<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number (Under the Securities Act of 1933) 33-37977
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2726166
-------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 PROGRESS PLACE, MIDLAND, MICHIGAN 48640
--------------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 839-6000
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF
(In Thousands)
<TABLE>
<CAPTION>
September 30,
2000 December 31,
ASSETS (Unaudited) 1999
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 141,028 $ 236,205
Restricted cash and cash equivalents 724 5,680
Accounts and notes receivable 139,162 118,768
Gas inventory 16,372 13,478
Unamortized property taxes 23,167 16,809
Prepaid expenses and other 3,986 5,968
------------- -------------
Total current assets 324,439 396,908
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 2,428,457 2,421,677
Pipeline 21,222 21,222
------------- -------------
Total property, plant and equipment 2,449,679 2,442,899
Accumulated depreciation (766,105) (711,019)
------------- -------------
Net property, plant and equipment 1,683,574 1,731,880
------------- -------------
OTHER ASSETS:
Restricted investment securities held-to-maturity 142,911 139,803
Deferred financing costs, net of accumulated amortization of
$12,353 and $11,425, respectively 12,612 7,152
Prepaid gas costs, materials and supplies 23,134 23,469
------------- -------------
Total other assets 178,657 170,424
------------- -------------
TOTAL ASSETS $ 2,186,670 $ 2,299,212
============= =============
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 74,179 $ 59,970
Interest payable 33,607 76,119
Current portion of long-term debt 155,632 139,095
------------- -------------
Total current liabilities 263,418 275,184
------------- -------------
NON-CURRENT LIABILITIES:
Long-term debt 1,429,233 1,584,865
Other 1,702 1,546
------------- -------------
Total non-current liabilities 1,430,935 1,586,411
------------- -------------
CONTINGENCIES (Note 6)
TOTAL LIABILITIES 1,694,353 1,861,595
------------- -------------
PARTNERS' EQUITY 492,317 437,617
------------- -------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,186,670 $ 2,299,212
============= =============
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-1-
<PAGE> 3
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- --------------------------------------
2000 1999 2000 1999
-------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Capacity $ 106,093 $ 105,110 $ 309,185 $ 305,577
Electric 38,505 47,444 139,712 149,903
Steam 3,451 2,714 11,175 10,010
-------------- ---------------- ---------------- ----------------
Total operating revenues 148,049 155,268 460,072 465,490
-------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Fuel costs 57,662 61,405 192,469 179,350
Depreciation 22,465 23,771 71,354 71,270
Operations 3,585 3,465 11,397 10,819
Maintenance 3,368 3,033 10,047 9,278
Property and single business taxes 6,176 6,529 19,117 19,416
Administrative, selling and general 2,249 2,253 7,104 7,292
-------------- ---------------- ---------------- ----------------
Total operating expenses 95,505 100,456 311,488 297,425
-------------- ---------------- ---------------- ----------------
OPERATING INCOME 52,544 54,812 148,584 168,065
-------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest and other income 7,295 5,094 18,680 14,429
Interest expense (35,715) (38,042) (112,564) (116,958)
-------------- ---------------- ---------------- ----------------
Total other income (expense), net (28,420) (32,948) (93,884) (102,529)
-------------- ---------------- ---------------- ----------------
NET INCOME $ 24,124 $ 21,864 $ 54,700 $ 65,536
============== ================ ================ ================
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-2-
<PAGE> 4
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 2000
-----------------------------------------------
General Limited
Partners Partners Total
------------- ------------ -------------
<S> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $ 369,638 $ 67,979 $ 437,617
Net income 47,623 7,077 54,700
------------- ------------ -------------
BALANCE, END OF PERIOD $ 417,261 $ 75,056 $ 492,317
============= ============ =============
</TABLE>
The accompanying condensed notes are an integral part of this statement.
-3-
<PAGE> 5
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 54,700 $ 65,536
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 72,282 72,028
Increase in accounts receivable (20,394) (6,127)
Increase in gas inventory (2,894) (1,934)
Increase in unamortized property taxes (6,358) (7,346)
Decrease (increase) in prepaid expenses and other 1,982 (1,202)
Decrease (increase) in prepaid gas costs, materials and supplies 335 (3,610)
Increase (decrease) in accounts payable and accrued liabilities 14,209 (10,442)
Decrease in interest payable (42,512) (41,311)
Increase in other non-current liabilities 156 473
---------------- -----------------
Net cash provided by operating activities 71,506 66,065
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant and equipment (23,048) (33,644)
---------------- -----------------
Net cash used in investing activities (23,048) (33,644)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (139,095) (64,331)
Debt refinancing costs (6,388) -
Maturity of restricted investment securities held-to-maturity 248,338 300,202
Purchase of restricted investment securities held-to-maturity (251,446) (296,595)
---------------- -----------------
Net cash used in financing activities (148,591) (60,724)
---------------- -----------------
NET DECEASE IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH - CURRENT (100,133) (28,303)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -
CURRENT, AT BEGINNING OF PERIOD 241,885 202,029
---------------- -----------------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -
CURRENT, AT END OF PERIOD $ 141,752 $ 173,726
================ =================
</TABLE>
The accompanying condensed notes are an integral part of these statements.
