UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from                                       to                                       

Commission File Number: (Under the Securities Act of 1933) 33-37977

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

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

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

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

The accompanying condensed notes are an integral part of these statements.

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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

The accompanying condensed notes are an integral part of these statements.

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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

The accompanying condensed notes are an integral part of these statements.

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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

The accompanying condensed notes are an integral part of these statements.

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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

These consolidated financial statements and condensed notes should be read along with the audited financial statements and notes contained in the Annual Report on Form 10-K for the year ended December 31, 2003 of Midland Cogeneration Venture Limited Partnership (“MCV”). In the opinion of management, the unaudited financial information herein reflects all adjustments (which include only normal recurring adjustments) necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. The consolidated financial statements included the accounts of MCV and its wholly-owned subsidiaries. In 1992, MCV had acquired the outstanding common stock of PVCO Corp., a previously inactive company. MCV and PVCO Corp. then entered into a partnership agreement to form MCV Gas Acquisition General Partnership (“MCV GAGP”) for the purpose of buying and selling natural gas on the spot market and other transactions involving natural gas activities. PVCO Corp. and MCV GAGP were dissolved on January 30, 2004 and July 2, 2004, respectively, due to inactivity. All material transactions and balances among entities, which comprised MCV, had been eliminated in the consolidated financial statements. In addition, the dissolution of these wholly-owned subsidiaries had no impact on the financial position and results of operations of MCV. Interim results may not be indicative of results that may be expected for any other interim period or for 2004 as a whole.

(1)		THE PARTNERSHIP AND ASSOCIATED RISKS
		MCV was organized to construct, own and operate a combined-cycle, gas-fired cogeneration facility (the “Facility”) located in Midland, Michigan. MCV was formed on January 27, 1987, and the Facility began commercial operation in 1990.
		The Facility has a net electrical generating capacity of approximately 1500 MW and approximately 1.5 million pounds of process steam capacity per hour. MCV has entered into three principal energy sales agreements. MCV has contracted to (i) supply up to 1240 MW of electric capacity (“Contract Capacity”) to Consumers Energy Company (“Consumers”) under the Power Purchase Agreement (“PPA”), for resale to its customers through 2025, (ii) supply electricity and steam to The Dow Chemical Company (“Dow”) through 2008 and 2015, respectively, under the Steam and Electric Power Agreement (“SEPA”) and (iii) supply steam to Dow Corning Corporation (“DCC”) under the Steam Purchase Agreement (“SPA”) through 2011. From time to time, MCV enters into other sales agreements for the sale of excess capacity and/or energy available above MCV’s internal use and obligations under the PPA, SEPA and SPA. Results of operations are primarily dependent on successfully operating the Facility at or near contractual capacity levels and on Consumers’ ability to perform its obligations under the PPA. Sales pursuant to the PPA have historically accounted for over 90% of MCV’s revenues.
		The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the Michigan Public Service Commission (“MPSC”) does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA (the “regulatory-out” provision). Until September 15, 2007, however, the capacity charge may not be reduced below an average capacity rate of 3.77 cents per kilowatt-hour for the available Contract Capacity notwithstanding the “regulatory-out” provision. Consumers and MCV are required to support and defend the terms of the PPA.
		The Facility is a qualifying cogeneration facility (“QF”) originally certified by the Federal Energy Regulatory Commission (“FERC”) under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”). In order to maintain QF status, certain operating and efficiency standards must be maintained on a calendar-year basis and certain ownership limitations must be met. In the case of a topping-cycle generating plant such as the Facility, the applicable operating standard requires that the portion of total energy output that is put to some useful purpose other than facilitating the production of power (the “Thermal Percentage”) be at least 5%. In addition, the Facility must achieve a PURPA efficiency standard (the sum of the useful power output plus one-half of the useful thermal energy output, divided by the energy input (the “Efficiency Percentage”)) of at least 45%. If the Facility maintains a Thermal Percentage of 15% or higher, the required Efficiency Percentage is reduced to 42.5%. Since 1990, the Facility has achieved the applicable Thermal and Efficiency Percentages. For the nine months ended September 30, 2004, the Facility achieved a Thermal Percentage of 15.3% and an Efficiency Percentage of 47.5%. The loss of QF status could, among other things, cause the Facility to lose its

