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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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
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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 (989) 839-6000
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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
--- ---
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
- ------ ----
Item 1. Consolidated Financial Statements (Unaudited)..............................................2
Consolidated Balance Sheets ...............................................................2
Consolidated Statements of Operations .....................................................3
Consolidated Statements of Partners' Equity................................................4
Consolidated Statements of Cash Flows......................................................5
Condensed Notes to Unaudited Consolidated Financial Statements.............................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...............................22
Item 4. Controls and Procedures...................................................................23
PART II OTHER INFORMATION
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Item 1. Legal Proceedings.........................................................................24
Item 6. Exhibits and Reports on Form 8-K..........................................................24
Signatures................................................................................25
Certifications............................................................................26
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF
(In Thousands)
September 30,
2002 December 31,
ASSETS (Unaudited) 2001
- ------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 82,661 $ 140,630
Restricted cash and cash equivalents -- 787
Accounts and notes receivable - related parties 51,582 108,780
Accounts receivable 21,238 20,490
Gas inventory 20,364 19,699
Unamortized property taxes 23,360 16,625
Derivative assets (Note 2) 55,822 --
Broker margin accounts and prepaid expenses 13,421 34,372
----------- -----------
Total current assets 268,448 341,383
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 2,448,095 2,439,541
Pipeline 21,432 21,398
----------- -----------
Total property, plant and equipment 2,469,527 2,460,939
Accumulated depreciation (902,728) (851,539)
----------- -----------
Net property, plant and equipment 1,566,799 1,609,400
----------- -----------
OTHER ASSETS:
Restricted investment securities held-to-maturity 138,558 141,467
Derivative assets non-current (Note 2) 29,211 --
Deferred financing costs, net of accumulated amortization of
$15,577 and $14,463, respectively 9,388 10,502
Prepaid gas costs, materials and supplies 13,131 14,295
----------- -----------
Total other assets 190,288 166,264
----------- -----------
TOTAL ASSETS $ 2,025,535 $ 2,117,047
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 52,720 $ 73,596
Interest payable 27,882 60,334
Current portion of long-term debt 93,928 186,173
----------- -----------
Total current liabilities 174,530 320,103
----------- -----------
NON-CURRENT LIABILITIES:
Long-term debt 1,153,221 1,243,060
Other 2,182 2,172
----------- -----------
Total non-current liabilities 1,155,403 1,245,232
----------- -----------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES 1,329,933 1,565,335
----------- -----------
PARTNERS' EQUITY 695,602 551,712
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,025,535 $ 2,117,047
=========== ===========
The accompanying condensed notes are an integral part of these statements.
-2-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
OPERATING REVENUES:
Capacity $ 102,271 $ 106,072 $ 302,753 $ 307,847
Electric 51,141 55,825 138,464 134,157
Steam and other 2,899 3,661 9,921 12,180
--------- --------- --------- ---------
Total operating revenues 156,311 165,558 451,138 454,184
--------- --------- --------- ---------
OPERATING EXPENSES:
Fuel costs (Note 2) 81,964 78,546 203,111 203,124
Depreciation 22,191 22,801 66,516 69,425
Operations 4,343 4,191 12,342 12,002
Maintenance 2,880 3,402 9,555 10,453
Property and single business taxes 6,848 6,896 20,217 19,920
Administrative, selling and general 1,964 9,270 5,963 14,185
--------- --------- --------- ---------
Total operating expenses 120,190 125,106 317,704 329,109
--------- --------- --------- ---------
OPERATING INCOME 36,121 40,452 133,434 125,075
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 1,187 3,321 4,528 14,001
Interest expense (28,285) (30,307) (90,828) (95,356)
--------- --------- --------- ---------
Total other income (expense), net (27,098) (26,986) (86,300) (81,355)
--------- --------- --------- ---------
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 9,023 13,466 47,134 43,720
Cumulative effect of change in method of
accounting for derivative option contracts
(to April 1, 2002) (Note 2) -- -- 58,131 --
--------- --------- --------- ---------
NET INCOME (LOSS) $ 9,023 $ 13,466 $ 105,265 $ 43,720
========= ========= ========= =========
The accompanying condensed notes are an integral part of these statements.
-3-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (Unaudited)
(In Thousands)
Three Months Ended
September 30,
---------------------------------------------------------------------------------
2002 2001
------------------------------------- ---------------------------------------
General Limited General Limited
Partners Partners Total Partners Partners Total
--------- --------- --------- --------- --------- ---------
BALANCE, BEGINNING OF PERIOD $ 577,601 $ 98,882 $ 676,483 $ 458,860 $ 81,238 $ 540,098
Comprehensive Income:
Net income 7,856 1,167 9,023 11,723 1,743 13,466
Other Comprehensive Income:
Unrealized gain (loss) on hedging
activities since beginning of period 3,945 586 4,531 (13,378) (1,989) (15,367)
Reclassification adjustments
recognized in net income above 4,845 720 5,565 3,117 463 3,580
--------- --------- --------- --------- --------- ---------
Total other comprehensive income change 8,790 1,306 10,096 (10,261) (1,526) (11,787)
Total Comprehensive Income 16,646 2,473 19,119 1,462 217 1,679
--------- --------- --------- --------- --------- ---------
BALANCE, END OF PERIOD $ 594,247 $ 101,355 $ 695,602 $ 460,322 $ 81,455 $ 541,777
========= ========= ========= ========= ========= =========
Nine Months Ended
September 30,
---------------------------------------------------------------------------------
2002 2001
------------------------------------ ---------------------------------------
General Limited General Limited
Partners Partners Total Partners Partners Total
--------- --------- --------- --------- --------- ---------
BALANCE, BEGINNING OF PERIOD $ 468,972 $ 82,740 $ 551,712 $ 448,100 $ 79,638 $ 527,738
Comprehensive Income:
Net income 91,647 13,618 105,265 38,063 5,657 43,720
Other Comprehensive Income:
Cumulative effect of accounting change -- -- -- 13,688 2,034 15,722
Unrealized gain (loss) on hedging
activities since beginning of period 20,844 3,097 23,941 (39,864) (5,924) (45,788)
Reclassification adjustments
recognized in net income above 12,784 1,900 14,684 335 50 385
--------- --------- --------- --------- --------- ---------
Total other comprehensive income charge 33,628 4,997 38,625 (25,841) (3,840) (29,681)
Total Comprehensive Income 125,275 18,615 143,890 12,222 1,817 14,039
--------- --------- --------- --------- --------- ---------
BALANCE, END OF PERIOD $ 594,247 $ 101,355 $ 695,602 $ 460,322 $ 81,455 $ 541,777
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
-4-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Nine Months Ended
September 30,