-4-
<PAGE> 6
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements and condensed notes should be read along
with the audited financial statements and notes as contained in the Annual
Report on Form 10-K for the year ended December 31, 1999 of Midland Cogeneration
Venture Limited Partnership ("MCV") which includes the Report of Independent
Public Accountants. In the opinion of management, the unaudited information
herein reflects all adjustments (which include only normal recurring
adjustments) necessary to assure the fair presentation of financial position,
results of operations and cash flows for the periods presented. Prior period
amounts have been reclassified for comparative purposes. These reclassifications
had no effect on net income. The consolidated financial statements include the
accounts of MCV and its wholly-owned subsidiaries. All material transactions and
balances among entities which comprise MCV have been eliminated in the
consolidated financial statements.
(1) THE PARTNERSHIP AND ASSOCIATED RISKS
MCV was organized to construct, own and operate a combined-cycle, gas-fired
cogeneration facility (the "Facility") located in Midland, Michigan. MCV
was formed on January 27, 1987, and the Facility entered into commercial
operation in 1990.
In 1992, MCV acquired the outstanding common stock of PVCO Corp., a
previously inactive company. MCV and PVCO Corp. entered into a partnership
agreement to form MCV Gas Acquisition General Partnership ("MCV GAGP") for
the purpose of buying and selling natural gas on the spot market and other
transactions involving natural gas activities. Currently, MCV GAGP is not
actively engaged in any business activity.
The Facility was originally designed to provide approximately 1,370
megawatts ("MW") of electricity and approximately 1.5 million pounds of
process steam per hour. Subsequent improvements to the Facility have
increased net electrical generating capacity 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.
-5-
<PAGE> 7
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the nine months ended September 30, 2000, the Facility achieved a
Thermal Percentage of 18.2% and a PURPA Efficiency Percentage of 46.9%. 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.
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. 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, 1997 through
February, 1998 (collectively the "Restructuring Orders"), 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 to protect against
denial of recovery by Consumers of PPA charges. The Michigan Court of
Appeals found that the Restructuring Orders do not unequivocally disallow
such recovery by Consumers and, therefore, MCV's issues were not ripe for
appellate review and no actual controversy regarding recovery of costs
could occur until 2008, at the earliest. 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. In September 1999, Consumers filed
a statement with the MPSC stating that it intends to begin voluntarily
implementing the Restructuring Orders. In June 2000, the state of Michigan
enacted legislation which, among other things, states that the
Restructuring Orders (being voluntarily implemented by Consumers) are in
compliance with the legislation and enforceable by the MPSC. The
legislation provides that the rights of parties to existing contracts
between utilities (like Consumers) and QF's (like MCV), including the
rights to have the PPA charges recovered from customers of the utilities,
are not abrogated or diminished, and permitted utilities to securitize
certain stranded (transition) costs including PPA charges.
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 they prohibit Consumers 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.
MCV continues to monitor and participate in these industry restructuring
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.
-6-
<PAGE> 8
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents and short-term investments
approximate fair value because of the short maturity of these instruments.
MCV's short-term investments, which are made up of investment securities
held-to-maturity, as of September 30, 2000 and December 31, 1999, have
original maturity dates of less than one year. The unique nature of the
negotiated financing obligation discussed in Note 5 makes it impractical to
estimate the fair value of the lessor group ("Owner Participants")
underlying debt and equity instruments supporting such financing
obligation.
Forward Foreign Exchange Contracts
An amended service agreement was entered into between MCV and ABB Alstom
Power ("ABB Power") (the "amended Service Agreement"), under which ABB
Power provides hot gas path parts for MCV's twelve gas turbines through the
sixth series of major gas turbine generator ("GTG") inspections, which are
expected to be completed by year-end 2008. The payments due to ABB Power
under this amended Service Agreement are adjusted annually based on the
ratio of the U.S. dollar to Swiss franc currency exchange rate. MCV
maintains a foreign currency hedging program to be used only with respect
to MCV payments subject to foreign currency exposure under the amended
Service Agreement.
To manage this currency exchange rate risk and hedge against adverse
currency fluctuations impacting the payments under this amended Service
Agreement, MCV 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") 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. As of September 30, 2000, MCV had forward
purchase contracts involving Swiss Francs in the notional amount of $10.0
million, with a deferred $.3 million loss recorded in prepaid expenses and
other. As of December 31, 1999, MCV had forward purchase contracts
involving Swiss Francs in the notional amount of $11.0 million, with a
deferred $.6 million loss, recorded in prepaid expenses and other.
Natural Gas Options and Futures
To manage market risks associated with the volatility of natural gas
prices, MCV maintains a gas hedging program. MCV enters into natural gas
options and futures contracts in order to hedge against unfavorable changes
in the market price of natural gas in future months when gas is expected to
be needed. These financial instruments are being utilized only to secure
anticipated natural gas requirements necessary for projected electric sales
and to hedge sales of natural gas previously obtained in order to optimize
MCV's existing gas supply, storage and transportation arrangements. The
natural gas futures contracts qualify as hedges under SFAS 80, "Accounting
for Futures Contracts," since the contracts cover probable future
transactions.
