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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number (Under the Securities Act of 1933) 33-37977
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-2726166
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 PROGRESS PLACE, MIDLAND, MICHIGAN 48640
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 839-6000
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I Page
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Item 1. Business.........................................................................1
A. General......................................................................1
B. The Partners.................................................................1
C. The Facility.................................................................2
D. Major Issues Facing MCV......................................................2
E. Contracts....................................................................3
F. Employees...................................................................11
G. Regulation..................................................................11
H. Environmental Matters.......................................................15
I. Overall Lease Transaction...................................................17
Item 2. Properties......................................................................20
Item 3. Legal Proceedings...............................................................21
Item 4. Submission of Matters to a Vote of Security Holders.............................21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........22
Item 6. Selected Financial Data.........................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................22
Item 8. Financial Statements and Supplementary Data.....................................30
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Reporting Matters.............................................................30
PART III
Item 10. Directors and Executive Officers of the Registrant..............................31
Item 11. Executive Compensation..........................................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management..................36
Item 13. Certain Relationships and Related Transactions..................................37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................38
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PART I
Item 1. BUSINESS
A. General
In January 1987, Midland Cogeneration Venture Limited Partnership ("MCV")
was formed as a limited partnership to convert a portion of an uncompleted
Consumers Power Company, now known as Consumers Energy Company
("Consumers"), nuclear power plant into a natural gas-fired,
combined-cycle, cogeneration facility located in Midland County, Michigan
(the "Facility"). The Facility commenced commercial operation (the
"Commercial Operation Date") in 1990 and is capable of generating
approximately 1,500 megawatts ("MW") of electricity and approximately 1.5
million pounds of process steam per hour. The Facility is dependent upon
natural gas for its fuel supply.
The Facility is a cogeneration facility, meaning that it sequentially
produces electricity and useful thermal energy through an integrated
system using a single fuel source. The Facility has been certified by the
Federal Energy Regulatory Commission ("FERC") as a qualifying cogeneration
facility ("QF") under the Public Utility Regulatory Policies Act of 1978,
as amended ("PURPA"). As a QF, the Facility is exempt from various
provisions of the Federal Power Act, as amended (the "FPA"), the Public
Utility Holding Company Act of 1935, as amended (the "1935 Act"), certain
state laws regarding rate, financial and organizational regulation, and is
entitled to sell electric capacity and related energy to a public utility
(such as Consumers) at such utility's incremental cost of alternative
electric energy, otherwise known as "avoided cost". A utility's
"incremental cost of alternative electric energy" means, with respect to
electric energy purchased from a QF, the cost to the electric utility of
the electric energy (determined, at the option of the QF, at either the
time of delivery or at the time the obligation is incurred) which, but for
the purchase from such QF, such utility would generate or purchase from
another source.
MCV has entered into three principal energy sales agreements. The first is
a Power Purchase Agreement (the "PPA") effective in 1990, providing for
the sale to Consumers of electric capacity and related energy from the
Facility for a term of 35 years. Under the terms of the PPA, MCV will
supply up to 1240 MW of electric capacity and related energy to Consumers
for resale to its customers. The second is a Steam and Electric Power
Agreement (the "SEPA") also effective in 1990, providing for the sale to
The Dow Chemical Company ("Dow") of steam and electricity produced by the
Facility for terms of 25 years and 15 years, respectively. The third is a
Steam Purchase Agreement (the "SPA") effective in 1996, providing for the
sale of steam produced by the Facility to Dow Corning Corporation ("DCC")
for a term of 15 years. From time to time, MCV enters into other
short-term sales agreements for the sale of excess capacity and/or energy
available above MCV's internal use and obligations MCV has to Consumers,
Dow and DCC.
B. The Partners
The current general partners of MCV are CMS Midland, Inc. ("CMS Midland"),
a wholly-owned subsidiary of Consumers, Coastal Midland, Inc. ("Coastal
Midland"), Source Midland Limited Partnership ("SMLP") and MEI Limited
Partnership ("MEI"), which is a general and limited partner, all of which
are wholly-owned subsidiaries of The Coastal Corporation ("Coastal").
MCV's other limited partners are Dow, Micogen Limited Partnership, owned
by subsidiaries of Coastal, and Alanna Corporation ("Alanna"), a
wholly-owned subsidiary of Alanna Holdings Corporation ("Alanna Holding").
The capital stock of Alanna Holding is owned by Dow, CMS Energy
Corporation ("CMS Energy"), an affiliate of Consumers and Coastal Natural
Gas Company, an affiliate of Coastal. Effective January 1, 2000, Coastal,
through its subsidiaries, acquired all of the partnership interests in
SMLP and MEI from MCN Energy Group Inc., the previous parent company. The
general partners and limited partners of MCV are referred to herein as the
"Partners." The ownership interests of the Partners are shown in "Security
Ownership of Certain Beneficial Owners and Management."
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C. The Facility
MCV's principal business is the operation of the Facility and the sale of
electric capacity and related energy (principally to Consumers) and steam
(to Dow and DCC) produced at the Facility. The Facility is located on an
approximately 1,200-acre site that is leased from Consumers (the "Site").
The Facility consists of the following:
- 12 gas turbine generators ("GTGs");
- 12 heat recovery steam generators ("HRSGs") which create steam using
heat from the GTG exhaust;
- A steam turbine (the "Unit 1 Steam Turbine") capable of producing
electricity from steam generated by the HRSGs;
- A second steam turbine (the "Unit 2 Steam Turbine") which serves as a
backup to the Unit 1 Steam Turbine;
- A back-pressure steam turbine;
- Pollution control assets;
- A 25-mile gas pipeline connecting interstate and intrastate gas
pipeline systems to the Facility;
- Pipelines to deliver steam to Dow and DCC; and
- Various associated equipment and improvements.
The Facility was originally designed to have a net electrical generating
capacity of approximately 1370 MW and to produce approximately 1.5 million
pounds per hour of process steam under design ambient conditions.
Electricity is produced from the 12 GTGs, and the steam is produced by the
12 HRSGs using the heat from the GTG exhaust. Subsequent improvements to
the Facility have increased the net electrical generating capacity to
approximately 1500 MW. The Unit 1 Steam Turbine is designed to produce
electricity from the steam generated by the HRSGs and process steam that
is provided to Dow and DCC. Demineralized water is sold by Dow to MCV from
the Dow plant. Electricity is sold by MCV to Consumers and other parties
through an interconnect and to Dow through dedicated transmission lines.
MCV is considering adding new generating equipment at its site.
Discussions have been held and are continuing with, among others, power
purchasers, manufacturers of generation equipment, and sources of
financing.
D. Major Issues Facing MCV
MCV faces several major issues crucial to its future success. These
issues, briefly summarized here, are discussed more fully in the sections
cross referenced below:
Electric Industry Restructuring. At both the state and federal level,
efforts continue to restructure the electric industry. In 1997 and 1998,
the Michigan Public Service Commission ("MPSC") entered a series of
orders, now final at the MPSC level, permitting customers to choose their
power provider over a four-year phase-in period which started in 1999
("Restructuring Orders"), (these orders are further described in
"Regulation - Michigan Electric Industry Restructuring Proceedings"). In
addition, proposed deregulation legislation exists at the state and
federal level. One significant issue to MCV is the issue of stranded
assets or transition cost recovery by utilities for PPA charges. Over 90%
of MCV's revenues come from sales pursuant to the PPA. To date,
restructuring has not negatively impacted MCV, but if the Restructuring
Orders deny
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stranded cost recovery of above-market PPA costs, MCV's cash flows may be
negatively impacted, especially in the period after 2007. MCV, among
others, filed appeals in state and federal courts challenging the
Restructuring Orders. On July 7, 1999, the U.S. District Court granted
summary judgment to MCV declaring that the Restructuring Orders are
preempted by federal law to the extent that they prohibit Consumers from
recovering from its customers any charge for avoided costs (or "stranded
costs") to be paid to MCV under PURPA. MCV continues to monitor and
participate in these matters, as appropriate. (See "Regulation - Michigan
Electric Industry Restructuring Proceedings and Federal Electric Industry
Restructuring", Managements Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") - Outlook - Michigan Electric Industry
Restructuring Proceedings and Federal Electric Industry Restructuring",
and Notes to Consolidated Financial Statements, Note 1, "The Partnership
and Associated Risks".)
Energy Rate and Cost of Production. Since January 1992, MCV has
experienced an overall reduction in the energy charges it is paid for
electricity under the PPA, primarily due to declining coal costs at
Consumers' generating plants. In addition, MCV's costs associated with
production of electricity have continued to rise. These circumstances have
negatively affected cash flow. (See "Regulation -- MPSC and Other
Proceedings Relating to Capacity and Energy Charges", "Overall Lease
Transaction", and MD&A -- Liquidity and Financial Resources.")
E. Contracts
MCV's material operating contracts include the PPA, which provides for the
sale to Consumers of electric capacity and related energy; the SEPA, which
provides for the sale of steam and electricity to Dow; the SPA, which
provides for the sale of steam to DCC; gas supply, storage and
transportation contracts with a number of companies; an agreement covering
gas turbine inspection services and spare parts with ABB Alstom Power
Inc., formerly known as ABB Power Generation, Inc. ("ABB Power") and an
agreement covering steam turbine inspection services and parts with
General Electric Company ("GE"). MCV's interests in all the foregoing
contracts, except the SPA, have been assigned to the Owner Trustees, which
in turn subassigned such contracts to MCV and granted a security interest
in such contracts to the Note Trustees. (See "Overall Lease Transaction.")
The following is intended to summarize briefly certain provisions of such
contracts and is qualified in its entirety by reference thereto.
Power Purchase Agreement
Under the PPA, Consumers contracted to purchase specified amounts (the
"Contract Capacity") of the Facility's electric capacity until March 15,
2025 and thereafter subject to yearly extensions that are automatic in the
absence of a termination notice from either party. Contract Capacity is
1240 MW/hour.
In allocating the available electrical output of the Facility, MCV must
first satisfy Dow's requirements under the SEPA before supplying power to
Consumers.
Consumers has the right of first refusal to purchase any available
electric capacity and related energy produced by the Facility in excess of
Contract Capacity if MCV is willing to sell the same for a period of six
months or longer. MCV is entitled to sell excess electric capacity and
related energy to other electric utilities, and Consumers is required, if
requested by such utilities or MCV, to transmit electrical energy for them
subject to certain conditions.
Capacity charges are payable for available Contract Capacity, whether or
not electricity is dispatched. The capacity charges for on-peak and
off-peak power average 4.15 cents per available kilowatt hour ("kWh");
however, until September 15, 2007, the capacity charge may be reduced by
Consumers to a level of no less than an average of 3.77 cents per kWh.
Energy charges are based on costs incurred by Consumers at certain of its
coal-fired plants (i.e., those coal plants wholly or partially owned by
Consumers having a net demonstrated capacity of at least 100 MW,
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available for generating electrical energy for not less than 5500 hours
during the most recent year and having a capacity factor of at least 40%
when connected to Consumers' system and generating electrical energy).
Fixed Energy Charges. Like the capacity charges, fixed energy
charges are payable for available kWhs of Contract Capacity. Fixed
energy charges are adjusted each year based on a fuel inventory
charge, administrative and general expenses and one-half of
operation and maintenance expenses (excluding fuel) incurred at
these plants during either the immediately preceding calendar year
or the calendar year preceding that year depending on when the
adjustment is being made. In 1995, an arbitrator ruled that, under
the PPA, Consumers had the right to withhold that portion of fixed
energy charges payable on the basis of energy available but not
delivered since it was not permitted by the MPSC to collect such
charges from its electric customers. (See "Regulation -- MPSC and
Other Proceedings Relating to Capacity and Energy Charges.")
Variable Energy Charges. Variable energy charges are payable for
energy actually delivered. Variable energy charges are determined
monthly and are equal to one-half of operation and maintenance
expenses incurred at these plants, as calculated annually, and the
actual cost of coal burned at these plants as determined monthly
based on a rolling twelve-month average (with a two-month lag) and
converted to an overall cost per kWh.
The PPA permits Consumers, under certain conditions, to reduce the
capacity and energy charges payable to MCV and/or to receive refunds of
capacity and energy charges paid to MCV if the MPSC does not permit
Consumers to recover from its customers the capacity and energy charges
specified in the PPA (the "regulatory-out" provision). Until September 15,
2007, however, the capacity charge may not be reduced below an average
capacity rate of 3.77 cents per kWh for the available Contract Capacity
notwithstanding the "regulatory-out" provision. Consumers and MCV are
required to support and defend the terms of the PPA. (See "Regulation --
MPSC and Other Proceedings Relating to Capacity and Energy Charges.")
Under the PPA, MCV must provide initial assurances that it has adequate
gas supplies under contract to generate at least 60% of the maximum annual
output of Contract Capacity for the period commencing on the Commercial
Operation Date through 1999. Consumers has acknowledged that MCV has
provided such initial assurances to Consumers. In addition, commencing in
1998 and each year thereafter, MCV must provide at Consumers' request
continuing annual assurances of such capability for each succeeding
five-year period. In November 1999, Consumers requested information for
the continuing fuel assurance requirements covering the period 2000-2004.
Consumers has reviewed MCV's fuel supply information for the period 2000
through 2004 and has provided MCV with a letter stating that MCV has
satisfied the fuel assurance requirement for that period. If MCV is unable
to provide these continuing assurances, Consumers is entitled to withhold
in a separate escrow fund a portion of capacity charges until these
assurances are provided. The portion of such capacity charges is a
function of the percentage of unmet fuel needs and an increasing factor
based on the number of consecutive months that capacity charges have been
withheld. Assuming a 3.77 cents per kWh capacity charge, the maximum
capacity charges which could be withheld and escrowed under this provision
are as follows:
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Maximum Possible
Consecutive Months That Reduction in
MCV Fails to Provide Capacity Charge
Adequate Continuing Assurance (cents/kWh)
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1-12........................................ .1885
13-24....................................... .5655
25-36....................................... 1.5080
37 and thereafter........................... 2.6390
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The PPA does not make any provision for the use of escrowed funds, except
that the PPA provides that interest earned, if any, on the escrowed funds
is to be divided equally between MCV and Consumers. After withholding
capacity charges for 48 months without fuel assurances being provided,
Consumers may terminate the PPA. In the event of termination, MCV must pay
an early termination charge.
If any party is rendered unable by force majeure to carry out its
obligations under the PPA, these obligations are suspended during the
period of force majeure. Force majeure includes all natural calamities;
war; curtailments, orders, regulations or restrictions imposed by
governmental authority; and all other causes beyond the reasonable control
of the affected party, but specifically does not include shortages of fuel
and supplies (unless caused by calamity or unusual world events applicable
to other major industrial users as well as MCV), mechanical breakdowns,
labor strikes or explosions or fires (unless caused by criminal acts).
Consumers schedules all deliveries of electricity from the Facility to its
system and is obligated to do so in a manner consistent with the safe and
prudent operation of the Facility. Consumers' determination of the amount
of energy that it dispatches from the Facility is subject to its
contractual relationships with The Detroit Edison Company, with which
Consumers established a Michigan Electric Coordinated System ("MECS") to
coordinate generation between the two utilities. The operation and
management of the MECS is subject to FERC Order 888 - "Open Access and
Stranded Costs Rulemaking". Consumers currently dispatches the Facility by
scheduling energy deliveries on an economic basis relative to the cost of
other energy resources, in contrast to the higher dispatch levels
experienced in the years 1993-1998.
As long as the annual availability of Contract Capacity equals or exceeds
75% of Contract Capacity, Consumers must purchase sufficient electrical
energy from the Facility to achieve at least a 60% capacity factor on an
annual basis. This purchase obligation decreases, based on a prescribed
formula, if annual availability falls below 75% of Contract Capacity.
Annual PPA availability has exceeded 98% since 1997.
Consumers must purchase a specified minimum amount of electrical energy at
all times, except during emergencies on its system. MCV determines a
minimum level of generation designed to assure that the Facility operates
in a stable manner and that MCV meets its obligations to supply steam and
electricity to Dow, but MCV cannot specify a minimum generating level
which exceeds 350 MW. Outages, other than forced outages, are to be
scheduled to accommodate Consumers' requirements to the extent MCV deems
practicable.
MCV is obligated to have the Facility inspected at least once each year by
a consulting engineer selected by it from a list of engineering firms
approved by Consumers. The annual inspection includes, at a minimum, all
equipment, structures, operating procedures and maintenance practices
necessary for the generation and delivery of energy to Consumers. Upon
completion of an annual inspection, the consulting engineer must promptly
issue a written report. Any recommendations in this report regarding
equipment, structure and maintenance practices which have been approved by
MCV's management must be implemented within a specified period of time. In
its April 1999 report, Cummins & Barnard, Inc., the consulting engineer,
found no specific issues that MCV should take under advisement or act
upon. With regard to the most recent inspection, MCV expects to receive
the report by the end of April, 2000 and does not anticipate any
substantial problems.
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In 1997, Consumers informed MCV of several other potential payment issues
it would 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 could
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 would take a similar position on
the incremental energy and capacity resulting from MCV's installation of
11NM upgrade packages on the GTGs (collectively the "Disputed Issues").
MCV and Consumers have addressed all of these issues in the Settlement
Agreement. 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, but in no
event sooner than 2002) all of the previously Disputed Issues under the
PPA and includes definitive obligations for Consumers to make energy
payments calculated in accordance with the PPA irrespective of any MPSC
decision which may affect those issues or payments. 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.
Steam and Electric Power Agreement; Related Dow Agreements
SEPA. Pursuant to the SEPA, Dow has agreed to purchase steam from the
Facility for an initial term of 25 years commencing in 1990 and to
purchase electricity from the Facility for 15 years (any electricity to be
purchased thereafter at Dow's option, although MCV remains obligated to
make certain amounts of electricity available for an additional 10 years).
The SEPA is subject to automatic extensions for up to 10 additional years
after its 25-year term in the absence of a three-year notice of
termination from either party.
In any year, MCV is not obligated to deliver more than 691,900 pounds of
steam per hour and 60 MW of electricity on an annual average basis except
as Dow may increase its entitlement as discussed below. Dow has agreed to
take as much steam as is necessary for the Facility to retain its QF
status under the FERC regulations in effect on November 1, 1986 (which
regulations have not been revised in relevant part in any material
respect). However, Dow's obligation with respect to minimum annual steam
purchases is an average of 440,000 pounds per hour (less amounts supplied
by certain standby facilities owned by Dow and less 50% of amounts
purchased by any other steam customers of MCV) and is binding only for the
initial 25-year term of the SEPA. During 1999, MCV sold an average of
552,057 pounds of steam and 61 MW of electricity per hour to Dow.
Dow may increase its steam or electricity entitlement to 110% of the steam
or electricity delivered in the previous 12-month period, plus any steam
or electricity required by any addition to or modification of the Dow
plant, provided that any increase above an annual average of 1,000,000
pounds of steam per hour or 75 MW of electricity requires MCV's consent.
MCV, however, may be required, on an instantaneous basis, to deliver steam
at a rate of up to 135% of the maximum annual average hourly quantity of
steam or to deliver power at a rate up to 20 MW greater than the
applicable annual average. In 1997, Dow increased its electric entitlement
to 67.75 MW/hr beginning April 1, 1997; no such increase was requested
during 1998 and 1999.
In 1994, MCV and Dow amended the SEPA to provide that Dow would install a
steam line to the Dow Corporate Center to deliver MCV-generated steam for
heating and air conditioning purposes. In return, MCV agreed to a 30%
price discount on steam used at the corporate center for a period of five
years for up to 262.8 million pounds of steam per year (an average of
30,000 pounds per hour). In 1995, steam deliveries to the Dow Corporate
Center began under this provision.
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Under the SEPA, there is a base charge for steam and electricity which is
subject to adjustment each quarter based on changes in MCV's fuel costs,
producer price for capital equipment and certain compensation per hour
indices. Dow also has the option under the SEPA to provide the gas
necessary to generate Dow's take of steam and electricity ("toll"). In
1996, MCV and Dow entered into an agreement (the "April 15, 1996
Agreement") concerning gas tolling. The April 15, 1996 Agreement provides
that Dow may toll up to 9,000 MMBtu per day, subject to certain
limitations and conditions, until January 1, 2002, at which time Dow's
tolling rights revert to the provisions in the SEPA. Under the provisions
of the SEPA, Dow receives a billing credit of 5/8 of its steam and
electric charges in exchange for Dow purchasing the gas from MCV. Dow has
been tolling gas under the April 15, 1996 Agreement since April 1, 1997.
In addition, Dow made 36 consecutive quarterly installment payments of
$3,817,500 each, through the year 1998, to MCV in consideration for the
delivery of steam and electricity.
In order to assure reliable steam for the Dow plant, Dow owns and
maintains standby facilities , which are not part of the Facility (the
"Standby Facilities"). The SEPA amendment also provided that Dow would
retire certain of the Standby Facilities located on the MCV site and would
progressively reduce the annual standby fees payable to Dow from $700,000
per year to a level of $350,000 per year in 1998 and thereafter. These
fees are subject to adjustment each quarter based on changes in fuel
costs, capital equipment costs and wage rates. In addition, the fee
charged by Dow for each use of the Standby Facilities, necessitated by
MCV's failure to deliver steam under the SEPA, was increased from $100,000
to $150,000.
The terms of the SEPA provide that Dow may terminate the SEPA if one or
more "contract outages" occur for a cumulative period greater than 60
hours in the first year after the Commercial Operation Date, 40 hours in
the second year and 24 hours in any subsequent year, provided that a
single outage of more than 24 consecutive hours but less than 72
consecutive hours will not give rise to a right of termination unless
another such contract outage has occurred within the previous 60 months.
A "contract outage" generally occurs when MCV fails to deliver minimum
operation steam (i.e., an hourly flow rate of at least 75% of the then
current rate), or fails to meet pressure specifications after having
failed to deliver steam for 15 consecutive minutes, or fails to meet
pressure and quantity specifications after having failed to deliver steam
for seven consecutive days, except in each case as a result of scheduled
maintenance outages, outages forced at Dow's request or resulting from
Dow's failure to provide demineralized water or waste water treatment
services or outages caused by an event of force majeure lasting no more
than two years. Steam provided to Dow from the Standby Facilities is
treated as steam delivered by MCV for this purpose. For such a contract
outage to occur, more than ten of the Facility's GTGs would have to be out
of service at the same time that Dow's Standby Facilities are unavailable.
The SEPA and various backup agreements among MCV, Consumers and Dow
contain various provisions designed to assure a continuous supply of steam
and electricity to Dow in the event the SEPA is terminated.
Dow Facilities and Demineralized Water. Dow owns the electrical
transmission lines which carry electricity from the Facility to the Dow
plant. Dow also owns certain steam and demineralized water lines which are
used in the operation of the Facility, and which have been leased by Dow
to MCV. Dow has contracted to provide MCV sufficient demineralized water
to meet the Facility's requirements until 30 months after MCV's obligation
to supply steam to Dow ceases.
Steam Purchase Agreement
In 1995, MCV entered into the SPA with DCC which provides that MCV
construct, own and operate a steam line and appurtenant equipment to serve
steam to DCC's Midland Plant. DCC has agreed to purchase steam from MCV
for an initial term of fifteen years with automatic year-to-year renewals
thereafter. MCV expects to supply steam at the rate of up to 180,000
pounds per hour with a minimum of 90,000 pounds per hour. The steam MCV
provides DCC must meet operational and content specifications. The
provision of steam to DCC is subject to Dow's first preference to the
steam under the SEPA. MCV began supplying steam to DCC
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in July, 1996. The parties have certain termination rights after the
declared in service date but may be subject to penalties or damages for
such termination.
Gas Supply Arrangements
MCV has a portfolio of long term natural gas purchase contracts (contracts
that provide for gas purchases for a term of greater than one year),
having remaining terms of 3 months to 11 years, with U.S. and Canadian
suppliers for a maximum supply of natural gas as of January 1, 2000 of
237,462 MMBtu/day. No single gas contract currently accounts for more than
11% of MCV's portfolio, and no single supplier accounts for more than 18%
of MCV's portfolio. Gas contracts with U.S. suppliers provide for the
purchase of 156,500 MMBtu/day as of January 1, 2000, while gas contracts
with Canadian suppliers provide for the purchase of 80,962 MMBtu/day. In
addition to purchasing natural gas under long term contracts, MCV also
purchases gas under short term ("spot") agreements for a term of less than
one year. During 1999, MCV's plant needs were supplied 82% from long term
gas contracts and 18% from spot gas contracts.
Approximately 92% of MCV's long term gas contracts are based on fixed
prices with escalation tied to various methods. The distribution of the
escalation methods are: 32% - a fixed escalator; 22% - an escalator tied
to the energy index based on Consumers' energy charges under the PPA and
38% - a combination of the fixed escalator and energy index escalator.
Approximately 8% of MCV's long term gas contracts are tied to the price of
the Henry Hub natural contract on the New York Mercantile Exchange for the
month the gas is purchased.
Current U.S. Long Term Gas Contracts. The U.S. long term gas contracts
provide for either a corporate "warranty of deliverability" or a
"dedication of reserves." Under a dedication of reserves, specific
reserves are dedicated to fulfill the supplier's obligations and under a
corporate warranty, reserves are not dedicated but generally MCV is
indemnified for the cost of purchasing supplies elsewhere if the gas is
not delivered as warranted.
Most of the U.S. long term gas contracts contain "take-or-pay" provisions
obligating MCV to purchase at least a specified percentage (generally 75%)
of the minimum daily quantity ("MDQ") to which MCV is entitled under the
contract, unless such failure is due to force majeure, failure of the gas
to meet quality standards or, in some cases, failure of the supplier to
deliver the quantity nominated by MCV. If, over the course of a contract
year, MCV has a take deficiency, it must make a deficiency payment that is
based, in most cases, on the product of the take deficiency and either all
or some percentage of the contract price. In addition, under some of the
U.S. long term gas contracts, the producer may terminate the contract if,
for reasons other than force majeure, MCV fails to purchase a specified
percentage of the MDQ (generally between 50 and 100%) within a specified
period (generally 120 days). Most U.S. long term gas contracts allow a
"make-up period" ranging from one to five years to make up the deficiency.
One supplier currently has the right to reduce the MDQ under one of its
contracts by 5,000 Mcf/day because MCV purchased gas quantities at less
than 75% of the MDQ during the first five years of the contract.
Most U.S. long term gas contracts provide that MCV has the right to
terminate upon 20 days' written notice if the supplier, for any reason
other than force majeure, fails to provide a specific percentage of the
requested volumes of gas for a period of at least 120 consecutive days.
MCV may terminate two other U.S. long term gas contracts upon 30 days'
written notice if the producer, for any reason, including force majeure,
fails to deliver 500 Mcf/day for a period of four consecutive months.
Current Canadian Long Term Gas Contracts. All Canadian long term gas
contracts warrant the delivery of quantities requested by MCV up to the
MDQ, subject to force majeure, and in one case, a 2% tolerance is allowed.
Subject to MCV's obligation to mitigate, Canadian suppliers have agreed to
indemnify MCV for the Facility's replacement gas costs, excluding indirect
or consequential damages or loss of profit, for any breach of this supply
warranty. One producer may be relieved of its supply warranty under
certain circumstances if its ratio of remaining reserves to annual
production is less than ten.
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Prices under the Canadian long term gas contracts are based on reference
prices indexed to Consumers' energy charges under the PPA, subject in some
instances to floor prices below which the reference price cannot fall, and
are denominated in U.S. dollars. All the Canadian long term gas contracts
provide for deliveries at the international border near Emerson, Manitoba.
In addition to an amount per MMBtu based on the quantity of gas actually
delivered (the "Commodity Charge"), MCV pays each Canadian supplier a
Demand Charge to cover the transportation demand charges incurred by the
Canadian suppliers to have transportation capacity for the MDQ available
to the U.S.-Canada border. To the extent that MCV takes less than 100% of
the MDQ from its Canadian long term gas contracts, gas costs per unit
taken by MCV increase because Demand Charges are being paid for the
quantity of gas not being taken. Two contracts provide discounts to the
Commodity Charge where monthly takes are in excess of 85% of MDQ.
The Canadian long term gas contracts establish specific minimum annual
takes (generally 75%). Generally, MCV is required to make deficiency
payments to the Canadian suppliers equal to all or some percentage of the
Commodity Charge multiplied by any deficiency. MCV has make-up rights in
some circumstances under some of the Canadian long term gas contracts.
If a Canadian supplier underdelivers to MCV in any month, subject to
certain force majeure provisions, the contract price is reduced by a
proportionate share of the Canadian and U.S. transporters' Demand Charges.
Further, if a Canadian supplier fails, for reasons other than force
majeure, to deliver 90% of quantities requested up to the MDQ over any 120
consecutive day period then, in most cases following a cure period, MCV
can reduce the MDQ or, under certain circumstances, terminate the
agreement. If the MDQ is reduced, MCV can request the Canadian supplier to
assign to it, to the extent permitted, the quantity of firm transportation
capacity on Canadian transporters that corresponds to the reduction in
MDQ. One of the Canadian suppliers may terminate its contract if MCV fails
to take specified percentages of the MDQ.
Gas Transportation and Storage Arrangements
The location of the Facility permits gas to be transported over a number
of U.S. interstate pipelines. MCV has signed long-term transportation
contracts with four of these pipelines: ANR Pipeline Company ("ANR"); CMS
Panhandle Eastern Pipe Line Company ("Panhandle"); CMS Trunkline Gas
Company ("Trunkline"); and Great Lakes Gas Transmission Company ("Great
Lakes"). ANR and Great Lakes are affiliates of Coastal. CMS Energy, the
parent company of Consumers, owns Panhandle and Trunkline. In addition,
certain of the gas suppliers arrange with pipelines for the gathering and
transportation of gas from their supply sources to the interconnection
points with the major interstate pipelines with which MCV has contracts.
MCV has also entered into long-term transportation arrangements with two
connecting pipelines which link the Facility and its own pipeline to these
interstate pipelines: Michigan Gas Storage Company (a subsidiary of
Consumers) and Consumers. Michigan gas produced by suppliers is currently
transported to Consumers' pipeline system by the supplier under contracts
the suppliers have with Michigan Consolidated Gas Company ("MichCon"), a
wholly-owned subsidiary of MCN Energy Group Inc., on the MichCon pipeline
system in northern Michigan.
The remaining terms of MCV's agreements with the U.S. transporters range
from 2 to 25 years. The transportation rates of ANR, Panhandle, Trunkline,
Great Lakes and Michigan Gas Storage Company are subject to FERC
regulation.
The suppliers under the Canadian long term gas contracts are themselves
responsible for arranging transportation within Canada, and are
responsible for paying the transportation rates charged by the Canadian
transporters, which are then reimbursed by MCV. All suppliers have been
allocated firm transportation capacity on the relevant pipelines. Great
Lakes transports Canadian gas from the U.S.-Canada border to Michigan.
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MCV has also entered into a gas storage agreement with Consumers for the
underground storage of eight billion cubic feet of gas in exchange for
delivery to Consumers of 1.75% of the gas placed in storage (for fuel) and
the payment by MCV to Consumers of an annual storage service charge of
32.04 cents per Dth times the eight billion cubic feet of storage service
provided. Consumers is obligated to provide deliveries from storage up to
a rate of 120,000 Mcf/day, subject to certain restrictions relating to
levels of storage gas maintained in inventory by MCV. This storage
capability allows MCV to meet fluctuating daily operating requirements and
to take advantage of opportunities to make spot purchases during periods
of the year when gas prices are favorable.
Gas Turbine Service Agreement
Under a service agreement between MCV and ABB Power (the "Service
Agreement"), ABB Power sold MCV spare parts for the GTGs and provides
qualified service personnel and supporting staff to assist MCV to perform
scheduled inspections on the GTGs, and to repair the GTGs at MCV's
request. The Service Agreement, as amended, commenced on January 1, 1990,
and will expire upon the earlier of the completion of the sixth series of
major GTG inspections or December 31, 2009. ABB Power does not assure any
level of performance by the GTGs in the Service Agreement but warrants all
repairs made by it pursuant to the Service Agreement.
Under this agreement MCV must pay a $392,885 (in 1999 dollars) per month
inspection fee which is adjusted based upon various wage level indices, is
payable on the basis of operating hours as they occur over the same
period, and may be increased under certain events of force majeure or
change of laws. In addition, MCV pays maintenance and repair fees equal to
material and other direct costs, amounts payable to subcontractors, and
ABB Power's out-of-pocket costs, plus 15% except in the case of fees
relating to certain service engineers, supervisors and specialists where
the maintenance fee shall be equal to the ABB Power rate. ABB Power
warrants that all repairs performed and all spare parts supplied by it
will be free of defects for one year from the date of completion or date
of use, respectively.
The Service Agreement terminates (i) if either ABB Power or MCV fails to
perform the duties outlined under the Service Agreement, at the option of
the other party; or (ii) at MCV's option, if MCV is unable to operate the
Facility for 60 consecutive days due to force majeure. Upon cessation of
the force majeure, the Service Agreement may be reinstated by either party
upon 60 days' notice, together with payment by MCV of a $.4 million
remobilization fee. Upon termination of the Service Agreement (except for
nonperformance by ABB Power), MCV must pay a cancellation payment ($1.0
million in 2000 and $.5 million in any year thereafter, escalated in 1988
dollars).
On March 22, 1994, MCV and ABB Power signed an agreement effective
December 31, 1993, to amend the Service Agreement with respect to
supplying hot gas path parts. Under the amended Service Agreement, ABB
Power will provide hot gas path parts for MCV's twelve gas turbines
through the fourth series of major GTG inspections. In January 1998, MCV
and ABB Power amended the length of the amended Service Agreement to
extend through the sixth series of major GTG inspections, which are
expected to be completed by year-end 2008, for a lump sum fixed price
covering the entire term of the amended Service Agreement of $266.5
million (in 1993 dollars, which is adjusted based on exchange rates and
Swiss inflation indices), payable on the basis of operating hours as they
occur over the same period. The amendment is severable and may be
terminated separately from the existing Service Agreement.
In addition to the January 1998 amendment to the term of the amended
Service Agreement, MCV contracted to purchase from ABB Power 11NM GTG
upgrade packages for eleven of the gas turbine generators for $41.6
million. The purchase of these upgrades was made after successfully
testing one upgrade package at the Facility in 1997. All eleven upgrade
packages have been installed in 1998 and 1999. The upgrade packages on all
twelve gas turbines have added to available capacity and significantly
improved the efficiency of the Facility. Maintenance and spare parts for
the upgrade packages are covered by the amended Service Agreement.
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If the amended Service Agreement is terminated, MCV must pay a
cancellation payment of $15.0 million, which is reduced to $5.0 million
upon completion of the fourth major inspection or July 1, 2003, whichever
comes last. As part of this amended Service Agreement, MCV has purchased a
spare GTG rotor to facilitate maintenance activities and improve
reliability.
Steam Turbine Service Agreement
MCV has entered into a nine year Steam Turbine Maintenance Agreement with
GE effective January 1, 1995, which is designed to improve unit
reliability, increase availability and minimize unanticipated maintenance
costs. MCV is to make monthly payments over the life of the contract
totaling $13.0 million (in 1995 dollars).
F. Employees
As of February 29, 2000, MCV had 132 employees, including 89 engineering,
operating and maintenance personnel. Fifty-eight of MCV's employees are
members of the Utility Workers Union of America, AFL-CIO Local 564 (the
"Union"), and are subject to the terms of a collective bargaining
agreement between MCV and the Union. MCV and the Union signed a new
agreement effective March 1, 1999. It is a five year contract with a wage
reopener in each of the last two years. MCV believes that its relationship
with its employees is good.