-----------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 105,265 $ 43,720
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 67,630 70,678
Cumulative effect of change in accounting principle (58,131) --
Decrease in accounts receivable 56,450 60,586
Increase in gas inventory (665) (7,257)
Increase in unamortized property taxes (6,735) (6,445)
Decrease (increase) in broker margin accounts and prepaid expenses 20,951 (27,718)
Increase in derivative assets (12,568) --
Decrease in prepaid gas costs, materials and supplies 1,164 1,502
Increase (decrease) in accounts payable and accrued liabilities 3,415 (41,314)
Decrease in interest payable (32,452) (37,561)
Increase in other non-current liabilities 10 169
--------- ---------
Net cash provided by operating activities 144,334 56,360
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant equipment (23,915) (21,908)
--------- ---------
Net cash used in investing activities (23,915) (21,908)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (182,084) (155,632)
Maturity of restricted investment securities held-to-maturity 326,211 457,220
Purchase of restricted investment securities held-to-maturity (323,302) (458,398)
--------- ---------
Net cash used in financing activities (179,175) (156,810)
--------- ---------
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT (58,756) (122,358)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT BEGINNING OF
PERIOD 141,417 206,298
--------- ---------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT END OF PERIOD $ 82,661 $ 83,940
========= =========
The accompanying notes are an integral part of these statements.
-5-
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, 2001 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 began 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 (i) 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, (ii) supply electricity and steam to
The Dow Chemical Company ("Dow") under the Steam and Electric Power
Agreement ("SEPA") and (iii) supply steam to Dow Corning Corporation ("DCC")
under the Steam Purchase Agreement ("SPA"). From time to time, MCV enters
into other 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'
ability to perform 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. For
the nine months ended September 30, 2002, the Facility achieved a Thermal
Percentage of 17.4% and a PURPA Efficiency Percentage of 46.9%. The loss of
QF status could, among other things, cause the Facility to
-6-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 2002 and
beyond, as well as the PURPA ownership limitations.
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. Beginning in
July 2000, in response to the rapidly escalating cost of natural gas, MCV
and Consumers agreed to reduce the dispatch level of the Facility, from time
to time. In the event of reduced dispatch, MCV agreed to share the savings
realized by not having to generate the electricity. For the nine months
ended September 30, 2002 and 2001, MCV estimates that these electric
dispatch reduction transactions resulted in net savings of approximately
$1.0 million and $7.6 million, respectively, a portion of which will be
realized in reduced maintenance expenditures in future years. MCV
anticipates entering into similar transactions in the future to mitigate the
impact of high market gas prices, if circumstances warrant such use.
At both the state and federal level, efforts continue to restructure the
electric industry. One significant issue to MCV is the issue of stranded
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 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 QFs (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 costs including PPA charges.
In 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. In 2001, the United States Court of Appeals ("Appellate Court")
vacated the U.S. District Court's 1999 summary judgment and ordered the case
dismissed based upon a finding that no actual case or controversy existed
for adjudication between the parties. The Appellate Court determined that
the parties' dispute is hypothetical at this time and the QFs' (including
MCV) claims are premised on speculation about how an order might be
interpreted by a future MPSC.
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.
-7-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(2) RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
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, 2002 and December 31, 2001, have
original maturity dates of approximately one year or less. 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.
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, MCV adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which was issued in June 1998 and then amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138 "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - An
amendment of FASB Statement No. 133" (collectively referred to as "SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards requiring
that every derivative instrument be recorded on the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133 requires that
changes in a 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, and requires
that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
Electric Sales Agreements
On June 27, 2001, and subsequently on December 19, 2001, the Financial
Accounting Standards Board ("FASB") issued Derivative Implementation
Group ("DIG") Issue C-15, extending the normal purchase and sales
exception to electric power purchase or sales agreements that meet
specific criteria. MCV believes that its electric sales agreements
currently do not qualify as derivatives under SFAS No. 133, and as such
does not record the fair value of these contracts on its balance sheet.
Forward Foreign Exchange Contracts
An amended service agreement was entered into between MCV and Alstom
Power Company ("Alstom") (the "Amended Service Agreement"), under which
Alstom will provide hot gas path parts for MCV's twelve gas turbines
through the ninth series of major gas turbine generator ("GTG")
inspections, which are expected to be completed by year-end 2008. The
payments due to Alstom under the Amended Service Agreement are adjusted
annually based on the U.S. dollar to Swiss franc currency exchange rate.
To manage this currency exchange rate risk and hedge against adverse
currency fluctuations impacting the payments under the Amended Service
Agreement, MCV maintains a foreign currency hedging program. Under this
program, MCV periodically enters into forward purchase contracts for
Swiss francs. Under SFAS No. 133, the forward foreign currency exchange
contracts qualify as fair value hedges, since they hedge the identifiable
foreign currency commitment of the Amended Service Agreement. The gains
and losses on these forward contracts, as well as the change in value of
the firm commitment, are to be recognized currently in earnings. Since
the currency, notional amounts and maturity dates on the hedged
transactions and forward contracts essentially match, the January 1, 2001
adoption of SFAS No. 133 resulted in an immaterial cumulative effect
accounting change and is expected to have an immaterial earnings impact
on an ongoing basis. The final gains and losses on these transactions,
accounted for as hedges, will be included in the measurement of the
underlying capitalized major renewal costs when incurred. As of September
30, 2002 and December 31, 2001, MCV had forward purchase contracts
involving Swiss Francs in the notional amount of $5.0 million and $10.0
million, respectively, these hedges are considered highly effective,
therefore, there is no material gain or loss recognized during the
periods ended September 30, 2002 and December 31, 2001.
