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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: (Under the Securities Act of 1933) 33-37977
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2726166
- ----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
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
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. Consolidated Financial Statements (Unaudited)
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF
(In Thousands)
September 30,
2003 December 31,
(Unaudited) 2002
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 109,605 $ 160,425
Accounts and notes receivable - related parties 43,710 48,448
Accounts receivable 33,819 32,479
Gas inventory 21,732 19,566
Unamortized property taxes 26,033 18,355
Derivative assets 72,649 73,819
Broker margin accounts and prepaid expenses 7,164 3,323
----------- -----------
Total current assets 314,712 356,415
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 2,460,559 2,449,148
Pipeline 21,432 21,432
----------- -----------
Total property, plant and equipment 2,481,991 2,470,580
Accumulated depreciation (973,353) (920,614)
----------- -----------
Net property, plant and equipment 1,508,638 1,549,966
----------- -----------
OTHER ASSETS:
Restricted investment securities held-to-maturity 139,023 138,701
Derivative assets non-current 20,184 31,037
Deferred financing costs, net of accumulated amortization of
$16,961 and $15,930, respectively 8,004 9,035
Prepaid gas costs, spare parts deposit, materials and supplies 24,043 12,919
----------- -----------
Total other assets 191,254 191,692
----------- -----------
TOTAL ASSETS $ 2,014,604 $ 2,098,073
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 57,314 $ 58,080
Gas supplier funds on deposit 8,250 --
Interest payable 26,207 56,386
Current portion of long-term debt 134,576 93,928
----------- -----------
Total current liabilities 226,347 208,394
----------- -----------
NON-CURRENT LIABILITIES:
Long-term debt 1,018,645 1,153,221
Other 2,379 2,148
----------- -----------
Total non-current liabilities 1,021,024 1,155,369
----------- -----------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES 1,247,371 1,363,763
----------- -----------
PARTNERS' EQUITY 767,233 734,310
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,014,604 $ 2,098,073
=========== ===========
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,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
OPERATING REVENUES:
Capacity $ 102,518 $ 102,271 $ 302,895 $ 302,753
Electric 42,223 51,141 127,532 138,464
Steam 3,572 2,899 13,068 9,921
--------- --------- --------- ---------
Total operating revenues 148,313 156,311 443,495 451,138
--------- --------- --------- ---------
OPERATING EXPENSES:
Fuel costs 97,908 81,964 202,648 203,111
Depreciation 22,365 22,191 66,965 66,516
Operations 4,205 4,343 12,857 12,342
Maintenance 3,294 2,880 9,998 9,555
Property and single business taxes 7,673 6,848 22,624 20,217
Administrative, selling and general 2,536 1,964 7,300 5,963
--------- --------- --------- ---------
Total operating expenses 137,981 120,190 322,392 317,704
--------- --------- --------- ---------
OPERATING INCOME 10,332 36,121 121,103 133,434
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 1,059 1,187 4,030 4,528
Interest expense (26,595) (28,285) (86,021) (90,828)
--------- --------- --------- ---------
Total other income (expense), net (25,536) (27,098) (81,991) (86,300)
--------- --------- --------- ---------
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (15,204) 9,023 39,112 47,134
Cumulative effect of change in method of
accounting for derivative option contracts
(to April 1, 2002) -- -- -- 58,131
--------- --------- --------- ---------
NET INCOME (LOSS) $ (15,204) $ 9,023 $ 39,112 $ 105,265
========= ========= ========= =========
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,
-----------------------------------------------------------------------------
2003 2002
------------------------------------- -----------------------------------
General Limited General Limited
Partners Partners Total Partners Partners Total
--------- --------- --------- --------- --------- ---------
BALANCE, BEGINNING OF PERIOD $ 687,670 $ 115,237 $ 802,907 $ 577,601 $ 98,882 $ 676,483
Comprehensive Income:
Net income (loss) (13,237) (1,967) (15,204) 7,856 1,167 9,023
Other Comprehensive Income:
Unrealized gain on hedging activities
since beginning of period (12,078) (1,794) (13,872) 3,945 586 4,531
Reclassification adjustments recognized in
net income above (5,744) (854) (6,598) 4,845 720 5,565
--------- --------- --------- --------- --------- ---------
Total other comprehensive income change (17,822) (2,648) (20,470) 8,790 1,306 10,096
Total Comprehensive Income (31,059) (4,615) (35,674) 16,646 2,473 19,119
--------- --------- --------- --------- --------- ---------
BALANCE, END OF PERIOD $ 656,611 $ 110,622 $ 767,233 $ 594,247 $ 101,355 $ 695,602
========= ========= ========= ========= ========= =========
Nine Months Ended
September 30,
------------------------------------------------------------------------------
2003 2002
------------------------------------- -----------------------------------
General Limited General Limited
Partners Partners Total Partners Partners Total
--------- --------- --------- --------- --------- ---------
BALANCE, BEGINNING OF PERIOD $ 627,947 $ 106,363 $ 734,310 $ 468,972 $ 82,740 $ 551,712
Comprehensive Income:
Net income 34,052 5,060 39,112 91,647 13,618 105,265
Other Comprehensive Income:
Unrealized gain on hedging activities
since beginning of period 22,646 3,365 26,011 20,844 3,097 23,941
Reclassification adjustments recognized in
net income above (28,034) (4,166) (32,200) 12,784 1,900 14,684
--------- --------- --------- --------- --------- ---------
Total other comprehensive income change (5,388) (801) (6,189) 33,628 4,997 38,625
Total Comprehensive Income 28,664 4,259 32,923 125,275 18,615 143,890