Cash is deposited with the broker in a margin account, at the time futures
or options contracts are initiated. The change in market value of these
contracts requires adjustment of the margin account balances. The margin
balance, recorded in prepaid expenses and other, was $(1.1) million and
$1.6 million as of September 30, 2000 and December 31, 1999, respectively.
MCV's deferred gains and losses on futures and options contracts, recorded
in current liabilities, will be offset by the corresponding underlying
transaction and then included in operating expenses in the same period the
natural gas is needed to produce electricity burned to operate the
Facility. As of September 30, 2000, MCV had net open futures and options
contracts of 8.8 Bcf with a deferred gain of $7.3 million. As of December
31, 1999, MCV had net open futures and options contracts of 1.9 Bcf with a
deferred loss of $.2 million. In addition, MCV recorded approximately $.8
million in net deferred gains on contracts closed prior to September 30,
2000, related to 2000 and 2001 purchase and sales commitments, and had
approximately $.6 million in net deferred gains on contracts closed prior
to December 31, 1999, related to 2000 purchase and sales commitments.
-7-
<PAGE> 9
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $.7
million and $.3 million, as of September 30, 2000 and December 31, 1999,
respectively. As of September 30, 2000, MCV had two separate interest rate
swap hedges with a notional amount totaling of $45 million, with various
periods of performance ranging between April 1, 1998 through December 1,
2002. The difference between the amounts received and paid under interest
rate swap transactions is accrued and recorded as an adjustment to the
interest income over the life of the hedged agreement. As of September 30,
2000, MCV recorded a net loss under the interest rate swap hedges of
approximately $108,000, while for the year ended December 31, 1999, MCV
recorded a net loss under the interest rate swap hedges of approximately
$42,000.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which was amended in June 2000 by SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An amendment of
FASB Statement No. 133." SFAS No. 133 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. The amendment addresses a limited number of
issues causing implementation difficulties for entities applying SFAS No.
133. In addition, in June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - 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 will adopt the new statement effective January 1, 2001. MCV is
currently addressing several outstanding accounting issues related to MCV's
current hedging activity and derivatives and has not yet quantified the
effects of adoption on MCV's financial statements.
Change in Estimate
Effective July 1, 2000, MCV made two accounting estimate changes. First,
MCV prospectively revised the remaining estimated useful lives of certain
components of the gas turbines and certain related capital spare parts to
more closely reflect the expected economic useful lives based upon current
operating performance. Secondly, MCV prospectively revised its amortization
of the payments for the hot gas path parts under the amended Service
Agreement so as to better match the cost of replacement parts used in the
gas turbines with the expected completion date under the amended Service
Agreement. The effect of these changes in accounting estimate resulted in
an increase in net income of $1.8 million for the third quarter and year to
date periods of 2000.
-8-
<PAGE> 10
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(3) RESTRICTED CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
HELD-TO-MATURITY
Current and non-current restricted cash and cash equivalents and investment
securities held-to-maturity consist of the following as of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ----------------
<S> <C> <C>
Current:
-------
Funds restricted for plant modifications $ 724 $ 5,680
================= ================
Non-current:
-----------
Funds restricted for rental payments pursuant to the Overall
Lease Transaction $ 141,079 $ 138,258
Funds restricted for management non-qualified plans 1,832 1,545
----------------- ----------------
Total $ 142,911 $ 139,803
================= ================
</TABLE>
(4) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ---------------
<S> <C> <C>
Accounts payable
Related parties $ 12,942 $ 13,016
Trade creditors 37,899 30,394
Property and single business taxes 12,746 12,973
Other 10,592 3,587
----------------- ---------------
Total $ 74,179 $ 59,970
================= ===============
</TABLE>
(5) LONG-TERM DEBT
Long-term debt consists of the following as of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ---------------
<S> <C> <C>
Financing obligation, maturing through 2015, effective interest rate of
approximately 8.3%, payable in semi-annual installments of principal
and interest, secured by property, plant and equipment $ 1,584,865 $ 1,723,960
Less current portion (155,632) (139,095)
----------------- ---------------
Total long-term debt $ 1,429,233 $ 1,584,865
================= ===============
</TABLE>
Financing Obligation
In 1990, MCV obtained permanent financing for the Facility by entering into
sale and leaseback agreements ("Overall Lease Transaction") with the Owner
Participants, related to substantially all of MCV's fixed assets. Proceeds
of the financing were used to retire borrowings outstanding under existing
loan commitments, make a capital distribution to the Partners and retire a
portion of the notes issued by MCV to MEC Development Corporation ("MDC")
in connection with the transfer of certain assets by MDC to MCV. In
accordance with SFAS No. 98, "Accounting For Leases," the sale and
leaseback transaction has been accounted for as a financing arrangement.