G. Regulation
Introduction
The Facility is not subject to most state and federal public utility laws
and regulations. The following is a discussion of the principal regulatory
proceedings and issues which could have an impact on the Facility.
QF Certification
In order to be a QF under PURPA and to maintain this status, not more than
50% of the "equity interest" in a facility may be owned by electric
utilities or their affiliates. In addition, certain operating and
efficiency standards must be maintained on a calendar-year basis. In the
case of a topping-cycle generating plant such as the Facility, the
applicable operating standard requires that the portion of total energy
output that is put to some useful purpose other than facilitating the
production of power (the "Thermal Percentage") be at least 5%. In
addition, the plant must achieve and maintain an average PURPA efficiency
standard (the sum of the useful power output plus one-half of the useful
thermal energy output, divided by the energy input) of at least 45% (the
"Efficiency Percentage"). However, if the plant maintains a Thermal
Percentage of 15% or higher, the required Efficiency Percentage is reduced
to 42.5%. Since 1990, the Facility has achieved the required Thermal and
Efficiency Percentages. During 1999, the Facility achieved a Thermal
Percentage of 18.0% and an Efficiency Percentage of 47.0%.
The Facility's QF certification by FERC became effective when portions of
the Facility were first synchronized to Consumers' system in June 1989. As
a QF, the Facility is exempt from various provisions of the FPA and the
1935 Act and from certain state laws and regulations respecting rate,
financial and organizational regulation of public utilities. On January 31
and March 1, 1990, FERC recertified the Facility as a QF in the context of
an ownership structure in which MCV owns the Facility and in the context
of a leveraged lease transaction in which the Facility is owned by owner
trustees on behalf of institutional investors. In 1997, 1998 and January
2000, MCV filed Notices of Self-Recertification with the FERC to reflect
changes in the configuration and equipment of the Facility, and changes in
MCV Partnership
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ownership (which changes did not result in a change in the percentage of
utility ownership). (See "MD&A -- Outlook -- Maintaining QF Status".)
MPSC and Other Proceedings Relating to Capacity and Energy Charges
Background. The PPA contains a "regulatory out" provision which permits
Consumers, under certain conditions, to reduce the capacity and/or energy
charges payable to MCV and/or to receive refunds of capacity and/or energy
charges paid to MCV under the PPA if the MPSC does not permit Consumers to
recover from its customers the capacity and energy charges specified in
the PPA. Until September 15, 2007, however, the PPA further provides that
Consumers may not reduce the average capacity charge below 3.77 cents per
kWh notwithstanding the MPSC's failure to approve either the amount of
capacity Consumers has agreed to purchase from MCV under the PPA or the
capacity charge specified in the PPA for such purchase.
Energy charges payable by Consumers under the PPA are separate and
distinct from the capacity charge in that no 17-1/2 year protection
against the exercise of the "regulatory out" provision for energy charges
is provided for in the PPA. Although prior approval of energy charges is
not required or provided for under Michigan law, the MPSC has asserted the
authority to disallow Consumers' recovery of a portion of such energy
charges paid to MCV. Any disallowance by the MPSC of Consumers' ability to
pass energy charges through to its customers could, pursuant to the
"regulatory out" provision of the PPA, result in a reduction or refund of
the fixed and variable portions of the energy charge under the PPA.
MPSC and Other Proceedings. In September 1987, in order to obtain a 17-1/2
year rate protection provided under Michigan law, known as Act 81, MCV
requested MPSC approval of the capacity rate provided for in the PPA.
During the pendency of this matter, Consumers, MPSC staff and others
negotiated a revised settlement proposal which was submitted to the MPSC
for approval ("Revised Settlement Proposal").
In a 1993 order, (the "Settlement Order") the MPSC approved with
modifications the Revised Settlement Proposal. Generally, the Settlement
Order approved cost recovery of 915 MW of MCV capacity subject to certain
"availability caps" associated with on-peak and off-peak periods of time
each day and recovery of energy payments based on coal proxy prices (the
formula in the PPA). However, instead of capacity and fixed energy
payments being based on "availability" as provided in the PPA, the
Settlement Order provided for recovery of such payments on an energy
"delivered" basis. The MPSC did not order that the PPA be modified to
conform with the cost recovery approved in the Settlement Order. However,
the MPSC found that since the capacity charges approved for recovery under
the Revised Settlement Proposal would not be reflected in the PPA,
approval for the purposes of Act 81 could not be extended to those
capacity charges. The MPSC did indicate in its order, however, that its
Settlement Order would be implemented for rate-making purposes in 1993 and
subsequent years. Opponents to the Revised Settlement Proposal
unsuccessfully filed appeals of the Settlement Order and the decision is
now final.
In connection with a dispute between MCV and Consumers regarding the
payment of certain fixed energy charges which stemmed from the Revised
Settlement Proposal, on December 10, 1993, Consumers made a written
irrevocable offer of relief ("Offer of Relief") to MCV. The Offer of
Relief was for the purpose of facilitating the sale of Senior Secured
Lease Obligation Bonds, issued in connection with the financing of the
Overall Lease Transaction (See "Overall Lease Transaction") and held by
Consumers. Pursuant to the Offer of Relief, which was rendered final and
irrevocable on December 28, 1993, Consumers committed to pay MCV the fixed
energy charges on all energy delivered by MCV from the block of Contract
Capacity above 915 MW. Consumers did not commit to pay MCV for fixed
energy charges on energy delivered above the "caps" established in the
Settlement Order up to 915 MW. The Offer of Relief represented a "floor"
for the arbitration of this dispute below which payments to MCV of fixed
energy charges in dispute could not fall. Consumers would schedule
deliveries of this energy in accordance with the provisions of the PPA.
This unilateral commitment, which became effective as of January 1, 1993,
to pay fixed energy charges on delivered energy from the block of Contract
Capacity above 915 MW will expire on September 15, 2007.
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On June 23, 1993, Consumers exercised its rights under the PPA to obtain a
determination through arbitration proceedings of whether Consumers could
exercise the "regulatory out" provision of the PPA in view of Consumers'
acceptance of the Settlement Order. In a Final Order issued on February
16, 1995, the arbitrator ruled that Consumers may withhold the fixed
energy charges for available but undelivered energy, as well as for energy
delivered between the "caps" contained in the Settlement Order and 915 MW,
subject to completion of appellate review in all regulatory and judicial
proceedings with respect to the Settlement Order and then pending MPSC
cases. Those regulatory and judicial proceedings are complete and no
changes resulted which would effect the arbitrator's ruling.
On September 8, 1995, Consumers and the MPSC staff asked the MPSC to
create a consolidated proceeding for the purpose of reviewing a settlement
agreement ("325 MW Settlement") entered into between the MPSC staff and
Consumers. The 325 MW Settlement proposed approving one-hundred percent
jurisdictional cost recovery of an additional 325 MW of capacity purchased
from MCV. Cost recovery approval for the 325 MW of MCV Contract Capacity
was in addition to the 915 MW already approved by the MPSC with recovery
from Consumers retail customers to begin January 1, 1996. On November 14,
1996, the MPSC approved, with modifications, the 325 MW Settlement
effective January 1, 1996 ("325 MW Settlement Order"). The modifications
were related to issues not material to MCV. After appeals by various
parties were unsuccessful, the Attorney General of Michigan filed a late
appeal to the Michigan Supreme Court, which has not yet acted upon the
appeal. MCV Management cannot predict the outcome of this proceeding.
PPA - 1998 PSCR Rate Freeze. In January 1998, the MPSC suspended Consumers
annual Power Supply Cost Recovery ("PSCR") plan and reconciliation cases
(annual proceedings in which the MPSC, among other things, sets Consumer's
recovery of MCV energy rates) and set a PSCR "rate freeze" effective
January 1, 1998. This PSCR rate freeze is subject to a further adjustment
which was approved in Consumers' 1997 PSCR reconciliation case. This case
determined 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, without MCV's consent, began paying MCV fixed energy
payments based upon MCV's availability up to 915 MW and on deliveries
above 915 MW. MCV took exception to Consumers payments at the lower level.
However, under the MCV/Consumers Settlement Agreement, Consumers will pay
MCV the fixed energy rates set forth in the PPA based on availability for
the first 915 MW and on delivered energy above 915 MW and up to the 1,240
MW of contract capacity through September 15, 2007 (See "PPA - Settlement
of PPA Issues.").
PPA - Settlement of PPA Issues. In 1997, Consumers informed MCV of several
other potential payment issues it would 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 could 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 would take a similar position on the incremental
energy and capacity resulting from MCV's installation of 11NM upgrade
packages on the GTGs (collectively the "Disputed 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, but in no event sooner than 2002)
all of the previously Disputed Issues under the PPA and includes
definitive obligations for Consumers to make energy payments calculated in
accordance with the PPA, irrespective of any MPSC decisions which may
affect those issues or payments. 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.
Michigan Electric Industry Restructuring Proceedings
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On December 20, 1996, the MPSC issued an order on its own motion to
consider the restructuring of the electric industry in Michigan and issued
orders on June 5, 1997, October 29, 1997, January 14, 1998 and February
11, 1998 (collectively the "Restructuring Orders"). While the
Restructuring Orders are not entirely clear, they provide for a transition
to a competitive regime whereby electric retail customers will be able to
chose their power supplier and pay negotiated or market-based rates for
such power supply. The Restructuring Orders also mandate that utilities
"wheel" third-party power to the utilities' customers. An issue involved
in this restructuring which could significantly impact MCV is stranded
cost recovery. The Restructuring Orders allow recovery by utilities
(including Consumers) of stranded costs, which include capacity charges
from QFs, including MCV, previously approved by the MPSC, 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 customers who chose an alternate power supplier and are
only paid for the period 1998 through 2007 (MCV's PPA expires in 2025).
Customers who chose to remain power supply customers of Consumers will
continue to pay capacity charges as part of rates charged by Consumers,
subject to MPSC rate regulation. The Restructuring Orders do not otherwise
specifically address the recovery of PPA capacity charges after 2007.
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 from all customers. MCV, as well as others, filed appeals in state
and federal courts challenging the Restructuring Orders. In June 1999, the
Michigan Supreme Court issued an opinion in an MPSC "retail wheeling"
experiment case holding, among other things, that the MPSC lacks the
statutory authority to mandate that utilities transmit power of third
parties to the utilities' customers ("Michigan Supreme Court Order").
While the Michigan Supreme Court Order was not directed at the
Restructuring Orders, the MPSC has effectively applied it to them by
entering an order on August 17, 1999, making retail wheeling under the
Restructuring Orders voluntary on the part of the utilities. On September
1, 1999, Consumers filed a statement with the MPSC stating that it intends
to voluntarily implement the Restructuring Orders.
On July 7, 1999, the U.S. District Court granted summary judgment to MCV
declaring that the Restructuring Orders are preempted by federal law to
the extent that they prohibit any utility from recovering from its
customers any charge for avoided costs (or "stranded costs") to be paid to
MCV under PURPA pursuant to the PPA. The order further provides that the
MPSC's prior orders approving the avoided cost rates for MCV takes
precedence over the Restructuring Orders. The Defendants in the lawsuit
(the Commissioners of the MPSC) were permanently enjoined from enforcing
the Restructuring Orders in any manner which denies or precludes
Consumers' recovery of the avoided costs set for MCV, including but not
limited to interpreting or enforcing the Restructuring Orders to preclude
them from recovering all or any portion of the avoided costs previously
approved by the MPSC from its customers, whether before, during, or after
the year 2007. This order and the Commission's August 17, 1999 order are
being appealed. 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 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. On December 20,
1999, FERC issued a final rule, Order No. 2000, designed to encourage all
owners and operators of interstate electric transmission lines to join
regional transmission organizations. Order No. 2000 is intended to
increase competition and remedy
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continuing problems with wholesale transmission access and reliability.
Order No. 2000 does not directly impact MCV since MCV does not own
transmission lines, but could indirectly impact MCV in selling electricity
in the wholesale market. Order No. 2000 is subject to rehearing and
appeal. In addition, several bills have been introduced in Congress to
require states to permit consumers to choose their supplier of electricity
and manage other issues such as transition cost recovery and FERC
jurisdiction of retail electric sales. MCV Management cannot predict the
impact on MCV or the outcome of these proceedings.
Other Regulatory Issues
MCV has been granted a permanent exemption from the Power Plant and
Industrial Fuel Use Act of 1978, as amended, relating to the use of
natural gas as its primary energy source. This exemption permits MCV to
consume gas without restriction as to hours of operation or the capacity
of the Facility to consume an alternate fuel.
The Canadian long term gas contracts require permits from both Canadian
and U.S. authorities. All of the suppliers have received approval from
Canadian provincial authorities to lift and remove sufficient gas volumes
to meet MCV contract requirements until November 1, 2004 and from the
National Energy Board ("NEB") to export these volumes. An application by
Husky Oil Operations Limited to provide 5,000 MMBtu/day of additional gas
to MCV for the period November 1, 2004 through October 31, 2007 is
presently under review by the NEB. The U.S. long term gas contracts are
not subject to regulatory approvals.
PPA - Sale and Assignment
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. The agreement calls for Consumers to sell
PECO between 100 MW to 150 MW 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 was subsequently amended
and clarified, which conditionally permitted the transaction to go
forward. Consumers has asked the MPSC for further clarification, but the
MPSC has not yet ruled on Consumers' latest request. At this time, MCV
Management cannot predict whether Consumers will accept the MPSC's orders.
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.
H. Environmental Matters
MCV has obtained all material federal, state and local environmental
permits necessary to construct and operate the Facility. MCV believes that
the Facility complies in all material respects with all applicable
federal, state and local environmental regulations and laws. There is no
litigation or, to the knowledge of MCV, any administrative proceeding or
investigation pending or threatened with respect to environmental issues
at the Facility. It is possible that applicable environmental laws and
regulations may change, making compliance more costly, time consuming and
difficult. Any such changes, however, are likely to apply to similarly
situated power plants and not only to the Facility.
Water Quality. On two instances in 1999, MCV exceeded the discharge limits
of oil and grease from the oily waste treatment system. The system along
with various plant sumps were cleaned and pumped out after each incident.
The Michigan Department of Environmental Quality ("MDEQ") has taken no
action to date on this issue. MCV's National Pollutant Discharge
Elimination System permit was reissued in August 1999 for the period of
October 1, 1999 to October 1, 2003.
Air Quality. MCV's Renewable Operating Permit ("ROP") was issued June 4,
1999 with an expiration date of June 4, 2004. This permit details the
applicable requirements which apply to all the emission unit/process
groups at MCV and did not apply more stringent limits on the site than was
already in the Permit to Install.
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In September 1998, the United States Environmental Protection Agency
("EPA") announced three rulemaking actions to address interstate and
regional transport of ground level ozone, namely the NOXSIP Call Final
Rule ("SIP Call Rule"), Proposed Federal Implementation Plan ("FIP Plan")
and Section 126 Petitions. The SIP Call Rule requires 22 states (including
Michigan) to submit state implementation plans ("SIPs") which address the
regional transport of ground level ozone through reductions in nitrogen
oxide ("NOX") emissions from combustion sources, including gas turbines.
States were to submit plans to meet certain overall reduction percentages
established in the SIP Call Rule by September 30, 1999, with emission
reduction measures in place by May 1, 2003 and overall compliance by
September 30, 2007. The FIP Plan includes the same NOX reduction
requirements and time tables contained in the SIP Call Rule. The FIP Plan
provides that it would be implemented in any state which fails to submit
an approvable NOX SIP by September 30, 1999 or otherwise fails to require
applicable NOX emission reduction requirements to be in place. The Section
126 Petitions deal with petitions filed by northeastern states under Clean
Air Act, Section 126, against sources in "upwind" states in the Midwest,
including Michigan. Public hearings were held and comments and appeals
have been filed on all three of these rulemaking actions. In two separate
decisions, in May 1999 the United States Court of Appeals for the D.C.
Circuit Court remanded EPA's 8-hour standard, set forth in the SIP Call
Rule, as being unconstitutional and stayed the submission dates required
by the SIP Call Rule. EPA proposes reinstatement of previously assigned
attainment designations/classifications and the 1-hour ozone standard.
Midland is one of six counties that would become a
nonattainment/unclassified area. That attainment designation may bring
more rigorous permitting requirements if new generating equipment were
added to the site. On January 18, 2000, the EPA issued its "Finding of
Significant Contribution and Rulemaking on Section 126 Petitions for the
Purposes of Reducing Interstate Ozone Transport" ("EPA Ozone Rulemaking").
In the EPA Ozone Rulemaking, the EPA made findings that a number of large
electric generating units ("EGUs") named in the petitions emit in
violation of the Clear Air Act prohibition against significantly
contributing to nonattainment or maintenance problems in the petitioning
States. The EPA Ozone Rulemaking also finalizes the Federal NOx Budget
Trading Program as the control remedy for sources affected by the rule.
The final rule is effective February 17, 2000 and requires compliance by
May 1, 2003. MCV is identified in the EPA Ozone Rulemaking as a large EGU
subject to NOx emissions averaging .15 lb/MMBtu during the ozone season
(May through September). MCV believes it will be able to meet the
standards in the EPA Ozone Rulemaking which is subject to rehearing and/or
appeal. MCV Management cannot predict the outcome of these proceedings.
Dow Operations. Portions of the Site were previously owned by Dow. At one
time, Dow had a brine pond, a portion of which was on the Site. Brine
pipelines previously crossed the Site. Some underground brine lines were
capped and abandoned in place. Dow had brine lines running near the Site.
One brine well was used by Dow on the Site. Dow brine pipeline spills off
the Site are listed on Michigan's "List of Sites of Environmental
Contamination" established under Michigan Environmental Response Act
("MERA"). The principal contaminant of concern at the pipeline spill
locations is brine. The Site also may have been used for the testing of
explosives during the 1950s or the 1960s.
The Dow Plant, immediately across the Tittabawassee River from the Site,
is on Michigan's "List of Sites of Environmental Contamination"
established under MERA. The principal contaminants of concern at the Dow
Plant are dioxins believed to have originated from chemical product
manufacturing.
While it is possible that MCV or Consumers could incur liability under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980 ("CERCLA") or MERA for Site conditions from previous Dow activities,
MCV does not know of any conditions on the Site that MCV believes require
cleanup. In any event, to the extent that such liability could be shown to
be due to Dow's activities, MCV or Consumers would seek contribution from
Dow for any costs incurred in connection with Dow's activities.
Noise. To minimize noise from normal plant operations, MCV has installed
silencers in all of the exhaust stacks, a silencer on the hogging air
ejector and anti-noise insulation on the gas knockout drum. Additionally,
steam venting silencers have been installed on all 12 HRSGs to control
noise in connection with startup and shutdown operation. In 1996, MCV
installed mufflers on the atmospheric dump valves to reduce noise in the
event of a steam turbine trip or during periods when the steam turbines
are out of service.
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<PAGE> 19
Environmental Indemnity Agreements. CMS Energy has executed environmental
indemnity agreements in favor of the Senior Bond Trustee, the Subordinated
Bond Trustee, the Tax-Exempt Trustee (all as defined in "Overall Lease
Transaction"), MCV and the holders, from time to time, of the Bonds.
Pursuant to these indemnity agreements, CMS Energy has agreed to indemnify
these parties and certain related parties against all expense, damage and
liability incurred by them which is caused by certain classes of
environmental matters to the extent these occurred at the Site before June
15, 1990 (with certain exceptions). These matters include (i) the presence
of any environmentally hazardous materials at the Site, (ii) any
environmentally hazardous activity at the Site and (iii) any event which
is a violation of environmental laws affecting the Site (including
amendments and supplements to such laws whenever enacted except, in the
case of such enactments after June 15, 1990, to the extent they would
require installation or modification of equipment). CMS Energy has entered
into a similar environmental indemnity agreement for the benefit of the
Owner Trustee (in its individual and trust capacities), the Owner
Participants (as defined in "Overall Lease Transaction") and certain
related parties. In the agreement in favor of MCV, payments by CMS Energy
are subject to a deductible of $20,000 per occurrence and $240,000 in the
aggregate. The agreement in favor of MCV terminates when all the Senior
Bonds (as defined in "Overall Lease Transaction") have been paid in full
and all the holders of the Bonds (as defined in "Overall Lease
Transaction") have been paid all amounts owed under the general indemnity
in the Participation Agreements, except that such indemnity shall not
terminate with respect to certain rights arising prior to such final
payment.
MCV has also executed an environmental indemnification agreement in favor
of CMS Energy under which it has agreed to indemnify CMS Energy in
connection with (i) any violation of the environmental laws by MCV with
respect to the Site after June 5, 1988, (ii) the release or disposal of
any hazardous materials at, on or to the Site after June 5, 1988 (unless
caused by CMS Energy or resulting from hazardous materials at or on the
Site prior to June 5, 1988), and (iii) any hazardous activities at the
Site after June 5, 1988, provided that CMS Energy may satisfy these
obligations only from amounts that are otherwise available for
distribution to Partners under the Participation Agreements.
I. Overall Lease Transaction
General
Permanent financing for the Facility has been provided through five
separate but contemporaneous sale and leaseback transactions (the "Overall
Lease Transaction"), pursuant to which MCV sold undivided interests in all
of the fixed assets comprising the Facility to the Owner Trustee under
five separate owner trusts (the "Owner Trusts") established for the
benefit of certain institutional investors ("Owner Participants"). State
Street Bank and Trust Company serves as Owner Trustee under each of the
Owner Trusts (in each such capacity, an "Owner Trustee" and, collectively,
the "Owner Trustees"). Each Owner Trustee leases its undivided interest in
the Facility to MCV under one of five separate leases, each having a
25-year base term (the "Basic Lease Term") commencing in 1990. The Overall
Lease Transaction was closed in two phases. The first closing (involving
pollution control and certain related assets) occurred on March 16, 1990,
(the "First Closing" or the "First Closing Date") and the second closing
(involving the remainder of the Facility) occurred on June 16, 1990 (the
"Second Closing" or the "Second Closing Date").
Each purchase of an undivided interest in the Facility by an Owner Trustee
and the lease of such undivided interest back to MCV constitutes a
separate transaction (each, a "Lease Transaction"). The undivided
interests are in varying "undivided interest percentages" ranging from
approximately 4.4% to 75.5%. Each Lease Transaction was effected through
separate, but substantially identical, documents relating to a particular
undivided interest, including a Trust Agreement pursuant to which the
Owner Participant established the Owner Trust with the Owner Trustee and
authorized the Owner Trustee to hold title to its undivided interest on
its behalf and lease the same to MCV (each a "Trust Agreement"), a
Participation Agreement pursuant to which MCV, the Owner Participant, the
Owner Trustee and the various other parties to such Lease Transaction
agreed to the terms and conditions thereof (each, a "Participation
Agreement"), a
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<PAGE> 20
Lease Agreement pursuant to which the Owner Trustee leases the undivided
interest to MCV (each, a "Lease") and two separate Trust Indentures
pursuant to which the Owner Trustee issued Senior Notes (as defined in
this Section I, "Overall Lease Transaction -- The Lease Funding") (each, a
"Senior Note Indenture") and Subordinated Notes (as defined in this
Section I, "Overall Lease Transaction -- The Lease Funding") (each, a
"Subordinated Note Indenture" and, together with the Senior Note
Indentures, the "Note Indentures"). The United States Trust Company and
First Union National Bank are note trustees under the Senior Note
Indenture and the Subordinated Note Indenture, respectively (the "Note
Trustees"). There is, however, a single Collateral Agency and
Intercreditor Agreement (the "Intercreditor Agreement"), executed by the
Owner Trustees, MCV, the Note Trustees, the Working Capital Lender (as
defined below) and US Bank Trust as collateral Agent (the "Collateral
Agent"), which provides for the creation and maintenance of certain
reserves, the deposit of all revenues generated by the Facility, the
payment of operating expenses, and the distribution of remaining revenues
according to the priorities set forth therein to or for the account of the
Working Capital Lender, the Note Trustees, the Owner Trustees, MCV and the
affiliates of certain Partners. MCV has arranged for a $50 million working
capital line (the "Working Capital Facility") with Bank of Montreal (the
"Working Capital Lender") which expires August 31, 2001. As security for
its obligation to repay advances made under the Working Capital Facility,
MCV has granted to the Working Capital Lender a first priority security
interest in certain receivables earned by MCV through the sale of
electricity, electric generating capacity, natural gas, or steam to third
parties, including Dow, Consumers and DCC (the "Earned Receivables") and
in MCV's natural gas inventory (the "Natural Gas Inventory"). Payments due
under the Working Capital Facility are direct obligations of MCV and will
in general have a priority in payment over payments under the Leases (and
thus on the Notes, as defined in this Section "Overall Lease Transaction
-- The Lease Funding," and the Bonds).
Pursuant to separate Tax Indemnification Agreements between MCV and the
Owner Participants (the "Tax Indemnification Agreements"), MCV has agreed
to indemnify the Owner Participants against certain adverse federal income
tax consequences.
Statement of Financial Accounting Standards ("SFAS") No. 98, which applies
to sale and leaseback transactions entered into after June 30, 1988,
specifies the accounting required by generally accepted accounting
principles for a seller-lessee's sale and simultaneous leaseback
transaction involving real estate, including real estate with equipment.
In accordance with SFAS No. 98, the Overall Lease Transaction must be
accounted for as a financing obligation and not a sale, since MCV has the
option to purchase the undivided interests in the Facility at the end of
the Basic Lease Term, which expires on July 23, 2015, and has other forms
of continuing involvement with the Facility throughout the Basic Lease
Term.
The Lease obligation is recorded as long-term debt, at the present value
of future minimum Lease payments. There was no change to property, plant
and equipment, on the Consolidated Balance Sheet, as the transaction was
accounted for as a financing arrangement for financial reporting purposes.
Certain Lease transaction expenses of MCV are recorded as deferred
financing costs and amortized using the interest method over the term of
the Lease. On an ongoing basis, the monthly accrual for the semi-annual
Lease payments are divided between interest and principal components using
the effective interest method.
The Lease Funding
Each Owner Trustee has financed the purchase of its undivided interest in
the Facility through a combination of equity invested by its related Owner
Participant ($556,320,000 in the aggregate) and debt incurred through the
issuance of nonrecourse notes by the Owner Trustee under the related Note
Indentures, consisting of senior secured notes ($1,200,000,000 in the
aggregate) (the "Senior Notes") and subordinated secured notes
($567,180,000 in the aggregate) (the "Subordinated Notes," and together
with the Senior Notes, the "Notes"). In order to facilitate the sale of
this debt (other than the debt evidenced by the Subordinated Notes pledged
to secure the Tax-Exempt Bonds) (as defined below), two funding
corporations have been established. Midland Funding Corporation I was
established for the purpose of issuing various series of senior bonds (the
"Senior Bonds"), each series secured by a pledge of the corresponding
series of Senior Notes issued by the five Owner Trustees. Midland Funding
Corporation II was established for the
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<PAGE> 21
purpose of issuing various series of subordinated bonds (the "Subordinated
Bonds" and, together with the Senior Bonds, the "Bonds"), each series
secured by a pledge of the corresponding series of the Subordinated Notes
issued by the five Owner Trustees. These pledged Subordinated Notes are
secured pari passu with the Subordinated Notes pledged to secure the
Tax-Exempt Bonds issued by the Tax-Exempt Issuer (as defined below). The
use of the funding corporations facilitated the sale of debt by permitting
the offer and sale of three series of Senior Bonds and two series of
Subordinated Bonds, each secured equally and ratably by the corresponding
series of Notes issued by each of the five Owner Trusts, thus eliminating
the need to offer a greater number of separate series of Notes to the
investor. In addition, the use of a corporate obligor facilitates
compliance with certain investment laws by certain institutional
purchasers of the Senior and Subordinated Bonds. The aggregate principal
amount, maturity date, interest rate, redemption provisions and other
material terms of each series of the Bonds are identical to those of the
Notes pledged as security therefore.
The Economic Development Corporation of the County of Midland (the
"Tax-Exempt Issuer") has issued certain series of tax-exempt bonds (the
"Tax-Exempt Bonds"), which are issued under and secured by a tax-exempt
collateral trust indenture. The proceeds from the issuance and sale of the
Tax-Exempt Bonds were used to finance certain pollution control assets
constituting a portion of the Facility. Each series of Tax-Exempt Bonds is
secured solely by a corresponding series of Subordinated Notes issued by
the Owner Trustees, which are secured by a junior security interest in the
undivided interests of the Owner Trustees in the Facility and certain of
their rights under and to the related Leases, including rents thereunder
and the Lease Collateral, including (subject to the rights of the Working
Capital Lender, which include a prior security interest in certain of
MCV's receivables and natural gas inventory securing the Working Capital
Facility) the revenues and other payments received thereunder. The
Subordinated Notes securing the Tax-Exempt Bonds and the Subordinated
Notes issued by the Owner Trustees to secure the Subordinated Bonds are
secured by junior security interests in a shared collateral pool.
Security and Sources of Payment
The sole sources of payment for the Senior Bonds and Subordinated Bonds
are certain pledged Senior Notes and pledged Subordinated Notes,
respectively, issued by each of the five Owner Trustees and pledged under
the Senior Bond Indenture and Subordinated Bond Indenture, respectively.
The pledged Senior Notes and pledged Subordinated Notes of each Owner
Trustee are nonrecourse obligations of such Owner Trustee payable solely
from the rental payments made by MCV under its related Lease and the other
security therefor. The Senior Notes are secured by a senior security
interest in such Owner Trustee's undivided interest in the Facility and
certain of its rights under and to the related Lease, including rents and
the Lease collateral, including (subject to the rights of the Working
Capital Lender) the revenues and other payments received thereunder. The
Pledged Subordinated Notes are secured on a pari passu basis with the
Subordinated Notes pledged to secure the Tax-Exempt Bonds, by a junior
lien on and security interest in such collateral. Such lien, security
interest and assignment are subordinated to the senior lien, security
interest and assignment securing the Senior Notes issued by such Owner
Trustee (and pledged to secure the Senior Bonds).
Additional Senior Notes may be issued (i) to refinance the Senior Notes,
in whole but not in part, and (ii) to pay certain costs of modifying the
Facility. Additional Subordinated Notes may be issued (i) to refinance any
series of Subordinated Notes, and (ii) to pay certain costs of modifying
the Facility. Any additional Senior and Subordinated Notes will rank pari
passu with all Senior and Subordinated Notes, respectively, then
outstanding. The aggregate principal amount of Senior and Subordinated
Bonds that may be issued is unlimited, provided that at no time may the
aggregate principal amount of Senior and Subordinated Bonds exceed the
aggregate principal amount of Senior and Subordinated Notes, respectively,
then outstanding. The future issuance of additional Senior and
Subordinated Bonds (other than for refinancing purposes) would create
additional claims against the security for the Note Indentures and the
amounts available to repay amounts in respect of the Bonds currently
outstanding in the event of foreclosure.
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<PAGE> 22
The rental payments under the Leases are established to provide funds
sufficient to service the debt issued by the Owner Trustees and to provide
the Owner Participants with a return on their equity investment. MCV is
unconditionally obligated to make rental payments under the Leases in
amounts sufficient to provide for scheduled payments of the principal of,
premium, if any, and interest on the Notes, which amounts, in turn, are
equal to scheduled payments of principal of, premium, if any, and interest
on the Bonds. MCV has pledged to each Owner Trustee an undivided interest
percentage of all revenues to be derived from the operation of the
Facility, together with its rights with respect to the PPA, the SEPA, and
various other contracts of MCV relating to the Facility (the "Lease
Collateral") to secure its rental obligations under the Leases. Neither
the Bonds nor the Notes are direct obligations of, or guaranteed by, MCV
nor do any Partners of MCV have any liability under the terms of the
Notes, the Bonds or the Leases. Neither the Partners nor the Partner
affiliates have any obligations under the Leases, and the obligations of
MCV under the Leases and the other documents related to the Overall Lease
Transaction are nonrecourse to the Partners and the Partner affiliates.
Any default or foreclosure with respect to the undivided interest of an
Owner Trustee relates solely to such undivided interest. There is no
cross-collateralization among Owner Trustees and the Subordinated Bond
trustee as holder of the pledged Subordinated Notes. The Leases, however,
contain identical events of default including an event of default related
to a failure by MCV to pay principal of or interest on any indebtedness
for borrowed money or other financing obligations (including lease
obligations) with respect to an amount greater than $10 million.
Pursuant to the Intercreditor Agreement, a reserve account has been
created for the benefit of the holders of the Notes, which had been
initially funded with $90 million in cash (the "Reserve Account"). The
Intercreditor Agreement sets forth circumstances under which amounts in
the Reserve Account will be adjusted to equal the greater (for so long as
the Senior Bonds are outstanding) or the lesser (after the Senior Bonds
have been paid in full) of $137 million or the debt portion of basic rent
under the Leases payable on the next succeeding basic rent payment date,
and limited circumstances under which no more than $10 million contained
therein may be withdrawn therefrom to provide working capital. As of
December 31, 1999, MCV had funds of $138.5 million in the Reserve Account.
Excess funds in the Reserve Account are periodically transferred to MCV.
Item 2. PROPERTIES
MCV leases the Facility from the Owner Trustees pursuant to the Leases. For a
description of the Facility, see "The Facility." For a description of the
financing arrangements in connection with the lease of the Facility to MCV,
including a description of the liens on the Facility, see "Overall Lease
Transaction."
The Facility is located on the Site, previously the location of Consumers'
abandoned Midland Nuclear Generating Plant in Midland County, Michigan. The Site
contains approximately 1,200 acres, including an 880-acre cooling pond. By a
lease dated as of December 29, 1987, Consumers, as fee simple owner, leased the
land on which the Facility is located to MCV, CMS Midland and MDC (the "Original
Lease") which was amended and restated in its entirety in 1988. By five separate
instruments, each dated as of June 1, 1990, Consumers and MCV created undivided
interests in the amended Original Lease and amended and restated the lease to
reflect the creation of such interests (the Original Lease as so amended and
restated is referred to as the "Ground Lease"). In connection with the Overall
Lease Transaction, MCV assigned to each Owner Trustee an undivided interest in
the Ground Lease equal to such Owner Trustee's undivided interest percentage.
Each Owner Trustee in turn subleased its undivided interest back to MCV pursuant
to separate subleases of the Site.
In addition to leasing the Site, the Ground Lease assigns to MCV appurtenant
easement rights for a gas pipeline in Midland and Isabella Counties, Michigan
and easements in the City of Midland for a railroad spur track and a water
pipeline. The Ground Lease terminates on December 31, 2035, with two renewal
terms of five years each and with additional renewal terms of two years each.
The annual rental under each of the Ground Leases is equal to the undivided
interest percentage of $600,000 per annum through the two five-year renewal
terms; thereafter, it is fair market rental. The Ground Leases are fully net
leases.
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Item 3. LEGAL PROCEEDINGS
MCV has filed property tax appeals contesting MCV's property taxes for 1997,
1998 and 1999, which are pending before the Michigan Tax Tribunal. MCV has also
filed a property tax appeal for 2000. MCV Management cannot predict the outcome
of these proceedings.