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		rights under PURPA to sell power to Consumers at Consumers’ “avoided cost” and subject the Facility to additional federal and state regulatory requirements.
		The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility’s operating expenses consist of the costs of natural gas. MCV recognizes that its existing gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of the existing gas contracts. In addition, to the extent that the costs associated with production of electricity rise faster than the energy charge payments, MCV’s financial performance will be negatively affected. The extent of such impact will depend upon the amount of the average energy charge payable under the PPA, which is based upon costs incurred at Consumers’ coal-fired plants and upon the amount of energy scheduled by Consumers for delivery under the PPA. However, given the unpredictability of these factors, the overall economic impact upon MCV of changes in energy charges payable under the PPA and in future fuel costs under new or existing contracts cannot accurately be predicted.
		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 a 915 MW settlement and a 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 is occurring 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 parties have entered into another agreement (the Reduced Dispatch Agreement (“RDA”)) implementing the terms of the RCA including the sharing of savings realized by not having to generate electricity. The RCA and RDA are subject to MPSC approval and MCV and Consumers must accept the terms of the MPSC order as a condition precedent to the RCA and RDA becoming effective. The MPSC has established a contested hearing schedule which is expected to result in an MPSC order being issued no earlier than the fourth quarter of 2004. MCV cannot predict the outcome of the MPSC proceedings necessary to effectuate the RCA and RDA. Effective October 23, 2004, MCV and Consumers entered into an interim Dispatch Mitigation program for energy dispatch above 1100 MW up to 1240 MW of Contract Capacity under the PPA. This program, which is structured very similarly to the RCA and RDA, can be terminated by either party upon 30 days written notice. During 2003, MCV estimates that the previous program resulted in net savings of approximately $7.9 million for the nine months ended September 30, 2003, a portion of which is realized in reduced maintenance expenditures in future years.
		At both the state and federal level, efforts continue to restructure the electric industry. A significant issue to MCV is the potential for future regulatory denial of recovery by Consumers from its customers of above market PPA costs Consumers pays MCV. At the state level, the MPSC entered a series of orders from June 1997 through February 1998 (collectively the “Restructuring Orders”), mandating that utilities “wheel” third-party power to the utilities’ customers, thus permitting customers to choose their power provider. MCV, as well as others, filed an appeal in the Michigan Court of Appeals to protect against denial of recovery by Consumers of PPA charges. The Michigan Court of Appeals found that the Restructuring Orders do not unequivocally disallow such recovery by Consumers and, therefore, MCV’s issues were not ripe for appellate review and no actual controversy regarding recovery of costs could occur until 2008, at the earliest. In June 2000, the State of Michigan enacted legislation which, among other things, states that the Restructuring Orders (being voluntarily implemented by Consumers) are in compliance with the legislation and enforceable by the MPSC. The legislation provides that the rights of parties to existing contracts between utilities (like Consumers) and QFs (like MCV), including the rights to have the PPA charges recovered from customers of the utilities, are not abrogated or diminished, and permits utilities to securitize certain stranded costs, including PPA charges.

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		In 1999, the U.S. District Court granted summary judgment to MCV declaring that the Restructuring Orders are preempted by federal law to the extent they prohibit Consumers from recovering from its customers any charge for avoided costs (or “stranded costs”) to be paid to MCV under PURPA pursuant to the PPA. In 2001, the United States Court of Appeals (“Appellate Court”) vacated the U.S. District Court’s 1999 summary judgment and ordered the case dismissed based upon a finding that no actual case or controversy existed for adjudication between the parties. The Appellate Court determined that the parties’ dispute is hypothetical at this time and the QFs’ (including MCV) claims are premised on speculation about how an order might be interpreted by the MPSC, in the future.
		Two significant issues that will affect MCV’s future financial performance are the price of natural gas and the MPSC’s decision in 2007 or beyond related to the recovery of PPA charges. Natural gas prices have historically been volatile and presently there is no consensus among forecasters on the price or range of future prices of natural gas. Even with an approved RCA and RDA, if gas prices continue at present levels or increase, the economics of operating the Facility may be adversely affected. MCV continues to monitor and participate in these industry restructuring matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. MCV management cannot, at this time, predict the impact or outcome of these matters.
(2)		RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
		Fair Value of Financial Instruments
		The carrying amounts of cash, cash equivalents and short-term investments approximate fair value because of the short maturity of these instruments. MCV’s short-term investments, which are made up of investment securities held-to-maturity, as of September 30, 2004 and December 31, 2003, have original maturity dates of approximately one year or less. The unique nature of the negotiated financing obligation discussed in Note 7 makes it unnecessary to estimate the fair value of the lessor group (“Owner Participants”) underlying debt and equity instruments supporting such financing obligation, since Statement of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures about Fair Value of Financial Instruments” does not require fair value accounting for the lease obligation.
		Accounting for Derivative Instruments and Hedging Activities
		Effective January 1, 2001, MCV adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” which was issued in June 1998 and then amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of SFAS No. 133,” SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities – An amendment of FASB Statement No. 133” and SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activity (collectively referred to as “SFAS No. 133”). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges in some cases allows a derivative’s gains and losses to offset related results on the hedged item in the income statement or permits recognition of the hedge results in other comprehensive income, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
		Electric Sales Agreements
		MCV believes that its electric sales agreements currently do not qualify as derivatives under SFAS No. 133, due to the lack of an active energy market (as defined by SFAS No. 133) in the State of Michigan and the transportation cost to deliver the power under the contracts to the closest active energy market at the Cinergy hub in Ohio and as such does not record the fair value of these contracts on its balance sheet. If an active energy