On June 15, 2000, MCV closed on the sale of $200 million of tax-exempt
bonds, the proceeds of which were used on July 24, 2000 to refund a like
amount of previously issued bonds. The refinancing of this portion of
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<PAGE> 11
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the outstanding debt has lowered MCV's effective interest rate on its
long-term debt arrangement from approximately 8.7% to 8.3%, which is still
scheduled to mature in year 2015.
Interest and fees incurred related to long-term debt arrangements during
the nine months ended September 30, 2000 and 1999 were $108.6 million and
$116.2 million, respectively. In addition, as of September 30, 2000, MCV
has expensed approximately $2.9 million of costs associated with MCV's
refinancing of its tax-exempt bonds. Interest and fees paid for the nine
months ended September 30, 2000 and 1999 were $151.2 million and $157.5
million, respectively.
(6) CONTINGENCIES
PPA - Sale and Assignment
In March 1999, Consumers signed a contract with PECO Energy Company
("PECO") whereby Consumers would have sold 1240 MW of capacity and
associated energy to PECO from the MCV PPA until September 2007. The
contract with PECO was subject to regulatory treatment satisfactory to
Consumers. The MPSC orders issued in this matter did not grant Consumers'
the regulatory treatment it requested. Consumers recently gave notice to
PECO of its intention to terminate this long-term agreement at the end of
2000 as contemplated under the terms of the agreement.
-10-
<PAGE> 12
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) PARTNERS' EQUITY AND RELATED PARTY TRANSACTIONS
The following table summarizes the nature and amount of each of MCV's
Partner's equity interest, interest in profits and losses of MCV at
September 30, 2000, and the nature and amount of related party transactions
or agreements that existed with the Partners or affiliates as of September
30, 2000 and 1999, and for each of the nine month periods ended September
30 (in thousands).
<TABLE>
<CAPTION>
Equity Partner, Type of Partner Equity
and Nature of Related Party Interest Interest Related Party Transactions and Agreements 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CMS Midland, Inc. $241,235 49.0% Power purchase agreements $428,185 $441,621
General Partner; wholly-owned Purchases under gas transportation
subsidiary of Consumers Energy agreements 17,533 14,251
Company (formerly Consumers Purchases under spot gas agreements 3,516 207
Power Company) Purchases under gas supply agreements 9,137 6,765
Gas storage agreement 1,922 1,922
Land lease/easement agreements 450 450
Accounts receivable 44,596 46,212
Accounts payable 9,044 6,719
Sales under spot gas agreements 6,085 430
The Dow Chemical Company 49,911 7.5 Steam and electric power agreement 22,909 20,165
Limited Partner Steam purchase agreement - Dow Corning
Corp (affiliate) 2,626 2,415
Purchases under demineralized water
supply agreement 5,033 4,688
Accounts receivable 2,795 1,948
Accounts payable 502 519
Standby and backup fees 502 489
Source Midland Limited Partnership 83,821 18.1 SMLP - Under Ownership of MCN Energy Group Inc.
("SMLP") General Partner; owned by -----------------------------------------------
subsidiaries of The Coastal Purchases under spot gas supply agreements -- 3,466
Corporation (2) Purchases under gas supply agreements -- 10,035
Accounts receivable -- 2,058
Accounts payable -- 1,323
Sales under spot gas agreements -- 5,950
Partner cash withdrawal (including accrued
interest) (1) -- 23,601
SMLP - Under Ownership of Coastal
---------------------------------
See related party activity listed under
Coastal Midland, Inc.
Coastal Midland, Inc. ("Coastal") 50,293 10.9 Purchase under gas transportation agreements 10,206 10,203
General Partner; wholly-owned Purchases under spot gas agreement 4,520 3,623
subsidiary of The Coastal Corporation Purchases under gas supply agreement 3,664 3,008
Gas agency agreement 1,682 1,337
Deferred reservation charges under gas
purchase agreement 6,895 5,910
Accounts receivable 2,985 --
Accounts payable 3,396 3,207
Sales under spot gas agreements 5,490 749
Partner cash withdrawal (including accrued
interest) (1) 50,144 20,823
MEI Limited Partnership ("MEI") (2) MEI - Under Ownership of Coastal and SMLP
A General and Limited Partner; -----------------------------------------
owned by subsidiaries of See related party activity listed under
The Coastal Corporation Coastal Midland, Inc. and Source Midland
General Partnership Interest 41,912 9.1 Limited Partnership
Limited Partnership Interest 4,190 .9
Micogen Limited Partnership 20,954 4.5 See related party activity listed under
("MLP") Limited Partner, owned Coastal Midland, Inc.
by subsidiaries of The Coastal
Corporation
Alanna Corporation 1 (3) .00001 Note receivable 1 1
Limited Partner; wholly-owned
subsidiary of Alanna Holdings
Corporation
</TABLE>
-11-
<PAGE> 13
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Footnotes to Partners' Equity and Related Party Transactions
(1) Letters of credit have been issued and recorded as notes receivables
from various equity partners, pursuant to the Participation Agreement.