--------- --------- --------- --------- --------- ---------
BALANCE, END OF PERIOD $ 656,611 $ 110,622 $ 767,233 $ 594,247 $ 101,355 $ 695,602
========= ========= ========= ========= ========= =========
The accompanying condensed 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,
-------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39,112 $ 105,265
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 67,996 67,630
Cumulative effect of change in accounting principle -- (58,131)
Cash released from restriction -- 787
Decrease in accounts receivable 3,398 56,450
Increase in gas inventory (2,166) (665)
Increase in unamortized property taxes (7,678) (6,735)
(Increase) decrease in broker margin accounts and prepaid expenses (3,841) 20,951
(Increase) decrease in derivative assets 5,834 (12,568)
(Increase) decrease in prepaid gas costs, materials and supplies (11,124) 1,164
Increase (decrease) in accounts payable and accrued liabilities (766) 3,415
Increase in gas supplier funds on deposit 8,250 --
Decrease in interest payable (30,179) (32,452)
Increase in other non-current liabilities 231 10
--------- ---------
Net cash provided by operating activities 69,067 145,121
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant equipment (25,637) (23,915)
Maturity of restricted investment securities held-to-maturity 550,515 326,211
Purchase of restricted investment securities held-to-maturity (550,837) (323,302)
--------- ---------
Net cash used in investing activities (25,959) (21,006)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (93,928) (182,084)
--------- ---------
Net cash used in financing activities (93,928) (182,084)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (50,820) (57,969)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 160,425 140,630
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 109,605 $ 82,661
========= =========
The accompanying condensed 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 contained in the Annual Report
on Form 10-K for the year ended December 31, 2002 of Midland Cogeneration
Venture Limited Partnership ("MCV"). In the opinion of management, the unaudited
financial 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. Interim results may not be
indicative of results that may be expected for any other interim period or for
2003 as a whole.
(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 has a net electrical generating capacity of approximately 1500
MW and approximately 1.5 million pounds of process steam capacity per hour.
MCV has entered into three principal energy sales agreements. MCV has
contracted to (i) supply up to 1240 MW of electric capacity ("Contract
Capacity") to Consumers Energy Company ("Consumers") under the Power
Purchase Agreement ("PPA"), for resale to its customers through 2025, (ii)
supply electricity and steam to The Dow Chemical Company ("Dow") under the
Steam and Electric Power Agreement ("SEPA") through 2015 and (iii) supply
steam to Dow Corning Corporation ("DCC") under the Steam Purchase Agreement
("SPA") through 2011. 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. 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, 2003, the
Facility achieved a Thermal Percentage of 19.9% and an Efficiency
Percentage of 47.3%. The loss of QF status could, among other things, cause
the Facility to lose its
-6-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
Percentage and the corresponding Efficiency Percentage in 2003 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 extent 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, 2003 and September 30,
2002, MCV estimates that these electric dispatch reduction transactions
resulted in net savings of approximately $7.9 million and $1.0 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. A significant issue to MCV is the potential for future
regulatory denial of recovery by Consumers from its customers of above
market PPA costs Consumers pays MCV. 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 permits 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 the MPSC, in the future.
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.
The majority of MCV's short-term investments, which are made up of
investment securities held-to-maturity, as of September 30, 2003 and
December 31, 2002, have original maturity dates of approximately one year
or less. The unique nature of the negotiated financing obligation discussed
in Note 8 makes it unnecessary to estimate the fair value of the lessor
group ("Owner Participants") underlying debt and equity instruments
supporting such financing obligation, since Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of
Financial Instruments" does not require fair value accounting for the lease
obligation.
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, MCV adopted 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," SFAS No. 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities -- An amendment of FASB Statement No. 133"
and SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activity (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
MCV believes that its electric sales agreements currently do not qualify as
derivatives under SFAS No. 133, due to the lack of an active energy market
(as defined by SFAS No. 133) in the State of Michigan and the
transportation cost to deliver the power under the contracts to the closest
active energy market at the Cinergy hub in Ohio and as such does not record
the fair value of these contracts on its balance sheet. If an active energy
market emerges, MCV intends to apply the normal purchase, normal sales
exception under SFAS No. 133 to its electric sales agreements, to the
extent such exception is applicable.
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. 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 maintained a foreign currency hedging program whereby MCV
periodically entered into forward purchase contracts for Swiss francs.