Other than as discussed in "Regulation" there are no other pending legal
proceedings to which MCV is a party and to which any of its property is subject,
that are material in relation to the consolidated financial statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of MCV. The
selected operating and financial position data as of December 31, 1999, 1998,
1997, 1996 and 1995 and for each of the five years ended December 31, 1999 have
been derived from audited financial statements. This information should be read
in conjunction with "MD&A" and the financial statements and notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Revenues $ 617,352 $ 627,054 $ 651,581 $ 645,168 $ 617,818
Operating Income 215,884 222,461 216,499 227,883 232,347
Cumulative Effect on Prior Years (to -- -- 15,533 -- --
December 31, 1996) of Change in Method of
Accounting for Property Taxes (1)
Net Income (Loss) 80,069 80,327 77,737 65,524 60,936
BALANCE SHEET DATA: (2)
Total Assets 2,299,212 2,286,506 2,351,271 2,363,945 2,360,530
Capitalization
Partners' Equity 437,617 357,548 277,221 199,484 133,960
Long-Term Debt, Excluding Current Maturities
1,584,865 1,723,960 1,788,291 1,929,241 2,007,815
</TABLE>
(1)Effective January 1, 1997, MCV changed its method of accounting for property
taxes so that such taxes are expensed monthly during the fiscal period of the
taxing authority for which the taxes are levied. This change provides a
better matching of property tax expense with both the payment for services
and those services provided by the taxing authorities. Prior to January 1,
1997, the Partnership expensed property taxes monthly during the year
following the assessment date (December 31). Also see MD&A "Cumulative Effect
of Accounting Change" and Notes to Consolidated Financial Statements, Note 3,
"Change in Method of Accounting for Property Taxes."
(2)Balance sheet data consists of the balances at December 31.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ("MD&A")
Results of Operations
Overview
For the year ended December 31, 1999, MCV recorded net income of $80.1 million,
a decrease of $.2 million as compared to 1998 net income of $80.3 million. The
decrease was primarily due to lower contract payments from Dow, lower energy
rates under the PPA with Consumers and the recording in 1998 of a non-recurring
interest refund from Great Lakes. This decrease was partially offset by a
Settlement Agreement between MCV and Consumers effective January 1, 1999, which
resolved a number of disputed issues under the PPA between the
22
<PAGE> 25
parties. Also partially offsetting this decrease in earnings was lower interest
expense on MCV's financing obligation, additional power sales outside of the
PPA, and lower depreciation expense.
For the year ended December 31, 1998, MCV's recorded net income was $2.6 million
higher than the 1997 net income of $77.7 million. The increase in 1998 earnings
is primarily the result of lower interest expense on MCV's financing obligation,
lower depreciation expense and higher available PPA capacity. This increase was
partially offset by the 1997 change in method of accounting for property taxes
(the cumulative effect on prior years of this change increased 1997 earnings by
$15.5 million) and an increase in the average cost of gas.
Operating Revenues
The following represents significant operating revenue statistics for the years
ended December 31 (dollars in thousands except average rates):
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
Operating Revenues $ 617,352 $ 627,054 $ 651,581
Capacity Revenue $ 407,429 $ 407,518 $ 405,488
PPA Contract Capacity (MW) 1,240 1,240 1,240
Billed PPA Availability (1) 98.5% 99.4% 98.9%
Electric Revenue $ 196,301 $ 192,258 $ 218,219
PPA Delivery as Percentage of Contract Capacity 78.2% 79.3% 91.2%
PPA, SEPA and Other Electric Deliveries (MWh) 9,205,083 9,194,474 10,455,717
Average PPA Variable Energy Rate ($ / MWh) $ 16.00 $ 16.76 $ 16.87
Average PPA Fixed Energy Rate ($ / MWh) $ 3.52 $ 3.75 $ 3.94
Steam Revenue $ 13,622 $ 12,008 $ 12,604
Steam Deliveries (Mlbs) 5,803,863 5,584,273 5,717,720
Other Revenue $ -- $ 15,270 $ 15,270
</TABLE>
(1) As part of the Settlement Agreement (See "Capacity and Energy Payments
Under the PPA" and Notes to Consolidated Financial Statements, Note 8,
"Contingencies, PPA - Settlement of PPA Issues"), effective January 1, 1999,
MCV agreed with Consumers to cap PPA availability at 98.5% in each calendar
year for so long as Consumers did not resell the capacity and energy under
the PPA in the wholesale market.
For the year ended December 31, 1999, MCV's operating revenues decreased by $9.7
million from 1998. This decrease is due to the expiration of the installment
payments under the SEPA with Dow, lower energy rates under the PPA and lower
capacity revenues under the PPA resulting from the capping of the capacity
payments under the Settlement Agreement. This decrease was partially offset by a
one-time net $6.4 million increase in electric revenues as a result of the
Settlement Agreement with Consumers and additional capacity and electric sales
revenues outside of the PPA.
For the year ended December 31, 1998, MCV's operating revenues decreased $24.5
million from 1997. This decrease primarily resulted from lower electric
deliveries under the PPA with Consumers, resulting from Consumers' change to
economic dispatch of the facility (See "Outlook - Operating Outlook") and to
lower variable and fixed energy rates. This decline in electric revenue was
largely offset by a decline in fuel costs also associated with the decrease in
dispatch. The decrease in energy related revenues was partially offset by higher
capacity payments generated under the PPA.
Operating Expenses
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<PAGE> 26
For the year ended December 31, 1999, MCV's operating expenses were $401.5
million, which included $244.4 million of fuel costs. During this period, MCV
purchased approximately 82.8 Bcf of natural gas for plant use, of which a net
2.5 Bcf was used for transportation fuel and as a net change to gas in storage.
During this same period, MCV consumed 82.3 Bcf, of which 1.9 Bcf of this total
was gas provided by Dow. The average commodity cost of fuel for 1999 was $2.50
per MMBtu. For the year 1998, MCV's operating expenses were $404.6 million,
which included $244.7 million of fuel costs. During this period, MCV purchased
approximately 87.5 Bcf of natural gas for plant use, of which a net 4.4 Bcf was
used for transportation fuel and as a net change to gas in storage. During this
same period, MCV consumed 84.1 Bcf, of which 2.9 Bcf of this total was gas
provided by Dow. The average commodity cost of fuel for 1998 was $2.45 per
MMBtu. Fuel costs for 1999 compared to 1998 decreased $.3 million. This decrease
was primarily due to a lower electric dispatch by Consumers under the PPA,
partially offset by a higher 1999 average cost of gas due to increases in the
long term natural gas prices.
In 1999, operating expenses other than fuel costs decreased $2.8 million from
1998, primarily resulting from lower depreciation expense. All other expenses
incurred in these periods were considered normal expenditures to achieve the
recorded operating revenues.
For the year ended December 31, 1998, MCV's operating expenses decreased $30.5
million from the year 1997, which included a $21.7 million decrease in fuel
costs. This decrease was primarily due to lower gas usage resulting from a lower
electric dispatch by Consumers, and Dow's election to provide its own gas to
generate part of its take of steam and electricity. This decrease was partially
offset by a higher 1998 average cost of gas due to increases in long-term
natural gas prices.
In 1998, operating expenses other than fuel costs decreased $8.8 million from
1997. This decrease was primarily due to lower depreciation expense, resulting
from a revision to the useful lives of the gas turbines and certain related
capital spares to more closely reflect the economic lives of these assets. Other
expenses incurred in these periods were considered normal expenditures to
achieve the recorded operating revenues.
Other Income (Expense)
The decrease in interest and other income in the year 1999 compared to 1998
reflected the 1998 accrual for the interest income refund from Great Lakes. The
decrease in interest expense in 1999 from 1998 is due to a lower principal
balance on MCV's financing obligation.
The increase in interest and other income for the year 1998 compared to 1997
reflected an interest income refund from Great Lakes. The decrease in interest
expense for the year 1998 compared to 1997 was due to a lower principal balance
on MCV's financing obligation.
Cumulative Effect of Accounting Change
Effective January 1, 1997, MCV changed its method of accounting for property
taxes so that such taxes are expensed monthly during the fiscal period of the
taxing authority for which the taxes are levied. This change provides a better
matching of property tax expense with both the payment for services and those
services provided by the taxing authorities. Prior to January 1, 1997, the
Partnership expensed property taxes monthly during the year following the
assessment date (December 31). The cumulative effect on prior years of this
change increased earnings for the year 1997 by approximately $15.5 million while
the current year effect increased 1997 earnings by approximately $.6 million.
Market Risk Sensitivity
Market risks relating to MCV's operations result primarily from changes in
commodity prices, interest rates and foreign exchange rates. To address these
risks, MCV enters into various hedging transactions as described below. MCV does
not use financial instruments for trading purposes and does not use leveraged
instruments. Fair values included herein have been determined based upon quoted
market prices. The information presented below should
24
<PAGE> 27
be read in conjunction with Note 2, " Significant Accounting Policies" and Note
6, "Long-Term Debt" to the Consolidated Financial Statements of MCV.
Interest Rate Risks. In 1990, MCV obtained permanent financing for the Facility
by entering into sale and leaseback agreements ("Overall Lease Transaction")
with a lessor group, related to substantially all of MCV's fixed assets. In
accordance with SFAS No. 98, "Accounting For Leases," the sale and leaseback
transaction has been accounted for as a financing arrangement. Under the terms
of the Overall Lease Transaction, MCV sold undivided interests in all of the
fixed assets of the Facility for approximately $2.3 billion, to the Owner Trusts
established for the benefit of the Owner Participants. The financing
arrangement, entered into for a term of 25 years, maturing in 2015, has an
effective interest rate of approximately 8.7%, payable in semi-annual
installments of principal and interest. Due to the unique nature of the
negotiated financing obligation it is impractical to estimate the fair value of
the Owner Participants' underlying debt and equity instruments supporting this
financing obligation.
In addition, to manage the effects of interest rate volatility on interest
income while maximizing return on permitted investments, MCV has established an
interest rate hedging program. The carrying amounts of MCV's short-term
investments approximate fair value because of the short term maturity of these
instruments. MCV's short-term investments are made up of investment securities
held to maturity and as of December 31, 1999 have original maturity dates of
less than one year.
For MCV's debt obligations, the table below presents principal cash flows and
the related interest rate by expected maturity dates. The interest rate reflects
the fixed effective rate of interest of the financing arrangement. For the
interest rate swap transactions, the table presents the notional amounts and
related interest rates by fiscal year of maturity. The variable rates presented
are the average of the forward rates for the term of each contract, as valued at
December 31, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date
--------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Long-Term Debt
Fixed Rate $288.6 $292.2 $309.2 $214.0 $247.9 $1,542.6 $2,894.5 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 $45.0 Immaterial
(in millions)
Avg. Pay Rate 6.67%
Avg. Receive Rate 6.32%
Floating to Floating $20.0 Immaterial
(in millions)
Avg. Pay Rate 6.93%
Avg. Receive Rate 6.67%
</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.
25
<PAGE> 28
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 seven months. The table presents the carrying
amounts and fair values at December 31, 1999:
<TABLE>
<CAPTION>
Expected Maturity in 2000 Fair Value
------------------------- ----------
Futures Contracts:
<S> <C> <C>
Contract Volumes (10,000 MMBtu) Long/Buy 307 --
Contract Volumes (10,000 MMBtu) Short/Sold (122) --
Weighted Average Price Long (per 10,000 MMBtu) $2.447 $2.342
Weighted Average Price Short (per 10,000 MMBtu) $2.470 $2.329
Contract Amount ($US in Millions) $4.5 $4.3
</TABLE>
Foreign Currency Risks. MCV periodically enters into foreign exchange forward
purchase contracts for Swiss Francs to hedge its foreign currency exposure
against adverse currency fluctuations impacting the payments under the amended
Service Agreement with ABB Power. The gains and losses on these transactions,
accounted for as hedges, are deferred on the balance sheet and included in the
measurement of the underlying capitalized major renewal costs when incurred.
Forward contracts which are entered into have maturity dates of less than one
year. MCV did not have any such forward purchase contracts for Swiss Francs
outstanding as of December 31, 1999.
Liquidity and Financial Resources
During the years ended December 31, 1999 and 1998, net cash generated by MCV's
operations was $154.4 million and $162.9 million, respectively. The primary use
of net cash was for the payment of principal on the financing obligation and
capital expenditures. No distributions to the Partners for federal tax
obligations were made in the last three years; instead, funds totaling $10.3
million, $23.2 million and $13.2 million were retained by MCV as working capital
in 1999, 1998 and 1997, respectively, since the Reserve Account was funded to
the maximum amount of $137 million in 1994, per the Intercreditor Agreement.
MCV's cash and cash equivalents have a normal cycle of collecting six months of
revenues less operating expenses prior to making the semiannual interest and
principal payments of the financing obligation due in January and July for the
next fifteen years. During 1999, 1998 and 1997, MCV paid the basic rent
requirements of $221.7 million, $309.0 million and $254.6 million, respectively,
as required under the Overall Lease Transaction.
MCV also has arranged for a $50 million working capital line ("Working Capital
Facility") from the Bank of Montreal to provide temporary financing, as
necessary, for operations. The Working Capital Facility has been secured by
MCV's natural gas inventory and earned receivables. At any given time,
borrowings and letters of credit are limited by the amount of the borrowing
base, defined as 90% of earned receivables. The borrowing base varies over the
month as receivables are earned, billed and collected. At December 31, 1999, the
borrowing base was $46.4 million. The Working Capital Facility term currently
extends to August 31, 2001. MCV did not utilize the Working Capital Facility
during 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 December 31, 1999, there was $312.0 million (which includes
$63.4 million reserved for capital improvements and spare parts purchases),
including accrued interest, in available reserves for such purposes.
Inflation
MCV does not expect inflation to have a significant effect on future results of
operations in the near term. The majority of MCV's gas purchases are based on
contracts with a fixed price in a base year which is subject to adjustment under
various methods -- a fixed price, a fixed price with an escalator, an index
based on Consumers' energy charges under the PPA, or a combination thereof --
which permits the seller to increase the price by the
26
<PAGE> 29
greater of the fixed escalator or the energy charge index. Management believes
these provisions provide a measure of relief from inflation risks. Under the
terms of MCV's financing obligations under the Overall Lease Transaction, all of
the outstanding long-term borrowings are at fixed rates.
Outlook
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995. The following discussion of the outlook for MCV contains certain
"forward-looking statements" as defined by the Private Securities Litigation
Reform Act of 1995 (the "Act"), including, without limitation, discussion as to
expectations, beliefs, plans, objectives and future financial performance, or
assumptions underlying or concerning matters discussed reflecting MCV's current
expectations of the manner in which the various factors discussed therein may
affect its business in the future. Any matters that are not historical facts are
forward-looking and, accordingly, involve estimates, assumptions, and
uncertainties which could cause actual results or outcomes to differ materially
from those expressed in the forward-looking statements. Accordingly, this "Safe
Harbor" Statement contains additional information about such factors relating to
the forward-looking statements. There is no assurance that MCV's expectations
will be realized or that unexpected events will not have an adverse impact on
MCV's business.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include the
final outcome of the MPSC Restructuring Orders and challenges thereto,
governmental policies, legislation and other regulatory actions (including those
of the Michigan Legislature, 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 pricing and
transportation of commodities and environmental legislation/regulation, among
other important factors. All such factors are difficult to predict, contain
uncertainties which may materially affect actual results, and are beyond the
control of MCV.
Results of operations are largely dependent on successfully operating the
Facility at or near contractual capacity levels, the availability of natural
gas, the level of energy rates paid to MCV relative to the cost of fuel used for
generation, Consumers' performance of its obligations under the PPA and
maintenance of the Facility's QF status.
Operating Outlook. In 1999, approximately 70% 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, which was effective January 1,
1999. Actual PPA availability was 99.7% in 1999, 99.4% in 1998 and 98.9% in
1997. Availability will depend on the level of scheduled and unscheduled
maintenance outages, and on the sustained level of output from each of the GTGs
and the steam turbines. MCV expects long-term PPA availability to meet or exceed
the capped level of 98.5%, though prolonged equipment outages could materially
reduce the level of availability.
In March 1998, Consumers began economically dispatching the Facility by
scheduling energy deliveries on an economic basis relative to the cost of other
energy resources, instead of at the higher dispatch levels experienced in 1997
and earlier years. Although MCV has experienced a decline in both electric
operating revenues and operating costs as a result of this change in dispatch;
this change has not resulted in a material adverse affect on MCV's financial
position.
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 a
portion of its fuel supply beyond the year 2005, MCV recognizes that its
existing long term 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 its existing
fixed price gas contracts or for gas that may be required by the Facility in
excess of the gas that MCV has under contract.
27
<PAGE> 30
Energy Rates and Cost of Production. Under the PPA, energy charges are based on
the costs associated with fuel inventory, operations and maintenance, and
administrative and general expenses associated with certain of Consumers' coal
plants. However, MCV's costs of producing electricity are tied, in large part,
to the cost of natural gas. To the extent that the costs associated with
production of electricity with natural gas rise faster than the energy charge
payments, which are based largely on Consumers' coal plant operation and
maintenance costs, MCV's financial performance would be negatively affected. For
the period April 1990 through December 1999, the energy charge (fixed and
variable) paid to MCV has declined by 16.5% per kWh, while the average variable
cost of delivered fuel for the period 1990 - 1999, has risen by 13.8% 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).
Capacity and Energy Payments Under the PPA. The PPA permits Consumers, under
certain conditions, to reduce the capacity and energy charges payable to MCV
and/or to receive refunds of capacity and energy charges paid to MCV if the MPSC
does not permit Consumers to recover from its customers the capacity and energy
charges specified in the PPA (the "regulatory-out" provision). Until September
15, 2007, the capacity charge may not be reduced below an average capacity rate
of 3.77 cents per kWh for the available Contract Capacity notwithstanding the
"regulatory-out" provision. Consumers and MCV are required to support and defend
the terms of the PPA.
MCV and Consumers entered into a Settlement Agreement, effective January 1,
1999, which resolves (for the various time periods specified in the Settlement
Agreement, but in no event sooner than 2002) all of the previously Disputed
Issues under the PPA and includes definitive obligations for Consumers to make
energy payments calculated in accordance with the PPA, irrespective of any MPSC
decisions which may affect those issues or payments. 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. 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. The agreement calls for Consumers to sell
PECO between 100 MW to 150 MW 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 was subsequently amended and clarified,
which conditionally permitted the transaction to go forward. Consumers has asked
the MPSC for further clarification, but the MPSC has not yet ruled on Consumers'
latest request. At this time, MCV Management cannot predict whether Consumers
will accept the MPSC's orders. 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 and issued orders on June 5, 1997, October 29,
1997, January 14, 1998 and February 11, 1998 (collectively the "Restructuring
Orders"). While the Restructuring Orders are not entirely clear, they provide
for a transition to a competitive regime whereby electric retail customers will
be able to chose their power supplier and pay negotiated or market-based rates
for such power supply. The Restructuring Orders also mandate that utilities
"wheel" third-party power to the utilities' customers. An issue involved in this
restructuring which could significantly impact MCV is stranded cost recovery.
The Restructuring Orders allow recovery by utilities (including Consumers) of
stranded costs, which include capacity charges from QFs, including MCV,
previously approved by the MPSC, 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 customers who chose an alternative
power supplier and are only paid for the period 1998 through 2007 (MCV's PPA
expires in 2025). Customers who chose to remain power supply customers of
Consumers will continue to pay capacity charges as
28
<PAGE> 31
part of rates charged by Consumers, subject to MPSC rate regulation. The
Restructuring Orders do not otherwise specifically address the recovery of PPA
capacity charges after 2007.
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 from all customers. MCV, as well as others, filed appeals in state and
federal courts challenging the Restructuring Orders. In June 1999, the Michigan
Supreme Court issued an opinion in an MPSC "retail wheeling" experiment case
holding, among other things, that the MPSC lacks the statutory authority to
mandate that utilities transmit power of third parties to the utilities'
customers ("Michigan Supreme Court Order"). While the Michigan Supreme Court
Order was not directed at the Restructuring Orders, the MPSC has effectively
applied it to them by entering an order on August 17, 1999, making retail
wheeling under the Restructuring Orders voluntary on the part of the utilities.
On September 1, 1999, Consumers filed a statement with the MPSC stating that it
intends to voluntarily implement the Restructuring Orders.
On July 7, 1999, the U.S. District Court granted summary judgment to MCV
declaring that the Restructuring Orders are preempted by federal law to the
extent that they prohibit any utility from recovering from its customers any
charge for avoided costs (or "stranded costs") to be paid to MCV under PURPA
pursuant to the PPA. The order further provides that the MPSC's prior orders
approving the avoided cost rates for MCV takes precedence over the Restructuring
Orders. The Defendants in the lawsuit (the Commissioners of the MPSC) were
permanently enjoined from enforcing the Restructuring Orders in any manner which
denies or precludes Consumers' recovery of the avoided costs set for MCV,
including but not limited to interpreting or enforcing the Restructuring Orders
to preclude them from recovering all or any portion of the avoided costs
previously approved by the MPSC from its customers, whether before, during, or
after the year 2007. This order and the Commission's August 17, 1999 order are
being appealed. 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 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. On December 20, 1999, FERC issued a final rule,
Order No. 2000, designed to encourage all owners and operators of interstate
electric transmission lines to join regional transmission organizations. Order
No. 2000 is intended to increase competition and remedy continuing problems with
wholesale transmission access and reliability. Order No. 2000 does not directly
impact MCV since MCV does not own transmission lines, but could indirectly
impact MCV in selling electricity in the wholesale market. Order No. 2000 is
subject to rehearing and appeal. 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 1999 the Facility achieved an Efficiency Percentage in
excess of 45%.
29
<PAGE> 32
MCV believes that the Facility will be able to maintain QF status and be capable
of achieving a 45% PURPA Efficiency Percentage on a long-term basis. In
addition, MCV believes annual steam sales will be sufficient to allow the
Facility to exceed the 15% Thermal Percentage. 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 1999, MCV achieved an Efficiency Percentage of 47.0% and a Thermal Percentage
of 18.0%.
The loss of QF status could, among other things, cause the Facility to lose its
right under PURPA to sell power to Consumers at Consumers' "avoided cost" and
subject the Facility to additional federal and state regulatory requirements,
including the FPA (under which FERC has authority to establish rates for
electricity, which may be different than existing contractual rates). If the
Facility were to lose its QF status, the Partners of MCV, the Owner
Participants, the Owner Trustee and their respective parent companies could
become subject to regulation under the 1935 Act (under which, among other
things, the Securities and Exchange Commission has authority to order
divestiture of assets under certain circumstances). The loss of QF status would
not, however, entitle Consumers to terminate the PPA. Under the PPA, Consumers
is obligated to continue purchasing power from MCV at FERC-approved rates
(provided that the FERC-approved rates do not exceed the existing contractual
rates) and MCV, not Consumers, is entitled to terminate the PPA (which MCV has
covenanted not to do under the Participation Agreements). There can be no
assurance that FERC-approved rates would be the same as the rates currently in
effect under the PPA. If the FERC-approved rates are materially less than the
rates under the PPA, MCV may not have sufficient revenue to make rent payments
under the Overall Lease Transaction. The loss of QF status would constitute an
Event of Default under the Lease (and a corresponding Event of Default under the
Indenture) unless, among other requirements, FERC approves (or accepts for
filing) rates under the PPA or other contracts of MCV for the sale of
electricity sufficient to meet certain target coverage ratios (as defined in the
Overall Lease Transaction).
Year 2000
MCV utilizes information technologies and non-information technologies
(collectively "Systems") in the Facility, some of which could have been affected
by the year 2000 ("Y2K") date change. As a result of MCV's efforts over the past
two years, the GTGs, steam turbine and back pressure steam turbine and all
critical plant and business systems operated effectively (no Y2K problems)
during the transition period on January 1, 2000. MCV expensed approximately
$300,000 to make its computer systems Y2K compliant, with additional minor
expenditures for new software capitalized and to be amortized over the
software's useful life.
"Financial Statements and Supplementary Data -- Notes 1 and 8 to the
Consolidated Financial Statements" for a further discussion of associated risks
and contingencies.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Public Accountants and Financial Statements are set
forth on Pages F-2 to F-21 of this Annual Report on Form 10-K and are hereby
incorporated herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL REPORTING MATTERS
None.
30
<PAGE> 33
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information with respect to those individuals who serve as
executive officers of MCV as well as those individuals who serve as members of
its Management Committee, with their ages in parenthesis. The executive officers
of MCV are each appointed by the Management Committee and serve until his or her
successor is duly chosen or until his or her death, ineligibility to serve,
resignation or removal by the Management Committee. Members of the Management
Committee are each appointed by a General Partner and serve until his or her
successor is appointed by the appropriate General Partner. Members of the
Management Committee receive no compensation from MCV for serving on the
Management Committee. For a discussion of the relationships between members of
the Management Committee, Executive Officers and the Partners, the ownership
interests of each of the general and limited partners of MCV, and the voting
percentages of each of the members of the Management Committee, see "Security
Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions."
<TABLE>
<CAPTION>
Management Committee
- --------------------
<S> <C> <C>
William T. McCormick, Jr. (55) Management Committee Chairman
David A. Arledge (55) Management Committee Member
Joseph L. Roberts, Jr. (45) Management Committee Member
Executive Officers
- ------------------
James M. Kevra (51) President and Chief Executive Officer
Bruce C. Grant (53) Vice President of Human Resources, Communications
and Public Affairs
James A. Mooney (60) Vice President of Engineering, Operations and
Construction
Gary B. Pasek (44) Vice President, General Counsel and Secretary
James M. Rajewski (52) Vice President and Controller
Stephen A. Shulman (43) Chief Financial Officer and Treasurer
LeRoy W. Smith (58) Vice President of Energy Supply and Marketing
</TABLE>
William T. McCormick, Jr. has served as Chairman of the Management Committee of
MCV since its creation in January, 1987. Mr. McCormick has served as Chairman of
the Board, Chief Executive Officer and Director of CMS Energy (diversified
energy holding company) since it was incorporated in February 1987 and as
Chairman of Consumers since November 1985.
David A. Arledge has served as a member of the Management Committee since July
1988. Mr. Arledge is Chairman, President and Chief Executive Officer of The
Coastal Corporation, a diversified energy holding company. Prior to becoming
Chief Executive Officer in October 1995, Mr. Arledge was Chief Operating Officer
of The Coastal Corporation from March, 1994. He is also a Director of Coastal
and of Coastal Midland, Inc., a subsidiary of Coastal and has held these
positions since February 1988 and April 1989, respectively. He has also held
various other executive positions in Coastal and numerous subsidiaries of
Coastal during the last five years.
31
<PAGE> 34
Joseph L. Roberts, Jr. served as a member of the Management Committee from May
1997 to January 5, 2000. Mr. Roberts is President and Chief Executive Officer of
MCNIC Power Company since July 1998 and a member of the Board of Directors of
MCN Investment Corporation since August 1997. His term on the Management
Committee ended with the transfer of MCNIC's MCV partnership interests to
affiliates of Coastal.
James M. Kevra has served as President and Chief Executive Officer of MCV since
July 1995. Mr. Kevra has served as a member of the Management Committee from
April 1992 to June 1995. Mr. Kevra has previously served as President of Pan
National Gas Sales, Inc. (engaged in the marketing of liquefied natural gas), a
subsidiary of PanEnergy, and held that position from February 1995 to June 1995,
was Vice President of Centana Energy Corporation (engaged in the gathering and
processing of natural gas), a subsidiary of PanEnergy, and was Vice President of
Planning for Panhandle Eastern Pipe Line Company (engaged in the interstate
transportation of natural gas). Mr. Kevra also served as the President of Source
Cogeneration Company, Inc., and served in that capacity from April 1992 to June
1995.
Bruce C. Grant has served as Vice President of Human Resources, Communications
and Public Affairs of MCV since February 1998. From May 1988 to February 1998 he
served as the Director of Human Resources and Communications of MCV.
James A. Mooney has served as Vice President of Engineering, Operations and
Construction of MCV since October 1987.
Gary B. Pasek has served as General Counsel and Secretary of MCV since May 1995
and was elected Vice President in February 1998. From 1991 until joining MCV,
Mr. Pasek was Assistant General Counsel and Assistant Secretary of the Illinois
Power Company ("IP") (an investor owned electric and gas utility) as well as
General Counsel and Secretary of Illinova Generating Company ("IGC") (an
independent power generation company); both IP and IGC were affiliates of
Illinova Corporation, which was acquired by Dynegy Inc.
James M. Rajewski has served as Vice President and Controller of MCV since
January 1988.
Stephen A. Shulman has served as Chief Financial Officer and Treasurer of MCV
since February 1999. From February 1994 to January 1999, he served as Vice
President of Finance and Treasurer of MCV.
LeRoy W. Smith has served as Vice President of Energy Supply and Marketing of
MCV since October 1998. From July 1988 to September 1998, he served as Vice
President of Gas Supply of MCV.
32
<PAGE> 35
Item 11. EXECUTIVE COMPENSATION
Compensation
The following table sets forth certain compensation data with respect to the
chief executive officer and four other most highly compensated executive
officers of MCV for each of the three years ended December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation
---------------------------------------------------------------------
Name and All Other
Principal Position Year Salary ($) Bonus ($)(a) Compensation($)
- ------------------------------ ------- ------------ -------------------- ----------------------
<S> <C> <C> <C> <C>
James M. Kevra 1999 241,965 178,360 48,942(b)
President and 1998 226,008 225,000 46,519
Chief Executive Officer 1997 221,750 127,302 45,942
James A. Mooney 1999 183,592 94,352 39,312(c)
Vice President of 1998 176,900 122,559 38,279
Engineering, Operations 1997 169,139 63,639 37,126
and Construction
Gary B. Pasek 1999 158,683 80,148 23,776(d)
Vice President 1998 152,169 106,287 22,794
General Counsel & Secretary 1997 142,380 51,195 21,329
LeRoy W. Smith 1999 158,105 76,805 26,210(e)
Vice President of Energy 1998 152,335 103,173 25,321
Supply and Marketing 1997 145,505 59,813 24,306
Stephen A. Shulman 1999 142,673 70,630 21,378(f)
Chief Financial Officer 1998 137,100 95,116 20,538
and Treasurer 1997 129,932 46,303 19,465
</TABLE>
- ------------------------------
(a) Represents bonuses accrued under the Senior Management Incentive Plan.
(b) Includes company contributions of $8,000 to the 401(k) Savings Plan,
$12,000 to the Defined Contribution Retirement Plan and $28,942 to the
Supplemental Retirement Plan.
(c) Includes company contributions of $8,000 to the 401(k) Savings Plan,
$12,000 to the Defined Contribution Retirement Plan and $19,312 to the
Supplemental Retirement Plan.
(d) Includes company contributions of $7,925 to the 401(k) Savings Plan,
$12,075 to the Defined Contribution Retirement Plan and $3,776 to the
Supplemental Retirement Plan.
(e) Includes company contributions of $7,867 to the 401(k) Savings Plan,
$12,133 to the Defined Contribution Retirement Plan and $6,210 to the
Supplemental Retirement Plan.
(f) Includes company contributions of $7,126 to the 401(k) Savings Plan,
$12,874 to the Defined Contribution Retirement Plan and $1,378 to the
Supplemental Retirement Plan.
33
<PAGE> 36
1999 Long-Term Incentive Plan Table
-----------------------------------
<TABLE>
<CAPTION>
Performance or Other Periods Estimated Future Payout Under
Name Until Maturation or Payout (a) Non-Stock Price Based Plan
- ------------------------------ --------------------------------- -----------------------------------
Maximum ($)
-----------
<S> <C> <C>
James M. Kevra 2-4 years 75,000
James A. Mooney 2-4 years 57,000
Gary B. Pasek 2-4 years 50,000
LeRoy W. Smith 2-4 years 49,000
Stephen A. Shulman 2-4 years 45,000
</TABLE>
(a) In 1998, MCV established a new long-term incentive plan under which
officers and certain management personnel could receive cash payouts based
on achieving certain targeted cashflows on a projected basis, thus enabling
cash distributions to be made to the Partners for their annual federal tax
obligations pursuant to provisions in the Participation Agreement. If, in
any of the years 2000 through 2002, MCV is able to make a cash distribution
to its Partners greater than 75% of the Partners' estimated tax obligation,
each participant in the plan could receive a payout equal to a range of
1%-30% of their base salary depending on the specific amount of cash
distributed to the Partners and the year that such distribution occurs.
Where the cash distribution to the Partners is 75% or less of the estimated
tax obligation for each of these three years, no cash payout to
participants will occur under this plan.
Compensation Committee Interlocks and Insider Participation
The members of the Management Committee also serve as members of MCV's
Compensation Committee. Members of the Compensation Committee are each appointed
by a General Partner and serve until his or her successor is appointed by the
appropriate General Partner. No member of the Compensation Committee was or is
an officer or employee of MCV. Members of the Compensation Committee receive no
compensation from MCV.
Mr. Arledge is a member of the Compensation Committee of MCV as well as
Chairman, President and Chief Executive Officer and a Director of Coastal and a
Director of Coastal Midland, Inc. Coastal Midland, Inc. and affiliates of
Coastal have engaged in numerous transactions in the ordinary course of business
to provide services or products to MCV. In 1999, Coastal affiliates engaged in
transactions with MCV which included the sale of natural gas, sale of natural
gas transportation, various natural gas marketing services and the purchase of
electricity that amounted in aggregate to approximately $31.4 million. A similar
level of transactions is expected to occur in 2000. In addition, as of December
31, 1999, Coastal had an outstanding cash withdrawal from the Partnership in the
amount of $21.0 million (including accrued interest) in exchange for a letter of
credit, pursuant to the Participation Agreement.
Mr. McCormick is Chairman of the Compensation Committee of MCV as well as
Chairman of the Board and Director of CMS Energy and Consumers. CMS Energy and
its affiliates have the following direct and indirect interests in MCV and the
Facility: CMS Midland Holdings Company has an ownership interest in one of the
Owner Trusts, representing indirectly a 35% equity interest in the Facility; CMS
Midland has a 49% general partnership interest in MCV; and Consumers has
contractual obligations under the PPA to purchase electric capacity and related
energy from MCV, has contractual obligations under various backup agreements
among MCV, Consumers and Dow to assure a continuous supply of steam and
electricity to Dow in the event the SEPA is terminated, has contractual
obligations to enter into transmission service agreements with other utilities
for MCV's benefit, and has leased undivided interests in the Site to the Owner
Trustees (as MCV's assignees) pursuant to the
34
<PAGE> 37
Ground Lease. In 1999, Consumers purchased electric capacity and related energy
from the Facility that aggregated approximately $585.8 million. In addition, CMS
Energy affiliates have engaged in numerous transactions in the ordinary course
of business to provide services or products to MCV. In 1999, CMS Energy
affiliates engaged in transactions with MCV which included the sale of natural
gas, the sale of natural gas transportation, the sale of natural gas storage and
the purchase of natural gas that amounted in aggregate to approximately $36.3
million. A similar level of transactions is expected to occur in 2000.
Mr. Roberts was a member of the Compensation Committee of MCV until January 5,
2000, as well as President and Chief Executive Officer of MCNIC Power Company
and a member of the Board of Directors of MCN Investment Corporation. Affiliates
of MCN have engaged in numerous transactions in the ordinary course of business
to provide services or products to MCV. In 1999, MCN affiliates engaged in
transactions with MCV which included the sale of natural gas and the purchase of
natural gas that amounted in aggregate to approximately $18.4 million. In
addition, as of December 31, 1999, MCN had an outstanding cash withdrawal from
the Partnership in the amount of $23.9 million (including accrued interest) in
exchange for a letter of credit, pursuant to the Partnership Agreement, which
was repaid to MCV on January 4, 2000, due to the sale of MCN's partnership
interests.
