Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from _____________________________ to _____________________________

Commission file number (Under the Securities Act of 1933) 33-37977

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

Securities registered pursuant to Section 12(b) of the Act:

     NONE

Securities registered pursuant to Section 12(g) of the Act:

     NONE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

Table of Contents

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

Table of Contents

PART I

Item 1. BUSINESS

A.		General
		In January 1987, Midland Cogeneration Venture Limited Partnership (“MCV”) was formed as a limited partnership to convert a portion of an uncompleted Consumers Energy Company (“Consumers”) nuclear power plant into a natural gas-fired, combined-cycle, cogeneration facility located in Midland County, Michigan (the “Facility”). The Facility commenced commercial operation in 1990 (the “Commercial Operation Date”) and is capable of generating approximately 1500 megawatts (“MW”) of electricity and approximately 1.5 million pounds of process steam per hour. The Facility is dependent upon natural gas for its fuel supply.
		The Facility is a cogeneration facility, meaning that it sequentially produces electricity and useful thermal energy (steam) through an integrated system using a single fuel source. The Facility has been certified by the Federal Energy Regulatory Commission (“FERC”) as a qualifying cogeneration facility (“QF”) under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”). As a QF, the Facility is exempt from various provisions of the Federal Power Act, as amended (the “FPA”), the Public Utility Holding Company Act of 1935, as amended (the “1935 Act”), certain state laws regarding rate, financial and organizational regulation, and is entitled to sell electric capacity and related energy to a public utility (such as Consumers) at such utility’s incremental cost of alternative electric energy, otherwise known as “avoided cost.” A utility’s “incremental cost of alternative electric energy” means, with respect to electric energy purchased from a QF, the cost to the electric utility of the electric energy (determined, at the option of the QF, at either the time of delivery or at the time the obligation is incurred) which, but for the purchase from such QF, such utility would generate or purchase from another source.
B.		The Facility
		MCV’s principal business is the operation of the Facility and the sale of electric capacity and related energy (principally to Consumers), electricity and steam to The Dow Chemical Company (“Dow”) and steam to Dow Corning Corporation (“DCC”) produced at the Facility. The Facility is located on an approximately 1200-acre site that is leased from Consumers (the “Site”).
		The Facility consists of the following:

	•		12 gas turbine generators (“GTGs”);
	•		12 heat recovery steam generators (“HRSGs”) which create steam using heat from the GTG exhaust;
	•		A steam turbine (the “Unit 1 Steam Turbine”) capable of producing electricity from steam generated by the HRSGs;
	•		A second steam turbine (the “Unit 2 Steam Turbine”) which serves as a backup to the Unit 1 Steam Turbine;
	•		A back-pressure steam turbine;
	•		Pollution control assets;
	•		A 25-mile gas pipeline connecting interstate and intrastate gas pipeline systems to the Facility;
	•		Pipelines to deliver steam to Dow and DCC; and
	•		Various associated equipment and improvements.

-1-

Table of Contents

Electricity is produced by the 12 GTGs, and the steam is produced by the 12 HRSGs using the heat from the GTG exhaust. The Unit 1 Steam Turbine is designed to produce electricity using the steam generated by the HRSGs and process steam that is provided to Dow and DCC. Improvements to the Facility have increased the net electrical generating capacity from approximately 1370 MW to 1500 MW. MCV purchases demineralized water from Dow. Electricity is sold by MCV to Consumers and other parties through an interconnect and to Dow through dedicated transmission lines.

C.		Major Issues Facing MCV
		MCV faces several major issues crucial to its future success. These issues, briefly summarized here, are discussed more fully in the sections cross referenced below:
		Electric Industry Restructuring. At both the state and federal level, efforts continue to restructure the electric industry. In 1997 and 1998, the Michigan Public Service Commission (“MPSC”) entered a series of orders, permitting customers to choose their power provider over a four-year phase-in period which started in 1999 (“Restructuring Orders”) (these orders are further described in Item 1, Section F, “Regulation — Michigan Electric Industry Restructuring Proceedings”). In addition, Michigan enacted restructuring legislation in June 2000. A significant issue to MCV is the potential for future regulatory denial of recovery by Consumers from its customers of above market costs Consumers pays MCV under the parties’ Power Purchase Agreement (“PPA”). 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 Consumers’ recovery of above-market PPA costs, MCV’s cash flows may be negatively impacted, especially after 2007. See Item 1, Section F, “Regulation — Michigan Electric Industry Restructuring Proceedings and Federal Electric Industry Restructuring”, Item 7, “Managements Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Outlook — Michigan Electric Industry Restructuring Proceedings and Federal Electric Industry Restructuring”, and Notes to Consolidated Financial Statements, Note 1, “The Partnership and Associated Risks”.
		Energy Rate and Cost of Production. Since January 1992, MCV has experienced an overall reduction in the energy charges it is paid for electricity under the PPA, primarily due to declining coal costs at Consumers’ generating plants. In addition, MCV’s costs associated with production of electricity have continued to rise. These circumstances have negatively affected MCV’s cash flow. While MCV has the majority of its expected natural gas needs under contract for the next several years, sustained periods of high market gas prices could adversely affect MCV’s earnings and cash flow. See Item 1, Section F, “Regulation — MPSC and Other Proceedings Relating to Capacity and Energy Charges”, Item 1, Section D, “Contracts — Gas Supply Agreements,” Item 1, Section H, “Overall Lease Transaction”, and Item 7, “MD&A — Liquidity and Financial Resources”. In addition, MCV has credit exposure to suppliers who have entered into fixed price natural gas contracts with MCV. To the extent that the aforementioned suppliers fail to deliver natural gas under their fixed price contracts which are not backed by credit support requirements, and the cost to replace such gas is in excess of the contract rate, MCV could experience higher natural gas prices in the future. See Item 1, Section D, “Contracts — Credit Support Requirements for MCV’s Gas Arrangements”.

D.		Contracts
		MCV’s material contracts are the PPA, which provides for the sale to Consumers of electric capacity and related energy; the Steam and Electric Purchase Agreement with Dow (“SEPA”), which provides for the sale of steam and electricity to Dow; the Steam Purchase Agreement with DCC (“SPA”), which provides for the sale of steam to DCC; gas supply, storage and transportation contracts with a number of companies; an agreement covering gas turbine inspection services and spare parts with Alstom Power Inc. (“Alstom”); and an agreement covering steam turbine inspection services and parts with General Electric Company (“GE”). On December 31, 2002, MCV entered into an agreement covering gas turbine inspection services and spare parts with General Electric International, Inc. (“GEII”). This agreement will replace the similar agreement with Alstom. MCV’s interests in all the foregoing contracts, except the SPA and the GEII agreement, have been assigned to the Owner Trustees, which in turn subassigned such contracts to MCV and granted a security interest in such contracts to the Note Trustees. See Item 1, Section H, “Overall Lease Transaction.” The

-2-

Table of Contents

		following is intended to summarize briefly certain provisions of such contracts and is qualified in its entirety by reference thereto.
		Power Purchase Agreement
		Under the PPA, Consumers contracted to purchase specified amounts (the “Contract Capacity”) of the Facility’s electric capacity until March 15, 2025 and thereafter subject to yearly extensions that are automatic in the absence of a termination notice from either party. Contract Capacity is 1240 MW/hour.
		In allocating the available electrical output of the Facility, MCV must first satisfy Dow’s requirements under the SEPA before supplying power to Consumers.
		Consumers has the right of first refusal to purchase any available electric capacity and related energy produced by the Facility in excess of Contract Capacity if MCV is willing to sell the same for a period of six months or longer. MCV is entitled to sell excess electric capacity and related energy to other electric utilities or third parties, and Consumers is required, if requested by such utilities or MCV, to transmit electrical energy for them subject to certain conditions.
		Capacity charges are payable for available Contract Capacity, whether or not electricity is dispatched. The capacity charges for on-peak and off-peak power average 4.15 cents per available kilowatt hour (“kWh”); however, until September 15, 2007, the capacity charge may be reduced by Consumers to a level of no less than an average of 3.77 cents per kWh.
		Energy charges are based on costs incurred by Consumers at certain of its coal-fired plants (i.e., those coal plants wholly or partially owned by Consumers having a net demonstrated capacity of at least 100 MW, available for generating electrical energy for not less than 5500 hours during the most recent year and having a capacity factor of at least 40% when connected to Consumers’ system and generating electrical energy).

			Fixed Energy Charges. Like the capacity charges, fixed energy charges are payable for available kWhs of Contract Capacity. Fixed energy charges are adjusted each year based on a fuel inventory charge, administrative and general expenses and one-half of operation and maintenance expenses (excluding fuel) incurred at these plants during either the immediately preceding calendar year or the calendar year preceding that year depending on when the adjustment is being made. In 1995, an arbitrator ruled that, under the PPA, Consumers had the right to withhold that portion of fixed energy charges payable on the basis of energy available but not delivered since it was not permitted by the MPSC to collect such charges from its electric customers. See Item 1, Section F, “Regulation — MPSC and Other Proceedings Relating to Capacity and Energy Charges.”
			Variable Energy Charges. Variable energy charges are payable for energy actually delivered. Variable energy charges are determined monthly and are equal to one-half of operation and maintenance expenses incurred at these plants, as calculated annually, and the actual cost of coal burned at these plants as determined monthly based on a rolling twelve-month average (with a two-month lag) and converted to an overall cost per kWh.