Under SFAS No. 133, the forward foreign currency exchange contracts
qualified as fair value hedges, since they hedged the identifiable foreign
currency commitment of the Amended Service Agreement. As of September 30,
2003, MCV did not have any such transactions outstanding and does not
anticipate any future transactions since the Alstom Agreement is expected
to be terminated in the near future. As of September 30, 2002, MCV had a
forward purchase contract involving Swiss francs in the notional amount of
$5.0 million. This hedge was considered highly effective, therefore, there
was no material gain or loss recognized in earnings during the three months
and nine months ended September 30, 2002.
-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. At April 1, 2002, MCV had nine long-term gas
contracts that contained both an option and forward component. As such,
they were 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. During the fourth quarter of 2002, MCV removed the
option component from three of the nine long-term gas contracts, which
should reduce the earnings volatility. Since April 2002, MCV has recorded
an additional mark-to-market gain of $15.6 million for these gas contracts
for a cumulative mark-to-market gain through September 30, 2003 of $73.7
million, which will reverse over the remaining life of these gas contracts,
ranging from 2004 to 2007.
For the nine months ended September 30, 2003, MCV recorded in "Fuel costs"
a $6.3 million net mark-to-market loss in earnings associated with these
contracts. In addition, as of September 30, 2003 and December 31, 2002, MCV
recorded "Derivative assets" in Current Assets in the amount of $53.5
million and $48.9 million, respectively, and for the same periods recorded
"Derivative assets" in Other Assets in the amount of $20.2 million and
$31.0 million, respectively, representing the mark-to-market gain on these
long-term natural gas contracts.
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
account balance as of September 30, 2003 and December 31, 2002 was recorded
as a current asset in "Broker margin accounts and prepaid expenses," in the
amount of $3.9 million and $.8 million, respectively.
-9-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the nine months ended September 30, 2003, MCV has recognized in other
comprehensive income, an unrealized $6.2 million decrease on the futures
contracts, which are hedges of forecasted purchases for plant use of market
priced gas. This resulted in a net $20.1 million gain in other
comprehensive income as of September 30, 2003. This balance represents
natural gas futures and options with maturities ranging from October 2003
to May 2007, of which $12.7 million of this gain is expected to be
reclassified into earnings within the next twelve months. MCV also has
recorded, as of September 30, 2003, a $19.1 million current 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, 2003, MCV has recorded a net $32.2 million gain in earnings from
hedging activities related to MCV natural gas requirements for Facility
operations and a net $.5 million gain in earnings from cost mitigation
activities.
For the nine months ended September 30, 2002, MCV recognized an unrealized
$38.6 million increase in other comprehensive income on the futures
contracts, which are hedges of forecasted purchases for plant use of market
priced gas, resulting in a $14.3 million gain balance in other
comprehensive income as of September 30, 2002. As of September 30, 2002,
MCV had recorded an immaterial current derivative asset in "Derivative
assets." For the nine months ended September 30, 2002, MCV had recorded a
net $14.7 million loss in earnings from hedging activities related to MCV
natural gas requirements for Facility operations. In addition, for the nine
months ended September 30, 2002, MCV has recorded a net $.4 million gain in
earnings from 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 account balance at December 31,
2002, of approximately $25,000, which was recorded as a current asset in
"Broker margin accounts and prepaid expenses," was returned to MCV during
the month of January 2003 since MCV currently does not have any outstanding
interest rate swap transactions.
As of September 30, 2002, MCV had one interest rate swap, with a notional
amount of $20.0 million with a period of performance that extended to
December 1, 2002, which did not qualify as a hedge under SFAS No. 133. The
gains and losses on this swap were recorded currently in earnings. For the
nine months ended September 30, 2002, MCV recorded an immaterial loss in
earnings.
(3) NEW ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This SFAS amends SFAS No.
133 for decisions made (1) as part of the Derivative Implementations Group
process that effectively required amendments to SFAS No. 133, (2) for other
Financial Accounting Standards Board projects dealing with financial
instruments and (3) for implementation issues raised in relation to the
application of this definition of a derivative. The changes in this SFAS
No. 149 improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly, which will result in
more consistent reporting of contracts as either derivatives or hybrid
instruments. This standard is effective for contracts entered into or
modified after June 30, 2003, with some exceptions. MCV has adopted this
standard and does not expect the application to materially affect its
financial position or results of operations.
-10-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) GAS TURBINE SERVICE AGREEMENT
Under the Amended Service Agreement, Alstom provides MCV spare parts for
MCV's gas turbine generators ("GTGs") and provides qualified service
personnel and supporting staff to assist MCV to perform scheduled
inspections on the GTGs, and to repair the GTGs at MCV's request. The
Amended Service Agreement commenced on January 1, 1990, and will expire
upon the earlier of the completion of the ninth series of major GTG
inspections or December 31, 2009, unless terminated sooner by MCV for
convenience. Effective December 31, 2002, MCV has signed a new maintenance
service and parts agreement with General Electric International Inc.