For further detailed discussions of MCV's contracts and leases with Partners,
see "Contracts", "Properties" and "Financial Statements and Supplementary Data
- -- Note 10 to the Consolidated Financial Statements."
35
<PAGE> 38
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is given with respect to the Partners of MCV, its
Management Committee members and all Management Committee members and officers
as a group.
Security Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership
-------------------------------------------------
Approximate Percent Approximate Percent
Name and Address of Beneficial Owner Title of Class of Voting Rights (a) of Partnership
Interest
- ---------------------------------------- ----------------------------- ---------------------- -----------------------
<S> <C> <C> <C>
CMS Midland, Inc. General Partnership Interest 49.0% 49.0%
212 West Michigan Avenue
Jackson, MI 49201
Source Midland Limited Partnership General Partnership Interest 24.2% 18.1%
Coastal Tower
Nine Greenway Plaza
Houston, TX 77046
Coastal Midland, Inc. General Partnership Interest 14.6% 10.9%
Coastal Tower
Nine Greenway Plaza
Houston, TX 77046
MEI Limited Partnership (b) General Partnership Interest 12.2% 9.1%
Coastal Tower Limited Partnership Interest -- 0.9%
Nine Greenway Plaza
Houston, TX 77046
The Dow Chemical Company Limited Partnership Interest -- 7.5%
2030 Dow Center
Midland, MI 48674
Micogen Limited Partnership Limited Partnership Interest -- 4.5%
Coastal Tower
Nine Greenway Plaza
Houston, TX 77046
Alanna Corporation Limited Partnership Interest -- 0.00001%
c/o MCV Limited Partnership
100 Progress Place
Midland, MI 48640
---------------------- -----------------------
100.0% 100.0%
</TABLE>
(a) Each partner has sole voting and investment power with respect to its
general partnership interest. Limited partners have no voting rights,
except to certain specified acts of the Management Committee. MCV is a
limited partnership wholly owned by its Partners. Beneficial interests in
the partnership are not available to any persons other than the Partners.
Accordingly, none of the members of the Management Committee and none of
the executive officers of MCV have any beneficial ownership in MCV.
(b) MCN, the previous parent company of SMLP and a previous 50% partner of
MEI through SMLP, both partners of MCV, announced on October 5, 1999 that
it had signed a definitive merger agreement with DTE Energy Company.
Since the pending merger would cause SMLP and MEI to become electric
utilities under PURPA, MCN announced that it would sell its interest in
the MCV partnerships in order to keep the electric utility ownership in
MCV in compliance with PURPA QF ownership requirements. On January 5,
2000,
36
<PAGE> 39
MCN sold all of its partnership interest in SMLP and MEI to wholly-owned
subsidiaries of Coastal. As a result of this sale, Coastal, through its
subsidiaries, has acquired all of the equity and voting interests of SMLP
and MEI in MCV. After this transaction, MCV continues to meet ownership
requirements of PURPA.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation -- Compensation Committee Interlocks and Insider
Participation."
37
<PAGE> 40
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial statements.
The following consolidated financial statements are as of December
31, 1999 and 1998 or for each of the three years ended December 31,
1999, 1998 and 1997.
<TABLE>
<CAPTION>
Page
<S> <C>
Index to Consolidated Financial Statements
and Supplemental Schedules F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Partners' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
2. All schedules are omitted because they are inapplicable, not required
or the information is included in the financial statements or notes
thereto.
3. The Exhibits that are filed or incorporated by reference as part of
this report are listed in the Exhibit Index filed herewith.
(b) Reports on Form 8-K.
Current report dated January 5, 2000, covering matters reported pursuant
to "Item 5, Other Events."
38
<PAGE> 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Reference
in Annual Report
on Form 10-K
----------------
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Partners' Equity for the Years Ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 42
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners and the Management Committee of the
Midland Cogeneration Venture Limited Partnership:
We have audited the accompanying consolidated balance sheets of the MIDLAND
COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and
subsidiaries (MCV) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of MCV's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Midland
Cogeneration Venture Limited Partnership and subsidiaries as of December 31,
1999 and 1998, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 3 to the financial statements, effective January 1, 1997,
MCV changed its method of accounting for property taxes.
Arthur Andersen LLP
Detroit, Michigan,
January 19, 2000
F-2
<PAGE> 43
<TABLE>
<CAPTION>
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
(In Thousands)
ASSETS 1999 1998
- ------ -------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 236,205 $ 193,116
Restricted cash and cash equivalents (Notes 2 and 4) 5,680 8,913
Accounts and notes receivable (Notes 6 and 10) 118,768 104,315
Gas inventory (Notes 2 and 6) 13,478 15,144
Unamortized property taxes (Note 3) 16,809 15,742
Prepaid expenses and other 5,968 4,031
-------------- -------------
Total current assets 396,908 341,261
-------------- -------------
PROPERTY, PLANT AND EQUIPMENT (Notes 2 and 6):
Property, plant and equipment 2,421,677 2,392,829
Pipeline 21,222 21,222
-------------- -------------
Total property, plant and equipment 2,442,899 2,414,051
Accumulated depreciation (711,019) (640,659)
-------------- -------------
Net property, plant and equipment 1,731,880 1,773,392
-------------- -------------
OTHER ASSETS:
Restricted investment securities held-to-maturity (Notes 2 and 4) 139,803 143,444
Deferred financing costs, net of accumulated amortization of $11,425 and $10,416,
respectively (Notes 2 and 6) 7,152 8,161
Prepaid gas costs, materials and supplies (Note 2) 23,469 20,248
-------------- -------------
Total other assets 170,424 171,853
-------------- -------------
TOTAL ASSETS $ 2,299,212 $ 2,286,506
============== =============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Notes 5 and 10) $ 59,970 $ 60,718
Interest payable (Note 6) 76,119 78,959
Current portion of long-term debt (Note 6) 139,095 64,331
-------------- -------------
Total current liabilities 275,184 204,008
-------------- -------------
NON-CURRENT LIABILITIES:
Long-term debt (Note 6) 1,584,865 1,723,960
Other 1,546 990
-------------- -------------
Total non-current liabilities 1,586,411 1,724,950
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 6, 7 and 8)
TOTAL LIABILITIES 1,861,595 1,928,958
-------------- -------------
PARTNERS' EQUITY (Note 10) 437,617 357,548
-------------- -------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,299,212 $ 2,286,506
============== =============
</TABLE>
F-3
<PAGE> 44
<TABLE>
<CAPTION>
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES (Notes 2, 7, 8 and 10):
Capacity $407,429 $407,518 $ 405,488
Electric 196,301 192,258 218,219
Steam and other 13,622 27,278 27,874
------------ ------------ ------------
Total operating revenues 617,352 627,054 651,581
------------ ------------ ------------
OPERATING EXPENSES:
Fuel costs 244,350 244,670 266,417
Depreciation 95,350 97,239 104,755
Operations 14,699 14,880 16,080
Maintenance 12,076 12,596 13,403
Property and single business taxes 25,744 25,687 26,044
Administrative, selling and general 9,249 9,521 8,383
------------ ------------ ------------
Total operating expenses 401,468 404,593 435,082
------------ ------------ ------------
OPERATING INCOME 215,884 222,461 216,499
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 19,913 21,092 19,645
Interest expense (155,728) (163,226) (173,940)
------------ ------------ ------------
Total other income (expense), net (135,815) (142,134) (154,295)
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 80,069 80,327 62,204
Cumulative effect on prior years (to December 31, 1996) of change in
method of accounting for property taxes (Note 3) -- -- 15,533
------------ ------------ ------------
NET INCOME $ 80,069 $ 80,327 $ 77,737
============ ============ ============
</TABLE>
F-4
<PAGE> 45
<TABLE>
<CAPTION>
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
General Limited
Partners Partners Total
----------- ------------ -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 162,312 $ 37,172 $ 199,484
Net income 67,680 10,057 77,737
----------- ------------ -------------
BALANCE, DECEMBER 31, 1997 229,992 47,229 277,221
Net income 69,935 10,392 80,327
----------- ------------ -------------
BALANCE, DECEMBER 31, 1998 299,927 57,621 357,548
Net income 69,711 10,358 80,069
----------- ------------ -------------
BALANCE, DECEMBER 31, 1999 $ 369,638 $ 67,979 $ 437,617
=========== ============ =============
</TABLE>
F-5
<PAGE> 46
<TABLE>
<CAPTION>
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
1999 1998 1997
------------ ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 80,069 $ 80,327 77,737
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 96,359 98,297 105,882
Cumulative effect of change in accounting principle -- -- (15,533)
Increase in accounts and notes receivable (14,453) (10,641) (19,863)
(Increase) decrease in gas inventory 1,666 (2,234) 629
(Increase) decrease in unamortized property taxes (1,067) 355 (564)
(Increase) decrease in prepaid expenses and other (1,937) 547 (500)
(Increase) decrease in prepaid gas costs, materials and supplies (3,221) 418 (14,816)
Increase (decrease) in accounts payable, accrued and other liabilities (748) 1,776 (8,597)
Decrease in interest payable (2,840) (6,224) (3,469)
Increase in other non-current liabilities 556 306 229
------------ ------------ --------------
Net cash provided by operating activities 154,384 162,927 121,135
------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant and equipment (53,838) (49,928) (36,186)
------------ ------------ --------------
Net cash used in investing activities (53,838) (49,928) (36,186)
------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (64,331) (140,950) (78,574)
Purchase of restricted investment securities held-to-maturity (332,453) (414,541) (138,898)
Maturity of restricted investment securities held-to-maturity 336,094 409,995 --
Decrease in restricted non-current cash and cash equivalents -- -- 143,049
------------ ------------ --------------
Net cash used in financing activities (60,690) (145,496) (74,423)
------------ ------------ --------------
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH - CURRENT 39,856 (32,497) 10,526
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT,
AT BEGINNING OF PERIOD 202,029 234,526 224,000
------------ ------------ --------------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT,
AT END OF PERIOD $ 241,885 $ 202,029 $ 234,526
============ ============ ==============
</TABLE>
F-6
<PAGE> 47
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE PARTNERSHIP AND ASSOCIATED RISKS
Midland Cogeneration Venture Limited Partnership ("MCV") was organized to
construct, own and operate a combined-cycle, gas-fired cogeneration
facility (the "Facility") located in Midland, Michigan. MCV was formed on
January 27, 1987, and the Facility entered into commercial operation in
1990. The Partners, their respective equity interests and interests in the
profit and losses of the Partnership and transactions between MCV and
affiliates of the Partners are discussed in Note 10.
In 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 to approximately 1,500 MW. MCV
has entered into three principal energy sales agreements. MCV has
contracted to supply up to 1,240 MW of electric capacity ("Contract
Capacity") to Consumers Energy Company ("Consumers") under the Power
Purchase Agreement ("PPA"), for resale to its customers, to supply
electricity and steam to The Dow Chemical Company ("Dow") under the Steam
and Electric Power Agreement ("SEPA") and to supply steam to Dow Corning
Corporation ("DCC") under the Steam Purchase Agreement ("SPA"). From time
to time, MCV enters into other short-term sales agreements for the sale of
excess capacity and/or energy available above MCV's internal use and
obligations under the PPA, SEPA and SPA. Results of operations are
primarily dependent on successfully operating the Facility at or near
contractual capacity levels and on Consumers' honoring its obligations
under the PPA with MCV. Sales pursuant to the PPA have historically
accounted for over 90% of MCV's revenues.
The PPA permits Consumers, under certain conditions, to reduce the capacity
and energy charges payable to MCV and/or to receive refunds of capacity and
energy charges paid to MCV if the Michigan Public Service Commission
("MPSC") does not permit Consumers to recover from its customers the
capacity and energy charges specified in the PPA (the "regulatory-out"
provision). Until September 15, 2007, however, the capacity charge may not
be reduced below an average capacity rate of 3.77 cents per kilowatt hour
for the available Contract Capacity notwithstanding the "regulatory-out"
provision. Consumers and MCV are required to support and defend the terms
of the PPA.
The Facility is a qualifying cogeneration facility ("QF") originally
certified by the Federal Energy Regulatory Commission ("FERC") under the
Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"). In
order to maintain QF status, certain operating and efficiency standards
must be maintained on a calendar-year basis and certain ownership
limitations must be met. In the case of a topping-cycle generating plant
such as the Facility, the applicable operating standard requires that the
portion of total energy output that is put to some useful purpose other
than facilitating the production of power (the "Thermal Percentage") be at
least 5%. In addition, the Facility must achieve a PURPA efficiency
standard (the sum of the useful power output plus one-half of the useful
thermal energy output, divided by the energy input (the "Efficiency
Percentage")) of at least 45%. If the Facility maintains a Thermal
Percentage of 15% or higher, the required Efficiency Percentage is reduced
to 42.5%. Since 1990, the Facility has achieved the applicable Thermal and
Efficiency Percentages. During 1999, the Facility achieved a Thermal
Percentage of 18.0% and a PURPA Efficiency Percentage of 47.0%. 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 the Facility will meet the required Thermal
and the corresponding Efficiency Percentages in 2000 and beyond.
MCN Energy Group Inc. ("MCN"), the parent company of Source Midland Limited
Partnership ("SMLP") and a 50% partner of MEI Limited Partnership ("MEI")
through SMLP, both partners of MCV, announced on October 5, 1999 that it
had signed a definitive merger agreement with DTE Energy Company. Since the
pending merger would cause SMLP and MEI to become electric utilities under
PURPA, MCN announced that it
F-7
<PAGE> 48
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
would sell its interest in the MCV partnerships in order to keep the
electric utility ownership in MCV in compliance with PURPA QF ownership
requirements. On January 5, 2000, MCN sold all of its partnership interest
in SMLP and MEI to wholly-owned subsidiaries of The Coastal Corporation
("Coastal"). As a result of this sale, Coastal, through its subsidiaries,
has acquired all of the equity and voting interests of SMLP and MEI in MCV.
After this transaction, MCV continues to meet the ownership requirements of
PURPA.
The Facility is wholly dependent upon natural gas for its fuel supply and a
substantial portion of the Facility's operating expenses consist of the
costs of natural gas. MCV recognizes that its existing gas contracts are
not sufficient to satisfy the anticipated gas needs over the term of the
PPA and, as such, no assurance can be given as to the availability or price
of natural gas after the expiration of the existing gas contracts.
Commencing in 1998, and each year thereafter, MCV must provide at Consumers
request, continuing annual assurances of such capability for each
succeeding five-year period. If MCV is unable to provide these continuing
assurances, Consumers is entitled to withhold in a separate escrow fund a
portion of capacity charges until these assurances are provided. In
November 1999, Consumers requested information for the continuing fuel
assurance requirements covering the period 2000-2004. Consumers has
reviewed MCV's fuel supply information for the period 2000 through 2004 and
has provided MCV with a letter stating that MCV has satisfied the fuel
assurance requirement for that period. In addition, to the extent that the
costs associated with production of electricity rise faster than the energy
charge payments, MCV's financial performance will be negatively affected.
The amount of such impact will depend upon the amount of the average energy
charge payable under the PPA, which is based upon costs incurred at
Consumers' coal-fired plants and upon the amount of energy scheduled by
Consumers for delivery under the PPA. However, given the unpredictability
of these factors, the overall economic impact upon MCV of changes in energy
charges payable under the PPA and in future fuel costs under new or
existing contracts cannot accurately be predicted.
At both the state and federal level, efforts continue to restructure the
electric industry. One significant issue to MCV is the issue of stranded
assets or transition cost recovery by utilities for PPA charges. At the
state level, the MPSC entered a series of orders from June 5, 1997 through
February 11, 1998 (collectively the "Restructuring Orders"), now final at
the MPSC level, mandating that utilities "wheel" third-party power to the
utilities' customers, thus permitting customers to choose their power
provider. MCV, as well as others, filed an appeal in the Michigan Court of
Appeals. In June 1999, the Michigan Supreme Court issued an opinion in the
appeal of an order in an MPSC "retail wheeling" experiment case holding,
among other things, that the MPSC lacks the statutory authority to mandate
that utilities transmit power of third parties to the utilities' customers
("Michigan Supreme Court Order"). While the Michigan Supreme Court Order
was not directed at the Restructuring Orders, the MPSC has effectively
applied it to them by entering an order on August 17, 1999, making retail
wheeling under the Restructuring Orders voluntary on the part of the
utilities. On September 1, 1999, Consumers filed a statement with the MPSC
stating that it intends to voluntarily implement the Restructuring Orders.
At the federal level, MCV filed a complaint in the U.S. District Court for
the Western District of Michigan challenging the Restructuring Orders. On
July 7, 1999, the U.S. District Court granted summary judgment to MCV
declaring that the Restructuring Orders are preempted by federal law to the
extent that they prohibit any utility from recovering from its customers
any charge for avoided costs (or "stranded costs") to be paid to MCV under
PURPA pursuant to the PPA. The order further provides that the MPSC's prior
orders approving the avoided cost rates for MCV take precedence over the
Restructuring Orders. The Defendants in the lawsuit (the Commissioners of
the MPSC) were permanently enjoined from enforcing the Restructuring Orders
in any manner which denies or precludes Consumers' recovery of the avoided
costs set for MCV, including but not limited to interpreting or enforcing
the Restructuring Orders to preclude them from recovering all or any
portion of the avoided costs previously approved by the MPSC from its
customers, whether before, during, or after the year 2007. This order and
the Commission's August 17, 1999 order are being appealed.
To date, these restructuring efforts have not negatively impacted MCV's
cash flow, but if the MPSC's Restructuring Orders are construed so as to
deny stranded cost recovery of above-market PPA costs, and if such order is
not reversed on appeal, MCV's cash flows may be negatively impacted in the
period after 2007.
F-8
<PAGE> 49
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued )
MCV continues to monitor and participate in these matters as appropriate,
and to evaluate potential impacts on both cash flows and recoverability of
the carrying value of property, plant and equipment. MCV Management cannot,
at this time, predict the impact or outcome of these matters.
(2) SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Following is a discussion of MCV's significant accounting
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of MCV and its
wholly owned subsidiaries. All material transactions and balances among
entities which comprise MCV have been eliminated in the consolidated
financial statements.
Revenue Recognition
MCV recognizes revenue for the sale of variable energy and fixed energy
when delivered (see Notes 7 and 8). Capacity and other installment revenues
are recognized based on plant availability or other contractual
arrangements.
Inventory
MCV's inventory of natural gas is stated at the lower of cost or market,
and valued using the last-in, first-out ("LIFO") method. Inventory includes
the costs of purchased gas, variable transportation and storage. The amount
of reserve to reduce inventories from first-in, first-out ("FIFO") basis to
the LIFO basis at December 31, 1999 and 1998, was $3.3 million and $2.7
million, respectively. Inventory cost, determined on a FIFO basis,
approximates current replacement cost.
Materials and Supplies
Materials and supplies are stated at the lower of cost or market using the
weighted average cost method.
Deferred Financing Costs
Financing costs incurred with the issuance of debt are deferred and
amortized using the interest method over the life of the related financing
obligation. Deferred financing costs of approximately $1.0 million were
amortized in 1999 and $1.1 million were amortized in each of the years 1998
and 1997.
Depreciation
Plant, equipment and pipeline are valued at cost for new construction and
at the asset transfer price for purchased and contributed assets, and are
depreciated using the straight-line method over an estimated useful life of
3 to 35 years. Major renewals and replacements which extend the useful life
of plant and equipment are capitalized, while maintenance and repairs are
expensed when incurred. Personal property is depreciated using the
straight-line method over an estimated useful life of 3 to 15 years. The
cost to remove an asset is assumed to equal the proceeds of any asset
disposition. The cost of assets and related accumulated depreciation are
removed from the accounts when sold or retired, and any resulting gain or
loss reflected in operations.
F-9
<PAGE> 50
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued )
Effective January 1, 1998, MCV prospectively revised its useful lives of
the gas turbine generators ("GTGs") and certain related capital spares, to
more closely reflect the economic useful lives of these assets. These
assets are serviced and maintained by ABB Alstom Power Inc., formerly ABB
Power Generation ("ABB Power") under the amended service agreement, which
will extend through the sixth series of major GTG inspections, with
expected coverage through 2008. The effect of this change in accounting
estimate resulted in a decrease to operating expenses of approximately $9.0
million for the year ending December 31, 1998.
Federal Income Tax
MCV is not subject to Federal income tax. Partnership earnings are taxed
directly to each individual partner.
Statement of Cash Flows
All liquid investments purchased with a maturity of three months or less at
time of purchase are considered to be current cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and short-term
investments approximate fair value because of the short maturity of these
instruments. MCV's short-term investments, which are made up of investment
securities held-to-maturity, as of December 31, 1999 have original maturity
dates of less than one year. The unique nature of the negotiated financing
obligation discussed in Note 6 makes it impractical to estimate the fair
value of the Owner Participants' underlying debt and equity instruments
supporting such financing obligation.
Forward Foreign Exchange Contracts
An amended service agreement was entered into between MCV and ABB Power
(the "amended Service Agreement"), under which ABB Power will provide hot
gas path parts for MCV's twelve gas turbines through the sixth series of
major GTG inspections, which are expected to be completed by year-end 2008.
The payments due to ABB Power under this amended Service Agreement are
adjusted annually based on the ratio of the U.S. dollar to Swiss franc
currency exchange rate. MCV maintains a foreign currency hedging program to
be used only with respect to MCV payments subject to foreign currency
exposure under the amended Service Agreement.
To manage this currency exchange rate risk and hedge against adverse
currency fluctuations impacting the payments under this amended Service
Agreement, MCV periodically enters into forward purchase contracts for
Swiss francs. The forward foreign currency exchange contracts qualify as
hedges under Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation," since they hedge the identifiable foreign
currency commitment of the amended Service Agreement. The gains and losses
on these transactions, accounted for as hedges, are deferred on the balance
sheet and included in the measurement of the underlying capitalized major
renewal costs when incurred. On December 29, 1999, MCV closed out its
forward purchase contracts involving Swiss francs in the notional amount of
$11.0 million, resulting in a deferred loss of approximately $.6 million,
recorded in prepaid expenses and other. On December 29, 1998, MCV closed
out its forward purchase contracts involving Swiss francs in the notional
amount of $10.0 million, resulting in a deferred gain of approximately $1.0
million, recorded in current liabilities.
Natural Gas Options and Futures
To manage market risks associated with the volatility of natural gas
prices, MCV maintains a gas hedging program. MCV enters into natural gas
options and futures contracts in order to hedge against unfavorable changes
in the market price of natural gas in future months when gas is expected to
be needed. These
F-10
<PAGE> 51
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued )
financial instruments are being utilized only to secure anticipated natural
gas requirements necessary for projected electric sales at a cost of gas
less than that available under MCV's long-term natural gas contracts and to
hedge sales of natural gas previously obtained in order to optimize MCV's
existing gas supply, storage and transportation arrangements. The natural
gas futures contracts qualify as hedges under SFAS No. 80, "Accounting for
Futures Contracts," since the contracts cover probable future transactions.
Cash is deposited with the broker in a margin account, at the time futures
or options contracts are initiated. The change in market value of these
contracts requires adjustment of the margin account balances. The margin
balance, recorded in prepaid expenses and other, was $1.6 million and $.5
million as of December 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 December 31, 1999, MCV had net open futures and options
contracts of 1.9 Bcf with a deferred loss of $.2 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 $.6
million in net deferred gains on contracts closed prior to December 31,
1999, related to 2000 purchase and sales commitments, and had approximately
$.2 million in net deferred gains on contracts closed prior to December 31,
1998, related to 1999 sales commitments.
Interest Rate Swap Hedges
To manage the effects of interest rate volatility on interest income while
maximizing return on permitted investments, MCV established an interest
rate hedging program. The notional amounts of the hedges are tied directly
to MCV's anticipated cash investments, without physically exchanging the
underlying notional amounts.
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 $.3
million and $.2 million, as of December 31, 1999 and December 31, 1998,
respectively. As of December 31, 1999, MCV had three separate interest rate
swap hedges with a notional amount totaling $65 million, with various
periods of performance ranging between April 1, 1998 through December 1,
2002. The difference between the amounts received and paid under the
interest rate swap transactions is accrued and recorded as an adjustment to
the interest income over the life of the hedged agreement. For the year
ended December 31, 1999, MCV recorded a net loss under the interest rate
swap hedges of approximately $42,000, while for the year ended December 31,
1998, MCV had a net loss under the December 1997 interest rate swap hedge
of approximately $61,000.
New Accounting Standard
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. This statement established guidance
on accounting for the costs incurred related to internal-use software. MCV
has implemented this statement in 1999. Application of this standard has
not had a material impact on MCV's financial position, liquidity or results
of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement establishes accounting and reporting standards requiring
that every derivative instrument be recorded in the balance sheet as either
an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges in some cases allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement or permits recognition of the hedge results in other
comprehensive income. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
F-11
<PAGE> 52
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued )
Deferral of the Effective Date of FASB Statement No. 133." This statement
defers the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. MCV expects to adopt the new statement effective January 1,
2001. MCV is continuing to study the impact of SFAS No. 133 and has not yet
quantified the effects of adoption on MCV's financial statements.
Reclassifications
Certain prior year amounts have been reclassified for comparative purposes.
These reclassifications have no effect on net income.
(3) CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES
Effective January 1, 1997, MCV changed its method of accounting for
property taxes so that such taxes are expensed monthly during the fiscal
period of the taxing authority for which the taxes are levied. This change
provides a better matching of property tax expense with both the payment
for services and those services provided by the taxing authorities. Prior
to January 1, 1997, the Partnership expensed property taxes monthly during
the year following the assessment date (December 31). The cumulative effect
of this change in accounting for property taxes increased earnings for the
year 1997 by approximately $15.5 million. The pro forma effect on 1997 and
prior years' consolidated net income, including all interim periods, of
retroactively recording property taxes as if the new method of accounting
had been in effect for all periods presented is not material.
(4) RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENT SECURITIES HELD-TO-
MATURITY
Current and non-current restricted cash and cash equivalents consist of the
following at December 31 (in thousands):
<TABLE>
<CAPTION>
Current: 1999 1998
------- -------------- --------------
<S> <C> <C>
Funds restricted for plant modifications $ 5,680 $ 8,913
============== ==============
Non-current:
Funds restricted for rental payments pursuant
to the Overall Lease Transaction $ 138,258 $ 142,453
Funds restricted for management non-qualified
plans 1,545 991
-------------- --------------
Total $ 139,803 $ 143,444
============== ==============
</TABLE>
F-12
<PAGE> 53
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued )
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Accounts payable
Related parties $ 13,016 $ 17,231
Trade creditors 30,394 27,457
Property and single business taxes 12,973 11,822
Other 3,587 4,208
-------------- --------------
Total $ 59,970 $ 60,718
============== ==============
</TABLE>
(6) LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
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 $ 1,723,960 $ 1,788,291
Less current portion (139,095) (64,331)
-------------- --------------
Total long-term debt $ 1,584,865 $ 1,723,960
============== ==============
</TABLE>
Financing Obligation
In June 1990, MCV obtained permanent financing for the Facility by entering
into sale and leaseback agreements ("Overall Lease Transaction") with a
lessor group, related to substantially all of MCV's fixed assets. Proceeds
of the financing were used to retire borrowings outstanding under existing
loan commitments, make a capital distribution to the Partners and retire a
portion of notes issued by MCV to MEC Development Corporation ("MDC") in
connection with the transfer of certain assets by MDC to MCV. In accordance
with SFAS No. 98, "Accounting For Leases," the sale and leaseback
transaction has been accounted for as a financing arrangement.
Under the terms of the Overall Lease Transaction, MCV sold undivided
interests in all of the fixed assets of the Facility for approximately $2.3
billion, to five separate owner trusts ("Owner Trusts") established for the
benefit of certain institutional investors ("Owner Participants"). State
Street Bank and Trust Company serves as owner trustee ("Owner Trustee")
under each of the Owner Trusts, and leases undivided interests in the
Facility on behalf of the Owner Trusts to MCV for an initial term of 25
years. CMS Midland Holdings Company ("CMS Holdings"), currently a wholly
owned subsidiary of Consumers, acquired a 35% indirect equity interest in
the Facility through its purchase of an interest in one of the Owner
Trusts.
The Overall Lease Transaction requires MCV to achieve certain rent coverage
ratios and other financial tests prior to a distribution to the Partners.
Generally, these financial tests become more restrictive with the passage
of time. Further, MCV is restricted to making permitted investments and
incurring permitted indebtedness as
F-13
<PAGE> 54
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
specified in the Overall Lease Transaction. The Overall Lease Transaction
also requires filing of certain periodic operating and financial reports,
notification to the lessors of events constituting a material adverse
change, significant litigation or governmental investigation, and change in
status as a qualifying facility under FERC proceedings or court decisions,
among others. Notification and approval is required for plant modification,
new business activities, and other significant changes, as defined. In
addition, MCV has agreed to indemnify various parties to the sale and
leaseback transaction against any expenses or environmental claims
asserted, or certain federal and state taxes imposed on the Facility, as
defined in the Overall Lease Transaction.
Under the terms of the Overall Lease Transaction, approximately $18.6
million of transaction costs were a liability of MCV and have been recorded
as a deferred cost. These costs are being amortized using the interest
method over the 25-year lease term.
Revolving Credit Agreement
MCV has also entered into a revolving credit agreement with the Bank of
Montreal ("Working Capital Lender") which expires August 31, 2001. Under
the terms of the existing agreement, MCV can borrow up to the $50 million
commitment, in the form of revolving credit loans or letters of credit
secured by MCV's natural gas inventory and earned receivables. Outstanding
borrowings under this agreement are limited to 90% of earned accounts
receivable. At December 31, 1999, the borrowing base calculated under this
agreement was $46.4 million. During 1999, MCV did not utilize the Working
Capital Facility, except for letters of credit associated with normal
business practice. At December 31, 1999, MCV had letters of credit
outstanding of $17.2 million related to gas purchase transactions.
Intercreditor Agreement
MCV has also entered into an Intercreditor Agreement with the Owner
Trustee, Working Capital Lender, First Trust Michigan as Collateral Agent
("Collateral Agent") and the Senior and Subordinated Indenture Trustees.
Under the terms of this agreement, MCV is required to deposit all revenues
derived from the operation of the Facility with the Collateral Agent for
purposes of paying operating expenses and rent. In addition, these funds
are required to pay construction modification costs and to secure future
rent payments. As of December 31, 1999, MCV has deposited $138.3 million
into the reserve account and $5.7 million into the construction repair
account. The reserve account is to be maintained at not less than $40
million nor more than $137 million (or debt portion of next succeeding
basic rent payment, whichever is greater). Excess funds in the reserve
account are periodically transferred to MCV. This agreement also contains
provisions governing the distribution of revenues and rents due under the
Overall Lease Transaction, and establishes the priority of payment among
the Owner Trusts, creditors of the Owner Trusts, creditors of MCV and the
Partnership.
Summary
Interest and fees incurred related to long-term debt arrangements during
1999, 1998 and 1997 were $154.7 million, $162.1 million and $172.8 million,
respectively.
Interest and fees paid during 1999, 1998 and 1997 were $157.5 million,
$168.3 million and $176.2 million, respectively.
Minimum payments due under these long-term debt arrangements over the next
five years are (in thousands):
<TABLE>
<CAPTION>
Principal Interest Total
------------- ------------- ------------
<S> <C> <C> <C>
2000 $ 139,095 $ 149,554 $ 288,649
2001 155,210 136,999 292,209
2002 185,791 123,379 309,170
</TABLE>
F-14
<PAGE> 55
<TABLE>
<CAPTION>
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<S> <C> <C> <C>
2003 103,109 110,866 213,975
2004 146,275 101,617 247,892
------------- ------------- ------------
$ 729,480 $ 622,415 $1,351,895
============= ============= ============
</TABLE>
(7) COMMITMENTS AND OTHER AGREEMENTS
MCV has entered into numerous commitments and other agreements related to
the Facility. Principal agreements are summarized as follows:
Power Purchase Agreement
MCV and Consumers have executed the PPA for the sale to Consumers of a
minimum amount of electricity, subject to the capacity requirements of Dow
and any other permissible electricity purchasers. Consumers has the right
to terminate and/or withhold payment under the PPA if the Facility fails to
achieve certain operating levels or if MCV fails to provide adequate fuel
assurances. In the event of early termination of the PPA, MCV would have a
maximum liability of approximately $270 million if the PPA were terminated
in the 12th through 24th years. The term of this agreement is 35 years from
the commercial operation date and year-to-year thereafter.
Steam and Electric Power Agreement
MCV and Dow executed the SEPA for the sale to Dow of certain minimum
amounts of steam and electricity for Dow's facilities. In addition to the
contractual steam and electric charges, Dow paid 36 quarterly payments,
pursuant to the agreement, of $3.8 million each. These installment payments
commenced in the first quarter of 1990 and continued through the fourth
quarter of 1998, notwithstanding performance of the Facility.
If the SEPA is terminated, and Consumers does not fulfill MCV's commitments
as provided in the Backup Steam and Electric Power Agreement, MCV will be
required to pay Dow a termination fee, calculated at that time, ranging
from a minimum of $60 million to a maximum of $85 million. This agreement
provides for the sale to Dow of steam and electricity produced by the
Facility for terms of 25 years and 15 years, respectively, commencing on
the commercial operation date and year-to-year thereafter.
Steam Purchase Agreement
MCV and DCC executed the SPA for the sale to DCC of certain minimum amounts
of steam for use at the DCC Midland site. Steam sales under the SPA
commenced in July 1996. Termination of this agreement, prior to expiration,
requires the terminating party to pay to the other party a percentage of
future revenues which would have been realized had the initial term of 15
years been fulfilled. The percentage of future revenues payable is 50% if
termination occurs prior to the fifth anniversary of the commercial
operation date and 33-1/3% if termination occurs after the fifth
anniversary of this agreement. The term of this agreement is 15 years from
the commercial operation date of steam deliveries under the contract and
year-to-year thereafter.
Gas Supply Agreements
MCV has entered into gas purchase agreements with various producers for the
supply of natural gas. The current contracted volume totals 237,462 MMBtu
per day as of January 1, 2000. As of January 1, 2000, gas contracts with
U.S. suppliers provide for the purchase of 156,500 MMBtu per day while gas
contracts with Canadian suppliers provide for the purchase of 81,962 MMBtu
per day. Some of these contracts require MCV to pay for a minimum amount of
natural gas per year, whether or not taken. The estimated minimum
commitments under these contracts for gas for the years 2000 through 2004
are $126.4 million, $121.8 million, $132.5 million, $147.9 million and
$163.0 million, respectively. A portion of these payments may be utilized
in future years to offset the cost of quantities of natural gas taken above
the minimum amounts.
F-15
<PAGE> 56
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Gas Transportation Agreements
MCV has entered into firm natural gas transportation agreements with
various pipeline companies. These agreements require MCV to pay certain
reservation charges in order to reserve the transportation capacity. MCV
incurred reservation charges in 1999, 1998 and 1997, of $35.3 million,
$35.9 million and $34.4 million, respectively. The estimated minimum
reservation charges required under these agreements for each of the years
2000 through 2004 are $36.0 million, $35.8 million, $35.4 million, $35.2
million and $35.3 million, respectively. These projections are based on
current commitments.