		The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the MPSC does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA (the “regulatory-out” provision). Until September 15, 2007, however, the capacity charge may not be reduced below an average capacity rate of 3.77 cents per kWh for the available Contract Capacity notwithstanding the “regulatory-out” provision. Consumers and MCV are required to support and defend the terms of the PPA. See Item 1, Section F, “Regulation — MPSC and Other Proceedings Relating to Capacity and Energy Charges.”
		Under the PPA, MCV must provide assurances that it has adequate gas supplies under contract to generate at least 60% of the maximum annual output of Contract Capacity. Annually, MCV must provide at Consumers’

-3-

Table of Contents

request continuing annual assurances of such capability for each succeeding five-year period. MCV believes it has adequate gas supplies under contract to satisfy its current PPA fuel assurance requirements. If MCV is unable to provide these continuing assurances, Consumers is entitled to withhold in a separate escrow fund a portion of capacity charges until these assurances are provided. The portion of such capacity charges is a function of the percentage of unmet fuel needs and an increasing factor based on the number of consecutive months that capacity charges have been withheld. Assuming a 3.77 cents per kWh capacity charge, the maximum capacity charges, which could be withheld and escrowed under this provision, are as follows:

		The PPA does not make any provision for the use of escrowed funds, except that the PPA provides that interest earned, if any, on the escrowed funds is to be divided equally between MCV and Consumers. After withholding capacity charges for 48 months without fuel assurances being provided, Consumers may terminate the PPA. In the event of termination, MCV must pay an early termination charge.
		If any party is rendered unable by force majeure to carry out its obligations under the PPA, these obligations are suspended during the period of force majeure. Force majeure includes all natural calamities; war; curtailments, orders, regulations or restrictions imposed by governmental authority; and all other causes beyond the reasonable control of the affected party, but specifically does not include shortages of fuel and supplies (unless caused by calamity or unusual world events applicable to other major industrial users as well as MCV), mechanical breakdowns, labor strikes or explosions or fires (unless caused by criminal acts).
		Consumers schedules all deliveries of electricity from the Facility to its system and is obligated to do so in a manner consistent with the safe and prudent operation of the Facility. As long as the annual availability of Contract Capacity equals or exceeds 75% of Contract Capacity, Consumers must purchase sufficient electrical energy from the Facility to achieve at least a 60% capacity factor on an annual basis. This purchase obligation decreases, based on a prescribed formula, if annual availability falls below 75% of Contract Capacity. Annual PPA availability has exceeded 98.5% since 1997.
		Consumers must purchase a specified minimum amount of electrical energy at all times, except during emergencies on its system. MCV determines a minimum level of generation designed to assure that the Facility operates in a stable manner and that MCV meets its obligations to supply steam and electricity to Dow, but MCV cannot specify a minimum generating level which exceeds 350 MW. Outages, other than forced outages, are to be scheduled to accommodate Consumers’ requirements to the extent MCV deems practicable.
		MCV is obligated to have the Facility inspected at least once each year by a consulting engineer selected by it from a list of engineering firms approved by Consumers. The annual inspection includes, at a minimum, all equipment, structures, operating procedures and maintenance practices necessary for the generation and delivery of energy to Consumers. Upon completion of an annual inspection, the consulting engineer must promptly issue a written report. Any recommendations in this report regarding equipment, structure and maintenance practices, which have been approved by MCV’s management, must be implemented within a specified period of time. In its April 2003 report, Cummins & Barnard, Inc., the consulting engineer, found no specific issues that MCV should take under advisement or act upon. With regard to the most recent inspection, MCV expects to receive the report by the end of April 2004 and does not anticipate any substantial problems or requirements for plant modifications.

-4-

Table of Contents

		In 1997, Consumers informed MCV of several other potential payment issues it would pursue, pursuant to the “regulatory out” and other provisions of the PPA. These issues related to Consumers’ special contract customers, pricing of the energy delivered during off-peak ramp hours (when MCV adjusts its output to match Consumers’ dispatch) and energy delivered in the band width (energy delivered above dispatch, within certain limits). In addition, Consumers notified MCV that it did not believe that MCV could use the approximately 15 MW of generating capacity and energy attributable to the back pressure turbine, which was placed into service in July 1997, towards available Contract Capacity or electric deliveries under the PPA. Consumers had also indicated that they would take a similar position on the incremental energy and capacity resulting from MCV’s installation of 11NM upgrade packages on the GTGs (collectively the “Disputed Issues”). MCV and Consumers entered into a settlement agreement (“Settlement Agreement”), effective January 1, 1999, which resolves (for the various time periods specified in the Settlement Agreement) 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, notwithstanding 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. Provided, however, that 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 and the 325 MW Settlement. See Item 1, Section F, “Regulation — MPSC and Other Proceedings Relating to Capacity and Energy Charges.” The Settlement Agreement has not materially affected MCV’s earnings and cash flows.
		MCV currently delivers its electric power to purchasers through transmission lines owned and operated by Trans-Elect, Inc. (“Trans-Elect”). Such lines were previously owned by Consumers. MCV and Consumers previously entered into the Facilities Agreement which provides for transmission service of excess capacity and energy available at the Facility. The sale of the transmission facilities to Trans-Elect does not change, in any respect, the contractual relationship and obligations of Consumers under the Facilities Agreement. Trans-Elect is serving as Consumers’ agent to perform Consumers’ obligations under the Facilities Agreement.
		Steam and Electric Power Agreement; Related Dow Agreements
		SEPA. Pursuant to the SEPA, Dow has agreed to purchase steam from the Facility for an initial term of 25 years from the Commercial Operation Date and to purchase electricity from the Facility for 15 years (any electricity to be purchased thereafter at Dow’s option, although MCV remains obligated to make certain amounts of electricity available for an additional 10 years). The SEPA is subject to automatic extensions for up to 10 additional years after its 25-year term in the absence of a three-year notice of termination from either party.
		In any year, MCV is not obligated to deliver more than 691,900 pounds of steam per hour and 60 MW of electricity on an annual average basis except as Dow may increase its entitlement as discussed below. Dow has agreed to take as much steam as is necessary for the Facility to retain its QF status under the FERC regulations in effect on November 1, 1986 (which regulations have not been revised in relevant part in any material respect). However, Dow’s obligation with respect to minimum annual steam purchases is an average of 440,000 pounds per hour (less amounts supplied by certain standby facilities owned by Dow and less 50% of amounts purchased by any other steam customers of MCV) and is binding only for the initial 25-year term of the SEPA.
		Dow may increase its steam or electricity entitlement to 110% of the steam or electricity delivered in the previous 12-month period, plus any steam or electricity required by any addition to or modification of the Dow plant, provided that any increase above an annual average of 1,000,000 pounds of steam per hour or 75 MW of

-5-

Table of Contents

		electricity requires MCV’s consent. MCV, however, may be required, on an instantaneous basis, to deliver steam at a rate of up to 135% of the maximum annual average hourly quantity of steam or to deliver power at a rate up to 20 MW greater than the applicable annual average. In 1997, Dow increased its electric entitlement to 67.75 MW/hr; no such increase has since been requested.
		Under the SEPA, there is a base charge for steam and electricity which is subject to adjustment each quarter based on changes in MCV’s fuel costs, producer price for capital equipment and certain compensation per hour indices. Dow also has the option under the SEPA and subsequent amendments, to provide the gas necessary to generate Dow’s take of steam and electricity (“toll”). Under the provisions of the SEPA, Dow receives a billing credit of 5/8 of its steam and electric charges in exchange for Dow purchasing the natural gas for MCV.
		In order to assure reliable steam for the Dow plant, Dow owns and maintains standby facilities, which are not part of the Facility (the “Standby Facilities”). The SEPA amendment also provided that Dow would retire certain of the Standby Facilities located on the MCV site and reduce the annual standby fees payable to Dow to $350,000 per year. This fee is subject to the same indexing adjustments each quarter as the base steam charge. In addition, the fee charged by Dow for each use of the Standby Facilities, necessitated when MCV fails to deliver steam under the SEPA is $150,000.
		The terms of the SEPA provide that Dow may terminate the SEPA if one or more “contract outages” occur for a cumulative period greater than 24 hours in any year, provided that a single outage of more than 24 consecutive hours but less than 72 consecutive hours will not give rise to a right of termination unless another such contract outage has occurred within the previous 60 months.
		A “contract outage” generally occurs when MCV fails to deliver minimum operation steam (i.e., an hourly flow rate of at least 75% of the then current rate), or fails to meet pressure specifications after having failed to deliver steam for 15 consecutive minutes, or fails to meet pressure and quantity specifications after having failed to deliver steam for seven consecutive days, except in each case as a result of scheduled maintenance outages, outages forced at Dow’s request or resulting from Dow’s failure to provide demineralized water or waste water treatment services or outages caused by an event of force majeure lasting no more than two years. Steam provided to Dow from the Standby Facilities is treated as steam delivered by MCV for this purpose. For such a contract outage to occur, more than ten of the Facility’s GTGs would have to be out of service at the same time that Dow’s Standby Facilities are unavailable.
		The SEPA and various backup agreements among MCV, Consumers and Dow contain various provisions designed to assure a continuous supply of steam and electricity to Dow in the event the SEPA is terminated.
		Dow Facilities and Demineralized Water. Dow owns the electrical transmission lines, which carry electricity from the Facility to the Dow plant. Dow also owns certain steam and demineralized water lines which are used in the operation of the Facility, and which have been leased by Dow to MCV. Dow has contracted to provide MCV sufficient demineralized water to meet the Facility’s requirements until 30 months after MCV’s obligation to supply steam to Dow ceases.
		Steam Purchase Agreement
		In 1995, MCV entered into the SPA with DCC which provides that MCV construct, own and operate a steam line and appurtenant equipment to serve steam to DCC’s Midland plant. DCC has agreed to purchase steam from MCV for an initial term of fifteen years with automatic year-to-year renewals thereafter. The steam MCV provides DCC must meet operational and content specifications. The provision of steam to DCC is subject to Dow’s first preference to the steam under the SEPA. MCV began supplying steam to DCC in July 1996. The parties have certain termination rights after the declared in service date but may be subject to penalties or damages for such termination.

-6-

Table of Contents

		Gas Supply Arrangements
		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.
		MCV has a portfolio of long term natural gas purchase contracts (contracts that provide for gas purchases for a term of greater than one year), having remaining terms of 1 to 10 years, with U.S. and Canadian suppliers for an annual average maximum supply of natural gas for 2004 of 227,561 MMBtu/day. As of January 1, 2004, no single gas contract accounts for more than 16.1% of MCV’s portfolio, though, El Paso Corporation (“El Paso”) and its subsidiaries now account for 38.1% of MCV’s portfolio. Gas contracts with U.S. suppliers provide for a 2004 annual average purchase of 149,423 MMBtu/day, while gas contracts with Canadian suppliers provide for the purchase of 78,138 MMBtu/day. In addition to purchasing natural gas under long term contracts, MCV also purchases gas under short term (“spot”) agreements for a term of less than one year. During 2003, MCV’s gas purchases were supplied 88% from long term gas contracts and 12% from spot gas contracts.