-8-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Natural Gas Supply Contracts
MCV Management believes that its long-term natural gas contracts, which
do not contain volume optionality, qualify under SFAS No. 133 for the
normal purchases and normal sales exception. Therefore, these contracts
are currently not recognized at fair value on the balance sheet.
The FASB issued DIG Issue C-16, which became effective April 1, 2002,
regarding natural gas commodity contracts that combine an option
component and a forward component. This guidance requires either that the
entire contract be accounted for as a derivative or the components of the
contract be separated into two discrete contracts. Under the first
alternative, the entire contract considered together would not qualify
for the normal purchases and sales exception under the revised guidance.
Under the second alternative, the newly established forward contract
could qualify for the normal purchases and sales exception, while the
option contract would be treated as a derivative under SFAS No. 133 with
changes in fair value recorded through earnings. MCV currently has nine
long-term gas contracts that contain both an option and forward
component. At April 1, 2002, MCV had not separated these contracts. As
such, they are no longer accounted for under the normal purchases and
sales exception and MCV began mark-to-market accounting of these nine
contracts through earnings. Based on the natural gas prices, at the
beginning of April 2002, MCV recorded a $58.1 million gain for the
cumulative effect of this accounting change. As of September 30, 2002,
MCV recorded in "Fuel costs" an additional $11.9 million net
mark-to-market gain in earnings, associated with these contracts. As of
September 30, 2002, MCV recorded "Derivative assets" in Current Assets
and Other Assets in the amounts of $40.8 million and $29.2 million,
respectively, representing the mark-to-market gain on these long-term
contracts. MCV expects these contracts to cause future earnings
volatility, since changes to this mark-to-market gain will be recorded on
a quarterly basis during the remaining life of approximately five years
for these gas contracts. In October 2002, MCV removed the option
component from two of the nine long-term gas contracts discussed above
and is currently working to remove the optionality presently contained in
some of the other contracts, which should reduce the earnings volatility.
Natural Gas Supply Futures and Options
To manage market risks associated with the volatility of natural gas
prices, MCV maintains a gas hedging program. 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
principally to secure anticipated natural gas requirements necessary for
projected electric and steam sales, and to lock in sales prices of
natural gas previously obtained in order to optimize MCV's existing gas
supply, storage and transportation arrangements.
These financial instruments are derivatives under SFAS No. 133 and the
contracts that are utilized to secure the anticipated natural gas
requirements necessary for projected electric and steam sales qualify as
cash flow hedges under SFAS No. 133, since they hedge the price risk
associated with the cost of natural gas. MCV also engages in cost
mitigation activities to offset the fixed charges MCV incurs in operating
the Facility. These cost mitigation activities include the use of futures
and options contracts to purchase and/or sell natural gas to maximize the
use of the transportation and storage contracts when it is determined
that they will not be needed for Facility operation. Although these cost
mitigation activities do serve to offset the fixed monthly charges, these
cost mitigation activities are not considered a normal course of business
for MCV and do not qualify as hedges under SFAS No. 133. Therefore, the
resulting mark-to-market gains and losses from cost mitigation activities
are flowed through MCV's earnings.
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 as a current asset in "Broker margin accounts and
prepaid expenses," was $10.0 million and $32.0 million as of September
30, 2002 and December 31, 2001, respectively.
Upon the January 1, 2001 adoption of SFAS No. 133, under the transaction
rules, the cumulative effect accounting gain related to the fair value of
the derivative instruments held for cost mitigation activities and
derivatives that do not qualify for hedge accounting, were reflected in
other comprehensive income based on previous hedging relationships. These
futures and options totaled 1.9 Billion cubic feet ("Bcf") with a total
-9-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
fair value loss of $2.2 million. Fair value changes in these contracts
were recognized currently in income and the amount reflected in other
comprehensive income was reclassified to income when the original
underlying transactions occurred during the first quarter of 2001. The
adoption of SFAS No. 133 resulted in a total cumulative effect accounting
gain, including cost mitigation activities of $15.7 million, which was
recognized in other comprehensive income.
For the nine month period ended September 30, 2002, MCV has recognized in
other comprehensive income, an unrealized and realized $38.6 million
increase on the futures contracts, which are hedges of forecasted
purchases for plant use of market priced gas, resulting in a net $14.3
million gain balance in other comprehensive income as of September 30,
2002. This balance represents natural gas futures and options with
maturities ranging from October 2002 to December 2005, of which $12.6
million of this gain is expected to be reclassified into earnings within
the next twelve months. MCV also has recorded, as of September 30, 2002,
a $15.0 million derivative asset in "Derivative assets," representing the
mark-to-market gain on natural gas futures for anticipated projected
electric and steam sales accounted for as hedges. In addition, for the
nine months ended September 30, 2002, MCV has recorded a net $14.7
million loss in earnings from hedging activities related to MCV natural
gas requirements for Facility operations and a net $.4 million gain in
earnings from cost mitigation activities. For the nine months ended
September 30, 2001, MCV recognized an unrealized and realized $45.4
million decrease in other comprehensive income on the futures contracts,
which are hedges of forecasted purchases for plant use of market priced
gas, resulting in a $29.7 million loss in other comprehensive income as
of September 30, 2001. In addition, for the nine months ended September
30, 2001, MCV recorded a net $2.4 million gain in earnings from hedging
activities and cost mitigation activities.
Interest Rate Swaps
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 is deposited with the
broker in a margin account 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 as a current asset in "Broker margin accounts and
prepaid expenses," was approximately $25,000 and $30,000 for the periods
ending as of September 30, 2002 and December 31, 2001, respectively.
As of September 30, 2002 and December 31, 2001, MCV did not have any
interest rate swap transactions outstanding which qualified for cash flow
hedge accounting. The January 1, 2001 adoption of SFAS No. 133 resulted
in an immaterial cumulative effect accounting change gain recognized in
other comprehensive income, and for the nine months ended September 30,
2001, MCV recorded a gain of approximately $100,000 in earnings for the
cash flow hedging activity.
