
Agreement except notice of nominations, shall be deemed to be properly
given or made if personally delivered, telecopied, sent by courier service
or sent by certified mail, postage prepaid to the following Authorized
Representative:
To Buyer: Consumers Energy Company
1945 West Parnall Road
Jackson, Michigan 49201
Fax (517) 788-2997
Attn: David F. Ronk, Jr.
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<PAGE> 12
To Seller: Midland Cogeneration Venture Limited Partnership
100 Progress Place
Midland, Michigan 48640
Attn: LeRoy W. Smith
Fax (517) 839-6793
Either Party may at any time, by written notice to the other Party, change
the designation or address of the Authorized Representative.
22. Assignment: Buyer may sell, assign or transfer its rights under this
Agreement to any other person. However, any obligation to make payment to
Seller shall remain with Buyer unless and until Buyer obtains the prior
written consent of the Seller, which shall not be unreasonably withheld. At
the time of any assignment, Buyer shall promptly notify Seller of the
assignment, including the identity, telephone number and fax number of the
Scheduling Agent and Authorized Representative of the assignee. Seller may
sell, assign or transfer its rights or obligations under this Agreement
with the prior written consent of the Buyer, which consent shall not be
unreasonably withheld.
23. Change in Law: No change in any existing order, or any future order of the
Michigan Public Service Commission or any other court or tribunal shall
give cause to Buyer to affect or change the terms and conditions of this
Agreement.
24. Partner and Affiliate Exculpation: Notwithstanding anything to the contrary
contained in this Agreement, the liabilities and obligations of the Parties
arising out of, or in connection with this Agreement or any other
agreements entered into pursuant hereto shall not be enforced by any action
or proceeding wherein damages or any money judgment or specific
-12-
<PAGE> 13
performance of any covenant in such document and whether based upon
contract, warranty, negligence, indemnity, strict liability or otherwise,
shall be sought against the assets of the partners or affiliates of the
Parties. By entering into this Agreement, the Parties waive any and all
right to sue for, seek or demand any judgment against such respective
partners or affiliates and their respective affiliates, other than Buyer or
Seller as the case may be, by reason of the nonperformance by Seller or
Buyer, as the case may be, of their respective obligations under this
Agreement or any other agreements entered into pursuant hereto, except to
the extent such partners or affiliates are legally required to be named in
any action to be brought against Seller or Buyer, as the case may be.
25. The signatories hereto represent that they are authorized to sign this
Agreement on behalf of the Party for whom they sign.
IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate
originals to be effective the date first above written.
Seller: Buyer:
MIDLAND COGENERATION VENTURE CONSUMERS ENERGY COMPANY
LIMITED PARTNERSHIP
By: James M. Kevra By: David W. Joos
----------------------------- ---------------------------------------
Its: President and CEO Its: President and Chief Executive Officer-
Electric and Executive Vice President
Date: April 5, 1999 Date: March 30, 1999
--------------------------- --------------------------------------
-13-
<PAGE> 14
APPENDIX A
<TABLE>
<CAPTION>
OPTION MONTH MONTHLY
OPTION PREMIUM
<S> <C>
June 1999 $ 1,459,744.00
July 1999 $ 1,459,744.00
August 1999 $ 1,459,744.00
September 1999 $ 698,544.00
June 2000 $ 1,459,744.00
July 2000 $ 1,327,040.00
August 2000 $ 1,526,096.00
September 2000 $ 665,280.00
June 2001 $ 1,393,392.00
July 2001 $ 1,393,392.00
August 2001 $ 1,526,096.00
September 2001 $ 632,016.00
</TABLE>
-14-
<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 QUARTER ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 181,333
<SECURITIES> 138,918
<RECEIVABLES> 93,786
<ALLOWANCES> 0
<INVENTORY> 8,238
<CURRENT-ASSETS> 326,660
<PP&E> 2,418,332
<DEPRECIATION> 655,112
<TOTAL-ASSETS> 2,255,919
<CURRENT-LIABILITIES> 210,293
<BONDS> 1,663,174
0
0
<COMMON> 0
<OTHER-SE> 381,371
<TOTAL-LIABILITY-AND-EQUITY> 2,255,919
<SALES> 0
<TOTAL-REVENUES> 158,123
<CGS> 0
<TOTAL-COSTS> 99,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,100
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,823
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