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		market emerges, MCV intends to apply the normal purchase, normal sales exception under SFAS No. 133 to its electric sales agreements, to the extent such exception is applicable.
		Natural Gas Supply Contracts
		MCV management believes that its long-term natural gas contracts, which do not contain volume optionality, qualify under SFAS No. 133 for the normal purchases and normal sales exception. Therefore, these contracts are currently not recognized at fair value on the balance sheet.
		The FASB issued DIG Issue C-16, which became effective April 1, 2002, regarding natural gas commodity contracts that combine an option component and a forward component. This guidance requires either that the entire contract be accounted for as a derivative or the components of the contract be separated into two discrete contracts. Under the first alternative, the entire contract considered together would not qualify for the normal purchases and sales exception under the revised guidance. Under the second alternative, the newly established forward contract could qualify for the normal purchases and sales exception, while the option contract would be treated as a derivative under SFAS No. 133 with changes in fair value recorded through earnings. At April 1, 2002, MCV had nine long-term gas contracts that contained both an option and forward component. As such, they were no longer accounted for under the normal purchases and sales exception and MCV began mark-to-market accounting of these nine contracts through earnings. Based on the natural gas prices, at the beginning of April 2002, MCV recorded a $58.1 million gain for the cumulative effect of this accounting change. During the fourth quarter of 2002, MCV removed the option component from three of the nine long-term gas contracts, which should reduce some of the earnings volatility. From April 2002 to September 2004, MCV recorded an additional net mark-to-market gain of $21.5 million for these gas contracts. The cumulative mark-to-market gain through September 30, 2004 of $79.6 million is recorded as a current and non-current derivative asset on the balance sheet, as detailed below. These assets will reverse over the remaining life of these gas contracts, ranging from 2004 to 2007.
		For the nine months ended September 30, 2004 and 2003, MCV recorded in “Fuel costs” a gain of $4.7 million and a loss of $6.3 million, respectively, for net mark-to-market adjustments associated with these contracts. In addition, as of September 30, 2004 and December 31, 2003, MCV recorded “Derivative assets” in Current Assets in the amount of $45.7 million and $56.9 million, respectively, and for the same periods recorded “Derivative assets non-current” in Other Assets in the amount of $33.9 million and $18.1 million, respectively, representing the mark-to-market value on these long-term natural gas contracts.
		Natural Gas Supply Futures and Options
		To manage market risks associated with the volatility of natural gas prices, MCV maintains a gas hedging program. MCV enters into natural gas futures contracts, option contracts, and over the counter swap transactions (“OTC swaps”) in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are being utilized principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize MCV’s existing gas supply, storage and transportation arrangements.
		These financial instruments are derivatives under SFAS No. 133 and the contracts that are utilized to secure the anticipated natural gas requirements necessary for projected electric and steam sales qualify as cash flow hedges under SFAS No. 133, since they hedge the price risk associated with the cost of natural gas. MCV also engages in cost mitigation activities to offset the fixed charges MCV incurs in operating the Facility. These cost mitigation activities include the use of futures and options contracts to purchase and/or sell natural gas to maximize the use of the transportation and storage contracts when it is determined that they will not be needed for Facility operation. Although these cost mitigation activities do serve to offset the fixed monthly charges, these cost mitigation activities are not considered a normal course of business for MCV and do not qualify as

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		hedges under SFAS No. 133. Therefore, the resulting mark-to-market gains and losses from cost mitigation activities are flowed through MCV’s earnings.
		Cash is deposited with the broker in a margin account at the time futures or options contracts are initiated. The change in market value of these contracts requires adjustment of the margin account balances. The margin account balance as of September 30, 2004 and December 31, 2003 was recorded as a current asset in “Broker margin accounts and prepaid expenses,” in the amount of $10.6 million and $4.1 million, respectively.
		For the nine months ended September 30, 2004, MCV has recognized in other comprehensive income, an unrealized $62.2 million increase on the futures contracts and OTC swaps, which are hedges of forecasted purchases for plant use of market priced gas. This resulted in a net $93.5 million gain in other comprehensive income as of September 30, 2004. This balance represents natural gas futures, options and OTC swaps with maturities ranging from October 2004 to December 2009, of which $51.9 million of this gain is expected to be reclassified into earnings within the next twelve months. MCV also has recorded, as of September 30, 2004, a $92.5 million current derivative asset in “Derivative assets,” representing the mark-to-market gain on natural gas futures for anticipated projected electric and steam sales accounted for as hedges. In addition, for the nine months ended September 30, 2004, MCV has recorded a net $21.0 million gain in earnings from hedging activities related to MCV natural gas requirements for Facility operations and a net $1.4 million gain in earnings from cost mitigation activities.
		For the nine months ended September 30, 2003, MCV recognized an unrealized $6.2 million decrease in other comprehensive income on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas, which resulted in a $20.1 million gain balance in other comprehensive income as of September 30, 2003. As of September 30, 2003, MCV had recorded a $19.1 million current derivative asset in “Derivative assets.” For the nine months ended September 30, 2003, MCV had recorded a net $32.2 million gain in earnings from hedging activities related to MCV natural gas requirements for Facility operations and a net $.5 million gain in earnings from cost mitigation activities.
(3)		GAS TURBINE SERVICE AGREEMENT
		Under an amended service agreement entered into between MCV and Alstom Power Company (“Alstom”) (the “Amended Service Agreement”), Alstom provided MCV spare parts for MCV’s gas turbine generators (“GTGs”) and provided qualified service personnel and supporting staff to assist MCV to perform scheduled inspections on the GTGs, and to repair the GTGs at MCV’s request. The Amended Service Agreement commenced on January 1, 1990, and was set to expire upon the earlier of the completion of the ninth series of major GTG inspections or December 31, 2009, unless terminated sooner by MCV for convenience or cause or by Alstom for cause. Upon termination of the Amended Service Agreement (except termination for cause by MCV), MCV must pay a cancellation payment of approximately $5.8 million. MCV terminated the Amended Service Agreement in February 2004, for cause and therefore did not owe Alstom the cancellation payment. MCV had also invoiced Alstom for approximately $3.0 million of overpayments by MCV due to reduced equivalent operating hours experienced under the Amended Service Agreement. These matters, as well as others, were disputed by Alstom. MCV and Alstom entered into a settlement agreement, effective September 30, 2004, which resolved all outstanding issues between the parties and mutually released the parties from further obligations under the Amended Service Agreement, except certain warranty obligations of Alstom. Pursuant to the settlement, MCV paid Alstom $2.8 million, on October 4, 2004, of which MCV expensed $2.5 million as a cost of termination and capitalized the remaining $.3 million previously incurred by Alstom associated with labor and parts already received. In addition, Alstom is required to provide MCV with one new combustion inner liner by the end of the first quarter of 2005. Upon receipt, MCV will make an additional payment of $.7 million to Alstom.
		Subsequent to Alstom’s termination in February 2004, maintenance, repairs and parts were being performed/provided by MCV, General Electric International Inc. (“GEII”) and others. MCV had previously signed, effective December 31, 2002, a new maintenance service and parts agreement with GEII (“GEII