MCV Gas Under Contract
Annual Average For Each Year
Maximum Daily Quantity (MMBtu/Day)

The pricing for the above contracted volumes are defined as follows:

Current U.S. Long Term Gas Contracts. The U.S. long term gas contracts provide for either a dedication of reserves, corporate guarantee or warranty of deliverability. Under a dedication of reserves, specific reserves

-7-

Table of Contents

		are dedicated to fulfill the supplier’s obligations and under a corporate guarantee, reserves are not dedicated but generally MCV is indemnified for the cost of purchasing supplies elsewhere if the gas is not delivered as warranted.
		Some of the U.S. long term gas contracts contain “take-or-pay” provisions obligating MCV to purchase at least a specified percentage (generally 75% to 100%) of the minimum daily quantity (“MDQ”) to which MCV is entitled under the contract, unless such failure is due to force majeure, failure of the gas to meet quality standards or, in some cases, failure of the supplier to deliver the quantity nominated by MCV. If, over the course of a contract year, MCV has a take deficiency, it must make a deficiency payment that is based, in most cases, on the product of the take deficiency and either all or some percentage of the contract price. In addition, under some of the U.S. long term gas contracts, the producer may terminate the contract if, for reasons other than force majeure, MCV fails to purchase a specified percentage of the MDQ (generally between 50 and 100%) within a specified period (generally 120 days). Some U.S. long term gas contracts allow a “make-up period” ranging from one to five years to make up the deficiency.
		Most U.S. long term gas contracts provide that MCV has the right to terminate upon 20 days’ written notice if the supplier, for any reason other than force majeure, fails to provide a specific percentage of the requested volumes of gas for a period of at least 120 consecutive days. MCV may terminate two other U.S. long term gas contracts upon 30 days’ written notice if the producer, for any reason, including force majeure, fails to deliver 500 Mcf/day for a period of four consecutive months.
		Current Canadian Long Term Gas Contracts. All Canadian long term gas contracts (“Canadian contracts”) warrant the delivery of quantities requested by MCV up to the MDQ, subject to force majeure, and in one case, a 2% tolerance is allowed. Subject to MCV’s obligation to mitigate, Canadian suppliers have agreed to indemnify MCV for the Facility’s replacement gas costs, excluding indirect or consequential damages or loss of profit, for any breach of this supply warranty. One producer may be relieved of its supply warranty under certain circumstances if its ratio of remaining reserves to annual production is ten.
		Prices under most of the Canadian contracts are based on reference prices indexed to Consumers’ energy charges under the PPA, subject in some instances to floor prices below which the reference price cannot fall, and are denominated in U.S. dollars. All the Canadian contracts provide for deliveries at the international border near Emerson, Manitoba.
		In addition to an amount per MMBtu based on the quantity of gas actually delivered (the “Commodity Charge”), under most of the Canadian contracts MCV is required to pay a monthly charge whether or not MCV buys any natural gas (the “Demand Charge”) to each Canadian supplier. This Demand Charge covers the transportation charges incurred by the Canadian suppliers to have transportation capacity for the MDQ available to the U.S.-Canada border. To the extent that MCV takes less than 100% of the MDQ from its Canadian contracts, gas costs per unit taken by MCV increase because Demand Charges are being paid for the quantity of gas not being taken. Two contracts provide discounts to the Commodity Charge where monthly takes are in excess of 85% of MDQ.
		The Canadian contracts establish minimum annual takes under the contracts that range from 75% to 100% of the stated MDQ. Generally, under the contracts that require less than 100% takes, MCV is contractually required to make a deficiency payment, which could range from a partial percentage to a full percentage of the Commodity Charge multiplied by the deficiency take; however, some contracts provide MCV the opportunity to reduce such deficiency payment by taking gas in excess of the MDQ during the following year. Generally, under the contracts that require 100% daily takes, MCV is required to pay the supplier for any unexcused deficiencies, which amount is calculated as the sum of (i) the daily deficiency multiplied by the positive price differential between market and contract prices and (ii) the Demand Charge accessed by transporter.
		Under most of the Canadian contracts, if a Canadian supplier under delivers to MCV in any month, subject to certain force majeure provisions, the contract price is reduced by a proportionate share of the Canadian and U.S. transporters’ Demand Charges. Further, if a Canadian supplier fails, for reasons other than force majeure, to deliver 90% of quantities requested up to the MDQ over any 120 consecutive day period then, in most cases

-8-

Table of Contents

		following a cure period, MCV can reduce the MDQ or, under certain circumstances, terminate the agreement. If the MDQ is reduced, MCV can request the Canadian supplier to assign to it, to the extent permitted, the quantity of firm transportation capacity on Canadian transporters that corresponds to the reduction in MDQ. One of the Canadian suppliers may terminate its contract if MCV fails to take specified percentages of the MDQ.
		Gas Transportation and Storage Arrangements
		The location of the Facility permits gas to be transported over a number of U.S. interstate pipelines. MCV has signed long term transportation contracts with four of these pipelines: ANR Pipeline Company (“ANR”); Panhandle Eastern Pipe Line Company (“Panhandle”); Trunkline Gas Company (“Trunkline”); and Great Lakes Gas Transmission Company (“Great Lakes”). ANR and Great Lakes are affiliates of El Paso. Panhandle and Trunkline were previously owned by CMS Energy Corporation (“CMS Energy”), the parent company of Consumers. On June 11, 2003, CMS Energy closed on the sale of Panhandle and Trunkline to Southern Union Pipeline. No change in rates or services under MCV’s contracts with these companies occurred as a result of this sale. In addition, certain of the gas suppliers arrange with pipelines for the gathering and transportation of gas from their supply sources to the interconnection points with the major interstate pipelines with which MCV has contracts.
		MCV originally entered into long term transportation arrangements with two connecting pipelines which link the Facility and its own pipeline to these interstate pipelines: Michigan Gas Storage Company (a subsidiary of Consumers) and Consumers. In November 2002, Consumers combined the operations of Michigan Gas Storage Company and Consumers. As a result of this combination, MCV’s service is now provided under one agreement. No change in rates or service occurred under the consolidation of these service agreements. Michigan gas produced by suppliers is currently transported to Consumers’ pipeline system by the supplier under contracts the suppliers have with MichCon Gathering Company (previously Michigan Consolidated Gas Company) (“MichCon”), on the MichCon pipeline system in northern Michigan.
		The remaining terms of MCV’s agreements with the U.S. transporters range from less than 1 to 21 years. The transportation rates of ANR, Panhandle, Trunkline and Great Lakes are subject to FERC regulation.
		The suppliers under the Canadian contracts are themselves responsible for arranging transportation within Canada, and are responsible for paying the transportation rates charged by the Canadian transporters, which are then, in most cases, reimbursed by MCV. All suppliers have been allocated firm transportation capacity on the relevant pipelines. Great Lakes transports Canadian gas from the U.S.-Canada border to Michigan.
		MCV has also entered into a gas storage agreement with Consumers for the underground storage of eight billion cubic feet of gas in exchange for delivery to Consumers of 1.75% of the gas placed in storage (for fuel) and the payment by MCV to Consumers of an annual storage service charge of 32.04 cents per Dth times the eight billion cubic feet of storage service provided. Consumers is obligated to provide deliveries from storage up to a rate of 120,000 Mcf/day, subject to certain restrictions relating to levels of storage gas maintained in inventory by MCV. This storage capability allows MCV to meet fluctuating daily operating requirements and to take advantage of opportunities to make spot purchases during periods of the year when gas prices are favorable.
		Credit Support Requirements for MCV’s Gas Arrangements
		Many of MCV’s gas supply contracts have credit support requirements that can be triggered by changes in the financial condition of MCV or the gas supplier, price changes in the forward gas market or the quantity of gas purchases. As of December 31, 2003, MCV was not supplying any credit support in the form of cash or letters of credit for any gas supply agreements. MCV was holding on December 31, 2003, letters of credit totaling $116.6 million from two gas suppliers as collateral support for specific MCV long term gas agreements.

-9-

Table of Contents

		A number of MCV’s gas supply agreements have parent guarantees that are supplied by the corporate parents of the entity that is a party to the MCV gas contract. The MCV Partners guarantee none of MCV’s gas supply agreements.
		MCV hedges gas with NYMEX contracts that have both initial and variation margin requirements. As of December 31, 2003, MCV held 3,559 NYMEX contracts and had provided $20.9 million in margin requirements to support the acquisition of the aforementioned NYMEX contracts.
		MCV also hedges gas with NYMEX commodity swaps and Alberta Energy Company (“AECO”) basis swaps. As of December 31, 2003, MCV had positions totaling 6.4 bcf of NYMEX commodity swaps and .9 bcf of AECO basis swaps in place. These contracts have credit support requirements that can be triggered by changes in the financial condition of MCV or the counterparty and price changes in the forward gas market. As of December 31, 2003, MCV was not supplying any credit support in the form of cash or letters of credit for these swap arrangements.
		In addition, MCV also has credit support requirements in connection with its gas transportation contracts. The present tariff provisions in MCV’s gas transportation contracts provide that credit support can be required based on the credit worthiness of the holder of the contract. As of December 31, 2003, MCV had not been required to provide any credit support for its gas transportation contracts.
		Gas Turbine Service Agreement
		Under a service agreement between MCV and Alstom, as amended, (the “Service Agreement”), Alstom sold MCV spare parts for the GTGs and provides qualified service personnel and supporting staff to assist MCV to perform scheduled inspections on the GTGs, and to repair the GTGs at MCV’s request. The Service Agreement, commenced on January 1, 1990, and was set to expire upon the earlier of the completion of the sixth series of major GTG inspections or December 31, 2009. Alstom did not assure any level of performance by the GTGs in the Service Agreement but warrants all repairs made by it pursuant to the Service Agreement.
		The Service Agreement is terminable (i) if either Alstom or MCV fails to perform the duties outlined under the Service Agreement, at the option of the other party; (ii) at MCV’s option, if MCV is unable to operate the Facility for 60 consecutive days due to force majeure or at MCV’s option for convenience. Upon cessation of the force majeure, the Service Agreement may be reinstated by either party upon 60 days’ notice, together with a remobilization fee. Upon termination of the Service Agreement (except for nonperformance by Alstom), MCV must pay a cancellation payment as discussed below.
		MCV and Alstom amended the Service Agreement effective December 31, 1993 under which Alstom provides hot gas path parts for MCV’s twelve gas turbines through the fourth series of major GTG inspections, which were completed in 2002. In January 1998, MCV and Alstom amended the length of the Service Agreement to extend through the sixth series of major GTG inspections, which were expected to be completed by year-end 2008, for a lump sum fixed price covering the entire term of the amended Service Agreement of $266.5 million (in 1993 dollars, which is adjusted based on exchange rates and Swiss inflation indices), payable on the basis of operating hours as they occur over the same period. The amendment is severable and may be terminated separately from the Service Agreement. If the Service Agreement, as amended, is terminated without cause, MCV must pay a cancellation payment of approximately $5.8 million. MCV terminated the Service Agreement, as amended, in February 2004, for cause.
		MCV signed a new maintenance service and parts agreement with GEII, effective December 31, 2002 (“GEII Agreement”). GEII will provide maintenance services and hot gas path parts for MCV’s twelve GTG’s under terms and conditions similar to the MCV/Alstom Service Agreement, as described above. The GEII Agreement will cover four rounds of major GTG inspections, which are expected to be completed by the year 2015, at a savings to MCV as compared to the Service Agreement with Alstom. The GEII Agreement is expected to replace the current Alstom Service Agreement commencing July 1, 2004. The GEII Agreement can be terminated by either party for cause or convenience. Should termination for convenience occur, a buy out amount will be paid by the terminating party with payments ranging from approximately $19.0 million to $.9 million, based upon the number of operating hours utilized since commencement of the GEII Agreement.