In the case of SMLP, the amount includes their share of the cash
available to MEI Limited Partnership ("MEI"). In the case of Coastal
Midland, Inc. ("Coastal"), the amount includes their share of cash
available to both MEI and Micogen Limited Partnership ("MLP").
(2) On January 5, 2000, wholly-owned subsidiaries of The Coastal
Corporation acquired all of the partnership interests in SMLP and the
remaining 50% interest in MEI from MCN Energy Group Inc. ("MCN"). All
SMLP related party activity under the ownership of MCN is for the
period ended September 30, 1999 and as of September 30, 1999.
(3) Alanna's capital stock is pledged to secure MCV's obligation under the
lease and other overall lease transaction documents.
-12-
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
This MD&A should be read along with the MD&A in the Annual Report on Form 10-K
for the year ended December 31, 1999 of the Midland Cogeneration Venture Limited
Partnership ("MCV").
Results of Operations:
Operating Revenues Statistics
The following represents significant operating revenue statistics for the
following periods (dollars in thousands except average rates):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenues $ 148,049 $ 155,268 $ 460,072 $ 465,490
Capacity Revenue $ 106,093 $ 105,110 $ 309,185 $ 305,577
PPA Contract Capacity (MW) 1,240 1,240 1,240 1,240
Billed PPA Availability (1) 98.5% 98.5% 98.5% 98.5%
Electric Revenue $ 38,505 $ 47,444 $ 139,712 $ 149,903
PPA Delivery as a Percentage of Contract Capacity 56.3% 74.9% 76.3% 77.5%
PPA, SEPA and Other Electric Deliveries (MWh) 1,738,464 2,289,643 6,765,745 6,866,662
Average PPA Variable Energy Rate ($/MWh) $ 15.66 $ 15.85 $ 15.69 $ 16.10
Average PPA Fixed Energy Rate ($/MWh) $ 3.59 $ 3.50 $ 3.56 $ 3.53
Steam Revenue $ 3,451 $ 2,714 $ 11,175 $ 10,010
Steam Deliveries (Mlbs) 1,245,330 1,216,600 4,327,250 4,288,880
</TABLE>
(1) As part of the settlement agreement which became effective January 1, 1999
between MCV and Consumers, among other things, MCV agreed not to bill
Consumers for PPA availability greater than 98.5% in each calendar year.
Comparison of the Three Months ended September 30, 2000 and 1999
Overview
For the third quarter of 2000, MCV recorded net income of $24.1 million as
compared to net income of $21.9 million for the third quarter of 1999. The
earnings increase for the third quarter of 2000 compared to 1999 is primarily
due to lower fuel costs resulting from a lower dispatch, lower interest expense
on MCV's financing obligation and increased interest income on MCV's
investments. This earnings increase was partially offset by a decrease in
revenues due to a lower electric dispatch.
-13-
<PAGE> 15
Operating Revenues
For the third quarter of 2000, MCV's operating revenues decreased $7.2 million
from the third quarter of 1999. This decrease is due primarily to a lower
electric dispatch under the PPA and other electric sales, partially offset by
increased rates under the SEPA with Dow.
Operating Expenses
For the third quarter of 2000, MCV's operating expenses were $95.5 million,
which includes $57.7 million of fuel costs. During this period, MCV purchased
approximately 18.1 billion cubic feet ("Bcf") of natural gas, and a net 2.2 Bcf
was injected into storage and used for transportation fuel. During this same
period, MCV consumed 15.9 Bcf. The average commodity cost of fuel for the third
quarter of 2000 was $2.92 per million British thermal units ("MMBtu"), which
includes the effects of the disposition of excess gas supplies not required for
generation. For the third quarter of 1999, MCV's operating expenses were $100.5
million, which includes $61.4 million of fuel costs. During this period, MCV
purchased approximately 20.5 Bcf of natural gas, and a net .8 Bcf was injected
into storage and used for transportation fuel. During this same period, MCV
consumed 20.2 Bcf, of which .5 Bcf of this total was gas provided by Dow. The
average commodity cost of fuel for the third quarter of 1999 was $2.57 per
MMBtu. Fuel costs for the third quarter of 2000 compared to 1999 decreased by
$3.7 million. This fuel cost decrease was due to a lower electric dispatch by
Consumers under the PPA, partially offset by higher natural gas prices.
For the third quarter of 2000, operating expenses other than fuel costs
decreased $1.3 million from the third quarter of 1999, primarily due to lower
depreciation expense resulting from a revision to the useful lives of the gas
turbine generator equipment and changes to the amortization of payments under
the amended Service Agreement. All other expenses incurred in these periods were
considered normal expenditures to achieve the recorded operating revenues.
Other Income (Expense)
The increase in interest and other income in the third quarter of 2000 compared
to 1999 reflects higher interest rates on MCV's investments. The decrease in
interest expense in the third quarter of 2000 from the third quarter of 1999 is
due to a lower principal balance on MCV's financing obligation.