("GEII") ("GEII Agreement"). GEII will provide maintenance services and hot
gas path parts for MCV's twelve GTGs under terms and conditions similar to
the Amended Service Agreement. The GEII Agreement is expected to replace
the Amended Service Agreement during the first half of 2004, but in no
event later than January 1, 2005. GEII must inform MCV by December 31, 2003
of their ability to perform under the new agreement. Should the Amended
Service Agreement be terminated, at that time, MCV expects to pay
approximately $5.8 million to Alstom in cancellation payments and Alstom is
expected to provide MCV with one set of hot gas path spare parts (valued
within a range of $3.0 million to $7.0 million). MCV continues to seek
final resolution of the cancellation payments to be paid to Alstom and the
spare parts to be provided to MCV. At this time, MCV has not recognized a
liability for the cancellation payments or an asset for the spare parts to
be received.
(5) RESTRICTED INVESTMENT SECURITIES HELD-TO-MATURITY
Non-current restricted investment securities held-to-maturity consist of
the following as of (in thousands):
September 30, December 31,
2003 2002
--------------- ----------------
Non-current:
Funds restricted for rental payments pursuant to the Overall
Lease Transaction $ 136,645 $ 136,554
Funds restricted for management non-qualified plans 2,378 2,147
--------------- ----------------
Total $ 139,023 $ 138,701
=============== ================
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of (in
thousands):
September 30, December 31,
2003 2002
------------- ----------------
Accounts payable
Related parties $ 9,152 $ 12,224
Trade creditors 31,192 27,935
Property and single business taxes 13,558 14,842
Other 3,412 3,079
------------- ----------------
Total $ 57,314 $ 58,080
============= ================
-11-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) GAS SUPPLIER FUNDS ON DEPOSIT
Pursuant to individual gas contract terms with counterparties, deposit
amounts may be required by one party to the other based upon the net amount
of exposure. The net amount of exposure will vary with changes in market
prices, credit provisions and various other factors. Collateral paid or
received will be posted by one party to the other based on the net amount
of the exposure. Interest is earned on funds on deposit. As of September
30, 2003, $.4 million in current liabilities "Gas supplier funds on
deposit" represents funds on deposit from El Paso Corporation ("El Paso"),
a related party.
(8) LONG-TERM DEBT
Long-term debt consists of the following as of (in thousands):
September 30, December 31,
2003 2002
----------------- -----------------
Financing obligation, maturing through 2015, payable in
semi-annual installments of principal and interest, secured by
property, plant and equipment $ 1,153,221 $ 1,247,149
Less current portion (134,576) (93,928)
----------------- -----------------
Total long-term debt $ 1,018,645 $ 1,153,221
================= =================
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 Overall Lease
Transaction has been accounted for as a financing arrangement.
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, 2003 and 2002 were $85.0 million and
$89.7 million, respectively. Interest and fees paid for the nine months
ended September 30, 2003 and 2002 were $115.3 million and $122.1 million,
respectively.
(9) PROPERTY TAX APPEALS
In 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
2003 at the Michigan Tax Tribunal. A trial was held for tax years 1997-2000
and for the appeals for tax years 2001-2003 are being held in abeyance
pending the resolution of the aforesaid trial. 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.
-12-
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(10) PARTNERS' EQUITY AND RELATED PARTY TRANSACTIONS
The following table summarizes the nature and amount of each of MCV's
Partner's equity interest, interest in profits and losses of MCV at
September 30, 2003, and the nature and amount of related party transactions
or agreements that existed with MCV's partners or affiliates as of
September 30, 2003 and 2002, 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 Related Party Transactions and Agreements 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
CMS Energy Company
- ------------------
CMS Midland, Inc. $375,944 49.0% Power purchase agreements $392,056 $425,894
======== =====
General Partner; wholly-owned Purchases under gas transportation agreements 11,952 17,702
subsidiary of Consumers Energy
Company Purchases under spot gas agreements 663 3,542
Purchases under gas supply agreements 2,330 7,506
Gas storage agreement 1,922 1,922
Land lease/easement agreements 450 450
Accounts receivable 40,753 46,845
Accounts payable 2,915 5,344
Sales under spot gas agreements 3,260 1,084
El Paso Corporation
- -------------------
Source Midland Limited Partnership $133,649 18.1% Purchase under gas transportation agreements 9,853 9,696
("SMLP") General Partner; owned by Purchases under spot gas agreement 610 7,217
subsidiaries of El Paso Corporation Purchases under gas supply agreement 40,862 34,311
Gas agency agreement 185 323
Accounts receivable -- 1,803
Accounts payable 5,432 5,268
Deferred reservation charges under gas purchase
agreement 5,125 6,701
Gas supplier funds on deposit (1) 409 --
Sales under spot gas agreements 3,474 10,477
El Paso Midland, Inc. ("El Paso Midland") 80,190 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 66,828 9.1
Limited Partnership Interest 6,681 .9
Micogen Limited Partnership 33,411 4.5 See related party activity listed under SMLP.