-10-

Table of Contents

		Steam Turbine Service Agreement
		MCV entered into a nine year Steam Turbine Maintenance Agreement with GE effective January 1, 1995, which is designed to improve unit reliability, increase availability and minimize unanticipated maintenance costs. Effective February 1, 2004, MCV and GE amended this contract to extend its term through August 31, 2007. MCV is to make monthly payments over the life of the contract totaling $22.3 million (subject to escalation based on defined indices). The parties have certain termination rights without incurring penalties or damages for such termination. Upon termination, MCV is only liable for payment of services rendered or parts provided prior to termination.
		Gas Turbine Generator Compressor Blade Agreement
		MCV entered into an agreement with MTS Machinery Tools & Services AG (“MTS”), in January 2002. Under this agreement MTS redesigned and will manufacture and install new design compressor blades for MCV’s GTG’s, which is expected to increase the overall electrical capacity and efficiency of each GTG. MCV has purchased three sets of such blades and has the option to purchase an additional nine sets. The first set of new compressor blades was installed in the second quarter of 2003, for approximately $4.2 million. At this time, an additional two sets have been ordered at a cost of $4.1 million.

E.		Employees
		As of March 1, 2004, MCV had 128 employees. Fifty-three of MCV’s employees are members of the Utility Workers Union of America, AFL-CIO Local 564 (the “Union”), and are subject to the terms of a collective bargaining agreement between MCV and the Union. MCV and the Union signed a five-year agreement effective March 1, 2004, with a wage reopener in each of the last two years. MCV believes that its relationship with its employees is good.

F.		Regulation
		Introduction
		MCV and the Facility are not subject to most state and federal public utility laws and regulations. The following is a discussion of the principal regulatory proceedings and issues which could have an impact on MCV and/or the Facility.
		QF Certification
		In order to be a QF under PURPA and to maintain this status, not more than 50% of the “equity interest” in a facility may be owned by electric utilities or their affiliates. In addition, certain operating and efficiency standards must be maintained on a calendar-year basis. In the case of a topping-cycle generating plant such as the Facility, the applicable operating standard requires that the portion of total energy output that is put to some useful purpose other than facilitating the production of power (the “Thermal Percentage”) be at least 5%. In addition, the plant must achieve and maintain an average PURPA efficiency standard (the sum of the useful power output plus one-half of the useful thermal energy output, divided by the energy input) of at least 45% (the “Efficiency Percentage”). However, if the plant maintains a Thermal Percentage of 15% or higher, the required Efficiency Percentage is reduced to 42.5%. Since 1990, the required Thermal and Efficiency Percentages have been achieved. During 2003, a Thermal Percentage of 21.0% and an Efficiency Percentage of 47.4% were achieved.
		The Facility’s QF certification by FERC became effective when portions of the Facility were first synchronized to Consumers’ system in June 1989. As the operator of a QF, MCV (and the Facility) are exempt from various provisions of the FPA and the 1935 Act and from certain state laws and regulations respecting rate, financial and organizational regulation of public utilities. On January 31 and March 1, 1990, FERC recertified the Facility as a QF in the context of an ownership structure in which MCV owns the Facility and in the context of

-11-

Table of Contents

		a leveraged lease transaction in which the Facility is owned by Owner Trustees on behalf of institutional investors. In 1997, 1998, 2000, 2001 and 2003, MCV filed Notices of Self-Recertification with the FERC to reflect changes in the configuration and equipment of the Facility, and changes in MCV Partnership ownership (which changes did not result in a change in the percentage of utility ownership). See Item 7, “MD&A — Outlook — Maintaining QF Status.”
		MPSC and Other Proceedings Relating to Capacity and Energy Charges
		Background. The PPA contains a “regulatory out” provision which permits Consumers, under certain conditions, to reduce the capacity and/or energy charges payable to MCV and/or to receive refunds of capacity and/or energy charges paid to MCV under the PPA if the MPSC does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA. Until September 15, 2007, however, the PPA further provides that Consumers may not reduce the average capacity charge below 3.77 cents per kWh notwithstanding the MPSC’s failure to approve either the amount of capacity Consumers has agreed to purchase from MCV under the PPA or the capacity charge specified in the PPA for such purchase.
		Energy charges payable by Consumers under the PPA are separate and distinct from the capacity charge in that no 17-1/2 year protection against the exercise of the “regulatory out” provision for energy charges is provided for in the PPA. Although prior approval of energy charges is not required or provided for under Michigan law, the MPSC has asserted the authority to disallow Consumers’ recovery of a portion of such energy charges paid to MCV. Any disallowance by the MPSC of Consumers’ ability to pass energy charges through to its customers could, pursuant to the “regulatory out” provision of the PPA, result in a reduction or refund of the fixed and variable portions of the energy charge under the PPA.
		MPSC and Other Proceedings. In September 1987, in order to obtain a 17-1/2 year rate protection provided under Michigan law, known as Act 81, MCV requested MPSC approval of the capacity rate provided for in the PPA. During the pendency of this matter, Consumers, MPSC staff and others negotiated a revised settlement proposal, which was submitted to the MPSC for approval (“Revised Settlement Proposal”).
		In a 1993 order (the “915 MW Settlement”), the MPSC approved with modifications the Revised Settlement Proposal. Generally, the 915 MW Settlement approved cost recovery of Consumers from its rate payers of 915 MW of MCV capacity subject to certain “availability caps” associated with on-peak and off-peak periods of time each day (beginning on January 1, 1998, the “availability caps” were 88.7% of 915 MW both on and off peak) and recovery of energy payments based on coal proxy prices (the formula in the PPA). However, instead of capacity and fixed energy payments being based on “availability” as provided in the PPA, the 915 MW Settlement provided for recovery of such payments on an energy “delivered” basis. The MPSC did not order that the PPA be modified to conform with the cost recovery approved in the 915 MW Settlement. However, the MPSC found that since the capacity charges approved for recovery under the Revised Settlement Proposal would not be reflected in the PPA, approval for the purposes of Act 81 could not be extended to those capacity charges. The MPSC did indicate in its order, however, that its 915 MW Settlement would be implemented for rate-making purposes in 1993 and subsequent years. Opponents to the Revised Settlement Proposal unsuccessfully filed appeals of the 915 MW Settlement which is now final.
		In connection with a dispute between MCV and Consumers regarding the payment of certain fixed energy charges which stemmed from the Revised Settlement Proposal, on December 10, 1993, Consumers made a written irrevocable offer of relief (“Offer of Relief”) to MCV. The Offer of Relief was for the purpose of facilitating the sale of Senior Secured Lease Obligation Bonds, issued in connection with the financing of the Overall Lease Transaction (See Item 1, Section H, “Overall Lease Transaction”) and held by Consumers. Pursuant to the Offer of Relief, which was rendered final and irrevocable on December 28, 1993, Consumers committed to pay MCV the fixed energy charges on all energy delivered by MCV from the block of Contract Capacity above 915 MW. Consumers did not commit to pay MCV for fixed energy charges on energy delivered above the “caps” established in the 915 MW Settlement up to 915 MW. This unilateral commitment, which became effective as of January 1, 1993, to pay fixed energy charges on delivered energy from the block of Contract Capacity above 915 MW will expire on September 15, 2007.

-12-

Table of Contents

		In 1993, Consumers exercised its rights under the PPA to obtain a determination through arbitration proceedings of whether Consumers could exercise the “regulatory out” provision of the PPA in view of Consumers’ acceptance of the 915 MW Settlement. In a Final Order issued in 1995, the arbitrator ruled that Consumers may withhold the fixed energy charges for available but undelivered energy, as well as for energy delivered between the “caps” contained in the 915 MW Settlement and 915 MW.
		In 1995, Consumers and the MPSC staff asked the MPSC to approve a settlement agreement (“325 MW Settlement”) which proposed approving recovery by Consumers from its ratepayers of an additional 325 MW of capacity purchased from MCV beginning January 1, 1996 through the term of the PPA. The costs recovered for this 325 MW of MCV Contract Capacity was essentially the same as the 915 MW Settlement already approved by the MPSC after a phase in of the capacity rate between 1996 and 2004 including the same “availability caps” as the 915 MW Settlement. On November 14, 1996, the MPSC approved, with modifications not material to MCV, the 325 MW Settlement effective January 1, 1996 (“325 MW Settlement”).
		In 1997, Consumers informed MCV of several other potential payment issues it would pursue, pursuant to the “regulatory out” and other provisions of the PPA. These issues related to Consumers’ special contract customers, pricing of the energy delivered during off-peak ramp hours (when MCV adjusts its output to match Consumers’ dispatch) and energy delivered in the band width (energy delivered above dispatch, within certain limits). In addition, Consumers notified MCV that it did not believe that MCV could use the approximately 15 MW of generating capacity and energy attributable to the back pressure turbine, which was placed into service in July 1997, towards available Contract Capacity or electric deliveries under the PPA. Consumers had also indicated that they would take a similar position on the incremental energy and capacity resulting from MCV’s installation of 11NM upgrade packages on the GTGs (collectively the “Disputed Issues”). MCV and Consumers entered into a settlement agreement (“Settlement Agreement”), effective January 1, 1999, which resolves (for the various time periods specified in the Settlement Agreement) 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, notwithstanding 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; provided, however, that 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 and the 325 MW Settlement. The Settlement Agreement has not materially affected MCV’s earnings and cash flows.
		In July 2000, in response to rapidly escalating natural gas prices and since Consumers electric rates were frozen, MCV entered into transactions with Consumers whereby Consumers agreed to reduce MCV’s dispatch level and MCV agreed to share with Consumers the savings realized by not having to generate electricity (“Dispatch Mitigation”). On January 1, 2004, Dispatch Mitigation ceased and Consumers began dispatching MCV pursuant to the 915 MW Settlement and the 325 MW Settlement “availability caps” provision (i.e., minimum dispatch of 1100 MW on- and off-peak (“Forced Dispatch”)). On February 12, 2004, MCV and Consumers entered into a Resource Conservation Agreement (“RCA”) which, among other things, provides that Consumers will economically dispatch MCV, if certain conditions are met. Such dispatch is expected to reduce electric production from what would have occurred under the Forced Dispatch, as well as decrease gas consumption by MCV. The RCA provides that Consumers has a right of first refusal to purchase, at market prices, the gas conserved under the RCA. The RCA further provides for the parties to enter into another agreement implementing the terms of the RCA including the sharing of savings realized by not having to generate electricity. The RCA is subject to MPSC approval and MCV and Consumers must accept the terms of the MPSC order as a condition precedent to the RCA becoming effective. The MPSC has not yet acted

-13-

Table of Contents

		upon Consumers’ application for approval of the RCA. MCV cannot predict the outcome of the MPSC proceedings necessary to effectuate the RCA.
		Michigan Electric Industry Restructuring Proceedings
		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 (transition) 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 point in 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 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 who 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,

-14-

Table of Contents

		the effect of which has been delaying the 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.
		Other Regulatory Issues
		MCV has been granted a permanent exemption from the Power Plant and Industrial Fuel Use Act of 1978, as amended, relating to the use of natural gas as its primary energy source. This exemption permits MCV to consume gas without restriction as to hours of operation or the capacity of the Facility to consume an alternate fuel.
		The Canadian long term gas contracts require permits from both Canadian and U.S. authorities. All of the suppliers have received approval from Canadian provincial authorities to lift and remove sufficient gas volumes to meet MCV’s current contract requirements and from the National Energy Board (“NEB”) to export these volumes. The U.S. long term gas contracts are not subject to regulatory approvals.