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		Agreement”). On July 1, 2004, GEII began providing maintenance services and hot gas path parts for MCV’s twelve GTGs under terms and conditions similar to the Amended Service Agreement. The GEII Agreement covers 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 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 equivalent operating hours incurred since commencement of the GEII Agreement.
(4)		RESTRICTED INVESTMENT SECURITIES HELD-TO-MATURITY
		Non-current restricted investment securities held-to-maturity have carrying amounts that approximate fair value because of the short maturity of these instruments and consist of the following as of (in thousands):

(5)		ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
		Accounts payable and accrued liabilities consist of the following as of (in thousands):

(6)		GAS SUPPLIER FUNDS ON DEPOSIT
		Pursuant to individual gas contract terms with counterparties, deposit amounts or letters of credit may be required by one party to the other based upon the net amount of exposure. The net amount of exposure will vary with changes in market prices, credit provisions and various other factors. Collateral paid or received will be posted by one party to the other based on the net amount of the exposure. Interest is earned on funds on deposit. As of September 30, 2004, MCV is supplying credit support to one gas supplier in the form of a letter of credit in the amount of $2.4 million. As of September 30, 2004, MCV is holding $21.0 million of cash on deposit from two of MCV’s brokers. In addition as of September 30, 2004, MCV is also holding letters of credit totaling $196.9 million from two gas suppliers, of which $165.6 million is a letter of credit from El Paso Corporation (“El Paso”), a related party.

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(7)		LONG-TERM DEBT
		Long-term debt consists of the following as of (in thousands):

		Financing Obligation
		In 1990, MCV obtained permanent financing for the Facility by entering into sale and leaseback agreements (“Overall Lease Transaction”) with a lessor group, related to substantially all of MCV’s fixed assets. Proceeds of the financing were used to retire borrowings outstanding under existing loan commitments, make a capital distribution to the partners of MCV and retire a portion of the notes issued by MCV to MEC Development Corporation (“MDC”) in connection with the transfer of certain assets by MDC to MCV. In accordance with SFAS No. 98, “Accounting For Leases,” the Overall Lease Transaction has been accounted for as a financing arrangement.
		The financing obligation utilizes the effective interest rate method, which is based on the minimum lease payments required through the end of the basic lease term of 2015 and MCV management’s estimate of additional anticipated obligations after the end of the basic lease term. The effective interest rate during the remainder of the basic lease term is approximately 9.4%.
		Interest and fees incurred related to long-term debt arrangements during the nine months ended September 30, 2004 and 2003 were $79.2 million and $85.0 million, respectively. Interest and fees paid for the nine months ended September 30, 2004 and 2003 were $108.5 million and $115.3 million, respectively.
(8)		COMMITMENTS AND CONTINGENCIES
		Property Tax Appeal
		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 2004 at the Michigan Tax Tribunal. A trial was held for tax years 1997 – 2000. The appeals for tax years 2001-2004 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 and has issued several orders correcting errors in the initial decision (together the “MTT Decision”). MCV management has estimated that the MTT Decision will result in a refund to MCV for the tax years 1997 through 2000 of approximately $35 million in taxes plus $9 million of interest as of September 30, 2004. The MTT Decision has been appealed to the Michigan Appellate Court by the City of Midland. MCV has filed a cross-appeal at the Michigan Appellate Court. MCV management cannot predict the outcome of these 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.

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		NOx Allowances
		The United States Environmental Protection Agency (“US EPA”) has 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, which for 2004 is from May 31 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. 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 and the parties have entered into a standstill agreement deferring the resolution of this dispute. However, either party may terminate the standstill agreement at any time and reinstate the PPA’s dispute resolution provisions. MCV management cannot predict the outcome of this issue. As of September 30, 2004, MCV has sold 1,200 tons of 2004 allowances for $2.7 million, which is recorded in “Accounts payable and accrued liabilities”, pending resolution of ownership of these credits.
		Voluntary Severance Program
		In July 2004, MCV announced a Voluntary Severance Program (“VSP”) for all employees (union and non-union employees), subject to certain eligibility requirements. This VSP was effective for a period of 45 days from date of the announcement. The VSP entitled participating employees, upon termination, to a lump sum payment, based upon number of years of service up to a maximum of 52 weeks of wages. Nineteen employees elected to participate in the VSP and MCV has recorded $1.6 million of severance costs in “Operating Expenses” related to the nineteen employees.
		Included in the nineteen employees who elected the VSP were three of MCV’s officers: LeRoy W. Smith, Vice President of Energy Supply and Marketing, James A. Mooney, Vice President of Engineering, Operations and Construction and Barbara E. Lawson, Treasurer. Their resignations became effective on October 1, 2004. On October 1, 2004, Laurie Valasek, an employee of MCV was appointed to serve as the Treasurer of MCV. As for the duties/responsibilities of the other two MCV officers that have resigned; other employees within MCV or the President and Chief Executive Officer have assumed these duties.
		Environmental Issues
		On July 12, 2004 the Michigan Department of Environmental Quality (“DEQ”), Air Control Division, issued MCV a “Letter of Violation” asserting that MCV violated its Air Use Permit to Install No. 209-02 by exceeding the carbon monoxide emission limit on the Unit 14 GTG duct burner and failing to maintain certain records in the required format. On July 13, 2004 the DEQ, Water Division, issued MCV a “Notice Letter” asserting MCV violated its National Pollutant Discharge Elimination System Permit by discharging heated process waste water into the storm water system, failure to document inspections, and other minor infractions.
		MCV has declared all duct burners as unavailable for operational use and is assessing the duct burner issue and has begun other corrective action to address the DEQ’s assertions. MCV disagrees with certain of the DEQ’s assertions. MCV filed responses to these DEQ letters in August 2004. The DEQ has not imposed a fine or penalty at this time but may do so in the future. At this time, MCV management cannot predict the financial impact or outcome of these issues.