Gas Turbine Service Agreement
MCV entered into a service agreement, as amended, with ABB Power which
commenced on January 1, 1990 and will expire upon the earlier of the
completion of the sixth series of major GTG inspections or December 31,
2009. Under the terms of this agreement, ABB Power sold MCV an initial
inventory of spare parts for the GTGs and provides qualified service
personnel and supporting staff to assist MCV, to perform scheduled
inspections on the GTGs, and to repair the GTGs at MCV's request. Upon
termination of the Service Agreement (except for nonperformance by ABB
Power), MCV must pay a cancellation payment of $1.0 million in 2000 and $.5
million in any year thereafter escalated in 1988 dollars. MCV and ABB Power
amended the Service Agreement, effective December 31, 1993, to include the
supply of hot gas path parts. Under the amended Service Agreement, ABB
Power will provide hot gas path parts for MCV's twelve gas turbines through
the fourth series of major GTG inspections. In January 1998, MCV and ABB
Power amended the length of the amended Service Agreement to extend through
the sixth series of major GTG inspections, which are expected to be
completed by year end 2008, for a lump sum fixed price covering the entire
term of the amended Service Agreement of $266.5 million (in 1993 dollars,
which is adjusted based on exchange rates and Swiss inflation indices),
payable on the basis of operating hours as they occur over the same period.
MCV has made payments totaling approximately $118.8 million under this
amended Service Agreement through December 31, 1999.
In addition to the January 1998 amendment to the term of the amended
Service Agreement, MCV contracted to purchase from ABB Power 11NM GTG
upgrade packages for eleven of the gas turbine generators for $41.6
million. The purchase of these upgrades was made after successfully testing
one upgrade package at the Facility in 1997. All eleven upgrade packages
have been installed in 1998 and 1999. The upgrade packages on all twelve
gas turbines have added to available capacity and significantly improved
the efficiency of the Facility. Maintenance and spare parts for the upgrade
packages are covered by the amended Service Agreement. As part of this
amended Service Agreement, MCV has purchased a spare GTG rotor to
facilitate maintenance activities and improve reliability.
Steam Turbine Service Agreement
MCV entered into a nine year Steam Turbine Maintenance Agreement with
General Electric Company effective January 1, 1995, which is designed to
improve unit reliability, increase availability and minimize unanticipated
maintenance costs. In addition, this contract includes performance
incentives and penalties which are based on the length of each scheduled
outage and the number of forced outages during a calendar year. MCV is
making monthly payments over the life of the contract, which will total
$13.0 million (in 1995 dollars).
Site Lease
In December 1987, MCV leased the land on which the Facility is located from
Consumers ("Site Lease"). MCV and Consumers amended and restated the Site
Lease to reflect the creation of five separate undivided interests in the
Site Lease as of June 1, 1990. Pursuant to the Overall Lease Transaction,
MCV assigned these
F-16
<PAGE> 57
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
undivided interests in the Site Lease to the Owner Trustees, which in turn
subleased the undivided interests back to MCV under five separate site
subleases.
The Site Lease is for a term which commenced on December 29, 1987, and ends
on December 31, 2035, including two renewal options of five years each. The
rental under the Site Lease is $.6 million per annum, including the two
five-year renewal terms.
(8) CONTINGENCIES
PPA - 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, but in no event sooner
than 2002) all of the previously disputed issues under the PPA and includes
definitive obligations for Consumers to make energy payments calculated in
accordance with the PPA, irrespective of any MPSC decisions which may
affect those issues or payments. 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
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. The agreement calls for Consumers to sell PECO
between 100 MW to 150 MW 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 was subsequently amended
and clarified, which conditionally permitted the transaction to go forward.
Consumers has asked the MPSC for further clarification, but the MPSC has
not yet ruled on Consumers' latest request. At this time, MCV Management
cannot predict whether Consumers will accept the MPSC's orders. 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.
(9) RETIREMENT BENEFITS
Postretirement Health Care Plans
In 1992, MCV established defined cost postretirement health care plans that
cover all full-time employees. The plans provide health care credits which
can be utilized to purchase medical plan coverage and pay qualified health
care expenses. Participants become eligible for the benefits if they retire
on or after the attainment of age 65 or upon a qualified disability
retirement, or if they have 10 or more years of service and retire at age
55 or older. The plans granted retroactive benefits for all employees hired
prior to January 1, 1992. This prior service cost has been amortized to
expense over a five year period. MCV annually funds the current year
service and interest cost as well as amortization of prior service cost to
both qualified and non-qualified trusts.
F-17
<PAGE> 58
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table reconciles the change in the plans' benefit obligation
and change in plan assets as reflected on the balance sheet as of December
31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 1,682.0 $ 1,413.1
Service cost 214.4 200.9
Interest cost 128.0 119.5
Actuarial gain (277.8) (51.5)
Benefits paid during year (7.3) --
-------------- -------------
Benefit obligation at end of year 1,739.3 1,682.0
-------------- -------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 1,724.1 1,400.0
Actual return on plan assets 186.2 148.0
Employer contribution 164.9 176.1
Benefits paid during year (7.3) --
-------------- -------------
Fair value of plan assets at end of year 2,067.9 1,724.1
-------------- -------------
Unfunded (funded) status (328.6) (42.1)
Unrecognized net gain 561.0 252.9
-------------- -------------
Accrued (prepaid) benefit cost $ 232.4 $ 210.8
============== =============
</TABLE>
Net periodic postretirement health care cost for years ending December 31,
included the following components (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- --------------- -------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 214.4 $ 200.9 $ 146.8
Interest cost 128.0 119.5 92.7
Expected return on plan assets (146.5) (119.0) (97.0)
Amortization of unrecognized net (gain) or loss (9.4) (4.2) (6.8)
------------- --------------- -------------
Net periodic benefit cost $ 186.5 $ 197.2 $ 135.7
============= =============== =============
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change
in assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage
Point Increase Point Decrease
---------------- -----------------
<S> <C> <C>
Effect on total of service and interest cost components $ 29.3 $ 51.8
Effect on postretirement benefit obligation $ 161.9 $ 410.0
</TABLE>
Assumptions used in accounting for the Post-Retirement Health Care Plan
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Discount rate 7.75% 6.75% 7.00%
Long-term rate of return on plan assets 8.50% 8.50% 8.50%
Inflation benefit amount
</TABLE>
F-18
<PAGE> 59
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued )
<TABLE>
<S> <C> <C> <C>
1997 through 2001 4.00% 0.00% 0.00%
2002 and later years 4.00% 4.00% 4.00%
</TABLE>
Retirement and Savings Plans
MCV sponsors a defined contribution retirement plan covering all employees.
Under the terms of the plan, MCV makes contributions to the plan of either
five or ten percent of an employee's eligible annual compensation dependent
upon the employee's age. MCV also sponsors a 401(k) savings plan for
employees. Contributions and costs for this plan are based on matching an
employee's savings up to a maximum level. In 1999, 1998, and 1997, MCV
contributed $1.1 million, $1.0 million and $1.0 million, respectively,
under these plans.
Supplemental Retirement Benefits
MCV provides supplemental retirement and excess benefit plans for key
management. These plans are not qualified plans under the Internal Revenue
Code; therefore, earnings of the trusts maintained by MCV to fund these
plans are taxable to the Partners and trust assets are included in the
assets of MCV.
F-19
<PAGE> 60
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(10) PARTNERS' EQUITY AND RELATED PARTY TRANSACTIONS
The following table summarizes the nature and amount of each of MCV's
Partner's equity interest, interest in profits and losses of MCV at
December 31, 1999, and the nature and amount of related party
transactions or agreements that existed with the Partners or affiliates
as of December 31, 1999 and 1998, and for each of the twelve month
periods ended December 31, (in thousands).
<TABLE>
<CAPTION>
Equity Partner, Type of Partner and Equity
Nature of Related Party Interest Interest Related Party Transactions and Agreements 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CMS Midland, Inc. $214,432 49.0% Power purchase agreements $585,838 $583,662 $608,640
General Partner; wholly-owned Purchases under gas transportation
subsidiary of Consumers Energy agreements 20,158 9,678 9,713
Company (formerly Consumers Purchases under spot gas agreements 991 520 6,490
Power Company) Purchases under gas supply agreements 10,187 9,855 9,543
Gas storage agreement 2,563 2,563 2,563
Land lease/easement agreements 600 600 600
Accounts receivable 48,697 48,652 53,513
Accounts payable 7,845 13,682 9,276
Gas sales under spot gas agreements 1,805 1,148 1,674
The Dow Chemical Company 45,808 7.5 Steam and electric power agreement 26,897 42,141 42,937
Limited Partner Steam purchase agreement - Dow Corning 3,329 3,256 3,167
Corp (affiliate)
Purchases under demineralized water 6,375 6,280 7,336
supply agreement
Accounts receivable 2,772 2,246 1,896
Accounts payable 649 580 678
Standby and backup fees 656 743 792
Source Midland Limited Partnership 73,907 18.1 SMLP - Under Ownership of MCNIC Power Co
("SMLP") General Partner; wholly- ----------------------------------------
owned limited partnership of MCN Purchases under spot gas agreements 4,590 6,810 578
Energy Group Inc. (1) (6) Purchases under gas supply agreements 13,814 13,230 8,364
Accounts receivable 901 -- 1,125
Accounts payable 1,921 1,178 588
Partner cash withdrawal (incl. Accrued 23,855 18,341 11,922
interest) (2)
Gas sales under spot gas agreements 7,262 169 1,845
SMLP - Under Ownership of Pan Energy Corp
-----------------------------------------
Purchases under gas transportation -- -- 4,648
agreements
Purchases under spot gas agreements -- -- 911
Gas sales under spot gas agreements -- -- 50
Accounts Payable -- -- --
Coastal Midland, Inc. ("Coastal 44,344 10.9 Purchases under gas transportation 13,581 13,547 13,593
Midland") agreements
General Partner; wholly-owned Purchases under spot gas agreement 6,892 10,382 9,920
subsidiary of The Coastal Purchases under gas supply agreement 4,528 4,339 4,188
Corporation Gas agency agreement 1,898 1,604 1,497
Deferred reservation charges under gas 5,910 4,925 3,940
purchase agreement
Accounts receivable 738 16 2,271
Accounts payable 2,602 1,791 4,569
Gas sales under spot gas agreements 3,473 5,253 5,486
Partner cash withdrawal (incl. Accrued 21,049 16,157 7,343
interest) (2)
MEI Limited Partnership ("MEI") (3)(6) MEI - Under Ownership of Coastal and SMLP
-----------------------------------------
A General and Limited Partner; See related party activity listed under
50% interest owned by Coastal Coastal Midland, Inc.
Midland, Inc. and 50% interest and Source Midland Limited Partnership
owned by SMLP
MEI - Under Ownership of ASEA Brown Boveri, Inc.
------------------------------------------------
General Partnership Interest 36,955 9.1 Gas turbine maint. and spare parts -- 23,377 29,900
agreement
Limited Partnership Interest 3,694 .9 Accounts payable -- -- 88
Partner cash withdrawal (including -- -- --
accrued interest) (2)
Equity Partner, Type of Partner and Equity
Nature of Related Party Interest Interest Related Party Transactions and Agreements 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE> 61
<TABLE>
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<S> <C> <C> <C> <C> <C> <C>
Micogen Limited Partnership 18,476 4.5 MLP - Under Ownership of The Coastal
------------------------------------
("MLP") Limited Partner; owned Corporation
by subsidiaries of The Coastal -----------
Corporation (4) See related party activity listed under
Coastal Midland Inc.
MLP - Under Ownership of Fluor
------------------------------
Corporation
-----------
Partner cash withdrawal (including -- -- 3,142
accrued interest) (2)
C-E Midland Energy, Inc. ("C-E") (5) -- -- C-E - Under Ownership of ASEA Brown
------------------------------------
Interest in MCV acquired by MEI Boveri, Inc.
Limited Partnership -----------
Service Agreement -- 1,252 2,195
Alanna Corporation 1 (7) .00001 Note receivable 1 1 1
Limited Partner; wholly-owned
Subsidiary of Alanna Holdings
Corporation
</TABLE>
Footnotes to Partners' Equity and Related Party Transactions
(1) On May 16, 1997, MCNIC Power Company acquired all of the partnership
interests in Source Midland Limited Partnership ("SMLP") from PanEnergy
Corp. The SMLP amounts listed Under Ownership of MCNIC Power Company are as
of December 31, 1998 and for the twelve month period ended December 31,
1998; and as of December 31, 1997 and for the period May 16, 1997 to
December 31, 1997. The SMLP amounts listed Under Ownership of PanEnergy
Corp. are for the period January 1, 1997 to May 15, 1997; and for the
twelve month period ended December 31, 1996, and as of December 31, 1996.
(2) Letters of credit have been issued and recorded as notes receivables from
various equity partners, pursuant to the Participation Agreement. In the
case of SMLP, the amount includes their share of the cash available to MEI
Limited Partnership ("MEI"). In the case of Coastal Midland, Inc. ("Coastal
Midland"), the amount includes their share of cash available of MEI and
Micogen Limited Partnership ("MLP").
(3) On June 16, 1998, Coastal Midland and SMLP, each acquired a 50% interest in
MEI. All MEI related party activity under the ownership of Coastal Midland
and SMLP is shown under the equity partners, Coastal Midland and SMLP. All
MEI related party activity under the ownership of ASEA Brown Boveri, Inc.
is for the period January 1, 1998 to June 16, 1998, and as of December 31,
1997 and 1996 and for the twelve month periods ended December 31, 1997 and
1996.
(4) On April 30, 1998 Coastal and an affiliate of The Coastal Corporation
acquired all of the partnership interests in MLP from Fluor Corporation
("Fluor"). All MLP related party activity under the ownership of The
Coastal Corporation is shown under the equity partner, Coastal Midland,
which is also wholly-owned by The Coastal Corporation.
(5) C-E Midland Energy, Inc.'s ("C-E") limited partnership interest was
acquired by MEI, which was subsequently acquired by Coastal and SMLP. All
C-E related party activity under the ownership of ASEA Brown Boveri, Inc.
is for the period January 1, 1998 to June 16, 1998, and for the twelve
month periods ended December 31, 1997 and 1996.
(6) On January 5, 2000, Coastal, through its subsidiaries, acquired all of the
partnership interests in Source Midland and MEI from MCN Energy Group Inc.
(7) Alanna's capital stock is pledged to secure MCV's obligation under the
lease and other overall lease transaction documents.
F-21
<PAGE> 62
SUPPLEMENTAL INFORMATION
Supplemental information is to be furnished with reports filed pursuant to
Section 15 (d) of the Act by registrants which have not registered securities
pursuant to Section 12 of the Act. No such annual report or proxy statement has
been sent to security holders.
F-22
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
Date: March 24, 2000 By /s/ James M. Kevra
----------------------------------
James M. Kevra
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James M. Kevra President and Chief Executive Officer March 24, 2000
- --------------------------------------- (Principal Executive Officer)
James M. Kevra
/s/ Stephen A. Shulman Chief Financial Officer and Treasurer March 24, 2000
- --------------------------------------- (Principal Financial Officer)
Stephen A. Shulman
/s/ James M. Rajewski Vice President and Controller March 24, 2000
- --------------------------------------- (Principal Accounting Officer)
James M. Rajewski
/s/ William T. McCormick Chairman, Management Committee March 24, 2000
- ---------------------------------------
William T. McCormick, Jr.
/s/ David A. Arledge Member, Management Committee March 24, 2000
- ---------------------------------------
David A. Arledge
</TABLE>
F-23
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ ---------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 - Restated Certificate of Limited Partnership dated June 13, 1988 ((a), Exhibit 3.1)).
3.2 - Amended and Restated Limited Partnership Agreement of MCV dated as of June 13, 1988 ((a) (Exhibit 3.2)).
3.2 (a) - Amendment No. 1 dated as of May 26, 1989 to Amended and Restated Limited Partnership Agreement ((a) (Exhibit
3.3)).
3.2 (b) - Amendment No. 2 dated as of November 28, 1989 to Amended and Restated Limited Partnership Agreement ((a),
Exhibit 3.4)).
3.2 (c) - Amendment No. 3 dated as of June 1, 1990 to Amended and Restated Limited Partnership Agreement (incorporated by
reference to Exhibit (2)(b) to CMS Energy Corporation's Form 10-K dated March 21, 1990, File No. 1-9513).
3.3 - Memorandum of Agreement, dated March 2, 1990, relating to Amended and Restated Partnership Agreement ((a),
(Exhibit 3.6)).
4.1 - Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between Shawmut
Bank and United States Trust Company of New York ((a), Exhibit 4.1)).
4.1 (a) - Senior Trust Indenture Supplement No. 1 dated as of June 1, 1990 ((a), (Exhibit 4.2)).
4.2 - Subordinated Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between
Shawmut Bank and Meridian Trust Company ("Subordinated Trust Indenture") ((a), (Exhibit 4.5)).
4.2 (a) - Subordinated Trust Indenture Supplement No. 1 dated as of June 1, 1990 ((a), (Exhibit 4.6)).
4.2 (b) - Subordinated Trust Indenture Supplement No. 2 dated as of July 1, 1990 ((a), (Exhibit 4.7)).
4.3 - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, MCV and United
States Trust Company of New York (incorporated by reference to Exhibit No. (28)(b) to CMS Energy
Corporation's Form 10-Q for the quarter ended June 30, 1990, File No. 1-9513).
4.3 (a) - Collateral Trust Indenture Supplement No. 1 dated June 1, 1990 ((a), (Exhibit 4.4)).
4.4 - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation II, MCV and Meridian
Trust Company (incorporated by reference to Exhibit No. (28)(d) to CMS Energy Corporation's Form 10-Q for the
quarter ended June 30, 1990, File No. 1-9513).
4.4 (a) - Collateral Trust Indenture Supplement No. 1 dated June 1, 1990 ((a), (Exhibit 4.9)).
4.5 - Amended and Restated Trust Agreement dated as of March 1, 1990 between Shawmut Bank and Owner Participant
((a), (Exhibit 4.10)).
4.6 - Lease Agreement, dated as of March 1, 1990 between MCV and Shawmut Bank ((a), (Exhibit 4.11)).
4.6 (a) - Amended and Restated Lease Agreement dated as of June 1, 1990 between MCV and Shawmut Bank ((a), (Exhibit
4.12)).
</TABLE>
E-1
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ ----------------------------------------------------------------------------------------------------------
<S> <C>
4.6 (b) - Amendment No. 1 dated as of January 1, 1992 to Amended and Restated Lease Agreement ((d), (Exhibit 4.17)).
4.6 (c) - Second Amended and Restated Agreement of Lease [Part A] dated as of June 1, 1990 among Consumers, MCV, CMS
Midland, Inc. and MEC Development Corporation ((a), (Exhibit 4.14)).
4.7 - Amended and Restated Participation Agreement dated as of June 1, 1990 among MCV, Owner Participant, Shawmut
Bank, United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding
Corporation II, MDC and Institutional Senior Bond Purchasers ((a), (Exhibit 4.13)).
4.8 - Ground Lease Assignment and Assumption Agreement dated as of June 1, 1990 among Shawmut Bank and MCV ((a),
(Exhibit 4.15)).
4.9 - Collateral Agency and Intercreditor Agreement dated as of June 1, 1990 between Shawmut Bank, MCV, United
States Trust Company, Meridian Trust Company, Bank of Montreal and Manufacturers National Bank of Detroit
((a), (Exhibit 4.16)).
10.1 - Tax Exempt Collateral Trust Indenture dated as of July 1, 1990 among The Economic Development Corporation of
the County of Midland, MCV and Meridian Trust Company (incorporated by reference to Exhibit No. (28)(g) to
CMS Energy Corporation's Form 10-Q for the quarter ended June 30, 1990, File No. 1-9513).
10.1 (a) - Tax Exempt Collateral Trust Indenture Supplement No. 1 dated July 1, 1990 ((a), (Exhibit 10.2)).
10.2 - Credit Agreement dated as of June 16, 1990 among Bank of Montreal as Agent, the Lenders named therein and MCV
((a), (Exhibit 10.3)).
10.3 - CMS Transfer Agreement dated as of January 27, 1987, as amended as of June 13, 1988, among Consumers Power
Company, CMS Midland, Inc. and MCV (incorporated by reference to Exhibit (19)(a) to Consumers Power Company's
Form 10-Q for the quarter ended June 30, 1988, File No. 1-5611).
10.4 - Amended and Restated MDC Transfer Agreement dated as of June 13, 1988, among Consumers Power Company, MEC
Development Corporation and MCV, as amended by the March 2, 1990 Memorandum of Agreement with respect to the
Amended and Restated Partnership Agreement (incorporated by reference to Exhibit No. (19)(b) to Consumers
Power Company's Form 10-Q for the quarter ended June 30, 1988, File No. 1-5611), as amended by the March 2,
1990 Memorandum of Agreement with respect to the Amended and Restated MDC Transfer Agreement (incorporated by
reference to Exhibit (2)(b) to CMS Energy Corporation's Form 8-K dated March 21, 1990, File No. 1-9513).
10.5 - Amended and Restated Tax Indemnification Agreement, dated as of June 1, 1990, among MCV and Owner Participant
((a), (Exhibit 10.70)).
10.6 - Capacity Support Agreement dated as of June 9, 1988, between CMS Energy Corporation and MCV (incorporated by
reference to Exhibit No. 10(m) to CMS Energy Corporation's Annual Report on Form 10-K, for the year ended
December 31, 1988, File No. 1-9513).
10.7 - Registration Rights Agreement dated as of December 17, 1993 among Midland Funding Corporation I, MCV,
Consumers and Morgan Stanley & Co. Incorporated and Donaldson, Lufkin & Jearette Securities Corporation ((e),
(Exhibit 10.97)).
</TABLE>
E-2
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ ---------------------------------------------------------------------------------------------------------
<S> <C>
10.8 - Power Purchase Agreement, dated as of July 17, 1986, between MCV and Consumers Power Company ("PPA") ((a),
(Exhibit 10.4)).
10.8 (a) - Amendment No. 1 to PPA dated September 10, 1987 ((a), (Exhibit 10.5)).
10.8 (b) - Amendment No. 2 to PPA dated March 18, 1988 ((a), (Exhibit 10.6)).
10.8 (c) - Amendment No. 3 to PPA dated August 28, 1989 ((a), (Exhibit 10.7)).
10.8 (d) - Amendment No. 4A to PPA dated May 25, 1989 ((a), (Exhibit 10.8)).
10.9 - Settlement Agreement dated April 5, 1999, between MCV and Consumers Energy Company ((j), (Exhibit 10.1)).
10.10 - Special Facilities/Interconnection Agreement dated as of July 8, 1988 between MCV and Consumers Power Company
((a), (Exhibit 10.25)).
10.11 - Residual Open Access Interconnection Service Purchase Agreement between Consumers Power Company and MCV,
dated December 5, 1991 ((c), (Exhibit 10.83)).
10.12 - Agreement with respect to the transmission of power dated as of June 9, 1988, between Consumers Power Company
and MCV ((a), (Exhibit 10.69)).
10.13 - MCV Backup Agreement dated June 9, 1988 between MCV and Consumers Power Company with respect to Alternative
Generating Equipment ((a), (Exhibit 10.27)).
10.14 - Interconnection Option between MCV, Consumers Power Company, Michigan Gas Storage Company and The Dow
Chemical Company dated April 27, 1988 ((a), (Exhibit 10.14)).
10.15 - Summer Peaking Call Option Agreement dated April 5, 1999, between MCV and Consumers Energy Company ((j),
(Exhibit 10.2)).
10.16 - Steam and Electric Power Agreement between The Dow Chemical Company and MCV dated January 27, 1987 (the
"SEPA") ((a), (Exhibit 10.10)).
10.16 (a) - First Amendment to SEPA ((a), (Exhibit 10.11)).
10.16 (b) - Exhibit "A" to SEPA ((a), (Exhibit 10.13)).
10.16 (c) - Fourth Amendment to SEPA ((a), (Exhibit 10.15)).
10.16 (d) - Fifth Amendment to SEPA ((a), (Exhibit 10.16)).
10.16 (e) - Sixth Amendment to SEPA, dated November 20, 1989 ((f), (Exhibit 10.14(e)).
10.16 (f) - Seventh Amendment to SEPA, dated November 22, 1994 ((f), (Exhibit 10.14(f)).
10.17 - Demineralized Water Supply Agreement dated as of January 27, 1987 between MCV and The Dow Chemical Company
((a), (Exhibit 10.31)).
10.18 - Package Boiler Sale and Support Agreement between The Dow Chemical Company, Consumers Power Company and MCV
dated as of January 27, 1987 ((a), (Exhibit 10.32)).
</TABLE>
E-3
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -------------------------------------------------------------------------------------------------------------
<S> <C>
10.19 - Equipment Lease dated as of January 27, 1987 between The Dow Chemical Company and MCV (the "Equipment Lease")
((a), (Exhibit 10.71)).
10.19 (a) - First Amendment to Equipment Lease effective March 1, 1988 and dated as of May 4, 1988 ((a), (Exhibit 10.72)).
10.19 (b) - Second Amendment to Equipment Lease effective December 1, 1989 and dated November 20, 1989 ((a), (Exhibit
10.73)).
10.20 - Equipment Lease Easement dated as of January 27, 1988 between The Dow Chemical Company and MCV (( a), (Exhibit
10.74)).
10.20 (a) - First Amendment to Equipment Lease Easement effective March 1, 1988 and dated May 4, 1988 ((a), (Exhibit
10.75)).
10.20 (b) - Second Amendment to Equipment Lease Easement effective December 1, 1989 and dated November 20, 1989 ((a),
(Exhibit 10.76)).
10.21 - Service Agreement dated as of June 9, 1988 between MCV and ABB Alstom Power, Inc. (Previously ABB Energy
Services, Inc.) ((a), (Exhibit 10.22)).
10.21 (a) - Hot Gas Path Parts Addendum to the Service Agreement dated March 22, 1994 ((e), (Exhibit 10.99)).
10.21 (b) - Amendment No. 1 to the Service Agreement dated April 1, 1995 ((g), (Exhibit 10.20(b))).
10.21 (c) - Amendment No. 2 to the Service Agreement dated January 15, 1998 ((h), (Exhibit 10.19 (c))).
10.22 - Operating Agreement, dated as of June 1, 1990, between MCV and Shawmut Bank, as Owner Trustee ((a), (Exhibit
10.23)).
10.23 - Lessee Mortgage and Security Agreement, dated as of June 1, 1990, between Shawmut Bank, as Owner Trustee, and
MCV ((a), (Exhibit 10.24)).
10.24 - Cogeneration Agreements Assignment, dated as of June 1, 1990, between Shawmut Bank, Owner Trustee, and MCV
((a), (Exhibit 10.26)).
10.25 - Support Facilities License and Easement Agreement dated as of June 1, 1990 between MCV and Shawmut Bank ((a),
(Exhibit 10.29)).
10.26 - Facility Agreements and Governmental Actions Assignment Agreement dated as of June 1, 1990 between MCV and
Shawmut Bank ((a), (Exhibit 10.30)).
10.27 - Development Agreement, dated as of June 1, 1990 between MCV, Shawmut Bank, as Owner Trustee, and MCV2 ((a),
(Exhibit 10.33)).
10.28 - Amended and Restated Consent and Agreement, dated as of June 1, 1990, between The Dow Chemical Company,
Shawmut Bank, as Owner Trustee, Meridian Trust Company and United States Trust Company, MCV and Consumers
Power Company ((a), (Exhibit 10.34)).
</TABLE>
E-4
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -------------------------------------------------------------------------------------------------------------
<S> <C>
10.29 - Consent and Agreement, dated as of June 1, 1990, between Consumers Power Company, MCV, Shawmut Bank, as Owner
Trustee, Meridian Trust Company and United States Trust Company ((a), (Exhibit 10.35)).
10.30 - Natural Gas Purchase Agreement, dated as of May 1, 1989 between Northern Michigan Gas Exploration Company
("Nomeco"), CMS Energy Corporation and MCV ((a), (Exhibit 10.39)).
10.30 (a) - Amendment dated March 1, 1992 to the Natural Gas Purchase Agreement dated as of May 1, 1989 between Nomeco,
CMS Energy Corporation and MCV ((e), (Exhibit 10.95)).
10.30 (b) - Amendment dated May 11, 1994 to the Natural Gas Purchase Agreement dated as of May 1, 1989 between Nomeco,
CMS Energy and MCV,((f), (Exhibit 10.29(b)).
10.31 - Natural Gas Purchase Agreement, dated as of May 13, 1988 between ANR Production Company and MCV ((a),
(Exhibit 10.41)).
10.32 - Natural Gas Purchase Contract dated August 18, 1994, between Coastal Gas Marketing and MCV ((f), (Exhibit
10.32)).
10.33 - Natural Gas Purchase Agreement, dated May 1, 1989 between CoEnergy Trading Company (previously Northern
Michigan Gas Exploration Company before being assigned to CoEnergy Trading Company on March 14, 1995) and MCV
((a), (Exhibit 10.40)).
10.34 - Natural Gas Purchase Agreement, dated February 1, 1992 between CoEnergy Trading Company (previously Nomeco
Oil and Gas Company before being assigned to CoEnergy Trading Company on July 22, 1994) and MCV ((d),
(Exhibit 10.84)).
10.35 - Natural Gas Purchase Agreement, dated as of June 2, 1997 between MCV and CMS Marketing, Services and Trading
Company ((h), (Exhibit 10.33)).
10.36 - Gas Sales Agreement, dated July 1, 1999, between MCV and CMS Marketing Services and Trading Company ((k),
(Exhibit 10.0)).
10.37 - Gas Sales Agreement, dated November 15, 1998, between MCV and Engage Energy US, L.P.
10.38 - Gas Sales Agreement, dated September 20, 1999, between MCV and Engage Energy US, L.P.
10.39 - Transportation Service Agreement, dated as of May 25, 1988 between Great Lakes Gas Transmission Company and
MCV and letter agreements dated May 25, 1988 and May 26, 1988 ((a), (Exhibit 10.60)).
10.40 - Transportation Agreement (#17800) dated November 24, 1993 between ANR Pipeline Company and MCV ((f),
(Exhibit 10.35)).
10.41 - Transportation Agreement (#17850) dated November 24, 1993 between ANR Pipeline Company and MCV ((f), (Exhibit
10.36)).
10.42 - Gas Transportation Agreement (Firm Service), dated as of March 2, 1988, between Michigan Gas Storage and MCV
and amendment thereto dated September 21, 1988 ((a), (Exhibit 10.64)).
</TABLE>
E-5
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -------------------------------------------------------------------------------------------------------------
<S> <C>
10.43 - Transportation Agreement (Firm Contract #011456), dated as of May 1, 1993 between Panhandle Eastern Pipeline
Company and MCV, as amended ((e), (Exhibit 10.90)).
10.44 - Transportation Agreement (Firm Contract #011457), dated as of May 1, 1993 between Panhandle Eastern Pipeline
Company and MCV, as amended ((e), (Exhibit 10.91)).
10.45 - Transportation Agreement (Firm Contract #011458), dated as of May 1, 1993 between Panhandle Eastern Pipeline
Company and MCV, as amended ((e), (Exhibit 10.92)).
10.46 - Firm Transportation Service Form of Transportation Agreement (#013296), dated November 1, 1993 between
Trunkline Gas Company and MCV ((e), (Exhibit 10.93)).
10.47 - Gas Exchange Agreement (Firm Service), dated as of March 2, 1988, between Consumers Power Company and MCV, as
amended September 21, 1988 ((a), (Exhibit 10.63)).
10.48 - Gas Storage Agreement (Firm Service) between MCV and Consumers Power Company dated March 2, 1988 ((a),
(Exhibit 10.68)).
10.49 - The Gas Supply Option dated as of January 27, 1987, between The Dow Chemical Company and MCV ((a), (Exhibit
10.67)).
10.50 - MCV Senior Management Incentive Plan ((i), (Exhibit 10.42)), (*).
10.51 - MCV Supplemental Retirement Plan dated July 6, 1992 ((d), (Exhibit 10.87)), (*).
10.52 - MCV Supplemental Benefit Plan dated January 1, 1989 ((d), (Exhibit 10.88)), (*).
10.53 - MCV Excess - Benefit Plan dated July 1, 1989 ((d), (Exhibit 10.89)), (*).
10.54 - MCV Long-Term Incentive Plan ((i), )Exhibit 10.46)). (*)
21 - Subsidiaries of Registrant -- MCV subsidiaries are in the aggregate not significant subsidiaries as defined
in Rule 1-02 (v) of Regulation S-X.
27 - Financial Data Schedule for year Ended 1999.
99.01 - Unaudited - MCV Selected Proforma Operating Cash Flow Data for the years ended 1999 and 1998.
</TABLE>
--------------------
(a) Incorporated by reference to MCV's registration statement on Form S-1
(File No. 33-37977) as the bracketed numbered exhibits.
(b) Incorporated by reference to MCV's registration statement on Form S-1
(File No. 33-37977) originally filed on November 23, 1990, as
amended, in Amendment No. 1 to File No. 33-37977 as the bracketed
numbered exhibits.
(c) Incorporated by reference to MCV's Annual Report on Form 10-K for the
year ended December 31, 1991 as the bracketed numbered exhibits.
(d) Incorporated by reference to MCV's Annual Report on Form 10-K for the
year ended December 31, 1992 as the bracketed numbered exhibits.
E-6
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -------------------------------------------------------------------------------------------------------------
<S> <C>
(e) Incorporated by reference to MCV's Annual Report on Form 10-K for the
year ended December 31, 1993 as the bracketed numbered exhibits.
(f) Incorporated by reference to MCV's Annual Report on Form 10-K for the
year ended December 31, 1994 as the bracketed numbered exhibits.
(g) Incorporated by reference to MCV's Annual Report on Form 10-K for the
year ended December 31, 1995 as the bracketed numbered exhibits.
(h) Incorporated by reference to MCV's Annual Report on Form 10-K for the
year ended December 31, 1997 as the bracketed numbered exhibits.
(i) Incorporated by reference to MCV's Annual Report on Form 10-K for the
year ended December 31, 1998 as the bracketed numbered exhibits.
(j) Incorporated by reference to MCV's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1999 as the bracketed numbered
exhibits.
(k) Incorporated by reference to MCV's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999 as the bracketed
numbered exhibits.
(*) Exhibits represent Management Contracts and Compensatory Plans and
Arrangements.
</TABLE>
E-7
<PAGE> 1
EXHIBIT 10.37
GAS SALES AGREEMENT
This Agreement is made this 15th of November, 1998, between Midland Cogeneration
Venture Limited Partnership ("MCV" or "Buyer") and Engage Energy U.S., L.P.
("Seller") for the purpose of entering into a long-term gas supply arrangement
on the terms and conditions which follow. In this Agreement, Seller and Buyer
may also be referred to individually as "Party" or collectively as "Parties."