G.		Environmental Matters
		MCV has obtained all material federal, state and local environmental permits necessary to construct and operate the Facility. MCV believes that the Facility complies in all material respects with all applicable federal, state and local environmental regulations and laws. There is no litigation or, to the knowledge of MCV, any administrative proceeding or investigation pending or threatened with respect to environmental issues at the Facility. It is possible that applicable environmental laws and regulations may change, making compliance more costly, time consuming and difficult. Any such changes, however, are likely to apply to similarly situated power plants and not only to the Facility.
		Environmental Indemnity Agreements. CMS Energy has executed environmental indemnity agreements in favor of the Senior Bond Trustee, the Subordinated Bond Trustee, the Tax-Exempt Trustee (all as defined in “Overall Lease Transaction”), MCV and the holders, from time to time, of the Bonds. Pursuant to these indemnity agreements, CMS Energy has agreed to indemnify these parties and certain related parties against all expense, damage and liability incurred by them, which is caused by certain classes of environmental matters to the extent these occurred at the Site before June 15, 1990 (with certain exceptions). These matters include (i) the presence of any environmentally hazardous materials at the Site, (ii) any environmentally hazardous activity at the Site and (iii) any event which is a violation of environmental laws affecting the Site (including amendments and supplements to such laws whenever enacted except, in the case of such enactments after June 15, 1990, to the extent they would require installation or modification of equipment). CMS Energy has entered into a similar environmental indemnity agreement for the benefit of the Owner Trustee (in its individual and trust capacities), the Owner Participants (as defined in “Overall Lease Transaction”) and certain related parties. In the agreement in favor of MCV, payments by CMS Energy are subject to a deductible of $20,000 per occurrence and $240,000 in the aggregate. The agreement in favor of MCV terminates when all the Senior Bonds (as defined in “Overall Lease Transaction”) have been paid in full and all the holders of the Bonds (as defined in “Overall Lease Transaction”) have been paid all amounts owed under the general indemnity in the Participation Agreements, except that such indemnity shall not terminate with respect to certain rights arising prior to such final payment.
		MCV has also executed an environmental indemnification agreement in favor of CMS Energy under which it has agreed to indemnify CMS Energy in connection with (i) any violation of the environmental laws by MCV with respect to the Site after June 5, 1988, (ii) the release or disposal of any hazardous materials at, on or to the Site after June 5, 1988 (unless caused by CMS Energy or resulting from hazardous materials at or on the Site prior to June 5, 1988), and (iii) any hazardous activities at the Site after June 5, 1988, provided that CMS Energy may satisfy these obligations only from amounts that are otherwise available for distribution to Partners under the Participation Agreements.

-15-

Table of Contents

H.		Overall Lease Transaction
		General
		Permanent financing for the Facility has been provided through five separate but contemporaneous sale and leaseback transactions (the “Overall Lease Transaction”), pursuant to which MCV sold undivided interests in all of the fixed assets comprising the Facility to the Owner Trustee under five separate owner trusts (the “Owner Trusts”) established for the benefit of certain institutional investors (“Owner Participants”). U.S. Bank National Association (formerly known as State Street Bank and Trust Company) serves as Owner Trustee under each of the Owner Trusts (in each such capacity, an “Owner Trustee” and, collectively, the “Owner Trustees”). Each Owner Trustee leases its undivided interest in the Facility to MCV under one of five separate leases, each having a 25-year base term (the “Basic Lease Term”) commencing in 1990.
		Each purchase of an undivided interest in the Facility by an Owner Trustee and the lease of such undivided interest back to MCV constitutes a separate transaction (each, a “Lease Transaction”). The undivided interests are in varying “undivided interest percentages” ranging from approximately 4.4% to 75.5%. Each Lease Transaction was effected through separate, but substantially identical, documents relating to a particular undivided interest, including a Trust Agreement pursuant to which the Owner Participant established the Owner Trust with the Owner Trustee and authorized the Owner Trustee to hold title to its undivided interest on its behalf and lease the same to MCV (each a “Trust Agreement”), a Participation Agreement pursuant to which MCV, the Owner Participant, the Owner Trustee and the various other parties to such Lease Transaction agreed to the terms and conditions thereof (each, a “Participation Agreement”), a Lease Agreement pursuant to which the Owner Trustee leases the undivided interest to MCV (each, a “Lease”) and two separate Trust Indentures pursuant to which the Owner Trustee issued Senior Notes (as defined in this Item 1, Section I, “Overall Lease Transaction — The Lease Funding”) (each, a “Senior Note Indenture”) and Subordinated Notes (as defined in this Item 1, Section I, “Overall Lease Transaction — The Lease Funding”) (each, a “Subordinated Note Indenture” and, together with the Senior Note Indentures, the “Note Indentures”). The Bank of New York (formerly known as United States Trust Company) and Wachovia Bank National Association (formerly known as First Union National Bank) are note trustees under the Senior Note Indenture and the Subordinated Note Indenture, respectively (the “Note Trustees”). There is a single Collateral Agency and Intercreditor Agreement (the “Intercreditor Agreement”), executed by the Owner Trustees, MCV, the Note Trustees, the Working Capital Lender (as defined below) and U.S. Bank National Association as collateral Agent (the “Collateral Agent”), which provides for the creation and maintenance of certain reserves, the deposit of all revenues generated by the operation of the Facility, the payment of operating expenses, and the distribution of remaining revenues according to the priorities set forth therein to or for the account of the Working Capital Lender, the Note Trustees, the Owner Trustees, MCV and the affiliates of certain Partners. MCV currently has arranged for a $50 million annual working capital line (the “Working Capital Facility”) with a syndicate of banks (the “Working Capital Lender”). As security for its obligation to repay advances made under the Working Capital Facility, MCV has granted to the Working Capital Lender a first priority security interest in certain receivables earned by MCV through the sale of electricity, electric generating capacity, natural gas, or steam to third parties, including Dow, Consumers and DCC (the “Earned Receivables”) and in MCV’s natural gas inventory (the “Natural Gas Inventory”). Payments due under the Working Capital Facility are direct obligations of MCV and will in general have a priority in payment over payments under the Leases (and thus on the Notes (see Item H, “Overall Lease Transaction — The Lease Funding”) and the Bonds).
		Statement of Financial Accounting Standards (“SFAS”) No. 98, which applies to sale and leaseback transactions entered into after June 30, 1988, specifies the accounting required by generally accepted accounting principles (“GAAP”) for a seller-lessee’s sale and simultaneous leaseback transaction involving real estate, including real estate with equipment. In accordance with SFAS No. 98, the Overall Lease Transaction must be accounted for as a financing obligation and not a sale, since MCV has the option to purchase the undivided interests in the Facility at the end of the Basic Lease Term, which expires on July 23, 2015, and has other forms of continuing involvement with the Facility throughout the Basic Lease Term. The Lease obligation is recorded as long term debt, at the present value of future minimum Lease payments. There was no change to property, plant and equipment, on the Consolidated Balance Sheet, as the transaction was

-16-

Table of Contents

		accounted for as a financing arrangement for financial reporting purposes. Certain Lease transaction expenses of MCV are recorded as deferred financing costs and amortized using the interest method over the term of the Lease. On an ongoing basis, the monthly accrual for the semi-annual Lease payments is divided between interest and principal components using the effective interest method.
		The Lease Funding
		Each Owner Trustee financed the purchase of its undivided interest in the Facility through a combination of equity invested by its related Owner Participant ($556,320,000 in the aggregate) and debt incurred through the issuance of nonrecourse notes by the Owner Trustee under the related Note Indentures, consisting of senior secured notes ($1,200,000,000 in the aggregate) (the “Senior Notes”) and subordinated secured notes ($567,180,000 in the aggregate) (the “Subordinated Notes,” and together with the Senior Notes, the “Notes”). In order to facilitate the sale of this debt (other than the debt evidenced by the Subordinated Notes pledged to secure the Tax-Exempt Bonds) (as defined below), two funding corporations were established. Midland Funding Corporation I was established for the purpose of issuing various series of senior bonds (the “Senior Bonds”), each series secured by a pledge of the corresponding series of Senior Notes issued by the five Owner Trustees. Midland Funding Corporation II was established for the purpose of issuing various series of subordinated bonds (the “Subordinated Bonds” and, together with the Senior Bonds, the “Bonds”), each series secured by a pledge of the corresponding series of the Subordinated Notes issued by the five Owner Trustees. These pledged Subordinated Notes are secured proportionally with the Subordinated Notes pledged to secure the Tax-Exempt Bonds issued by the Tax-Exempt Issuer (as defined below). The use of the funding corporations facilitated the sale of debt by permitting the offer and sale of three series of Senior Bonds and two series of Subordinated Bonds, each secured equally and ratably by the corresponding series of Notes issued by each of the five Owner Trusts, thus eliminating the need to offer a greater number of separate series of Notes to the investor. In addition, the use of a corporate obligor facilitated compliance with certain investment laws by certain institutional purchasers of the Senior and Subordinated Bonds. The aggregate principal amount, maturity date, interest rate, redemption provisions and other material terms of each series of the Bonds were identical to those of the Notes pledged as security therefore. As of February 28, 2004, there remains outstanding approximately $556.3 million of equity invested by the Owner Participants and $544.9 million of Subordinated Bonds. The Senior Bonds were retired in July 2002.
		The Economic Development Corporation of the County of Midland (the “Tax-Exempt Issuer”) issued certain series of tax-exempt bonds (the “Tax-Exempt Bonds”), which were issued under and secured by a tax-exempt collateral trust indenture. The proceeds from the issuance and sale of the Tax-Exempt Bonds were used to finance certain pollution control assets constituting a portion of the Facility. Each series of Tax-Exempt Bonds is secured solely by a corresponding series of Subordinated Notes issued by the Owner Trustees, which are secured by a junior security interest in the undivided interests of the Owner Trustees in the Facility and certain of their rights under and to the related Leases, including rents thereunder and the Lease Collateral, including (subject to the rights of the Working Capital Lender, which include a prior security interest in certain of MCV’s receivables and natural gas inventory securing the Working Capital Facility) the revenues and other payments received thereunder. The Subordinated Notes securing the Tax-Exempt Bonds and the Subordinated Notes issued by the Owner Trustees to secure the Subordinated Bonds are secured by junior security interests in a shared collateral pool. On June 15, 2000, MCV refinanced the Tax-Exempt Bonds.
		Security and Sources of Payment
		The sole sources of payment for the Subordinated Bonds were certain pledged Subordinated Notes issued by each of the five Owner Trustees and pledged under the Subordinated Bond Indenture. The pledged Subordinated Notes of each Owner Trustee are nonrecourse obligations of such Owner Trustee payable solely from the rental payments made by MCV under its related Lease and the other security therefore. The Subordinated Notes were secured by a junior (now senior) security interest in such Owner Trustee’s undivided interest in the Facility and certain of its rights under and to the related Lease, including rents and the Lease collateral, including (subject to the rights of the Working Capital Lender) the revenues and other payments received thereunder. The Subordinated Notes are secured on a proportional basis with the Subordinated Notes pledged to secure the Tax-Exempt Bonds.