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(9)		RETIREMENT BENEFITS
		Postretirement Health Care Plans
		In 1992, MCV established defined cost postretirement health care plans (“Plans”) that cover all full-time employees, excluding key management. The Plans provide health care credits, which can be utilized to purchase medical plan coverage and pay qualified health care expenses. Participants become eligible for the benefits if they retire on or after the attainment of age 65 or upon a qualified disability retirement, or if they have 10 or more years of service and retire at age 55 or older. The Plans granted retroactive benefits for all employees hired prior to January 1, 1992. This prior service cost has been amortized to expense over a five year period. MCV annually funds the current year service and interest cost as well as amortization of prior service cost to both qualified and non-qualified trusts. The MCV accounts for retiree medical benefits in accordance with SFAS 106, “Employers Accounting for Postretirement Benefits Other Than Pensions.” This standard required the full accrual of such costs during the years that the employee renders service to the MCV until the date of full eligibility.
		Net periodic postretirement health care cost for the nine months ending September 30, included the following components (in thousands):

		Contributions
		Since MCV’s Plan is funded annually, no contributions have been made as of September 30, 2004. MCV expects to contribute approximately $.2 million to the Plans in December 2004.
		Medicare Prescription Drug, Improvement and Modernization Act of 2003
		The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law in December 2003. The Act expanded Medicare to include, for the first time, coverage for prescription drugs. At December 31, 2003, based upon FASB staff position, SFAS No. 106-1, “Employers Accounting for Postretirement Benefits Other Than Pensions,” MCV had elected to defer financial recognition of this legislation until the issuance of final accounting guidance. The final SFAS No. 106-2 was issued in second quarter 2004 and supersedes SFAS No. 106-1. MCV adopted SFAS No. 106-2 during the second quarter of 2004. The adoption of this standard had no impact to MCV’s financial position, because MCV does not consider its Plans to be actuarially equivalent. The Plans benefits provided to eligible participants are not annual or on-going in nature, but are a readily exhaustible, lump-sum amount available for use at the discretion of the participant.

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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(10)		PARTNERS’ EQUITY AND RELATED PARTY TRANSACTIONS
		The following table summarizes the nature and amount of each of MCV’s Partner’s equity interest, interest in profits and losses of MCV at September 30, 2004, and the nature and amount of related party transactions or agreements that existed with MCV’s partners or affiliates as of September 30, 2004 and 2003, and for each of the nine month periods ended September 30 (in thousands):

Footnotes to Partners’ Equity and Related Party Transactions

(1)

Alanna’s capital stock is pledged to secure MCV’s obligation under the lease and other overall lease transaction documents.

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Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

This MD&A should be read along with the MD&A in the Annual Report on Form 10-K for the year ended December 31, 2003 of the Midland Cogeneration Venture Limited Partnership (“MCV”).

RESULTS OF OPERATIONS:

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995. This Quarterly Report on Form 10-Q contains certain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995 (the “Act”), including without limitation, discussion as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed reflecting MCV’s current expectations of the manner in which the various factors discussed therein may affect its business in the future. Any matters that are not historical facts are forward-looking and, accordingly, involve estimates, assumptions, and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Accordingly, this “Safe Harbor” Statement contains additional information about such factors relating to the forward-looking statements. There is no assurance, 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 MPSC) 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.

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Operating Revenue Statistics:

The following represents significant operating revenue statistics for the following periods (dollars in thousands except average rates):

Comparison of the Three Months ended September 30, 2004 and 2003:

Overview:

For the third quarter of 2004, MCV recorded a net loss of $7.4 million, which includes a $.9 million mark-to-market loss. The mark-to-market loss is on long term gas contracts that began being marked-to-market, as required by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” MCV’s net loss for the third quarter of 2003 was $15.2 million, which included a $32.0 million mark-to-market loss on the long term gas contracts. The earnings increase for the third quarter of 2004 compared to 2003 of $7.8 million is the result of a $31.1 million favorable change in the long term gas contract mark-to-market value and lower interest expense. This increase was partially offset by increased net usage of natural gas from a higher electric dispatch, higher natural gas prices and the settlement with Alstom.