MCV has one interest rate swap, with a notional amount of $20 million
with a period of performance that extends until December 1, 2002, which
does not qualify as a hedge under SFAS No. 133. The gains and losses on
this swap are recorded currently in earnings. For the nine months ended
September 30, 2002 and 2001, MCV recorded an immaterial loss and a gain
of approximately $800,000 in earnings, respectively.
-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):
September 30, December 31,
2002 2001
---------- ----------
Current:
Funds restricted for plant modifications $ -- $ 787
========== ==========
Non-current:
Funds restricted for rental payments pursuant to the Overall
Lease Transaction $ 136,376 $ 139,301
Funds restricted for management non-qualified plans 2,182 2,166
---------- ----------
Total $ 138,558 $ 141,467
========== ==========
(4) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of (in
thousands):
September 30, December 31,
2002 2001
---------- ----------
Accounts payable
Related parties $ 11,431 $ 10,918
Trade creditors 26,096 24,678
Property and single business taxes 12,349 12,946
Other 2,844 25,054
---------- ----------
Total $ 52,720 $ 73,596
========== ==========
(5) LONG-TERM DEBT
Long-term debt consists of the following as of (in thousands): September 30, December 31,
2002 2001
---------- ----------
Financing obligation, maturing through 2015, payable in
semi-annual installments of principal and interest, secured by
property, plant and equipment $1,247,149 $1,429,233
Less current portion (93,928) (186,173)
---------- ----------
Total long-term debt $1,153,221 $1,243,060
========== ==========
Financing Obligation
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. Proceeds of the
financing were used to retire borrowings outstanding under existing loan
commitments, make a capital distribution to the partners of MCV 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.
-11-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The financing obligation utilizes the effective interest rate method, which
is based on the minimum lease payments required through the end of the
basic lease term of 2015 and MCV management's estimate of additional
anticipated obligations after the end of the basic lease term. The
effective interest rate during the remainder of the basic lease term is
approximately 9.4%.
Interest and fees incurred related to long-term debt arrangements during
the nine months ended September 30, 2002 and 2001 were $89.7 million and
$94.1 million, respectively. Interest and fees paid for the nine months
ended September 30, 2002 and 2001 were $122.1 million and $131.7 million,
respectively.
-12-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(6) 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, 2002,
and the nature and amount of related party transactions or agreements that
existed with MCV's partners or affiliates as of September 30, 2002 and 2001, and
for each of the nine month periods ended September 30 (in thousands).
Beneficial Owner, Equity Partner, Equity
Type of Partner and Nature of Related Party Interest Interest Party Transactions and Agreements 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
CMS Energy Company
CMS Midland, Inc. $340,844 49.0% Power purchase agreements $425,894 $403,259
======== =======
General Partner; wholly-owned Purchases under gas transportation agreements 17,702 18,071
subsidiary of Consumers Energy Purchases under spot gas agreements 3,542 1,136
Company Purchases under gas supply agreements 7,506 7,054
Gas storage agreement 1,922 1,922
Land lease/easement agreements 450 450
Accounts receivable 46,845 48,919
Accounts payable 5,344 8,053
Sales under spot gas agreements 1,084 3,891
El Paso Corporation
Source Midland Limited Partnership $120,667 18.1% Purchase under gas transportation agreements 9,696 10,300
("SMLP") General Partner; owned by Purchases under spot gas agreement 7,217 41,828
subsidiaries of El Paso Corporation Purchases under gas supply agreement 34,311 3,795
Gas agency agreement 323 1,601
Deferred reservation charges under gas
purchase agreement -- 7,880
Accounts receivable 1,803 --
Accounts payable 5,268 5,937
Sales under spot gas agreements 10,477 28,183
Partner cash withdrawal (including accrued
interest) (1) -- 55,989
El Paso Midland, Inc. ("El Paso Midland") 72,400 10.9 See related party activity listed under SMLP.
General Partner; wholly-owned subsidiary
of El Paso Corporation
MEI Limited Partnership ("MEI") See related party activity listed under SMLP.
A General and Limited Partner;
50% interest owned by El Paso Midland,
Inc. and 50% interest owned by SMLP
General Partnership Interest 60,336 9.1
Limited Partnership Interest 6,032 .9
Micogen Limited Partnership 30,165 4.5 See related party activity listed under SMLP.
("MLP") Limited Partner, owned
subsidiaries of El Paso Corporation
-------- -------
Total El Paso Corporation $289,600 43.5%
======== =======
The Dow Chemical Company
The Dow Chemical Company $ 65,157 7.5% Steam and electric power agreement 20,281 25,358
======== =======
Limited Partner Steam purchase agreement - Dow Corning Corp
(affiliate) 2,706 2,738
Purchases under demineralized water supply
agreement 5,028 5,094
Accounts receivable 2,933 2,986
Accounts payable 819 901
Standby and backup fees 548 520
Sales of gas under tolling agreement 5,879 --
Alanna Corporation
Alanna Corporation $ 1 (2) .00001% Note receivable 1 1
======== =======
Limited Partner; wholly-owned
subsidiary of Alanna Holdings
Corporation
Footnotes to Partners' Equity and Related Party Transactions
(1) A letter of credit was issued and recorded as a note receivable from El
Paso Midland, this amount included their share of cash available, as well
as, cash available to MEI, MLP and SMLP.
(2) Alanna's capital stock is pledged to secure MCV's obligation under the
lease and other overall lease transaction documents.