-17-

Table of Contents

		Additional Subordinated Notes may be issued (i) to refinance any series of Subordinated Notes, and (ii) to pay certain costs of modifying the Facility. Any Subordinated Notes will rank proportionally with all Subordinated Notes then outstanding. The aggregate principal amount of Subordinated Bonds that may be issued is unlimited, provided that at no time may the aggregate principal amount of Subordinated Bonds exceed the aggregate principal amount of Subordinated Notes, respectively, then outstanding. The future issuance of additional Subordinated Bonds (other than for refinancing purposes) would create additional claims against the security for the Note Indentures and the amounts available to repay amounts in respect of the Bonds currently outstanding in the event of foreclosure.
		The rental payments under the Leases are established to provide funds sufficient to service the debt issued by the Owner Trustees and to provide the Owner Participants with a return on their equity investment. MCV is unconditionally obligated to make rental payments under the Leases in amounts sufficient to provide for scheduled payments of the principal of, premium, if any, and interest on the Notes, which amounts, in turn, are equal to scheduled payments of principal of, premium, if any, and interest on the Bonds. MCV has pledged to each Owner Trustee an undivided interest percentage of all revenues to be derived from the operation of the Facility, together with its rights with respect to the PPA, the SEPA, and various other contracts of MCV relating to the Facility (the “Lease Collateral”) to secure its rental obligations under the Leases. Neither the Bonds nor the Notes are direct obligations of, or guaranteed by, MCV nor do any Partners of MCV have any liability under the terms of the Notes, the Bonds or the Leases. Neither the Partners nor the Partner affiliates have any obligations under the Leases, and the obligations of MCV under the Leases and the other documents related to the Overall Lease Transaction are nonrecourse to the Partners and the Partner affiliates.
		Any default or foreclosure with respect to the undivided interest of an Owner Trustee relates solely to such undivided interest. There is no cross-collateralization among Owner Trustees and the Subordinated Bond trustee as holder of the Subordinated Notes. The Leases, however, contain identical events of default including an event of default related to a failure by MCV to pay principal of or interest on any indebtedness for borrowed money or other financing obligations (including lease obligations) with respect to an amount greater than $10 million.
		Pursuant to the Intercreditor Agreement, a reserve account has been created for the benefit of the holders of the Notes, which had been initially funded with $90 million in cash (the “Reserve Account”). The Intercreditor Agreement sets forth circumstances under which amounts in the Reserve Account are to be maintained at not less than $40 million, will be adjusted to equal the lesser of $137 million or the debt portion of basic rent under the Leases payable on the next succeeding basic rent payment date, and limited circumstances under which no more than $10 million contained therein may be withdrawn therefrom to provide working capital. As of December 31, 2003, MCV had funds of $137.3 million in the Reserve Account. Excess funds in the Reserve Account are periodically transferred to MCV.

Item 2. PROPERTIES

MCV leases the Facility from the Owner Trustees pursuant to the Leases. For a description of the Facility, see Item 1, Section B, “The Facility.” For a description of the financing arrangements in connection with the lease of the Facility to MCV, including a description of the liens on the Facility, see Item 1, Section H, “Overall Lease Transaction.”

The Facility is located on the Site, previously the location of Consumers’ abandoned Midland Nuclear Generating Plant in Midland County, Michigan. The Site contains approximately 1,200 acres, including an 880-acre cooling pond. By a lease dated as of December 29, 1987, Consumers, as fee simple owner, leased the land on which the Facility is located to MCV, CMS Midland and MDC (the “Original Lease”), which was amended and restated in its entirety in 1988. By five separate instruments, each dated as of June 1, 1990, Consumers and MCV created undivided interests in the amended Original Lease and amended and restated the lease to reflect the creation of such interests (the Original Lease as so amended and restated is referred to as the “Ground Lease”). In connection with the Overall Lease Transaction, MCV assigned to each Owner Trustee an undivided interest in the Ground Lease

-18-

Table of Contents

equal to such Owner Trustee’s undivided interest percentage. Each Owner Trustee in turn subleased its undivided interest back to MCV pursuant to separate subleases of the Site.

In addition to leasing the Site, the Ground Lease assigns to MCV appurtenant easement rights for a gas pipeline in Midland and Isabella Counties, Michigan and easements in the City of Midland for a railroad spur track and a water pipeline. The Ground Lease terminates on December 31, 2035, with two renewal terms of five years each and with additional renewal terms of two years each. The annual rental under each of the Ground Leases is equal to the undivided interest percentage of $600,000 per annum through the two five-year renewal terms; thereafter, it is fair market rental. The Ground Leases are fully net leases.

Item 3. LEGAL PROCEEDINGS

Property Taxes

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. The appeals for tax years 2001-2003 are being held in abeyance. On January 23, 2004, the Michigan Tax Tribunal issued its decision in MCV’s tax appeal against the City of Midland for tax years 1997 through 2000. MCV management has estimated that the decision will result in a refund to MCV for the tax years 1997 through 2000 of approximately $29 million in taxes plus $7 million of interest. The decision is subject to reconsideration at the Tribunal and may be appealed to the Michigan Appellate Court and Michigan Supreme Court. The City of Midland has filed a motion for reconsideration at the Michigan Tax Tribunal, asking the Tribunal to make certain technical corrections, as well as substantive changes to the decision. MCV has opposed this motion. MCV management cannot predict the outcome of these further legal proceedings. MCV has not recognized any of the above stated refunds (net of approximately $15.5 million of deferred expenses) in earnings at this time.

NOx Allowances

The United States Environmental Protection Agency (“US EPA”) has conditionally approved the State of Michigan’s — State Implementation Plan (“SIP”), which includes an interstate, NOx budget and allowance trading program administered by the US EPA. Each NOx allowance permits a source to emit one ton of NOx during the seasonal control period (May 1 through September 30). NOx allowances may be bought or sold and unused allowances may be banked for future use, with certain limitations. MCV estimates that it will have excess NOx allowances to sell under this program. The current value of the excess 2004 NOx allowances range from approximately $3.0 million to $4.2 million. Consumers has given notice to MCV that it believes the ownership of the NOx allowances under this program belong, at least in part, to Consumers. MCV has initiated the dispute resolution process pursuant to the PPA to resolve this issue. MCV management cannot predict the outcome of this issue.

Other than as discussed in Item 1, Section F, “Regulation,” there are no other pending legal proceedings to which MCV is a party and to which any of its property is subject, that are material in relation to MCV’s consolidated financial statements.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

-19-

Table of Contents

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Not applicable.

Item 6. SELECTED FINANCIAL DATA

(1) 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. Subsequent gains and losses were recorded as operating costs.

(2) Balance sheet data consists of the balances at December 31.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

Results of Operations

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995. This Annual Report on Form 10-K 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

-20-

Table of Contents

relating to the forward-looking statements. 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, Federal Energy Regulatory Commission and the Michigan Public Service Commission) with respect to cost recovery under the PPA, industry restructuring or deregulation, operation 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.

Overview

For the year ended December 31, 2003, MCV recorded net income of $59.8 million, which includes a $5.0 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, “Accounting for Derivative Instruments and Hedging Activities.” MCV’s net income for the year ended December 31, 2002 was $132.0 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 December 31, 2002 resulted in an additional earnings increase of $21.9 million. The earnings decrease for the year of 2003 compared to 2002 of $72.2 million is the result of the $85.0 million decrease in the long term gas contract mark-to-market value and lower energy rates under the PPA with Consumers. This earnings decrease is partially offset by lower net natural gas prices, lower interest expense on MCV’s financing obligation and higher electric and steam energy rates under the SEPA with Dow.

For the year ended December 31, 2002, MCV recorded net income of $132.0 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 additional quarterly mark-to-market adjustments as of December 31, 2002 resulted in an additional net earnings increase of $21.9 million. The earnings increase for the year 2002 compared to 2001 of $83.7 million, is the result of the $80.0 million increase due to the mark-to-market gain on the long term gas contracts. Also contributing to this earnings increase is lower fuel usage and two 2001 one-time charges. In December 2001, MCV expensed $8.2 million in relating to the prepayment of gas costs under a long term contract with an affiliate of Enron Corporation, which was subsequently terminated and expensed $6.7 million in development costs. Other factors contributing to the earnings increase were lower interest expense on MCV’s financing arrangements and higher electric rates under the PPA, partially offset by higher natural gas prices under MCV’s long term gas contracts, lower interest income on MCV’s invested cash reserves and lower revenues from energy sales outside of the PPA.

-21-

Table of Contents

Operating Revenues

The following represents significant operating revenue statistics for the years ended December 31 (dollars in thousands except average rates):

For the year ended December 31, 2003, MCV’s operating revenues decreased $12.4 million from 2002. This decrease is due primarily to a lower electric dispatch 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.

For the year ended December 31, 2002, MCV’s operating revenues decreased $14.0 million from 2001. This decrease is due primarily to a lower electric dispatch under the PPA with Consumers, lower capacity and energy revenues under summer electric option agreements with Consumers and other third parties, and lower energy rates under the SEPA, due to Dow’s election to cease tolling of gas. This decrease was partially offset by an increase in the electric energy rates under the PPA.