Operating Revenues:

For the third quarter of 2004, MCV’s operating revenues increased $17.9 million from the third quarter of 2003. This increase is due primarily to a higher electric dispatch under Forced Dispatch with Consumers.

Operating Expenses:

For the third quarter of 2004, MCV’s operating expenses were $150.8 million, which includes $108.2 million of fuel costs, including a $.9 million mark-to-market loss on certain natural gas contracts which contain optionality. During this period, MCV purchased approximately 26.0 Bcf of natural gas, and a net 1.9 Bcf was used for transportation fuel and as a net change to gas in storage. During this same period, MCV consumed 24.1 Bcf at an average commodity cost of $3.97 per MMBtu. For the third quarter of 2003, MCV’s operating expenses were $138.0 million, which includes $97.9 million of fuel costs, including a $32.0 million mark-to-market net gain on the natural gas contracts which contain optionality. During this period, MCV purchased approximately 17.9 Bcf of natural gas, and a net .9 Bcf was used for transportation fuel and as a net change to gas in storage. During this same period, MCV consumed 17.0 Bcf at an average commodity cost of $3.21 per MMBtu, which includes the effects of

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the disposition of excess gas supplies not required for generation. Fuel costs for the third quarter of 2004 compared to 2003 increased by $10.3 million. This fuel cost increase was due to a $ 41.4 million increase from a combination of higher gas usage resulting from the increase in the electric dispatch and higher natural gas prices. Partially offsetting this increase was a $31.1 million favorable change in the mark-to-market value of the long term gas contracts with optionality.

For the third quarter of 2004, operating expenses other than fuel costs increased $2.5 million from the third quarter of 2003. This increase is primarily the result of the settlement with Alstom and the costs associated with the one-time voluntary severance program.

Other Income (Expense):

For the third quarter of 2004 compared to 2003, interest expense decreased due to a lower outstanding principal balance on MCV’s financing obligation.

Comparison of the Nine Months ended September 30, 2004 and 2003:

Overview:

For the first nine months of 2004, MCV recorded a net loss of $1.6 million, which includes a $4.7 million mark-to-market gain. The mark-to-market gain is on long term gas contracts that began being marked-to-market, as required by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” MCV’s net income for the first nine months of 2003 was $39.1 million, which included a $6.3 million mark-to-market loss on the long term gas contracts. The earnings decrease for the first nine months of 2004 compared to 2003 of $40.7 million is the result of increased net usage of natural gas from a higher electric dispatch, higher natural gas prices and the settlement with Alstom. This earnings decrease was partially offset by an $11.0 million favorable change in the long term gas contract mark-to-market value and lower interest expense.

Operating Revenues:

For the first nine months of 2004, MCV’s operating revenues increased $41.9 million from the first nine months of 2003. This increase is due primarily to a higher electric dispatch under Forced Dispatch with Consumers.

Operating Expenses:

For the first nine months of 2004, MCV’s operating expenses were $410.6 million, which includes $287.5 million of fuel costs, including a $5.9 million mark-to-market gain on certain natural gas contracts which contain optionality. During this period, MCV purchased approximately 72.0 Bcf of natural gas, and a net 2.1 Bcf was used for transportation fuel and as a net change to gas in storage. During this same period, MCV consumed 69.9 Bcf at an average commodity cost of $3.69 per MMBtu. For the first nine months of 2003, MCV’s operating expenses were $322.4 million, which includes $202.6 million of fuel costs, including a $6.3 million mark-to-market net loss on the natural gas contracts which contain optionality. During this period, MCV purchased approximately 55.1 Bcf of natural gas, and a net 2.5 Bcf was used for transportation fuel and as a net change to gas in storage. During this same period, MCV consumed 52.6 Bcf of natural gas at an average commodity cost of $3.11 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. Fuel costs for the first nine months of 2004 compared to 2003 increased by $84.9 million. This fuel cost increase was due to a $97.1 million increase from a combination of higher gas usage resulting from the increase in the electric dispatch and higher natural gas prices. Partially offsetting this increase was an $11.0 million favorable change in the mark-to-market value of the long term gas contracts with optionality.

For the first nine months of 2004, operating expenses other than fuel costs increased $3.3 million from the first nine months of 2003. This increase is primarily the result of the settlement with Alstom and the costs associated with the one-time voluntary severance program.

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Other Income (Expense):

For the first nine months of 2004 compared to 2003, interest expense decreased due to a lower outstanding principal balance on MCV’s financing obligation.

LIQUIDITY AND CAPITAL RESOURCES:

For the nine months ended September 30, 2004 and 2003, net cash generated by MCV’s operations was $51.1 million and $69.1 million, respectively. Included in MCV’s net cash generated for the period ended September 30, 2004 is $16.5 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 eleven years. During the nine months ended September 30, 2004 and 2003, MCV paid financing obligation requirements of $242.8 million and $208.9 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 accumulated 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, 2005. MCV did not utilize the Working Capital Facility during the first nine months of 2004, except for letters of credit associated with normal business practices. At September 30, 2004, MCV had $47.6 million available under its Working Capital Facility. As of September 30, 2004, MCV’s borrowing base was capped at the maximum amount available of $50 million and MCV had outstanding letters of credit in the amount of $2.4 million. 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, available cash and investments not restricted for debt service requirements. 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 2, “MD&A – Outlook: Energy Rates and Cost of Production.” As of September 30, 2004, there were approximately $217.6 million of cash reserves of which $137.8 million had been reserved for the debt portion of the financing obligation.