("MLP") Limited Partner, owned
subsidiaries of El Paso Corporation -------- ----
Total El Paso Corporation $320,759 43.5%
======== ----
The Dow Chemical Company
- ------------------------
The Dow Chemical Company $70,529 7.5% Steam and electric power agreement 27,345 20,281
Limited Partner ======= ===== Steam purchase agreement - Dow Corning Corp
(affiliate) 2,926 2,706
Purchases under demineralized water supply
agreement 4,904 5,028
Accounts receivable 2,956 2,933
Accounts payable 805 819
Standby and backup fees 547 548
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
TOTAL PARTNERS' EQUITY $767,233 100.0%
======== ======
Footnotes to Partners' Equity and Related Party Transactions
(1) Reflects cash collateral paid to MCV based on the net amount of exposure on
MCV's natural gas contracts with El Paso.
(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, 2002 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,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating Revenues $ 148,313 $ 156,311 $ 443,495 $ 451,138
Capacity Revenue $ 102,518 $ 102,271 $ 302,895 $ 302,753
PPA Contract Capacity (MW) 1,240 1,240 1,240 1,240
Billed PPA Availability 98.5% 98.4% 98.5% 98.5%
Electric Revenue $ 42,223 $ 51,141 $ 127,532 $ 138,464
PPA Delivery as a Percentage of Contract Capacity (1) 64.7% 80.9% 66.9% 75.1%
PPA, SEPA and Other Electric Deliveries (MWh) 1,916,885 2,386,968 5,843,804 6,538,603
Average PPA Variable Energy Rate ($/MWh) $ 15.71 $ 16.01 $ 15.72 $ 15.98
Average PPA Fixed Energy Rate ($/MWh) $ 3.59 $ 3.89 $ 3.70 $ 3.89
Steam Revenue $ 3,572 $ 2,899 $ 13,068 $ 9,921
Steam Deliveries (Mlbs) 1,137,880 1,090,240 4,182,200 3,958,240
(1) Beginning in July 2000, in response to the rapidly escalating cost of
natural gas, MCV entered into transactions with Consumers whereby Consumers
agreed to reduce the dispatch level of the Facility. In the event of reduced
dispatch, MCV agreed to share the savings realized by not having to generate
the electricity.
Comparison of the Three Months ended September 30, 2003 and 2002:
Overview:
For the third quarter of 2003, MCV recorded a net loss of $15.2 million, which
includes a $32.0 million mark-to-market loss. The mark-to-market loss is the
result of long term gas contracts that began being marked-to-market on April 1,
2002, as required by SFAS No. 133. MCV's net income for the third quarter of
2002 was $9.0 million, which includes a $3.4 million mark-to-market loss. The
earnings decrease from the third quarter of 2003 compared to 2002 of $24.2
million is primarily the result of the $28.6 million increase in the long term
gas contract mark-to-market loss and due to $1.6 million of lower energy rates
under the PPA with Consumers. This decrease is partially offset by $6.0 million
of lower natural gas prices, lower interest expense on MCV's financing
obligation and higher electric and steam energy rates under the SEPA with Dow.
-14-
Operating Revenues:
For the third quarter of 2003, MCV's operating revenues decreased $8.0 million
from the third quarter of 2002. This decrease is due primarily to a lower
electric dispatch under the PPA with Consumers resulting from an increase in the
electric dispatch reduction transactions and due to lower energy rates under the
PPA. This decrease was partially offset by higher energy rates under the SEPA
with Dow resulting from Dow's election to cease natural gas tolling.
Operating Expenses:
For the third quarter of 2003, MCV's operating expenses were $138.0 million,
which includes $97.9 million of fuel costs, including a $32.0 million quarterly
mark-to-market loss on the natural gas contracts which contain optionality.
During this period, MCV purchased approximately 17.9 billion cubic feet ("bcf")
of natural gas and a net .9 bcf was used for transportation fuel and as a net
change in storage. During this same period, MCV consumed 17.0 bcf of natural
gas. The average commodity cost of fuel for the third quarter of 2003 was $3.21
per million British thermal units ("MMBtu"), which includes the effects of the
disposition of excess gas supplies not required for generation. For the third
quarter of 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 which contain optionality. During this period,
MCV purchased approximately 21.6 bcf of natural gas and a net 1.0 bcf was used
for transportation fuel and as a net change in storage. 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. Fuel costs for the third quarter of 2003 compared to
2002 decreased by $12.7 million, excluding the effects of the quarterly
mark-to-market adjustments for both periods. This fuel cost decrease was due to
lower costs associated with the electric dispatch reduction transactions entered
into with Consumers, lower long-term natural gas prices due to the commencement
of several new contracts with favorable pricing terms and lower natural gas
hedged prices of market priced gas. This decrease was partially offset by a
higher gas usage resulting from Dow's election to cease tolling gas.
For the third quarter of 2003, operating expenses other than fuel costs
increased $1.9 million from the third quarter of 2002, primarily resulting from
increased property taxes expense. 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 2003 compared to 2002, interest expense decreased $1.7
million due to a lower outstanding principal balance on MCV's financing
obligation.