-13-
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, 2001 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):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating Revenues $ 156,311 $ 165,558 $ 451,138 $ 454,184
Capacity Revenue $ 102,271 $ 106,072 $ 302,753 $ 307,847
PPA Contract Capacity (MW) 1,240 1,240 1,240 1,240
Billed PPA Availability 98.4% 98.5% 98.5% 98.5%
Electric Revenue $ 51,141 $ 55,825 $ 138,464 $ 134,157
PPA Delivery as a Percentage of Contract Capacity 80.9% 89.5% 75.1% 71.9%
PPA, SEPA and Other Electric Deliveries (MWh) 2,386,968 2,698,006 6,538,603 6,375,311
Average PPA Variable Energy Rate ($/MWh) $ 16.01 $ 15.62 $ 15.98 $ 15.58
Average PPA Fixed Energy Rate ($/MWh) $ 3.89 $ 3.80 $ 3.89 $ 3.73
Steam Revenue $ 2,899 $ 3,661 $ 9,921 $ 12,180
Steam Deliveries (Mlbs) 1,090,240 1,200,810 3,958,240 4,242,250
Comparison of the Three Months ended September 30, 2002 and 2001:
Overview:
For the third quarter of 2002, MCV recorded net income of $9.0 million, which
includes a $3.4 million quarterly mark-to-market loss recorded at September 30,
2002 in "Fuel costs", resulting from the April 1, 2002 change in method of
accounting for long-term gas derivative option contracts. Certain natural gas
contracts that contain optionality are now being marked-to-market through
earnings, as required by a newly effective interpretation of SFAS No. 133. MCV's
recorded net income, without the effects of the mark-to-market change of $3.4
million, was $12.4 million as compared to net income of $13.5 million for the
third quarter of 2001. The earnings decrease, for the third quarter of 2002
compared to 2001, was primarily due to higher natural gas prices under MCV's
long-term contracts, lower capacity and energy revenues under summer option
agreements, a lower electric dispatch under the PPA and lower interest income on
MCV's invested cash reserves. This decrease was partially offset by the 2001
expensing of development costs and lower interest expense on MCV's financing
arrangements.
-14-
Operating Revenues:
For the third quarter of 2002, MCV's operating revenues decreased $9.2 million
from the third quarter of 2001. This decrease is due primarily to lower capacity
and energy revenues under summer option agreements with Consumers and other
third parties, a lower electric dispatch under the PPA with Consumers and lower
energy rates under the SEPA with Dow. This decrease was partially offset by
higher energy rates under the PPA.
Operating Expenses:
For the third quarter of 2002, MCV's operating expenses were $120.2 million,
which includes $82.0 million of fuel costs, including a $3.4 million quarterly
mark-to-market loss on the natural gas contracts that contain optionality.
During this period, MCV purchased approximately 21.6 Bcf of natural gas, and a
net 1.0 Bcf was injected into storage and used for transportation fuel. During
this same period, MCV consumed 21.1 Bcf of which .5 Bcf of this total was gas
provided by Dow. The average commodity cost of fuel for the third quarter of
2002 was $3.32 per MMBtu, which includes the effects of the disposition of
excess gas supplies not required for generation. Without the effects of the
disposition of the excess gas supplies, the average commodity cost of fuel for
the third quarter of 2002 would have been $3.33 per MMBtu. For the third quarter
of 2001, MCV's operating expenses were $125.1 million, which includes $78.5
million of fuel costs. During this period, MCV purchased approximately 25.5 Bcf
of natural gas, and a net 1.9 Bcf was injected into storage and used for
transportation fuel. During this same period, MCV consumed 23.6 Bcf. The average
commodity cost of fuel for the third quarter of 2001 was $2.85 per MMBtu, which
includes the effects of the disposition of excess gas supplies not required for
generation. Without the effects of the disposition of the excess gas supplies,
the average commodity cost of fuel for the third quarter of 2001 would have been
$2.86 per MMBtu. Fuel costs for the third quarter of 2002 compared to 2001
increased by $.1 million, excluding the $3.4 million quarterly mark-to-market
loss. This slight fuel cost increase was due to higher natural gas prices under
MCV's long-term gas contracts, offset by lower gas usage resulting from Dow's
election to toll gas in 2002.
For the third quarter of 2002, operating expenses other than fuel costs
decreased $8.4 million from the third quarter of 2001, primarily resulting from
the 2001 expensing of $6.7 million of development costs. All other expenses
incurred in these periods were considered normal expenditures to achieve the
recorded operating revenues.
Other Income (Expense):
For the third quarter of 2002, interest and other income decreased $2.1 million
compared to 2001, primarily resulting from lower interest rates on MCV's
invested cash and a lower average invested balance. The decrease in interest
expense for the third quarter of 2002 compared to 2001 of $2.0 million is due to
a lower principal balance on MCV's financing obligation.
Comparison of the Nine Months ended September 30, 2002 and 2001:
Overview:
For the first nine months of 2002, MCV recorded net income of $105.3 million,
which includes the April 1, 2002 change in method of accounting for long-term
gas derivative option contracts. Certain natural gas contracts that contain
optionality are now being marked-to-market through earnings, as required by SFAS
No. 133. The cumulative effect of this accounting change as of April 1, 2002
increased earnings by approximately $58.1 million and the additional quarterly
mark-to-market adjustments as of September 30, 2002 resulted in an additional
net earning increase of $11.9 million, in "Fuel costs". MCV's recorded net
income, without the effects of the accounting change of $70.0 million, was $35.3
million as compared to net income of $43.7 million for the first nine months of
2001. The earnings decrease, for the first nine months of 2002 compared to 2001,
was primarily due to higher natural gas prices under MCV's long-term contracts,
lower interest income on MCV's invested cash reserves and lower capacity and
energy sales under summer option agreements. This decrease was partially offset
by the 2001 expensing of development costs, lower costs associated with the
electric dispatch reduction transactions entered into with Consumers, lower
interest expense on MCV's financing arrangements and increased electric rates
under the PPA.
-15-
Operating Revenues:
For the first nine months of 2002, MCV's operating revenues decreased $3.0
million from the first nine months of 2001. This decrease is due primarily to
lower capacity and energy revenues under summer option agreements with Consumers
and other third parties; and by lower energy rates under the SEPA with Dow. This
decrease was partially offset by an increase in the electric dispatch and higher
energy rates both under the PPA with Consumers.
Operating Expenses:
For the first nine months of 2002, MCV's operating expenses were $317.7 million,
which includes $203.1 million of fuel costs, including an $11.9 million
mark-to-market net gain on the natural gas contracts which contain optionality.