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Disclosure about Contractual Obligations:

MCV has assumed various financial obligations and commitments in the normal course of its business. These obligations are considered to represent expected cash payments that MCV is required to make under its existing contractual arrangements. As of September 30, 2004, MCV has the following contractual financial obligations and commitments:

(1)

Payment periods represent calendar years beginning with January 1, 2004.

(2)

Represents expected cash payments, including interest.

(3)

Represents estimated minimum commitments under current long term natural gas contracts, natural gas transportation reservation charges, GTG compressor parts and the ground lease agreement.

(4)

Represents the cost of current Facility maintenance service agreements and spare parts.

NEW ACCOUNTING STANDARDS:

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law in December 2003. The Act expanded Medicare to include, for the first time, coverage for prescription drugs. At December 31, 2003, based upon FASB staff position, SFAS No. 106-1, “Employers Accounting for Postretirement Benefits Other Than Pensions,” MCV had elected to defer financial recognition of this legislation until issuance of final accounting guidance. The final SFAS No. 106-2 was issued in second quarter 2004 and supersedes SFAS No. 106-1, which MCV adopted during this same period. The adoption of this standard had no impact to MCV’s financial position, because MCV does not consider its Plans to be actuarially equivalent. The Plans benefits provided to eligible participants are not annual or on-going in nature, but are a readily exhaustible, lump-sum amount available for use at the discretion of the participant.

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 September 30, 2004, MCV was not involved in any unconsolidated SPE transactions.

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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 the first nine months of 2004, approximately 66% 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 98.4% for the first nine months of 2004, 99.4% for 2003 and 98.8% for 2002. Availability will depend on the level of scheduled and unscheduled maintenance outages, and on the sustained level of output from each of the GTGs and the steam turbines. MCV expects long term PPA availability to meet or exceed the capped level of 98.5%, though prolonged equipment outages could materially reduce the level of availability.

Natural Gas. The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility’s operating expenses consist of the costs of natural gas. While MCV continues to pursue the acquisition of a portion of its expected fuel supply requirements in future years, MCV recognizes that its existing long term gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of its existing fixed price gas contracts or for gas that may be required by the Facility in excess of the gas that MCV has under contract.

Energy Rates and Cost of Production. Under the PPA, energy charges are based on the costs associated with fuel inventory, operations and maintenance, and administrative and general expenses associated with certain of Consumers’ coal plants. However, MCV’s costs of producing electricity are tied, in large part, to the cost of natural gas. To the extent that the costs associated with production of electricity with natural gas rise faster than the energy charge payments, which are based largely on Consumers’ coal plant operation and maintenance costs, MCV’s financial performance would be negatively affected. In addition, the extent to which the Facility is dispatched by Consumers can exacerbate the divergence between variable revenues and costs of production. The divergence between variable revenues and costs will become greater if the energy charge (based largely on the cost of coal) declines or escalates more slowly than the spot market or contract prices under which MCV purchases fuel. Currently, MCV continues to purchase the majority of its natural gas requirements under long term fixed price gas contracts, with a smaller portion of gas purchased under long term market priced contracts and on the spot market. 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 expected gas needs not provided for under its long term fixed price gas contracts of approximately 92% in 2005, 75% in 2006 and 50% in 2007 based upon an economic dispatch level of approximately 79%. 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 will 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 because 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 a 915 MW settlement and a 325 MW settlement “availability caps” provision (i.e., minimum dispatch of 1100 MW on- and off-peak (“Forced Dispatch”)). This Forced Dispatch has and will continue to negatively affect MCV’s financial performance in 2004 by approximately $40 million, based upon an annual average spot gas price of approximately $5.90/MMBtu. MCV expects this level of reduced earnings and cash shortfalls to continue beyond 2004, absent the establishment of a Dispatch Mitigation program.

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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 is occurring 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 parties have entered into another agreement (the Reduced Dispatch Agreement (“RDA”)) implementing the terms of the RCA including the sharing of savings realized by not having to generate electricity. The RCA and RDA are subject to MPSC approval and MCV and Consumers must accept the terms of the MPSC order as a condition precedent to the RCA and RDA becoming effective. The MPSC has established a contested hearing schedule, which is expected to result in an MPSC order being issued no earlier than the fourth quarter of 2004. MCV cannot predict the outcome of the MPSC proceedings necessary to effectuate the RCA. MCV management cannot, at this time, predict the impact or outcome of these matters. Effective October 23, 2004, MCV and Consumers entered into an interim Dispatch Mitigation program for energy dispatch above 1100 MW up to 1240 MW of Contract Capacity under the PPA. This program, which is structured very similarly to the RCA and RDA, can be terminated by either party upon 30 days written notice. MCV estimates that this interim program will result in net savings of approximately $2 million for the remainder of 2004.

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 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.

Two significant issues that will affect MCV’s future financial performance are the price of natural gas and the MPSC’s decision in 2007 or beyond related to the recovery of PPA charges. Natural gas prices have historically been volatile and presently there is no consensus among forecasters on the price or range of future prices of natural gas. Even with an approved RCA and RDA, if gas prices continue at present levels or increase, the economics of operating the Facility may be adversely affected. MCV continues to monitor and participate in these industry restructuring matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. MCV management cannot, at this time, predict the impact or outcome of these matters.

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

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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 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.

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.