Comparison of the Nine Months ended September 30, 2003 and 2002:
Overview:
For the first nine months of 2003, MCV recorded net income of $39.1 million,
which includes a $6.3 million mark-to-market loss. The mark-to-market loss is
the result of long term gas contracts that began being marked-to-market on April
1, 2002, as required by SFAS No. 133. MCV's net income for the first nine months
of 2002 was $105.3 million, which includes the April 1, 2002 change in method of
accounting. 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 gain recorded as of September 30, 2002 resulted in an additional
earnings increase of $11.9 million. The earnings decrease for the first nine
months of 2003 compared to 2002 of $66.2 million is the result of the $76.3
million decrease in the long term gas contract mark-to-market value and due to
$3.3 million of lower energy rates under the PPA with Consumers. This earnings
decrease is partially offset by $13.4 million of lower natural gas prices, lower
interest expense on MCV's financing obligation and higher electric and steam
energy rates under the SEPA with Dow.
-15-
Operating Revenues:
For the first nine months of 2003, MCV's operating revenues increased $7.6
million from the first nine months of 2002. This increase is due primarily to
higher energy rates under the SEPA with Dow, resulting from Dow's election to
cease natural gas tolling. This increase was partially offset by a lower
electric dispatch under the PPA with Consumers resulting from an increase in the
electric dispatch reduction transactions and due to lower energy rates under the
PPA.
Operating Expenses:
For the first nine months of 2003, MCV's operating expenses were $322.4 million,
which includes $202.6 million of fuel costs, including a $6.3 million quarterly
mark-to-market loss on the natural gas contracts which contain optionality.
During this period, MCV purchased approximately 55.1 bcf of natural gas and a
net 2.5 bcf was used for transportation fuel and as a net change in storage.
During this same period, MCV consumed 52.6 bcf of natural gas. The average
commodity cost of fuel for the first nine months of 2003 was $3.11 per MMBtu,
which includes the effects of the disposition of excess gas supplies not
required for generation. 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 quarterly mark-to-market 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. Fuel costs for the first nine months of
2003 compared to 2002 decreased by $18.7 million, excluding the effects of the
quarterly mark-to-market adjustments for both periods. This fuel cost decrease
was due to lower costs associated with the electric dispatch reduction
transactions entered into with Consumers, lower long-term natural gas prices due
to the commencement of several new contracts with favorable pricing terms and
lower natural gas hedged prices of market priced gas. This decrease was
partially offset by a higher gas usage resulting from Dow's election to cease
tolling gas.
For the first nine months of 2003, operating expenses other than fuel costs
increased $5.2 million from the first nine months of 2002, primarily resulting
from increased property taxes 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 2003 compared to 2002, interest expense decreased
$4.8 million due to a lower outstanding principal balance on MCV's financing
obligation.
Liquidity and Capital Resources
During the nine months ended September 30, 2003 and 2002, net cash generated by
MCV's operations was $69.1 million and $145.1 million, respectively. Included in
MCV's net cash generated as of September 30, 2003 is $8.3 million of cash
collateral paid to MCV, based upon the net amount of exposure on MCV's long term
natural gas contracts with counterparties. This collateral balance will vary
with changes in market prices, credit provisions and various other factors.
MCV's cash and cash equivalents have a normal cycle of collecting revenues less
operating expenses prior to making the semiannual payments under the financing
obligation due in January and July for the next twelve years. During the nine
months ended September 30, 2003 and 2002, MCV paid financing obligation
requirements of $208.9 million and $304.1 million, respectively, as required
under the Overall Lease Transaction.
MCV also has a $50 million working capital line ("Working Capital Facility"),
which was renewed through a syndication in August 2003, to provide temporary
financing, as necessary, for operations. The Working Capital Facility has been
collateralized 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, capped at $15 million. The borrowing base varies over the month as
-16-
receivables are earned, billed and collected and as natural gas inventory
balances are built and depleted. In addition, earned receivables borrowing base
can be affected by Consumers' credit rating. The Working Capital Facility term
currently expires on August 28, 2004. MCV did not utilize the Working Capital
Facility during the first nine months of 2003. As of September 30, 2003, MCV had
no outstanding borrowings or letters of credit. 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,
capital expenditures and financing obligations primarily through cash flows from
operations. Due to uneven 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 to the extent available for
such purposes. These cash flow shortfalls are anticipated to be replenished
annually. As of September 30, 2003, there were approximately $248.6 million of
cash reserves of which $136.6 million had been reserved for the debt portion of
the financing obligation.
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, 2003, MCV has the following contractual
financial obligations and commitments:
Contractual Obligations (In Millions)
--------------------------------------------------------------------------------
Total 2003(4) 2004 2005 2006 2007 Thereafter
-------- -------- -------- -------- -------- -------- ----------
Long term Debt (1) $1,764.1 $ -- $ 242.8 $ 174.4 $ 156.0 $ 150.9 $1,040.0
======== ======== ======== ======== ======== ======== ========
Unconditional Purchase $2,585.8 $ 60.9 $ 284.2 $ 339.2 $ 342.9 327.2 $1,231.4
Obligations (2)
Other Long term
Obligations (3) 221.2 7.3 12.1 11.7 11.9 12.2 166.0
-------- -------- -------- -------- -------- -------- --------
Total Contractual Cash
Obligations $2,807.0 $ 68.2 $ 296.3 $ 350.9 $ 354.8 $ 339.4 $1,397.4
======== ======== ======== ======== ======== ======== ========
(1) Represents expected cash payments, including interest.