Comparison of the Nine Months ended September 30, 2000 and 1999
Overview
For the first nine months of 2000, MCV recorded net income of $54.7 million as
compared to net income of $65.5 million for the first nine months of 1999. The
earnings decrease for the first nine months of 2000 compared to 1999 was due
primarily to increased fuel costs resulting from higher natural gas prices. Also
contributing to the decrease were two one-time events, the 1999 recognition of a
net $6.4 million increase in operating revenues due to a settlement agreement
between MCV and Consumers, effective January 1, 1999 ("Settlement Agreement") as
well as expenses arising from MCV's refinancing of its tax-exempt bonds in June
2000. In addition, MCV experienced slightly lower energy rates payable under the
PPA. This earnings decrease was partially offset by lower interest expense on
MCV's financing obligation, higher capacity revenue and increased interest
income on MCV's investments.
Operating Revenues
For the first nine months of 2000, MCV's operating revenues decreased $5.4
million from the nine months of 1999. This decrease is due primarily to the
first quarter 1999 recognition of a one-time net $6.4 million increase in
operating revenues due to the Settlement Agreement between MCV and Consumers,
which resolved (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 included definitive obligations for Consumers to make
energy payments calculated in accordance with the PPA. Also decreasing earnings
was lower energy rates under the PPA with Consumers and a slightly lower
electric dispatch. This decrease was partially offset by increased electric and
steam rates under the SEPA with Dow and higher capacity revenues from Consumers
under the PPA and third parties.
-14-
<PAGE> 16
Operating Expenses
For the first nine months of 2000, MCV's operating expenses were $311.5 million,
which includes $192.5 million of fuel costs. During this period, MCV purchased
approximately 63.1 Bcf of natural gas, and a net 2.9 Bcf was injected into
storage and used for transportation fuel. During this same period, MCV consumed
61.0 Bcf, of which .8 Bcf of this total was gas provided by Dow. The average
commodity cost of fuel for the first nine months of 2000 was $2.72 per MMBtu,
which includes the effects of the disposition of excess gas supplies not
required for generation. For the first nine months of 1999, MCV's operating
expenses were $297.4 million, which includes $179.4 million of fuel costs.
During this period, MCV purchased approximately 62.6 Bcf of natural gas, and a
net 2.8 Bcf was placed in storage and used for transportation fuel. During this
same period, MCV consumed 61.2 Bcf, of which 1.4 Bcf of this total was gas
provided by Dow. The average commodity cost of fuel for the first nine months of
1999 was $2.46 per MMBtu. Fuel costs for the first nine months of 2000 compared
to 1999 increased by $13.1 million. This fuel cost increase was due to higher
natural gas prices in both the MCV's long-term gas agreements and in the
short-term market and a slight increase in gas usage.
For the first nine months of 2000, operating expenses other than fuel costs
increased $1.0 million from the first nine months of 1999, primarily resulting
from higher depreciation expense associated with equipment upgrades installed
over the past two years, partially offset by a change resulting from a revision
to the useful lives of the gas turbine generator equipment and changes to the
amortization of payments under the amended Service Agreement. All other expenses
incurred in these periods were considered normal expenditures to achieve the
recorded operating revenues.
Other Income (Expense)
The increase in interest and other income in the first nine months of 2000
compared to 1999 reflects higher interest rates on MCV's investments. The
decrease in interest expense in the first nine months of 2000 from the first
nine months of 1999 is due to a lower principal balance on MCV's financing
obligation, partially offset by the expenses arising form MCV's refinancing of
its tax-exempt bonds in June 2000 and due to refinancing a portion of MCV's
outstanding debt.
Market Risk Sensitivity
Market risks relating to MCV's operations result primarily from changes in
commodity prices, interest rates and foreign exchange rates. To address these
risks, MCV enters into various hedging transactions as described below. MCV does
not use financial instruments for trading purposes and does not use leveraged
instruments. Fair values included herein have been determined based upon quoted
market prices. The information presented below should be read in conjunction
with Note 2, " Significant Accounting Policies" and Note 5, "Long-Term Debt" to
the Condensed Notes to Unaudited 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, had an
effective interest rate of approximately 8.7%, payable in semi-annual
installments of principal and interest. On June 15, 2000, MCV closed on the sale
of $200 million of tax-exempt bonds, the proceeds of which were used on July 24,
2000 to refund a like amount of previously issued bonds. The refinancing of this
portion of the outstanding debt has lowered MCV's effective interest rate on its
long-term debt arrangement from approximately 8.7% to 8.3%, which is still
scheduled to mature in year 2015. Lower interest rates on the recently issued
tax-exempt bonds should result in MCV incurring lower interest payments of
approximately $5.1 million annually through July 2007, with somewhat smaller
savings through the bonds' final maturity in July 2009. 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
-15-
<PAGE> 17
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 September 30, 2000 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
September 30, 2000:
<TABLE>
<CAPTION>
Expected Maturity Date
--------------------------------------------------------------------------------------------------
Change in
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
----
Long-Term Debt
Fixed Rate $151.7 $287.1 $304.1 $208.9 $242.8 $1,521.3 $2,715.9 N/A
(in millions)
Avg. Interest Rate 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3%
Interest Rate Swaps:
-------------------
Variable to Fixed $25.0 $ (.1)
(in millions)
Avg. Pay Rate 6.88%
Avg. Receive Rate 6.32%
Floating to Floating $20.0 $ (.4)
(in millions)
Avg. Pay Rate 6.58%
Avg. Receive Rate 6.52%
</TABLE>
Commodity Risk. MCV is a purchaser of natural gas. MCV enters into natural gas
futures and option contracts in order to hedge against unfavorable changes in
the market price of natural gas in future months when gas is expected to be
needed. These financial instruments are being utilized only to secure
anticipated natural gas requirements necessary for projected electric sales at a
cost of gas less than that available under MCV's long term natural gas contracts
and to hedge sales of natural gas previously obtained in order to optimize MCV's
existing gas supply, storage and transportation arrangements. The natural gas
futures and option contracts qualify as hedges under SFAS No. 80, "Accounting
for Futures Contracts," since the contracts cover probable future transactions.