Operating Expenses

The table below reconciles MCV’s fuel costs, as reported in the Consolidated Statement of Operations, to the non-GAAP fuel costs reported below. The non-GAAP fuel costs are a better representation of MCV’s actual natural gas cost of production utilized at the Facility. The table reconciles non-GAAP fuel costs for the years ended December 31, (dollars in thousands):

For the year ended December 31, 2003, MCV’s operating expenses were $416.5 million, which includes $255.0 million of fuel costs, including a $5.0 million mark-to-market loss on certain natural gas contracts which contain optionality. During this period, MCV purchased approximately 69.5 Bcf of natural gas, and a net 3.0 Bcf was used for transportation fuel and as a net change to gas in storage. During this same period, MCV consumed 66.5 Bcf. The average commodity cost of fuel for the year 2003 was $3.09 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. For the year ended December 31, 2002, MCV’s

-22-

Table of Contents

operating expenses were $408.7 million, which includes $255.1 million of fuel costs, including a $21.9 million mark- to-market net gain on the natural gas contracts which contain optionality. During this period, MCV purchased approximately 74.6 Bcf of natural gas, and a net 2.3 Bcf was used for transportation fuel and as a net change to gas in storage. During this same period, MCV consumed 74.3 Bcf of which 2.0 Bcf of this total was gas provided by Dow. The average commodity cost of fuel for the year 2002 was $3.23 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. Fuel costs for the year 2003 compared to 2002 decreased by $27.0 million, excluding the effects of the quarterly mark-to-market adjustments for both periods. This fuel cost decrease was due to lower natural gas costs resulting from increased 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 year ended December 31, 2002, MCV’s operating expenses decreased $44.3 million from the year 2001, which includes a $33.0 million decrease in fuel costs. This fuel cost decrease includes a $21.9 million mark-to-market net gain on the natural gas contracts which contain optionality. Fuel costs for the year 2002 compared to 2001 decreased by $11.1 million, excluding the $21.9 million mark-to-market net gain. This fuel cost decrease was primarily due to a lower natural gas usage resulting from a reduction in the electric dispatch under the PPA and from Dow’s election to toll gas; and lower costs associated with the electric dispatch reduction transaction entered into with Consumers. Also contributing to this decrease was a 2001 one-time expense for an $8.2 million provision made relating to the prepayment of gas costs under a long term contract with an affiliate of Enron. Partially offsetting this decrease are higher natural gas prices under MCV’s long term gas contracts.

For the year ended December 31, 2003, operating expenses other than fuel costs increased $7.9 million from 2002, primarily resulting from increased property tax expense due to higher 2003 millage rates, a provision for an option payment with Alstom for two gas turbines and higher compensation cost payments under the senior management bonus plan. All other expenses incurred in these periods were considered normal expenditures to achieve the recorded operating revenues.

For the year ended December 31, 2002, operating expenses other than fuel costs decreased $11.3 million from the year 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 normal expenditures to achieve the recorded operating revenues.

Other Income (Expense)

For the year ended December 31, 2003 compared to 2002, interest expense decreased $6.5 million due to a lower outstanding principal balance on MCV’s financing obligation.

For the year ended December 31, 2002, interest and other income decreased $11.2 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 year ended December 31, 2002 compared to 2001 of $6.5 million is due to a lower outstanding 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. At 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. 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 some of the earnings volatility. MCV expects the remaining six contracts to cause future earnings volatility,

-23-

Table of Contents

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 four years.

Liquidity and Capital Resources

For the years ended December 31, 2003 and 2002, net cash generated by MCV’s operations was $141.5 million and $227.9 million, respectively. Included in MCV’s net cash generated as of December 31, 2003 is $4.5 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 years ended December 31, 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 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 year 2003. As of December 31, 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.

In the near term, 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 unless Forced Dispatch continues for an extended period of time. See Item 7, “MD&A — Outlook Energy Rates and Cost of Production.” As of December 31, 2003, there were approximately $313.4 million of cash reserves of which $137.3 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 December 31, 2003, MCV has the following contractual financial obligations and commitments:

-24-

Table of Contents

(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.

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.

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. At this time, because of various uncertainties related to this legislation and the appropriate accounting methodology, MCV has elected to defer financial recognition of this legislation until the FASB issues final accounting guidance. When issued, that final guidance could require MCV to change previously reported information. This deferral election is permitted under SFAS 106-1, “Employers Accounting for Postretirement Benefits Other Than Pensions.”

Off-Balance Sheet Arrangements

As part of MCV’s ongoing business, MCV does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2003, MCV was not involved in any unconsolidated SPE transactions.

Outlook

Results of operations are largely dependent on successfully maintaining availability of the Facility at or near Contract Capacity levels, the availability of natural gas and the level of energy rates paid to MCV relative to the cost of fuel used for generation.

Operating Outlook. During 2003, approximately 69% of PPA revenues were capacity payments under the PPA, which were 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 99.4% for 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

-25-

Table of Contents

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. MCV maintains a hedging program to mitigate risk associated with volatile market prices in the gas market. MCV has entered into natural gas purchase and hedging arrangements with respect to approximately 58% of its 2004 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 December 2003. Previously, the Facility was being dispatched on an uneconomic basis (relative to the cost of other energy resources) under the terms of the 915 MW Settlement and the 325 MW Settlement      , averaging approximately 90% annual dispatch. In July 2000, in response to rapidly escalating natural gas prices and since Consumers electric rates were frozen, MCV entered into transactions with Consumers whereby Consumers agreed to reduce MCV’s dispatch level and MCV agreed to share with Consumers the savings realized by not having to generate electricity (“Dispatch Mitigation”). On January 1, 2004, Dispatch Mitigation ceased and Consumers began dispatching MCV pursuant to the 915 MW Settlement and the 325 MW Settlement “availability caps” provision (i.e., minimum dispatch of 1100 MW on- and off-peak (“Forced Dispatch”)). On February 12, 2004, MCV and Consumers entered into a Resource Conservation Agreement (“RCA”) which, among other things, provides that Consumers will economically dispatch MCV, if certain conditions are met. Such dispatch is expected to reduce electric production from what would have occurred under the Forced Dispatch, as well as decrease gas consumption by MCV. The RCA provides that Consumers has a right of first refusal to purchase, at market prices, the gas conserved under the RCA. The RCA further provides for the parties to enter into another agreement implementing the terms of the RCA including the sharing of savings realized by not having to generate electricity. The RCA is subject to MPSC approval and MCV and Consumers must accept the terms of the MPSC order as a condition precedent to the RCA becoming effective. The MPSC has not yet acted upon Consumers’ application for approval of the RCA. MCV cannot predict the outcome of the MPSC proceedings necessary to effectuate the RCA. This Forced Dispatch could negatively affect MCV’s financial performance by approximately $32 million per year, based upon projected spot gas prices of approximately $5.02/MMBtu.

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, notwithstanding modifications to the Facility increasing its capacity, in billing Consumers for capacity

-26-

Table of Contents

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 and the 325 MW Settlement. 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 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 who will provide transmission service under a standardized tariff and administer market based wholesale energy markets for day-ahead and

-27-

Table of Contents

real-time sales. The SMD proposal has drawn strong criticism, the effect of which has been delaying the 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 2003 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 2003, the Facility achieved an Efficiency Percentage of 47.4% and a Thermal Percentage of 21.0%.

The loss of QF status could, among other things, cause the Facility to lose its right under PURPA to sell power to Consumers at Consumers’ “avoided cost” and subject the Facility to additional federal and state regulatory requirements, including the 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 Item 1, Section H, “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 Item 7, “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

-28-

Table of Contents

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 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 some of 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 four 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 $16.9 million for these gas contracts for a cumulative mark-to-market gain through December 31, 2003 of $75.0 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. On January 23, 2004, the Michigan Tax Tribunal issued its decision in MCV’s tax appeal against the City of Midland for tax years 1997 through 2000. MCV management has estimated that the decision will result in a refund to MCV for the tax years 1997 through 2000 of approximately $29 million in taxes plus $7 million of interest. The decision is subject to reconsideration at the Tribunal and may be appealed to the Michigan Appellate Court and Michigan Supreme Court. The City of Midland has filed a motion for reconsideration at the Michigan Tax Tribunal, asking the Tribunal to make certain technical corrections, as well as substantive changes to the decision. MCV has opposed this motion. MCV management cannot predict the outcome of these further legal proceedings. MCV has not recognized any of the above stated refunds (net of approximately $15.5 million of deferred expenses) in earnings at this time.

See Item 8, “Financial Statements and Supplementary Data – Note 1 to the Consolidated Financial Statements” for a further discussion of associated risks and contingencies.

-29-

Table of Contents

Item 7A. 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 Item 15, “Notes to Consolidated Financial Statements — Note 2, Significant Accounting Policies and Note 6, 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. 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, which are made up of investment securities held to maturity and as of December 31, 2003, have original maturity dates of approximately one year or less.

For MCV’s financing 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:

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.

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 February 2004 to December 2007. The table presents the carrying amounts and fair values at December 31, 2003:

-30-

Table of Contents

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Report of Independent Auditors and Financial Statements are set forth on pages F-2 to F-23 of this Annual Report on Form 10-K and are hereby incorporated by reference herein.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

In June 2002, MCV’s Management Committee, upon the recommendation of the Audit Subcommittee of MCV, voted to discontinue using Arthur Andersen, LLP to audit MCV’s financial statements for the year ending December 31, 2002. MCV previously retained Arthur Andersen, LLP to review their financial statements for the quarter ended March 31, 2002. In June 2002, the Management Committee engaged PricewaterhouseCoopers, LLP to audit its financial statements for the year ending December 31, 2002. During 1999, 2000 and 2001 there were no disagreements or “reportable events” as described in Items 304(a)(1)(iv) and (v) of Regulation S-K between MCV and Arthur Andersen, LLP. During 2003 and 2002, there were no disagreements or “reportable events” as described in Items 304(a)(1)(iv) and (v) of Regulation S-K between MCV and PricewaterhouseCoopers LLP.

Item 9A. 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 last fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

-31-

Table of Contents

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is information with respect to those individuals who serve as executive officers of MCV as well as those individuals who serve as members of its Management Committee, with their ages in parenthesis. The executive officers of MCV are each appointed by the Management Committee and serve until his or her successor is duly chosen or until his or her death, ineligibility to serve, resignation or removal by the Management Committee. Members of the Management Committee are each appointed by a General Partner and serve until his or her successor is appointed by the appropriate General Partner. Members of the Management Committee receive no compensation from MCV for serving on the Management Committee. For a discussion of the relationships between members of the Management Committee, Executive Officers and the Partners, the ownership interests of each of the general and limited partners of MCV, and the voting percentages of each of the members of the Management Committee, see Item 12, “Security Ownership of Certain Beneficial Owners and Management” and Item 13, “Certain Relationships and Related Transactions.”