(2) Represents estimated minimum commitments under current long term natural gas
contracts, natural gas transportation reservation charges, GTG compressor
parts and the ground lease agreement.
(3) Represents the cost of current Facility maintenance service agreements and
spare parts.
(4) Represents obligations from October to December 2003.
New Accounting Standards
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This SFAS amends SFAS No. 133
for decisions made (1) as part of the Derivative Implementations Group process
that effectively required amendments to SFAS No. 133, (2) for other Financial
Accounting Standards Board projects dealing with financial instruments and (3)
for implementation issues raised in relation to the application of this
definition of a derivative. The changes in this SFAS No. 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly, which will result in more consistent reporting of
contracts as either derivatives or hybrid instruments. This standard is
effective for contracts entered into or modified after June 30, 2003, with some
exceptions. MCV has adopted this standard and does not expect the application to
materially affect its financial position or results of operations.
-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. MCV has made every reasonable effort to ensure
that the information and assumptions on which these statements and projections
are based are correct, reasonable and complete. There is no assurance, however,
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, FERC and the MPSC) 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 obligations 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 cost of maintenance of the Facility's QF status.
Operating Outlook. During the first nine months of 2003, approximately 68% 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
99.5% for the first nine months of 2003, 98.8% for 2002 and 99.5% for 2001.
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. 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 gas contracts, with a smaller portion
of gas purchased under long term market priced contracts and on the spot market.
-18-
MCV maintains a hedging program to mitigate risk associated with volatile market
prices in the gas market. As of September 30, 2003, MCV has entered into natural
gas purchase and hedging arrangements with respect to most of its 2003 expected
gas needs not provided for under its long term fixed price gas contracts. MCV
expects that its purchase and hedging arrangements will mitigate the effects of
rises in natural gas prices in future years, 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
(without dispatch reduction transactions) of approximately 79% from April 1998
through September 2003. Previously, the Facility was being dispatched on an
uneconomic basis (relative to the cost of other energy resources) under the
terms of a 915 MW settlement order and a 325 MW settlement order, averaging
approximately 90% annual dispatch. In April 2003, Consumers informed MCV that
effective January 1, 2004, Consumers expects to return to dispatching the
Facility on an uneconomic basis, pursuant to the settlement orders. If such an
event were to occur, such uneconomic dispatch could negatively affect MCV's
financial performance by approximately $35 million per year, based upon
projected spot gas prices of approximately $5.03/MMBtu. MCV is in discussions
with Consumers regarding means to minimize the potential impact of high
dispatch, but cannot predict whether those discussions will be successful or
whether state regulatory approval, if required, can be obtained.
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. MCV and Consumers entered into a settlement
agreement, effective January 1, 1999 ("Settlement Agreement"), which resolves
all of the previously disputed issues under the PPA and includes definitive
obligations for Consumers to make energy payments calculated in accordance with
the PPA, irrespective of any MPSC or the reviewing courts decision which may
affect those issues or payments. The Settlement Agreement also provides that,
not withstanding modifications to the Facility increasing its capacity, in
billing Consumers for capacity charges (at the rates set forth in the PPA)
availability would be capped at 98.5% of the 1240 MW ("98.5% cap") on a
calendar-year basis for the term of the PPA irrespective of any MPSC or the
reviewing courts decision, which may affect this issue or payment. If Consumers
transfers (subject to MCV's prior consent) its rights of up to 1240 MW of
capacity and associated energy under the PPA to a third party for an extended
period of time, the 98.5% cap will not apply except that the 98.5% cap is, in
any event, reinstated on September 15, 2007. Notwithstanding the Settlement
Agreement, after September 15, 2007, an issue could exist as to whether or not
Consumers can exercise the "regulatory out" provision to reduce capacity
payments to MCV based upon the "availability caps" of 88.7% of the 1240 MW (both
on and off peak) of contract capacity as provided for in the 915 MW settlement
order and the 325 MW settlement order. 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.
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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 permits 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 the 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 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. In July 2001, FERC issued a Notice of Proposed Rulemaking to
establish a standard market design ("SMD") in order to remedy remaining undue
discrimination in transmission and wholesale energy markets. The SMD requires
all FERC jurisdictional transmission providers to transfer control of their
transmission facilities to an independent transmission provider. The independent
transmission provider will provide transmission service under a standardized
tariff and administer market based wholesale energy markets for day-ahead and
real-time sales. The SMD proposal has drawn strong criticism from certain State
regulators and others asking Congress to block the proposal. This criticism has
had the effect of delaying issuance of a final SMD rule. In addition, federal
energy legislation is proposed from time to time with various provisions which
could impact MCV. The SMD and/or federal legislation could impact MCV in selling
electricity in the wholesale market. MCV management cannot predict the outcome
of the SMD or the impact the SMD or federal legislation 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 2002 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.