MCV's futures and forward contracts generally have maturities not exceeding
twelve months.
The following table provides information about MCV's futures and option
contracts that are sensitive to changes in natural gas prices; these futures and
option contracts have maturity dates ranging from one to eleven months. The
table presents the carrying amounts and fair values at September 30, 2000:
<TABLE>
<CAPTION>
Expected Maturity in 2000 Fair Value
------------------------- ----------
<S> <C> <C>
Futures Contracts:
-----------------
Contract Volumes (10,000 MMBtu) Long/Buy 813 --
Contract Volumes (10,000 MMBtu) Short/Sold (68) --
Weighted Average Price Long (per 10,000 MMBtu) $3.730 $4.642
Weighted Average Price Short (per 10,000 MMBtu) $5.048 $5.281
Contract Amount ($US in Millions) $26.9 $34.1
</TABLE>
-16-
<PAGE> 18
Foreign Currency Risks. MCV periodically enters into foreign exchange forward
purchase contracts for Swiss Francs to hedge its foreign currency exposure
against adverse currency fluctuations impacting the payments under the amended
Service Agreement with ABB Power. The gains and losses on these transactions,
accounted for as hedges, are deferred on the balance sheet and included in the
measurement of the underlying capitalized major renewal costs when incurred.
Forward contracts which are entered into have maturity dates of less than one
year. As of September 30, 2000, MCV had forward purchase contracts involving
Swiss Francs in the notional amount of $10.0 million, with a deferred $.3
million loss.
Liquidity and Financial Resources
During the nine months ended September 30, 2000 and 1999, net cash generated by
MCV's operations was $71.5 million and $66.1 million, respectively. The primary
use of net cash was for the payment of principal on the financing obligation and
capital expenditures. MCV's cash and cash equivalents have a normal cycle of
collecting six months of revenues less operating expenses prior to making the
semiannual interest and principal payments of the financing obligation due in
January and July for the next fifteen years. During 2000 and 1999, MCV paid the
basic rent requirements of $288.6 million and $221.7 million, respectively, as
required under the Overall Lease Transaction.
MCV also has arranged for a $50 million working capital line ("Working Capital
Facility") from the Bank of Montreal to provide temporary financing, as
necessary, for operations. The Working Capital Facility has been secured by
MCV's natural gas inventory and earned receivables. At any given time,
borrowings and letters of credit are limited by the amount of the borrowing
base, defined as 90% of earned receivables. The borrowing base varies over the
month as receivables are earned, billed and collected. At September 30, 2000,
the borrowing base was $37.6 million. The Working Capital Facility term
currently extends to August 31, 2001. MCV did not utilize the Working Capital
Facility during the first nine months of 2000, 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 September 30, 2000, there was $286.2 million (which includes
$45.2 million reserved for capital improvements and spare parts purchases),
including accrued interest, in available reserves for such purposes.
Outlook
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995. The following discussion of the outlook for MCV contains certain
"forward-looking statements" as defined by the Private Securities Litigation
Reform Act of 1995 (the "Act"), including without limitation, discussion as to
expectations, beliefs, plans, objectives and future financial performance, or
assumptions underlying or concerning matters discussed reflecting MCV's current
expectations of the manner in which the various factors discussed therein may
affect its business in the future. Any matters that are not historical facts are
forward-looking and, accordingly, involve estimates, assumptions, and
uncertainties which could cause actual results or outcomes to differ materially
from those expressed in the forward-looking statements. Accordingly, this "Safe
Harbor" Statement contains additional information about such factors relating to
the forward-looking statements. There is no assurance that MCV's expectations
will be realized or that unexpected events will not have an adverse impact on
MCV's business.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include the
final outcome of the MPSC Restructuring Orders and challenges thereto,
governmental policies, legislation and other regulatory actions (including those
of the Michigan Legislature, Congress, Federal Energy Regulatory Commission and
the Michigan Public Service Commission) with respect to cost recovery under the
PPA, industry restructuring or deregulation, operation and construction of plant
facilities including natural gas pipeline and storage facilities, and present or
prospective wholesale and retail competition, among others. The business and
profitability of MCV is also influenced by other factors such as pricing and
transportation of commodities and environmental legislation/regulation, among
other important factors. All such
-17-
<PAGE> 19
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. During the first nine months of 2000, approximately 70% of
PPA revenues were capacity payments under the PPA, which are billed on
availability, subject to an annual availability cap of 98.5% pursuant to a
Settlement Agreement between MCV and Consumers, which was effective January 1,
1999. Actual PPA availability was 99.6% for the first nine months of 2000, 99.7%
in 1999 and 99.4% in 1998. 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.