During this period, MCV purchased approximately 58.3 Bcf of natural gas, and a
net 1.8 Bcf was used for transportation fuel and as a net change to gas in
storage. During this same period, MCV consumed 58.4 Bcf of which 1.9 Bcf of this
total was gas provided by Dow. The average commodity cost of fuel for the first
nine months of 2002 was $3.24 per MMBtu, which includes the effects of the
disposition of excess gas supplies not required for generation. Without the
effects of the disposition of the excess gas supplies, the average commodity
cost of fuel for the first nine months of 2002 would have been $3.33 per MMBtu.
For the first nine months of 2001, MCV's operating expenses were $329.1 million,
which includes $203.1 million of fuel costs. During this period, MCV purchased
approximately 61.7 Bcf of natural gas, and a net 4.2 Bcf was injected into
storage and used for transportation fuel. During this same period, MCV consumed
57.5 Bcf. The average commodity cost of fuel for the first nine months of 2001
was $2.94 per MMBtu, which includes the effects of the disposition of excess gas
supplies not required for generation. Without the effects of the disposition of
the excess gas supplies, the average commodity cost of fuel for the first nine
months of 2001 would have been $3.22 per MMBtu. Fuel costs for the first nine
months of 2002 compared to 2001 increased by $11.9 million, excluding the $11.9
million mark-to-market net gain. This fuel cost increase was due to higher
natural gas prices under MCV's long-term gas contracts and a higher electric
dispatch under the PPA. This increase was partially offset by lower costs
associated with the electric dispatch reduction transaction entered into with
Consumers and a lower gas usage resulting from Dow's election to toll gas.
For the first nine months of 2002, operating expenses other than fuel costs
decreased $11.4 million from the first nine months of 2001, primarily resulting
from the 2001 expensing of $6.7 million of development costs and lower
depreciation expense. All other expenses incurred in these periods were
considered normal expenditures to achieve the recorded operating revenues.
Other Income (Expense):
For the first nine months of 2002, interest and other income decreased $9.5
million compared to 2001, primarily resulting from lower interest rates on MCV's
invested cash and a lower average invested balance. The decrease in interest
expense for the first nine months of 2002 compared to 2001 of $4.5 million is
due to a lower principal balance on MCV's financing obligation.
Cumulative Effect of Accounting Change:
Effective April 1, 2002, the FASB issued guidance regarding natural gas
commodity contracts that combine an option component and a forward component.
This guidance requires either that the entire contract be accounted for as a
derivative or the components of the contract be separated into two discrete
contracts. As of April 1, 2002 MCV had nine long-term gas contracts that each
contain both an option and forward component. As such, they are no longer
accounted for under the normal purchases and sales exception and MCV began
mark-to-market accounting of these nine contracts through earnings. Based on the
natural gas prices, at the beginning of April 2002, MCV recorded a $58.1 million
gain for the cumulative effect of this accounting change. MCV expects these
contracts to cause future earnings volatility, since changes to this
mark-to-market gain will be recorded on a quarterly basis during the remaining
life of the gas contracts, which approximates five years. In October 2002, MCV
removed the option component from two of the nine long-term gas contracts
discussed above and MCV is currently working to remove the optionality presently
contained in some of the other contracts, which should reduce the earnings
volatility.
-16-
Liquidity and Capital Resources
During the nine months ended September 30, 2002 and 2001, net cash generated by
MCV's operations was $144.3 million and $56.4 million, respectively. The primary
use of net cash was for the payment of principal on the financing obligation
required under the Overall Lease Transaction 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 payments under
the financing obligation due in January and July for the next thirteen years.
During 2002 and 2001, MCV paid financing obligation requirements of $304.1
million and $287.1 million, respectively, as required under the Overall Lease
Transaction.
MCV also has 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 and 50% of natural gas inventory. The borrowing base varies over the
month as receivables are earned, billed and collected and as natural gas
inventory balances are built and depleted. In addition, earned receivables
borrowing base can be effected by Consumers credit rating. The Working Capital
Facility term currently expires on August 29, 2003. MCV did not utilize the
Working Capital Facility during the first nine months of 2002, except for
letters of credit associated with normal business practices. MCV believes that
amounts available to it under the Working Capital Facility along with available
cash reserves will be sufficient to meet any working capital shortfalls that
might occur.
For the foreseeable future, MCV expects to fund current operating expenses and
payments under the amended Service Agreement primarily through cash flows from
operations. Due to uneven future scheduled financing obligation payments (high
summer payment, low winter payment), MCV anticipates that it will be drawing on
its cash reserves to fund temporary cash flow shortfalls. These cash flow
shortfalls are anticipated to be replenished annually. If necessary, MCV could
fund any ongoing operating cash flow shortfalls from cash reserves to the extent
available for such purposes. As of September 30, 2002, there was approximately
$221.2 million of cash reserves.
Disclosure about Contractual Obligations
MCV has assumed various financial obligations and commitments in the normal
course of its business. These obligations are considered to represent expected
cash payments that MCV is required to make under its existing contractual
arrangements. As of September 30, 2002, MCV has the following contractual
financial obligations and commitments:
Contractual Obligations (In Millions)
-----------------------------------------------------------------------------
Total 2002(1) 2003 2004 2005 2006 Thereafter
-----------------------------------------------------------------------------
Long-Term Debt(2) $1,973.0 $ -- $ 208.9 $ 242.8 $ 174.4 $ 156.0 $1,190.9
=============================================================================
Unconditional Purchase
Obligations(3) $2,664.6 $ 53.4 $ 247.4 $ 268.0 $ 307.7 $ 322.6 $1,465.5
Other Long-Term
Obligations(4) $ 137.7 $ 6.4 $ 26.9 $ 25.7 $ 26.7 $ 27.6 $ 24.4
-----------------------------------------------------------------------------
Total Contractual Cash
Obligations $2,802.3 $ 59.8 $ 274.3 $ 293.7 $ 334.4 $ 350.2 $1,489.9
=============================================================================
(1) Represents obligations from October - December 2002.
(2) Represents expected cash payments including interest.