During the first nine months of 2003, the Facility achieved an Efficiency
Percentage of 47.3% and a Thermal Percentage of 19.9%.
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
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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,
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. As stated in Part 1, Item 2, "MD&A - Outlook",
at both the state and federal level, efforts continue to restructure the
electric industry. To date, restructuring has not negatively impacted MCV, but
if restructuring results in denying Consumers recovery of above-market PPA
costs, MCV's cash flows may be negatively impacted, especially in the period
after 2007. Over 90% of MCV's revenues come from sales pursuant to the PPA. 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.
The FASB issued Derivative Implementation Group ("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. At April 1, 2002, MCV had nine long term gas contracts that contained
both an option and forward component. As
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such, they were no longer accounted for under the normal purchases and sales
exception and MCV began mark-to-market accounting of these nine contracts
through earnings. During the fourth quarter of 2002, MCV removed the option
component from three of the nine long term gas contracts discussed above, which
should reduce the earnings volatility. MCV expects future earnings volatility on
the six remaining long term gas contracts that contain volume optionality, 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. 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. Since April
2002, MCV has recorded an additional mark-to-market gain of $15.6 million for
these gas contracts for a cumulative mark-to-market gain through September 30,
2003 of $73.7 million, which will reverse over the remaining life of these
contracts, ranging from 2004 to 2007.
Property Tax Appeals. MCV currently accrues property taxes on the basis of the
taxable value as assessed by the taxing authorities. In 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 2003 at the Michigan Tax Tribunal.
A trial was held for tax years 1997 -- 2000 and for the appeals for tax years
2001-2003 are being held in abeyance pending the resolution of the aforesaid
trial. 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. 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 the trial and these appeals.
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 Overall Lease
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 unnecessary to estimate the fair value of
the Owner Participants' underlying debt and equity instruments supporting this
financing obligation, since SFAS No. 107 "Disclosure about Fair Value of
Financial Instruments" does not require fair value accounting for the lease
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, 2003, have original maturity dates of
approximately one year or less.
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For MCV's debt obligations, the table below presents principal cash flows and
the related interest rate by expected maturity dates as of September 30, 2003.
The interest rate reflects the fixed effective rate of interest of the financing
arrangement:
Expected Maturity In
------------------------------------------------------------------------
Fair
2003 2004 2005 2006 2007 Thereafter Total Value
----- -------- -------- -------- -------- ---------- ---------- -----
Debt:
Long term Debt Fixed
Rate (in millions) $ -- $ 242.8 $ 174.4 $ 156.0 $ 150.9 $ 1,040.0 $ 1,764.1 N/A
Avg. Interest Rate -- 9.4% 9.4% 9.4% 9.4% 9.4% 9.4%
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
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.
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 2003 to May 2007. The
table presents the carrying amounts and fair values at September 30, 2003:
Expected Maturity in 2003/2007 Fair Value
------------------------------ ----------
Futures Contracts:
Contract Volumes (10,000 MMBtu) Long/Buy 3,311 --
Weighted Average Price Long (per MMBtu) $ 4.218 $ 4.797
Contract Amount ($US in Millions) $ 139.6 $ 158.8
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
Evaluation of Disclosure Controls and Procedures
MCV's management, including the President and Chief Executive Officer, and the
Chief Financial Officer, Vice President and Controller, carried out an
evaluation of the effectiveness of MCV's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report. 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 were
effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that
occurred during the fiscal quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion below is limited to an update of events or developments that have
occurred in various judicial and administrative proceedings since March 25,
2003. A complete summary of all outstanding legal proceedings is set forth in
MCV's Form 10-K for the year ended December 31, 2002 filed with the Securities
and Exchange Commission on March 26, 2003.
Property Tax Appeals
In 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 2003 at
the Michigan Tax Tribunal. A trial was held for tax years 1997 - 2000 and for
the appeals for tax years 2001-2003 are being held in abeyance pending the
resolution of the aforesaid trial. 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
31.1 Certification of President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer, Vice
President and Controller Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer, Vice
President and Controller Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
b.) Reports on Form 8-K
Current report dated November 10, 2003 containing Item 12, "Results of
Operations and Financial Condition," reporting MCV's 2003 third quarter
and year-to-date earnings results.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
-------------------------------------
(Registrant)
Dated: November 13, 2003 /s/James M. Kevra
----------------- -------------------------------------
James M. Kevra
President and Chief Executive Officer
Dated: November 13, 2003 /s/James M. Rajewski
----------------- -------------------------------------
James M. Rajewski
Chief Financial Officer,
Vice President and Controller
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10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX - 31.1 Certification of President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
EX - 31.2 Certification of Chief Financial Officer, Vice
President and Controller Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
EX - 32.1 Certification of President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
EX - 32.2 Certification of Chief Financial Officer, Vice
President and Controller Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002