1. Definitions. The following terms when used in this Agreement, shall have
the following meanings:
a) The term "Agreement" means this Agreement and all Exhibits hereto.
b) The term "business day" shall mean: any day other than a day on which
banks in Michigan are allowed by law to be closed.
c) The term "Btu" shall mean one (1) British Thermal Unit, the amount of
heat required to raise the temperature of one (1) pound of water one
(1) degree Fahrenheit at sixty (60) degrees Fahrenheit. BTU is
measured on a dry basis.
d) The term "Contract Year" shall mean any calendar year during the term
of this Agreement.
e) The term "cubic foot of gas" shall mean the volume of gas contained in
one (1) cubic foot of space at a pressure of fourteen
<PAGE> 2
and seventy-three hundredths (14.73) dry psia, at a temperature of
sixty degrees (60 degrees) Fahrenheit.
f) The term "day" shall mean a period of twenty-four (24) consecutive
hours (23 hours when changing from Standard to Daylight time and 25
hours when changing back to Standard time), beginning and ending at
9:00 a.m. Central clock time.
g) The term "Disputed Amount" shall have the meaning set forth in Section
5A(ii).
h) The term "gas" shall mean any mixture of hydrocarbon and
non-combustible gases in a gaseous form, consisting primarily of
methane, and includes natural gas produced from gas wells (gas well
gas), gas which immediately prior to being produced from a reservoir
is in solution with crude oil, or dispersed in an intimate association
with crude oil, or in contract with crude oil across a gas-oil contact
(casinghead gas), or residue gas resulting from the processing of
either or both casinghead gas and gas well gas.
i) The term "Mcf" shall mean one thousand (1,000) cubic feet of gas.
j) The term "MMBtu" shall mean a quantity of gas equal to one million
(1,000,000) Btu which is equivalent to one (1) dekatherm.
k) The term "month" shall mean the period beginning at 9 a.m. Central
clock time on the first day of any calendar month and ending at 9 a.m.
Central clock time on the first day of the next succeeding calendar
month.
<PAGE> 3
l) The term "Point of Delivery" shall mean the point where Seller
delivers gas to Buyer as set forth in this Agreement.
m) The term "Prime Rate" shall mean the fluctuating per annum lending
rate of interest from time to time published by CITIBANK, NA, or its
successor, for its best commercial customers.
n) The term "psia" shall mean pounds per square inch absolute.
o) The term "psig" shall mean pounds per square inch gauge.
p) The term "Transporter" shall mean any pipeline transporting gas
subject to this Agreement.
q) The term "Great Lakes Pipeline" shall mean the pipeline owned by Great
Lakes Gas Transmission Limited Partnership which connects to the 26"
pipeline owned by the Midland Cogeneration Venture Limited
Partnership.
r) The term "Undisputed Amount" shall have the meaning set forth in
Section 5A (ii).
2. Quantity. Seller agrees to deliver and sell and MCV agrees to receive and
purchase 10,000 MMBtu/day, on a firm basis in accordance with the terms and
conditions of this Agreement.
3. Price.
(A) The price to be paid by Buyer to Seller for all quantities of gas
delivered hereunder inclusive of all taxes and other adjustments or
costs not provided for herein shall be $2.79 per MMBtu for all gas
<PAGE> 4
delivered to the interconnection of the Midland Cogeneration Venture
Limited Partnership's 26" pipeline with Great Lakes Pipeline's Midland
interconnect located in Isabella County, Michigan.
(B) Seller shall be responsible for all taxes prior to the Point of
Delivery. MCV shall be responsible for all taxes at and after the
Point of Delivery.
4. Term. Deliveries of gas shall commence on November 1, 2004 and continue
through October 31, 2007.
5. Billing and Payments.
(A) Billing and payment procedures are as follows:
(i) After the delivery of gas has commenced hereunder, Seller
shall, on or about the tenth day of each month, render to
Buyer a statement showing the estimated (or actual if
available) quantity of gas delivered at each Point of
Delivery during the prior month, and the amounts due Seller
hereunder. Seller shall also render to Buyer, if necessary,
a separate statement showing the adjustment, if any,
required to conform the prior month's estimated and actual
deliveries and prices. Payment of the amount due based on
such statements shall be made by Buyer to Seller by wire
transfer with immediately available funds the later of (a)
ten (10) days following receipt of such statement or (b) the
twentieth (20th) day of the month. If the due date falls on
a day which is not a business day, then payment shall be
<PAGE> 5
made on the next business day. If the Buyer bills Seller the
same procedure shall be followed as set forth in this
subparagraph.
(ii) In the event that either Party shall in good faith dispute
any portion of the amount shown in the other Party's
statement (hereinafter called the "Disputed Amount"), the
disputing Party shall (a) notify the other Party in writing
as to the Disputed Amount, and (b) pay the remaining
undisputed portion of the other Party's statement when due
(hereinafter, the "Undisputed Amount").
(iii) If it is determined that the failure to pay any Undisputed
Amount of any statement was not justifiable, interest on
such Undisputed Amount shall accrue at a rate per annum
equal to the Prime Rate, plus one percent (1.0%), from the
time payment would have been due until the time payment is
made, but in no event shall the interest on such unpaid
portion exceed the applicable lawful nonusurious rate of
interest. Payment of any previously unpaid Undisputed Amount
shall be credited first to all interest accrued and then to
principle.
(B) Each Party hereto shall have the right, upon reasonable written
notice, during normal business hours and at its own expense to examine
the books and records of the other Party to the extent necessary to
verify the accuracy of any statement, charge,
<PAGE> 6
computation or demand made under or pursuant to this Agreement. Such
examination shall be conducted no more than once in a twelve-month
period. Any error or discrepancy in statements furnished pursuant to
this Agreement shall be promptly reported to Seller or Buyer, as
applicable, and proper adjustment thereof shall be made within thirty
(30) days after final determination of the correct volumes or amounts
involved; provided, however, that, if no such errors or discrepancies
are reported to Seller or Buyer, as applicable, within two (2) years
from the end of the calendar year in which such errors or
discrepancies occurred, the same shall be conclusively deemed to be
correct.
6. Deliveries.
(A) Exhibit A hereto sets forth the Point of Delivery under this
Agreement. Seller shall not use any other point to deliver gas without
Buyer's written consent which Buyer may grant or withhold in its sole
discretion.
(B) To the extent that the procedures for the delivery of gas set forth
herein conflict with the rules and tariffs of any Transporter, the
Transporter's rules and tariffs will control and the Parties shall
cooperate fully with each other in complying with such rules and
tariffs.
7. Third Party Gas. Buyer understands and agrees the gas delivered
hereunder may be supplied either from Seller's gas or from gas
purchased by Seller from third parties, provided however, if such gas
is
<PAGE> 7
purchased from third parties, Seller shall be solely responsible for
the payment of the purchase price of gas to such third parties.
8. Title. Title and risk of loss to gas delivered hereunder shall pass
from Seller to Buyer at the Point of Delivery.
9. Delivery Pressure. Seller shall be required to deliver or cause
delivery of the gas at the Point of Delivery hereunder against the
varying pressures in the facilities of Buyer's Transporter(s) (MCV's
26" pipeline); provided however, Seller shall have the right but not
the obligation to install compression.
10. Quality of Gas. The gas to be delivered hereunder shall comply with
the quality requirements of the Seller's Transporter (Great Lakes
Pipeline) delivering the gas at the Point of Delivery.
11. Measurement and Tests of Gas. The quantity and quality of gas
delivered to the Buyer's account at the Point of Delivery shall be
determined by the Seller's Transporter (Great Lakes Pipeline) in
accordance with the then current standard terms and conditions
applicable to Great Lakes Pipeline's gas transportation contracts.
12. Warranty of Title. Seller hereby warrants (i) title to all gas sold
hereunder or the right to sell such gas, (ii) that it has the right to
sell same to Buyer and (iii) that all such gas shall be free from any
and all liens and adverse claims of any nature whatsoever. Seller
agrees to indemnify and hold Buyer harmless, including but not limited
to, all costs, damages and expenses (including Buyer's reasonable
attorney fees) incurred by Buyer
<PAGE> 8
in defending against any liens or adverse claims of any nature
whatsoever, including but not limited to, third parties from whom
Seller purchased gas as permitted in Section 7, in addition to any
other remedies Buyer may have hereunder or at law.
13. Credit Worthiness.
13.1 This Agreement is subject to Seller providing Buyer a
guaranty from The Coastal Corporation in the form attached
hereto as Exhibit "B."
13.2 At any time, and from time to time during the term of this
Agreement (and notwithstanding whether an Event of Default
has occurred, as defined in Section 23) but not more than
once in any seven (7) day period, if the Termination Payment
(as such term is defined in Section 13.5) should exceed
$4,000,000 until November 1, 2004 and $5,000,000 thereafter
as to MCV, and $8,000,000 as to Seller, (the "Security
Threshold"), then either Party may request the other Party
to provide additional Performance Assurance in an amount
equal to: the amount by which the Termination Payment
exceeds the Security Threshold (rounding upwards for any
fractional amount to the next $100,000). The Performance
Assurance shall be delivered within thirty (30) calendar
days of the date of the request. If such additional
Performance Assurance is not received by the requesting
Party within thirty (30) calendar days, then the requesting
Party in addition to any other remedy
<PAGE> 9
available, may immediately suspend performance with respect to the
quantities associated with the amount in excess of the Security
Threshold plus any Performance Assurance already in place and cover
such lost supply or market, as the case may be. Incremental gas costs
(as defined in Section 17 with respect to either Buyer or Seller, as
applicable) incurred by the covering Party shall be recoverable from
the other Party. Such suspension will be implemented on a pro rata
basis to a level at which assurances have been provided. In addition,
a failure to provide Performance Assurance as requested shall
constitute an Event of Default under Section 23.
13.3 Either Party, at its sole expense, may request the other Party to
reduce its Performance Assurance then in place, if the Termination
Payment (with respect to all Transactions then outstanding) reverts
back to an amount less than or equal to the sum of the Performance
Assurance and the Security Threshold then in place (rounding upwards
for any fractional amount to the next $100,000). Such request for
reduction shall be no more frequently than weekly with respect to
Letters of Credit and guaranties, and daily with respect to cash. The
consent to such request(s) shall not be unreasonably withheld.
13.4 Either Party may at any time make a calculation of the Termination
Payment and submit same to the other Party for review. If within
<PAGE> 10
thirty days of the submission of the value of the Termination Payment
from one Party to the other, agreement has not been reached by the
Parties as to the amount of the Termination Payment, the determination
of the amount of the Termination Payment shall be submitted to
arbitration as provided for in Section 18 of this Agreement.
Notwithstanding the submission of the determination of the amount of
the Termination Payment to arbitration, all requirements in Section 13
of this Agreement shall remain in effect.
13.5 With respect to this Section 13: (a) "Performance Assurance" means
collateral in the form of either cash or Letters of Credit. The
requesting Party may also accept a parental guaranty or other
collateral deemed sufficient by the requesting Party. If the
collateral is in the form of cash, then such cash shall be placed in a
segregated, interest-bearing escrow account on deposit with a major
U.S. commercial bank having a credit rating of at least "A-" from
Standard and Poor's or "A3" from Moody's (interest to accrue to the
Party posting the collateral); (b) "Letter of Credit" means one or
more irrevocable, transferable standby letters of credit from a major
U.S. commercial bank or foreign bank with a U.S. office having a
credit rating of at least "A-" from Standard & Poor's or "A3" from
Moody's; (c) "Termination Payment" means the amount by which the
requesting Party shall aggregate Gains, Losses, and
<PAGE> 11
Costs (as those terms are defined in Section 23.2 (e)) with
respect to this Agreement into a single net amount. The
Termination Payment shall include all amounts owed but not yet
paid by one Party to the other Party, whether or not such amounts
are then due, for performance already performed pursuant to any
Transaction.
14. Right to Terminate Agreement.
(A) In addition to any other remedy of Buyer under law or
provided under this Agreement, Buyer shall have the right at
its election to terminate this Agreement upon twenty (20)
days written notice to Seller if Seller, for any reason,
other than (i) force majeure, (ii) Buyer's failure to take,
or (iii) a failure by Buyer to pay any Undisputed Amounts,
fails, over a period of at least sixty (60) days, to deliver
an average of ninety percent (90%) of the agreed quantity
and provided further that such failure occurred not more
than one hundred forty (140) days immediately preceding the
giving of such notice of termination. Seller shall have
twenty (20) days after receipt of such cancellation notice
to cure any failure in which case Buyer's cancellation is
null and void and this Agreement shall remain in full force
and effect.
(B) In addition to the other remedies of Seller under law or
provided under this Agreement, Seller shall have the right
at its election to terminate this Agreement upon twenty (20)
days written notice to Buyer if Buyer, for any reason, other
than (i) force majeure, (ii) Seller's failure to
<PAGE> 12
deliver, or (iii) a failure by Seller to pay any Undisputed
Amounts, fails, over a period of at least sixty (60) days, to
take a volume of gas not less than an average of ninety percent
(90%) of the agreed quantity, and provided further that such
failure occurred not more than one hundred forty (140) days
immediately preceding the giving of such notice of termination.
Buyer shall have twenty (20) days after receipt of such
cancellation notice to cure any failure in which case Seller's
cancellation is null and void and this Agreement shall remain in
full force and effect.
15. Assignment.
(A) The terms, covenants and conditions hereof shall be binding
on the Parties hereto and on their successors and permitted
assignees.
(B) Either Party may assign its interest under this Agreement,
with the consent of the other Party, which consent shall not
be unreasonably withheld, to an affiliate or any company
which shall succeed, by merger or consolidation, to
substantially all of its assets. In the event of any such
assignment, such successor shall be entitled to the rights
and shall be subject to the obligations of its predecessor.
Seller acknowledges that pursuant to a certain Gas Backup
Agreement among Consumers Power Company, The Dow Chemical
Company (Dow) and the Midland Cogeneration Venture Limited
Partnership dated January 27, 1987, Buyer may be required to
make an assignment to Dow of certain rights under this
Agreement. Seller
<PAGE> 13
specifically agrees to accept such assignments, if any, made
by Buyer to Dow in accordance with the aforementioned Gas
Backup Agreement; provided, however, that such assignment
shall not relieve Buyer of its obligations under this
Agreement absent Seller's written consent.
(C) Except as provided above, neither Party shall assign this
Agreement without the prior consent of the other Party,
which consent shall not be unreasonably withheld. Nothing
herein contained shall prevent or restrict either Party from
pledging, granting a security interest in, or assigning as
collateral all or any portion of such Party's interest to
secure any debt or obligation of such Party under any
mortgage, deed of trust, security agreement or similar
instrument.
(D) Either Party desiring to make an assignment for which it has
the right pursuant to the foregoing may upon request obtain
a written consent within sixty (60) days to such assignment
from the other Party evidencing its consent.
16. Notices. Except as otherwise herein provided, any notice, request,
demand or statement given in writing or required to be given in
writing by the terms of this Agreement shall be deemed given when
deposited in the government mail, postage prepaid, as certified mail,
directed to the post office address of the Parties as follows:
<PAGE> 14
TO SELLER:
For Invoices and Payments: Engage Energy US, L.P.
Five Greenway Plaza, Ste. 1200
Houston, Texas 77046
Attn.: Client Services
Telephone: (713) 877-7800
Telecopier: (713) 297-1489
Wire Transfer No. Citibank, NA, NY,
NY,
Acct. # 4071-9415, ABA # 0210-00089
For all other notices: Engage Energy US, L.P.
Five Greenway Plaza, Ste. 1200
Houston, Texas 77046
Attn.: Contract Administration
Telephone: (713) 877-7800
Telecopier: (713) 877-3583
TO BUYER:
For Invoices and Payments: Midland Cogeneration Venture
Limited Partnership
Attn.: Treasury
100 Progress Place
Midland, MI 48640
Telephone No.: (517) 839-6018
Telecopier: (517) 839-6137
Wire Transfer: U.S. Bank Trust, N.A.
Minneapolis, MN
ABA# 091000022
A/C# 180121167365
MI Clearing #47300196 - FBO MCV
76608640
For all other notices: Midland Cogeneration Venture
Limited Partnership
100 Progress Place
Midland, MI 48640
Attn.: Gas Supply Department
Telephone No.: (517) 839-6008
Telecopier: (517) 839-6793
<PAGE> 15
or at such other address as either Party may from time to time specify
as its address for such purposes by registered for certified letter
addressed to the other Party. Notices, requests, demands or statements
made in person, by telephone, Telecopier, Telex or wire shall be
deemed given when received provided, however, that if such notices are
received after 5:00 p.m. (recipient's local time), they shall not be
effective until the next business day.
Gas nomination notices will be in accordance with the terms and
conditions applicable to Great Lakes Pipeline.
17. Remedies. In the event Seller fails to deliver the daily quantities
for reasons not otherwise excused by force majeure, Seller shall be
responsible for any incremental gas costs incurred by MCV in replacing
such gas. MCV agrees to use commercially reasonable efforts to
purchase replacement gas at the lowest available price. Seller's
obligation to pay MCV for incremental replacement gas costs (and any
transportation penalties or transportation demand charges resulting
from unused transportation) shall be MCV's sole and exclusive remedy
for Seller's failure to deliver except as provided in Section 14. In
the event that MCV fails to take gas for reasons not otherwise excused
by force majeure, MCV shall pay Seller for any incremental decrease in
the resale price of such gas. Seller agrees to use commercially
reasonable efforts to resell such deficiency gas at the highest
achievable price. MCV's
<PAGE> 16
obligation to pay Seller for such decrease (and any transportation
penalties or transportation demand charges resulting from unused
transportation) shall be Seller's sole and exclusive remedy for MCV's
failure to take gas except as provided in Section 14.
18. Arbitration.
(A) If the Parties are unable to resolve a disagreement arising
under this Agreement such disagreement shall be settled by
arbitration. Either Party may then commence arbitration by
serving written notice thereof on the other Party
designating the issue to be arbitrated.
(B) The Parties shall each appoint one (1) arbitrator and the
two (2) arbitrators so appointed will select a third
arbitrator, all of such arbitrators to be qualified by
education, knowledge, and experience to resolve the dispute
or controversy. If either Party fails to appoint an
arbitrator within ten (10) days after a request for such
appointment is made by the other Party in writing, or if the
two (2) appointed fail, within ten (10) days after the
appointment of the second, to agree on a third arbitrator,
the arbitrator or arbitrators necessary to complete a board
of three (3) arbitrators will be appointed upon application
by either Party therefor to the American Arbitration
Association.
(C) The jurisdiction of the arbitrators will be limited to the
single issue referred to arbitration and the arbitration
shall be conducted pursuant to the guidelines set forth by
the American Arbitration Association; provided, however,
that should there be any conflict between such
<PAGE> 17
guidelines and the procedures set forth in this Agreement, the terms
of this Agreement shall control.
(D) Within fifteen (15) days following selection of the third arbitrator,
each Party shall furnish the arbitrators in writing its position
regarding the issue being arbitrated. The arbitrators may, if they
deem necessary, convene a hearing regarding the issue being
arbitrated. Within thirty (30) days following the later of the
appointment of the third arbitrator or of the hearing, if one is held,
the arbitrators shall notify the Parties in writing as to which of the
two (2) positions submitted is most consistent with the meaning of
this Agreement with respect to the issue being arbitrated. No other
position may be selected. Such decision shall be binding on the
Parties hereto and shall remain in effect until and unless changed in
accordance with the provisions of this Agreement.
(E) Enforcement of the award may be entered in any court having
jurisdiction over the Parties.
(F) Each Party will pay the expenses of the arbitrator selected by or for
it, and its counsel, witnesses and employees. All other costs of
arbitration will be equally divided between Parties.
19. Force Majeure. The term "force majeure" as employed herein for all purposes
relating hereto, shall mean acts of God, strikes, lockouts or other
industrial disturbances, acts of public enemy, wars, blockades,
insurrections, riots, epidemics, landslides, lightning, earthquakes,
<PAGE> 18
hurricanes, explosions, fires, arrests and restraints of governments and
people, civil disturbance, freeze-up of Seller's wells or wells from which
Seller is furnishing gas hereunder, or other temporary inability of
Seller's wells or wells from which Seller is furnishing gas hereunder to
produce, mechanical breakdowns or repairs of MCV's plant or pipeline
facilities or those of any Transporter used to transport gas hereunder,
inability of any Party hereto to obtain necessary materials, supplies or
permits due to existing or future rules, regulations, orders, laws or
proclamations of governmental authorities (federal, state or local),
including both civil and military, and any other causes whether of the kind
herein enumerated or otherwise, not within the control of the Party
claiming suspension and which by the exercise of due diligence such Party
is unable to prevent or overcome.
20. Transportation. Both Parties shall cooperate in an effort to eliminate
imbalances on either Party's transporting pipeline(s). The Parties further
agree that if any imbalance penalties or charges (including cash out
charges) are imposed on a Party as a result of the other Party's failure to
deliver or accept the required quantities, then the failing Party shall
reimburse the non-failing Party for such charges or penalties.
21. Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUCTED ACCORDING TO THE
LAWS OF THE STATE OF MICHIGAN.
<PAGE> 19
22. Miscellaneous.
(A) No waiver by either Seller or Buyer of any default by the other under
this Agreement shall operate as a waiver of any future default,
whether of like or different character or nature.
(B) The descriptive headings of particular provisions of this Agreement
are for the purpose of facilitating administration and shall not be
construed as having any substantive effect on the terms of this
Agreement.
(C) The Parties agree to proceed with due diligence and make good faith
effort to obtain such governmental authorizations as may be necessary
to enable performance of this Agreement.
(D) This Agreement is subject to the January 27, 1987 Gas Supply Option
between Buyer and Dow and to Dow's rights under a certain Gas Backup
Agreement with Buyer and Consumers Power Company dated January 27,
1987.
(E) If any provision of this Agreement is determined to be invalid, void
or unenforceable by any court having jurisdiction, such determination
shall not invalidate, void or make unenforceable any other provision
of this Agreement.
(F) Neither Buyer nor Seller shall disclose to any third Party other than
its partners, parents, affiliates, directors, officers, employees,
consultants, representatives, agents or those third parties providing
financing to it, any information received from the other Party that is
<PAGE> 20
explicitly marked "Confidential" (such information hereinafter
referred to as ("Confidential Information"); provided however, that
nothing shall be deemed Confidential Information which:
(i) is part of the public domain;
(ii) becomes publicly known otherwise than through an action or
inaction of the receiving Party;
(iii) is independently developed by the receiving Party; or
(iv) is required to be disclosed pursuant to any law, rule, or
regulation, or pursuant to any order of a governmental
instrumentality, provided that the Party receiving the
order shall, if feasible, notify the other Party of any
such requirement at least ten (10) days before compliance
is required, and if so requested by the other Party, shall
use reasonable efforts to oppose the required disclosure,
as appropriate under the circumstances, or to otherwise
make such disclosure pursuant to a protective order or
other similar arrangement for confidentiality.
(G) This Agreement may be amended only by a written instrument executed by
the Parties hereto. This Agreement, the Guaranty (Exhibit B attached
hereto), and the Consent and Agreement (Exhibit C attached hereto)
contain the entire understanding of the Parties with respect to the
matter contained in said documents. There are no
<PAGE> 21
promises, covenants or undertakings other than those expressly set
forth in said documents.
(H) Buyer represents and warrants that it has full and complete authority
to enter into and to perform this Agreement. Seller represents and
warrants that it has full and complete authority to enter into and to
perform this Agreement. Each person who executes this Agreement on
behalf of Buyer represents and warrants that he or she has full and
complete authority to do so and that Buyer will be bound thereby. Each
person who executes this Agreement on behalf of Seller represents and
warrants that he or she has full and complete authority to do so and
that Seller will be bound thereby.
(I) Notwithstanding anything to the contrary contained in this Agreement,
the liabilities and obligations of MCV arising out of, or in
connection with, this Agreement or any other agreements entered into
pursuant hereto shall not be enforced by any action or proceeding
wherein damages or any money judgment or specific performance of any
covenant in any such document and whether based upon contract,
warranty, negligence, indemnity, strict liability or otherwise, shall
be sought against the assets of the partners of MCV. By entering into
this Agreement, Seller waives any and all right to sue for, seek or
demand any judgment against such partners and their affiliates, other
than MCV by reason of the performance by MCV of its obligations under
this Agreement or any other agreements entered into pursuant
<PAGE> 22
hereto, except to the extent such partners are legally required to be
named in any action to be brought against MCV.
23. Defaults and Remedies.
23.1 Event of Default. A Party shall be deemed in default under this
Agreement upon the occurrence of any one or more of the following
events ("Events of Default"):
(a) The unexcused failure by a Party (the "Defaulting Party") to
make, when due, any payment required pursuant to this Agreement
if such failure is not remedied within three (3) business days
after written notice of such failure is given to the Defaulting
Party by the other Party (the "Non-Defaulting Party") and
provided the payment is not a Disputed Amount as described in
Section 5(A)(ii);
(b) Any representation or warranty made by a Party herein shall at
any time during the term of this Agreement prove to be false or
misleading in any material respect;
(c) The failure by a Party to perform, in any material respect, any
material covenant or provision set forth in this Agreement (other
than (i) the events that are otherwise specifically covered in
this Section 23.1 as a separate Event of Default and (ii) the
events that are covered in Sections 14 and 17) and such failure
is not cured within five (5) business days (or such longer period
of time if reasonably necessary to cure the failure and the
Defaulting Party is making continuous and diligent efforts to
cure) after written
<PAGE> 23
notice thereof to the Defaulting Party unless such failure is
excused by force majeure;
(d) A Party becomes subject to a Bankruptcy Proceeding; or
(e) The failure of a Party, upon the occurrence of a Material Adverse
Change, to provide, for so long as the Material Adverse Change is
occurring, adequate assurance (in the form of cash or a Letter of
Credit to be provided at the election of the Defaulting Party or
a guaranty deemed acceptable by the Non-Defaulting Party which
such acceptance of such guaranty may not be unreasonably
withheld) of its ability to perform all of its outstanding
obligations to the Non-Defaulting Party under this Agreement,
within a period not to exceed three (3) business days of the
Defaulting Party's receipt, in accordance with the notice
provisions of Section 16, of a demand therefore by the
Non-Defaulting Party.
The term "Material Adverse Change" shall mean: (i) with respect to
The Coastal Corporation, having consolidated net worth of less
than $2.0 billion as presented in its financial statements, and
(ii) with respect to MCV having less than $60 million of its Cash
Reserves as reported in the Liquidity Section of Midland
Cogeneration Venture's annual 10K report and quarterly 10Q
report. Cash Reserves equal the total cash reserves as reported
less the funds restricted for rental payments (presently
<PAGE> 24
$137,000,000) and funds restricted for management non-qualified
plans (presently $0).
<PAGE> 25
23.2 Remedies Upon an Event of Default.
(a) If an Event of Default occurs with respect to a Defaulting Party
at any time during the term of this Agreement, the Non-Defaulting
Party shall have the right, for so long as the Event of Default is
continuing, to (i) establish a date (which date shall be between 5
and 10 business days after the Non-Defaulting Party delivers
written notice to the Defaulting Party of its intent to exercise
the remedy described herein) ("Early Termination Date") on which
this Agreement shall terminate and (ii) withhold any payments due;
provided, however, upon the occurrence of any Event of Default
listed in item (d) of Section 23.1 as it may apply to any Party,
this Agreement in respect thereof shall automatically terminate,
without notice, and without any other action by either Party as if
an Early Termination Date had been declared immediately prior to
such event.
(b) If an Early Termination Date has been designated, the
Non-Defaulting Party shall in good faith calculate its Gains,
Losses and Costs resulting from the termination of this Agreement.
The Gains, Losses and Costs shall be determined by comparing the
value of the remaining term, Contract Quantities and Contract
Prices under this Agreement had it not been terminated, to the
equivalent quantities and relevant market prices for the remaining
term either quoted by a bona fide third-
<PAGE> 26
party offer or which are reasonably expected to be available in
the market under a replacement contract for the balance of this
Agreement. To ascertain the market prices of a replacement
contract, the Non-Defaulting Party may consider, among other
valuations, settlement prices of NYMEX natural gas futures
contracts, quotations from leading dealers in natural gas swap
contracts and other bona fide third party offers, all adjusted for
the length of the remaining term and differences in
transportation. It is expressly agreed that a Party shall not be
required to enter into replacement transactions in order to
determine the Termination Amount (as hereinafter defined.)
(c) The Non-Defaulting Party shall aggregate such Gains, Losses and
Costs with respect to the balance of this Agreement into a single
net amount ("Termination Amount"). The Non-Defaulting Party shall
provide the Defaulting Party with a notice and statement
containing a clear identification and calculation of the
Termination Amount owed by or due to the Defaulting Party and
shall be accompanied by sufficient information to enable the
Defaulting Party to determine the basis upon which the calculation
was made and the accuracy thereof. If the Non-Defaulting Party's
aggregate Losses and Costs exceed its aggregate Gains, the
Defaulting Party shall, within five (5) business days of receipt
of such statement, pay the Termination
<PAGE> 27
Amount to the Non-Defaulting Party, which amount shall bear
interest at the interest rate as set forth in Section 5(A)(iii)
above, from the Early Termination Date until paid. If the
Non-Defaulting Party's aggregate Gains exceed its aggregate Losses
and Costs, if any, resulting from the termination of this
Agreement, the Non-Defaulting Party shall pay such excess to the
Defaulting Party on or before the latter of: (i) twenty (20) days
after the end of the month ending on or after the Early
Termination Date, and (ii) five (5) business days after receipt by
the Defaulting Party of the Non-Defaulting Party's notice of the
Termination Amount, which amount shall bear interest at the
interest rate as set forth in Section 5(A)(iii) above, from the
Early Termination Date until paid.
(d) If the Defaulting Party disputes the Non-Defaulting Party's right
to terminate this Agreement or disagrees with its calculation of
the Termination Amount, in whole or in part, the Defaulting Party
shall, within three (3) business days of receipt of the
Non-Defaulting Party's calculation of the Termination Amount,
provide to the Non-Defaulting Party a detailed written explanation
of the basis for such dispute or disagreement and, if the
Termination Amount is due from the Defaulting Party, shall
promptly pay to the Non-Defaulting Party such portion thereof as
is conceded to be correct. Upon receipt of the
<PAGE> 28
Defaulting Party's explanation, the Parties shall seek to resolve
the issues in accordance with mutually agreeable dispute
resolution procedures.
(e) As used herein in this Section 23.2, with respect to each Party:
(i) "Costs" shall mean reasonable brokerage fees, commissions and
other similar transaction costs and expenses reasonably incurred
by a Party either in terminating or entering into new arrangements
which replace this Agreement, and reasonable attorney's fees, if
any reasonably incurred in connection with enforcing its rights
under this Agreement; (ii) "Gains" shall mean an amount equal to
the present value (calculated using the interest rate as set forth
in Section 5(A)(iii) above as the prevailing discount rate) of the
economic benefit (exclusive of Costs), if any, to a Party
resulting from the termination of its obligations with respect to
this Agreement, determined in a commercially reasonable manner;
and (iii) "Losses" shall mean an amount equal to the present value
(calculated using the interest rate as set forth in Section
5(A)(iii) above as the prevailing discount rate) of the economic
loss (exclusive of Costs), if any, to a Party from the termination
of its obligations with respect to this Agreement, determined in a
commercially reasonable manner. In no event, however, shall a
Party's Costs, Gains or Losses include any costs or expenses
incurred
<PAGE> 29
by a Party in terminating or re-establishing any arrangement
pursuant to which it has hedged its obligations under this
Agreement.
24. Limitations: NEITHER PARTY HERETO SHALL BE LIABLE TO THE OTHER PARTY FOR
ANY CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES ARISING OUT OF, OR
RELATED TO, A BREACH OF THIS AGREEMENT.
IN WITNESS WHEREOF, this Agreement is executed in multiple originals
effective as of the day and year first herein above written.
BUYER MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
By: LeRoy W. Smith
------------------------
Name: LeRoy W. Smith
Title: V.P. Gas Supply
SELLER ENGAGE ENERGY U.S., L.P.
By: Clark C. Smith
------------------------
Name: Clark C. Smith
Title: President and CEO
<PAGE> 30
EXHIBIT A
POINT OF DELIVERY
Great Lakes Gas Transmission - Midland Interconnect
<PAGE> 31
EXHIBIT B
GUARANTY
Guaranty dated effective as of the 1st day of January, 1999, by The
Coastal Corporation, a Delaware corporation (hereinafter referred to as the
"Guarantor"), in favor of Midland Cogeneration Venture Limited Partnership, a
Michigan partnership (hereinafter referred to as "Creditor").
WHEREAS, Creditor and Engage Energy U.S., L.P. (hereinafter referred to
as "Debtor") have entered into a certain Gas Sales Agreement dated November 15,
1998 (hereinafter referred to as the "Contract"); and
WHEREAS, as a condition precedent to Creditor's entering into the
Contract, Guarantor has agreed to provide this Guaranty as provided herein;
NOW, THEREFORE, for and in consideration of the premises, Guarantor
hereby agrees as follows:
1. Guaranty. Guarantor unconditionally guarantees to Creditor the payment of
amounts due and payable by Debtor pursuant to the Contract up to a maximum
amount in the aggregate of $8,000,000 (such obligations being hereinafter
referred to as the "Obligations"); provided, however, that as to
Obligations which Guarantor is called upon to honor, Guarantor is and shall
be entitled to assert any and all claims, counterclaims, defenses, offsets
and other rights which Debtor could assert against Creditor with respect to
the Obligations, except as provided in paragraph 7 below. In the event
Debtor defaults in the payment of any of the Obligations, after thirty days
written
<PAGE> 32
notice to Guarantor at the address provided below, Guarantor shall make
such payment or otherwise cause same to be paid. Guarantor's Obligations
are subject to its receiving from Creditor copies of any and all notices of
defaults and events of default given by Creditor to Debtor pursuant to the
Contract in the same manner and at the same time as such notices are given
by Creditor to Debtor, except to Guarantor's address for notice set forth
in this Guaranty.
2. Termination. This Guaranty is continuing and irrevocable and shall remain
in full force and effect until such time as all of the Obligations have
been fully satisfied, performed and discharged.
3. Waivers. Except as is otherwise provided in this Guaranty, Guarantor waives
notice of acceptance of the guaranty contained herein, presentment, demand,
notice of dishonor, protest and notice of protest, and prosecution of
litigation in connection with the Obligations.
4. Assignment. Neither Guarantor nor Creditor may assign its respective rights
or obligations under this Guaranty without the other's written consent.
Subject to the foregoing, this Guaranty shall be binding upon and inure to
the benefit of the parties hereto and their respective successors,
permitted assigns, and legal representatives.
5. Notices. Any notice or other communication required or permitted to be
given to Guarantor under this Guaranty shall be deemed to have been given
when delivered personally or otherwise actually received or on the tenth
(10th) day after being deposited in the United States mail if registered or
<PAGE> 33
certified, postage prepaid, or one (1) day after delivery to a nationally
recognized overnight courier service, fee prepaid, return receipt
requested, if in writing and addressed as follows: The Coastal Corporation,
Nine Greenway Plaza, Houston, Texas 77046, Attention: Secretary.
6. Applicable Law. This Guaranty shall in all respects be governed by,
enforced under and construed in accordance with the laws of the State of
Texas.
7. Effect of Certain Events. Guarantor agrees that Guarantor's liability
hereunder will not be released, reduced, impaired or affected by the
occurrence of any one or more of the following events:
a. The insolvency, bankruptcy, reorganization, or disability of Debtor;
b. The renewal, consolidation, extension, modification, or amendment from
time to time of the Contract;
c. The failure, delay, waiver, or refusal by Creditor to exercise any right
or remedy held by Creditor with respect to the Contract;
d. The sale, encumbrance, transfer or other modification of the ownership
of Debtor or the change in the financial condition or management of
Debtor.
IN WITNESS WHEREOF, Guarantor has duly executed this Guaranty effective
as of the date first written above.