(3) Represents estimated minimum commitments under current long-term natural gas
contracts, natural gas transportation reservation charges, spare parts
purchases and ground lease agreement.
(4) Represents the cost of current Facility maintenance service agreements.
-17-
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 that 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
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, Consumers'
ability to perform its obligation under the PPA and present or prospective
wholesale and retail competition, among other factors. The business and
profitability of MCV is also influenced by other factors such as pricing and
transportation of natural gas, changes in accounting standards (such as
accounting for derivative instruments and hedging activities) and environmental
legislation/regulation. 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 and maintenance of the Facility's QF status.
Operating Outlook. During the first nine months of 2002, approximately 71% 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. Actual PPA availability was
98.5% for the first nine months of 2002, 99.5% for the year 2001 and 98.5% for
the year 2000. 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. In
addition, the extent to which the Facility is dispatched by Consumers can
exacerbate the divergence between variable revenues and costs of production. For
the period 1999 through September 2002, the unit energy charge (fixed and
variable) paid to MCV has risen by 1.5%, while the average unit variable cost of
delivered fuel for approximately the same period has risen by 19.7%. 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.
Currently, MCV continues to purchase the majority of its natural gas
requirements under long-term fixed-price
-18-
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. For the year 2002, MCV has entered into gas purchase and
hedging arrangements with respect to most of its expected gas needs 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 2002,
although high gas prices for an extended period of time could adversely affect
operating results.
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 available to Consumers, resulting in an average dispatch of
approximately 75% from April 1998 through September 2002. Previously, the
Facility was being dispatched on an uneconomic basis (relative to the cost of
other energy resources) averaging approximately 90%. A return to uneconomic
dispatch could negatively affect MCV's financial performance.
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.
Michigan Electric Industry Restructuring. The MPSC issued orders in 1997 and
1998 (collectively the "Restructuring Orders"). The Restructuring Orders provide
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
restructuring, which could significantly impact MCV, is stranded cost recovery.
The Restructuring Orders allow recovery by utilities (including Consumers) of
net 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 (including 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.
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 recovery of PPA charges
(capacity and energy) 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. This order is now final.
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
costs including PPA charges.
In MCV's federal court challenge to the Restructuring Orders, the U.S. District
Court granted summary judgment to MCV declaring, among other things, 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. In June
2001, the United States Court of Appeals ("Appellate Court") vacated the U.S.
District Court's summary judgment and ordered the case dismissed based upon a
finding that no actual case or controversy existed for adjudication between the
parties. The Appellate Court determined that the parties' dispute is
hypothetical at this time and the QFs (including MCV) claims are premised on
speculation about how an order might be interpreted in the year 2007 or beyond
by a future MPSC.
Federal Electric Industry Restructuring. FERC has jurisdiction over wholesale
energy sales and is moving towards "market" based pricing of electricity as
opposed to traditional cost-based pricing. In April 1996, FERC issued Order No.
888 requiring all utilities that FERC regulates to file uniform transmission
tariffs providing for, among other
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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. In December 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 and subsequent related
orders were affirmed by the United States Court of Appeals for the D.C. Circuit.
In 2002, FERC issued a Notice of Proposed Rulemaking ("NOPR") to examine
remedying undue discrimination through open access transmission service and
standardized electricity market design. Interested parties have until
mid-November 2002 to file comments on the NOPR. MCV management cannot predict
the outcome of the NOPR or the impact it may have on MCV's business, if any, at
this time.
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 2001 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 2001, MCV achieved an Efficiency Percentage of 47.0% and a Thermal Percentage
of 18.3%. During the first nine months of 2002, MCV achieved an Efficiency
Percentage of 46.9% and a Thermal Percentage of 17.4%.
The loss of QF status could, among other things, cause the Facility to lose its
right under PURPA to sell power to Consumers at Consumers' "avoided cost" and
subject the Facility to additional federal and state regulatory requirements,
including the Federal Power Act, as amended (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 Trustees and their respective parent
companies could become subject to regulation under the Public Utility Holding
Company Act of 1935 (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 financing obligation 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).
Critical Accounting Policies
In preparing MCV's financial statements in accordance with accounting principles
generally accepted in the United States, management must make a number of
estimates and assumptions related to the reporting of assets, liabilities,
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revenues and expenses. The following areas represent those that management
believes are particularly important to the financial statements and that require
the use of significant estimates and assumptions.
Electric Industry Restructuring. At both the state and federal level, efforts
continue to restructure the electric industry. In 1997 and 1998, the MPSC
entered a series of orders, now final, permitting customers to choose their
power provider over a four-year phase-in period, which started in 1999. In
addition, Michigan enacted restructuring legislation in June 2000. Proposed
restructuring legislation also exists at the federal level. One significant
issue to MCV is the possible future regulatory denial of stranded cost recovery
by Consumers of above-market PPA costs. Over 90% of MCV's revenues come from
sales pursuant to the PPA. To date, restructuring has not negatively impacted
MCV, but if restructuring results in denying stranded cost recovery of
above-market PPA costs, MCV's cash flows may be negatively impacted, especially
in the period after 2007. 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. Any
future adjustment to property, plant and equipment, if required, would result in
a one-time negative earnings impact. At this time, MCV management cannot predict
the outcome of these matters or the magnitude of any possible adjustment.
Natural Gas Contracts. Effective January 1, 2001, MCV adopted SFAS No. 133,
which establishes accounting and reporting standards requiring that every
derivative instrument be recorded on the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 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, and requires that a company formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
MCV management believes that MCV's current long-term natural gas contracts that
do not contain volume optionality qualify under SFAS No. 133 for the normal
purchases and sales exception. These long-term gas contracts are not being
marked-to-market with gains or losses recorded in earnings. Should significant
changes in the level of Facility operational dispatch or purchases of long-term
gas occur, MCV would be required to re-evaluate its accounting treatment for
these long-term gas contracts. This re-evaluation may result in recording
mark-to-market activity on some contracts, which could add to earnings
volatility.
Effective April 1, 2002, the FASB issued guidance regarding natural gas
commodity contracts that combine an option component and a forward component.