Property, Plant and Equipment. As discussed in Item 2, “MD&A – Outlook”, at both the state and federal level, efforts continue to restructure the electric industry. To date, restructuring has not negatively impacted MCV, but if restructuring results in denying Consumers recovery of above-market PPA costs, MCV’s cash flows may be negatively impacted, especially in the period after 2007. Over 90% of MCV’s revenues come from sales pursuant to the PPA. MCV continues to monitor and participate in these matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. Any future

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adjustment to property, plant and equipment, if required, would result in a one-time negative earnings impact. At this time, MCV management cannot predict the outcome of these matters or the magnitude of any possible adjustment.

Derivative Instruments. As discussed in Item 1, “Condensed Notes to Unaudited Consolidated Financial Statements – Note 2, Risk Management Activities and Derivative Transactions – Natural Gas Supply Contracts,” 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. 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. 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 $21.5 million for these gas contracts. The cumulative mark-to-market gain through September 30, 2004 of $79.6 million is recorded as a current and non-current derivative asset on the balance sheet. These assets will reverse over the remaining life of these contracts, ranging from 2004 to 2007.

Property Taxes. 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 2004 at the Michigan Tax Tribunal. A trial was held for tax years 1997 – 2000. The appeals for tax years 2001-2004 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 and has issued several orders correcting errors in the initial decision (together the “MTT Decision”). MCV management has estimated that the MTT Decision will result in a refund to MCV for the tax years 1997 through 2000 of approximately $35 million in taxes plus $9 million of interest as of September 30, 2004. The MTT Decision has been appealed to the Michigan Appellate Court by the City of Midland. MCV has filed a cross-appeal at the Michigan Appellate Court. MCV management cannot predict the outcome of these 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risks relating to MCV’s operations result primarily from changes in commodity prices and interest rates. To address these risks, MCV enters into various hedging transactions as described herein. MCV does not use financial instruments for trading purposes and does not use leveraged instruments. Fair values included herein have been determined based on quoted market prices. The information presented below should be read in conjunction with Part 1, Item 1, “Condensed Notes to Unaudited Consolidated Financial Statements — Note 2, Risk Management Activities and Derivative Transactions and Note 7, 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.

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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 September 30, 2004, have original maturity dates of approximately one year or less. As of September 30, 2004, MCV does not have any outstanding interest rate hedges.

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 contracts, option contracts and over the counter (“OTC”) swap transactions 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 contracts, option contracts and OTC swap transactions that are sensitive to changes in natural gas prices; these futures and option contracts have maturity dates ranging from October 2004 to December 2009. The table presents the carrying amounts and fair values at September 30, 2004:

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

MCV’s management, including the President and Chief Executive Officer, and the Chief Financial Officer, Vice President and Controller, carried out an evaluation of the effectiveness of MCV’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such review of MCV’s disclosure controls and procedures, the President and Chief Executive Officer, and the Chief Financial Officer, Vice President and Controller, have concluded that MCV’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The discussion below is limited to an update of events or developments that have occurred in various judicial and administrative proceedings since March 1, 2004. A complete summary of all outstanding legal proceedings is set forth in MCV’s Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 1, 2004.

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 2004 at the Michigan Tax Tribunal. A trial was held for tax years 1997 – 2000. The appeals for tax years 2001-2004 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 and has issued several orders correcting errors in the initial decision (together the “MTT Decision”). MCV management has estimated that the MTT Decision will result in a refund to MCV for the tax years 1997 through 2000 of approximately $35 million in taxes plus $9 million of interest as of September 30, 2004. The MTT Decision has been appealed to the Michigan Appellate Court by the City of Midland. MCV has filed a cross-appeal at the Michigan Appellate Court. MCV management cannot predict the outcome of these 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 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, which for 2004 is from May 31 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. 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 initiated the dispute resolution process pursuant to the PPA to resolve this issue and the parties have entered into a standstill agreement deferring the resolution of this dispute. However, either party may terminate the standstill agreement at any time and reinstate the PPA’s dispute resolution provisions. MCV management cannot predict the outcome of this issue. As of September 30, 2004, MCV has sold 1,200 tons of 2004 NOx allowances for $2.7 million, which is recorded in “Accounts payable and accrued liabilities”, pending resolution of ownership of these credits.

Environmental Issues

On July 12, 2004 the Michigan Department of Environmental Quality (“DEQ”), Air Control Division, issued MCV a “Letter of Violation” asserting that MCV violated its Air Use Permit to Install No. 209-02 by exceeding the carbon monoxide emission limit on the Unit 14 GTG duct burner and failing to maintain certain records in the required format. On July 13, 2004 the DEQ, Water Division, issued MCV a “Notice Letter” asserting MCV violated its National Pollutant Discharge Elimination System Permit by discharging heated process waste water into the storm water system, failure to document inspections, and other minor infractions.

MCV has declared all duct burners as unavailable for operational use and is assessing the duct burner issue and has begun other corrective action to address the DEQ’s assertions. MCV disagrees with certain of the DEQ’s assertions. MCV filed responses to these DEQ letters in August 2004. The DEQ has not imposed a fine or penalty at this time but may do so in the future. At this time, MCV management cannot predict the financial impact or outcome of these issues.

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Item 6. Exhibits and Reports on Form 8-K

a.) List of Exhibits

b.) Reports on Form 8-K

Current Report, dated September 1, 2004, containing Item 5.02, “Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers,” reporting on the voluntary separation of three of MCV’s officers.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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