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 expected fuel supply requirements in future years, 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.
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 September 2000, the unit energy charge (fixed and
variable) paid to MCV has declined by 15.6%, while the average unit variable
cost of delivered fuel for the period 1990 - 1999, has risen by 13.8%. 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). MCV continues to purchase the majority of its natural gas requirements
under long-term fixed-price contracts, with a smaller portion of gas purchased
on the spot market. MCV has maintained a hedging program to mitigate risk
associated with volatile prices in the spot market and has entered into gas
purchase and hedging arrangements with respect to most of its expected gas needs
for the fourth quarter of 2000 and the year 2001 for requirements not provided
for under its long-term contracts. MCV expects that its purchase and hedging
arrangements will mitigate the effects of rises in natural gas prices for the
fourth quarter of 2000 and the year 2001, although high gas prices for an
extended period of time could adversely affect operating results.
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.
PPA - Sale and Assignment. In March 1999, Consumers signed a contract with PECO
Energy Company ("PECO") whereby Consumers would have sold 1240 MW of capacity
and associated energy to PECO from the MCV PPA until September 2007. The
contract with PECO was subject to regulatory treatment satisfactory to
Consumers. The MPSC orders issued in this matter did not grant Consumers' the
regulatory treatment it requested. Consumers recently gave notice to PECO of its
intention to terminate this long-term agreement at the end of 2000 as
contemplated under the terms of the agreement.
-18-
<PAGE> 20
Michigan Electric Industry Restructuring Proceedings. The MPSC issued orders on
June 5, 1997, October 29, 1997, January 14, 1998 and February 11, 1998
(collectively the "Restructuring Orders"). While the Restructuring Orders were
not entirely clear, they provided for a transition to a competitive regime
whereby electric retail customers would be able to choose their power supplier
and pay negotiated or market-based rates for such power supply. The
Restructuring Orders also mandated 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 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. The Michigan Court of
Appeals found that the Restructuring Orders do not unequivocally disallow such
recovery by Consumers and, therefore, MCV's issues were not ripe for appellate
review and no actual controversy regarding recovery of costs could occur until
2008, at the earliest. 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. In September 1999, Consumers filed a
statement with the MPSC stating that it intends to begin voluntarily
implementing the Restructuring Orders. In June 2000, the state of Michigan
enacted legislation which, among other things, states that the Restructuring
Orders (being voluntarily implemented by Consumers) are in compliance with the
legislation and enforceable by the MPSC. The legislation provides that the
rights of parties to existing contracts between utilities (like Consumers) and
QF's (like MCV), including the rights to have the PPA charges recovered from
customers of the utilities, are not abrogated or diminished, and permitted
utilities to securitize certain stranded (transition) costs including PPA
charges.
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 they prohibit Consumers 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. MCV
continues to monitor and participate in these industry restructuring 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.
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. 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
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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 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%.
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%. During the first nine months of 2000, MCV achieved an Efficiency
Percentage of 46.9% and a Thermal Percentage of 18.2%.
The loss of QF status could, among other things, cause the Facility to lose its
right under PURPA to sell power to Consumers at Consumers' "avoided cost" and
subject the Facility to additional federal and state regulatory requirements,
including the 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).
See Part I, Item 1, "Financial Statements -- Notes 1 and 6 to the Condensed
Notes to Unaudited Consolidated Financial Statements" for a further discussion
of associated risks and contingencies.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion below is limited to an update of events or developments that have
occurred in various judicial and administrative proceedings. A complete summary
of all outstanding issues is fully described in MCV's Form 10-K for the year
ended December 31, 1999.
Property Tax Appeal
MCV has filed property tax appeals contesting the assessed value of MCV's
property for the years 1997 and 1998 and the taxable value for 1999 and 2000,
which are pending before the Michigan Tax Tribunal. MCV Management cannot
predict the outcome of these proceedings.
Item 6. Exhibits and Reports on Form 8-K
a.) List of Exhibits
(27) Financial Data Schedule
b.) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter for which this
report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
----------------------------
(Registrant)
Dated: November 8, 2000 /s/ James M. Kevra
---------------- -------------------------------------
James M. Kevra
President and Chief Executive Officer
Dated: November 8, 2000 /s/ James M. Rajewski
---------------- -------------------------------------
James M. Rajewski
Vice President and Controller
(Principal Accounting Officer)
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Exhibit Index
Exhibit No. Description
----------- -----------
27 Financial Data Schedule