This guidance requires either that the entire contract be accounted for as a
derivative or that the components of the contract be separated into two discrete
contracts. Under the second alternative, the newly established forward contract
could qualify for the normal purchases and sales exception while the option
contract would be treated as a derivative under SFAS No. 133, with changes in
fair value recorded through earnings. MCV currently has nine long-term gas
contracts that each contains both an option and forward component. As of April
1, 2002, MCV had not separated these contracts. As such, they are no longer
accounted for under the normal purchases and sales exception and MCV began
mark-to-market accounting of these contracts through earnings. MCV expects these
contracts to cause future earnings volatility, since these contracts will be
adjusted on a mark-to-market basis and affect future earnings through 2007 (the
expiration date of the last contract). In October 2002, MCV removed the option
component from two of the nine long-term gas contracts discussed above and is
currently working to remove the optionality contained in some of the other
contracts, which should reduce the earnings volatility.
Property Tax Appeals. MCV currently accrues property taxes on the basis of the
taxable value as assessed by the taxing authorities. MCV has filed property tax
appeals contesting its property taxes for tax years 1997 through 2002. If MCV is
successful in lowering its taxable value for these years, a one-time favorable
earnings adjustment would be recorded. In addition, future property tax expense
would be reduced. At this time, MCV management cannot predict the outcome of
these appeals.
-21-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 herein. MCV
does not use financial instruments for trading purposes and does not use
leveraged instruments. Fair values included herein have been determined based on
quoted market prices. The information presented below should be read in
conjunction with Part I, Item 1, "Condensed Notes to Unaudited Consolidated
Financial Statements - Note 2, Risk Management Activities and Derivative
Transactions and Note 5, Long-Term Debt".
Interest Rate Risk. 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 basic term of 25 years, maturing in 2015, has an
effective interest rate of approximately 9.4%, 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.
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 September 30, 2002, have original maturity dates of
approximately one year or less.
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, 2002:
Expected Maturity In
---------------------------------------------------------------------------------------- Fair
2002 2003 2004 2005 2006 Thereafter Total Value
-------- -------- -------- -------- -------- ---------- -------- -------
Debt:
Long-Term Debt Fixed
Rate (in millions) -- $ 208.9 $ 242.8 $ 174.4 $ 156.0 $1,190.9 $1,973.0 N/A
Avg. Interest Rate -- 9.4% 9.4% 9.4% 9.4% 9.4% 9.4%
Interest Rate Swaps:
Floating to Floating $ 20.0 $ .1
(in millions)
Avg. Pay Rate 1.73%
Avg. Receive Rate 4.16%
Commodity Risk. 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 principally to secure anticipated natural gas requirements
necessary for projected electric sales and to lock in sales prices of natural
gas previously obtained in order to optimize MCV's existing gas supply, storage
and transportation arrangements.
-22-
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 November 2002 to December
2005. The table presents the carrying amounts and fair values at September 30,
2002:
Expected Maturity in 2002/2005 Fair Value
------------------------------ ----------
Futures Contracts:
Contract Volumes (10,000 MMBtu) Long/Buy 3,393 --
Weighted Average Price Long (per MMBtu) $ 3.514 $ 3.959
Contract Amount ($US in Millions) $ 119.2 $ 134.3
Foreign Currency Risk. 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 Alstom. The gains and losses on these transactions,
accounted for as hedges, are included in the measurement of the underlying
capitalized major renewal costs when incurred. Forward contracts entered into by
MCV have maturity dates of less than one year. As of September 30, 2002, MCV had
forward purchase contracts involving Swiss Francs in the notional amount of $5.0
million, with a deferred $.8 million gain.
See Part I, Item 1, "Condensed Notes to Unaudited Consolidated Financial
Statements - Note 1" for a further discussion of associated risks and
contingencies.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Within the 90 days prior to the date of the filing of this report, MCV carried
out an evaluation, under the supervision and with the participation of MCV's
management, including the President and Chief Executive Officer, and the Chief
Financial Officer, Vice President and Controller; of the effectiveness of the
design and operation of MCV's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended).
Based on such review of MCV's disclosure controls and procedures, the President
and Chief Executive Officer, and the Chief Financial Officer, Vice President and
Controller; have concluded that MCV's disclosure controls and procedures are
effective.
Changes in Internal Controls
There have been no significant changes in MCV's internal controls or in other
factors that could significantly affect these controls subsequent to the date
MCV completed its evaluation.
-23-
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 since June 13, 2002.
A complete summary of all outstanding legal proceedings is set forth in MCV's
Form 10-K for the year ended December 31, 2001 filed with the Securities and
Exchange Commission on March 25, 2002.
Property Tax Appeals
In June 1997, MCV filed a property tax appeal against the City of Midland at the
Michigan Tax Tribunal contesting MCV's 1997 property taxes. Subsequently, MCV
filed appeals contesting its property taxes for tax years 1998 through 2002 at
the Michigan Tax Tribunal. MCV is seeking a reduction of its annual property
taxes on the basis that the City of Midland has over assessed the property's
taxable value for ad valorem property tax purposes. MCV management cannot
predict the outcome of these proceedings.
Item 6. Exhibits and Reports on Form 8-K
a.) List of Exhibits
99.1 President and Chief Executive Officer Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer, Vice President and Controller
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b.) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter for which
this report was filed.
-24-
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 12, 2002 /s/ James M. Kevra
-------------------- -------------------------------------
James M. Kevra
President and Chief Executive Officer
Dated: November 12, 2002 /s/ James M. Rajewski
-------------------- -------------------------------------
James M. Rajewski
Chief Financial Officer,
Vice President and Controller
-25-
CERTIFICATIONS
I, James M. Kevra, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Midland
Cogeneration Venture Limited Partnership;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ James M. Kevra
- -------------------------------------
James M. Kevra
President and Chief Executive Officer
26
I, James M. Rajewski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Midland
Cogeneration Venture Limited Partnership;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
d) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
e) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
b) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
c) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ James M. Rajewski
- -----------------------------------------------
James M. Rajewski
Chief Financial Officer, Vice President and Controller
27
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002