THE COASTAL CORPORATION
BY: J. B. Levos
Vice President and Controller
<PAGE> 34
EXHIBIT C
CONSENT AND AGREEMENT
CONSENT AND AGREEMENT, dated as of November 15, 1998, made by Engage
Energy US L.P., a Delaware limited partnership, (the "undersigned") to the
parties whose names appear on Schedule A attached hereto (the "Transaction
Parties"), provides as follows:
1. Midland Cogeneration Venture Limited Partnership ("MCV"), and the
undersigned entered into the Gas Sales Agreement, dated November 15, 1998, as
the same may be amended, modified or supplemented from time to time in
accordance with the provisions thereof and of this Consent and Agreement (the
"Contract"). MCV was the owner of an approximately 1370 MW gas-fired
cogeneration facility in Midland, Michigan (the "Facility"). Pursuant to several
separate Participation Agreements, each dated as of June 1, 1990, MCV sold and
leased-back several separate Undivided Interests in the Facility under several
separate Leases each having a basic term of 25 years. The general structure of
the sale and lease-back transactions is described in more detail in Schedule B
attached hereto.
2. The undersigned hereby acknowledges notice of the sale and
lease-back transactions described in Schedule B and receipt of a photocopy of
each Participation Agreement (including Appendix A thereto but excluding other
Appendices, Exhibits and Schedules referenced therein unless specifically
requested). Photocopies of the related Transaction Documents will be made
available by MCV to the undersigned at its request for inspection. The
undersigned further acknowledges and consents to the assignments of and Liens on
the Contract pursuant to the Transaction Documents related to each sale and
lease-back transaction, and hereby agrees with each of the Transaction Parties
(provided, however, that each of the Indenture Trustees will have the rights set
forth herein only until the undersigned receives written notice from such
Indenture Trustee that the related Undivided Interest in the Facility is no
longer subject to the Lien of the Indenture to which such Indenture Trustee is a
party and the Secured Notes issued pursuant to such Indenture have been paid in
full) that:
(a) Each Owner Trustee and each related Indenture Trustee
shall be entitled, after a Lease Event of Default or an Indenture Event of
Default under the Lease or the Indenture, as the case may be, to which such
Person is a party, to exercise any and all rights of MCV under the Contract in
accordance with the terms of the related Lease, the related Lessee Security
Agreement, the related Indentures and this Consent and Agreement, and the
undersigned will comply in all respects with such exercise by any of such
Persons.
<PAGE> 35
(b) The undersigned will give each owner Trustee and Indenture
Trustee prompt written notice of any default of which it has knowledge under the
Contract which, if not cured, would give the undersigned the right to suspend
its performance under, or to terminate, the Contract. Each Owner Trustee and
Indenture Trustee (and their respective designee(s)) shall have the right,
within 30 days (or such longer period, not to exceed 90 days, as may reasonably
be required to cure defaults other than defaults in respect to the nonpayment of
money by MCV) of receipt by each such Person of such written notice, to cure
such default.
(c) In the event any Owner Trustee or Indenture Trustee
succeeds to MCV's rights or interests under the Contract after a Lease Event of
Default or an Indenture Event of Default under the Lease or the Indenture, as
the case may be, to which such Person is a party, whether by foreclosure or
otherwise, such Person shall have the right to exercise all rights of MCV under
such Contract, and the undersigned will comply in all respects with such
exercise by such Person.
(d) The exercise of remedies under any Lease or foreclosure of
any Indenture, whether by judicial proceedings or under power of sale contained
in such Indenture or otherwise or any conveyance from MCV or any Owner Trustee
to either related Indenture Trustee in lieu thereof, following a Lease Event of
Default or Indenture Event of Default under the Lease or the Indenture, as the
case may be, to which such Person is a party, shall not require the further
consent of the undersigned.
3. It is understood and agreed that the Contract and this Consent and
Agreement are subject to all tariffs and all Applicable Laws relating to such
services. Except as required, in the undersigned's reasonable opinion or by any
Applicable Law, the undersigned will not, without the prior written consent of
each Owner Trustee and Indenture Trustee (unless MCV delivers to the undersigned
a certificate stating that such consent is not required by the terms of the
related Transaction Documents), cancel, amend, modify or terminate or accept any
cancellation, amendment, modification or termination thereof, except if such
cancellation or termination is in accordance with the express terms of the
Contract, but subject to the rights of each Owner Trustee and Indenture Trustee
to cure any defaults and to keep the Contract in full force and effect as
provided in Section 2(b) above.
4. In the event that any Owner Trustee or Indenture Trustee (or their
respective designee(s)) assumes the Contract or otherwise elects to perform the
duties of MCV under the Contract, such Person shall not have any personal
liability to the undersigned for the performance of MCV's obligations under the
Contract, it being understood that the sole recourse of the undersigned seeking
<PAGE> 36
enforcement of such obligations shall be to such Person's interest in the
Facility and the related rights and Revenues therefrom.
5. If the Contract is rejected by a trustee or debtor-in-possession in
any bankruptcy, insolvency or similar proceeding involving any Persons other
than the undersigned, or is terminated for any other reason (except as a result
of a default which was not appropriately cured as provided herein and in the
Contract), and if, (i) within 30 days thereafter, MCV (in the case of a
bankruptcy, insolvency or similar proceeding involving any Owner Trustee or
Owner Participant), any Owner Trustee, Indenture Trustee or their respective
successors or assigns so request and (ii) all payment defaults under the
Contract have been cured, the undersigned will execute and deliver to the Person
or Persons making such request in proportion to their respective interests in
the Contract a new Contract for the services remaining to be performed under the
original Contract and containing the same terms and conditions as the original
Contract (except for any requirements which have been fulfilled prior to such
termination). Such new Contract also shall be subject to the terms of this
Consent and Agreement.
6. The undersigned acknowledges that after the end of the respective
Lease Terms and during the respective Residual Terms, each Owner Trustee, as the
assignee of an Undivided Interest in the Contract pursuant to the related
Facility Agreements Assignment, shall have all of the rights and shall be liable
for all of the obligations (to the extent of its respective Undivided Interest
Percentage) on a non-recourse basis of MCV under the Contract. The undersigned
further acknowledges that MCV shall be the initial Operator of the Facility
under the Operating Agreement and further agree that the Owner Trustees may
appoint any Person to serve as a successor Operator thereunder so long as such
Person satisfies the requirements set forth in the Operating Agreement.
7. No termination, amendment or waiver of any provision of this Consent
and Agreement or consent to any departure by the undersigned from any provision
of this Consent and Agreement shall be effective unless the same shall be in
writing and signed by the Owner Trustees, the Indenture Trustees and MCV and
then such waiver or consent shall be effective only in a specified instance for
the specific purpose for which it was given.
8. This Consent and Agreement shall be governed by, and construed in
accordance with, the laws of the State of Michigan, and shall be binding on the
parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the undersigned by its officers thereunto duly
authorized, have duly executed this Agreement as of the day and year first above
written.
<PAGE> 37
---------------------------
By: Clark C. Smith
Title: President & CEO
Seen and Agreed to this 20 day of January , 1999.
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP, as
Lessee
By: LeRoy Smith
Title: Vice President Energy Supply and Marketing
<PAGE> 38
SCHEDULE A
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP,
as Lessee,
FIRST MIDLAND LIMITED PARTNERSHIP,
DCC PROJECT FINANCE ONE, INC.,
EDISON CAPITAL (formerly, Mission Funding Epsilon),
BELL ATLANTIC CREDIT CORPORATION (formerly, NYNEX Credit Company),
RESOURCES CAPITAL MANAGEMENT CORPORATION,
as the several Owner Participants,
STATE STREET BANK AND TRUST COMPANY
(formerly, Fleet National Bank, Shawmut Bank Connecticut, National
Association, and The Connecticut National Bank),
not in its individual capacity but solely as Owner Trustee
under several separate Trust Agreements,
UNITED STATES TRUST COMPANY OF NEW YORK,
not in its individual capacity but solely as Senior Indenture Trustee
under several separate Senior Trust Indenture, Leasehold Mortgage
and Security Agreements for the benefit of the Senior Secured Notes,
FIRST UNION NATIONAL BANK
(formerly, Meridian Trust Company),
not in its individual capacity but solely as Subordinated Indenture Trustee
under several separate Subordinated Trust Indenture,
Leasehold Mortgage and Security Agreements
for the benefit of the Subordinated Secured Notes, and
MIDLAND FUNDING CORPORATION I AND
MIDLAND FUNDING CORPORATION II,
as purchasers of the Secured Notes.
<PAGE> 39
SCHEDULE B
A. As described below, the Owner Participants named in
Schedule A acquired separate Undivided Interests in the Facility and leased such
Undivided Interests back to MCV through separate Owner Trustees acting on behalf
of separate Owner Trusts. The beneficial interest in each Owner Trust is held by
Owner Participant.
B. For purposes of this Schedule B and the Consent and
Agreement, capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in Appendix A to the several separate
Amended and Restated Participation Agreements (the "Participation Agreements"),
each dated as of June 1, 1990, to which MCV, an Owner Participant, the related
Owner Trustee, the related Indenture Trustees, the Funding Corporations, MDC and
the Institutional Senior Bond Purchasers named therein are parties. The rules of
usage set forth in such Appendices also shall apply hereto; provided, that when
the terms defined in Appendix A to a particular Participation Agreement as
relating only to the transaction contemplated therein are used in the plural
herein, such terms are intended to apply to the terms applicable to the
transactions contemplated by all Participation Agreements collectively. In
addition, the word "related", when used with respect to any Person, interest,
instrument, agreement or document, shall denote a Person which is a party to, or
an interest, instrument, agreement or document which is a part of, the
transaction contemplated in a particular Participation Agreement and the
Transaction Documents referred to in such Participation Agreement.
C. Pursuant to a related Participation Agreement, MCV sold and
transferred to each Owner Trustee, and each Owner Trustee acquired, subject to
Dow's Prior Rights and Consumers' Prior Rights, an Undivided Interest in the
Facility equal to the respective Undivided Interest Percentage of such Owner
Trustee (with the Undivided Interests in the Initial Assets having been sold and
transferred on the First Closing Date and the Undivided Interests in the Second
Closing Assets being sold and transferred on the Second Closing Date). Each
Owner Trustee leased its Undivided Interest in the Facility back to the Lessee
pursuant to a related Lease, under which MCV has the use, possession and control
of the Undivided Interest in the Facility for the related Lease Term (with the
Undivided Interests in the Initial Assets having been leased on the First
Closing Date and the Undivided Interests in the Second Closing Assets being so
leased on the Second Closing Date).
D. On the Second Closing Date, (i) MCV assigned to each Owner
Trustee a separate Undivided Interest in the Facility Agreements and the
Cogeneration Agreements pursuant to a related Facility Agreements Assignment
<PAGE> 40
and a related Cogeneration Agreements Assignment, respectively, (ii) each Owner
Trustee assumed the obligations of MCV under the PPA and the SEPA, to the extent
of its respective Undivided Interest Percentage, pursuant to a related
Cogeneration Agreements Assignment, (iii) pursuant to the related Lease, each
Owner Trustee subassigned its Undivided Interests in the Cogeneration Agreements
and Facility Agreements back to MCV for the respective Lease Term, subject to
the Lien of the related Indentures, and MCV, as lessee, accepted such
subassignment, and (iv) MCV granted to each Owner Trustee a Lien on, without
limitation, MCV's right, title and interest in the related Undivided Interests
in the Cogeneration Agreements and the Facility Agreements (and the Revenues
therefrom) as collateral security for the related Secured Obligations pursuant
to a related Lessee Security Agreement.
E. Each Owner Trustee, as provided in the related
Participation Agreement, financed a portion of the Purchase Price for its
Undivided Interest in the Facility with the proceeds of Senior Secured Notes
issued by it to Midland Funding Corporation I pursuant to a related Senior Trust
Indenture and related Subordinated Secured Notes issued by it to Midland Funding
Corporation II pursuant to a related Subordinated Trust Indenture, and Midland
Funding Corporation I and Midland Funding Corporation II purchased such Secured
Notes.
F. Each Owner Trustee granted to the related Indenture
Trustees Liens on, among other things, the Owner Trustee's Undivided Interests
in the Facility, the Cogeneration Agreements and the Facility Agreements, the
Site Interest and its interest in certain of the related Transaction Documents
as collateral security for the Owner Trustee's obligations under the related
Secured Notes.
G. On the Second Closing Date, the Funding Corporations issued
Bonds pursuant to a Senior Collateral Trust Indenture and a Subordinated
Collateral Trust Indenture, respectively, for the purpose of participating in
the payment of the Purchase Price for each Undivided Interest in the Facility
and acquiring the funds necessary to purchase the Senior Secured Notes and the
Subordinated Secured Notes pursuant to a related Participation Agreement. The
Funding Corporations secured their obligations under the Bonds by a pledge to
the related Collateral Trust Trustees of the related Secured Notes (and the
collateral security therefor) held by the Funding Corporations.
H. MCV, each Owner Trustee and Indenture Trustee and the
Working Capital Lender, on the Second Closing Date, entered into an
Intercreditor Agreement with the Collateral Agent providing for the deposit with
and disbursement of all Revenues from the Undivided Interests in the Project by
the Collateral Agent.
<PAGE> 41
I. MCV and each Owner Trustee also entered into an Operating
Agreement appointing MCV as the initial operator of the Project during the
respective Residual Terms, commencing on the Operation Commencement Date (as
such term is defined in the Operating Agreement).
J. On the Second Closing Date, in order to obtain necessary
working capital for the operation of the Facility, MCV obtained the Working
Capital Line from the Working Capital Lender and granted to the Working Capital
Lender first priority Liens on MCV's right, title and interest (as subassignee
of the separate Undivided Interests in the Cogeneration Agreements and the
Facility Agreements during the respective Lease Terms) in and to (i) all Earned
Receivables, (ii) its Natural Gas Inventory and (iii) the Gas Brokering
Contract.
K. Each Owner Trustee has agreed to reassign its Undivided
Interest in the Project (including the Undivided Interest in the Facility
Agreements) and the Site Interest back to MCV at the expiration of the related
Support Term.
<PAGE> 1
EXHIBIT 10.38
GAS SALES AGREEMENT
This Agreement is made this 20th of September, 1999, between Midland
Cogeneration Venture Limited Partnership ("MCV" or "Buyer") and Engage Energy
U.S., L.P. ("Seller") for the purpose of entering into a long-term gas supply
arrangement on the terms and conditions which follow. In this Agreement, Seller
and Buyer may also be referred to individually as "Party" or collectively as
"Parties."
1. Definitions. The following terms when used in this Agreement, shall
have the following meanings:
a) The term "Agreement" means this Agreement and all Exhibits hereto.
b) The term "business day" shall mean: any day other than a day on
which banks in Michigan are allowed by law to be closed.
c) The term "Btu" shall mean one (1) British Thermal Unit, the amount
of heat required to raise the temperature of one (1) pound of
water one (1) degree Fahrenheit at sixty (60) degrees Fahrenheit.
BTU is measured on a dry basis.
d) The term "Contract Year" shall mean any calendar year during the
term of this Agreement.
e) The term "cubic foot of gas" shall mean the volume of gas
contained in one (1) cubic foot of space at a pressure of fourteen
<PAGE> 2
and seventy-three hundredths (14.73) dry psia, at a temperature of
sixty degrees (60 degrees) Fahrenheit.
f) The term "day" shall mean a period of twenty-four (24) consecutive
hours (23 hours when changing from Standard to Daylight time and
25 hours when changing back to Standard time), beginning and
ending at 9:00 a.m. Central clock time.
g) The term "Disputed Amount" shall have the meaning set forth in
Section 5A(ii).
h) The term "gas" shall mean any mixture of hydrocarbon and
non-combustible gases in a gaseous form, consisting primarily of
methane, and includes natural gas produced from gas wells (gas
well gas), gas which immediately prior to being produced from a
reservoir is in solution with crude oil, or dispersed in an
intimate association with crude oil, or in contract with crude oil
across a gas-oil contact (casinghead gas), or residue gas
resulting from the processing of either or both casinghead gas and
gas well gas.
i) The term "Mcf" shall mean one thousand (1,000) cubic feet of gas.
j) The term "MMBtu" shall mean a quantity of gas equal to one million
(1,000,000) Btu which is equivalent to one (1) dekatherm.
k) The term "month" shall mean the period beginning at 9 a.m. Central
clock time on the first day of any calendar month and ending at 9
a.m. Central clock time on the first day of the next succeeding
calendar month.
<PAGE> 3
l) The term "Point of Delivery" shall mean the point where Seller
delivers gas to Buyer as set forth in this Agreement. The Point(s)
of Delivery are set forth on Exhibit A.
m) The term "Prime Rate" shall mean the fluctuating per annum lending
rate of interest from time to time published by CITIBANK, NA, or
its successor, for its best commercial customers.
n) The term "psia" shall mean pounds per square inch absolute.
o) The term "psig" shall mean pounds per square inch gauge.
p) The term "Transporter" shall mean any pipeline transporting gas
subject to this Agreement.
q) The term "Great Lakes Pipeline" shall mean the pipeline owned by
Great Lakes Gas Transmission Limited Partnership ("GLGT") which
connects to the 26" pipeline owned by the Midland Cogeneration
Venture Limited Partnership.
r) The term "Undisputed Amount" shall have the meaning set forth in
Section 5A (ii).
2. Quantity. Seller agrees to deliver and sell and MCV agrees to receive
and purchase 20,000 MMBtu/day, on a firm basis in accordance with the
terms and conditions of this Agreement. If Seller is delivering to the
Midland-MCV Point of Delivery, then the 20,000 MMBtu/day shall be
reduced by an amount equal to the fuel/loss/unaccounted-for percentage
attributable to the route between Emerson and Midland-MCV as set forth
in the then-effective GLGT Tariff.
<PAGE> 4
3. Price.
(A)For the period November 1, 2004 through October 31, 2005, the price
to be paid by Buyer to Seller for all quantities of gas delivered
hereunder, inclusive of all taxes shall be: (i) for deliveries made
to the Emerson Point of Delivery, the price per MMBtu will be equal
to NYMEX Closing Price flat; (ii) for deliveries made to the
Midland-MCV Point of Delivery, the price per MMBtu will be equal to
the sum of the following:
(i) NYMEX Closing Price flat,
plus
(ii) the then-effective maximum fuel/loss/unaccounted-for charges
(FL&U) as specified in the Great Lakes Gas Transmission
tariff ("the GLGT Tariff") for firm transportation service
between Emerson and Midland. The calculation of this amount
shall be made according to the following formula:
NYMEX Closing Price flat
(------------------------) minus NYMEX Closing Price flat
1-FL&U
plus,
(iii)the, variable commodity charges, surcharges, taxes and any
other variable charges that are, or would be, applicable to
receiving supplies at the Emerson Point of Delivery and
transporting such supplies to the Midland-MCV Point of
<PAGE> 5
Delivery under the rates set forth in MCV's FT028 Service
Agreement with GLGT (or its effective equivalent in the event
FT028 ceases to exist), provided, however, that such variable
charges shall not be less than zero.
In the event the rates for variable charges under MCV's FT028 (or
equivalent successor agreement) change from the current maximum
tariff rate, then MCV shall provide prior written notice to Engage
specifying the extent of the changes for Engage's billing purposes.
The term "NYMEX Closing Price" shall mean the closing ("settle")
price on the NYMEX for natural gas for delivery (at the Henry Hub)
in the month of delivery in question on the last day on which
futures contracts for gas for delivery in such month were traded.
For the period November 1, 2005 through October 31, 2007, the price
to be paid by Buyer to Seller for all quantities of gas delivered
hereunder, inclusive of all taxes shall be: the price per MMBtu will
be equal to the NYMEX Closing Price plus $0.19.
(B)Should natural gas futures contracts (for delivery at Henry Hub)
cease to be traded on the NYMEX, Buyer and Seller shall identify and
agree on a replacement index. In the event that Buyer and Seller
cannot agree on a replacement index within thirty (30) days, either
Party may request the matter be submitted to an expert for
determination in accordance with Section 18(G) hereof.
<PAGE> 6
(C)Seller shall be responsible for all taxes prior to the Point of
Delivery. MCV shall be responsible for all taxes at and after the
Point of Delivery.
4. Term. Deliveries of gas shall commence on November 1, 2004 and
continue through October 31, 2007.
5. Billing and Payments.
(A)Billing and payment procedures are as follows:
(i)After the delivery of gas has commenced hereunder, Seller
shall, on or about the tenth day of each month, render to Buyer
a statement showing the estimated (or actual if available)
quantity of gas delivered at each Point of Delivery during the
prior month, and the amounts due Seller hereunder. Seller shall
also render to Buyer, if necessary, a separate statement
showing the adjustment, if any, required to conform the prior
month's estimated and actual deliveries and prices. Payment of
the amount due based on such statements shall be made by Buyer
to Seller by wire transfer with immediately available funds the
later of (a) ten (10) days following receipt of such statement
or (b) the twentieth (20th) day of the month. If the due date
falls on a day which is not a business day, then payment shall
be made on the next business day. If the Buyer bills Seller the
same procedure shall be followed as set forth in this
subparagraph.
<PAGE> 7
(ii) In the event that either Party shall in good faith dispute any
portion of the amount shown in the other Party's statement
(hereinafter called the "Disputed Amount"), the disputing Party
shall (a) notify the other Party in writing as to the Disputed
Amount, and (b) pay the remaining undisputed portion of the
other Party's statement when due (hereinafter, the "Undisputed
Amount").
(iii)If it is determined that the failure to pay any Undisputed
Amount of any statement was not justifiable, interest on such
Undisputed Amount shall accrue at a rate per annum equal to the
Prime Rate, plus one percent (1.0%), from the time payment
would have been due until the time payment is made, but in no
event shall the interest on such unpaid portion exceed the
applicable lawful nonusurious rate of interest. Payment of any
previously unpaid Undisputed Amount shall be credited first to
all interest accrued and then to principle.
(B)Each Party hereto shall have the right, upon reasonable written
notice, during normal business hours and at its own expense to
examine the books and records of the other Party to the extent
necessary to verify the accuracy of any statement, charge,
computation or demand made under or pursuant to this Agreement. Such
examination shall be conducted no more than once in a twelve-month
period. Any error or discrepancy in statements furnished
<PAGE> 8
pursuant to this Agreement shall be promptly reported to Seller or
Buyer, as applicable, and proper adjustment thereof shall be made
within thirty (30) days after final determination of the correct
volumes or amounts involved; provided, however, that, if no such
errors or discrepancies are reported to Seller or Buyer, as
applicable, within two (2) years from the end of the calendar year
in which such errors or discrepancies occurred, the same shall be
conclusively deemed to be correct.
6. Deliveries.
(A)Exhibit A hereto sets forth the Point(s) of Delivery under this
Agreement. Seller shall not use any other point to deliver gas
without Buyer's written consent which Buyer may grant or withhold in
its sole discretion.
(B)To the extent that the procedures for the delivery of gas set forth
herein conflict with the rules and tariffs of any Transporter, the
Transporter's rules and tariffs will control and the Parties shall
cooperate fully with each other in complying with such rules and
tariffs.
(C)For the period November 1, 2004 to October 31, 2005 Engage shall
designate the Point of Delivery for the entire coming month to MCV
no later than two days prior to the last day on which gas futures
contracts are traded on the NYMEX for delivery (at the Henry Hub)
for such coming month. Should Engage fail to timely designate a
Point of
<PAGE> 9
Delivery for any of the delivery months during that period, then for
such delivery month, the Point of Delivery shall be Emerson.
7. Third Party Gas. Buyer understands and agrees the gas delivered
hereunder may be supplied either from Seller's gas or from gas
purchased by Seller from third parties, provided however, if such gas
is purchased from third parties, Seller shall be solely responsible for
the payment of the purchase price of gas to such third parties.
8. Title. Title and risk of loss to gas delivered hereunder shall pass
from Seller to Buyer at the Point of Delivery.
9. Delivery Pressure. All gas shall be delivered at the prevailing
pressure of the delivering pipeline.
10. Quality of Gas. The gas to be delivered hereunder shall comply with the
quality requirements of GLGT.
11. Measurement and Tests of Gas. The quantity and quality of gas delivered
to the Buyer's account at the Point of Delivery shall be determined by
GLGT in accordance with the then current standard terms and conditions
applicable to GLGT's gas transportation contracts.
12. Warranty of Title. Seller hereby warrants (i) title to all gas sold
hereunder or the right to sell such gas, (ii) that it has the right to
sell same to Buyer and (iii) that all such gas shall be free from any
and all liens and adverse claims of any nature whatsoever. Seller
agrees to indemnify and hold Buyer harmless, including but not limited
to, all costs, damages and expenses (including Buyer's reasonable
attorney fees) incurred by Buyer
<PAGE> 10
in defending against any liens or adverse claims of any nature
whatsoever, including but not limited to, third parties from whom
Seller purchased gas as permitted in Section 7, in addition to any
other remedies Buyer may have hereunder or at law.
13. Credit Worthiness.
13.1 This Agreement is subject to Seller providing Buyer a guaranty
from The Coastal Corporation in the form attached hereto as
Exhibit "B."
13.2 At any time, and from time to time during the term of this
Agreement (and notwithstanding whether an Event of Default has
occurred, as defined in Section 23) but not more than once in
any seven (7) day period, if the Termination Payment (as such
term is defined in Section 13.5) should exceed $4,000,000
until November 1, 2004 and $5,000,000 thereafter as to MCV,
and $8,000,000 as to Seller, (the "Security Threshold"), then
either Party may request the other Party to provide additional
Performance Assurance in an amount equal to: the amount by
which the Termination Payment exceeds the Security Threshold
(rounding upwards for any fractional amount to the next
$100,000). The Performance Assurance shall be delivered within
thirty (30) calendar days of the date of the request. If such
additional Performance Assurance is not received by the
requesting Party within thirty (30) calendar days, then the
requesting Party in addition to any other remedy
<PAGE> 11
available, may immediately suspend performance with respect
to the quantities associated with the amount in excess of the
Security Threshold plus any Performance Assurance already in
place and cover such lost supply or market, as the case may
be. Incremental gas costs (as defined in Section 17 with
respect to either Buyer or Seller, as applicable) incurred by
the covering Party shall be recoverable from the other Party.
Such suspension will be implemented on a pro rata basis to a
level at which assurances have been provided. In addition, a
failure to provide Performance Assurance as requested shall
constitute an Event of Default under Section 23.
13.3 Either Party, at its sole expense, may request the other
Party to reduce its Performance Assurance then in place, if
the Termination Payment (with respect to all Transactions
then outstanding) reverts back to an amount less than or
equal to the sum of the Performance Assurance and the
Security Threshold then in place (rounding upwards for any
fractional amount to the next $100,000). Such request for
reduction shall be no more frequently than weekly with
respect to Letters of Credit and guaranties, and daily with
respect to cash. The consent to such request(s) shall not be
unreasonably withheld.
13.4 Either Party may at any time make a calculation of the
Termination Payment and submit same to the other Party for
review. If within
<PAGE> 12
thirty days of the submission of the value of the Termination
Payment from one Party to the other, agreement has not been
reached by the Parties as to the amount of the Termination
Payment, the determination of the amount of the Termination
Payment shall be submitted to arbitration as provided for in
Section 18 of this Agreement. Notwithstanding the submission
of the determination of the amount of the Termination Payment
to arbitration, all requirements in Section 13 of this
Agreement shall remain in effect.
13.5 With respect to this Section 13: (a) "Performance Assurance"
means collateral in the form of either cash or Letters of
Credit. The requesting Party may also accept a parental
guaranty or other collateral deemed sufficient by the
requesting Party. If the collateral is in the form of cash,
then such cash shall be placed in a segregated,
interest-bearing escrow account on deposit with a major U.S.
commercial bank having a credit rating of at least "A-" from
Standard and Poor's or "A3" from Moody's (interest to accrue
to the Party posting the collateral); (b) "Letter of Credit"
means one or more irrevocable, transferable standby letters
of credit from a major U.S. commercial bank or foreign bank
with a U.S. office having a credit rating of at least "A-"
from Standard & Poor's or "A3" from Moody's; (c) "Termination
Payment" means the amount by which the requesting Party shall
aggregate Gains, Losses, and
<PAGE> 13
Costs (as those terms are defined in Section 23.2 (e)) with
respect to this Agreement into a single net amount. The
Termination Payment shall include all amounts owed but not
yet paid by one Party to the other Party, whether or not such
amounts are then due, for performance already performed
pursuant to any Transaction.
14. Right to Terminate Agreement.
(A)In addition to any other remedy of Buyer under law or provided
under this Agreement, Buyer shall have the right at its election to
terminate this Agreement upon twenty (20) days written notice to
Seller if Seller, for any reason, other than (i) force majeure, (ii)
Buyer's failure to take, or (iii) a failure by Buyer to pay any
Undisputed Amounts, fails, over a period of at least sixty (60)
days, to deliver an average of ninety percent (90%) of the agreed
quantity and provided further that such failure occurred not more
than one hundred forty (140) days immediately preceding the giving
of such notice of termination. Seller shall have twenty (20) days
after receipt of such cancellation notice to cure any failure in
which case Buyer's cancellation is null and void and this Agreement
shall remain in full force and effect.
(B)In addition to the other remedies of Seller under law or provided
under this Agreement, Seller shall have the right at its election to
terminate this Agreement upon twenty (20) days written notice to
Buyer if Buyer, for any reason, other than (i) force majeure, (ii)
Seller's failure to
<PAGE> 14
deliver, or (iii) a failure by Seller to pay any Undisputed Amounts,
fails, over a period of at least sixty (60) days, to take a volume
of gas not less than an average of ninety percent (90%) of the
agreed quantity, and provided further that such failure occurred not
more than one hundred forty (140) days immediately preceding the
giving of such notice of termination. Buyer shall have twenty (20)
days after receipt of such cancellation notice to cure any failure
in which case Seller's cancellation is null and void and this
Agreement shall remain in full force and effect.
15. Assignment.
(A)The terms, covenants and conditions hereof shall be binding on the
Parties hereto and on their successors and permitted assignees.
(B)Either Party may assign its interest under this Agreement, with the
consent of the other Party, which consent shall not be unreasonably
withheld, to an affiliate or any company which shall succeed, by
merger or consolidation, to substantially all of its assets. In the
event of any such assignment, such successor shall be entitled to
the rights and shall be subject to the obligations of its
predecessor. Seller acknowledges that pursuant to a certain Gas
Backup Agreement among Consumers Power Company, The Dow Chemical
Company (Dow) and the Midland Cogeneration Venture Limited
Partnership dated January 27, 1987, Buyer may be required to make an
assignment to Dow of certain rights under this Agreement. Seller
<PAGE> 15
specifically agrees to accept such assignments, if any, made by
Buyer to Dow in accordance with the aforementioned Gas Backup
Agreement; provided, however, that such assignment shall not relieve
Buyer of its obligations under this Agreement absent Seller's
written consent.
(C)Except as provided above, neither Party shall assign this Agreement
without the prior consent of the other Party, which consent shall
not be unreasonably withheld. Nothing herein contained shall prevent
or restrict either Party from pledging, granting a security interest
in, or assigning as collateral all or any portion of such Party's
interest to secure any debt or obligation of such Party under any
mortgage, deed of trust, security agreement or similar instrument.
(D)Either Party desiring to make an assignment for which it has the
right pursuant to the foregoing may upon request obtain a written
consent within sixty (60) days to such assignment from the other
Party evidencing its consent.
16. Notices. Except as otherwise herein provided, any notice, request,
demand or statement given in writing or required to be given in writing
by the terms of this Agreement shall be deemed given when deposited in
the government mail, postage prepaid, as certified mail, directed to
the post office address of the Parties as follows:
<PAGE> 16
TO SELLER:
For Invoices and Payments: Engage Energy US, L.P.
Five Greenway Plaza, Ste. 1200
Houston, Texas 77046
Attn.: Client Services
Telephone: (713) 877-7800
Telecopier: (713) 297-1489
Wire Transfer No. Citibank, NA, NY, NY,
Acct. # 4071-9415, ABA # 0210-00089
For all other notices: Engage Energy US, L.P.
Five Greenway Plaza, Ste. 1200
Houston, Texas 77046
Attn.: Contract Administration
Telephone: (713) 877-7800
Telecopier: (713) 877-3583
TO BUYER:
For Invoices and Payments: Midland Cogeneration Venture
Limited Partnership
Attn.: Treasury
100 Progress Place
Midland, MI 48640
Telephone No.: (517) 839-6018
Telecopier: (517) 839-6137
Wire Transfer: U.S. Bank Trust, N.A.
Minneapolis, MN
ABA# 091000022
A/C# 180121167365
MI Clearing #47300196 - FBO MCV 76608640
For all other notices: Midland Cogeneration Venture
Limited Partnership
100 Progress Place
Midland, MI 48640
Attn.: Gas Supply Department
Telephone No.: (517) 839-6008
Telecopier: (517) 839-6793
<PAGE> 17
or at such other address as either Party may from time to time specify
as its address for such purposes by registered for certified letter
addressed to the other Party. Notices, requests, demands or statements
made in person, by telephone, Telecopier, Telex or wire shall be deemed
given when received provided, however, that if such notices are
received after 5:00 p.m. (recipient's local time), they shall not be
effective until the next business day.
Gas nomination notices will be in accordance with the terms and
conditions applicable to Great Lakes Pipeline.
17. Remedies. In the event Seller fails to deliver the daily quantities for
reasons not otherwise excused by force majeure, Seller shall be
responsible for any incremental gas costs incurred by MCV in replacing
such gas. MCV agrees to use commercially reasonable efforts to purchase
replacement gas at the lowest available price. Seller's obligation to
pay MCV for incremental replacement gas costs (and any transportation
penalties or transportation demand charges resulting from unused
transportation) shall be MCV's sole and exclusive remedy for Seller's
failure to deliver except as provided in Section 14. In the event that
MCV fails to take gas for reasons not otherwise excused by force
majeure, MCV shall pay Seller for any incremental decrease in the
resale price of such gas. Seller agrees to use commercially reasonable
efforts to resell such deficiency gas at the highest achievable price.
MCV's obligation to pay Seller for such decrease (and any
transportation
<PAGE> 18
penalties or transportation demand charges resulting from unused
transportation) shall be Seller's sole and exclusive remedy for MCV's
failure to take gas except as provided in Section 14.
18. Arbitration
(A)If the Parties are unable to resolve a disagreement arising under
this Agreement such disagreement shall be settled by arbitration.
Either Party may then commence arbitration by serving written notice
thereof on the other Party designating the issue to be arbitrated.
(B)The Parties shall each appoint one (1) arbitrator and the two (2)
arbitrators so appointed will select a third arbitrator, all of such
arbitrators to be qualified by education, knowledge, and experience
to resolve the dispute or controversy. If either Party fails to
appoint an arbitrator within ten (10) days after a request for such
appointment is made by the other Party in writing, or if the two (2)
appointed fail, within ten (10) days after the appointment of the
second, to agree on a third arbitrator, the arbitrator or
arbitrators necessary to complete a board of three (3) arbitrators
will be appointed upon application by either Party therefor to the
American Arbitration Association.
(C)The jurisdiction of the arbitrators will be limited to the single
issue referred to arbitration and the arbitration shall be conducted
pursuant to the guidelines set forth by the American Arbitration
Association; provided, however, that should there be any conflict
between such
<PAGE> 19
guidelines and the procedures set forth in this Agreement, the terms
of this Agreement shall control.
(D)Within fifteen (15) days following selection of the third
arbitrator, each Party shall furnish the arbitrators in writing its
position regarding the issue being arbitrated. The arbitrators may,
if they deem necessary, convene a hearing regarding the issue being
arbitrated. Within thirty (30) days following the later of the
appointment of the third arbitrator or of the hearing, if one is
held, the arbitrators shall notify the Parties in writing as to
which of the two (2) positions submitted is most consistent with the
meaning of this Agreement with respect to the issue being
arbitrated. No other position may be selected. Such decision shall
be binding on the Parties hereto and shall remain in effect until
and unless changed in accordance with the provisions of this
Agreement.
(E)Enforcement of the award may be entered in any court having
jurisdiction over the Parties.
(F)Each Party will pay the expenses of the arbitrator selected by or
for it, and its counsel, witnesses and employees. All other costs of
arbitration will be equally divided between Parties.
(G)This subsection shall apply only to the issue of selecting a
replacement index for the NYMEX (delivery at Henry Hub). In the
event that Buyer and Seller cannot agree on a replacement index
within thirty (30) days, either Party may request the matter be
<PAGE> 20
submitted to an expert for determination by providing the other
Party with written notice of its election. In such event, the
Parties shall attempt to agree upon a single expert with academic
training and industry experience relevant to determining the matter
in dispute. If the Parties are unable to agree upon a single expert
within 30 days after the date of the notice of election, each Party
shall select an expert and the two selected experts shall together
select a third expert to serve on a panel to determine the disputed
matter. The Parties shall each submit to the expert (or panel of
experts, as applicable) all relevant information concerning the
disputed matter within 30 days after the selection of the last
expert. The final decision of the expert (or panel of experts, as
applicable) shall be delivered to the Parties in writing, shall
constitute the final resolution of all matters so determined, and
shall be binding upon the Parties. Unless the expert (or panel of
experts, as applicable) directs otherwise, the fees of the expert
(or panel of experts, as applicable) and the cost of conducting the
investigation shall be shared equally by the Parties. Each Party
shall bear its own costs and expenses and those of counsel.
Enforcement of the decision may be entered in any court having
jurisdiction over the Parties.
19. Force Majeure. The term "force majeure" as employed herein for all
purposes relating hereto, shall mean acts of God, strikes, lockouts or
other industrial disturbances, acts of public enemy, wars, blockades,
<PAGE> 21
insurrections, riots, epidemics, landslides, lightning, earthquakes,
hurricanes, explosions, fires, arrests and restraints of governments
and people, civil disturbance, freeze-up of Seller's wells or wells
from which Seller is furnishing gas hereunder, or other temporary
inability of Seller's wells or wells from which Seller is furnishing
gas hereunder to produce, mechanical breakdowns or repairs of MCV's
plant or pipeline facilities or those of any Transporter used to
transport gas hereunder, inability of any Party hereto to obtain
necessary materials, supplies or permits due to existing or future
rules, regulations, orders, laws or proclamations of governmental
authorities (federal, state or local), including both civil and
military, and any other causes whether of the kind herein enumerated or
otherwise, not within the control of the Party claiming suspension and
which by the exercise of due diligence such Party is unable to prevent
or overcome.
20. Transportation. Both Parties shall cooperate in an effort to eliminate
imbalances on either Party's transporting pipeline(s). The Parties
further agree that if any imbalance penalties or charges (including
cash out charges) are imposed on a Party as a result of the other
Party's failure to deliver or accept the required quantities, then the
failing Party shall reimburse the non-failing Party for such charges or
penalties.
21. Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUCTED ACCORDING TO
THE LAWS OF THE STATE OF MICHIGAN.
<PAGE> 22
22. Miscellaneous.
(A)No waiver by either Seller or Buyer of any default by the other
under this Agreement shall operate as a waiver of any future
default, whether of like or different character or nature.
(B)The descriptive headings of particular provisions of this Agreement
are for the purpose of facilitating administration and shall not be
construed as having any substantive effect on the terms of this
Agreement.
(C)The Parties agree to proceed with due diligence and make good faith
effort to obtain such governmental authorizations as may be
necessary to enable performance of this Agreement.
(D)This Agreement is subject to the January 27, 1987 Gas Supply Option
between Buyer and Dow and to Dow's rights under a certain Gas Backup
Agreement with Buyer and Consumers Power Company dated January 27,
1987.
(E)If any provision of this Agreement is determined to be invalid,
void or unenforceable by any court having jurisdiction, such
determination shall not invalidate, void or make unenforceable any
other provision of this Agreement.
(F)Neither Buyer nor Seller shall disclose to any third Party other
than its partners, parents, affiliates, directors, officers,
employees, consultants, representatives, agents or those third
parties providing financing to it, any information received from the
other Party that is
<PAGE> 23
explicitly marked "Confidential" (such information hereinafter
referred to as ("Confidential Information"); provided however, that
nothing shall be deemed Confidential Information which
(i) is part of the public domain;
(ii) becomes publicly known otherwise than through an action or
inaction of the receiving Party;
(iii) is independently developed by the receiving Party; or
(iv) is required to be disclosed pursuant to any law, rule, or
regulation, or pursuant to any order of a governmental
instrumentality, provided that the Party receiving the
order shall, if feasible, notify the other Party of any
such requirement at least ten (10) days before compliance
is required, and if so requested by the other Party, shall
use reasonable efforts to oppose the required disclosure,
as appropriate under the circumstances, or to otherwise
make such disclosure pursuant to a protective order or
other similar arrangement for confidentiality.
(G)This Agreement may be amended only by a written instrument executed
by the Parties hereto. This Agreement, Point(s) of Delivery (Exhibit
A attached hereto), the Guaranty (Exhibit B attached hereto), and
the Consent and Agreement (Exhibit C attached hereto) contain the
entire understanding of the Parties with respect to the matter
<PAGE> 24
contained in said documents. There are no promises, covenants or
undertakings other than those expressly set forth in said documents.
(H)Buyer represents and warrants that it has full and complete
authority to enter into and to perform this Agreement. Seller
represents and warrants that it has full and complete authority to
enter into and to perform this Agreement. Each person who executes
this Agreement on behalf of Buyer represents and warrants that he or
she has full and complete authority to do so and that Buyer will be
bound thereby. Each person who executes this Agreement on behalf of
Seller represents and warrants that he or she has full and complete
authority to do so and that Seller will be bound thereby.
(I)Notwithstanding anything to the contrary contained in this
Agreement, the liabilities and obligations of MCV arising out of, or
in connection with, this Agreement or any other agreements entered
into pursuant hereto shall not be enforced by any action or
proceeding wherein damages or any money judgment or specific
performance of any covenant in any such document and whether based
upon contract, warranty, negligence, indemnity, strict liability or
otherwise, shall be sought against the assets of the partners of
MCV. By entering into this Agreement, Seller waives any and all
right to sue for, seek or demand any judgment against such partners
and their affiliates, other than MCV by reason of the performance by
MCV of its obligations under this Agreement or any other agreements
entered into pursuant
<PAGE> 25
hereto, except to the extent such partners are legally required to
be named in any action to be brought against MCV.
23. Defaults and Remedies.
23.1 Event of Default. A Party shall be deemed in default under this
Agreement upon the occurrence of any one or more of the following
events ("Events of Default"):
(a) The unexcused failure by a Party (the "Defaulting Party") to
make, when due, any payment required pursuant to this
Agreement if such failure is not remedied within three (3)
business days after written notice of such failure is given
to the Defaulting Party by the other Party (the
"Non-Defaulting Party") and provided the payment is not a
Disputed Amount as described in Section 5(A)(ii);
(b) Any representation or warranty made by a Party herein shall
at any time during the term of this Agreement prove to be
false or misleading in any material respect;
(c) The failure by a Party to perform, in any material respect,
any material covenant or provision set forth in this
Agreement (other than (i) the events that are otherwise
specifically covered in this Section 23.1 as a separate
Event of Default and (ii) the events that are covered in
Sections 14 and 17) and such failure is not cured within
five (5) business days (or such longer period of time if
reasonably necessary
<PAGE> 26
to cure the failure and the Defaulting Party is making
continuous and diligent efforts to cure) after written
notice thereof to the Defaulting Party unless such failure
is excused by force majeure;
(d) A Party becomes subject to a bankruptcy, insolvency,
reorganization, assignment for the benefit of creditors or
similar proceeding; or
(e) The failure of a Party, upon the occurrence of a Material
Adverse Change, to provide, for so long as the Material
Adverse Change is occurring, adequate assurance (in the form
of cash or a Letter of Credit to be provided at the election
of the Defaulting Party or a guaranty deemed acceptable by
the Non-Defaulting Party which such acceptance of such
guaranty may not be unreasonably withheld) of its ability to
perform all of its outstanding obligations to the
Non-Defaulting Party under this Agreement, within a period
not to exceed three (3) business days of the Defaulting
Party's receipt, in accordance with the notice provisions of
Section 16, of a demand therefore by the Non-Defaulting
Party.
The term "Material Adverse Change" shall mean: (i) with respect
to The Coastal Corporation, having consolidated net worth of less
than $2.0 billion as presented in its financial statements, and
(ii)
<PAGE> 27
with respect to MCV having less than $60 million of its Cash
Reserves as reported in the Liquidity Section of Midland
Cogeneration Venture's annual 10K report and quarterly 10Q
report. Cash Reserves equal the total cash reserves as reported
less the funds restricted for rental payments (presently
$137,000,000) and funds restricted for management non-qualified
plans (presently $0).
23.3 Remedies Upon an Event of Default.
(a)If an Event of Default occurs with respect to a Defaulting Party at
any time during the term of this Agreement, the Non-Defaulting Party
shall have the right, for so long as the Event of Default is
continuing, to (i) establish a date (which date shall be between 5
and 10 business days after the Non-Defaulting Party delivers written
notice to the Defaulting Party of its intent to exercise the remedy
described herein) ("Early Termination Date") on which this Agreement
shall terminate and (ii) withhold any payments due; provided,
however, upon the occurrence of any Event of Default listed in item
(d) of Section 23.1 as it may apply to any Party, this Agreement in
respect thereof shall automatically terminate, without notice, and
without any other action by either Party as if an Early Termination
Date had been declared immediately prior to such event.
<PAGE> 28
(b)If an Early Termination Date has been designated, the
Non-Defaulting Party shall in good faith calculate its Gains, Losses
and Costs resulting from the termination of this Agreement. The
Gains, Losses and Costs shall be determined by comparing the value
of the remaining term, Contract Quantities and Contract Prices under
this Agreement had it not been terminated, to the equivalent
quantities and relevant market prices for the remaining term either
quoted by a bona fide third-party offer or which are reasonably
expected to be available in the market under a replacement contract
for the balance of this Agreement. To ascertain the market prices of
a replacement contract, the Non-Defaulting Party may consider, among
other valuations, settlement prices of NYMEX natural gas futures
contracts, quotations from leading dealers in natural gas swap
contracts and other bona fide third party offers, all adjusted for
the length of the remaining term and differences in transportation.
It is expressly agreed that a Party shall not be required to enter
into replacement transactions in order to determine the Termination
Amount (as hereinafter defined.)
(c)The Non-Defaulting Party shall aggregate such Gains, Losses and
Costs with respect to the balance of this Agreement into a single
net amount ("Termination Amount"). The Non-Defaulting Party shall
provide the Defaulting Party with a notice and
<PAGE> 29
statement containing a clear identification and calculation of the
Termination Amount owed by or due to the Defaulting Party and shall
be accompanied by sufficient information to enable the Defaulting
Party to determine the basis upon which the calculation was made and
the accuracy thereof. If the Non-Defaulting Party's aggregate Losses
and Costs exceed its aggregate Gains, the Defaulting Party shall,
within five (5) business days of receipt of such statement, pay the
Termination Amount to the Non-Defaulting Party, which amount shall
bear interest at the interest rate as set forth in Section 5(A)(iii)
above, from the Early Termination Date until paid. If the
Non-Defaulting Party's aggregate Gains exceed its aggregate Losses
and Costs, if any, resulting from the termination of this Agreement,
the Non-Defaulting Party shall pay such excess to the Defaulting
Party on or before the latter of: (i) twenty (20) days after the end
of the month ending on or after the Early Termination Date, and (ii)
five (5) business days after receipt by the Defaulting Party of the
Non-Defaulting Party's notice of the Termination Amount, which
amount shall bear interest at the interest rate as set forth in
Section 5(A)(iii) above, from the Early Termination Date until paid.
(d)If the Defaulting Party disputes the Non-Defaulting Party's right
to terminate this Agreement or disagrees with its calculation of
<PAGE> 30
the Termination Amount, in whole or in part, the Defaulting Party
shall, within three (3) business days of receipt of the
Non-Defaulting Party's calculation of the Termination Amount,
provide to the Non-Defaulting Party a detailed written explanation
of the basis for such dispute or disagreement and, if the
Termination Amount is due from the Defaulting Party, shall promptly
pay to the Non-Defaulting Party such portion thereof as is conceded
to be correct. Upon receipt of the Defaulting Party's explanation,
the Parties shall seek to resolve the issues in accordance with
mutually agreeable dispute resolution procedures.
(e)As used herein in this Section 23.2, with respect to each Party:
(i) "Costs" shall mean reasonable brokerage fees, commissions and
other similar transaction costs and expenses reasonably incurred by
a Party either in terminating or entering into new arrangements
which replace this Agreement, and reasonable attorney's fees, if any
reasonably incurred in connection with enforcing its rights under
this Agreement; (ii) "Gains" shall mean an amount equal to the
present value (calculated using the interest rate as set forth in
Section 5(A)(iii) above as the prevailing discount rate) of the
economic benefit (exclusive of Costs), if any, to a Party resulting
from the termination of its obligations with respect to this
Agreement, determined in a
<PAGE> 31
commercially reasonable manner; and (iii) "Losses" shall mean an
amount equal to the present value (calculated using the interest
rate as set forth in Section 5(A)(iii) above as the prevailing
discount rate) of the economic loss (exclusive of Costs), if any, to
a Party from the termination of its obligations with respect to this
Agreement, determined in a commercially reasonable manner. In no
event, however, shall a Party's Costs, Gains or Losses include any
costs or expenses incurred by a Party in terminating or
re-establishing any arrangement pursuant to which it has hedged its
obligations under this Agreement.
24. Limitations: NEITHER PARTY HERETO SHALL BE LIABLE TO THE OTHER PARTY FOR
ANY CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES ARISING OUT OF, OR
RELATED TO, A BREACH OF THIS AGREEMENT.
IN WITNESS WHEREOF, this Agreement is executed in multiple originals
effective as of the day and year first herein above written.
BUYER MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
By: LeRoy W. Smith
Name: LeRoy W. Smith
Title: V.P. Gas Supply
SELLER ENGAGE ENERGY U.S., L.P.
<PAGE> 32
By: Clark C. Smith
Name: Clark C. Smith
Title: President & CEO
<PAGE> 33
EXHIBIT A
POINT(S) OF DELIVERY
For the period November 1, 2004 to October 31, 2005:
Great Lakes Gas Transmission - Midland Interconnect located in Isabella
County, Michigan (Midland),
or
Great Lakes Gas Transmission - Interconnect with TransCanada PipeLines
Limited located near Emerson, Manitoba (Emerson)
For the period November 1, 2005 to October 31, 2007:
Great Lakes Gas Transmission - Midland Interconnect located in Isabella
County, Michigan (Midland).
<PAGE> 34
EXHIBIT B
GUARANTY
Guaranty dated effective as of the 1st day of January, 2000, by The
Coastal Corporation, a Delaware corporation (hereinafter referred to as the
"Guarantor"), in favor of Midland Cogeneration Venture Limited Partnership, a
Michigan limited partnership (hereinafter referred to as "Creditor").
WHEREAS, Creditor and Engage Energy US, L.P. (hereinafter referred to
as "Debtor") have entered into a certain Gas Sales Agreement dated September 20,
1999 (hereinafter referred to as the "Contract"); and
WHEREAS, as a condition precedent to Creditor's entering into the
Contract, Guarantor has agreed to provide this Guaranty as provided herein;
NOW, THEREFORE, for and in consideration of the premises, Guarantor
hereby agrees as follows:
1. Guaranty. Guarantor unconditionally guarantees to Creditor the payment of
amounts due and payable by Debtor pursuant to the Contract up to a maximum
amount in the aggregate of $3,000,000 (such obligations being hereinafter
referred to as the "Obligations"); provided, however, that as to
Obligations which Guarantor is called upon to honor, Guarantor is and shall
be entitled to assert any and all claims, counterclaims, defenses, offsets
and other rights which Debtor could assert against Creditor with respect to
the Obligations, except as provided in paragraph 7 below. In the event
Debtor defaults in the payment of any of the Obligations, after thirty days
written
<PAGE> 35
notice to Guarantor at the address provided below, Guarantor shall make
such payment or otherwise cause same to be paid. Guarantor's Obligations
are subject to its receiving from Creditor copies of any and all notices of
defaults and events of default given by Creditor to Debtor pursuant to the
Contract in the same manner and at the same time as such notices are given
by Creditor to Debtor, except to Guarantor's address for notice set forth
in this Guaranty.
2. Termination. This Guaranty is continuing and irrevocable and shall remain
in full force and effect until such time as all of the Obligations have
been fully satisfied, performed and discharged.
3. Waivers. Except as is otherwise provided in this Guaranty, Guarantor waives
notice of acceptance of the guaranty contained herein, presentment, demand,
notice of dishonor, protest and notice of protest, and prosecution of
litigation in connection with the Obligations.
4. Assignment. Neither Guarantor nor Creditor may assign its respective rights
or obligations under this Guaranty without the other's written consent.
Subject to the foregoing, this Guaranty shall be binding upon and inure to
the benefit of the parties hereto and their respective successors,
permitted assigns, and legal representatives.
5. Notices. Any notice or other communication required or permitted to be
given to Guarantor under this Guaranty shall be deemed to have been given
when delivered personally or otherwise actually received or on the tenth
(10th) day after being deposited in the United States mail if registered or
<PAGE> 36
certified, postage prepaid, or one (1) day after delivery to a nationally
recognized overnight courier service, fee prepaid, return receipt
requested, if in writing and addressed as follows: The Coastal Corporation,
Nine Greenway Plaza, Houston, Texas 77046, Attention: Secretary.
6. Applicable Law. This Guaranty shall in all respects be governed by,
enforced under and construed in accordance with the laws of the State of
Texas.
7. Effect of Certain Events. Guarantor agrees that Guarantor's liability
hereunder will not be released, reduced, impaired or affected by the
occurrence of any one or more of the following events:
a. The insolvency, bankruptcy, reorganization, or disability of Debtor;
b. The renewal, consolidation, extension, modification, or amendment from
time to time of the Contract;
c. The failure, delay, waiver, or refusal by Creditor to exercise any
right or remedy held by Creditor with respect to the Contract;
d. The sale, encumbrance, transfer or other modification of the ownership
of Debtor or the change in the financial condition or management of
Debtor.
IN WITNESS WHEREOF, Guarantor has duly executed this Guaranty effective as
of the date first written above.
THE COASTAL CORPORATION
BY: J.B. Levos
Vice President and Controller
<PAGE> 37
EXHIBIT C
CONSENT AND AGREEMENT
CONSENT AND AGREEMENT, dated as of September 20, 1999, made by Engage
Energy U.S., L P, a Delaware limited partnership, (the "undersigned") to the
parties whose names appear on Schedule A attached hereto (the "Transaction
Parties"), provides as follows:
1. Midland Cogeneration Venture Limited Partnership ("MCV"), and the
undersigned entered into the Gas Sales Agreement, dated September 20, 1999, as
the same may be amended, modified or supplemented from time to time in
accordance with the provisions thereof and of this Consent and Agreement (the
"Contract"). MCV was the owner of an approximately 1370 MW gas-fired
cogeneration facility in Midland, Michigan (the "Facility"). Pursuant to several
separate Participation Agreements, each dated as of June 1, 1990, MCV sold and
leased-back several separate Undivided Interests in the Facility under several
separate Leases each having a basic term of 25 years. The general structure of
the sale and lease-back transactions is described in more detail in Schedule B
attached hereto.
2. The undersigned hereby acknowledges notice of the sale and
lease-back transactions described in Schedule B and receipt of a photocopy of
each Participation Agreement (including Appendix A thereto but excluding other
Appendices, Exhibits and Schedules referenced therein unless specifically
requested). Photocopies of the related Transaction Documents will be made
available by MCV to the undersigned at its request for inspection. The
undersigned further acknowledges and consents to the assignments of and Liens on
the Contract pursuant to the Transaction Documents related to each sale and
lease-back transaction, and hereby agrees with each of the Transaction Parties
(provided, however, that each of the Indenture Trustees will have the rights set
forth herein only until the undersigned receives written notice from such
Indenture Trustee that the related Undivided Interest in the Facility is no
longer subject to the Lien of the Indenture to which such Indenture Trustee is a
party and the Secured Notes issued pursuant to such Indenture have been paid in
full) that:
(a) Each Owner Trustee and each related Indenture Trustee
shall be entitled, after a Lease Event of Default or an Indenture Event of
Default under the Lease or the Indenture, as the case may be, to which such
Person is a party, to exercise any and all rights of MCV under the Contract in
accordance with the terms of the related Lease, the related Lessee Security
Agreement, the related Indentures and this Consent and Agreement, and the
undersigned will comply in all respects with such exercise by any of such
Persons.
<PAGE> 38
(b) The undersigned will give each owner Trustee and Indenture
Trustee prompt written notice of any default of which it has knowledge under the
Contract which, if not cured, would give the undersigned the right to suspend
its performance under, or to terminate, the Contract. Each Owner Trustee and
Indenture Trustee (and their respective designee(s)) shall have the right,
within 30 days (or such longer period, not to exceed 90 days, as may reasonably
be required to cure defaults other than defaults in respect to the nonpayment of
money by MCV) of receipt by each such Person of such written notice, to cure
such default.
(c) In the event any Owner Trustee or Indenture Trustee
succeeds to MCV's rights or interests under the Contract after a Lease Event of
Default or an Indenture Event of Default under the Lease or the Indenture, as
the case may be, to which such Person is a party, whether by foreclosure or
otherwise, such Person shall have the right to exercise all rights of MCV under
such Contract, and the undersigned will comply in all respects with such
exercise by such Person.
(d) The exercise of remedies under any Lease or foreclosure of
any Indenture, whether by judicial proceedings or under power of sale contained
in such Indenture or otherwise or any conveyance from MCV or any Owner Trustee
to either related Indenture Trustee in lieu thereof, following a Lease Event of
Default or Indenture Event of Default under the Lease or the Indenture, as the
case may be, to which such Person is a party, shall not require the further
consent of the undersigned.
3. It is understood and agreed that the Contract and this Consent and
Agreement are subject to all tariffs and all Applicable Laws relating to such
services. Except as required, in the undersigned's reasonable opinion or by any
Applicable Law, the undersigned will not, without the prior written consent of
each Owner Trustee and Indenture Trustee (unless MCV delivers to the undersigned
a certificate stating that such consent is not required by the terms of the
related Transaction Documents), cancel, amend, modify or terminate or accept any
cancellation, amendment, modification or termination thereof, except if such
cancellation or termination is in accordance with the express terms of the
Contract, but subject to the rights of each Owner Trustee and Indenture Trustee
to cure any defaults and to keep the Contract in full force and effect as
provided in Section 2(b) above.
4. In the event that any Owner Trustee or Indenture Trustee (or their
respective designee(s)) assumes the Contract or otherwise elects to perform the
duties of MCV under the Contract, such Person shall not have any personal
liability to the undersigned for the performance of MCV's obligations under the
Contract, it being understood that the sole recourse of the undersigned seeking
<PAGE> 39
enforcement of such obligations shall be to such Person's interest in the
Facility and the related rights and Revenues therefrom.
5. If the Contract is rejected by a trustee or debtor-in-possession in
any bankruptcy, insolvency or similar proceeding involving any Persons other
than the undersigned, or is terminated for any other reason (except as a result
of a default which was not appropriately cured as provided herein and in the
Contract), and if, (i) within 30 days thereafter, MCV (in the case of a
bankruptcy, insolvency or similar proceeding involving any Owner Trustee or
Owner Participant), any Owner Trustee, Indenture Trustee or their respective
successors or assigns so request and (ii) all payment defaults under the
Contract have been cured, the undersigned will execute and deliver to the Person
or Persons making such request in proportion to their respective interests in
the Contract a new Contract for the services remaining to be performed under the
original Contract and containing the same terms and conditions as the original
Contract (except for any requirements which have been fulfilled prior to such
termination). Such new Contract also shall be subject to the terms of this
Consent and Agreement.
6. The undersigned acknowledges that after the end of the respective
Lease Terms and during the respective Residual Terms, each Owner Trustee, as the
assignee of an Undivided Interest in the Contract pursuant to the related
Facility Agreements Assignment, shall have all of the rights and shall be liable
for all of the obligations (to the extent of its respective Undivided Interest
Percentage) on a non-recourse basis of MCV under the Contract. The undersigned
further acknowledges that MCV shall be the initial Operator of the Facility
under the Operating Agreement and further agree that the Owner Trustees may
appoint any Person to serve as a successor Operator thereunder so long as such
Person satisfies the requirements set forth in the Operating Agreement.
7. No termination, amendment or waiver of any provision of this Consent
and Agreement or consent to any departure by the undersigned from any provision
of this Consent and Agreement shall be effective unless the same shall be in
writing and signed by the Owner Trustees, the Indenture Trustees and MCV and
then such waiver or consent shall be effective only in a specified instance for
the specific purpose for which it was given.
8. This Consent and Agreement shall be governed by, and construed in
accordance with, the laws of the State of Michigan, and shall be binding on the
parties hereto and their respective successors and assigns.
<PAGE> 40
IN WITNESS WHEREOF, the undersigned by its officers thereunto duly
authorized, have duly executed this Agreement as of the day and year first above
written.
ENGAGE ENERGY U.S., L P
By: Clark C. Smith
Title: President & CEO
Seen and Agreed to this
18 day of October, 1999.
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP, as
Lessee
By: LeRoy W. Smith
Title: Vice President Energy Supply & Marketing
<PAGE> 41
SCHEDULE A
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP,
as Lessee,
FIRST MIDLAND LIMITED PARTNERSHIP,
DCC PROJECT FINANCE ONE, INC.,
EDISON CAPITAL (formerly, Mission Funding Epsilon),
BELL ATLANTIC CREDIT CORPORATION (formerly, NYNEX Credit Company),
RESOURCES CAPITAL MANAGEMENT CORPORATION,
as the several Owner Participants,
STATE STREET BANK AND TRUST COMPANY
(formerly, Fleet National Bank, Shawmut Bank Connecticut, National
Association, and The Connecticut National Bank),
not in its individual capacity but solely as Owner Trustee
under several separate Trust Agreements,
UNITED STATES TRUST COMPANY OF NEW YORK,
not in its individual capacity but solely as Senior Indenture Trustee
under several separate Senior Trust Indenture, Leasehold Mortgage
and Security Agreements for the benefit of the Senior Secured Notes,
FIRST UNION NATIONAL BANK
(formerly, Meridian Trust Company),
not in its individual capacity but solely as Subordinated Indenture Trustee
under several separate Subordinated Trust Indenture,
Leasehold Mortgage and Security Agreements
for the benefit of the Subordinated Secured Notes, and
MIDLAND FUNDING CORPORATION I AND
MIDLAND FUNDING CORPORATION II,
as purchasers of the Secured Notes.
<PAGE> 42
SCHEDULE B
A. As described below, the Owner Participants named in
Schedule A acquired separate Undivided Interests in the Facility and leased such
Undivided Interests back to MCV through separate Owner Trustees acting on behalf
of separate Owner Trusts. The beneficial interest in each Owner Trust is held by
Owner Participant.
B. For purposes of this Schedule B and the Consent and
Agreement, capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in Appendix A to the several separate
Amended and Restated Participation Agreements (the "Participation Agreements"),
each dated as of June 1, 1990, to which MCV, an Owner Participant, the related
Owner Trustee, the related Indenture Trustees, the Funding Corporations, MDC and
the Institutional Senior Bond Purchasers named therein are parties. The rules of
usage set forth in such Appendices also shall apply hereto; provided, that when
the terms defined in Appendix A to a particular Participation Agreement as
relating only to the transaction contemplated therein are used in the plural
herein, such terms are intended to apply to the terms applicable to the
transactions contemplated by all Participation Agreements collectively. In
addition, the word "related", when used with respect to any Person, interest,
instrument, agreement or document, shall denote a Person which is a party to, or
an interest, instrument, agreement or document which is a part of, the
transaction contemplated in a particular Participation Agreement and the
Transaction Documents referred to in such Participation Agreement.
C. Pursuant to a related Participation Agreement, MCV sold and
transferred to each Owner Trustee, and each Owner Trustee acquired, subject to
Dow's Prior Rights and Consumers' Prior Rights, an Undivided Interest in the
Facility equal to the respective Undivided Interest Percentage of such Owner
Trustee (with the Undivided Interests in the Initial Assets having been sold and
transferred on the First Closing Date and the Undivided Interests in the Second
Closing Assets being sold and transferred on the Second Closing Date). Each
Owner Trustee leased its Undivided Interest in the Facility back to the Lessee
pursuant to a related Lease, under which MCV has the use, possession and control
of the Undivided Interest in the Facility for the related Lease Term (with the
Undivided Interests in the Initial Assets having been leased on the First
Closing Date and the Undivided Interests in the Second Closing Assets being so
leased on the Second Closing Date).
D. On the Second Closing Date, (i) MCV assigned to each Owner
Trustee a separate Undivided Interest in the Facility Agreements and the
Cogeneration Agreements pursuant to a related Facility Agreements Assignment
<PAGE> 43
and a related Cogeneration Agreements Assignment, respectively, (ii) each Owner
Trustee assumed the obligations of MCV under the PPA and the SEPA, to the extent
of its respective Undivided Interest Percentage, pursuant to a related
Cogeneration Agreements Assignment, (iii) pursuant to the related Lease, each
Owner Trustee subassigned its Undivided Interests in the Cogeneration Agreements
and Facility Agreements back to MCV for the respective Lease Term, subject to
the Lien of the related Indentures, and MCV, as lessee, accepted such
subassignment, and (iv) MCV granted to each Owner Trustee a Lien on, without
limitation, MCV's right, title and interest in the related Undivided Interests
in the Cogeneration Agreements and the Facility Agreements (and the Revenues
therefrom) as collateral security for the related Secured Obligations pursuant
to a related Lessee Security Agreement.
E. Each Owner Trustee, as provided in the related
Participation Agreement, financed a portion of the Purchase Price for its
Undivided Interest in the Facility with the proceeds of Senior Secured Notes
issued by it to Midland Funding Corporation I pursuant to a related Senior Trust
Indenture and related Subordinated Secured Notes issued by it to Midland Funding
Corporation II pursuant to a related Subordinated Trust Indenture, and Midland
Funding Corporation I and Midland Funding Corporation II purchased such Secured
Notes.
F. Each Owner Trustee granted to the related Indenture
Trustees Liens on, among other things, the Owner Trustee's Undivided Interests
in the Facility, the Cogeneration Agreements and the Facility Agreements, the
Site Interest and its interest in certain of the related Transaction Documents
as collateral security for the Owner Trustee's obligations under the related
Secured Notes.
G. On the Second Closing Date, the Funding Corporations issued
Bonds pursuant to a Senior Collateral Trust Indenture and a Subordinated
Collateral Trust Indenture, respectively, for the purpose of participating in
the payment of the Purchase Price for each Undivided Interest in the Facility
and acquiring the funds necessary to purchase the Senior Secured Notes and the
Subordinated Secured Notes pursuant to a related Participation Agreement. The
Funding Corporations secured their obligations under the Bonds by a pledge to
the related Collateral Trust Trustees of the related Secured Notes (and the
collateral security therefor) held by the Funding Corporations.
H. MCV, each Owner Trustee and Indenture Trustee and the
Working Capital Lender, on the Second Closing Date, entered into an
Intercreditor Agreement with the Collateral Agent providing for the deposit with
and disbursement of all Revenues from the Undivided Interests in the Project by
the Collateral Agent.
<PAGE> 44
I. MCV and each Owner Trustee also entered into an Operating
Agreement appointing MCV as the initial operator of the Project during the
respective Residual Terms, commencing on the Operation Commencement Date (as
such term is defined in the Operating Agreement).
J. On the Second Closing Date, in order to obtain necessary
working capital for the operation of the Facility, MCV obtained the Working
Capital Line from the Working Capital Lender and granted to the Working Capital
Lender first priority Liens on MCV's right, title and interest (as subassignee
of the separate Undivided Interests in the Cogeneration Agreements and the
Facility Agreements during the respective Lease Terms) in and to (i) all Earned
Receivables, (ii) its Natural Gas Inventory and (iii) the Gas Brokering
Contract.
K. Each Owner Trustee has agreed to reassign its Undivided
Interest in the Project (including the Undivided Interest in the Facility
Agreements) and the Site Interest back to MCV at the expiration of the related
Support Term.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
MIDLAND COGENERATION VENTURE FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 241,885
<SECURITIES> 139,803
<RECEIVABLES> 118,768
<ALLOWANCES> 0
<INVENTORY> 13,478
<CURRENT-ASSETS> 396,908
<PP&E> 2,442,899
<DEPRECIATION> 711,019
<TOTAL-ASSETS> 2,299,212
<CURRENT-LIABILITIES> 275,184
<BONDS> 1,584,865
0
0
<COMMON> 0
<OTHER-SE> 437,617
<TOTAL-LIABILITY-AND-EQUITY> 2,299,212
<SALES> 0
<TOTAL-REVENUES> 617,352
<CGS> 0
<TOTAL-COSTS> 401,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,728
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,069
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
SELECTED PRO FORMA OPERATING CASH FLOW DATA (a)
FOR THE YEARS 1999 AND 1998
(In Millions of Dollars) (Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenue
Power Purchase Agreement $572 $587
Steam and Electric Power Agreement 27 42
Other Revenue 9 2
Interest on Revenue Account 7 6
---- ----
Total Revenue 615 637
---- ----
Operating Expenses
Fuel, transportation, storage 246 248
Operations and maintenance 37 37
Property, other taxes 28 27
Other (b) 37 49
---- ----
Total Operating Expenses 348 361
---- ----
Net Operating Income $267 $276
==== ====
Lease Payments $266 $264
Coverage Ratios
Senior Interest 4.81 4.40
Senior Debt Service 1.43 1.96
Total Interest 2.29 2.23
Total Debt Service 1.08 1.37
</TABLE>
(a) The above table presents selected pro forma information on operating cash
flows of MCV in a format consistent with that presented in the Feasibility
Study to the Prospectus filed as part of MCV's Registration Statement on
Form S-1 (File No. 33-3977). This format is used to compute various debt
service coverage ratios on an annual basis by aligning annual operating
cash flows with the semi-annual rent payments made in July and January of
each year. For example, the cash flow presented for 1999 reflects revenues
and expenses associated with 1999 activity, as well as the Lease rental
payments made on July 23, 1999, and January 23, 2000. In addition to the
revenues presented in this table, interest income on reserves totaled $9.3
million in 1999 and $11.4 million in 1998.
(b) Includes use of funds available for payment of spare parts, maintenance
and capital expenditures that had been reserved in prior years and funding
of reserves for future spare parts, maintenance and capital expenditures.