John J. O’Rourke has served as a member of the Management Committee since March 2001 and was elected as Chairman of the Management Committee in June 2002. Mr. O’Rourke has served as Vice President and Managing Director for El Paso Merchant Energy North America Company since May 2000. Prior to becoming Vice President and Managing Director for El Paso Merchant Energy North America Company, Mr. O’Rourke has held several other senior management positions in the energy business over the past 20 years with FPL Energy and Ebasco Services, Inc.

David W. Joos has served as a member of the Management Committee since June 2002. Mr. Joos is President, Chief Operating Officer and a member of the Board of Directors of CMS Energy Corporation, a position he was elected to in 2001. Previously he was Executive Vice President and Chief Operating Officer – Electric of CMS Energy since December 2002 and President and Chief Executive Officer – Electric of Consumers Energy since 1997.

James M. Kevra has served as President and Chief Executive Officer of MCV since July 1995.

-32-

Table of Contents

Bruce C. Grant has served as Vice President of Human Resources, Communications and Public Affairs of MCV since February 1998. From May 1988 to February 1998 he served as the Director of Human Resources and Communications of MCV.

Barbara E. Lawson was appointed by the Management Committee in May 2002, to the position of Treasurer and Manager of Internal Audit of MCV. Ms. Lawson has held various financial positions at MCV since May 1988, including her previous position as Manager of Internal Audit.

James A. Mooney has served as Vice President of Engineering, Operations and Construction of MCV since October 1987.

Gary B. Pasek has served as General Counsel and Secretary of MCV since May 1995 and was elected Vice President in February 1998.

James M. Rajewski was appointed by the Management Committee in May 2002 to the position of Chief Financial Officer, Vice President and Controller of MCV. He had served as Vice President and Controller of MCV since January 1988.

LeRoy W. Smith has served as Vice President of Energy Supply and Marketing of MCV since October 1998. From July 1988 to September 1998, he served as Vice President of Gas Supply of MCV.

Audit Subcommittee Financial Expert

MCV’s Management Committee has established an audit subcommittee for the purpose of overseeing the accounting and financial reporting processes of the MCV and audits of the financial statements of the MCV. The audit subcommittee’s members consist solely of representatives from each of MCV’s three Partners. MCV believes that the experience, education and ethics of the subcommittee members qualify them to oversee the accounting and financial reporting process and audits of the financial statements of MCV. The MCV’s Management Committee has determined Ronald C. Edmonds of The Dow Chemical Company (a limited partner of the MCV Partnership), a member of the audit subcommittee, to be the audit subcommittee financial expert, based upon his education and work experience. Mr. Edmonds is currently the Global Accounting Director of The Dow Chemical Company and has held this position since 2001. Prior to serving as Global Accounting Director, he has held various other positions with Dow, serving as leader of the Global Procurement Service Center, Global Payables Manager, Controller for Payables Accounting and Latin American Audit Manager. Mr. Edmonds is a Certified Public Accountant (“CPA”) and a member of the American Institute of CPA’s, Michigan Association of CPA’s and the Financial Executives International. Because the MCV does not have a class of securities listed on any national securities exchange or in an automated inter-dealer quotation system, the Securities and Exchange Commission’s (“SEC”) independence requirements for audit subcommittee members do not apply to the MCV. The SEC rules do require that the MCV disclose whether its audit subcommittee financial expert is independent, using a definition for audit subcommittee member independence of a national securities exchange or a national securities association that has been approved by the SEC. Using the definition for audit subcommittee member independence set forth in the New York Stock Exchange’s Listed Company Manual, Mr. Edmonds is not independent because of his status as an accounting officer of Dow, which has a material relationship with MCV.

-33-

Table of Contents

Code Of Ethics

MCV has adopted a Code of Conduct and Ethics (“Code”), in compliance with applicable rules of the SEC requirements, that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. This Code also extends to others within MCV that have an active role in the development of MCV’s financial data. A copy of the Code is available, without charge, upon written request to:

Item 11. EXECUTIVE COMPENSATION

Compensation

The following table sets forth certain compensation data with respect to the chief executive officer and four other most highly compensated executive officers of MCV for each of the three years ended December 31, 2003, 2002 and 2001.

Summary Compensation Table

-34-

Table of Contents

(c)		Includes company contributions of $10,000 to the 401(k) Savings Plan, $18,000 to the Defined Contribution Retirement Plan and $15,088 to the Supplemental Retirement Plan.
(d)		Includes company contributions of $9,126 to the 401(k) Savings Plan, $18,000 to the Defined Contribution Retirement Plan and $2,859 to the Supplemental Retirement Plan.
(e)		Includes company contributions of $9,126 to the 401(k) Savings Plan, $18,000 to the Defined Contribution Retirement Plan and $251 to the Supplemental Retirement Plan.
(f)		Includes company contributions of $7,579 to the 401(k) Savings Plan and $15,159 to the Defined Contribution Retirement Plan.

Compensation Committee Interlocks and Insider Participation

The members of the Management Committee also serve as members of MCV’s Compensation Committee. Members of the Compensation Committee are each appointed by a General Partner and serve until his or her successor is appointed by the appropriate General Partner. No member of the Compensation Committee was or is an officer or employee of MCV. Members of the Compensation Committee receive no compensation from MCV.

Mr. O’Rourke was elected as Chairman of the Compensation Committee in June 2002. He has served since March 2001 as a member of MCV’s Compensation Committee. He also serves as Vice President and Managing Director for El Paso Merchant Energy North America Company. El Paso Midland, Inc. and affiliates of El Paso have engaged in numerous transactions in the ordinary course of business to provide services or products to MCV. In 2003, El Paso affiliates engaged in transactions with MCV, which included the sale of natural gas, sale of natural gas transportation and various natural gas marketing services that amounted in aggregate to approximately $71.7 million. In December 2002, MCV and an El Paso affiliate entered into a master netting agreement, covering the natural gas purchase agreements, in which collateral in the form of cash or a letter or credit can be required of either party based on such party’s credit ratings and on the mark-to-market values of the natural gas purchase agreements. As of December 31, 2003, El Paso had provided to MCV letters of credit under the master netting agreement in the amount of $99.5 million.

Mr. Joos commenced in June 2002 as a member of MCV’s Compensation Committee. He also serves as President, Chief Operating Officer and a member of the Board of Directors of CMS Energy Corporation. CMS Energy and its affiliates have the following direct and indirect interests in MCV and the Facility. CMS Midland Holdings Company has an ownership interest in one of the Owner Trusts, representing indirectly a 35% equity interest in the Facility; CMS Midland Inc. has a 49% general partnership interest in MCV; and Consumers has contractual obligations under the PPA to purchase electric capacity and related energy from MCV, has contractual obligations under various backup agreements among MCV, Consumers and Dow to assure a continuous supply of steam and electricity to Dow in the event the SEPA is terminated, has contractual obligations to enter into transmission service agreements with other utilities for MCV’s benefit, and has leased undivided interests in the Site to the Owner Trustees (as MCV’s assignees) pursuant to the Ground Lease. In 2003, Consumers purchased electric capacity and related energy from the Facility that aggregated approximately $513.8 million. In addition, CMS Energy affiliates have engaged in numerous transactions in the ordinary course of business to provide services or products to MCV. In 2003, CMS Energy affiliates engaged in transactions with MCV which included the sale of natural gas, the sale of natural gas transportation, the sale of natural gas storage and the purchase of natural gas that amounted in aggregate to approximately $23.7 million. This level of transactions decreased substantially from the 2002 level as a result of the sale of the Panhandle and Trunkline transportation services to Southern Union Pipeline and due to the sale of CMS Marketing Services and Trading’s (a subsidiary of Consumers) natural gas contracts to Sempra Energy Trading, the wholesale commodity trading unit of Sempra Energy. As of February 1, 2003, Consumers or its subsidiaries no longer hold any natural gas contracts with MCV.

For further detailed discussions of MCV’s contracts and leases with Partners, see Item 1, Section E, “Contracts”, Item 2, “Properties” and Item 8, “Financial Statements and Supplementary Data — Note 7 to the Consolidated Financial Statements.”

-35-

Table of Contents

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following information is given with respect to the Partners of MCV, its Management Committee members and all Management Committee members and officers as a group.

Security Ownership of Certain Beneficial Owners

(a)

Each partner has sole voting and investment power with respect to its general partnership interest. Limited partners have no voting rights, except to certain specified acts of the Management Committee. MCV is a limited partnership wholly owned by its Partners. Beneficial interests in the partnership are not available to any persons other than the Partners. Accordingly, none of the members of the Management Committee and none of the executive officers of MCV has any beneficial ownership in MCV.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Item 11, “Executive Compensation — Compensation Committee Interlocks and Insider Participation.”

-36-

Table of Contents

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees

The aggregate of all fees billed to MCV by its independent auditor, Pricewaterhouse Coopers, LLP (PwC), were $191,000 during fiscal year 2003 and $190,033 for 2002, for the portion of 2002 that PwC served as MCV’s independent auditor. Prior to June 2002, at which time PwC was engaged as MCV’s independent auditor, Arthur Andersen, LLP (“AA”) served as MCV’s independent auditor and billed fees of $31,000 during the first half of 2002. See Part II, Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure”. All fees billed to MCV for both periods were for audit fees. These audit fees were for professional services rendered by the principal accountant for the audit of MCV’s annual financial statements and review of financials statements included in MCV’s Form 10-Q, as well as services that are normally provided in connection with statutory and regulatory filings or engagements. During fiscal year 2003 and 2002, MCV was not billed by PwC or AA for any fees for services considered audit-related fees, tax services for tax compliance, tax advice or tax planning or any other fees, other than those described above.

Audit Subcommittee Pre-Approval Policies and Procedures

All services provided by MCV’s independent auditors, PwC, are subject to pre-approval by MCV’s audit subcommittee. The audit subcommittee charter does provide the delegation of pre-approval for some minor services to MCV’s management in the event that there is a need for such approval prior to the next full audit subcommittee meeting. However, a full report of any such interim approvals must be given at the next audit subcommittee meeting.

-37-

Table of Contents

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)

The following documents are filed as part of this report:

	1.		Financial statements.
			The following consolidated financial statements are as of December 31, 2003 and 2002 or for each of the three years ended December 31, 2003, 2002 and 2001:

	2.		All schedules are omitted because they are inapplicable, not required or the information is included in the financial statements or notes thereto.
	3.		The Exhibits that are filed or incorporated by reference as part of this report are listed in the Exhibit Index filed herewith.

(b)		Reports on Form 8-K.
		Current report dated January 23, 2004 containing Item 5, “Other Events” reporting on MCV’s Property Tax judgment.

-38-

Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS